By William Lazonick, professor of economics and director of the UMass Center for Industrial Competitiveness, Ken Jacobson, a journalist covering business, economics and technology, and Lynn Parramore, a contributing editor at Alternet . Cross posted from Alternet
The wealth of the American nation depends on the productive power of our major business corporations. In 2008 there were 981 companies in the United States with 10,000 or more employees. Although they were less than two percent of all U.S. firms, they employed 27 percent of the labor force and accounted for 31 percent of all payrolls. Literally millions of smaller businesses depend, directly or indirectly, on the productivity of these big businesses and the disposable incomes of their employees.
When the executives who control big-business investment decisions place a high priority on innovation and job creation, then we all have a chance for a prosperous tomorrow. Unfortunately, over the past few decades, the top executives of our major corporations have turned the productive power of the people into massive and concentrated financial wealth for themselves. Indeed the very emergence of “the 1%” is largely the result of this usurpation of corporate power. And executives’ use of this power to benefit themselves often undermines investment in innovation and job creation.
These corporations do not belong to them. They belong to us. We need to confront some powerful myths of corporate governance as part of a movement to make corporations work for the 99%. To start, we have to recognize these corporations for what they are not.
• They are not “private enterprise.”
• They should not be run to “maximize shareholder value.”
• The mega-millions in remuneration paid to top corporate executives are not determined by the “market forces” of supply and demand.
Let’s take a closer look at each of these myths.
1. Public corporations are not private enterprise.
Here’s something you’ll rarely hear stated by today’s politicians and pundits: Publicly listed and traded corporations are not private enterprise. As documented by the pre-eminent business historian Alfred D. Chandler, Jr., in a book aptly called The Visible Hand, about 100 years ago the managerial revolution in American business placed salaried managers in charge of running the nation’s largest and most productive business corporations.
This was a peaceful revolution in which a generation of owner-entrepreneurs who had founded these companies some decades earlier used initial public offerings on the New York Stock Exchange to sell their ownership stakes to the public, leaving decision-making power in the hands of salaried managers. In effect, these corporate employees, and the boards of directors whom they selected, became trustees of the immense productive power that these corporations had accumulated.
Even when founders of companies that evolve into major public corporations become their CEOs, they generally occupy the top positions as corporate employees, not owners. For example, when the late Steve Jobs returned to Apple Computer in 1997, 11 years after being denied the CEO position of the company he had founded, his ascent to the top position was as a manager, not on owner. When a company founder like Larry Page of Google gives up private ownership by publicly selling shares, he may become CEO of the new corporation, but he is occupying this position as a hired hand, not as a private entrepreneur.
In other words, private owners make choices to transform a private enterprise into a public company that then needs to be regulated as such. There are other choices that could have been made. When the retiring owner of a private company wants to pass on control over a prosperous company to his or her employees, an alternative to the public corporation is to establish an Employee Stock Ownership Plan, or ESOP. There are many successful companies in the U.S. that are not public corporations precisely because they are under the collective ownership of their employees.
It is also possible for some investors to agglomerate sufficient shares to take a public company private (Mitt Romney made his millions doing just that), but that only emphasizes the point: public corporations are not private enterprise. We regulate public corporations far more stringently than private businesses precisely because they are publicly held. And as U.S. citizens, how we regulate public corporations (or even private businesses, for that matter) is up to us.
2. Corporations should be run to benefit everyone who contributes to their success – not just shareholders.
It’s a myth that corporations have a legal duty to maximize profits to shareholders at the expense of everyone else. Historically, the executives and directors of U.S. public corporations understood that they had a responsibility to other constituencies – customers, employees, suppliers, creditors, the communities in which they operate, and the nation.
Today, however, the dominant ideology is that a corporation should “maximize shareholder value.” At the most basic level, the rationale for this ideology is that shareholders own the company’s assets, and therefore have exclusive claim on its profits. A more sophisticated argument is that that among all stakeholders in the business corporation only shareholders bear the risk of getting a positive return from the firm, while all other participants receive guaranteed returns for their productive contributions. If society wants risk-bearing, so the argument goes, firms need to return value to shareholders.
This argument sounds logical – until you question its fundamental assumption. Innovation, defined as the process that generates goods or services that are higher quality and/or lower cost than those previously available, is an inherently uncertain process. Anyone who invests their labor or their capital in the innovation process is taking a risk that the investment may not generate a higher quality, lower cost product. Once you understand the collective and cumulative character of the innovation process, you can easily see that the assumption that shareholders are the only participants in the business enterprise who make investments in productive resources without a guaranteed return is just plain false. In an innovative economy, workers and taxpayers habitually make these risky investments.
How do workers make these risky investments? As is generally recognized by employers who declare that “our most important assets are our human assets”, the key to successful innovation is the extra time and effort, above and beyond the strict requirements of the job, that employees expend interacting with others to confront and solve problems in transforming technologies and accessing markets. Anyone who has spent time in a workplace knows the difference between workers who just punch the clock to collect their pay from day to day and workers who use their paid employment as a platform for the expenditure of creative and collective effort as part of a process of building their careers.
As members of the firm, these forward-looking workers bear the risk that their extra expenditures of time and effort will not yield the gains to innovative enterprise from which they can be rewarded. If, however, the innovation process does generate profits, workers, as risk-bearers, have a claim to a share in the forms of promotions, higher earnings and benefits. Instead, shareholder-value ideology is often used as a rationale for laying off workers whose hard and creative work has contributed to the company’s success. That’s grossly unfair.
Taxpayers also invest in the innovation process without a guaranteed return. Through government agencies, taxpayers fund infrastructural investments that, given their cost and the uncertainty of returns, business enterprises would not have made on their own. It is impossible to explain U.S. leadership in information technology and biotechnology without recognizing the role of government in making investments to develop new knowledge and facilitate its diffusion. As one example, the current annual budget of the National Institutes of Health (http://www.nih.gov/about/budget.htm) is about $31 billion, twice in real terms its level in the early 1990s. Without this government expenditure on research, year in and year out, we would not have a medicinal drug industry. Yet shareholder-value ideology is often used to justify low taxes that deny taxpayers a return on these investments.
So shareholder-value ideology provides a flawed rationale for excluding workers and taxpayers from sharing in the gains of innovative enterprise. To turn this ideology on its head, what risk-bearing role do public shareholders play in the innovation process? Do they confront uncertainty by strategically allocating resources to innovative investments? No. As portfolio investors, they diversify their financial holdings across the outstanding shares of existing firms to minimize risk.
They do so, moreover, with limited liability, which means that they are under no legal obligation to make further investments of “good” money to support previous investments that have gone bad. Even for these previous investments, the existence of a highly liquid stock market enables public shareholders to cut their losses instantaneously by selling their shares – what has long been called the “Wall Street walk”.
3. Executive compensation is a rigged game, not the result of the laws of supply and demand.
You often hear that stratospheric executive pay is the result of some inexorable law of supply and demand. If we don’t give top executives their multimillion dollar compensation, they won’t be willing to come to work and do their jobs. They are supposedly the bearers of “scarce talent” that demands a high price in the market place. Even Robert Reich, Secretary of Labor in the Clinton administration and a critic of U.S. income inequality, has justified the explosion in executive pay, arguing that intense competition makes it much more difficult than it used to be to find the talent who can manage a large corporation (Supercapitalism, 2008, pp 105-114).
That is not what determines executive pay. Here is how it works: Top executives select other top executives to sit on “their” boards of directors. These directors hire compensation consultants to recommend an executive pay package, which consists of salary, bonus, incentive pay, retirement benefits, and all manner of other perks. The consultants look at what top executives at other major corporations are getting, and say that, well, this executive should get more or less the same. Since the directors are mostly these very same “other executives”, they have no interest in objecting – and if any of them were to do so, they would find that they are no longer being invited to sit on corporate boards.
