The Great Power-Shift (Part I)
Why America's corporate and financial elites are wrong about the roots of Trumpism and of soaring inequality
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Friends,
Sorry to burden you with this long letter, but in these last days before the 2022 midterm elections we have come to a juncture where many of the political and economic strands over the last forty years are conjoining. It's important to see the result, and to separate truth from fiction.
Trumpism — as seen through the eyes of America's corporate and financial establishment — is a backlash against demographic and social changes. White men, so the story goes, are in revolt against the rising share of the population encompassing people of color and immigrants, the growing economic power of women, and the increasing political power of the LGBTQ community.
It' a convenient story for the corporate and financial establishment to tell because it leaves out the corporate and financial establishment. Naturally, the establishment doesn't want to view Trumpism as working-class revolt against the income, wealth, and power of the corporate-financial establishment.
Meanwhile, the establishment explains the record inequalities of income and wealth as the natural result of the "free market." According to this story, globalization and technological change have made most Americans — especially those without college degrees — less competitive. The tasks they used to do can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.
Both explanations offered by the corporate-financial establishment — for the rise of Trumpism and for widening inequalities of income and wealth — leave out the increasing concentration of political power in the corporate and financial elite, which has been able to influence the rules on which the economy runs.
Yet this power shift lies at the heart of both Trumpism and widening inequality.
I. The false view of the market
The elite's market explanation for inequality offers the meritocratic tautology that individuals are paid what they're "worth," without examining the legal and political institutions that define the market. This tautology is easily confused for a moral claim that people deserve what they are paid.
Yet this claim has meaning only if the legal and political institutions defining the market are morally justifiable.
By ignoring the shift in power, it's been possible for the establishment to argue that the median wage of the bottom 90 percent — which for the first 30 years after World War II rose in tandem with productivity — has stagnated for the last 40 years, even as productivity continued to rise, because most workers are worth less than they were before new software technologies and globalization made many of their old jobs redundant. It follows that most workers have to settle for lower wages and less security. If they want better jobs, they need more education and better skills. So hath the market decreed.
Yet this market view doesn't explain why the transformation occurred so suddenly. The divergence between productivity gains and the median wage began in the late 1970s and then took off. But globalization and technological change did not suddenly arrive at America's doorstep in those years. What else began happening?
Nor can the market view account for why other advanced economies facing similar forces of globalization and technological change did not succumb to them as readily as the United States. Why have globalization and technological change widened inequality in the United States to a much greater degree than in Europe or Japan?
Nor can the market view account for why the compensation of the top executives of big American companies soared from an average of 20 times that of the typical worker 40 years ago to over 300 times today. Or why the denizens of Wall Street, who in the 1950s and 1960s earned comparatively modest sums, are now paid tens or hundreds of millions annually. Are they really "worth" that much more now than they were worth then?
Nor can the market view explain why the middle class's share of the total economic pie continues to shrink, while the share going to the top continues to grow.
II. How corporate power has altered the market to increase profits
A deeper understanding of what has happened to American income and wealth over the last forty years requires an examination of changes in the structure of the market.
These changes stem from a dramatic increase in the political power of large corporations and Wall Street to change the rules of the market in ways that have enhanced their profits, while reducing the share of economic gains going to the majority of Americans. Higher corporate profits have meant higher returns for shareholders and, directly and indirectly, for the executives and bankers themselves.
This transformation has amounted to a redistribution upward, but not as "redistribution" is normally defined. The government did not tax the middle class and poor and transfer a portion of their incomes to the rich. The government made the upward redistribution by altering the rules of the game.
— Intellectual property rights-patents, trademarks, and copyrights have been enlarged and extended. This has created windfalls for pharmaceuticals, high tech, biotechnology, and many entertainment companies, which now preserve their monopolies longer than ever. It has also meant high prices for average consumers, including the highest pharmaceutical costs of any advanced nation.
