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Quite a few authors have pointed out that the "financialization" of American businesses, with a focus less on innovation or investing in their workforce and mor

Quite a few authors have pointed out that the "financialization" of American businesses, with a focus less on innovation or investing in their workforce and more on massaging their numbers to meet shareholder expectations, has created a lot of short-term enrichment for the super-wealthy while absolutely destroying the middle class as we know it. This seems like more fuel for that fire.

pdxandi 2y ago
I’ve shared this opinion for a while, and would love to hear more informed opinions. Do you have any links to articles you’d recommend reading?
- spenrose 2y ago
  Trade Wars are Class Wars: https://www.amazon.com/Trade-Wars-Are-Class-International/dp/0300244177 https://www.amazon.com/Trade-Wars-Are-Class-International/dp...
- languagehacker 2y ago
  I'm currently reading "When McKinsey Comes to Town" and just finished "The Man Who Broke Capitalism" about Jack Welch and GE.
SoftTalker 2y ago
Really, anyone with a 401k or similar investments has benefited from this. That's a lot of middle class folks. Your parents, your grandparents, and very likely you. It's far from limited to the super-wealthy.
- anotherhacker 2y ago
  Not quite. This behavior leads to firing of middle-class workers. John Deere just laid off 300 workers, moved the factory to Mexico, engaged in buyback, and gave the CEO a huge pay. So, yeah, it helps your 401k, but in the mean time you don't have a job. And if you do have a job, your salary is not increasing in line with inflation...
  - TylerE 2y ago
    Companies should be prohibited from doing buybacks for, say, 5 years, after any layoff.
    - Ekaros 2y ago
      Just straight up ban them. Have to pay taxes on investment due to dividends? Well too bad for you.
      - marcosdumay 2y ago
        Just tax them, they'll disappear.
        mulmen 2y ago
        Tax what? The buy back? How does that work? The seller is already paying capital gains tax.
        marcosdumay 2y ago
        That doesn't require that the government don't tax the profit that allowed the buyback. The US taxing almost no kind of corporate profit is an oddity, and they can carve more exceptions to any kind of reinvestment they decide.
    - frikk 2y ago
      I recently learned that buybacks and short selling historically have not been legal, its only in recent history that they've been standard practice en large (1982 is when buybacks were legalized, I think)
      - layer8 2y ago
        It’s part of Reaganomics. Buybacks weren’t explicitly illegal beforehand though, it just wasn’t clear when they would count as stock price manipulation.
- joejohnson 2y ago
  The 401k is an invention that is yet to prove its efficacy. The first 401ks were opened in 1978, so if you were entering the workforce then you’d be retiring this decade! So, we will see if this privatization of pensions really benefits us all or merely enriched a generation of asset managers while absolving the corporate and the government from providing pensions for workers.
  - kbolino 2y ago
    Traditional pensions are fundamentally unsustainable endeavors under modern demographics. You cannot pay decent benefits to a growing retired population while collecting reasonable dues from a shrinking working population. As we've seen, all retirement funds, even the remaining pensions, have largely switched their investments to the stock and bond markets in the vain hope that this fundamental conundrum will be solved through moonshots and financial tricks. The 401(k) is just one piece of a much bigger puzzle.
    - vineyardlabs 2y ago
      I agree with your general idea here but could it not be argued that pensions are just an abstraction on top of 401ks in the sense that if the demographics are shifting such that non-producers outweigh producers then you would expect the economy and business profits to suffer. These effects would cause broad slow growth or even reductions in business valuations, and therefore poor performance in investment accounts broadly.
      - kbolino 2y ago
        Yes, and I think that describes the past few decades in Japan (among other factors). Other options included pensioners taking a haircut and/or workers taking a paycut, neither of which is particularly palatable and still runs us into the ground eventually. Increasing corporate taxes could square the circle for a little while, but then corporations would slowly move more operations offshore, decreasing tax revenues eventually anyway. There's also the option of cutting other government expenditures, but eventually that stops working and at least some of the things that were cut can't stay un(der)funded forever. The only other (distantly) feasible idea I can think of would be, again with an eye to Japan (of the past), near-total isolation from other countries economically, but that would have an even more substantial stagnating effect.
- ryandrake 2y ago
  It's a lot, but still it's only ~50% of US households[1]. So the other 50% are not benefiting at all from a rising stock market, except very indirectly (companies with happy earnings reports less likely to lay them off). And even that indirect benefit is not a given. 1: https://www.federalreserve.gov/econres/scf/dataviz/scf/chart/#series:Retirement_Accounts;demographic:all;population:1;units:have https://www.federalreserve.gov/econres/scf/dataviz/scf/chart...
- delfinom 2y ago
  Yep. But I'm so extremely skeptical the "your 401k will always go up by 10%" argument is going to continue to hold for more decades. Eventually the blood they are squeezing out from companies and consumers will run out...
  - gizmo 2y ago
    If the US economy keeps growing then American businesses will do well and the stock market will reflect that. It’s hard to image scenarios where the American economy shrinks while other countries have growing prosperity.
