On this episode of the Capitalisn’t podcast, Pulitzer Prize-winning journalist Steven Pearlstein drops by to talk with hosts Kate Waldock and Luigi Zingales about the incredible shrinking newspaper (especially the business section), his book Can American Capitalism Survive?, and how the mantra of ‘maximizing shareholder value’ has affected the dynamics of the American economy.
Kate: Hi, I’m Kate Waldock from Georgetown University.
Luigi: And I’m Luigi Zingales at the University of Chicago.
Kate: You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.
Luigi: And, most importantly, what isn’t.
Speaking about what is not working in capitalism, I think that the media plays quite an important role in trying to expose the many things that don’t work in capitalism. This is not a recent innovation. Going back in history, there was a very important role played by the press and particularly by a journalist, a woman journalist, Ida Tarbell, who exposed the problems with the Standard Oil monopoly and created the political demand for intervention.
Kate: But the last two decades have fundamentally altered business journalism, from the relationship between journalists and corporations, to the business models of publications themselves, to the public trust in the media. We’re very fortunate to have as our guest today someone who’s been a prominent business journalist throughout this transformation, Steve Pearlstein. Steve’s a Pulitzer Prize-winning journalist. He has a regular column at the Washington Post. He’s the Robinson Professor of Political and International Affairs at George Mason, and he recently came out with a book called Can American Capitalism Survive? Steve, welcome to the show.
Steve Pearlstein: Thanks for having me.
Kate: Steve, can you describe to us how the relationship between journalists and businesses was when you first started in your career?
Steve Pearlstein: I started, actually, at, seriously as a business journalist, at Inc. Magazine, which in the 1980s was a very fat book. If you dropped it on your foot, you would’ve broken your toe. The reason was because there were all these ads for this new thing called the personal computer. It was the beginning of Silicon Valley, and Inc. was the magazine of small business. I got a pretty good view of the entrepreneurial sector, but Inc. and a few other magazines, Entrepreneur, were the only ones that covered that. Covering business was covering big business. There was, frankly, a very close relationship between the business press and large, public companies. They all had vice presidents for, essentially what they then called press relations, and reporters were organized by beats. You were the defense industry reporter, or you were the retail reporter, or, at a place like the Wall Street Journal, you were the GE reporter. There were probably two GE reporters at the Wall Street Journal.
I eventually went to the Washington Post, and then I started covering the defense industry. When I became the defense industry reporter, I had a meeting at every one of these headquarters. I met this head of PR, but I also met several executives and the chief executive. They wanted to meet me, and I wanted to meet them. Now, this is the days of the telephone. You’d call them up, and they’d call you right back if they didn’t pick up the phone right away. They would do anything, really, to accommodate you, to answer your questions, to arrange for you to visit someplace, to talk to who you ever wanted to talk to. There were some exceptions to that, but by and large, that was the way things worked. There were several things going on there. First of all, we were very important to them, and so they needed us. They needed us to talk to the world, in the case of the defense industry, to talk to Washington. They needed us to talk to investors, and they needed us to talk to their customers.
We played the game in an honorable way. We didn’t do things to screw them. If we said it was off the record, it was off the record. They didn’t do things to mislead us because they knew if they misled us once, that it was not going to be good the next time we came around.
I want to contrast that with today. Today, businesses, particularly public companies, and private companies too, they don’t need us. They feel, anyway, they don’t need us. They feel they can communicate with their employees, with their customers, and with their investors through different channels. Social media has greatly changed that but also specialized blogs. So when someone like me calls up, who may not be a beat reporter—and there aren’t many beat reporters left, I’ll get to that in a minute—they may or may not respond. Mostly, they don’t give you their phone number on the website. You have to hunt for it, or you have to send an email to some drop box, and they may or may not respond to you.
The general rule is they’re not interested in talking to you. They’ll answer questions, written questions, by email, and that’s the end of it.
Half of this is our fault. The reason it’s our fault is because there are very many fewer business reporters, we’re not organized by beats, or the beats are very broad. You don’t have the knowledge and the relationships with the company. That’s a function of how journalism has changed and the economics of mainstream media have changed.
