American Economy PDF

Week 8: 11/21 - Power Within the Firm: Corporate Governance Stakeholders: party that has an interest in a company and can either affect or be affected by the business Corporate Governance: the relations between the different groups of people who wield power in business companies ○ Focus...

Week 8: 11/21 - Power Within the Firm: Corporate Governance Stakeholders: party that has an interest in a company and can either affect or be affected by the business Corporate Governance: the relations between the different groups of people who wield power in business companies ○ Focus on the shareholders (people who own shares in the company) and managers (people who run the day-to-day operations of the company) ○ Questions How these two groups have been composed since the 19th century in the US (who are the shareholders/managers? What do they do? Are the groups homogeneous) At different periods in US history, who has exercised more power within US firms? How have the relations between these two groups been regulated by the public authorities? (especially the federal government) Corporation: legal entity that is distinct from its owners. Corporations enjoy most of the rights and responsibilities that individuals possess: they can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. Some refer to it as a “legal person.” Limited Liability: Shareholders may take part in the profits through dividends and stock appreciation but they are not personally liable for the company’s debts Annual Meeting Voting Rights ○ Shareholders at the annual meeting – elect → Board of Directors – elect → Chief Executive Officers Corporate Laws: government laws (state by state) ○ Ex: (non) binding shareholder votes - the government decides whether shareholder votes are binding on certain issues Company Bylaws: Inside directors (representative of the company), can have representatives for other stakeholders (investors, unions, etc) Power Relations Among Shareholders: Focus on Voting Rights Early 19th Century Generalized in the late 19th Late 20th century century Republican/Democratic “Plutocratic” voting rights “Oligarchic voting rights” voting rights One vote per share: most common form of voting right today, but not always the case, and not universal, even today ○ Plutocracy: power to the richest Colleen Dunlavy, business historian ○ Early 19th Century: corporations as political entities, voting rights as a form of distribution of power among shareholders in those entities ○ Ex: Taylor v. Griswold, New Jersey Supreme Court decision from 1834 Corporate structures: cooperatives (but about 30,000 cooperatives in the US in 2006) Even in Classical Corporations ○ Multiple share classes with different voting rights: giving more power to a small class of shareholders ○ Ceilings/time-phased voting: prevent the concentration of power and reward kong-term shareholders (loyalty shares) Ex: J.M. Smucker Company (10 votes per share after 4 years of holding) Managers in US Corporations The Managerial Revolution Alfred Chandler, The Visible Hand of Managers ○ Play on The Invisible Hand by Adam Smith (1776) The separation of ownership from control and its critics Dilution of shareholding ○ While less than 1% of the American population owned stocks in 1900, about ¼ of US households did in 1929 Criticisms: ○ John Kenneth Galbraith, The New Industrial State (1967) Notions of “reversed sequence” and “technostructure.” Promoted the development of “countervailing powers” to control the technostructure of large firms ○ Friedrich Hayek, neo-classical economist “Corporations in a Democratic Society” (1959)  Power should remain to the shareholders, the true owners of the corporations Recent Evolutions: the impact of financial capitalism on corporate governance Shareholder Activism Shareholder Activism: the campaigns led by the largest shareholders and their representatives since the 1980s to defend the interests of shareholders and to put pressure on companies for them to take steps to increase the value of their stock “Wall Street Rule” v. Shareholder Activism The Rise of Institutional Investors Institutional Investors: organizations such as banks, insurance companies, or pension funds which invest on behalf of their clients ○ 70% of American shareholders in 2011, while they were only 16% in 1965 ○ Ex: CalPERS, one of the biggest institutional investors in the US California Public Employees Retirement System ○ Ex: Amazon, 425M shares in 2018: largest shareholder Jeff Bezos (CEO) with 16.3% Defense of “shareholder value” ○ 1985: Creation of the Council of Institutional Investors to defend the interest of the shareholders List of “good’ and “bad” companies on their website - impacts the value of their stock Changes in Corporate Structures and in Executive’s Compensation Changes in corporate structures and strategies: ○ Downsizing = layoffs and spinoffs ○ Ex: Jack Welch, CEO of General Electric (1981-2001) firing 100,000 people Louis Gerstner, CEO of IBM ○ Changes in Executive’s Compensation Stock options Half of the pay of American top-executives in 1994 Week 10: 12/05 Social Protection in the US Need to consider the entire “world of welfare” (Gosta Esping-Andersen) - consider private and public contributions Specificities of the US system ○ Reliance on private mechanisms of protection and regulation (but not exclusively → mixed system) ○ Federal system with important local variations Public side of welfare: many subdivisions Means tested program (not universal) First social protection in the colonies and early Amercia - influence of the British poor laws of the 17th century. ○ Worthy/unworthy poor ○ role of parishes ○ “Outdoor relief” → almshouses and workhouses ○ Local patchwork initiatives Early 20th century (Progressive Era) - development of Mothers’ pensions ○ First statewide adoption in Illinois in 1911 ○ State help, but administered