Mike Konczal is a fellow with the Roosevelt Institute, where he works on inequality and financialization.
That the largest financial institutions pose both an economic and political problem is clear, but the danger runs deeper than this. It’s not just about the biggest banks being “Too Big to Fail.” At its core, financialization is about reworking the real economy, the government and ourselves to serve financial needs.
It’s beyond dispute that the largest banks are out of control. The financial sector’s huge growth rate has enabled the rise of “the 1 percent.” Government officials hint about the biggest banks being “too big to jail” and no matter what the latest terrible wrongdoing is, they get away with just a slap on the wrist.
But the effects of finance on the corporations and businesses we all work in is far more important. There has been a revolution in the way corporations are run since the 1980s, and the dominant theme is that shareholders are in charge. This turns the focus of business toward giving shareholders more and more payouts at the expense of real investment.
The numbers are striking. Total shareholder payouts in 2014 exceeded $1.2 trillion, an amount roughly in line with total corporate profits. This is the new normal: From the 1940s through the 1960s, closer to a quarter of profits went to shareholder payouts. During the mid-century period, companies borrowed to fund investments in research, infrastructure, technology and personnel. Now they borrow to fund buybacks and dividends. Finance used to be a way of getting money into our productive enterprises. Now it’s a tool for taking money out of them.
This has serious macroeconomic consequences. There’s a lot of attention on the Verizon strike, but less attention to Verizon’s payouts to shareholders. Verizon did a $5 billion stock buyback last year to boost its stock price, on top of an already generous dividend. If that money had instead been divided among 180,000 workers, it would have come to $28,000 per person — showing that there’s plenty of profit to be shared across the company. Or, if it costs $500 to install FiOS in one household, that money could have been used to help 10 million households cross the digital divide. More generally, in a period with slack demand, low interest rates and high profits, we’d expect there to be more investment to take advantage of profitable opportunities, driving down those very profits. There is not, and the increasing power of finance has played a role in making this the case.
Beyond the material dimensions of whom corporations should work for, there’s also an ideological component. Increasingly, we regard ourselves as miniature financial firms and view social goods as mere financial claims. In the words of business professor Gerald Davis, we see ourselves living in a “portfolio society,” one where “entire categories of social life have been securitized, turned into a kind of capital.”
Instead of education as a right, it’s an investment in human capital best funded through student loans. Instead of a focus on building out a public pension system, we encourage people to manage their own retirement risks. The state becomes submerged and hidden from our everyday lives, working through elaborate and blunted market mechanisms rather than helping citizens directly. And instead of seeing economic problems as requiring collective solutions, they are seen as private, individual risks to be managed. This exacerbates inequality, as it is the well-off who can most take advantage of this system. Those with little money left over to navigate the endless maze of tax savings programs meant to provide economic security are left behind.
It’s possible to imagine a world where the financial sector doesn’t explode so often, or even one in which such crises don’t have the devastating results we associate them with today. It’s also possible to consider a society in which people aren’t seen as individual manipulators of elaborate financial portfolios of “human capital,” but instead citizens deserving of basic economic rights. But to get to either of these places, it will be crucial to imagine a world in which finance allows the economy to thrive, instead of using it as a piggybank to raid for short-term profits. We have to solve financialization first. Only then we can start to tackle the broader damage it has done to our society.
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