OLIGARCHY OR DEMOCRACY: CORPORATIONS VS. WORKERS

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

Robert Reich’s latest book, The System, presents his analysis of how our democracy is more like an oligarchy these days, how it got that way, and how to fix it. Oligarchy “refers to a government of and by a few exceedingly rich people or families who … have power … . Oligarchs may try to hide their power … . But no one should be fooled. Oligarchs wield power for their own benefit.” (page 13-14) [1]

Reich identifies three major systemic changes that have occurred since 1980 that have shifted power, both economic and political, to a small group of very wealthy Americans. They are:

The shift of big corporations from stakeholder to shareholder capitalism (see my previous post for a summary of this change),
The shift in bargaining power from unions to large employers and corporations (see below), and
The shift in power in our economy and politics to the financial sector and Wall Street.

The shift in power from workers and their unions to large employers and corporations began in the 1980s. It included three components:

The increased size and marketplace power of corporations,
The increased influence of large corporations and employers in policy making, and
The weakening of the power of workers and their unions.

The increased size, marketplace power, and political influence of corporations has occurred in large part because the federal government has, starting in the 1980s under President Reagan, basically abandoned enforcement of anti-trust laws limiting mergers and acquisitions. As a result, two-thirds of the business sectors of our economy have become more concentrated since the 1980s. This means that ever larger corporations have gained monopolistic power, allowing them to raise prices or reduce customer service or quality without losing business to the competition, because there is little or no competition in many local markets.

The resultant large companies have the resources to engage in extensive political activity including lobbying, making sizable campaign donations and expenditures, and moving employees through the revolving door to positions in government (and often back again). This has provided them with substantial political power and influence.

Because payroll costs are typically 70% of a business’s costs, reducing personnel costs is the quickest way to increase profits and share prices, the goals of shareholder capitalism. The increased size and reduced number of employers inherently suppress worker pay by leaving workers fewer choices of whom to work for in many locales. This means there is less competition among employers in hiring workers, and therefore less need to increase pay or benefits to attract workers.

On the policy front, a central focus of large companies’ political influence has been on undermining and weakening enforcement of laws supporting unionized workers. In addition, relaxed laws governing international trade have allowed employers to shift jobs overseas to cheaper labor markets. Finally, a bankruptcy filing, a technique frequently used by vulture capitalists (i.e., private equity investors and corporate raiders), allows employers to void union contracts, as well as benefits for retirees. Simply the threat of bankruptcy has become enough to get unions and workers to agree to cuts in pay and benefits. All of these factors mean that large employers have gained the ability to undermine and eliminate unionized workers, as well as to block the formation of new unions.

As a result, unionization of private sector U.S. workers has dropped precipitously from 35% in the 1950s to 6% today. Reduced unionization leaves employees with less power to bargain for good pay and benefits. It also means employers are able to effectively require workers to agree to disadvantageous employment conditions such as signing agreements prohibiting them from working for a competitor (i.e., non-compete agreements) and agreeing to engage in arbitration rather than going to court with a lawsuit when mistreatment or other grievances occur. Moreover, the economy-wide boost to pay and benefits due to employers having to compete against unionized jobs to attract workers, has effectively disappeared as unionization has dropped to today’s very low levels.

In addition, large employers have gotten states to enact so-called “right-to-work” laws. These laws allow workers at a unionized workplace to refuse to pay union dues, even though they benefit from the union’s negotiation of pay, benefits, working conditions, and grievance procedures. This undermines the financial resources and bargaining power of unions.

The increased size and reduced number of businesses has increased corporate profits and economic inequality. It has also stifled innovation as large companies block access to customers for newer companies and buy up smaller companies that are seen as threats to their monopolistic dominance. The rate of new business formation today is half of what it was in 1980.

The economic result is that today a greater share of businesses’ income goes to profits and a smaller share to workers’ compensation than at any time since World War II.

The societal result is that workers are economically insecure, frustrated, and angry. Therefore, they are susceptible to demagogues like Donald Trump selling racism, xenophobia, and oligarchic authoritarianism as the solution to their insecurity and anger.

