Episode 3 - Corporate Profits at the Expense of Workers
Full transcript and sources below:
Welcome back to TOIL, EPISODE THREE. It’s a long one today, so buckle up, and ya might need to take a break or two.
In the last episode, I targeted three main government failures as the key causes of our wealth inequality. Today I want to talk more about the first one: the government’s failure to protect individuals from the power and profit-seeking behavior of corporations.
A key tenet of capitalism claims that the free market pays folks what they are VALUED by the market. Valued? No, we have seen that workers are paid the absolute minimum that employers can get away with paying them; not what they’re valued. Corporations couldn’t function or earn any money if they didn’t have their workers, they are certainly VALUED much higher than the meager wages they’re getting - often poverty wages well below the standard of living and comically less than senior executives and shareholders. So we cannot just leave this to the “free” market. The rules running our so-called free market were created by the wealthy and powerful who benefit most from it. Let’s talk about how.
HOW MUCH PROFIT ARE CORPORATIONS MAKING AND HOW?
Profits have been rising since 1976, which also happens to be just a few years after Milton Friedman came out with a blockbuster NYTimes article advocating for the shareholder model of capitalism. Friedman literally titled his article “The Social Responsibility of Business Is to Increase Its Profits” - full stop. I link in the show notes to the article. Corporations quickly leveraged this social acceptance of their pursuing profits above all else and President Ronald Reagan rode it to the White House in 1980 promising to slash all the regulations of the 1970s that were intended to protect individuals from corporate greed. Ronald Reagan’s presidency and the damage it did to the laws we had to protect Americans, deserves its own episode. But for today, I encourage you to view the graph I link to in the transcript to see just how drastically profits have been rising since that time through to today where in just the first quarter of 2024, companies in the U.S. made over $2.7 trillion in profit after taxes. So, in one quarter, after paying all expenses and taxes, corporations in the U.S. had $2.7 trillion remaining. So, HOW are they making these profits? They’re over-charging customers and under-paying employees. They’re also cutting corners, plundering shared resources, harming the environment and communities and underpaying suppliers, but we’ll save those for later episodes.
So for today, let’s talk about how employees suffer on the road to corporations generating profit. A recent Brookings Report analyzed how 22 major corporations managed profits and wages over the first two years of the pandemic. These 22 companies all had over 100,000 employees, paid $15 or less per hour at the start of the pandemic, and ranked among the largest in their respective industries. And I’m going to list out all 22 quickly because I will keep referring to these 22 companies through this episode and I want you to know just how big and profitable these companies are that I’m discussing. They include: Walmart, Amazon, McDonalds, Kroger, UPS, Home Depot, Target, FedEx, CVS, Lowe’s, Albertsons, Starbucks, Walgreens, Costco, Dollar General, Walt Disney, Marriott, Chipotle, Gap, Best Buy, and Macy’s.
Over the first two years of the pandemic, these 22 companies furloughed, laid off, or cut the hours of hundreds of thousands of workers, while at the same time changing their compensation rules to protect tens of millions of dollars in CEO compensation. Also note that of these 22 corporations, 18 signed a Business Roundtable Pledge in 2019 to follow a “stakeholder business model” instead of a “shareholder model”. The Business Roundtable is a 50+ year old association of more than 200 CEOs of both public and private corporations across the country, which, may come as no surprise, lobbies hard against government regulation or an increase in corporate taxes. This pledge, signed by nearly all 200 members of the Business Roundtable, committed signatories to shifting their business model from one of shareholder capitalism to one of stakeholder capitalism.
As I explained in the last episode, shareholder capitalism is a model that cares only about getting returns for the shareholder, basically increasing profits, regardless of who might be harmed along the way, and funneling those profits to the shareholders rather than back into the company through improvements or increased wages. Stakeholder capitalism, on the other hand, considers the rights and needs of all stakeholders impacted by a corporation: the employees, suppliers, local communities, consumers, and yes, shareholders, as well.
One of many organizations that has been sounding the alarm on corporate profits accumulated unfairly and at the expense of others is the Groundwork Collaborative, which released a report in January outlining how corporate profits have been driving more than half of the recent inflation. And, since the start of the pandemic, corporate profits as a share of national income have increased 29% while labor’s share of the national income has decreased. So corporations are overcharging consumers and underpaying employees.
