Talk Talk Talk: August 2019

Recently I've been hearing more and more people calling for major structural changes to the economy. Though the unemployment rate is below 4% there are people who don't think the economy is working properly. I agree and I've written a few posts some months ago on this topic and with specific suggestions to change things which will shift the distribution of wealth slowly away from the investor class and back toward the government and the workers.

Today's post is not another small technical change of that kind. It's about a shift in our economy which began with the political shift to the Right, back in the 1970s and early 1980s. It's about Vulture Capitalism and some associated things.

It may come as a surprise to many younger people, but in the 1970s during the malaise of the Carter administration (1977-1980) the economy grew at about 4% every year. This wasn't a major political advantage or surprising. It always grew at a strong pace because when it collapsed it fell badly. But, the general rate of growth (taking all the pluses and negatives into account) was very strong and a typical stock market increase would be about 7%. Recently it's been struggling to grow faster than 2% / year. The wealth through the 1960s and 1970s was fairly well distributed between labor and capital and all boats rose with the tide or sank the same. In the early 1980s there was debate about the coming revolution in the economy due to micro-computers and the Republican's planned assault on unions and one conclusion was that capital, and not labor, should get all the new profits due to their investments in computerization. Of course, capital would also get the longest straws when unions evaporated and wages went South (literally). Later there was also the beginning of globalization and many more women in the workforce and those too took a toll on worker wages. This and the fact people loved Ronald Reagan was a nightmare for worker wages and the Republicans loved every second of it. They nick-named Ronald Reagan "St. Ronnie".

With Republican deregulation of business and tax cuts and the usual economic ups and downs there were many business failures during recessions. I'm not absolutely certain of the provenance of Vulture Capitalism, but it may have begun with something called a "turn-around". When companies were being scrutinized to see if they could survive the next turn-down some investors decided there were a few companies which simply needed better management. They invested, changed the CEO and in many cases the companies did better to earn everyone a nice return on their investment. Workers benefited too since the companies didn't go bankrupt. I think it was in the 1980s that a few investors saw that rather than trying to turn a company around, they could just take it into bankruptcy, shed some debts, return to normal functioning, and make the company profitable again. This all sounds pretty good until some investors took another shot at making big money from weak companies. Rather than trying to turn them around, they put them into bankruptcy, shed debts, fired workers, sold the company for profits, and put the money in their own pockets. They didn't care about the life of the company or the livelihoods of the workers, they just wanted the money. These were the Vulture Capitalists -- picking over the carcasses of the companies they had killed.

A side-effect of this was that many very capable CEOs began to demand higher pay or other compensation (stock options, etc.), so that their ability to keep a company's stock price high was recognized. Keeping stock price up helped to keep away the Vulture Capitalists, though a cost of that was to shift attention away from normal business activities and investments. The increase in CEO compensation has contributed to the huge wealth gap which exists today. It drains money from legitimate business activities and puts it in the hands of a few. It's like paying mafia types, pirates, or kidnappers a regular fee (protection money or insurance policy) to keep them away. Over the long run it gives those bad guys far too much power. With that economic power they begin to be more represented in government too. The shifting of resources away from normal business activities has led to a weaker economy (growing about 2% / year).

Once you've seen that a weak, but going business, can be taken down and picked apart for instant profits, the idea of running a company that only returns 4-15% profit / year makes no sense. Why not just kill and pillage every company you can get your hands on? You may ask how this was all legal and I don't know the law very well, but you can rest assured that with Republicans in charge from 1981-1992, they found ways to ensure it was all legal.

