Category Archives: Economy

The Economic Elite Agenda

Economic Elite

How does 0.5% of the population manage to control the political discussion about the economic realities of the remaining members of the citizenry?  If everything is a commodity, then everything can be bought and sold – including information.  There are repercussions related to this. For themselves and others.

The economic elite, the financialist allies, and the compliant Republican Party would like very much to remove the fetters on their capacity to accumulate wealth.  Deregulate banking,  cut taxes for the ultra-wealthy and remove the taxation on capital gains, get rid of unions and any other form of organized labor, privatize and monetize as many formerly public services as possible and then they’ll be happy?  Probably not.  They may be “shackled in golden handcuffs,”  or  “addicted to wealth.”  Or, they are simply following the prescribed path to riches, adopt the Shareholder Value Theory of Everything as if it described any economic reality other than their own.

Controlling the Flow

In order to advance the Shareholder Value Theory of Everything it must take precedence over all other topics of conversation.   For example, see the current web page for CNBC, and look at the major topics for today:  Comprehensive Immigration Reform is reduced to a political article about a possible government shutdown.  It’s a relatively shallow piece, speculative in nature, and purely political.  It will not tell you the findings which demonstrate the value of immigrants to this country in economic terms.

“Immigrants are not the cause of unemployment in the United States. Empirical research has demonstrated repeatedly that there is no correlation between immigration and unemployment. In fact, immigrants—including the unauthorized—create jobs through their purchasing power and their entrepreneurship, buying goods and services from U.S. businesses and creating their own businesses, both of which sustain U.S. jobs.”  [AIC]

Interesting, that sounds just like DB’s favorite theme:  Increase the aggregate demand and you will grow the economy.   Nor will a speculative political piece inform us that the top occupations for foreign born workers between the ages of 25 and 64 were construction jobs and extraction related employment. [CBO pdf]   Better still for our economy, immigrants play a large role in our overall economic life:

“Immigrants have an outsized role in U.S. economic output because they are disproportionately likely to be working and are concentrated among prime working ages. Indeed, despite being 13 percent of the population, immigrants comprise 16 percent of the labor force. Moreover, many immigrants are business owners. In fact, the share of immigrant workers who own small businesses is slightly higher than the comparable share among U.S.-born workers. (Immigrants comprise 18 percent of small business owners.)”  [EPI]

And here comes the point – if CNBC is trying to grab ratings in order to boost advertising, and thereby increase the value of its shares – then the Shareholder Value Theory of Everything is ultimately determining what kind of “business news” we are getting.  Not information about the economic value of immigrants, or even what portion of our demographics they represent; instead we are fed a pabulum of political speculation. Nothing so enhances the power of the economic elites as the capacity to offer little or no economic information beyond the stock market reports and the endless speculation of analysts.

For information which has not been sifted through the tentacles of the economic elite see: “Facts About Immigration and the U.S. Economy” (EPI) “Immigration / EPI” (EPI) “Value Added Immigration,” (EPI), “Immigration and American Values,” (Our Future),  “Immigration and the Rural Workforce,” (USDA), “The Economic Benefits of Fixing Our Broken Immigration System,” (WhiteHouse pdf)  Clicking on just a couple of these links will give you 100% more economic information than you would get from the CNBC lead article.

Interestingly enough, considering the ridiculousness of Fox’s reporting on climate related issues, their Big Story of the day is about Toyota’s hydrogen powered car.  Fox is quick to inform its readers that other car manufacturers are ramping up development of more ‘climate friendly’ vehicles – but as for the effect of climate problems on our economy – you’ll have to go elsewhere.   Honda, they note with emphasis, is not keeping up in order to keep costs down – thus complying with the Shareholder Value Theory of Everything.

For information about the relationship of climate change and the economy, there’s the UCS site including  the “Hot Map,”  or the CBO’s “The Economics of Climate Change,” (pdf) “Modeling the Impact of Warming in Climate Change Economics,” (NBER), and “Climate Change: Of Warming and Warnings,” (Economist) Again, reading just a few articles out of many will offer far more knowledge about climate and the economy than most of what appears in the so-called business channels.

Good luck finding any comprehensive information about the American work force, or about the increasing threat of income inequality which could have a profound impact on our consumer based economy, or even about the state of American research and development – these are not topic which grab the viewers and focus attention on the sponsor’s products.  Worse still, information about the economic impact of income inequality or the struggles of middle income Americans in the ‘wrong’ hands could lead to some serious questioning of the motives of the economic elite.

Controlling the Ballot Box

Money is valuable – especially when a bit of it spread about can offer success in the election of those amenable to the interests of the economic elite.  If there’s “runaway spending” in this country it’s NOT coming from the federal government, its sources are corporations – some of which are foreign – pouring vast amounts of the coin of the realm into American politics.  Would it surprise anyone that the debate over the pipeline project is driven by about $60 million in election and lobbying funding? [Common Cause]   We’re talking about “net neutrality,” and others were discussing it as well – to the tune of some $42 million in federal and state lobbying efforts from AT&T, Comcast, Verizon, NCTA, Time Warner Cable, [Common Cause] all of whom oppose neutrality.

Of course, the concept of net neutrality is at odds with the short term business interests of the corporate giants listed above, and since we remain in the land of the Shareholder Value Theory of Everything this must not be implemented – less the share prices go down during the quarter.

However, there is much more attached to the election of those enamored of the economic elite – there’s deregulation of the banks because they had so much fun, and so much profit, the last time they turned Wall Street into such a casino that there are no more investment banks; there’s the privatization of public services because who can complain about someone’s idea to turn public education into test driven private schooling?  What better opportunity to make a few million than to privatize public water systems? Privatize public library and internet connection services?  We could even privatize our roads, bridges, dams, airports, air traffic control systems? Food inspection? Hospital and clinic inspections?   All in the interest of the economic elite.  But mostly we could insure the continued prosperity of the economic elite by making certain they don’t have to pay taxes.  “Only little people pay taxes.” 