WHAT ARE CORPORATIONS DOING WITH THEIR PROFIT?
A company has basically two things it can do with its profits. It can (1) invest back into the company - through increased wages and benefits, research and development (R&D), improved infrastructure, or paying down any debt, or (2) it can pay out more to shareholders - through either dividends or stock buy-backs (also called stock or share “repurchases”). We cannot talk about economic inequality and corporate greed without talking about dividends and stock buybacks.
Dividends are periodic payments paid to shareholders out of profits. Because of the primacy of our “shareholder model”, how much and how frequently and consistently companies pay dividends to shareholders is used as a key sign of financial health of a company - regardless of what may be going on internally within a corporation, like the well-being of its employees or suppliers.
Stock buybacks are when a public or private company buys back shares of its own stock from the stock market or its private investors, and it means less shares are available. When there is less of something, meaning the supply is down, that drives demand up, which drives up the price. This is basic economics 101 supply and demand theory. When share prices go up, that means anyone who owns shares, the shareholders, now have more money. It’s a way to return profits to shareholders, and avoid taxes by the way, instead of putting profits back into the company.
And again because of the primacy of the “shareholder model” we see corporations overwhelmingly choosing to send most of their profits to shareholders - through dividends and stock buybacks. This is why all trickle-down-economic policies fail. Let’s look at former President Trump's 2017 corporate tax cuts. He and Republicans promised us that corporations would use their tax savings to invest back into their companies and create new good-paying jobs. Overwhelming reporting has shown us this did not happen. Including a report recently published by Americans for Tax Fairness looking at what 280 of America’s largest corporations did with their savings from Trump’s 2017 tax cuts. In the five years following these tax cuts, corporations paid out $4.4 trillion in dividends and stock buybacks to their shareholders.This reflects a DOUBLING of stock buybacks and an increase in dividend payouts of 40%. At the same time, wages only grew 14%.
In the last episode I shared that about half of the public stock market is owned by the top 1% wealthiest Americans. The top 10% of wealthiest Americans own 93% of the stock market! So, it should come as no surprise that “over 42% of those dividends went to households with over $1 million of income in 2023”. These households make up less than 0.5% of American families. Curious how much in dividends families with incomes under $100,000 received in 2023? $176.
Let’s look at this effect across the 22 large corporations in the Brookings analysis. Brookings found that during the first 2 years of the pandemic, across the 22 companies in their analysis, as millions of workers across the country were struggling without a paycheck, company shareholders grew $1.5 trillion richer, with workers getting less than 2% of that benefit.
And because 93% of the stock market is owned by the country’s top 10% wealthiest folks, more than 70% of that $1.5 trillion went to the richest 5% of Americans (about 6 million families (note the population of the U.S. is over 330 million)), while only 1% of that $1.5 trillion went to the bottom entire half of all American families. It is in this reality that rising stock values increased the wealth of 13 billionaire founders across 7 companies by $160 billion just by their stock value increasing – 13 people! That is more than 12 times all the additional pay for those billionaire founders’ 3 million workers at their 7 companies. Did the free market allocate resources based on what these billionaires and their workers are valued? Absolutely not.
And not only did workers not receive any of the growth in wealth that their billionaire founders did, they were not even paid enough to get by, though senior executives sure were. In 2020 alone, the 22 CEOs earned nearly $500 million in compensation, an average of about $23 million each. And for five companies that saw large returns during the pandemic, profits rose 41% compared to a 5% increase in wages for workers – meaning profits rose at 8x the pace of worker wages. How is this fair?
Runaway CEO pay is yet another feature brought to us by Milton Friedman’s shareholder capitalism model. I shared in the last episode, that from 1978 to 2022, CEO pay grew by 1,209% while at the same time compensation for the typical worker grew 15%. 1,209% vs. 15%. Who could possibly think this is fair?
Millions across the country are making poverty wages while senior executives and shareholders are rewarding themselves with trillions of dollars.. The Brookings report used the same living wage calculator that I referenced in the last episode: a living wage calculator from MIT which defines a living wage as “the annual take-home pay that allows workers to cover only critical costs: rent, food, child care, health care, transportation, and taxes. It is the line that prevents a worker from going hungry, getting evicted, or forgoing critical health care. A living wage does not leave money left over for savings, emergency expenses, or even the smallest of luxuries, like ordering out. It is the minimum standard for financial independence.”
