Saturday, April 8, 2017

Greed at Top Leads to Inequality

Vice reported:
A wave of new research shows how as corporations get bigger, the share of money out there going to actual workers declines. 

There's been roughly a 10 percent decline in what's known as "labor share" over the past 30 years. (Barkai's paper looked at the non-financial corporate sector, which encompasses roughly 80 million workers.) What this means is that out of the total number of goods and services produced by corporations, less of it by percentage terms (10 percent less) is going to pay for salaries and benefits—a.k.a. income.
Consummate insider Larry Summers offered the monopoly answer to rising inequality.

“Only the monopoly-power story can convincingly account” for high business profits and low corporate investment. 
Private equity underwriters (PEU) can account for high business profits and low corporate investment.  Private equity underwriters prioritize interest, dividends and management/deal fees over capital and human resource investments.  Money is frequently spent on interest expenses several orders higher than pre-buyout levels.  Once cash begins to build corporate capital is spun off to PEU sponsors as dividends or special distributions.  

Vice cited research that supports this practice.  Researchers found

"spending on capital inputs, which includes robots, is declining even faster than spending on labor. As Barkai put it, "Measured in percentage terms, the decline in the capital share (30 percent) is much more dramatic than the decline in the labor share (10 percent)." 
Private equity exploded the last thirty years.

Ten years ago HBR lauded private equity as a model for public companies to follow.  That meant focusing on profits and optimizing capital strategies, both to the detriment of worker pay and benefits.

Private equity became ubiquitous in our economy with its rapid growth in assets under management (AUM) from 2000-2015.

PEUs bought companies at over the twice the rate they sold them the last five years.

Sometimes PEU affiliates have the misfortune of being sold to another private equity underwriter.

Might things turn for the little people?  Not likely.  Billionaire President Donald Trump and his Wall Street/PEU administration offer little hope.   Private equity's preferred taxation via carried interest continues a decade after it was raised as unfair.

Might benevolent corporate chiefs send a little more employees way?  Not if it reduces their executive incentive compensation.

What if the rare CEO wants to put workers interest above their own?  They might have a PEU owned benefits consultant to get through.

Private equity firm Blackstone Group LP (BX.N) has agreed to acquire insurance broker Aon Plc's (AON.N) employee benefits outsourcing business for around $4.8 billion.
Blackstone's Stephen Schwarzman is a Trump friend and advisor.  Greed is the water in which business and political leaders swim.  Doing things at the expense of workers won't likely change anytime soon.

Update 4-15-17:   Carlyle's Sandra Horbach described how our world became PEU.