Where the Money Goes

As some readers know, I have lamented the dominance of Wall before. I and certainly many others, have expressed disgust over the way Wall Street sucks money out of the economy. This is not mere rhetoric spewed from that swirling cacophony called the Internet. Let me provide a very specific example of what I mean when the Wall Street feeding frenzy is damaging America: the current practice of stock buybacks. It is a simple enough to understand, and why corporations might want to do it when warranted. What is not as obvious is the broader ramifications.

As you should know, publicly-traded companies become public by issuing stock, shares of which are available to anyone who cares to buy them. Said companies often issue additional shares from time to time as a way to raise capital, which is not debt, and in lieu of borrowing, which is. Over time, a company, call it Acme Widget, may have raised a great deal of capital by issuing a flood of stock. Companies like Acme may or may not have grown as a result.

However, Wall Street doesn't just want to see Acme make profits; what it really wants is for the stock price to rise and it cares little about how it is done. Rising stock prices are harder to come by if Acme has gazillions of shares floating around. On a per-share basis, earnings look better if Acme has, say, 300 million shares instead of three billion. Obviously they are not better, they only look better.

What to do? Acme could use its profits on R&D, or on new equipment, two mainstays of stable growth. Or Acme could buy back shares of its stock. This has some ramifications. Apologists will tell you Acme is investing in its future, and buybacks should be seen as a mark of confidence. That is risible nonsense. What does Acme get by blowing its earnings on its own stock? Companies like Acme are now spending big money, billions of dollars in some cases, buying (back) something that is not a productive asset. Cash spent on buybacks is cash not spent on increased wages, new technologies, or something corporate America could really use; higher quality products and processes. But buybacks enrich the investor class, which insists that maximizing shareholder value should be a corporation's overriding objective. If they get rich, then, well, that's it.

There is, finally, a growing recognition that American capitalism, with its obsession of stock buybacks, is toxic to this country's long-term health. At MarketWatch, not exactly the New Left Review, Rex Nutting writes:

Many factors have been blamed for the plummeting fortunes of the American middle class: globalization, technology, deregulation, easy credit, the winner-take-all economy, and even the inevitable tide of history. 

But one under-appreciated factor is a pervasive business model that encourages top managers of American corporations to loot their company for short-term gains, depriving those companies of the funds they need to build and enlarge, and invest in their workers for the long haul. 

How do they loot their company? By using large stock buybacks to manage the short-term objectives that trigger higher compensation for themselves. By using those stock buybacks to manipulate the share price, which allows them to use inside information to time their own stock sales. By using buybacks to funnel most of the company’s profits back to shareholders (including themselves).

Upper management at publicly traded companies is highly incentivized to enrich the already rich, most of whom are passive investors and have nothing to do with those companies except that they own shares. CEOs have garnered enormous wealth in recent decades because they also own many shares. Their role helps explain the corporate America's felt need to aggressively engage in stock buybacks. CEOs generally don't get multi-million dollar paychecks; that's for professional athletes. They get big paychecks, to be sure, but the really big money comes from stock options, though with a catch. Generally the stock has to appreciate in value up to a pre-determined amount, and within a certain time frame. Therein lies the short-term thinking in so many American companies that focus on their stock instead of on their products, customers, and employees.

This unproductive but highly addictive practice plays out as such: CEOs know that if they can get or keep the stock price at a certain level, their previously awarded stock options can be exercised. He, or occasionally she, sell those shares on the open market. The result is a windfall of cash, sometimes many millions of dollars. And this is an ongoing process: stock options awarded, work the stock, cash in, fresh stock options, repeat and enrich yourself.

Most shares the CEOs care to sell end up in the open market, where they tend to weigh down the price of the stock. That won't make investors happy, nor the CEO, who hopes for more stock options in the future. That's where the stock buybacks come in. CEOs and compliant corporate boards are only too happy to accommodate them, for they, CEOs, others in upper management, boards and investors alike stand to benefit.

The situation is complicated only somewhat by dividends. CEOs and investors alike are more inclined to keep their shares if the company pays a dividend. Fine, you say, except that dividends can get very expensive. Again, this is cash that could have been plowed into productive assets. But once dividends are paid, they are gone forever and they go mostly to the hedge funds, investment banks, and the rest of Wall Street, as well as the CEOs.

It is essential that voters understand the damage being done. Corporate America extracts profits from the working- and middle-class. That is as it always has been. And that is not the problem since customers, that's us, get something in return. The difference now is that those profits are not finding their way back, in the form of increased wages, to middle America. To reiterate, corporate America is on a buyback frenzy to please investors, and it is using money that in the past went to increased wages and capital improvements.  Instead, the use of stock options and buybacks ensures that an ever-increasing portion of capital sifts upward to the very top, where it remains in control of the .01%. Even the rich are beginning to recognize the recklessness.

It is the antithesis of the intellectual asininity called "trickle-down." Indeed, it is an ongoing debate whether neoliberalism's warriors were ever ideologically naive enough to buy into the trickle-down argument, or they simply figured we were.

 

Trade Gets No Respect

I posted earlier this summer about international trade and why the US media has little to say about it. I contended that the investor class does not want to talk much about international trade because an informed electorate would threaten the continuance of free trade's role in an inherently unequal economic system on which the privileged and powerful depend.

For some, mostly wealthy, mostly Republican, and mostly on the Right,  there is not much to discuss regarding free trade; for them it is the default position that rarely needs defending, except to marginalize and shame heretics who might be tempted to explore the vast chasm between the orthodox gospel theory of free trade and the brutal empiricism of what the rest of us call the real world. They are rather oblivious to distinctions between global trade, which has many benefits, and unfettered free trade, which doesn't.

There is, of course, the cynical proponent, the paid operative, side by side with the ideologically-committed true believer. The former are less interested in the vagaries of free trade as an economic doctrine, but are determined to crack the whip of orthodoxy because they are, like the true believers, pleased to see global trade increase, but also because ever-increasing global trade contributes to what they view as the proper hierarchy of power, the one that puts corporations, the powerful men who run them, and that ever-astute risk-taking investor on top, and workers and other less morally-deserving hoi polloi on the bottom. Their incessant message is that robust and unfettered trade represents efficiency, choice, and competition, all of which we are told to crave and admire. You can't compete? Don't be weak, it's your fault anyway, so suck it up.

