Misfortune 500: How One Economist Exposed a Dirty Corporate Secret

There are many gauges of the depth and breadth of economic inequality, and they often measure what middle-income working people have today against what they had prior to 1980 – that time when homes were affordable, along with doctor visits and college educations. Yet few of the astonishing charts and metrics that have captured this widening gulf explain how it all came about. So when economist William Lazonick pointed a finger at a very specific aspect of corporate behavior, people took note.

In a September 2014 Harvard Business Review article, Lazonick, a University of Massachusetts at Lowell professor, declared that much of the trouble began when corporate America decided to stop funding research and development (which introduces new products, expands the manufacturing base and creates more jobs), and instead concentrate its efforts towards increasing profits through stock buy-back schemes.

“Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming,” wrote Lazonick. “Yet most Americans are not sharing in the recovery.”

Lazonick identified the top 10 stock repurchasers nationally from 2003-2012. The list included Exxon Mobil, Microsoft, IBM and Walmart as well as four companies headquartered in California’s Silicon Valley – Cisco Systems, Hewlett-Packard, Intel and Oracle. (Read more here about the “Top Five California Corporations Driving Inequality” and “Silicon Valley’s Brave New Economic Order.”)

There was more:

“While the top 0.1 percent of income recipients – which include most of the highest-ranking corporate executives – reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread prosperity.”

This news was a thunderbolt, prompting The Washington Post’s Harold Meyerson to proclaim that Lazonick’s article did “nothing less than decode the Rosetta Stone of America’s economic decline.”

“His research is fantastic,” software entrepreneur and philanthropist Stephen Silberstein told Capital & Main in an interview this week. Silberstein has worked with California lawmakers on drafting legislation to combat economic inequality in the state. “It’s really eye-opening. I had no idea of what’s going on until I read his article.”

Indeed, the trend continues to snowball, Lazonick told Capital & Main last year. “Stock buybacks have become a bigger and bigger part of the way companies allocate resources,” he said. “Trillions of dollars that could have been spent on innovation and job creation over the past three decades have instead been used to buy back shares for what is effectively stock price manipulation.”

Lazonick’s 4,900-word piece, titled “Profits Without Prosperity,” focused on the 449 companies in the Standard & Poor’s 500 index that were publicly listed from 2003 to 2012. Lazonick found that from the end of World War II until the late 1970s, corporations generally took a “retain-and-reinvest” approach to profits. That is, they kept their earnings and reinvested them – first and foremost in pay raises and job benefits for the employees who helped make the firms more competitive, but also in business expansion, research and new technologies.

But starting in the early 1980s, after the Securities and Exchange Commission removed limits on companies’ power to buy back their stock, these large, publicly traded companies began spending a portion of their net income on stock buybacks. The trend was exacerbated in the 1990s, when the compensation packages of corporate chief executives were linked directly to the stock value, and has accelerated in recent years – even though it’s been little noticed and rarely discussed as a prime driver of economic inequality.

According to Lazonick, however, this move may have increased stock prices in the short run, but in the long term has undermined income equality, job stability and growth. He says that the buybacks mostly served the interests of corporate executives, much of whose compensation is in the form of stock. Moreover, he wrote, corporations are continuing to lobby for federal subsidies for research, development and exploration — while they are devoting far greater resources to stock buybacks.

As part of the reporting for this series about economic inequality in California, Capital & Main has spoken at length with Lazonick, who shared his updated research on corporations and stock buybacks for the period 2004-2013. The information is also available at the Academic-Industry Research Network’s site, theairnet.org. Lazonick is president of the network, which conducts research about economic development.

In an interview with Capital & Main this week, he foresaw a continued “concentration of income at the top and the disappearance of middle-class jobs,” adding, “The forces for income inequality – they’ve gotten away with it for so long. It’s going to get worse and be more of the same.”

He also warned the economy will deteriorate if inequality isn’t addressed.

“Absolutely it will get worse,” Lazonick said. “All of the structures are in place to continue in that direction.”

This post was originally published by Capital and Main as part of its series on economic inequality. Gary Cohn won the Pulitzer Prize for Investigative Reporting in 1998 and has garnered other honors, including a George Polk Award, an Investigative Reporters and Editors Medal, the Selden Ring Award and a Robert F. Kennedy Award.)

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