Date: 2024-12-21 Page is: DBtxt003.php txt00025615
ACADEMIC PAPER
BY DONALD TOMASKOVIC-DEVEY & KEN-Hou LIN*
FINANCIALIZATION: CAUSES, INEQUALITY CONSEQUENCES, AND POLICY IMPLICATIONS
BY DONALD TOMASKOVIC-DEVEY & KEN-Hou LIN*
FINANCIALIZATION: CAUSES, INEQUALITY CONSEQUENCES, AND POLICY IMPLICATIONS
Original article: https://scholarship.law.unc.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1365&context=ncbi
Open saved PDF: Financialization-Causes-Inequality-Consequences-and-Policy-Implications.pdf
https://www.ineteconomics.org/perspectives/blog/how-corporations-get-away-with-murder-to-inflate-prices-on-rent-food-and-electricity#comment-6018438865
Peter Burgess COMMENTARY
This dialog goes back to around 2017 and the issue arising are probably three times more serious now than they were then:
Ms.B ... a year ago
Another problem is Financialization of the economy. As Donald Tomaskovic-Devey and Ken-Hou Lin wrote in their 2013 paper, Financialization: Causes, Inequality Consequences, and Policy Implications, 'We have long known that the fundamental risk of capitalism is that it is driven by the interests and influence of capital and so runs the risk of immiserating citizens.... Financialization is at its root a system of income redistribution which favors the finance sector over the non-finance sector, financial investments over investments in production, and shareholders and top executives over workers and middle-class citizens.'
Private equity firms are a prime example of this financialization. And private equity firms are buying up all sectors of the economy from grocery chains to newspapers to nursing homes, resulting in near monopolies in those areas. So of course they can set the price to whatever they want.
PeterBurgess ... a year ago Great article / conversation! In the 1970s when I was a lot younger I was part of a management team that included a number of executives who had previously worked at General Electric during its anti-trust prosecutions. Many of their GE colleagues did prison time for their business behavior. My colleagues were scared stiff relative to anything involving competitors. Since the 1980s there has been almost no constraint on corporate concentration of economic power either in the USA or globally and the media has enabled a lot of this by very superficial (and to a great extent self serving) reporting on almost every aspect of corporate behavior. How many products are there where the production costs have gone down over time while the prices have gone up ... and it is a lot more than just because of volume. There are no 'trust-busters' in the modern world!
greg
to PeterBurgess
And how much does corporate media report on, or allow reporting on, corporate misdemeanors and crimes? How much press and newstime did the Purdue Pharma crimes and settlement get, compared to- puppies, say? (So small and cute!)
You know what, though? Capitalists will invest in creating the humanity, the society, the economy, the kinds of people, from which they can extract profit at the highest rate. Even if that rate is unsustainable.
And here we are.
The APEX predator learning once again, the hard way, that he can only prosper so far as he nurtures and cherishes his garden.
Juris Kalns
greg
Greg, the problem may not be capitalism as such, how many in weak policy makers who are driven by self-interest.
Rebecca Turner
Peter Burgess
BY DONALD TOMASKOVIC-DEVEY & KEN-Hou LIN*
The U.S. is now a financialized economy, where the financial sector and its priorities have become increasingly dominant in all aspects of the economy. We focus on financialization as a process of income redistribution with two faces. The first face is one of rent seeking by an increasingly concentrated and politically influential finance sector. This rent seeking has been successful, leading to the pooling ofprofits and income in the finance sector. The second face is a shift in behavior of non-finance firms away from production and nonfinancial services and toward financial investments and services. This shift has had both strategic and normative components and has reduced the bargaining power of labor and the centrality of production. As a consequence, financialization of the non-finance sector has led to lower employment, income transfers to executives and capital owners, and increased inequality among workers. We discuss the policy implications of these consequences at the end of this Article.