Having said this, it is also true that many on the Left do not have much to say about international trade, as it is currently playing out, despite bountiful data and a well-developed but under-utilized theoretical framework that vividly describes reality: unfettered, global trade impoverishes the working class and enriches (most) corporations and the managerial and investor classes.

Of course, there has been some protest against globalization. There is currently a push-back, one that may be growing, against the Trans-Pacific Partnership, just as there was against NAFTA. Nevertheless, the TPP remains a second-tier concern for the Left.

The Left finds itself once again ideologically divided, its modest resources spread thin. Protesting the ravages of aggressive trade means the Left, to some extent, aligns itself with Corporate America. If you protest, say, Chinese or Korean steel dumping in the US, you not only are taking the ostensible view of the US Chamber of Commerce (e.g., imports are fine, but only at market prices), but you are uniting with the America's economic aristocracy, largely white, Republican, and reactionary.

And this is something the Left cannot abide. It is easier to view the US as economic aggressor. With that as their default position, few are willing to rally against Chinese trade aggression or systemic Korean disregard for American patents, copyrights, or intellectual property. We see occasional outbursts against China's export quality control, such as with food additives, but that is because our health as individuals is threatened. But cheap Chinese products as a growing threat to America's economic interests? Yeah, maybe, but I have a save-a-bug rally to attend, so later, dude.

What the US does in international commerce is considered an existential threat. To report critically about what China does is effortlessly labeled as fear-mongering and bigotry. The Left will do anything to avoid such charges, so any viewpoint that might equate the two countries is embraced very reluctantly. Accordingly, we rarely see any on the Left protesting the systematic circle jerk to which China subjects American companies.

The Left wants to see other nations, at least the non-white ones, as valiantly defending their economic sovereignty. American corporations are the modern exemplars of economic imperialism. The Left too often is content to view avarice as uniquely American (or western); nations whose citizens have brown or black skin are perpetually the designated victim.

To be sure, the American Left opposes oppression of civil rights abroad, be it China, Iran, or Zimbabwe. But when they care to look at the massive, chronic trade deficits the US has with Asia and elsewhere, or when they read how corrupt officials stonewall foreign companies in China, steal technology, or hack our government's computers, the protests are muted. Instead a blame-America-first mentality kicks in. Those on the Right complain about this all the time, and they have a point.

To fairly examine East Asia's neo-mercantilist complicity in America's de-industrialization requires a willingness to confront uncomfortable realities, so most on the Left move on to something less ambiguous, like minimum wage increases, or social security. Others, of course, focus on social issues, such as gay marriage or abortion rights. The dismantling of American industry remains a low priority with purveyors of identity politics.

Dixification

I am pleased, if that is the right word, to see a growing chorus of criticism about not just the direction this country is headed, but the very specific reasons why. Some point to the eroding infrastructure, and characterize it, too vaguely I believe, as "economic decline." It is, but without detailing why such decline is happening, such assertions have limited utility.

Others are closer to the point when they talk of the US becoming "third world." They don't mean a lack of technology or development, but instead point to economic inequality and a political economy dominated by a well-entrenched landed-gentry-cum-oligarchs; e.g., an aristocratic overclass. 

Those who know their American history, the history we did not learn in high school, are well aware this country was built on cultural fault lines from the very beginning. Talk of secession was in the air, and has remained there, from the earliest days of the Republic. If you didn't hear much about secession growing up, and thought it was just that one flare-up called the Civil War, it's probably because you were not born in the south, or in Texas.

But this is not about secession; it's about southern economics, or Dixiefication.  A recent article by Nicholas Kristof in the New York Times takes an important leap in fleshing out what has gone wrong in the US in the last 30+ years.

Kristof writes of the last 30+ years of conservative influence as a "failed experiment."

...In upper-middle-class suburbs on the East Coast, the newest must-have isn’t a $7,500 Sub-Zero refrigerator. It’s a standby generator that automatically flips on backup power to an entire house when the electrical grid goes out.

In part, that’s a legacy of Hurricane Sandy. Such a system can cost well over $10,000, but many families are fed up with losing power again and again...

...the lust for generators is a reflection of our antiquated electrical grid and failure to address climate change. The American Society of Civil Engineers gave our grid , prone to bottlenecks and blackouts, a grade of D+ in 2009.

Kristof notes that demand for household generators has surged. Most of them are being scooped up by upper-middle class families that can afford the generator and the gas that goes with it. 

That’s how things often work in America. Half-a-century of tax cuts focused on the wealthiest Americans leave us with third-rate public services, leading the wealthy to develop inefficient private workarounds.

But our political system is dysfunctional: in addressing income inequality, in confronting climate change and in maintaining national infrastructure.

Indeed it it dysfunctional. But government is not a mess because people do not know what to do. We are being purposefully pushed in one direction because of deeply held ideological beliefs and the policies that reflect that ideology. That belief system is familiar to those raised in the deep south. It is based on class, race, hierarchy, tribalism, and an obsequious allegiance to authority. The result is that the plantation mentality of the colonial south, where cruel slave masters from Barbados established themselves far from the prying eyes of Yankee do-gooders, and created a feudal society dominated by a privileged few. In other words, a society much like the old one they left behind in Europe, one structured on wealth, privilege, and class. Democracy and equality before the law had nothing to do with it. Mouth breather Ted Nugent, who appears increasingly unstable these days, epitomizes this brutally undemocratic attitude when he says that poor people and those on welfare should be denied the right to vote.

Slavery may be gone, but much of the rest of Dixie model not only has remained, it has spread to other states, mostly in the Midwest and Appalachia. A sense of where I am coming from on this can be found in Democracy Heading South: National Politics in the Shadow of Dixie, (2001) and Dixie Rising: How the South is Shaping American Values, Politics, and Culture, (1996) by Peter Applebome. A study I have mentioned before, Colin Woodward's American Nations, provides an invaluable historical backdrop to explain how we got this way.

A sense of that Southern model, what I am calling Dixification, can be seen in a litany of examples. Kristof provides a few:

So time and again, we see the decline of public services accompanied by the rise of private workarounds for the wealthy.

Is crime a problem? Well, rather than pay for better policing, move to a gated community with private security guards! 

   
Are public schools failing? Well, superb private schools have spaces for a mere $40,000 per child per year.

Public libraries closing branches and cutting hours? Well, buy your own books and magazines!

Are public parks — even our awesome national parks, dubbed “America’s best idea” and the quintessential “public good” — suffering from budget cuts? Don’t whine. Just buy a weekend home in the country!

Public playgrounds and tennis courts decrepit? Never mind — just join a private tennis club!

I’m used to seeing this mind-set in developing countries like Chad or Pakistan, where the feudal rich make do behind high walls topped with shards of glass; increasingly, I see it in our country. The disregard for public goods was epitomized by Mitt Romney’s call to end financing of public broadcasting.

You got it, Kristof. At its core, Dixification means disdain for the public sector, but also low wages, low regulations, and low taxes.  It calls for a dominant class run by corporations, the modern version of the plantation's boss man; land owners and sharecroppers, feudal overlords and a peasantry.

Recent data shows just how badly the middle class has been squeezed. As CNNMoney just reported (my emphasis):

Corporate profits hit their highest percentage of GDP on record in the third quarter.

Just four years after the worst shock to the economy since the Great Depression, U.S. corporate profits are stronger than ever.

In the third quarter, corporate earnings were $1.75 trillion, up 18.6% from a year ago, according to last week's gross domestic product report. That took after-tax profits to their greatest percentage of GDP in history.

But the record profits come at the same time that workers' wages have fallen to their lowest-ever share of GDP.

Welcome to Dixie.

Good For Business

I see where America's biggest corporations, the Fortune 500, have just reported record profits of $824 billion for 2011. This wasn't supposed to happen, not if you listened to the rhetoric from the chieftains of these firms, along with the paid shills of the Republican Party. After all, wasn't President Obama supposed to be a closet Marxist? And isn't he set on destroying free enterprise and turning us all into wards of the Democratic Party? Or was it a Muslim caliphate?

How did that argument go again? They said business needs tax cuts in order to hire more workers, and that America's seemingly high corporate tax rate was stifling business. They said that Wall Street had no confidence in Obama and that business would languish as a result. All those regulations and taxes had to be cut if we were ever to recover. If only Obama wasn't so extremist or anti-business. This is after Wall Street trashed the economy under Bush's indifferent watch, and before, during, and after the dramatic recovery of corporate profits and stock prices after Obama took office.

Couldn't have happened to a more deserving bunch, the same Wall Street crowd that was, and under Obama, continues to be, the wealthiest and most privileged people this side of the House of Windsor.

Republican talking points have become a fantastical bundle of contradictions, increasingly disconnected to empirical reality. Here is ThinkProgress with more on how well big business has done under Obama and more background on increased productivity (with no commensurate wage increases), increasing CEO pay, and the 40-year low in the tax rates corporations actually pay.

Our Low-Wage Recovery

There has been lots of talk in the air about what this country needs. Republican presidential candidates have been almost unanimous about the value of cutting taxes, by which they mean the top tax rate, the one that affects the wealthy. And we must get the corporate tax rate down as well; it tops out at 35% and that must surely be why American corporations are having trouble competing, except that they aren't. The premise for lowering the top corporate tax rate is that corporations actually pay the current rate. They don't. What they do pay are the most obscene compensation packages in the world.

And let's not forget to cut spending, lots of it. Please tell me you find it odd --in a simple math that doesn't add up kind of odd-- that proponents of spending cuts, meaning nearly every conservative member of congress, simultaneously insist on budget-destroying tax cuts for the wealthy, those who have already enjoyed a generation of such largess, even as they yelp about the deficits those tax cuts created. The national debt is so horrible that we must gut spending on society's most vulnerable to save the republic, but apparently not so horrible that we can't give more tax breaks for our most privileged.

So why has our recession lasted so long? It isn't because taxes are too high, or because we have a large budget deficit.

The reason is that we are turning into a low-wage country. Look at chart below. It shows the share of employees in low-wage work. Hey, we are number one. Yes, I know, having a crappy job is better than no job at all. But this is a long ways from the can-do spirit that this country once had, back when it was an unambiguous economic superpower, back when its tax rates were much higher and wages grew along with productivity. I've discussed the wage-productivity divergence here and here.  



As Tavis Smiley and Cornel West have shown, many of the newly created jobs are "...in the restaurant, retail, temporary service, social assistance and hospitality sectors. In other words, low-wage jobs, most without health benefits or paid sick leave."  Additional analysis of the significance of the chart above, including America's growing wage polarization, is at "Economist's View."

In other words, low wages means marginalized families with low consumption. Not only can they not save, provide for their children's education, and pay for health care simultaneously, they simply cannot buy much of the products that both corporations and merchants need them to buy. The inability to consume more, regardless of how one feels about materialism, prolongs the weak recovery because everything is predicated on sales, not low taxes. Businesses, especially the smaller ones on Main Street America that do not have foreign sales, do not want lower taxes or cheaper workers. They want more customers.

“It is to the real advantage of every producer, every manufacturer and every merchant to cooperate in the improvement of working conditions, because the best customer of American industry is the well-paid worker.” FDR

Little Sally's Epiphany

On Dec. 22 I posted an article about the doctrine of maximizing shareholder value, what former GE CEO Jack Welch called "the dumbest idea in the world." I shared the views of Steve Denning at Forbes who discussed the contradictions, to use a Marxist term, of management's blind allegiance to improving the net worth of shareholders. Denning, in turn, featured a new book by Roger Martin.

Martin has another article on this called "Little Sally Learns About the Toxicity of Shareholder Value Maximization." In it, Martin makes the case that corporations committed to maximizing shareholder value have perverse expectations of employees. Why would management expect, Martin says, employees to be motivated by a corporate culture that cares most about making mostly rich people richer, people the employees do not even know?

Martin's recognition of the basic psychology of employee motivation should sound familiar to the longstanding view, often held by progressives, that American corporate culture is short-sighted and less committed to improving its products than their bottom line. Recall that General Motors' management of yesteryear boasted that GM was not in the business of making cars, but of making money. GM's subtle indifference to product quality and innovation weighed heavily on it for a generation and nearly destroyed it. Its future remains uncertain.

There are, in fact, two separate arguments at play here; One is the Denning-Roger idea that management is inappropriately concentrating on short-term profits and boosting share price, practices which are systematically distorting management decisions. The other is that focusing on the interests of the investor class, the one percent, creates a bias against workers, community, and ultimately the corporation itself. It is a model best suited to maximizing wealth for a few; it does that very well.

The result is that US corporate culture has the deeply held tendency to treat employees as a mere input, an irritating expense that must be reduced, the abstract L for Labor in the cold computations of economists. It is this second argument which explains why, in the US more than, say, Germany or Sweden, the middle class is squeezed, why jobs are scare, but the investor class is richer than ever. It is the triumph of corporate profits as the centerpiece of American political economy, economics as if people didn't matter.

These are two different lines of argument, from different sources, politics, and traditions, that have dovetailed into a single unavoidable conclusion. I can only hope that we finally see a few inchoate signs that free market economists, free traders, and other purveyors of casino capitalism are beginning to realize the intellectual poverty of their ideology and the aching unsustainability of the American corporate model they have created and upon which they feed.

I leave you with an illustrative dialogue Roger Martin shared about Little Sally.

Sally: Daddy, my teacher asks me to listen carefully in class and do my homework every night. What does your boss ask you to do?

Daddy: He wants me to help him maximize shareholder value?

Sally: Huh? What does that mean?

Daddy: It means increasing our stock price to the highest we can make it go.

Sally: Why?

Daddy: Because that will make the shareholders happy.

Sally: Well who are these shareholders anyway?

Daddy: They are people who buy shares in our company.

Sally: What are they like? Do you know them?

Daddy: Actually we don't really know who they are. Every three months, we get a list of them but they buy and sell so often, the list changes routinely. And even the list we get is for organizations like mutual fund companies and pension funds that invest money on behalf of shareholders and aren't the actual shareholders.

Sally: This is getting a bit confusing. Are they at least nice people; these mutual funds and pension funds?

Daddy: It would be hard to describe them as terribly nice. They are really demanding and if we don't increase the stock price for them, they get pretty upset and sell our stock.

Sally: That isn't very nice. When they do that, do they sell to nicer people?

Daddy: No, typically they sell to people about like them - pretty impatient.

Sally: This sounds pretty weird. If you do get the share price to rise and the shareholders are happy rather than upset, do they do nice things for the company?

Daddy: Not really, Sally. What happens is that they then insist on us getting the share price to rise some more still. Or sometimes they sell their shares because the price has risen enough for them.

Sally: Whew. I must have this wrong but let me check. You go to work every day trying to increase your company's share price for people that you don't know, who don't act nicely at all, and if they are unhappy just sell their shares to some other people who you don't know either and are also not very nice. And if you succeed, they don't do anything for you other than put more pressure on you or sell because they are happy. They seem to sell whether they are happy or upset. That can't be much fun. Why do you do it Daddy? Why don't you try to do something a bit more fun?

Daddy: Well Sally, I know that it sounds kind of weird, but that is our capitalist system. It is our duty to maximize shareholder value, even if it is pretty unfulfilling and unpleasant. And I try to do the best job I can to help our CEO do that. And Sally, if I do a really good job helping my CEO, when he retires, he might appoint me CEO.

Sally: I love you Daddy and because of that I kind of hope that he doesn't make you CEO!

American Tax Dodgers

On January 12, I posted some comments about Les Leopold's recent article on tricks the corporate use to hoard wealth. I referred to economic productivity and how the gains are no longer being shared with the middle class.

He also highlighted how large corporations, despite the endless bleating about high corporate taxes, often pay little or no taxes. Specifically he noted how low state and local corporate taxes have become. As Leopold says:

Large corporations pay next to nothing in state and local taxes. As a result of the Wall Street-created crash, state and local governments are struggling to make up for lost revenues and rising costs to care for the jobless and the destitute. In a fair society we would be asking Wall Street to pay for the damage it created. Instead, Wall Street has used its enormous lobbying muscle to make sure politicians are asking states to cut back public services of all kinds. Meanwhile, large corporations use every trick in the book to avoid paying state and local taxes. A recent joint report by the Institute on Taxation and Economic Policy and Citizens for Tax Justice reveals that 265 large corporations avoided $42.7 billion in taxes from 2008 to 2010. That’s enough money to hire more than one million teachers! Instead, we are firing teachers in the name of fiscal austerity.

 The full report to which Leopold refers is at The Institute for Taxation and Economic Policy.  The reports should make clear that whatever other problems ail the US, overtaxed corporations isn't one of them. Citizens for Tax Justice also offers a compendium of how America's most profitable companies pay taxes dramatically lower than the advertised rate; for many, the US tax code has become a profit center, one more way to privatize benefits and socialize costs.


The idea, which every Republican presidential candidate has made at one time or another, that America's high corporate tax rate of 35% is killing the economy should be put to rest by a simple observation at the next debate followed up by a blunt question: 

"You do realize that corporate profits have grown enormously, along with executive compensation?" 


"Are you so naive that you actually believe corporations pay a 35% tax rate?" 

It really is no different at the state level. They game the system at the federal level and at the state level. A more detailed analysis of how corporations avoid taxes while they capture subsidies and other benefits paid by taxpayers, in particular how they play one state or municipality off against another, can be found in Greg LeRoy's well-researched book: The Great American Job Scam: Corporate Tax Dodging and the Myth of Job Creation.

Redistributing Wealth

Les Leopold recently posted an article at Alternet called How Can the World's Richest Country Let Children Go Hungry? 6 Tricks Corporate Elites Use to Hoard All the Wealth. Not only is he spot on in his analysis, the evidence supporting his contentions is massive and unmistakable. I want to examine just one of them in this post. The others I will return to in time.

His first, and now mine, addresses increased economic productivity and how the benefits have become poorly distributed. His contention is thus:

Productivity continues to rise but the 99 percent doesn’t share in the benefits. The key to the material wealth of any nation is productivity – how much we produce per worker hour. Productivity is a crude measure of our overall level of knowledge, technique, organization, skill and cooperative work practices that produce the sum total of our goods and services. Lo and behold, there’s nothing at all wrong with productivity in America. It continues to rise and rise just like it did during our post-WWII boom years. What’s changed is that the average American wage has stalled since the mid-1970s -- which is precisely the time that we started to deregulate Wall Street and cut taxes on the rich. During the 1950s and '60s boom years, almost all Americans shared in the fruits of productivity leading to rising real wages (after inflation). But now the productivity lines and wage lines have pulled apart. The gap between the two lines represents trillions of dollars that once went to the average American but are now going almost entirely to the super-rich.

Here's what Leopold is saying, in graphic form:

As should be apparent, throughout most of the post-war period, labor productivity steadily increased, and workers' compensation largely kept up. This was close to ideal and helps explain why the US economy was the envy of the world. The trend came to an end, rather abruptly, in roughly 1980.

It isn't getting any better. A recent study from Northwestern University reveals that 88 percent of income growth since 2009 was in the form of corporate profits, and only one percent went to wages. A recent investor report from JP Morgan notes approvingly that corporate profit margins increased by about 1.3 percent from 2000 to 2007, adding not only that profit margins are now at levels "not seen in decades," but that the primary reason for the fattened margins is a reduction in wages and benefits.

This is sick.  I remind the reader that reducing taxes on the wealthy and on corporations is at the heart of the Republican platform. And increasing wages and benefits for middle America is not.

"The Dumbest Idea in the World"

In a recent article in the online version of Forbes, Steve Denning writes intriguingly of the American corporate model and its penchant for short-term profit seeking. His views are something of a vindication for those, myself included, that have long felt the American management system is flawed. His basic premise is that in the mid 1970s US corporations began to shift their focus away from their products and processes, and towards catering to the short-term interests of investor.

Denning cites the work of Roger Martin in his new book, Fixing the Game. As Denning relates, 'Martin says that the trouble began in 1976 when finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published a seemingly innocuous paper in the Journal of Financial Economics entitled “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.'"

In short, Martin says US corporations began a fateful and undue focus on the interests of investors in the 1970s. And that means, generally, the short-term interests of individuals and firms that are less interested in what a company makes, or how it makes it, and more interested in making money off the company's stock, preferably sooner than later. As a result, managers, especially CEOs, are motivated to turn in quick, impressive results, measured primarily by quarterly earnings. 

CEO compensation has become tied to the stock price, not product quality, and that is because they too are focused on the short-term. Boosted earnings will please the investor class, and also line the CEOs' pockets through stock options. They have less incentive to focus on a company's long-term health, the way a founder would, and more on making sure their stock options pay out. The ability to quickly increase "shareholder value" is thus the holy grail by which investors judge management.

Accordingly, both Steve Denning and Roger Martin argue that corporate America's dogma regarding the importance of shareholder value, e;g. making the investor class rich, is proving ruinous. Martin specifically identifies US business schools as culprits in promoting the primacy of shareholder value. Denning reminds us that none other than Jack Welch, legendary former head of GE, said the concern over maximizing shareholder value was "the dumbest idea in the world."

Now let me take a moment to remind readers what most business writers don't often explicitly acknowledge: business in America, especially big business, is predominately Republican. More to the point, management at major US corporations is conservative, often deeply so. The American corporate model is, or has become, a conservative model; labor should be cheap, regulations should be minimal, taxes are always too high, and business should be free to move cash and assets around, including overseas, as it sees fit. This model implicitly says that the sum and substance of capitalism is the microeconomic interests of the corporation and the investors to which it is supposed to owe its greatest allegiance: that allegiance must prevail over the broader interests of country, citizens, and communities. As it turns out, that includes just about everyone in the world except the investor class and their subset, upper management. It is business economics for the chronically selfish and short-sighted.

In other words, the interests of the 1% must prevail over the 99%. Anything less is socialism and an invitation to stagnation and decline. Real patriots must give the 1% all they want or you will jeopardize civilization. And if you have not noticed how much further to the right the Republican party--starting notably with Ronald Reagan--has helped both corporations and the investor class reap ever higher portions of economic output, then you are not paying attention. 

So it is grimly satisfying to see some business thinkers and leaders, and not just those on the Left, questioning the efficacy of a model that obscenely enriches the few while it provides decreasing benefits for most. 

Again, Steve Denning provides an example. He writes:

The new bottom line of business is customer delight. If a firm isn’t delighting its customers, the prospects of its long-term survival in today’s highly competitive low-growth economy aren’t promising. Fortunately, as a result of almost three decades of research by Fred Reichheld and his colleagues at Bain, we have a robust methodology for measuring customer delight. It’s the Net Promoter Score discussed in the second edition of The Ultimate Question 2.0 published in September 2011.

The parameter they developed, the Net Promoter Score, basically attempts to quantify (crucial for numbers-obsessed business schools) how well companies are winning and keeping satisfied customers.

What a novel thought; actually pleasing the customer with an eye towards long-term loyalty. This is beginning to sound almost progressive; worry about your products, and how you treat customers and workers, and the stock price will follow suit. Your allegiance should be to those who build and buy your products and services.

It's enough to give Ayn Rand a fit.

How They Really Feel

This man's comments speaks volumes on the attitudes of the wealthy. His disdain for those with less money is palpable. He clearly is equating people's value with the size of their portfolio. Rich people are better.



And it is not just an arrogant attitude; he is also egregiously wrong,his intellectual honesty clearly compromised by his ideology. Notice that he claims to be subsidizing the 99% because he is making big bucks. It is especially ridiculous in light of the massive amounts of money our government has directed at the 1%, and especially the 0.1%, who operate under a self-serving delusion that everything they have is because of skill and hard work. Overlooked by this dickhead are the endless flows of government contracts and concessions to big Pharma, defense contractors and the like. Overlooked are the multi-million dollar giveaways by state and municipal governments as they compete to entice corporations to locate in their areas.

Richie Rich also ignores huge sums given to banks as part of their bailout, money bank executives then used to pay outsized bonuses. And just this week we read that those banks earned roughly $13 billion in interest directly the result of the sweetheart deal they received for tanking the US economy. Here is the gist of it, as related by AllGov:

Thanks to the Federal Reserve’s generous lending during the 2007-2009 financial crisis, banks that were teetering and at risk of collapsing wound up making billions of dollars in profits, according to Bloomberg Markets magazine.

After combing through 29,000 pages of Fed documents released to Bloomberg by court order, the publication determined that banks earned about $13 billion in income by taking advantage of the Fed’s below-market rates. These loans were made without informing the public or Congress of which institutions were borrowing heavily to stave off disaster.

Finally, have a look at the chart below. The corporations in these sectors are generally run by individuals who espouse rugged individualism, a can-do attitude, and the glories of a free market. They also almost always bitch about high taxes and government regulation. As you can see, they rarely pay their share of taxes, but they sure know how to pull in those tax subsidies- nearly $223 billion from 2008-2010.

Source: Citizens for Tax Justice

That's some serious corporate welfare. And from their government-subsidized profits, they pay outsized compensation to people like the guy in the video. If corporate boards claim that their executives deserve their often huge compensation, then those corporations don't need and don't deserve government support.  If you cannot live without taxpayers like me subsidizing your bottom line, then your insistence on fat bonuses is even more morally obscene than it already is.

Or is this a problem only when the recipients are the 99%?

The implicit message: It's just good business, complete with tax write-offs, when rich guys are in on it, and it's socialism only when the poor receive it.

Conservatives Get Their Way

At the heart of America's often shallow debate about political economy, policy, and the direction this country should take, is the cluster of variables surrounding taxes, regulation, economic policy, and the proper role of government. The basic conservative argument is that taxes are too high, regulation is too onerous and counterproductive, and business is too hobbled by misguided bureaucrats. 

The Republican prescription has been simple, persuasive for some, and amazingly consistent for a generation: cut taxes and everything good will happen. It is the elixir, the panacea, the cure-all for all that ails you. And if tax cuts are not enough (they are always a prerequisite), then just cut back on all that wasteful spending, which for conservatives means the welfare state and other transfers that go from deserving producers to the undeserving takers. 

To hear Republicans tell it, America is near comatose because of high taxes, radical unions ("big labor," as they say with a straight face), and more recently, government spending, not on defense of course, but on character-destroying entitlements such as social security, medicare, welfare, public education, and infrastructure boondoggles. 

Millions of Americans believe this argument; teabaggers in particular have been convinced that they are "taxed enough already" and that Democrats are transferring massive amounts of money "we don't have" to undeserving liberals who vote Democrat for that precise reason. Joshua Holland has an excellent article the title of which precisely captures what has become a real problem for the reality-based community: Thanks to Decades of Conservative Spin, Americans Are Hopelessly Confused About Taxes, Spending and the Deficit. 

As Holland states:

A good number of Americans are hopelessly confused about taxes, deficits and the debt. And it's no mystery why – conservatives have spent 30 years divorcing the taxes we pay from the services they finance. They've bent themselves into intellectual pretzels arguing that cutting taxes – on the wealthy – leads to more revenues in the coffers. They've invented narratives about taxes driving “producers” to sunnier climes, killing jobs by the bushel, and relentlessly spun the wholly false notion that we're facing “runaway spending” and are “taxed to death.”

Holland implicates the mainstream media for its failure to critically assess and challenge what has been Republican class warfare disguised as common sense. It is a narrative that has proved persuasive to people who do not often hear, and don't want to hear, analyses that challenge that narrative.

My immediate purpose is not to resolve ideological differences or to prove the efficacy of certain policy preferences. In this occasional series; let's call it "Conservatives Get Their Way," I want to show that regardless of how else you or I might feel about it, the inescapable conclusion is that on economic policy and legislation, including taxation, conservatives, the right-wing, the Republican party, and most assuredly, corporate America, have gotten most of what they have wanted on the policies, legislation, and legal opinions that overwhelmingly benefit them.

It is not a matter of conservatives wanting to move away from what they consider to be harmful, liberal policies. The reality is that Republicans, with the help of some Democrats, have undercut what they hate, and have already turned over power to wealthy oligarchs. The conservative charge that liberals, socialists, Democrats, dirty fucking hippies, a black President, "teh gays," and all the rest are destroying America, is demonstrably false. We do not have "Big Labor", high taxes, or profit-killing regulations, a large and expensive public sector, high social spending, or job-killing environmental regulations. In fact, we lag other industrialized nations on each of these points; our taxes are among the lowest, as is union membership and pubic sector spending.

So where does the US lead? Corporate profits and executive compensation. And of course, we do spend a pantload on defense, precisely what most conservatives and nearly all Republican politicians demand. 

The evidence more clearly shows that corporate America, the Republican party, and the conservative policies and legislation they say we need, but have already enacted, are undermining America's economic strength, its political institutions, and its social fabric. In other words, America's right wing not only has got its arguments mostly backwards, it is precisely the conservative policies they claim we need that have created the current mess, one that has been in the making for 35 plus years.

Conservatives get their way and they have the results one would expect; massive inequality, an unending gravy train for our bloated defense industry, executive compensation that has reached obscene levels, is largely detached from job performance (golden parachutes anyone?), and is loaded with money-saving perks denied to the rest of us. 

They succeeded in largely gutting private pension systems for workers, outsourced much of our manufacturing base to cheap labor countries, hobbled unions, have enjoyed significant productivity increases but have not shared those increases with their employees, and have beat back nearly all efforts to hold them accountable on the environment, tax loopholes, and regulations.

Much of this is vividly on display on Wall Street, where the perpetrators of massive fraud and malfeasance have managed to beat back essentially all efforts to hold them accountable and to rein in their ridiculously irresponsible behavior. 

Any no, it is not because Congress can't do anything; progressive Dems favor and vote for legislation that would return us to more stable and equitable times, legislation that we once had in place, such as Glass-Steagal.

It is because nearly all Republicans, joined by a few Blue Dog Democrats, have voted for the legislation that is so overwhelming favorable to the overclass.

It isn't Congress; it is Republicans in Congress.

US as Third World

On August 25 I had a post on Wall Street and how it bought and captured the institutions originally meant to ensure the public was served. I wrote then, and I say here again, the outsized role of the financial sector and the obscene, short-sighted, and shameless priorities of a reckless investor class, complete with unprecedented lack of accountability and legal liability, are at the heart of America's economic difficulties.

Corporate America's dominance of media and public discourse gloss over the fact that said financial dominance was what conservatives wanted; it was they that pushed through legislation favorable to the wealthy, investors (wealthy or not), and corporations. Conservatives, especially the wealthy variety, have gotten most of what they have wanted; lower taxes, fewer regulations, free movement of capital, lucrative defense contracts, and more.

Crap about how progressive agendas have hurt America are the imaginary domain of the ignorant. Union membership is now at negligible levels, far below similar countries. Labor unions have been weak for the last 30-odd years and getting weaker, just what  conservatives wanted.

New Deal legislation had made banking relatively safe and stable for generations. It was conservatives who said barriers between banking and finance were dated and holding us back. So Republicans in Congress overturned Glass-Steagall. Conservatives got what they wanted. Casino capitalism almost immediately ensued; financial meltdown soon followed. They wanted taxpayers to bail out the banks, and without any meaningful reform to prevent further catastrophes or undeserved enrichment. They got that too.

Wages for most workers have been flat for decades, precisely what conservatives have wanted. The US was a wage leader before Reagan; since then, wages for most have been flat. Conservative policy has been to suppress wages however possible. Conservatives got what they wanted.

The list goes on and on; our nation's richest and most powerful get what they want; favorable legislation, weak regulation, accommodating regulators, court rulings, and a compliant press. This should all be obvious to anyone who pays attention and doesn't walk on their knuckles. But reality struggles for attention in the face of a conservative noise machine that continually distracts voters.

Conservatives have also favored free trade, the mantra, the religion, the chiseled-in-stone gospel of laissez faire economics. It is front and center in the pantheon of conservative political economy, right up there with free markets. And here again, conservatives get what they want.

Conservatives, including Republican party operatives, rarely miss a chance to pimp free trade doctrine. American media usually goes along with Republican talking points. Even if one does find articles that dutifully report massive deficits, and even outsourcing, there are few coherent and visible efforts that explain the ramifications in detail and dare to analyze free trade as class warfare or why a lack of industrial policy is destroying us.

To get just an inkling of how international trade is playing out for the US, have a look at the figures below (Data are from Alan Tonelson's America's Increasingly Third World Trade Profile).

Below are the top ten US trade SURPLUS manufacturing categories for Jan.-June, 2011
(billions of current U.S. dollars)

Waste & scrap materials:  +$15.53
Spacial classification provisions:  +$11.44
Plastics & resins:  +$10.19
Soybeans:  +$8.81
Non-anthracite coal and petroleum gases:  +$7.18
Corn:  +$6.67
Wheat:  +$6.45
Cotton:  +$6.39
Misc. basic organic chemicals:  +$3.87
Non-poultry meat:  +$3.85

Next are the top ten US trade DEFICIT manufacturing categories for Jan.-June, 2011
(billions of current U.S. dollars)

Crude oil & gas:  --$121.13
Autos & light trucks:  --$37.82
Petroleum refinery products:  --$27.62
Computers:  --$22.50
Broadcast & wireless communication. equip.:  --$22.35
Goods returned to Canada & reimported:  --$21.47
Audio & video equipment:  --$15.80
Pharmaceuticals:  --$13.38
Telecommunications hardware:  --$12.72
Computer parts:  --$12.67

Notice a pattern? The US has become a big supplier of scrap and raw materials. Although the data do not show it, this is a substantial reversal of a few decades ago, when the US had a trade surplus in a variety of manufactures, especially high-end, high-tech goods.

Now look at the sectors with the biggest trade deficits. Except for oil, they are all manufactured goods that not long ago were among America's biggest contributors to what we once had, a trade surplus.

There is much to address here. My intention in future posts is to further explore issues in international trade and to demonstrate that America's free-trade ideology and the policies and practices that have resulted, are primarily in the interests of the overclass, have shaped corporate America to serve the interests of that overclass, but are damaging for the country as a whole.

Don't let conservatives tell you the US has a trade deficit because our taxes are too high, wages are too high, unions are too powerful, or regulations are too onerous.

They are wrong on every point.

Teabaggers Want Chaos

As I write this, politicians and ideologues alike are working, with various degrees of sincerity, to come to an agreement on a budget and a possible balanced budget amendment, all the while under threat from a small minority of Representatives, voted into office by a small minority of voters, to not raise the federal debt ceiling and bring a level of chaos and pain upon the country that even most Republicans agree would be disastrous.

There are several scenarios in all of this; One is that Republicans exact a huge price in the way of spending cuts, no new taxes, and the debt ceiling is raised. Republican threats to sabotage the economy work. Said economy likely sputters just in time for election season. Republicans, knowing that Americans have short memories, will blame Dems and Obama in particular.

The second scenario is that Republicans exact a huge price in the way of spending cuts, no new taxes, but the debt ceiling is raised only temporarily. Economy sputters because of reduced government spending, which even worries the Chamber of Commerce (but not the Club for Growth), and Republicans not only blame the Dems and Obama in the upcoming elections, they get to sabotage the economy again by threatening to oppose further debt ceiling hikes, unless, you guessed it, further spending cuts. They may insist on repeal of last year's health care reform.

A third scenario is just as repulsive but a bit trickier for Republicans. Not all of them want to just threaten the economy; it's not just a negotiating style with some of them. Republican members of Congress are on record as saying they will not vote to raise the debt ceiling even with spending cuts. And that is because they want to induce chaos. Forcing the federal government to default will, they say, create enough dispair that they can then force through a balanced budget amendment. (Not sure how that could work? Read Naomi Klein, The Shock Doctrine).

The intransigence of the Teabagger wing of the Republican Party, where most of the hard-line "let the government default" members are, has created governing challenges for the more establishment members of the Party. It is they, not the Dems, who are giving John Boehner gray hair.

It has become obvious that the Teabaggers are no longer playing by the script Republican operatives set for them. Wall Street financed the Teabagger movement specifically as a way to keep Democrats in check. Fact is, Wall Street loves government, as long as it gets what it wants from it; lax regulatory enforcement, if not outright deregulation, lucrative government contracts, preferential tax rates, and no meaningful reforms or investigations. Republicans are especially willing to let the Wall Street Casino continue.

But Wall Street has seriously underestimated the anti-government lunacy of Teabaggers. Most Republicans, the ones promoting Wall Street's interests, have never been especially interested in the deficit.They certainly did not care during the Bush era. Recall Dick Cheney's claim that Reagan proved "deficits don't matter." If Republicans had been interested in the budget deficit, they would not have pushed for a continuation of Bush's tax giveaway to the wealthy. They went back to harping about the deficit just as soon as the two-year tax extension was in place. Even now, virtually no Congressional Republican will agree to any tax increases on the wealthy whatsoever. Their priorities are low taxes and other privileges for the wealthy and for corporate America, reduced social spending on the poor, and high spending on defense. Reducing the deficit is further down their priority pole. 

But not, of course, for the true believing Teabaggers. My own take on this is that enough Teabaggers will very reluctantly agree to a deal that gets them most of what they want; they will have to give up on the chaos-through-default option for now. Boehner et. al. will have to remind them to the very end that destroying the country is not a vote-getting strategy. Nor will they get a balanced budget amendment. That will piss off the Teabaggers big time, and you can bet they will be back with it next year.

Democrats, on the other hand, should not agree to any of this madness. They have yet to appreciate that most Americans support them on this. 

President Obama should invoke the 14th amendment. But he won't.

I Paid More Taxes Than Exxon, Boeing, B of A Combined

Lots of data has come out recently about how little America's top corporations are paying in taxes, both federal and state, and that's despite earning huge profits. So where is the outcry from teabaggers? Where are the demands about "paying your fair share"?

What makes this especially contemptible is that corporate America has managed to get Republicans to yelp about our high corporate tax rate, as if any corporation actually paid anything close to the nominal rate. How many times have we seen Republicans and other intellectual prostitutes stand before a camera and say we can create jobs and get the economy going if we would just lower corporate taxes? This does not even include the numerous corporations that not only do not pay taxes, but get $ millions or even $ billions back from the feds.

Senator Bernie Sanders has released a list of corporate giants that pay dramatically lower taxes than their profits would suggest. The list, shown below, is available from various websites. I got it from here. 

1)      Exxon Mobil made $19 billion in profits in 2009.  Exxon not only paid no federal income taxes, it actually received a $156 million rebate from the IRS, according to its SEC filings.
2)      Bank of America received a $1.9 billion tax refund from the IRS last year, although it made $4.4 billion in profits and received a bailout from the Federal Reserve and the Treasury Department of nearly $1 trillion.
3)      Over the past five years, while General Electric made $26 billion in profits in the United States, it received a $4.1 billion refund from the IRS.
4)      Chevron received a $19 million refund from the IRS last year after it made $10 billion in profits in 2009.
5)      Boeing, which received a $30 billion contract from the Pentagon to build 179 airborne tankers, got a $124 million refund from the IRS last year.
6)      Valero Energy, the 25th largest company in America with $68 billion in sales last year received a $157 million tax refund check from the IRS and, over the past three years, it received a $134 million tax break from the oil and gas manufacturing tax deduction.
7)      Goldman Sachs in 2008 only paid 1.1 percent of its income in taxes even though it earned a profit of $2.3 billion and received an almost $800 billion from the Federal Reserve and U.S. Treasury Department.
8)      Citigroup last year made more than $4 billion in profits but paid no federal income taxes. It received a $2.5 trillion bailout from the Federal Reserve and U.S. Treasury.
9)      ConocoPhillips, the fifth largest oil company in the United States, made $16 billion in profits from 2007 through 2009, but received $451 million in tax breaks through the oil and gas manufacturing deduction.
10)  Over the past five years, Carnival Cruise Lines made more than $11 billion in profits, but its federal income tax rate during those years was just 1.1 percent.

The video below is a compilation of taxpayers wanting to know why they pay their share, and many corporations don't. Some nice suggestions about how we can share the video and make people more aware of what this country has become. If enough people can make these points, maybe we will hear less of this obscene shit about how teachers need to take a pay cut to balance the budget.

Because, sweetheart, if we don't push back, it will only get worse. 

The Results of Wage Suppression

Negligible wage growth for most Americans has been an underreported feature of our political economy for an entire generation. This is as corporate America has wanted it, not because they don't want Americans in general to have higher incomes, but because they care first and foremost about their bottom line. That may seem normal to Americans who grew up in a post-Reagan society, but the result is that corporations have come to dominate policy, and economic ideology, as never before. What is best for citizens, families, and communities need not concern the corporation or the investor class.

We are now seeing the results of 30+ years of wage suppression and the gigantic growth in inequality that was inevitable. In a very recent study by The Economic Policy Institute, Lawrence Mishel reveals just how little workers have benefited from decades of substantial productivity growth:

Over the last 30 years there has been very modest wage growth for the typical worker. This is not because the economy was weak and employers were strapped for cash or profits. The economy enjoyed soaring productivity between 1980 and 2009. The Figure compares median wage growth over that period to average gross domestic product growth per worker, a measure of what each individual worker, on average, contributed to the overall economy. This is equivalent to the growth of income per worker as well. While average income per worker grew 59.0%, median wages grew by just 11.2%. Over this same period the amount of wealth (household assets less liabilities) per worker grew by 63.7%. 

What we usually hear and read is the ignorant and asinine contention that unions and public sector workers are to blame for deficits, poor productivity, and slow growth.  This is a nauseatingly stupid position, and it figures that teabaggers would get behind it. In reality, wage growth has never been a policy goal for most politicians. As Mishel writes, "The focus instead has been on policies that claimed to make consumers better off through lower prices: deregulation of industries, privatization of public services, the weakening of labor standards such as the minimum wage, erosion of the social safety net, expanding globalization, and the move toward fewer and weaker unions."

Below is a graph taken from Mishel's paper. It shows as much as any single graph could as to why so Americans are hurting, despite working longer hours even as they fall into debt. The benefits of all that toil, investment, education, and innovation are not accruing to the middle class, but to upper management and the investor class. (Interestingly enough, the graph shows a distinct, recent uptick in both private and public sectors, even as productivity continues to climb. When was that? After Obama took office. No wonder Republicans hate facts).

In a nutshell, the gap in recent decades means that working- and middle-class incomes have not kept up with corporate America's ability to pay them. Workers' incomes would be significantly higher, but our overclass is pocketing the difference. 

Those outsized bonuses gotta come from somewhere.