All signatories of the Business Roundtable who pledged to operate under a model of stakeholder capitalism rather than shareholder capitalism claimed they would “compensate fairly”. One would think this includes at least paying workers enough to qualify as a “livable wage” according to MIT’s definition. While they can afford to go well beyond this, most fail to even provide this “livable” wage. Not a single one of these 22 companies, 18 of which signed the pledge, paid all of their employees a living wage during the first two years of the pandemic. By the end of the pandemic only 7 companies paid even half their workers a living wage. So it’s no surprise that 14 of these 22 companies were among the top employers in the U.S. with the most workers on SNAP, also called food stamps. Meanwhile, senior executives and shareholders were rewarding themselves with billions of dollars during this same time at these companies.
I link in the transcript to a recent Washington Post profile of a single mother of three in Oklahoma, Tabitha Shinn, who is barely scraping by. She was really helped by pandemic-era relief programs that provided $40/month per child on top of her SNAP benefits but those benefits ended in May. A new federal food program would have kicked in this summer thanks to a Democrat-pushed budget agreement, but Oklahoma’s Republican Governor Kevin Stitt refused these federal funds for his state - along with 11 other Republican Governors across the country. This is free money for states that 12 Republican Governors have refused. Which means Tabitha, and many more like her, now literally often goes hungry to make sure she can feed her three teenage children. And guess what: she works a full time 40 hours per week job making $16/hour, and she takes overtime any chance she gets, but that’s not enough for a family of four in her area. They’re only making it right now because of a generous food bank in their town. She couldn’t afford the $80 for her daughter to attend basketball camp until at the last minute the camp said she could come for free. Is this the country we want to live in? Do we want folks like Tabitha, who work a full time job to not make ends meet? It doesn’t have to be this way.
Our options to solve this problem are either: (1) we ask that corporations opt, on their own, to act more justly or (2) an outside entity forces them to.
Let’s explore the likelihood of the first option: corporations, on their own, choose to operate more fairly - to truly adopt a “stakeholder model” rather than a “shareholder model”. There are both structural incentives and, sadly, human nature acting against this solution.
First, the structural barriers, I’ll mention three today:
Executives face a lot of pressure from shareholders to maximize short-term shareholder returns and executive compensation is almost always tied to a company’s profit and returns to shareholders - through dividends and stocks. Even middle managers at major corporations receive significant portions of their compensation in company stock and are therefore similarly incentivized to advise that a company engage in stock buybacks and not do anything that could reduce the stock price.
Company boards of directors are not currently an effective check because they’re also compensated with company stock!They’re also often friends, former and future colleagues and possibly even future replacements of the very executives they are overseeing. The report includes a figure on page 55 that I urge folks to glance at. The revolving door of board members and executives that shuffle within just these 22 companies is rather shocking.
Shareholders do not seem to care about worker well-being. What really shocked me was the lack of any investor questions about worker well-being. The report authors reviewed more than 100 shareholder calls across these 22 companies during the first 2 years of the pandemic and NEVER, not once, did a shareholder ask about worker welfare, including in early days of the pandemic when frontline workers were truly risking their lives to continue working, or hundreds of thousands of employees were furloughed. No one ever asked: How many workers were furloughed or laid off, how many returned to their jobs, and what support did companies offer them? How many workers were sick, or even died, from COVID-19? Were Covid pay and benefits adequate to compensate workers for the risks they were taking? No one ever asked these questions.
So, with no hope of corporations just doing what is right, we need an outside entity powerful enough to force corporations to operate fairly. And this doesn’t mean charity. This does not mean redistribution of wealth. This means paying the employees that earn all those profits, not only a LIVING wage, but a comfortable and fair wage that allows them to have some quality of life and save for emergencies. And also offer benefits like sick leave, parental leave, and healthcare. What kind of a business model is it that relies on paying poverty wages and not providing benefits? While at the same time funneling almost all profits to shareholders who don’t even work there? Who is powerful enough to do this other than the government? No one. No non-profit, no organization, no grassroots movement of individuals yelling at corporations will get them to follow a fair business model.
