Wall Street's War Against the Real Economy & We, the People

At a meeting with bloggers before last week's Building The New Economy conference [1], AFL-CIO President Rich Trumka talked about how we have developed two economies, one real and one financial. As he said, originally the financial sector was designed to support the real economy by providing capital as needed for building manufacturing facilities, public infrastructure, etc. But in recent decades the power of Wall Street has twisted that relationship until the real economy now feeds the financial economy.

As I have been writing about, for decades the real economy has been "financialized" by the Wall Street types -- sold off piece by piece providing short term profits for a very few. We lost more than 50,000 manufacturing facilities [2] in just the last decade! If you sell your house you might have some cash in your own pocket for a while but your family doesn't have a place to live and the present state of our economy demonstrates the long term cost of this kind of short-term thinking: a few Wall Street types have a bunch of cash and the rest of us don't have an economy anymore.

As each factory closes and its jobs are eliminated the companies that supplied machines, parts and supplies also go away. The effect on those of us still employed (for now) has been profound as we work longer hours for less pay and fewer benefits with ever-higher stress levels. A few get ever richer, the rest of us have ever-lower standards of living and quality of life. And our country's ability to bounce back becomes ever more compromised.

Along with others at CAF I have been exploring how We, the People became the servants of Wall Street and what to do about it. The post Companies As Buy-And-Sell Commodities - Workers, Customers and Country As Costs [3] laid out the pattern of company buyouts and takeovers since Reagan. Here is the company-buyout pattern that has turned into a machine with no human concerns:

buying up good companies, shedding and outsourcing the workers, cutting their pay and benefits, outsourcing and cheapening the product or service, fleecing and mistreating the customers, closing the offices and factories and running up debt.

The post Caught In A Machine That Grinds Us Up [4] talked about the incentives that created this inhuman machine:

I have described here a destructive, unsustainable system that creates company- and society-breaking machines. These exist because of the economic and social incentives that our government has set up and we allow to stay in place. Breaking unions, stealing pensions, outsourcing jobs and squeezing customers all depend on government not enforcing laws and regulations – especially labor, consumer and environmental rules. …

Certainly there is no incentive at the top to stop this. This system helps a wealthy few get ever wealthier and not feel the consequences. The people who do this are celebrated as "successful." And if they don’t like the resulting devastation to the economy, community, country and world they can just hop into their private jet or yacht to retire to their private island or tax haven.

This is conservative economics and the long-term consequences. Since Reagan supposedly stopped government from "picking winners and losers" our government has indeed been picking winners and losers with Wall Street winning and the rest of us losing. This brought about a concentration of wealth so severe that a very few now control almost all of the wealth of the country.

Over and over again we see the consequences of conservative economics and Wall Street domination: Short-term profits for a very few with devastating long-term consequences for the rest of us.

We see these consequences now as the economy supposedly enters “recovery” – Wall Street is reaping vast profits and paying astonishing bonuses – enabled by taxpayer dollars – while the taxpayers themselves face loss of houses, raises or jobs, pensions, health care, etc. Gains for a few at the expense of the rest of us.

Wall Street vs Costco

Just as with the private equity game [4], Wall Street and market ideology has been at war with any part of our economy that benefits customers or workers. For example, in 2005 the NY Times took a look at Wall Street’s war against Costco, How Costco Became the Anti-Wal-Mart [5]. The complaint? Costco treats its customers and workers well. The article quotes one after another Wall Street “analyst” complaining that Costco is “altruistic” or “overly generous.” One makes it clear, saying the company “could force employees to pick up a little more of the burden.” In their eyes a business serving customers or employees is wrong. From the article,

Some Wall Street analysts assert that Mr. Sinegal is overly generous not only to Costco's customers but to its workers as well.

Costco's average pay, for example, is $17 an hour, 42 percent higher than its fiercest rival, Sam's Club. And Costco's health plan makes those at many other retailers look Scroogish. One analyst, Bill Dreher of Deutsche Bank, complained last year that at Costco "it's better to be an employee or a customer than a shareholder."

