Two important economists have written the most important analysis so far of the Boeing 737 Max crisis. It is called “Make Passengers Safer? Boeing Just Made Shareholders Richer,” and it’s by Mustafa Erdem Sakinç, a young French economist who teaches at the University of Bordeaux and specializes in “aerospace, pharmaceutical and ICT industries”; and the US-based Canadian economist William Lazonick, who taught at Columbia for many years and focuses on business innovation. After examining the evidence, the two economists reached this conclusion: The Boeing execs should be fired and the money they grabbed from the future sales of Boeing 737 returned. That plane’s future is at present unknown, as it appears to have fundamental design flaws that the execs decided to fix with software and not with design modifications. And what would it have cost Boeing to make a plane without these flaws? $7 billion. Apparently, the execs, based in Chicago, decided to transfer this cash to its shareholders (and, ultimately, themselves) rather than make a plane that can safely fly.
Sakinç and Lazonick write:
The cost of developing a clean-sheet replacement incorporating the latest technologies was estimated at $7 billion above that of going with a re-engined 737. That is about the same amount that, on average, Boeing has been spending on stock buybacks annually since 2013. Indeed, from 2004 through 2008, when the need for a new midrange narrow-body plane was clear, Boeing had thrown away $11.0 billion on buybacks while also giving shareholders ample dividends of $4.8 billion. If, with Airbus as its only competitor, Boeing had funded a well-planned and -executed investment in a wholly new aircraft, the company could have generated significant revenues and profits far into the future.
As I suspected in March, stock repurchases (which inflate the value of shares) are entering the center of this crisis, in much the same way they will be found at the center of the next big stock market crash (coming to a town near you). 2008 crash had its epicenter in the housing sector; the next will be in the business sector, which has become the basin for massive loan flows. And a huge amount of this borrowed money, according to Steven Pearlstein, business writer for the Washington Post, is being used to do what Boeing did until a few months ago: “to buy back their own shares, pay special dividends to private equity investors and acquire other companies, all of which have the effect of inflating stock prices.” And how bad is the situation?
This bad: “During the first three months of this year, according to Trepp, a data company, interest-only loans — loans requiring no payback of principal until the loan is due — accounted for three-quarters of all new commercial real estate loans.” What this means is we are soon to enter the classic Ponzi stage of Hyman Minsky’s “Financial Instability Hypothesis [FIH].”
Minsky has been dead for nearly a quarter century. And the market-crash steps he detailed in his 1992 hypothesis paper were almost totally ignored by the mainstream until the meltdown of 2008, which is now called a classic “Minsky moment.” Applying FIH to recent events in US finance, it is clear that we left Minsky’s first moment, the Hedge moment, around 2016. This is when a borrower can “fulfill all of their contractual payment obligations by their cash flows.” We are now at the end of the Speculative moment (when a borrower can pay just the interest on a loan with cash flows), and about to enter the Ponzi stage, during which a borrower borrows to pay just the interest on their debts (thus the surge in “interest-only loans”).
Back to Boeing and all of its troubles, which have their roots in a transition that’s described in Gérard Duménil’s and Dominique Lévy’s book The Crisis of Neoliberalism. It goes like this: In the 1970s, the alliance between workers and management that, in the US, was exemplified by what is known as the mid-century Treaty of Detroit, came under fierce attack from a financial sector that wanted corporations to focus not on value creation, but the transference of profits (present and in the future) to Wall Street.
From Duménil and Lévy:
The dramatic social transformation realized during neoliberalism would have been impossible if an alliance had not been made between capitalist and managerial classes, in particular their upper fractions. This shift in alliances can be denoted as the “neoliberal compromise.” Depending on the country, the adhesion of the managerial classes to the neoliberal project was more or less easy or difficult to achieve, given specific power configurations and the features of the postwar compromise in each country. In the United States, it was easier than in Europe. There were also significant differences based on the fields of activity, finance, engineering, and so on. But the thorough alignment of management and policies to neoliberal objectives would have been impossible in the absence of such a compromise.
Put simply: post-war managerial capitalism was weakened in the 1970s (the period that gave birth to neoliberalism), and finally stabbed in the heart when Jimmy Carter nominated Paul Volcker to the Fed Chair in 1979. Under Ronald Reagan, Volcker instituted what is now called the Volcker Shock which, by dramatically raising high-interest rates, did three things: killed inflation, instituted monetarism as the key tool for economic management, and brought death to the post-war alliance between corporate management and workers. The shock made it clear to managers that they were now aligned with the key subject of finance, shareholders. These speculators (they are by no means investors in the entrepreneurial sense) can never not be convinced that their “investments” aren’t being adequately rewarded.
The hypothesis of shareholder maximization actually achieved economic respectability (called “agency theory“). By the time the execs at Boeing left Seattle for Chicago in 2001, it was understood that shareholders were (under this new regime, downsize-and-distribute, rather than retain-and-reinvest) their key allies. And to make sure there was no misunderstanding about this state of affairs, management pay was tied to the value of shares.
And what do we find at Boeing? Here it is is:
Boeing CEO Muilenburg has benefited immensely from the company’s soaring stock price (see Figure 3). From 2015 through 2018, as Boeing’s chairman and chief executive officer, Muilenburg banked $95.9 million in gross pay, though his annual salary never exceeded $1.7 million. Of this total remuneration, 51 percent consisted of realized gains from exercising stock options and the vesting of stock awards. Another 34 percent was nonequity compensation, based in 2013–2016 on Boeing’s profitability and in 2017–2018 on a more complicated set of financial metrics.
But why isn’t Muilenburg fired and stripped of all powers in the face of all these facts? Because we live in an age where there’s no other good than “to beat the gun,” to use an expression of John Maynard Keynes. Shame is dead. If the money you have made by dubious means is already in your bank account, then it’s game over, man, game over. You won.