— Antitrust laws have been relaxed for corporations with significant market power. This has meant large profits for Monsanto, which sets the prices for most of the nation's seed corn; for four high-tech companies with power over portals and platforms (Amazon, Facebook, Google, and Apple); for cable companies facing little or no broadband competition; for airlines (which went from twelve in 1980 to four today); and for the largest Wall Street banks, among others. As with intellectual property rights, this market power has simultaneously raised prices and reduced services available to average Americans.
During the current inflation, monopolistic corporations have been able to increase their prices higher than their increasing costs, using the cover of inflation as an excuse.
— Financial laws and regulations instituted in the wake of the Great Crash of 1929 and the consequential Great Depression have been abandoned — restrictions on interstate banking, on the intermingling of investment and commercial banking, and on banks becoming publicly held corporations, for example — thereby allowing the largest Wall Street banks to acquire unprecedented influence over the economy.
The growth of the financial sector, in turn, spawned junk-bond financing, unfriendly takeovers, private equity, and the notion that corporations exist solely to maximize shareholder value.
— Bankruptcy laws have been loosened for large corporations but contracted for homeowners and student debtors. Airlines and automobile manufacturers have been allowed to abrogate labor contracts, threaten closures unless they receive wage concessions, and leave workers and communities stranded.
The largest banks and auto manufacturers were bailed out in the downturn of 2008–2009. But bankruptcy was not extended to homeowners burdened by mortgage debt, who owe more on their homes than the homes are worth, or to graduates laden with student debt. The result has been to shift the risks of economic failure onto the backs of average working people and taxpayers.
— Contract laws have been altered to require mandatory arbitration before private judges selected by big corporations and "non-compete" clauses that reduce the bargaining power of employees.
— Securities laws have been relaxed to allow insider trading of confidential information. CEOs have used stock buybacks to boost share prices when they cash in their own stock options.
— Taxes have been cut for big corporations and the rich. Tax laws have created loopholes for the partners of hedge funds and private-equity funds, special favors for the oil and gas industry, lower marginal income-tax rates on the highest incomes, and reduced estate taxes on great wealth.
All these instances represent distributions upward — toward big corporations and financial firms, and their executives and shareholders-and away from average working people.
III. How corporate power has suppressed wages to increase profits
Meanwhile, corporate and financial executives have done everything possible to prevent the wages of most workers from rising in tandem with productivity gains, in order that more of the gains go instead toward corporate profits. Their major strategy has been to make workers more economically insecure, so they accept lower real wages (adjusted for inflation).
— Some of this insecurity has been the consequence of trade agreements that have encouraged American companies to outsource jobs abroad.
Since all nations' markets reflect political decisions about how they are organized, so-called "free trade" agreements entail complex negotiations about how different market systems are to be integrated. The most important aspects of such negotiations concern intellectual property, financial assets, and labor.
The first two of these interests have gained stronger protection in such agreements, at the insistence of big U.S. corporations and Wall Street. The latter-the interests of average working Americans in protecting the value of their labor-have gained less protection, because the voices of working people have been muted.
— Rising job insecurity can also be traced to high levels of unemployment. Here, too, government policies have played a significant role. The Great Recession of 2008-09, whose proximate causes were the bursting of housing and debt bubbles brought on by the deregulation of Wall Street, hurled millions of Americans out of work. The resulting joblessness undermined the bargaining power of average workers and translated into stagnant or declining wages.
This was followed by the dramatic increase in unemployment during the 2020-21 pandemic, and — in the wake of a predictable post-pandemic inflation — the eagerness with which the denizens of Wall Street and C-suites have encouraged the Federal Reserve to increase interest rates, even at the inevitable cost of jobs.
— Some insecurity has been the result of shredded safety nets and disappearing labor protections. Public policies that emerged during the New Deal and World War II had placed most economic risks squarely on large corporations through strong employment contracts, along with Social Security, workers' compensation, 40-hour workweeks with time-and-a-half for overtime, and employer-provided health benefits (wartime price controls encouraged such tax-free benefits as substitutes for wage increases).
