The problem politicians won’t talk about: Financialization

Since the November election, there have been scores of books and articles exploring the supposed alientation of the white working class. Some of these are quite good and others are much less so. Maybe voters were feeling nostalgic. Maybe their cultural locations had been ignored for too long. Maybe they were victims of a shifting occupational structure that resulted in a combination of moving jobs overseas or automating manufacturing plants. Maybe the coastal elites didn’t want to understand those inland. Maybe concerns about security overwhelmed other more self-interested factors. Maybe a focus on progressive issues like transgender bathrooms and criminal justice reform didn’t speak to the concerns of those voters. Each of these arguments shares some elements of truth.

During the primary campaign Bernie Sanders consistently complained about “millionaires and billionaires” who had benefitted the most since the end of the Great Recession. Others raised concerns over the need to raise the minimum wage or solve the health care crisis. Still others voices cited the damage being done by excessive inequality and raised concerns about the fragility of the middle class. These positions are also easily supported by data.

There is, however, something much deeper going on. The vast majority of the issues I’ve listed above are simply symptoms of that deep change. In his book, Aftershock, Robert Reich argues that the period from World War II until 1980 constituted a Great Expansion. Then we had a great transition. While “Reaganomics” played a role in this change, it’s only the political face of the larger issue.

 I recently read two books that speak to the critical change and its significance. The first of these was Brian Alexander’s Glass House;  an examination of the impacts of financialization on the Anchor Hocking plant and its community of Lancaster, Ohio. The other is Charles Peters’ We Do Our Part; a political and social  autobiography by the octogenarian editor of Washington Monthly.

Peters’ book, which was commissioned by Newsweek’s Jon Meacham (which is why I bought it), begins just before the New Deal begins addressing issues of the Depression. Growing up in West Virginia, Peters saw the impacts of the New Deal up close and became a fan of FDR from early on. The book runs all the way to the 2016 election. In the very first chapter, Peters observes that the key figures involved in FDR’s administration weren’t serving for access to money or prestige but because problems needed to be solved. When they left government, there was no revolving door to well-appointed lobbying firms. It wan’t long before that trend changed and changed dramatically. Peters also explores shifts in economic policy beginning with Reagan but continuing in general shape until the present. Deregulation became the watchword of the day for Republican and for Democratic administrations alike (although the rhetorical justification shifts by party).

Peters spend a couple of chapters laying out the connections between a focus on New York City (because that’s where the money is), its style magazines that explain What’s In, salaries that support that lifestyle, and attitudes of those who are OC (not Our Class). This adds texture and context to the Bernie Sanders “millionaires and billionaires” complaint that moves us away from greedy individuals (although they exist) to larger structural and therefore sociological dynamics.

Peters’ argument reminded me of a book that Bob Woodward wrote about the first year of the Clinton administration: The Agenda. I haven’t read it in years, but the essence of it was that Clinton got his tax cut through (because VP Gore voted for it) as an expression of Clinton’s hope for a Third Way — to promote progressive policies by doing things that would benefit the bond and stock markets.  Clinton’s “end of big government” as illustrated in the Welfare Reform Act is consistent with the commitment to the financial system. As history tells us, by many measures Clinton’s agenda was successful — the government had an operating surplus and the stock market boomed.

As a democrat himself, Peters is generally supportive of the Clintons but he was obviously troubled by the circles the Clintons traveled in when they settled in New York City. Seen through the lens of Peters’ book, the high speaking fees (to financial firms, no less), celebrity status, and the Rolodex of the Clinton Global Initiative are fairly predictable. Peters points out that Obama was more circumspect but he had to be very careful about how he dealt with the financial industries in the midst of a precarious economic recovery.

Eisenhower’s defense secretary (formerly head of GM), Charles Wilson, once argued that “what was good for General Motors was good for the country and vice versa”. It’s interesting to think of that quote in light of the economic transitions of the last six decades. For all of the complaining about off-shoring or about Obama’s auto bailout, I think it is exactly what Wilson is calling for.

Today, of course, it’s more accurate to read Wilson’s line as “what is good for Wall Street is good for America”. And without the “vice versa”.

Improving stock price is key to business success and because the Republican mantra for four decades has been about rewarding the “job creators” (regardless of whether they add jobs), it has become the major objective in our economy. Well beyond the increase in compensation for executives is the practice of providing stock options, directly incentivizing the CEO (but not the workers) in seeing the stock perform as expected. This focus on stock price not only leads to short-term business strategy but it also results in (perfectly legal) game playing to kept the stock price high. The impact, as Peters describes, is clear:

Let’s take one company and see the impact of these buybacks on its workers. Over the past ten years Wal-Mart has spent an average of $ 6.5 billion a year on stock buybacks. This would have been enough to give each of its 1.4 million U.S. workers a $ 4,642 raise for every one of those years. So Congress or the SEC could make a good start on reforming the system by simply reinstating the regulation that prohibited buybacks.

