"Shareholder Revolution" and Modern America's Lack of Job, Wage and Innovation Growth

What is a company for? I was taught as a child that the purpose of American companies was to generate wealth broadly by allocating capital to productive purposes - investing in people, factories, production lines, new ideas, and business. What was good for American Business would be good for America and Americans. It worked that way for a while, after WW II. Where those times an anomaly?

Regardless of the post-WW II era, the modern business climate is marked by stock buybacks and shareholder payouts. Modern American companies are sitting on large reserves of cash and debt. Let's use Apple as an example. Apple has $215B in reserves. Apple has $16.8B in cash. It has $177B in long-term securities that it intends to accrue interest for at least another year. Of those reserves, $200B (93%) are located overseas, and Apple does not intend to return those funds to the U.S. and pay taxes on them. Apple has $53B in long-term debt, as well as $32B in non-current liabilities, a result of selling corporate bonds. Apple spent $8.8B in the fourth quarter on dividends and stock repurchases, and has another $47B promised to stockholders.

This pattern of increasing dividends, shareholder payouts and stock repurchases is a direct result of the "Shareholder Revolution" which states that the ultimate measure of a companies success is the extent to which it enriches its shareholders. Corporate strategy changed from the one I learned as a youth, maximizing overall value as a broad measure by investment in people, facilities, innovation and business, to one of short-term shareholder enrichment.

Higher profits in recent business cycles have not resulted in higher wages or higher levels of investment. Corporate America invests about 10% of every borrowed dollar, a rate that has remained constant before and after the Great Recession of 2008. The other 90 cents went to shareholder payouts, varying in amounts based on credit and growth conditions.

Post-WW II management models met 1970's stagflation, and corporate leaders sought changes. Takeover artists and corporate raiders convinced themselves they were ousting inept CEOs. Institutional investors convinced themselves that CEOs should be payed for performance. Analysts convinced themselves that forecasts were better judges of stock price than current performance. Overall, the incentives changed for corporate strategy.

Research at Stanford University shows that once a business undergoes an IPO their funding for innovation drops 40%. Wall Street punishes long-term strategic investment. For example, StarBucks was one of the first retailers to offer comprehensive healthcare to its employees. In 2015, it established a plan to fund employee's bachelor degrees. For both, StarBucks received pushback from investors.

Private and family owned businesses do much better at resisting the inhibition of financialization. Several years ago, all of the public car battery manufacturers were very worried about competition from Korean battery makers. The push from Wall Street was for cost cutting and outsourcing. Yet East Penn Manufacturing, a family owned battery maker founded in 1946, ignored the wisdom and continued to invest in facilities, and is now the world's largest single-site battery manufacturer.

So what's wrong with American Business? Help from Wall Street.

"Summer day, make me feel fine..."

It has been a while since I made a post. As a way of easing back into things, I decided to create a book list. Summer is traditionally the time when people relax a bit, take a vacation, maybe buy a book to read while at the beach or the lake. So, here is a list of the books that I have been reading, and recommend.

