The US needs to reclaim the kind of economy that existed before Wall Street was the only thing that mattered
In November, I told the story of DemeTech Corp., a family-owned manufacturer of surgical products in Miami. Although the company had never made personal protective equipment, when the pandemic hit last spring, it hired around 600 workers and invested several million dollars to get into the PPE business. It was soon manufacturing N95 masks and other equipment that hospitals needed urgently.
Sales took off. Because of the higher labor costs in the US, the company's masks were more expensive than those made in China. With PPE so difficult to come by, buyers didn't care. Yet by November, when I interviewed the company's vice president, Luis Arguello Jr., Chinese companies had started winning back some of that business.
It was a business — like so many manufacturing-based industries — that the Chinese had largely taken over during the previous two decades, according to Marc Schessel, a hospital supply-chain expert. With more and more hospitals owned either by private equity firms or for-profit corporations, "there was a lot of pressure to lower costs," Schessel said. By the time the pandemic hit, 3M Co., which had invented the N95 mask, was the only significant US manufacturer. Companies in China, Malaysia and Vietnam made most of the PPE used in the US; these companies had become critical components in the hospital supply chain. When that supply chain broke down in the wake of the coronavirus, it exposed a significant US vulnerability.
I was surprised to learn then that as the N95 shortage eased a bit — in large part because hospital professionals were reusing masks meant to be discarded after one use — distributors and hospitals had reverted to buying from Chinese companies. They were putting price ahead of stability, just as they had before the pandemic.
"Despite everything," I wrote at the time, it appeared to Arguello that "distributors and hospitals care more about saving a few pennies than ensuring a supply of US-made masks." Arguello said that if the government didn't get involved, none of the US companies that had begun manufacturing PPE — which they had done to help the country through this emergency — were likely to stay in the business. This not only had national security implications, it also meant the loss of thousands of good-paying jobs that DemeTech and others had created during the pandemic.
In the weeks before the inauguration of President Joe Biden, I kept thinking about DemeTech. Biden has a tremendously ambitious agenda, but his twin priorities, as he has said repeatedly, are to get the pandemic under control and to fix a coronavirus-battered economy.
In the short term, he'll be pushing a $1.9 trillion stimulus package aimed at helping Americans and businesses survive the pandemic. His stimulus bill includes doubling the national minimum wage to $15 an hour. He wants to raise the top corporate tax rate to 28% and impose an alternative minimum tax on companies with more than $100 million in net income. And, of course, he has talked repeatedly about creating the kind of middle-class jobs that characterized the US economy in the decades after World War II.
These are all worthy and important objectives. But if the Biden administration is serious about transforming the economy, it needs to go further. It needs to enlist US industry in a push to change the values that now dominate American capitalism. It needs to help instill values that, for instance, give more weight to having domestically made hospitals equipment over saving a few dollars. To put it another way, the US needs to reclaim the kind of capitalism that existed before the 1980s, when the financialization of American business — and the belief that Wall Street was the only thing that mattered — began. And maybe, just maybe, the experience of the pandemic can help show the way.
The economic story of the last half century in the US has been told and retold, so let me review it quickly. It begins with Milton Friedman's famous 1970 New York Times magazine article in which he scoffed at the idea that business has social responsibilities and argued that a corporate executive's primary responsibility is to "his employers" — the shareholders. By the 1980s, Michael Jensen, a professor at the University of Rochester and later Harvard Business School created an academic framework that justified "maximizing shareholder value," as focusing on share price would soon be called. Corporate raiders like T. Boone Pickens and Carl Icahn used Friedman's creed and Jensen's framework to justify their attacks on companies with what they considered underperforming stocks.
By the 1990s, corporate America was all-in. Increasing a company's share price became all important, not least because chief executive officers held stock options that could make them incredibly wealthy. For too many companies, pleasing Wall Street mattered more than pleasing employees or even customers. Stock buybacks became one tool for keeping Wall Street happy. Layoffs were another. Private equity firms became dominant institutions, borrowing billions to pay shareholders when they took companies private.
