Tag Archives: Financialism

Yes, He IS That Stupid? Economics for Ultra Dummies

It’s March 5th, 2018 and the occupant of the White House has just announced — by a tweet as usual — “He tweeted out Friday morning that for the United States, a trade war is “good” and “easy to win.” This is July 3rd, 2018 and evidently le crétin economique still believes this.  There are three very simple reasons why this belief borders on insanity:

First: Prices will go up.  Why? Because in order for prices to remain the same or decline the product must be manufactured in the “home country” at a level which would fill the gap between imported and domestic goods.  Buh, buh, buh but — then American manufacturing will increase to fill the gap! Hooray!!  Maybe eventually, and eventually is always the dearest vision of the economic theorist while the rest of us try to buy our beer in aluminum cans rather more immediately, and there’s another little sticky spot.  For some time now DB’s railed about “financialism” and the propensity of the financial markets to “manufacture” and sell “paper.”  DB’s howling notwithstanding, the US has been primarily a “service economy” for some decades (yes, that’s decades) now and while our manufacturing output and sales may be on the wane our “export” of service related products is definitely not.  As in last year we had a $243 billion services trade surplus. [CNN money]  Please don’t try to tell me Mr. “I went to U PA” just not the famous economics school therein… hasn’t at least grasp the nonsensical nature of starting a trade dispute with countries with whom we have service surpluses… oh, wait… he did already.

 The U.S. goods and services trade surplus with Canada was $8.4 billion in 2017. […] Trade in services with Canada (exports and imports) totaled an estimated $91.5 billion in 2017. Services exports were $58.7 billion; services imports were $32.8 billion. The U.S. services trade surplus with Canada was $25.9 billion in 2017. [USTR]

We could speak of regional trading hubs and re-exportation of goods at this point, but let’s not, it would only confuse him.

Secondly, interest rates could easily go up.  There’s already some pressure for increasing interest rates given the increases expected in the federal debt.  We know, that federal debt the GOP’s been screaming about for years? That debt.

“One thing keeping rates in check so far is the demand for US debt from overseas. America’s foreign trading partners, including China, are among the largest buyers of that debt. It added $127 billion to its holdings last year and now owns more than $1 trillion in U.S. debt, making it the largest foreign holder of our debt.

The trade deficit that President Trump decries is one of the reasons for those holdings. It gives foreign countries a powerful incentive to buy that debt, since they have to do something with the dollars they get back on those sales.”  [CNN money]

Shrink the trade gap = less incentive = significant increase in interest rates.

Third reason, American businesses will lose sales.   Much effort is expended reaching deals for the sale of everything from pharmaceuticals to auto parts.  Remember all those sales and marketing divisions? The ones in every major corporation in this country? The departments and divisions pitching products in every corner of the globe?  Let American products become less competitive because of trade restrictions, and then watch foreign buyers find new suppliers.  Business Rule #1: Losing customers is never a good idea.

So, what went on this week?

“Canada over the weekend imposed tariffs on $12.6 billion in U.S. goods in retaliation for U.S. levies on steel and aluminum. On Friday, China is set to slap levies on $34 billion in American goods like soybeans in response to a symmetrical imposition of tariffs by the United States on Chinese goods. Also last week, the European Union sent a letter to the Commerce Department threatening to implement tariffs on $290 billion in American goods if Trump follows through with his desire to crack down on foreign autos.”

Remember not so long ago when DB was bellowing about soybeans?  Yes, DB is back to bellowing about soy beans.

Threatening tariffs may be a negotiating tactic, but at some point the other party will reach a point at which they tire of the gamesmanship.  Reality sets in, deadlines come, and the skirmishes begin.  World Wars can with something as dramatic as the invasion of Poland or the bombing of Pearl Harbor; however, World War I began with an assassination in Sarajevo.  The US Civil War can be said to have begun with attacks and counterattacks in Kansas.  The problem with skirmishes is that unless they are carefully controlled they can spiral beyond retrieval, the results are usually not pretty.

