This continues a summary of some notes I took from Robert Reich’s book “Saving Capitalism. For the Many, Not the Few” (2015), specifically chapter 13 “The Declining Bargaining Power of the Middle”.
Changes in the way the market is organized has occurred in a number of key areas over time: property, wages, and unions. I will look at the first two areas in this post.
Property: In the early 20th century corporate executives were considered stewards of America. Can you believe it? Corporate governance meant looking after the interests of everybody – investors, employees, consumers, and citizens. Corporations were “owned” by all stakeholders.
Then along came the 70’s and 80’s and the corporate raiders with their hostile takeovers. Corporate ownership meant shareholders were now the only legitimate owners. So the main purpose of the corporation became transfixed on maximizing shareholder returns. But why did this change take place? Basically, the rules changed in the way corporations and financial markets were organized which favored corporate interests and Wall Street.
Here are some examples: The 1974 Employee Retirement Income Security Act meant pension funds and insurance companies could be invested in the stock market. Reagan also loosened the banking and financial regulations and reduced the number of enforcement staff in the Securities and Exchange Commission (SEC). These rule changes meant the corporate raiders could get enough money and approval to engage in their takeovers with all the consequences that flowed from that.
At the same time the principal role of the CEO became to drive up share prices. The best way to do this was to cut costs, and the biggest cost of them all was labor. When jobs were cut, share prices and compensation for CEO’s went through the roof. All was well in the land of the haves. But workers lost their jobs and wages and often entire communities had to be abandoned. This meant lost bargaining power and the golden link between productivity and worker’s incomes was severed.
As a result of these changes almost all gains from growth have gone to the top. The average worker today is no better off than the equivalent worker of 30 years ago, comparatively speaking. And today’s workers are less secure economically. There was also another benefit to lowering wages. The inflation risk was lowered so there was less risk to the value of corporations’ assets.
Wages: In terms of wages, workers were forced to accept lower pay out of fear of losing their jobs. Economic insecurity placed them in a position where they could not demand higher wages. Capitalism at its pinnacle for those with the economic power to call the shots!
A number of decisions at the political level contributed to this position. The negotiation and ratification of more international trade agreements meant companies could outsource jobs overseas which created more job insecurity. The interests of corporations continued to be favored over the interests of labor.
High levels of unemployment in recent years have also meant workers will settle for lower wages. Consider what happens when the Federal Reserve raises its interest rates. Instead of trying to reduce unemployment, recent policy decisions have pushed towards lowering the budget deficit. Unemployment then also serves to strip workers of their bargaining position. The cycle continues.
This overall loss of bargaining power has shifted the risks of economic change to workers. Consider during the New Deal and WWII when employees almost possessed property rights in their jobs due to longevity in the companies they worked for. After the takeovers of the 70’s and 80’s that relationship was severed. Often workers who had been with companies for decades found themselves without a job.
All of the above has meant a decrease in the possibility of having a pension when a worker leaves a job. The number of workers with a pension has fallen 15 percent in the last 25 years. Defined-benefit pensions have been replaced by defined-contribution plans connected to the stock market. This has also shifted the risk to workers. Consider how 401(k) plans suffered when the stock market crashed in the last financial crisis.
Next post I will look at the loss of union protection for workers.