Moving Corporations To Shared Productivity

by Ralph Gomory and Richard Sylla TDR

This article was originally published by The Huffington Post

Great corporations exist only because they are created and safeguarded by our institutions; and it is therefore our right and our duty to see that they work in harmony with these institutions.

That quote is not from an Occupy Wall Street organizer or some modern-day corporate watchdog, but from President Theodore Roosevelt, as part of his First Annual Message to Congress in 1901. Indeed, questions about the actions and purposes of American corporations have been with us as long as corporations themselves.

Today, people are once again raising basic questions about how well corporations work, including: why, in the current financial and economic crisis did large financial institutions and industrial firms get bailed out by the federal government while so much less is done for homeowners facing foreclosure? Why do the profits of American corporations and the compensation of their executives stay high, and even rise, while jobs disappear and economic growth and median family incomes stagnate?

If there is any surprise about the current crisis, it is not that worries about corporate power and its abuse are once again being raised, but that so little is being done about them in comparison with earlier crises in our nation's history.

In the Gilded Age of the late nineteenth century, the U.S. witnessed the rise of the robber barons, business leaders who amassed great power and wealth, as did the great financiers of Wall Street. At that time popular politicos, such as Roosevelt, took up the concerns ordinary Americans had about the corporate concentration of wealth and power. Antitrust laws were adopted and corporate regulation increased. Similarly the Great Depression of the 1930s, which again put the financial and corporate sectors under a cloud, resulted in a host of New Deal reforms and the legitimization of labor unions.

With these changes in place, the early decades after World War II went well for everyone. Corporate leaders, in various ways, balanced the interests of managers, stockholders, workers, consumers, and society. Unions were at their strongest then, and they pushed for higher wages as well as health care and retirement benefits from their corporate employers. "What's good for General Motors is good for the country and vice-versa" did not seem outrageous at that time. But that was about to change.

Technical progress, in the form of container ships for example, repealed the de facto protectionism long provided by the oceans. As competition emerged from abroad, the 1970s saw a major slowdown in what had been steadily rising U.S. economic growth, and prosperity. Corporate America was in trouble.

The period from the 1980s to the present has been marked by a major shift by corporations away from a broad view of many stakeholder interests to an almost exclusive focus on shareholder value. Academics and others began to attack government antitrust and regulatory policies as misguided and economically costly. They called for deregulation and increasingly placed government itself under scrutiny. President Ronald Reagan epitomized this new view when he famously said that government wasn't the solution, it was the problem.

This new doctrine looked good to shareholders. By providing executives with huge stock options, the interests of top management became aligned with the interest of the shareholder. Keeping wages and benefits from growing came to be seen as in the interest of both.

This change resulted in a rapid concentration of wealth. From 1979 to 2009 productivity rose 80 percent, but worker compensation rose only 8 percent. The top 1 percent of earners' share of the national income rose from 13 to 23 percent. Almost all the country's gain went to the wealthy.

Once again people are asking: is this what we want from our corporations? In a forthcoming issue of Daedalus, a journal published by the American Academy of Arts and Sciences, we describe this history and suggest adopting two major goals for U.S. corporations:

  1. Productivity: Our companies should be productive, each contributing as much as possible to the total of goods and services produced in the United States. It is the sum of these efforts that makes America prosperous.
  2. Sharing: Our corporations should provide productive and well-paying jobs so that the value the companies create is widely shared by Americans. This widely shared wealth gives the nation and its people economic security and political stability.

These goals are in sharp contrast to the present situation, in which many large corporations have just one goal: maximizing the return to the shareholders. In fact, this goal has now become so dominant that it is often thought to be a legal requirement. It definitely is not.

Can we move corporations in the direction of shared productivity? Yes, it can be done in many ways. Here we sketch only a few of many possibilities.

The corporate income tax could become an incentive for productivity if we provide low tax rates for companies that add high value to the United States economy. We do not need to select special companies for this; but simply use the tax rate to reward companies for creating high value-added in the U.S., whether they achieve that goal through R&D and advanced technology or by finding their own ingenious ways to improve productivity in manufacturing or in services.

Unbalanced trade, produced by Asian mercantilist policies, is harming major productive sectors of our economy. A measure to counter this that must be considered is tariffs. We know that is a forbidden word for economists, but in our paper we describe why it shouldn't be and why tariffs should be a part of our present as they have been of our past.

Next the goal of sharing: Clearly we need to consider here the role of unions and of their bargaining power in dividing up the economic pie. But we should also consider other forms of corporate organization; user-owned corporations--mutuals--have a long history in the U.S. and until recently dominated the insurance industry. In addition, the present corporate form could evolve; corporations could adopt the goal of being value-added maximizing rather than profit maximizing. Maximizing value added is measurable, as profit is, and in a world of companies devoted to value added, there could be many ways to divide the value they create between wages and profits and other goals. We might become a nation whose companies have a variety of goals, all adding strongly to the GDP, and many adding to a better distribution of income, wealth, and political power.

The great American corporations today are doing well for their top executives and shareholders, but this does not mean that they are doing well for the country as a whole. The growing concentration of income and wealth threatens both the long-range productivity of the country, through extensive offshoring, and its long-range internal stability through a growing concentration of wealth that carries with it political as well as economic power. These issues, and what to do about them, deserve more thought both from the economics profession and from all Americans. The start of a new presidential term makes this a good time to begin.

This post is a summary of a much longer article scheduled to be published in April in Daedulus, a publication of the American Academy of Arts and Sciences. Read the full text of "The American Corporation" by Ralph Gomory and Richard Sylla here.

 


A previous article, Corporation Nation, references Gomory and Sylla's paper. 

