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August 19th, 2014 at 11:21 am

Why America’s economy stinks: Because business owners are greedier than ever

gdp growth

GDP growth

The is growth of the U.S. economy still so slow and weak? One reason is that average American consumers account for the vast majority of the spending in the economy and they are still strapped.

 

 

The reason average American consumers are still strapped, meanwhile, is that America’s companies and company owners — the small group of Americans who own and control America’s corporations — are hogging a record percentage of the country’s wealth for themselves.

In the past five years, American corporations have boosted their profits and share prices by cutting costs (firing people) and buying back stock. As a result, unemployment remains high. And wage growth for the Americans who are lucky enough to be working has been pathetic — the slowest since World War II.

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Meanwhile, America’s corporations and their owners have never had it better. Corporate profits just hit another all-time high, both in absolute dollars and as a percent of the economy. And U.S. stocks are at record highs.

Many people seem confused by this juxtaposition. If corporations and shareholders are doing so well, why is the economy so crappy?

The answer is that one company’s wages are other companies’ revenues. Americans save almost nothing, so every dollar we earn in wages gets spent on products and services (including, in some cases, those of the companies we work for). The less that American companies pay their workers, the less American consumers have to spend. And the less American consumers have to spend, the slower the economy grows.

This isn’t a complex concept. We’re all in this together. People make it complicated by casting it as a political issue and inflaming partisan tensions. But it has nothing to do with politics.

Importantly, it doesn’t have to be this way.

There’s no “law of capitalism” that says that companies have to pay their employees as little as possible. There’s no law of capitalism that says companies have to “maximize short-term profits.” That’s just a story that America’s owners made up to justify taking as much of the company’s wealth as possible for themselves.

Ironically, this short-term greed on the part of America’s owners is most likely reducing their long-term wealth: Companies can’t grow profits by cutting costs forever, because their profits can’t grow higher than their revenues. At some point, revenue growth needs to accelerate. But that won’t happen until companies start sharing more of the wealth they create with the folks who create it — their employees.

Let’s go to the charts …

1) Corporate profit margins just hit another all-time high. Companies are making more per dollar of sales than they ever have before. (Some people are still blaming economic weakness on “too much regulation” and “too many taxes.” That’s crap. Maybe little companies are getting smothered by regulation and taxes, but big ones certainly aren’t. What they’re suffering from is a myopic obsession with short-term profits at the expense of long-term value creation.)

profits

Profits as a percent of the economy.

2) Wages as a percent of the economy just hit another all-time low. Why are corporate profits so high? One reason is that companies are paying employees less than they ever have as a share of GDP. And that, in turn, is one reason the economy is so weak: Those “wages” represent spending power for consumers. And consumer spending is “revenue” for other companies. So the profit obsession is actually starving the rest of the economy of revenue growth.

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Wages as a percent of the economy.

In short, our obsession with “maximizing profits” is creating a country of a few million overlords and 300+ million serfs.

Michael Cushman: This is consistent with the global shift of wealth.  I don’t attribute it just to greed gone wild.  With good, near instant data, global competition, and labor access becoming more digital and fluid, this is a systemic phenomenon.  It makes perfect sense to each individual actor, but  it is unsustainable at the system level.   The problem is that all ideas so far to fix it, are hopeless.

What is so crazy is this is what Karl Marx saw as the future of capitalism.  He is looking more like a genius every day.  Unfortunately he couldn’t come up with a good solution either.  His basic idea, that everyone owns a piece of production has merit,  but how to operationalize it, is still a mystery.  We live in fascinating times.

When you have systemic dysfunction,  normally it takes a bigger system like government to legislate a system-wide fix, but with a global economy, spanning nations, there is no bigger system with a stick to force a system rule change.

This suggests to me that a micro change is needed.  A new corporate entity that distributes wealth more evenly yet out performs current corp governance.   A bottom up change.

Via Business Insider

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