'It’s Shameless Financial Strip-Mining': Les Leopold Explains How the 1 Percent Killed the Middle Class
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27 March 2016
While the fate of the presidential campaign that talks about the issue more than any other remains uncertain, this much is clear: Despite the general public’s mounting anxiety and awareness, the economic inequality that’s done so much to change American society over the past 40 years has not abated. It may, in fact, be getting worse.
For this reason alone, “Runaway Inequality: An Activist’s Guide to Economic Justice,” the new book from Labor Institute executive director and president Les Leopold, would be worth reading. Thankfully, however, the book has many virtues besides its timeliness. And more than most of the other high-profile books on inequality in recent years, “Runaway Inequality” doesn’t just explain where the U.S. economy went wrong; it also explains how American citizens can organize to get it back on track.
Recently, Salon spoke with Leopold over the phone about the book and economic inequality in general. Our conversation has been edited for clarity and length.
There are a lot of books about inequality out there now, especially in the past five or so years. What does your book bring to the conversation that was otherwise lacking?
I think there were three things that I thought would differ from the ongoing conversation. The first one was that runaway inequality was accelerating. It isn’t just there, it’s growing. The fact that 95 percent of all the new income in the current so-called recovery is going to the top 1 percent is indicative of what’s happening. I don’t think that’s ever happened before in American economic history that I can find. There’s no recovery at the bottom, it just keeps going to the top.
The second one, which I think is even more important, was that I saw runaway inequality as a core issue that linked so many diverse issues. I think it’s kind of funny when someone says, “Well, Bernie Sanders is just interested in inequality or Wall Street. It’s just one issue.” I see it quite differently. I see it as the issue that connects so many other issues, and therefore that leads to the third reason.
I thought that connective tissue could be the basis for building an analysis that could help foster a broad-based progressive-populist movement. That if people could see that their issue silos were actually connected to inequality, it could build bridges amongst various progressive groups that have gotten siloed. Much of the last generation’s worth of progressive action has been within an issue category, be it identity politics or education or housing or environment or so on. There has been a fracturing of what could be a more coherent movement, and I thought “Runaway Inequality,” with its focus on Wall Street and the financialization of the economy, could provide that connective tissue. I didn’t see that anywhere else.
How does your analysis differ from some of the other recent work on inequality?
The slant on Runaway Inequality was different from Piketty and others. There tends to be a story that goes something like this: “American workers kind of got lost in the global shuffle. They don’t have the skills that the more elite people have and we don’t need the manual labor, et cetera. It’s kind of a skill problem, a mismatch between skills and jobs.” I just don’t think that’s true. I think, in fact, the deregulation of the financial system is the driving force of runaway inequality.
I think the way to build a coherent, broad-based populist movement is to focus on runway inequality and Wall Street. That’s what I’m hoping to contribute to.
Why is it that so much of the recovery has gone to those at the top?
That’s the question that takes us to the core analysis. In the late ’70s, roughly, a new economic philosophy really caught hold in both political parties. It originally came from the right, from Milton Friedman and the free marketeers. Academics call it neoliberalism; in the book, we call it the “Better Business Climate.”
It basically was kind of a simple model. Cut taxes, cut regulations, cut back social spending so people will be more eager to find work and be less dependent on the government, and basically undermine the power of labor unions so the economy would run more on market principles and have less inefficiencies in it. There would be more investment and profits, and therefore, all boats would rise. It would lead to kind of a boom economy. That was the theory. I was in graduate school when that was going on, and it was pretty strong, even more liberal economists were sort of giving up on Keynesianism and going in this direction.
What they didn’t teach us and what they never discussed is that it’s one thing to deregulate trucking or airlines or telecommunications, but it’s quite another thing to deregulate the financial sector. When they started deregulating the financial sector, it put in motion something that we refer to as “financial strip mining.” It’s an incredible, insidious process. It started with a lot of corporate raids – we know call them hedge funds, takeovers, private equity companies – financiers who use a little bit of their own money, borrow a huge amount of money, and start buying up companies. In the deregulated atmosphere they bought up thousands of them over time. The debt that was accumulated to do that was basically put on the company. It’s a little bit like if you went out and bought a car with a loan, instead of you paying back the loan the car pays back the loan. That’s what they were doing.
How did this practice change the way those companies were run?
They changed the way the CEOs were paid, so that the CEO acted in behalf of the Wall Street investors. This was really powerful. In 1980, 95 percent of the CEOs’ pay was salary and bonuses, and five percent was stock incentives. Today, it’s virtually reversed. About 85 to 95 percent is stock incentives, and only five percent is salaries and bonuses. So that means the price of the stock is all that matters to the CEO, and of course that’s all that matters to the investors – the hedge funds, the private equity companies. They want to see the stock go up.
It’s a huge change in corporate culture. Now the CEO cares only about raising the stock. What’s the best way to do that? In workshops, we ask working people and community activists this question, and they start talking about, “Well, you’ve got to create a better product, you want to get more market share,” all of the things you would think would lead in that direction. In fact, they did something else.
