Profits Without Social Benefit

The conventional explanation for our economic problems seems to be that our businesses are strapped for funds.  Greater business earnings, it is said, will translate into needed investment, employment, consumption and, finally, sustained economic recovery.  Thus, the preferred policy response: provide business with greater regulatory freedom and relief from high taxes and wages. 

It is this view that underpins current business and government support for new corporate tax cuts and trade agreements designed to reduce government regulation of business activity, attacks on unions, and opposition to extending unemployment benefits and increasing the minimum wage.

One problem with this story is that businesses are already swimming in money and they haven’t shown the slightest inclination to use their funds for investment or employment.

The first chart below highlights the trend in free cash flow as a percentage of GDP.  Free cash flow is one way to represent business profits.  More specifically, it is a pretax measure of the money firms have after spending on wages and salaries, depreciation charges, amortization of past loans, and new investment.  As you can see that ratio remains at historic highs.  In short, business is certainly not short of money.

So what are businesses doing with their funds?  The second chart looks at the ratio of net private nonresidential fixed investment to net domestic product.  I use “net” rather than “gross” variables in order to focus on investment that goes beyond simply replacing worn out plant and equipment.  The ratio makes clear that one reason for the large cash flow is that businesses are not committed to new investment.  Indeed quite the opposite is true.

cash flow

real investment trends

Rather than invest in plant and equipment, businesses are primarily using their funds to repurchase their own stocks in order to boost management earnings and ward off hostile take-overs, pay dividends to stockholders, and accumulate large cash and bond holdings.

Cutting taxes, deregulation, attacking unions and slashing social programs will only intensify these very trends.  Time for a new understanding of our problems and a very new response to them.

The Free Trade Myth

The US government, on behalf of our largest corporations, continues to push for approval of the Transpacific Trade Partnership (TPP), a new “so-called” free trade agreement.

It is striking how political and business leaders rally around the virtues of free trade.  The WTO, NAFTA, TPP, the Korea-U.S. Free Trade Agreement, etc. are all presented as vehicles for freeing trade and thus boosting efficiency and majority living conditions.  Notice—it is the World Trade Organization, the North American Free Trade Association, etc.

Two problems—first free trade does not automatically lead to benefits for working people.  Second, these agreements do far more than reduce trade barriers.

The theory of comparative advantage, which underpins most arguments for free trade, is based on numerous assumptions, including full employment, full mobility of labor and capital within a country, complete lack of mobility of labor and capital across national borders, perfect competition, automatic currency movements to balance trade, a lack of externalities . . . the list goes on.  The fact is that if any one of these assumptions is violated there is no assurance that dropping tariffs and other trade barriers will benefit working people; in fact, quite the opposite is likely to result.  (For more see my recent book, Capitalist Globalization: Consequences, Resistance, and Alternatives.)

Moreover, while lowering barriers to trade gets all the attention, these agreements generally have more than twenty chapters that are designed to restrict the ability of governments to regulate the production, investment, and employment activity of foreign investors as well as more directly promote the power of transnational corporations to freely pursue profits.  See here, here, and here for the Korea-U.S. Free Trade Agreement and here and here for the TPP.

As more and more U.S. workers have come to see how globalization has led to a hollowing out of manufacturing, growing downward pressure on wages and working conditions, corporate tax avoidance, and enhanced political power for large corporations, they are often lectured that they are part of the global wealthy and therefore should support these agreements to help workers in other countries.

Well, 2014 marks that twentieth anniversary of NAFTA and Mark Weisbrot, writing in the Guardian newspaper, provides a useful summary of how things worked out for Mexico.

Here is an excerpt:

But what about Mexico? Didn’t Mexico at least benefit from the agreement? Well if we look at the past 20 years, it’s not a pretty picture. The most basic measure of economic progress, especially for a developing country like Mexico, is the growth of income (or GDP) per person. Out of 20 Latin American countries (South and Central America plus Mexico), Mexico ranks 18, with growth of less than 1 percent annually since 1994. It is of course possible to argue that Mexico would have done even worse without NAFTA, but then the question would be, why?

