Stagnation and Financialization

The dominant firms in the U.S. and other major capitalist counties are happily making profits.  They just aren’t interested in investing them in new plant and equipment.  Rather they prefer to use their earnings to acquire other firms, reward their managers and shareholders, or increase their holdings of cash and other financial assets.

The chart below, taken from a Michael Burke blog post in the Irish Left Review, shows trends in both U.S profits (defined by Gross Operating Surplus which is calculated by subtracting the value of intermediate inputs, employee compensation, and taxes on production from earnings) and investment (defined by Gross Fixed Capital Formation).

 

As you can see the increase in profits (in orange) has swamped the increase in investment (in blue) over the relevant time period; in fact investment in current dollars has actually been falling.

Looking at the ratio between these two variables helps us see even more clearly the growth in firm reluctance to channel profits into investment.  The investment ratio (investment/profits) was 62% in 1971, peaked at 69% in 1979, fell to 61% in 2000 and 56% in 2008, and dropped to an even lower 46% in 2012.

According to Burke, “If US firms investment ratio were simply to return to its level of 1979 the nominal increase in investment compared to 2012 levels would be over US$1.5 trillion, approaching 10% of GDP.”  

The same dynamic is observable in the other main capitalist economies:

In 1995 the investment ratio in the Euro Area was 51.7% and by 2008 it was 53.2%. It fell to 47.1% in 2012. In Britain the investment ratio peaked at 76% in 1975 but by 2008 had fallen to 53%. In 2012 it was just 42.9% (OECD data).

So what are firms doing with their money? As Burke explains:

The uninvested portion of firms’ surplus essentially has only two destinations, either as a return to the holders of capital (both bondholders and shareholders), or is hoarded in the form of financial assets. In the case of the US and other leading capitalist economies both phenomena have been observed. The nominal returns to capital have risen (even while the investment ratio has fallen) and financial assets including cash balances have also risen.

So, with firms seeing no privately profitable productive outlet for their funds, despite great societal needs, their owners appear content to reward themselves and sock away the rest in the financial system.  In many ways this turns out to be a self-reinforcing dynamic.  No wonder things are so bad for so many.

Real Unemployment

The Federal Reserve Bank has said it will maintain its stimulus policy as long as the economy remains weak. One of its key indicators for the strength of the economy is the unemployment rate.

The unemployment rate has been steadily falling for several years, from 10% in October 2009 to 7.3% in August 2013.  However, this decline in the official unemployment rate gives a misleading picture of economic conditions, at least as far as the labor market is concerned.

The reason, as the Economy Policy Institute explains, is because of the large number of “missing workers”. These missing workers are:

potential workers who, because of weak job opportunities, are neither employed nor actively seeking a job. In other words, these are people who would be either working or looking for work if job opportunities were significantly stronger. Because jobless workers are only counted as unemployed if they are actively seeking work, these “missing workers” are not reflected in the unemployment rate.

The chart below shows the Economic Policy Institute estimate for the number of missing workers.

 

The next chart compares the estimated unemployment rate including missing workers (in orange) with the official unemployment rate (in blue).

 

As you can see, while the official unemployment rate continues to decline, the corrected unemployment rate remains stuck at a rate above 10%. In other words labor market conditions remain dismal. And here we are only talking about employment.  If we consider the quality of the jobs being created, things are even worse.

Fighting Inequality

The following post by the economist Michael Taft appeared in the Irish Left Review.    Although Taft is addressing an Irish audience, I think his discussion of Swiss initiatives against inequality should be of interest to many Americans as well.

As the [Irish] Government does its post-mortem on the Seanad referendum [to abolish the upper house of the Irish parliament], Switzerland is gearing up for a vote in November on a referendum that is truly reforming.  It’s called the 1:12 initiative. It proposes that monthly senior executive salaries cannot exceed 12 times the pay of the lowest paid in a firm.  And it proposes that this be put into law.  This is pretty heavy in a country which is home to major financial institutions and multinationals.

Imagine the impact here.  In the Bank of Ireland, the CEO Richie Boucher has a salary of €843,000 (no, that’s not a typo).  A bank clerk on starting pay is approximately €22,000.  Under this law one of two things would have to happen:  either Richie’s salary would have to fall by three-quarters – to €264,000 a year. Or the starting pay would have to rise to €70,250.  I leave you to decide which is more likely to happen, if either.

