Where is America heading? And what are the causes of a tectonic shift like the handover that will take place at the White House on January 20?
It's not at all easy to find a concise answer. But reporting by Il Sole 24 Ore in the two months since Donald Trump's election victory reveals one single reason that directly or indirectly contributed to the three phenomena that are roiling the United States on the social, economic and political fronts. We are referring, respectively, to increased inequality, the loss of good jobs, and the resulting frustration of voters.
The one reason can be summed up in four words: unconditional supremacy of shareholders. This is a business theory developed in the second half of the 1970s and the first half of the 1980s by economists Michael Jensen, William Meckling and Eugene Fama, which states that the mission of a company is to maximize profits for shareholders.
We've pinpointed an event that vastly accelerated this process. It occurred on November 17, 1982 when the president of the Securities and Exchange Commission (SEC) adopted the rule 10B-18, a measure among the agency's least known, that, in a context of deregulation initiated by then President Ronald Reagan, granted de facto approval for publicly-traded companies to buy their own shares.
That provision, rejecting a half a century of anti-speculation regulations, was backed by John Shad, an investment banker who was asked to run the SEC. In his position as vice president of the brokerage firm E. F. Hutton & Company, Shad had orchestrated mergers and acquisitions for billion of dollars and, in a rule of just over 50 words, he smoothed the way for what William Lazonick, an economist at the University of Massachusetts in Lowell, considers the most unfettered form of financial manipulation in history.
Over the past 35 years, the free pass granted by that little rule, according to Lazonick, destroyed the U.S. economy's manufacturing sector, which, more than any other, had fueled the prosperity of the postwar period, and encouraged accumulation in the hands of a few of resources that were once distributed among white and blue-collar workers, top managers, shareholders and related communities.
Between 2005 and 2015, companies in the S&P 500 index spent more than $4 trillion on buybacks, in addition to $2.5 billion paid out in dividends, and in 2015 this transfer of wealth from companies to investors and speculators represented 115% of net profits.
Behind the transfer was a heavy increase in debt. According to a recent study by Standard & Poor's, US corporate debt rose by $2 trillion in recent years, from less than $4 trillion at the end of 2010 to about $7 trillion at the end of 2015.
In order to understand what happened, we should look at Apple, one of the biggest jewels in the American corporate crown.
In the world of the new economy, the company that belonged to Steve Jobs took the place of the one founded by Henry Ford in the old industrial economy. But while Ford made it possible for everyone to live the American dream, with decent salaries, pension plans and health insurance, Apple pays its engineers extremely well but not the high number of its 76,000 U.S. employees who work in its stores and whose total compensation package is less than half what former Ford workers earned.
Top managers, on the other hand, are paid very well. In 2015, between salary, incentives and vested stock options, the six highest paid managers took home a total of $145 million.
Not to mention the transfer of wealth made in favor of market speculators. In just 32 months of increasing investments in Apple shares, between the summer of 2013 and the spring of 2016, Carl Icahn, the famous US corporate raider and political supporter of Donald Trump, took home almost $2 billion in profits. Without contributing in any way to the wellbeing of the company, Icahn benefited from a buyback program, in part due to his pressure, that led Apple to spend $127 billion on purchasing its own shares (on top of about $44.8 billion paid in dividends).
As if that was not enough, Apple decided not to pay Icahn and other investors using cash, rather it preferred to issue $50 billion in bonds.
So far, Apple has been able to sustain this form of financial self-cannibalization. But for other companies in the high-tech sector it did not go as well. After spending billions on buybacks companies such as Motorola, Cisco or Hewlett-Packard have been reduced to shadows of their former selves.
“It may seem incredible, but the reality is that since the 1980s in America, corporations have provided funds to the stock markets and not vice versa,” said Lazonick. Furthermore, credit has stopped playing the propelling role of earlier times: between 1952 and 1982 the average share of every dollar of profit or new debt that went towards investments was around 40 cents. Since 1983 that has fallen to 10 cents.
Aside from investors and speculators, the only others that have obtained significant benefits from the unregulated financialization of the economy (and rule 10B-18) are top managers.
Analyzing the balance sheets of listed US companies, Lazonick found that, in the last 10 years, the biggest part of compensations of top managers, whose average annual salary grew from $25.6 million in 2006 to $32.6 million in 2015, is linked to stocks. In 2006 they represented about 73% of the total. In 2015 that reached 82%.
“It is clear how top managers are hugely incentivized to make the shares of their own companies grow,” said Lazonick. “And the 10B-18 rule offers them the best tool to increase their personal wealth while looting the company they run.”
His figures and the analysis could also help explain why the expansive monetary policy of the last eight years produced an insufficient recovery in terms of salary increases and industrial activity. Interest rates of around zero have in fact encouraged companies to take on debt, but this was not followed by an equal increase in investments as much of those funds went towards satisfying investors like Icahn.
The irony is that now Icahn is an economic adviser, though informal, to a man who has reached the White House on the wave of frustration fueled by the very financial speculation of which Icahn is the grand master.
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