There is also the poker element; eventually a bluff will be called.  We’re not far from the Canadians and Chinese calling our bluff, the EU as well for that matter.   Someone in a position of responsibility ought to have the wisdom to know when to (and not to) bluff; when to fold; when to up the ante.  In short, there has to be some adult supervision.  My way or the highway is almost never a strong negotiating position.  Bullies often have accomplices, but they rarely have wing-men.

Thus the Business Roundtable, the US Chamber of Commerce, and other organizations not generally perceived as bastions of liberal thought will decry the Administration’s tariff and trade policies, academics will refer to the Smoot Hawley Tariff Act of 1930, and citizens will watch the price of can of beer increase as the cost of the aluminum can increases.  And all because  le crétin economique thinks in bumper stickers.

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Filed under Economy, Politics

The Great Bamboozle: GOP Tax Plan Targeted Right At the Middle Of The Top 1%

There are some amazing feats of verbal legerdemain going on as Republicans try to explain why their Jam It Through Tax Plan isn’t a real bag of snakes.

Oh, don’t worry about our plan…people want to see an improving economy…people want to see more in their paychecks…now 90% of the people can file a simple return…there’s a lot of wishful thinking going on here, and most of it is wrong.  The political advertising is going to write itself in 2018.

Senator Maria Cantwell (D-WA) is correct to say that “haste makes waste,” and in its haste the GOP is about to unload both barrels into their own feet.

The tax cuts will explode the debt.  Remember all the times the GOP told us that debt is a problem?  It certainly can be.  When there was a Democrat in the White House the Heritage Foundation positively screamed about the impact of increasing the national debt:

Current and projected increases in government debt, cutting into future economic growth rates, also mean slower future growth of government revenues. Even as future interest expense rises as taxpayers are called upon to service all this debt, growth in government revenues will slow, leaving less available for other priorities, such as national security and economic security, education, and innovation-driving research.

The only difference now is that the accumulated deficits will be driven by a Republican penchant for rewarding the investor class with amazing tax cuts.  Now the argument is reversed: there will supposedly be More revenue, More innovation, More funds for national security and research.  No there won’t. And we don’t need to kid ourselves, because the same basic economic elements are going to underpin the new tax/budget structure that are girding the current one. 

Nothing in the tax bill reverses the current emphasis on short term gains. The GOP is fond of pointing to gains in the stock market as “proof” of its stewardship of economic growth.  There’s an obvious problem with this, as noted by the Chicago Tribune:

Nearly half of country has $0 invested in the market, according to the Federal Reserve and numerous surveys by groups such as Gallup and Bankrate. That means people have no money in pension funds, 401(k) retirement plans, IRAs, mutual funds or ETFs. They certainly don’t own individual stocks such as Facebook or Apple.

So, nearly half the population has Zilch invested in The Market. What about the others?  While people don’t generally have elephantine memories, 2008 isn’t that far in the rear view mirror, and that’s part of the reason about 54% of Americans have some sort of investments, as opposed to the 62% prior to the Big Crash of 2007-08.

Further,  there’s some recent research indicating the decline isn’t over.

Rosenthal and Austin’s main focus was the precipitous decline of taxable investment accounts. In 50 years, the amount of stock owned by individual investors and funds outside retirement and nontaxable accounts such as 529 college-savings plans has dropped off a cliff — to about 25% in 2015 from over 80% in 1965.

But wait, there’s more:

The other startling finding was the growth in foreign investment in the US stock market. What was once a small sliver of the makeup now accounts for a quarter of all stock ownership at $5.5 trillion. Part of this may be due to increasing wealth in foreign countries, but, as the researchers noted, it could also be influenced by corporate inversions, in which foreign-domiciled firms have large direct holdings of US-based stock.

So, we have a structural situation in which the percentage of individual investors is declining precipitously, the percentage of institutional investors is increasing, as is the percentage of foreign investors.   It doesn’t take much effort to perceive that the produce of stock market gains aren’t going to benefit most Americans, but should assist institutional and foreign investors.