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Comments

Corporations/responsibility - watch 787 fiasco unfold

Watch this unfold. It's going to be a nightmare for Boeing and many for the flying public, but hopefully no one gets seriously injured or killed here or abroad. See if outsourcing or corporate irresponsibility ever get mentioned by those in the govt. or the private sectors. If anyone doubted who the govt. serves in matters of safety, it was pretty obvious when LaHood came out, at the same time an investigation was being announced, that he would fly on 787s and didn't have problems with them. Hey, Ray, that's called prejudging an investigation and kind of stupid and unprofessional. Why announce an investigation if everything is going along according to plan? Massive outsourcing and labor saving moves do have serious consequences, and do endanger not only the economic security of individuals, families, and communities, but do cost real lives. Like I said, let the bigwigs work in one of their factories making products for pennies in Bangladesh on the 6th floor of a locked firetrap and face angry security if they try to leave too early or don't work their 80 hour week. Let them insist on continuing flying on a 787 on a plane in which only execs are aboard and HR that aids outsourcing while smoke fills the compartment (somehow without endangering the pilots trying to save the plane and everyone on board). What's to worry about - 36,000-40,000 feet above the ocean, acrid smoke filling the cabin and cockpit, but all is well.
Yup, outsourcing and treating good people like dirt does have very real and very dangerous consequences, and until the people that cause these issues are forced to personally live them, they will continue to not care and blame everything else (e.g., just couldn't "find skilled Americans," "Americans are lazy," etc.).

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Tit-for-tat Tariffs

I agree that many products manufactured in Asia are aimed to undercut US prices. As is well known, in China the government sets the renminbi at low levels specifically to boost exports. But this being said, there are many established companies producing competitive goods which should be given an equal footing in the global marketplace.

Apple's attempt to sue Samsung into being banned from selling its smartphone range in the US, for alleged patent infringement, could be an example of the long-term consequences of disabusing legislation for short-term gain.
A public opinion poll on 'buzz' around Apple and Samsung at the time of the lawsuits showed that many consumers switched their brand allegiance to Samsung as a result.
http://www.brandindex.com/article/samsung-buzz-bounces-back-lawsuit
And - though it is probably not a phenomenon that will be repeated in 2013 - Samsung made a record £4.5bn operating profit for Q3 of 2012, largely on the back of its Galaxy range. This despite the fact it was barred from US markets.
http://www.guardian.co.uk/technology/2012/oct/05/samsung-operating-profi...

So does America really want to 'protect' itself from all imports that compete with domestic industry? The danger of overt protectionism is that established sectors become complacent and inward-looking. The rest of the world moves on.

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that's not "protectionism"

One of those buzz phrases coined by corporate lobbyists. First, Apple isn't really American due to their massive manufacturing in China. Second, Samsung is taking market share and yes stole patents and frankly Apple certainly "stole" a lot of ideas from elsewhere, including individuals. These corporate patent lawsuits are battles of the titans, have nothing to do with trade, everything to do with intellectual property law.

So, the battle is over IP, patents and protecting one's invention. Do I think some of the patent wars are simply corporate power, yes. Do I think innovation should be protected since it is much harder to innovate than copy? Absolutely.

We have knock off, ripoff out of China especially on IP daily. I have no idea what people are thinking manufacturing in China for their products and development will be reverse engineered.

I also think Samsung is proxy for Google. Also, the "ban" lasted not even six months and didn't matter. Mobile dev. moves so fast by the time they even get an injunction court ruling, the new model has come out.

Less would switch from Apple to Samsung if they manufactured in the U.S. Google, most of all, should manufacture in the U.S. They are the ones providing Samsung with the framework upon which they build the Galaxy models.

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It's always Americans that are deemed protectionist

It's fine for Crony Capitalist China to force American companies stupid enough to manufacture over there to hire locals, share critical IP, etc. Of course, to no one's surprise, the IP is quickly stolen and the "American" company is now competing with a cheaper version of its own product that can be manufactured even more cheaply, sold cheaper, and distributed worldwide. And the Japanese also know all about protectionism (the 80s were awesome for Japan and they loved dumping goods on us through their national protectionism - things haven't gone well for Japan's economy since then). And India today, same deal. How about their labor "protectionism"? Many nations require that certain percentages of locals work on crews and will only allow expatriate bosses to work there until locals can assume the duties. In Japan and other nations, it's not common for foreigners to work in Japanese firms, and in fact, foreigners will more likely be teaching English in Japan and abroad, not working in Japanese factories and firms. Try visiting Russia or Japan or China and work there off the books. Ain't happening and if you're caught, well, Japan is probably the best best because they'll treat you well. Russia and China, yeah, best of luck. Try getting caught over there without proper visas. Oh, most unpleasant. Ask Georgians or others in Russia how they are treated. Sure, the media talks about Depardieu and Russia's taxes, but the news over here rarely, if ever, covers violence against minorities, immigrants, corruption, the killing of those who speak out, including journalists, etc. in Russia. India, nope, not fans of foreigners working there in white or blue-collar jobs. Mexico, nope, they don't like people from neighboring countries working there at all but the government sure is quick to bash us and have meetings with our "leaders" to form pro-Mexico economic policies at our expense.

But oh man, all these countries do love complaining about the US and its foreign worker and production policies. They do insist on easier visas, that everyone here illegally stay here as long as they want, and that every single position in academia, white collar, blue collar, and every other collar be open to foreigners, even if Americans had those jobs, want those jobs, or could be trained for those jobs. In fact, it doesn't even matter if the person that wants that job can't speak English, needs a visa, and can't perform the job. According to these other nations and our sell-out corporate-owned politicians, they are "entitled" to everything they want, even if they are the ultimate hypocrites that don't care about America or its citizens. So who's protectionist and who's just full of it?

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