Combining The Queen of Mean with the Shareholder Value Theory of Everything  yields such excesses as the taking of approximately $30 Trillion from financial gains since the recession – almost all of it going to the richest 1% of our nation’s population – and much of it tax free.  The economic elite have framed the system such that you pay less on the income earned from stocks than from the labor of your hands, you can use “carried interest” as an excuse not to pay taxes for hedge fund profits.  Roth IRA’s are a tax loophole for the 20% of Americans who own 95% of our financial wealth, and you can insure that your derivatives are paid off first if the bank collapses.  And, by the way – a business can get out of debt by declaring bankruptcy, but a student can’t. [Salon]

Did you hear any of this from the corporate controlled media?  Probably not.  Put the Queen of Mean with the Shareholder Value Theory of Everything and add a Wealth Addiction and we get a picture of the economic elites:

“Only a wealth addict would feel justified in receiving $14 million in compensation — including an $8.5 million bonus — as the McDonald’s C.E.O., Don Thompson, did in 2012, while his company then published a brochure for its work force on how to survive on their low wages. Only a wealth addict would earn hundreds of millions as a hedge-fund manager, and then lobby to maintain a tax loophole that gave him a lower tax rate than his secretary.”  [NYT]

Ours was supposed to be a republic, founded on the democratic principle of voting by citizens who shared in the future of the nation – it was not intended to be an aristocracy much less a plutocracy.  Nor was it ever meant to be a nation pandering to the addictions of those for whom the love of money became the rationale for their existence.

We can do better.

Comments Off

Filed under Economy, Immigration, Politics

The Great Pension Swipe Coming to a State Near You

Burglar

“Elections have consequences” and this time the results may be a disaster for public employee pensions.  The rationale underpinning this contention is simple.  Wall Street is running out of Big Pots of Money.  They’ve already run through the money which flowed in from the earnings of more women in the work force – the Wall Street Casino used up the proceeds from the increasing number of two income families by 2000, when the number of women in the work force increased from 18,389,000 in 1950 to 65,616,000 in 2000.  To add a bit of context here:  In 1950 there were 43,819,000 men in the work force, and 18,389,000 women.  By 2000 there were 75,247,000 men working and 65,616,000 women. [BLS pdf]   Some families were induced to join in the new Money Market Accounts made possible by the Garn-St. Germain Depository Institutions Act of 1982.  This new form of “savings” account allowed the banks to get and keep the deposits.

“Banks are required to discourage customers from exceeding these limits (on withdrawals), either by imposing high fees on customers who do so, or by closing their accounts. Banks are free to impose additional restrictions (for instance: some banks limit their customers to six total transactions). ATM, teller, and bank-by-mail transactions are not counted towards the total.”  [link]

And so, Wall Street had a big pot of money to play with. But enough is never enough.   Wall Street invented more money pots – using securitized assets. These were non-existent before the 1970s.  For review, a securitized asset is something done to create “debt securities, or bonds, whose payment of principal and interest derive from cash flows generated by separate pools of assets.”  [ HFS pdf 2003]  In plainer English this means that Wall Street can use securitization to immediately (and that’s a key word – immediately) make money on any “cash-producing asset” – like trade receivables, leases, auto loans, credit card lines, and, of course, mortgages.

Now the Money Mad Denizens of Wall Street have run through the addition of women’s earnings, the accumulation of funds in money market accounts created thereby, and they mis-managed their money in securitized assets such that the Housing Bubble of the early 2000’s burst and splattered all over their operations.  But enough is never enough.  One former Wall Street trader described the Wealth Addiction rampant in the firms:

“But in the end, it was actually my absurdly wealthy bosses who helped me see the limitations of unlimited wealth. I was in a meeting with one of them, and a few other traders, and they were talking about the new hedge-fund regulations. Most everyone on Wall Street thought they were a bad idea. “But isn’t it better for the system as a whole?” I asked. The room went quiet, and my boss shot me a withering look. I remember his saying, “I don’t have the brain capacity to think about the system as a whole. All I’m concerned with is how this affects our company.” [...]

“From that moment on, I started to see Wall Street with new eyes. I noticed the vitriol that traders directed at the government for limiting bonuses after the crash. I heard the fury in their voices at the mention of higher taxes. These traders despised anything or anyone that threatened their bonuses.” [NYT]

What might threaten those bonuses? Not having Big Pots of Money to play with.   There are some money pots out there – and more and more of them are being “touched” by the Wall Street bankers who see them as ways to enhance those precious bonuses.  Pension funds.

How to unlock that next Big Money Pot for the Wealth Addicts of Wall Street?  The strategy has been alarmingly simple.

First, bash public employee unions – the organizations which negotiated defined benefit plans for retiring public employees.  Union bashing has been a staple of Republican politics since time out of mind, so it makes perfect sense to incorporate it into the strategy for raiding public pension funds. Public employees are no longer to be seen as the helpful librarian, or the firefighter who saves the kittens, or the police officer who donates time to direct traffic at the high school football game.  He or she is no longer the person willing to work in frigid temperatures clearing snow from highways at 3:00 A.M. Nor is the public employee to be thought of as the bookkeeper who diligently keeps track of taxes paid, fees assessed, or paper-work properly filled out to prevent fraud.  No! These people are to be seen as “greedy teachers” who think only of job security, “lazy” bureaucrats who create paperwork, and “leagues of over-paid shovel leaners” who don’t care about the snow on the roads…. The cynicism of this is excruciating.  The result is little else than a contemptuous, divisive, misanthropic perspective which divides private sector employees earning $45,000 per year from public sector employees earning $45,000 per year.

Secondly, once the bashing begins the misanthropes add in a measure of jealousy.   Publish the retirement incomes of Everyone, because surely someone is making more money in retirement income than the targeted population of disaffected voters.  Cover this in the banner of Right to Know. “You,” meaning the disenchanted audience, have a “right” to know what “each and every public employee is making” because, “you know” they have been “feeding at the public trough.”  The argument is predicated on the jealousy factor – who else would care what a firefighter, police officer, highway department employee, teacher, librarian, public health nurse, etc. would receive in a year?

That the release of this information would allow personal identity thieves to thrive is of little consequence to the advocates of total transparency – so much transparency that the former public employees have no right to any financial privacy whatsoever.

Third, flat out lie about the sustainability of defined benefits pension plans.  There are three major advantages of a defined benefit plan.  It provides security.  The person who has paid into the plan knows exactly want the financial benefits will be and can do some financial planning accordingly. The person also know exactly how long he or she has to work to be eligible for the benefits.  And, finally, the person knows that the pension is covered by the Pension Benefit Guaranty Corporation.

We know that some public employee pension plans are better administered than others, but the opponents of defined benefit plans are eager, enthusiastic even, about publicizing the problems of some as the characteristics of all.  This is evident in the ALEC assault on public pension funds, all 45 pages of it which blatantly calls for defined benefit plans to be morphed  into “properly defined alternatives, such as defined contribution, cash balance, and hybrid plans.”  Read: The Next Big Money Pot for Wall Street.