• Makers and Takers - Rana Forooba. More than any other book I have read, this one explains why America in general and the American economy in particular are struggling so hard to recover from the Great Recession most recently and since 1970 in general. Forooba is a Times Magazine economic columnist and CNN Global economic analyst. The book is not just about the recent economic problems, such as the 2008 Financial crisis, but rather about the great changes in American business from the 1870s through the Great Depression, the post-WW II stability, the 1970s slow down, and more recently. Everyone should read this book to understand why the politicians can't solve the problems of America until the business of America is changed.
• The Party's Over: Oil, War, and the Fate of Industrial Societies - Richard Heinberg. Whether you believe that Peak Oil is here or that fracking and other technologies will save the day, this book will explain how and why society and population is directly and entirely determined by energy. The author ties together such disparate areas as history, anthropology, ecology, technology, sociology and psychology into an overall explanation of why everything depends on the availability of energy.
• Demagogue: The Fight to Save Democracy From It's Worst Enemies - Michael Signer. Americans have always worried about Demagogues. Alexander Hamilton warned about the danger of demagogues in the first and the last (86th) of the Federalist Papers. James Madison's vice-president, Elbridge Gerry, wrote that democracy was "the worst...of all political evils" because the ignorance of the people would result in the election of demagogues that would take away their freedoms. The demagogue is a mob leader who takes advantage of a power vacuum to gather ultimate power to him/her self. James Fenimore Cooper wrote "A demagogue, in the strict sense of the word, is a 'leader of the rabble.'...The peculiar office of the demagogue is to advance his own interests, by affecting a deep devotion to the interests of the people." We have seen many such types: Hugo Chavez, Moqtada al-Sadr, Mahmoud Ahmadinejad, Slobadan Milosevic, Fidel Castro, Benito Mussolini, Adolf Hitler, Jimmy Hoffa, Louis Farrakhan. Perhaps we are seeing it today, in a man who thinks that his ideas alone are better than anyone else...
• Twilight's Last Gleaming - John Michael Greer. In the '80s and '90s I gobbled up the techno-thrillers of Tom Clancy. In Clancy's world, the U.S. always won, despite the odds. John Michael Greer is a believer in Peak Oil, limited resources, and the coming decline. Imagine a techno-thriller set in the 2020s where foreign powers, chiefly China, gang up on an over-extended U.S. A great book, but with a different ending for the good guys.
• Failures of Imagination: The Deadliest Threats to our Homeland - And How to Thwart Them - The Honorable Michael McCaul. Chairman of the Homeland Security Committee, the author has a book of eight possible future attacks on America. Such threats as a "dirty bomb", a massacre at the Mall of America, a cyberstrike on the U.S. financial centers, and a Russian Cold War attach, the book seeks to stimulate thinking and planning for the kind of "failures of imagination" that lead to Pearl Harbor and 9/11. Thinking about the unthinkable might help prevent it.
• Light's Out - Ted Koppel. Light's Out is about the destruction of the U.S. electrical grid by cyberattack, EMP or extreme solar storm (Coronal Mass Ejection). In 1859, the world's first observed solar flare, known as the Carrington Event, took down parts of the U.S. telegraph system, shocking telegraph operators and melting telegraph lines. In 1962, a 1.4 Megaton detonation outside the earth's atmosphere above Johnston Island caused damage in Hawaii 1,400 kilometers away, destroying streetlights, setting off burglar alarms and taking down microwave relays. The increasing number of cyberattacks on the U.S. have included attempts to hack and install malware into the software that controls the three U.S. electrical grids. On April 6, 2013, some unknown number of perpetrators cut fiber-optic telecom cables to the PG&E Metcalf Transmission Substation in San Jose and then used AK-47s to fire on and knock out seventeen giant transformers. While grid operators where able to avoid a blackout, the substation was offline for 27 days to repair the damage. There have been any number of warnings about the dangers to the U.S. electrical grid. Where the grid to be taken down for one year, denying electricity to Americans, the loss of electricity would result in the deaths of millions of Americans, due to loss of water, food, transportation, health and medical care, etc. Koppel warns about the dangers, and just how little is being done about it. (Homeland Security has no plan for a grid loss scenario.)
• American Amnesia: How the War on Government Led Us to Forget What Made America Prosper - Jacob Hacker and Paul Pierson. It takes government - a lot of government - for advanced societies to flourish. This is uncomfortable because Americans cherish freedom. Eleven years after the Declaration of Independence - with its ringing declaration of "certain unalienable rights"... fifty-five American notable gathered in Philadelphia because they had become convinced that the absence of effective public authority was a mortal threat to the fledgling nation. James Madison [wrote]: "There never was a Government without force. What is the meaning of government? An institution to make people do their duty. A Government leaving it to a man to do his duty, or not, as he pleases, would be a new species of Government, or rather, no Government at all." We suffer from a kind of mass historical forgetting, a distinctively "American Amnesia" what both our history and basic economic theory suggest: We need a constructive and mutually beneficial tension between markets and government rather than the jealous rivalry that so many misperceive and help foster.
• War By Other Means: Geoeconomics and Statecraft - Robert Blackwill and Jennifer Harris. The United States has the most powerful economy on earth. Yet too often, the U.S. reaches for its gun instead of its purse, in conducting international conduct. As the U.S. has forgotten the use of economic statecraft, Russia, China, and other countries have used economic measures as their first resort. Why has the U.S. fallen behind?
• The Truthful Art: Data, Charts, and Maps for Communication - Alberto Cairo. This is a book about telling a story, a truthful story, from data, using maps and charts. The author talks about spending the 2014 fall recess (re)learning R, ggplot2 and tableau. Since he needed a data set to use, and wanted one that was meaningful, he used a set of reading and math scores from the Miami-Dade County Public Schools web site, to check the schools in his area. Using R and ggplot, he was able to generate scatter plots of reading and math scores for the 9 school districts. The scatter plots showed which districts had better and which had worse scores. Then, he gathered a map of income data for the area from the Census Bureau website, and overlaid the math and reading scores with the income areas. The exercise generated many questions regarding association, causality, etc. This book is about using data to tell stories, and to find stories, in data.
• Dark Territory: The Secret History of Cyber War - Fred Kaplan. On Saturday, June 4, 1983, President Ronald Reagan spent the day at Camp David. That night, he settled in to watch a movie. The movie was WarGames where Matthew Broderick hacks into NORAD and nearly start World War III, thinking he is playing a new computer game. The following Wednesday, Reagan couldn't get the movie out of his mind. In a meeting to discuss arms talks with the Soviets and a new nuclear missile (the MX) he asked John Vessey, the chairman of the Joint Chiefs, if it could really happen. General Vessey reported back a week later: "Mr. President, it is much worse than you think". In 1983, the first laptops were becoming available. Public internet providers were yet to come. Yet NSDD-145, "National Policy on Telecommunications and Automated Information Systems Security" stated that the new systems being acquired were "highly susceptible to interception, unauthorized electronic access, and related technical exploitation." Hostile foreign intelligence agencies were already "extensively" hacking into these services already, and "terrorist groups and criminal elements" had the capabilities to do so also. This was the first time that an American President discussed cyber warfare.

These are some of the best books I have read lately. Hope you enjoy your summer reading!