Meanwhile, given the preponderance of stock-based compensation (especially stock options) in executive pay, whenever there is speculative boom in the stock market, top executives of the companies with most rapidly rising stock prices make out like bandits. The higher compensation levels then create a “new normal” for executive pay that, via the compensation consultants and compliant directors, ratchets up the pay of all the top dogs. And, when the stock market is less speculative, these corporate executives do massive stock buybacks to push stock prices up.
What we have here is not “market forces” at work but an exclusive club that promotes the interests of the 0.1%. All too often executives allocate corporate resources to benefit themselves rather than to invest in innovation and job creation. It is time that the 99% see through the ideology, break up the club, and get the U.S. economy back on track.
Corporate power for the people!
Business corporations exist as part of the collective and cumulative development of our economy. The investments in innovation and job creation that these corporations make or decline to make are key to our future prosperity. Public shareholders, the supposed owners of these corporations, are in general only willing to hold shares in a company because of the ease with which they can terminate this relation by selling their shares on the stock market. Yet, almost unanimously, corporate executives proclaim that they run their companies for the sake of shareholders. In fact, their personal coffers pumped up with stock-based compensation, our business “leaders” have increasingly run the corporations for themselves.
The real corporate investors are taxpayers and workers. Through government agencies at federal, state, and local levels, taxpayers supply business corporations with educated labor and physical infrastructure. Through their interaction in business organizations, workers expend the time and effort that can generate innovative products. In the name of shareholder value, however, taxpayers and workers have been losing out. It’s time to confront the myths of “private enterprise”, “shareholder value”, and “market-determined executive compensation” with arguments about how the innovation process actually works with sustainable prosperity as the result.
What will it take to build a movement that can make the business corporation work for the 99%?
We have to elect politicians who will take on corporate power rather than shill for corporate power-brokers. We have to support labor leaders who recognize that gaining a voice in corporate governance is the only way to ensure that corporations will invest in workers and create good jobs. We need teachers at all levels of the education system who understand what business corporations are and what they are not. We need the responsible media to escape from the grip of corporate control. And we have to put in place business executives who represent the interests of civil society rather than those of an elite egotistical club.
Getting Involved
– April 25: National Day of Action Against Student Debt
On April 25th, the total amount of student loan debt in the U.S. is due to top 1 trillion dollars. This staggering economic milestone marks a momentous victory for Wall Street and the 1% against two generations of students and families. A day of action will target big banks and student lenders, as well as increasingly corporatized universities.
-May 1st: May Day
Recognized worldwide as International Workers’ Day, May 1st marks the Haymarket Massacre of 1886 in Chicago, where workers were fighting for the eight hour workday. Look for rallies and gatherings across the country that will draw attention to the needs and concerns of workers.
The Move Your Money campaign was launched in 2010 to take on the power of the megabanks that helped cause the financial crisis and continue to wreak havoc on our economy. Numerous ongoing actions around the country are calling attention to the need for fairness and accountability in the banking industry (read about the latest: "Move Your Money" Goes Nationwide As Cities Pull Their Money”)
The leaderless resistance movement continues to take on the greed and corruption of the 1%, including a recent day of action for public transit workers. Check the website for gatherings and actions in your community.
99 comments
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-Move Your Money
We need the option of being able to move our money completely outside the banking system so it cannot be leveraged against us. And no, the mattress is no real option.
..and neither is “investment”…
The only real way to do that is direct investment. Put the money directly in a biz. You may not have to run the biz, you might be able to just be the money man but…
I have been trying to move SEP-IRA money off Wall Street and into my local economy for the last several years. It is doable, I have moved some, but it is much harder than just picking stocks and ETF’s in a Schwab account. To find and evaluate the bizs, move the money, keep track of how your investment is doing. Seriously, its a full time job.
I honestly dont see how you can do it if you have a ‘real’ job. There is just not that much time in a day.
The only real way to do that is direct investment. Put the money directly in a biz. Jib
You’d still be competing with people with access to stolen purchasing power, including your own, so-called “credit”.
Credit creation should be banneed since it amounts to theft – especially from the poor and minorities since they are usually considered less “credit-worthy”.
banned
Ah, my mistake. I did not realize you were searching for utopia. I never get in the way of anybody who is trying to create heaven on Earth. Good luck on your journey.
I reckon we have less than 50% odds of escaping the End of the World within the next 20 years. We could put that off for 120 or so years if Nineveh is a guide if we seriously repented.
But do as you please. I don’t particularly care what happens to cynics.
I guess banning slavery was Utopian too in your book.
We won’t face the classical religious end of the world, we’ll be driven extinct by global warming.
Unless, you know, we do something to stop it.
F. Beard… placing the end of the world is not a task for rational people.
As a group, those who predict the end of the world, either precisely or even roughly, are in fact the… wrongest people every to grace the earth. Countless times it has been predicted, and the running average of correct predictions is a big fat goose egg. It’s like betting on red and losing 40,000 times in a row.
The Biblical prophecies? I can’t help but think of Lucy holding the football for Charlie Brown. How many times will the trick work? The old cons will always work.
As a group, those who predict the end of the world, either precisely or even roughly, are in fact the… wrongest people every to grace the earth. K Ackermann
I don’t predict the End of the World; I just say the odds are not good that the world will last much longer if we don’t repent, especially from our money system. The last Great Depression was a (the?) major cause of WWII which killed 50-86 million. Can we have WW III and it NOT be the End of the World?
One has to wonder though that we have survived so long. God is certainly long suffering and patient. However, the world seems intent on suicide and He might not prevent that.
The obvious reply to F. Beard is a Credit Union, preferably one demonstrably active in local lending.
Comment on the original column … there is a hand-wave at Employee Stock Ownership Plans (ESOPs) but no mention of Worker-Owned Businesses (worker owned co-ops, see http://usfwc.coop/ for examples). 2012 is the UN’s International Year of the Cooperative and worker-owned enterprises have proven to be an effective alternative to monarchic “publicly held” corporations.
The obvious reply to F. Beard is a Credit Union, preferably one demonstrably active in local lending. Marty Heyman
Nope. That just turns depositors into bankers. What about the stolen purchasing power of non-credit-union-members? What about credit union members who are allowed larger loans than other credit union members?
Now you’re raising the question of good government. This is an unsolved question.
Fundamentally, every government, whether of a country or of a credit union, makes decisions to allocate resources differently between members (citizens). As long as the government is democratically controlled, we accept this. Because we haven’t found a better alternative.
Regarding not allocating resources to non-members (non-citizens), well, if they refuse to be members, they’re excluding themselves. I believe in generous immigration policies and no “affiliation” restrictions on credit union membership….
I am in favor of worker owned businesses but unless the counterfeiting cartel is abolished then those workers will likely become exploiters too.
I participated in an ESOP a while ago. I put the maximum amount I could into it and was pleased when the stock split, making my “ownership” even greater. However after a few years, the company decided to go private and offered a buy back. I declined to sell my stock, so imagine my surprise when, at the end of the year, I received a check for my stock. That’s the problem with ESOPs, and possibly with other stocks, if the PTBs decide to take your stock back you have no recourse.
Seeing that this guy is from UMASS it reminds me that everyone who I have ever know that went to school in Massachusetts reeks of socialist thinking!
I have consulted for some ESOPS and will have to tell you that it has been a sad affair. People are usually not just losing their company and jobs but their life time savings. Most people are elected to run this business not because they are the most competent but because they are the best liked (one of the reasons that sociopaths end up in the corner office).
The whole article left me lying on the floor lauging. Like most things in life if this was the best way to run a company then we would be using it now!
Massachusetts was the center of utopian thinking in the 1800’s. Seems like that philosophy is still alive and well there.
