Relevant and even prescient commentary on news, politics and the economy.

Another image of labor’s broken back: $48,887 in profit per employee!

This article via Yahoo news caught my attention: Five years into recovery, Dow Companies squeeze workers as investors thrive

I think this picture spells it out rather well.

 

Profit per employee

“As the chart shows, the 30 huge companies that comprise the Dow Jones Industrial Average have barely nudged their employee ranks higher…”

But this is even more astounding:

Over the past five years, total profits of the current Dow 30 members surged by more than 42% through the end of 2014, to nearly $320 billion. This has driven the average annual profit per employee up by more than 34% since 2009, to $48,887.

According to this CNN article from August, the median household income is $53,891.    That means these 30 companies are pocketing 90% of what an household earns.  That’s out the door, cash in the pocket 90% of what a household works all year to earn.  Now, I’m not sure, but I think that household income is pretax and I doubt they get to hid that $53,891 in some account out of reach of the tax man.  In fact, I’ll bet that household needs every bit of that money just to get through the year.

Well, the 30 are not hiding all of it:

Dividends paid by the Dow 30 are up better than 30% the past five years, according to FactSet.

Read the article.  The author does his best to explain this situation, but it’s seem more like excuses.  A grasping at straws to dismiss what we know has been an intentional drive to get to this point.  My interpretation of it is that these companies are now able to “grow” the pot of money without actually having to increase their sales.  True money from money… but, they are scared that this magic will leave them and then what?

$48,887 PROFIT PER EMPLOYEE!

 

 

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Scott Brown Solves the Mystery of What All Those Mega-Corporations Are Doing With Their Record Profits

They’re spending it on lawyers!

I’m not kidding.  Brown told a 27-year-old Fidelity Investments retirement specialist that big corporations can’t afford to hire people because they’re spending so much money on lawyers.  Which they have to do because of all those regulations.  Which is why he wants to “loosen regulations on big companies”: “So they could spend more money on hiring instead of on lawyers.”

And to think that I thought he wants to loosen regulations on big companies because the owners of one of the biggest companies of all—Koch Industries, which can afford to hire as many people as it wants, despite its big attorneys’ fees—wants loosened regulations and is spending huge sums of money to buy his election.  Silly me.

Obviously, I’m wrong about that, because the 27-year-old Fidelity Investments retirement specialist—her name is Erin Henson—accepted this and now plans to vote for Brown.

Although there also is another reason she’s decided to vote for him.  His opponent, Sen. Jeanne Shaheen, has been highlighting her support for small businesses.  “Her ads show her walking around Main Street, America — that means nothing to me,” Henson told Associated Press reporter Holly Ramer, who’s in New Hampshire covering the race.  “I don’t think small businesses are going to be the wave of the future for people of my generation. I think she’s a little too focused on the little guy, and I’m not the little guy.”

No, she’s not the little guy. But her clients will be if they don’t change financial advisers, since their current one doesn’t keep up with corporate-profits news.  And if her supervisors at Fidelity read the AP article and realize that she’s clueless about current corporate profits and about what big corporations do with those profits, she might soon become a little guy herself.

Unless, of course, Paul Krugman’s been pulling my leg.

Shaheen should point this out.  If Brown isn’t aware that U.S. corporations are seeing record profits, and if he actually believes that the reason that companies aren’t hiring more than they are is that their regulatory lawyers’ fees are so high, he’s probably not someone most people would want in the U.S. Senate.  I mean, what if he becomes chairman of the Banking Committee or the Finance Committee?

Then again, Ms. Henson’s a Fidelity Investments retirement specialist, and she thinks Brown is onto something.  Although on second thought, I’m guessing that if Brown wins, Henson plans to recommend that her clients invest in those derivatives that bet against the stock market.

____

ADDENDUM: Does anyone know how to reach someone high up in Shaheen’s campaign or in the DSCC?  I saw Ramer’s report on Yahoo News yesterday; it’s my opening page on Chrome.  But it certainly wasn’t a big political story–I just happened to catch it—and neither the Shaheen campaign nor the DSCC may be aware of Brown’s comments.  But this is exactly the kind of thing that the voting public should be told of, because it really does get into the essence of public policy.

