Even more so than usual, in recent weeks Wall Street Journal headlines have been messaging pet beliefs of the capitalist classes. We’ll soon discuss a new article, CEOs Trumpet Smaller Workforces as a Sign of Corporate Health, as further proof that rentierism and short-termism are fattening corporate wallets at the expense of ordinary citizens. These plutocrats and their corporate minions need to connect the dots between their labor-exploitative behavior and the rise of Zohran Mamdani and a possible return to influence by Jeremy Corbyn.
Even more so than usual, the Journal has been cheerleading the purported vigor of the US and global economy. We described why those conclusions were questionable….unless you are of the school that the stock markets and not real world conditions are what “the economy” amounts to. And a piece by Wolf Richter that we posted yesterday provides more evidence that market conditions are indeed frothy, and that the Fed is not following the old William McChensey Martin policy of ordereing the punch bowl removed just when the party was really warming up.
This article celebrates CEOs as rentiers. Consider its first sentence:
Big companies are getting smaller—and their CEOs want everyone to know it.
This is a trend we called out in 2005 in a Conference Board Review article, The Incredible Shrinking Corporation. A key message is that increasing profits via obsessive cost cutting, as opposed to investment and entering new markets (where margins are often fat until competition really ramps up), is a self-limiting process. It amounts to slow motion liquidation. This process has been masked by acquisitions, so the company appears to be bulking up even as constituent parts of the acquirer and acquired have been contracting.
Key bits from that article:
The pattern of unhealthy corporate responses started in the late 1990s, when CEOs began pumping up corporate profits beyond reason. In a 2002 Brookings Institution paper, Yale economist William Nordhaus noted a decline in corporate profits, reflected in the National Income and Product accounts, from mid-1997 through early 2000 and a further slight fall into 2001. But S&P-reported profits for that period showed a very different picture—they grew 70 percent from the beginning of 1998 through early 2000, before falling by nearly 50 percent from early 2000 to early 2001..
The most extreme manifestation of corporations’ desperate desire to look good was accounting fraud, which
peaked in 2002…Other manifestations of corporate dysmorphia include:
Employees as liabilities. Despite the cliché “employees are our most important asset,” many companies are doing everything in their power to live without them, and to pay the ones they have minimally…Instead, the Wal-Mart logic increasingly prevails: Pay workers as little as they will accept, skimp on benefits, and wring as much production out of them as possible (sometimes illegally, such as having them clock out and work unpaid hours). The argument is that this pattern is good for the laboring classes, since Wal-Mart can sell goods at lower prices, providing savings to lower-income consumers like, for instance, its employees. The logic is specious: Wal-Mart’s workers spend most of their income on goods and services they can’t buy at Wal-Mart, such as housing, health care, transportation, and gas, so whatever gains they recoup from Wal-Mart’s low prices are more than offset by the rock-bottom pay…
The dangers of the U.S. approach are systemic. Real wages have been stagnant since the mid-1970s, but consumer spending keeps climbing. As of June, household savings were .02 percent of income (note the placement of the decimal point), and Americans are carrying histor ically high levels of debt. According to the Federal Reserve, consumer debt service is 13 percent of income. The Econ omist noted, “Household savings have dwindled to negli gible levels as Americans have run down assets and taken on debt to keep the spending binge going.” As with their employers, consumers are keeping up the appearance of wealth while their personal financial health decays.
Part of the problem is that companies have not recycled the fruits of their growth back to their workers as they did in the past. In all previous postwar economic recoveries, the lion’s share of the increase in national income went to labor compensation (meaning increases in hiring, wages, and benefits) rather than corporate profits, according to the National Bureau of Economic Analysis. In the current upturn, not only is the proportion going to workers far lower than ever before—it is the first time that the share of GDP growth going to corporate coffers has exceeded the labor share.
We have pointed out repeatedly that Warren Buffett in the early 2000s deemed the corporate profit share of GDP to be unsustainably high at 6%. It’s been at close to double that level in recent years.
Even business stalwart Fast Company has expressed concern about another manifestation of corporate labor-squeezing: the yawning and generally rising gap between average worker and CEO pay. From The gap between CEO and worker pay keeps increasing—and Trump’s policies are making it grow faster:
Ten years ago, just months after announcing his presidential campaign, Donald Trump called sky-high CEO pay “disgraceful,” telling CBS’s Face the Nation in 2015: “You see these guys making enormous amounts of money, and it’s a total and complete joke.”
Since then, average CEO pay—and the gap between it and median worker pay—has grown even more. And as president, Trump’s policies are making that inequality even worse.
The average CEO-to-worker-pay ratio for S&P 500 Index companies in 2024 was 285 to 1, according to the AFL-CIO’s annual Executive Paywatch report—an increase from 268 to 1 in 2023….
The tax cuts in Trump’s “big beautiful bill” are set to increase CEO take-home pay even more. Each CEO is set to get about $500,000 back from those tax cuts; all together, the CEOs of the publicly traded companies in the AFL-CIO’s Executive Paywatch database will see a combined $738 million in income tax savings. Meanwhile, that bill has severely cut funds for government services like Medicare health coverage, Supplemental Nutrition Assistance Program (SNAP) benefits, and school lunches….
Skyrocketing CEO pay isn’t a recent issue; the gap between what a CEO takes home and what an average worker earns has been widening for years. Looking at the S&P Index specifically, the average CEO compensation package increased $6.5 million in the past decade alone, the report notes. In 1965, the pay ratio between CEOs and average workers was 20 to 1.