Creeping Financialism

The ALEC advocates and associates are only too pleased to discuss the delights of the defined contribution plans.  Most often they are couched in friendly wording such as “you can manage your own plan,” which sounds like “freedom.”  It also sounds like a 401(k).   What they aren’t anxious to publicize is that 401(k) plans have been a bust.

“The 401(k) plan was never meant to be a mainstream pension plan and is a poor substitute for one. It’s a voluntary program that was intended to supplement retirement savings –  one of those quirky little options in the byzantine tax code that employers seized upon as a way to save money while pretending that they were doing the right thing by their employees.” [Forbes]

That’s putting it about as bluntly as possible.  Oops! The 401(k) was never intended to be the main source of retirement funds, and it’s a poor substitute for a defined benefit plan.

“Authors like Helaine Olen have been right on the mark in saying that the financial services industry and employers are all too eager to tell us how little we’re saving, yet don’t serve as honest brokers in maximizing our retirement savings. That would require cutting fees, eliminating middlemen, increasing employer contributions and getting rid of the fee structure that is based on assets under management. And above all, the most dangerous part of this equation: Educating employees on how to invest cost- and risk effectively.”  [Forbes]

And for all this – while the fund administrators collect the fees, hire middlemen, and thrive under the fee structure – the public employee is asked to give up any and all financial privacy, learn to be a financial manager, and forget about the security a defined benefits plan offers. All this so that Wall Street will secure the next Big Money Pot.  And it’s already started.

Creepy Financialists

The unease felt by public employees about their future financial security isn’t merely the result of escalating fiscal paranoia; it’s very real. The Rhode Island Case describes what happens when crony capitalism merges with Wall Street wealth addiction when state treasurer Gina Raimondo issued forth :

“Nor did anyone know that part of Raimondo’s strategy for saving money involved handing more than $1 billion – 14 percent of the state fund – to hedge funds, including a trio of well-known New York-based funds: Dan Loeb’s Third Point Capital was given $66 million, Ken Garschina’s Mason Capital got $64 million and $70 million went to Paul Singer’s Elliott Management. The funds now stood collectively to be paid tens of millions in fees every single year by the already overburdened taxpayers of her ostensibly flat-broke state. Felicitously, Loeb, Garschina and Singer serve on the board of the Manhattan Institute, a prominent conservative think tank with a history of supporting benefit-slashing reforms. The institute named Raimondo its 2011 “Urban Innovator” of the year.

The state’s workers, in other words, were being forced to subsidize their own political disenfranchisement, coughing up at least $200 million to members of a group that had supported anti-labor laws.” [Rolling Stone]

Worse still, the states that were supposed to be making defined contributions didn’t seem to be taking the process very seriously.

Chris Tobe, a former trustee of the Kentucky Retirement Systems who blew the whistle to the SEC on public-fund improprieties in his state and wrote a book called Kentucky Fried Pensions, did a careful study of states and their ARCs. While some states pay 100 percent (or even more) of their required bills, Tobe concluded that in just the past decade, at least 14 states have regularly failed to make their Annual Required Contributions. In 2011, an industry website called 24/7 Wall St. compiled a list of the 10 brokest, most busted public pensions in America. “Eight of those 10 were on my list,” says Tobe.

Among the worst of these offenders are Massachusetts (made just 27 percent of its payments), New Jersey (33 percent, with the teachers’ pension getting just 10 percent of required payments) and Illinois (68 percent). In Kentucky, the state pension fund, the Kentucky Employee Retirement System (KERS), has paid less than 50 percent of its ARCs over the past 10 years, and is now basically butt-broke – the fund is 27 percent funded, which makes bankrupt Detroit, whose city pension is 77 percent full, look like the sultanate of Brunei by comparison.” [Rolling Stone]

However, nothing stops the administrators of the Annual Required Contribution plans from drawing their salaries. Nothing stops the hedge fund managers and wealth managers from earning their money, and nothing stops the hedge funds, wealth funds, and bankers from getting nice bonuses from playing with these new Big Money Pots.

2013 also brought the disclosure of other pension swindles.  A report on North Carolina’s pension plan yielded the most opaque atmosphere surrounding a supposedly transparent pension system, with the Wall Street characters benefiting from the opacity:

“Today, TSERS assets are directly invested in approximately 300 funds and indirectly in hundreds more underlying funds, the names, investment practices, portfolio holdings, investment performances, fees, expenses, regulation, trading and custodian banking arrangements of which are largely unknown to stakeholders, the State Auditor and, indeed, to even the (State) Treasurer and her staff,” he reports. “As a result of the lack of transparency and accountability at TSERS, it is virtually impossible for stakeholders to know the answers to questions as fundamental as who is managing the money, what is it invested in and where is it?” [Salon]

How are the investors in the system (the state, the locality, the employees) supposed to act as “free” administrators of their own pension plans when they can’t discover who is managing the money, what investments have been made, and where the money is?  Much less ask what fees are being paid to the money managers of the new Big Pot?  In the initial example above, Rhode Island, state treasurer Raimondo couldn’t answer the question about the amount paid in fees.

President George W. Bush famously tread on the third rail of American politics, privatizing Social Security in 2005, and just as famously backed away from the precipice.  It seems that Americans have not forgotten what is supposed to be a “mainstream pension plan.”   If continued symbolic acts continue to be promoted by the Cato Institute and if there continue to be the likes of Iowa senator-elect Ernst who call for a hybrid plan in which younger workers are allowed to put a portion of their Social Security into a Retirement Savings Account (read: Wall Street Money Pot) we can’t declare the nation free of schemes to privatize Social Security.  If a state treasurer in Rhode Island who promoted the defined contribution plan in her jurisdiction can’t find out how much is being raked in by money managers, then how do we expect our average “younger worker” to effectively track his or her retirement account.

Thus we can look forward to more proposals for Hybrid Plans – which augment the Big Money Pot, and Defined Contribution Plans – which can’t be tracked and make a mockery of the entire concept of transparency, and more assaults on public employees who might be victims of the latest Great Burglary of their pension systems.  Elections do have consequences, and the last mid term election put more than $100 billion in public pension funds in the hands of financialists turned politicians.

