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OpEdNews Op Eds    H1'ed 5/12/20

Here's Why the Covid Crisis Will Be Worse Than the 1930s

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  • The St. Louis Fed released unemployment figures at 14.7 on May 8, 2020
  • The highest unemployment during the Great Depression hit 15.01 in 1931
  • Wall Street, major corporations and the top 10% will bounce back, but not the 90%

We are not experiencing one crisis caused by the Corona virus calamity, but four. The other three are hidden under it. They remain largely undetected in the mainstream media. They are about to surface for, as that intrepid investor Warren Buffet once quipped, "It's only when the tide goes out that we see who has been swimming naked."

Not only are they going to cause an increase in the coming economic disaster, as they are main methods of siphoning up the wealth of a nation to the already rich, their invisibility will be staunchly protected. They will remain in full effect after the next recovery. I discuss the first of these unseen causes below.

As historian Walter Scheidel wrote in his insightful book a couple of years ago, The Great Leveler, "It is not a crisis that increases or decreases economic inequality, it is the government's response". For a time, the government's response to a crisis created economic equality, but then the ultra-high net worth group learned how to ensure that they profited from a crisis and not the salaried classes.

Recall that the reforms after the Great Depression created economic equality by giving the stimulus funds by mortgage relief to the homeowners (not the banks), social security and the Security and Exchange Commission. By 2008, the stimulus money benefited only the 10%; the income and wealth of the salaried classes stagnated. That was no accident. And we see that much of the 2020 Coronavirus stimulus package is being grabbed by big businesses that show bleak financial statements with absolutely no reserves for any downturn in the economy- as they once kept. This failure to prepare was a conscious decision.

Not enough voters understand that these businesses voluntarily put themselves in this position so they would not have not a penny put aside for a crisis. Thus, there was no public support for true reforms that could be demanded as part of the present handouts to corporations. True, the Democrats got some, but temporary, restrictions on a few of the mechanisms for the upward transfers of wealth to the super rich. But they entirely missed this one: shareholder value.

It's too late to save our economy, but we might be able to prevent this from happening again for the sake of our grandchildren. It will take discipline to understand how it's being done. As head of the Grantland L. Johnson Institute of Leadership Development, Lee Turner, wrote to me, the average reader lacks the 'scaffolding' to understand these issues. So, here's an attempt to bridge that gap. It's not an easy read because some of the concepts are unfamiliar.

Unnecessary Unmanageable Corporate Debt

A full two years before the new coronavirus challenge emerged, analysts warned that corporations were taking on so much debt that many would likely default on these debt payments on the next mild downturn in the economy. They had abandoned the practice of keeping a rainy-day fund for the bad times. Jeff Cox writing for CNBC in 2018 called the massive "corporate debt bomb was bubbling in the US economy". With a certainty, the coronavirus has lit the fuse.

How come this mountainous corporate debt when the 2008 reforms returned corporations to prosperity? The fault lies with the neo liberal school of economics and especially with one of its most respected promoters, Nobel prize winner, Milton Friedman.

Milton Friedman on receiving his Nobel Prize
Milton Friedman on receiving his Nobel Prize
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Friedman on winning his Nobel Prize

With the assistance of the authority of the New York Times, in 1970 (note this date as the beginning of the end of economic equality), Friedman promoted the theory of shareholder value.

The purpose of a corporation, he theorized from his armchair at the University of Chicago, is to maximize value for shareholders. It became known as the Friedman doctrine.

So, what happened? I can do no better than to repeat how, in 2012, Cornell Law Professor Lynn A. Stout captured the aftermath in her article in the Harvard Law Review: In the quest to

"unlock shareholder value" they [CEOs] sell key assets, fire loyal employees, and ruthlessly squeeze the workforce that remains; cut back on product support, customer assistance, and research and development; delay replacing outworn, outmoded, and unsafe equipment; shower CEOs with stock options and expensive pay packages to "incentivize" them; drain cash reserves to pay large dividends and repurchase company shares, leveraging firms until they teeter on the brink of insolvency;""

Of course, her warning was ignored.

Every item she lists demands a full article, but this post will focus on 'leveraging firms until they teeter on the brink of bankruptcy'. 'Leveraging' is a bit of jargon to hide that what the corporations are really doing is going into debt for business expanses so there is money to pay shareholder dividends.

Previously, sound corporate practice required saving 50% of profits for future needs, such as product development, expansion and the like, but also for risk management because of expected downturns in the business cycle with a special rainy day provision for the totally unexpected. Businesses knew to expect the unexpected and provide for it. All that prudence was abandoned a fter 1970 to strip every cent of profit by dividends to shareholders.

There is a false image in the public mind that all shareholders contribute cash to a corporation, but these shareholders only extract value from the corporation, giving it no benefit. These shareholders are not the investors who took high risk by funding the founders when they were working out of their garage. They are the money managers of hedge, equity and pension funds who search for well-established corporations with assets that they can wrest from the corporation. The money that they pay for the shares does not go to the corporate treasury, it goes to prior shareholders. That's why the corporation gets no benefit.

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Jan D. Weir is a lawyer who has advised international corporations, banks and accounting firms. He has taught business law at the University of Toronto, and is the co-author of The Critical Concepts of Canadian Business Law (6e) Pearson. Follow him for updates on laws that affect inequality  (more...)
 

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