But in the wake of the junk-bond and takeover mania of the 1980s, economic risks were shifted to workers. Corporate executives did whatever they could to reduce payrolls — outsource abroad, install labor-replacing technologies, and utilize part-time and contract workers. A new set of laws and regulations facilitated this transformation.
Full-time workers who had put in decades with a company often found themselves without a job overnight — with no severance pay, no help finding another job, and no health insurance. Even before the crash of 2008, the Panel Study of Income Dynamics at the University of Michigan found that over any given two-year stretch in the two preceding decades, about half of all families experienced some decline in income.
Today, nearly one out of every five working Americans is in a part-time job. Many are consultants, freelancers, and independent contractors. Two-thirds are living paycheck to paycheck. And employment benefits have shriveled. The portion of workers with any pension connected to their job has fallen from just over half in 1979 to under 35 percent today.
— The prevailing insecurity is also a consequence of the demise of labor unions. Fifty years ago, when General Motors was the largest employer in America, the typical GM worker earned $35 an hour in today's dollars. By 2014, America's largest employer was Walmart, and the typical entry-level Walmart worker earned about $9 an hour. The GM worker was not better educated or motivated than the Walmart worker.
The real difference was that GM workers a half-century ago had a strong union behind them that summoned the collective bargaining power of all autoworkers to get a substantial share of company revenues for its members. And because more than a third of workers across America belonged to a labor union, the bargains those unions struck with employers raised the wages and benefits of non-unionized workers as well. Non-union firms knew they would be unionized if they did not come close to matching the union contracts.
Today's Walmart workers do not have a union to negotiate a better deal. They are on their own. And because only 6 percent of today's private-sector workers are unionized, most employers across America do not have to match union contracts.
This puts unionized firms at a competitive disadvantage. Public policies enabled and encouraged this fundamental change. More states adopted so-called "right-to-work" laws. The National Labor Relations Board, understaffed and overburdened, barely enforced collective bargaining. When workers were harassed or fired for seeking to start a union, the board rewarded them back pay — a mere slap on the wrist of corporations that have violated the law. The result has been a race to the bottom.
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Next week, in Part II of this letter, I'll talk about the consequences of this great power-shift — how it relates to the rise of populism on both the right and the left and the upcoming midterms, and what can and should be done.
The Great Power-Shift (Part II)
And what it means for the upcoming midterms
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Friends,
Last Friday, in Part I of this letter, I argued that corporate and financial elites have perpetrated two dangerously misleading narratives about our current predicament: first, that Trumpism is mainly a reaction by white working-class men to the increasing number and dominance of people of color, immigrants, women, and LGBTQ people. Second, that the soaring inequalities of income and wealth in America are due mainly to the impersonal workings of the "free market."
Both of these views are self-serving because they ignore the increasing power of America's corporate and financial elites, which goes a long way to explaining both Trumpism and soaring inequality.
Today, in Part II, I want to show how this power shift has allocated more of the economy to corporate profits and less to the wages of the middle and working class, which in turn has contributed to populist revolts on the left and right — beginning in 2016 in the form of the candidacies of Bernie Sanders and Donald Trump. Yet Trumpism itself is an elitist strategy to prevent Americans from joining together to create a more sustainable and shared prosperity.
I. Profits and wages
Given the changes in the structure of the market I outlined in Part I, it is not surprising that corporate profits have increased as a portion of the total economy, while wages have declined. The upward redistribution over the past 40 years has shifted $50 trillion from the bottom 90 percent to the top 1 percent — $50 trillion that would have gone into the paychecks of working Americans.
Those whose income derives directly or indirectly from profits — corporate and financial elites — have done better than ever. Those dependent primarily on wages have been on a downward escalator.
The underlying problem is not that most Americans are "worth" less in the market than they had been decades ago, or that they have been living beyond their means. Nor is it that they lack enough education to be sufficiently productive.
The basic problem is that the market itself has become tilted ever more in the direction of a corporate and financial elite that has exerted disproportionate influence over it, while average working people have steadily lost bargaining power — both economic and political — to receive as large a portion of the economy's gains as they commanded in the first three decades after World War II.
