Economics must adapt to structural deficiencies affecting both businesses and workers; Deficiencies that itself created.
This was written in May of 2020, at the heights of the pandemic – certainly things have changed:
Friday morning, May 8th the Labor Department released its monthly employment data. It was the darkest monthly employment figures on record. Through the March and April job reports, 21.4 million Americans lost their jobs1.Between 2010 and February of 2020, the United States created almost 22.7 million jobs2. With many continuing to file for unemployment, the decade plus of job creation following the 2008 financial crisis will be wiped out in a little under 3 months. To visualize this, The New York Times ran their frontpage section showing the monthly employment figures. April’s 20.5 million lost jobs runs the entire length down the paper. An important statistic to you, the reader; 1 in 4 people between 20 to 24 years old are unemployed3. This pandemic has a disproportionate effect for many Americans across the income spectrum. The vast majority of Americans that work in the services industry have either felt the brunt of a layoff or been furloughed, or fortunate to continue working, but in an ongoing and ever elusive health crisis that’s evolving faster than employers can prepare. Many are worried about unpaid bills, job security, or fighting the labyrinth of our country’s antiquated welfare programs. For the few in the top percentile of the income bracket, whose pay is tied more to the stock market, the story is much different. Snap Inc., the parent company of the popular social media app worth approximately $20B, rose almost 10% in value the week before the horrific data was released by the Labor Department4. That week, Evan Spiegel, the co-founder and CEO of Snap Inc., sold almost 4 million shares, worth $55 million5. Evan owns over 10% of the total company, and through a dual share-class ownership structure similar to that of Google or Facebook, Evan owns 54% of the voting-rights (actual decision-making rights of a company). His co-founder, Bobby Murphy, owns the other 46% of the voting rights6. I hope you go back and re-read those two sentences. Note that a company worth $20B owned by many individuals fortunate enough to have a 401K, or dumb enough to trade the stock on Robinhood, or engineering and software developers at his company, have 0% right or say in the company’s business. You can spend billions of dollars trying to buy the company outright, but even then you can’t change the policy that notifies users on Snapchat when their snaps are screenshotted. You would need Evan’s shares to do that. This goes against what you are taught in undergraduate economics. If you buy a company, you control it. The unique dual share-class structure arising in tech companies blows this idea out of the water. Instead, one individual, like Evan Spiegel, has essentially the entire say of what goes on at the company; complete power.
The vast majority of us make our living off of wages. Wages that were created by jobs, like those who were hired in the last decade. The jobs created were waiters and waitresses paying off student loans. Some are trying to support their family through unforeseen circumstances. Others take on jobs in the summer to gain life or career experiences and move out of their hometowns. These jobs, albeit lower-pay, have evaporated. This eliminated a way for them just to make ends meet. Meanwhile, the Evan Spiegel type makes a living off of selling his company’s stock, to the tune of millions of dollars. That is how he, along with others in an exclusive slice of the top 1%, make a living. According to a study conducted by the Congressional Research Service, real wage trends (wages adjusted for inflation) for the median worker has increased just 6.1% cumulatively over the course of nearly 40 years, from 1979-20187. Over that same time period, the real S&P 500 return (adjusted for inflation) is 2,005.5%8. That means the majority shareholders of companies, the wealthy, and a small slice of the population, have gotten exponentially more wealthy in the past 4 decades. While the vast majority of Americans haven’t. You can dive deeper into these trends, slicing data by demographics, by age, by zip code, etc. You will find even more worrying problems. This topic, inequality, has been covered at length by many labor economists. Notably, Raj Chetty, a distinguished young economist at Harvard. His work has covered “The American Dream” that is, upward economic mobility. Paul Krugman, the Nobel prize winning economist and columnist, won his Nobel prize covering international trade. He helps breakdown attributes like technological innovation and globalization as factors that have both benefited consumers, but also contributed to income inequality. Thomas Piketty, the Nobel prize winning french economist, wrote “Capital in the 21st Century” which was an immersion and historical analysis based on European and American inequality since the 18th century. Despite the economists like Raj Chetty, Paul Krugman, and Thomas Piketty contributing mightily to the economics profession, their influential work on their respective subjects isn’t disseminated to the masses. Meanwhile the influential economists like Milton Friedman, Paul Samuelson, and Eugene Fama have had their work circulated and carved into the founding frameworks of Economics 101 and courses taught at almost all education levels. Whether you paid attention in class or not, these economists’ work were what you were learning.
This isn’t to knock against capitalism, it’s worked great to build America, employ millions, and lift everyone’s standard of living. This isn’t an ode to communism either, labor needs businesses to succeed too. Company’s earnings haven’t kept pace with their own valuations in the stock market. Corporate earnings since 1989 have increased 592%, far better than median worker, but keep in mind S&P 500 returns have increased almost 4x that amount9. It is more pronounced when you look at the last decade. Corporate earnings have increased 30%, that is in comparison with the 192% increase in the S&P 50010. Before 1989, the trend was flipped; corporate earnings far outpaced stock market returns. The company that Evan Spiegel runs, Snap Inc., hasn’t been profitable its entire existence11. There are plenty of companies out there where this is the same case. It is easier for labor to demand a fairer share of corporate profits when they have increased dramatically. But they haven’t, it is much harder for labor to argue for better wages, which remain stagnant for decades when shareholders’ gains have outpaced our own economy. This is what the Occupy Wall Street movement should’ve been about. And companies’ management teams’ explanations are understandable. They are doing what they were taught in business school; maximize shareholder’s wealth. As pointed out, they’re doing an extremely good job of that. That’s how they retain their job. It’s what was taught by the works of Milton Friedman, Paul Samuelson, and Eugene Fama. If only they were taught the lessons of Raj Chetty, Paul Krugman, or Thomas Piketty, that the data on inequality wouldn’t be so stark.
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References:
Historical employment information was obtained by the Bureau of Labor Statistics.
https://www.bls.gov/news.release/empsit.nr0.htm
https://data.bls.gov/timeseries/CES0000000001?output_view=net_1mth
The New York Times front page for May 8th, 2020 can be found here, this is also where the unemployment data by age can be found.
Data referencing Snap Inc. can be found below:
The congressional research report covering stagnant wages can be found here.
S&P 500 return information and corporate profit information can be found below:
http://www.econ.yale.edu/~shiller/data.htm
https://fred.stlouisfed.org/series/CP
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