1 Comment

Filed under Economy, financial regulation, Politics, public employees, Republicans

Let’s Save Capitalism

Adam Smith If we want to do something big why not craft a nationwide campaign to save capitalism?  Basic, dictionary definition capitalism:

“ (noun) an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, especially as contrasted to cooperatively or state-owned means of wealth.” [Dict.com]

Let’s declare, right out front, that capitalism is NOT a political system.  It does, however, require a political apparatus and infrastructure to maintain our economic institutions.   Let’s assume that Adam Smith was correct, that monarchical controlled monopolies and charters were counter-productive.  Indeed, Adam Smith was quite vehement on the subject of monopolies. He was particularly opposed to those guild members, shop keepers, and manufacturers who conspired to operate in the Wretched Spirit of Monopoly.”  [Kurz pdf]  He’d seen the results of  conglomerates such as the East India companies of Great Britain and the Netherlands – and he disapproved.   That critique hasn’t prevented the monopolists from mangling the message by adding a bit of  Mandeville here, adding a touch of Samuelson there; marinated in the toxic and sophomoric economics of Rand,  and devising a philosophy to justify unadulterated greed.

The problem for the Justification of Greed crowd is that at some point in the economic process someone has to buy something.  At least in the real world, someone must manufacture a product using primary products (minerals, timber, etc.) and then must transport the products to distributors (secondary) markets, so that ultimately a consumer will purchase the product at a price determined by the balance of supply and demand.  This, at its simplest, is pure capitalism.  We need more of it.

In America’s bifurcated economic system the financial sector, which once primarily facilitated the investment in the manufacturing, distribution, and selling of goods and services, has taken it upon itself to function for its own benefit – one all too often at odds with the Main Street economy it was meant to serve.

The financialists [Forbes]  discovered the gold to be mined from mountains of debt, and sought profit from the debt, the service of the debts, the trading of debt, the manufacturing of securitized assets based on debts, and they turned Adam Smith on his head:

“Adam Smith never espoused the beliefs that control our capitalist system today, that the only purpose of a business is to create shareholder value and that the unfettered market will effectively regulate itself. These two views have been widely adopted, without empirical foundation, by many influential financial and political policy-makers. They have been used to justify systemic deregulation and a maniacal focus on generating short-term earnings that are not necessarily real economic earnings.” [Forbes]

And, they’ve held sway for almost the last three decades:

“Over the last 25 years American capitalism has become financialism, which is primarily transactional, unrestrained greed. Financialism embraces the view that the only purpose of business is to create shareholder value, measured primarily by short-term results. The dominance of short-termism is evidenced by the magnitude of institutional stock “renting” for terms of 12 months or less, the volume of high-speed, high-frequency algorithmic short-term trading, the short average tenures of chief executive officers and the dominance of executive compensation tied solely to short-term results.” [Forbes]

In short, ‘faster and more volatile’ has replaced ‘visionary and more rational’ in our economic system.  And the politicians in place are either wedded to this financialism and actively abetting it, or they are such close allies that the differentiation is difficult to discern. Or to put it in harsher terms: The politicians are selling out the long term benefits of American capitalism for the benefit of short-term financialism.  What’s been the result?

“When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first,” said Piketty, “capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.” [Piketty, Farrell]

We might simplify this statement by saying: When the financialists take over the field from the capitalists the economic inequalities they create unleash havoc on our real economy and our national values.  Who warned us about this?  None other than the patron saint of financialists – Adam Smith:

“The disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition is the great and most universal cause of the corruption of our moral sentiments.” [Piketty, Farrell

Smith wasn’t quite finished with the Greedy:

“The great source of both the misery and disorders of human life, seems to arise from over-rating the difference between one permanent situation and another. Avarice over-rates the difference between poverty and riches: ambition, that between a private and a public station: vain-glory, that between obscurity and extensive reputation. The person under the influence of any of those extravagant passions, is not only miserable in his actual situation, but is often disposed to disturb the peace of society, in order to arrive at that which he so foolishly admires.” [Smith; Theory of Moral Sentiments]

So, what have we done for the past 25 years?  We de-regulated the avaricious, we praised the vain-glorious, and we rewarded those harboring these “extravagant passions” with riches beyond their dreams.  Then we declared it “good,” and “American” and the culmination of “Free Enterprise,” when in fact the effect was to “disturb the peace of society,”  and create such income inequality that it is difficult to sustain the basic capitalism we say we admire.

Politicians need to make their positions clear: Do you support American capitalism or do you support Financialism?  If the former, you are deserving of our praise and votes. If the latter, you need to be out of any office of influence until you understand that you are destroying the very system you purport to value above all else.

Comments Off

Filed under Economy, Politics

Curmudgeon Junction: Short Term Thinking Long Term Losses

Halloween Pumpkin Want something to be afraid of this Halloween week?  No, it’s not Ebola, nor is it ISIS, nor is it that some undocumented person will cast an “impersonation ballot” at some polling station… it’s Short Term Thinking.  Today’s rant from Curmudgeon Junction is a general grouse about the lack of foresight intrinsic in our economic and political institutions. 

The Economics of Myopia

The whole artificial edifice of Shareholder Value would collapse in a heap if the Management Interests would take a longer view of their corporate health.  When one’s interests are aligned with quarterly earnings reports, and the effect on stock market prices, then what we will get are executives who place cost cutting measures above the long term interests of the corporation.  It will be necessarily more important to lay off expensive workers than to promote long term corporate loyalty.  It will be necessarily more important to engage in stock buy backs than to allocate resources to research and development.  It will be necessarily more important to invent ever more exotic tax treatments and financial products than to invest in corporate expansion.  It will be necessarily more important to conflate the interests of trade with the interests of financial markets.  It will necessarily be more important to accumulate a profitable financial product revenue stream than to invest in modern plants and equipment.  And, this is a recipe for a witch’s brew for short term “results” and long term losses.

What U.S. steel industry?  Yes, U.S. Steel is still in business, but it’s no longer producing 67% of this country’s steel. [USX] Did anyone notice when U.S. Steel was removed from the Standard and Poor 500 Index? [NYT] Yes, the company has diversified, but it also moved in and out of some very risky propositions in the process, and simply surviving isn’t a particularly impressive item in comparison to actually thriving. 

VWonder Bread is back on the shelves, but why did the process have to be such a mess?  Let’s start with what financial writers are pleased to call a “highly leveraged capital structure with little room for error.” [Forbes]  And, we can add in an obsolete line of products – where was the investment in product research and development? And,  we can add in relatively high labor costs – which were cut in return for a promise (unkept) that the management would allocate resources into more efficient plants and equipment… So, the Twinkies got the axe, (rather later than perhaps that product line should have in the face of changing consumer trends), and the whole jerry-built private equity backed operation couldn’t take the strain of having to turn a mismanaged company around in the face of immediate capital needs.

