There are two high-profile economic stories currently in the news that, on first observation, would seem to indicate completely contradictory realities. The first story is the continual championing of “Bidenomics” by President Joe Biden’s economic team, a catch-all term that is supposed to encapsulate the current success and vigor of the American economy. The second story is the continual occurrence of high-profile labor strikes this year, including UPS, the Writers and Actors Guilds and, perhaps most significantly, the United Auto Workers (UAW) Strike and Kaiser Permanente healthcare workers. This is certainly the most significant and wide-scale labor action in decades and directly flies in the face of many economic narratives presented by both Congress and the Presidency, no matter which party holds majority power at the time.
One of the elephants in the room when talking about organized labor action is that, in America, there has been very little of it in the past 40+ years. The most common form of labor action that Americans are used to seeing is when professional sports leagues go on strike. When a high-profile league like MLB, the NBA or NFL goes on strike, the amount of money that individual participants in the fight make — much higher than the average American income — tends to skew the power dynamics for many people. When someone making $12 an hour sees a millionaire athlete fighting for increased pay, the tendency is to label the athlete as “spoiled” or “ungrateful.” But, that is an overly facile reading of the situation. Professional sports strikes are an extremely high-profile example of what labor can accomplish with leverage. Owners are forced to almost always give in because they realize the talent pool would continually weaken if there is a refusal to pay top-line labor its worth, thus creating a far inferior product and, ultimately, cutting into profit and harming the perception of the league.
But professional sports leagues are an outlier in terms of American labor strikes. Professional athletes are able to come to the table with assets that individuals employed at other large corporations often don’t. Three of the most obvious factors in preventing wide-scale labor action are the gutting of organized labor, fear of retaliation and lack of any leverage over management, all of which do not apply to professional athletes. So, given the myriad factors systemically preventing organized labor action in America, it says that workers are getting increasingly desperate, fearless and unwilling to believe what management promises them. Labor strikes for normal workers, as those who participate in them often say, are not enjoyable but a move of last resort when relations with management become completely untenable. There is a lot of pain associated with labor strikes for workers, so it is a profound indictment of the current economy that we are seeing them pop up at a rate thought inconceivable in recent decades. It’s also worth noting that a low unemployment rate gives workers more freedom to strike as well, as there is not as much fear that one will not be able to find employment when losing a job, particularly a low-wage one.
These simultaneous labor strikes indicate that the American economy is being stretched to its outer limits based on its current structure. As the “Bidenomics” pitch from the White House indicates, traditional top-line indicators such as unemployment, the stock market, year-to-year inflation, GDP and consumer spending are looking strong. However, President Biden’s own comments and support for the striking autoworkers indicate that even he understands that something is amiss despite the strong top-line numbers. Biden, in his comments regarding the commencement of the UAW strike, indicated that the record profits auto manufacturers have seen in recent years must be adequately shared with the workforce. He even marched on the picket line with the autoworkers and spoke to them, encouraging them in their fight. This is a sign that, even in the upper echelons of D.C., where worker power is typically scoffed at, there is an understanding that public sentiment is largely with the striking workers right now. We’re at a tipping point in American history where corporate power has become so overwhelming that even some of its past loyal custodians are looking for ways to rein it in.
When looking at all of the recent labor actions as a whole, common threads emerge. Wildly successful companies have seemingly created a separate cottage industry in the form of stock buybacks and, crucially, have increasingly wedded executive compensation to the stock price. A stock buyback is one of the principal ways a company can use its cash, including investing in its operations, paying off debt or paying out dividends to investors. Crucially, with a buyback, the company can increase earnings per share, all else being equal. When pursued enough over time, buybacks can elevate investors’ returns significantly. They’re also a more tax-efficient way to return the earnings of the business to shareholders, as opposed to dividends, which are taxable.
While stock buybacks can juice returns for shareholders, they can also starve a company of money needed in other areas, such as research and development or investment in new products and facilities. Notably, in the past 12 months, the Big Three automakers (General Motors, Ford and Stellantis) have authorized $5 billion in stock buybacks and reported $21 billion in profits in the first six months of 2023. In the negotiations with the automakers, the UAW specifically targeted stock buybacks as providing a major obstacle in companies spending more on their workers. “Our union has also proposed an enhanced profit-sharing formula that would provide workers $2 for every $1 million spent by Ford on stock buybacks, special dividends and increases to normal dividends,” said UAW President Shawn Fain. “Ford has responded with a concessionary proposal that would change the profit-sharing formula so that workers would actually earn less.”