    - ok_dad 2y ago
      Maybe if prices doubled over a few years, housing was out of reach, and salaries were stagnant it would be harder to buy stuff and the economy would suffer. Whoops!
    - oezi 2y ago
      If the US economy grows 5% and stocks grow more, then there must be a reckoning coming at some point. If it is 5 years or 10, nobody knows.
    - consteval 2y ago
      > It’s hard to image scenarios where the American economy shrinks while other countries have growing prosperity I don't understand this viewpoint - this seems like the obvious end result of the last 50 ish years of tomfoolery. The US doesn't make anything anymore, our economy is purely theoretical. We're lying on a huge scale and scamming, and that's how we have our economy. We gave up entire industries - and almost all of them - to foreign countries. China, Korea, Japan, Bangladesh and on and on. Yes, these companies are "American". In name only. All the capital, all the means of production - which is the actual "economy" here - is being held by not us. We literally just gave up our means of production. What we did then is made up a bunch of fake jobs to justify these companies in the US and to extract money from these developing countries. It's only a matter of time before they wisen up and realize they have all the capital. Granted, not all industries are like this. Just most.
- deleted 2y ago
  [deleted]
- nostrademons 2y ago
  Only if it's still high when you go to retire. It probably will not still be high when you go to retire, because the very act of many people drawing on their stock portfolios to fund retirement will put downward pressure on stock prices. Ironically, if you happen to have made lots of money in the stock market over the last 10-15 years, your best strategy may be to retire now, mid-career, even if you don't have enough to last the rest of your life. Basically you're arbitraging the large labor force of today to fund your time off through high stock values. Then when the market crashes, the recovery will likely be in all-new firms in all-new industries, so you reinvent yourself to capitalize on the labor shortage then. Or even better, start one of those new firms and capitalize on all the workers who need to go back to work because they can't afford their retirements. You can't do that with a 401k, though, it'd have to be a taxable investment account that you can withdraw at will.
- sangnoir 2y ago
  401k's are a lot like a bunch of ranchers granting their herds 0.01% of their Cattle futures portfolios. Less hyperbolic - the existence of large pools of capital without a voice on the boards is partly responsible for the management-led short-termism mess we're in.
jeffreyrogers 2y ago
The problem with this theory is that by most metrics the middle class in America is doing very well. Homeownership rates are high (significantly higher than Europe), incomes are higher (again, median income in the US significantly higher than even wealthy European countries like Germany), and consumption of things like cars and other manufactured goods is higher than ever.
- moffkalast 2y ago
  > Homeownership rates are high (significantly higher than Europe) What's your data source for that if you recall, just curious?
  - n4r9 2y ago
    This dataset suggests that it's around 65.7%, higher than the 62.9% in 1965 but lower than the 2004 peak of 69.2%: https://fred.stlouisfed.org/series/RHORUSQ156N https://fred.stlouisfed.org/series/RHORUSQ156N . Not sure that "consumption of manufactured goods" is a particularly good metric for measuring wellbeing, though.
    - moffkalast 2y ago
      That covid spike in 2020 is pretty interesting. Probably the percentage of people that rent something close to their workplace and could move home when WFH became a thing. > The homeownership rate is the proportion of households that is owner-occupied. I suppose there probably aren't better metrics available, but someone who lives in a rented out penthouse that's being financed by owning 20 rented out apartments wouldn't show up as a homeowner under this which is hilarious. From what I can find [0] homeownership rates in the EU are typically north of 70%, and up to to 90% in some countries. Germany seems to be a real outlier at only 50%. [0] https://ec.europa.eu/eurostat/cache/digpub/housing/bloc-1a.html#:~:text=Over%20two%2Dthirds%20of%20people,30%20%25%20lived%20in%20rented%20housing https://ec.europa.eu/eurostat/cache/digpub/housing/bloc-1a.h....
      - n4r9 2y ago
gizmo 2y ago
Businesses are primarily valued based on their discounted future cashflows. American businesses are worth much more than their European counterparts because investors (correctly) expect that American businesses will more aggressively seek profit. By contrast, businesses that don’t make money and that are not expected to make (much) money in the future are worth nothing. In most countries the stock market doesn’t go up. European stock markets needed ~15 years to recover from the 2008 highs because European businesses don’t make money. The Japanese stock market has languished for 30 years. Chinese businesses that get too cocky get the Jack Ma treatment. Turkey and Venezuela had their currencies collapse. American financialization has its downsides for sure. Some American businesses will do grossly immoral things for profit. But nonetheless having a functioning stock market that rewards good capital allocation is a great thing. Otherwise all money will just end up in real estate and that is way worse for society.
- oezi 2y ago
  European companies can be very profitable but they aren't growing. Tesla vs all other car manufacturers is a great example. Most car manufacturers have higher profits than Tesla, still the market cap of all car companies combined is challenged by Tesla alone.
jppope 2y ago
thank you for this comment. this one needed to be said

