OLIGARCHY OR DEMOCRACY: THE SYSTEM BY ROBERT REICH
Robert Reich’s latest book, The System: Who rigged it, how we fix it, presents his pointed, insightful, and relatively succinct analysis of how our democracy is more like an oligarchy these days, how it got that way, and how to get back to democracy. Oligarchy “refers to a government of and by a few exceedingly rich people or families who control the major institutions of society and therefore have power over other people’s lives. Oligarchs may try to hide their power behind those institutions, or … through philanthropy and ‘corporate social responsibility.’ But no one should be fooled. Oligarchs wield power for their own benefit.” (page 13-14) [1]
Reich identifies three major systemic changes that have occurred since 1980 that have shifted power, both economic and political, to a small group of very wealthy Americans. They are:
· The shift of big corporations from stakeholder to shareholder capitalism,
· The shift in bargaining power from unions to large employers and corporations, and
· The shift in power in our economy and politics to the financial sector and Wall Street.
The shift of big corporations from stakeholder to shareholder capitalism began in the 1980s with “corporate raiders,” who were wealthy investors who would buy enough shares of a corporation’s stock to force the Chief Executive Officer (CEO) to make changes to increase the stock price or lose his job due to the raider taking control of the Board of Directors in what was called a hostile takeover. There were 13 hostile takeovers in the 1970s of corporations worth over $1 billion; there were 150 in the 1980s.
In addition, financial entrepreneurs or engineers, as they were referred to then and who more recently have been labeled vulture capitalists, developed the leveraged buyout technique that has been widely adopted by private equity funds. This technique, made possible by our tax and financial laws and regulations, allows the “investor” to borrow the huge sums of money needed to buy a corporation and then put the debt and risk on the corporation that was purchased, while receiving favorable tax treatment for the huge interest payments on the debt. In the 1980s, there were more than 2,000 leveraged buyouts of corporations worth over $250 million.
During the 1980s and 1990s, almost one out of every four U.S. corporations was the target of a hostile takeover and another quarter were the target of a takeover that was not deemed hostile because the CEO supported it (sometimes reluctantly).
As a result of all of this, CEOs shifted to focusing solely on maximizing the short-term price of the corporation’s stock and, therefore, the wealth of shareholders. Previously, the CEO’s job had been seen as having responsibility to a range of stakeholders, including employees, customers, the communities employees lived in, and the public, in addition to shareholders.
This shift from stakeholder to shareholder capitalism could not have occurred without tax and financial laws and regulations that allowed it or without lax enforcement of laws and regulations that could have stopped it. Some laws and regulations were changed to allow the corporate raiders’ practices. President Reagan’s administration in the 1980s failed to take enforcement actions that could have stopped or slowed corporate raiders and leverage buyouts, such as enforcement of anti-trust laws or a crackdown on large, risky loans by federally regulated and insured banks. Furthermore, the Reagan administration testified before Congress in opposition to laws that would have curbed the practices used by the corporate raiders.
Starting in the 1970s and growing in the 1980s, academic economists including Milton Friedman (University of Chicago) and Michael Jensen (Harvard Business School) gave academic and theoretical support to the takeovers (and threatened takeovers), asserting that they were increasing economic efficiency. They ignored the costs to workers and communities, focusing narrowly on the corporation, its profits, and its stock price. In other words, their focus was benefits to stockholders while ignoring costs to other stakeholders.
As a result, the mantra for CEOs, the business community, and many economists has become that the sole purpose of the corporation and its management is to maximize shareholder value at the expense of any and all other stakeholders.
Under the shift to shareholder capitalism, the “efficiency” gains go to shareholders, who are generally wealthy investors (including CEOs), while other stakeholders suffer the costs and burdens. This “efficiency” ignores any acknowledgement of a broader common good or the general welfare (which the preamble to the Constitution says our country was created to promote).
I will summarize Reich’s book’s description of the other two big systemic changes in subsequent posts:
· The shift in bargaining power from unions to large employers and corporations, and
· The shift in power in our economy and politics to the financial sector and Wall Street.
In the meantime, I urge you to read Reich’s book or check out his writing and videos at https://robertreich.org/ and/or https://www.inequalitymedia.org/. His analysis of the current economic and political landscape is always insightful and clear, and often entertaining as well.
[1] Reich, R.B., 2020, The System: Who rigged it, how we fix it. NY, NY: Alfred A. Knopf.