Kate: Can you give us an example of your favorite company to cover and the types of relationships you established in doing so?
Steve Pearlstein: Lockheed Martin was one I had a very close relationship with. The guy who was the chief flack, as we used to call them—and that was not a negative term—I mean, we had each other on the speed dials. I had his home number. He had my home number. We used to go out and have dinner together a couple of times a year just . . . He never lied to me, and he would never mislead me. If I really wanted something, if I really wanted to talk to the chairman, he’d get me the chairman. They wanted me to be well-informed and knowledgeable. It wasn’t a time . . . It’s not gotcha journalism. We didn’t do a lot of stories about people complaining about chief executives doing sexual harassment. I got to tell you, that was not . . . We were worried about profits, and mergers, and who was winning, and who was losing. The way I like to describe it is that in those days, we covered business the way sports reporters covered sports. There were various teams, and they were competing against each other for the World Series, and we covered it like that.
We covered the stars, that is the executives who, often, big profiles were done of them. They were on the front pages of magazines. When was the last time you saw a business executive on the front page of anything in a laudatory fashion? It just doesn’t happen anymore. The other thing about CEOs, particularly today, is they really like to control. You can’t control the press. You have to get comfortable with the idea that you don’t know how the story’s going to come out. They hate that. These guys, today, are control freaks, and they do not like dealing with the press, in part, because of that. We talk back to them. They’re not used to getting talked back to. They say they are. They say, “Oh, yeah, my people talk back to me all the time.” Let me tell you, that’s a load of crap.
This is another reason they don’t like the press, because we’re not, in their opinion, respectful. By the way, if you want to know where this goes back to, it goes back 20 years, 25 years, to the early ‘90s and the stories we used to write about their compensation. This where the trust, not between the PR people and us, but between the executives and the press broke down, because we kept writing these stories about nobody deserves to earn this amount of money. Of course, back in the ‘90s, they were pikers compared to today. Anyway, that’s where it started.
Luigi: I come from a country where big advertisers were few, and when they didn’t directly own a newspaper, they were still so influential that they could get their view of the world in a pretty dramatic way. Back then, was that the case in the United States?
Steve Pearlstein: No. It just wasn’t, Luigi, there was an absolute wall. I told you that I was the business editor of the Post for a few years. There was a guy who used to do all the selling for the Washington Postto the car dealers in the Washington area . . . There were several of them, but he was the chief one. One day, he came down to talk to the auto industry reporter. That became a big deal. The managing editor complained to the publisher. There was a big meeting about it, and those guys were told, “Don’t you ever come on the fifth floor.” That’s how much of a wall there was. No, they had . . . We used to write articles . . . The biggest advertisers were the department stores. We used to have this retail reporter who was always driving them nuts, and they would get the call. They called the publisher, and the publisher would just say, “Well, thank you for calling.” That was the end of it. We never heard of it.
Kate: What do you think was the mechanism that allowed the wall to exist? It wasn’t regulatory, right?
Steve Pearlstein: No, no, no. It was culture, and norms, and it was . . . We needed to protect our credibility. That was one way we protected our credibility. You see it even today in the Wall Street Journal. There’s a wall between the editorial department, which as you, if you read the Wall Street Journal, you’ll know is a very conservative editorial department, and the news department. Those guys, news people, play it absolutely straight, or at least they did before Murdoch took over. Their reporting was as unbiased as anyone else’s reporting at the Wall Street Journal. The editorial department had nothing, so it’s not just advertisers, but the editorial department were walled off. It was enforced this way: In the competition for good journalists, good journalists wouldn’t work for a place that allowed advertisers or the editorial department, or the publisher to affect your news coverage. Not only was it important for credibility for the public, but if you wanted to attract the best journalists, you had to have that wall.
Luigi: Can I try a different theory, maybe less romantic—
Steve Pearlstein: OK.
Luigi: I view the journals of yesteryear as a kind of oligopoly. They were making a lot of profits.
Steve Pearlstein: No doubt about that.