pdxandi 2y ago

I’ve shared this opinion for a while, and would love to hear more informed opinions. Do you have any links to articles you’d recommend reading?

spenrose 2y ago
Trade Wars are Class Wars: https://www.amazon.com/Trade-Wars-Are-Class-International/dp/0300244177 https://www.amazon.com/Trade-Wars-Are-Class-International/dp...
languagehacker 2y ago
I'm currently reading "When McKinsey Comes to Town" and just finished "The Man Who Broke Capitalism" about Jack Welch and GE.

SoftTalker 2y ago

Really, anyone with a 401k or similar investments has benefited from this. That's a lot of middle class folks. Your parents, your grandparents, and very likely you. It's far from limited to the super-wealthy.

anotherhacker 2y ago
Not quite. This behavior leads to firing of middle-class workers. John Deere just laid off 300 workers, moved the factory to Mexico, engaged in buyback, and gave the CEO a huge pay. So, yeah, it helps your 401k, but in the mean time you don't have a job. And if you do have a job, your salary is not increasing in line with inflation...
- TylerE 2y ago
  Companies should be prohibited from doing buybacks for, say, 5 years, after any layoff.
  - Ekaros 2y ago
    Just straight up ban them. Have to pay taxes on investment due to dividends? Well too bad for you.
    - marcosdumay 2y ago
      Just tax them, they'll disappear.
      - mulmen 2y ago
        Tax what? The buy back? How does that work? The seller is already paying capital gains tax.
        marcosdumay 2y ago
        That doesn't require that the government don't tax the profit that allowed the buyback. The US taxing almost no kind of corporate profit is an oddity, and they can carve more exceptions to any kind of reinvestment they decide.
  - frikk 2y ago
    I recently learned that buybacks and short selling historically have not been legal, its only in recent history that they've been standard practice en large (1982 is when buybacks were legalized, I think)
    - layer8 2y ago
      It’s part of Reaganomics. Buybacks weren’t explicitly illegal beforehand though, it just wasn’t clear when they would count as stock price manipulation.
joejohnson 2y ago
The 401k is an invention that is yet to prove its efficacy. The first 401ks were opened in 1978, so if you were entering the workforce then you’d be retiring this decade! So, we will see if this privatization of pensions really benefits us all or merely enriched a generation of asset managers while absolving the corporate and the government from providing pensions for workers.
- kbolino 2y ago
  Traditional pensions are fundamentally unsustainable endeavors under modern demographics. You cannot pay decent benefits to a growing retired population while collecting reasonable dues from a shrinking working population. As we've seen, all retirement funds, even the remaining pensions, have largely switched their investments to the stock and bond markets in the vain hope that this fundamental conundrum will be solved through moonshots and financial tricks. The 401(k) is just one piece of a much bigger puzzle.
  - vineyardlabs 2y ago
    I agree with your general idea here but could it not be argued that pensions are just an abstraction on top of 401ks in the sense that if the demographics are shifting such that non-producers outweigh producers then you would expect the economy and business profits to suffer. These effects would cause broad slow growth or even reductions in business valuations, and therefore poor performance in investment accounts broadly.
    - kbolino 2y ago
      Yes, and I think that describes the past few decades in Japan (among other factors). Other options included pensioners taking a haircut and/or workers taking a paycut, neither of which is particularly palatable and still runs us into the ground eventually. Increasing corporate taxes could square the circle for a little while, but then corporations would slowly move more operations offshore, decreasing tax revenues eventually anyway. There's also the option of cutting other government expenditures, but eventually that stops working and at least some of the things that were cut can't stay un(der)funded forever. The only other (distantly) feasible idea I can think of would be, again with an eye to Japan (of the past), near-total isolation from other countries economically, but that would have an even more substantial stagnating effect.