Donald Tomaskovic-Devey & Ken-Hou Lin, Financialization: Causes, Inequality Consequences, and Policy Implications, 18 N.C. Banking Inst. 167 (2013). Available at: http://scholarship.law.unc.edu/ncbi/vol18/iss1/17 1. Greta R. Krippner has the foundational statement on this double movement. She made the empirical argument in her 2005 paper The Financialization of the American Economy, 3 Socio-EcoNoMIc REVIEW 173 (presenting a detailed description of the regulatory process that elevated the financial principle in her 2011 monograph, CAPITALIZING ON CRISIS: THE POLITICAL ORIGINS OF THE RISE OF FINANCE. 2. Gerald Davis argues that there are two additional dimensions: the adoption of investment behaviors at the household level and a general normative shift to value investments over work in all phases of life. See GERALD F. DAVIS, MANAGED BY THE MARKETS: How FINANCE RE-SHAPED AMERICA ( 2009). 3. GINI Index, THE WORLD BANK, http://data.worldbank.org/indicator/SI.POV.GINI/ (last visited Jan. 25, 2013) (providing World Bank inequality data). 4. Non-Farm Business Sector: Labor Share (PRS85006173), FED. RESERVE BANK OF ST. Louis, http://research.stlouisfed.org/fred2/series/PRS85006173?rid=47&soid=22 (last visited Jan. 25, 2012). 5. See Thomas Piketty & Emmanuel Saez, The Evolution of Top Incomes: A Historical and International Perspective, 96 AM. ECON. REV. 200 (2006); see also CONG. BUDGET OFFICE, TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 (Oct. 2011), available at http://cbo.gov/sites/default/files/cbofiles/attachments/10-25- Householdincome.pdf. 6. Andrew G. Berg & Jonathan D. Ostry, Equality and Efficiency, FIN. AND DEV., Sept. 2011, at 12, available at http://www.imf.org/external/pubs/ft/fandd/2011/09/Berg.htm (last visited Jan. 25, 2013). 7. KATE PICKETT & RICHARD WILKINSON, THE SPIRIT LEVEL: WHY GREATER EQUALITY MAKES SOCIETIES STRONGER (Bloomsbury Press 2009). 8. On the theory of skill-biased technological change leading to increased income inequality and declining labor shares of income, see Daron Acemoglu, Labor and Capital Augmenting Technical Change, I J. EUR. ECON. Ass'N 1 (2003), and Daron Acemoglu, Technical Change, Inequality, and the Labor Market, 40 JOURNAL OF ECONOMIC LITERATURE 7 (2002). On the linkage between globalization and U.S. income inequality, see Arthur S. Alderson & Frangois Nielsen, Globalization and the Great U-Turn: Income Inequality Trends in 16 OECD Countries, 107 AM. J. Soc. 1244 (2002), and Tali Kristal, Good Times, Bad Times: Postwar Labor's Share of National Income in Capitalist Democracies, 75 AM. SOC. REV. 729 (2010). 9. An extended version of the analysis in this section can be found in Donald Tomaskovic-Devey & Ken-Hou Lin, Income Dynamics, Economic Rents, and the Financialization of the U.S. Economy, 76 AM. SOC. REv. 538 (2011) [hereinafter Income Dynamics]. 10. SEYMOUR M. MILLER & DONALD TOMASKOVic-DEVEY, RECAPITALIZING AMERICA: ALTERNATIVES TO THE CORPORATE DISTORTION OF NATIONAL POLICY (1983); MICHAEL USEEM, THE INNER CIRCLE: LARGE CORPORATIONS AND THE RISE OF BUSINESS POLITICAL ACTIVITY IN THE U.S. AND U.K. (1984); MICHAEL USEEM, EXECUTIVE DEFENSE: SHAREHOLDER POWER AND CORPORATE REORGANIZATION (1993); DAVID VOGEL, FLUCTUATING FORTUNES: THE POLITICAL POWER OF BUSINESS IN AMERICA (1989). I1. Marion Fourcade-Gourinchas & Sarah L. Babb, The Rebirth of the Liberal Creed: Paths to Neoliberalism in Four Countries, 108 AM. J. Soc., 533 (2002); Dustin Avent-Holt, The Political Dynamics of Market Organization: Cultural Framing, Neoliberalism, and the Case ofAirline Deregulation, 30 Soc. THEORY 283 (2012). 