by counties Federal public assistance developed in the 1930s ○ System of matching state-federal funds ○ 1935: creation of the “Aid to Dependent Children” Program = federalization of mothers’ pensions ○ Became “Aid to Families with Dependent Children” (AFDC) in 1962 ○ States decide who is eligible - long history of racial inequalities Major reform of welfare in 1996 under Clinton administration ○ PRWORA (Personal Responsibility and Work Opportunities Reconciliation Act) ○ AFDC became Temporary Aid to Needy Families (TNAF) Work requirement (workfare) Limits in time (lifetime limit of 5 years imposed on the recipients) Consequence → decline in unemployment and the number of welfare recipients not in poverty ○ Not means-tested Always much more generous than public assistance, the benefits of social insurance increased at a rapid rate over time Development of social insurance at the state level in the Progressive Era ○ Ex: Wisconsin workmen compensation law in 1911 (insuring workplace accidents) ○ Development of social insurance at the federal level in the 1930s with the New Deal  ○ 1935: Social Security Act → created a program of retirement insurance after 65 State-federal unemployment insurance Social Insurance Still today, most effective public program of social insurance Payments calculated on the 35 highest-earning years of a workers’ career. Full retirement 65, then 67 Insufficient to rely on/ceiling ○ Maximum in 2020 - $3k/month, avg payment in 2020 $1461/month ○ Dramatic effect on poverty, but not eliminated Important evolution in the 1960s with the “Great Society” programs of L.B. Johnson ○ 1965: Medicare Program of health insurance for people over 65 Also Medicaid: for the poor, but public assistance ○ Unemployment, social security, and medicare all funded by payroll taxes Strong link of social insurance to the conditions of unemployment ○ Most recently: The Patient Protection and Affordable Care Act (Obamacare) 2010 Before, 15% of Americans with no health coverage No universal coverage ○ Obligation to get insurance ○ Public regulation of private insurance Subsidies for the poorest families to help them get insurance; creation of the “health insurance exchanges” in the states, where the state governments can regulate and oversee the private insurance companies Penalties for companies of more than 50 employees not providing healthcare Insurance companies cannot refuse to insure an individual because of pre-existing conditions Earned Income Tax Credit ○ Form of negative income taxation for those who participate in the labor market but whose wages are inferior to a certain threshold ○ Created in 1975, expanded in the 1980s and 90s (tripled in 1993) By the end of the 1990s, the help provided through this mechanism was higher than traditional welfare spending Public regulation of the labor market ○ Minimum wage (since 1939 and the Fair Standards Labor Act) ○ 1974: Employee Retirement Income Security Act - regulation of the pension plans offered by some employers (standards, disclosure, and means) ○ 1993: Family and Medical Leave Act - very limited rights to unpaid leave, limited to large companies BUT  ○ almost no regulation in termination of employment contract ○ no federal parental-leave ○ in spite of some regulations of working time: US workers work among the longest hours in the industrialized world, have the least annual leave In most conditions it depends on the employer Week 11: 12/12 Healthcare and Pensions Long history of philanthropy in the US ○ Ex: community chests - pooling resources for charity giving, created in the early 20th century. First in Ohio in 1913 Private or semi-private system of social services. ○ Increasingly funded by the government (1960s) ○ Still private operations → in 2000, private social services employed more than 2.5M people in the US (60% of social services jobs) Development of “fringe benefits” mostly after WWII ○ 1940: 9% of Americans with some form of health insurance ○ 1960: ⅔ had some insurance, mostly through their job ○ 1990: 60% of Americans had employer-based health insurance Government Support: ○ Tax deduction since 1943 ○ National Labor Relation Board decision 1949 - said employers are required not to provide but at least to bargain/negotiate with unions over employee benefits Created to ensure compliance with the Wegner Act Health Insurance ○ Number of Americans with health insurance lowered during the Trump Administration because of his repeals on Obamacare, numbers rose again during Biden’s presidency (reinstated what Trump repealed) ○ Demographic of who has health insurance - more people with high-paying jobs have health insurance (ex: managers, financiers), whereas people with lower-paying jobs (particularly service workers) are less likely to have health insurance ○ Jobs with unions: 95% have health insurance ○ Non-union jobs: 68% have health insurance Unions more common in the industrial sector To form a union, workers take a vote. People might vote against a union because of a bad reputation in the US or the factory threatening to close if they form a union ○ Even if companies provide health insurance, that does not mean worker’s don’t pay. It is taken out of their salary  Less expensive than if they were to pay for insurance on their own, though ○ Sometimes insurance has a ceiling (ex: $100k then they stop paying) ○ Strong distaste for “socialized medicine” in the United States (universal healthcare) Ex: US healthcare considered more efficient than Canada, which is universal Conversation between Biden and Sanders during the 2020 election - Sanders pro socialized medicine Pensions ○ Pensions: to complement social security, most Americans have a private pension plan ○ Different kinds of systems: Defined benefit plan → promises a specified monthly benefit at retirement Defined contribution plan → does not promise a specific amount. Contribution