There was a rule change in 1982, under Reagan. A guy who was the former Head of E.F. Hutton became head of the Securities and Exchange Commission, and he changed the rule about companies buying back their own shares. Before 1982, it was virtually illegal to do that because it was considered stock manipulation. When a company buys back its own shares, it reduces the number of share owners, and therefore every share is worth a little bit more. If you do this, all things being equal, you’re going to boost the share and manipulate the price. The free market’s not doing it, you’re doing it. This guy thought, “Well that’s very efficient. Anyway, competition will even all of that out.”
CEOs and their corporate raider Wall Street partners are thinking, “Oh, this is fantastic. Let’s use the company’s money to raise the price of the share, and then we can cash in on our stock incentives. The outside investors can cash in and leave, ‘pump and dump.’ This is great.”
How prevalent have stock buybacks become, and what are the implications of that?
In 1980, about two percent of a company’s profits were used for stock buybacks. By 2007, 75 percent of all corporate profits were used to buy back their own shares. Forget about R&D, forget about workers’ wages, forget about all that kind of stuff. All that matters to a CEO today is raising the prices of the shares through stock buybacks.
Yesterday, I was at a United Steelworkers meeting and they were very concerned about Carrier moving to Mexico. They’re negotiating and they’ve been making concessions and they still can’t get a deal. It’s a really bad situation. Donald Trump has actually been talking about it as well.
The difference between the negotiations, things are $10 million, $20 million, $30 million dollars. So I quickly go to Google and look up United Technologies, which owns Carrier. In October, United Technologies bought back $9 billion of their own shares. So they’re strip mining the company, and they’re using the worker contracts and the moving to Mexico as a way to generate more cash flow so that they can buy back their own shares. This financial strip mining is phenomenal. The net result is, in 1970 the ratio between a top-100 CEO’s pay and an average worker was 45-to-1. Which is a lot if you think about it this way: if an average worker could afford one car, the CEO could afford 45 cars. Or one home versus 45 homes, or one home that’s 45 times the size of an average worker’s home. We just crunched the numbers again for 2014: it’s 844-to-1. You can’t even conceive of how big that gap is, and it’s a direct result of financial strip mining.
That’s what leads to that acceleration. There’s nothing to stop it now. This is just what they do. When they run out of cash flow to buy back their own shares, they go deeper into debt. They’ll go to the debt market and try to get more money and then turn around and buy back their own shares. This has an incredible effect on virtually every other issue.
How so?
I can just give you one example that really galls me, but it says a lot and shows how many different issues are connected. The Obama administration bailed out the auto industry, and it’s great that they did. The industry was going under due to the Wall Street crash and there was no other reason at all at the time. It was a financial crunch that was taking General Motors under. The guy who negotiated that deal, one of the key negotiators for the Obama administration, left and went to a hedge fund. GM built up a cash cushion because it’s doing better now. I think all of the American people, at the very least, hoped that when GM built up its cash reserves it would do what needed to be done, which is build the best, highest quality, most efficient cars they possibly could for the future generations. This is what we all needed. I think that was the hope.
Well, this guy goes to a hedge fund and takes a position, buys a bunch of shares of GM. And what does it do? It demands that instead of that cash going to R&D, that it goes to the investors through stock buybacks. And about three weeks ago, GM also announced a $9 billion stock buyback plan. It’s shameless financial strip-mining. It does nothing whatsoever for society, but it undermines other goals.
What the book then does is show how this process has huge impact on the public sector. This whole Better Business Climate has a direct connection to the rise of the prison population. So we show how issue after issue is deeply connected to this process of financial strip mining and runaway inequality.
Capitalism has never been particularly warm and fuzzy towards workers, but there was a time before this Better Business Climate concept when businesses were seen as part of communities and were perceived as having obligations to society. They weren’t just doing financial strip mining — even if it made economic sense, hypothetically.
That’s a very good point. Our story kind of starts there. I personally think that this is a transformation of capitalism. Capitalism was still capitalism from World War II to the late 1970s, but the productivity, which is output per worker hour, basically has risen every year except five from 1947 to today. The line just goes up on a 45-degree angle. Average worker wages, taking into account inflation, also grows from 1947 to around 1977. Rose every single year. When we were in grad school, they taught us this was the iron law – that corporations needed to do this. In other words, being more community minded was part of what made a corporation a corporation, and supply and demand led them, if they wanted to keep that productivity going, to pay their workers reasonably well.
The philosophy at that point was basically “retain and reinvest.” CEOs viewed stakeholders as labor, community and their shareholders. It wasn’t that shareholders were somehow in there for the share price over everything else. Once this Better Business Climate model hit, you look at these same two lines and they just split apart. Worker wages actually go down in terms of real buying power. The gap between the two lines today is so large that if worker wages stayed on that productivity line that they taught us was an iron law, which of course they then repealed as soon as I graduated, if the two lines kept going up together the average weekly wage would be double what it is today. That’s how big a gap took place. Something really big changed.