12. DAVID HARVEY, A BRIEF HISTORY OF NEOLIBERALISM (2005); DAVID HARVEY, THE ENIGMA OF CAPITAL AND THE CRISIS OF CAPITALISM (2010). 13. Krippner, supra note 1; Gerald A. Epstein & Arjun Jayadev,The Rise of Rentier Incomes in the OECD Countries: Financialization, Central Bank Solidarity and Labor Solidarity, in FINANCIALIZATION IN THE WORLD ECONOMY, 46 (Gerald A. Epstein ed., 2005). 14. Greta R. Krippner, The Political Economy of Financial Exuberance, in 30B MARKETS ON TRIAL: THE ECONOMIC SOCIOLOGY OF THE U.S. FINANCIAL CRISIS: PART A RESEARCH IN THE SOCIOLOGY OF ORGANIZATIONS 141(Michael Lounsbury & Paul M. Hirsch eds., 2010). 15. Marquette Nat'1 Bank of Minneapolis v. First of Omaha Serv. Corp., 439 U.S. 299 (1978). 16. Pub. L. No. 96-221, 94 Stat. 132. 17. An extended version of the analysis in this section can be found in Income Dynamics, supra note 9. 18. Northeast Bancorp, Inc. v. Bd. of Governors of the Fed. Reserve Sys., 472 U.S. 159 (1985) (finding state statutes that allowed interstate bank acquisitions by bank holding companies to be authorized by the Bank Holding Company Act and to not violate the constitution). 19. Gramm-Leach-Bliley Act, Pub. L. No. 106-102. 113 Stat. 1338 (1999). 20. See Davis, supra note 2; see also Mauro F. Guill6n & Sandra Suar6z, The Global Crisis of 2007-2009: Markets, Politics, and Organizations, in 30A MARKETS ON TRIAL: THE ECONOMIC SOCIOLOGY OF THE U.S. FINANCIAL CRISIS: PART A RESEARCH IN THE SOCIOLOGY 21. See Guill6n & Suar6z, supra note 21; see also Neil Fligstein & Adam Goldstein, The Anatomy of the Mortgage Securitization Crisis, in 30A MARKCETS ON TRIAL: THE ECONOMIle SOCIOLOGY OF THE U.S. FINANCIAL CRISIS: PART A, RESEARCH IN THE SOCIOLOGY OF ORGANIZATION 29 (Michael Lounsbury & Paul M. Hirsch eds., 20 10); Jacob S. Hacker & Paul Pierson, Winner-Take-All Politics: Public Policy, Political Organization, and the Precipitous Rise of Top Incomes in the United States, 38 POL. & Soc'Y 152 (2010) (referring to this absence of adaptive regulation in the face of new finance sector organizational forms and products as 'regulatory drift'). 22. Historical Statistics on Banking (HSOB), FDIC, http://www2.fdic.gov/hsob/index.asp. 23. Historical Statistics on Banking (HSOB), FDIC, http://www2.fdic.gov/sdi/download large_1ist-outside.asp (providing HSOB data since 1992; data prior to 1992 was requested via The Freedom of Information Act). 24. OZGOR ORHANGAZI, FINANCIALIZATION AND THE US ECONOMY (2008). 25. Guill6n and Suar&, supra note 21 26. See Davis, supra note 2; see also Fligstein & Goldstein, supra note 24. 27. FIRE refers to Finance, Insurance and Real Estate industries. Across the period, the real estate component is fairly stable; the growth in the series is being driven by increased profits in security and investments, insurance, and especially, banking. See further discussion in Income Dynamics, supra note 9. 28. National Income and Product Accounts, U.S. DEP'T OF COM., BUREAU OF ECON. ANALYSIS, http://www.bea.gov/iTable/index-nipa.cfm. CCA stands form Capital Consumption Allowance, which is an accounting estimate on the amount of capital consumed in the production process, which should not be taxed as profits. 29. Andrew Sum et al., The Great Divergence: Real-Wage Growth of All Workers Versus Finance Workers, 51 CHALLENGE 57 (2008). 