There’s a famous scene in the 1987 movie Wall Street in which the corporate raider Gordon Gekko gets up at a shareholder meeting and defends his impending takeover of the company. (Click the source link above to watch it).
To the horror of the company’s assembled executives and CEO, Gekko assails management for using the company’s cash to live the high life while sucking shareholders dry.
Then he launches into a speech about how the company, Teldar Paper, exemplifies what’s wrong with the American economy:
GEKKO: …In the days of the free market when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company! All together, these men sitting up here own less than three per cent of the company. And where does [Teldar CEO] Mr. Cromwell put his million-dollar salary? Not in Teldar stock; he owns less than one per cent. You own the company. That’s right, you, the stockholder. And you are all being royally screwed over by these, these bureaucrats, with their luncheons, their hunting and fishing trips, their corporate jets and golden parachutes.
TELDAR CEO CROMWELL: This is an outrage! You’re out of line Gekko!
GEKKO: Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analysing what all these guys do, and I still can’t figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I’ll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents. The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated. In the last seven deals that I’ve been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars. Thank you. I am not a destroyer of companies. I am a liberator of them!
And then Gekko concludes his speech with the most famous line of the movie–a line that came to define a whole generation of American business:
The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA.
The movie “Wall Street” was made in 1987, which means that it was likely written in the mid-1980s.
And guess what?
In the economy in which Gordon Gekko was operating–the economy of the early 1980s–Gordon Gekko was right.
Greed was good.
U.S. corporations had become too much of a feeding trough for their senior executives–at the expense of their shareholders.
The American economy did need to be kicked into shape.
And the aggressive takeovers and restructurings and “greed” that emerged from that era were actually an effective way to do that.
But there’s a time and place for everything.
And what was true in the early 1980s–that American companies had gotten fat, happy, and lazy–is no longer true. Three decades of ever-increasing shareholder “greed” have worked their magic, transforming the U.S. economy into a hyper-efficient, shareholder-rewarding money-machine.
Unfortunately, in that process, American companies have also come to neglect the most important engine in the U.S. economy: The tens of millions of “average employees” whose work allows companies to create value for their shareholders–and whose spending powers most of the American economy.
How important is the difference between then and now? Critically important.
Let’s look at some charts.
First, check out corporate profits as a per cent of the economy. In the early 1980s, when Gordon Gekko gave his famous speech, profits were at a record low. Corporations were fat and lazy. Shareholders (and America) needed “greed” to make companies more efficient:
30 years later, however, “greed” has become so pervasive, and companies have gotten so hyper-efficient, that corporate profit margins have hit an all-time high:
Also, in the early 1980s, companies were paying their rank-and-file employees average wages as a per cent of the economy. Wages had come down from the highs of the 1970s, but they were still reasonable.
Now, three decades later, wages as a per cent of the economy have hit an all-time low:
So, what’s important to remember here is that, from the perspective of the economy as a whole, “wages” aren’t just an expense line on a single company’s income statement.
One company’s “wages” are other companies’ revenues.
Because the employees who are paid those wages use the wages to buy things–houses, food, clothing, cars, vacations, you name it. And in buying those things, they create revenue for other companies.
So, when wages go down as a per cent of the economy, companies may get more profitable, but the employees paid those wages (or not paid any wages, if they’ve been laid off) have less money to spend. And that lack of spending power eventually hurts the revenue growth of most companies in the economy.
Once you understand that “wages” become “revenues,” you can begin to understand what has happened to our economy over the past 30 years.
Our companies have become extraordinarily profitable.
But they have become extraordinarily profitable at the expense of their rank-and-file-employees, who have not shared in this prosperity and do not have much money to spend.
As a result, although our companies are extraordinarily profitable, they are growing slowly.
Because the middle class–which contributes most of the work and most of the spending in our economy–has not shared in our companies’ prosperity.
Only the companies’ owners have benefitted.
Let’s look at some more charts.
“Average hourly earnings”–the amount paid to average rank-and-file employees–has dropped significantly since the 1970s and has barely risen in 50 years. In other words, the average wage-earners in our economy haven’t seen any benefit from our companies’ extraordinary profitability and prosperity.
And now compare the flat earnings of the average worker with the exploding earnings of senior management, companies, and shareholders (and this is just since 1990).