And the Executive Paywatch analysis greatly understates how much CEOs are actually paid. From The Atlantic in 2016:
On its website, the AFL-CIO, the largest federation of labor unions in the United States, has a page called Executive Paywatch that is meant to demonstrate just how much corporate executives’ pay dwarfs the compensation of the average worker. On this page, the AFL-CIO reports that the total pay of the CEOs of America’s largest corporations was, on average, 373 times larger than the earnings of an average American worker in 2014, and 335 times larger in 2015. These are striking ratios that are meant to bolster the AFL-CIO’s message: The top executives of America’s corporations are vastly overpaid, and most American workers are woefully underpaid.
For that reason, it may come as a surprise that the AFL-CIO’s calculations grossly understate just how much money executives make. While the AFL-CIO’s calculations are for CEOs at S&P 500 companies, our analysis of data for the 500 highest-paid senior executives (not all of whom are CEOs) from the ExecuComp database, which is maintained by Standard & Poor’s, suggests that the Executive Paywatch ratios are far too low. Data on these executives’ actual take-home pay, which is published, as required by law, in companies’ annual filings with the Securities and Exchange Commission (SEC), show that in 2014, senior executives made 949 times as much money as the average worker, far higher than the AFL-CIO’s ratio of 373:1.
Now let’s turn to the Wall Street Journal putting a happy face on this trajectory….because it is a happy turn of affairs for corporate executives and stock market touts, even though it amounts to long-term looting of the companies and hollowing out of the economy. From the article:
Big companies are getting smaller—and their CEOs want everyone to know it.
The careful, coded corporate language executives once used in describing staff cuts is giving way to blunt boasts about ever-shrinking workforces. Gone are the days when trimming head count signaled retrenchment or trouble. Bosses are showing off to Wall Street that they are embracing artificial intelligence and serious about becoming lean….
The shift reflects a cooling labor market, in which bosses are gaining an ever-stronger upper hand, and a new mindset on how best to run a company. Pointing to startups that command millions in revenue with only a handful of employees, many executives see large workforces as an impediment, not an asset, according to management specialists. Some are taking their cues from companies such as Amazon.com, which recently told staff that AI would likely lead to a smaller workforce….
Companies are used to discussing cuts, even human ones, in dollars-and-cents terms with investors. What is different is how more corporate bosses are recasting the head-count reductions as accomplishments that position their businesses for change, he said.
“It’s a powerful kind of reframing device,” Mukewa said.
Large-scale layoffs aren’t the main way companies are slimming down. More are slowing hiring, combining jobs or keeping positions unfilled when staffers leave. The end result remains a smaller workforce….
Fast-rising companies are at the forefront of figuring out how to do more with less. Garry Tan, chief executive of Y Combinator, the Silicon Valley startup accelerator, said this spring that the biggest change he sees in the startup ecosystem now is how effective companies can be with hardly any employees, using AI to grow…..
The story makes clear that a great deal of this enthusiasm for heaving workers over the side is based on the premise that AI can pick up the slack. But as we have chronicled at nauseating length, large language models are not only inaccurate and bad at certain tasks, but their propensity is to get worse over time, due to garbage-in, garbage out compounding. That is not to deny that some narrow AI applications are highly productive. But it seem very likely that what these CEOs are so excited about is using AI to replace many customer-facing, customer-problem-solving roles.
However, some of the executive eagerness because Wall Street rewards this fad-chasing:
Some reductions might have little to do with adoption of the technology and more with executives’ desire to please investors. Efforts to reduce head count or restrain hiring show that an executive has a willingness to make tough calls, [communications firm] Sloane’s [Zack] Mukewa said.
We have mentioned, with some examples, C-level public company contacts often told us that the financial case at their company for offshoring and outsourcing were weak, but they went ahead to please Mr. Market.
I didn’t read all of the 930 (so far) comments on this article, but they seemed to be overwhelmingly negative. Some examples:
STEPHEN BEUCLER
Yet another article saying that AI is replacing people with no details as to how it’s doing it? What work is it doing? I’ve seen nothing but slop code and unnecessary reports being generated. If AI is so useful, then what is it doing? Somebody has to ask if the emperor has clothes…Tom Peyton
Strange. With the war for talent and 4% unemployment, I would think a far-sighted CEO would probably brag about effectively re-skilling and re-deploying staff to grow his business/revenue and quality faster than previously thought possible.Paul Sonnenfeld
And all is well and good until that product liability suit is filed against your company and your legal staff has to explain to the judge and jury why terminating the folks that actually tested your products or services was such a good idea. The fact that a customer was injured or killed or property was destroyed is merely an unexpected effect of the down-sizing.
Two words for the CEOs: Brian Thompson.Patricia Sette
I imagine the people who came up with China’s one child policy in the late 70’s “could not have been prouder” either, even though they were strangely unable to foresee the predictable drawbacks – among them a quickly skewed sex ratio when a generation of women “went missing.”So I guess I shouldn’t be surprised that these proud CEOs can’t foresee how difficult it will be to maintain, let alone, expand, their markets when so many former workers “go missing,” along with the money they earned. AI can do a lot of things, but it can’t buy goods and services that the new lean companies need to sell.
But this trend is unlikely to stop until, as one of the Journal comments indicated, there is a lot of litigation for liability thanks to unsupervised AI, or the pitchforks come out.
