Corporate Profits Soaring Thanks to Record Unemployment
by Mark Provost
re-posted from Economic Populist with permission of author
Corporate Profits Soaring Thanks to Record Unemployment
In a January 2009 ABC interview with George Stephanopoulos, then President-elect Barack Obama said fixing the economy required shared sacrifice, “Everybody’s going to have to give. Everybody’s going to have to have some skin in the game.” (1)
For the past two years, American workers submitted to the President’s appeal—taking steep pay cuts despite hectic productivity growth. By contrast, corporate executives have extracted record profits by sabotaging the recovery on every front—eliminating employees, repressing wages, withholding investment, and shirking federal taxes.
The global recession increased unemployment in every country, but the American experience is unparalleled. According to a July OECD report, the U.S. accounted for half of all job losses among the 31 richest countries from 2007 to mid-2010. (2) The rise of U.S. unemployment greatly exceeded the fall in economic output. Aside from Canada, U.S. GDP actually declined less than any other rich country, from mid-2008 to mid 2010. (3)
Washington’s embrace of labor market flexibility ensured companies encountered little resistance when they launched their brutal recovery plans. Leading into the recession, the US had the weakest worker protections against individual and collective dismissals in the world, according to a 2008 OECD study. (4) Blackrock’s Robert Doll explains, “When the markets faltered in 2008 and revenue growth stalled, U.S. companies moved decisively to cut costs—unlike their European and Japanese counterparts.” (5) The U.S. now has the highest unemployment rate among the ten major developed countries. (6).
The private sector has not only been the chief source of massive dislocation in the labor market, but it is also a beneficiary. Over the past two years, productivity has soared while unit labor costs have plummeted. By imposing layoffs and wage concessions, U.S. companies are supplying their own demand for a tractable labor market. Private sector union membership is the lowest on record. (7) Deutsche Bank Chief Economist Joseph LaVorgna notes that profits-per-employee are the highest on record, adding, “I think what investors are missing – and even the Federal Reserve – is the phenomenal health of the corporate sector.” (8)
Due to falling tax revenues, state and local government layoffs are accelerating. By contrast, U.S. companies increased their headcount in November at the fastest pace in three years, marking the tenth consecutive month of private sector job creation. The headline numbers conceal a dismal reality; after a lost decade of employment growth, the private sector cannot keep pace with new entrants into the workforce.
The few new jobs are unlikely to satisfy Americans who lost careers. In November, temporary labor represented an astonishing 80% of private sector job growth. Companies are transforming temporary labor into a permanent feature of the American workforce. UPI reports, “This year, 26.2 percent of new private sector jobs are temporary, compared to 10.9 percent in the recovery after the 1990s recession and 7.1 percent in previous recoveries.” (9) The remainder of 2010 private sector job growth has consisted mainly of low-wage, scant-benefit service sector jobs, especially bars and restaurants, which added 143,000 jobs, growing at four times the rate of the rest of the economy. (10)
Aside from job fairs, large corporations have been conspicuously absent from the tepid jobs recovery. But they are leading the profit recovery. Part of the reason is the expansion of overseas sales, but the profit recovery is primarily coming off the backs of American workers. After decades of globalization, U.S. multinationals still employ two-thirds of their global workforce from the U.S. (21.1 million out of 31.2 million). (11) Corporate executives are hammering American workers precisely because they are so dependent on them.
