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"Labor and finance in the United States" in Cynthia Williams and Peer Zumbansen, eds., The Embedded Firm: Corporate Governance, Labor, and Finance Capitalism, Cambridge Univ. Press, 2011

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Introduction: We live in an era of financialization. Since 1980, capital markets have expanded around the world; capital shuttles the global instantaneously. Shareholder concerns drive executive decision-making and compensation, while the fluctuations of stock markets are a source of public anxiety. So are the financial scandals that have regularly occurred in recent years: junk bonds in the 1980s; lax accounting and stock manipulation in the early 2000s; and debt securitization today. We also live in an era of rising income inequality and employment risk. The gaps between top and bottom incomes and between top and middle incomes have widened since 1980. Greater risk takes various forms, such as wage and employment volatility and the shift from employers to employees of responsibility for pensions and, in the United States, for health insurance.
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Part III
Labor’s evolution in the new economy
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Labor and  nance in the United States
Sanford M. Jacoby
T his chapter is dedicated to Lloyd U lman: scholar, teacher, mensch. It is a revised ver-
sion of a prev ious paper, “Finance and Labor,” which  rst appeare d in Comparative
Labor Law & Policy Journal (2008).
1 IMF, World Economic Outlook: Globalization and Inequality ( Washin gton, DC, 2007),
p. 48.
I Introduction
We live in an era of nancialization . Since 1980, capital markets have
expanded around the world; capital shuttles the global instantaneously.
Shareholder concerns drive executive decision-making and compensa-
tion, while the  uctuations of stock markets are a source of public anx-
iety. So are the  nancial scandals that have regularly occurred in recent
years: junk bonds in the 1980s; lax accounting and stock manipulation
in the early 2000s; and debt securitization today.
We also live in an era of rising income inequality and employment risk.
The gaps between top and bottom incomes and between top and mid-
dle incomes have widened since 1980. Greater risk takes various forms,
such as wage and employment volatility and the shift from employers to
employees of responsibility for pensions and, in t he United States, for
health insurance.
T here is an enor mous lite ratu re on  nancial development and another
on inequality. But relatively few studies consider the intersection of
these phenomena. Standard explanations for rising inequality – skill-
biased technological change and trade – account for only 30 percent of
the var iation in aggregate inequality.
1 W hat else matters ? We arg ue here
that an omitted factor is  nancial development. This study explores the
relationship between  nancial markets and labor markets along three
dimensions: contemporary, historical, and comparative. For the world’s
industrialized nations, we  nd that  nancial development waxes and
wanes in line with top income shares. Since 1980, however, there have
been national divergences between  nancial development – de ned
here as the economic prominence of equity and credit markets – and
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S.M. Jacoby278
inequality. In the United States and the UK, there remains a strong
positive correlation but in other parts of Europe and in Japan the rela-
tionship is weaker.
What accounts for swings in nancial development and inequality
and the relationship between them? Economic growth is one factor.
Another is the politics of  nance. The model presented here is simple
but consistent with the evidence: upswings in  nancial development
are related to political pressure exerted by elite bene ciaries of nan-
cial development. Political objectives include policies that favor  nan-
cial expansion – and  nance-derived earnings – and the shunting of
investment gains to top-income brackets. Against  nancial interests
is arrayed a shifting coalition that has included middle-class con-
sumers, farmers, small business, and organized labor, upon which we
focus here. W hen successful, these groups cause a contraction in the
economic and political signi cance of  nance, which registers in the
distribution of income and wealth. In other words, politics dr ives
the swings in  nancial development and mediates the  nance–labor
Political contests occur not only in the public arena but also within
rms. We expand the politics of nancial development to include
contests over corporate resource allocation through the mechanisms
of corporate governance. Corporate governance affects the distribu-
tion of a  rm’s value-added among shareholders, executives, work-
ers, and retained earnings. Here too, organized labor is an important
player. In both public and private arenas, labor wields in uence via
its bargaining and political power and, more recently, via its pension
Our historical framework draws from Karl Polanyi ’s classic study of
markets and politics in the nineteenth and early twentieth centuries.
Polanyi challeng ed econom ic liber alis m by showing that market expan-
sion in the Western countries was not a natural development; it was
embedded in politics and society. He also showed that markets are not
self-regulating. Undesirable side-effects – instability, monopoly, exter-
na lit ie s – can not be re cti ed by the market itself. As a result, every mar-
ket expansion is followed by spontaneous countermovements to “resist
the pernicious effects of a market-controlled economy.” Polanyi called
this the double movement “the action of two organizing principles in
society … economic liberalism, aiming at the establishment of a self-
regulating market … [and] the other was the principle of social protec-
tion a iming at the c onservation of man and natu re as well as productive
organization.” Writing in the early 1940s, Polanyi could not foresee
the relevance of his ideas to our present age. Today, laissez-faire ideas,
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Labor and  nance in the United States 279
including those relating to  nancial markets, again are with us as are
countermovements to contain the market’s failings.
The focus of this study is on  nancial markets in the world’s richest
nations. Much of the material is based on the American experience,
although there are comparisons to Europe and Japan. Section II ana-
lyzes the mechanisms that link contemporary  nancial development to
rising inequality and risk. Section III considers the political and ideo-
logical bases for post-1980  nancial development and cor porate gov-
ernance. Section IV is historical, tracing political movements to contain
nance and emphasizing the contributions of organized labor. Section
V takes us back to the present. It considers the efforts of organized labor
to re-regulate  nance and reshape corporate governance, in part by
using its pension capital.
II Labor and  nancial development since 1980
Financial development since 1980 is unprecedented. The value of  nan-
cial assets – bank assets, equities, private and public debt securities –
increased from $12 trillion in 1980 to $140 trillion in 2005. Equities
alone drove nearly half the rise in global  nancial assets during those
years, with stock market capitalizations reaching or exceeding levels not
seen since t he 1920s.
Along with this has come abundant capital that lowers debt costs,
thereby permitting banks, hedge funds , and private equity funds to
leverage small asset bases.
Although  nancial development is global, the wealthiest regions
of the world – the United States, the UK, the Eurozone, and Japan –
account for 80 percent of world  nancial assets. Finance has become
a key sector of the American and British economies, representing over
15 percent of their GDPs and over 40 percent of total corporate pro ts
before the  nancial implosion that started in 2008.
Finance is vital to economic growth. It provides capital to sustain
rms and households, and mechanisms to mitig ate risk. The relationship
2 Karl Polanyi, T he Great Transformation: The Political and Economic O rigins of Our Time
(New York: Far rar & R ineha rt, 1944), p. 132.
3 Bank for Inter national Sett lements, Semiannual Over-The-Counter (OTC) Derivatives
Markets Statistics (Basel, 2008).
4 Raghuram Raja n and Luigi Zingales, “ The Gr eat Rever sals: The Politics of Financial
Development in the 20th Century” (2003) 69 Journal of Financial Economics 13–15;
Charles R. Mor ris, T he Trillion Dollar Meltdown: Easy Money, High Rollers and The
Great Credit Crash (New York: Perseus Book Group, 2008); Diana Farrell, Susa n M.
Lund, a nd Alex ander N. Maasry, “Mapping the Global Capital Ma rket,” McKi nsey
Global I nstit ute (2007), p. 8.
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S.M. Jacoby280
between  nancial development and growth is ambig uous, however.
The effects var y by a nation’s GDP level and the type of  nancial
development – credit markets, equity markets, or  nancial openness –
under consideration.
5 Other aspects of  nance are more controversial.
Investors are prone to herd behavior and to mercurial speculation about
an uncer tain future. Because perceptions of the future constantly are
changing and because speculation involves leveraging, capital markets
are prone to volatility and periodic crises that can damage the real econ-
omy, as with the recession that started in 2008.
There is also the problem that  nancialization raises risk. Optimism –
animal spirits – and the opportunities for diversi cation associated with
nancial development raise the risk-tolerance levels of investors. Wall
Street asserts that derivatives and other instruments have mitigated the
problems that this poses. But the events of 2008 suggest the oppos-
ite: that hedging ampli es, rather than reduces, risk. Until recently, it
was claimed that we were at the end of history – that  nancial crises , at
least in advanced economies, were a thing of the past thanks to savvy
central banking and savvier derivatives . Today the assertion appears to
be another case of irrational exuberance.
Another problematic aspect of  nancial development is its relation to
5 Levine a nd Zer vos  nd t hat stoc k ma rket liq ui dity i s posi ti vel y asso ci ate d w it h grow th
but that stock market size has no effect. Arestis et al . (2001, 2006) show that t he
contribution of stock markets to growth is modest and that the effect attenuates in
developed countr ies. An I MF (2006: 16) review of the evidence on  nancial openness
concludes t hat “it remains d if cult to  nd robust evidence that  na ncial integration
systematically increases grow th, once ot her deter mina nts of grow th are controlle d
for,” a  nding replicated by Rodrik. Ross Levine and Sara Zervos, “Stock Markets,
Bank s, and Economic Growth” (1998) 88 American Economic Review ; Phi lip Arestis,
Panicos O. Demetriades, and Kul B. Luintel, “Fi nancial Development and Economic
Growth: The Role of Stock Markets” (2001) 33 Journal of Money, Credit, and Banking ;
Philip Arestis, Georgios E. Chortareas, and Evangelia Desli, “Financial Development
and Productive Ef ciency in OECD Countries (2006) 74 The Manchester School ;
M. Ayan K hose, Eswar Prasad, Ken neth Rogoff, and Shang-Jin Wei, “Financial
Global ization: A Reappr aisal,” IMF Staff Papers 56, 8– 62 (April 2009); Dani Rodrik
and Ar vind Subrama nian, “ Why Did Financial Globalization Disappoint?” IMF
Working Paper (March 2008).
6 Philip T. Hoffman, Gilles Postal-Vinay, and Jean-Laurent Rosenthal, Surviving
Large Losses: Financial Crises, the Middle Class, and the Development of Capital Markets
(Cambridge, MA: Bellk nap Press, 2007); David Skeel, Icarus in the Boardroom: The
Fundame ntal Flaws In C orporate Ame rica And Whe re They Came Fro m ( New York: Oxford
Univer sity Press, 20 05); Cha rles Kindleberger and Robert Aliber, Manias, Panics, and
Crashes: A History of Financial Crises (Hoboken: John Wiley and Sons, 2005).
7 The literat ure on  nance a nd inequ ality largely deals with developing, not devel-
oped, cou ntries: Clarke et al . (2006) and Beck et al . (2007)  nd a negative as soci-
ation bet ween  nancial development and inequalit y, althoug h they ex amine credit
provision, not equity markets; Baddeley (2006)  nds a positive associ ation bet ween
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Labor and  nance in the United States 281
The  nance–inequality link occurs via the concentration of  nance-
derived incomes in the top brackets. Since 1980, the top 1 percent dou-
bled its income share in the United States, reaching levels not seen since
the early twentieth century (see Table 13.1 ). Atkinson estimates that a
rise of 8 percentage points in the top 1 percent share – which occurred
in the United States since 1980 – can account for nearly all of the Gini
coef cient’s increase during this period. Of course, this does not prove
that the former caused the latter. But the dif culty of demonstrating
causality is endemic to studies of inequality, as with the well-known
example of the returns to computer usage.
A Wealth ownership
After remaining stable during most of the postwar period, top wealth
shares recently have trended upward in the United States. The average
nancial development and inequality; Das and Mohapatra (2003) show t hat stock
market libera lizat ion is followed by rising inequa lity, especially through the effects
on top-i ncome shar es; and Goldberg and Pavc nik (2007)  nd that tr ade openness,
which is correlated with nancial openness, is positively associated with inequality.
Claessens and Perotti (2007)  nd that the relationship bet ween  nancial openne ss
and consumption smoothi ng by the poor is mediated by politics: when the rich have
political control, the relat ionship is negative, which is consistent w ith our a rgument.