30. Stephen N. Kaplan & Joshua Rauh, Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes? (Nat'1 Bureau of Econ. Research, Working Paper No. I3270,02007). 31. Epstein & Jayadev, supra note 14. 32. National Income and Product Accounts, U.S. DEP'T OF COM., BUREAU OF ECON. ANALYSls, http://www.bea.gov/iTable/indexnipa.cf . The Ratio is calculated as (FIRE Total Compensation/Private Economy Total Compensation)/(FIRE Total Full-Time Equivalent Employment/Private Economy Total Full-Time Equivalent Employment). 33. Tomaskovic-Devey & Lin, supra note 9. 34. These and other examples come from Ken-Hou Lin & Donald Tomaskovic-Devey, Financialization and U.S. Income Inequality. 1970-2008,118 AM. J. OF Soc. 1284 (2013) [hereinafter Financialization]. 35. David Kocieniewski, G.E. 's Strategies Let It Avoid Taxes Altogether, N.Y. TIMES, Mar. 24, 2011, available at http://www.nytimes.com/2011/03/25/business/economy/25tax.html?pagewanted=all&_r-0. 36. Danny Hakim, Detroit Profits Most from Loans, Not Cars, N.Y. TIMES, July 22, 2004, available at http://www.nytimes.com/2004/07/22/business/detroit-profits-most-fromloans-not-cars.html. 37. We calculate realized profits as the sum of accounting profits before tax and the capital consumption allowance. 38. See Davis, supra note 2; see also NEIL FLIGSTEIN, THE ARCHITECTURE OF MARKETS: AN ECONOMIC SOCIOLOGY OF TWENTY-FIRST-CENTURY CAPITALIST SOCIETIES (Princeton University Press 2001). 39. Frank Dobbin & Dirk Zorn, Corporate Malfeasance and the Myth of Shareholder Value, 17 POLITICAL POWER AND SOCIAL THEORY, 179-198 (2005); DAN KRIER, SPECULATIVE MANAGEMENT: STOCK MARKET POWER AND CORPORATE CHANGE (2005). 40. See Davis, supra note 2; see also Engelbert Stockhammer, Financialisation and the slowdown of accumulation, 28 CAMBRIDGE JOURNAL OF ECONOMICS, 719-741; USEEM, supra note 10; MICHAEL USEEM, INVESTOR CAPITALISM: HOW MONEY MANAGERS ARE CHANGING THE FACE OF CORPORATE AMERICA (BasicBooks 1996). 44. Evidence for this trend can be found in Ken-Hou Lin, Financialization and Firm Employment Dynamics, 1982-2005 (2013), (unpublished manuscript) (on file with the University of Massachusetts, Amherst) available at http://papers.ssrn.com/sol3/papers.cfm?abstractid=2284507. Specific evidence for the firms mentioned here can be found in Casey Hoerth, These Companies Are Minting Debt to Buy Back Stock, SEEKING ALPHA (Apr. 8, 2013), http://seekingalpha.com/article/ 1326111-these-companies-are-minting-debt-tobuy-back-stock. 45. Evidence for this trend can be found in Jon Faust, Will Higher Corporate Debt Worsen Future Recessions?, FED. RESERVE BANK OF KANSAS CITY ECON. REV., Mar. 1990, at 19; and Thomas I. Palley, Financialization: What It is and Why It Matters, in FINANCELED CAPITALISM: MACROECONOMIC EFFECTS OF CHANGES IN THE FINANCIAL SECTOR 29 (Eckhard Hein et al. eds., 2008). 46. That the shareholder value movement created such pressures is well documented. See, e.g., Jennifer E. Bethel & Julia Liebeskind, The Effects of Ownership Structure on Corporate Restructuring, 14 STRATEGIC MGMT. J. 15 (1993); Art Budros, The New Capitalism and Organizational Rationality: The Adoption of Downsizing Programs, 1979- 1994, 76 Soc. FORCES 229 (1997); Art Budros, Organizational Types and Organizational Innovation: Downsizing Among Industrial, Financial, and Utility Firms, 15 Soc. F. 273 (2000); Art Budros, The Mean and Lean Firm and Downsizing: Causes of Involuntary and Voluntary Downsizing Strategies, 17 Soc. F. 307 (2002); Art Budros, Causes of Early and Later Organizational Adoption: The Case of Corporate Downsizing, 74 SoC. INQUIRY, 355 (2004); Taekjin Shin, The Shareholder Value Principle: The Governance and Control of Corporations in the United States, 7 Soc. Compass 829 (2013). 