An annual study by USA Today found that private sector paychecks as a share of Americans’ total income fell to 41.9 percent earlier this year, a record low. (12) Conservative analysts seized on the report as proof of President Obama’s agenda to redistribute wealth from, in their words, those ‘pulling the cart’ to those ‘simply riding in it’. Their accusation withstands the evidence—only it’s corporate executives and wealthy investors enjoying the free ride. Corporate executives have found a simple formula: the less they contribute to the economy, the more they keep for themselves and shareholders. The Fed’s Flow of Funds reveals corporate profits represented a near record 11.2% of national income in the second quarter. (13)
Non-financial companies have amassed nearly two-trillion in cash, representing 11% of total assets, a sixty year high. Companies have not deployed the cash on hiring as weak demand and excess capacity plague most industries. Companies have found better use for the cash, as Robert Doll explains, “high cash levels are already generating dividend increases, share buybacks, capital investments and M&A activity—all extremely shareholder friendly.” (5)
Companies invested roughly $262 billion in equipment and software investment in the third quarter. (14) That compares with nearly $80 billion in share buybacks. (15) The paradox of substantial liquid assets accompanying a shortfall in investment validates Keynes’ idea that slumps are caused by excess savings. Three decades of lopsided expansions has hampered demand by clotting the circulation of national income in corporate balance sheets. An article in the July issue of The Economist observes: “business investment is as low as it has ever been as a share of GDP.” (16)
The decades-long shift in the tax burden from corporations to working Americans has accelerated under President Obama. For the past two years, executives have reported record profits to their shareholders partially because they are paying a pittance in federal taxes. Corporate taxes as a percentage of GDP in 2009 and 2010 are the lowest on record, just above 1%. (17)
Corporate executives complain that the U.S. has the highest corporate tax rate in the world, but there’s a considerable difference between the statutory 35% rate and what companies actually pay (the effective rate). Here again, large corporations lead the charge in tax arbitrage. U.S. tax law allows multinationals to indefinitely defer their tax obligations on foreign earned profits until they ‘repatriate’ (send back) the profits to the U.S. U.S. corporations have increased their overseas stash by 70% in four years, now over $1 trillion—largely by dodging U.S taxes through a practice known as “transfer pricing”. (18)Transfer pricing allows companies to allocate costs in countries with high tax rates and book profits in low-tax jurisdictions and tax havens—regardless of the origin of sale. U.S. companies are using transfer pricing to avoid U.S. tax obligations to the tune of $60 billion dollars annually, according to a study by Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon. (18)
The corporate cash glut has become a point of recurrent contention between the Obama administration and corporate executives. In mid December, a group of 20 corporate executives met with the Obama administration and pleaded for a tax holiday on the $1 trillion stashed overseas, claiming the money will spur jobs and investment. In 2004, corporate executives convinced President Bush and Congress to include a similar amnesty provision in the American Jobs Creation Act; 842 companies participated in the program, repatriating $312 billion back to the U.S. at 5.25% rather than 35%. (19) In 2009, the Congressional Research Service concluded that most of the money went to stock buybacks and dividends—in direct violation of the Act. (20)
The Obama administration and corporate executives saved American capitalism. The U.S. economy may never recover.
Sources:
1. ‘This Week’ ABC News with George Stephanopoulos, January 2009. http://abcnews.go.com/ThisWeek/Economy/story?id=6618199&page=2
2. OECD report, U.S. lost most jobs among rich countries. EMMA VANDORE AP Business Writer http://abcnews.go.com/Business/wireStory?id=11104432
3. Carnegie Endowment for International Peace. Policy Brief 89. November, 2010. Uri Dadush & Vera Eidelman. Five Surprises of the Great Recession. http://carnegieendowment.org/files/five_surprises.pdf
4. OECD Indicators of Employment Protection. http://www.oecd.org/document/11/0,3343,en_2649_37457_42695243_1_1_1_3745…
5. The Wall St. Journal. June 8, 2010. Robert Doll. Opinion. The Bullish Case for U.S. Equities. http://online.wsj.com/article/SB1000142405274870356160457528289379646147…
