"Great corporations exist only because they are created and safeguarded by our institutions; and it is therefore our right and our duty to see that they work in harmony with these institutions."
That quote is not from an Occupy Wall Street organizer or some modern-day corporate watchdog, but from President Theodore Roosevelt, as part of his First Annual Message to Congress in 1901. Indeed, questions about the actions and purposes of American corporations have been with us as long as corporations themselves.
Today, people are once again raising basic questions about how well corporations work, including: why, in the current financial and economic crisis did large financial institutions and industrial firms get bailed out by the federal government while so much less is done for homeowners facing foreclosure? Why do the profits of American corporations and the compensation of their executives stay high, and even rise, while jobs disappear and economic growth and median family incomes stagnate?
If there is any surprise about the current crisis, it is not that worries about corporate power and its abuse are once again being raised, but that so little is being done about them in comparison with earlier crises in our nation's history.
In the Gilded Age of the late nineteenth century, the U.S. witnessed the rise of the robber barons, business leaders who amassed great power and wealth, as did the great financiers of Wall Street. At that time popular politicos, such as Roosevelt, took up the concerns ordinary Americans had about the corporate concentration of wealth and power. Antitrust laws were adopted and corporate regulation increased. Similarly the Great Depression of the 1930s, which again put the financial and corporate sectors under a cloud, resulted in a host of New Deal reforms and the legitimization of labor unions.
With these changes in place, the early decades after World War II went well for everyone. Corporate leaders, in various ways, balanced the interests of managers, stockholders, workers, consumers, and society. Unions were at their strongest then, and they pushed for higher wages as well as health care and retirement benefits from their corporate employers. "What's good for General Motors is good for the country and vice-versa" did not seem outrageous at that time. But that was about to change.
Technical progress, in the form of container ships for example, repealed the de facto protectionism long provided by the oceans. As competition emerged from abroad, the 1970s saw a major slowdown in what had been steadily rising U.S. economic growth, and prosperity. Corporate America was in trouble.
The period from the 1980s to the present has been marked by a major shift by corporations away from a broad view of many stakeholder interests to an almost exclusive focus on shareholder value. Academics and others began to attack government antitrust and regulatory policies as misguided and economically costly. They called for deregulation and increasingly placed government itself under scrutiny. President Ronald Reagan epitomized this new view when he famously said that government wasn't the solution, it was the problem.
This new doctrine looked good to shareholders. By providing executives with huge stock options, the interests of top management became aligned with the interest of the shareholder. Keeping wages and benefits from growing came to be seen as in the interest of both.
This change resulted in a rapid concentration of wealth. From 1979 to 2009 productivity rose 80 percent, but worker compensation rose only 8 percent. The top 1 percent of earners' share of the national income rose from 13 to 23 percent. Almost all the country's gain went to the wealthy.
Once again people are asking: is this what we want from our corporations? In a forthcoming issue of Daedalus, a journal published by the American Academy of Arts and Sciences, we describe this history and suggest adopting two major goals for U.S. corporations:
(1) Productivity: Our companies should be productive, each contributing as much as possible to the total of goods and services produced in the United States. It is the sum of these efforts that makes America prosperous.
(2) Sharing: Our corporations should provide productive and well-paying jobs so that the value the companies create is widely shared by Americans. This widely shared wealth gives the nation and its people economic security and political stability.
These goals are in sharp contrast to the present situation, in which many large corporations have just one goal: maximizing the return to the shareholders. In fact, this goal has now become so dominant that it is often thought to be a legal requirement. It definitely is not.
Can we move corporations in the direction of shared productivity? Yes, it can be done in many ways. Here we sketch only a few of many possibilities.
The corporate income tax could become an incentive for productivity if we provide low tax rates for companies that add high value to the United States economy. We do not need to select special companies for this; but simply use the tax rate to reward companies for creating high value-added in the U.S., whether they achieve that goal through R&D and advanced technology or by finding their own ingenious ways to improve productivity in manufacturing or in services.
Unbalanced trade, produced by Asian mercantilist policies, is harming major productive sectors of our economy. A measure to counter this that must be considered is tariffs. We know that is a forbidden word for economists, but in our paper we describe why it shouldn't be and why tariffs should be a part of our present as they have been of our past.
Next the goal of sharing: Clearly we need to consider here the role of unions and of their bargaining power in dividing up the economic pie. But we should also consider other forms of corporate organization; user-owned corporations--mutuals--have a long history in the U.S. and until recently dominated the insurance industry. In addition, the present corporate form could evolve; corporations could adopt the goal of being value-added maximizing rather than profit maximizing. Maximizing value added is measurable, as profit is, and in a world of companies devoted to value added, there could be many ways to divide the value they create between wages and profits and other goals. We might become a nation whose companies have a variety of goals, all adding strongly to the GDP, and many adding to a better distribution of income, wealth, and political power.
The great American corporations today are doing well for their top executives and shareholders, but this does not mean that they are doing well for the country as a whole. The growing concentration of income and wealth threatens both the long-range productivity of the country, through extensive offshoring, and its long-range internal stability through a growing concentration of wealth that carries with it political as well as economic power. These issues, and what to do about them, deserve more thought both from the economics profession and from all Americans. The start of a new presidential term makes this a good time to begin.
This post is a summary of a much longer article scheduled to be published in April in Daedulus, a publication of the American Academy of Arts and Sciences. Read the full text of "The American Corporation" by Ralph Gomory and Richard Sylla here.