Thinking Beyond Monetary Policy and Banking Regulation to Manage the Next Economic Downturn
April 3, 2019
By Katy Milani
This blog post is based on remarks given at “Wall Street and the Next Recession: Protecting Main Street in the Next Economic Downturn,” an event co-sponsored by Americans for Financial Reform and the Center for Popular Democracy at the US Senate.
One thing is certain about markets: they go up and they go down. The current period of economic growth will soon be the longest on record, and more economists are predicting that the next downturn is eminent. While we’re in a moment of relative economic stability, now’s the time to discuss potential ways that the next downturn could show up (i.e., what will drive it) and what policymakers can and should do to get us out of it.
Markets don’t operate in a vacuum. They are structured by the laws, rules, and policies put in place by government. The potential risks we see bubbling up in our financial markets, and the economy more broadly, are a direct result of our economic policies—from financial regulation and corporate governance, to antitrust and tax policies. When we think about how the next downturn might happen or what policymakers should do to get ahead of and manage us out of it, we need to come back to this fact and consider the broad range of policies at our disposal. This means that instead of focusing on one set of solutions—mainly banking regulation and monetary and fiscal policy—as the means to avert and manage evitable economic slumps, we should also look to corporate governance, tax policy, and antitrust law as preemptive measures to fix our broken corporate sector—which will play a likely role in triggering the next downturn.
How Will the Next Economic Downturn Surface?
Our corporate sector is broken. Corporations aren’t making productive investments or putting the more than $1 trillion of firm-level debt toward growth-inducing uses, such as research and development (R&D), capital investments, or better compensation for our workforce. Instead, they’re putting more and more funds, largely financed by debt, toward rewarding shareholders, which is reaching upwards of $2.9 trillion since 2012 through a combination of stock buybacks and takeovers of non-financial corporations.
Toys “R” Us’s bankruptcy and liquidation illustrates the ways in which our corporate sector is broken and how Wall Street predation and the rise of shareholder power plays out in the real economy and impacts everyday people. Former Toys “R” Us employee, Ann Marie Reinhart Smith, shared her story on how shareholder-first behavior ended her 29-year career. The end of her time rising the ranks at Toys “R” Us is a direct result of Wall Street saddling the company with billions of dollars of debt and extracting $500 million to reward shareholders. This drove the company to bankruptcy and now liquidation, which resulted in 30,000 Toys “R” Us employees losing their jobs, many of which were low-wage workers. This is a snapshot of what’s happening to firms across the economy, including industries concentrated with low-wage workers, such as the retail and restaurant sectors. Reinhart Smith now advocates for a corporate America that doesn’t squeeze workers to cut costs.
To illustrate this fact, Irene Tung, from the National Employment Law Project (NELP), and I found that the restaurant industry spent more on payouts to shareholders, in the form of buybacks, than it made in profits—ultimately funding buybacks through debt and/or cash reserves. Buybacks actually totaled nearly 140 percent of net profits in the restaurant industry alone. “Leveraged buybacks”—the issuance of new corporate debt in order to fund stock buybacks—is more pervasive and contributes to the highly skewed economy we have today. McDonald’s, for example, could have paid each of its 1.9 million workers almost $4,000 more a year if the company redirected the money it spends on buybacks to workers’ paychecks instead.
How Can Policymakers Better Manage the Next Downturn?
Solutions to manage the next economic downturn need to center on two things: fixing our broken corporate sector and ensuring that government interventions in markets directly assist workers, consumers, and communities.
Unless we fix our broken corporate sector—which means rectifying today’s high-profit, low-wage economy—banking regulation, securities laws, and monetary policy can only go so far. We need to think outside banking regulatory levers and instead implement solutions that encourage the kind of corporate behavior that prioritizes productive activities that grow the real economy—corporate behavior that supports higher wages, better jobs, and new business development, for example. To redirect our corporate sector to the productive, growth inducing activities we seek, we need to rein in corporate power by raising taxes on corporations, the financial sector, and capital; revamping our antitrust laws to break up concentrated and anticompetitive market power; and reforming the laws that govern corporate decision-making.
We also need policies to rebuild worker power. Workers are a key stakeholder within firms and across our economy at large, who play a critical role in generating corporate value. Bold policy solutions are necessary to rebalance economic power and ensure that workers—who are investing in companies with their own labor on a daily basis—have a voice in the firm and agency over their lives. This includes policies that give workers a say over how corporate boards are structured, including who sits on them. This also must include building countervailing power for workers by promoting workplace unionization, encouraging bargaining across industries, and protecting workers’ rights to engage in collective action—most notably, the right to strike.
To adequately prepare policymakers and the public at large for the next downturn, it is crucial that we implement these policy changes now. As my colleague J.W. Mason recently explained, “We shouldn’t just think about the state of the economy today. We should think about what it may be in a few years.”
Lastly, before the next downturn hits, we should reflect on the lessons from the Great Recession. In the last crisis, government intervention, in the form of taxpayer funded bailouts and monetary policy, consistently prioritized rescuing the financial sector and markets over directly helping people and communities weather the economic turbulence. For example, we neglected to help families stay in their foreclosed homes. Meanwhile, financial institutions received five times more assistance than households during the crisis and throughout the recovery. That is not to say government should not provide direct assistance to the market when the next crisis hits. It should. However, now is the time to redefine what we mean when we deploy public power by the government. When saving the corporate and financial sector, government assistance should come with conditions to ensure that the real economy and everyday people directly see the benefits of this government intervention while also guaranteeing that we will establish rules to prevent what occurred after the last economic downturn.
When the next downturn hits—and it will happen—policymakers will act fast and then reflect later. We don’t have the luxury to ignore the lessons of the last crisis, including how it was managed to benefit banks and corporations over everyday people. And we cannot afford to move forward without structural solutions that rein in our corporate sector and revive the power and voice of workers.