Why Wall Street Hates A Healthy Labor Market
It’s simple: When workers gain some leverage, it gets a little harder to generate totally obscene profits.
It’s always such a shame when the interests of labor don’t match up with the priorities of capital. The Bureau of Labor Statistics reported on Thursday that new claims for jobless benefits fell again last week. But in a Wall Street Journal roundup of reactions to the news, one economist found reason for concern.
Deutsche Bank’s Alan Ruskin observed that the rate at which productivity — the amount of goods and services produced per worker — is growing is beginning to slow down in the United States.
We are at the point in the cycle where squeezing any more output from the existing labor force, with the current capital stock, becomes more difficult and attempts to raise output, force an increase in employment or at least employee hours. The good news is that we are closer to the point where a virtuous cycle of increased demand, driving increased employment and income, generating more demand, is in place. The flip side is that the rise in wages relative to output pushes up unit labor costs and undermines productivity, and could chip into the record profit share of income with some negative implications for equities.
In other words, stock prices could slump because an increase in the demand for labor will put upward pressure on wages. For the vast majority of Americans, this is fantastic news. For the 1 percent, not so much.
The news inspires memories of the go-go days of the dot-com boom, when the stock market greeted every new monthly release of gangbuster job growth numbers with a sharp sell-off. Wall Street doesn’t like it when American workers are in demand. That’s either the most heartening news yet about the nascent economic recovery, or the most maddening.
By: Andrew Leonard, Salon, February 2, 2012
Mitt Romney, “Hero of Finance”
Romney’s backers say he did the tough work needed to restructure the economy. Actually, he seized opportunities that the tax, securities, and bankruptcy laws should never have given him.
“Creative destruction” is Mitt Romney’s best defense for his career in private equity and the trail of displaced workers some of his ventures left behind. The idea comes from the economist Joseph Schumpeter, who argued that capitalism generates economic growth through “gales of creative destruction” that sweep away obsolete technologies and products. As Romney’s advocates have it, that’s what his firm, Bain Capital, has advanced—painful economic changes that are essential to a rising standard of living.
If Romney made his fortune that way, he deserves the praise that some conservatives have lavished on him for contributing to American competitiveness. But that isn’t the whole story. Much of the work of Bain and other private—equity firms has little to do with the kind of wrenching Schumpeterian change that contributes to growth, still less to the job creation for which Romney claims credit.
Technological innovation was at the heart of Schumpeter’s vision, and no one today objects to the role of venture capital in financing tech start-ups or to the re-engineering of businesses to take advantage of new technology. Reorganizing firms to exploit special provisions in tax, securities, and bankruptcy laws is a different proposition. That kind of restructuring can be immensely profitable, transferring wealth to investors while making no positive contribution to growth and employment.
The standard operating procedure for private equity has been to buy firms, take them private, and load them up with debt. By taking them private, the new owners escape from the securities laws, which apply only to publicly traded companies. By loading them with debt, they cut the companies’ taxes because the interest is fully deductible from profits, and they use those tax savings to pay themselves generous fees and dividends. If an overleveraged enterprise then fails, they take it into bankruptcy, firing workers and stiffing creditors even though their own firm has already pocketed large gains. And because private-equity partners can receive those gains as “carried interest” (taxed only at 15 percent), they benefit from special legal advantages in yet one more way.
This kind of restructuring doesn’t just siphon off wealth; it can also interfere with genuine innovation because debt-burdened companies are sometimes starved for capital to invest in new technologies and products. Private equity has generally sought a high return with a quick exit instead of providing patient capital for long-term gains. That’s great for those who are in on the deal, but not for the national economy.
Private equity has also contributed to a broader change related to rising economic inequality. Instead of corporations serving a complex of interests—owners, workers, and communities—they have increasingly become wholly dedicated to maximizing returns to owners. This “shareholder-value revolution” has helped to drive the overexpansion of the financial sector and to funnel the gains from economic growth into fewer hands—Romney’s, for example.
That Romney served investors well at Bain, no one doubts. That’s not a credential, however, for solving the nation’s problems. We ought to be reducing the incentives for the maneuvers that enriched Romney—for example, by cutting the deductibility of interest on debt incurred in acquiring companies and raising taxes on “carried interest” so that financiers pay no lower a tax rate than the rest of us. Good luck with that in a Romney presidency.
There is a larger point about Romney’s career and good public policy. The turmoil in the private economy, whether generated by creative destruction or financial manipulation, is a reason we need progressive government. Individual firms cannot be counted on to retrain workers for new jobs or to provide them with long-term security; the very instability of private employment is why workers need to be able to count on government when they get displaced to help them obtain the education and skills to adapt. The best “national innovation systems” minimize the harms to workers while advancing technological progress.
