Monday, December 19, 2016

Financialization, Not Globalization, Driving Carrier's Movement of Jobs

President-elect Donald Trump’s apparent success in getting Carrier to partially reverse its decision to shift jobs from Indiana to Mexico has rightfully received a lot of attention. This certainly isn’t the first time a politician has used a bully pulpit to pressure private corporations on labor issues. But to do so using Twitter, and more substantially, to get a major corporation to keep (at least some) jobs in the US is perhaps unprecedented, at least in recent decades. And at least some who decidedly do not share Trump’s perspective on many issues are applauding this move because too many politicians have sat silent while American corporations have moved thousands (millions) of jobs out of the country, even while benefiting from subsidies, tax breaks, government contracts, and other supports. Others have criticized this deal as interfering with free markets, or as furthering corporate subsidies (Carrier received $7 million in tax breaks).

Not debated is that Carrier workers in Indiana make $22 per hour; in Mexico Carrier can pay $3 per hour ($6 including benefits). So Carrier can save $65 million per year by shifting production to Mexico, or a host of other countries with similar labor costs and lax labor protections. So this is universally seen as illustrative of the pressures of globalization. What else could it be? That’s not a rhetorical question. Because this isn’t just a story of globalization, it’s a story of financialization. Financialization is when financial markets, motives, results, and institutions become more important than the production and delivery of goods and services.

Carrier is profitable in Indiana, and its parent United Technologies made billions—yes, billions—in profits last year. So this isn’t a struggling company moving in order to eke out a modest profit to stay in business. Rather, it’s a very profitable company seeking to make even greater profits. Why? Because of pressure from Wall Street. Investors have become insatiable in their demands for higher and higher financial returns all in the name of maximizing shareholder value. Workers thus face demands for wage and benefit concessions, layoffs, and stressful restructurings, all while being asked to invest more of themselves (but denied a role in corporate governance) in order to cut costs, increase short-term profitability, and drive up stock prices.

These issues are magnified by stock repurchases. Rather than retaining and reinvesting cost savings and earnings back into the business as was the norm before the shareholder-value movement, cost savings and earnings are increasingly being used to repurchase shares of the company’s stock. This “downsize and distribute” strategy drives up the stock price which not only benefits investors, but also top executives because of their sizable stock options. This is not globalization; this is financialization.

The shareholder-value movement is one element of financialization. A second dimension of financialization is an increased emphasis on pursuing profits through financial transactions rather than the production and delivery of goods and services. This has two facets.  One facet is the increasing importance of the financial sector. Deregulation of the financial sector allowed commercial banks to becomes more like investment banks and led to industry consolidation so that the small number of key financial firms are “too big to fail.” Moreover, information technology has allowed sophisticated financial investments to be priced and traded.  This has created a concentration of wealth in the financial sector, widens inequalities between Wall Street and Main Street, and further reinforces the primacy of financial investment over productive investment. The other facet of this dimension of financialization is the increased importance of financial activities of nonfinancial firms, such as the Ford Credit arm of Ford, which is forecast to earn pre-tax profits of $1.5 billion in 2017.

Perhaps the most visible and aggressive examples of wringing profits out of companies is the third dimension of financialization—private equity funds that use leveraged buyouts to take over companies that are seen as financially underperforming, install their own cost-cutting leadership teams, strip off assets, and then sell the pieces at a significant profit. This pushes the shareholder value ethos to the extreme by seeing companies solely as assets to be traded for maximum profit, and the private equity structure allows private equity firms to do this using financial engineering strategies that are much riskier and involve a lot more debt than public corporations are able to do, or find it prudent to do. Some private equity interventions create jobs, some destroy them. On net, the evidence seems to suggest that more jobs are lost than created. 

Financialization affects public sector workers, too. For example, efforts to restrain or remove bargaining rights for public sector workers in Wisconsin, Ohio, and elsewhere have consistently been justified by citing the need for budget austerity, including Wisconsin’s “Budget Repair Bill.” This can be seen as an extension of financialization because fiscal concerns are prioritized over service delivery, and because budget deficits and public sector pension shortfalls were at least partly a result of the financial crisis. Internationally, countries with high levels of public debt (e.g., Greece) have had to lower public sector wages in order to meet the bailout provisions of financial institutions like the International Monetary Fund (IMF) and the European Central Bank.

In sum, money is no longer simply a medium of exchange, and financial institutions are no longer simply neutral sources of financing. Rather, the rise of financialization means that financial motives and institutions have become active players that strongly influence corporate decision-making and challenge governmental sovereignty, and thereby affect workers and their communities. Yes, financialization is like globalization in that they both consist of a bundle of  interrelated structural changes in the economy, and they both affect economic and political power. But it’s important to recognize the importance of financialization in today’s economy rather than seeing everything through a globalization lens.

Why does this matter? Partly to have a deeper understanding of key trends that affect the economy, workers, and their communities. But to recognize the importance of financialization also brings the issues back home. Rather than blaming low-cost foreign competition, recognizing the importance of financialization draws attention to Wall Street, investors (which includes people who have retirement investments), the incentives that executives face for buying back stock rather than investing in the production and delivery of valuable goods and services, and the rhetoric around public sector austerity. Financialization isn’t a problem any easier to solve than globalization, but it will never be addressed if we don’t recognize these forces. 

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