Aghion et al . (1999) explain how growt h is hampered by inequalit y. George Cla rke,
Lix in Xu, and Heng-fu Zou, “Finance and Income Inequality: What Do the Dat a Tell
US?” (2006) 72 Southern Economic Journal ; Thorsten Beck, Asli Dem irguc-Kunt, and
Ross Levine, “Finance, Inequalit y, and the Poor,” Working Paper (2007); Michelle
Baddeley, “Convergence or Divergence? The Impacts of Globalisation on Growth and
Inequality in Less Developed Countries” (2006) 20 International Review of Applied
Economics ; Mit ali Das a nd Sanket Mohapatra, “Income Inequality: The Af termath
of Stock Market Liberalization in Emerging Markets” (2003) 10 J ournal of Empirical
Finance ; P inelopi Goldberg a nd Nina Pavcni k, “Distri butional Effects of Globalizat ion
in Developing Countries” (2007) Journal of Economic Literature ; Stijn Claessens a nd
Enrico Perotti, “Finance and Inequality: Channels and Evidence” (2007) 35 Journal
of Comparative Economics 748–773; Philippe Aghion, Eve Carol i, and Cec ilia Garcia-
Penalosa, “Inequality and Economic Grow th” (1999) 37 Jour nal of Economic Literature .
A recent paper, however, focuses on  nancial development in wea lthy countries over
the past centur y and  nds a positive association bet ween  nancia l development a nd
to p -s h ar e i nc om e s, th e s a me re la ti on s hi p c on si de r ed he re . J es p er Ro in e, Jo na s Vl ac ho s ,
and Daniel Waldenst rom, “W hat Dete rmines Top Income Shar es? Evidence from t he
Twentieth Century” (2007) Social Science Research Network (SSRN ) Working Paper
1018332, Research Institute of Industrial Economics ( IFN ), forthcoming.
8 A.B. Atkinson, “Measuring Top Incomes: Methodological Issues,” in A.B. Atkinson
and T. Piketty (eds.), Top Incomes over the Twentieth Century: A Contrast between
Continental European and E nglish- Speaking C ountries (New York: Oxford University
Press, 2007), pp. 18–42; Joh n DiNa rdo and Jor n-Stef fen Pischke, “T he Returns to
Computer Use Revisited: Have Pencils Cha nged the Wage Structure Too?” (1997)
The Quarterly Jour nal of Economics . In cont rast to the Kuznet s inverted-U cu rve chart-
ing inequality against industrialization over ti me, the post-1980 data look like the  rst
part of a subsequent i nverted-U.
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S.M. Jacoby282
Ta ble 13.1 Financial development and inequality , 1913–1999
Fina ncial development Inequality
Stock market
capitalizat ion as GDP
Gross  xed capita l
raised via equity Top 1% i ncome sha re
Eur. &
US &
Eur. &
Japan US & UK
Eur. &
1913 0.74 (0.39) 0.55 0.09 0.15 0.19 (0.18) 0.19
1929 1.07 (0.75) 0.65 0.37 0.30 0.19 (0.20) 0.16
1938 0.85 (0.56) 0.64 0.05 0.27 0.16 (0.15) 0.15
1950 0.55 (0.33) 0.14 0.06 0.01 0.11 (0.12) 0.10
1970 1.15 (0.66) 0.22 0.04 0.20 0.08 (0.08) 0.09
1980 0.42 (0.46) 0.16 0.04 0.02 0.08 (0.09) 0.07
1999 1.89 (2.3) 1.32 0.11 0.21
0.16 (0.18) 0.08
1980/1929 0.39 (0.61) 0.27 0.11 0.07 0.39 (0.45) 0.46
1999/1980 4.5 (4.9) 8.3 2.8 10.5
2.1 (2.0) 1.1
Notes: the Europea n nations and Japan i nclude two using t he French leg al system
(Fra nce and Net herlands), two using t he Ger manic system (Ger many a nd Japan), and
one following the Scandi navia n system (Sweden). Figures in parentheses a re for the
United States;  gures in brackets exclude t he Netherlands.
Sources: nancia l data are from Raghuram Raja n and Luigi Zin gales, “Great
Reversals: The Politics of Fi nancial Development in the Twentiet h Century” (2003)
Journal of Financial Economics 13–15. Top share sou rces ar e as follows.
UK : A.B. At kinson, “Top Incomes in the U.K. over t he 20t h Century” (2005) 168
Journal of the Royal Statistical Society . US: Em manuel Saez website, htt p://elsa.berke- /. France: Thomas Piketty, “Income Inequ ality in France, 1901–1998,”
CEPR Worki ng Paper 2876 (2001). Germany: Fabien Dell, “Top Incomes in Germany
and Swit zerla nd over the 20th Century” (2005) 3 Journal of the European Economic
Association . Netherlands: A .B. Atkinson and Wiemer Salverda, “Top Incomes in t he
Netherlands and the U.K. over the 20t h Century” (2005) 3 Journal of the European
Economic Association . Sweden: Jesper Roine a nd Daniel Waldenstrom, “Top Incomes
in Sweden over the 20th Centur y,” Stockholm School of Economics, workin g paper
602 (2005). Japan: Chiaki Moriguch i and Emmanuel Saez , “The Evolution of Income
Concent ration in Japan, 1886– 2005,” Work in g Pap er, No rt hwe stern Un ive rsity (2007).
Data do not include capita l gains.
net worth (wealth minus debt) of the top 1 percent wealth class grew
by 78 percent from 1983 to 2004, while for the middle 20 percent, net
worth grew by 27 percent. Financial development is related to wealth
accumulation at the top. Non-residential assets are relatively unimport-
ant for the median wealth bracket (24 percent of net worth), but for the
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Labor and  nance in the United States 283
top 1 percent they constitute 91 percent of net worth. The top 1 percent
owns 42 percent of net  nancial assets; the bottom 90 percent owns 19
percent. Wealth appreciation and income  ows derived from owning
nancial assets have risen in recent years, much more so than for resi-
dential housing, the primary asset held by the less wealthy. Corporate
payouts are up, as are opportunities for capital gains. (A dollar invested
in an S&P index fund in 1980 would be worth $1,500 today.) In 2004,
the top 10 percent accounted for 61 percent of all unrealized capital
gains. To the extent that the wealthy get better (including inside) infor-
mation and realize larger  nancial returns than the less wealthy, their
share of wealth-derived income will be greater than their total share of
B Financial occupations
For ty- ve percent of the income going to the top 1 percent-bracket
derives f rom wages and salar ies, 25 percent from business income, and
30 percent from wealth (dividends , interest, capital gains, and rents).
One might think that the last  gure is an upper limit on the contribu-
tion of  nance to top income shares. But the top 1 percent contains a
large number of individuals who earn their salaries or their business
incomes in nancial occupations. These include but are not limited to
investment bankers, commercial and trust bankers , managers of hedge,
venture, private equit y, and mutual funds ,  nancial advisors and con-
sultants, and attorneys specializing in  nancial transactions. Consider
that the fty highest-paid hedge fund managers in 2007 earned a total
of $29 billion. Then there is the well-known phenomenon of skyrock-
eting compensation for CEOs and other executives. The lion’s share
derives from capital gains via stock options . In 1980, less than a third
of CEOs were granted stock options; today options are universal for top
US executives. Individuals in  nance-dependent occupations are esti-
mated to account for as much as 40 percent of those in the top income
9 Lawrence M ishel, Jared Bernstein, a nd Sylvia Alleg retto, The State of Working
America: 2006/2007 (Ithaca: Cornell University Press, 2006); Financial Times ,
February 22, 2007; Har ry De A ngelo, L inda De A ngelo, a nd Douglas J. Skinner,
“Are Dividends Disappearing?” (2003) 72 Journal of Financial Economics ; Edward N.
Wolff, “Recent Trends in Household Wealth in t he U.S.,” Economics Department,
NY U (2007); Wojciech Kopczuk and Emmanuel Saez, “Top Wealt h Shares in the
United States: 1916–2 000: Ev idence From Estate Tax Retu rns,” National Bureau of
Economic Research (N BER) Working Paper 10399 (2004); “Recent Cha nges in U.S.
Family Finances,” Federal Reserve Bulletin (2006), pp. A1–A38.
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S.M. Jacoby284
brackets. In fact, the  gure likely is higher because the estimate excludes
some capital gains and many  nancial occupations.
C Risk
Investors affect the level of risk in the real economy and its alloca-
tion among owners, creditors, suppliers, executives, and employees . A
rm’s nancial structure in uences outcomes in this area . Debt, for
example, interferes with cyclical risk insurance for employees (e.g. via
wage smoothing and job guarantees). Ownership dispersion also mat-
ters. Blockholders, more prevalent in continental Europe, are relatively
undiversi ed so t heir risk preference s will be closer to t hose of simi larly
undiversi ed employees, whose main asset is their illiquid  rm-speci c
human capital. As owners become more diversi ed, they can tolerate
greater risk.
In fact, this is what has happened with the rise of institutional
investors, a heterogeneous group including mutual funds, trusts,
insurance companies, and pension funds, the largest category.
Institutional composition varies across nations, with pension funds
more important in the United States and the UK than other coun-
tries. US institutional investors in 1960 owned 12 percent of US
equities; by1990 they owned 45 percent and the share rose to 61 per-
cent in 2005. Institutions today own 68 percent of the 1,000 largest
US public corporations. Although institutional holdings rose over a
long period, it was in the 1980s that institutions began to  ex their
muscles as shareholder activists.
10 Data from Emmanuel Saez, tables A7 and A8 at ~saez (last
accessed February 22, 2011); Ne w York Times , Ju ne 21, 2007; Los Angel es Times , Apri l
25, 2007, Apr il 16, 200 8; Lucian Be bchuk and Jess e Fried, Pay w ithout Perfor mance: The
Unful lled Promise of Executive Compensation (Cambridge, M A: Har vard Un iversity
Press, 2006); Gerald Epstein and A rjun Jayadev, “The R ise of Rent ier Income s in
OECD Count ries,” in Gerald Epstein (ed.), Financialization and the Worl d Economy
(Cheltenham: Edward Elgar Publishing, 2005); Steven N. Kaplan and Joshua Rauh,
“Wall Street and Main Street: Wh at Contributes to the R ise in t he Highest Incomes?”
NBER Working Paper 13270 (2007). The change in exec utive pay a fter 1993 is not
explained by cha nges in  rm performance or size. Bebchuk and Fried, Pay without
Performance . Problems with stock options recently have caused a modest decline in the
share of CEO compensation based upon them. Wall Street Journal , April 14, 2008.
11 Margaret Blair, Ownership and Contr ol: Rethinking Corporate Governance for the 21st
Century (Washington, DC: Brook ings I nstit ution Press, 1995), p. 46; Conference
Board, “2007 Institutional I nvestment Repor t” (2007); I MF, Global Financial
Stability Report (2005), p. 68. Total US institutional assets of $24 t rillion are ow ned
by corporate pension funds (28 percent), public pension funds (11 percent), mutua l
funds (25 percent), tr usts (11 percent), and i nsurance compa nies (25 percent).
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Labor and  nance in the United States 285
Institutional investors are highly diversi ed; they rarely own more
than 1 percent of a company. They also supply much of the capital for
the M&A market: raiders in the 1980s and private equity today. Hence
they can and do cause companies to pursue riskier business strategies
such as heavier debt, the regular payment of which can endanger a  rm
when markets t ur n down, as is presently the case w ith ma ny debt-laden
companies owned by private equity. Institutions also press  rms for a
larger share of corporate resources. As a result, institutional activism
statistically is associated with asset divestitures and with layoffs. This
does not mean that institutions push  rms to the edge of bankruptcy
but even a bank ruptcy now and then would not do serious damage to
their portfolios.