Luigi: We’re using journalists as people, now, as the fashion industry uses haute couture. It is like you use haute couture to attract the reputation, attract the big designers. Nobody actually buys haute couture. Haute couture is completely sort of a losing proposition—
Steve Pearlstein: Right.
Luigi: —but it is a good barrier to entry, a good way to create reputation, and a good way to attract talented designers. I think that the newsrooms of old newspapers were exactly that. The competition brought by online advertising and so on and so forth destroyed those monopoly rents. The news departments are going down the tube as the haute couture departments of fledging fashion houses.
Steve Pearlstein: Well, the analogy is apt except for one thing. A lot of people did wear our clothes. That is, we had millions of readers who did read us. That’s all we cared about. You’re right, having a quality journalistic product attracted the advertisers because it attracted the readers. We were the intermediary between the advertisers and the readers. The newsroom attracted the readers, and then the advertising department sold our product to the advertisers, and, effectively, the advertisers paid for the news. You did pay something for the newspaper, but what you really paid for was the printing and the delivery. The news, the gathering, and the writing, and the editing, and the display of the news were actually paid for by the advertisers. When there were less advertisers, there’s less news or less resource going to the news.
Luigi: Absolutely. Our listeners will remember when we discussed the multisided platform. Multisided platform is a new concept in economics, but it is not a new sort of a business model.
Steve Pearlstein: Right. No.
Luigi: The newspapers were exactly a multisided platform where the sides were the journalists, the readers, and the advertisers.
Steve Pearlstein:Like other multisided platforms, they have a tendency to winner-take-all competition because the advertisers want the place with the most readers, but it turns out the readers want the place with the most advertising. I’m not talking about the display ads. I’m talking about the classified ads. The reason that there was only one newspaper in every major metropolitan area until the 1990s, now there’s zero sometimes, but there was one, was because that was the paper that got ahead in the competition for classified advertising. That was a big source of revenue and much more profitable than other kinds of advertising. Once you got ahead in that, you basically won the game, because all the advertisers, classified wanted to go to the largest classified, and all the readers wanted to go to the largest classified. It’s like a natural monopoly.
Kate: Excuse my ignorance here—
Steve Pearlstein: Yeah.
Kate: —but who is mostly paying for the classified ads? Those weren’t necessarily personal ads. Right?
Steve Pearlstein: No, the people . . . No, well, they are. They were personal ads.
Steve Pearlstein: But they’re not personal ads like for dating. They were personal ads for selling—
Kate: That’s what I have in mind.
Steve Pearlstein: No, no, no. That was a small part, and we regulated those very, very, very heavily. No, it was for real estate, and used cars, and jobs. That’s how people, you forget, you’re too young. You forget that that’s how people got jobs. There was no online matches. It’s much more efficient now with cars, and real estate, and jobs. The online world . . . Craigslist ruined the newspaper business, basically. I mean, if you wanted to . . . it wasn’t Google. It was Craigslist that ruined the newspaper business as a business.
Luigi: Yeah, when I joined Chicago in 1992, and I looked for an apartment to stay, I bought the Chicago Tribune. I went through the classified ads of the Chicago Tribune. That’s the reason why I bought the newspaper, and the people who were renting apartments were paying to post their ads in the Chicago Tribune. That was really the focal point of the market at the time.
Steve Pearlstein: Yeah, and that was far and away the most profitable part of the advertising because people paid ... They only had these little things, and so they paid per line a very high amount compared to the number of lines you bought if you were a department store. But also, it was no sales cost involved. They called you. You didn’t have to call them.
Luigi: But I wonder to what extent, also, this brought a segmentation in the political views of the newspapers, because if you were the local newspaper, you were trying to cater to the largest possible market. You are naturally a moderate in position. You couldn’t be a radical on the left or the right because you wouldn’t get the market.