Just because banker fascism has defeated Communism does not mean that banker fascism is ITSELF stable. Wait till China and India are deep in Depressions like the West had in the 1930s. Will WW III be far behind?
Heck, even the US is close to extreme belligerence.
I see. And so we should defer to the current corporate trend of placing sociopaths in the corner office that are “elected” by their friends in the board of directors. Its always a popularity contest, and CEOs elected by their plutocratic friends are no better (and likely worse) as responsible corporate stewards than alternatively arranged corporations. The sad affair is the one most of us experience at the “lean and mean” greed machines you bow before: massive waste, constant lay-offs, and CEOs padding their nest eggs with obscene salaries and perks.
The only reason large US corporations like GE and Boeing are doing well at all has nothing to do with the skill of their leaders and everything to do with crony connections to government and the employment of slave labor in China. If “our” corporations were run like they used to be, as more or less responsible stewards of the community who built excellent products that their employees could afford debt-free, ESOPs probably wouldn’t exist. Instead they build garbage in China (as an example my electric stove is 30 years old and still works, whereas my dishwasher, bought 3 years ago, regularly refuses to turn on due to faulty electronic push buttons) with slave labor, pay no taxes here at home, and take out billion dollar contracts with government that turn into boondoggles of profit mongering greed and duplicity.
Something reeks around here, and it ain’t socialism.
Ishmael,
You are a bigot. Your bigoted thinking and speech may seem normal to you at this point, but they are quite apparent to most of Yves’ discerning readership.
Attacking your adversary rather than his ideas by asserting that every person who received an education in Massachusetts “reeks” is bigotry. Kudos for expanding the term’s usefulness beyond it’s traditional racist arguments.
Ridiculing your adversary’s writing through hyperbole about the prone fits you are suffering is unconvincing. How on earth did you type your response in such a state?
Your allegation that “if this was the best way to run a company then we would be using it now!” would appear naive had it not historically been used so methodically to stifle dissent among the dispossessed. Your preface “Like most things in life,” implies that you believe most things are the best they can possibly be in this best-of-all-possible-worlds. What a stifling philosophy to live under.
Mass was the center of Utopian thinking during the eighteen hundreds?
What an incredible statement… just pulled it out of your ass.
And who was doing all the dreaming? Was it the Irish “niggers” coming over from the famine? Was it the children working in the mills? When the mills weren’t rioting or burning, that is.
“It’s a myth that corporations have a legal duty to maximize profits to shareholders at the expense of everyone else.” er, that’s a false statement, surely. Can anyone point me to a proof of this statement?
I also have read, in more than one place, that “by law” in some states corporations ARE required to maximize shareholder profits, but I do not know any exact laws. Anyone know if this is true? It would be a rather big flaw in this article, at least in some states.
“that’s a false statement, surely. Can anyone point me to a proof of this statement?”
The proof is that no law exists that places a legal duty on managers of a corporation to maximize shareholder value.
Milton Friedman is the person responsible for injecting this idea into public discourse.
http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html
Poor Miltie! He thought we should be “free to choose” EXCEPT when it came to money. Then a government enforced monopoly for the sake of the banks was just fine.
Surely? What is sure is that we’ve been propagandized with this factoid for so long and so hard that we’ve come to believe its true. No. As discussed in Lazonick’s prior post, this ordering of priorities is actually quite new and is under total control of corporate boards and CEOs. Even 20-30 years ago the priorities of large US corporations placed shareholders 5th or 6th in a line of priorities, with customers, employees, managers, the community, and in some cases, creditors, all before shareholders.
and in some cases, creditors, YankeeFrank
Hah! Are they not always first in line?
Actually, CEOs generally put themselves ahead of creditors.
The duty to maximize shareholder value is a fiducuary duty imposed by court precedent and not by any statute that I am aware of. See the 1919 Michigan Supreme Court decision Ford v. Dodge.
In regards to this nonsense that the corporations should be run only per the benefit of the shareholders, I’d like to make the point that the people that get into the upper echelons of management in these corporations enjoy a corporate shield that they often hide behind which protects them from personal liability … financial and all too often criminal. With these people given that “protection”, they have less restraining them … less personal stake in the form of the possibility of being personally sued, going bankrupt and/or going to jail … from doing harm to society and hence are potentially more of a danger to society that they would be otherwise. Therefore these corporations should be particularly tightly regulated to make sure that the people in charge do not do harm to society. Just becoz the shareholders – mind you the vast majority of these shares are owned by the 1% – are willing to cede that power to corporate managements doesn’t mean the rest of us should be subjected to it.
Z
The wealth of the American nation depends on the productive power of our major business corporations.
That’s the bad assumption. You could quit right there.
Here’s something you’ll rarely hear stated by today’s politicians and pundits: Publicly listed and traded corporations are not private enterprise.
The reason they won’t make that statement is because it isn’t true. Publicly traded corporations are privately owned and, therefore, private enterprise. By your argument, any corporation that is not publicly traded would not be a private enterprise, if the owner is not a manager or employee of the corporation. That is plain silly.
Yet, almost unanimously, corporate executives proclaim that they run their companies for the sake of shareholders. In fact, their personal coffers pumped up with stock-based compensation, our business “leaders” have increasingly run the corporations for themselves
This is a half-truth. The fact is that the only shareholders who matter to corporate executives are institutional investors, and corporate executives run their companies for both institutional investors and themselves.
Why are they called “publicly held” corporations then? The general public has the right to purchase equity in them, and whether we are current, prior or never-was shareholders, the fact is very large corporations (almost all of which are “public”) have a huge footprint on our society and there are strong public policy reasons why they must consider more than shareholder value when making decisions.
Additionally, if you had a passing familiarity with the short term thinking and dead-end, quick profit mentality shareholder primacy creates in corporations, you would know that what is good for a shareholder today, may have nothing to do with what is good for her in the long run. Shareholders used to mean those who held shares over the long term (the buy and hold days). Now that it doesn’t mean that anymore (due mainly to the corruption and instability of our financial system) the idea of shareholder primacy is even more destructive, with long term losses/depressed profits the most likely scenario for many publicly held companies. Relying on wage and environmental arbitrage, slave labor and destroying our nation’s manufacturing expertise for long term profit gains is a losing bet. Short term its a marvel, but once oil prices rise to $150/barrel and stay there, which will likely occur in the near term, shipping goods from China for purchase in the US will be even more expensive, and we cannot really afford these goods now. If things continue this way the US consumer economy will soon completely collapse, taking GE and others with them. Or wait, maybe not. GE makes much of its profits in foreign markets now, so no worries… except that those foreign markets are themselves supported by US consumers, so oops. Let’s face it, when the US conglomerates decided to reorder their priorities and shaft the people and communities they relied on for their success, it spelled the beginning of the end, and nothing that has happened in the intervening decades has managed to push that sad end any further into the future.
Why are they called “publicly held” corporations then?
Come, now. You’re engaging in sophistry. “Publicly held” does not mean “publicly owned.” The local Ferrari dealer offers Ferrari’s for sale to the public. That doesn’t mean the public who doesn’t actually purchase a Ferrari owns a Ferrari. Same thing for publicly traded companies (the more accurate terminology). Unless you “hold” it, you don’t own it.
The reason they’re sometimes called “publicly held” is to give the illusion that the public has some stake in them. But the fact is that under modern corporate law, the public has no say.
Now, am I saying that corporations should measure shareholder value solely on the short-term monetary benefits to the actual shareholders? Not at all. One can criticize another’s arguments with criticizing their ultimate conclusion, and I ask you if you have seen me disagree with the notion that corporations have a public responsibility (which you could reframe as an argument that shareholder value is a broader concept that includes value to the community)?
I’m just saying that silly arguments that apply sophistry should be called out for what they are. Silly.
If you want to create meaningful change, by all means do so. Just do so honestly. I’ve had enough of the manipulations and gyrations of well-meaning people. If you think you need to bullshit me, you are saying more about you than me.
