There is no such thing as deregulation

One of the signature political ideas of neoliberalism is deregulation. Governments have various rules about how business is conducted, and neoliberals argue that these rules are holding the economy back. By removing strangling red tape, innovation and growth will be unleashed — and consumers and businesses will be free of interfering rules, able to conduct themselves as they see fit. It sounds appealing!

Government regulations can be good or bad. But for the most part, there is no such thing as no regulation at all. If government does not make those choices, then other businesses — Wall Street, most especially — will do it for them.

As an initial matter, it's important to remember that government "interference" in markets goes far beyond the usual regulatory agencies. Indeed, government creates markets, through property law, corporate law, securities law, labor law, and so on. These institutions generally get less attention from free-market types (who like to pretend that markets are some pre-political, freestanding entity), but the fact is that markets as we know them could not possibly exist without a strong state.

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But when it comes to more traditional regulation, business decisions are for starters often constrained by market choices — and these almost always cut against the interest of workers. Suppose you own a business and you want to provide your employees a nice vacation benefit. But that can easily put you at a significant disadvantage compared to your competition. "Deregulation" can often mean that businesses are forced to follow the lead of whoever can wring the most value out of their workers for the least pay.

Much more important, however, is how financial firms can use their control of wealth, stocks, and contracts to exercise direct control over other businesses. One recent example came courtesy of Bank of America, when an analyst there downgraded its rating of Chipotle (still struggling due to the 2015 E. coli outbreak) because the firm's labor costs are still too high, and it will be hard "to get labor below 27 percent of sales." Its stock promptly fell, and it's a certainty that Chipotle management is right now searching for ways to pay its workers less.

It's not hard to imagine why big banks are concerned about labor costs: It leaves less corporate surplus to be kicked out to shareholders and executives. Other heavy-hitting investors are not remotely subtle about this. Carl Icahn has made an entire career out of using financial tools to engineer hostile takeovers, mergers, and acquisitions to obtain more of the corporate surplus for himself. It's a well-tested formula by now: Roll up several companies into one using borrowed money, fire tens of thousands of employees, collect a huge payout, and repeat. It pays really well.

As economist J.W. Mason demonstrated in a study of corporate finances, this reflects a systemic change in the American corporation over the past few decades. Whereas corporate profits and borrowing used to be associated with significant amounts of investment, now they are associated with more payouts to shareholders (in the form of share buybacks and dividends), and very little investment.

All this has an extremely serious effect on the day-to-day operations of businesses. For example, as Matt Stoller points out, the airline JetBlue once tried to compete with the big airlines on quality, by cutting bag fees and adding more legroom. Wall Street attacked, putting pressure on the stock price, and the company eventually gave in, packing in more seats and adding fees. Any publicly traded company (which is most of them) faces not just constant overt pressure, but the implicit knowledge that if it does not disgorge enough of its profits to satisfy Wall Street pirates, it could be attacked and dismantled.

Wall Street firms, like almost all corporations, are hierarchical, authoritarian, command-and-control organizations. (Indeed, as economist Brad DeLong wrote back in 1997, they are rather similar to the old Soviet economy in terms of structure.) These are the companies that are, by and large, writing the rules for how American business is conducted today. Everything from how much workers are paid, to how much companies will spend on innovative research, to what sort of products will be offered and precisely how they will be built — these are now under the strong influence of Wall Street, which demands quick and easy profits above every other consideration. The results are often just as bad as the most sclerotic government regulator — except this time, you can't call up your congressman and complain.

It's long since time the American people put their corporations back under democratic control.