Want to Boost the Economy? Check the Power of U.S. Corporations, Not China | Opinion

Xi Jinping might possibly agree this Friday when he meets with Donald Trump on further steps to bring down China's trade imbalance with the United States—giving Trump a face-saving way of ending his trade war.

But Xi won't agree to change China's economic system. Why should he?

The American economic system is focused on maximizing shareholder returns. And it's achieving that goal: This past Friday, the S&P 500 notched a new all-time high.

But average Americans have seen no significant gains in their incomes for four decades, adjusted for inflation.

China's economic system, by contrast, is focused on maximizing China. And it's achieving that goal: Forty years ago, China was still backward and agrarian. Today, it's the world's second-largest economy—home to the world's biggest auto industry and some of the world's most powerful technology companies. And over the past four decades, hundreds of millions of Chinese people have been lifted out of poverty.

The two systems are fundamentally different.

At the core of the American system are 500 giant companies headquartered in the United States but making, buying and selling things all over the world. Half of their employees are non-American, located outside the United States. A third of their shareholders are non-American.

These giant corporations have no particular allegiance to America. Their only allegiance and responsibility is to their shareholders.

They'll do whatever is necessary to get their share prices as high as possible—including keeping wages down, fighting unions, reclassifying employees as independent contractors, outsourcing anywhere around world where parts are cheapest, shifting their profits around the world wherever taxes are lowest and paying their top CEOs ludicrous sums.

At the core of China's economy, by contrast, are state-owned companies that borrow from state banks at artificially low rates. These state firms balance the ups and downs of the economy—spending more when private companies are reluctant to do so.

They're also engines of economic growth making the capital-intensive investments China needs to prosper, including investments in leading-edge technologies.

Trump thinks this is unfair.

But it seems to be working. Since 1978, the Chinese economy has grown by an average of about 9 percent per year. Growth has slowed recently, and American tariffs could bring it down to 6 or 7 percent, but that's still faster than almost any other economy in the world, including the United States.

The American system relies on taxes, subsidies and regulations to coax corporations to act in the interest of the American public. But these levers have proven weak relative to the overriding corporate goal of maximizing shareholder returns.

Last week, for example, Walmart, American's largest employer, announced it would lay off nearly 570 employees, despite taking home more than $2 billion courtesy of Trump and the GOP's corporate tax cuts. Last year, the company also closed dozens of Sam's Club stores, leaving thousands of Americans out of work.

At the same time, Walmart has plowed more than $20 billion into buying back shares of its own stock—which boosts the pay of Walmart executives and enriches wealthy investors but does nothing for the economy.

It's the same across the American economy: The Trump tax cut did squat for jobs and wages but did nicely for corporate executives and big investors. Instead of reinvesting the money into their businesses, the International Monetary Fund reported, companies used it to buy back stock.

But wait. America is a democracy and China is a dictatorship, right?

True, but most Americans have little or no influence on public policy—which is why the Trump tax cut did so little for them.

Donald Trump Xi Jinping
President Donald Trump and President Xi Jinping, along with members of their delegations, hold a dinner meeting at the end of the G20 Leaders' Summit in Buenos Aires, on December 1, 2018. SAUL LOEB/AFP/Getty

That's the conclusion of professors Martin Gilens of Princeton University and Benjamin Page of Northwestern University, who analyzed 1,799 policy issues before Congress and found that "the preferences of the average American appear to have only a miniscule, near-zero, statistically non-significant impact upon public policy."

Instead, American lawmakers respond to the demands of wealthy individuals (typically corporate executives and Wall Street moguls) and big corporations—those with the most lobbying prowess and deepest pockets to bankroll campaigns.

I'm not blaming American corporations. They're in business to make profits and maximize their share prices, not to serve America.

But because of their dominance on American politics, and their commitment to share prices instead of the wellbeing of Americans, it's folly to count on them to create good American jobs or improve American competitiveness.

I'm not suggesting we emulate the Chinese economic system. I am suggesting that we not be smug about the American economic system.

Instead of trying to get China to change, we must lessen the dominance of big American corporations over American policy.

Americans can't thrive within a system run largely by big American corporations, organized to boost their share prices but not boost Americans.

Robert B. Reich, former secretary of labor, is chancellor's professor of public policy at Berkeley. He is author, most recently, of The Common Good.

The views expressed in this article are the author's own.​​​​​​​

Want to Boost the Economy? Check the Power of U.S. Corporations, Not China | Opinion | Opinion