Business, Brexit, and the Precariat

by Tim Weinhold (originally published, July 16, 2016)

I’ve been transfixed of late by Brexit and its fallout. It’s hard not to be. After all, we don’t often come face-to-face with ‘the end of western civilization as we know it.’ OK, not all the commentary has been that dire. By and large, though, it’s been pretty grim.

The vote revealed deep divisions in Britain. Remain voters were, generally, more prosperous, younger, and from London. Leave voters were, instead, mostly working class, older, and from the hinterlands. They cast their votes as an angry protest against business and political elites, against Europe (primarily because EU leadership personifies establishment elites), and against immigrants. Almost no one viewed Brexit as a thoughtful policy choice. Rather, it was an eruption of simmering discontent — or, as the Guardian put it, an “angry insurrection.”

Many pundits noted the commonalities between Brexit and the extraordinary 2016 presidential campaign here in the U.S. Clearly supporters of Donald Trump have much in common with Britain’s Leave voters — especially their anger toward elites and immigrants. Nevertheless, swelling elite/immigrant animus extends far beyond the Anglo world.

Austria recently came within a hair’s breadth of electing a far-right nationalist as president. Actually, they still may, since the country’s supreme court just ruled in favor of an election do-over.

In France, Marine LePen of France’s far-right National Front has, in just the past couple of years, gone from a fringe figure to arguably the country’s most prominent politician. Following the Brexit vote, she predicted she will win next year’s presidential election and then lead France out of the European Union as well.

In Poland, the right-wing Law and Justice party won 39 percent of the national vote in the 2015 parliamentary elections — trouncing the more moderate Civic Platform party that had held power since 2007. In Hungary, Victor Orban’s right-wing Fidelsz party has won the last three elections. Orban has declared his support for “illiberal democracy” and praised the success of authoritarian states like China and Russia.

Nationalism is clearly and broadly on the rise, while liberal democracy is in bewildered retreat. But why? What’s going on?

Hard Times

Don’t look for (good) answers among the reams of Brexit commentary. You’ll read a lot of hand- wringing about the various manifestations of rage — about the ill-considered backlash against globalization; about the rise of fascist-tinged chauvinism; about a xenophobia that smells of racism. But you’ll read very little about the real source of the fear that’s driving the fury.

Actually, that’s not quite true. A decided minority of commentators rightly fix the proximate cause of that fear — a cresting wave of economic hardship and insecurity. But none of them go on to accurately identify the root cause of the economic distress felt by so many. Before we get to that root cause, however, let’s remind ourselves of the extent of the economic angst that is so dramatically upending politics, even democracy itself, across the western world.

Some of the economic facts are increasingly well known. But still stunning. Headlining our new economic reality is the remarkable rise in inequality. The 62 wealthiest individuals now own as much as the entire bottom half of the world’s population — 3.6 billion people. And it’s rapidly getting worse — since 2010 the wealth of these 62 individuals increased by half a trillion dollars while the wealth of the bottom half shrunk by a full trillion dollars.

Maybe even more striking: the top 1% now owns more than all the rest of us combined. Evidently there was more significance to the “We are the 99%” slogan than most of us realized. No surprise then that Joseph E. Stiglitz, Nobel Prize-winning economist and President of the International Economic Association, writes in his book, The Price of Inequality: “Capitalism is failing to produce what was promised … We have a system that is working overtime to move money from the bottom and middle to the top.”

Yet inequality per se is both important and not important. It’s important because we are hardwired to care about fairness (justice). If a system of government or economics seems patently unfair, then its very legitimacy is suspect. Which means that extreme and growing inequality is pushing capitalism’s legitimacy issue to the forefront across the globe.

And yet inequality is not the real issue. For most of us, the fact that some individuals are extraordinarily wealthy is of no real consequence. It may spark a twinge of envy for a few, but most of us don’t see it as a big deal — provided our own economic situation seems sufficient and secure.

And there’s the rub. Because for more and more people, the very idea of economic sufficiency and security is just a fading memory. The numbers, in fact, are startling. According to Edward Wolff, an economist at New York University and author of several books on wealth in America, between 1983 and 2013median net worth for the middle quintile of Americans — definitionally, the middle class — dropped by 25.8 percent. Think about that for a moment. Despite all the economic gains for the U.S. over the past three decades, including record corporate profits, our middle class is decidedly poorer today than in the early 1980s.

The story is worse for those below. For the second-lowest quintile, during those 30 years their wealth dropped by almost two thirds — down 63.5 percent. And the wealth of those in the lowest quintile plunged by an astounding 85.3 percent. According to a September 2014 Demos study, this means that for American whites in the working-class — the bottom 32.1 percent — their average net worth is now $0. As in absolutely no net worth whatsoever!

Flat Incomes/Soaring Costs

As disheartening as that may be, appreciating the true economic plight of middle- and working-class Americans requires accounting for two other factors. First, the relationship between incomes and expenses, especially for big-ticket items like healthcare, housing and college. And second, what’s happened to economic security.

