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TechnoratiYear of the Fat Cats
One of the standard year-end rituals is to assess the stock market's performance for the year. Many people noted the Dow Jones index rose a respectable 7.5 percent in 2007. Before anyone celebrates this modest achievement, it is important to remember the Dow includes just 30 blue chip stocks. The much broader S&P 500 index rose by just 3.5 percent, slightly less than the rate of inflation in 2007. In other words, the real return for most stockholders was roughly equal to what their stock paid out in dividends, not a terribly good story.
In fact, poor stock returns are not a new phenomenon. If we go back ten years, we find the S&P 500 has risen by a cumulative total of 52.6 percent from December 1997 to December 2007. After adjusting for inflation, the increase was 17.3 percent, which translates into real growth of just 1.6 percent a year. Add in a dividend yield of approximately the same size, and we get that the average real return on stocks over the last decade has been 3.2 percent, a bit lower than the yield that was available on inflation-indexed government bonds ten years ago.
This is rather striking. It is unlikely many people invested in stock for the sort of return that is typically associated with government bonds, which are much less risky. At least for the last decade, stockholders have not been rewarded for taking this risk.
This brings us to the topic of CEO pay. We saw an explosion in CEO pay that began in the eighties and has continued into the current decade. While the ratio of the pay of CEOs to an average worker had been around 30 to 1 in the sixties and seventies, by the end of the eighties it stood at more than 70 to 1. It crossed 100 to 1 in the early nineties. The ratio has been perched between 200 to 1 and 300 to 1 since the late nineties, with CEOs at major companies routinely pulling down pay packages in the tens of millions, and running into the hundreds of millions in good years.
This explosion of pay at the top was justified, by many economists, based on the returns CEOs produced for shareholders. The argument was that even these incredibly high salaries still were just a small fraction of the value the CEOs generated, so their pay was money well spent. These exorbitant salaries gave the CEOs the necessary incentive to produce extraordinary returns.
While this argument may never have been terribly compelling (it would have been hard to keep a company's stock prices from rising in the nineties bubble), it clearly is not true today. The typical CEO is not producing great returns for shareholders. The average return is weak, and in many cases shareholders are incurring loses due to CEO mismanagement. Even in the disaster stories, the CEOs still seem to get extraordinary pay packages.
The poster child for this new trend is Robert Nardelli. In five years as CEO at Home Depot, he lost shareholders 40 percent of the stock's value, more than $25 billion. When he was eventually pushed out the door, he walked away with a compensation package worth more than $200 million. Call it "pay for nonperformance."
In the fifties and sixties, it was common to think of corporations as bodies that served a variety of stakeholders. In addition to shareholders, corporations were also seen as having responsibilities to their workers, to the communities in which they were located, to their consumers, and even the larger society. This diverse group of stakeholders sometimes meant that a company should sacrifice short-term profit maximization in order to meet some broader goal.
In the eighties, we got the shareholder revolution, which said corporate management should focus simply on maximizing shareholder value. If this meant mass layoffs of workers or abandoning communities where a company had deep roots, so be it.
As a result of the shareholder revolution, the range of constituencies the corporation was expected to serve was drastically narrowed. Concerns for workers, communities, and the larger society were jettisoned, with shareholder value being the only true concern for the corporation and the CEOs that run them. This single-minded concern for profit maximization and shareholder value was supposed to be best for society in the long run.
It turns out, the range of constituencies has been narrowed even further than we realized. With recent evidence on returns, it doesn't look like shareholders fit in the equation anymore. At least the CEOs are still doing well.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.
15 Comments so far
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Dear Sirs and Mesdames,
This subject, in my mind, is the most immediate most urgent and serious matter confronting the Human Race. Despite the fact that many great minds, philosophers, politicians, academics and economists, have all created eminent careers based on their knowledge and understanding of how free enterprise, national economies and the human race interact, they have all failed to admit the obvious. It is glaringly obvious that we have large swathes of the human race that do not have access to money; it is that simple.
Therefore we need a system of economy that literally accommodates the needs and aspirations of every human being. A system that will not rely on taxing others' in order to provide all the multifarious forms of infrastructures, as well as our human and social obligations. A system of taxation in which the haves are continually being pressured to claw back those taxes from the have-nots. We must face the fact, once and for all; this system can never provide all human needs and infrastructures.
We have allowed right-wing ideology to dictate the terms and even if or when large swathes of populations may be fed and housed or have health needs addressed. We tolerate the fact that we have millions of working poor who will never earn enough to meet all of life's basic costs. Many of these are struggling to raise families the bedrock of our future. Those who work lead the most precarious of lives.
Precarious, because their work and income has become the plaything of corporate power, which moves production to lower waged economies. This makes the executives and the shareholders richer but at the cost of the misery they leave behind. Wages go down, but not prices, or costs of living, and the formerly free "social wage entitlements" are removed.
This is the "rationalized" world directed by Corporate Power and implemented by our Governments, the world of "user pays".
Take it or suffer the consequences. The Government calls this "work choices". Hear the Corporate applause? The consequences are total destitution for some; they could buy none of life's essential services.
