How Exactly Did We Drive Off This Cliff?
As Labor Day approaches, Hillman Judge Harold Meyerson asks where it all went wrong for the global economy…
Labor Day — that mocking reminder that this nation once honored workers — is upon us again, posing the nagging question of why the economy ceased to reward work. Was globalization the culprit? Technological change? Anyone seeking a more fundamental answer should pick up the September issue of the Harvard Business Review and check out William Lazonick’s seminal essay on U.S. corporations, “Profits Without Prosperity.”
The short answer is that corporations are paying out almost all their profits to shareholders. Lazonick’s research shows that this wasn’t always the case. From the end of the Second World War through the 1970s, big companies reinvested the lion’s share of their profits to hire more workers, raise wages, research new technologies, and generally grow their businesses–with positive effects for the larger economy. These days, large corporations spend most of their profits paying returns to shareholders and buying back their own stock. Companies started buying back a lot more of their own stock after restrictions on the practice were lifted during the Reagan Era. CEOs who are paid in stock options have a vested interest in buy-backs because they increase the value of the company’s stock.
These days, 91% of corporate profits of S&P 500 companies go to shareholders, leaving just 9% for pay raises, R&D, or any other purpose.
Corporations are systematically redistributing wealth from workers to investors, and if we don’t implement the reforms to curb this trend, the problem is only going to get worse.