We don't ordinarily think of Nobel Prize winning economists as mean or evil people. But Milton Friedman is the man who made the principle of maximizing shareholder value the main business ethic, indeed, he asserted that the corporation's sole responsibility was to its shareholders. Just think of the amazing assumptions that must underpin that policy! The environment counts for nothing! The workers well-being and income count for nothing. The infant mortality rate of newborns in this country being higher than Russia's isn't a concern under that theory. The once-precious concept of the common good counts for nothing. When you look at the implications of a business principle such as the Friedman Doctrine, putting the earnings of the wealthy and influential people above all other environmental, social and governance values, its just plain evil.
Mr. Reich, this is the kind of material that ignites my sense of possibility again. More, more, more! People need ideas, we need to know there is something worth working for and fighting for.
Milton Friedman wrote his influential "maximize shareholder value" essay in 1970. In 1980 we elected Ronald Reagan President. A year later in 1981 Reagan broke the PATO air traffic controllers strike and signaled that the federal government would henceforth be on the side of management and against workers. The Tax Reform Act of 1986 (TRA) was signed into law by President Ronald Reagan on October 22, 1986. The Act lowered federal income tax rates, decreasing the number of tax brackets and reducing the top tax rate from 50 percent to 28 percent. In 1987 the character Gordon Gekko, played by Michael Douglas in the movie "Wall Street" said, “The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right."
These events, happening in a such remarkably short period of time, were waypoints on our transformation from an imperfect but quasi functioning society and economy into a dysfunctional one that today resembles the board game Monopoly", when one player has all the hotels, houses, railroads utilities and cash. Then the game stops.
The problem for workers isn’t owning shares, it is who allocates capital. Most corporations today have billions of shares. The shareholders are beholden to the management for the success or failure of the corporation and the management operates the corporation largely for their own benefit not that of the shareholders. A good example of this is AT&T. It’s management decided to borrow billions of $ to buy into media content and content distribution. It stopped investing in its real business. It then paid itself enormous bonuses for successfully completing the acquisition. When the management finally realized they had no experience with content creation and they were losing money with their acquisitions they decided to sell them off at a loss, cut their dividend and continue to pay themselves bonuses for this new turn in the corporate
So you have to go much farther than profit sharing. Profit seeking is what motivated all of AT&T management decisions. They were not thinking how do we extend fiber to the home, that wasn’t profitable. It took Covid and government subsidies to force them into investing in extending high speed internet to the home. They wouldn’t allocate capital to it themselves.
So unless you come up with a better way to allocate capital than leaving it to the selfish self interested management of Corporations you are doing nothing for workers.
The better option is tax high incomes, asset accumulation, and profits. When this was done in the 1950s getting more money wasn’t an advantage to managers because the government took it all away in taxes. So sharing corporate income with the workers wasn’t as much of man out of my pocket into theirs issue.
To give workers non controlling stock is just to give them a few token chips with which to enter the Wall St casino.
I have friends who benefited from their companies “profit sharing” and retired with a huge amount of money. I also have friends whose companies never offered profit sharing and even though they received a small percentage match on their 401K contributions, they lost most of it, along with jobs and homes in 2008 due to the Wall Street crash. Which then brings us to “pensions” which have also disappeared from most industries except for high level executives who receive millions in stock options and exit bonuses.
Businesses cry that they don’t have workers anymore and can’t survive. I have no sympathy for them, they should have built a solid employee foundation based on a happy, well paid and compensated workforce right from the beginning, including pensions and stocks. If they want employee loyalty then it’s time they start earning it.
I urge you to read "Employee Ownership and Wealth Inequality: A Path to Reducing Wealth Concentration" https://ssrn.com/abstract=3942536 It examines how the wealth of various populations would change if all businesses were to become 30% employee-owned. The Gini coefficient would decrease nearly 10% from 0.85 to 0.77, lower than any point measured by the Survey of Consumer Finances since its inception in 1962. The wealth share of those with below-median wealth increasing from 1% to 6% of total wealth. The net wealth of the average black family would increase more than 400%, from $24,100 to $106,271, and those with no high school diploma would see similar gains. Overall, all demographic groups would see gains to their median wealth. On the other end of the spectrum, the decline in wealth would be concentrated among the top 1%. Those in the 90th to 99th percentile of wealth would see an average decline in net worth of 1%, while the wealth of the top 1%, who currently have an average of $28.4 million in assets, would see a 14% decline to $24.4 million, on average. Plus shares carry voice. Workers who own a significant share of the companies they work for would be able to reprioritize activities. Workers have less incentive to externalize costs because they live in the communities where they work. While 30% ownership by workers may be overly ambitious, 10% ownership is not. Instead of cash bonuses, give employees stock that comes with voice. Workers could combine their voices with those of worker-friendly pension funds like CalPERS and with many traditional SRI funds. Together, they could use proxy access provisions to elect up to 20% of the members on corporate boards. Voice and representation, that's the ticket.
