Book Review: Makers and Takers: The Rise of Finance and The Fall of American Business
Since the market meltdown of 2008 and its ensuing (unpopular) TARP program, where taxpayer money was used to bail out ‘too big to fail’ banks, there has been a lot of drum beating against Wall Street. From a distance, this drum beat can seem a lot like a rich versus poor conflict. A little more close up, it becomes a problem of fairness with slogans such as “the system is rigged” repeatedly chanted. Very closeup, the argument against Wall Street becomes the argument against ‘financialization.' Financialization, Rana Foroorhar argues in her book Makers and Takers: The Rise of Finance and The Fall of American Business, is what is responsible for slow growth, stagnant wages, rising income inequality, job loss, and lots of other horrible things.
First off, it’s important to note that this book is biased. She does try—especially in the beginning—to make it non-partisan. In truth, there is some truth to her argument that the perils of financialization are neither right nor left but rather foolish short-term thinking over wise long-term thinking. However, as one reads on, her bias to the left becomes very clear, and by the end, her fan-girling for Elizabeth Warren is so strong it almost felt awkward. Nearly every paragraph opened with Elizabeth Warren said…. So, if you are to the right, this will be an informative though at times very annoying book. If you are to the left, this will feel like a very comfortable shoe. If you are a mega Elizabeth Warren fan, this will be a romance novel. For me, I am neither left nor right rather a devoted Freethinker. I found the book valuable at two levels. I learned a thorough explanation as to why everyone from politicians, to economists, to even people in business who made a fortune on Wall Street like Warren Buffet are saying that Wall Street is broken and becoming increasingly corrosive to Main Street. Secondly, I also was able to see the flaws in some of their arguments which could have only been possible if I took some time to study what all the bitching was about. For everyone: this book will make you completely irritating at parties.
Makers and Takers is pretty thorough, and one is taken through a lot of reasons why Wall Street is bad for business. However, one of the central themes is corporate stock buybacks versus using stashed money to invest in research and development, improved manufacturing, and investing in people via raises, training, and new hires. Buybacks used to be illegal as they were viewed as market manipulation. “This changed in 1982 when the Securities and Exchange Commission passed Rule 10b-18, which, despite a few mechanical restrictions, opened the gates for companies to begin to repurchase shares en masse.” (Bob Bryan, Business Insider, 2016)
Buybacks are when a company buys back its stocks to raise the price of the stock. It’s great for shareholders—especially in the short term. It’s great for CEOs whose pay is primarily company stock and who is paid based on the yearly performance of the stock. In 1993, Congress enacted Code 162 (m) which limited the amount that can be deducted for a corporate officer’s salary at $1 million. However, a super important exemption was included: performance pay. There was born a new way to pay CEOs and other top executives: stock and stock options. Naturally, if one is paid by stock and the amount of stock paid is determined by performance than it makes perfect sense to A. have a bias towards raising stock values within a calendar year, and B. to tie performance to the price of shares. Tying performance to the price of shares is very attractive to quantitative analysis because it is an easily measured thing. However, tracking long-term things like employee training programs and research and development are very opaque things to track year to year. Part of the financialization problem is an ever-growing preference and trust in quantitative analysis which is biased towards things that are easily measured. It’s a problem because just because something is easily measured does not mean it is superior data. Consequently, even though the 1993 $1 million dollar limit was meant to curb executive pay it wildly inflated it. It created a bias towards short-term gains over long-term investment and organic growth. Market growth based on artificial growth (like buybacks) versus growth based on actual growth in sales or services hurts individual companies, workers, and the economy as a whole, as none of the corporate profits are being recycled back into the economy via pay raises, hiring, buying new machinery, and building new factories.
History is a marvelous thing, and it saddens me that few follow it. In 1982, corporate buybacks were made legal. For awhile, this worked well, as it did give a tool to companies who were being undervalued by metrics outside of the actual health of the company which can happen with major world events or another company from the same sector tanking. To curb executive pay in 1993, a little exemption was included and given very little thought. By exempting “performance pay” and paying in the form of stock and stock options, you had a clear bias towards yearly stock value increases (versus capital investments that might take 5 to 10 years to come to fruition). The preference for quantitative analysis would be connected to post WWII America, Harry Truman, and a group of gentlemen called The Whiz Kids, however, there is no room to get into that fun adventure of how easily measurable things became the preferred way to navigate complex problems (like Vietnam!) (oh dear).
There was a lot I was not in agreement with in Rana Foroohar’s Makers and Takers: The Rise of Finance and The Fall of American Business. However, where I do agree is that the dangers of stock buybacks to society, economic growth, and even to the health of the companies engaging in the buybacks themselves very well might be real. Hence, buybacks should be thoroughly re-examined as to whether or not they should be allowed to continue the way they are now. However, when it comes to the blame game and the search for solutions, it’s important to realize that a lot of the problems of financialization were caused by unintended consequences spanning decades, generations, and historical climates.