Institutional investors have never been the paragons of long-term
investing that some claim them to be. In the 1980s, one CFO said that
institutional investors “have the short-term, total-return objective as
their primar y objective” (short-termism). Pension funds have always
had myopic tendencies in some degree because of the short tenures
of in-house fund managers. Recent changes in portfolio composition
have accelerated short-termism. Active trading of equities is increasing;
indexed equities are now only 30 percent of all pension fund assets.
To raise returns above those provided by equities, institutions also are
putting more money into “alpha” (riskier) investments, illiquid and/or
leveraged . These include private equity, venture, and hedge funds ; real
estate and real estate CDOs ; commodities; and micro-cap stocks. Some
pension funds and private endowments have 50 percent or more of their
assets in these alternative investments, a mistake for which they suf-
fered during the  nancial crisis . Private equity and hedge fund s come
with much shorter time horizons than for indexed equities. On aver-
age, private equity’s purchase-to-sale process takes around four years.
Hedge f unds , which make more than half the trades on the NYSE, have
even shorter time horizons, sometimes less than a second.
12 Michael Fir th, “The Impact of Inst itutional Investors and M anagerial I nterest s on
the Capit al Str uctu re of Firms” (1995) 16 Managerial and Decision Economics ; Sa nford
M. Jacoby, “Convergence by Design: T he Case of Ca lPER S in Japan” (2007) 55
Amer ican Journal of Comparative L aw 249.
13 Quote from Michael Useem, Investor Capitalism (New York: Basic Book s, 1996),
p. 82; Gar y Gorton and Matt hias K ahl, “Blockholder Identity, Equ ity Ow nersh ip
Structures, and Hostile Takeovers,” NBER Workin g Paper W7123 (1999); Pensions
& Investme nts , November 15, 2004, April 17, 2006, Aug ust 21, 2006; Business Week ,
September 17, 2007; Stephen J. Choi and Ji ll E. Fisch, “Beyond CalPERS: Sur vey
Evidence on the Developing Role of P ublic Pension Funds in Corporate Gover nance,”
Working Paper, Fordham Law School (20 07); World Economic Forum, Globalization
of Alter native Investments (Genev a, 2008). The instit utions t hat had t he greate st
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S.M. Jacoby286
Thus institutional investors and their alpha investments raise a  rm’s
risk levels and shorten its time horizons . For workers this induces
wage and employment volatility and the shifting of other risks, such as
health insurance and pension costs. What is telling is that volatility is
greater in public than private  rms; the latter have exhibited a decline
in employment volatility, suggesting an association with  nancial mar-
kets. Another result is that investment projects with long- duration pay-
offs, such as employee training, are adversely affected. The decline in
employee job duration is at tr ibuted by many economists to technolog y-
driven shifts from speci c to general technolog y that permit labor
mobil it y. But it is also l ikely that chan ge s i n i nvestor t ime horiz ons have
undermined the viability of career-type employment systems. In fact,
there is an empirical association between greater shareholder control
and a reduction in employee tenure levels.
D Corporate governance
Finance enthusiasts asser t that giving shareholders a larger role in cor-
porate governance promotes ef ciency. When shareholders lack in u-
ence, executives build overstaffed empires, pay themselves too much
and, to avoid con ict and enjoy a quiet life, overpay and coddle employ-
ees. When shareholders gain power, the effects are attenuated. Measures
of shareholder power are statistically associated with downsizing and
with lower levels of executive and worker compensation, outcomes that
allegedly are ef cient.
But owners, too, can exacerbate inef ciency. They may seek exces-
sive payouts and burden  rms with ill-conceived practices like stock
exposure to alph a suffered sha rp decl ines in portfolio value i n 2008, includi ng Ivy
Leag ue universit y endowments such as Harvard’s and Yale’s.
14 Robert A. Mof tt and Peter Gottscha lk, “Trends i n the Transitory Variance of
Earning s in the U.S.” (2002) 112 Economic Journal ; C lair Brown, John Haltiwa nger,
and Julia Lane, Economic Turbulence: Is a Volatile Economy Good for America?
(Chicago: University of Chicago Press, 2006); The Economist , July 14, 2007; Boyd
Black, Howa rd Gospel, and And rew Pendleton, “Fina nce, Corporate Governance,
and the Employment Relationship” (2007) 46 Industrial Relations ; Steven J. Davis,
John Haltiwanger, Ron Jarmin, and Javier Miranda, “Volatility and Dispersion in
Busine ss Growth Rates: Publicly Traded vs. Privately Held Firms,” NBER Working
Paper 12354 (2006).
15 Mar ianne B ertrand and Sendhil Mullainathan, “Enjoy ing t he Quiet L ife?
Corporate Gover nance and Managerial Preferences” (1999) 111 Journal of Political
Economy ; Henr ik Cronqvist and Rudiger Fahlenbrach, “La rge Sha reholders and
Corporate Policies” (2009) 22 Review of Financial Studies 3941–3976; Michael C.
Jensen, “Agency Costs of Free Cash Flow, Corporate Fi nance, a nd Takeovers”
(1986) 76 The American E conomic Review . Note that the “lazy executive” view is an
analogue to the v iew that employees are shirkers. Both assume that the pursuit of
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Labor and  nance in the United States 287
options , which promote instead of inhibit executive malfeasance.
16 The
new  eld of behavioral  nance, which applies psychological concepts
to executive and investor behavior, calls into question assumptions of
investor rationality. It shows that investors are prone to cognitive dis-
tortions such as myopia, overcon dence, and biased self-attribution.
The ndings undermine the claim that share price is a reliable criter-
ion of performance and that shareholders know better than executives
and boards how to create value. Behavioral nance provides justi -
cation for practices that limit shareholder in uence, such as takeover
Institutional activism generally brings a larger share of value-added
to owners but this is not the same as an increase in value-added. In
fact, activism can undermine value creation. First, downsizing does not
boost productivity, although it raises shareholder returns and reduces
labor sha re of value-added, especially when downsizing is aggressive (i.e.
when it occurs during periods of pro tability). Second, cutting compen-
sation undermines the ef ciency wage effect, which is the rise in prod-
uctivity induced by above-average wages and that occurs via a decline
in employee turnover and a rise in effort. Third, attempts by activist
investors to reduce takeover barriers may harm, rather than help, ef -
ciency. The average takeover is not associated with pre-existing perform-
ance defects or with subsequent pro tability gains, even nine years after
the event. Instead, the average takeover is driven by arbitrage of price
imperfections and by tax bene ts associated with leverage . Hence when
self-i nterest leads individuals to the sub optimal quadrant of t he prisoner’s di lemma,
an idea t hat originates in classical liberalism. For a different a nd more empi rical
view, see Rob ert M. A xelrod, T he Evolution of Cooperation (New York: Basic Books,
198 4).
16 Bronw yn Hall, “Corporate Rest ructuri ng and I nvestment Horizons in the U.S.,
1976–1987” (1994) 68 The Business History Review ; Br ian J. Bushee, “T he In uence
of Institution al Investors on Myopic R&D Investment Beh avior” (1998) 73 The
Accounting Review ; Ju lian Fr anks and Colin Mayer, “Capita l Markets and Cor porate
Control” (1990) 5 Economic Policy ; Clayton Ch risten sen and Scott Ant hony, “Put
Investors in Their Place,” Business Week , M ay 28, 2007; The Economist , A pril 23,
2005, p. 71. Note that M ichael Jensen recent ly recanted his fa ith in stock options. See
http://papers.s 3/ m?abstrac t _id=480401 (last accessed February
22, 2011).
17 A sampling of behavioral nance includes: Russell Korobk in and T homas Ulen,
“Law a nd Behav ioral Sc ience: Remov ing the Rationality Assumption from Law
and Economics” (200 0) 88 California Law Review ; A ndrei Shleifer, Inefficient
Markets: An Intr oduc tion to Behavioral Finance ( New York : Oxford Un iversit y Pr ess,
2000); Robert J. Shiller, Irrational Exuberance (Princeton: Pr inceton Un iversity
Press, 2000); Ray Fisman, Rakesh Khurana, and Matthew Rhodes-Kropf,
“Gover nance a nd CEO Turnover: Do Someth ing or Do t he Rig ht Thing?” SSRN
Working Paper (2005).
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S.M. Jacoby288
managers oppose takeovers, it is not always to preserve t heir empires but
sometimes because of skepticism that takeovers make economic sense.
Earlier we observed the high proportion of individuals in the top
1 percent who come from  nance-dependent occupations. Why have
their salaries been rising so quickly? The standard explanation has to
do with market forces: returns to skill of corporate and  nancial elites.
Surely there is some truth in that. But  nance-related incomes not only
re ect value creation; again there is also value extraction in the form of
rising payouts to shareholders.
19 Owners, who include top executives,
appropriate resources that otherwise would have been reinvested or
returned to other factors of production, including employees, whose
share of productivity gains has declined in recent years. Resources also
come from taxpayers who subsidize the tax bene ts associated with
debt, capital gains, compensation of private equity and hedge fund
managers, and more.
True, a portion of shareholder payouts  nd their way back to middle-
class households via retirement plans. But even including these plans, the
ow is a trickle. The wealthiest 10 percent owns about 80 percent of all
equities, including pension assets. And when shareowners receive larger
payouts, less is lef t for non-executive employees, which i s one reason – albeit
18 Bebchu k and Fried, Pay w ithout Performance ; Willia m J Baumol, Alan Bli nder, and
Edward N. Wolff, Downsizing in America ( New York: Russel l Sage Foundation
Publications, 2003), p. 261; Gunt her Capelle-Blancard and Nicolas Couderc, “How
Do Shareholders Respond to Downsizing?” SSR N Working Paper 952768 (2007);
David I. Levi ne, “Can Wage I ncreases Pay for Themselves? Tests with a Production
Funct ion” (2007) 102 Economic Journal ; Julian Franks and Colin Mayer, “Hostile
Takeover and the Correction of Managerial Failure” (1995) 40 Journal of Financial
Economics ; Andrei Shleifer and Lawrence H. Summers, “Br each of Trust in Hostile
Takeovers,” in Alan J. Auerbach (ed.), Corporate Takeovers: Causes and Consequences
(Chicago: University of Chicago Press, 1988); Andrei Shlei fer and Robert Vishny,
“ Sto ck M a rk et Dr iv en Ac qu i si ti on s” (200 3) 70 Journa l of Financial Economics ; W illiam
W. Bratton, “Is t he Hostile Takeover Irrelevant? A L ook at the Ev idence,” Working
Paper, Georg etown Law Center (2007); Ly nn Stout, “Do Antita keover Defenses
Decrease Shareholder Wealth ?” (2002) 55 Stanford Law Review .
19 See tex t at note 33.
20 Regarding the effect of takeovers on labor’s share of value- added, see Shleifer and
Summe rs, “Breach of Tru st in Hostile Takeov ers”; Jagadeesh G okhale, E rica Gro shen,
and David Neumark, “Do Host ile Takeovers Reduce Extra marg inal Wage Pay ments”
(1995) 77 The Review of Economics and Statistics ; Martin J. Conyon, Sourafel Girma,
Steve Thompson, and Peter W. Wrig ht, “Do Hostile Mergers Destroy Jobs? ” (2001)
45 Journal of Economic Behav ior & Organ ization 427– 440. The claim also is made
that high pay for pr ivate equ ity and he dge fu nd managers is a return to skill a nd to
risk-t aking. Bear i n mind, however, that hedge and private equity principals – regard-
less of their ski ll or lack t hereof – are guaranteed 2 percent in management fees.
Compensation of fund managers also derives from a guaranteed 20 percent of any
earnings (“carried pro t” ), which is ta xed not as income but as capital gains, a favor-
able provision that a lso applies to venture capital a nd real estate par tners hips.
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Labor and  nance in the United States 289
only one – that labor’s share of GDP has fallen and is smaller now than at
any time since the mid-1960s. Within labor’s share, there also has been
a reallocation to top brackets. From 1972 to 2001, the top 0.01 percent
saw their real earnings rise by 181 percent, whereas real earnings for the
median worker fell by 0.4 percent. The result is a combination of rising
inequality along with stagnant incomes for the less af uent.
