The plight of Boeing shows the perils of modern capitalism. The corporation is a wounded giant. Much of its productive capacity has been mothballed following two crashes in six months of the 737 MAX, the firm’s flagship product: the result of safety problems Boeing hid from regulators.
Just a year ago, Boeing appeared unstoppable. Last year, the company delivered more aircraft than its rival Airbus, with revenue hitting US$100 billion. It was also a cash machine, shedding 20 percent of its workforce since 2012 while funneling US$43 billion into stock buybacks in about the same period.
Boeing’s board rewarded its chief executive officer, Dennis Muilenburg, lavishly, paying him US$23 million last year, up 27 percent from the year before. There was only one problem. The company was losing its ability to make safe airplanes.
Illustration: Yusha
As Scott Hamilton, an aerospace analyst and editor of Leeham News and Analysis, said: “Boeing Commercial Airplanes clearly has a systemic problem in designing, producing and delivering airplanes.”
Something is wrong with today’s version of capitalism. It is not just that it is unfair. It is that it is no longer capable of delivering products that work. The root cause is the generation of high and persistent profits, to the exclusion of production. Financiers have been allowed to take over corporations. They monopolize industries and then loot the corporations they run.
The executive team at Boeing is quite skilled — just at generating cash, rather than as engineers. Boeing’s competitive advantage is centered on politics, not planes.
The corporation is now a political machine with a side business making aerospace and defense products.
Boeing’s general counsel, former judge Michael Luttig, is the former boss of FBI Director Christopher Wray, whose agents are investigating potential criminal activity at the company. Luttig is so well connected in high-level legal circles that he served as a groomsman for US Supreme Court Chief Justice John Roberts.
The firm’s board members also include Nikki Haley, until recently the UN ambassador, former NATO supreme allied commander Edmund Giambastiani Jr, former American International Group chief executive officer Edward Liddy, and a host of former political officials and private equity icons.
Boeing used its political connections to monopolize the US aerospace industry and corrupt its regulators.
In the 1990s, Boeing and McDonnell Douglas merged, leaving the US with just one major producer of civilian aircraft. Before this merger, when there was a competitive market, Boeing was a wonderful company.
Journalist Jerry Useem said 20 years ago: “Boeing has always been less a business than an association of engineers devoted to building amazing flying machines.”
Yet after the merger, the engineers lost power to the financiers. Boeing could increase prices, lay off workers, reduce quality and spend its cash buying back stock, and no one could do anything about it. Customers and suppliers no longer had any alternative to Boeing, and Boeing corrupted officials in both parties who were supposed to regulate it. High profits masked the collapse in productive skill until the 737 MAX crashes.
Boeing’s inability to make good safe airplanes is a clear weakness. It is, after all, an airplane aerospace company, but because Boeing is the US’ only commercial airplane company, the crisis is rippling across the economy.
Michael O’Leary, chief executive officer of Ryanair, which ordered 58 of the 737 MAX planes, said that his company cannot grow as planned until Boeing “gets its shit together.”
Contractors and subcontractors slowed production of parts for the airplane, and airline customers scrambled to address shortages of airplanes.
Far from being an anomaly, Boeing is the norm in the corporate world across the West.
In 2016, The Economist said that profits across the corporate sector were high and persistent, a function of a lack of competition across swaths of the economy. If corporations do not have to compete, they can raise prices to buyers, lower what they pay to suppliers and workers, and reduce quality. High profits result in sloth and corruption. Many industrial goliaths are now run in ways that are fundamentally destructive.
General Electric, for instance, was once a jewel of American productive capacity, a corporation created out of George Westinghouse and Thomas Edison’s patents for electric systems. Today, as a result of decisions made by Jack Welch in the 1990s to juice profit returns, General Electric slaps its label on lightbulbs made in China.
Even worse, if investigator Harry Markopoulos is right, General Electric might actually be riddled with accounting fraud, a once great productive institution strip-mined by financiers.
These are not the natural, inevitable results of capitalism. Boeing and General Electric were once great firms, working in capitalist open markets.
So what went wrong? In short, the law. In the 1970s, a host of thinkers on the right and left — from Milton Friedman to George Stigler to Alfred Kahn to US Supreme Court Justice Stephen Breyer — argued that policymakers should take restraints off capital and get rid of anti-monopoly rules.
They used many terms to make this case, including deregulation, cost/benefit analysis and the consumer welfare standard in antitrust law. They embraced the shareholder theory of capitalism, which emphasizes short-term profits. What followed was a radical consolidation of market power, and then systemic looting.
Today, high-profit margins are a pervasive and corrupting influence across the government and corporate sectors. Private equity firms moved capital from corporations and workers to themselves, destroying once healthy retailers such as RadioShack, Toys “R” Us, Payless and K-Mart.
The disease of inefficiency and graft has spread to the government.
In 1992, Harvard professor Ash Carter, who later became the US secretary of defense under former US president Obama, wrote that the Pentagon was too difficult to do business with.
“The most straightforward step” to address this “would be to raise the profit margins allowed on defense contracts,” he wrote.
The next year, Carter was appointed US assistant secretary of defense for international security policy in former US president Bill Clinton’s first administration, which followed his advice.
Earlier this year, the US Department of Defense found that one defense contractor run by private equity executives had profit margins of up to 4,451 percent on spare parts it sold to the military.
Consulting giant McKinsey & Co was recently caught trying to charge the government US$3 million a year for the services of a recent college graduate.
The ultimate result of concentrating wealth and corrupting government is to concentrate power in the hands of a few. We have been here before.
In the 1930s, fascists in Italy and Germany were gaining strength, as were the communists in Russia. Meanwhile, leaders in liberal democracies were confronted by a frightened populace losing faith in democracy.
US political leaders were able to take on domestic money lords with a radical antitrust campaign to break the power of the plutocrats.
Today, we are in a similar situation, with autocrats making an increasingly persuasive case that liberal democracy is weak.
The solution to this political crisis is fairly simple, and it involves two basic principles.
First, policymakers have to increase competition for large powerful companies, to bring profits down. Executives should spend their time competing with each other to build quality products, not finding ways of attracting former generals, or administration officials to their board of directors.
Second, policymakers should raise taxes on wealth and high incomes to radically reduce the concentration of wealth, which would make looting irrational.
The system is no longer aligning rewards with productive skill. Despite the 737 MAX crisis, Boeing’s stock price is still twice as high as in July 2015, when Muilenburg took over as chief executive. That right there is what is broken about modern capitalism. I had better be fixed fast.
Matt Stoller is a fellow at the Open Markets Institute.
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