By Peter Georgescu
Both politically and economically, we seem to have lost our bearings. The US economy grows more and more fractured, while solutions from all political tribes and ideologies are touted as “the only way.” Mostly, sometimes intentionally, they are in conflict with one another. There’s little effort to collaborate now. Gridlock wins, and citizens and businesses lose, as well. What’s missing is the ability to ask the right questions along with the sort of research and rigorous analysis into why we seem to be in a potentially tragic socioeconomic cul-de-sac.
Instead, we take economic stagnation as a given, or else we propose old solutions that have proven ineffective in the past. Take, for example, the health care plan championed by the White House. It would cut deeply from Medicaid. Mick Mulvaney, the White House budget director, states: “It’s our job in government to look at both the needy and those who will pay the taxes for the needy.” One senses that the plan directs its attention more toward the taxpayers than the needy — and thus remains in denial about the current reality of crippling economic inequality.
The case gets worse. Some 22 million people will ultimately lose their health coverage under the proposal. Those with preexisting conditions will ultimately be overlooked if their only hope is in block grants to states facing serious financial challenges. They are, in their own way, just as much in denial about our economic crisis. The White House budget makes use of those Medicaid cutbacks by suggesting that the wealthiest Americans should get huge tax cuts. Doesn’t this just widen the inequality and intensify the problem everyone is trying to soften with stopgap measures?
Here’s their justification: Businesses will get a tax break, along with the rich, in line with the “trickle-down” theory that lower taxes will stimulate economic growth. But tax cuts for years have simply been stashed away overseas, or invested in financial instruments simply to produce more wealth, not to be invested in domestic growth. The wealth does not trickle down.
What’s missing here is the ability to face the fundamental cause of our economic quagmire and how we can reverse what it’s doing to our society. By the way, here’s another simple, obvious question: Why do people like me, in the top 20% income bracket, need personal tax cuts? We’re doing just fine paying taxes at the current rates.
If we were to care enough to ask the central question — how did we get here? — a different truth would emerge. It would point to the existential challenge confronting our nation: economic inequality and its catastrophic socioeconomic consequences for the vast majority of Americans, leading to our lackluster economic health, low job growth, stagnant wages, as well as rising levels of debt, both personal and national.
There is one clear, simple statistic that speaks volumes about our peril: Wages quit rising about four decades ago and have remained flat ever since. Meanwhile, profits have steadily grown, shareholders have been enriched, as businesses have found more and more effective ways to cut costs thanks to the globalization of national economies. All of this has gone on in plain view, but only recently has it become a burning topic of national discussion. And no one is really recognizing how to address this issue. The question no one is asking is twofold: Was this inevitable and is there any way to reverse how it has eroded the US economy?
If you are among the top 20% of earners, you probably wonder why anyone worries about all this. The bull market is setting historical records, and the unemployment rate seems reasonable again (because of the way we measure it), so most casual observers — certainly most of the media — think America is back on track and growing. Nothing could be further from the truth. The stock market isn’t an accurate measure of anything but how much profit we can extract from our system. Quick profits have become all important. Year in and year out, quarter after quarter, profits must go up. As a result, a CEO pushes earnings and stock prices skyward by whatever means possible — mostly by reducing employment and keeping wages flat.
It is a self-destructive way to do business, and it’s leading us to disaster. This is a world in which shareholders have come to demand and get maximum, short-term returns. Shareholder primacy has become so fundamental to the way we’ve thought about business for nearly half a century that most of those in business are hardly more aware of it than they are of the air they breathe. Meanwhile, this philosophy has been destroying the conditions that create new markets and healthy communities, which are precisely what companies need to do to make their shareholders wealthy over the long term.
Corporate margins up and wages down
Long story short: Corporate profit margins are at an all-time high, even though the economy has almost stalled, and wages have barely kept up with inflation, notwithstanding a couple of recent months with tiny deviations from the long-term, flat trend. Despite the extraordinary rise in income and wealth for the top quartile of earners in America, the median household income is less than 1% higher than it was in 1989. Wages have stayed flat, or have declined, since 1980. Since the 2008 financial crisis, 91% of income growth has gone to the top 1% of earners.
As a result, most households are sinking deeper and deeper into debt. Nearly 60% of the population is staying afloat through deficit spending — to put food on the table and pay their bills, they have to borrow money. We don’t have “extreme poverty,” like some developing nations, but more than half our population is sliding toward insolvency. On top of all this, America ranks highest for socioeconomic immobility and inequality among developed nations. We have become the Land of Lost Opportunity. For the majority of our citizens, the American Dream and the hope it represents are all but gone.
However, none of this means we are doomed to remain in this state of dysfunctional imbalance. We can reverse all of this if the private sector wakes up to its responsibility. Companies have to recognize that their workforce, the employee, is the source of success — not simply another cost on the income statement. Business can start to save capitalism in two fundamental ways.
First, invest in the actual value creators: the employees. Start compensating fairly, by which I mean a wage that enables employees to share amply in incremental productivity increases and creative innovations they, in fact, produce.