The inequality has gotten so extreme that the ratio of CEOs’ pay to average workers’ pay rose from 50X in 1980 to 350X by 2007.
Why does this matter?
Who cares whether the 1% takes home such a huge share of the country’s earnings?
Those 1%-ers, after all, spend a lot of money.
They spend money, and they invest money.
They invest money in new companies, and those companies then go on to “create jobs” and increase the country’s prosperity.
Well, yes, the richest Americans do spend a lot of money. And they do invest in companies. And those companies do, sometimes, go on to employ other Americans.
But here are two critical points:
- America’s highest wage-earners do not spend anywhere near as much as they make.
- America’s middle-class earners, meanwhile, spend nearly every penny they make.
In fact, taken together, America’s middle-class and poor people spend vastly more money than the richest Americans. In fact, they account for the vast majority of spending in the American economy.
Let’s go back to the charts…
From the 1940s to the 1980s, the top 10% of American wage-earners took home 35% of all the income in the United States. In the 1980s, however, this “take” began to increase. In 2007, it topped out at a shocking 50%.
Photo: Emmanuel Saez, 2009
What’s more, the top 1% of wage-earners took home almost half of that ~50%.
Photo: Emmanuel Saez, 2009
And what about spending?
What per cent of the spending in the economy does “the 90%” or even “the 99%” account for?
I haven’t been able to find precise data on this (if you know of a source, please tell me). But we can estimate it.
In 2010, according to data from the BLS, the bottom 80% of wage-earners accounted for more than 60% of the spending in the economy, while generating only half of the income.
The top 5% and top 1% of the economy, therefore, don’t spend anywhere near as much of the national income as they take in.
In other words, the more income becomes concentrated at the very top of the economy, the less money is spent on the goods and services produced by the economy. Because the people who spend most of the money–the average Americans–have less to spend.
Looked at differently, even if you have all the money in the world, there’s only so much stuff you can buy:
- A half a dozen cars.
- A few hundred dollars-worth of food a day.
- A few vacation houses
- A few vacations.
- Private schools.
- A couple of boats.
- A private jet.
- A personal staff.
Add all that up, and you’re still only spending a couple of million dollars a year.
Meanwhile, if you’re a member of the 0.01%, you’re taking home $11 million a year.
But what about investments? Don’t the investments made by the 1% fund companies that create jobs and pay wages?
Yes, some of these investments do that.
But, right now, there’s plenty (too much) investment capital around. Companies have cash coming out of their ears–they just can’t find anything productive to invest it in.
THE BOTTOM LINE:
Great companies create value for three different constituencies:
- Shareholders, and
In a well-balanced economy, companies balance the interests of these constituencies: They give customers great products and shareholders a nice return while also providing a good living and rewarding careers for their employees.
Sometimes, however, things get out of balance–and companies focus too much on serving only one constituency.
In the early 1980s, when the fictional Gordon Gekko made his speech, American companies were grossly inefficient. They were serving (senior) employees at the expense of customers and shareholders. They needed a good dose of shareholder greed to get them to rebalance their priorities.
But, 30 years later, things have changed completely.
Corporations have become highly efficient, so much so that profit margins have just hit an all-time high.
Meanwhile, wages are at an all-time low, thus starving the economy.
So, it’s time to rebalance the economy again (and preferably not through taxation–it’s better if the private sector solves this problem itself.)
Let’s end with a thought experiment.
Let’s imagine that U.S. companies decided collectively to share more of their current prosperity with their employees.
Right now, as shown in the chart below, corporate profit margins are nearly 11% of revenue. The long-term average margin, meanwhile, is about 7%:
So, let’s imagine that corporations decided to share more 4 points of profit margin with their employees, bringing their profit margins back down to the long-term average of 7% of the economy.
What would happen?
Well, three things would happen.
First, U.S. companies would pay out an additional $600 billion a year in wages to their employees. Some of that would go to taxes, reducing the country’s deficit. The bulk of it would go to the employees, who would convert it to spending. That would be a big economic stimulus, one that would help jumpstart the growth of the economy.
Second, corporate profit margins would drop, which means that stocks would probably drop. However! Economic growth would also likely accelerate, so stock multiples would probably increase. So they shareholder “loss” from this move would probably not be extreme.
Third, our economy would, finally, be well-balanced again.
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