6. Bureau of Labor Statistics. International Labor Comparisons. Updated Dec. 2, 2010. http://www.bls.gov/ilc/intl_unemployment_rates_monthly.htm
7. Bloomberg Businessweek. January 22, 2010. Holly Rosenkrantz.Union membership in the private sector declines to record low: http://www.businessweek.com/news/2010-01-22/union-membership-in-the-priv…
8. Joseph Lavorgna quote: CNBC. When will profits translate into jobs? http://www.cnbc.com/id/40350345/When_Will_Record_Corporate_Profits_Trans…
9. UPI. Temp work becomes a fixture. Dec. 20th, 2010. http://www.upi.com/Business_News/2010/12/20/Temp-work-becomes-a-fixture/…
10. Restaurant industry’s hiring helping to revive economy. DAYTON, Nov 28, 2010 (Dayton Daily News – McClatchy-Tribune Information Services via COMTEX): http://www.techzone360.com//news/2010/11/28/5161348.htm
11. Tax Notes, Martin A. Sullivan. U.S. Multinationals Cut U.S. Jobs While Expanding Abroad. http://taxprof.typepad.com/files/128tn1102.pdf
12. USA Today. May 26, 2010. Private pay shrinks to historic lows as gov’t payouts rise. http://www.usatoday.com/money/economy/income/2010-05-24-income-shifts-fr…
13. New York Times. Economix blog. Catherine Rampell. Nov. 23, 2010. Visualizing Booming Profits. http://economix.blogs.nytimes.com/2010/11/23/visualizing-booming-profits/
14. $262 billion in equipment and software investment, calculated from EconStats. http://www.econstats.com/nipa/nipa_5__3___5q.htm
15. ABC News. Dec. 20, 2010. Mark Jewell. S&P 500 Companies More Than Double Buybacks in 3Q. http://abcnews.go.com/Business/wireStory?id=12440445
16. The Economist. Companies’ cash piles: Show us the Money.http://www.economist.com/node/16485673
17. Corporate Income Tax as a share of GDP, 1946-2009. http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=263
18. Bloomberg. May 13, 2010. U.S. Companies Dodge $60 Billion in Taxes with Global Odyssey. http://www.bloomberg.com/news/2010-05-13/american-companies-dodge-60-bil…
19. Bloomberg. Jesse Drucker. Dec 29, 2010. Dodging Repatriation Tax Lets U.S. Companies Bring Home Cash http://www.bloomberg.com/news/2010-12-29/dodging-repatriation-tax-lets-u…
20. Center for Budget priorities. Robert Greenstein and Chye-Ching Huang. Feb. 2009. Proposed Tax Break For Multinationals Would Be Poor Stimulus
“Dividend Repatriation Tax Holiday” Failed in 2004, Unlikely to Work Now. http://www.cbpp.org/cms/index.cfm?fa=view&id=2270
“Over the past two years, productivity has soared while unit labor costs have plummeted.”
Err, yes. An excess supply of labour at current prices over the demand for labour at current prices means, clearly, that the current price of labour is too high to clear the market.
The solution therefore is to lower the price of labour, something which can be done in two ways. Reduce what is paid to labour and increase the product of labour at the same price.
As you note, US companies are doing both, raising productivity of labour and also cutting the price they pay for labour.
So they are solving the problem. Your problem with this is?
I will see if Mark can come by.
Isn’t this what Boeing did, only outsoused to forign countries on the Dreamliner? The old saying, “you get what you pay for” certainly holds true today. One miught give it consideration the next time one is in the air over the ocean.
“So they are solving the problem. Your problem with this is?”
The only disagreement I have with Tim here is that from the viewpoint of capital, “the problem” is not a bug, it’s a feature! Far from “solving the problem,” it is in the interest of capitalist production and every capitalist to exploit it and perpetuate it. Increasing productivity while decreasing pay will indeed increase employment — thus “solving the problem” (temporarily) until the constraints imposed by the solution again present a limit to capital accumulation and… here we go again.
Here’s the hypothesis, stated without the customary obfuscation:
“Capitalist production can by no means content itself with the quantity of disposable labour-power which the natural increase of population yields. It requires for its free play an industrial reserve army independent of these natural limits.”
and
“It is the absolute interest of every capitalist to press a given quantity of labour out of a smaller, rather than a greater number of labourers, if the cost is about the same. In the latter case, the outlay of constant capital increases in proportion to the mass of labour set in motion; in the former that increase is much smaller.”
The problem or feature as Sandwichman notes is only the result of in inequality in market power.
Labor can not pit the company of employ against a threat of outsourcing such that labor can benefit from the lack of labor regulation (safety, environment, tax etc) in the outsourced locations.
