Nearly a year after they lost the presidential election, centrist and right-leaning Democrats continue to hound their rivals within the party. Last week, Democratic National Committee Chairman Tom Perez announced his nominees for new at-large DNC members, purging a number of progressives from leadership positions. And on the same day, former Clinton pollster and Fox News Democrat Douglas Schoen published an op-ed in the New York Times that red-baited the Bernie Sanders crowd for “advocating wealth distribution through higher taxes” and urged the Democratic Party to “strengthen ties to Wall Street.”
We might forgive Schoen for believing that Wall Street “brings to the market the world’s most innovative products and platforms that expand the economy and create jobs.” After all, this carefully crafted — but misleading — claim has been propagated by the financial industry for nearly a century. Beginning in the 1970s, it became an unquestioned article of faith among neoliberals in both political parties. The size of the financial sector has grown relative to the rest of the economy, even as the pace of innovation and economic growth has slowed in the United States.
In truth, private-sector finance — Wall Street — has historically played a relatively minor role in funding innovation compared with the public sector and with internal reinvestment by large corporations. But today, both of these sources are sputtering. The Trump administration has threatened severe cuts to public funding for research and development, while corporate R&D languishes thanks to CEOs’ shortsighted obsession with stock market performance. Democrats need to ignore Schoen’s tiresome canards and rededicate themselves to an economic policy that will revive public and corporate investment.
In the 20th century, Americans’ tax dollars advanced innovation-based growth in key industries like computing, energy, biotechnology and nanotechnology. By supporting research and development through loans, guarantees, tax breaks and procurement contracts awarded to private firms, and through grants and reimbursements awarded to nonprofit research institutions, our government has provided the kind of “patient” finance that transformative innovation requires. That public investment is vital, because government funding is what attracts private investment, which otherwise tends to avoid deep, long-term commitments with uncertain outcomes.
Internal reinvestment by major corporations also funded breakthroughs that spurred economic growth and rising standards of living after World War II. Consider the stunning output of AT&T’s Bell Labs: the transistor, the laser, solar energy cells and batteries, radio astronomy, the microchip, programming languages C and C++, the UNIX operating system, mobile telecommunications, the satellite — and six Nobel Prizes along the way.
Nokia now owns Bell Labs. It shuttered basic science research in 2008, closing down the innovation pipeline. Today, it employs only one-quarter of the scientists and engineers that it did during its midcentury heyday.
Nokia is part of a broader trend. Before 1980, each new dollar of corporate cash flow or corporate borrowing yielded about 40 cents in corporate reinvestment. Since the mid-1980s, however, that same dollar has brought only about 10 cents of internal investment.
What’s happened to that corporate money? Today, Wall Street moves it from corporations to investors, not the other way around. In the last decade, S&P 500 corporations spent $7.2 trillion to buy back their stock and pay dividends to shareholders. In other words, our largest and most profitable corporations forgo internal R&D to return their surpluses to current shareholders. This swells the pocketbooks of executives whose pay is linked to stock price, but it contributes nothing to innovation or to employment.
And that corporate investment matters. The last time the United States experienced a major burst of productivity growth — during the so-called Internet Revolution — existing corporations provided between one-half and one-third of all funding for early-stage technology development, while the federal government delivered roughly another quarter. Venture capital firms contributed a paltry 8 percent.
So what does Wall Street contribute to entrepreneurialism and innovation?
Not much, actually. Today’s entrepreneurs depend heavily on their own (and family) savings to finance a new business. In 2015, only 17.7 percent of new businesses reported receiving a loan from a bank or financial institution. When they do get bank loans, it’s small, local banks that are more likely to grant them. And while 10.3 percent of entrepreneurs resorted to carrying a balance on their personal credit card to sustain their businesses, only 0.5 percent received money from outside investors.
It’s often claimed that venture capital funds deliver investors’ money to promising start-up companies, playing the vital role government funding once did. But the real purpose of venture capital funds is to make money for investors by buying firms cheap and selling them dear. Venture capitalists prefer to select companies that they believe can be sold quickly, at a high valuation. Whether those companies turn a profit, create long-term value, generate good jobs or develop innovations that improve our lives or address societal problems in meaningful ways — these are secondary concerns, if even that.
If we look beyond early-stage funding, it becomes even more evident how little Wall Street contributes to innovation, growth and jobs. Only 15 percent of all the money in our financial system flows into the real economy. The rest stays inside the financial system itself, lent to finance real estate speculation or to fund trading in financial assets and derivative products — the only innovation Wall Street can properly claim to its credit and hardly the stuff of positive societal or economic transformation.
As entrepreneurship among millennials declines, Democrats need to recognize it’s not “anti-business rhetoric” that discourages “entrepreneurs and small businesses,” as Schoen claims, but an inability to save anything from inadequate and stagnant wages, a dearth of loans, skyrocketing student debt and the fear of losing affordable, quality health care.
Democrats must address these issues if they care about innovation. Major increases in government funding for research and development — to the private sector and to our public research universities — also must be a key economic priority. And the Democratic Party must fight corporate short-term thinking by supporting restrictions on stock buy-backs (which existed before 1982) and reform of executive pay to de-link it from short-term stock performance.
And as Republicans threaten to overhaul the tax code behind closed doors to benefit the wealthy few, Democrats must fight to preserve the progressive income tax. This feature of our tax code has been broadly accepted in this country — and in other Western democracies — for more than a century.
Yet time and again, the erroneous assumption that Wall Street channels our savings and recycles investors’ returns into the real economy has been trotted out to defend polices that only make the wealthy wealthier. (These include the tax preference for income from capital gains and the tax loophole for the ‘carried’ interest that make up the compensation of fund managers.) What about the bottom 50 percent of the U.S. wealth distribution that holds no net wealth? What about the racial wealth gap that shows no sign of narrowing?
Schoen’s call for the Democratic Party to renew its embrace of Wall Street and the policies it favors must be music to the ears of big donors. But it’s bad economic policy. And it will lose elections by driving away the base — 82 percent of whom say our economic system “unfairly favors powerful interests” — just like it did for Hillary Clinton.