The declining value of the minimum wage since 1968 is indicative of the decline of workers’ power and compensation. Increasing the federal minimum wage to $15 an hour in 2025, as is currently being proposed in Congress, would be a step in the right direction but would still not give workers the full value of their increases in productivity. Using 1968 as the reference point, today’s current federal minimum wage of $7.25 would be roughly:

$11.00 if it had kept up with inflation. (In other words, the minimum wage today has roughly 1/3 less purchasing power than it had in 1968.)
$22.00 if it had kept up with the increases in workers’ productivity, i.e., the increases in the value of the output of today’s workers over those in 1968. Instead, this increased value is going to profits and shareholders. [2]

I will summarize Reich’s book’s description of the shift in power in our economy and politics to the financial sector and Wall Street, the last of his three big systemic changes, in a subsequent post.

In the meantime, I urge you to read Reich’s book or check out his writing and videos at https://robertreich.org/ and/or https://www.inequalitymedia.org/. His analysis of the current economic and political landscape is always insightful and clear, and often entertaining as well.

[1] Reich, R.B., 2020, The System: Who rigged it, how we fix it. NY, NY: Alfred A. Knopf.

[2] Lee, T.M., 2/25/21, “Our deeply broken labor market needs a higher minimum wage,” Economic Policy Institute (https://www.epi.org/publication/our-deeply-broken-labor-market-needs-a-higher-minimum-wage-epi-testimony-for-the-senate-budget-committee/)

OLIGARCHY OR DEMOCRACY: THE SYSTEM BY ROBERT REICH

Robert Reich’s latest book, The System: Who rigged it, how we fix it, presents his pointed, insightful, and relatively succinct analysis of how our democracy is more like an oligarchy these days, how it got that way, and how to get back to democracy. Oligarchy “refers to a government of and by a few exceedingly rich people or families who control the major institutions of society and therefore have power over other people’s lives. Oligarchs may try to hide their power behind those institutions, or … through philanthropy and ‘corporate social responsibility.’ But no one should be fooled. Oligarchs wield power for their own benefit.” (page 13-14) [1]

Reich identifies three major systemic changes that have occurred since 1980 that have shifted power, both economic and political, to a small group of very wealthy Americans. They are:

The shift of big corporations from stakeholder to shareholder capitalism,
The shift in bargaining power from unions to large employers and corporations, and
The shift in power in our economy and politics to the financial sector and Wall Street.

The shift of big corporations from stakeholder to shareholder capitalism began in the 1980s with “corporate raiders,” who were wealthy investors who would buy enough shares of a corporation’s stock to force the Chief Executive Officer (CEO) to make changes to increase the stock price or lose his job due to the raider taking control of the Board of Directors in what was called a hostile takeover. There were 13 hostile takeovers in the 1970s of corporations worth over $1 billion; there were 150 in the 1980s.

In addition, financial entrepreneurs or engineers, as they were referred to then and who more recently have been labeled vulture capitalists, developed the leveraged buyout technique that has been widely adopted by private equity funds. This technique, made possible by our tax and financial laws and regulations, allows the “investor” to borrow the huge sums of money needed to buy a corporation and then put the debt and risk on the corporation that was purchased, while receiving favorable tax treatment for the huge interest payments on the debt. In the 1980s, there were more than 2,000 leveraged buyouts of corporations worth over $250 million.

During the 1980s and 1990s, almost one out of every four U.S. corporations was the target of a hostile takeover and another quarter were the target of a takeover that was not deemed hostile because the CEO supported it (sometimes reluctantly).

As a result of all of this, CEOs shifted to focusing solely on maximizing the short-term price of the corporation’s stock and, therefore, the wealth of shareholders. Previously, the CEO’s job had been seen as having responsibility to a range of stakeholders, including employees, customers, the communities employees lived in, and the public, in addition to shareholders.

