The minute anyone says “income inequality” half the country stops listening. They know this is code for some tax-the-rich-and-redistribute-to-the-poor scheme aimed at punishing success and rewarding failure. And any behavioral psychologist will tell you that’s not a reinforcement system you want to service.
On the other hand, turning a blind eye to the fact that 60 percent of Americans now borrow money to pay for basics such as rent, food, gasoline and health care, is just as misguided. There’s no such thing as an economic recovery where more than half of the country doesn’t participate.
So if punishing success, and ignoring the fact that Americans are going into debt to stay afloat aren’t the answer, then what is?
Well, for starters, we have to stop calling it “income inequality.” Whenever a catch phrase is used to mask a larger, more complex issue you can be sure we’re headed down the wrong path. Treating a symptom never did anything for curing the disease.
Everyone knows this can’t last. There is no economic model wherein growing income disparity ends well. And since we have the benefit of knowing this beforehand, we can act to avert the disruption that other economies in similar circumstances have faced.
It turns out income inequality isn’t about the growing gap between the wealthiest and poorest. It’s one of many signs capitalism isn’t working the way it did until the mid-Seventies. That’s when a historical bifurcation between worker productivity and wages began. And continued. Right on up to today.
Fact is, between 1948 and 2011, the productivity of American workers soared a whopping 254 percent. Imagine a graph with a line that begins at the bottom left corner and continues to the top right corner. That’s what U.S. worker output looks like over a 60-plus year period. Now imagine a second line paralleling productivity gains right on up to the mid-Seventies, when suddenly compensation flat-lines. Without warning, American workers stop reaping the benefits of more output.
So, what happened? What caused wages to stop keeping pace with productivity - to the point where “income inequality” became an issue?
The short answer is those wage increases were diverted to shareholders and investors.
Here’s what happened (and how to fix it):
Prior to the Seventies, shareholder value was an organic byproduct of how well a company performed. When a business grew market share, expanded products and services, improved efficiency and profitability, the value of their stock increased commensurate with those advances. If you happened to own shares - or were a capital investor - you were rewarded with a nice profit. But shareholders and investors were not the only beneficiaries. Businesses also re-invested profits into more and better capital equipment, new facilities, long-term research and development, expansion into new markets, and yes, in the workers responsible for the prosperity.
But as tech IPO’s came on the scene in the early Seventies, pressure to meet zealous analyst expectations began to mount. The driving force behind an obsession with quarterly forecasts was venture capital. By 1972, tech venture firms like Kleiner, Perkins, Caufield and Byers and Sequoia Capital had perfected the recipe for elevating the market value of their portfolio companies in quick order. Their sole mission was to take start-ups public and reap their profit as quickly as possible. It didn’t take long before they had these quick flips down to a science.
Tech VC investments became so profitable during this period – rolling out one successful company after another (Tandem, Genentech, Apple, Compaq, Electronic Arts, Digital Equipment, etc.) - that by the end of the Eighties there were over 650 venture capital firms operating in the U.S. -- managing over $31 billion.
As the dotcom era came to full fruition and short-term investing, quick value building, and fast exits grew ever more popular, public companies were under the gun to show profits every 90 days. This had a devastating effect on industries that required long-term or risky investments in research and development.
Overnight, Boards and CEO’s began demanding 3-6 months ROI’s, and businesses began looking for ways to subcontract primary research, license or acquire. Some even resorted to buying back their own stock, making premature announcements and stuffing their channels to keep share values on track.
The pervasive short-sightedness also had a detrimental impact on how companies viewed employees. Instead of treating them as the “value creators” of the company, workers became an operational expense. And soon benefits, wages, training, pensions and every other thing that could be cut, was cut.
As businesses went looking for ways to meet quarterly analyst expectations, these wage increases and benefits were diverted to shareholders and investors in the form of higher returns.
It is only now, many decades later, that we see the toll this diversion has taken on the American worker. Sixty percent borrow every year to stay alive, while at the same time Wall Street breaks new highs.
But everyone knows this can’t last. There is no economic model wherein growing income disparity ends well. And since we have the benefit of knowing this beforehand, we can act to avert the disruption that other economies in similar circumstances have faced. We can use foreknowledge to our advantage.
In truth, many public companies are waking up to the fact they can no longer kowtow to Wall Street and must return to reinvesting the way business did prior to the Seventies.
Progressive companies like Costco, Starbucks, Home Depot, Whole Foods, and others, are voluntarily raising worker wages to parallel productivity and profitability. They are making long-term investments rather than allowing themselves to be held captive to short-term ROI’s. And they are returning to a healthier, sustainable form of capitalism – the kind that puts shareholders, producers and customers on equal footing.
Don’t call it income equality. Call it short-sightedness. Call it venture capital run amuck. Call it the absurdity of requiring businesses to report profits every 90 days. Call it a temporary problem the free market can, and will, fix—without any help from the government.
It’s already happening.
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