Paul Krugman Remains Blind to Wall Street's War on Workers

It’s not easy for a labor educator like me to take on Paul Krugman, a Nobel laureate and New York Times columnist. Krugman is a liberal, par excellence, a Keynesian who is trying to counter America’s slide into autocracy. Which is why someone has to hold him accountable for failing to take on Wall Street.

Krugman is puzzled by working people who have been economically devastated, yet are falling for charlatans who talk a big game of resentment but do little to help them.

That devastation, he argues, is caused by technological change, which “has made America as a whole richer, but…has reduced economic opportunities in rural areas.”

Maybe rural working-class voters are growing sour on the Democrats because the Democrats are growing sour on them.

It’s a timeless story, he tells us, with new technologies replacing people in farming, mining, and manufacturing. Rural areas, once so dependent on jobs now replaced by machines, have inevitably suffered as the country has shifted to knowledge and services-centered jobs clustered in urban areas. This is inevitable, he warns, and all we can do is mitigate the pain and suffering. End of story.

No.

What Krugman fails to see again and again is that many, if not most, rural mass layoffs in the last four decades, are the result of Wall Street’s out-and-out greed. This greed was enabled by financial-sector deregulation starting in the Reagan years and accelerating during Clinton’s two terms. Wall Street kills jobs not because of technological advances but because it’s easier to make money by extracting wealth from productive enterprises than by allowing those productive enterprises to continue to prosper.

Deregulation, however, created a virtual gold rush of Wall Street hustlers who have extracted wealth from corporations, creating an army of laid-off workers and devastated communities. Leveraged buyouts, which were infrequent before 1980 because of regulatory controls, have become ubiquitous.

Since then, Wall Street hedge funds and private equity companies have bought tens of thousands of companies using borrowed money, often up to 90 percent of the purchase price. That debt is then placed on the purchased company’s books. For the company to service that debt, cost-cutting is required, and cutting costs almost always requires mass layoffs. As Forbes magazine notes:

“All too often when private equity professionals tout their cost cutting strategies, they do not mention that cost cutting means firing people and taking away their livelihoods.”

Forbes’ observation is confirmed by studies that show that leveraged buyouts cost jobs.

Another Wall Street weapon is the stock buyback. Until 1982, when buybacks were deregulated, no corporation could use more than two percent of its profits to buy back its own shares. Why? Because stock buybacks were considered a form of stock manipulation, changing a stock’s price without changing the underlying condition of the company. (Reducing the number of shares, automatically increases the earnings per share.) In recent years nearly 70 percent of all corporate profits have gone to stock buybacks, greatly enriching the largest Wall Street players.

How do these companies pay for those buybacks? Usually mass layoffs. In fact, companies often buy back stocks just before announcing mass layoffs.

This game is now on at The Walt Disney Company, where activist investors (actually short-term stock sellers) led by Nelson Peltz are trying to force Disney to move wealth to them. As Peltz recently put it: “Fundamentally and crudely, we want the stock to go up.”

Roy Disney understands exactly what that means:

“These activists must be defeated. They are not interested in preserving the Disney magic but stripping it to the bone to make a quick profit for themselves.”

“Stripping it to the bone” means mass layoffs in the Magic Kingdom. This has zilch to do with technological progress.

So it was with Bed, Bath and Beyond and Toys “R” Us and hundreds of other firms bankrupted by Wall Street’s aggressive tactics. Krugman surely knows none of this was caused by technological change.

White Working-Class Rage in Coal Country

Krugman’s take on Coal Country is shaped by a similar technological myopia. Consider Mingo County, West Virginia, population 22,573. It is 95.9 percent white, a very poor county in a very poor state that ranks 48th out of 50 states in education and dead last in infrastructure and health care. Mingo County’s household median income is less than half the national average.

In the early 20th century, Mingo County was the epicenter of the great coal wars. After Franklin Delano Roosevelt and his New Deal embraced labor unions, Mingo County coal workers in the United Mineworkers saw their wages and benefits rise, and safety conditions improve. They became loyal Democrats rewarding Bill Clinton with 69.7-percent of the Mingo County vote in 1996.

But by 2020, Mingo’s Democratic voters were an endangered species with Joe Biden receiving only 13.9 percent of the vote.

Why did Mingo County voters switch away from the Democrats? Rising racism doesn’t explain why Barack Obama received more than three times the vote share (42.1 percent) in 2008 that Joe Biden did in 2020.

Krugman correctly identifies the decline of coal jobs as the likely cause for workers abandoning the Democratic Party. Our research finds that in 1996, approximately 3,300 Mingo County workers were employed in the coal industry. By 2020, that number had dropped to 300. This was the largest loss of coal jobs in any county in the entire country.

Krugman once again places the blame on inevitable technological change—in this case strip-mining. He’s right that mountaintop removal requires far fewer workers than traditional underground coal mining. But does it really reflect technological progress? No, it’s just using existing technology, dynamite and big trucks, to tear down the land into an open pit and pollute everything below it. It shouldn’t have been allowed in the first place. Progress, it is not.