This shift from stakeholder to shareholder capitalism could not have occurred without tax and financial laws and regulations that allowed it or without lax enforcement of laws and regulations that could have stopped it. Some laws and regulations were changed to allow the corporate raiders’ practices. President Reagan’s administration in the 1980s failed to take enforcement actions that could have stopped or slowed corporate raiders and leverage buyouts, such as enforcement of anti-trust laws or a crackdown on large, risky loans by federally regulated and insured banks. Furthermore, the Reagan administration testified before Congress in opposition to laws that would have curbed the practices used by the corporate raiders.

Starting in the 1970s and growing in the 1980s, academic economists including Milton Friedman (University of Chicago) and Michael Jensen (Harvard Business School) gave academic and theoretical support to the takeovers (and threatened takeovers), asserting that they were increasing economic efficiency. They ignored the costs to workers and communities, focusing narrowly on the corporation, its profits, and its stock price. In other words, their focus was benefits to stockholders while ignoring costs to other stakeholders.

As a result, the mantra for CEOs, the business community, and many economists has become that the sole purpose of the corporation and its management is to maximize shareholder value at the expense of any and all other stakeholders.

Under the shift to shareholder capitalism, the “efficiency” gains go to shareholders, who are generally wealthy investors (including CEOs), while other stakeholders suffer the costs and burdens. This “efficiency” ignores any acknowledgement of a broader common good or the general welfare (which the preamble to the Constitution says our country was created to promote).

I will summarize Reich’s book’s description of the other two big systemic changes in subsequent posts:

The shift in bargaining power from unions to large employers and corporations, and
The shift in power in our economy and politics to the financial sector and Wall Street.

[1] Reich, R.B., 2020, The System: Who rigged it, how we fix it. NY, NY: Alfred A. Knopf.

PANDEMIC RELIEF, UNITY, AND BIPARTISANSHIP

Passage of the American Rescue Plan (ARP), i.e., the pandemic relief package, is a milestone for unity because it fosters economic recovery and fairness for all Americans. Although it was a great opportunity for bipartisanship, unfortunately it has only been another milestone in the continuing, now decades-long, hyper-partisanship of Republicans.

President Biden had Republicans to the White House to try to obtain bipartisan support. He compromised by cutting unemployment benefits and reducing the number of Americans who qualified for relief payments by 17 million to address Republicans’ and conservative Democrats’ concerns about the costs of the bill and the targeting of benefits to those most in need. Nonetheless, the Republicans did everything they could to delay the bill, including demanding that the whole 628-page bill be read aloud in the Senate. And then, not one single Republican voted for it despite its overwhelming, bipartisan support for it among Americans. Roughly 75% of Americans supported the bill, including about 60% of Republicans.

Many in the media reported inaccurately that the passage of the ARP was also the death of bipartisanship because no Republican voted for it. The truth is that Republicans killed bipartisanship in the 1990s with their impeachment of President Clinton and put another nail in its coffin in 2008 with their pledge to make President Obama fail and to block every one of his legislative initiatives.

The ARP will cut the number of children living in poverty by one half. Child poverty in the U.S. is significantly higher than any other wealthy country and is incredibly harmful to children. Children in poverty in the U.S. are, of course, disproportionately children of color. The ARP will cut the overall number of Americans in poverty by 1/3. By the way, the official poverty line in the U.S. is well below any minimally realistic standard of living in many parts of the country at $26,500 for a family of four, which can be a single parent with three children.

The ARP provides a huge boost to middle-income families, increasing their after-tax incomes by an average of 5.5%, or about $2,750 for a family with a $50,000 income and $5,500 for a family with a $100,000 income.

Perhaps not surprisingly, Republicans’ calls for unity seem to have disappeared in the shadow of their blatantly partisan actions on the ARP. They have made it clear that their primary goal is obstruction of any initiative proposed by President Biden and supported by Democrats, even if it would do tremendous good for the country, its people and small businesses, as the ARP will. The Republicans will even obstruct policies that have broad bipartisan support among the public if somehow they believe that doing so will help them politically, i.e., in retaining their power and elected positions.

Perhaps not surprisingly as well, some Republicans are already trying to take credit for the benefits of the ARP, making it sound like they supported it. For example, Senator Wicker (R-MS) tweeted positively about the bill the same day that it passed, noting that it would help small businesses and restaurants, and giving the false impression that he had voted for it.

