ABSTRACT
“Sustainable prosperity” denotes an economy that generates stable and equitable growth for a large and growing middle class. From the 1940s into the 1970s, the United States appeared to be on a trajectory of sustainable prosperity, especially for white-male members of the U.S. labor force. Since the 1980s, however, an increasing proportion of the U.S. labor force has experienced unstable employment and inequitable income, while growing numbers of the business corporations upon which they rely for employment have generated anemic productivity growth.
Stable and equitable growth requires innovative enterprise. The essence of innovative enterprise is investment in productive capabilities that can generate higher-quality, lower-cost goods and services than those previously available. The innovative enterprise tends to be a business corporation—a unit of strategic control that, by selling products, must make profits over time to survive. In a modern society, however, business corporations are not alone in making investments in the productive capabilities required to generate innovative goods and services. Household units and government agencies also make investments in productive capabilities upon which business corporations rely for their own investment activities. When they work in a harmonious fashion, these three types of organizations—household units, government agencies, and business corporations—constitute “the investment triad.”
The Biden administration’s Build Back Better agenda to restore sustainable prosperity in the United States has focused on investment in productive capabilities by two of the three types of organizations in the triad: government agencies, implementing the Infrastructure Investment and Jobs Act of 2021, supplemented by the CHIPS and Science Act of 2022 as well as the Inflation Reduction Act of 2022, and household units, envisioned by the American Families Act, which, blocked in the Senate, has for now fallen by the wayside. Largely absent, from the Build Back Better agenda have been policy initiatives to ensure that, given government and household investment in productive capabilities, the executives who control resource allocation in major U.S. business corporations have both the abilities and incentives to invest in innovation.
This lacuna is problematic because many of the largest industrial corporations in the United States place a far higher priority on distributing the contents of the corporate treasury to shareholders in the form of cash dividends and stock buybacks for the sake of higher stock yields than on investing in the productive capabilities of their workforces for the sake of innovation. Based on analyses of the “financialization” of major U.S. business corporations, I argue that, unless the Biden administration includes an effective policy agenda to ensure corporate investment in innovation, its program for attaining stable and equitable growth will fail.
Drawing on the experience of the U.S. economy over the past seven decades, I summarize how the United States moved toward stable and equitable growth from the late 1940s through the 1970s under a “retain-and-reinvest” resource-allocation regime at major U.S. business corporations. Companies retained a substantial portion of their profits to reinvest in productive capabilities, including those of career employees. In contrast, since the early 1980s, under a “downsize-and-distribute” corporate resource-allocation regime, unstable employment, inequitable income, and sagging productivity have characterized the U.S. economy. In transition from retain-and-reinvest to downsize-and-distribute, many of the largest, most powerful corporations have adopted a “dominate-and-distribute” resource-allocation regime: Based on the innovative capabilities that they have previously developed, these companies dominate market segments of their industries but, in the allocation of corporate resources, prioritize distributions of the profits from their dominant positions to shareholders over investment in productive capabilities.
Enabled and even encouraged by the once-obscure Rule 10b-18, adopted by the Securities and Exchange Commission (SEC) in November 1982, the practice of open-market share repurchases— aka stock buybacks—at major U.S. business corporations has been central to the dominate-and-distribute and downsize-and-distribute regimes. Since the mid-1980s, stock buybacks have become the prime mode for the legalized looting of the business corporation. I call this looting process “predatory value extraction” and contend that it is the fundamental cause of the increasing concentration of income among the richest household units and the erosion of middleclass employment opportunities for most other Americans.
I conclude the paper by outlining a policy framework that, by directly confronting predatory value extraction, could stop the looting of the U.S. business corporation and put in place social institutions that support sustainable prosperity. The agenda includes a) a ban on stock buybacks done as open-market repurchases, b) radical changes in incentives for senior corporate executives, c) representation of workers and taxpayers as directors on corporate boards, d) reform of the tax system to reward innovation and penalize financialization, and, e) guided by the investment-triad framework, government programs to support “collective and cumulative careers” of members of the U.S. labor force. Sustained investment in human capabilities by the investment triad, including business corporations, would make it possible for an ever-increasing portion of the U.S. labor force to engage in the productive careers that underpin upward socioeconomic mobility, manifested by a growing, robust, and hopeful American middle class.
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