Of course, outsourcing to China and other Asian countries was another important tool. In 1995, the World Trade Organization was born. (China joined in 2001.) Globalization was becoming an unstoppable force, and the WTO was established to set the rules of free trade and serve as referee. In the US, globalization meant, among other things, that American companies could swap high-paying jobs in the US for lower-paying jobs abroad. And American consumers could buy imported goods that were cheaper than comparable ones made in the US
Economists, academics, policy makers and journalists all took it as a given that globalization was good for the US Yes, people in the Rust Belt lost their jobs, but other parts of the country gained jobs, didn't they? I remember in 2006 quoting Diana Farrell, who was the director of the McKinsey Global Institute 1 at the time, telling me that "the process of globalization is wealth-creating for the economy." This, ironically, was in a column about my brother-in-law being forced to shut his costume jewelry business in Rhode Island because the Chinese were stealing his designs and undercutting his prices.
The flaws in this model of capitalism were obvious well before the arrival of the coronavirus. The income inequality that resulted has been a pressing concern for at least a decade; the bulk of the new wealth generated in the economy went to those already wealthy while everyone else saw far fewer gains. 2 The essential ruthlessness of private equity became impossible to ignore. Recall, for instance, the outcry when Bain Capital, Vornado Realty Trust and KKR & Co. closed Toys "R" Us Inc. in 2018, putting some 30,000 people out of work with no severance. A singular focus on share price led to scandals like Enron and the Boeing 737 Max disaster. It led to rising drug prices that many patients couldn't afford. It led to CEOs in the US making, on average, 320 times more than the average worker by 2019. (In 1965, the ratio was 21-to-1.) And so on.
As for globalization, supply chains became inextricably international, fine-tuned for efficiency and cost. But while economists still viewed this as a net plus, many of them stopped talking about how globalization was a positive for US workers. Their continuing difficulties were simply too obvious to ignore.
In 2015, Larry Fink, the influential CEO of BlackRock Inc., the giant money manager, wrote an open letter to his fellow executives telling them that by capitulating to the pressures of Wall Street with buybacks and the like, they were likely "underinvesting in innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth." Two years later, he wrote in his annual letter that while he still supported globalization, "there is little doubt that globalization's benefits have been shared unequally." And two years after that, he told the CEOs that "to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society." The combination of climate change and the country's economic disparities had led Fink to repudiate Milton Friedman's thesis.
The next year, the Business Roundtable, an organization of nearly 200 CEOs, changed its core statement on the purpose of a corporation. For two decades, it had said that companies should primarily strive to maximize shareholder returns. Its new statement called on companies to deliver value to customers, invest in employees and support the communities in which they reside. Shareholders should be rewarded, yes, but over the long term.
In theory, corporate America seemed to finally understand that the income inequality that had been a crucial consequence of catering to shareholder value had to be reversed if America was going to continue to prosper. But understanding is not the same as doing. After the corporate tax cuts of 2017, companies used the money on — what else? — stock buybacks, with $770 billion worth of stock repurchased in 2018 and an additional $709 billion in 2019. Many retail chains, ravaged after being sucked dry by private equity firms, filed for bankruptcy. The outplacement firm Challenger, Gray & Christmas reported that almost 600,000 jobs were eliminated in 2019, a 10% rise from 2018.
And then came the pandemic.
In the years after World War II, the US had some significant economic advantages when soldiers returned from the war looking for jobs. One, of course, was that the US had escaped the devastation suffered by Europe and Japan, so its companies faced only domestic competition. Labor costs, for instance, were nearly irrelevant, and unions, which played an important role in raising living standards, were able to thrive.
But another advantage, as Rick Wartzman pointed out in his 2017 book "The End of Loyalty," 3 is that American businessmen were unusually farsighted after the war. They knew it was critically important to generate millions of jobs to prevent the US from falling into another depression. And they also knew that returning fighters were owed something for defeating the Nazis. There was a "we're-all-in-this-together" feeling that came from having been through such a terrible war.
