The Great Power-Shift (Part I)

Why America's corporate and financial elites are wrong about the roots of Trumpism and of soaring inequality

Friends,

Sorry to burden you with this long letter, but in these last days before the 2022 midterm elections we have come to a juncture where many of the political and economic strands over the last forty years are conjoining. It’s important to see the result, and to separate truth from fiction.

Trumpism — as seen through the eyes of America’s corporate and financial establishment — is a backlash against demographic and social changes. White men, so the story goes, are in revolt against the rising share of the population encompassing people of color and immigrants, the growing economic power of women, and the increasing political power of the LGBTQ community.

It’ a convenient story for the corporate and financial establishment to tell because it leaves out the corporate and financial establishment. Naturally, the establishment doesn’t want to view Trumpism as working-class revolt against the income, wealth, and power of the corporate-financial establishment.

Meanwhile, the establishment explains the record inequalities of income and wealth as the natural result of the “free market.” According to this story, globalization and technological change have made most Americans — especially those without college degrees — less competitive. The tasks they used to do can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.

Both explanations offered by the corporate-financial establishment — for the rise of Trumpism and for widening inequalities of income and wealth — leave out the increasing concentration of political power in the corporate and financial elite, which has been able to influence the rules on which the economy runs.

Yet this power shift lies at the heart of both Trumpism and widening inequality.

I. The false view of the market

The elite’s market explanation for inequality offers the meritocratic tautology that individuals are paid what they're "worth," without examining the legal and political institutions that define the market. This tautology is easily confused for a moral claim that people deserve what they are paid.

Yet this claim has meaning only if the legal and political institutions defining the market are morally justifiable.

By ignoring the shift in power, it’s been possible for the establishment to argue that the median wage of the bottom 90 percent — which for the first 30 years after World War II rose in tandem with productivity — has stagnated for the last 40 years, even as productivity continued to rise, because most workers are worth less than they were before new software technologies and globalization made many of their old jobs redundant. It follows that most workers have to settle for lower wages and less security. If they want better jobs, they need more education and better skills. So hath the market decreed.

Yet this market view doesn't explain why the transformation occurred so suddenly. The divergence between productivity gains and the median wage began in the late 1970s and then took off. But globalization and technological change did not suddenly arrive at America's doorstep in those years. What else began happening?

Nor can the market view account for why other advanced economies facing similar forces of globalization and technological change did not succumb to them as readily as the United States. Why have globalization and technological change widened inequality in the United States to a much greater degree than in Europe or Japan?

Nor can the market view account for why the compensation of the top executives of big American companies soared from an average of 20 times that of the typical worker 40 years ago to over 300 times today. Or why the denizens of Wall Street, who in the 1950s and 1960s earned comparatively modest sums, are now paid tens or hundreds of millions annually. Are they really "worth" that much more now than they were worth then?

Nor can the market view explain why the middle class's share of the total economic pie continues to shrink, while the share going to the top continues to grow.

II. How corporate power has altered the market to increase profits

A deeper understanding of what has happened to American income and wealth over the last forty years requires an examination of changes in the structure of the market.

These changes stem from a dramatic increase in the political power of large corporations and Wall Street to change the rules of the market in ways that have enhanced their profits, while reducing the share of economic gains going to the majority of Americans. Higher corporate profits have meant higher returns for shareholders and, directly and indirectly, for the executives and bankers themselves.

This transformation has amounted to a redistribution upward, but not as "redistribution" is normally defined. The government did not tax the middle class and poor and transfer a portion of their incomes to the rich. The government made the upward redistribution by altering the rules of the game.

— Intellectual property rights-patents, trademarks, and copyrights have been enlarged and extended. This has created windfalls for pharmaceuticals, high tech, biotechnology, and many entertainment companies, which now preserve their monopolies longer than ever. It has also meant high prices for average consumers, including the highest pharmaceutical costs of any advanced nation.

— Antitrust laws have been relaxed for corporations with significant market power. This has meant large profits for Monsanto, which sets the prices for most of the nation's seed corn; for four high-tech companies with power over portals and platforms (Amazon, Facebook, Google, and Apple); for cable companies facing little or no broadband competition; for airlines (which went from twelve in 1980 to four today); and for the largest Wall Street banks, among others. As with intellectual property rights, this market power has simultaneously raised prices and reduced services available to average Americans.

During the current inflation, monopolistic corporations have been able to increase their prices higher than their increasing costs, using the cover of inflation as an excuse.

— Financial laws and regulations instituted in the wake of the Great Crash of 1929 and the consequential Great Depression have been abandoned — restrictions on interstate banking, on the intermingling of investment and commercial banking, and on banks becoming publicly held corporations, for example — thereby allowing the largest Wall Street banks to acquire unprecedented influence over the economy.

The growth of the financial sector, in turn, spawned junk-bond financing, unfriendly takeovers, private equity, and the notion that corporations exist solely to maximize shareholder value.

— Bankruptcy laws have been loosened for large corporations but contracted for homeowners and student debtors. Airlines and automobile manufacturers have been allowed to abrogate labor contracts, threaten closures unless they receive wage concessions, and leave workers and communities stranded.