Republicans’ obstructionism has extended to President Biden’s nominees for his Cabinet and other positions. The precedent is that every President should be allowed to have whomever he wishes in his Cabinet, regardless of political differences. Unqualified and inappropriate nominees have been smoothly confirmed for President Trump and other Republican Presidents. Nonetheless, Senate Republicans have been dragging their feet and opposing some of Biden’s nominees solely for political reasons. They are even opposing nominees because of their partisan social media activity – a standard that would have disqualified a number of Trump nominees.

Looking ahead a bit, the For the People Act and the John Lewis Voting Rights Advancement Act were recently passed by the House and would take strong steps to guarantee the right to vote for all, a key step toward unifying America. (See this previous post for more details.) These bills have the broad, bipartisan support of about 70% of Americans. However, the Republicans plan to block them in the Senate with the filibuster. Meanwhile, Republicans in many state legislatures and Governors’ offices are pushing bills that would suppress voting, particularly of people of color and those with low-incomes. (See this previous post for more details.) The House has also passed the George Floyd Justice in Policing Act, which will presumably be blocked by a filibuster by Senate Republicans. Clearly, most Republicans in Congress and those in many states across the country have no interest in bipartisanship and no interest in unifying America.

The hypocrisy of Republicans in Congress was just highlighted by their filing of a bill to repeal the estate tax. Over the next ten years, this would give $350 billion to 2,000 very wealthy people (i.e., those with estates of over $11 million for an individual or $22 million for a couple). Yet, the Republicans pushed to stop 17 million middle class Americans from receiving the $1,400 pandemic relief payments to save $24 billion (7% of the estate tax giveaway) and also to reduce weekly unemployment benefits by $100. So, Republicans support a big tax cut for some of the wealthiest people in America but oppose a little help for those in the middle class. This makes it clear that their purported concern about government spending and the deficit is hypocritical. Clearly, their calls for unity are hypocritical as well.

On a personal note, I’m dismayed to be writing so negatively about most Republicans and the Republican Party. I believe in political competition and an honest debate over policies. I grew up in New York State when Nelson Rockefeller, a Republican, was a well-respected Governor for 16 years. Up until the 1980s, I was a proud Independent voter, not registered in either party. My first significant political involvement was in 1980 when I worked hard for John Anderson for President, a Republican running as an independent against Jimmy Carter and Ronald Reagan.

However, the 1980s made it clear to me that the Republicans had become wedded to an anti-government, anti-worker, anti-civil rights agenda. And their agenda has only gotten more extreme since then. In the 1990s, I became quite disillusioned with the national Democrats who adopted much of the Republican deregulation, pro-big business, pro-Wall Street agenda.

The Republican Party, for the most part, has now adopted an anti-democracy agenda that supports voter suppression, big corporations, and wealthy individuals without reservations. I hope President Biden can change the direction of the country and the Democratic national party while standing up to the radical revolutionaries of the Republican Party.

I urge you to contact the White House and let Biden know that you support his and the Democrats’ efforts to restore our democracy and its commitments to equal opportunity for all, the rule of law, and government of, by, and for ALL the people. You can contact the White House at https://www.whitehouse.gov/contact.

CRACKING DOWN ON CORPORATE CORRUPTION AND SHELL COMPANIES

There’s a piece of very good news in the battle against corporate corruption and the use of shell companies to engage in criminal and unsavory activity. You may recall the defense spending bill, called the National Defense Authorization Act, that Congress passed last December and then, on New Year’s Day, overrode President Trump’s veto of it. (Trump vetoed it because it renames military bases currently named for Confederate generals and because it doesn’t repeal the liability protection for social media platforms when third parties post offensive or libelous material.) Given that it was one of a very few pieces of legislation actual passed by Congress, a number of unrelated items (called riders) were attached to it as the only way to get them passed.