Aside from stock buybacks, another component that has contributed to the current corporate environment is tying CEO pay to stock performance. According to a 2021 research report by the Economic Policy Institute, “Exorbitant CEO pay is a major contributor to rising inequality that we could safely do away with. CEOs are getting more because of their power to set pay and because so much of their pay (more than 80%) is stock-related, not because they are increasing their productivity or possess specific, high-demand skills. This escalation of CEO compensation, and of executive compensation more generally, has fueled the growth of the top 1.0% and top 0.1% incomes, leaving less of the fruits of economic growth for ordinary workers and widening the gap between very high earners and the bottom 90%. The economy would suffer no harm if CEOs were paid less (or were taxed more). Stock-related components of CEO compensation constitute a large and increasing share of total compensation; realized stock awards and stock options were 73.1% of total compensation in 2016 ($12.6 million out of $17.2 million) and were 83.1% of total compensation ($20.1 million out of $24.2 million) in our sample for 2020. The growth of these stock-related components from 2016 to 2020 was the sole reason total CEO realized compensation grew by $7.0 million from $17.2 million to $24.2 million, up 40.5%. Of the stock-related components of compensation, stock awards make up a growing share while the share of stock options in CEO compensation packages has decreased over time.”
As the study indicates, corporations have increasingly tied CEO pay to stock performance. However, as has been proven time and time again, stock performance often doesn’t reflect the health of a company or its workforce. For instance, a company can lay off a large part of its workforce and the stock price will often go up. Or a company can gut some of its key infrastructure and the stock price may improve under the guise of efficiency. A 1982 SEC ruling drastically changed the complexion of our economy and we’re still seeing the fallout today. As an article from Vox discusses, “After the stock market crash of 1929 and the Great Depression, the United States government passed the Securities Act of 1933 and the Securities Exchange Act of 1934 to try to prevent it from happening again. The 1934 legislation didn’t bar stock buybacks, per se, but it barred companies from doing anything to manipulate their stock prices. Companies knew that if they did a stock buyback, it could open them up to accusations from the Securities and Exchange Commission of trying to manipulate their stock price, so most just didn’t. Reagan appointed John Shad to head the SEC in 1981. A former vice chair of a major Wall Street securities firm, Shad was the first financial executive to head the agency in 50 years, and it showed. In 1982, the SEC adopted rule 10b-18, which provides a ‘safe harbor’ for companies in stock buybacks. As long as companies stick to specific parameters — such as not buying more than 25% of the stock’s average daily trading volume in a single day — they won’t be dinged for stock manipulation. Companies have spent trillions of dollars on their shareholders since the 1980s. Over the last 15 years, firms have spent an estimated 94% of corporate profits on buybacks and dividends. Stock buybacks and dividends aren’t necessarily a bad thing; they’re a way for shareholders to reap the rewards of a company’s success. But shareholder primacy, in which corporate boards prioritize maximizing profits and returns to shareholders above all else, has been on the rise since the 1980s — along with a focus on short-term profits instead of long-term stability and success.”
There have been multiple major strikes across completely disparate industries (UPS, The Writers Guild, The Screen Actors Guild, UAW and Kaiser Permanente) because companies have not been investing enough in their infrastructure and workforce. It’s no longer sustainable, and the momentum is currently behind the American worker. That could obviously change because corporate power has a multitude of ways of fighting back. But we’re currently in a moment where the American public realizes that labor needs more power in order to sustain the kind of country most of us want to live in. For instance, the United Auto Workers took a major haircut in 2008, and they recognize that this is a moment, with public sentiment on the side of workers, to strike for a better deal. Both UPS and the Writers Guild have shown how much labor can extract from management when they are organized and have a coherent, well-reasoned and researched set of demands. No, labor shouldn’t expect miracles, but fighting for fair treatment is something that is currently being instilled in millions of Americans. It’s an encouraging sign because, for decades, too many Americans were not aware of unfair or unjust labor practices and, in the year 2023, that is clearly changing. I think most people can agree that this is an extremely positive development.