Very interesting information, and a great idea to lower tax rates on corporations that share profits with their employees. If the idea gained enough momentum, you could expect blowback from the Bezos of the world that it smacks of socialism, or that it’s unAmerican or some other b.s.
I spent my working life interfacing with small business owners. They constantly griped about their inability to find "good workers." I often found myself wondering why these owners didn't have a profit-sharing plan in place. The few that I asked about this responded, in one form or another, that it wouldn't work: people only wanted higher wages, they wouldn't appreciate it, they didn't deserve it, the business needed the money, etc. The inference to be made is that good old fashioned greed was the real reason they didn't want to do it.
I stopped asking why, but I remain quizzical about the subject. It seems so obvious: if you want good employees who will be productive, remain loyal and care about the the health and welfare of the business, share the profits.
But business owners don't see it that way. They want it all for themselves.
This sounds like a great idea. We need more discussion of sharing in this country. We also need the powerful to recognize that employees are human beings and not merely a business expense. The greedy plutocrat class seems to believe that life is all about the already privileged accumulating more and more wealth at the expense of everyone else. Why does one person even need $200 billion?
What role would a union play in a profit-sharing environment? What purpose would it serve? Somehow, it seems like a profit sharing union membership could end up at cross purpose with itself. Maybe it's a dumb question, but I don't mind appearing dumb, as long as I get a clear answer here.
Common sense should show that Professor Reich's analysis of business management practice is on target. As long as the emphasis is on maximizing short term gains for upper management and big stockholders, the wealth gap will keep widening, and the benefits to the larger society will keep shrinking. The whole infrastructure of investment and corporate management has to change to restore a balance between big capital, labor and the consumer of the company's goods or services. The trick will be to overcome years of knee jerk responses against adjusting the system, in part due to diverting labor into focusing on short term outcomes (small increases in wages and benefits) vs. more structural change in the broader system of ownership and governance. Where is the national leadership needed to drive this lesson home, and show the way to a more equitable system?
I could not agree more. Ownership especially matters, and companies that share it widely through Employee Stock Ownership Plans (ESOPs) perform better than other companies and their employees do much better. ESOPs are supported by both parties and have been provided generous tax benefits. A few additional steps could make them far more common.
A 2021 study by the National Center for Employee Ownership looked at how participants in ESOP companies fared relative to participants in retirement plans in comparable companies. First, note that 50% of the private sector workforce is not in any retirement plan, and lower paid employees and employees of color and women are even less likely to be in these plans.
Looking at the total average assets of ESOP participants versus those in comparable companies with the main other form of retirement benefit, the 401(k) plan, the study found that ESOP participants have over twice the assets in their ESOP accounts as those in comparable companies have in their 401(k) plans and about the same assets in their 401(k) plans (most ESOPs have both plans, not just one).
Data from the General Social Survey show that over the last 20 years, employees in these plan are laid off at one-third to one-fifth the rate of other companies.
Based on Census data, the median household net wealth among respondents in ESOPs was 92% higher for employee owners than for non-employee-owners. This disparity held true for the great majority of subgroups analyzed, including single women, parents raising young children, non-college graduates, and workers of color. Employee-owners of color in this data, for instance, had 30% higher income from wages, 79% greater net household wealth, and median tenure in their current job 36% over nonemployee-owners of color.
This is an excellent and very necessary column, and I'm particularly impressed by the thoughtfulness and intelligence of the discussion that follows. More reason to value Professor Reich's essays. Well done to all!
Employees are an important investment just as buildings and machinery. It would seem some companies think of employees as disposables. The tax incentive is a fabulous idea.
Also, my company used to use matching funds for up to a certain percentage of your income. This may be a compromise where individuals can eek out saving a bit every week and the company matches it.
