Sunday, May 14, 2017

Something is Wrong - And It's Holding Us Back! by Allen Laudenslager & Bryan Neva

Something is Wrong - And It's Holding Us Back!
by Allen Laudenslager & Bryan Neva

JPMorgan Chase CEO Jamie Dimon, in his annual letter to investors on April 4, 2017, said he has high hopes for the U.S. economy but warned, "Something is wrong - and it's holding us back!"

Dimon is absolutely right that something is fundamentally wrong with the U.S. economy. Our economy has been growing much more slowly in the last sixteen years than in the previous 50 years as shown in the chart below. From 1948 to 2000, real per capita GDP grew 2.3%; whereas from 2000 to 2016 it only grew 1%.
Household incomes in 2016 were 2.5% lower than they were in 2000, and the middle class has actually shrunk. The middle class was 61% of the population in 1971; today it's only 50%. And believe us, they didn't move into the upper class as research has shown that social mobility (those moving from the middle to the upper class) has declined by 20% since 1980.

The Labor Force Participation Rate (LFPR) has declined for men (ages 25 to 54, the prime working ages for men) from over 96% in 1968 to 88% today. (See chart below.) This is way below the LFPR of most developed countries today. And if you factor in the number of discouraged workers who've left the labor force entirely, our unemployment rate is actually double or triple the official 4.4%.


This lack of economic growth and opportunity in the U.S. has led to anger and frustration among the American people evidenced recently by the populist election of President Donald Trump in November 2016 and the strong polarization between liberals and conservatives. Americans are angry at politicians and government bureaucracy; they're angry at Corporate America; they're angry at our educational institutions for the exorbitant costs and not preparing them for the job market; they're angry about illegal immigration and the abuse of the H-1B visa program by high-tech companies as these are taking jobs away from U.S. citizens; they're angry about the double standard of the rule of law: one for the rich, powerful and special interest groups, and another for the rest of us; they're angry about the lack of job opportunities for their children; they're angry at the exorbitant cost of healthcare in our country; and they're angry at each other thinking all this is the fault of the left or the right.  

Dimon wrote further in his letter to investors, "We need coherent, consistent, comprehensive and coordinated policies that help fix these problems. The solutions are not binary — they are not either/or, and they are not about Democrats or Republicans. They are about facts, analysis, ideas and best practices (including what we can learn from others around the world)."

Dimon's observations are correct but we believe these disjointed, inconsistent policies of the government can be traced to the inordinate influence of corporate lobbying and donations to political parties and candidates. The founding fathers had a deep distrust of corporations and originally limited their formation and size exactly for these reasons. In the case of Jamie Dimon, his statement is akin to the pot calling the kettle black as Big Banks like JPMorgan Chase have substantially benefited from all the legal financial loopholes they've lobbied for.

Rana Foroohar, who is the Global Business Columnist and an Associate Editor at the Financial Times, in her best-selling book Makers and Takers: The Rise of Finance and the Fall of American Business, makes a compelling case about why Capital Markets no longer support business, and that Finance and not just poor economic theory is mostly to blame for our current economic problems. She makes a point that from Presidents Carter through Obama, most Presidents have slowly deregulated the Financial Services sector of our economy. She also argues that the Dodd-Frank law, enacted after the 2008 financial meltdown, made everyone feel a bit better, but didn't really change the way the Big Banks and Wall Street operate due to so many loop-holes written into the law (mostly by their lobbyist).  This is a prime example of crony capitalism hard at work!  She argues that only by enacting new, stricter laws and regulations can America break the stranglehold the Big Banks and Wall Street have over our economy. 

Dr. Mark Mizruchi, and Dr. Howard Kimeldorf, Sociology Professors from the University of Michigan, in their article published in 2005 in the Journal Political Power and Social Theory titled, “The Historical Context of Shareholder Value Capitalism” offer an explanation of the rise in prominence of Institutional Investors and Securities Analysts as a function of the changing political economy throughout the late 20th century. The crux of their argument is that their rise in prominence can be credited to three significant forces: organized labor, the state, and banks. The roles of these three forces were abdicated and can no longer keep corporate abuse in check.

They write, “Without the internal discipline provided by the banks and external discipline provided by the state and labor, the corporate world has been left to the professionals who have the ability to manipulate the vital information about corporate performance on which investors depend.” In laymen's terms, the fox has been guarding the henhouse.

We believe there are two fundamental issues here. First, despite what the Supreme Court has ruled, corporations are not people! (When was the last time you saw a corporate officer go to jail for the misdeeds of their company?) Rather they're an aggregation of people with many of the drawbacks of a mob and none of the strengths of an individual. Second, the concept that shareholder value is the single measure of a company’s success. It's not! Rather, stakeholder value is the measure of a company's success. (We've written in depth about this previously.) When the Big Banks, Wall Street, or Corporate America don't share the wealth with Main Street America, our economy as a whole suffers.

There is an old military aphorism, “The troops do what the commander checks,” used to remind military leaders they need to check that key things are being done by their troops. It can also illustrate why our economy is in such disarray. Government regulations are the "commander's checks" on business. And with corporate efforts to tailor those regulations to enhance the industry's profits, either the checks are not being done or the government is checking the wrong things. Government regulations are supposed to be intrusive! They're supposed to help ensure that business doesn't harm society as a whole - sometimes at the expense of profits. 

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