III Origins of modern  nancial development
It would be naïve to think that  nancial development was due only to
market forces unleashed by globalization . The  nancial industry is a
paradigmatic example of a lobby that secures for itself political bene ts
whose costs are borne by other, often unsuspecting, parties. The work-
ings of  nance are recondite, unlike trade, and for this reason it is dif-
cult to mobilize consumers and workers around nancial policy. The
result is regulatory capture.
The current era of  nancial development can be traced back to the
mid-1950s, when London bankers sought to expand their business by
weakening capital controls associated with Bretton Woods. Initially the
effort was rebuffed by British governments committed to Keynesian
policies. Wall Street also sought weaker capital controls but it too failed.
Eventually the bankers realized t hat it was easier to do an end ru n around
regulations than to change them and the result was the Euromarket,
an offshore and unregulated foreign currency market that emerged in
the 1960s and was a challenge to Bretton Woods. President Kennedy
allegedly said that it was “absurd” to shrink government spending for
the sake of facilitating private capital  ows . But elite  nanciers had
access to top monetar y of cials, who often were former colleagues, and
throughout the 1960s they lobbied steadily for  nancial deregulation.
Wall Street’s persistent complaints about the SEC led Richard Nixon
to criticize the agency for its “heavy-handed bureaucratic schemes.”
Nixon’s choice to head the SEC in 1969 was a diehard libertarian who
favored relaxation of Glass-Steagall .
21 Ian Dew-Becker and Rober t J. Gordon, “Where did the Product ivity Growt h Go?
In ation Dynamics and t he Dist ribution of Income” (2005) 2 Brookings Papers on
Economic Activity 67–127; Richa rd Freeman, America Works: Critical Thoughts on the
Exceptional U.S . Labor Market (New York: Russell Sage Foundat ion Publications,
2007), p. 39; New York Times , Aug ust 28, 2006; A lan B. Krueger, “Measu ring Labor’s
Share” (1999) 89 American Economic Review 45– 51.
22 Eric Helleiner, States and the Reemergence of Global Finance: From Bretton Woods to the
1990s (It haca: Corne ll Universit y Press, 1994), pp. 81–122; James H awley, “Protect ing
Capital from Itsel f” (1984) 38 International Organization 131–165; Jo el Se lig ma n, The
Transformation of Wall Street (Boston: Aspen Publi shers, 1982), p. 382, p. 441.
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S.M. Jacoby290
Economic stagnation in the 1970s made it easier for banks (and other
industries) to press for deregulation. Major  nancial institutions like
First National City Bank and Morgan Trust lobbied for deregulation,
including repeal of Glass-Steagall. Their argument was that New Deal
regulatory policies were strangling growth, a claim that became conven-
tional wisdom not only for Republicans but also for centrist Democrats
like Presidents Carter and Clinton. Carter kicked off a “deregulatory
snowball” when he signed a bank deregulation act in 1980. Under
Ronald Reagan,  nancial deregulation intensi ed . The virtual demise
of antitrust enforcement encouraged hostile takeovers and permitted
the emergence of  nancial powerhouses like Citibank. Following their
historic 1994 Congressional victory, the Republicans placed on their
agenda proposals to scrap restrictions on margin buys by large investors
and to limit lawsuits against allegedly fraudulent underwriters, execu-
tives, and accountants.
23 Although a Republican Congress repealed
Glass-Steagall, it was Clinton’s Treasury Secretary, Robert Rubin, who
plied the halls of Congress to line up Democratic support. (The 1999
Financial Services Modernization Act that repealed Glass-Steagall
came to be known as the Citigroup Authorization Act. Shortly after its
pas sage, R ubin r esigne d to b ec ome chair man of Citig ro up.) With Gl as s -
Steagall out of the way, commercial banks like Citigroup were free to
move into relatively unregulated domains such as securitization.
Tax policy is crucial to  nance and to top incomes, a fact that has
never been lost on the  nancial industry. For example, the industry
worked closely with other business organizations to secure passage
of the 1981 tax reform act. The main lobbying group was the newly
formed Business Roundtable, which included on its board  nanciers
such as David Rockefeller of Chase Manhattan and Walter Wriston of
23 In 1995, Cong ress passed the Private Securities Lit igation Act with near- unanimous
suppor t from Republicans and also from some liberal Democrat s. Treasur y Secretary
Rubin favored the bi ll and, i nitia lly, so did Clinton. But Clinton later made a sym-
bolic concession to consumers by vetoing t he bill, k nowing that Congress had the
votes to override him, which it did. New York Times , December 20, 1995; David
Leinsdorf a nd Donald Eltra, Citibank: Ralph Nader’s Study Group Report on First
Natio nal City Bank (New York: Grossman Publishers, 1973); Ernie Englander
and Al len Kaufman, “The End of Managerial Ideology: From Corporate Social
Responsibilit y to Corporate Social Indi fference” (2004) 5 Enter prise & Society 417;
Charles Geisst, Undue In uence: How the Wall Street Elite Puts the Financial System
at Risk (Hoboken: John Wiley & Sons I nc, 2005); Thomas H. Hammond and Jack
H. Knott, “The Deregulatory Snowball: Explaining Deregulation in the Financial
Indust ry” (1988) 50 T he Jour nal of Politics 3 –30.
24 Robert Kuttner, T he Squandering of America: How the Failure of Our Politics Under mines
our Prosperity ( New York : Knopf, 200 7), p . 105; New York Times , May 14, 1998; Robin
Blackburn, “T he Subprime Crisis” (2008) 50 New Left Review .
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Labor and  nance in the United States 291
Citibank. Citing supply-side theories, the Roundtable argued that tax
cuts rather than government spending would remedy economic stag-
nation. The act contained a cornucopia of tax goodies, including more
favorable treatment of corporate debt . The provision underwrote the
decade’s leveraged buyouts, which were touted as a tonic for US com-
petitiveness but proved a chimera when the junk bond market collapsed
in the late 1980s and again during the  nancial crisis that occurred
twenty years later.
The 1980s also saw a decline in top marginal income-tax rates.
Two-thirds of the decline in tax progressivity between 1960 and 2004
occurred during the Reagan presidency. Additionally, there were cuts
in personal tax rates related to  nance, including a 29 percent reduction
in the capital-gains tax. It is Republicans – going back to 1954 – who
consistently favor low rates on unearned incomes. In the Anglo-Saxon
nations, a 10 percent cut in the top investment rate is associated with a
0.4 percentage point increase in the top 1 percent income share.
Shareholder primacy asserts that maximizing shareholder value is the
corporation’s sole objective. It is a break from previous legal doctrines
that the corporation is an entity distinct from its shareholders. The
earlier view held that boards were legally autonomous from sharehold-
ers and could exercise independent business judgment on behalf of the
enterprise. Promotion of the shareholder-primacy doctrine, starting in
the 1970s, came in tandem with a surge in hostile takeovers that circum-
vented boards and made direct appeals to shareholders to tender their
shares. Economic justi cation for the doctrine was provided by agency
theory, an old idea that now received scientistic grounding. The theory
25 J. Cr aig Jenki ns and Crai g M. Eckert , “The Rig ht Tu rn in Econom ic Policy” (200 0) 15
Sociological Forum 307–338; T homas Piketty and Emmanuel Saez, “How Prog ressive
is the U.S. Federal Tax System?” (20 07) 21 Jour nal of Economic Perspectives ; Business
Week , June 14, 2004; Denn is P. Quinn a nd Robert Y. Shapiro, “Business Political
Power: The Case of Taxation” (1991) 85 American Political Science Review 851– 874;
A.B. At kinson and A. L eigh, “Underst anding the Distribution of Top Incomes in
Anglo-Sa xon Count ries over the 20t h Century,” Working Paper, Aust ralian National
Univer sity (200 4). In the 1980s, wealthy businessmen endowed tax-related t hin k-
tanks such as Grover Norquist’s Amer icans for Tax Reform, lau nched in 1985,
which received support from the Olin and Scaife Foundations. Even the Brookings
Foundation swung from liberal to centrist as business donations rose from $95,000
in 1978 to $1.6 million in 1984. Brooki ngs’ fund-ra iser at the time, a conservative
Republican named Roger Semerad, said the gi fts demonstrated that Brooking s was
“no longer tied to decades of ideology.” A 1984 Brookings report advocated a cash-
ow tax, the  rst step towards the long-soug ht conser vative goal of subst ituting
consumption ta xes for prog ressive i ncome taxes. The chief econom ist for the US
Chamber of Commerce said that the report “shows that we have won the philosoph-
ical revolution.” Boston Globe , Ma rch 31, 2006; Peter B ernstein, “Brookings Tilts
Rig ht,” 110 Fortune July 23, 1984, p. 96.
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S.M. Jacoby292
did not constitute a rebalancing of the relationship between sharehold-
ers on the one hand and boards, executives, and other stakeholders on
the other; it simply cut off the latter part of the scales. Agency theory
offered an economic rationale for hostile bids, stock options, and other
governance changes intended to boost shareholder in uence. As the
Council of Economic Advisers opined in 1985, takeovers “improve ef -
ciency, transfer scarce resources to higher valued uses, and stimulate
effective corporate management.” The self-regulating market was born
Agency theory and deregulatory dogma became increasingly in u-
ential in law schools and the courts. They traveled from economics to
law over a bridge erected by conservative philanthropists. The annual
“Pareto in the Pines” retreats were started in the 1970s to educate legal
scholars about the applicability of economic concepts to antitrust law,
corporate law, and other topics. The concepts were technocratic, such
as cost-bene t analysis, as well as normative, such as agency theory and
public choice. Later the students included regulators and jurists. By
1991 the Law and Economics Center at George Mason had given eco-
nomics training to nearly a thousand state and federal judges. Funding
for the seminars and for academic research in law and economics came
from wealthy libertarian ideologues like Richard Scaife and John M.
Olin. The intent was to offer a platform to academic “norm entrepre-
neurs” whose ideas would confer legitimacy on shareholder primacy in
the private sector and dereg ulation in the public sector. Institutional
investors took these ideas as their own and embedded them in codes of
corporate governance that were thrust upon stock exchanges and for-
eign gover nments in the 1990s.
26 Morton J. Horwitz, The Transformation of American Law, 1870–1960: The Crisis of
Legal Orthodoxy ( New York: Ox for d University Press , 1992); Stephen M . Ba in bridg e,
“Director Pr imacy a nd Shareholder Disempowerment ” (2006) 119 Harvard L aw
Review ; Margaret Blair and Lynn Stout, “Speci c Investment and Corporate Law”
(2006) 7 European Business Organization Law Review ; Si mon Deak in, “T he Coming
Transformation of Shareholder Value (2005) 13 Corporate Governance ; Connie
Bruck, T he Predators’ Ball: The Inside Story of Drexel Burnam and the Rise of the J unk
Bond Raiders ( New York: Penguin Classics, 1988), p. 261.