Where were the Democrats? In the 1990s Bill Clinton was doing a lot of things, including making the economy run like a top. But, he only had 2 years with a Democratic Congress. After the Gingrich revolution of 1994 the Republicans stopped any and all progressive legislation. They ended by trying to tear down Clinton-Gore to win the next presidential election. They impeached Clinton, but failed to remove him from office. They didn't want to remove him, they just wanted to hurt him. If they had removed him the Vice President, Al Gore, would have been in great position for the next presidential election. Then the Republicans had the presidency from 2001-2008 and it was a catastrophe with 9/11, wars, spending out of control, torture, and everything else you can imagine. They ended with a recession which was the worst since the 1930s Great Depression. The start of the Obama administration (2009-2016) was obsessed with stopping the recession and passing financial reforms to prevent it happening again AND healthcare reform (see Obamacare or the Patient Protection and Affordable Care Act or the ACA). Pres. Obama also had only 2 years with a Democratic controlled Congress. So, the Democrats simply haven't had sufficient power and time to get a lot of things done -- after cleaning up Republican messes.

Today we still have a Republican president, Donald Trump, and an economy which is working the way Pres. Obama and the Democrats left it, except for a huge tax cut the Republicans passed and de-regulations the administration pushed through. Oh, and there are the tariffs. Pres. Trump has decided a trade war is the best way to convince China and some other countries to agree to a new trade deal that he likes. It's killing the agriculture sector of the economy and a lot of people are hurting.

I say, give the Democrats control and some time to make big changes and we can do much more to make the economy grow while employing most Americans and growing global trade.

Aside from eliminating the tariffs and working out a real trade regime that makes sense, the ridiculous tax cuts for the rich have to be rolled back to give the government a chance to get back on track. We can't run trillion-dollar deficits every year. Then we can turn to other changes of a fundamental nature which will help return the proper balance of labor and capital.

Looking at the changes which led to our current weak economy and wealth imbalance and lack of a real "American Dream" for most Americans, the changes which have to take place are largely a reversal of Reaganomics. We must tax the wealthier people in America to pay our debts. We must pay workers more (increase the minimum wage). We must NOT hinder unions since they have been a strong force to keep workers wages at good levels. But, more than that, we have to recognize that Vulture Capitalism is not only a failure, it's equivalent to a mugging or pirating or kidnapping for ransom. It's criminal behavior and it has to be stopped.

One of the key laws which is involved in Vulture Capitalism was recently mentioned in an on-line discussion. It is that when a company goes into bankruptcy the company's assets are distributed to the shareholders. But, what of the workers, their retirement funds, vendors, other debtors? I think the laws allow far too much benefit in bankruptcies for investors who supposedly knew the risks of investing, but who want to recover all the benefits available before other interested parties. I say that the social purpose of a company is to employ people usefully and to earn a profit everyone can share. If that is broken and only the capital investors benefit, then you no longer have reason for anyone to keep a company viable and operating when they can just put it into bankruptcy (to take advantage of the bankruptcy laws), stuff all its value into the Vulture Capitalist's pockets, and walk away. It's like bank robbery where you steal the entire bank instead of just the ready cash. Vulture Capitalism is like Bank robber Banking. It's an insane idea. No, the company assets in a bankruptcy proceeding must go to workers, worker retirement funds, and vendors before other debtors, so that the incentives are to keep a company functioning and profiting in a normal way for normal profits. Leave the pirate-level profits to people who should end in jail.

Perhaps one of the biggest revelations about Donald Trump, as it relates to the economy, is how he, as the self-labeled "King of Debt", borrowed money from banks for his businesses, took his own businesses into bankruptcy and took all their assets, leaving a carcass for the creditors and banks. He did this so many times there were finally no American banks which would lend him (or his businesses) money. He went overseas to Deutsche bank of Germany and it is suspected that during the 1980s or 2008 during a recession that he began to receive loans which were essentially Russian money. This process made him wealthy on American bank loans, but then poor during the American recession(s) and in hock to Russians when he got German bank loans (backed presumably by Russian money). It's a strange story, but an important lesson for how important it is to secure our banking system from this kind of fraud and to help the business community to get back to doing business instead of fending off Vulture Capitalists.

The Democrats, though some may seem radical, are offering a return to real capitalism and not Reaganomics or Vulture Capitalism.

Talk Talk Talk

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Major Structural Changes to the Economy