From the 1940s through the 1980s, back when the mob ran Las Vegas’ casinos, the essence of the city’s economy was the skim.
Before the day’s take was tallied, the counting-room guys skimmed off a certain percentage for the care and feeding of the Giancanas and the Lanskys then entered what remained into the ledgers as official casino earnings, to be reinvested in more lavish floor shows or paid out in taxes. The skim never really put a crimp in the floor shows, but it certainly diminished the funds available for Nevada’s public works, not to mention likely financed any number of gangland hits across the republic.
The mob was driven out of Vegas in the 1980s, but it was during that era that a new, and this time perfectly legal, skim began that has greatly reduced productive investment in the United States. The new skimmers have been the nation’s largest investors. And although they haven’t had anybody whacked, they have managed, as the mob never did, to bring America’s middle class to its knees.
A recent paper by J.W. Mason, an economist at the City University of New York and a fellow at the Roosevelt Institute, documents the great shift in what U.S. corporations have done with their money. In the 1960s and ’70s, about 40 cents of every dollar that a corporation either borrowed or realized in net earnings went into investment in its facilities, research or new hires. Since the 1980s, however, just 10 cents of those dollars have gone to investment. As a result of the shareholder revolution, the money that once went to expansion and new ventures has gone instead into shareholders’ pockets.
Over the past decade, the payouts that corporations made to shareholders (through dividends and share repurchases) were equal to the entirety of their borrowing. Indeed, as Mason writes, “the businesses that have been borrowing the most since the end of the recession have not been those with the highest levels of investment, but rather those with the highest dividend payments and share repurchases.”
In the decades following World War II, the disposition of funds within corporations was the prerogative of the managers. In the 1980s, however, the managerially controlled firm was challenged by corporate raiders who sought to create leaner firms with lower wages to return more money to shareholders.
A newly deregulated financial sector encouraged corporations to fund their endeavors more from borrowing — which enriched Wall Street — than from earnings. And influential economists such as Milton Friedman propounded the belief that the sole corporate mission was to reward shareholders. That belief had informed very few corporate strategies in the postwar decades. But in the 1980s, it became holy writ in U.S. business schools. It won over top managers when, beginning in the early 1990s, their pay (but not their employees’ pay) was linked to stock performance. Today, the shareholder revolution is triumphant.
Technological change we have always had with us, but it was the coming of both globalization and the shareholder revolution in the 1980s that undid the broadly shared prosperity that Americans had enjoyed in the mid-20th century. The decline of investment and the slowing of productivity growth, the rise of corporate debt and Wall Street, the enrichment of major investors at the expense of employees — all this and more are consequences of shareholder appropriation of funds that used to make the United States thrive.
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