Complete and total destitution for many unless they work, no shelter, no food, no health care, and no education, none of life's necessities.
So we need a system, which provides equal opportunity and care for all, overlaid with free enterprise. At the same time we can put in place a fair and equitable industrial relations system that eliminates employer employee antagonisms.
Our democracy is in serious trouble. Rich people and corporations channel funds into political parties in order to achieve their own commercial or ideological ends cleverly bypassing democratic inputs. It is happening in all democracies but that does not make it "worlds best practice" or "right". We can correct that quite easily. We make so-called free trade agreements under which corporations are exempted from government regulation that control workers rights, pay and working conditions. Is this democracy, is this really necessary, should corporations have such unbridled power, where will it end?
Introduction of The Universal Economy will immediately and substantially impact and improve such questions as Poverty, provision of universal education, health care, pensions, unemployment, housing and all public infrastructure (roads bridges schools hospitals etc). None of this will require the imposition of taxation.
The concept of The Universal Economy will be easy to introduce, because it benefits everyone, everyone will want it to work. It will be hardest to implement in third world nations, not impossible, just slower to implement. It will kick start economies wherever it is introduced.
This is a concept for the twenty-first century. Put to one side traditional thought processes and embedded conventions see only the greater-good and benefit of mankind then you will support this enterprise with the open heart and mind it deserves. Adopt this concept for the good of humanity.
Give your support, not money.
Yours Faithfully, THOMAS W ADAMS.
IGOVANNA: Your intellect glows so good luck with your career aspirations; but I'd like to make a point that seems so obvious it's overlooked: The U.S. has 2.2 million currently incarcerated. When Bush's "bearing good news" team speaks of "progress" in Iraq, the sheer loss of numbers would seem to impact statistics. I presume as much with respect to U.S. crime statistics. With so many behind bars or on parole/probation, etc. how many would-be violent types are left on the streets? Is it assumed the rate is a constant, regardless of how many are incarcerated? If 20 million are behind bars, do "experts" still argue the numbers born of crap shots, a/k/a statistics rendered?
PBK, excellent summary of our dismal state of affairs. I share your sentiments and your frustration.
It's interesting that you mention violent crime versus corporate crime. It's true, by the way, that since the FBI was mandated by Congress in 1930 to track national crime statistics, the annual Uniform Crime Reports have shown a linear increase in violent crime with no drop each year until the mid 1990s, when violent crime leveled off for several years. So, for more than 60 straight years, violent crime in the US increased. Then, suddenly, beginning in the late 1990s through to the present, each year has shown a significant linear decrease in reports of violent crime. There are several reasons for this, with the usual politicians taking credit, but interestingly one of the significant rationales for this drop in crime corresponds directly to the Roe v. Wade decision in 1972. Obviously, I am not advocating abortion as a means to decreasing violent crime, but instead simply pointing out that a drop in the birthrate during the 1970s and 1980s does suggest a reason for the corresponding drop in violent crimes committed during the late 1990s and early 2000s. A significant number of people who would potentially be committing crimes in their teens and early twenties were simply never born. I digress.
I'm a criminal justice major and currently working on a master's degree in forensic sciences. It's amazing how overlooked corporate crime is by both the public and most local law enforcement agencies. I guess people simply do not think of corporate and political crime as salacious and titillating as murder and mayhem in the streets. I recall sitting in classes with other criminal justice students who were fixated on psychopathic serial murderers while I was constantly trying to enlighten my classmates to what I foresaw as the largest threat to overall public welfare: corporate and political crime, which euphemistically gets referred to as "white collar crime." Sounds tame, huh? It's anything but tame; it's vicious, rapacious, and affects millions of lives. Remember, political and corporate collusion gave us this bloody fiasco in Iraq--another case of poor boys sent off to fight rich men's wars to keep the rich men, well, rich. I can't think of a more bloody, despicable crime. Can you?
Incidentally, while it is true that all serial murderers are psychopathic, not all psychopaths are serial murderers. In fact, only about 1/10th of 1 percent of psychopaths are sadistic killers. Most are busy dominating, manipulating, conning, and cheating the rest of us out of our hard-earned money, happiness, and lives.
Though they can be found everywhere, favorite places for psychopaths to ply their evil trades include: Wall Street, "K" Street, corporate offices, churches, and naturally, political offices. Psychopathic personalities are generally charismatic, impulsive individuals who crave excitement and love taking risks--usually with other people's lives and money. They are usually contradictory, petulant and prone to tantrums. They are narcissistic, puerile, arrogant, possess distorted senses of entitlement, and lie as easily as we breathe air. They do not experience normal anxieties, so they feel no remorse, never accept blame, possess no internal controls or conscience, and therefore never consider future consequences. Psychopathic personalities often exhibit another interesting linguistic flaw: semantic aphasia. They use words incorrectly and do not recognize the differences between neutral words and emotional words. Thus, they have a completely shallow affect, which to most people sounds like simple malaprops. Do you recognize this personality? Hint: the White House, Congress, the media, and their corporate cronies are crawling with them, literally.