So, please, if anyone knows how to reach someone high up at the Shaheen campaign or at the DSCC, and cares about the outcome of the Senate elections: Can you contact whoever and pass along the link to my post here?  Even reaching someone important in Harry Reid’s office might work.

Political pundits, our-side economists … anyone who can reach someone, directly, who matters ….

I mean it.

Thanks!

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From Today’s New York Times Front Page, and From Tomorrow’s New York Times Op-Ed Page

Today, in the New York Times:

With the Dow Jones industrial average flirting with a record high, the split between American workers and the companies that employ them is widening and could worsen in the next few months as federal budget cuts take hold. …

“So far in this recovery, corporations have captured an unusually high share of the income gains,” said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch. “The U.S. corporate sector is in a lot better health than the overall economy. And until we get a full recovery in the labor market, this will persist.”

Tomorrow, in the New York Times:

If President Obama really wants to show leadership, he will seize this moment and propose a reduction in corporate tax rates, so that corporations will have money to invest and hire and raise salaries and wages.

Carpe Clueless, David Brooks, op-ed

Bet on it.

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Corporations Don’t Need More Tax Breaks

by Linda Beale

Corporations Don’t Need More Tax Breaks

If you listen to the corporate lobbyists, and the right-wingers who plead their cases for them in Congress and in the media, you’d think that corporations are so heavily taxed that it is threatening their ability to continue to conduct business and be competitive in world markets. But is that really the case? This blog has often pointed out two obvious shortcomings in the corporate whine: first, the corporate statutory rate of 35% is honored in the breach–most corporations pay actual tax rates so significantly lower than 35% that the statutory rate is an illusion; and second, as far as global competitiveness is concerned, the corporate tax rate is the only significant tax that US corporations pay, whereas most other countries have both corporate income taxes and VAT taxes, often paid at each transactional stage of production.

A site called “NerdWallet” provides considerable information based on analysis of the financial statements of companies, providing greater transparency for investors and, lucky for us, for those of us interested in tax facts.   See, e.g., the NerdWallet study, Top Companies Paid 9% Tax Rate (July 24, 2012).

Because tax provision includes both domestic and foreign, current and deferred taxes, NerdWallet researched further to find how much was actually paid by these American companies to the U.S. federal government in the most recent tax year.  By dividing the current portion of federal taxes by pre-tax income, NerdWallet was able to calculate the percentage of these companies’ earnings that was paid to the U.S. government. For the ten American companies with highest earnings in the most recent fiscal year, this number averaged 9%. NerdWallet Study (emphasis added).

A press release about the study notes just how much corporate taxation has shrunk as a source of revenue in the US, as corporations pay lower rates than ordinary Americans.

A new NerdWallet study found the 10 most profitable U.S. companies paid an average of just 9% in federal taxes last year. These low rates are particularly shocking given that the official tax rate is 35%. The study also revealed that more than half of the 500 largest U.S. companies paid a lower tax rate than the average American.  NerdWallet press release (July 30 2012).

NerdWallet also has a very useful tool for seeing what each major corporation of the top 500 actually pays in taxes, available here. You can scroll through a list of corporations to select a particular one of interest, and the tool will show the actual rate of taxes paid to the U.S. government, the compensation paid to the CEO, and the average compensation for the company’s employees, as well as the multiple of the CEO compensation to the average employee compensation. For example, the tool provides the following information for several of the largest of the 500 corporations.

1. Exxon Mobil Pre-tax Earnings: $73.3 Billion Actual Taxes Paid: $1.5 Billion (2%)
2. Chevron Pre-tax Earnings: $46.6 Billion Actual Taxes Paid: $1.9 Billion (4%)
3. Apple Pre-tax Earnings: $34.2 Billion Actual Taxes Paid $3.9 Billion (11%)
4. Microsoft Pre-tax Earnings: $28.1 Billion Actual Taxes Paid: $3.1 Billion (11%)
5. JPMorgan Chase & Co Pre-tax Earnings: $26.7 Billion Actual Taxes Paid $3.7 Billion (14%)

cross posted with ataxingmatter

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Where Has All The Money Gone, Pt IV – Dividends

We’ve already seen in previous installments of this series that since about 1980, I: corporate profits have soared, II: the slice of profits going to finance has soared even more, and III:  wages have stagnated.  Here we see what corporations have done with all that money.   There is a limited selection set: pay taxes, distribute as dividends, pay down debt, invest, make acquisitions, speculate, and hold as cash.