Um. No. They are called public corporations because the public can purchase equity in them. Anyone with some cash can purchase a stake in a public company. That is what makes them public. Its not some “illusion” to fool people, as you say.
And purchasing a product from a company differs in many ways from purchasing equity in a company. However, both acts create obligations on the part of the company.
I am glad we agree that corporations have responsibility beyond their equity holders. But a public company opens itself up to the public in many ways that a private company does not have to — its financial position and any changes in same must be reported. Insider stock sales must be reported. There are a million and one rules and laws that apply to them that don’t apply to private companies that mainly exist so it is less easy for them to defraud the public.* Etc. etc. Its not an illusion.
*Well, perhaps I spoke to soon. Obama’s new JOBS act guts a lot of that, at least for “smaller” (under a billion $ ;) businesses. And as Bill Black says in the Real News interview, just wait. Now the larger companies are going to complain that its unfair for them to have to comply with laws the “smaller” companies don’t have to. Race to the bottom. Well underway.
The major flaw with the argument that public companies (and private too) should be “tightly regulated” assumes that the people in charge of doing the regulating are competent. In fact, plenty of regulators and regulatory bodies were in place prior to this crisis and didn’t or weren’t capable of doing there jobs. If they had, the effects of this recession could have been much less.
Bottom line: politicians are one dimensional thinkers incapable of regulating something they themselves aren’t bright enough to understand.
Example: The Mayor of Los Angeles, Anthony Villaraigosa, went to some third rate law school. He attempted and failed the Bar Exam some 7 times. So, what’s his move? He becomes a politician! And now he’s President of the Council of Mayors. He’s indicative of the “talent” that’s runnning out goverments, state and federal.
Agree with what you say here Scott. There are plenty of regulations and laws out there, it is the enforcement which is the issue. If you enforce that law you will get cut off from the honey pot.
This is what it boils down to. Enforcement and that the people who are responsible for the enforcement are under regulation capture! Of course people cheat and steal when they can get away with it.
I get brought into a number of projects and get “fired” part of the way through because (1) people want to ride on my reputation and (2) they then find out the reason I have this reputation is because I will not lie for them and the few pennies they throw my way.
As I always say, I was looking for a job when I found this one!
You’re confusing stupidity with corruption. Of course regulators didn’t do a good job. You’ve heard of “deregulation”, right? Their funding was gutted, their authority was trashed, and they were staffed with revolving door corporate sellouts. Their failure to regulate was a feature not a bug.
I see you think politicians and regulators are pretty stupid. Well let’s compare them to the prodigies of private industry who built a Tower of Mortgage Babel based on fraud and crashed the entire economy. Corporations are run by business majors, who were the dumbest kids in college.
>> failed the Bar Exam some 7 times.
4 times. (Bad enough. But not 7.)
>> So, what’s his move? He becomes a politician!
Thanks to your comment, I decided to read his wikipedia page. It seems you might inadvertently have his career choices reversed. AV attended an unaccredited “People’s College of Law”, a law school that … well, read it for yourself on wikipedia.
And yet AV is one of the better mayors in the country. Perhaps because he has an innate grasp of simple things like “Government should build infrastructure like bike racks and rail lines, for people to use”.
I agree that the regulators are often not qualified–that, however is not a reason to do away with regulations!
Meanwhile: to get corporate officers to look for the better interests of the corporation (and thus the nation, usually), the compensation that they receive should be tied to that of the lowest-paid person working for the corporation (I say working for because virtual corporations would outsource everything in order to get past this requirement). 10x or 20x the lowest paid worker would likely be a good starting point.
Exceptions to the above would be
1) those who create immediate value for the corporation (i.e. sales of items that give the corporation the money immediately). These would be commissions and would be allowed to exceed the reg.
2) those who are in the entertainment business and command salary for performance (examples are singers, athletes, etc.)
3) Employees may be given stock options; however
a) Stock options must be set at the price of the stock when the employee got his/her currently job or the price of the stock when the option is earned–whichever is higher!
b) Stock options granted this way may not be exercised until 3 years after they are earned. (perhaps a longer period, but 3 seems sufficient).
Reason for B: you do not make short-term beneficial but long-term hurtful decisions if a significant part of your compensation is dependent on the company continuing to do well. In addition, it would help corporations from a ‘spy’ position. Often a corporate officer will be ‘recruited’ to another company and use his knowledge of previous company. He won’t be so eager to do so if 3 years of his compensation is tied up in his previous company doing well.
Reason for 3: if an employee (say CEO or some such) is actually worth a huge amount of money, he will receive it (as his stock options will be worth huge sums in coming years). If he sucks, he will get his salary and benefits (which, btw, should be included in the limit) and nothing else.
*Their
*our
Three Corporate Truths that Threaten the Health of the Nation
1. The 1% own the vast majority of corporate wealth
2. When corporations organize, it’s called an ‘industry group’ when people organize it’s called ‘socialism.’ People have been conditioned to look favorably upon the former and to despise the later.
3. Corporations, Industry Groups, and their lobbiests provide most of the money politicians need to get elected – and are rewarded with a government that serves their interests.
This influence-rewards cycle fuels crony-ism and grinds down the economy for everyone else.
===
1. Raising awareness among the 99% is a worthwhile effort but it requires connecting the dots in a simple and direct way.
2. The 1% has the most at stake for preventing this cycle from leading to an economic disaster. Yet they seem unable or unwilling to correct the downward spiral as long as most 1%-ers see a net benefit to the current system. This fuels moral hazard.
3. TPTB has done a super job in conveying the message that: 1) there is no better system; and 2) The 1%-ers are worthy and the the 99% are slouchers and mouchers.
By “super job” I simply mean that it will be difficult to convince people otherwise.
Correct. Thanks.
Oh boy.
“These corporations do not belong to them. They belong to us”
No. They belong to the shareholders that put their capital at risk.
As an employee you absolutely do not own a corporation. That’s like the employees of your local grocery store one day just usurping the family that owns it and claming the grocery store as their own.
If you want to own a corporation you can do it the legally mandated way: by buying shares. You can’t just claim assets that aren’t yours and to which you have no title.
Because if it’s okay to just claim ownership or control of a corporation arbitrarily like that, it is surely okay to claim ownership of the neighbor’s house and his car and asking that his car be made to work for you since you have some indirect, obscure contribution towards the roads that it’s driven on.
In fact, the whole argument that if you contribute to something, you own it is objectively absurd.
Just because you pay tax dollars and those dollars build roads does not entitle you to every piece of property that touches the road.
You can’t commandeer airplanes because they take off from runways your taxes helped build.
You can’t take a police officer’s uniform because you helped pay for it.
The whole point of public goods is that they are there to benefit everyone and you are free to use them for your purposes. That doesn’t mean that those who use them most efficiently owe something to the rest.
“You can’t just claim assets that aren’t yours and to which you have no title.” Zlati Petroff
You are arguing as a fact something which demonstrably no longer is. If mortgage banks can and are doing what you declare to be impossible, arguing that the populace cannot claim the same prerogative is no more likely to make it a fact. Let’s start with reality and move on from there.
Employees create the surplus that’s confiscated by your shareholder “owners”. These absentee owners don’t work in the business, they don’t manage it, they contribute nothing but the legal imprimatur to use the capital they control.
You confuse the law — which is bought and purchased by the owners — with real morality.
What is this “real morality” exactly and how does it differ from fake morality? How specifically do you propose we distribute property rights and title to assets so that it reflects your real morality?
You’re right. The problem is not so much capitalism as the political influence and corporate socialism that corrupts capitalism and undermines democracy.
By not recognizing that fact, you assume that public goods are priced appropriately. But if we ALL share the expense of building the airport (via taxes) while private users (corporations and private-jet owners) only pay for use based on operating cost, then those private users enjoy a subsidy.