Let’s start with incomes. Real hourly wages — i.e., wages adjusted for inflation — peaked in 1972. In fact, median real income for a full-time male worker in the US is lower today than it was four decades ago. That’s an entire working lifetime during which most middle- and working-class Americans failed to see any appreciable benefit from a growing economy.

During that same period, the cost of big-ticket expenses — healthcare, housing, and college — has soared. Admittedly, housing is a mixed-bag. In many places, housing prices have been flat for some time. But in places with good jobs and a growing local economy, the opposite is true. In the northeast, and on the west coast, and in cities like Austin and Denver, housing prices continue to climb. In my home town of Seattle, for example, Zillow reports that our median home price went up by 17.6 percent in just the past year.

With regard to healthcare, Americans face a double-whammy. Expenses continue to ratchet upwards — average family healthcare costs have tripledsince 2001 — while even good employer-provided insurance plans push more and more cost onto consumers. Deductibles more than tripled just since 2006. Coupled with the rising cost of co-pays, and of the employee-paid portion of insurance premiums, the average annual out-of-pocket employee costfor healthcare now stands at $11,033.

Yet college may be an even more serious threat to Americans’ economic well being. As of the beginning of 2015, the national average cost for four years at a four-year public college was over $120,000. Just since 2008, in fact, tuition at public colleges rose by 33 percent, while states’ cut funding by 17 percent. For a four-year private college the cost is a staggering $240,000. For elite colleges the figure is close to $300,000. All of which explains the fact that Americans now owe an extraordinary $1.27 trillion in student debt.

USA Today put all this in stark perspective. In July 2014 they estimated the price tag for the traditional hallmarks of middle-class life for a family of four at $130,000 a year.¹ Median household income wasn’t even half that — just $51,000. Which means a middle-class lifestyle is impossibly out of reach for middle-tier American earners.

Insecure Jobs

Actually, most mid-level American earners have long since resigned themselves to a much more modest economic goal — survival. That’s because there’s still more bad news.

Jobs, and their income, have become ever-less steady and secure. A generation back, a great many workers were employed by the same company for 20 years, 30 years, or longer. More to the point, these workers knew that layoffs were a measure of last resort — a risk to their financial wellbeing only if their company’s survival were in question. As well, a great many of them were covered by defined-benefit pension plans. Today, it’s just the opposite. Now layoffs are the go-to choice whenever CEOs need to boost their stock price. And pension plans are all but extinct.

Layoffs are hardly the only risk factor. Many retail and service-sector employees are purposely employed as part-timers to keep costs (benefits) down. And both they and “full-time” employees are often sent home whenever customer traffic is down. The result is considerable uncertainty regarding weekly pay.

More recently we’ve seen the dramatic rise of the ‘gig economy’ — where workers aren’t employees at all, they’re simply treated as ad hoc independent contractors. This is the Uber business model which so many other startups emulate. Needless to say, in such scenarios job security is an oxymoron.

Taken together, then, the economic reality for more and more Americans is dark and getting darker — dramatic declines in net worth, stagnant and ever-less-secure incomes, while big-ticket expenses continue to spiral upward. For some, their finances remain passable, yet considerably diminished from a decade or two ago. For the rest, their situations range from difficult to dire.

How dire? And for how many? Consider last year’s remarkable Federal Reserve report that 47 percent of Americans do not have the resources to cover a $400 bill for something like an unexpected car repair or health emergency. 47 percent? $400? That’s right — they would need to borrow from friends or family, sell something, go to a payday loan company, or add to their credit card debt. The Fed also reported that “nearly a third of [Americans] went without some medical treatment in the past year because they could not afford it.” Hardly surprising, then, that a similar study concluded that nearly half of American adults are “financially fragile” and “living very close to the financial edge.”

The economic lives of (at least) half of Americans are, in a word, precarious. And the situation is much the same in other western nations. According to University of London economist Guy Standing, all these financially at-risk people comprise a new socio-economic class — the precariat (yes, an amalgam or precarious and proletariat). These are workers whose economic lives are fundamentally insecure —and whose outlook, in turn, is one of angry resentment. Which explains Standing’s presciently titled 2011 book, The Precariat: The New Dangerous Class. Now in 2016 it’s easy to see Brexit as, essentially, a revolt of the precariat i.e., a revolt by the swelling ranks of all those for whom contemporary capitalism has worked to their decided detriment. And almost everyone believes there is more unrest to come.

A Deeper Cause

So how did we get here? Or, in the more common vernacular, who’s to blame? But it’s here where the drums of ink devoted to Brexit and, for that matter, to analyzing the Trump phenomenon, prove useless. Expert after supposed expert lays the blame at the feet of politicians — castigating them for their venal ambition, for being deeply out-of-touch with their constituents, and for failing to address voters’ grievances, economic and otherwise.

Thomas Friedman’s Brexit post-mortem in the New York Times was typical, largely chalking up the outcome to “a few cynical politicians who [saw] a chance to exploit public fears of immigration to advance their careers.” Going a tad deeper, Friedman further observed that “people are feeling deeply anxious about something … the pace of change in technology, globalization and climate have started to outrun the ability of our political systems to build the social, educational, community, workplace and political innovations needed for some citizens to keep up.”