Chevron made much of its prowess in developing alternative energy, it even created a renewable power group (CVX) and then shut the lights down.

“In January, employees of Chevron’s (CVX) renewable power group, whose mission was to launch large, profitable clean-energy projects, dined at San Francisco’s trendy Sens restaurant as managers applauded them for nearly doubling their projected profit in 2013, the group’s first full year of operations. But the mood quickly turned somber. Despite the financial results and the team’s role in helping launch more than a half-dozen solar and geothermal projects capable of powering at least 65,000 homes, managers told the group that funding for the effort would dry up and encouraged staffers to find jobs elsewhere, say four people who attended the dinner.” [Bloomberg]

The renewable power group created a net profit of $27 million in 2013, well above the $15 million target, so why did Chevron pull the plug? 

“When you have a very successful and profitable core oil and gas business, it can be quite difficult to justify investing in renewables,” says Robert Redlinger, who ran a previous effort at Chevron to develop large renewable-energy projects before he left in 2010. “It requires significant commitment at the most senior levels of management. I didn’t perceive that kind of commitment from Chevron during my time with the firm.” [Bloomberg]

Translation: OK, the renewables were making money just not enough money to get the attention of top management.  More translation: the Renewables group wasn’t making enough money in the short term to get management support in the long run.

How many investments banks are there in the United States? If you guessed Zero you got it right.  None, zilch, zip. We now have Bank Holding Companies, as the former high flyers on Wall Street sought the protection of the Federal Reserve to avoid financial oblivion in September 2008. [MotleyFool]  After running, ever so willingly, into the arms of the government in their debacle of 1002-2008, the bankers now want to revert to playing by their own rules – Repeal Dodd Frank – and re-engage in the same short term behaviors which brought on the collapse of the financial sector in 2007 and 2008.

The Politics of Myopia

There’s never been a shortage of self-serving myopia in politics. Ever.  Nor has there been a surfeit of times in which there was less costuming going on in political campaigns than there were little goblins out seeking confectionary items to put in their pillow cases.  However, turning the politics of fear into an art form, is to emphasize the fear and trivialize the long term prospects of hope.

So, we have politicians ginning up fear of a virus – of which we now have ONE case in the entire country  of 330 million people – to secure short term votes based on “Did the administration do enough?” Has the administration been strong enough?”  Probably – given that we have ONE case in a population of 330 million.   Notice, we’re not talking about (1) What should U.S. funding priorities be for the research and development of vaccines for relatively rare viral diseases which occur primarily in third world nations? or, (2) What should be the U.S. contribution to world wide efforts to eradicate viral infections?  Those would be long term questions – and we seem to have the attention span of fruit flies when it comes to politics.

The Media and Myopia

While we’re on the topic of viral diseases – has it occurred to anyone in the management end of public media that Wolf! is not to be carried to extremes, or have we missed that point from the kindergarten reading list?  How many times have we been told that Swine Flu!  Avian Flu! West Nile Virus! MERS! SARS! was going to be the End of Humanity! Or, close to it.   Now, it’s Ebola – and the media circus begins once more.  Has it not taken hold in the imaginations of media management that there may come a time when something like the Spanish Flu – a real pandemic – may creep up on us and because the “Wolf!” cry has been offered up so often and in such a dramatic way, that health care professionals will have trouble convincing the public that “This time it’s REAL?”  Are the monthly, or weekly, ratings really so important in the short run that we’d take this risk in the long run?

How many editors across the nation are assigning people to cover stories for which the reporter is simply unqualified?  That’s not ‘on’ the reporter.  If a reporter turns in a story about race relations in a mid-western city based on impressions made during a few nights of protest, with little or no background knowledge of the historic context, do we blame the superficiality of the reporting on the writer – or on the management which decided to cut back on the number of writers in order to “increase shareholder value?”  How many media outlets retain the services of several persons with a background in economics or finance to craft articles about our economy?  How many media outlets hire individuals with a background in history/sociology to write about race and ethnic relations?   How many can afford to?

It’s one thing to blast the banality of much political reporting – and another to remember that national pundits aren’t reporters.  The pundits are time fillers.  It’s expensive to send reporters to New Hampshire, Colorado, or Nevada. It’s more expensive to send them to Ukraine,  Burkina Faso, and China.  It’s cheaper to keep a pool of reporters in central locations and send “teams” out to cover events – whether or not the team members have any expertise in the regions to which they are sent.

In return for short term economies we get a long term prospect of sensationalized reporting on the dramatic and very little contextual information about subjects of greater long term impact ( such as, the efforts of Middle Eastern nations to come to terms with the historic impact of post World War I boundaries).  Are we hearing about what mega-studies of student learning models tell us about how children actually learn, or are we getting packaged news about how children in one city measure up against children in another on a high stakes standardized test?

Are we hearing about how most bridges in the United States are designed to last 50 years, and the average age of bridges in this country is 43?  Do we know that in just ten years one out of every four bridges in this country will be over 65 years of age, that would be some 170,000 of them. [BridgeReport pdf] Or, do we wait until another one collapses and more lives are lost? 

And so it goes. We’ll shove more and more eye-catching events with less and less context into the great maw of 24 hour news cycles until the information is granulized into particles about which the Time Fillers will offer interminable speculation because that’s what they’re paid to do – speculate. In the short term it’s entertaining – in the long run it isn’t conducive to a well informed electorate.

Worse still, we’ll probably keep doing this until the old song lyrics are true: “I get all the news I need from the weather report.”

Comments Off

Filed under ecology, Economy, Infrastructure, media, Politics

The Halloween Campaign Season

Halloween House It’s always great fun when Halloween and Mid Term Elections converge.   Or, as comedian Jon Stewart puts it, “We’ve got nothing to fear, but fear itself, so we’re going with fear.”   If I were really getting into the spirit of the campaign/Halloween season I’d put the Halloween candy up on the roof, take down the ladder and lock it up in the shed, and then tell the kiddies that if they are patient, hard working, diligent, and patriotic some day the candy will trickle down to their eager little mitts.

However, since I’m definitely not a Republican, the candy will stay on the porch where everyone gets a shot at it.   So, what’s scary this season?

Halloween Pumpkin

It’s three pumpkin scary that there are still a large number of voters who are clinging to the failed and long debunked hoax that what is good for Wall Street is necessarily good for Main Street.   Wall Street, and the financialists therein,  love the witches brew of mergers and acquisitions – whether the companies involved are actually improved or gutted – and tales of layoffs, off-shoring, and other devices to reduce costs and improve “shareholder value.”  Anything which reduces the expenses is received with joy, such as not paying their share of taxes by using accounting tricks and the ever popular Inversions.  