Now if we extrapolate to numerous industries, nation-wide and include such ‘externalities’ as pollution and quality of life (e.g. people living near the airport pay a price just like those living near fracking operations, etc.) then we can recognize a HUGE transfer of wealth/well-being from citizens to private interests.
Its gets even worse if you consider Government support for research. Government provides research tax incentives, funds public universities and government labs.
If the “all-in” cost of building that airport includes government R&D then the benefit to private interests is evern more stark.
If the Government maximized the profits to *IT’S* shareholders (citizens) as well as corporations maximize profits, then US citizens would be very well-off indeed. Instead, cronys get sweetheart deals while the economy grinds lower.
Wisdom!!
Corporations are a huge net positive for society. Yes, they are greedy and search for wealth.. is there any other motivator?? but in the end, produce things we need and pay us for our labor…
The issue lies in a dubious politicians that make promises that the tax payer cannot keep. Maybe we can create a law stating.. the tax payer is not liable for any promises made by any politicians. Should they make any promises, they themselves are liable for the costs.
To top it off, they go to bed with the same corporations being discussed on the board and laws that benefit those corporations magically come into existence. Of course, marxists will conviniently ignore this during any conversation because it kills their “government is good” point.
Any company doing business in any country of the world will seek to maximize returns (since the beginning of times), or else it would not be in business. It is up to us, the population to demand from our leaders/politicians to allow the responsible to operate, and allow the irresponsible to fail/leave.
This is what has made the US the strongest economy/capitalist society in the world. If we dont stop this socialist non-sense, we will end up lining up for half pound of chicken in soup lines, while politicians basks in caviar.
Don’t look right in front of you – look well ahead my friends, your nation is being stollen from under you.
“Yes, they are greedy and search for wealth.. is there any other motivator?? ” Wow. I assure you there is.
It looks like your guys screwed up. They should have focused on ethical capitalism instead of cooperating with banker fascism to concentrate wealth and power unjustly. Then the entire population would have a stake in the success of corporations because they would mostly likely all own shares.
Beard,
Aren’t we all shareholders already? Don’t we already get paid?
Can you explain how this ownership will make us any better? You can go to any exchange today and purchase all the shares you can afford?
How many shares is enough?
What about if somebody decides to sell your shares and buy shares in another company – that fails – and after 2 years they are totally broke? Would the government against raid the shares of the others for the benefit of their failure?
Am I missing something?
Aren’t we all shareholders already?
No.
Don’t we already get paid?
Wages are not a share in the profits or the power.
Can you explain how this ownership will make us any better?
People like you could donate your shares if you don’t want them.
‘No. They belong to the shareholders that put their capital at risk.’
What do you mean by ‘capitol at risk’? Do you mean those various fund managers who through some keystrokes, exchange money to they buy shares and debt? Why is that relevant, when we have a federal reserve who, with some keystrokes, can print trillions of dollars, and via the treasury, which can legally absorb all the financial risk of the economy?
Financial risk is meanigless from a society standpoint. What is always important is value creation; which are the goods and services and experiences that either we enjoy in the present or which will provide for our well being in the future. Think about this…it is not dollars that bring food to your table, it is the action and cooperation of numerous individuals and corporations, using the infrasturcture provided by the government, that brings food to the table. It is not dollars that develop new knowledge and new technologies, it is the work, insight, and the genius of people that develop these things. So from a society point of view, we would want corporations to and institutions to develop and cultivate the skills and cooperation of people, and through this process we are happy if the corporation becomes rich. But we should not tolerate corporations that solely aim to become rich, and in the process exploit or minimize or cut-off the development of people of our nation, because in the long run, the nation becomes poor.
From the 99% point of view, who cares about their financial capitol. the only concern among the rentiers among the 1% is to use their financial resources (money) to increase their money. They provide only money. Since most transaction in the stock market and bond market involve the trading of existing bonds and stocks, very little money actually flows to the companies. Thus the only thing these rentiers do is provide their money for gambling (i.e. liquidity) in those markets. A useless activity. In the rare cases that the 1% actually finance activity in the company via new bond or stock issuance, all they provide is money. From a MMT point of view, sovereign nation can always print what ever amount of money desired to purchase this capitol from them. So even here, why are the 1% important. Why is financial risk relevant, when money is can be printed and allocated without limit?
There is the entrepreneur/active owner shareholder…men and women who perform the day to day operations management and the longterm planning and evolution of the corporation. What is very valuable about these people is their vision, initiative, discipline, and insight…these should be cultivated and allowed to reap their appropriate reward.
@Zlati,
No. They belong to the shareholders that put their capital at risk.
Not true.
When a corporation is privately held, the shareholders put their capital at risk.
When a corporation initially goes public, the initial shareholders put their capital at risk.
After that, shareholders who purchase shares in the secondary equity markets are merely gamblers.
Think of it this way: after the IPO, the proceeds of any shares sold do not go to the corporation, so the vast majority of shareholders have not put their capital at risk, they’ve just made a bet.
There’s a reason that the purchase of shares on secondary exchanges is not considered an “investment” for the purposes of calculating GDP. It’s speculation, not investment.
That’s blatantly false and it illustrates the main problem with all of these “arguments”: people refuse to obtain even a basic understanding of the law.
There is nothing about buying shares in the secondary market that entitles shareowners to any less ownership or title. There is no difference. If you own a share, you own a share. You have a residual claim on the assets of the corporation that has been assigned to you as an exchange of consideration in the transaction.
What you are saying is that if you buy a used car from a dealer you don’t really own the car. The only person that can possibly own a car is someone that builds it on his own. Do I need to get into how wrong this is?
“These corporations do not belong to them. They belong to us”.
Since there is no mention of the “us” being the stockholders, this whole essay is complete nonsense. This is just another example of an attempt to overturn property rights and give it to the state to do with what it wishes.
I am going to suppose UMass is incorporated. So, now I can round up enough people, with no actual conncetion to UMass, to tar, feather, and run out of town on a rail, William Lazonick simply becuase UMass belongs to all of us. Somehow, I don’t think that is what Lazonick has in mind.
This is another example of strange thinking only an “intellectual” could come up with. I have been debating removing Naked Capitalism from m Google reader. There is no longer any debate.
This is just another example of an attempt to overturn property rights … Rick Caird
Were the banks and their corporate borrowers thinking of property rights when they stole the population’s purchasing power to build the corporations and enrich the banks?
Let them reap what they sowed then.
I think this is a really faulty assumption.
Corporations do not and have not stole from society, rather they are interested and seek to maximize profits. They are greedy and as well should be. There is nothing bad about greed, we all are. The sheer notion of asking the government to rip assets/funds from the corporation and give them to “us” is a form of greed. You want something.
As far as corporations, as stated on other posts, corporations will do what the government/politicians allow them to do. I can’t think of any case where a company is violating property rights in the US, but let’s forget this for a minute and let’s talk about me. Let’s say I have saved 100k and think I want to increase/maintain my wealth – call me greedy if you want – I won’t take it personal. I set up shop and hire a few folks. I will most likely pay the going rate because, if I dont, they will leave and work for someone else. So – Not only is there a department of labor stopping me, I cannot rip off my workers because I will not be able to operate.
Hopefully, after paying for materials, equipment, labor, I will make a profit. By your theory, this profit is not mines, it belongs to “the people”. But how do you deal with the fact that I had to shed my 100k to create this profit?
Do you think that I will continue to operate if I was forced to hand over that profit? Should I be forced to do such; I would close shop salvaging every cent I can and the economy just lost a few jobs that I had create via my investment.
The economy is not that complex, (capital = sweat from your forehead = wealth). You can grow the money supply from 10 trillion to 20 trillion, but you cannot do the same with capital (sweat from your forehead). In order to produce, there has to be a motivator – can any Marxist tell me what would the motivator be in a Marxist society.