One of the riders attached to the recent defense spending bill was the Corporate Transparency Act (CTA), which will significantly inhibit the use of shell companies for money laundering and other illegal or unsavory activities. A shell company is a legal entity established without any actual business operation or significant assets that is typically used to obscure ownership and hide financial transactions from law enforcement and/or the public. The CTA is the most significant financial industry reform addressing money laundering since the Patriot Act, which was passed after the Sept. 11, 2001, terrorist attacks. [1]

The CTA will require a company to disclose the names of its owners, i.e., anyone with a 25% or greater ownership share or who exercises substantial control over the company. This information will be in a confidential registry maintained by the Financial Crimes Enforcement Network (FinCEN) at the U.S. Treasury Department. FinCEN captures and analyzes financial transactions in order to combat money laundering, terrorism financing, drug trafficking, and other illegal activity. Its data is available only to law enforcement and to financial institutions (that use it to scrutinize the entities involved in financial transactions). The CTA also increases penalties for money laundering, streamlines cooperation among banks and foreign law enforcement, and significantly expands the rewards for whistleblowers, allowing them to receive up to 30% of money seized by law enforcement. [2]

The CTA responded to a decade of disclosures of the abusive uses of shell companies led by the reporting of the International Consortium of Investigative Journalists (ICIJ). The ICIJ has repeatedly documented how criminals and the rich have used shell companies to hide their wealth and move their money. It investigated and reported on the use of shell companies based on the leaked Panama Papers in 2016, the 2017 Paradise Papers leak, and its Secrecy for Sale project, which began in 2012 and continues to today. ICIJ reporting has disclosed that Delaware, Wyoming, and Nevada are favorite locations to set up shell companies, in addition to offshore tax havens. [3] Its analysis in 2020 of leaked FinCEN reports of suspicious financial transactions identified shell companies transferring money through U.S. banks for criminals in Russia, China, Iran, and Syria.

ICIJ’s reporting has made it clear that the U.S. has been the country of choice for criminals and wealthy individuals to set up anonymous shell companies that, in addition to tax evasion, have facilitated bribery and other illegal payoff schemes, as well as money laundering for terrorism, political corruption, and a variety of criminal enterprises including drug, arms, and human trafficking.

The U.S. political system is a swamp of money and increasingly the true sources of political contributions and campaign spending are hidden, a trend exacerbated by the use of shell companies. While it is illegal for foreign individuals or entities to contribute to U.S. campaigns, a shell company makes the true source of campaign spending anonymous. Therefore, it is highly likely that illegal foreign money has been going into U.S. political campaigns via shell companies.

The Trump campaign created a shell company, American Made Media Consultants, that spent more than $759 million of Trump’s campaign funds (over 50% of the campaign’s spending). This obscured the flow of money including who was paid when and how much. Nonetheless, it is clear that at least eight individuals who were paid by the Trump campaign were also paid in connection with the January 6, 2021, rally that led to the storming of the Capitol. [4] Previously, Trump had personally used shell companies, including to pay off Stormy Daniels, the pornography actress who says Trump had an affair with her. [5]

The Corporate Transparency Act is an important step forward in increasing the transparency of financial transactions. It will, among other things, reduce corporate and political corruption, inhibit criminal and terrorism finances, and reduce tax evasion. This is a good step but there’s lots more to do, such as strengthening prosecution of white-collar crime. More on that in a future post.

[1] Talking Points, 1/11/20, “New law cracks down on shell companies to combat corruption,” The Boston Globe from the Associated Press

[2] Cox Richardson, H., 12/27/20, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/december-27-2020)

[3] Mustufa, A., 12/11/20, “Advocates celebrate major US anti-money laundering victory,” International Consortium of Investigative Journalists (https://www.icij.org/investigations/paradise-papers/advocates-celebrate-major-us-anti-money-laundering-victory/)

[4] Massoglia, A., 1/22/21, “Shell companies and ‘dark money’ may hide details of Trump ties to DC protests,” Center for Responsive Politics (https://www.opensecrets.org/news/2021/01/trump-tied-to-dc-protests-dark-money-and-shell-companies/)

[5] Cox Richardson, H., 12/27/20, see above