When we look at the causes of growing income inequality and the loss of good middle-class jobs, it’s become fashionable to blame the march of technology. Rana Foroohar has a different diagnosis: the fundamental incentive structures of our financial system. CEOs are rewarded for short-term gains in stock price rather than long-term productive reinvestment. The net result is that companies too often treat workers as a cost to be eliminated rather than an asset to be harnessed to new uses. Rana will help us bring this problem to life.
— Tim O’Reilly
The single biggest unexplored reason for long-term slower growth is that the financial system has stopped serving the real economy and now serves mainly itself.
In lobbying for short-term share-boosting management, finance is also largely responsible for the drastic cutback in research-and-development outlays in corporate America, investments that are seed corn for future prosperity.
It’s no accident that corporate stock buybacks, corporate pay, and the wealth gap have risen concurrently over the past four decades.
Despite the lobbying power of the financial industry and the vested interests both in Washington and on Wall Street, there’s a growing push to put the financial system back in its rightful place, as a servant of business rather than its master.
Crises of faith like the one American capitalism is currently suffering can be a good thing if they lead to re-examination and reaffirmation of first principles. The right question here is in fact the simplest one: are financial institutions doing things that provide a clear, measurable benefit to the real economy? Sadly, the answer at the moment is mostly no. But we can change things. Our system of market capitalism wasn’t handed down, in perfect form, on stone tablets. We wrote the rules. We broke them. And we can fix them.
Rana Foroohar is an assistant managing editor at Time magazine, where she also writes the Curious Capitalist column, and CNN’s global economic analyst. Rana is the author of the recently published Makers and Takers: The Rise of Finance and the Fall of American Business, about why the capital markets no longer support business and how that’s creating slower growth and greater inequality. Prior to joining Time and CNN, Rana spent 13 years at Newsweek as an economic and foreign affairs editor and a foreign correspondent covering Europe and the Middle East. During that time, she was awarded the German Marshall Fund’s Peter Weitz Prize for transatlantic reporting. She has also received awards and fellowships from institutions such as the Johns Hopkins School of International Affairs and the East West Center. She is a life member of the Council on Foreign Relations. Rana holds a degree from Barnard College, Columbia University. She lives in Brooklyn with her husband, the author John Sedgwick, and her two children.
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