The head of Costco explained that they take a longer-term view:

Mr. Sinegal, whose father was a coal miner and steelworker, gave a simple explanation. "On Wall Street, they're in the business of making money between now and next Thursday," he said. "I don't say that with any bitterness, but we can't take that view. We want to build a company that will still be here 50 and 60 years from now."

And how does he do for himself?

Despite Costco's impressive record, Mr. Sinegal's salary is just $350,000, although he also received a $200,000 bonus last year. That puts him at less than 10 percent of many other chief executives, though Costco ranks 29th in revenue among all American companies.

"I've been very well rewarded," said Mr. Sinegal, who is worth more than $150 million thanks to his Costco stock holdings.

So in 2005 Wall Street’s short-term view of how Costco should operate was to squeeze the workers, cheapen the products, fleece the customers and grossly overpay the CEO. Costco did none of that, and now it is 2009 – the long term. How is Costco doing? I looked over their annual report [6] and they are going just fine. According to The Motley Fool [7],

The retailer of pianos, coffins, and, yes, 30-pound jars of mayonnaise -- along with hundreds of other goods in bulk -- has managed to continue growing during the recession, impressively avoiding any layoffs in the process.

By the way, last year Sinegal’s salary was still $350,000. And a week ago US News and World Report wrote about [8] Sinegal that he still “has a habit, which sometimes irks stockholders and almost certainly annoys his competitors, of taking excellent care of his employees.”

So Costco, a real company, was under attack from Wall Street for providing actual service to customers and actual pay and benefits to employees who were actually in the United States. And Costco came out OK through the 2008 financial crisis and aftermath.

But then, what we call Wall Street came out of this OK as well. Thanks to their stranglehold on our political and economic systems Wall Street came out of all this enriched and emboldened, using taxpayer dollars to pay bonuses and increase their lobbying. Many of the individuals who might have looted and destroyed companies and communities are rich and gone, others are still collecting bonuses. As far as the public sees, few of them have faced negative consequences for what they did -- virtually guaranteeing that such activities will continue.

Lessons

What lesson should we take away from this? Costco is a rare exception to the new rules. How many companies can get away with ignoring the demands of Wall Street that they cheapen the products, squeeze the employees and drain their surrounding communities? Why do we allow a system that enriches a very few in the short term while harming the rest of us, and how do we change this? Why do we tolerate IBG-YBG [9], the "I'll be gone - you'll be gone" take-the-money-and-run attitude that understands that there are no consequences when you take as much as you can from everyone else?

Now that Wall Street and short-term, unsustainable profit-taking have brought us to inevitable collapse, where do we go from here? Well obviously too-big-to-fail is just too big and that is a starting point. We were forced by their size to bail out these institutions, actually making them even bigger, and now they use our money to lobby against taxpayer interests, lobby for more bailout dollars, lobby against compensation curbs and taxes, lobby against politicians who want to change things, against rules to protect consumers, and anything that might change the short-term destructive approach. Using our dollars to do this - did I mention? We should break them up, like England is doing [10]. But our government is, for whatever reasons, not doing so.

The recent Building The New Economy conference [1] provided some guidelines that we can follow as we look for paths out of this. Take a look at the blog posts from conference participants [11] that try to tackle these questions. (There is also a highlights video and should be more video when available.) The themes from the conference included the need for the Obama administration to develop a national industrial/economic policy [12], a rebalancing of trade, increasing the manufacturing that we do IN the U.S., a new emphasis on increasing research and development, modernizing and maintaining our infrastructure, an infrastructure bank [13] to finance public projects, improving education and access to education including vocational education, and passing the financial reforms currently before Congress.

And how about using taxpayer stimulus dollars to actually stimulate OUR economy [14]?

So how do we reign in Wall Street? Leave a comment.