That is, I can not outsource my labor such that I can import the results of it and pocket the difference. Labor can not play the arbitrage.
So, capital is not solving anything. Capital is only acting in what is it’s natural persona. Frankly, capital solves nothing. Society solves things.
Beyond that, the pursuit of ever decreasing labor cost results in ever greater need to sell more do to the lower purchasing power of labor/consumer requiring an ever lower selling price.
From the small business example, the liqour store is maintaining gross dollar sales, only it comes at the expense of profit margins.
Need to sell/produce ever more to make the break just uses up resources faster.
Increasing productivity while decreasing pay will indeed increase employment…
let me give that a twist – decreasing pay [or threatening to] can generate increased intensity of labor so, up to a point, provide increased productivity [while, again w/lags, cause output quality to suffer].
“So they are solving the problem. Your problem with this is?” Worstall
The problem that “they” are solving is not the problem addressed in Mark Provost’s post. That’s the problem with your interpretation. You’re trying to take the problem and recast it as though it were a solution. Try recognizing that economic systems have varying problems and what is problematic to one sector of an economy may result in a benefit to other sectors of that economy and one man’s benefit is another man’s loss. Too much loss to too many participants is a significant problem even if there are others that can take advantage of those problems. What is your problem with understanding such differences?
Gee Tim, they have been solving the problem not for two years, but for 30 years.
that is how long labor’s share of the pie has been falling.
When do you think they will finally succeed?
Spencer the race to the bottom is not done until the fat lady sings. She may currently reside in the UK.
Why is it that economic activity is virtually always portrayed as an adversarial situation, an antagonistic relationship between all sectors of manufacturing and trade, as well as between participants on both sides of the supply and demand equation? How much waste might be attributable to that antagonism? I’ve read repeatedly here and else where that malpractice litigation results in significantly greater health care costs and the lawyers are always portrayed as the problem rather than a solution. If plaintiffs adersary raises costs in health care how can any economic system contain its costs in the face of pervasive adversarial behavior?
Plan together…is that cultural>
Mark Provost’s article is a good read. He put forth a lot of research effort. I am glad to see Dan bring some of his writings to Angry Bear.
I am left with the impression from Mark’s article and many other articles that some people are displeased with any efficiency improvements that companies and corporations undertake. I find that to be an odd attitude which flies in the face of hoping that U.S. businesses remain competitive domestically and expand their markets abroad.
I don’t blame businesses for not hiring unneeded workers. Businesses know their labor needs. They’re not in the welfare business nor should they be.
As we know, the national economy needs a substantial increase in employment for many reasons not the least of which is taxable revenue at the municipal, county, state, and federal levels. Fine. Let’s show some leadership on that front and think outside the box if that is required.
Let’s lay out a goal and a supporting set of quick actions:
Federal Government goal: Full national employment within three years.
Plan of Action:
1. Change Federal labor law to require that hourly overtime paid to workers be set at 2.5 times normal hourly pay.
2. Change Federal labor law to require that temporary workers be paid a 35% hourly wage premium over comparable in-company skill hourly wage.
3. Implement massive Federal small, medium, and large business expansion tax, grant, and loan guarantee initiatives focusing on an order of priority funding for (a) placing new businesses in existing empty storefronts and other empty community facilities, (b) new facility construction, and (c) relocation of offshore production and services to the United States of America.
4. Implement a national Federal program of business incubators located in all communities with populations of 35,000 to 250,000, the purpose of which are to assist in sustaining the development and growth of new businesses.
—–
What is the next problem?
Mark Provost’s article is a good read. He put forth a lot of research effort. I am glad to see Dan bring some of his writings to Angry Bear.
I am left with the impression from Mark’s article and many other articles that some people are displeased with any efficiency improvements that companies and corporations undertake. I find that to be an odd attitude which flies in the face of hoping that U.S. businesses remain competitive domestically and expand their markets abroad.
I don’t blame businesses for not hiring unneeded workers. Businesses know their labor needs. They’re not in the welfare business nor should they be.