Steve Pearlstein: It was mass media, and so you had to be mass. They tended to be centrists. Sometimes editorial pages would go left or right, mostly right. Again, the editorial pages were separated from the newsroom, and there was a sort of professional attitude about how to cover the news objectively and fairly. People scoff at that now, but the truth is, there just was a way of doing things that we passed on from generation to generation. We didn’t, in our generation we didn’t go to journalism school, but it was learned on the job. One of the things you learned was how to be fair and balanced. We didn’t kid ourselves. Journalists, by sort of self-selection, tend to be liberal because they tend to be antiestablishment. They don’t get paid that much. They tended to be liberal, but we didn’t try to slant the news in one way or the other in terms of party or ideology. We were equal-opportunity assholes. Whoever has power, we tried to take them down a notch.
Luigi: So, how do we fix this problem, because I believe that the press was far from perfect in the past, but it was playing a very useful role. I think the business model allowed it to play this role. Now, that business model has been destroyed, and I don’t think it’s been substituted by an alternative so far.
Steve Pearlstein: It is being substituted, Luigi. The new business model, and we can see it in the Wall Street Journal, in the New York Times, and in the Washington Post, is now the readers will have to pay for the news. There was a time when the internet was fairly new, when there was a belief, and it came from Silicon Valley, that content ought to be free. Well, content, in the case of news, can’t be free. So, what’s happening now is, first of all, people who care about news and care about having edited news, curated news, quality news, factual news, are willing to pay for it. They’re willing to pay, I’m just throwing out a round number, a dollar a day to get a good newspaper—only it’s not a paper anymore—but to get a good news product. They’re willing to pay half of what they pay for a cup of Starbucks coffee, or a third, every day.
If you get a couple of million people, three or four million people willing to do that around the world, now you don’t have to worry just about your local area. You’re going to be able to put out a good global news product. The Timesis well on its way to doing that. I think we at the Washington Postare on our way. The Wall Street Journaland the FThave an advantage, because the people who buy it actually are not people. They’re businesses that are buying, so they’re not that price-sensitive.
Luigi: I thought businesses were people, no?
Steve Pearlstein: Well, right. Anyway, so there is a new model, but what’s going to be the new model is there’s only going to be six or seven English-language, full-service, global news organizations around the world. They’re going to be print. They’re going to have video. They’re going to have podcasts. They’re going to have everything. They’re going to be global, and there’ll only be room for six or seven of those, because it’s only going to be a dollar a day, so you need several million. The loser in this is going to be local news coverage, because they can’t aggregate that number of paid readers. That’s going to suffer, but in terms of national and international news, and I would add sports news and global business news, there will be a product, and it is evolving. But remember, Luigi, that just at the height of the major newspaper era, there were something like, I’m guessing, 1,200 daily newspapers in the United States alone. That was so fragmented. You need consolidation, but with consolidation comes the neglect of local news.
Luigi: I would like you to elaborate, because I think it’s quite important. This generates a fragmentation, because if you are trying to please your customers, and especially if you’re trying to extract more of the surplus from your customers with higher prices, you’re going to cater to their ideological biases, and so the middle-of-the-road media that facilitated the common conversation in the United States are replaced by super-partisan media that make it more difficult for people to talk. I remember, you probably know the name, but there was somebody who said, “You are entitled to your opinion, but not to your own facts.”
Steve Pearlstein: Yeah, that was a senator named Daniel Patrick Moynihan.
Luigi: Yes, and so that, I think, used to represent what politics was. Today, politics has its own facts.
Steve Pearlstein: Well, I will say that there’s probably going to be a bifurcation. There is a market for straight, factual, smart news. Basically, upper-middle-class professionals want that. They do want the facts, and they do want smart, balanced analysis. They have the most money, and so there will always be one, or two, or maybe even three competitors who are trying to get them, because that’s where the money is. By the way, they’re also a good advertising audience. Advertising won’t drive this thing, but they are a good advertising audience. So, there will be them, and then there will be others who prefer a more biased news.
Just to give you an example, if you were running General Motors, you want to know what’s going on in the world, and you want a straight shot at the facts of what’s going on in the world. You’ll make your own opinions about it, but you don’t want your news tilted. There are still a lot of people, academics like yourselves, who are going to want that, and there’s a lot of people who want basically straight news. To have straight news doesn’t mean you can’t have commentary. You can either have slanted commentary or you could have a mix of commentary. Again, this audience that I just described probably wants to read a good conservative columnist and a good liberal columnist, as I do, and I suspect you do.
