The good people at the Federal Reserve have some wonderful charts, such as the one above showing the level of debt racked up by American corporations shown above. If we’re going to talk about ‘national’ debt in a meaningful way, let’s talk about a debt that means something. For all the glitz of “debt clocks” and other bits of propaganda which show that the government debt is some horrendous burden for which we need an amulet to protect us, we do know that most of the so-called national debt is that which we owe to ourselves. Therefore, since “one man’s debt is another man’s asset,” debt we owe to ourselves doesn’t constitute much of a threat, most of it is an asset. So, what is the really scary national debt?
Notice the portion of the chart prior to 1980. From 1949 to 1970 the amount of corporate debt increased from $64.37 billion in Q4 1949 to $363.38 billion in Q4 1970. The handy calculator says that’s about a 465% increase, but it’s spread out over 21 years, and most of the increase starts showing up in the mid 1960’s. In the ten years between 1970 and 1980 the level of corporate debt increases from $363.38B to $919.61B. Now we have an increase of over 150% in ten years, and there is another 180% increase in the next ten, from $919.61B (Q4 1980) to $2,583.29 (Q4 1990.) As of Q3 2014 there was $7,446.54 in total corporate debt, an 11,464% increase since 1949. What are we looking at?
In the days of good old fashioned capitalism, corporate debt was part of the ‘retain and reinvest’ management matrix. Corporations incurred debt to invest in research and development, plant and equipment improvements, factory expansion, and other activities we associate with an improved economy.* Since the Deregulation Era bankers have been “free” to create a system in which corporate debt creates its own revenue stream (for them) and profoundly transforms the function of the financial sector. We’ve moved from “retain and reinvest” to “downsize and distribute.” [Alternet]**
Les Leopold summarizes the result:
“To pay back these mounting loans, corporations squeezed their own workers. They downsized, moved abroad, cut wages and benefits and replaced full-time workers with temps. CEOs were transformed into financial engineers who sought more and more ways to enrich themselves through debt, while forcing their companies and workers to pay the price. So corporate capitalism morphed into what should be called financialism.”
And so it should be relabeled, because the framework of “downsize and distribute” is characteristic of financialism, not capitalism. The more debt incurred by corporations, the more downsizing, the more outsourcing, the more wage cutting, the more pensions raided, and the more full time workers replaced with part time or temporary employees.
Financialist Debt and Shareholder Value
One of the more pathetic apologists for the recent hacking of Sony Inc. came from a former executive trying to explain to a television audience why the corporation should be held blameless, while at the same time assisted by the federal government, because, after all the real purpose of Sony management was to improve Shareholder Value. [MSNBC] (See also: [Cringely] [NYT]) That was it – not necessarily to protect its intellectual property, not primarily to protect the private information about its employees and clients, not even to produce the best entertainment products on the market – Shareholder Value. What the former executive said referenced far more than a single cybersecurity problem.
Take a step back to the phrase in the previous quotation in which the author describes CEOs “transformed into financial engineers.” Now the pieces of the puzzle fit nicely. The function of a CEO in a financialist system isn’t to oversee the production of the best movies, automobiles, aircraft engines, wrist watches, table ware, carpeting, or even carpet cleaners – the job is to manage debt and expectations. Certainly, no one wants recalls – those tarnish the corporate image and make the stock price fall. No one wants inferior products, but so long as the products are acceptable, the stock price won’t fall. It all comes back to the stock price. And, what is the stock price related to? Reality? Probably not. It’s more often related to “expectations.”
Is the price for Sony stock tied to the actual results of its entertainment ventures? Are institutional investors looking at the enterprise value? ($27.17B) The 0.22% return on assets? Quarterly revenue growth? (7.2%) The forward annual dividend yield? (1.20%) – likely, but if the numbers don’t meet the analysts’ opinions, and estimates, then we know what happens – the price of the stock drops. The real issue becomes what is the problem when we build a system based on debt management and expectations? We get, according to Steve Denning in Forbes, “The Dumbest Idea in the World,” with a dismal unintended consequence:
“The proponents of shareholder value maximization and stock-based executive compensation hoped that their theories would focus executives on improving the real performance of their companies and thus increasing shareholder value over time. Yet, precisely the opposite occurred. In the period of shareholder capitalism since 1976, executive compensation has exploded while corporate performance has declined.