It's impossible to claim that the pandemic has brought the nation together the same way that World War II did for that generation. But if you looked closely, you could see companies taking actions that had nothing to do with shareholder value and everything to do with helping the country.
Consider Xerox Holdings Corp., which early in the pandemic saw that it had employees with not a lot to do and diverted them to help a small ventilator company ramp up production. Companies with low-paid workers began giving out hardship raises, at least temporarily. Delta Air Lines decided, in the interest of safety, not to sell any middle seats, even though its competitors were not willing to take that financial hit. Restaurateurs set up "Go Fund Me" campaigns for their laid-off employees and asked patrons to make contributions. Some companies promised no layoffs during the pandemic and stuck to their promise.
It wasn't all like that, of course. But for many executives, the crisis caused them to become protective of their employees in a way that hadn't been seen in decades. A survey conducted by the Sloan Management Review showed that employees of 500 large companies rated their corporate culture better during the pandemic than at any time during the past five years. And they gave their CEOs high marks for communication and integrity.
Other events that have taken place during the pandemic — George Floyd's death; the rise of Black Lives Matter; the November election, followed by Donald Trump's effort to overturn the results; and finally the siege of the US Capitol on Jan. 6 — have only solidified the idea that companies and their executives have a societal role to play that goes beyond making money for shareholders. CEOs acknowledged Biden's victory before many in Congress did. They denounced the attack on the Capitol, and a number of large, important companies decided they would no longer contribute to the campaigns of Republicans who tried to subvert the election results.
"Business leaders must realize that they not only have a moral obligation but also a commercial stake in advocating for a fairer, more equitable system," said a memo that was given to the New York Times earlier this week. The memo was composed by members of a private advisory committee to JPMorgan Chase & Co., reporting to the CEO, Jamie Dimon. "Unless and until the core problem of inequality is addressed," the memo continues, "all other overarching objectives and desires will remain elusive." In an interview with the Times, Dimon said inequality wouldn't be erased until other CEOs began advocating for policies that might be against their own short-term business interest.
It is this changing sentiment among the business class that Biden needs to encourage and take advantage of. There are plenty of things the new administration can initiate that will begin the unwinding of income inequality. In 2017, during one of those meetings of CEOs and Trump, Salesforce.com's Marc Benioff suggested that Trump make apprenticeships an administration initiative.
Nothing ever came of this, of course. But apprenticeship programs of the kind that are common in Germany or Australia could create many well-paying jobs for workers who didn't go to college. Government could help establish programs joining community colleges with companies that need skilled workers.
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The administration could use the rebuilding of the country's infrastructure to establish a wage level that would attract workers and force companies to pay wages that were just as good if they didn't want to lose employees. It could offer tax incentives to companies that built factories in the US It could seed green industries — as Biden has vowed to do — with the proviso that a certain percentage of the workforce be employed in the US
But Biden also needs to find ways to keep business on the path it started down during the pandemic — a path that puts helping the country ahead of stock appreciation. His bully pulpit should help, but he should also look for ways to diminish the influence Wall Street has while encouraging companies to do right by their employees. He should tighten the rules governing private equity and corporate activists. And he should insist, as a matter of national security, that there be more domestic manufacturers for a whole range of products, from transistors the military relies on to, well, N95 masks.
Globalization isn't going to end, and I'm not suggesting it should. The jobs that have been lost are most likely gone forever. Trump's efforts to generate domestic manufacturing jobs by slapping tariffs on Chinese goods was a bust. There has to be a balance between outsourcing and maintaining a strong base of jobs for the millions of Americans who will never go to college. Given the current expansive attitude of business, I don't think it will take much prodding to get CEOs to buy into this idea, stockholder value be damned.
As awful as the pandemic is, it is giving Biden a once-in-a-century opportunity to make good on his promise to make the economy work for everyone. As someone once said, a crisis is a terrible thing to waste.
Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."
Disclaimer: This article first appeared on bloomberg.com and is published by special syndication arrangement.