Maybe the greatest change that has occurred during the life of Generation X in the United States occurred in November of 1982 when the SEC adopted Rule 10b-18. This new rule allowed companies to begin doing stock buy backs and from that day forward an interesting thing has happened.
First let's talk about stock buy backs and what they are and how this has had such a significant affect. Especially since this wasn't even something created by congress and we've had multiple administrations of different parties who could have changed the rule and didn't.
Prior to this rule change if you were a corporation in the United States you had essentially four choices you could make with your earnings.
1. You could save the money.
2. You could invest the money in your company.
3. You could invest the money in your employees.
4. You could pay your stock holders a dividend.
If we look at growth numbers from 1942 to 1982 we get some idea of how companies were investing their earnings.
This shows the wage growth for employees broken up into two groups. First from 1942 to 1982, then from 1983 to 2023. The period from 1942 until 1982 was a boom for wages. Especially between the years of 1947 to 1973. Wages during that time grew as much as 95%. The economy slowed in the 1970's. In 1973 GDP grew at 5.6% the combined growth from 1974 and 1975 was -.7%. Things bounced back from 1976 until 1979, but then 1980 was another down year with negative GDP growth. This brought in Ronald Reagan and a new approach. The 80's would mark a return to solid GDP growth but there was a change in how wage growth would rebound. It rebounded for higher wage earners, they grew an estimated 12% to 15% during that time while middle wage earners grew only 5% to 7% and low wage earners grew only 2% to 4%. From 1942 to 1982 salaries had increased for low wage earners an average of around 3% a year. Now during an entire 10 year positive economy those wages had only grown at most 4%. Even the 15% increase for high wage earners seems little compared to what growth had been up to 1983. High wage earners had been experiencing 4.5% growth in wages per year.
When we think about wages we also have to think about wealth distribution. In the chart above you can see the wealth distribution from 1942 to 1982 and then from 1983 to 2023. You'll notice that the top 1% and top 10% expanded their percentile dramatically over these last 40 years completely eliminating the bottom 20% for having any accumulated wealth. This transfer of wealth really picked up steam between 1983 and 1992. During that 10 year period middle income earners dropped a full 10% and the bottom earners dropped 3%, while the top 10% gained 8% and the top 1% gained 6%. This trend would continue in the 90's and onward until we reach the level in the chart you see above. In 1982 the middle income controlled 43% of the wealth. By 2023 that number would be down to just 12%, the bottom income down to less than 1%.
The question is why would wages and wealth distribution be so affected by a simple rule change at the SEC and why has no one done anything to fix it?
Remember we talked about corporations having 4 options for their money prior to the rule change. Well now they had 5 options.
1. You could save the money.
2. You could invest the money in your company.
3. You could invest the money in your employees.
4. You could pay your stock holders a dividend.
5. You could buy back stock.
Prior to the ruling change stock buy backs were seen by the SEC as a way to manipulate stock value and thus was considered illegal. After the rule change as you can see from the chart above corporations began to use the majority of their earnings to do stock buy backs.
In 2017 the Trump administration pushed through a 40% tax break for corporations. The goal was that the money saved by corporations would be invested in infrastructure and wages. During that time data has shown that the vast majority of that 40% savings went into stock buybacks while wages and infrastructure investment have essentially stayed flat.
There are other key factors that have lead to the wealth distribution shift and wage stagnation, but one critical piece is SEC Rule 10b-18. One question we have to ask ourselves is why has no administration every changed this rule back? When the Trump administration saw that the money from the 2017 tax cuts was going to stock buy backs did they not make some change to how companies can use their funds?
The short answer is propaganda.
After the stock buybacks began increasing after the tax cuts Marco Rubio announced a proposal along with some Democrat colleagues to discourage this investment. He said, “At present, Wall Street rewards companies for engaging in stock buybacks, temporarily increasing their stock prices at the expense of productive investment.”
The response from corporate America, conservative think tanks, and Republican lawmakers was simple. You are wrong, you don't understand how things work, and you are abandoning free-market principles. Meanwhile the response from Democrats, the media, and liberal think tanks was just as simple. We told you so.
It left Marco Rubio in an odd space. He wanted to side in this case with the Democrats and the left, but was welcomed with criticism and skepticism rather than support of what he was saying. His own party and like minded groups hit him with the same argument they had been using against the Democrats and left leaning groups for decades, you don't understand business.
In short propaganda. Sure people on the right pointed to numbers that showed investment, but those numbers were no different that any of the previous years. They pointed to wage growth, but the wage growth was only felt by those in the top 10% of earners and even that was only at the same levels they had been in previous years. The Democrats pointed to the fact that they had been arguing about this problem for years, but since 1982 the Democrats had controlled the white house for 16 years and then another 4 years and never once did anything to change Rule 10b-18.
So where does this leave Generation X and how has this rule defined it? Well it leaves Generation X as a generation who watched the middle class become the lower class in our societal structure, while also watching the lower class fall off of a cliff into nothingness. If the trends continue the middle class will soon find themselves falling off of a cliff during Generation X's lifetime. When people wonder why Trump got elected or why someone like Zohran Mamdani is now the Democratic nominee for mayor in New York City, it is because of this change.
We have had a revolution in the United States, we have had a civil war in the United States. We have never had a civil war based primarily on wealth inequality, but that is something that seems to be looming. When you have married couples who both have college degrees, both have full time jobs that solidly place them in the middle income bracket, and yet they find themselves struggling financially, can't buy a house, can't afford anything frivolous. There is a problem. For the most part people just want to live their lives and be happy. When you take away their ability to live their lives, they will start to see that something is terribly wrong.
No comments:
Post a Comment