Seven years after the financial crisis, many still worry that the financial sector is too powerful. And there are obvious signs to justify that worry: The top 25 hedge fund managers make as much as all kindergarten teachers combined, regulators still don’t believe that the largest banks are making enough effort to ensure they aren’t Too Big to Fail, and the size and profits of finance as a whole have come roaring back.
Mike Konczal is a fellow at the Roosevelt Institute, a non-profit organization in New York devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.
But the increased role of the financial sector in the economy is only one element of the problem, and perhaps not the most important part. Academics often discuss the “financialization” of the economy, a mind-numbing term that simply means the increased size and power of finance, especially over corporations, the rules of the economy, and the way we view society. It’s this broader problem that should cause us to worry about the future of work and labor. Only by overcoming this challenge will the economy achieve the innovation and broad-based prosperity it is capable of creating.
This power of finance is very obvious when you consider the increased power of shareholders over firms. Whatever corrective the “shareholder revolution” and the re-focusing of corporations on the stock market provided to the sclerosis of the 1970s, the pendulum has swung dramatically in the opposite direction. CEOs and managers openly say they’d pass on a long-term profitable project if it meant they’d miss a short-term earnings goal or briefly hurt their stock price, a textbook definition of leaving money on the table.
Research now finds that private firms invest more than similarly situated public ones, while the corporate sector as a whole now returns virtually all profits to shareholders in the form of dividends and buybacks. This was unheard of before the 1980s. Where finance used to get money into firms, now finance is about getting money out of them.
This has serious consequences for work. Investment has numerous spillover effects, and the subsequent decrease in investment affects the entire economy. So much power concentrated in the hands of shareholders means wages suffer. Less investment and risk-taking means less innovation and less of the cumulative effects that innovation has on the economy as a whole. It is harder to achieve full employment if investment is less sensitive to interest rates and more sensitive to shareholders.
This wasn’t an accident; it was the result of an intellectual, legal, and regulatory revolution. When people discuss inequality, they tend to focus on technology, or globalization, or demographics. But recent research has emphasized that the rules of the economy, the laws, regulations, taxes, and practices that structure and influence the markets themselves, are a major generator of inequality. Those rules have consistently been re-written to benefit wealth and finance over everyone else, creating another major challenge for workers.
The most obvious and important rule change has been in macroeconomic policy. The rules here have been re-written and executed to protect those with significant wealth holdings from inflation at the cost of emphasizing full employment, thereby preventing the economy from running at maximum speed. The Federal Reserve could have taken more dramatic action during the Great Recession, for example announcing a higher inflation target or directly setting long-term rates. Refusing to do this benefited those with wealth at the expense of everyday workers.
The biggest current labor battle is over who exactly is an employee of whom. What does it mean when a sharing app dictates the conditions of your labor but takes no ownership of your role as an employee? But this battle is taking place in a regulatory and rules environment that has recently been stacked toward owners, and away from workers.
The rules have also benefited holders of specific property, such as intellectual property, at the expense of the innovative potential of the economy as a whole. This encourages abusive legal practices, where excessive patents and lawsuits discourage competition and the innovation of other firms.
The changes described here, and the weakened position of labor that results, could prevent optimistic future scenarios of a world that is richer but has less work from coming to pass. A world in which labor is cheap and has little power has very little incentive to innovate the labor-saving techniques necessary for growth. If labor is weak, there’s no point in discovering the robots that would take workers’ jobs, a process that is disruptive in the short-term but can be prosperous in the long run. The result of these changes is an economy that becomes fundamentally backward looking, aimed to protect the claims of the past. In turn, this weakens the potential for a new, more disruptive future.
For the Future of Work, a special project from the Center for Advanced Study in the Behavioral Sciences at Stanford University, business and labor leaders, social scientists, technology visionaries, activists, and journalists weigh in on the most consequential changes in the workplace, and what anxieties and possibilities they might produce.