But surely those institutional investors will be looking for long term investment prospects and will act as a curb on short term pursuits as exemplified by hedge fund operations?  Nupe.  That part of the structure hasn’t changed either.  It’s not happening:

Across the world, a clamor is rising against corporate short-termism—the undue attention to quarterly earnings at the expense of long-term sustainable growth. In one survey of chief financial officers, the majority of respondents reported that they would forgo current spending on profitable long-term projects to avoid missing earnings estimates for the upcoming quarter.1

Critics of short-termism have singled out a set of culprits—activist hedge funds that acquire 1% or 2% of a company’s stock and then push hard for measures designed to boost the stock price quickly but unsustainably. 2 The typical activist program involves raising dividends, increasing stock buybacks, or spinning off corporate divisions—usually accompanied by a request for board seats.

If corporations increase profitability I am hearing, “raising dividends, increasing stock buybacks, and mergers, acquisitions, and spin offs.  I am NOT hearing investment in plant expansion, workers’ wages, and company benefits.  And, I’m certainly not hearing anything about encouraging the promotion of taxable investment accounts, the kind that  puts revenue into the Nation’s coffers.

Nothing in the tax bill addresses wage stagnation.   And, no, this is not a myth:

“After adjusting for inflation, wages are only 10 percent higher in 2017 than they were in 1973, with annual real wage growth just below 0.2 percent.[1] The U.S. economy has experienced long-term real wage stagnation and a persistent lack of economic progress for many workers.” […] ” The portion of national income received by workers fell from 64.5 percent in 1974 Q3 to 56.8 percent in 2017 Q2.”

Ouch.  Somehow, the Growth Fairy is supposed to be so enamored of tax cuts for corporations and wealthy individuals that more greenbacks will float down and squirm into the pay packets of average American workers.  Probably not, and putting more dollars into the pockets of institutional investors — foreign and domestic — isn’t going to be all that helpful either.  So, not only does the tax plan not address short term-ism, it doesn’t really address paycheck issues either.

But Wait! How about increasing the child tax credits and standard deductions?  It’s no secret that those people earning $75,000 or less aren’t going to be the big winners in this tax bill.  “The tax bill Senate Republicans are championing would give large tax cuts to the rich while raising taxes on American families earning $10,000 to $75,000 over the next decade, according to a report released Thursday by the Joint Committee on Taxation, Congress’s official nonpartisan analysts.” [WaPo]

But, but, but…Your tax filings will be simpler!  Simple doesn’t matter if you aren’t getting your taxes cut.  And, if the tax preparation deduction is eliminated then there are going to be some mom and pop franchises in serious straits — those just happen to be local small businesses as well.

But, but, but…jobs won’t go overseas!  You can only dream.  The arguments get a bit into the economic weeds, into territorial taxation, but the bottom line is clear:

This might seem like a small difference, but the design of their global minimum tax creates perverse incentives for companies to offshore jobs and shift profits to tax havens—outcomes that a per-country minimum tax would avoid.

Perverse indeed, especially if one expects the new tax plan to provides incentives for companies to expand operations domestically.  Nothing in this plan actually and directly promotes domestic expansion in the economy — it’s all indirect and absolutely hopeful, perhaps even illusory if not downright delusional.

In the meantime, Medicare will be facing cuts of about $25 billion.  There will be calls to “reform” Social Security” in order to reduce the debt — translation: Higher requirements for fewer benefits.  There will be calls to cut SNAP programs — not a drop in the bucket needed to fill the debt hole; and, educational funding — another squeeze on programs that actually help people eventually earn higher wages.