“Maximizing shareholder value” turned out to be the disease of which it purported to be the cure. Between 1960 and 1980, CEO compensation per dollar of net income earned for the 365 biggest publicly traded American companies fell by 33 percent. CEOs earned more for their shareholders for steadily less and less relative compensation. By contrast, in the decade from 1980 to 1990 , CEO compensation per dollar of net earnings produced doubled. From 1990 to 2000 it quadrupled.” [Forbes]
Most people get the part wherein if you are paying more for something or some service and getting less there’s a problem. And yet, there we have a person broadcasting the opinion that the real purpose of any enterprise, Sony included, to is create Shareholder Value! It does make a person wonder what happened to Ford’s “Quality is Job One,” or to the mantra from business guru Peter Drucker — “There is only one valid definition of a business purpose, to create a customer.”
Stop Buying Baloney
It’s altogether too easy to describe the problems associated with corporate debt and the unfortunate theory of Shareholder Value. There are some paths we might pursue to improve our economic situation.
#1. Enforce the provisions of the Sarbanes-Oxley and Dodd-Frank Acts. Scream and wail though they may, the financialists are on the wrong side of history on these two acts. No, neither of them is perfect, but they are better than returning to the bad old days of deregulated, unrestrained, Wall Street avarice which brought us Enron, World Com, Tyco, and a lovely Great Recession which wiped out all the investment banks beginning with Lehman Brothers. You can tell which politicians are truly “pro-capitalism” by who votes to improve the bills (capitalists) and who tries to declaw them (financialists.)
#2. Rein in the power of the hedge funds. Not to put too fine a point to it, but have you noticed that hedge funds don’t actually create any value for our society or our nation as a whole? They are ‘wealth management’ entities, which make money by encouraging stock market volatility (the opposite of what your retirement plan needs), and they play the Expectations Game for all it’s worth, encouraging the detrimental Shareholder Value Scam and all too often punishing those who follow the old capitalist maxim that the business is there to create customers.
#3. Insist on long term economic improvement. Even the Aspen Institute caught on to this kernel of capitalism back in 2009. Their blast at ‘short termism’ should be downloaded by anyone with a connection to the Internet. We could, for example, impede the high-flying short-term sighted hedge fund and other managers by revising our capital gains tax format to better reward those who make long term investments, and put a premium on short term stock plays. We could adopt minimum holding periods – oh, how the short-term financialists would scream about this one! We might even want to take a long look at corporate governance to make changes in corporate compensation schemes which reward short term goals at the expense of long term corporate viability.
#4. Penalize corporate gamesmanship which places the company at risk while manipulating the stock price. Here’s where the Great Stock Buyback comes into play. As of October 2014, S&P 500 corporations spent 95% of their profits on buyouts and paybacks. [Bloomberg] Let’s be brutally honest – you can only keep the stock price high for so long until people figure out you are manufacturing buggy whips in an age of hybrid cars. Stock buybacks will keep those “investors” (read: Hedge funds and private equity groups) happy until the factory falls apart:
“The reluctance to raise capital investment has left companies with the oldest plants and equipment in almost 60 years. The average age of fixed assets reached 22 years in 2013, the highest level since 1956, according to annual data compiled by the Commerce Department.” [Bloomberg 2014]
In short, the financialists have promoted a system in which their revenue is just fine, thank you very much, but the corporations are quietly dying for lack of upgraded fixed assets, meager funding for research and development, and a focus on “stock price” as opposed to product improvement and sales.
When we stop buying the baloney from the advocates of “Debt Management,” “Financial Engineering,” and “Shareholder Value” we will most likely find our economy improving, our middle class workers in better shape, and our long term prospects enhanced – there will be some real meat on the table.
* For background pieces on Financialism and its impact on our capitalist system see, here, here, here, and “It’s not Capitalism anymore…” ** see also: “The Business Revolution That’s Destroying the American Dream,” Forbes, 2/24/11. “From Capitalism to Financialism,” Turbulence Ahead, (Ireland), 11/20/12. “Jungle Ethics Financialism,” Seeking Alpha, 6/08/09.