Oral Statement before
The Committee on Banking, Housing, and Urban Affairs
United States Senate
The Dignity of Work
April 29, 2021
Americans for Financial Reform
Chairman Brown, Ranking Member Toomey and members of the Committee, thank you for the opportunity to testify. I am Lisa Donner, the executive director of Americans for Financial Reform, a coalition of more than 200 consumer, community, labor, civil rights, and other organizations advocating for financial policies that serve workers and communities.
Over the past several decades, too many of the laws that structure finance have allowed Wall Street to profit at the expense of almost everyone else. There are a variety of reasons for the growing inequality, economic insecurity, and racial wealth gap that plague our country, but policies that allow big finance to extract increasing amounts of wealth from workers and from communities are a significant factor. We need to identify and change these rules if we are going to build an economy that treats workers with dignity, and fosters security, and the opportunity to flourish.
Decades of deregulation have led to an increase in the size of the financial industry and to the creation of banking behemoths that can put financial stability at risk for all of us through predatory practices and excessive risk taking. At the same time, Wall Street has increased its dominance over decision making at firms that we think of as nonfinancial. Financial engineering and financial speculation have been rewarded and expanded to the detriment of the “real economy” of producing goods, providing non- financial services, and inventing things. And money has been pushed to shareholders and executives rather than workers. People of color have often been targeted first and worst, and working people of every kind and their families and communities have lost ground.
All of these have contributed to a significant upwards transfer of wealth. Since 1989, the share of nation’s wealth held by the middle class shrank from 35 to 28 percent. Families in the bottom half of the wealth distribution had 4 percent of wealth then and only 2 percent now. The wealth of the top 1 percent, on the other hand, grew by more than one-third. The gap between Black and white wealth today is very large, and essentially the same as it was before the civil rights movement. Increasingly, wealth is leading to wealth, and wages are falling behind.
The gap between CEO pay and typical workers’ earnings has gone up 10-fold over the past 50 years. In 1978, the CEO-worker pay ratio was 31-to-1, by 2019 it reached 320-to-1. At least 50 S&P 500 companies paid their CEOs more than 1,000 times more than typical workers.
What are some of the specific mechanisms of the transfer of wealth away from workers?
First, the financial sector is a greater portion of the overall economy and a larger slice of corporate profits than it was 50 years ago. And evidence suggests that you need a sufficiently robust financial sector to have a thriving economy, but once finance gets too big, more banking and more credit hurt rather than help.
Second, payments to shareholders — share buybacks and dividends — have exploded. This comes at the expense of worker pay and benefits, investment in research and development, or more capacity that would sustain and create future jobs. In 1981, before SEC deregulation enabled stock buybacks on a large scale, S&P 500 companies spent approximately two percent of their profits on buybacks, by 2017, it was 59 percent. Share buybacks, along with debt financing, are associated with a decline in the number of workers and with wage stagnation.
Third, abusive practices by private equity and hedge funds have an increasing impact as they grow and provide extreme examples of finance run amuck. Private equity’s worker-harming practices include debt-funded leveraged buyouts; financial engineering that extracts value from target firms through excessive fees, dividends, and stripping out real estate and other valuable assets; and exploiting legal and regulatory blind spots and loopholes.
Private equity takeovers frequently include aggressive cost-cutting through layoffs, offshoring, and wage and benefit cuts. Equity stripping and debt loads imposed on target firms also put them in a precarious position. So, PE-owned firms are more likely to end up in bankruptcy and liquidation, pushing workers out of their jobs. A 2019 study found that 20 percent of the firms taken over by private equity went into bankruptcy — ten times higher than the non-private equity firms.
Fourth, financial stability can sound very abstract — but financial crises do the most harm to those who are already more economically vulnerable, compounding existing disparities. So, deregulation plus mega-financial institutions plus government support for the biggest banks and the financial sector in times of crisis has enabled a “heads they win tails we lose” dynamic where they profit from speculation and overleveraging, get bailed out when things go wrong, and working people suffer the consequences.
Fifth, a set of consumer and investor facing practices have fleeced people. Whether it is those providing investment “advice” who the rules allow to be compensated more for investments that pay lower returns or have higher fees, costing people saving for retirement tens of billions of dollars a year. Or poverty wages and lack of regulation creating an opening for abusive credit products, including things like payday loans and frequent overdraft fees, which transfer billions of dollars a year from those who can least afford it to financial firms and their executives.
None of these dynamics are inevitable, they are a consequence of a host of interconnected policy choices that can and should be changed to honor the dignity of work, and build a more just economy.