How Capital Strikes Yanked Barack Obama’s Presidency to the Right
Barack Obama swept into office with a progressive mandate, but his legislating was tepid, often conservative. One key reason: his administration had no plans — or even interest in — overcoming the massive capital strikes they were up against.
President Barack Obama speaks during a meeting with financial regulators at the White House on March 7, 2016 in Washington, DC. The president received an update on progress in implementing Wall Street reforms. (Alex Wong / Getty Images)
The Barack Obama administration initiated a host of new legislation designed to advance the interests of business. Often those initiatives contradicted Obama’s campaign rhetoric, which had promised that he would tax the wealthy at higher rates, pursue trade deals that benefited workers rather than corporations, and regulate business more closely. The disjunction stemmed less from the new president “selling out” than from the imperative of boosting business investment in the economy. Cultivating businesses’ confidence in the administration was essential because the $787 billion government stimulus bill passed in February 2009 was too small, given the magnitude of the crisis, and because the administration was unwilling or unable to take measures that would force investment in Main Street.
President Obama entered office in the throes of a historic disinvestment crisis. The problem was not a lack of money, but the fact that corporations were hoarding trillions of dollars in capital rather than investing it in the economy. Although the Great Recession officially ended in June 2009, the rate of unemployed or underemployed workers was still 17 percent in November 2010, and remained at almost 15 percent as Obama’s second term began in January 2013. Thus, Obama’s first term and much of his second were dedicated to convincing business leaders to start investing again.
During Obama’s first two years, many corporate leaders deemed his policies insufficiently pro-business. Their critique was overblown: from the start, the administration took great pains to accommodate corporate demands. But business was not satisfied.
Treasury Secretary Timothy Geithner later wrote in frustration that although “the President helped rescue the economy and their bottom lines,” many corporate executives believed “that he was relentlessly hostile to their interests.” In the November 2010 midterm elections, business made its anger known. Whereas in 2008 the financial industry had favored Democratic congressional candidates by a margin of $124 million, in 2010 it favored Republicans by almost as large a margin.
When Democrats took huge losses in the midterms, White House officials interpreted it as a sign of the need to bolster business confidence in the administration. More consequential than corporate campaign donations was the fact that business was still withholding so much money from the economy, impeding the recovery and contributing to voter disaffection with the Democrats.
Noting that unemployment was still “stubbornly high” and that there was “little likelihood” of renewed government stimulus, the Wall Street Journal argued in early 2011 that “the key to economic growth — and Mr. Obama’s re-election prospects — could lie in corporate treasuries. U.S. non-financial businesses are sitting on nearly $2 trillion in cash and liquid assets, the most since World War II, and Mr. Obama wants them to use it to create more U.S. jobs.”
This approach was not the only logical one: many outside observers attributed the Democrats’ midterm losses to the shortage of progressive reform in Obama’s first two years. But the backgrounds of Geithner, Larry Summers, and Obama’s other top advisers virtually ensured that the midterm defeat would be attributed to business discontent.
Following election day, Obama buckled down in an effort to boost executives’ “confidence” in his administration. On the legislative front, Obama’s efforts to “repair relations with corporate America,” as the Journal wrote, took the form of bills that cut taxes for business and amplified investor privileges overseas via free-trade agreements. According to the Journal, Obama was proposing a deal with corporate leaders in which they would “stop hoarding cash and start hiring in return for tax breaks and other government support,” including free-trade deals and deregulation.
None of these reforms would directly address the economic roots of the crisis. They would do little to boost the low level of domestic demand, which was the main economic cause of continued recession. Doing so would have required putting more money into the hands of consumers and/or greatly increasing government spending.
Rather, the reforms sought to address the political nature of the economic recession. By granting concessions to business in unrelated realms of policy, the administration hoped to cajole banks into making new loans and employers into hiring new workers. The reforms did not make economic sense, but they had a compelling political logic. They were concessions designed to get business to cease its capital strike.
“It’s Got to Be Sacred Cows”
Corporate leaders were often explicit about their political demands. In November 2010, Emerson Electric CEO David Farr told the Journal that “he would expand more in the U.S. only ‘if I felt the government was going to get out of the way’” by overhauling the tax code and streamlining “environmental and hiring rules.”
