Fewer than half of the US population owns a single share of stock and even fewer Americans are in a position to start their own businesses. Nonetheless, at least in rhetoric this nation remains the land of the self-made man — and occasional woman. Many believe they still have the opportunity to be real entrepreneurs — by investing in corporate America through the stock market.
Stock markets provide all our citizens the chance to invest in those companies with promising products and technologies. Companies use capital from the markets and loans from banks to expand plants and innovate. Banks also act as an instrument to screen and evaluate new business opportunities. All of these contentions would hardly survive the usual scrutiny the media give to most economic matters, especially government programs. Why these myths persist is a vital political question.
The stock market today seldom raises capital for real investment. Our economy has become increasingly financialized with speculative activity generating a large share of total profits and also steering — and disrupting — the course of the productive economy.
Consider first what happens when I purchase a share of stock on the New York Stock Exchange. If I buy a share of GE stock, am I in effect loaning funds to GE, which it may then use to expand its productive facilities? No. I am buying this share from another market participant. GE sees none of this money. The only circumstance in which stock purchases lead to productive activity is corporate issuance of Initial Public Offerings, IPOs.
These, however, represent a tiny portion of stock market activity. Douglas Orr, professor of economics at City College of San Francisco, points out that in 2007, just before the financial collapse, $43.8 trillion in stocks changed hands while only $65 billion was raised in IPOs. Orr also argues: “The biggest propaganda coup of the 20th century was convincing the media and the general public to call the speculators on the New York Stock Exchange ‘investors.’”
The stock market may not be a direct source of productive investment, but that does not mean the market has no effect on the overall economy.
Unfortunately the effects are often negative. Though the media portray a healthy stock market as a boon for ordinary citizens, they seldom look at the numbers. Only 10% of the population owns 90% of the stocks.
With the decline of unions and other countervailing regulations of its behavior, the modern US corporation, often sitting on piles of cash, has become a financial asset to be manipulated by CEOs and institutional shareholders alike.
Michael Konczal, writing in the Washington Monthly, invites us to compare two eras at General Electric. This is how business professor Gerald Davis describes the perspective of Owen Young, who was CEO of GE almost straight through from 1922 to 1945: “[S]tockholders are confined to a maximum return equivalent to a risk premium. The remaining profit stays in the enterprise, is paid out in higher wages, or is passed on to the customer.” Davis contrasts that ethos with that of Jack Welch, CEO from 1981 to 2001; Welch, Davis says, believed in “the shareholder as king — the residual claimant, entitled to the [whole] pot of earnings.”
CEOs, who now are more often finance experts rather than entrepreneurs, are frequently paid with stock options, the value of which depends on the stock price. Cutting jobs and driving down wages is often rewarded by the market with at least short term increases in stock prices. In addition, using those piles of cash to buy back stock can jack stock prices up even as it cuts into the capital that might once have fostered business expansion. Goldman Sachs predicts, “The slow pace of recovery and recurring threat of economic stagnation has biased managements in recent years toward returning cash to shareholders. Although we expect a gradual shift toward investing for growth via capital expenditures and [mergers and acquisitions] as confidence in the US economy grows, the popularity of dividends and buyback should continue …” What Goldman does not say is the role that stock buybacks have in slowing growth.
Both as a cause and a consequence of these trends, large investment banks have become less inclined to make traditional loans for business expansion and more focused on other speculative strategies, including mergers and acquisitions, currency trades, stocks, and new instruments pegged to other loans, such as mortgages, education, and credit card debt. Konczal points out: “Beginning in 1980 and continuing today, banks generate less and less of their income from interest on loans. Instead, they rely on fees, from either consumers or borrowers. Fees associated with household credit grew from 1.1% of GDP in 1980 to 3.4% in 2007. As part of the unregulated shadow banking sector that took over the financial sector, banks are less and less in the business of holding loans and more and more concerned with packaging them and selling them off.”
And with an economy in which working class wages have stagnated despite productivity gains, workers have needed and been encouraged to borrow more in order to sustain their living standards. Thus not only has housing depended increasingly on credit but pensions, education for one’s children, medical and long term insurance are all purchased on a market and/or depend on debt financing or stock market valuations.
The neo liberal agenda is sustained not only by federal tax and fiscal policy but also through practices of everyday life. These practices in turn are supported by and in turn reinforce cultural narratives, as in the various high stakes lotteries so widely publicized in our corporate media.
Of course even this slow growth economy has seen some remarkable product, technology, and health care innovations. Any time labor and social justice advocates complain about it they are asked if they want to live in a world without computers and flat screen TVs. But what is the origin of these marvels?
In a commentary for the blog Naked Capitalism, Marshall Auerback summarizes recent work by Mariana Mazzucato, author of “The Entrepreneurial State”, “Typically the private sector only finds the courage to invest in breakthrough technologies after a so-called “entrepreneurial state” has made the initial high-risk investments. This can be seen today in the green revolution, the development of biotech and pharmaceutical industry, and the technological advancements coming out of Silicon Valley. Mazzucato argues that by not giving due credit to the state’s role in this process we are socializing the risks of investing, while privatizing the rewards. So who benefits from the state’s role in the development of technology?
Consider Apple’s iPhone and Google’s search engine. In both cases these extremely popular consumer products benefitted mightily from state intervention. For the iPhone, many of the revolutionary technologies that make it and similar devices “smart” were funded by the US government, such as the global positioning system (or GPS), the touchscreen display, and the voice-activated personal assistant, Siri. And for Google, the creation of its algorithm was funded by the National Science Foundation. Plus, of course, there’s the development of the Internet, another government funded venture, which enables the iPhone to be a valuable tool and makes Google searches possible.”
In short the state does the heavy lifting by funding not only R and D but even further stages of product development. Then when such accomplishments are turned over to the private sector they are often patented, thus generating monopoly profits that can be used both for speculative activity and to lobby on behalf of further subsidies.
Are we in an inescapable bind or are there alternative policies and strategies that offer some hope? I’ll address this question in my next column.
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