There are other complex market forces, such as Eastern coal giving way to competitive pressures from Western coal, the rise of fracking, and a general move away from coal pollution as causes of job loss. But even as these markets shifted, Wall Street feasted on the industry carcass doing all it could to deprive coal miners of their retiree benefits, according to an exposé by The Guardian. That’s not progress either.

Shouldn’t Mingo be grateful for subsidized services?

Krugman is quick to point out that the richer areas of the country have provided the tax dollars to subsidize a wide range of programs to support rural America. He writes, “there are huge de facto transfers of money from rich, urban states like New Jersey to poor, relatively rural states like West Virginia.” And indeed, Mingo County offers an extensive list of government services on its website:

Medicaid, WVCHIP, Medicaid for Long-Term-Care, Medicare Premium Assistance Programs, Non-Emergency Medical Transportation (NEMT), Supplemental Nutrition Assistance Program (SNAP), Emergency Assistance, Indigent Burial Program, Refugee Resettlement, Tel-Assistance, SNAP E&T, Low Income Energy Assistance Program (LIEAP), 20% Discount Utility program, Temporary Assistance for Needy Families (TANF), School Clothing Allowance (SCA) and Other Needs Assistance Disaster Programs

What’s missing? Socially useful jobs for thousands of coal miners who are willing and able to work.

While coal jobs were vanishing, the Democrats held the presidency for 16 of 24 years. Yet the party of working people failed to develop the jobs dislocated workers needed. That’s because direct public job creation was off the policy table. “The era of big government is over,” said Bill Clinton in his 1996 inaugural address.

While coal jobs were vanishing, the Democrats held the presidency for 16 of 24 years. Yet the party of working people failed to develop the jobs dislocated workers needed.

Instead, the Democrats increasingly relied on the private sector to create new jobs.

How did free enterprise work out in Mingo County?

Drug capitalism stepped in to fill the void, turning Mingo into the opioid prescription capital of America! One small but enterprising drug store there, for example, put out one prescription a minute in 2019, making it the 22nd largest opioid provider in America. It’s unlikely that former coal miners would reward the Democrats for Big Pharma’s unconstrained drug-pushing binge.

Mass Layoffs Turn the Blue Wall Purple

Krugman certainly knows that mass layoffs affect politics. He might even agree with the research in my book, Wall Street’s War on Workers, which shows that as the rate of mass layoffs in a county in the Blue Wall States has increased, the Democratic vote has declined. But we radically diverge when it comes to why.

Krugman says that the decline comes from the kind of white rural rage described by Tom Schaller and Paul Waldman, who write:

Republican politicians, and their conservative media allies trigger the worst instincts and most deep-seated fears of rural White Americans…. They are constantly told that horrible people who live in and govern our cities – racial and religious minorities, feminists, homosexuals, White liberals, and Democrats in general – threaten the survival of the traditionalist, White Christian values venerated by so many who reside in the rural White heartland.

Or to put it more bluntly, rural white folks are so dumb and so racist that they can be easily manipulated by this kind of Republican trash talking.

If Krugman wants a more liberal society, then he should join with Senator Brown in waging war on Wall Street.

Krugman would do better by exploring a study by Katherine Cramer and Jonathan Cohen, who report:

When asked what drives the economy, many Americans have a simple, single answer that comes to mind immediately: "greed." They believe the rich and powerful have designed the economy to benefit themselves and have left others with too little or with nothing at all.

Maybe rural working-class voters are growing sour on the Democrats because the Democrats are growing sour on them. Senator Chuck Schumer, in 2016, was positively enthusiastic about writing off the working class:

For every blue-collar Democrat we lose in western Pennsylvania, we will pick up two moderate Republicans in the suburbs in Philadelphia, and you can repeat that in Ohio and Illinois and Wisconsin.

Sherrod Brown Defies the Racist White Rural Trope

Krugman and many others accept at face value the rural racist depiction. But our research shows that Hillary Clinton’s infamous “basket of deplorables,” holds no more than three percent of the entire white working class. This cohort, in fact, has grown considerably more liberal over the past several decades, not illiberal, on key divisive social issues. And our data finds no difference between white working-class urban, rural, and suburban voters on contentious social issues.

Democratic Senator Sherrod Brown of Ohio is proof positive that fighting against Wall Street is good politics. In fact, he just republished an essay he wrote in 2019 entitled, “Wall Street’s War on Workers: Stock Buybacks.” And he hasn’t pulled away from supporting the rights of women, minorities, immigrants, and the LGBTQ+ communities. He understands that working-class rage has a lot more to do with economic rip-offs than culture wars.

In the 2018 election Brown, a Democrat, retained his Ohio Senate seat by 6.8 percent, a state that Trump won by 8 percent in 2020.

If Krugman wants a more liberal society, then he should join with Senator Brown in waging war on Wall Street. He needs to understand that the white working class, whether in Staten Island or Mingo County, craves jobs stability. To stop the needless destruction of jobs, working people are more than ready to support those willing to challenge Wall Street’s greed.

But is Paul Krugman?