Capitalism as if workers matter
Welcome to Popular Information, a political newsletter for people who give a damn — written by me, Judd Legum. Send your feedback to firstname.lastname@example.org or tweet your thoughts using #popularinfo.
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My friend Walt Hickey writes an excellent newsletter called Numlock that focuses on the numbers in the news. It's a quick read, and I learn something new from it every time. Yesterday, I learned about the disturbing number of medical students who do not attend their classes. You can subscribe at numlock.substack.com.
Capitalism as if workers matter
In Monday’s newsletter, I detailed how, despite a growing economy, real wages for workers have fallen over the last year. Over the last 40 years, real wages for workers are flat.
Something is seriously wrong.
Most of the wealth generated by corporations is being distributed to executives and shareholders while workers tread water. There are a lot of contributing factors to this problem but they all boil down to this: workers need more power.
On Wednesday, Senator Elizabeth Warren (D-MA) introduced legislation aimed squarely at this problem: The Accountable Capitalism Act.
How accountable capitalism works
Under Warren’s bill, corporations with over $1 billion in annual revenue would be required to receive a “federal corporate charter.” That charter would require corporate directors to consider all stakeholders in a corporation -- workers and shareholders -- when making decisions.
A company that continued to pursue maximum profits at the expense of workers could be sued.
Warren’s bill doesn’t just require a new charter. Workers at large corporations would elect 40% of the board of directors.
Currently, most executive compensation at public companies comes in the form of stock. This incentivizes CEOs and other top executives to juice share prices. Warren’s bill would also prohibit executives who receive stock as compensation from selling it for five years, encouraging more long-term thinking.
Companies are juicing stock prices by buying their own shares. Corporations spent a record $437 billion on stock buybacks in the second quarter of 2018. Warren’s bill disincentivizes stock buybacks. Each time a company buys back shares, its executives are prohibited from selling their stock for three years.
Wait, but don’t corporations exist to return value to shareholders?
It’s worth taking a step back to consider the corporate form and how it started. Corporations don’t exist in nature. They were created by the state to benefit the public.
Ordinarily, people are legally responsible for their actions. If something you do ends up hurting someone, you are responsible for compensating them. If you borrow money, you are responsible for paying the debt.
This makes it very risky to do complicated things like building houses or manufacturing cars. People can get hurt, or you can end up with a lot of debt. But people need houses and cars.
The corporation was a solution to this problem. The government started issuing corporate charters to incentivize the production of things for the public benefit. The deal is that individuals who own and operate corporations will not be held personally responsible for their actions. Instead, the corporation, a legal fiction, is held responsible.
How corporations changed
Over time, the requirement that corporations provide a benefit to the public was relaxed. States wanted to attract businesses, so most adopted a “general incorporation” statute that allowed corporations to be formed for any purpose.
This was when things started to get out of control. Corporations started to become more powerful than the people who created them. They started to monopolize or ologopolize entire industries.
A particularly galling example is the public airwaves, which corporations control through public licenses. Today, politicians must spend countless hours fundraising, frequently from corporations, to pay corporations for access to the airwaves to run TV ads.
For a long time, corporations, as currently constituted, were a good deal for the public. They facilitated lots of productive activity and generated an enormous amount of wealth. But if the deal isn’t working well anymore -- if corporate wealth is flowing to a handful of people while leaving workers behind -- the public has the power to change the terms.
The corporate form is a privilege, not a right.
Could Warren’s plan work?
The question is whether Warren’s bill would fundamentally change the activity of corporations. To answer this question, we can look to Germany, which has instituted a version of Warren’s plan, known as codetermination, since 1976. It’s called codetermination because workers, shareholders, and executives jointly determine the activities of the corporation.
In Germany, research shows that codetermination “reduces worker turnover, boosts salaries and productivity, and supports income equity.” The average German worker makes about $6,000 more than their American counterpart. Another study, comparing countries that mandate codetermination with those that do not, found codetermination “has a strong equalizing effect on the distribution of income.”
A 2010 study found that “productivity per employee is, on average, significantly higher” in companies with a codetermination model. The system has also “fostered a healthy degree of communication and cooperation between management and workers.”
Shareholder returns are reduced somewhat, due to lower profitability. The companies are spending more money on wages and less on dividends and stock buybacks which benefit shareholders.
Another casualty is executive compensation. German CEO salaries are about half of their American counterparts. But companies like BMW and Siemens are still able to attract top executive talent.
The $0 solution
As Matthew Yglesias notes, Warren’s plan has an impressive feature: it’s a big idea that cost taxpayers nothing. Generally, ideas that could make a dent in wealth inequality come with substantial price tags. Warren’s plan effectively lets the market do the work, by shifting the ground rules.
The knives are out
Despite its attractive price tag, passage of Warren’s proposal would not be easy. Hours after Warren introduced her bill, the attacks had already started.
Jeffrey Miron, an economist at the libertarian Cato Institute, went on CNBC and said Warren’s proposal would “destroy capitalism.” (He also said that “inequality that comes from the free market is not undesirable -- it is what it is.”)
Reason Magazine said Warren would “substitute the decisions of people who run businesses with the prejudices and preferences of people who think like she does.”
Fox News also joined the fray.
Press unites against Trump attacks
Trump refers to the news media as “fake,” “horrible,” and the “enemy of the people.” These attacks have continued after five journalists were gunned down in a newsroom in Annapolis, Maryland.
The United Nations’ human rights commissioner said that “authoritarian leaders around the world are using Trump’s example to crack down on the media in ways they never would have before.”
In the United States, a recent poll found 43% of Republicans think Trump should have the power to shut down media outlets engaged in “bad behavior.”
In response, hundreds of newspapers are writing editorials in defense of a free press.
The Bangor Daily News (Maine)
Facts matter. But they don’t make themselves known. They don’t, actually, speak for themselves. They need people, such as journalists, or yourselves, to say them out loud.
The Cape Cod Times (Massachusetts)
The true enemy of any democracy is ignorance, and the only way to battle ignorance is through the acquisition of knowledge: a single set of well-researched, incontrovertible, unbiased facts.
The Des Moines Register (Iowa)
The true enemies of the people — and democracy — are those who try to suffocate truth by vilifying and demonizing the messenger. The response to that cannot be silence.
The Falls City Journal (Nebraska)
We hold people in power accountable for their actions. Some think we’re rude to question and challenge. We know it’s our obligation.
The Star News (Wisconsin)
Yes, members of the press occasionally get facts wrong. When they do, they are held accountable by their news organizations as well as others in the industry, and far more often than not, the error is acknowledged in the form of a timely correction. The same cannot be said about this president.
A comprehensive list of Trump’s “great new trade deals”
On Twitter Wednesday, Trump bragged that the tariffs he’s imposed -- on China, Canada, Mexico, Japan, South Korea, Turkey, the UK, and the EU -- have resulted in “great new trade deals.”
Our Country was built on Tariffs, and Tariffs are now leading us to great new Trade Deals - as opposed to the horrible and unfair Trade Deals that I inherited as your President. Other Countries should not be allowed to come in and steal the wealth of our great U.S.A. No longer!August 15, 2018
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