Makers vs. Takers: Is Wall Street Driving Income Inequality?

Rana Foroohar’s new book, “Makers and Takers,” is a first-class takedown of the ways many American firms make money today. The book’s subtitle, “The Rise of Finance and the Fall of American Business,” argues a sad paradox: Some people make money by making things. Others make money by playing financial tricks with stuff the first group makes.

In the late 20th century, some clever folks on Wall Street realized it was far easier to make gobs of money doing the latter. It wasn’t long ago that Goldman Sachs was accused of boosting Coca-Cola’s profits by hoarding aluminum and forcing its price higher. (Goldman told the New York Times, which reported the news in 2013, it was in compliance with all industry standards.)

A massive system of this kind of speculation was put in place, creating wild profits for “financial innovators” and bubble swings for everyone else. But more fundamentally, the rewards for hard work are arguably steered toward the wrong people — the takers, not the makers — and that has contributed to the growing income inequality problem threatening the American social fabric.

In her book, Foroohar calls this development “financialization.” I asked her to explain what that could mean for consumers and the future of American business.

Bob Sullivan: What is financialization, and what does it mean in the (real or perceived) conflict of Wall Street versus Main Street?

Rana Foroohar: Financialization is the growth in size and power of the financial sector — it creates only 4% of the jobs in this country but takes 25% of all corporate profits, is regularly one of the top three industry lobbying forces in Washington, D.C., and has come to dictate the terms of American business, which results in a corporate focus on short-term profits rather than long-term economic growth.

B.S.: Is there a connection between financialization and what I’ve seen you call the “falling down” problem, where older workers lose their jobs and have to settle for lower salaries in their new jobs or worse?

R.F.: Yes, the neo-liberal philosophy of letting capital go wherever it will — which is usually where labor is cheapest — is a crucial part of how financialization works. Unfortunately, it leads to greater inequality and slower growth as wealth is funneled to the top of the economic pyramid. Over the last 40 years, the rise of finance has correlated with fewer startups, less [Research & Development] spending, flat wages and lower economic growth.

B.S.: A generation or two ago, if you asked parents what they hoped their kids would become, they’d give answers like doctors, pilots or perhaps engineers. Today, that’s a harder question to answer. App developer doesn’t sound as secure or prestigious. How would you respond?

R.F.: Well, today, parents might say they want their kids to be a financier — in fact, it’s the number one job choice for MBA grads, in part because wages in the financial sector have so outpaced those in other fields as a result of the monopoly power of the financial industry.

B.S.: Just what are they teaching in those MBA programs?

R.F.: Balance sheet manipulation. As I explain in chapter 3, (one) of the biggest complaints that business leaders have about MBA education today is that it has become too focused on the short-term engineering of capital rather than innovation, industrial expertise or a real understanding of how to nurture human talent.

B.S.: Uber-rich social commenter Nick Hanauer has famously said, and repeated, that income inequality could eventually lead to an ugly pitchfork scene. Is that where the makers-and-takers world is headed?

R.F.: If we don’t fix things, for sure. I’m a big fan of Thomas Piketty, and as he sketched so clearly and powerfully in his book, greater income inequality eventually leads to political and social instability. It doesn’t have to be that way, though. As I talk about in my book, there are countries and communities that have found better, more sustainable ways to grow. Private companies in the U.S., for example, that aren’t under pressure from the financial markets, invest about twice as much into productive things like factory upgrades, worker training and R&D as similar public companies do.

B.S.: Many Main Street Americans will be hearing these concepts for the first time, and it will make them feel helpless, like a game where the rules are a secret. How can they respond?

R.F.: The most direct way to respond to the problem of financialization is via our retirement savings. Asset management is the fastest growing and one of the most exploitative areas of the financial sector. Actively managed funds that have higher than average fees and lower than average returns can eat up 30 to 60% of our retirement nest egg over our lifetimes. Put your money in an index fund, and forget about it.

[Editor’s Note: If you’re eager to save for retirement, but debt is holding you back, you can see how long it will take to pay it all off with this calculator. And you can monitor your financial goals, like building a good credit score, for free each month on Credit.com.]