Kate: I’d like to talk a little bit about your book.
Steve Pearlstein: OK.
Kate: You focus on one important norm that changed at businesses, which is the idea of shareholder value maximization. What were CEOs maximizing prior to that idea, and what caused the shift?
Steve Pearlstein: Well, what they were maximizing was, perhaps, their own reputations, perhaps the size of their companies, and, putting it in the best face, they felt they had a number of stakeholders to which they had to pay attention. They saw their jobs as balancing the interests of these various stakeholders in order to maintain the long-run viability and success of the enterprise. In the 1950s and ‘60s, chief executives, top executives, had as much power as they do now, or more. Boards were actually more easy to sway. And no one would ever have considered paying himself what these guys pay themselves now. The reason was not only because their employees, whether they were unionized or not, would have not liked that. They would have seen these employees when they go out to the soccer game, or when they went downtown on Main Street to do shopping, or whatever, they ran into their employees, they wouldn’t have wanted to jeopardize those relationships. They didn’t want their employees to become unionized and socialist, so that’s another reason that they didn’t do it.
They wouldn’t, but here’s another reason they wouldn’t do it. They wouldn’t do it because when they went to the country club, one of them would have said to the other one, “Don’t do that. You’ll make us all look bad.” There was a sense, in those days, that they all had to stick to certain norms for the good of all business, so that business was well-regarded and trusted, so people didn’t join unions, so they didn’t vote socialist. There was also a period coming out of World War II, and there was a lot of shared sacrifice during World War II. Women went to work together in the same factories. Men served together of all different classes. There was a lot of sacrifice going on, in terms of people giving up certain consumer goods and rationing. So, coming out of World War II, that sort of thing would have been unseemly, the sort of individualistic “I’ve got mine, I don’t care whether you get yours” kind of thing. That would have seemed unseemly.
Now, obviously, as you get farther and farther from the war, that wore off, so that’s one reason the norms changed. The other reason was because of Wall Street. The period of the ‘70s was really a lost decade for investors. They made no money. If you invested in the broad stock market during the 1970s, on an inflation-adjusted basis, because we had pretty high inflation, you would have lost money. By the early ‘80s, Wall Street had pretty much had it. Here’s what happened: Big US companies used to earn rents in a closed economy, and they shared those rents with their employees and a little bit with their customers, but not really, but they shared it with their employees and their communities. Then global competition came, and they lost their rents. Their first instinct was actually not to take it away from their employees and their communities. They basically took it away from their shareholders, and that was the lost decade. After that, the shareholders said, “Hey, enough of that,” and you had this market for corporate control that developed during the 1980s, the hostile takeovers.
You had to change a lot of social norms in order to for that to happen. It used to be that white-shoe investment firms wouldn’t handle a hostile takeover, and that white-shoe legal firms wouldn’t handle one, and there was no bank that would finance it. So, there had to be a whole new system that developed, and it was out in California. It was Mike Milken and his company, Drexel Burnham Lambert. They provided the investment banking. They created junk bonds to finance it, and they went around the establishment system, so you had these corporate raiders who were considered low-life by the executives and the other people on Wall Street.
They started doing these things, and they basically revealed that a lot of these companies were not run with anything like the investors in mind. They said to investors, “Let us take over, and we’ll make you first.” They did that a few times, and then all of the sudden the norm was changed. Everyone felt that if they wanted to avoid a corporate takeover, they’d better run their companies that way. A lot of people in academics then jumped on and sort of came up with the economic and legal justification for maximizing shareholder value, and we’ve basically had shareholder capitalism ever since.
Luigi: But there’s one fact in your picture that you seem to ignore, which I think is equally important. Back in the days where people were not paid a very high salary, tax rates were 91 percent, so they changed the tax system, to some extent, to favor the emergence of some of those differences, because it’s not that the executives of the time were poor and were sacrificing their life.