Friedman was simply echoing the consensus view — our politicians failed us, as did our political systems. All true. And all dangerously misleading.

The rise of the precariat — those struggling desperately to keep their economic noses above water — is only secondarily a failure of government. It is, first and foremost, a business failure, one that dates to the 1980s and represents a conscious choice to advantage shareholders at the expense of everyone else. Until we acknowledge this true cause of our troubles, we’ve got no hope for a cure.

During the middle decades of the 20th century, most corporations operated according to what is known as ‘stakeholder theory.’ CEO’s believed that a corporation’s essential purpose was to serve the interests of all its varied stakeholders, the most important of whom were customers and employees. This period is sometimes called the Great Prosperity because it was a time when virtually everyone’s wages grew, and the ranks of the middle class swelled.

But in the 1980s business adopted a new conception of corporate purpose — ‘shareholder value maximization.’ In this view, corporations exist for a single purpose — to maximize the wealth of their shareholder owners.² Now every dollar that can be extracted from wages or retirement funding is a dollar that can — and should — fatten profits to spur share price. Now every job that can be performed by a cheaper worker overseas can — and should— be moved to boost the bottom line. And every job that can be done by part-timers, or by independent contractors, is a job that can — and should — be eliminated from the ranks of full-time employees. As a result, the share of economic output that now goes to labor has never been lower, and the share that goes to reward capital (owners) has never been higher (see below).

Did politicians aid and abet this process? Absolutely. From Reagan and Thatcher on, they systematically dismantled regulatory frameworks, handicapped unions, and gladly allowed big business to buy an extraordinary amount of political access and influence. But were politicians driving the process by which the economic lives of more and more workers became ever more precarious? Absolutely not. That’s been business people — specifically CEOs single-mindedly intent on inflating short-term share price.

But when business prioritizes owners over others, it chooses selfishness over service. Which means it violates the ‘Love your neighbor’ Golden Rule that is the very bedrock of moral behavior. And takes the pathway that, in the end, brings blight rather than blessing.

For the last few decades, big business has operated from a selfishness-saturated conception of corporate purpose — and shown stunning indifference to its cruel consequences. Until we acknowledge and address this failure, we can have little hope that the economic lives of middle- and working-class Americans, or those in Britain and elsewhere, will take a consequential turn for the better. And no reason whatsoever to believe Brexit will be their last outraged outburst.

Fortunately, there are glimmers of hope. In her first speech as Britain’s new prime minister, Theresa May declared, “We will make Britain a country that works not for a privileged few, but for every one of us.” More pointedly, she also said, “If you’re one of those families [who is] just managing, I want to address you directly. I know you’re working around the clock, I know you’re doing your best, and I know that sometimes, life can be a struggle. The government I lead will be driven not by the interests of a privileged few, but by yours. We will do everything we can to give you more control over your lives. When we make the big calls, we’ll think not of the powerful, but you. When we pass new laws, we’ll listen not to the mighty, but you. When it comes to taxes we’ll prioritize not the wealthy, but you. When it comes to opportunity, we won’t entrench the advantages of the fortunate few.”

The day before, in an op-ed piece in the New York Times, Jamie Dimon, chairman and chief executive of JPMorgan Chase, announced plans to substantially raise salaries for 18,000 of the bank’s lowest-paid employees. He went on to say, “Too many people are not getting an opportunity to get ahead. We must find ways to help them move up the economic ladder, and everyone — business, government and nonprofits — needs to play a role.” More pointedly, he added, “A pay increase is the right thing to do. Wages for many Americans have gone nowhere for too long … more people [must] begin to share in the rewards of economic growth.”

Exactly right. Hopefully more and more business and political leaders will follow May and Dimon’s lead, and business can once again claim its rightful role — as creator of provision and prosperity for many, not just fortunes for a few.

Notes:

1. USA Today’s key assumptions: 4% interest payments on a 30 year mortgage for 90% of the median cost of a new home ($275,000); one SUV automobile; average health care costs; modest education costs for two children, plus a modest college savings plan; and a bit less than 15% of annual earnings contributed to a retirement plan. They noted: “Add one more child and another vehicle and you could easily reach $150,000.” USA Today’s conclusion: “though the American dream is still alive, fewer and fewer of us can afford it.”
2. In her book The Shareholder Value Myth, respected Cornell Law School professor Lynn Stout makes a convincing case that 1) neither shareholders, nor anyone else, are the legal owners of corporations and 2) U.S. law does not obligate senior management and directors to make the interests of shareholders paramount. That said, in the shareholder-centric version of business embraced in the U.S. since the 1980s, CEOs clearly act as if shareholders (senior management very much included) are the effective and beneficial owners of public corporations.

The material provided herein has been provided by Eventide Asset Management, LLC and is for informational purposes only. Eventide Asset Management, LLC serves as investment adviser to one or more mutual funds distributed by Northern Lights Distributors, LLC, member FINRA. Northern Lights Distributors, LLC and Eventide Asset Management are not affiliated entities.

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