ryandrake 2y ago
It's a lot, but still it's only ~50% of US households[1]. So the other 50% are not benefiting at all from a rising stock market, except very indirectly (companies with happy earnings reports less likely to lay them off). And even that indirect benefit is not a given. 1: https://www.federalreserve.gov/econres/scf/dataviz/scf/chart/#series:Retirement_Accounts;demographic:all;population:1;units:have https://www.federalreserve.gov/econres/scf/dataviz/scf/chart...
delfinom 2y ago
Yep. But I'm so extremely skeptical the "your 401k will always go up by 10%" argument is going to continue to hold for more decades. Eventually the blood they are squeezing out from companies and consumers will run out...
- gizmo 2y ago
  If the US economy keeps growing then American businesses will do well and the stock market will reflect that. It’s hard to image scenarios where the American economy shrinks while other countries have growing prosperity.
  - ok_dad 2y ago
    Maybe if prices doubled over a few years, housing was out of reach, and salaries were stagnant it would be harder to buy stuff and the economy would suffer. Whoops!
  - oezi 2y ago
    If the US economy grows 5% and stocks grow more, then there must be a reckoning coming at some point. If it is 5 years or 10, nobody knows.
  - consteval 2y ago
    > It’s hard to image scenarios where the American economy shrinks while other countries have growing prosperity I don't understand this viewpoint - this seems like the obvious end result of the last 50 ish years of tomfoolery. The US doesn't make anything anymore, our economy is purely theoretical. We're lying on a huge scale and scamming, and that's how we have our economy. We gave up entire industries - and almost all of them - to foreign countries. China, Korea, Japan, Bangladesh and on and on. Yes, these companies are "American". In name only. All the capital, all the means of production - which is the actual "economy" here - is being held by not us. We literally just gave up our means of production. What we did then is made up a bunch of fake jobs to justify these companies in the US and to extract money from these developing countries. It's only a matter of time before they wisen up and realize they have all the capital. Granted, not all industries are like this. Just most.
deleted 2y ago
[deleted]
nostrademons 2y ago
Only if it's still high when you go to retire. It probably will not still be high when you go to retire, because the very act of many people drawing on their stock portfolios to fund retirement will put downward pressure on stock prices. Ironically, if you happen to have made lots of money in the stock market over the last 10-15 years, your best strategy may be to retire now, mid-career, even if you don't have enough to last the rest of your life. Basically you're arbitraging the large labor force of today to fund your time off through high stock values. Then when the market crashes, the recovery will likely be in all-new firms in all-new industries, so you reinvent yourself to capitalize on the labor shortage then. Or even better, start one of those new firms and capitalize on all the workers who need to go back to work because they can't afford their retirements. You can't do that with a 401k, though, it'd have to be a taxable investment account that you can withdraw at will.
sangnoir 2y ago
401k's are a lot like a bunch of ranchers granting their herds 0.01% of their Cattle futures portfolios. Less hyperbolic - the existence of large pools of capital without a voice on the boards is partly responsible for the management-led short-termism mess we're in.