Taxes and regulation, not the lack of demand, were also key themes in a meeting between CEOs and Obama later that month. Barclays CEO Robert Diamond said that US corporations “don’t have the confidence to hire in the United States of America until we can believe that the government, the private sector and financial institutions are working together and connected again.”
Bausch & Lomb CEO Brent Saunders warned that “we’re being a little more tentative on whether or not you want to move a plant, or invest,” due to disagreements with the administration over rules governing profit repatriation. A few months later, Joseph Czyzyk, the chairman of the Los Angeles Chamber of Commerce, said that “the thing that bothers us the most is regulatory reform.” To unlock the trillions of dollars that businesses were hoarding, Czyzyk said, the administration would have to get serious about dismantling regulations: “It can’t be lip service and blue ribbon commissions on that, it’s got to be sacred cows.”
Obama listened. On tax policy, he agreed in December 2010 to renew the tax cuts for the wealthy originally passed under George W. Bush, which he had previously vowed to end. Although he did sign several measures, such as the Affordable Care Act, that modestly increased taxes on the wealthy, he left the rate on capital gains income (income from stock market holdings) lower than it had been two decades earlier. Many tax policy experts also argued that Obama could have ended the tax loophole on “carried interest,” which benefits hedge funds and private equity managers, but he did not.
Most important for business confidence was the tax rate on corporations. In February 2012 the White House released the “President’s Framework for Business Tax Reform,” which proposed to reduce the top corporate rate from 35 percent to 28 percent, and 25 percent for manufacturing companies.
Obama made the quid pro quos explicit. In exchange for his efforts “to give businesses a better deal” through new legislation, he was hoping to cajole new business investments. He also asked congressional Republicans to fund a small fiscal stimulus “to create jobs through education, training, and public works projects.”
The most aggressive administration initiatives involved promoting exports and overseas investments by US corporations. Obama’s first secretary of state, Hillary Clinton, effectively became “the government’s highest-ranking business lobbyist,” as the business press noted, directly negotiating foreign deals for Boeing, Lockheed Martin, General Electric, and other companies. She pushed countries to embrace fracking for natural gas and Monsanto’s genetically modified seeds.
Clinton also reoriented the State Department itself, converting it “into a machine for promoting U.S. business.” She created the new position of chief economist, hired a former Wall Street banker for the job, and promoted “the embassy economic officers who act as State’s liaisons to business.” She directed department employees to embrace what she called the “Ambassador-as-CEO” approach to diplomacy, ordering “embassies to make it a priority to help U.S. businesses win contracts.”
As Clinton cleared the path for specific companies, the administration responded to the 2010 midterm defeat by trying to open up new markets for all US corporations. Obama had already appointed a delegation of government and corporate leaders to negotiate bilateral trade treaties that would “open up markets so that American businesses can prosper.” By the end of the year, passing new trade agreements with South Korea, Colombia, and Panama became a priority, with the goal that these actions would restore corporate confidence and unlock investment.
In Obama’s words, these initiatives were intended to “make clear to the business community, as well as to the country, that the most important thing we can do is boost and encourage our business sector and make sure that they’re hiring.” Business loved it, though the public was less enthused. The Wall Street Journal reported in January 2011 that “the administration is relying on business groups to take a lead role in passing the trade deals, countering opposition from unions and a skeptical public.”
Following the successful passage of these laws in Congress later that year, Obama moved on to the behemoth Trans-Pacific Partnership (TPP). The deal was designed to extend the privileges granted to corporations under other free-trade agreements to twelve Pacific countries. The administration’s pursuit of the TPP was a multiyear campaign involving a “war room” of top officials in the West Wing and the targeting of dozens of individual congressional Democrats who were on the fence.
The administration also took the inclusion of corporate leaders to new levels. It gave nearly six hundred business representatives direct access to the draft text, which it refused to release to the public or Congress, and recruited CEOs to lobby Congress.
For Congress as well, subsidizing the overseas investments and exports of US corporations was a bipartisan policy, as the approval of the bilateral trade deals suggests. Congress members’ behavior was heavily shaped by the business-confidence logic that drove the administration to support these proposals.
