Spring 2023

MONEY MATTERS - Toxic Predators

Written by Drummond Pike

Bill Lazonick is an interesting case of a crusading economist. A slightly disheveled UMass professor emeritus of Eonomics, he has led the charge against “stock buy backs,” the increasingly popular practice by public companies trying to increase their stock price. Fewer shares in the open market increases the value of an individual share, and that is a boon to the remaining shareholders and, not incidentally, the holders of stock options who are almost always insider executives. This scheme can raise stock value even when sales are declining. 

Now, normally, when a company has large after-tax profits, it can do several things: invest in R&D, raise wages for its workers, build more capacity to make more stuff to sell, or pay dividends to shareholders. In theory, it could also lower the cost of its products, but this is at best a rare an event. One poignant example at the moment is Chevron which, like many petroleum companies, has had obscene profits in recent years in no small part due to painfully high gas prices. So, in the face of towering profits, do they reduce those per gallon prices? Nah…much better to spend $75 billion to buy back their shares. Now the motive for management is simple: raise the share price to make their options valuable.

Led in part by Milton Friedman, the ultimate “free-market fundamentalist,” the idea that the obligation of companies is to maximize the value of its shares (and thus the wealth of their owners) took hold in the Reagan years of the 1980s and has been on a roll ever since. The idea that a company should retain profits and reinvest to make more widgets better and more efficiently has fallen by the wayside as the financialization of corporate management has accelerated. And the names of its leading lights are well known not because they are stellar managers, but because they have figured out how to game the system for personal benefit: Carl Icahn, Nelson Peltz, Paul Singer, Daniel Loeb, etc. Icahn is a great example: he bought $2 billion of Apple shares and then proceeded to publicly berate Tim Cook, Apple’s CEO and his board to “go big” on stock buy-backs in 2014 and 2015 and then disposed his shares at great profit within 2.5 years. Lazonick and co-author Jang-sup Shin coined the apt description of this phenomena: Predatory Value Extraction, which is also the title of their recent book. What brings all of this to mind was a recent 2/22/23 story on CNN Business comparing Norfolk Southern’s response to the horrendous toxic crisis caused by their train’s derailment ($6.5 million) to their simultaneous generosity to their shareholders in the form of a $7.5 BILLION stock buy-back. Very little question of where their concerns lie, and it certainly was not with the victims of the disaster.

Late on the night of February 3^rd, a long 150-car train derailed in East Palestine, Ohio. Among the 50 or so cars that crashed off the rails, a number were carrying toxic chemicals and one was full of the highly flammable and toxic material called vinyl chloride. 115,580 gallons kept under pressure to liquify the material began escaping containment. When vinyl chloride is exposed to air, it forms phosgene, the deadly gas used in WWI to kill and maim trench-bound soldiers. Moreover, the gas is twice as dense as air, so stays close to the ground, creating the most fearful risk of explosion for this hyper-flammable material. As a result, authorities chose to burn it off given the close proximity to the town. When you burn that lovely stuff, multiple by-products form including deadly dioxin. The contamination of the surrounding land and water will be studied, and litigated, for years as Norfolk Southern continues buying back stock and boosting executive compensation. 

Delving deeper into the rail safety issues that converged to create the tragedy, one of the early stories focused on the Trump administration’s move to throw out the Obama-era regulation requiring railroad trains moving toxic materials to install an expensive braking system that would limit the damage caused in derailments. This is absolutely true, but it wouldn’t have altered the fate of East Palestine, Ohio. Why? Well, that gets into the absurd state of the regulatory capacities we still have in place. You see, those Obama regs would not have applied to a train where toxic materials were contained in less than a third of the cars or some such. This makes about as much sense as saying “wear those seat belts most of the time,” but God help you if there’s an accident when you don’t have them on.

In this quasi-democracy we have, money plays an outsized role as a result of ongoing conservative efforts highlighted by the Buckley and Citizen’s United decisions that have unleashed an astonishing wave of corporate and dark money into the political system. Industry-friendly appointees during the Trump administration led the undoing of the Obama regs that required an improved braking system for trains moving flammable and toxic materials. Who were strongest advocates for relaxing the regs? Of course, the chemical and petroleum industries who’d become bosom buddies of the former guy’s regime. So why wouldn’t it have made a difference to those poor Ohioans? Simple. On that particular train, the number of cars carrying toxic crap was just below the threshold when the Obama regs would have called for modern braking systems.

Like all big American industries, the rail industry is constantly driving for more profits. They produce those profits by defeating or delaying safety regulations, by lowering the cost of labor by making each train longer and longer (more cars/conductor, etc), and by deferring maintenance on tracks and trains – and certainly by avoiding mandated equipment improvements such as those that would have been required under the Obama regs. More profits equal more dividends, and stock buy-backs equal executives making bank at the expense of collateral damage.

For the forty-three years since Reagan’s famous remark that “government IS the problem,” there has been a steady erosion of the ability of governments at all levels to regulate industry in the interests of public health and safety. Government is seen as the “enemy of free enterprise”, making business more difficult to conduct. How quickly we forget the egregious and exploitive record of big business in the first half of the 20^th Century, not to mention how unregulated financial markets led to the Depression. Trump made the most of this rhetoric by convincing people they were victims – not of private sector bad actors, but of government. His grandstanding in East Palestine along with Fox News’ implying that this was an example of how white communities are discriminated against is simply breathtaking. That people are taken in by this drivel is our modern-day tragedy of the commons.

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