Home > 2016 > Personal Finance

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

Advertiser Disclosure Comments 0 Comments

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.] 

More Money-Saving Reads:

Image: franckreporter

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team