Schumpeter’s 1942 classic, Capitalism, Socialism and Democracy, was a dour book. A true believer in capitalism, Schumpeter nonetheless thought it was doomed because people wouldn’t put up with creative destruction, and businessmen lacked the heroic qualities to become effective political leaders. He was wrong on both counts. Instead of resisting innovation, we welcome it, and some business leaders, like Steve Jobs, have become popular heroes.
But Romney is no Jobs, and even his most successful investments—Domino’s Pizza, Staples, and Sports Authority—don’t quite make him a Schumpeterian hero. There is one good thing about his candidacy, though. It highlights the inequities that have helped make people like Romney so wealthy and powerful.
President Obama’s Best State Of The Union Speech
The State of the Union was upbeat and positive, and that’s saying a lot from me, a pessimist. Now I know those on the right will tell you everything that was wrong with the president’s speech; heck, former House Speaker Newt Gingrich and former Gov. Mitt Romney told America what they thought of the president’s speech before he even uttered a word!
Personally, I felt the president hit it out of the park—his best State of the Union speech and hopefully his fourth, not his last.
Starting out with thanking the U.S. military, he pointed out that for the first time in nine years we’re no longer in Iraq, and more importantly, that we’re safer and we’re more respected throughout the world. And of course, there was the huge applause when he mentioned that for the first time in over two decades, we’re no longer fearful of the wrath of Osama bin Laden.
I personally loved when the president referred to how our military operates, and how we as a nation and how the government should operate: focus on the mission at hand and do it working together. With the lowest approval rating of Congress ever and polls showing that Americans clearly want both sides of the aisle to work together to get things done, the president, I believe, was speaking to all Americans and to all of our frustrations with our government.
I also liked how the president painted a picture of what could be. He pointed out America’s values; except for one remark about the administration that preceded him, he didn’t blame former President Bush, which I found refreshing and necessary.
He was bold when he specifically stated that the banks were wrong and irresponsible in lending money to people who couldn’t afford to pay it back.
He gave facts about job loss: 4 million jobs lost before he entered office, millions more before his policies were implemented.
I found that the president was being humble when he spoke of the jobs that businesses created–not he, his administration, or Congress.
When the president spoke of American values, it didn’t have to do with church or religion; it had to do with our work ethic—from American manufacturing to GM regaining its title as the number one automaker in the world. Even the Republicans had to clap on that one.
And for a president who is constantly accused of wanting to tax America to death, he was talking about a lot of tax credits going around: tax credits for making products here in America, tax breaks for small business owners—rewarding those who keep and develop jobs here, and stopping the rewards going to companies that send their jobs overseas. (Sidenote: Eric Cantor looked angry about that–hmm…)
Then the president went on to other things America values, other things that make our nation great, and what could make us greater: education. He linked education with the ability to increase a person’s income in the future. And he made it personal when he spoke of every person in the chamber who has a teacher they liked, remembered, etc. I found myself nodding at that remark.
He reached out to Hispanics with the DREAM act, although never mentioning it by name. He touched the unions in speaking about manufacturing, teachers, and the auto industry. And he even gave a shout out to us ladies with the desire for us to earn equal pay for the jobs we do that men do. (Woo hoo!)
The bottom line is, although this speech is about governing, it is a campaign year. I felt the president reminded Americans of where we are, how far we’ve come, and where we could be headed with him at the helm. He spoke of the facts rather than the fiction Americans so often hear in the media. And if America were a ship, he showed us with his words that he is more than up to the task of being the ship’s captain for the next four years.
By: Leslie Marshall, U. S. News and World Report, January 25, 2012
“Everyday Workers”: Capitalism’s Real “Risk-Takers”
Mitt Romney is casting the 2012 campaign as “free enterprise on trial” — defining free enterprise as achieving success through “hard work and risking-taking.” Tea Party favorite Sen. Jim DeMint of South Carolina says he’s supporting Romney because “we really need someone who understands how risk, taking risk… is the way we create jobs, create choices, expand freedom.” Chamber of Commerce President Tom Donahue, defending Romney, explains “this economy is about risk. If you don’t take risk, you can’t have success.”
Wait a minute. Who do they think are bearing the risks? Their blather about free enterprise risk-taking has it upside down. The higher you go in the economy, the easier it is to make money without taking any personal financial risk at all. The lower you go, the bigger the risks.