We don't ordinarily think of Nobel Prize winning economists as mean or evil people. But Milton Friedman is the man who made the principle of maximizing shareholder value the main business ethic, indeed, he asserted that the corporation's sole responsibility was to its shareholders. Just think of the amazing assumptions that must underpin that policy! The environment counts for nothing! The workers well-being and income count for nothing. The infant mortality rate of newborns in this country being higher than Russia's isn't a concern under that theory. The once-precious concept of the common good counts for nothing. When you look at the implications of a business principle such as the Friedman Doctrine, putting the earnings of the wealthy and influential people above all other environmental, social and governance values, its just plain evil.
Mr. Reich, this is the kind of material that ignites my sense of possibility again. More, more, more! People need ideas, we need to know there is something worth working for and fighting for.
Milton Friedman wrote his influential "maximize shareholder value" essay in 1970. In 1980 we elected Ronald Reagan President. A year later in 1981 Reagan broke the PATO air traffic controllers strike and signaled that the federal government would henceforth be on the side of management and against workers. The Tax Reform Act of 1986 (TRA) was signed into law by President Ronald Reagan on October 22, 1986. The Act lowered federal income tax rates, decreasing the number of tax brackets and reducing the top tax rate from 50 percent to 28 percent. In 1987 the character Gordon Gekko, played by Michael Douglas in the movie "Wall Street" said, “The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right."
These events, happening in a such remarkably short period of time, were waypoints on our transformation from an imperfect but quasi functioning society and economy into a dysfunctional one that today resembles the board game Monopoly", when one player has all the hotels, houses, railroads utilities and cash. Then the game stops.
The problem for workers isn’t owning shares, it is who allocates capital. Most corporations today have billions of shares. The shareholders are beholden to the management for the success or failure of the corporation and the management operates the corporation largely for their own benefit not that of the shareholders. A good example of this is AT&T. It’s management decided to borrow billions of $ to buy into media content and content distribution. It stopped investing in its real business. It then paid itself enormous bonuses for successfully completing the acquisition. When the management finally realized they had no experience with content creation and they were losing money with their acquisitions they decided to sell them off at a loss, cut their dividend and continue to pay themselves bonuses for this new turn in the corporate
So you have to go much farther than profit sharing. Profit seeking is what motivated all of AT&T management decisions. They were not thinking how do we extend fiber to the home, that wasn’t profitable. It took Covid and government subsidies to force them into investing in extending high speed internet to the home. They wouldn’t allocate capital to it themselves.
So unless you come up with a better way to allocate capital than leaving it to the selfish self interested management of Corporations you are doing nothing for workers.
The better option is tax high incomes, asset accumulation, and profits. When this was done in the 1950s getting more money wasn’t an advantage to managers because the government took it all away in taxes. So sharing corporate income with the workers wasn’t as much of man out of my pocket into theirs issue.
To give workers non controlling stock is just to give them a few token chips with which to enter the Wall St casino.
I have friends who benefited from their companies “profit sharing” and retired with a huge amount of money. I also have friends whose companies never offered profit sharing and even though they received a small percentage match on their 401K contributions, they lost most of it, along with jobs and homes in 2008 due to the Wall Street crash. Which then brings us to “pensions” which have also disappeared from most industries except for high level executives who receive millions in stock options and exit bonuses.
Businesses cry that they don’t have workers anymore and can’t survive. I have no sympathy for them, they should have built a solid employee foundation based on a happy, well paid and compensated workforce right from the beginning, including pensions and stocks. If they want employee loyalty then it’s time they start earning it.
I urge you to read "Employee Ownership and Wealth Inequality: A Path to Reducing Wealth Concentration" https://ssrn.com/abstract=3942536 It examines how the wealth of various populations would change if all businesses were to become 30% employee-owned. The Gini coefficient would decrease nearly 10% from 0.85 to 0.77, lower than any point measured by the Survey of Consumer Finances since its inception in 1962. The wealth share of those with below-median wealth increasing from 1% to 6% of total wealth. The net wealth of the average black family would increase more than 400%, from $24,100 to $106,271, and those with no high school diploma would see similar gains. Overall, all demographic groups would see gains to their median wealth. On the other end of the spectrum, the decline in wealth would be concentrated among the top 1%. Those in the 90th to 99th percentile of wealth would see an average decline in net worth of 1%, while the wealth of the top 1%, who currently have an average of $28.4 million in assets, would see a 14% decline to $24.4 million, on average. Plus shares carry voice. Workers who own a significant share of the companies they work for would be able to reprioritize activities. Workers have less incentive to externalize costs because they live in the communities where they work. While 30% ownership by workers may be overly ambitious, 10% ownership is not. Instead of cash bonuses, give employees stock that comes with voice. Workers could combine their voices with those of worker-friendly pension funds like CalPERS and with many traditional SRI funds. Together, they could use proxy access provisions to elect up to 20% of the members on corporate boards. Voice and representation, that's the ticket.