I think this is a really faulty assumption. Defiant
Then you don’t understand endogenous money creation and how it steals purchasing power from the less “credit-worthy” which typically includes the poor and minorities.
Please don’t ignore the question…
Also, if the profit belongs to the people, what about if I end up losing my investment borrow 10 million and also lose it – does that also belong to the people.
BTW – I am poor and I am a minority. This might not work on me.
The system is good at flattering, indoctrinating and co-opting poor minorities. Heck, they may even let you in the country club.
That is those who are hungry to make a buck.
You make the mistake of assuming that a Fortune 500 company operates like a small business.
Corporations buy influence and arrange to receive monopoly rents, which basicly means that they can set the price nearly as well as if they were a monopoly.
Corporations complain of Government regulation but that regulation also helps to keep out competitors.
With State support, corporations don’t have to struggle like a small business, and those “rents” (higher prices) comes out of YOUR pocket. Healthcare, Defense, Finance, Energy, etc. They all get their pound of flesh while the economy – and our collective standard of living – grind lower. What you end up with is a huge wealth disparity and a faux democracy that is just a con game.
Jack,
I agree with you 100%. Believe me, I suffer this day by day and I know that others feel the same. However, I think that shooting at Corporations is shooting in the complete wrong direction. I will elaborate.
As I mentioned on another thread, our fathers and grandfathers were able to purchase items that we now have to borrow to purchase, i.e. cars, homes, etc. You may think this is because corporations are paying us less? Well… let me ask you.. If you went to a store and saw a widget for $50 and went to the one next door and saw it for $10, which one would you chose? You dont have to answer, but I think we both know.
If you bought the widget valued at $10 – greed and the search to maximize profit and wealth is not the issue and it is not a bad thing. After all, you have to feed/care for your family.
The issue is the laws/policies which allows corporations to do irresponsible things, like, taking risks on MBS/CDS going bankrupt and than going to the government for a bailout. This is called irresponsible behaviour – and should be managed accordingly. You invest in stocks(risky), you lose your money, you foot the lose – there is no way around this.
Companies will seek to pay the minimum wage, just as you seek the lowest price. It is right for us to do it and it is right for companies to do it. This, by the way, is a net positive for society as it drives down costs of goods/services.
The issue, and I keep going back to it, is politicians that promise things that the tax payer cannot pay, go to bed with the corporations, make laws that benefits those corporations and bailout irresponsible behavior.
At the same time, the Central Banking cartel keeps devaluing our currency, which creates inflation – those with access to money and credit benefit as they are the first ones to buy into bubbles and sell at the high when the massess jump in. Again, irresponsible behavior.
So all in all – we are currently in a system which rewards irresponsible behavior (risk taking), and punishes responsible behavior (savers). But nobody cares – we asking for more priting/irresponsible behavior (insanity??)..
As I previously stated, we are a mosquito driving at 250 MPH with a massive wall right ahead. Keep driving folks – nothing is happening here…
Defiant:
You know, you don’t have to pretend. People here really prefer straight shooters.
Just say “Ron Paul for President.”
In reply to Defiant (no “reply” button to post)
“Companies will seek to pay the minimum wage, ……. it is right for companies to do it.”
Hmm, it is “right” only of you accept the “greed is good” philosophy of life …
But, for the sake of argument, let us accept this premise and then ask, what happens when that “minimum wage” falls below what folks need to “progress”, to live a decent life, or sometimes even to just tread water, which is what we are seeing as the impetus for the rising load of private debt?
In that case, it seems to me, what we need to do is legally establish a “minimum wage” that enables folks to live decently – a “living wage”…
“But oh”, you would say, “that will put our domestic companies at a ‘competitive disadvantage’ with imports from countries who pay much less.”
The answer to that is the “P” word – protectionism. This country – all “advanced” counties – “progressed” to where they are by protecting their domestic industry. All the growth, advancement and innovation of any value came under “protectionist” regimes (read some Ha-Joon Chang) And most of the recent economic devastation has come in countries large and small who “opened their borders” to the wonders of “free trade”. We are seeing an increasing understanding of this internationally as more and more countries rebel against the expansion of the dictats of the WTO …
As for the desire for “cheap goods” – that is, indeed, how folks here got suckered – “free trade” was sold as the Trojan Horse of “Yippee, cheap goods!”, but the men in the horse (or horse’s ass) “forgot” to tell us that the price of these “cheap goods” would be our jobs, our salaries, our benefits, our resources, our children’s education, etc.,etc. …
“Ah”, you may say, “that might work for business domestically, as a ‘level playing field’, so to speak, but we will still be, even more so, at a disadvantage globally ..”
Aside from the fact that it seems to me one should question the wisdom of a philosophy that establishes a maxim – “need to compete globally” that produces such domestic woe, who says we HAVE TO compete globally? Why isn’t it enough to have domestic industry meet domestic needs?
“But business won’t like that – they want to grow and grow, it’s grow or die ..”
Well, aside from the increasingly obvious planetary limits to growth established by a natural system that has sustained itself and us for millions of years, until we started screwing with it under the mantra of perpetual growth, there is always the obvious – “we can’t always get what we want”. As long as we get what we need …
PS – speaking of Chang, how come we haven’t seen any posts by, or interviews of, him? If you feature “rebel” economists, i can’t think of a better example ..
@Aquifer:
I agree with what you say about protectionism. It’s suicidal to ignore it as a legitimate tool. I wonder if it might be an intelligent use to apply minimum wage standards and environmental standards to offshore factories. I think we could argue that it only helps their economies by helping to create a middle class society there. In any case, though the other countries certainly would squawk, they DO have a right to NOT sell their products here, and we have a legitimate need to protect our markets from environmental and labor arbitrage.
To Defiant
you said
“Do you think that I will continue to operate if I was forced to hand over that profit? Should I be forced to do such; I would close shop salvaging every cent I can and the economy just lost a few jobs that I had create via my investment. ”
We are not asking for all of your profit. As an entrepreneur, I would pursue the opportunity to make profit…so long as the net profit after tax is sufficient concerning the risk and effort I must undertake, I would pursue the opportunity.
You said:
‘As far as corporations, as stated on other posts, corporations will do what the government/politicians allow them to do. ‘ I agree with you here; I want corporations to make a profit, but do it in a way that benefits our society as a whole also. Hence I would support higher prices, as long as the money went to employ Americans, pay high wages, engage in research and development and knowledge dissemination…I do not companies to engage in war of ‘lowest price’ by moving jobs to China and polluting with abandon.
This means we need to develop some important regulations…less hard rule based and more enformcement to support the principles of the regulation, and allow companies to be adaptable to and work within the broad principles of the regulations instead of trying to ‘innovate’ or circumvent the regulations.
I think we agree on all counts Heretic.
Issues about pollution, etc go back to the same point – condoning irresponsible behavior as stated in my post.
Moving jobs to China is not as bad a politicians make it seem. Let me elaborate.
You are a company making widgets in the US and you have 100 employees making $10 bucks an hour – $5000 a week labor cost, plus $30,000 other costs,etc a week. This is $35,000 a week. You sell the widgets for an arbitrary price to cover the costs and make a profit (let’s say $100 each widget). You goods will be purchased by 100 people, which will pay you $70,000 (this is offset by gain in making widget in China). A net profit of $35,000 a week.
Tomorrow you move the company to China, lay off the 100 workers here, hire them there, and make the same number widgets for $5,000 including labor, raw materials and shipping costs included (this is just an example and not real), but now you sell the widgets for less, say $30 each, to the same 100 people as above. Company nets $45,000 due to lower costs.