So, when faced with the probability that they might have to contribute their fair share or face their responsibilities, the corporate shills resort to dragging out their well rehearsed talking points – taxes cost jobs, the wealthy create jobs, taxes make us less ‘competitive,’ and regulations are a burden.  These lines are just so much mush in the core of an over-ripe pumpkin.

The good folks on Main Street and Elm Street are left holding the bag, every time a multi-national corporation plays games with the tax system Main Street and Elm Street have to foot the bills for roads, infrastructure, education, national defense, and health services.  

Halloween Pumpkin

Another three scary pumpkins for a political system so cynical that cheating is required to win.  There’s NO epidemic of voter impersonation fraud in this country.  An analysis of 2,068 cases of fraud in the entire nation since 2000 revealed that there were only 10 cases of voter impersonation fraud. There are approximately 146,000,000 registered voters in this country.  Do the arithmetic.  Your calculation should result in an answer of 6.84e-8.  (If that “e-8” is throwing you, just remember to move the decimal point place 8 places to the left.)

However, that infinitesimally small number hasn’t stopped candidates from advocating Photo ID laws, the purpose of which  is to reduce the number of the elderly, the young, the ethnic minorities, and the women at the polling stations.   We even have our very own Vote Suppressionist running to be the chief election officer (Secretary of State) in Nevada.  Voting suppression bills are enacted because voters buy into the fear-mongering about fraud, and the utterly illogical personalization talking point, “Would you want your vote to be canceled out by a fraud?”   The answer, of course, is “no,” but the odds against this actually happening are literally astronomical.

Halloween Pumpkin

It’s also three pumpkins scary we have media outlets which cater to the least attractive  human characteristics – like, fear and what it does to otherwise rational beings.   Yes, what the Islamic State proposes to do in Iraq and Syria is serious stuff, but remember the odds of being killed in a terrorist attack are 1:20,000,000.   The terrorists would no doubt like to get us sufficiently agitated so that we’d agree to send troops to their region, which would make it ever so much easier to kill Americans. 

And yes, the Ebola virus is a nasty little bug. However, it tends to thrive in places where medical facilities are both rare and not well regulated.  It seems to prefer places with inadequate sanitation infrastructure.  Thus far that does not describe the public health systems in North America and western Europe.  What should concern us more than the incidents are questions about how our privatized health care delivery services are to regulated in order to prevent outbreaks of any infectious disease.

There is an old bit of business advice which says, “You can’t control what you don’t own.”  We can apply the adage to public health care facilities.  Government standards can be enforced in public facilities, whereas under the current system of corporate health care standards come in the form of guidelines – the implementation of which may not be as uniform as we’d like. One relatively recent report says that public hospitals declined by 27% in major suburban areas from 1996 to 2002, and by 16% in major cities.  [AmMedNews]  Are standards of accreditation strong enough to maintain a level of health care practices in which the environment is safe for both the patients and the medical staff?  This question leads to our next set of pumpkins.

Halloween Pumpkin There ought to be three scary pumpkins awarded to the advocates of de-regulation.  The exploiters, polluters, and “shareholder value” advocates have been beating drums about “burdensome regulations” since the corporate interests organized their campaigns to repeal any law which impinged on their profits.  For example, since January 2011 the House of Representatives have voted 297 times to weaken public health and environmental protections. [CWA]  

Though the Enron Debacle seems a distant memory from 2002, the Republicans are still trying to repeal the Sarbanes-Oxley Act which sought to curb the abuses that allowed the scam to spread through the financial sector.  Opponents of financial regulation are still calling for the Act’s amendment or outright repeal in spite of the benefits stemming from its enforcement.   The Dodd Frank Act, enacted in the wake of yet more financial sector abuse, and the cavorting in the Wall Street Casino leading to the Housing Bubble disaster,  passed its 4th anniversary with more calls from the GOP to repeal it.

It would be remiss not to mention the REINS Act again.  This bit of legislation from the House is a de-regulator’s wet dream, and everyone else’s nightmare.  Congress would have to approve any and every regulation set forth by any agency of the federal government – environmental, financial, and (compliments of the Smith Amendment) public health. [See H.R. 367] Representative Jason T. Smith (R-MO8) offered amendment #450 which included all regulations under the Affordable Care Act.  This is as good a time as any to see what Representative Smith’s amendment would do in terms of hospital regulations.

Section 3025 of the ACA outlined a “readmission reduction program” which penalizes hospitals which have readmission rates higher than acceptable.  The idea was to get hospitals to use Best Practices (pdf) to reduce the readmission rate for cardiac patients, those who were at risk of being readmitted because of a lack of resources, and those who might show signs of infections after initial hospitalization.   Now, imagine the members of the House of Representatives “de-regulating” hospitals which have high readmission rates by refusing to approve the CMS standards.   That’s more money in the coffers of the 81% of Alabama hospitals which have been penalized; 82% of the hospitals in Arkansas which have been penalized; 89% of the hospitals in Illinois which have been penalized; and the 153 hospitals in Texas (out of 322) which have been penalized. [Kaiser]

Want to get scared again?  There’s credible research suggesting that hospital acquired infections affect the readmission rate [AmMedNews] and hence the regulations from Section 3025 relate to hospital sanitation practices and the prevention of hospital acquired infections.  Now, grab the remote and try to find a cable news channel that isn’t overloading the airwaves about Ebola. Quiver again, while thinking that Representative Smith’s little amendment could remove the incentive for corporately owned hospitals to literally clean up their acts.

Halloween Pumpkin

Instead of being fearful, let’s enjoy the Halloween season with thoughts of increasing the minimum wage and adding about $22 billion to our gross domestic product. [TP]  Or, we could think about further reducing our dependence on foreign oil by encouraging more solar power research, and ending the $4 billion annual subsidy paid by taxpayers to highly profitable Giant Oil Companies.  Or, we could think of reducing the burden on college students by allowing them to renegotiate or refinance student loans.  We could start by insuring students aren’t required to repay more than 10% of their annual income. [WH] We could improve the Voting Right Act and insure that everyone, in every state has an equal opportunity to cast his or her ballot.  We could enact legislation to require equal pay for equal work, improving family financial situations across the country.  We could employ people in our construction sector by starting to work on our infrastructure issues – our airports, dams, bridges, water lines, wastewater facilities, and  levees could all use some work.  [ASCE]  We could enact reasonable gun safety legislation.  And we could enact legislation to insure there’s no discrimination of any kind in American commerce.