As a result, the means of most Americans have not kept up with what the economy could otherwise provide them. And most Americans' aspirations — and assumptions — of upward mobility for themselves and their children have been dashed.
II. A vicious cycle
To attribute this to the impersonal workings of the "free market" is to disregard the power of large corporations and the financial sector, which have received a steadily larger share of economic gains as a result of that power. As their gains have continued to accumulate, so has their power to accumulate even more.
These changes in the structure of the economy have been reinforcing and cumulative:
As more of the nation's income flows to large corporations and Wall Street and to those whose earnings and wealth derive directly from them, the greater has been their political influence over the rules of the market, which in turn enlarges their share of total income.
The more dependent politicians become on their financial favors, the greater is the willingness of such politicians and their appointees to reorganize the market to the benefit of these moneyed interests.
The weaker unions and other traditional sources of countervailing power become, the less able they are to exert political influence over the rules of the market — which causes the playing field to tilt even further against average workers and the poor.
Reversing the scourge of widening inequality therefore requires reversing the upward re-distribution within the rules of the market, and giving average working Americans the bargaining leverage they need to get a larger share of the gains from growth.
Yet neither will be possible as long as corporate and financial elites have the power to prevent such a restructuring. As they continue to collect the lion's share of the income and wealth generated by the economy and use some of that income and wealth to bribe politicians and influence public opinion, their power over the rules of the economic game continues to grow.
III. The Democrats' response?
The answer to this conundrum is not found in economics. It is found in politics.
Today's Republican Party is treacherous and treasonous. It is in the vanguard of the anti-democracy movement. It has become a front for corporate and financial elites who fear democracy at a time in our history when they are siphoning off a record share of the economy for themselves.
So why are Democrats facing midterm elections that are too close to call?
Some commentators think Democrats have moved too far to the left — too far from the so-called "center." This is utter rubbish. Where's the center between democracy and authoritarianism and why would Democrats want to be there?
Others think Biden hasn't been sufficiently angry or outraged. Please. What good would that do? And after Trump, why would anyone want more anger and outrage?
The biggest failure of the Democratic Party has been its loss of the American working class. As Democratic pollster Stanley Greenberg concluded after the 2016 election,
"Democrats don't have a 'white working-class' problem. They have a 'working class problem' which progressives have been reluctant to address honestly or boldly. The fact is that Democrats have lost support with all working-class voters across the electorate."
The working class used to be the bedrock of the Democratic Party. What happened?
Democrats have occupied the White House for 18 of the last 26 years. Democrats controlled both houses of Congress during the first two years of the Clinton, Obama, and Biden administrations.
During these years, Democrats scored some important victories for working families: the Affordable Care Act, an expanded Earned Income Tax Credit, the Family and Medical Leave Act, and the Inflation Reduction Act, for example. I take pride in being part of a Democratic administration during this time.
But I'd be lying to you if I didn't also share my anger and frustration from my battles inside the White House with Wall Street Democrats and battles with corporate Democrats in Congress, all refusing to do more for the working class, all failing to see (or quietly encouraging) the rise of authoritarianism as the middle class continued to shrink.
Clinton used his political capital to pass free trade agreements without providing millions of blue-collar workers who consequently lost their jobs the means of getting new ones that paid at least as well. His North American Free Trade Agreement and for China to join the World Trade Organization undermined the wages and economic security of manufacturing workers across America, hollowing out vast swaths of the Rust Belt — and turning much of Wisconsin, Michigan, Ohio, Pennsylvania, and upstate New York, Republican.
Clinton also deregulated Wall Street. This indirectly led to the financial crisis of 2008 — in which Obama bailed out the biggest banks and bankers but did nothing for homeowners, many of whom owed more on their homes than their homes were worth. Obama didn't demand as a condition for being bailed out that the banks refrain from foreclosing on underwater homeowners. Nor did Obama demand an overhaul of the banking system. Instead, he allowed Wall Street to water down attempts at re-regulation.
