Tag Archives: deflation

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.

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Filed under Economy, financial regulation

Senator Heller: Any Talking Point In A Storm

Nevadans have a relatively clear choice in the 2012 election between two Senate candidates who are examples of two entirely different political and economic philosophies.   Senator (By Appointment Only™) Dean Heller (R-NV), who has demonstrated a few precious moments of moderation, has more often illustrated the politics of the Senator Jim DeMint (R-SC) brand of ultra-right side of the aisle protection of corporate and financial interests.  His opponent Rep. Shelley Berkley (D-NV1) has more often sided with the interests of middle class working families, consumers, and small business interests.

Our first clue that Double Dean Heller isn’t espousing a critical view of large corporate and financial institutions in America comes from his choice of buzz-words.  He is pleased to tell us that he voted against “taxing small businesses and job creators.” [Heller]

It should be remembered at this point that Senator Heller supports the Republican expansive definition of what constitutes a “small business,” i.e.  The differentiation between small business enterprises as they are commonly known, and small business enterprises as they are generously defined by the Republican Party has been discussed at some length previously; notably HERE, and  here in a 2010 post.   Cutting to the chase, the GOP definition includes K-Street lobby shops, some major law firms, and anyone else who can squeeze into the “small business” tent because they employ fewer than 500 people.

Secondly, Senator Heller’s use of the term “job creators,” is instructive.   There’s nothing particularly original about the term, in fact if we climb in the political time capsule and return to 1993 we’ll find the Republican members of Congress balking at President Bill Clinton’s upper income tax hikes, calling them “job killing.”  “At issue was President Bill Clinton’s $496 billion program of stimulus and upper income tax increases. And what Republicans then decried as disaster ushered in the longest economic expansion in modern American history, a period which produced 23 million new jobs and a balanced budget.” [Perrs]

Not only is there nothing new about the “job creators” term, if the object is to reduce the federal deficit and to create jobs in the United States, then the Clinton tax hikes and economic policies were Job Creating.  Witness the following chart from the Center For American Progress:

This somewhat elderly tried and true graphic shows the marginal tax rates at the bottom — note what’s NOT happening in terms of job growth in the left hand side of the chart.  While there may be several factors in play concerning tax rates and job growth, what cannot be demonstrated is a causal relationship between low marginal income tax rates and increased employment.

Additionally, IF balancing the federal budget is a desirable thing, and Senator Heller touts his votes for various balanced budget legislation, then one obvious way to do that is to follow the recent example of the Clinton Administration and raise the marginal rates on the wealthiest among us — the 0.1% — and seek to replicate the budget balancing accomplishment of the Clinton Administration which left office with a tidy surplus. [FactCheck]

There’s another graphic we should dust off and  haul out of the vaults one more time, because it serves to illustrate the difference between Budget Deficit Hawks and Budget Deficit Chicken Hawks, a Chicken Hawk being one who squawks loudly about “OMG the sky is falling we have a no-good horrible terrible heinous humdinger of a deficit/debt” and then supports the very policies that created the aforementioned debt.

Again, what’s that wide swath of burnt orange comprising the largest portion of contributing factors to the current deficit?  BUSH TAX CUTS.   Who still supports extending the Bush Tax Cuts for the wealthiest Americans?  Senator Dean Heller (R-NV).

The Case of the Small Business Jobs Act

One piece of legislation we can use as a touchstone to measure willingness to support the interests of small businesses is the 2010 Small Business Jobs Act.

On Sept. 27, 2010, President Obama signed into law the Small Business Jobs Act, the most significant piece of small business legislation in over a decade. The new law is providing critical resources to help small businesses continue to drive economic recovery and create jobs. The new law extended the successful SBA enhanced loan provisions while offering billions more in lending support, tax cuts, and other opportunities for entrepreneurs and small business owners. [SBA]

When the bill came up for a vote in the House of Representatives on June 17, 2010 one member of the Nevada Congressional delegation voted in favor of the bill — Rep. Shelley Berkley (D-NV1); Rep. Dean Heller (R-NV2) voted against it. [GovTrack]

The Case of the Economic Development Revitalization Act

Section Seven of the EDR Act in the 112th Congress would have boosted the U.S. economy, with specific attention on public works construction projects and planning:

“Modifies provisions regarding grants for planning and administrative expenses for public works and economic development to authorize funding for: (1) fostering regional collaboration among local jurisdictions and organizations, and (2) facilitating a stakeholder process that assists the community or region in creating an economic development vision that takes into account local and regional assets and global economic change. Requires any overall state economic development planning assisted to be part of a comprehensive planning process that considers the provision of public works to support practices that enhance energy and water efficiency, reduce U.S. dependence on foreign oil, and encourage efficient coordination and leveraging of public and private investments.”