This won’t prevent Republicans like Nevada’s Senator Dean Heller from enjoying the passage of a “great tax cut,” while he hopes to high Heaven no one in the state notices cuts to Medicare, Medicaid, Childrens’ Health Insurance, and no one talks about increased premiums in the individual health insurance market.  Perhaps no one will notice that graduate students at UNR and UNLV are supposed to pay taxes on tuition waivers while they’re actually earning minimum wages for part time jobs?  No one will notice the reduction in home mortgage interest deductions?  No one will observe the reduction or elimination of deductions for major medical expenses — much of which will be out of the pockets of the elderly.

My guess is that Nevadans will notice.  The political ads may, indeed, write themselves.

 

 

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Filed under health insurance, Heller, Nevada economy, Nevada politics, Politics, Taxation

Fantasy Island: GOP on Corporate Taxation

There is a mandatory mantra to be recited by all proponents of the Republican tax cut plan:  “It will make corporations more competitive. It will raise employee wages.  It will make corporations more competitive. It will raise employee wages. It will make corporations more competitive.  It will raise employee wages. This really requires some unique methodology and some very creative logic. [FC]

First, there’s the obvious proposition that when Republicans speak of “competitiveness” they are addressing a global market for goods and services. Further, being competitive usually means being able to offer goods and services at lower costs to customers and clients.  And, being able to offer goods and services at lower costs means having a grip on factors which increase costs — things like labor.  If there isn’t any obvious connection between “competitiveness” and increasing wages then how can the contentions be contorted to make the mantra lucid?  We probably can’t, at least not until we agree on what we mean by “competitive.”

Whether a nation is competitive hinges instead on its long-run productivity—that is, the value of goods and services produced per unit of human, capital, and natural resources. Only by improving their ability to transform inputs into valuable products and services can companies in a country prosper while supporting rising wages for citizens. Increasing productivity over the long run should be the central goal of economic policy. This requires a business environment that supports continual innovation in products, processes, and management. [HBR]

If we accept the Harvard Business School’s thesis, then the policies we should be adopting to promote competitiveness would be (1) conducive to research and development; (2) that which promotes greater efficiency in the delivery of services and the manufacturing of goods; and (3) that which promotes better management practices.  I don’t see “tax cut” in this list.

Tax policy that encourages research and development, promotes efficiency, and encourages better management practices, might be a start.  However, that doesn’t seem to be what the White House and Congress have in mind.  For example, there’s the tax repatriation scheme — which was tried in 2004, and the result as reported by the Wall Street Journal was:

“The 15 companies that benefited the most from a 2004 tax break for the return of their overseas profits cut more than 20,000 net jobs and decreased the pace of their research spending, according to report from the Democratic staff of the Senate Permanent Subcommittee on Investigations released Monday night.”

“Decreased spending on research” doesn’t fit the formula for increased competitiveness.  Far from it, as in antithetical.  How about promoting long term visions on the part of corporate management?

“Even as managers’ geographic horizons have broadened, their time horizons appear to have shortened. Shareholder activism, stock-based incentives, and declining managerial tenure surely injected new, needed discipline into American business and had some positive effects. However, financial markets and executive compensation practices that reward quick fixes and focus attention on “this quarter’s numbers” can tempt managers to move business activities to whatever location offers the best deal today rather than make the sustained, location-specific investments required to boost long-run productivity. ”  [HBR]

Returning to a consistent theme on this site, short term “financialist” perspectives won’t promote American competitiveness.  However, nothing in the guidance on tax cuts thus far  demonstrates any broad interest in long term productivity.  Indeed, it appears to move right along, in step, with the financialist rhetoric.