Here is a look at taxes through 2008 and dividends through 2010, as percentages of profits; data from BEA table 7.16, lines 19, 20 and 38. For my purposes, profits are divided among taxes, dividends, and all the other things mentioned above, which I’ll call the Residual.


Dividends/ Profits are in green; Taxes/Profits in red.  I’ve added 13 year moving averages to clarify the trends over time.  The Dividend percentage bottomed in 1978 at 20.6%.  I’ve marked that year on both curves with a yellow dot.  After that, dividend payments took off sharply and have been mostly in the 40 to 50 % range since 1989.  The tax rate on dividends was reduced to 15% in 2003, also marked with a yellow dot, but I don’t think that change has had much effect on dividend payout.  The gyrations in the payout percentage since 2003 are largely due to the denominator affect, as profitability increased after the 2001-2 recession, and plummeted during the recent Great Recession.  Notably, 2010 profits are the highest ever. 
 
The tax payout drop lagged the dividend increase by several years, and didn’t start dropping until 1987.   In 1986, the tax payout rate was 45.2%.  After a sharp drop to 27.7% in 1992, the payout rate increased throughout the Clinton administration, topping at 34.5% in 2000.  Then, there was another sharp drop.  It has since leveled off, averaging 25% since 2004.

In 1978, the 13 year averages were 24.2% for dividends and 42.4% for taxes.  Those averages are now 28.3, and dropping; and 45.7 and rising, respectively  45.7 and rising for dividends; and 28.3% and dropping for taxes – essentially a reversal of positions.  The net result is a massive funneling of money from government to dividend recipients who now are paying only 15% tax on their dividend income.

This is not only “Starve the Beast” in action, it is a massive redistribution of wealth into the hands of those who already have the most.   Say what you will about the relative efficiencies of the private and public sectors in using resources, the public sector places money into the hands of people who will spend it and keep the economy moving.  The private sector largely funnels it into rent seeking.

For the sake of completeness, here is a look at the Residual – as defined above – with a 13 year moving average and a best fit straight trend line.

This provides a partial explanation for Jon Hammond’s observation that net corporate investment has been down over the duration.  There is less residual to invest.

Bottom line:  Corporate profits have been skewed to dividend payments, to the detriment of worker salaries, government tax revenues, and corporate investment.

Cross posted at Retirement Blues.

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Where Has All The Money Gone, Pt I, Corporate Profits

INTRODUCTION

1) Rethug Speaker of the House John Boehner says that as a nation, “we’re broke“; Rethug presidential candidate Ron Paul claims America “should declare bankruptcy.”  I say these two are liars, and at least one of them is crazy.

2) Tyler Cowan says “we are poorer than we think we are,” due to mis-measurement of value, which might be true.  I believe his prescription for recovery is generally very bad, though.

3) In comments to my previous Angry Bear post, Bob McManus directed us to the writings of Michael Hudson, where we find his post Democracy and Debt.  This is must reading.  The relevant point here is that the increasing capture of wealth, as rents, by a creditor class impoverishes society in general, and this eventually leads to severe repression, major social upheaval, or both.  I whole-heartedly agree.

4) Jon Hammond’s guest post at Angry Bear shows that a more-or-less continuous decrease in real investment has occurred during the post WW II era.

In this series of posts, I intend to show that we are a wealthy nation, but that our wealth  has been increasingly captured by elite creditors, who, in my opinion, are strangling the economy by 1) extracting excessive rents and 2) diverting this wealth to financial tail chasing, rather than real investment.

WHERE THE MONEY HASN’T GONE

Here is a look at average hourly earnings, the typical income of a working stiff, presented on a log scale.

Like almost every time series you can imagine, including GDP, it exhibits a break near 1980.   The break is always to lower growth.  But, compared to most other data series, this break is especially sharp.

Hear is the same series compared to GDP, an approximate measure of the income of the nation, on a linear scale.  For this graph, each is normalized to a value of 100 in Q1, 1965.

