New book: Makers and Takers -- While Wall Street is making money for nothing, Main Street struggles for survival
Author Rana Foroohar
Rana Foroohar’s new book, Makers and Takers, is a first-class takedown of the way many American firms make money today. The book’s subtitle – The Rise of Finance and the Fall of American Business – lays out the sad paradox. Some people make money by making things. Others make money by playing clever financial tricks with stuff that the first group makes. In the late 20th Century, some clever folks on Wall Street realized it was far easier to make gobs of money doing the latter than the former. As just one example, Goldman Sachs not long ago was accused of helping raise Coca-Cola profits by hoarding aluminum and forcing its price higher.
A massive system of this kind of speculation was put in place, creating wild profits for “financial innovators” and wild bubble swings for everyone else. But more fundamentally, the rewards for hard work are steered towards the wrong people – the takers, rather than the makers – and that has contributed to the growing income inequality problem that now threatens the American social fabric.
(This story first appeared on Credit.com. Read it there.)
Foroohar calls this development “financialization.” (I have called this 'Money for Nothing' for a long time, with full apologies to Mark Knopfler.
Credit.com asked her to explain what it means for consumers, and for the future of American business.
Me: What is financialization, and what does it mean in the (real or perceived) conflict of Wall Street vs Main Street?
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Rana: Financialization is the growth in size and power of the financial sector – it creates only 4 percent of the jobs in this country, but takes 25 percent of all corporate profits, is regularly one of the top three industry lobbying forces in Washington, and has come to dictate the terms of American business, which results in a corporate focus on short term profits rather than longer term economic growth.
Is there a connection between financialization and what I've seen you call the "falling down" problem, where older workers lose their jobs and have to settle for lower salaries in their new jobs -- or worse?
Yes — the neo-liberal philosophy of letting capital go wherever it will (which is usually where labor is cheapest) is a crucial part of how financialization works. Unfortunately, it leads to greater inequality and slower growth, as wealth is funneled to the top of the economic pyramid. Over the last 40 years, the rise of finance has correlated with fewer start-ups, less R & D spending, flat wages, and lower economic growth.
Here's a parlor game I play with young families. A generation or two ago, if you asked parents what they hoped their kids would be, they'd give answers like doctor, pilot, maybe engineer. Today, that's a harder question to answer. "App developer" doesn't seem to offer the same prestige or security. How would you answer?
Well, today, parents might say they want their kids to be a financier — in fact, it's the number one job choice for MBA grads, in part because wages in the financial sector have so outpaced those in other fields, as a result of the monopoly power of the financial industry.
Just what are they teaching in those MBA programs these days?
Balance sheet manipulation. As I explain in chapter 3 of my book, (one) of the biggest complaints that business leaders have about MBA education today is that it has become too focused on the short term engineering of capital, rather than innovation, industrial expertise, or a real understanding of how to nurture human talent.
Uber-rich social commenter Nick Hanauer has famously said, and repeated, that income inequality could eventually lead to an ugly pitchfork scene. Is that where the Makers vs Takers world is headed?
If we don’t fix things, for sure. I'm a big fan of Thomas Piketty, and as he sketched so clearly and powerfully in his book, greater income inequality eventually leads to political and social instability. It doesn't have to be that way, though. As I talk about in my book, there are countries and communities that have found better more sustainable ways to grow. Private companies in the US, for example, that aren't under pressure from the financial markets, invest about twice as much into productive things like factory upgrades, worker training, and R & D, as similar public companies do.
Many Main Street Americans will be hearing these concepts for the first time, and it will make them feel helpless -- like there's a party they haven't been invited to, or a game where the rules are a secret. What can they do to react to this?
The most direct way to respond to the problem of financialization is via our retirement savings. Asset management is the fastest growing and one of the most exploitative areas of the financial sector. Actively managed funds that have higher than average fees and lower than average returns can eat up 30-60 percent of our retirement nest egg over our lifetimes. Put your money in an index fund, and forget about it.
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