Let’s analyze this now:
– The 100 people lost their jobs with income of $5000 a week – BAD
– The company is making the same widgets for much less (Can sell the widgets cheaper) – GOOD
– The company is neting more in profits (can hire more people – perhaps market/sales/jobs in the US) – GOOD
– The purchasing power of the buyer offsets the loses in jobs and more – (In other words, the buyers have gained more in buying power and now spend less in the widgets than the income that was previously gained in the jobs that were lost). – GOOD
Maximizing profit, lowering costs is not bad when you look at it from a different angle. Meaning, you want higher earnigns (company pay me more), you want high returns (stock/home price please go up), lower costs (where can I buy that car for the least amount of cash again?). It all becomes easier to understand. When you start reading fancy words from college professors, it all becomes fuzzy and extremely hard to understand. Perhaps we are all just dumb and can’t develop that kind of intellect.
Defiant:
You know, you don’t have to pretend. People here really prefer straight shooters.
Just say “Ron Paul for President.”
Corporations are created by obtaining government licenses.
The government has the legal power to revoke those licenses.
Think about who really has the power over corporations. Then ask why it doesn’t use that power.
Farewell, dear Rick Caird. We will try to survive without you. Hopefully, you will be able to find a site without the “intellectual” taint to fill out your Google reader. Adieu.
This is a reply to Defiant…
I do not object anyone using a numbers based model illustrate an argument, but if you use numbers, your model should reflect causality and proportion and have some real measured facts.
First of all… How did costs decline from $35000 a week in America to $5000 a week in China? In the US, with all its expensive labour, labour costs account for not more than 20% of the produc cost. Unless China has some radical technology that America does not have, such a real difference in productivity is impossible to achieve. What China does allow for is unrestricted pollution…. Which could save a company quite a substantial amount of money. (I have read that pollution control equipment can account of 30% of cost of Capitol). But we do not want China to pollute, since all pollution invariably will poison either the air or the sea, which will eventually affect all of us.
You need to consider something else in your model. According your narration, the company has cut out $30,000 in spending, which benefits itself and it’s direct consumers. But this means that some other group of people has lost $30,000 of income, which also means that another group of companies have lost some proportion of that income, which would manifest itself as sales of their product. So this is a large net negative, that offsets the positive gain of the consumers and the company that offshore to China.
In the USA, if the financial system had not allowed people to continually increase debt, inspite of stagnant or declining income for the 99%, the USA would have long ago entered a depression, as the outsourcing of jobs an loss of income would have wrecked the finances of the 99%, destroying demand for the goods and services provided by the companies owned by the 1%.
Don’t waste your breathe Heretic.
If you look back, you’ll see that “Defiant” claims to be poor and a minority. Yet “Defiant” believes that the blame lies with Government, deficit spending, and Fed banker cartel. (sound familiar?)
“Defiant” seeks clarification or wholeheartedly agrees with a comment as a device to push his pet themes.
It’s an election year. No doubt we’ll see more of this.
Jack,
I disaprove of both the GOP and the Democrats for the record. It is easy to ignore my comments and bash me though.
I didn’t ignore you. I, and others, have responded to you. But you harp on the same themes that we see from Republican candidates – especially Ron Paul.
I know that there are RP supporters here that would sympathize with you but they are usually straightforward about what they think. The way that YOU have engaged with the folks here has not been honest.
You feign confusion but it seems clear that your mind is made up. You claim to be a poor minority but I suspect that is disingenuous: you are a “minority” only in as much as your opinions are in the minority. And you agree only to disagree.
Perhaps I oversimplified to illustrate why offshoring jobs is not necerarily a bad thing. I think considering all things, capital seaking lower costs is net positive to society. Of course, I cannot argue with the polution item, as well as many other items that we can probably discuss for years to come and yes, you are right, China does allow for pollution.
I did not consider loses to other companies because as I clearly stated, the widgets are being sold to the same 100 people from the first paragraph (tried not to complicate matters), hence, loses to other companies is irrelevant. Yes, you are right, should this company figure how to make the widget much cheaper vs competitors most likely will drive consumers to the cheaper widget, but the net positive should be obvious by the argument above. If all consumers, heck let’s say all 300 million, are now spending 70 dollars less, its additional disposable income they can spend on something ELSE- thereby driving demand somewhere else in the economy and actually creating wealth/jobs somewhere else. Unless you agree that spending 100 is better than spending 30. Perhaps I am a lonely ranger, but I would spend 30 any day.
I partially agree on your last statement. Yes.. stopping the increase in debt will definately crash the economy right now, but again, let’s analyze the situation and whether we feel it is needed or not.
Wealth is created by providing a service/good for something of value. For instance, I will not just simply give you a cow because I like you, I will give you a cow for a horse, or 300 pounds of rice,etc… Or perhaps I will work a day for 10 pounds of beef. I think it’s clear that for me to buy a cow or horse, or house, I need to work, save and buy the cow and the horse. So in some form, a cow and horse store wealth. Money was invented to avoid the obvious issues with cows and horses and other things. Money allows us to work and store wealth and not have to worry about the cow dying or having to carry a cow to the supermarket to get eggs and rice.
Credit is essentially debt. A bank borrows cheap money from the Fed, the bank lends you 300k to buy a house, and you pay off every month until you pay off the loan. The bank makes a profit on the loan. At face value, a loan looks like a good thing, and perhaps, there is some good to it. Debt should not be confused with money as money is liquid while debt is not. The bank cannot liquidate your house for the amount of the loan at will.
First though, let’s see what happens when credit is abused. Rich individuals and corporations have tons of cash at hand and access to credit. When the economy slows down (look at history), the Fed simply lowers the interest rate (cheapening credit/currency) flooding the markets with additional credit. By definition, if credit is created, it must go somewhere (kind of like water). Can you guess where this credit went? Homes? School Loans? Stock Market?
As credit is passed to consumers, consumers can now pull demand forward and buy things they would not otherwise, like flat screen TVs, iPods, new cars, boats, expensive homes, etc… Companies dont have to worry about demands for higher salaries (employees will not demand it as they feel they can now afford things) and have the first access to cash and credit anyway. Corp/rich can take the money and invest in assets to protect them from inflation.
One day the last fool runs out (housing?), consumers wake up, smell the coffee and realize it was all an illusion and that they are broke, stuck with the same salaries for 15 years, and cannot pay what they borrow. Now what happens when income is not enough to pay for the interest of outstanding debt? I think this is called bankrupcy? And printing will not help BTW, as all printing does is complicate matters as interest rates soar.
So your comment about depression is correct, but it is incomplete. Had we not embarked in this suicide mission, we would not be faced with these choices. You can make the argument that if we do not continue to expand debt, we would be in a depression, I argue that we will regardless. The answer is to stop this madness and let the irresponsible fail, let the responsible thrive.
I can see the excuses coming though, Paul Krugman is already saying it is not enough. US debt has increased 2 fold since 2009, bailouts for banks, home owners, etc. And it is still not enough. Should the economy collapse tomorrow – do you want to take a guess at what someone like Krugman will say? I will venture and say it will be that “we did not do enough printing”. Can somebody again remind me what the definition of insanity is?
So what are the choices?
1) Keep issuing more and more debt until (as we all know) it ends and the system as we know it collapses on itself. This may end up causing unstability not only economically but politically and socially as well. Can mean the loss of a nation. Not good at all..
2) Stop issuing debt and take our pill late, but better late than never. This means not allowing the gov to go into debt to pay for promises that cannot be met. It means letting failed GSEs and corporations going bust. It means, for once, taking responsibility for our actions and letting failure fail, and success reign. It means punishing risky behavior while rewarding responsible one. Price drops are not a bad thing, and prices will drop, companies will fail until the system washes out the VIRUS currently in it. Than it stops and again begins to grow from within. This means the rebirth of a nation. A country can have riches, power, but cannot replace trust. You lose trust, you lose it all.
