Jeb Bush got a lot of attention last week when he suggested that Americans who want higher living standards need to work harder.
During a speech on Monday, Hillary Clinton happily served up a rejoinder: It’s the people running companies, not their workers, whose behavior needs to change.
In making this argument, Clinton wasn’t simply taking a swipe at a potential rival in the 2016 presidential election. She was embracing a critique that economists and even some prominent investors have been making with increasing urgency -- that corporate America’s focus on maximizing short-term profits has come at the expense of worker pay and, ultimately, the economy as a whole.
It’s an argument that Clinton is likely to keep making, no matter who becomes the Republican nominee.
Campaign officials had billed the speech, delivered at the New School for Social Research in New York City, as a major economic policy address -- Clinton's first since she officially announced her candidacy in April. The goal wasn’t to dwell on any one proposal in particular, campaign advisers stressed, but rather to sketch out, in broad terms, how Clinton would try to raise incomes and improve economic security for the middle class and poor.
What followed was a laundry list of proposals -- including a bunch that have been the focus of recent economic policy debates in Congress, like creating an infrastructure bank and raising the minimum wage. Others, like increasing support for childcare and paid sick leave, are only now getting serious attention in Washington.
But then Clinton started talking about “short-termism” -- the focus on delivering quick returns for investors, whether through dividends or corporate "buy-backs" of stock that drive up share prices. That was a little different.
The prevailing view among most business leaders and conservatives is that focusing on shareholders is ultimately good for everybody, because investors can then re-allocate resources to the most efficient companies and investments.
Clinton challenged this conventional wisdom, suggesting that the focus on short-term returns ends up extracting wealth from companies, leaving them with less money to put back into facilities or workers. That wealth extraction, Clinton argued, is one reason that income for the typical worker has stagnated, even as corporate profits and executive salaries have soared. At the same time, Clinton said, it deprives companies of the replenishing investments that would make them more productive in the future.
“Net business investment -- which includes things like factories, machines, and research labs -- has declined as a share of the economy,” Clinton said. “In recent years, some of our biggest companies have spent more than half their earnings to buy back their own stock, and another third or more to pay dividends. That doesn’t leave a lot left to raise pay or invest in the workers who made those profits possible or to make the new investments necessary to ensure a company’s future success.”
Here Clinton was drawing, in part, on an influential essay called “Profits Without Prosperity” that the Harvard Business Review published in September, 2014. That article, written by University of Massachusetts Lowell economist William Lazonick, used data from Standard & Poor's 500 companies to document a sharp change in corporate behavior -- a move away from what he calls a “retain-and-reinvest” mentality and towards a “downsize-and-distribute” strategy.
Between 2003 and 2012, Lazonick found, the corporations he studied used 54 percent of earnings for buy-backs and 37 percent for stock dividends -- leaving less than 10 percent for investment in equipment or workers.
It wasn’t always this way, Lazonick explained. As recently as the late 1970s, corporations devoted fewer earnings to shareholders and more to investment. But corporate culture started changing in the 1980s -- around the time the fictional Gordon Gekko was telling movie audiences that “greed is good” and real-life corporate raiders like Carl Icahn were pushing companies to maximize quick returns for shareholders. At roughly the same time, executives started taking more of their incomes in the form of company stock -- giving them more reason to drive up share prices, even if that meant giving short shrift to building new capacity or a more productive and better-paid workforce. On top of that, a Reagan-era regulatory change made it easier and more lucrative for companies to offer stock buy-backs.
Lazonick is hardly the only one making this case. The Center for American Progress (whose president, Neera Tanden, is a top Clinton counselor) and the Roosevelt Institute (whose chief economist, the Nobel laureate Joseph Stiglitz, has also been advising Clinton) have issued reports highlighting the changes in corporate investment patterns -- and the likely link between those changes and stagnant wages for workers. Just last month, Elizabeth Warren, the Massachusetts senator and unofficial spokesperson for the Democratic Party’s liberal wing, endorsed similar changes in a speech.
But calls to curb short-term thinking in the C-suite aren’t only coming from progressives. Among those making the same essential argument are some tech entrepreneurs and big-time, influential investors like Lawrence Fink of BlackRock, though the investors tend to worry less about workers and more about the effect on the economy’s long-term capacity.
Of course, proposing to change corporate behavior isn’t the same as fleshing out and lobbying for specific changes, such as tax increases on dividends or stricter regulations on buy-backs. The idea is new enough, at least in political circles, that it’s yet to get the same ideological scrutiny that older ideas for raising living standards -- like a higher minimum wage -- have received. Republicans will likely control at least one house of Congress come 2017, so if Clinton becomes president, she would have a tough time passing legislation. She'd have to rely mostly on her power to write regulations, and it's a lot tougher to change corporate behavior that way.
But the main purpose of these broad campaign speeches is to establish themes and priorities -- to make it clear how a candidate analyzes major problems and what kind of solutions he or she would prefer. On Monday, Clinton said that fixing the economy so it benefits everybody will require getting into corporate boardrooms and changing the way people there operate. It's highly unlikely that the eventual 2016 Republican nominee will be saying the same thing.