Tuesday, February 11, 2014


For years now I have been preaching that the U.S.’s economic problems are structural—and recently ran across a paper which reaches exactly the same conclusions. It’s by William Lazonick of the University of Massachusetts and its dated July 2012. It’s titled:

The Financialization of the US Corporation: What Has Been Lost, and How It Can Be Regained

It’s a great read, even if you are not an economist—and it reinforces my argument that there are Body Snatchers at work (only he calls them corporations). The following is an extract from this hard-hitting paper. It deserves a wide audience. Despite its restrained academic language, it’s actually a scathing indictment of the current American Business Model—and of corporations in particular. It is also supported by the evidence. All in all, he makes an entirely convincing case.

But, what are we doing about it? Virtually nothing.

As the US economy still struggles to recover from the Great Recession , the erosion of middle - class jobs and the explosion of income inequality have gone on long enough to raise serious questions about whether the US economy is beset by deep structural problems. My research on the evolution of the US economy over the past half century shows that such is indeed the case (see Lazonick 2009a, 2009c; 2010a; 2012). Since the beginning of the 1980s employment relations in US industrial corporations have undergone three major structural changes –which I summarize as “rationalization”, “marketization”, and “globalization” –that have permanently eliminated middle-class jobs. From the early 1980s rationalization, characterized by plant closings, eliminated the jobs of unionized blue -collar workers. From the early 1990s marketization, characterized by the end of a career with one company as an employment norm, placed the job security of middle -aged and older white-collar workers in jeopardy. From the early 2000s globalization, characterized by the offshoring of employment, left all members of the US labor force, even those with advanced educational credentials and substantial work experience, vulnerable to displacement.

Initially, each of these structural changes in employment could be justified in terms of major changes in industrial conditions related to technologies, markets, and competition.
In the early 1980s the plant closings that characterized rationalization were a response to the superior productive capabilities of Japanese competitors in consumer durable and
related capital goods industries that employed significant numbers of unionized blue-collar workers. In the early 1990s the erosion of the one-company-career norm among white-collar workers that characterized marketization was a response to the dramatic technological shift from proprietary systems to open systems that was integral to the microelectronics revolution. In the early 2000s the acceleration in the offshoring of the
jobs of well-educated and highly experienced  members of the  US  labor force that characterized globalization was a response to the emergence of large supplies of highly capable labor in lower-wage developing nations such as China and India.

Once US corporations adopted these structural changes in employment, however, they often pursued these employment strategies purely for financial gain. Some companies closed manufacturing plants, terminated experienced (and generally more expensive) workers, and offshored production to low-wage areas of the world simply to increase profits, often at the expense of the  company’s  long-term competitive capabilities  and without regard for  displaced employees’ long years of service.  Moreover, as these changes became embedded in the structure of US employment, US business corporations failed to invest in new, higher value-added job creation on a sufficient scale to provide a foundation for equitable and stable growth in the US economy. On the contrary, with superior corporate performance defined as meeting Wall Street’s expectations of steadily rising targets of quarterly earnings per share, companies turned to massive stock repurchases. Trillions of dollars that could have been spent on innovation and job creation in the US economy over the past three decades have instead been used to buy back stock, the sole purpose of which is to manipulate a company’s stock price. Legitimizing this “financialized” mode of corporate resource allocation has been the ideology, itself a product of the 1980s and 1990s, that a business corporation should be run to “maximize shareholder value” (Lazonick and O’Sullivan 2000; Lazonick 2012).  Through their stock-based compensation, prime beneficiaries of this focus on rising stock prices as the measure of corporate performance have been the very same corporate executives who make these financialized resource allocation decisions.
In the next section of this paper, I summarize the evidence that supports the proposition that there have been fundamental structural changes in employment in the United States that since the early 1980s have eroded middle-class employment opportunities for the US labor force. Then I present the evidence that over the same period the remuneration of top executives of both industrial and financial corporations has been a major reason for the increasing concentration of income at the top. In the following sections I show that stock buybacks have became a massive and systemic way in which these corporate executives seek to boost their  companies’  stock prices,  and hence, via stock-based compensation, their own incomes. Then I point out how, in many different ways in many different industries,  this financialized  mode of corporate resource allocation has undermined the prosperity of the US economy. Finally I turn to the questions of what the conditions for sustainable prosperity that have been lost, and how they can be regained.

The situation is beyond serious—but who is going to act to redress the situation? The Republicans are unashamedly the party of the plutocracy; the Democrats are sufficiently paid off with corporate money not to want to rock the boat—and anyway don’t seem to know to communicate effectively; the president has taken over five years to stumble onto income inequality (only a fraction of the problem) but doesn’t seem to know what to do about it; and the media are owned by the very people who are causing the problem.

That leaves the American public who seem to have forgotten how to protest—or are too drugged to care.

This is a story which does not seem likely to end well. It’s fascinating for me intellectually—but I’m not sure I want hundreds of millions of Americans suffer economically just to keep me entertained. I’m rather fond of this country—and of its people.

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