Second, businesses must invest aggressively in their own operations, directing profit into productivity and innovation to boost real business performance and grow more and more creative jobs.
This is not some new, radical way to think about making a profit. It’s essentially the way we did business half a century ago. Back then, during the heyday of American business, most successful companies felt an allegiance to a variety of stakeholders — employees, customers, the corporation itself, communities and the nation. By operating with an imperative to strengthen all of these constituencies, our system thrived in the late 1940s through the 1970s, when America organized itself into the greatest engine of prosperity in the history of the world. In the late 1970s, all that began to change. We narrowed our vision and started to focus solely on rewarding shareholders. As a result, we desperately need to correct free-market capitalism’s vision — to restore its broader sense of responsibility to multiple stakeholders, to our society as a whole.
I’m not the first to suggest this. Many advocates for “stakeholder primacy,” as it were, have been pointing toward shareholder primacy as a villain. Among others, Lynn Stout at Cornell Law School and Judith Samuelson of the Aspen Institute have been decrying this philosophy for years and pushing for a new sense of responsibility in the executive suite. Organizations such as JUST Capital have sprung up to push for a wiser form of corporate governance. Even Jack Welch, the former CEO of General Electric, has famously called shareholder primacy “the dumbest idea in the world.”
A creative workforce
The objectives of enlightened capitalism are simple and clear: to build a devoted, loyal, motivated and creative workforce. You do this by compensating and treating employees appropriately, while investing more aggressively in R&D. The goals: sustained innovation and the growth it generates. Each company needs to adapt and adjust to the new normal with its own wisdom and flexibility, given the dynamics within that company and its industry. In addition, consideration should be given to the most efficient and effective way to improve compensation for employees outside the C-suite.
The first imperative is to increase compensation for employees making $100,000 or less. The source of these funds would come from a reasonable, incremental sharing of productivity and innovation gains. In other words, when leadership finds new ways to increase profit through efficiency, share it with employees as well as stockholders. (A decrease in the cost of financial engineering by throttling stock buybacks and lowering dividends could be shared this way as well).
Depending on circumstances, the increase in compensation can be made in cash or equity — a form of restricted stock, for example. It could be a five-year plan that has a sunset and is reevaluated before continuing with appropriate improvements.
There are two fundamental concepts for how we can do this in a fair and just way. The first is a fair wage: That means sharing the incremental value produced by the organization as a result of productivity or innovation. That is fair value. The second way to do this is through a living wage. This applies to the lower end of the pay scale. Individuals should take home enough in wages to pay their bills, pure and simple. A living wage shouldn’t be a single number across the board; it can differ depending on cost-of-living situations, based on different locations. Manhattan and Peoria, Illinois, will have different wage scales from Bangladesh and Paris. A living wage must be realistic but also be perceived as generous in the context of its local and regional setting. Let me put it another way: Pay people enough that it makes them feel lucky and privileged to work for you.
All of this would do many things for our economy and our society, but fundamentally it would drive up the demand curve. Very simply it would give people at all levels more money to spend, which would stimulate growth throughout all sectors, creating the conditions for starting new businesses, growing older ones, driving up new employment. The good news is that many private and public companies have found that doing the right things for all stakeholders makes winners out of their businesses, their employees and their shareholders. By changing this culture for all businesses, it would give America a chance to, once again, become a land of opportunity for all of its citizens.
I love America. It has made me who I am. I found enormous opportunity here when I arrived as an immigrant at the age of 15, coming here after a harrowing childhood in Romania. I hadn’t attended school for some five years before I arrived because I’d been consigned to hard labor by the Romanian communist regime. My parents had been stranded in the US when the Iron Curtain came down over Eastern Europe. Fortunately a failed blackmail attempt — to pressure my parents to spy on behalf of the Soviets — became the red line for them. They decided to tell their story to the world press, which created an international scandal, and eventually led President Dwight Eisenhower to exchange Russian spies for freedom and our lives.
As an immigrant I was given help by many people, with the opportunity to engage in essentially a “crash education” at great schools, and was hired by Young & Rubicam. Over the decades, I rose to become the head of the company thanks to the hard work I learned how to do as a child in Europe. The principal of Exeter Academy accepted me as a student, not because I was qualified, but because he believed it was the right thing to do and because he believed I would catch up with my fellow students. And I found this kind of compassion at every step in my education, and in much of my career. Only in America could an immigrant boy like me have risen to live the American Dream with the chance to be the best I could be.
When I retired as chairman and CEO, I understood that the real hero of my life was America. It was a world where generally companies put their employees first; where caring and compassion mattered; where fairness and justice were respected and honored. The private sector was growing dramatically and that growth gave everyone hope: it was a different world. I fear that if I were to arrive in America now, my future would be incredibly dim, compared to the opportunity I faced more than half a century ago. Lucky for me I am now here to tell the story and to wish that kind of opportunity for all our children.
Peter Georgescu is the former Chairman and CEO of Young & Rubicam.
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