But there is more going on in Switzerland than just a pay ratio debate.  Earlier this year, the people voted on a referendum that put controls on executive pay and gave shareholders’ more rights over executive compensation.  There has been growing anger over excessive salaries and the bonus culture among Swiss companies.  The referendum passed overwhelmingly despite the fact that opposing business lobbies outspent the ‘yes’ side by 40-1.

Now there are three more referenda coming down the line.  First, there is a proposal to increase the minimum wage to approximately €18 per hour.  Even in an economy with high living costs this is a hefty rise.  Proportionately, for Ireland, this would amount to somewhere between €11 and €12 per hour (using the median wage as the comparison).

There is a referendum on a basic income – guaranteeing every adult a basic income of €24,500 a year.   Again, even factoring in living standard difference, this is hefty sum, designed to ensure a safety net for everyone.

And then there’s that 1:12 initiative – designed to do two things:  put upward pressure on low-pay and downward pressure on excessive pay.  As you can imagine, the business lobbies and the Government are predicting all manner of plagues and pestilence if this referendum succeeds.  First off, there is the claim that businesses will leave Switzerland if this is passed.  There is something in that.  Multi-national capital can be relatively mobile and many companies can punish a people for taking democratic decisions that companies don’t like.  This is not the case for all companies, though but the blackmail threat permeates the body politic.

A second argument put forward by the business lobbies is that they will just avoid the law by breaking up their companies into smaller units.  In this scenario, all the low-paid will be put into one sub-company and the high-paid into another.  This will mean that each sub-company can maintain the 1:12 ratio.  There is no doubting that companies get up to all sorts of activities to avoid democratic interventions  (the ever-vigilant WorldbyStorm highlight Ryanair’s byzantine employment contracts to prevent employees from collective bargaining).  However, this threat could be easily dealt with by legislation that treats sub-companies that sell exclusively into a main company as part of the main company itself.

Could such an initiative work here?  Eventually, but as always we must treat all such initiatives as part of a process that must be rooted in today’s reality.  We have an extremely poor indigenous sector and an over-reliance on foreign capital for value-added employment and participation in the global market.  A 1:12 initiative would immediately become hostage to multinational blackmail (this will cost jobs, etc.) and with the economy still in a domestic-demand recession such an initiative would understandably raise fears.

However, this is not to say we put this on some shelf to be dealt with sometime in some future (like Seanad reform).  A first step would be to require all companies to publish their company accounts – profits, executive pay, etc.  Publicly-listed companies are already required to do this but many private unlimited companies (Dunnes Stores) and foreign branches (Tesco) don’t have to.  There is no rationale why some companies are required to publish and others are not.  Freedom of economic information would be a first step in creating a more informed public and efficient market relationships.

Second, we could take up the idea put forward by ICTU sometime ago – that wages that exceed a certain ratio should not be deductible for income tax purposes.  If, for instance, there was a 1:12 pay ratio in a company, then the company would have to pay corporate tax on incomes that exceed the upper threshold.  Taking the Richie Boucher example, Bank of Ireland would have to pay tax on that portion of his salary that exceeded €264,000.  We may not be in a position now to stop excessive pay, but we certainly don’t have to subsidise it with taxpayer money.

So we could take positive concrete steps.  However, let’s not lose the overall sight of what’s happening in Switzerland.  There is a democratic revolt against high pay and low pay:  limitations on executive pay, increased minimum wage, and a basic income.  There is a lively debate about equality and inequality.  There are concrete proposals and there will be votes.  But even if the 1:12 initiative fails, that’s not the end of it.

Of the many issues that we will need to address on the other side of austerity (and there are many:  employment, investment, indigenous enterprise development, universal public services, social protection, etc.) there is the issue of reducing inequality, creating strong social protection floors and raising income floors.

What the Swiss are debating is how to raise that floor while toppling a few golden towers.  This is what we should start debating.  And the sooner the better.

Interesting Note:  Despite all the blackmail threats and warnings of doom about the 1:12 initiative, recent polls show it is too close to call:  36% for yes, 38% for no, with the rest undecided.