27 Mic hael C. Jensen and Wi lliam Meckling, “T heory of the Fir m: Managerial
Behav ior, Agenc y Costs, a nd Ownership St ructure” (1976) 3 Journal of Financial
Economics ; Cass Sunstei n, “Social Norms a nd Socia l Roles” (1996) 96 Columbia Law
Review ; Sanford M. Jacoby, “Economic Ideas and t he Labor Market: Origi ns of the
Anglo-A merica n Model and P rospec ts for Globa l Diffusion” (2003) 25 Comparative
Labor Law & Policy Journal ; J.P. Heinz, A. Southworth, a nd A. Paik , “Law yers for
Conservative Causes” (2003) 37 Law & Society Review 5–50; USA Today , M ay 3,
2006. M any of the governa nce refor ms spawne d by agency theor y and pressed by
shareholder activists turn out to have little or no relationship to performance; some
even have negative effects. One explanation is that optimal governance is endogenous
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Labor and  nance in the United States 293
Law and regulation establish boundaries for another type of pol-
itical contest, this time played at the corporate level. Here the play-
ers – workers, executives, and owners – press singly or in coalition for
alternative forms of corporate governance with different allocations of
value-added. Following Gourevitch and Shinn, one may identify three
games, each with a winner and loser: (1) owners + executives vs. work-
ers, (2) executives + workers vs. owners, and (3) owners + workers vs.
executives. The  rst game, which Gourevitch and Shinn label “class
con ict,” was prevalent in the early decades of the twentieth century,
with workers usually the losers. T he second game, which I term “pro-
ducerism,” gained currency during the postwar decades when man-
agers and workers, many of them unionized, replaced class con ict
with cooperation to raise productivity; owners got the short end of
the stick. The third coalition, “institutional capitalism,” emerged after
1980 a s i n st itutio nal ow ner s p res sed exec uti ve s to focu s on sh are pr ice ,
thereby creating a bond between owners and worker-shareholders who
own stock directly or through pension plans. But institutional capit-
alism is not t he only game being played today. There is nascent class
con ict because the median worker owns but a pittance in equities
and many executives, encouraged by stock options , have cast their lot
with owners. Another prevalent game today is the “war of all against
all”: executives exploit owners and workers; owners try to do the same
to executives and workers. The vast majority of workers, however, are
What about the situation outside the A nglo-American world?
Northern Europe and Japan since 1980 have experienced rapid  nan-
cial development, with growth rates exceeding those in the UK and
the United States, although Northern Europe and Japan started and
remain at lower levels. What is cr ucial, however, is that despite recent
nancialization , their top income shares have not increased to the
same extent as in the United States and the UK (see Ta ble 1 3. 1 ).
to a  rm’s idiosyncrat ic char acteristics; the activists’ formula ic approach ignores
this fact. See Jacoby, “Convergence by Design,” pp. 250–254; Sanjai Bha gat, Brian
Bolton, and Roberta Romano, “The Promise and Peril of Cor porate Governance
Indices” (2008) 109 Columbia Law Review 180 3–1882.
28 Note th at multiple games can be played in t he same cou ntry at t he same time,
although one game is likely to be more prevalent than others. This has caused end-
less debate s in the Var ieties of Capitalism literat ure over how to classif y a nation’s
type. Peter Gourevitch and James Shin n, Political Power and Corporate Control: T he
New Global Politics of Corpo rate Governance (P rinceton: Princeton Universit y Press,
2005); Sa nford M. Jacoby, The Embedded Corporation: Corporate Governance and
Employment Relations in Japan and the United States (Princeton: Pri nceton Universit y
Press, 2005).
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S.M. Jacoby294
First, Northern European and Japanese unions have shrunk less in
size and in uence than their US and, to a lesser extent, British, coun-
terparts. Japanese and Northern Europeans have relatively cooperative
relations among workers, executives, and owners. This is relational
capitalism, or what David Soskice calls the “coordinated market econ-
omy” (CME). It is a  fth type of game, the obverse of the war against
all . In CMEs, there remains support for the idea that the corpor-
ation is beholden to all of the stakeholders who have invested in it, not
only shareholders. Hostile takeovers and private equity are resisted in
European CMEs and remain rare in Japan . Foreign norm entrepre-
neurs, chie y US investors, have been less successful than at home in
molding CME law and regulation to their purposes, although they have
found a more receptive audience in the European Commission.
Ta ble 13. 2 shows the allocation of value-added at the  rm level under
different corporate-governance regimes in Europe. Labor’s share is rela-
tively low in t he United K ingdom and Ireland, where gover nance coalitions
changed after 1980 in the direction of shareholder primacy. Conversely,
labor’s share is higher under the CME coalitions found in Europe and in
Japan. Since the mid-1990s, German companies have shifted shares away
from labor, although this tends to be the result of a union-sanctioned
reallocation from wages to investment, with relatively less owing to
shareholders than in the United States . The United States has seen a huge
jump in payouts to shareholders, from 58 percent of after-tax pro ts in
1981 to 89 percent in 2000. In Japan, allocations have changed only mod-
estly. Hence politics, broadly de ned, drives a wedge between  nance and
labor in CMEs but tightens the connection in liberal economies.
29 David Soskice, “Reinterpret ing Cor poratism and Explaining Unemploy ment:
Coordinated and Uncoordi nated Economies,” in Renatta Brunetta and Carlo
Dell’Arring a (eds.), Labour Re lations and Economic Performance (New York: New
York University Press, 1990); Ronald Dore, Stock Market Capitalism, Welfare
Capitalism: Japan and Germany vs. the Anglo-Saxons (New York: Oxford University
Press, 2000); Jonas Pontusson, Inequality and Prosper ity: Social Europe vs. Liberal
America ( Ithaca: Cornel l Univer sity Press, 20 05); Gregory Jack son and Hideaki
Miyaji ma, “Var ieties of Capitalism, Varieties of Markets: Mergers and Acquisitions
in Japan, Germany, France, the UK, and USA,” Research I nstit ute of Economy,
Trade and Industry Working Paper ( June 2007). In 1999, Amer ican Federation of
Labor a nd Congress of Industrial Organ izations (AFL-CIO) president Joh n Sweeney
issued a st atement opposing Vodafone’s hostile bid for Ma nnesmann and endorsin g
the CM E approach to governance: “T he AFL-C IO,” he said, “bel ieves value is cre-
ated over the long-ter m by partnerships among all of a cor poration’s constituents –
workers, investors, customers, suppliers, and communities. Mannesman, and the
European model of cor porate governance under wh ich it is str uctu red, has allowed
just those kinds of value creating partnerships to  ourish.” Statement by AFL- CIO
President John Sweeney on Mannesman n Takeover, November 22 , 1999.
30 Henk von Eije and William Megginson, “Dividends a nd Share R epurch ases in
the European Union (2008) 89 Journal of Financial Economics ; Gregory Jackson,
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Labor and  nance in the United States 295
IV Financial development in the past
Another way of gauging the relationship between  nance and labor is
to consider earlier periods of  nancial development. From the 1870s
through the 1920s the industrialized world experienced an expan-
sion of trade and  nance that rivals today’s. Before World War I, trade
growth averaged 3.8 percent annually. The share of trade in GDP
for the Western economies reached a high point in 1913 that was not
exceeded until the 1970s (and for some countries not until the 1990s).
Trade and  nance were positively related but it was  nance that was
the more dynamic. Between 1870 and 1913 foreign investment  ows,
including portfolio investments, grew faster than, and exceeded the level
of, trade-related  ows. After 1918 the  nancial sector grew larger and
more concentrated as banking and the security industries converged.
The number of US national banks with securities af liates increased
from ten in 1922 to 114 in 1931.
“Stake holders Under P ressure: Corporate Gover nance a nd Labou r Management
in Germany and Japan” (2005) 13 Corporate Governance ; Takeshi Inagam i,
“Managers and Corporate Governance Reform in Japan: Restoring Self-Con dence
or Shareholder Revolut ion?” in Simon Deakin and Hugh Whittaker, Corporate
Gover nance and the Spirits of Capita lism (forthcoming 2009); J. Fred Weston and Juan
Siu, “Cha nging Motives for Share R epurchases,” UCL A Ander son Working Paper
(December 2002). Data on labor’s sha re and on cor porate payouts that are derived
for roughly comparable companies are a more reliable indicator of distr ibutional
outcomes at the  rm level than aggregate measures of labor’s sha re of value -added,
which comprise a changing mix of  rms and h ave the added problem of including
income from self-employment.
31 Angus Madd ison, T he World Economy, vol. 2 Historical Statistics (Pa ris: Or gani zation
for Economic Co- operation and Development, 2006), p. 362; Barry Eichengreen,
Ta ble 13. 2 Distribution of net value added in large European
corporations, 1991–1994
Labor Capital Government
Earnings Dividends
62.2 23.5 14.3 3.2 15.0
Germ an ic 86.1 8.8 5.1 5.2 3.0
Latinic 80.3 14.4 5.3 3.0 4.7
Average 79.0 13.7 7.3 3.6 6.1
Note: dividends and retai ned ear nings do not equal the capital share becau se
net interest payments and third- party shares are not included. Source: Henk
Wouter De Jong, “The Governance Struc ture a nd Perfor mance of L arge
European Corporations” (1997) 1 Journal of Management and Governance .
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S.M. Jacoby296
Financial development was related to industrialization. But the rela-
tionship went i n both d irections:  nance serviced industry, and owners
poured their wealth into  nancial assets. Hence income concentration
in the late nineteenth century rose in tandem with  nancial develop-
ment. Top income shares in Germany increased from 1870 to 1900;
British top 5 percent shares declined in nominal value but rose in real
value between 1867 and 1911; and top wealth shares in France rose
after 1880. As compared to the United States in 1913, Europe and
Japan had more developed stock markets and a slightly larger share
of income going to the top 1 percent. The United States caught up on
both dimensions by 1929 (see Table 13.1 ). US wealth concentration
did not match that of previously feudal countries until the 1980s. Yet it
hardly was egalitarian: the top 1 percent in 1912 held about 56 percent
of US wealth. T he rich invested their assets through  nancial inter-
mediar ies such as trust banks that grew rapidly after the turn of the
century. Stock ownership was concentrated; many of the wealthy were
company founders and their descendants. After World War I, however,
stockholding became more diffuse. The initial reason was progressive
income taxation, which induced the rich to shift assets into munici-
pal bonds. Wall Street brokers responded with campaigns to persuade
less af uent individuals to buy stock directly or through employer stock
purchase plans. The 1920s were an era of exuberance. On the eve of
the crash, a series of articles in the Saturday Evening Post described the
preceding decade as one in which “buying [of stock] … was not based
on reasoning but simply on the fact that prices had risen; a rise led the
public to expect more and more returns.” The magazine presciently
warned that excessively optimistic speculation would lead to depression
and unemployment.
Glo balizing Capi tal: A Histor y of the Inter national Mon etary Syste m ( Prin ceton: Pri nceton
University Press, 1996); Paul Bai roch and Richa rd Kozul-Wright, “Globali zation
Myths,” UNCTAD Discussion Paper 113 (1996); Charles Kindleberger, A Financial
History of Wester n Europe ( N e w Y o r k : O x f o r d U n i v e r s i t y P r e s s , 1 9 9 3 ) ; R i c h a r d F. B e n s e l ,
The Political Economy of American Industrialization, 1877–1900 ( New York: Cambr idge
Univer sity Press, 20 00), pp. 418–442; Larry Neal, “Trust Companie s and Fin ancia l
Innovation,” (1971) 45 Business History Review .
32 Em manuel Saez, “Income and Wealth Concentrat ion in a Historica l and International
Perspective,” in A lan Auerbach, Dav id Card, and John Quigley (eds.), Public Policy
and Income Distribution (New York: Russell Sage Foundation Publicat ions, 20 06);
Peter Li ndert, “ Three Centuries of Inequality in Br itain and Amer ica” and Christian
Morrisson, “Historical Perspectives on Income Distribut ion: The Case of Europe,”
in A.B. Atkinson and F. Bourguigon (eds.), Handbook of Income Distribution (New
York: Elsevier, 2000), 179; Thomas Piketty, Gilles Postel-Vinay, and Jean-Lau rent
Rosenthal, “Wealt h Concentration in a Developing Economy: Paris and France, 1807–
1994” (2006) 96 The Ame rican Economic Review ; Jeffrey Williamson and Peter Lindert,
Amer ican Inequality: A Macroeconomic Histor y ( New York: Ac adem ic Pr ess , 198 0), p. 50;
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Labor and  nance in the United States 297
Despite more dispersed shareholding in the 1920s, ownership
remained concentrated. Fifty- ve percent of the 200 largest US com-
panies were controlled by their owners in 1929, either through total
or majority ownership, or through minority control and various legal
devices. T he top 1 percent in 1927 had around 60 percent of their
wealth in stock and received 82 percent of all dividend payments, a
conservative estimate. The association between  nancial wealth and
personal income was close: for the top 1 percent, capital retur ns were
the largest component of income (50 percent in 1927). With concen-
trated wealth came sizable top 1 percent income shares.