Wall Street has become the center of riskless free enterprise. Bankers risk other peoples’ money. If deals turn bad, they collect their fees in any event. The entire hedge-fund industry is designed to hedge bets so big investors can make money whether the price of assets they bet on rises or falls. And if the worst happens, the biggest bankers and investors now know they’ll be bailed out by taxpayers because they’re too big to fail.
But the worst examples of riskless free enteprise are the CEOs who rake in millions after they screw up royally.
Near the end of 2007, Charles Prince resigned as CEO of Citgroup after announcing the bank would need an additional $8 billion to $11 billion in write-downs related to sub-prime mortgages gone bad. Prince left with a princely $30 million in pension, stock awards, and stock options, along with an office, car, and a driver for five years.
Stanley O’Neal’s five-year tenure as CEO of Merrill Lynch ended about the same time, when it became clear Merrill would have to take tens of billions in write-downs on bad sub-prime mortgages and be bought up at a fire-sale price by Bank of America. O’Neal got a payout worth $162 million.
Philip Purcell, who left Morgan Stanley in 2005 after a shareholder revolt against him, took away $43.9 million plus $250,000 a year for life.
Pay-for-failure extends far beyond Wall Street. In a study released last week, GMI, a well-regarded research firm that monitors executive pay, analyzed the largest severance packages received by ex-CEOs since 2000.
On the list: Thomas E. Freston, who lasted just nine months as CEO of Viacom before being terminated, and left with a walk-away package of $101 million.
Also William D. McGuire, who in 2006 was forced to resign as CEO of UnitedHealth over a stock-options scandal, and for his troubles got pay package worth $286 million.
And Hank A. McKinnell, Jr.’s, whose five-year tenure as CEO of Pfizer was marked by a $140 billion drop in Pfizer’s stock market value. Notwithstanding, McKinnell walked away with a payout of nearly $200 million, free lifetime medical coverage, and an annual pension of $6.5 million. (At Pfizer’s 2006 annual meeting a plane flew overhead towing a banner reading “Give it back, Hank!”)
Not to forget Douglas Ivester of Coca Cola, who stepped down as CEO in 2000 after a period of stagnant growth and declining earnings, with an exit package worth $120 million.
If anything, pay for failure is on the rise. Last September, Leo Apotheker was shown the door at Hewlett-Packard, with an exit package worth $13 million. Stephen Hilbert left Conseco with an estimated $72 million even though value of Conseco’s stock during his tenure sank from $57 to $5 a share on its way to bankruptcy.
But as economic risk-taking has declined at the top, it’s been increasing at the middle and below. More than 20 percent of the American workforce is now “contingent” — temporary workers, contractors, independent consultants — with no security at all.
Even full-time workers who have put in decades with a company can now find themselves without a job overnight — with no parachute, no help finding another job, and no health insurance.
Meanwhile the proportion of large and medium-sized companies (200 or more workers) offering full health care coverage continues to drop – from 74 percent in 1980 to under 10 percent today. Twenty-five years ago, two-thirds of large and medium-sized employers also provided health insurance to their retirees. Now, fewer than 15 percent do.
The risk of getting old with no pension is also rising. In 1980, more than 80 percent of large and medium-sized firms gave their workers “defined-benefit” pensions that guaranteed a fixed amount of money every month after they retired. Now it’s down to under 10 percent. Instead, they offer “defined contribution” plans where the risk is on the workers. When the stock market tanks, as it did in 2008, the 401(k) plan tanks along with it. Today, a third of all workers with defined-benefit plans contribute nothing, which means their employers don’t either.
And the risk of losing earnings continues to grow. Even before the crash of 2008, the Panel Study of Income Dynamics at University of Michigan found that over any given two-year stretch about half of all families experienced some decline in income. And the downturns were becoming progressively larger. In the 1970s, the typical drop was about 25 percent. By late 1990s, it was 40 percent. By the mid-2000s, family incomes rose and fell twice as much as they did in the mid-1970s, on average.
What Romney and the cheerleaders of risk-taking free enterprise don’t want you to know is the risks of the economy have been shifting steadily away from CEOs and Wall Street — and on to average working people. It’s not just income and wealth that are surging to the top. Economic security is moving there as well, leaving the rest of us stranded.
To the extent free enterprise is on trial, the real question is whether the system is rigged in favor of those at the top who get rewarded no matter how badly they screw up, while the rest of us get screwed no matter how hard we work.
The jury will report back Election Day. In the meantime, Obama and the Democrats shouldn’t allow Romney and the Republicans to act as defenders of risk-taking free enterprise. Americans need to know the truth. The only way the economy can thrive is if we have more risk-taking at the top, and more economic security below.
By: Robert Reich, Salon, January 17, 2012
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