So, the Republicans and corporate allies argue that cutting corporate taxes will increase wages.  Before we get lost in the weeds there is a general point to be made about the corporate tax burden and employees:

“Three nonpartisan organizations — the Joint Committee on Taxation, the Congressional Budget Office and Tax Policy Center — all say the majority of the corporate tax burden falls on shareholders, not workers. The Treasury Department, which Mnuchin now heads, reached that same conclusion in 2008 during the George W. Bush administration.”  [FC]

To make a long story a bit shorter — if less of the corporate tax ‘burden’ is hefted by the employees, then the less of a ‘tax break’ the employees will receive if the corporation pays less in taxation.  Some work is required to make the data fit the results desired by the Republicans:

“…the CRS states that while “a number of more recent theoretical studies find that labor can bear the majority of the [corporate] tax burden” those studies “appear to rely critically on particular assumptions that drive the results. When these assumptions are relaxed the burden of the corporate tax is found to fall mostly on capital — in line with the traditional analysis.”   [FC]

Thus, only in the highly theoretical fantasy land of Republican economists will we find support for the notion that lower taxes automatically make our businesses more competitive, and lower corporate taxes will necessarily make businesses pay higher wages.

Unfortunately, none of this will stop the Republican propaganda machine from cranking up the volume and increasing the repetition of their mantra, until it is picked up by Republican members of Congress who will recite it in turn to their constituents.

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Filed under Economy, Politics, Taxation

Anti-Choice: The Rebirth of Deregulation

I don’t think anyone in the state of Nevada doesn’t know what happened the last time Wall Street was left unfettered.  The Bubble splattered all over the state.   The offcast included 167,000 empty houses. [USAToday]  Nevada’s unemployment rate soared to 12.8% by December, 2009.  By October 2010 the state’s unemployment rate was 14.4%.  And now the House of Representatives is on track to vote on H.R. 10, the “Choice Act” to dismantle the financial regulatory reforms enacted in the wake of the Housing Debacle and deregulated banking disaster.

Two procedural votes are on record to move this bill forward — House vote 290, and House vote 291 — and Representative Mark Amodei voted in favor of bringing this bill to a vote by the full House.   Watch this space for an update on the vote for passage.

Update:  On House vote #299, Representative Mark Amodei (R-NV2) voted along with 232 other Republicans to essentially gut the financial reform regulations enacted in the wake of the Housing Bubble debacle. (HR 10)

Representatives Kihuen, Rosen, and Titus voted against this deregulation bill.

Comment: Be aware of Republican representatives to frame this vote as one against Bank Bailouts and “Too Big to Fail.”   In a polite world we’d call this something euphemistic like “south bound product of a north bound bull.”  The Dodd Frank Act requires banks to have a plan for unwinding failing banks, and bankers have screamed to the heavens about provisions to allow outside oversight of banking management.  More simply, if you approve of the antics of Wells Fargo — then you’ll love the “Choice Act,” a bill which gives banks the “choice” to skewer its customers and investors.

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Filed under Amodei, Economy, financial regulation, Nevada economy, Nevada politics, Politics

Republican Myths and Legends

Good morning, another day another 24 hours of trumpster fires, lit by the tinder of well worn Republican mythology.

The Economy Works In Reverse.  Let’s guess that the whopping increase in defense spending will be covered by an increase in “economic growth.”  I doubt very seriously that my utility company would be much impressed by my assertion that increases in my power bill will be paid for by my getting up an hour and a half earlier every morning.  The argument would go “because I get up earlier I will be more productive, and if I am more productive then my earnings will increase. If my earnings increase then I will have more money to spend, and therefore my bills will ‘pay themselves.'”  Gee, perhaps if I aroused myself two hours earlier I could trade my vehicle in for a Cadillac CTS-V? Somehow, I don’t think my banker will be sufficiently enamored of my presentation to hand over the money.

There’s another facet of the administration’s fantasy economy which we need to discuss, at least two ways in which while waving its firearms it shoots itself in the foot.  Round one into the metatarsal — anti-immigration rhetoric and action.  Before theorizing about economic growth, the GOP might want to look at economic activity in our major urban centers, which depend in no small part on their immigrant communities.

Round two into the navicular bone comes compliments of heavy budget cuts. For the millionth time in this blog, there’s a formula for the gross domestic product.  Once more C+I+G + (Ex-IM) = GDP.  That G stands for government spending, and not just defense spending.  Want to expand the consumer economy? Then remember that every dollar spent on the SNAP program almost doubles in economic activity.

