Corporate Growth for the Sake of Corporate Growth
On at least one level, Bernie Sanders remains right: Billionaires are getting richer as everyone else gets poorer. Yes, the top one-tenth of 1 percent own nearly as much wealth as the bottom 90 percent, but the problem is, Sanders stops his rhetoric right there. Such statements lead both his followers and detractors to assume he’s calling for a forced redistribution of all that money through taxes or other penalties.
A better approach would be to focus on the economic system’s inner workings and how they can be retooled. Right now, the American economy demands that businesses take a grow-or-die approach to their industries. Growth of capital ranks above everything else, such that even revenue pales in comparison: A company such as Twitter, which makes $500 million per quarter off an app that sends 140-character messages, is considered a failure on Wall Street. Investors don’t want that $2 billion a year—they want to see the share price grow 100-fold over the rate they bought in at.
The accumulation of capital trumps any effort to create sustainable revenue flows, and this is the reason why so many large companies utilize scorched-earth tactics to dominate their markets. They use their fortunes to undercut competition, and the leverage gained from that to squeeze their competition. All these companies hope to do is establish a monopoly in one industry in order to move into another.
The irony is that, in the long term, the economic landscapes that such companies dominate eventually go fallow. The towns where massive retailers operate, for example, lose the ability to provide sustainable revenue to themselves or the corporations hoping to profit off them. In the relentless pursuit of growth, these companies extract the money that the people and businesses in their markets use to transact—or even buy stuff from the extractive company itself. And while these companies are great at growing by extracting value from their marketplaces and labor forces, they are really bad at putting their money to work, so that it can continue growing over the long term. They can store capital, but don’t deploy it.
They use their fortunes to undercut competition, and the leverage gained from that to squeeze their competition. All these companies hope to do is establish a monopoly in one industry in order to move into another.
In fact, in the past 75 years, corporate profits have gotten smaller as businesses’ total value has increased. Many corporations simply keep cash in the frozen storage of share prices, and as the emphasis has been put on fiscal tinkering, companies have become less interested in innovating. They have started to depend on acquisitions for growth, which is one reason why big pharmaceutical companies simply buy smaller ones that develop new drugs.
I’ve consulted to multiple Fortune 100 CEOs who have actually broken down in tears as they’ve recounted selling their companies’ few productive assets in order to show growth to shareholders. They are tired of cannibalizing their own businesses, laying off loyal employees, and making their companies less enduring just to satisfy the demands of short-term growth imposed by the market.
This is where economic policy comes in. The current economic operating system is programmed to encourage growth and discourage distributed prosperity. One major reason shareholders are incentivized to destroy a business en route to increasing its share price, rather than just accepting a dividend, is that capital gains are taxed at less than half of what earnings are taxed at. That encourages extraction over transaction. More than two-thirds of the income of the top 0.1 percent comes from passive gains, not value creation.
So, if the economy is to be tilted less toward accumulation and the storage of capital, and more toward increasing the velocity of money as it travels between people and businesses, the tax code is a good place to start making revisions. This would mean rewarding revenue, earnings, and even payroll with lower tax rates, while discouraging capital gains with higher ones. Imagine if companies were busy trying to figure out how to avoid taxes by doing business, instead of by selling assets, laying off employees, or hiding earnings overseas.
That is just one example—there are plenty of other ways that the American economy currently prioritizes growth. Banking policy offers few rewards for banks that facilitate local reinvestment rather than lending and then extracting working capital, and it leaves little room for local and complementary currencies. At the moment, the largest companies are the ones that are rewarded with better interest rates, access to lawmakers, and other advantages of scale, but instead rules could be put in place to encourage businesses to learn to succeed in the lowest possible weight class, instead of striving to monopolize a single market. These are the sorts of things that could be changed so that prosperity could be more evenly distributed—and so that big business could be rescued from the cross of growth.
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This article was originally published in The Atlantic and has been re-published here with the permission of the author.