to an individual account. Balance received at retirement. Subject to fluctuations Idea is that since you invest this money into the stock market, you’ll earn interest on this money (maybe 5-6% per year) ○ Evolution: toward “defined contribution” plans ○ The most common plan: 401(k) → defined contribution plan Employees can choose the amount they want to give for their retirement Ex: say they want to give 10% of their salary into their 401(k), employers will invest this much into their retirement fund Not government guaranteed. If the stock market plunges and you lose everything, the government doesn’t have to do anything. Defined benefit plans are government guaranteed/protected. ○ Benefits Teachers ( 89% defined benefits) → educational jobs have unionized Sales (20% defined benefits) Unionized jobs (80% defined benefits), un-unionized jobs (18% defined benefits) Lowest 25% - only 46% have access to benefits, only 8% have defined benefits Impact of the gig economy on the welfare system ○ Role of the gig economy and job misclassification in weakening the existing welfare system (both private and public) Ex: Job misclassification: Uber drivers are treated like employees in their work practices but they are not employes as employees - they are “freelance workers” Courts working to try to force to employ these workers and offer them protections and benefits  Companies are resisting and want to continue employing workers independently - arguing its better for everyone ○ PUBLIC: loss of tax revenues, especially payroll taxes Less money to fund unemployment, social security, other public programs funded by payroll taxes, etc ○ PRIVATE: no access to fringe benefits for the workers ○ Around 2010 the number of employees offered an employer-sponsored retirement plan dropped WHAT TO REMEMBER Absence of social protection = myth (consider the entire world of welfare, including the private spending) Absence of public welfare = myth (complicated system, many subdivisions and differences in different states, but mixed system) Historically in this public system… ○ An assistance part, which has increasingly relied on private employers, especially to select the recipients (workfare) ○ An insurance part, more universal, but which does not cover all the social needs. In both parts the federal government had taken an increasing part over the 20th century The private system has developed to massive proportions, especially with the system of employee benefits which developed after WWII This private system because it depends on employment, has created major inequalities in terms of access, as well as uncertainty ○ And the development of the gig economy undermines both the public and private side of welfare (payroll taxes and benefits) Business and Politics The business of lobbying Definitions and scope of lobbying in the United States ○ Origin of the term: British meaning in the 18th century → people coming to the theatre not to see the show, but to chat with important people and get favors Political meaning in the US after the 1810s → people trying to influence politicians ○ Today’s definition: an activity in which special interest groups hire professionals, often lawyers, to defend specific legislation in decision-making bodies such as Congress. In the US it is a legal activity protected by the 1st Amendment (right to petition government) ○ Scope of this activity and connection to businesses: Of the 100 organizations that spend the most on lobbying, 95 represent businesses. Ex: NRA (National Rifle Association), pharmaceuticals, oil industry,  In the early 2000s: the budget of corporate lobbying exceeded the total budget of the US Congress In 2015: for every dollar spent on lobbying by labor unions and public-interest groups together, large corporations and their associations noe spend $34 Ex: K Street in DC - the neighborhood of lobbyists Evolution of lobbying and regulation ○ A common (and criticized) practice in the Gilded Age Ex: Sam Ward, “King of the Lobby” (organized dinners for members of congress in order to lobby for businesses who hired him). Convicted in 1876 Policy Capture ○ 1930s - First explicit regulation of lobbying activities in the US 1938: Foreign Agents Registration Act → requiring foreign entities to disclose relationships with American politicians 1946: Federal Regulation of Lobbying Act Definition of a lobbyist: someone who spends half of their paid time directly lobbying the federal government Have to register with the US government and file reports several times a year indicating their activities (who they talked to, about what, did they award gifts, etc) 1954: Supreme Court decision United States v. Harriss Lobbying was only considered in-person meetings now. Sending mail or talking on the phone did not count In practice, fewer people were actually considered lobbyists 1995: The Lobbying Disclosure Act New definitions of “lobbyist” with new thresholds Shortcomings: the agencies in charge of supervision were short-staffed, so it was difficult to enforce 2007: Honest Leadership and Open Government Act Jack Abramoff convicted of fraud and embezzlement Said the acts of lobbying should be transparent - increased the requirements on lobbyists and what they’re allowed to do, increased regulations on the gifts members of congress can receive and they MUST disclose it ○ Increasing importance of lobbying in the context of financial capitalism after the 1970s ○ Unification of lobbying groups → ex: Business Roundtable, created in 1972 (group of about 200 CEOs of the most powerful companies lobbying for policies in their interest.) (They have been successful! Ex: 1980s they supported “Reaganomics” - supporting deregulation and lower taxes.) (don’t have to remember the names of all these laws, just remember the progression) Campaign finance: the case of the 2024 election Corporations’ political rights