Round three into the phalanges: Seek to limit increases in the minimum wage.  Evidently it has not occurred to GOP economists that people do not spend money they do not have.  They can accumulate debt (which Wall Street is only too happy to securitize) up to a point, but the point is quickly reached. Delinquency happens, leading to defaults, leading to the unraveling of all those beautifully packaged tranches of securities.  We know what happened last time.

Round four into the cuboid, continue the progress of income inequality, the trends of which promote the accumulation of wealth into fewer hands, creating a surplus to be used not for corporate promotion and expansion but for the collection and trading of risk diversion securities or for corporate buy-backs which do NOT generate economic growth in the overall economy but bolster the financial sector.  Have I been railing about Financialism before? Constantly?

Four shots into the foot and we’re not walking, much less running, anywhere towards overall economic prosperity.  It’s the return of the old, stale, Trickle Down Supply Side Hoax nurtured and pampered by right wing think tanks and GOP orthodoxy.

And now, we should return to a discussion of why we need an independent commission to investigate the political and economic ties of the Trump-Bannon regime to the Russian government. We might also want to avoid the trap of calling for a special prosecutor, which would only have the authority to investigate outright crimes, when what we need immediately is an investigation into the possibly profound security risks in the executive branch.  But that’s a discussion for another post.

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Filed under conservatism, Economy, financial regulation, Politics, Republicans

The Warning Flags are Up: Trumpsterism and Corporate Debt

Corporate Debt Chart 2016

No, you don’t need to get out the magnifier to get the gist of this chart, but if you’d like to see the original click here.  Simply consider the trajectory of the blue line indicating the level of non-financial corporate business debt – as in UP.  Nevadans may want to gaze at this with some caution, because (to borrow and vandalize a fine old saying) the last time the national economy caught a cold, Nevada got pneumonia.  We can, and should, look at the comparison in the trends of corporate debt, government debt, and household debt:

Corporate Government Debt Levels

In the last five years government debt has dropped precipitously, (don’t show this chart to Uncle Fustian at your holiday dinner it’s likely to jolt his fact free universe) household debt has declined, and “business debt” is way up.  There are all manner of reasons for an increase in corporate debt, and some of them are very productive – such as expansion of plants and factories – others not so much.  We’re in “maybe not so much” territory.

Part of the pile of current corporate debt is the result of stock buy backs, a boomlet of sorts in recent times:

“Over the first six months of the year (2016) S&P 500 companies paid out 112 percent of their earnings in the form of either dividends or share buybacks. That, Damodaran argues, is the kind of figure you might expect to see when a recession had suddenly crimped company cashflows, not during a very long-running, if tepid, expansion.

The last time companies were paying out this much more than they are taking in was in 2008, when the financial crisis hammered revenues faster than companies could cut buybacks and dividends.”

… Certainly the very idea of buybacks has come under increasing scrutiny. While a share buyback improves per share earnings performance, it is a piece of financial engineering which increases leverage but does nothing to improve a company’s product offerings or market position, much less its long-term prospects. Indeed, the vogue for buybacks has happened at the same time as an otherwise puzzling lack of corporate investment, especially given that corporate profit margins are still high by historic standards.” [Time] (emphasis added)

There’s nothing too terribly “puzzling” about this state of affairs.   Why would companies indulge in “financial engineering” while profits are high?  Could it be that the “wealth” of the company is financially anchored rather than structurally? Consider this Household debt service as a percentage of disposable personal income  chart from FRED:

Household Debt trends 2016

Superficially, we could argue that the American consumer has done some belt tightening since the Recession of 2007-08 and there’s less money being paid out in debt service from the family coffers – but, we’d also have to be realistic and see that the debt levels are already too high.