A telling example came late in Obama’s second term, when Congress was divided over whether to renew the Export-Import Bank’s subsidies to US exporters. The threat of disinvestment created the leverage needed for a congressional majority. As Bloomberg Businessweek reported, key manufacturers threatened to migrate overseas if Congress resisted. Boeing’s CEO “quietly warned that Boeing might have to move work abroad if it didn’t have Ex-Im’s help.” These threats “alarmed moderate members of Congress,” and produced the votes needed to assure the bank’s renewal.
Business Held the Cards
There are several noteworthy patterns in these efforts to bolster business confidence. First, representatives of large US corporations were directly involved in administration initiatives: through consultation in formulating tax policy, through the corporate presence on trade delegations and within the State Department, and through the White House’s enlistment of CEOs as consultants and lobbyists for the TPP. These business representatives helped design policy and also performed the crucial role of winning over Congress.
Victories like the renewal of the Export-Import Bank and Congress’s approval of foreign trade deals did not result from negotiations between Republicans and Democrats, but from negotiations between corporate leaders and reluctant members of both parties. The deployment of business lobbyists against one’s congressional opponents is a common political strategy utilized by both Democrats and Republicans.
Second, many of the policies initiated after the 2008 economic crash entailed quid pro quos between government and business. The policies were not designed to address the economic roots of disinvestment, nor to directly resolve problems like unemployment and slow growth. Rather, they were part of a bargaining process that traded government actions for corporate investment.
This disconnect is particularly visible in the pursuit of trade and investment treaties, which were publicly advertised as ways to “make sure” that corporations would expand domestic production and therefore add jobs. But trade agreements can only produce net job gains if they generate increased production, if the increased production takes place domestically, and if that production involves expanding the workforce. In practice, this has generally not occurred.
Likewise, as even the business press and most mainstream economists concede, reduced corporate tax rates tend to have “little bearing on economic growth” in industrialized nations. As business analysts would later testify during the 2017 tax cut debate, corporate tax cuts or a tax holiday (designed to allow corporations to repatriate money held in overseas tax shelters at a low tax rate) would not produce significant new investments or jobs.
Many CEOs frankly admitted in late 2017 that “tax cut proceeds will go to shareholders.” And, as predicted, most of the proceeds of the December 2017 tax cut were indeed used to increase profit levels, stock prices, and shareholder dividends.
Third, the process also highlights the necessity of trust in the negotiations around capital strikes, since capital investment and government policy can never be fully implemented at the same time. Obama’s actions were intended to “boost and encourage” business confidence in the government as an ally across a range of issues.
But someone had to go first. Either corporations would first invest in new hiring and trust that the Obama administration would negotiate favorable policy reforms, or the administration would first secure pro-business reforms and then trust that the corporate beneficiaries would invest in new US jobs. Congressional actions obeyed the same logic, as the Export-Import Bank renewal suggests. This “who goes first” dilemma is common to most policy negotiations between business and government.
Fourth, negotiating relationships were asymmetrical. The Obama administration was constantly trying to persuade business to trust the government, not the other way around.
Government overtures to business were a gamble, since pro-business policy changes would not necessarily result in business being confident enough to end disinvestment. As the Wall Street Journal noted in late 2010, “It isn’t clear how far any moves by Mr. Obama or the new Congress would go in encouraging U.S. businesses to unleash the $2 trillion in capital they are holding.”
The renewal of corporate investment remained agonizingly slow, and hoarded profits remained at gargantuan levels at the end of Obama’s time in office. The structural power of business meant that it was not obliged to negotiate in good faith. Executives could take their tax cuts and then decide to give the money to shareholders instead of investing it. Capital strikes tend to be open-ended, capable of generating a series of pro-business policy initiatives — unless government officials are willing and able to punish business for reneging, which the Obama administration was very reluctant to do.