As we know, the national economy needs a substantial increase in employment for many reasons not the least of which is taxable revenue at the municipal, county, state, and federal levels. Fine. Let’s show some leadership on that front and think outside the box if that is required.
Let’s lay out a Federal goal and a supporting set of quick actions:
Federal Government goal: Full national employment within three years.
Concurrent Federal Actions:
1. Change Federal labor law to require that hourly overtime paid to workers be set at 2.5 times normal hourly pay.
2. Change Federal labor law to require that temporary workers be paid a 35% hourly wage premium over comparable in-company skill hourly wage.
3. Implement massive Federal small, medium, and large business expansion tax, grant, and loan guarantee initiatives focusing on an order of priority funding for (a) placing new businesses in existing empty storefronts and other empty community facilities, (b) new facility construction, and (c) relocation of offshore production and services to the United States of America.
4. Implement a national Federal program of business incubators located in all communities with populations of 35,000 to 250,000, the purpose of which are to assist in sustaining the development and growth of new businesses.
—–
What is the next problem?
“that some people are displeased with any efficiency improvements that companies and corporations undertake.”
Efficiency improvements and exploitation are closely related phenomenon. Where do you draw the line?
MG,
Here’s Maurice Dobb’s answer from 1927 to your question about why some people might be displeased with corporate “efficiency improvements”:
MG, Here is Maurice Dobb’s 1927 answer to your question about why some people might be displeased with corporate “efficiency improvements”:
“It is sometimes said that while the employer is interested in securing a low wage-cost, the worker is interested in securing a high level of earnings, and that, since by increased efficiency both things can be simultaneously attained, employer and worker should have a like interest in the speeding up of work and in all methods which promote this result. In the past a similar, but more general, argument has been advanced to the effect that anything which hinders an increase of output is damaging to worker and employer alike and trade unionists in the nineteenth century were severely castigated by economists for adhering, it was alleged, to a vicious “Work Fund” fallacy, which held that there was a limited amount of work to go round and that workers could benefit themselves by restricting the amount of work they did. But the argument as it stands is incorrect. It is not aggregate earnings which are the measure of the benefit obtained by the worker, but his earnings in relation to the work he does — to his output of physical energy or his bodily wear and tear. Just as an employer is interested in his receipts compared with his outgoings, so the worker is presumably interested in what he gets compared with what he gives.”
one man’s benefit is another man’s loss.
By that standard the economy is a zwero sum game. As we know that the economy is not a zero sum game then it must be the standard which is wrong.
And as Ol’ Karl also pointed out, there is a market solution to this: multiple capitalists competing for the profits that can be made by employing labour. It’s only if you have monopsony (not a word he knew), a single buyer of labour, that “the” capitalist can actually push down the price of labour.
As long as there are multiple buyers of labour, then wages will (with lags and wobbles) rise with productivity. Which is why Karl warned so fiercely against monopoly capitalism.
“Man in the silk suit hurries by
as he catches the poor old lady’s eye
Just for fun he says: Get a Job…” – Bruce Hornsby, That’s just the way it is
The latest jobs report reveals the labor market is finally turning the corner. Unfortunately, real earnings are stagnating because weak wage growth is getting absorbed by rising food and energy costs. Wage growth is barely outpacing the slowest core inflation in fifty years.
American workers are contributing more than ever in the form of productivity gains, but they are receiving a near record low share of the national income.
By contrast, corporations are extracting record profits but contributing less to the national economy than ever—fewer jobs, lower wages, tepid investment, and the lowest tax contribution.
Also, income distribution is partially politically determined. The lopsided recovery reflects lopsided government support. The assistance provided to the financial sector stands in sharp contrast to the labor market. At the height of the financial crisis, executives huddled under the government umbrella and emerged first. Workers were left in the cold rain. There is nothing inevitable about the unequal distribution of gains. Nor does the lopsided recovery reflect a marginal return to value-added. The US economic regime provides nanny-state assistance for the banks and business, while it compels workers to the free-market fallout.