A Rosetta Stone
It has been a mystery why economic recovery and a rising stock market have failed to translate into the kind of growth that is felt by ordinary citizens whose earnings have remained mostly stagnant in recent years. A column in The Washington Post by Harold Meyerson sheds light on that question.
Meyerson’s column highlights an article in the Harvard Business Review showing evidence that corporate behavior has changed in a decisive fashion in the last 30 years. And that changed behavior has starved the larger economy in favor of benefits for stockholders and corporate executives.
Before 1980 or so, major corporations used most of their earnings to invest in business expansion, improved technologies, worker training and pay hikes. After 1980, corporate behavior changed.
The author of the paper, economist William Lazonick, found that from 2003 to 2012, 449 companies on the S&P 500 used 54 percent of net earnings to buy back shares of their stock. Buy-backs have the effect of raising stock prices. Another 37 percent of profits went to dividends for shareholders. Thus, 91 percent of corporate profits were used for the immediate benefit of stockholders rather than the long-term benefit of the company or the benefit of workers through training or raises.
Before 1980, less than half of profits went to shareholders. Thus, within that 30-year period, the percentage of profits used for the benefit of shareholders rose from less than 50 percent to 91 percent.
One reason for the change was that in the early 1980s, the Securities and Exchange Commission eliminated limits on the power of corporations to buy back their shares. Then in the 1990s, when compensation for company executives became more commonly linked to share price, buy-backs began in earnest. Thus, a CEO who wanted a big payday could direct his company to buy back shares rather than investing in new equipment or pay raises for employees.
So how did they pay for business expenses? They did so by borrowing. Further, companies increasingly are borrowing for the purpose of buy-backs and dividend payments.
In this way, major corporations have become little more than engines of wealth, not for the society at large, but for the narrow segment of the population with large stock holdings or for company executives whose compensation packages balloon as stock prices rise.
It used to be that corporations were seen as a social good, producing jobs that supported the middle class, producing products that were widely available to consumers whose incomes gave them money to buy things, producing ground-breaking research that would lead to even better technology and better products. But now, Meyerson said, “the purpose of the modern U.S. corporation is to reward large investors and top executives with income that once was spent on expansion, research, training and employees.”
Economic inequality, the shrinking middle class, the lack of social mobility, a sense of vanishing opportunity — all of these problems are rising into the consciousness of more and more Americans, who share a sense of helplessness before economic forces that seem beyond their control. But the economy is not beyond our control. It is our creation. The SEC could change the rule that allows unhindered stock buy-backs. Corporations, which are a legal construct designed with public and private responsibilities, could become good citizens again.
Meyerson said, “Lazonick’s article does nothing less than decode the Rosetta Stone of America’s economic decline.” It sheds a light on investment decisions made by the titans of business that are channeling America’s great wealth into the hands of the few, leaving everyone else scrambling to hold onto their jobs and pay their bills.
Companies that have become accustomed to writing the rules, giving them tax breaks and special treatment, need to be reminded that they have a responsibility, too, to invest in America’s workers. It remains to be seen if the politics of the nation, corrupted by the vast flows of corporate money unleashed by recent Supreme Court decisions, can come to grips with the economic realities that are felt in neighborhoods all across America.