Market development in this era, including  nancial markets, did
not occur in an autonomous economic realm but was abetted by the
business community’s reliance on political power. The result was “an
enormous increase in continuous, centrally organized and controlled
34 This included tariffs, subsidies, special charters,
pro-business tax and spending policies, monetary and banking regu-
lation , and suppression of labor unions. The most visible expression of
nancial politics was the prolonged effort to establish the gold stand-
ard, which subordinated worker and farmer concerns to  nancier inter-
ests in a strong currency. The battle came to a head during the 1896
presidential contest when John D. Rockefeller and J.P. Morgan each
contributed vast sums to McK inley’s campaign, as did other business
leaders. Four years later the gold standard became law.
A strong central bank, free of Congressional purview and “spe-
cial interests,” was crucial for maintenance of the gold standard. The
Kevi n Phillips, Wealth and De mocracy: A Political History of the American Rich (New
York: Broadway Books, 2002), p. 43; Kopczuk and Saez, “Top Wealt h Shares”; Cedric
B. Cowing, Populists, P lungers, and Progressives: A Social Histor y of Stock and Commodity
Speculations, 1890–1936 (Princeton: Princeton Universit y Press, 1965), p. 170.
33 Adolf A. Berle and Gardiner C. Mea ns, The Modern C orporation and Private Propert y
(New York: Transaction Publishers, 1932), p. 106; Robert A. Gordon, Business
Leadership in the Large Corporation (Washington, DC: The Brooking s Institution,
1945); Dennis Leech, “Concentration and Control in L arge U.S. Corporat ions”
(1978) 35 Journal of Industrial Economics ; Gard iner C. Means, “T he Dif fusion of
Stock Ow nersh ip in the U.S.” (1930) 44 The Quarterly Journal of E conomics 599;
Thomas Piketty and Emmanuel Saez, “I ncome Inequalit y in the United States,” in
A.B. Atkin son and T. Piket ty (eds.), Top Incomes over the Twentieth Century (New
York: Oxford University Press, 2007); Irving B. Kravis, “Relative Income Shares in
Fact and T heory ” (1959) 49 American Economic Review . In 1914, Scott Near ing, a
socialist economist then teaching at the Wharton School, found simila rity of labor’s
share in France, Germany, Switz erland, the UK , and the Un ited States; it was
about 60 percent. This is close to K ravis’  gures. Scott Nearing, “Service Income
and Propert y Income” (1914) 14 Publications of the American Statistical Association ;
Krueger, “Measu ring Labor’s Share.”
34 Pola nyi, Great Transformation , p. 137.
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S.M. Jacoby298
deliberations over the Federal Reserve Act of 1913 were conducted by
a small group of  nanciers, industrialists, and politicians led by Paul
Warburg of Kuhn, Loeb. There was contention within this elite –
between Wall Street and banks from outlying regions – that resulted in a
compromise creating twelve district banks with New York at their apex.
Warburg, who Woodrow Wilson later appointed to the  rst Federal
Reserve Board, believed that the Act would insure that New York and
the dollar, rather than London and the pound, had the upper hand in
global  nance. The  nancial elite understood the power of ideas and
that they had to give the appearance of acting in the public interest,
and so they “recruited, attracted, and developed the talents of leading
economists, journalists and intellectuals.
The courts became the shareholders’ best friends. For much of the
nineteenth century, jurists held that corporations were subject to regu-
lation because they were public or quasi-public entities with powers
derived from the state. But by the end of the century, the courts were
asserting that corporations were islands of private property – like land –
and had nothing to do with the state or any entity other than their
owners. “Outside” interference with the corporation, whether by gov-
ernment or trade unions, was a taking, in the legal sense, whose harm
could be measured by changes in the  rm’s market value. Eventually
the theory developed that corporate power derived from shareholders –
the principals – thereby allowing courts to “disaggregate the corpor-
ation into freely contracting individuals.”
V The double movement in the past
From the 1870s through the early 1900s, labor organizations were
active in popular movements opposing the de ationary tendencies and
tight credit associated with the gold standard. The movements ran
the gamut from Greenbackers, radical Republicans, and free silverites
35 Lawrence Goodwyn, The Populist Movement: A Short History of the Agrarian Revolt in
America (New York: Oxford University Press, 1978), pp. 278–284; Phillips, Wea lth
and Democracy , p. 239; Bensel, American Industrialization , passim ; G abriel Kolko,
The Triumph of Conser vatism (New York: The Free Press, 1963); J. Lawrence Broz,
The International Origins of the Federal Reserve System ( Ithac a: Cornell University
Press, 1997); James Living ston, Or igins of the Federal Reserve System: Money, Class
and Corporate Capitalism , 1890–1913 ( Ithaca: Corne ll Un ivers ity Pre ss, 1986), p. 228 .
Haute  nance st rong-armed other nations – in Asia and Latin America – to adopt the
gold sta ndard. E mily S. Rosenberg, Spreading the American Dream: American Economic
and Cultural Expansion, 1890 –1945 ( New York: Hill and Wang, 1982).
36 Horwitz, Tra n sf orm a ti o n , p. 90.
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Labor and  nance in the United States 299
to the Knights of Labor and the People’s Party. Labor’s initial effort
to promote the greenback, the “people’s currency,” came through
the National Labor Union, the country’s  rst amalgamation of trade
unions. Trade unionists espoused the Republican ethos that direct pro-
ducers were the source of value, whereas nanciers were speculative
parasites. This was an early expression of the idea that  nance and the
real economy operated in separate and con icting realms. Labor not
only had a distrust of concentrated  nancial power; it saw its interests
as antithetical to those of nance. Labor opposed monetar y stringency,
condemned speculation that led to panics and depressions, and loathed
the inequities associated with Gilded Age  nance.
Yet popular movements against the gold standard could neit her
unify nor sustain themselves, nor could they muster the resources
to win elections. The K nights of Labor, the Populist Party, and the
Bryan campaign of 1896 were valiant efforts. But Bryan’s 1896 anti-
gold campaign was run on a shoestring. The collapse of the K nights
and later on of the Populist Party brought a halt to labor’s  nancial
The political baton passed from agrarians and labor to Progressive
reformers. Richard T. Ely, Thorstein Veblen, and Louis D. Brandeis
were among the intellectuals who railed against  nancial monopoly.
Brandeis criticized investment banking – “the money trust” – in a
series of essays published in 1914 as Other People’s Money and How
the Bankers Use It . His ideas overlapped another strand in Progressive
thought: an enthusiasm for social engineering. In a contemporaneous
book, Business – A Profession , Brandeis predicted that corporations
would become more ef cient as a new class of technocratic managers
separated itself from self-interested owners, eschewed class con ict,
and adopted producerism in the form of scienti c management and
employee participation in both union and non-union forms.
37 Louis Har tz, Economic Policy and Democratic Thought: Pennsylvania 1776–1860 ,
(Cambridge, MA: Har vard Un iversit y Press, 1948); Mark Roe, Strong Managers,
Weak Owners: The Political Roots of American Corporate Finance ( Princeton: Pr inceton
Univer sity Pr ess, 1994), p. 68; David Montgomer y, Beyond Equality: Labor and the
Radical Republicans, 1862–1872 (Urba na: University of I llinois Press, 1967), p. 445.
38 Goodwyn, The Populist Movement , pp. 278 –284; Phillips, Wealth and Democ racy , p.
239; Bensel, American Industrialization , passim ; Kim Voss, The Making of American
Exceptionalism: The Knight s of Labor and Class Formation in the Nineteenth Centur y
(Ithaca: Cor nell Universit y Press, 1994).
39 Louis D. Brandeis, Other People’s Money and How the Bankers Use It (New
York: Frederick A Stokes Compa ny, 1914); Louis Brandeis, Business – A Profession
(Boston: A. M. Kelley, 1914); Samuel Haber, Efficiency and Uplift: Scienti c
Management in the Progressive Era, 1890 –1920 (Chic ago: University of Chicag o Press,
196 4).
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S.M. Jacoby300
Progressive jurists such as Brandeis advanced a pragmatic concep-
tion of the corporation that challenged conservative views. Ownership
rights were held to be relative, not absolute. This required a balancing
test to weigh claims made by shareholders against those of other claim-
ants. Challenging assertions that the market was self-regulating, the
legal realists argued that the market was embedded: “a social creation,
a creature of law, government, and prevailing conceptions of legitimate
exchange.” The realists drew on a broad set of ideas, including those of
the institutional economists, several of whom, like John R. Commons,
had ties to the labor movement.
Yet labor, or at least the AFL, mostly was silent on the era’s  nan-
cial issues, whether the 1912 Pujo investigations or the backroom nego-
tiations over the Federal Reserve. One reason is that after the 1908
Danbury Hatters case, the AFL’s political efforts were absorbed with
undoing the judiciary’s repressive interpretation of antitrust and other
laws. Another is that organized labor, unlike farmers or small business,
had options other than legislation to tame  nance. Lloyd Ulman has
well described the process by which unions formed national organi-
zations in response to the extension and interpenetration of markets.
Collective bargaining gave labor the power to privately challenge
shareholder claims. A t hird reason for labor’s silence was its electoral
weakness. Compared to European unions, the A FL was small and did
not form alliances with socialists, farmers, or the middle class. There
were exceptions of course, chie y at the local and state levels. Labor
cooperated with the middle class in “sewer socialist” cities. And in the
Midwest, labor participated in fusion parties or supported politicians
like Wisconsin’s “Fighting Bob” LaFollette, Jr., who opposed “Wall
Street dictatorship” and demanded nationalization of banks.
When it came to nancial politics, European labor faced differ-
ent incentives than the AFL . In much of Europe there was propor-
tional instead of majoritarian voting, which gave labor a political voice
through labor and other left-wing parties representing worker interests.
40 Horw itz, Tran sfo rma tio n , passim .
41 Lloyd Ulman, T he Rise of the Nat ional Trade Unio n: The Development and Signi cance of
Its Structure, Governing Institut ions, and Economic Policies (Cambr idge, M A: Har vard
Univer sity Press, 1955); James Wein stein, “R adica lism in the Midst of Normalcy”
(1966) 52 Journal of American History ; Cedric Cowi ng, “Son s of the Wild Jackass a nd
the Stock M arket” (1959) 33 Business History Review . T he AFL h ad almost nothing
to say about the gold standard dur ing the 1910s and 1920s, whereas Br itain’s 1926
General Strike, in wh ich 2.5 million workers par ticipated, had at its heart the gold
standard and the wage cuts attr ibuted to it. Melvin C. She t z, “T he Trade Disputes
and Trade Unions Act of 1927: The Af termat h of the General St rike” (1967) 29
Review of Politics .
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Labor and  nance in the United States 301
European labor was able to negotiate a political quid pro quo wherein it
supported trade and  nancial openness in return for a social compact
mitigating the risks that openness brought. The extensiveness of social
insurance enacted before 1913 is positively related to a nation’s level of
openness in 1913. The United States, with majoritarian voting and a
labor movement lacking political allies, was a social insurance laggard
until the New Deal.
Only at the midnight hour, in 1929, did the AFL weigh in on  nance.
Fiv e mont hs be fore t he cr as h, its of  cial magazine demanded that “growth
of speculative credit shall not be permitted to undermine business stabil-
ity.” It warned that inaction would have deleterious effects on wage earn-
ers and, via underconsumption, on growth. When tax  gures for 1929
were released, the AF L observed that the bulk of income gains since 1927
had gone to the top brackets. It blamed three factors: concentrated stock
ownership, stock speculation that bene ted the rich, and an uneven distri-
bution of value-added due to excessively high dividend s. But these words
came late in t he game, in fact, after the game was over.