From 1960-1980 Mexico’s GDP per capita nearly doubled. This amounted to huge increases in living standards for the vast majority of Mexicans. If the country had continued to grow at this rate, it would have European living standards today. And there was no natural barrier to this kind of growth: this is what happened in South Korea, for example. But Mexico, like the rest of the region, began a long period of neoliberal policy changes that, beginning with its handling of the early 1980s debt crisis, got rid of industrial and development policies, gave a bigger role to de-regulated international trade and investment, and prioritized tighter fiscal and monetary policies (sometimes even in recessions). These policies put an end to the prior period of growth and development. The region as a whole grew just 6 percent per capita from 1980-2000; and Mexico grew by 16 percent – a far cry from the 99 percent of the previous 20 years.

For Mexico, NAFTA helped to consolidate the neoliberal, anti-development economic policies that had already been implemented in the prior decade, enshrining them in an international treaty. It also tied Mexico even further to the U.S. economy, which was especially unlucky in the two decades that followed: the Fed’s interest rate increases in 1994, the U.S. stock market bust (2000-2002) and recession (2001), and especially the housing bubble collapse and Great Recession of 2008-9 had a bigger impact on Mexico than almost anywhere else in the region.

Since 2000, the Latin American region as a whole has increased its growth rate to about 1.9 percent annually per capita – not like the pre-1980 era, but a serious improvement over the prior two decades when it was just 0.3 percent. As a result of this growth rebound, and also the anti-poverty policies implemented by the left governments that were elected in most of South America over the past 15 years, the poverty rate in the region has fallen considerably. It declined from 43.9 percent in 2002 to 27.9 percent in 2013, after two decades of no progress whatsoever.

But Mexico has not joined in this long-awaited rebound: its growth has remained below 1 percent, less than half the regional average, since 2000. And not surprisingly, Mexico’s national poverty rate was 52.3 percent in 2012, basically the same as it was in 1994 (52.4 percent). Without economic growth, it is difficult to reduce poverty in a developing country. The statistics would probably look even worse if not for the migration that took place during this period. Millions of Mexicans were displaced from farming, for example, after being forced into competition with subsidized and high-productivity agribusiness in the United States, thanks to NAFTA’s rules.

It’s tough to imagine Mexico doing worse without NAFTA. Perhaps this is part of the reason why Washington’s proposed “Free Trade Area of the Americas” was roundly rejected by the region in 2005 and the proposed Trans-Pacific Partnership is running into trouble. Interestingly, when economists who have promoted NAFTA from the beginning are called upon to defend the agreement, the best that they can offer is that it increased trade. But trade is not, to most humans, an end in itself. And neither are the blatantly mis-named “free trade agreements.”

In sum, we don’t help workers here or anywhere else by falling for government and business pronouncements surrounding the TPP or other similar agreements.

Unfortunately, far too many people remain confused about what these agreements really do and that has weakened our ability to defeat them.  One reason is that far too many people see them as disconnected from on-going domestic policies and struggles, as separate initiatives that are too complex to understand.  In reality, these agreements are simply another way for corporate interests to advance current domestic attacks on the public sector and unions and efforts to promote privatization, tax cuts, corporate mobility, and financialization.  We need to see that we are up against a coherent set of political and economic interests and organize accordingly.

Dismal Trends

Officially our most recent recession began December 2007 and ended June 2009.  The following chart provides an important perspective on the recovery period.


Stocks and profits have enjoyed a remarkable recovery.  While income is slightly up over the period, it is critical to remember that this is average income and the increase largely reflects gains for those at the very top of the income distribution.  Jobs and housing have yet to recover.

So, with returns to capital booming, it is easy to understand why business leaders are relatively content with current policies and, by extension, political leaders are reluctant to rock the boat.

Unfortunately, current policies are unlikely to do much to improve the job prospects or income of most workers.  In fact, the rise in business profits owes much to our depressed labor conditions.  Unless something dramatic happens, we can expect the next few years to look very much like the past few years.