Where else can we see evidence of that change?
You can see the change most clearly if you look at financial sector wages and non-financial sector wages. From 1947 to 1980, the two lines go up together. There was no premium for working on Wall Street. You could work for Chase Manhattan Bank or Manufacturers Hanover or whatever, or General Motors or Ford, and given your general level of skill, education, experience and so on, you’d earn about the same. There was no premium. And then basically the lines split apart again. Financial sector wages go through the roof after deregulation takes hold, so you get a different kind of capitalism.
Piketty, I think, doesn’t really emphasize that. I think very few people have really stressed what a huge change that is – to have the financial sector draw so much money to itself. By 2006, 40 percent of all corporate profits were going to the financial sector. They only have five percent of the workforce, but they’ve got 40 percent of the profits. The strip mining of wealth was being collected there, going from everybody else to them. I think that’s different than the Robber Baron era, where the industrialists were getting a lot of money, but there was a rising standard of living for everybody else. That has stopped.
The average American worker knows about inequality, but they may also wonder why it should matter to them so long as their own standard of living is improving. How do you reach people who think inequality is more of a problem in the abstract than in their daily lives?
Basically there are two competing narratives. “Who cares about inequality if everybody is doing better in America?” and the narrative that’s in the book, which is, “It’s happening at your expense.” We have a couple of chapters that do nothing else but compare the United States to other countries around the world, indicator after indicator after indicator, and just show how far we’ve fallen. We do lead the world in inequality, military spending and number and percent of prisoners. Of all the developed countries, we are second-to-last in child poverty. Romania is the only country behind us.
They did a nice study of seven countries, according to upward mobility, what are the odds that you would be in an income bracket higher than your parents’, and it turned out in the United States it was about 50-50. We were at the bottom of the list. Number one was Denmark, where the odds were seven-to-one that you would do better than your parents. So even upward mobility, our most cherished dream. It goes on and on. Education – in terms of what we pay our teachers, it’s low. The amount of money we invest in 3-year-old and 4-year-old education, we’re near the bottom of the list. An indicator like longevity, we actually showed a decline in comparison to other countries.
So there’s something really going on. Of course, if you were in the top one-percent, this is the greatest country on earth, I’m sure, because you live in your own world. You have your gated community, your private schools, virtually a private healthcare system. You pay very little tax because your money is offshore, and so on. So there’s this breaking apart of America. American exceptionalism, the American dream is sort of collapsing.
How does this financial strip mining impact the public sector?
Two things are very important to realize about this financialization of corporations. The first is that the interest payment on debt is not taxable, just like the interest payment on the mortgage on someone’s home is tax deductible. There was virtually no corporate debt up until about 1980; corporations used their own resources to fund what they needed. Then, through this corporate raiding process debt became the rage and now there’s like $12 trillion in corporate debt. And as corporate debt goes up, tax payments go down.
For example, corporate tax contributions to state and local government have virtually fallen in half since 1980, which puts more pressure on individual tax receipts. But the wealthy have moved so much money offshore that their taxes have also gone down. So we now have, when it comes to state and local government, a perfectly regressive tax system. The top one percent pay about half the tax rate as the bottom 20 percent. As you go down the brackets, the tax rate actually goes up and up – the actual percentage that people pay gets higher and higher.
And that decline in overall revenue leads to deficits and calls to cut safety net programs.
That leads to a fiscal crisis. You have this great squeeze on the public sector, because you’ve got workers who haven’t had a raise in a generation in terms of real buying power and you’ve got the wealthy not paying their share. We estimate there’s something like $21 trillion offshore, and we’re losing at least $150 billion in tax revenues on money that should be taxed but isn’t. Now you have corporate inversions, which are putting more downward pressure on corporate taxes.
So the people in the middle that are paying most of the taxes are tapped out. They’re easy prey to a politician who says, “We want to cut the public sector. Teachers are getting paid too much, we can’t afford their pensions.”
Why are programs like education such an easy target for spending cuts?
We’ve got a new philosophy that comes with the Better Business Climate, and it’s total individual responsibility — the idea of a Great Society or a New Deal taking care of people goes out the window. If you want a job, go find it. If you’re poor, it’s your fault. If you want to go to school, take out a loan. The idea of the government providing anything is greatly diminished.
Ask yourself when was the last time a politician said, “I want to create more public sector jobs so we can create jobs for inner-city youth, where unemployment is high.” I don’t think there’s a politician in the country that directly would say that anymore, yet that was common in the ’60s and early ’70s because we knew there was a crisis of employment in rural places and inner cities. There were lots of experiments to figure out how to get employment in those areas, and the public sector grew. It was the track of upward mobility for African Americans, especially African American women, that was their ticket into the middle class: public employment.
Since then, the number of government jobs as a percentage of the U.S. population has gone down as the Better Business Climate model took hold. As runaway inequality accelerated, it put more and more pressure on the public sector, and we basically gave up on the idea of a poverty program.