In the end, Obama was only partly successful in restoring business confidence. While the unemployment rate had significantly declined by 2016, US companies were still hoarding some $2.5 trillion in profits in overseas tax havens. Prominent CEOs were still rehearsing the standard line: threats of continued disinvestment coupled with promises of new investments should government comply with their demands for lower taxes. The CEO of Apple, which held $181 billion overseas, said frankly that “we’re not going to bring it back until there’s a fair rate. There’s no debate about it.”
General Electric’s CEO said in early 2017 that the economy “is in what I would call an investment recession. Companies aren’t reinvesting in capital expenditures in the U.S.” Only drastic corporate tax cuts would give business “the ability to repatriate capital from around the world.”
The Democratic and Republican nominees to replace Obama agreed that slashing corporate tax rates was the way to “bring private sector dollars off the sidelines and put them to work here.” Again, the strategy was to cajole, not coerce. Outlawing tax havens or taking punitive measures were off the table.
Capital Strikes Have Affected Trump, Too
The Trump transition in 2017 has not altered any of these basic patterns. There was a gradual recovery in business investment levels starting at the end of the Obama era and continuing in Trump’s first years, owing to a recovery in energy prices and a modest growth in consumer demand (partly fueled by rising consumer debt, it seems). Surveys in 2018 found a significant increase in business “optimism” and plans to hire, and the official unemployment rate dropped to under 4 percent.
However, corporations continued to keep trillions of dollars out of the real economy, including $2.5 trillion in domestic reserves alone. Moreover, they continued to make strategic use of their cash hoards to win policy changes from government.
The demands had not changed: more tax cuts, more deregulation, more public subsidies, and more privileges overseas. In return, they promised to invest in the United States.
A preview of the Trump administration’s approach to business came in November 2016, when Trump negotiated an agreement with the Carrier manufacturing company. Carrier and its parent company, United Technologies, had declared that they would transfer over two thousand jobs from Indiana to Mexico. Three weeks after the election, Trump gloated that he had saved over half of those jobs.
Carrier’s executives offered a clearer account of the deal, however, explaining that Trump had offered them preferential input in policymaking: “The incoming Trump-Pence administration has emphasized to us its commitment to support the business community and create an improved, more competitive US business climate,” meaning tax cuts and deregulation.
Economist Michael Hicks called the negotiation “damned fine deal-making” on Carrier’s part: “The chance for Carrier (and their lawyers) to help craft a huge regulatory relief bill is worth every penny they might save [in exchange for] delaying the closure of this plant for a few years.”
The self-styled master of “the deal” had just surrendered to a classic capital strike. He had negotiated a partial postponement of Carrier’s disinvestment and gained a public relations victory, but only by promising the company future leverage over regulatory policy.
Tellingly, the company stressed that the deal had not altered its policy of moving investment overseas: “This agreement in no way diminishes our belief in the benefits of free trade and that the forces of globalization will continue to require solutions for the long-term competitiveness of the US and of American workers moving forward.” Its control over its investment capital made it the more powerful partner in the deal.
Other companies quickly followed suit, promising investment in exchange for pro-business reforms from government. Corporate tax cuts remained a central demand.
In January 2017 the CEO of AT&T vowed to “step up our investment levels” in exchange for a reduced corporate tax rate. AT&T was not holding back on US investments for lack of capital: it was posting over $1 billion a month in profits. It had also received $38.1 billion in special tax breaks from the government since 2008, more than any other company. But it still was not confident enough.
Even after Congress slashed the top corporate tax rate from 35 percent to 21 percent in December 2017, the fate of the hoarded cash remained far from certain. Corporations did start to repatriate their overseas money, but spent most of it on stock buybacks and dividends rather than productive investments or wage increases for workers. Business investment levels in 2018 were still much weaker than during the second half of the twentieth century.
The Trump presidency has thus exhibited the same basic patterns as its predecessors. Corporate representatives have been directly involved in making policy, even more blatantly than in the past. Quid-pro-quo deals have traded government handouts to corporations for new investment in the economy, asking government to trust that business leaders will follow through.
And the negotiating relationship in those deals has remained asymmetrical, with capitalists free to renege on their pledges. Trump’s own billionaire status and unabashedly pro-business rhetoric mark a partial difference from Obama, but he has remained subject to the same basic parameters and constraints.