Very interesting information, and a great idea to lower tax rates on corporations that share profits with their employees. If the idea gained enough momentum, you could expect blowback from the Bezos of the world that it smacks of socialism, or that it’s unAmerican or some other b.s.
I agree.
I spent my working life interfacing with small business owners. They constantly griped about their inability to find "good workers." I often found myself wondering why these owners didn't have a profit-sharing plan in place. The few that I asked about this responded, in one form or another, that it wouldn't work: people only wanted higher wages, they wouldn't appreciate it, they didn't deserve it, the business needed the money, etc. The inference to be made is that good old fashioned greed was the real reason they didn't want to do it.
I stopped asking why, but I remain quizzical about the subject. It seems so obvious: if you want good employees who will be productive, remain loyal and care about the the health and welfare of the business, share the profits.
But business owners don't see it that way. They want it all for themselves.
This sounds like a great idea. We need more discussion of sharing in this country. We also need the powerful to recognize that employees are human beings and not merely a business expense. The greedy plutocrat class seems to believe that life is all about the already privileged accumulating more and more wealth at the expense of everyone else. Why does one person even need $200 billion?
What role would a union play in a profit-sharing environment? What purpose would it serve? Somehow, it seems like a profit sharing union membership could end up at cross purpose with itself. Maybe it's a dumb question, but I don't mind appearing dumb, as long as I get a clear answer here.
Good suggestion. Totally agree with using taxation as a tool to encourage profit sharing.
Common sense should show that Professor Reich's analysis of business management practice is on target. As long as the emphasis is on maximizing short term gains for upper management and big stockholders, the wealth gap will keep widening, and the benefits to the larger society will keep shrinking. The whole infrastructure of investment and corporate management has to change to restore a balance between big capital, labor and the consumer of the company's goods or services. The trick will be to overcome years of knee jerk responses against adjusting the system, in part due to diverting labor into focusing on short term outcomes (small increases in wages and benefits) vs. more structural change in the broader system of ownership and governance. Where is the national leadership needed to drive this lesson home, and show the way to a more equitable system?
I could not agree more. Ownership especially matters, and companies that share it widely through Employee Stock Ownership Plans (ESOPs) perform better than other companies and their employees do much better. ESOPs are supported by both parties and have been provided generous tax benefits. A few additional steps could make them far more common.
A 2021 study by the National Center for Employee Ownership looked at how participants in ESOP companies fared relative to participants in retirement plans in comparable companies. First, note that 50% of the private sector workforce is not in any retirement plan, and lower paid employees and employees of color and women are even less likely to be in these plans.
Looking at the total average assets of ESOP participants versus those in comparable companies with the main other form of retirement benefit, the 401(k) plan, the study found that ESOP participants have over twice the assets in their ESOP accounts as those in comparable companies have in their 401(k) plans and about the same assets in their 401(k) plans (most ESOPs have both plans, not just one).
Data from the General Social Survey show that over the last 20 years, employees in these plan are laid off at one-third to one-fifth the rate of other companies.
Based on Census data, the median household net wealth among respondents in ESOPs was 92% higher for employee owners than for non-employee-owners. This disparity held true for the great majority of subgroups analyzed, including single women, parents raising young children, non-college graduates, and workers of color. Employee-owners of color in this data, for instance, had 30% higher income from wages, 79% greater net household wealth, and median tenure in their current job 36% over nonemployee-owners of color.
This is an excellent and very necessary column, and I'm particularly impressed by the thoughtfulness and intelligence of the discussion that follows. More reason to value Professor Reich's essays. Well done to all!
Employees are an important investment just as buildings and machinery. It would seem some companies think of employees as disposables. The tax incentive is a fabulous idea.
Also, my company used to use matching funds for up to a certain percentage of your income. This may be a compromise where individuals can eek out saving a bit every week and the company matches it.