Yes, household debt levels relative to the GDP have been declining, but it remains higher than it’s been for almost all of post-war history, and by post-war we mean World War II. [Slate]  

What else could be depressing loans? Other loans – such as Student Debts. Again, we have a picture of that from the Federal Reserve:

Student Loan Trends FRED

What we see here is an increase in student loans owned and securitized, which are outstanding: from Q1 2006 at $480.9670 to Q3 2016 at $1,396.3355.  Student loan indebtedness now exceeds credit card debt, auto loans, and other non-mortgage debt. [Slate] What’s happening here?  Perhaps those corporate profits aren’t predicated on the increasing number of consumers flocking to their doors?  Perhaps not when consumers have an annual household credit card debt of $16,000; a $27,000 average of auto loans; and $169,000 in mortgages? [Slate]

Then, there’s the matter of real household income in the US.  In the first quarter of 1999 it hit a high of $57,909 and hasn’t been back since. The current figure is $56,516. [FRED]   Little wonder there’s some “financial engineering” going on in the corporate world.   That “financial engineering” especially in terms of stock buybacks simply doesn’t make any long term sense:

“No matter how low-interest rates get, it is hard to justify the raising of corporate debt to purchase outstanding stock. Longer-term debt should be used for longer-term needs, e.g. capital expenditures. But from a macroeconomic view, raising stock prices does not figure in promoting economic growth or general well-being—it is simply financial engineering serving the interest of only shareholders and management. No new jobs are created and no new capital investment is undertaken in a world of corporate buybacks. Investors are simply bribed with their own money.” [FinSen] (emphasis added)

So, where does Trumpsterism come into play?  First, let’s assume, given the preliminary appointments to Commerce and Treasury, that the emphasis in this administration won’t be on reducing student debt and regulating the securitization of corporate debt.  Let’s also assume that a Corporate Tax Holiday in the form of “re-patriated” corporate earnings will be a feature.  How is that likely to be spent?

The Financial Times reports: “Much of the debt sold by companies in recent years has been used to buy back their own shares, pay out higher dividends or finance big mergers and acquisitions. While these buybacks funded by cheap borrowing have boosted earnings, a missing ingredient has been spending on investment to build their businesses.”

Why not? If the consumers (read the other 99% of the US population) aren’t clamoring to spend more (read creating demand) then the “financial engineers” will boost themselves by … buybacks, higher dividends, and mergers and acquisitions.  Or…

“A tax holiday that prompts repatriation of cash held overseas by global US companies, a move investors expect during the Trump administration, could help boost investment. Mr Milligan says it is unclear whether companies will plough any repatriated profits into capital investment or simply boost buybacks.“Repatriation could flow through fairly quickly and lead to a noticeable rise in share buybacks.” [FinT]

In less diplomatic terms – here we go again.  Corporations, getting tax breaks and subsidies, faced with a market in which there is declining or stagnating consumer capacity, find ways to engineer their financial statements.  Nevada has seen this movie before, and it didn’t end well for us.

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Filed under Economy, financial regulation, Nevada economy

Capitalism Won’t Be Saved By Republicans

For the sake of this argument let’s assume that while capitalism may not be the most egalitarian system of resource management and allocation, it’s the best one we have to date.  It’s a bit like the definition of democracy – it isn’t perfect, but no one’s come up with anything better.  So, with this in mind we can propose that capitalism is worth saving.  But, saving from what?  And here I climb back on the hobby horse – we need to save free market capitalism from Financialism.

What is Financialism?  If you’ve just tuned in, I’ve been operating with the Armistead definition:

“Financialism is an economic system where the primary activity consists of creating and manipulating financial instruments.  Financial instruments…are in their original form firmly linked to economic reality.  However, when financialism sets in, financial instruments become progressively further removed from their role in supporting commerce in the real world and develop a life of their own.”  [Armistead]

When this “life of its own” comes in to play there are some serious problems for the underlying economy.  Michael Konczal summarizes the issue as succinctly as anyone:

“If you want to know what happened to economic equality in this country, one word will explain a lot of it: financialization. That term refers to an increase in the size, scope, and power of the financial sector—the people and firms that manage money and underwrite stocks, bonds, derivatives, and other securities—relative to the rest of the economy.