47. S&P Compustat/EEO-1 Reports proprietary data file compiled by authors. Panel B standardizes both trends using their initial values 48. S&P Compustat/EEO-1 Reports proprietary data file compiled by authors. Financial investment includes items such as certificates of deposit, commercial paper, government and other marketable securities, and cash 49. The technical paper which contains the details of this analysis is Ken-Hou Lin, Financialization and Firm Employment Dynamics, 1982-2005 (2013), (unpublished manuscript) (on file with the University of Massachusetts, Amherst) available at http://papers.ssrn.com/sol3/papers.cfm?abstractid=2284507. The sample is drawn from all publicly traded non-finance firms that were ever listed in the Fortune 500 between 1982 and 2005 and includes 834 firms and 14,377 firm-year observations 50. See Ken-Hou Lin, The Rise of Finance and Firm Employment Dynamics, 1982- 2005 (June 24, 2013) (unpublished manuscript), http://papers.ssrn.com/sol3/papers.cfm?abstract-id=2284507. 51. National Income and Product Accounts, U.S. DEP'T OF COM., BUREAU OF ECON. ANALYSIS, http://www.bea.gov/iTable/index.nipa.cfn; SOI Tax Stats - Corporation Complete Report, IRS, http://www.irs.gov/uac/SOI-Tax-Stats-Corporation-CompleteReport; Current Population Survey, US CENSUS, http://www.census.gov/cps/. 52. The formal development and presentation of these models can be found in Financialization, supra note 35. 53. These do not sum to the total because there are other variables in the model not reported here. 54. See Financialization, supra note 35. 55 MISSING 56. See Financialization, supra note 35. 57. See ANAT ADMATI & MARTIN HELLWIG, THE BANKERS' NEW CLOTHES: WHAT'S WRONG WITH BANKING AND WHAT TO DO ABOUT IT (2013). 58. See Peter Lattman, A Guilty Plea over Mortgage Bond Fraud, DEALBOOK (Apr. 13, 2013), http://query.nytimes.com/gst/fullpage.html?res=9CO7E4DB 1 F3FF930A25757COA9659D8 B63. 59. See Jesse Eisinger, Swap Market, Like Libor, Is Vulnerable to Manipulation, DEALBOOK (July 18, 2012, 12:15 PM), http://dealbook.nytimes.com/2012/07/18/behindcredit-default-swaps-market-a-cartel-left-open-to-collusion/. See also Jessica SilverGreenberg, MasterCard and Visa Settle Claims of Antitrust, N.Y. TIMES, July 14, 2012, at B1; see also Matt Taibbi, The Scam Wall Street Learned from the Mafia, ROLLING STONE, June 21, 2012, available at http://www.rollingstone.com/politics/news/the-scam-wall-streetlearned-from-the-mafia-20120620. 60. Graham Bowley, With Settlement, Blankfein Keeps His Grip, DEALBOOK (July 16, 2010, 4:27 AM), http://dealbook.nytimes.com/2010/07/16/with-settlement-blankfein-keepshis-grip/; Joe Nocera, Op-Ed., Rigging the IP.O. Game, N.Y. TIMES, Mar. 10, 2013, at SRI. 61. See JOHN KAY, DEP'T FOR Bus., INNOVATION & SKILLS, THE KAY REVIEW OF U.K. EQuITY MARKETS AND LONG-TERM DECISION MAKING: FINAL REPORT (2012). 62. See the discussion of the efficient markets hypothesis and political capture in James Crotty, Structural Causes of the Global Financial Crisis: A Critical Assessment of the 'New Financial Architecture,' 33 CAMBRIDGE J. EcoN. 563 (2009). 63. The Editors, Why Should Taxpayers Give Big Banks $83 Billion a Year?, BLOOMBERG (Feb. 20, 2013), http://www.bloomberg.com/news/2013-02-20/why-shouldtaxpayers-give-big-banks-83-billion-a-year-.html.