While earnings have grown less than 8 times in 47 years, GDP has grown more than 20 times.

Clearly, the money has not gone to compensation of the workers whose labor actually creates the wealth of the nation.  That might explain some of the alleged envy.

CORPORATE PROFITS

As a first step in finding where the money has gone, let’s consider the growth of corporate after-tax profits since about 1950.  You can see it in this FRED graph.   It’s on a log scale, so constant growth would be a straight line.  There are lots of wiggles, but I see an increasing slope over time, and it’s not an optical illusion.

There are a lot of ways to parse this.  One is to connect the dip bottoms with straight lines.  I’ve done that with alternating red and blue to show the slope increasing over time.  The problem is selecting which bottoms to connect.  Some alternate choices are indicated in yellow.  The yellow lines define times of above normal profit growth: 1970 to 1980, 1986 to 1998, and 2001 through 2007.  Each of them leads to a correction, indicated by a purple line across the top of the decline.

After I did all that, it occurred to me to let Excel throw an exponential best fit line on the data set, and you can see that as well.

I see now that I could have included another yellow line from 1961 to 1967.  Notice that with each yellow line, the data set advances above the exponential best fit line before a sideways correction takes it below again.  After the correction is complete, profits increase again until the best fit curve is breached.  Or, they did until now.

Remember that on a log scale constant growth rate is represented by a straight line, and that the growth compounds, so that the underlying increase is exponential.  Sooner or later, that has to end.  Nothing in the real word can go to infinity.  Here we see an exponential curve on a log scale.  This demonstrates an increasing growth rate.  Therefore, the underlying increase is greater than exponential.  If exponential growth is unsustainable, what would you say about greater than exponential growth?

In fact, the whole trend might now be falling apart, as the last blue line has a much lower slope.  Also, for the first time following a correction, profits have stayed below the trend line, and the gap is increasing.

To show the extent of national income capture by corporations, here is a graph of corporate profits as a percentage of GDP.   I’ve divided the set into two segments: 1951 to 1979, and 1980 on, and had Excel place a linear trend line on each.  This division is somewhat arbitrary, but almost every economic time series you can find has a break point within a few years of 1980.  Division between ’79 and ’80 is the least favorable to my point that Profits/GDP had no trend in the post WW II Golden Age, but have trended sharply upward during the Great Stagnation period.

Profit/GDP growth was unusually poor from 1980 through 1986.  Then from late 2001 through early 2006 it exhibited the greatest growth ever.  But remember the denominator effect.  Nominal GDP growth increased rapidly following the ’80-’82 double recession; while GDP growth in this century has been generally slow.  The financial melt-down of 2008 caused a dip that was sharp and brief, but the rebound has not gone to a new high.  But even now, in the midst of anemic recovery, profit/GDP is hovering in the 9 to 10% range, far above historical norms.

CONCLUSION

The corporate profit growth picture looks unsustainable, and that is troubling.  What it means for the future is anybody’s guess.  But, what we get from it is the first partial answer to the question, “Where has all the money gone?”

Gone to profits, everyone.

A slightly different version is posted at Retirement Blues.

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The Corporations That Occupy Congress

The Corporations That Occupy Congress

 by David Cay Johnston via taxprofblog and Reuters

Some of the biggest companies in the United States have been firing workers and in some cases lobbying for rules that depress wages at the very time that jobs are needed, pay is low, and the federal budget suffers from a lack of revenue.
Last month Citizens for Tax Justice and an affiliate issued Corporate Taxpayers and Corporate Tax Dodgers 2008-10. It showed that 30 brand-name companies paid a federal income tax rate of minus 6.7% on $160 billion of profit from 2008 through 2010 compared to a going corporate tax rate of 35%. All but one of those 30 companies reported lobbying expenses in Washington. Another report, by Public Campaign, shows that 29 of those companies spent nearly half a billion dollars over those three years lobbying in Washington for laws and rules that favor their interests. … The report – “For Hire: Lobbyists or the 99 percent” – says that while shedding jobs, the 30 companies are “spending millions of dollars on Washington lobbyists to stave off higher taxes or regulations.”
….
Company reports to shareholders show that among the 30 companies in the Public Campaign report, the 10 firms that spent the most on lobbying during the same three-year period fired more than 93,000 American workers. …

Worth reading the whole piece.