A focus on share price above all creates the bizarre situation where stocks are abstracted from investments in companies. When traders move their server farms next to the NYSE server farms so that their algorithms gain a microsecond for arbitraging stock prices before the rest of the market catches shifts, they aren’t making the company better. They are just getting rich playing the market.

Of course, we are all increasingly complicit in this new financialization. My 401-K account, like virtually all others, is tied up in mutual funds managed by folks I’ve never met and never will. I’d love us to rethink our dependence on stock market expansion but my retirement (along with that of millions of others) depends on market expansion. 

So when Trump supporters say that the system is rigged against them, they’re right. They are just looking at the wrong system. It’s not a failure of government, it’s the success of the financial market. By operating as it’s supposed to operate, unfettered by government, press, or public opinion, it provides success for some at the expense of a great many others.

That brings me to Brian Alexander’s book on Lancaster, Ohio. It is a wonderful account of the changes that occurred in this medium sized manufacturing town as these economic transformations took hold. It was made poignant by the fact that Alexander grew up in Lancaster.

The Anchor Hocking plant (famous for Pyrex and other kitchen ware) was one of the true “anchors” of life in Lancaster. Executives lived in the town, it was a place where young high school graduates worked their way up into responsible production roles (in a very dangerous profession). Anchor and its employees were leaders in the community and cared for its general wellbeing. The plant found community to be very important: both the community in which they were located and the way in which the plant employees related to one another.

While Anchor had issues with competition from Libby, keeping up with plant maintenance, and the fluctuations of the business cycle, the real issues with financialization began in the 1970s. Raider Carl Icahn was a minority stockholder in Anchor after it had good public and engaged in “greenmail” to force changes in the company (or he’d weaken the stock value). Shortly thereafter, Anchor becomes a pawn in a series of what we used to call “leveraged buy outs”. Sometimes the new entity combined Anchor with other kitchen products in an attempt at horizontal integration. Sometimes it was the piece spun off and the company changed hands.

As these practices continued, it had devastating effects on the company. Workforce reductions were common and union contracts were “renegotiated”. When a new group of venture capitalists took on the company, their primary interest was to improve its short term safety rating and not to enhance the capacity of the plant to retool (to say nothing of dealing with deferred maintenance). Why safety? It stood in the way of selling the plant to the next group of potential investors after the first group had gotten from it what they could. But if it had a good safety rating, selling was a positive option (for the owners, not the plant).

Furthermore, each of these transactions wound up loading Anchor with the debt involved in the other acquisitions. This led to Anchor having to declare bankruptcy in 2015 as a means of eliminating the debt load. As a result, the board of directors was made up entirely of the creditors who knew nothing about glass production and were only looking to get out of the glass business as quickly as possible so as to move on the next option.

None of these people had any history in Lancaster. They didn’t care about the yearly folk festival. They weren’t likely to prop up the very successful alternative school. They weren’t going to run for mayor or see that the town competed with more affluent suburbs closer to Columbus. 

Alexander tells part of his story by tracking the lives of some neighborhood residents who were involved in the opioid epidemic through sales, use, or both. Their feeling of being tied to Lancaster while simultaneously not seeing hope for the future shows a serious indirect impact of the acquisitive financial markets that enveloped Achor Hocking and therefore Lancaster.

One of the toughest parts about sociology is that it often finds that a search for villains is futile. People respond to the social structures in which they are imbedded. It’s not enough to suggest that billionaires are gaining at the expense of the working class. We need to examine the imbedded incentives that are part of our systems and figure out how to make them just a little more fair.

I’m not suggesting that Wall Street is evil or that sometimes plants don’t need to close (although I really have a hard time with micro trading). Capitalism depends upon balancing economic and social interests. It recognizes that we actually have multiple markets, not one. Gains by one part of the economy (investors) at the expense of another (workers or consumers) create an unstable system.

Citizens United said that corporations were legally citizens when it comes to political speech. Many, including me, have criticized that decision. But the solution is for corporations and their governing boards to be real citizens who engage the life of the communities impacted by their operations.

Voters often tell pollsters that they think that having someone with a business background will help solve the problems of governing a complex modern society. But investing in real estate has little resemblance to what the preamble to the constitution calls “promoting the general welfare”.

As we work our way out of the current governmental disunity, we need politicians of both parties to join economists, political scientists, journalists, and sociologists in finding an appropriate sense of balancer in the economic marketplace. 

At the end of the day, what is good for Americans is what is good for Wall Street.

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