Both Clinton and Obama stood by as corporations hammered trade unions, the backbone of the working class. They failed to reform labor laws to allow workers to form unions with a simple up-or-down majority vote, or even to impose meaningful penalties on companies that violated labor protections.
Biden has supported labor law reform but hasn't fought for it, leaving the Protecting the Right to Organize (PRO) Act to die inside the ill-fated Build Back Better Act.
At the same time, Clinton and Obama allowed antitrust enforcement to ossify, enabling large corporations to grow far larger and major industries to become more concentrated. Biden is trying to revive antitrust enforcement but hasn't made it a centerpiece of his administration.
Both Clinton and Obama depended on big money from corporations and the wealthy. Both turned their backs on campaign finance reform. In 2008, Obama was the first presidential nominee since Richard Nixon to reject public financing in his primary and general election campaigns, and he never followed up on his re-election promise to pursue a constitutional amendment to overturn Citizens United vs FEC, the 2010 Supreme Court opinion opening the floodgates to big money in politics.
Throughout these years, Democrats drank from the same campaign funding trough as the Republicans – big corporations, Wall Street, and the very wealthy. "Business has to deal with us whether they like it or not, because we're the majority," crowed Democratic representative Tony Coelho, head of the Democratic Congressional Campaign Committee in the 1980s when Democrats assumed they'd continue to run the House for years. Coelho's Democrats soon achieved a rough parity with Republicans in contributions from corporate and Wall Street campaign coffers, but the deal proved a Faustian bargain. Democrats became financially dependent on big corporations and the Street.
By the 2016 election, the richest 100th of 1 percent of Americans – 24,949 extraordinarily wealthy people – accounted for a record-breaking 40 percent of all campaign contributions. That same year, corporations flooded the presidential, Senate and House elections with $3.4 billion in donations. Labor unions no longer provided any countervailing power, contributing only $213 million – one union dollar for every 16 corporate dollars.
IV. Biden and the Democrats post-2020
Hopefully, Democrats will retain control over the House and Senate next week. But it is remarkable that with most Republican candidates supporting Trump's big lie, the contest is as close as it is.
Joe Biden has tried to regain the trust of the working class, but Democratic lawmakers (most obviously and conspicuously, Senators Joe Manchin and Kyrsten Sinema) have blocked measures that would have lowered the costs of childcare, eldercare, and education. They've blocked raising the minimum wage and paid family leave. They've blocked labor law reforms.
Yet neither Manchin nor Sinema nor any other Democrat who has failed to support Biden's agenda has suffered any consequences. Why does Manchin still hold leadership positions in the Senate? Why is Manchin's West Virginia still benefitting from the discretionary funds doled out by the administration?
Why haven't the Democrats done more to rally the working class and build a coalition to grab back power from the emerging oligarchy? Presumably for the same reasons Clinton and Obama didn't: The Democratic Party still prioritizes the votes of the "suburban swing voter" – so-called "soccer moms" in the 1990s and affluent politically independent professionals in the 2000s – who supposedly determine electoral outcomes. And, as noted, the party depends on big money for its campaigns.
Yet the most powerful force in American politics today is anti-establishment fury at a rigged system. There is no longer a left or right. There is no longer a moderate "center." The underlying choice is either Trump Republican authoritarianism or Democratic progressive populism.
Democrats cannot defeat authoritarianism without an agenda of radical democratic reform — an anti-establishment movement. Democrats must stand squarely on the side of democracy against oligarchy. They must form a unified coalition of people of all races, genders, and classes to unrig the system.
Trumpism is not the cause of our divided nation. It is the symptom of a rigged system that was already dividing us. While Trump authoritarianism masquerades as being anti-elitist, it is backed by some of America's richest corporate and financial leaders — such as money manager Stephen A. Schwarzman, industrialist Charles Koch, venture capitalist Peter Thiel, shipping magnate Richard Uihlein, and almost every major American corporation and trade association.
The central goal of the corporate and financial backers of Trump authoritarianism has been to split the bottom 90 percent of Americans into warring factions so they don't look upward and see where all the wealth and power have gone.
We will soon discover whether their ploy is succeeding.
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