The Great Depression hit the United States especially hard, impover-
ishing the middle class along with workers and far mers. This created a
broader political coalition than existed in 1896 and helped put Roosevelt
into of ce. T he belief was widespread that  nancial speculation and
graft had caused the stock market crash and depression. Antipathy to
nance led to a myriad of investigations and regulations. The of cial
leadership of the AFL played a minor role in these events. But parts of
42 Michael Huber man and Wayne Lewchu k, “European Economic Integrat ion and the
Labour Compact” (2003) 7 European Review of Economic History . Did social insur-
ance ex pendit ures have a redistributive effect on top shares? For t he three nort h-
ern Eu ropean countries shown i n Table 1 (Germany, Netherlands, Sweden), social
sp en di ng a s a sh ar e of nati on al i nc ome ro se f ro m an a ver ag e of 0.61 p erc en t of nat io na l
product in 1900 to 2.9 percent in 1930, nearly a  ve-fold gai n; top shares decli ned
after 1920. In France, social spending rose but on ly two-fold, and top shares d id not
change. In the United States, social spendi ng did not change at a ll between 1900 and
1930 and top shares rose after 1920. The big changes in welfare expenditure and top
shares did not occ ur in Eu rope or the United States unti l after World War II , how-
ever. In 1965, social expenditures in the three northern European cou ntries stood at
21 percent of GDP, an expenditure that required substantial redistribution of pre-
tax incomes. Peter Lindert, “The Rise of Social Spending, 1880–1930” (1994) 31
Explorations in Economic Histor y ; Jens Alber, “Is There a Crisis of t he Welfare State?”
(1988) 4 European Sociological Review 190.
43 According to t he AFL , between 1927 and 1928 capital gains rose by 70 percent,
dividends by 7 percent, and wages by 1.5 percent. At Inter national Har vester – a
bellwet her corporation i n its day – wages barely budged dur ing the 1920s despite
the  rm’s record pro ts. (1929) 36 American Federationist 535; (1930) 37 American
Federat ionist 339–341; Cowing, Populists, Plungers , pp. 155–186; Robert Ozanne,
Wages in Practice and Theory (Mad ison: University of Wisconsin Press, 1968), p. 49.
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S.M. Jacoby302
the AFL, and of the urban working class more generally, were deeply
involved in  nancial politics. Before the emergence of industrial union-
ism, the largest popular movements of the 1930s were led by dema-
gogic populists like Senator Huey Long and Father Charles Coughlin.
In a reprise of 1896, they blasted the money interests and called for the
remonetization of silver.
44 Long attacked the nation’s unequal distri-
bution of wealth – “concentrated in the hands of a few people” – and
tied it to the “God of Greed [worshipped] by Rockefeller, Morgan, and
their crowd.” Coughlin, too, attacked “bankers and  nanciers” and his
heated rhetoric attracted millions of adherents from the same groups
that had elected Roosevelt.
In the Senate, Long disrupted the Glass-Steagall deliberations by  l-
ibustering for three weeks until the bill included limits on branch bank-
ing. Meanwhile Coughlin angrily testi ed to Congress about  nancial
“plutocrats.” He demanded a silver standard and nationalization of
the Federal Reserve, which led Congressman Wright Patman to spon-
sor a bill along those lines. The AFL chimed in, asking that Congress
erect safeguards “against speculation that destroys wealth and business
Congress and the Roosevelt administration spun a web of  nancial
restraints, including the Securities Act of 1933 and suspension of gold
convertibility, the Securities Exchange and Banking Acts of 1934, and
the Investment Company Act of 1940. Some argue that these laws were
designed by a New Deal brain trust that was deferential to  nance and
44 Roe, Strong Managers , p. 42. Said Coug hlin, “God wills it – this religious cr usade
agai nst the pagan of gold. Silver is t he key to prosperity – silver that was damned
by the Morgans.” Members of the House and Senate pressured Roosevelt to send
Coug hli n to t he 1933 L ondon Co nf erence on th e gol d sta nda rd and i n 193 4 Con gre ss
passe d t he Silv er P urch as e Ac t, a mostl y symb ol ic g estu re. Wi ll iam E. Le uchtenbe rg ,
Franklin D. Roosevelt and The New Deal, 1932–1940 (New York: Harper & Row, 1963),
101; Daniel J.B. Mitchell, “Dismantling the Cross of Gold: Economic Crise s and
U.S. Moneta ry Polic y” (2000) 11 North American Journal of Economics & Finance
45 Ibid ., p. 10 3; Ala n Bri nkley, Voices of Protest: Huey L ong, Father Coughlin, and the Great
Depression ( New York: Knopf, 1982), pp. 140, 150, 171.
46 Leuchtenberg , Roosevelt , pp. 54– 56, 60; Cow ing, Populists, Plungers , p. 223; Geisst,
Undu e In uence , p. 68; Paul Studenski and Herman E. Kroos, Financial History of
the United States (New York: Beard Books, 1952), p. 363; Herbert M. Bratter, “The
Silver Episode: II” (1938) 46 Jour nal of Political Economy ; El lis Hawley, The New Deal
and the Problem of Monopoly (Princeton: Princeton University Press, 1966), p. 307;
New York Times , December 13, 1937. Congressional Republican s and supply-side
economists revived the gold-standard debate in the 1980s, leading to formation of
the Gold Commission, which issued a pro-gold report in 1982. Nothing happened,
although the ide a has recurred since then, as in the 1996 presidential campa ign of
Steve Forbes. Mitchell, “Cross of Gold,” p. 101.
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Labor and  nance in the United States 303
thereby permitted regulatory capture. But limits on securities trading
and  nancial centralization shrank the  nancial sector (see Table 13.1 ).
Along with this came fewer opportunities for  nance-derived incomes.
The proportion of Har vard Business School graduates choosing Wall
Street as their  rst position fell from 17 percent in 1928 to 1 percent in
1941. Not until the 1980s would fresh MBAs become as prevalent on
Wall Street as they had been in the 1920s.
Financial regulations also took hold in Europe and Japan. The
world’s industrialized nations experienced what John Ruggie calls “a
common thread of social reaction against market rationality,” which
caused a contraction of global  nancial markets through 1980 (with
a blip in the late 1960s). Top income shares in Europe, Japan, and the
United States tracked these changes. They contracted from the 1930s
through the 1970s, at which point top shares in the United States and
the UK started a steady climb that left Europe and Japan behind (see
Table 13.1 ).
VI Double movement redux
As the New Deal coalition broke down in the 1970s, labor found itself
isolated. It was a Democrat, Jimmy Carter, who deregulated union
strongholds such as the transportation and communications indus-
tries. But the situation went from bad to worse in the 1980s. Employer
hostility to unions, encouraged by Reagan’s PATCO actions, made it
dif cult for unions to retain members and gain new ones. Hostile take-
overs and management buyouts were accompanied by downsizing on a
massive scale. Labor’s previous trifecta had transmogri ed into a triple
With its house collapsing, labor focused attention not on capital mar-
kets – though it criticized hostile acquisitions – but on product markets
(trade) and on survival. In any event, it seemed that there was little
labor could do with respect to  nance because of its weak bargaining
power and political in uence, except at the state level, where it secured
47 Vincent Carosso, “Washington a nd Wall Stre et: The New Deal and I nvestment
Bankers” (1970) 44 Business History Review ; Ba rry Eicheng reen, Golden Fetters: The
Gold Standard an d the Great D epression, 1919–1939 (New York: Oxford University
Press, 1992); Steve Fraser, Every Man a Speculator: A History of Wall Street in American
Life (New York: Ha rper Colli ns, 2005), pp. 444 –447, 473.
48 John G. Ruggie, “Inter nation al Regimes, Transactions, and Cha nge: Embedded
Liberalism in the Postwar Economic Order” (1982) 36 International Organization
49 Daniel J.B. Mitchell, “Union vs. Nonunion Wage Norm Shifts” (1986) 76 American
Economic Review .
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S.M. Jacoby304
passage of anti-takeover legislation in several states. The situation was
eerily reminiscent of the 1920s. There was, however, at least one new
factor: the trillions in pension assets over which unions had in uence.
In the late 1980s, labor awoke to the fact that these funds offered lever-
age to partially compensate for its de ciencies.
The development of labor’s pension activism is a complicated story,
involving the interplay between  nancial markets, state and local gov-
ernment pension funds (SLPFs), and union-af liated pension funds
(UAPFs). SLPFs changed in the 1980s as they were freed of limits on
their equity allocations, which permitted them to raise their equity
stakes to accommodate funding gaps and demographic shif ts. In search
of higher returns and in uenced by shareholder-primacy doctrines,
the SLPFs became leaders of the shareholder rights movement. T he
UAPFs were and are somewhat different. They came more slowly to
shareholder activism and gave it a different twist.
The largest and most active SLPF is CalPERS, which today has
assets of almost $250 billion. (SLPFs have total assets of around $4
trillion.) CalPERS was one of the  rst institutional investors to pres-
sure corporations to be more shareholder-friendly. It proposed what
agency theorists saw as standard remedies for instantiating shareholder
primacy: greater board independence, lower takeover barriers, larger
payouts to shareholders, and tighter links between CEO pay and share
performance. CalPERS relied on a variety of tactics, including proxy
resolutions, public targeting of underperformers, lawsuits, and alli-
ances with other owners, including corporate raiders. In 1985 CalPERS
formed the Council of Institutional Investors (CII) to bolster its clout.
The CII’s initial members were other SLPFs. The CII later included
UAPFs and corporate pension funds.
SLPFs professed to be interested in long-term performance but dis-
gruntled corporate executives said that the funds abandoned their
long-term philosophy whenever raiders offered suf ciently juicy pre-
miums for their shares. The SLPFs supplied capital for  nancing hos-
tile takeovers in the 1980s, which they justi ed in the same way as
the raiders: that they were performing a public service by prodding
underperforming companies to maximize shareholder value . CalPERS
of cially was on record that it preferred companies to improve share-
holder returns without layoffs. But it was not averse to downsizing.
Patricia Macht, a CalPERS of cial, told the New York Times in 1996,
50 Teresa Ghilarducci, Labor’s Capital: The Economics and Politics of P rivate Pensions
(Cambridge, MA: The MIT Press, 1992).
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Labor and  nance in the United States 305
“There are companies that are fat, that have not taken a good look at
the number of employees they need.”
It would be a stretch to call SLPFs worker– owner coalitions. A lthough
many of those enrolled in SLPFs are public-sector union members,
there are limits on union and worker in uence because ultimate con-
trol of an SLPF resides with the government entity that created it. Also,
none of theworkers” covered by an SLPF is employed by compan-
ies in which their pension funds invest. Hence the SLPFs sometimes
take positions that are pro-shareholder but harmful to private-sector
employees. Union leaders from the private sector will state off the
record that SLPFs can pursue shareholder primacy because doing so
wi ll never hurt their member s. SLPF tru stees retort that UAPFs ignore
their  duciary duties by favoring workers over retirees.
The UAPFS are multiemployer funds that are jointly administered
by unions and employers, also known as Taft-Hartley plans. UAPFs
have combined assets that are only about 9 percent of the SLPFs’,
although their in uence belies their size. They place greater emphasis
than SLPFs on a corporation’s employment responsibilities and on the
negative aspects of  nancialization . For example, in 1989 the AFL-
CIO opposed having pension funds invest in junk bonds whereas the
CII, dominated by the SLPFs, supported it. Although UAPFs and
SLPFs both criticize executive pay levels, the SLPFs are inclined to
focus on damage to owners whereas UAPFs additionally emphasize any
harm done to employees. Yet the funds overlap and work closely on
many issues. UAPF staff f unds include unions that represent public
employees, such as AFSCME, while SLPFs from liberal regions stake
out positions close to the UAPFs’. In fact, because the UAPFs’ holdings
are usually small, they must rely on friendly SLPFs to pressure com-
panies and their boards to make desired changes.