jeffreyrogers 2y ago

The problem with this theory is that by most metrics the middle class in America is doing very well. Homeownership rates are high (significantly higher than Europe), incomes are higher (again, median income in the US significantly higher than even wealthy European countries like Germany), and consumption of things like cars and other manufactured goods is higher than ever.

moffkalast 2y ago
> Homeownership rates are high (significantly higher than Europe) What's your data source for that if you recall, just curious?
- n4r9 2y ago
  This dataset suggests that it's around 65.7%, higher than the 62.9% in 1965 but lower than the 2004 peak of 69.2%: https://fred.stlouisfed.org/series/RHORUSQ156N https://fred.stlouisfed.org/series/RHORUSQ156N . Not sure that "consumption of manufactured goods" is a particularly good metric for measuring wellbeing, though.
  - moffkalast 2y ago
    That covid spike in 2020 is pretty interesting. Probably the percentage of people that rent something close to their workplace and could move home when WFH became a thing. > The homeownership rate is the proportion of households that is owner-occupied. I suppose there probably aren't better metrics available, but someone who lives in a rented out penthouse that's being financed by owning 20 rented out apartments wouldn't show up as a homeowner under this which is hilarious. From what I can find [0] homeownership rates in the EU are typically north of 70%, and up to to 90% in some countries. Germany seems to be a real outlier at only 50%. [0] https://ec.europa.eu/eurostat/cache/digpub/housing/bloc-1a.html#:~:text=Over%20two%2Dthirds%20of%20people,30%20%25%20lived%20in%20rented%20housing https://ec.europa.eu/eurostat/cache/digpub/housing/bloc-1a.h....
    - n4r9 2y ago

gizmo 2y ago

Businesses are primarily valued based on their discounted future cashflows. American businesses are worth much more than their European counterparts because investors (correctly) expect that American businesses will more aggressively seek profit. By contrast, businesses that don’t make money and that are not expected to make (much) money in the future are worth nothing. In most countries the stock market doesn’t go up. European stock markets needed ~15 years to recover from the 2008 highs because European businesses don’t make money. The Japanese stock market has languished for 30 years. Chinese businesses that get too cocky get the Jack Ma treatment. Turkey and Venezuela had their currencies collapse. American financialization has its downsides for sure. Some American businesses will do grossly immoral things for profit. But nonetheless having a functioning stock market that rewards good capital allocation is a great thing. Otherwise all money will just end up in real estate and that is way worse for society.

oezi 2y ago
European companies can be very profitable but they aren't growing. Tesla vs all other car manufacturers is a great example. Most car manufacturers have higher profits than Tesla, still the market cap of all car companies combined is challenged by Tesla alone.

jppope 2y ago

thank you for this comment. this one needed to be said