The financialization revolution over the past thirty-five years has moved us toward greater inequality in three distinct ways. The first involves moving a larger share of the total national wealth into the hands of the financial sector. The second involves concentrating on activities that are of questionable value, or even detrimental to the economy as a whole. And finally, finance has increased inequality by convincing corporate executives and asset managers that corporations must be judged not by the quality of their products and workforce but by one thing only: immediate income paid to shareholders.”

That second paragraph is a summation of what we’ve been looking at for the last 20 years.   If we were discussing capitalism we’d be talking about economic growth predicated on development in manufacturing, housing, infrastructure, energy, agriculture, primary industries, transportation, etc.  However, we’ve not been talking about capitalism, especially in the media. We’ve been lathered up and shaved by financialism.

We barely know what capitalism is anymore.  What’s the first thing that comes to mind when someone says, “business news?”  If you said, “stock market report” that would reflect what the evening news gives you. Usually the Dow Jones Industrial Average comes first, and then ‘what drives it’ comes in commentary purporting to be analysis.  Consider the following reaction to inquiries about the strength of the economy in 2012:

“The stock market in the past has been a leading indicator, but that leading quality has weakened in recent years. Stock prices are driven by profits and profit growth. During the Great Recession, corporations have been able to maintain profitability by slashing employment to reduce costs. They have streamlined their operations and have squeezed more productivity out of their remaining workers. Thus, higher stock prices don’t necessarily mean a stronger economy, especially in terms of employment growth. That said, I do think the economy is on an upward path, with job growth of about 2 million expected for the national economy in 2012.” [SDUT]

And here we have an illustration of the third point Konczal was making:  Corporations are judged not by the quality of their products, the character of their work forces, the direction of their research and development – but by the immediate income paid to shareholders.

Couple this with the Shareholder Theory of Value, which Jack Welch once referred to as the “dumbest idea in the world,” and the financialist  incentive is to maximize productivity, prioritize immediate results, and ignore the stakeholders for the benefit of the shareholders.  Now, view the Epi Pen issue from the perspective of the shareholders – the object was to increase immediate shareholder value, but:

“While individual consumers may not have had a voice or recourse, the market did. Mylan may have improved its margins and ultimately driven higher returns and shareholder value, but within a week the price increase cost the company $3 billion in market cap and a stock tank of over 12% in 5 days.” [Fortune]

Ethics do matter, especially to stakeholders.  If there is a silver lining in this cloud it is that the stakeholders (individual consumers, school districts, emergency responders, local fire departments…) can place significant pressure on shareholders.  Breach the bounds of acceptable human behavior and the amorphous market will take a bit out of the corporate hide; illustrating former CEO Welch’s point precisely.

Now, let’s enter the political phase.  Republicans would love to dismantle the financial regulation structure which has curtailed some of the excesses of Financialism which precipitated the last Great Recession.  Out with Sarbanes-Oxley, Out with Dodd Frank, out with “excessive regulation.”   This is a recipe for disaster.  Regulation restrains, and restraint is what is needed to prevent capitalism from degenerating into financialism.

Again, a summation from Konczal:

“…the most important change will be intellectual: we must come to understand our economy not as simply a vehicle for capital owners, but rather as the creation of all of us, a common endeavor that creates space for innovation, risk taking, and a stronger workforce. This change will be difficult, as we will have to alter how we approach the economy as a whole. Our wealth and companies can’t just be strip-mined for a small sliver of capital holders; we’ll need to bring the corporation back to the public realm. But without it, we will remain trapped inside an economy that only works for a select few.”

Income inequality on steroids? More Bubbles? More volatility? And, more economic problems associated with those issues.  It will be up to Democrats to resist the financialization of the American system of capitalism because the Republicans are either trapped in its web or ignorant of its consequences.

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Filed under Economy, financial regulation