"Suite" crime instead of "street crime" is organized--just like the infamous Italian and Russian 'mobs'. Folks involved in corporate and political malfeasance and criminal cabals are no different from mob thugs, domestic abusers, and petty check kiters. Their goals are identical: the pathological pursuit of power and profit (ends) via illegal means through the use of deception, exploitation, humiliation, and often violence and murder. This pervasive personality thrives on capitalism and has come to personify American success: "the playa," if you will. It's pathetic.
In 2001 I moved %100 of my retirement out of the stock market and into %100 guaranteed securities. I will not support the thieves, liars and greedy robber barons by investing my life savings in their so-called "businesses".
The mob by any other name, has taken over this and other countries' markets and governments and thugs pay themselves handsomely.
May they all rot in hell. And may there be a hell for them to rot in. Amen.
As RuthK points out, most of the stocks are held by the richest 10%. Now correct me if I'm wrong, but other than when new stock is issued and sold, the price of the stock doesn't actually impact the amount of money that is invested in the company. I.E., Wal-Mart doesn't get a cut every time a share of their stock is sold, but their board of directors makes a decision about how large of a dividend to pay to the shareholders.
For the most part, what we have in the stock market is a bunch of fatcats trying to outsmart each other trying to dump stock in companies that won't be paying out a good dividend. I wouldn't even care how much they screwed each other if it weren't for the little folks who have their 401(k) plans tied up in the market and can't afford to take a dive.
"In the fifties and sixties, it was common to think of corporations as bodies that served a variety of stakeholders. In addition to shareholders, corporations were also seen as having responsibilities to their workers, to the communities in which they were located, to their consumers, and even the larger society."
If one has responsibilities to communty it infers one is part of that community.
If we extrapolate Dean Baker's description of the narrowing of corporate responsibility/constituencies since the 50s/60s, we can see that ultimately corporations will be in a self-sealed, self-serving community of themselves, the privilaged and weary consumers.
Stakeholders, shareholders and workers will all become consumers and have responsibility to this emaciated and reversed state of constituencies, mainly in feeding as much personal, and sometimes physical worth into the bowels of machine which generates life for the corporate community.
It seems we are nearly there already. Simply take a look at the leading pres. candidates and ask how many advocate removal of state support for corporations or demand controls over their business practices?
[Edwards/Kucinich/usual none-persons excepted]
PBK: Nice summary, and one could add to it, sadly.
Not fat cats, but vampires feeding on the blood of hundreds of thousands.
Nardelli now that he has run Home Depot into the ground and walks with $200 million he has been called upon to run Chrysler into the ground (no pun intended)
Why would anyone name him as president of an auto company. But look at who owns it.......a bunch of investment bankers.
This is America today.
As negative as this sounds, every major indicator of success in our society has plummeted in the past six years. There is an all time high disparity in the distribution of wealth, we have a neofascist corporatocracy in the White House, guilty of high crimes and misdeamenors; and a paralyzed congress, paralyzed and polarized. The treasury has been looted by the military-industrial complex, with both political parties complicit in this robbery. The national debt grows at over 1 billion a day, job growth is flat or outsourced, and almost every economic indicator speaks of financial disaster, recession or worse. The news media is now oriented around entertainment and unquestioning obedience to their corporate masters who are uncommonly supportive of this quasi dictatorship, so the masses are spoon fed drivel, another reason for the dumbing down of our citizenry, e.g., a Harris poll found that 64% of Americans believe that man was created by God as it says in the Book of Genesis. I could go on but it gets too damn frustrating and depressing. But as bandido said, "in corporate America, the only rationale is greed." Perhaps the FBI's report on a drop in violent street crime is true. But there has been a huge spike in white collar crime in every sector of our country, including government. And what is even more discouraging is that there are not angry crowds in the streets protesting the war in Iraq. There is no media cry for impeachment. Just silence.
In corporate America, the only rationale is greed. Nothing, consumers, community, shareholders, nothing else matters. Its been going on a long time.
Once again, I'm listing this site:
http://www.inequality.org/
Click on "By the Numbers" and page down to the pie charts listing wealth distribution and stock ownership for 2004.
In 2004, 10% of people owned nearly 80% of the stocks. The rest of us, all 90%, owned about 20%. I suspect that many of them, like me, have a retirement plan that is tied to the market in some mysterious way and are counted.
It is interesting to note that today the government is talking about a economic stimulus package. That is after the stock market tanked for a while. Before that stock market and the 10% who own most of it, the economy was considered to be sound.
If you go to the site, also note the skewed distribution of wealth. Again, 10% have over 70% of the wealth. Less than 30% of the wealth is distributed over the rest of the 90% of us.
That was 2004. I'll bet it's worse now.
Correct for since1492:
Workers and shareholders are "disposable" resources, not renewable resources. Corporations pay lip service to the term "renewable" for PR purposes, while their business model is based upon disposable resources.
Corporations, invented by businessmen, have replaced the 'we' in "we the people". Our politicians have sold us out to corporate America and are rewriting the Constitution to accommodate globalization and the expansion of the empire. Workers and shareholders are renewable resources for corporate America.
Hoa binh
There's nothing but truth in this article!