Come On, Wall Street, Give America A Raise!

Gordon Gecko CigarWe’re glad you’re back and doing great, Mr. Gecko. But how about something for the rest of us???

As I’ve
explained before, one big reason U.S. economic growth is so crappy these days is that big American companies are
hoarding cash and “maximizing profits” instead of investing in their people and future projects.

This is contributing to record income inequality and starving the primary engine of U.S. economic growth — the vast American middle class — of purchasing power. (See charts below).

If average Americans don’t get paid living wages, they can’t can’t buy many products and services. And when average Americans can’t buy products and services, the companies that sell products and services can’t grow. So the profit obsession of America’s big companies is, ironically, hurting their ability to grow.

One obvious solution to this is for big companies to pay people more — to share more of the vast wealth that they create with the people who create it. Another is for the companies to invest more in future projects.

The companies have record profit margins, so they can certainly afford to do this.

But, unfortunately, over the past three decades, what began as a healthy and necessary effort to make our companies more efficient has evolved into a warped consensus that the only value that companies create is financial (cash) and that the only thing managers and owners should ever worry about is making more of it.

This view is an insult to anyone who has ever wanted to work for something more than money. And it is a short-sighted and destructive view of capitalism, an economic system that sustains not just this country but most countries in the world.

It’s no mystery where this consensus is coming from, though:

Wall Street.

Income Inequality, 1981-2008Economic Policy InstituteAlmost all of America’s income gains over the last three decades have gone to the ‘owners.’

Over the past three decades, Wall Street’s asset-management industry has become ever more lucrative and professionalized. As this has happened, many of the country’s most promising business executives have “followed the money” to Wall Street, where they become investors and seek to add value (and enrich themselves) by reminding the people who make America’s products and services who they work for and what is expected of them. In the asset-management business, the quality of the “product” is judged only by one simple measure–the financial return. So with so many talented, ambitious, and smart people flooding into the industry, it’s no surprise that America’s big companies have been heckled, berated, threatened, and incented until their managers view their teammates as “costs” and come to care about only one thing: The bottom line.

To make sure senior managers obsess about financial value over the other kinds of value that great companies create–value for customers and employees–Wall Street’s asset managers have also learned to compensate the senior managers with big helpings of stock. This way, the senior managers are also incented to view rank-and-file employees as “costs” and minimize them in order to deliver the highest possible return.

And woe to to the CEO or senior management team that dares to share the value a company creates with the folks who create it (the employees)!

An “activist” investor will immediately attack the company, get the CEO and senior managers fired, and install a management team that knows that job number one is to kiss the Wall Street ring.

Corporate profits as a per cent of GDPBusiness Insider, St. Louis FedAmerica’s big companies are more profitable than they have ever been.

Now, in defence of Wall Street, this behaviour is understandable. Wall Street executives, like other professionals, want to do a good job. It’s just that what doing a “good job” as an asset manager means these days is dumping or attacking companies that balance and share the value they create with all of their constituencies (customers, employees, and shareholders) and buy the ones that steer every penny possible into the pockets of the shareholders.

Wall Street, in other words, is just doing what it is ordering every big American company to do: “Maximise earnings.”

In the process, however, it is destroying the health of the American economy by treating hundreds of millions of Americans as “costs” and keeping a staggering percentage of the country’s wealth for itself.

Profits as a per cent of GDPBusiness Insider, St. Louis FedThe same companies, meanwhile, are paying the lowest wages in history.

And, as previously noted, Wall Street is also sacrificing long-term returns in the service of its short-term greed. If some of those quarterly profits that Wall Street insists be “maximized” were instead invested in paying existing employees more, hiring new employees, and investing in other promising projects, the future growth of the companies Wall Street owns would almost certainly accelerate. And this, in turn, would produce higher long-term profits and make Wall Street even richer.

In short, in the ever-present tension between “labour” and “capital,” capital has won. The Wall Street industrial complex has done its job so well–so much of the wealth of America’s big corporations is being devoted to enriching shareholders–that tens of millions of hard-working fully-employed Americans are living in poverty. And tens of millions of other Americans aren’t working at all–casualties of the “maximized profits” and lack of investment that Wall Street so aggressively insists on.

Labour share of incomeBusiness Insider, St. Louis Fed, Bureau of Labour StatisticsAs a result, the share of America’s income that is going to the people who make the products and services (‘labour’) is plummeting. Wall Street investors, meanwhile, have never had it so good.

Importantly, if big American companies were struggling to make money, or were making only average profits, there would be no need to have this conversation. But they aren’t. America’s big companies are currently generating the highest profit margins in history. Meanwhile, they are paying the lowest wages in history.

The solution to this problem is not to make companies pay out all of their earnings to their employees. Shareholders deserve a cut, too.

The solution is merely to get companies to balance the interests of their shareholders, customers, and employees–to take some of their profits and re-invest them in people and future projects.

Importantly, in doing this, Wall Street and America’s senior managers would not so much be sharing their wealth as “reinvesting” it. Any cash that America’s big companies spend instead of hoarding (or buying back stock) will become revenue for other companies. And this revenue, in turn, will accelerate the growth of most American companies.

Employment as a per cent of the populationBusiness Insider, St. Louis FedAnd, of course, America’s big companies have cut so many ‘costs,’ that fewer Americans are working than any time in the past three decades.

(And for those managers and owners who just can’t stomach the idea of sharing their wealth with the people who generate it, there is another option, too: Just cut prices. If companies reduce the prices for their products and services, they will make them more affordable for customers, a.k.a., normal Americans. And for these customers, a penny saved is a penny earned.)

So that’s the solution to America’s economic woes.

It is persuading (or, if necessary, forcing) Wall Street and America’s senior managers to better balance the interests of customers, shareholders, and employees–and, in so doing, share more of the vast wealth of America’s big companies with the people who generate it.

Wages vs Profits ArrowsBusiness Insider, St. Louis FedIn short, the problem is this. America’s big companies have the highest profits in history…and are sharing a record-low amount with their employees.

These employees, after all, are consumers. And unlike most Wall Street investors and senior managers, who make more money than they know what to do with, these consumers will turn around and spend every penny that they earn.

So, come on, Wall Street!

Give America a raise!


In short, here’s the solution to our economic woes:

Lower profits. Higher wages.

SEE ALSO: Sorry, It’s Not A “Law Of Capitalism” That You Pay Employees As Little As Possible

Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.