So it’s our choice. We either ignore the train wreck that is visible straight ahead, or we turn and avoid the crash. What will it be?
I am confident we will again return to a trust system…
1) Keep issuing more and more debt until (as we all know) it ends and the system as we know it collapses on itself. This may end up causing unstability not only economically but politically and socially as well. Can mean the loss of a nation. Not good at all..
2) Stop issuing debt and take our pill late, but better late than never. Defiant
You don’t understand the difference between a money issuer and a money issuer. Some money creation is GOOD and that is what deficit spending is – money creation. However, it does not require borrowing.
make that “You don’t understand the difference between a money user and a money issuer.”
Defiant,
You are a wearyingly dull thinker. No, thinker is not the right term; repeater is a more apt descriptive.
Exactly right, sir. The entire premise of the article is flawed in the context of the existing legal system.
That anyone can claim that people can arbitrarily demand ownership of assets that they have no legal title to is terrifying.
And then they put forward all these arguments about how if you contribute to the public goods that contribute to the development of the said private assets you somehow can claim those assets as yours. That is a mighty convenient demagoguery but ultimately illogical and
Making corporations work for “us” (whoever “us” is, does “us” include people that make $299,000 yes because those are in fact a part of the 99%!) also doesn’t quite make sense. What should that entail? Free iPhones? Dividends to every man, woman and child? A salary for everyone regardless of qualifications?
I am all for social justice but it has to be sensible. Illogical radicalism doesn’t do anyone any good.
Dividends to every man, woman and child? Zlati Petroff
No. Just to their parents would be just. However dividends are stupid so the common stock should just be equally distributed.
I am all for social justice … Zlati Petroff
Apparently you are not. The corporations were built with stolen purchasing power of the population and other raids on the public commons. For those corporations not built thusly exceptions can be made.
“The consultants look at what top executives at other major corporations are getting, and say that, well, this executive should get more or less the same. Since the directors are mostly these very same “other executives”, they have no interest in objecting – and if any of them were to do so, they would find that they are no longer being invited to sit on corporate boards.”
So its all based on “a mess of fairness”..
“We have to elect politicians who will take on corporate power rather than shill for corporate power-brokers.”
Hmmm, now who could that possibly be? Dems? No. Reps? No
Are there any available? Yup!
http://www.jillstein.org/
C’mon, folks – past time to, as Stein would say, “throw the bums out”.
The only way you will have a crack at getting any of the reforms we NEED is to elect people who will enact them. They DO exist – contrary to the claims of many, greed is not the sole motivator of human endeavor and we need to elevate folks to positions of “power” who are not motivated by it, but by other factors – like giving a damn about others, future generations, and the planetary system that sustains the whole shebang, including our pitiful “human” economies …
The “social science” of human economics is a subset of a much larger system – planetary “economics”, and until we get that subset to follow the rules laid down by that overarching system, instead of subverting them as it does now, we are screwed, and all the fancy fiscal/monetary models, no matter how well argued, or “logical”, that don’t take that into account are worthless, nay, less than worthless – they are destructive …
Fallacy of Misplaced Concreteness at its “finest” …
Feel the need to explain – i don’t “invent” arguments in order to “shill” for Stein or the Greens. If i keep pushing this stuff here, it is for 3 main reasons:
1) We have to get serious about our politics and use them to get what we want and need instead of accepting that they are “useless”. If they are it is because we haven’t used them to their potential, but accepted the parameters of the MSM, i.e. the “duopoly”, regarding what we “can” get.
2) I came to my understandings of what we need over decades of observation, both personally and professionally (dare i say it here, medicine) – then went in search of someone who, as far as i can discern, operates out of these principles to support/vote for – Stein is the current incarnation of such a person ..
3) I do it here and everywhere i can because of the fact that, because she ISN’T owned by corps, you won’t see her advertised on, or feted by, the MSM, or even by many, if not most, “progressive” blogs, who, for all their critiques, are various shades of “gotta getta Dem”. If we complain about our pols being bought, why do we keep voting for the ones who are?
You can’t get much more “graasroots” than this, where one has to do it one post, one thread, one blog, often one person, at a time …
It’s getting late, folks – we are running out of that time. It is time, past time, for the rubber to meet the road, the oar to hit the water, or whatever image you like, before we have none of those things left …
Mostly to TJ –
I have a textbook understanding of corporate finance, meaning I would generally lose money to people who really understand it, but …
1) Public companies generally retain some portion of their stock, as well as the right to create new classes of shares. This means that secondary market transactions – Share-seller A to ShareBuyer X – are not entirely speculative, as the reason for retaining shares was for the corp to have the option of “lower cost” of capital, that is, selling its shares at a more favorable (higher) price in the market. (Note: I agree with most of Iyves’ post last week about corporations, stock issue and “entrepreneurs” typical “hell no” attitude toward selling equity, but that’s mostly a different matter than this thread).
But I will say this, when I first learned about corporate finance, the Friedmanite SMOV theory was maybe a plurality opinion, and the “stakeholder” theory maybe a hair less so. Today, I would say that the stakeholder theory has no serious political support, even from its ardent adherents. But, ironically, it is the hidden side of virtually everything involving big money.
As for corporate governance, it was clear then that it was a 100% joke, and nothing that I’m aware of has really changed except SarBox, and the tendency to “go private.”
Finally, it has been an explicit political strategy to broaden the “investor” class and that was certainly a large motivating factor behind the push to “privatize” a portion of Social Security. The assumption was that having an “individual mandate” to participate in the capital markets would decrease tolerance toward political meddling with corporate America. The reaction on the right to President Bush’s failure on that initiative explains a lot of the ideological chaos on the right, as there appears to be a “silent majority” that was relieved that it failed (despite having been in support), those who viewed the failure as foundational, and those who are pissed that access to all that retail investor money slipped away.
On a completely different subject: I predict that if the Gregg Williams situation isn’t the equivalent of the Catholic Church molestation cover-up, and doesn’t bankrupt the NFL and its teams, the NFL will become more popular than food.
One thing I know… corporations will go to endless lengths to deny responsibility for a mountain of dead bodies or a plot of scorched earth of their causing.
In some cases, the corporation stokes and brings out the sociopath in people so disposessed. It rewards people for hiding reports on the fatalities linked to a new drug, and to dispose toxic waste near sources of drinking water. It turns people into snakes.
moving money is hard.
Lockheed Martin Credit Union pays the best interest rates on CDs, but it’s part of the war machine.
Just checked out National Bank of CA, turns out they specialize in commercial loans, just read a consent order to them from the OCC dated 10-27-11 requiring them to form a compliance committee, strategic plan, capital plan, and “The Board shall ensure adherence to the Bank’s written program to reduce and manage the high level of credit risk in the Bank.”
May end up going with the war machine….
Unless someone has any suggestions for someone in southern CA.
Wouldn’t at all surprise me that the “war machine” pays the best interest rates on CDs … But if CD interest rates are an adequate justification for feeding the war machine, it is no wonder, IMO, we are in trouble …
Well, I haven’t moved my money there yet because it is part of the war machine.
The difficulty is finding a community bank or credit union that is BETTER than the too big to fail bankster I’m currently with.
Moving money is a very big deal, you can’t just pick a bank/CU from a list.
Are you from southern CA and with a good bank/CU that you can recommend? That was really the kind of response I was hoping for when I wrote my previous comment.
“Companies will seek to pay the minimum wage, just as you seek the lowest price. It is right for us to do it and it is right for companies to do it. This, by the way, is a net positive for society as it drives down costs of goods/services.”
No, No it dosent. Christ you are full of shit
I thought private banking with its Lender of Last Resort and Deposit Insurance schemes was like a sort of cooperative using both the People’s license and power to create money from nothing. As such it’s amazingly socialist in theory but somehow badly managed by some remarkably greedy and incompetent individuals we now call Banksters.