Steve Pearlstein: I was a kid in the 1950s and early ‘60s, so I can’t say this from personal experience, but I have talked to people about this. First of all, nobody paid a 90 percent tax rate. There are liberals and conservatives who love to bring that up all the time. Nobody ever paid that, so unless you got this sort of windfall that you couldn’t arrange to avoid it, nobody paid it. For one thing, they could have paid themselves in stock, and that could have been taxed as capital gains, and that’s one way they did do it. That’s one way they still do it, so that’s the primary way in which you would increase your compensation if you were a chief executive, and that was still available at that time.
Kate: All right, so another trend that you talk about in your book is a shift in culture, and the shift in trust, and communication, and cooperation amongst citizens themselves. Do you think that that was part and parcel with the shifts in business attitudes towards maximizing shareholder value, or do you think there was something else going on at the same time?
Steve Pearlstein: A lot of what I consider to have gone wrong in American capitalism stems from maximizing shareholder value and that view of corporate purpose. I don’t think it’s a leap to say that one of the relationships that got strained badly was the relationship between workers and companies because of that. But there’s a second thing, which is the inequality question. The rise of income inequality has eroded social capital, has eroded the trust that we have in each other, and has resulted in things like a polarized politics, which makes our government dysfunctional. That, too, is not good for business. It’s not good for an economy if your government can’t respond in a timely fashion to changes in markets and changes in technology. Eventually, if your politics gets ossified, you’re not going to have a good economy.
Luigi: There are some key ideas in your book on how to sort of save capitalism or make capitalism survive. Can you summarize them for us?
Steve Pearlstein: Sure. Well, as I said, this all goes back to the 1980s when our economy had gotten uncompetitive, and we needed to do something to fix it. There was a real serious threat that Japan would overtake us, that Germany would overtake us. We had all these competitiveness panels and that sort of thing. I mean, it was a serious threat, and we needed to do something. And we did, but we did it by embracing a set of ideas, which at the time were quite useful. Ideas like the purpose of a corporation is to maximize shareholder value, or that greed was good. We needed people to be hungry in that way in order to have a competitive, entrepreneurial economy. Or, as things became more unequal, we said, “Look, don’t worry about income inequality. What matters is equality of opportunity, not income.” Or we had the idea that you could divide the pie more equally, but if you do that, you’re going to get a smaller pie.
There is some truth to all of those ideas, but when you push them as far as they have now been pushed in the last 30 years by the market fundamentalists, it turns out that they’re not true. If you come to realize that, then the solutions, it seemed to me, are a lot more apparent on what you can do and should do, which is not to have the pendulum go back to the 1960s and ‘70s. It’s not to become like socialist France, but maybe we have some things to learn from Germany, or Denmark, or Sweden. Maybe we have some things to learn from Japan. Maybe we have some things to learn from Chile, but our conversation about a lot of these things has gotten awful stale. Either you’re free market or you’re anti-free market. I haven’t found that, in recent years, to be a very satisfying conversation.
Luigi: And, by the way, countries like Sweden that are often indicated as socialist countries, they do have, of course, a higher level of distribution of income. But in terms of competition, in many dimensions, they’re more competitive than the United States. I was shocked to arrive at the Stockholm airport, and there are multiple cab companies competing one against the other.
Steve Pearlstein: Yes.
Luigi: You can make your price, and this is true not only, of course, in the cab companies, but in a lot of sectors. I think that the Swedish system, or even the Danish system, has tried to protect and push competition in a way that is not true in this country.
Steve Pearlstein: And particularly like that because there’s less regulation, but in order to do that, they have to have the safety net underneath people in order to do that, because you can’t have that kind of creative destruction that comes from that competition if everyone has so much on the line, that if I lose this, I don’t get health care. That’s exactly the kind of thing we have to talk about, but you can’t have that conversation today with most Republicans in Congress. Let’s do this tradeoff: less regulation with a better safety net. They will only have half the conversation. I wish we could have more of that kind of conversation, Luigi, because we would be a lot more fun, and much more productive, and it would be better for our economy.
Luigi: We certainly can have it in this podcast.
Kate: Steve Pearlstein, thanks for joining us on the show.
Steve Pearlstein: My pleasure.