The scary part is that none of these things will get started, much less accomplished, with Republicans sowing fear and discomfort – belaboring spooky apparitions like “Benghazzziiiii,” or “IRSssssss,” or “ISISssssss,” or other specters, wraiths, and spirits.   It’s Halloween after all, and  those are manufactured phantoms, nor more material than the costumes available at any big box store.   Instead of focusing on the Spooks of October, we ought to be enthusiastic about the opportunities in November, such as electing people to state and national offices who aren’t afraid of their own shadows.

1 Comment

Filed under Economy, financial regulation, Health Care, Iraq, terrorism, Vote Suppression, Voting

Thinking Minimum and Waiting For Yes

The minimum wage in Nevada is $7.25 per hour if the employer sponsors group health insurance policies, or $8.25 if health insurance is not part of the compensation package.  This doesn’t mean a person will automatically receive those wages because some employers are taking advantage of loopholes in current statutes [LVRJ] There are other elements which are the subject of FAQs on the Labor Commissioner’s web site. 

However, the bottom line is still that the minimum wage in Nevada is not a living wage.  The point is driven home in the realm of fast food operations, and there is talk of a bill in the upcoming session of the state legislature to raise the minimum wage to $15.00 per hour.   Because minimum wage levels are a topic inserted in the state constitution, the raise would have to pass in two sessions and go to the voters. [LVRJ]  The second important point is that Nevada job growth is showing in sectors which employ a high number of minimum wage workers – in the sector we are pleased to call “leisure and hospitality.”

Nevada Job Growth 2014

The median wage for a fast food cook in Nevada is $18,890 per year.  [DETR]  A counter attendant can expect median annual wages of $20,990. [DETR]   Now, look at the 2014 Federal poverty guidelines:

Federal Poverty lines 2014

Obviously, there’s ample evidence from the charts above to support the contention that if employers pay sub-living level wages, then the state and local governments must make up the difference in the form of social safety net programs. In short, the taxpayers are subsidizing the businesses. 

But, but, but…  Spare me the noble story of How I Started Mowing Lawns in the 7th Grade And Worked Up To….  Only about 7% of the low wage work force in this country is composed of teenagers.  This means 93% of low wage workers are adults.  Women make up about 60% of the low wage work force, and a growing number of low wage workers are men. [LWW]

But, but, butgranted that wages are low in retail and fast food sectors but this is insufficient to raise the minimum for everyone… yes, fast food work considered nationally makes up about 5% of low wage employment.  However, we’re forgetting about data entry operators, bank tellers, child care workers, teachers’ aides, home health care providers, maids, cooks, porters, cashiers, pharmacy assistants, parking lot attendants, ambulance drivers, dry-cleaning workers, hotel receptionists, and a plethora of other low wage occupations.   The median annual wage for a home health care provider is $26,170; for a bank teller $24,940; for a grocery cashier about $21,370.  None of these jobs would get a person with a family of four above the federal poverty line.

But, but, butif we raise the minimum wage that will actually destroy jobs… this bit of mythology has been around since time out of mind.  It’s purely theoretical, rising from the minds of well paid lobbyists from the United State Chamber of Commerce, and at least five academic studies have debunked it:

“A significant body of academic research has found that raising the minimum wage does not result in job losses even during hard economic times. There are at least five different academic studies focusing on increases to the minimum wage—including increases ranging from 7 percent to 12.3 percent made during periods of high unemployment—that find an increase in the minimum wage has no significant effect on employment levels. The results are likely because the boost in demand and reduction in turnover provided by a minimum wage counteracts the higher wage costs.

Similarly, a simple analysis of increases to the minimum wage on the state level, even during periods of state unemployment rates above 8 percent, shows that the minimum wage does not kill jobs. Indeed the states in our simple analysis had job growth slightly above the national average. [...]

All the studies came to the same conclusion—that raising the minimum wage had no effect on employment.” [emphasis in original] [TProg]

But, but, butthink of the Mom and Pop store… which we would except for the fact that 2/3rds of low wage workers don’t work at the corner bodega. 2/3rds of our low wage workers labor for large corporations.  For example, WalMart has seen profits grow by 23% since the Recession, Yum! Brands by 45%, and McDonalds by a hefty 130%, with help from U.S. taxpayers supporting their personnel.  [TP]  From the April 15th edition of Forbes we learn that WalMart workers cost U.S. taxpayers approximately $6.2 billion in public assistance.  One certainly wouldn’t want to disparage the efforts of the Walton’s to create a successful business – but on the other hand there’s no reason to give the ultra-rich family gifts from the taxpayers.  McDonald’s cost the U.S. taxpayers some $1.2 billion in public assistance. [HuffPo]  A billion here, a billion there, and soon, as the late Senator Everett Dirksen opined, it starts to add up to real money.  That would be real money Mom and Pop are paying in taxation to support their competition.

And then there’s the concept – repeated to the point of redundancy – that increasing wages increases aggregate demand, and increased demand produces increased sales, and increased sales yield increased profits – for any business, large or small.

We should be asking Nevada politicians who are out seeking our votes this season: Do you support raising the minimum wage in Nevada to $15.00 per hour?  If what comes back is a “No” qualified by the standard talking points – it’s just kids, or it’s just a few jobs, or it’ll kill employment – then the politician in question is simply regurgitating the corporate line, the big corporate line.  The big corporate lie.

We’re waiting for Yes.

Comments Off

Filed under Economy, Nevada economy, Nevada politics

Profits Without Prosperity

If there’s just one item which ought to be remembered from Vice President Biden’s recent  speech in Las Vegas it’s this – If the minimum wage were to be raised to $10.10 per hour this would add $19 billion into the national economy.  For 256,000 minimum income earners in Nevada that would pay for 19 months of groceries and three months worth of rent.  [LA-AP] So, if we really are “pro-business” then this information should be well received?

Once yet again to the point of unmentionable redundancy, here’s how we measure the growth in our national economy:

GDP formula

Consumer spending + business spending + government spending + the difference between imports and exports = the GDP.  So, why all the gnashing of teeth and tearing of hair over spending?  Why not promote that which will increase consumer spending? And why the inordinate attention to national spending?   Because the tail is wagging the dog.