However, this provision and others in the bill which might have boosted the lagging construction sector faced the usual Republican filibuster in the Senate.  When a cloture vote was called on June 21, 2011 Senator Dean Heller (R-NV) voted to sustain the Republican filibuster. [roll call 94]

The vote is interesting given that in February 2011 the situation in the Nevada construction sector was pretty dismal:

About 70,000 of the 180,000 jobs lost in Nevada during the recession were construction related, said Bill Anderson, chief economist of the Nevada Department of Employment, Training & Rehabilitation.

Some of those workers told lawmakers that they are still out of work after being unemployed for two to three years.  [RGJ]

The problem with the opposition logic to public works bills is that if a significant sector is experiencing high unemployment a drag is created on local economies because of lost wages and salaries.  Lower wages or lost wages mean less demand, and less demand further depresses the local economy.  For all the fretting about the perils of inflation, it’s the deflation cycle which puts the greatest strain on economies.  If we’re truly worried about a long and tedious recovery from the Crash of 2008, then one way to speed up the process would be to relieve the drag created by long term unemployment in the construction sector.  This would benefit construction companies and their employees.

The Case of the American Jobs Act

S. 1549, sponsored by Senator Harry Reid (D-NV), another attempt to move Congress off the dime and move on infrastructure needs and construction industry hiring, was introduced in the Senate on September 13, 2011 — and it’s still sitting there — locked in the logjam that has become the legislative process in Washington, D.C.

When a portion of the bill was brought forward to provide funds to hire teachers and first responders on October 20, 2011, Senator Heller voted against it.  [TPG]   Senator Heller castigated the bill as “another stimulus,” and pointed to the “failure” of the initial ARRA to put a dent in Nevada’s unemployment rate.  Senator Heller was at some pains to posit a direct correlation between a bevy of legislation and the increase in Nevada unemployment rate.  [YouTubeVideo] If anyone is looking for a classic presentation of post hoc ergo propter hoc this would be it.

That the ARRA failed is an article of faith among Republicans, and that’s all it is because the numbers don’t support the contention.

From the Congressional Budget Office: What did the Stimulus Bills do?

They raised real (inflation-adjusted) gross domestic product by between 1.1 percent and 3.1 percent,  Lowered the unemployment rate by between 0.6 percentage points and 1.8 percentage points, Increased the number of people employed by between 1.2 million and 3.3 million, and Increased the number of full-time-equivalent (FTE) jobs by 1.6 million to 4.6 million compared with what would have occurred otherwise. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers).

The Congressional Budget Office wasn’t the only source of optimism, “The End of the Great Recession,” authored by Mark Zandi (Moody’s) and Alan S. Blinder, Princeton University, (pdf)  noted what Senator Heller failed to acknowledge — that without the ARRA (Stimulus) and other federal interventions the Recession could have been far worse.  The Federal Reserve Bank of San Francisco (pdf) also weighed in making an astute observation that economic multipliers may have differing impact on national and regional numbers, but the effect was essentially the same — ARRA saved jobs.

Both Ways?

Our first clue that Senator Heller is repeating Party talking points rather than offering substantive proposals for economic growth was the “jobs creator – small business” rhetoric.  It sounds ever so much nicer to speak of those in the top 0.1% of American income earners as “job creators” than to describe them as hedge fund managers, financial sector executives, and merger & acquisition specialists.

Our second clue is that Senator Heller seems impervious to hard data on the source of our current federal deficit and debt, and the lack of a causal connection between marginal income tax rates and actual economic growth.

The third clue is that Senator Heller has voted against or refused to support bills that would relieve unemployment in the public sector (teachers, police, firefighters) and to create jobs in the hard pressed Nevada construction sector.

The fourth clue is that Senator Heller relies on the post hoc ergo propter hoc   fallacy to justify his opposition to any legislation which might serve to enhance “economic multipliers” or to save or create jobs.  Again, he espouses the GOP Article of Faith (All Stimulus Measures Were Failures — which the Republicans were announcing before the laws took full effect) rather than look to the actual numbers.

Doubling down on talking points doth not an economic vision make.

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Filed under 2012 election, Berkley, Economy, Heller, Nevada politics, Politics, public employees