By Jeff Ferry, CPA Chief Economist
Last month, Sen. Marco Rubio (R-FL) published one of the most enlightening and surprising reports from a member of Congress in a long while.
Entitled American Investment in the 21st Century, Rubio’s report took a fresh look at the problems ailing the US economy and concluded that there’s a shortage of investment in US industry caused by the dominance of “shareholder value” philosophy.
Since 2016, Rubio’s views on the economy have evolved. Once a fairly conventional Republican, today he has become much more outspoken—and original—in his critiques of pressing economic issues like the loss of working-class jobs in the US and growing inequality between the top 10 percent of the population and everybody else. Rubio was born in Miami, the son of Cuban immigrants who arrived here penniless. His father worked as a hotel cocktail waiter and was able to give his family what Rubio calls a “middle-class lifestyle.” Today, it’s much harder for many industrial workers, let alone anybody engaged in the low-paid hospitality industry, to deliver that lifestyle for their family. Indeed, the dirty little secret found in today’s government statistics is that, for most households, it’s only possible for the average family to achieve that lifestyle if there are two family members going to work.
Rubio’s new report notes that investment in plants and equipment in this country has fallen to about half of the levels we saw back in the 20th century, when the US was performing much better. The report criticizes the Republican tax reform of 2017 for failing to fix the investment shortfall, at least so far. And it argues for the importance of bringing manufacturing jobs back to the US.
Rubio’s argument is that US businesses have effectively stopped investing in the US economy because corporations return more money to shareholders than they invest in their operations. They are more focused on short-term stock prices than long-term performance. He also argues, quite correctly, that our companies can generate more wealth—and pay people higher wages and salaries—if they increase capital investment to make workers more productive. He then goes onto suggest that the problem lies in the rise of shareholder value theory.
As Rubio says: “Shareholder primacy theory has tilted business decision-making towards delivering returns quickly and predictably to investors rather than building long-term capabilities through investment and production.”
The trend to return billions to stockholders is clear in Figure 1, a graph from a Citigroup financial analyst. If you add up corporate dividends and buybacks, you can see they easily outpace the level of capital spending each year, and this trend has continued throughout the 21st century. These are the 500 top US corporations, names like General Electric, Ford, Google, Apple, Boeing, and Lockheed. If they aren’t investing in their own future, what does that say about the economic future for 330 million Americans?
Figure 1: The S&P 500 (the top 500 publicly-listed American companies) returned more money to shareholders in form of dividends and buybacks almost every year since 2000. Source: Citigroup
The rise of short-termist shareholder value philosophy is only part of the story. Investing in US manufacturing has also become increasingly unrewarding due to predatory foreign competition. Foreign manufacturers often have many advantages, supported by their governments, to take market share from domestic US companies. Those advantages include: an overvalued dollar (estimated to be 27% overvalued by the Coalition for a Prosperous America) which makes US costs unfairly high; widespread cheating on trade rules and agreements by foreign nations; and, low wages paid by emerging economies. Many of these emerging economies do not have labor unions, labor regulations, or other modern regulations. And that enables manufacturers (many of them US-owned multinationals) to produce more cheaply overseas and to put downward pressure on US wages.
Eliminating some of these unnatural disadvantages would help enable the US manufacturing sector to grow again, and rekindle investment in plants and equipment.
But those changes in US competitiveness will only be effective if we find a way to rebuild a long-term approach in corporate management. “Stakeholder value” is the term often used for an approach which rewards corporate management on its success in meeting the needs of all stakeholders over the long term. Germany and some Asian economies have developed a business-government philosophy based on a “stakeholder value” set of priorities. In those countries, manufacturing is prioritized because it is the best way to provide work for large segments of the population, in jobs where wages tend to rise because productivity tends to increase over time.
The argument about automation eliminating jobs is a red herring, because genuine automation would raise the productivity and hence the wages of those remaining in manufacturing. In the US, there is no automation boom, and the limited automation that does take place is overwhelmed by the downward pressure on real wages caused by the shrinkage of the entire sector.
In those countries that have successfully sustained their manufacturing base and continued to pay high wages (often higher than US wages today), the stakeholder value philosophy is backed up with careful coordination between government, industry, and labor to ensure investment and growth strategies for selected industries.
The challenge is to develop a version of this philosophy that would work in the American context. Since we are a much more legalistic society, the rules would probably have to be clearly expressed in law. In the past, the US economy was often dominated by behind-the-scenes, coordinated investment and growth by major corporations. For example, the post-1865 economic boom was based on close coordination between the railroad and steel industries. The post-World War II period was probably the high point of tacit coordination with limited competition, especially notable in industries like automobiles, aerospace, and others.
The US government has many sticks and carrots it can use to incentivize the private sector to invest in high-productivity, broadly-shared growth. And that includes government investment in critical industries, like what was accomplished with the space program in the 1960s. Note that this does not exclude an aggressive antitrust program, which would be very useful, notably in mature, low-growth industries like telecom services or food processing, where excessive market power distorts the economy and pulls resources away from potential growth sectors and into low-growth, high-profit sectors.
One final illustration: In 1953, Charles Wilson was attacked and pilloried as a heartless corporate kingpin for claiming that the goals of GM and the USA were the same. Yet back then, GM was a great place to work for the average production worker, engineer, or manager. In the 1950s, the earnings of a typical large company CEO were about thirty times the pay of the median employee.
Today, Mary Barra is CEO of General Motors. On quarterly investor conference calls, she tells investors quite explicitly: “I want to assure our owners that we are focused on creating shareholder value.” This year, GM is closing some US plants and moving jobs to Mexico. Last year, Barra earned $21.87 million, 281 times the total compensation of the median GM employee of $77,849.
Rebuilding the US economy on stakeholder value principles will require close cooperation between lawmakers, corporate management, and labor. Finance will have to take a back seat.