The titans of finance – the banking sector – are wary of inflation.  That which puts more money into the hands of middle and working class families may cause inflation – the banker’s big bug-bear.  However, they’ve not mentioned the other side of the ledger; if income levels are dropping or if they remain stagnant those same bankers might be looking at deflation.  “The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.”

In other words, for average families the income will be spent.  Increasing the minimum wage would put more money into local businesses – furniture, appliances, groceries, clothing, entertainment, food service, hardware and home improvement, and so on.  However, for the top .01% whose income is primarily derived from investment earnings, increasing the minimum wage is of relatively little interest.  They are more interested in The Market (read Stock Market) than in the grocery market, the furniture market, the home improvement market, or the clothing market.

Not sure how this works?  Witness the plans for Hewlett-Packard to split up:

A close follower of the company’s stock price, Ms. Whitman may have also decided that the two separate companies would be worth more on Wall Street. Since Ms. Whitman became chief in September 2011, HP shares have risen about 50 percent. [NYT

HP also confirmed the split will result in the loss of another 5,000 jobs, in addition to the 45,000-50,000 layoffs announced with the company’s second quarterly earnings report for 2014 back in May. HP plans to invest the money saved in research and development, and projects full year non-GAAP (Generally accepted accounting principles) earnings of $3.83-$4.03 per share in 2015, not including one-time tax costs of the split. The companies will each have more than $57 billion in annual revenue.” [SDTimes]

There are structural reasons for the split, but the bottom line is that investors have decided the corporation would be more profitable split into at least two entities. And those 5,000 jobs lost?  The layoffs announced in May 2014?  The Market won’t be bothered by those at all; the value of the stock will increase whether or not the former employees are able to find new jobs, or have money to spend on housing, food, clothing, entertainment, furniture, etc.   The value of the stock is the pinnacle of success in the “Shareholder Value” construct of modern American capitalism.  There’s really nothing dramatically new about this – when share value for the sake of share value becomes the primary force in management then other considerations are necessarily secondary.

Hewlett-Packard’s focus on shareholder value isn’t unique either. Remember how the old Trickle Down Hoax was supposed to work? Corporations were supposed to have more revenue to invest on research and development, more to spend on expansion and hiring, more to spend on marketing and product sales?  Not. So. Much.

“Instead of investing in new plants, equipment and products, instead of paying their taxes and giving a long-overdue raise to their employees, big corporations are spending their record profits — plus gobs of newly borrowed money — to buy back their own shares and those of other companies.” [WaPo May 2014]

And we’re not speaking of just a few corporations, and the arithmetic is fairly simple:

“Meanwhile, the corporations of the Standard & Poor’s 500-stock index spent $477 billion last year (2013)  buying back their own shares, a 29 percent increase over 2012 and the most since the peak year of 2007. The idea behind buybacks is that they are a tax-advantaged way to return profits to shareholders by boosting the market price of their shares. Since the stock market tends to value companies by multiplying the profits per share times the number of shares, reducing the number of outstanding shares has the arithmetic effect of boosting the stock price. [WaPo May 2014]

During 2013 this “tax advantaged way to return profits to shareholders” was applied by 80% of the companies on the S&P 500.  This is precisely how Wall Street and the Corner Offices can see profits without prosperity. What we need to observe is the interplay between value creation and value extraction.  The Harvard Business Review explains:

“For three decades I’ve been studying how the resource allocation decisions of major U.S. corporations influence the relationship between value creation and value extraction, and how that relationship affects the U.S. economy. From the end of World War II until the late 1970s, a retain-and-reinvest approach to resource allocation prevailed at major U.S. corporations. They retained earnings and reinvested them in increasing their capabilities, first and foremost in the employees who helped make firms more competitive. They provided workers with higher incomes and greater job security, thus contributing to equitable, stable economic growth—what I call “sustainable prosperity.”

This pattern began to break down in the late 1970s, giving way to a downsize-and-distribute regime of reducing costs and then distributing the freed-up cash to financial interests, particularly shareholders. By favoring value extraction over value creation, this approach has contributed to employment instability and income inequality.”

Does that last sentence sound familiar?  So, we know that stock buybacks were popular as of 2013, how about 2014 – it’s now reported (Bloomberg) that 95% of the S&P 500 have engaged in the activity – of value extraction rather than value creation.   The Economist chimes in on the subject:

“Over the past 12 months American firms have bought more than $500 billion of their own shares, close to a record amount. From Apple to Walmart, the most profitable and prominent companies have big buy-back schemes (see article). IBM spends twice as much on share repurchases as on research and development. Exxon has spent over $200 billion buying back its shares, enough to buy its arch-rival BP. The phenomenon is less extreme in other countries, but is becoming popular even in conservative corporate cultures. Led by firms such as Toyota and Mitsubishi, Japanese companies are buying back record amounts of their own shares.”

Yes, stock buybacks can artificially elevate share prices, and give quick bucks to the short term investors.    Someone needs to flash on a yellow caution light.

“In 2013, 38% of firms paid more in buy-backs than their cashflows could support, an unsustainable position. Some American multinationals with apparently healthy global balance sheets are, in fact, dangerously lopsided. They are borrowing heavily at home to pay for buy-backs while keeping cash abroad to avoid America’s high corporate tax rate.” [Economist]

Yet when we have a corporate compensation system which rewards share value why would the CEO of Hewlett-Packard, or IBM, or any other major corporation NOT focus on share prices? Even if they are in peril of having lopsided ledgers. Even if they are extracting more value than they are creating?  Even while they are avoiding America’s corporate taxes? The GAO calculates the actual tax rate paid by these corporations at 12.6%. [CNN]

So, instead of creating value (building new plants, new equipment, new products, paying taxes, or raising wages and salaries) the companies are busy trying to extract value at the risk of making themselves uncompetitive. The financialists, focused as they are, on short term investments, in debt incrusted corporations, are far more interested in value extraction than in value creation, and that’s how we get profitability without prosperity.

Capitalism requires value creation, a balance of consumers and producers, and the accumulation of assets. Financialism is focused on value extraction, feeds on the notion that one firm’s debt is another M&A firm’s asset, and demands that “costs” whether for plant upgrades, employee wages, or research and development not impinge on the “tax advantaged ways to return profits to shareholders.”   The Economist closes the argument: “shareholder capitalism is about growth and creation, not just dividing the spoils.”

The creation of value means investing in more products, better products, more goods, better goods, more services, better services – and now we’re back to the point at which we need to restart the conversation about how to increase aggregate demand for these goods and services – by increasing the minimum wage.

Comments Off

Filed under Economy, financial regulation