One architect of a distinctive UAPF approach was William B. (Bill)
Patterson,  eld director for ACTWU in the 1970s. During the J.P.
Stevens textile-workers organizing drive, Patterson helped to develop
51 Pensions & Investments , February 6, 1989; Jacoby, “Convergence by Desi gn,” p. 249.
Note that one reason SL PFs could become equity-holders i n LBOs was that they
were, and are, exempt f rom ER ISA, wh ich conti nues to afford them g reater invest-
ment  exibilit y than UAPFs.
52 Sea n Harrigan, former president of CalPERS, found out the hard way t hat SLPFs are
not worker funds. At t he time of h is appointment to the CalPER S board by Governor
Gray Davis, Harrigan was a union of c ial. He sta ked out a labor ist path for CalPERS
duri ng his tenure as board member and later chairma n (1999–2004). But when
Harrigan led CalPERS into con ict with California companies such as Disney and
Safeway, Governor A rnold Schwarzenegger had him removed from the board.
53 Pensions & Investments , Febr uar y 6, 1989; New York Times , Apr il 1, 1996.
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S.M. Jacoby306
the corporate campaign, in which unions pressure a company’s major
shareholders in hopes that the latter will restrain anti-union managers.
It was a logical progression from pressuring managers via owners to
deploying labor’s own pension assets for similar ends. UAPFs began
utilizing their pension assets tactically in support of traditional union
objectives in organizing, negotiations, and strikes. Today that approach
is still alive, especially at Change To Win (CTW) and the unions af li-
ated with it. CTW’s unions have combined their pension assets to sup-
port organizing at companies such as Columbia Health Care, Manor
Care (nursing homes), and Unicco (building services). Support from
SLPFs has proven crucial in several of these efforts, as has support
from large European pension funds.
As compared to the CTW, the AFL -CIO and its national unions
are somewhat less likely to engage in tactical pension activities, that
is, those in support of traditional union objectives. The AFL-CIO has
more members in manufacturing, where most pension plans are pro-
vided by the employer and lack union in uence. However, some AFL-
CIO unions, such as the Steelworkers, regularly pursue the tactical
approach. SLPFs have no members in the private sector but they occa-
sionally refuse to invest in  rms that bene t from privatization, such as
bus companies.
To avoid employer opposition, including RICO lawsuits, Patterson
and others have tried to develop a pension model that will raise worker
concerns, meet  duciary standards, and attract support f rom other
shareholders. What is called the “worker-owner” or “capital steward-
ship” philosophy has four parts. First is a search for investment cri-
teria that promote worker interests while satisfying  duciary law. For
example, companies that overpay their executives are wasting money
that could have gone to better purposes, including investments t hat
enhance employee pay and security. Also, if two investments offer simi-
lar returns, labor will favor the company with better human resource
management and human rights policies.
55 Second, UAPFs seek to per-
suade other investors that pro-worker policies promote long-term value.
54 Pau l Jarley and C her yl Mara nto, “ Union Corporate C amp aig ns” (1990) 43 Industrial
and Labor Relations Review ; Stewa rt Schwab and Ra ndall T homas, “Realignin g
Corporate Gover nance: Shareholde r Activ ism by Labor Unions” (1998) 96 Michigan
Law Review ; P&I , A pril 4, 1994; P&I September 29, 2003; Teresa Ghilarducci, James
Hawley, and A ndrew Wi lliams, “Labour’s Paradox ical Interests a nd the Evolution of
Corporate Gover nance” (1997) 24 Jour nal of Law & Society ; Interview with Carin
Zelenko, March 24, 2008; Boston Globe , September 26, 2002; The Deal , April 30,
55 On t he relationship human r esource policies and  rm performance, see Alex Edmans,
“Does t he Stock Market Fully Value Intangibles?” Working Paper, Wharton School
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Labor and  nance in the United States 307
Third, there is the hope that shareholder activism will give labor in u-
ence at the corporation’s highest levels, a goal that has eluded it since
the 1970s. Fourth, UAPFs espouse mainstream governance principles
so as to establish common ground with other active investors.
In this regard UAPFs have demanded that corporations limit execu-
tive pay; hold binding, not advisory, votes on shareholder resolutions;
and minimize takeover defenses such as staggered boards. As noted,
UAPF activism has eclipsed that of the SLPFs; UAPFs  le more share-
holder resolutions than any other investor group. The problem here
is that UAPFs occasionally give the impression that they are in favor
of shareholder primacy, governance principles that sometimes harm
employee interests.
A turning point came in 1997, when the AFL-CIO created an Of ce
of Investment to coordinate labor’s capital-market activities and hired
Patterson to oversee it. Almost overnight, the AFL -CIO became the
center of UAPF activism. One of the of ce’s  rst moves was to create
a website called PayWatch, which allows employees to compare their
earnings to those of their CEO. The site was extremely popular, getting
over four million hits in its  rst year. Later the website added a feature
called “Pick-a-Pension,” which divulges the value of egregious CEO
retirement packages and calculates how much health insurance those
packages could purchase for uninsured families.
The AFL-CIO’s Of ce of Investment and the CTW Investment
Group have the freedom to be aggressively vocal on capital-market
issues because neither has  duciary obligations and therefore is free
of legal actions by employer groups. The CTW Investment Group
is closely linked to the tactical concerns of the CTW unions, espe-
cially SEIU. The AFL-CIO, because of the federation’s long tradition
of national-union autonomy, does less to directly support traditional
objectives of its constituent unions and spends more time on strategic
(2007). There are t hree mut ual fu nds that invest in union-friendly companies. Two
of the funds are above thei r benchm arks over the past  ve year s; one is below by one-
half of 1 percent. “Pro-Labor Mutual Funds Not Sacri cing Pro ts” (2007), www. (last accessed Febru ary 22 ,
56 Pensions & Investments , April 5, 1993; Inte rview with Damon Silvers, March 26,
2007; Thom as Kocha n, Har ry Katz, and Robert McKersie, The Transformation of
American Industrial Relations (New York: Ba sic Books, 1986); Schwab and Thomas,
57 Schwab and Thom as, “Rea lign ing.” Houston Chronicle , Apr il 17, 1994; Pensions &
Investments , A pril 13, 1995; New York Times , March 12, 1996.
58 Pensions & Investments , Apr il 23, 1998; Trumka in Washin gton P ost , Apr il 11, 1997;
Business Week , September 29, 1997, Decembe r 8, 1997.
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S.M. Jacoby308
activities: gathering information, coordinating UAPFs, and lobby-
ing on Capitol Hill. It issues “Key Votes” lists prior to proxy season
that describe resolutions which various UAPFs intend to submit. The
lists are circulated to UAPFs and SLPFs and to other institutional
investors . Another coordinating effort is the AFL -CIO’s Proxy Voting
Guidelines, which are disseminated to UAPF trustees and their invest-
ment advisors. The guidelines identify good governance practices
that also promote employee welfare, what is called “the high road to
The AFL-CIO cast itself into the limelight during the corporate scan-
dals epitomized by Enron . In January 2002, the federation’s Executive
Council was the  rst to respond to Enron when it demanded that com-
panies refuse to renominate any Enron director serving on their boards.
Two months later, Damon Silvers, the AF L- CIO’s Associate General
Counsel, appeared before the Senate Banking Committee and called for
an omnibus law to insure directorial independence, tighter regulation
of accountants and analysts, and repeal of the law shielding executives
and auditors from lawsuits. Several of Silvers’ proposals were included
in the Sarbanes-Oxley Act of July 2002. The AFL-CIO hailed SOX
and said the law was needed to refor m  nancial markets which “once
were well-regulated but are now trapped in a destructive cycle where
short-term  nancial pressures combine with the greed of corrupt cor-
porate insiders.” Harking back to the 1890s, the AF L- CIO condemned
markets for being “rigged to entrench and enrich speculators … at the
expense of employees, shareholders, and communities.”
59 Int erview w ith Rich Trum ka, AFL -CIO, Ma rch 26, 2007; IR RC Corpora te Governanc e
Bulletin , April 2001; Pensions & Investments , March 23, 1998; AF L-CIO, AFL- CIO
Proxy Voting G uidelines: Exercising Authority, Restoring Accountablility (2003); Business
Week , Apr il 15, 1993; Ron Blackwell and Bil l Patterson, “The Crisis of Con dence
in Ame rican Business,” draft working paper, March 2003; The Economist , July 14,
2007. Long-term me asures of perfor mance make intuitive sense but many econo-
mists reject the claim t hat the long-term is anyt hing more than a concatenat ion of
multiple short-terms and t hat a focus on the long-term necessar ily results in better
long-term performance. They may be wrong but resea rch contesting t heir claims is
scant y at best, a problem that plagues not on ly pension activ ism but social investing
more general ly.
60 Financial Times , January 26, 20 02; Damon A . Silver s, Testimony, to the U.S. Sen.
Comm. on Banking, Housing, and Urban Affairs, “Hearing on Accounting and
Investor Protection Issues Raised by Enron and Ot her Public Companies,” 107th
Cong., 2d. S ess., March 20, 2002; Skeel, Icarus , p. 175; Blackwel l and Patterson,
“Crisis of Con dence”; John C. Coates, “The Goals and Promise of the Sar banes-
Oxley Act” (2007) 21 Jour nal of Economic Perspectives . Labor’s effor t to capital ize on
the sca ndals was underc ut by revelat ions th at Robert Georgine, a long-time bu ild-
ing trades of cial, personally pro ted f rom Ullilco’s investment in Global Crossing’s
IPO. Business Week , March 18, 2002.
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Labor and  nance in the United States 309
In what follows, we focus on UAPF activism in four areas. Two
of them – executive pay and board structure – are old chestnuts of
the shareholder-r ights movement. The other two are proxy access
and regulation of private equity and hedge funds . In each of these
areas, t he labor movement since the late 1990s has been an outspoken
advocate of change. While the  nancial crisis hastened adoption of
these provisions, the labor movement’s steady beating of the drum
in the years before the crisis guided legislators in crafting provisions
contained in the landmark  nancial regulation law enacted in July
A Pay issues
Ever-higher CEO compensation and scandals such as options backdat-
ing have kept executive pay at the forefront of pension activism. T he
AFL-CIO and CTW have called for regulations to prevent backdating
and to force executives to return pay if cor porate earnings are revised.
The proposals tap into public anger over stratospheric executive pay
levels. In a recent survey of American households, 70 percent agreed
with the statement, “When corporations are pro table, the bene ts are
not shared with workers but go only to the top.”
The SEC’s new executive pay disclosure rules – for which the AFL-
CIO lobbied – have uncovered numerous types of executive excess.
The New York Times said that the rules brought to mind Brandeis’
quip that “sunlight is said to be the best of disinfectants” (from his
post-Pujo book, Other People’s Money ). I n rece nt proxy sea sons, UA PFs
sponsored the vast majority of advisory pay resolutions. Some sought
limits on golden parachutes and executive retirement bene ts; others
demanded that executive bonuses be awarded only if performance was
superior to a peer group. By far the most popular of the UAPFs’ resolu-
tions are those urging a “Say on Pay” by holding advisory shareholder
votes on a board’s pay proposals. To avoid negative publicity, some
companies have agreed to privately meet with activist shareholders,
including labor, to discuss their pay policies. This has brought labor
a measure of in uence at strategic corporate levels. As one union of -
cial said, “Five years ago we would never have gotten in a cor porate
61 Schwab a nd Thomas, “Real igni ng”; Damon Si lvers, Willia m Patterson, and J.W.
Mason,Challenging Wall Streets Conventional Wisdom, in Archon Fung,
Tessa Hebb, and Joel Rogers (eds.), Working Capital: The Powe