So what can we do?
The good news is that there are a lot of great policy solutions that aren’t terribly complicated or difficult to implement. The bad news is that these massive billion dollar corporations we’ve been discussing and their shareholders, with armies of lobbyists and strong influence over lawmakers, are against these reforms. Because of course they are, the reforms could mean they make less money. Not a lot less money, just a little. They would still be millionaires many times over. Some, even still billionaires. BUT their employees, who again make.them.their.money. would not be living in poverty. Surely everyone can agree this is fair and right. I’m not talking about a redistribution of wealth. I’m not saying the wealthy should take their hard earned money and give it to poor Americans who are not working hard. Rather, I’m talking about a situation in which poor Americans are working hard. They are doing the hard work that is earning wealthy corporate leaders and shareholders their money and the wealthy are then hoarding it while paying their employees poverty wages. And this is all possible because our economic system is allowing it. This is not a “free” market. This is a market the government, and the wealthy and powerful who influence them, have created. So our government, us, charged with representing ourselves, we can change these rules and institute guardrails to protect workers. So let’s discuss six key policy solutions.
First up: We need a higher federal minimum wage. Attacking this issue from the bottom and ensuring that everyone is paid a fair and living wage before corporations even have the chance to steal profit will protect the most people. The reason that corporations have been able to make so much profit is because they make unjust decisions about how much to allocate to expenses, namely, how much to pay the people earning them their revenue. But the government can say, look - you can make as much profit as your heart desires, AFTER you’ve paid the people who work for you enough to survive. Do any of us want to live in a country where this is not the reality? What are we saying about the people working those jobs if we don’t want them to earn a wage that allows them to live above the poverty line?
And we need this minimum wage to be tied to the cost of living, which varies across the country and changes often. According to the MIT Living Wage Calculator, $25.02 per hour is the average wage needed to just barely get by in this country, because remember that doesn’t even allow someone to save, cover emergency expenses, or spend on anything enjoyable. In some places it is less, in others it’s more. Tying a new minimum wage to what someone needs according to the cost of living in their area both accounts for location differences and does not require that Congress manually raise it, which clearly, given that the federal minimum wage was raised to $7.25/hr 15 years ago, we cannot trust Congress to do.
Beyond it just being basic decency to pay someone a living wage for their work and the reality that corporations can and should absolutely pay their workers a fair wage, so many social programs are only needed because corporations are paying poverty wages. As I mentioned earlier, 14 of the 22 companies included in the Brookings analysis were named among the employers with the most SNAP recipients. So, we are allowing corporations making billions in profits to not pay their staff a livable wage AND at the same time using taxpayer funds, that those same corporations did not pay into fairly, to make up the difference for corporations so folks can survive. This is a subsidy to these massive corporations. If Tabitha Shinn in Oklahoma was paid a fair wage she wouldn’t need SNAP benefits.
How can it be an accepted business model to pay employees below a livable wage? That’s a failed business model and should be illegal. A majority of Americans agree on raising the minimum wage, I link in the notes to a recent survey, yet Republican elected officials continue to block Democrat efforts on this. If Senate Republicans hadn’t blocked it in 2021, we would have a $15 minimum wage in this country, though again I think it should be tied to the cost of living but $15/hour is certainly better than $7.25/hr. There has also been a growing body of evidence in states that have raised their minimum wage that it does NOT hurt employers, even small businesses, as opponents often claim. I’ll talk more about this in an upcoming labor episode as there has been a lot of misleading news about this.
Second: Restrict Corporate Compensation
While it makes sense that senior executives make more than other employees at a company, surely we can all agree they shouldn’t make anywhere between 344 to 603 times more, like they are now. A recent Gallup survey found that 83% of Americans believe that companies should avoid a major pay gap between CEOs and average employees and there are several legislative proposals (linked to in the transcript), introduced by Democrats in the House and Senate, that would apply tax penalties to corporations with gaps greater than 50:1 between CEOs and typical workers. Surely 50:1 is enough.
Third: Labor Reform
We need to strengthen unions and worker power in this country. While a livable federal minimum wage would ensure folks working hard aren’t living below the poverty line, there will remain millions of workers in jobs that deserve much higher wages above the minimum wage as well as better benefits and working conditions. But corporations will continue to only pay folks the least they can get away with, not what workers are actually valued. This is where workers themselves could have more power to fight back, if their organizing rights were strengthened and protected.
