Monday, September 1, 2014


While in Ocean Grove, New Jersey, my sister-in-law gave me three articles to read that a friend of hers recommended.  My sister in law is the widow of Congressman Ted Weiss (D., NY) so she likes to keep informed.  One article was from the Harvard Business Review and the other two were from Forbes magazine.  These are not left-leaning magazines.  They discussed what went wrong with the last market collapse and why the gap between the rich (the 1%) and the poor (the bottom 10%) has been widening.  I consider myself poorly informed about economics.  I try to be a Platonic liberal arts thinker who avoids mundane things like making money, investing, or admiring those who amass personal fortunes. But I listen to a lot of news commentary on cable TV and this story has not been explained with the detail and clarity these three articles convey.
The Harvard Business Review article was by William Lazonick, a professor at the University of Massachusetts, Lowell [“Profits without prosperity”].  He argues that our inequality gap was largely due to a policy of “buying back” the stock of one’s own company to drive up the value of the stock.  Why this is not seen by the Securities and Exchange Commission (SEC) as manipulating the stock market is a puzzle to me, but It is apparently legal (loop holes generally are).  This short term gain is offset by using the increased value to pay executives and major shareholders generous salaries, bonuses, and returns.  But it is not used to invest in expanded business, research and development, or salary increases for the vast number of employees whose higher productivity made the initial high value of the company’s stock.  Lazonick argues that corporations use the credo that the purpose of a corporation is to maximize stock value.  He argues that the function of a company is to make a useful and desired product.  The higher stock value should be a consequence of the sales of those products. The Forbes editorial comments supported Lazonick’s thesis and warned that if the gap continues to widen and if the wealth generated by a company does not go into the processes that benefit the long term interests of a company, there will be a collapse of massive proportions when the over-inflated bubble bursts.  Corporate boards do not usually take up this issue because its members are usually fellow CEOs who benefit from such inflated salaries and bonuses.
What puzzles me is the relatively scant discussion of the “buy back” policy, the lack of curiosity by the press to go after the SEC, major corporations, and congressional supporters of this dangerous policy that the Forbes articles described as a “negative Ponzi scheme.”  The “buy back” practice depletes funds from the company, puts a lid on worker pay raises, reduces or eliminates health and retirement benefits, and shifts the burden of stagnant or reduced worker income to the taxpayer.  This leads to worker discontent and loss of loyalty.  

In the 1890s and early 1900s there were journalists and writers like Ida Tarbell, Frank McClure, Upton Sinclair, David Phillips, and Louis Brandeis.  We need more “muckrakers”, as they were then called, for the twenty-first century.  Where are they?  What are they waiting for, another 1929 type of stock market crash?

No comments: