U.S. economy stinks because of greedy corporations?

Blodget accurately uses the word "greedy" and "short term" to describe how U.S. corporations are acting -- by cutting back staff, freezing most workers' wages, and buying back stock. 

Yet there's another way to look at these trends: from an orthodox business perspective. Indeed, in my finance course in business school, we were taught that corporate decisions such as buying back shares and issuing big dividends may be popular among investors; yet such actions must also be eyed skeptically by long-term investors, since they are a signal that the corporation can currently find no better use of its profit, such as R&D or capital investment.

 Now jump to the "job creators" myth, and you'll understand why this is relevant: every time Wall Street cheers these short-term gains in stock price, U.S. workers are losing out again, because either somebody's not getting hired or somebody's not getting a raise. And this means less consumption and economic activity (about 70 percent of U.S. GDP).  

And this gets back to the idea of depressed aggregate demand, and why the "job creators" myth is bullshit, because the capitalists (people with money) and the corporate owners (shareholders) and officers, when acting rationally in a system where their customers don't have as much money as they once did to buy their products, stop investing and producing as much, because this seems like the sensible thing to do. And they all do this at once. They are prisoners in the same system that wage-earners and consumers inhabit; they're not divorced from it, at least not in the long term. 

So this idea that job creators, if government would only get out of their way and/or cut their taxes, would behave much differently than they are now, is totally bogus and irrational, because although they are at the top, they are not the commanders of the system, nor do they stand apart from it. 

In fact, as Paul Krugman pointed out back in 2010, and just about every business survey since then has supported, lack of demand (sluggish sales) is the key business problem, not taxes or regulation or general "uncertainty."  

Why Does The Economy Stink? Because America's Owners Are Greedier Now Than Ever Before

By Henry Blodget

August 19, 2014 | Business Insider

Business Insider, St. Louis Fed

GDP growth.

The U.S. economy is still sputtering. (See GDP growth chart above.)

Why is growth so slow and weak?

One reason is that average American consumers, who account for the vast majority of the spending in the economy, are still strapped.

The reason average American consumers are still strapped, meanwhile, is that America's companies and company owners — the small group of Americans who own and control America's corporations — are hogging a record percentage of the country's wealth for themselves.

In the past five years, American corporations have boosted their profits and share prices by cutting costs (firing people) and buying back stock. As a result, unemployment remains high. And wage growth for the Americans who are lucky enough to be working has been pathetic — the slowest since World War II.

Meanwhile, America's corporations and their owners have never had it better. Corporate profits just hit another all-time high, both in absolute dollars and as a percent of the economy. And U.S. stocks are at record highs.

Even Scrooge would be appalled.

Many people seem confused by this juxtaposition. If corporations and shareholders are doing so well, why is the economy so crappy?

The answer is that one company's wages are other companies' revenues. Americans save almost nothing, so every dollar we earn in wages gets spent on products and services (including, in some cases, those of the companies we work for). The less that American companies pay their workers, the less American consumers have to spend. And the less American consumers have to spend, the slower the economy grows.

This isn't a complex concept. We're all in this together. People make it complicated by casting it as a political issue and inflaming partisan tensions. But it has nothing to do with politics.

Importantly, it doesn't have to be this way.

There's no "law of capitalism" that says that companies have to pay their employees as little as possible. There's no law of capitalism that says companies have to "maximize short-term profits." That's just a story that America's owners made up to justify taking as much of the company's wealth as possible for themselves.

Ironically, this short-term greed on the part of America's owners is most likely reducing their long-term wealth: Companies can't grow profits by cutting costs forever, because their profits can't grow higher than their revenues. At some point, revenue growth needs to accelerate. But that won't happen until companies start sharing more of the wealth they create with the folks who create it — their employees.

Let's go to the charts ...

1) Corporate profit margins just hit another all-time high. Companies are making more per dollar of sales than they ever have before. (Some people are still blaming economic weakness on "too much regulation" and "too many taxes." That's crap. Maybe little companies are getting smothered by regulation and taxes, but big ones certainly aren't. What they're suffering from is a myopic obsession with short-term profits at the expense of long-term value creation.)

Business Insider, St. Louis Fed

Profits as a percent of the economy.

2) Wages as a percent of the economy just hit another all-time low. Why are corporate profits so high? One reason is that companies are paying employees less than they ever have as a share of GDP. And that, in turn, is one reason the economy is so weak: Those "wages" represent spending power for consumers. And consumer spending is "revenue" for other companies. So the profit obsession is actually starving the rest of the economy of revenue growth.

Business Insider, St. Louis Fed

Wages as a percent of the economy.

In short, our obsession with "maximizing profits" is creating a country of a few million overlords and 300+ million serfs.

Don't believe it?

More evidence the middle class is gone

Sedulous readers (all three of you) will remember how back in 2011 I remarked on Citbank's "consumer hourglass theory": companies should either sell high-end products or bottom basement. Because the middle-class consumer is gone.

Well, it took the New York Times only three years to catch on.

Check this out: "[A]bout 90 percent of the overall increase in inflation-adjusted consumption between 2009 and 2012 was generated by the top 20 percent of households in terms of income." 

Bye-bye, American Dream!

The Middle Class Is Steadily Eroding. Just Ask the Business World.

By Nelson D. Schwartzfeb

February 2, 2014 | New York Times

URL: http://www.nytimes.com/2014/02/03/business/the-middle-class-is-steadily-eroding-just-ask-the-business-world.html?ref=business&_r=0

Don't forget that special someone this Christmas: You

Go on, you deserve it!  Santa Claus and Baby Jesus want you to be happy. That's the true meaning of Xmas.

Seriously though, this may just be pent-up recessionary demand that has waited all year for the big holiday sales in order to buy necessary items.

Americans Buying More Gifts for That Special Someone ... Themselves

By Lynn Stuart Parramore

December 19, 2012 | AlterNet

This year, self-gifting has hit an all-time high. Shoppers are rushing to sales racks and frantically loading up on everything from tablets to trendy sneakers for that very special someone known as Me.

According to the Wall Street Journal, market research company NPD has discovered that the trend is a prime driver of holiday shopping growth this year. Before the recession, the firm found that around 12 percent of shoppers said they’d purchased items for themselves during the holidays. Last year the figure was up to 19 percent for surveys that went out before Christmas. And the post-Christmas surveys showed that 26 percent of respondents had made holiday purchases for Numero Uno. This year, the figure is already up to a whopping 32 percent.

The National Retail Federation has also predicted a big jump in self-gifting. In fact, it found that 59 percent of holiday shoppers plan to spend an average of $139.92 on items not meant to be shared. Young adults, especially, have hit upon a handy formula for shopping during the season of giving: “one for you, two for me.” Promotions on electronic items and clothing have worked particularly well with this age group, even given the fact that young people typically have less to spend: 71.5 percent of Millennials who caught the big Black Friday sales got a little something for themselves.

What is going on? Are we becoming more self-oriented? Maybe not. NPD posits that the self-gifting trend could be more about hard economic times. The idea is that the trend has increased as retailers address the crappy economy by vigorously promoting Black Friday, Cyber Monday and other discount opportunities. So consumers have learned to wait to buy that new TV until the holidays roll around. Taking advantage of special deals may be more a sign of economic prudence than narcissistic extravagance.

There’s also a pervasive feeling that, damnit, we deserve it. Americans are horribly overworked compared to other nations. In the U.S., 85.8 percent of males and 66.5 percent of females work more than 40 hours per week. That’s even more than the notoriously nose-to-the-grindstone Japanese. In every industrialized country except Canada, Japan and the U.S., workers get at least 20 paid vacation days. Guess what they get in France and Finland? 30 days. A whole month off. Paid.

According to the Bureau of Labor Statistics, the productivity of American workers has jumped 400 percent since 1950. We should be working fewer hours, but we most assuredly aren’t. We’re working more. And most of us are not profiting from it, either. Americans who get paltry vacations and face stagnant wages can hardly be blamed for wanting to do something for themselves when the holidays come around. And there’s a big advantage to self-gifting: you'll get something you really want.

Firms confirm: U.S. middle class is gone

WSJ cites some cheerful statistics about the U.S. middle class, or what's left of it:

At the end of March, Americans had $6.1 trillion in equity in their houses—the value of the house minus mortgages—half the 2006 level, according to the Federal Reserve. ... [T]he net worth—household assets minus debts—of the middle fifth of American households grew by 2.4% a year between 2001 and 2007 and plunged by 26.2% in the following two years.

Since the private sector knows best, and since Proctor & Gamble is perhaps #1 at consumer marketing, then P&G's decision to exclude the middle class from its future marketing efforts is very telling. Wal-Mart and Target are losing customers while Dollar General stores are selling more food items than ever. Meanwhile, luxury retailers like Estee Lauder, Saks, Neiman Marcus, and Tiffany & Co. are going more high-end because only their rich customers have any money.

It turns out that bailed-out TBTF bank Citigroup has been preaching its "Consumer Hourglass Theory" to its investment clients since 2009.

Said Citigroup analyst Deborah Weinswig: "Companies have thought that if you're in the middle, you're safe. But that's not where the consumer is any more—the consumer hourglass is more pronounced now than ever."

That's not where the consumer is anymore. Chilling words, if you think about them.

As Middle Class Shrinks, P&G Aims High and Low

By Ellen Byron

September 12, 2011 | Wall Street Journal

URL: http://online.wsj.com/article/SB10001424053111904836104576558861943984924.html

Channel Marx to save capitalism?

Give Karl Marx a Chance to Save the World Economy

By George Magnus

August 28, 2011 | Bloomberg

Policy makers struggling to understand the barrage of financial panics, protests and other ills afflicting the world would do well to study the works of a long-dead economist: Karl Marx. The sooner they recognize we're facing a once-in-a-lifetime crisis of capitalism, the better equipped they will be to manage a way out of it.

The spirit of Marx, who is buried in a cemetery close to where I live in north London, has risen from the grave amid the financial crisis and subsequent economic slump. The wily philosopher's analysis of capitalism had a lot of flaws, but today's global economy bears some uncanny resemblances to the conditions he foresaw.

Consider, for example, Marx's prediction of how the inherent conflict between capital and labor would manifest itself. As he wrote in "Das Kapital," companies' pursuit of profits and productivity would naturally lead them to need fewer and fewer workers, creating an "industrial reserve army" of the poor and unemployed: "Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery."

The process he describes is visible throughout the developed world, particularly in the U.S. Companies' efforts to cut costs and avoid hiring have boosted U.S. corporate profits as a share of total economic output to the highest level in more than six decades, while the unemployment rate stands at 9.1 percent and real wages are stagnant.

U.S. income inequality, meanwhile, is by some measures close to its highest level since the 1920s. Before 2008, the income disparity was obscured by factors such as easy credit, which allowed poor households to enjoy a more affluent lifestyle. Now the problem is coming home to roost.

Over-Production Paradox

Marx also pointed out the paradox of over-production and under-consumption: The more people are relegated to poverty, the less they will be able to consume all the goods and services companies produce. When one company cuts costs to boost earnings, it's smart, but when they all do, they undermine the income formation and effective demand on which they rely for revenues and profits.

This problem, too, is evident in today's developed world. We have a substantial capacity to produce, but in the middle- and lower-income cohorts, we find widespread financial insecurity and low consumption rates. The result is visible in the U.S., where new housing construction and automobile sales remain about 75% and 30% below their 2006 peaks, respectively.

As Marx put it in Kapital: "The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses."

Addressing the Crisis

So how do we address this crisis? To put Marx's spirit back in the box, policy makers have to place jobs at the top of the economic agenda, and consider other unorthodox measures. The crisis isn't temporary, and it certainly won't be cured by the ideological passion for government austerity.

Here are five major planks of a strategy whose time, sadly, has not yet come.

First, we have to sustain aggregate demand and income growth, or else we could fall into a debt trap along with serious social consequences. Governments that don't face an imminent debt crisis -- including the U.S., Germany and the U.K. -- must make employment creation the litmus test of policy. In the U.S., the employment-to-population ratio is now as low as in the 1980s. Measures of underemployment almost everywhere are at record highs. Cutting employer payroll taxes and creating fiscal incentives to encourage companies to hire people and invest would do for a start.

Lighten the Burden

Second, to lighten the household debt burden, new steps should allow eligible households to restructure mortgage debt, or swap some debt forgiveness for future payments to lenders out of any home price appreciation.

Third, to improve the functionality of the credit system, well-capitalized and well-structured banks should be allowed some temporary capital adequacy relief to try to get new credit flowing to small companies, especially. Governments and central banks could engage in direct spending on or indirect financing of national investment or infrastructure programs.

Fourth, to ease the sovereign debt burden in the euro zone, European creditors have to extend the lower interest rates and longer payment terms recently proposed for Greece. If jointly guaranteed euro bonds are a bridge too far, Germany has to champion an urgent recapitalization of banks to help absorb inevitable losses through a vastly enlarged European Financial Stability Facility -- a sine qua non to solve the bond market crisis at least.

Build Defenses

Fifth, to build defenses against the risk of falling into deflation and stagnation, central banks should look beyond bond- buying programs, and instead target a growth rate of nominal economic output. This would allow a temporary period of moderately higher inflation that could push inflation-adjusted interest rates well below zero and facilitate a lowering of debt burdens.

We can't know how these proposals might work out, or what their unintended consequences might be. But the policy status quo isn't acceptable, either. It could turn the U.S. into a more unstable version of Japan, and fracture the euro zone with unknowable political consequences. By 2013, the crisis of Western capitalism could easily spill over to China, but that's another subject.

(George Magnus is senior economic adviser at UBS and author of "Uprising: Will Emerging Markets Shape or Shake the World Economy?")