The largest banks and auto manufacturers were bailed out in the downturn of 2008–2009. But bankruptcy was not extended to homeowners burdened by mortgage debt, who owe more on their homes than the homes are worth, or to graduates laden with student debt. The result has been to shift the risks of economic failure onto the backs of average working people and taxpayers.

— Contract laws have been altered to require mandatory arbitration before private judges selected by big corporations and “non-compete” clauses that reduce the bargaining power of employees.

— Securities laws have been relaxed to allow insider trading of confidential information. CEOs have used stock buybacks to boost share prices when they cash in their own stock options.

— Taxes have been cut for big corporations and the rich. Tax laws have created loopholes for the partners of hedge funds and private-equity funds, special favors for the oil and gas industry, lower marginal income-tax rates on the highest incomes, and reduced estate taxes on great wealth.

All these instances represent distributions upward — toward big corporations and financial firms, and their executives and shareholders-and away from average working people.

III. How corporate power has suppressed wages to increase profits

Meanwhile, corporate and financial executives have done everything possible to prevent the wages of most workers from rising in tandem with productivity gains, in order that more of the gains go instead toward corporate profits. Their major strategy has been to make workers more economically insecure, so they accept lower real wages (adjusted for inflation).

— Some of this insecurity has been the consequence of trade agreements that have encouraged American companies to outsource jobs abroad.

Since all nations' markets reflect political decisions about how they are organized, so-called "free trade" agreements entail complex negotiations about how different market systems are to be integrated. The most important aspects of such negotiations concern intellectual property, financial assets, and labor.

The first two of these interests have gained stronger protection in such agreements, at the insistence of big U.S. corporations and Wall Street. The latter-the interests of average working Americans in protecting the value of their labor-have gained less protection, because the voices of working people have been muted.

— Rising job insecurity can also be traced to high levels of unemployment. Here, too, government policies have played a significant role. The Great Recession of 2008-09, whose proximate causes were the bursting of housing and debt bubbles brought on by the deregulation of Wall Street, hurled millions of Americans out of work. The resulting joblessness undermined the bargaining power of average workers and translated into stagnant or declining wages.

This was followed by the dramatic increase in unemployment during the 2020-21 pandemic, and — in the wake of a predictable post-pandemic inflation — the eagerness with which the denizens of Wall Street and C-suites have encouraged the Federal Reserve to increase interest rates, even at the inevitable cost of jobs.

— Some insecurity has been the result of shredded safety nets and disappearing labor protections. Public policies that emerged during the New Deal and World War II had placed most economic risks squarely on large corporations through strong employment contracts, along with Social Security, workers' compensation, 40-hour workweeks with time-and-a-half for overtime, and employer-provided health benefits (wartime price controls encouraged such tax-free benefits as substitutes for wage increases).

But in the wake of the junk-bond and takeover mania of the 1980s, economic risks were shifted to workers. Corporate executives did whatever they could to reduce payrolls — outsource abroad, install labor-replacing technologies, and utilize part-time and contract workers. A new set of laws and regulations facilitated this transformation.

Full-time workers who had put in decades with a company often found themselves without a job overnight — with no severance pay, no help finding another job, and no health insurance. Even before the crash of 2008, the Panel Study of Income Dynamics at the University of Michigan found that over any given two-year stretch in the two preceding decades, about half of all families experienced some decline in income.

Today, nearly one out of every five working Americans is in a part-time job. Many are consultants, freelancers, and independent contractors. Two-thirds are living paycheck to paycheck. And employment benefits have shriveled. The portion of workers with any pension connected to their job has fallen from just over half in 1979 to under 35 percent today.

— The prevailing insecurity is also a consequence of the demise of labor unions. Fifty years ago, when General Motors was the largest employer in America, the typical GM worker earned $35 an hour in today's dollars. By 2014, America's largest employer was Walmart, and the typical entry-level Walmart worker earned about $9 an hour. The GM worker was not better educated or motivated than the Walmart worker.

The real difference was that GM workers a half-century ago had a strong union behind them that summoned the collective bargaining power of all autoworkers to get a substantial share of company revenues for its members. And because more than a third of workers across America belonged to a labor union, the bargains those unions struck with employers raised the wages and benefits of non-unionized workers as well. Non-union firms knew they would be unionized if they did not come close to matching the union contracts.

Today's Walmart workers do not have a union to negotiate a better deal. They are on their own. And because only 6 percent of today's private-sector workers are unionized, most employers across America do not have to match union contracts.

This puts unionized firms at a competitive disadvantage. Public policies enabled and encouraged this fundamental change. More states adopted so-called "right-to-work" laws. The National Labor Relations Board, understaffed and overburdened, barely enforced collective bargaining. When workers were harassed or fired for seeking to start a union, the board rewarded them back pay — a mere slap on the wrist of corporations that have violated the law. The result has been a race to the bottom.

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Next week, in Part II of this letter, I’ll talk about the consequences of this great power-shift — how it relates to the rise of populism on both the right and the left and the upcoming midterms, and what can and should be done.