We currently have weak protections on the books and corporations are violating even those weak protections with little consequence. And employer anti-union efforts are strong and well-funded with well over 70% of employers spending more than $400 million per year trying to block any unionizing efforts, often with illegal tactics.
The good news is we have solutions to both problems. We have a National Labor Relations Board (NLRB), an independent federal agency that oversees unionizing efforts and investigates and prosecutes violations of current labor laws, but we need to make it stronger. It doesn’t have enough resources or enforcement power to disincentivize corporations from violating labor laws.
But, Democrats have introduced the Protecting the Right to Organize Act, the PRO Act, to strengthen labor laws and the NLRB’s power. I link in the show notes to a great chart from the Economic Policy Institute that lists problems with current labor law and how the PRO Act solves each one.
Fourth: Worker Representation on Corporate Boards
We discussed earlier in this episode how abysmally corporate boards consider worker rights. What if we had workers on boards to voice these issues? Yet again, Democrats are on it. Senators Elizabeth Warren and Tammy Baldwin have introduced legislation that would mandate that companies give workers the ability to elect a certain percentage of the boards of directors.
Five: Tax Corporations Fairly
I’ll say more in a later episode on taxes but for now I’ll say that Democrats and Harris want to do this while Republicans and Trump are constantly cutting or trying to cut corporate taxes; putting the tax burden on lower income Americans and growing our national debt. Trump continues to claim that his 2017 tax cuts for the wealthy and corporations led to massive investments into the economy. But as I showed earlier, we now know this didn’t happen. Why do we keep rewarding corporations at the expense of Americans?
Sixth and lastly for now, Restricting Stock BuyBacks and Dividends
Stock buybacks were actually illegal for most of the 20th century because they’re considered market manipulation, but then, in 1982 - another Ronald Reagan gift to the wealthy and powerful - the Securities and Exchange Commission legalized them and since then we’ve seen corporations pour trillions into stock buybacks instead of back into their people, products, and supply chains.
There are active debates (which I link to in the show notes) on how best to restrict stock buybacks and dividends, with Democrats leading the way, yet again. Democrats successfully passed a 1% tax on stock buybacks through the Inflation Reduction Act and are committed to raising this higher if Republicans will join them or they can win a large enough majority in Congress.
CONCLUSION
So, what can we do to support these many proposals and others? We all can’t do everything about everything, that’s why electing representatives who can fight across so many different issues of injustice - and holding them accountable when they’re in office - is the most effective and efficient way to fight for change. Beyond that, if any of us have time and energy to champion specific issues that’s awesome and we should try to do that. But the bottom line is our elected representatives are meant to solve these problems for us and they have their full time jobs and a staff to do it. So if we elect the right people and pay attention to what they do when in office - and hold them accountable to do what they promised, that can be enough.
We need to support policymakers who want to fight for individual Americans and not for the wealthy and powerful corporations. While all politicians are influenced by donors and lobbyists - which is something we can fix by overturning Citizens United, another issue I’ll devote an entire episode to - Republicans are usually on the side of big business against what is best for workers. Democrats on the other hand are consistently trying to fight to protect workers and usually fail because Republicans block every effort. Republicans talk a lot about how they’re the party of the worker and everyday Americans, but we need to pay attention to what they DO, not just what they SAY. For every single policy issue I shared here today, and many others, Democrats are pushing forward on solutions to protect Americans while Republicans are blocking every attempt in favor of what is best for massive corporations.
We need to make sure we are better informed when we vote. We have to stop voting on vibes. While we might be okay, while we might be paid enough and able to afford a comfortable life, tens of millions in this country aren’t and can’t, and it’s not their fault. They’re working hard, but corporations aren’t paying them enough to survive. As I discussed in Episode 1, luck is the main driver of why we’re okay and others aren’t, even if we work hard. Shouldn’t we consider when we vote what is best for folks who haven’t been as lucky as we are?
We need to know the actual policies that officials who want our vote would implement, how those policies will impact everyone, not just us, and we need to make sure anyone we vote for knows where we stand on these issues and that we’re watching them. That we will toil to hold them accountable.