Most people did not grow up with the narrative that economists are beginning to tell about the last 25 years. It was easy once. Businesses, employees, and the nation all prospered. After the war, that order persisted for a number of decades. The connections then started to loosen. The chain now hangs in fragments, and the sound of those fragments clattering against one another is what economists refer to as the micro-macro divide.
It can be seen in certain places as well as in the data. When you drive through Youngstown or Allentown, you can see the texture of the disconnection: the new warehouse that pays about half as much as the old steel mill, the boarded-up retail, and the still-handsome civic buildings. According to macro data, the nation is wealthier than before. It is obvious that the wealth, in whatever form it has taken, went somewhere else when you stroll through these towns.
McKinsey’s Global Institute, which spent years tracking money flows through about 5,000 major OECD companies, provided the most lucid accounting of that “somewhere else.” The simplicity of the headline finding was unsettling. Capital income per dollar of revenue increased by roughly two-thirds between the mid-1990s and 2018. There was a 6% decrease in labor income per dollar of revenue. In those same companies, productivity increased by twenty-five points. Wages increased by eleven percent. The math isn’t nuanced.
By now, everyone knows what happened to the missing cash. It increased share prices, dividends, and executive compensation packages, which have begun to resemble a distinct economy rather than just compensation. Up until 1982, stock buybacks were practically prohibited in the US; however, after the rule was changed, they became commonplace and aggressive following the 2008 financial crisis. Over the course of the last ten years, S&P 500 companies have paid out more to shareholders than they actually made, using low-cost debt to make up the difference. The market adored it. Most employees were unaware of it until much later.
Speaking with those who research this gives the impression that the change was more institutional than ideological. Returns were desired by pension funds. Bonuses for executives were based on the share price. Debt became more affordable than equity due to tax laws. When considered separately, each piece sounded technical and convincing. When combined over a thirty-year period, they created a machine that is far more effective at converting business success into shareholder wealth than it is at converting business success into wages. As this develops, it’s difficult to avoid thinking of Gardiner Means and Adolf Berle, who cautioned in 1932 that the modern corporation was creating its own internal logic. Before they realized it, they were correct.
Who truly owns what makes up the other half of the gap. Approximately 66% of all corporate equity in the US was owned by the top 10% of households in 2018, compared to 59% in 1995. Something that resembles a rounding error is contained in the bottom half. Therefore, for a relatively small number of people, the great corporate boom of the last 25 years is truly a boom. For everyone else, the boom is primarily something they read about while they wait for the bus, like a market index scrolling across the bottom of a screen.
The abstraction is made concrete by the difference in cost of living. No productivity statistic can account for the rise in rent in Toronto or Austin. Since the early 2000s, the cost of health insurance has nearly doubled. In real terms, a four-year degree at a public university now costs more than many parents made during their own enrollment. Fast fashion, smartphones, and flat-screen TVs are examples of items that have become more affordable, but they do not determine a person’s ability to build a life. When rent takes up 60% of one’s income, a cheap phone is little consolation.
Whether this is stable or if something will eventually give is still unknown. Some economists predict that political pressure, aging populations, and tighter labor markets will eventually drive wages back up. Others see no reason for the trend to change on its own when they examine the same data. The mechanisms that caused the divide are still in place. The terms used in business have not evolved. Observing successive earnings seasons gives one the impression that the system is performing exactly as intended and that the design itself—rather than any one of its villains—is the issue that no one really wants to address.
