Since the end of the Great Recession in 2009, economic commentators have repeatedly noticed that the investment is too damn low. That is to say, corporations used to direct quite a lot of their surplus money towards upgrading their equipment and giving their workers raises, but they aren't doing it as much anymore. In 2008, gross private investment plunged to levels not seen in more than 60 years, and has only just now begun to bounce back.
Economist Noah Smith suggests that while this is lamentable in many ways, there is simply no going back to what he calls the "corporate welfare state" of the 1950s and '60s, when shareholders had little influence over firms and corporate investment was much higher. Drawing on his experience in Japan, which has a notoriously sclerotic corporate structure, he suggests that trying to wind back the clock won't help:
The rise in inequality and the stagnation in middle-class incomes might not have been the result of U.S. politics. It might have been caused by the pressures of globalization — the billions of new workers dumped on the global labor market by the end of the Cold War — and the advances in information technology that allowed American companies to harness those workers. If that was what caused the woes of the neoliberal age, then the move to shareholder capitalism was probably just a necessary response. [Bloomberg View]
Smith makes some good points, particularly with respect to the way that the old corporate model was built on excluding many groups (women and blacks in particular). However, he has also presented a false dichotomy. There is good reason to think that we might not only restore corporate investment without returning to the corporatist days of yore, but also that globalization is a less menacing concern than he makes out.
Let's examine corporations first. Another economist, professor J.W. Mason of City University of New York, has been developing a much more convincing thesis to explain the decline of corporate investment. He argues, most recently in a working paper for the Roosevelt Institute, that it is a result of a political struggle over the profits created by firms.
For most of the 20th century, corporations were operated by a professional managerial class that largely ignored the shareholders. Owning stock meant you got a yearly dividend and nothing more, while managers ran companies mainly with an eye towards preserving and expanding them through time. That meant a lot of investment in future capacity, which meant paying workers for manufacturing and installation.
But starting in the 1980s, shareholders launched a revolution, using political pressure and hostile takeovers to get at corporate profits. Managers' control of firms was dramatically undermined — and they became shareholders themselves to a great degree. Thus, money that would have gone to investment in days past is now going towards share buybacks and dividends, as firms "disgorge the cash" to appease shareholders. In 2014, about 95 percent of corporate profits were so directed.
Smith identifies the corporate welfare state as one of the central problems with corporatism. With its generous employment benefits and lifetime employment, it is supposedly what makes Japan's corporate system so inflexible, since it is much harder for firms to adapt to changing circumstances. But nothing in Mason's story necessarily implies that curbing the power of shareholders (by repealing SEC Rule 10b-18, for example, which allows share buybacks) will reintroduce these conditions.
The high-benefits managerial capitalism of the '50s was partly underpinned by government rules sharply restricting shareholder payouts. But as Elizabeth Stoker Bruenig points out with respect to Sheryl Sandberg's corporate feminism, there is every reason for new benefits — such as badly needed paid maternity leave – to be structured as universal government programs rather than funneled through individual firms, because then they will include the poor. Indeed, the major remaining portion of the American corporate welfare state — the tax exclusion for health insurance — looks to be eventually replaced by ObamaCare-style universal policy.
That brings us to globalization. Shareholder behavior towards firms these days often smells suspiciously like looting, thus undermining America's long-term economic health. But will rolling back corporate looting undermine America's competitiveness?
It is surely the case that at least some of what ails the American worker is competition from China and other places. But as David Callahan argues, that ship has already sailed, circled the globe, and come back with a load of Chinese electronics. The U.S. high-wage manufacturing base is basically gone, and the sectors that have replaced it — mainly services — are much harder to export. What's more, skyrocketing wages in China and elsewhere in the developing world have improved the relative position of the American worker.
If we grant the dubious premise that the shareholder value revolution was due to the competitive pressures of globalization in decades past, today there is much less reason to fear undoing some of that development. Indeed, the very existence of massive corporate profits (currently at record highs) suggests that America's firms, considered as a whole, are not facing dire competition.
The upshot here is that where corporate surplus goes is not predetermined. Managers used to control it, and they spent much of it on cushy wages and benefits for workers. Now shareholders, by and large the very wealthy, control it, and they spend it on themselves. Government regulations used to direct it away from the rich, and there's no reason to fear the government doing that again.