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CORPORATE TAXES AND INVESTMENT

Yesterday in the New York Times Greg Mankiw — a professor of economics at Harvard, an advisor to the governor of Massachusetts, in the campaign for the Republican presidential nomination and a former Chairman of the Council of Economic Advisers under president Bush — had a column in which he argued that a cut in the corporate tax rate would induce greater investment. This is a key premise of Republican campaigns that has driven Republican policy since the early 1980s. The article is here.

We should look at the record and see how well such cuts to corporate taxes actually has worked.

First, average corporate profits versus tax business pays. Contrary to the statutory rate of 39% widely quoted, the effective rate corporations actually pay is now about 22%. That is down from about 50% in 1950 and a local peak of some 44% in the early 1980s. The right likes to compare the statutory rate to other advanced countries statutory rate and claim that the US has about the highest corporate tax among advanced countries. But according to a recent study by the US Treasury the US effective rate is in about the middle of the pack of effective rates for advanced countries.

Second, let’s look at after tax profits as a percent of GDP. Despite cyclical swing there has been a strong secular trend since 1950. From 1950 to the early 1980s taxes as a percent of GDP declined from about 10% of GDP to under 4%. Since 1980 it has rebounded from under 4% back to about 10% of GDP and this measure appears to be on the verge of breaking out to a new record high.

Next look at business investment as a share of GDP . Again, despite cyclical swings there appears to be a secular trend. From 1950 to 1981 it rose and reached an all time peak of 14% in the early 1980s. Since 1980 it has been trending down from 14% and is now back to about the 10% level it was at in 1950.

…and compare it to taxes as a percent of GDP. Note the secular swing in investment is the exact opposite of the secular trend in profits. From 1950 to 1980 profits fell and investment rose. Since 1980 profits rose and investment fell. This is the exact opposite of Mankiw’s theory that cutting corporate taxes will lead to higher investments.

Mankiw writes a column for the NY Times every few weeks. Maybe in his next column he can explain why we should ignore this evidence that directly contradicts his theory.

His theory appears to be like the supply side theory that if we cut personal taxes on savings that people will save more. Since 1980 we have created IRA and other instruments that allow consumers to save on a tax free basis and increase their returns. So what happened to the personal savings rate over this period, it fell from 14% to almost 0%. This has to be about the greatest failure of an economic theory since communism. Remember, Milton Friedman said the most important test of a theory is how its forecasts work. Using Friedman’s basis the supply side theory about personal savings was a abject failure.

Now, I’m going to surprise you by saying that I completely agree with Mankiw that corporate profits taxes should be cut. But of course there is a catch.

What I want corporations to pay taxes on is their profits as defined by the Generally Accepted Accounting Procedures (GAAP) rather than profits as defined by the IRS. Congress does not establish GAAP so this change would massively cut the ability of Congress to create loopholes or special cases in the tax code. As a consequence incentives for firms to buy-off politicians would be massively reduced. If you are a corporate CEO would rather use the money you now have to spend on Washington lobbyist and expensive tax lawyers to actually expand your business. My primary objective is to reduce the power of corporate money in politics and if Mankiw is right that it increases investment all the better.

Almost to a man Republican and business leaders strongly agree that the US should not have industrial planning. Politicians should not be in the business of picking winner and losers. But the US has a major industrial planning system, it is just that we call it the federal tax code. And generally the critics are right, Washington does a poor job of picking winners and losers.

According to the GAO the industries with the highest effective tax rates like information technology are frequently the fastest growing industries. Moreover the slowest growing industries, like oil, have the lowest effective tax rate. The GAO estimate that the oil industries’ effective tax rate is about 11%, or about half the overall corporate tax rate.

Apparently oil executives learned decades ago that the get a much higher return on their capital if they use it to buy political favors rather that actually drilling for more oil. Surprisingly, domestic oil production actually rose in 2009 and 2010. This is the first consecutive annual increase in domestic oil production since Carter was president and oil faced price controls and windfall profits taxes. Maybe the oil executives realized they could not buy-off Obama and decided that to grow profits they had to do something really radical, like increasing domestic oil production.

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