Posts Tagged ‘dividends’

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We’re all done singing to “days gone by” (even though no one really knows the lyrics). But, unless we change our tune and resolve to fundamentally alter the way the economy is organized, we’re going to have to face up to the problem that’s been haunting the United States for decades now: growing inequality.

And it’s only getting worse.

Part of the problem stems from the increase in market concentration in the United States. According to a recent research paper by Joshua Gans et al., the rise in mark-ups by large U.S. corporations is a two-edged sword: it increases the prices consumers pay but, at the same time, rewards shareholders. The problem is, the ownership of corporate stocks is more unequal than consumption—and it’s been getting more unequal in recent decades. Thus, the majority of Americans are forced to pay higher prices for the goods they consume but they don’t own much in the way of corporate equity—and the distribution of income, which was already obscenely unequal, is made even worse.

expnditure

For example, the distribution of consumption expenditures is profoundly unequal but has remained relatively stable over time: the 20 percent of families with the lowest incomes accounted for 9 percent of all expenditure in 1989, the same figure as in 2016. The 20 percent of families with the highest incomes comprised 38 percent of all expenditure in 1989, rising to 39 percent in 2016.

equity

Meanwhile, the ownership of corporate equity, which was grotesquely unequal in 1989, has become even more unequal over time. The lowest-income fifth of families had 1.1 percent of corporate equity in 1989, and still only 2.0 percent in 2016. By contrast, the highest-income quintile had 77 percent of corporate equity in 1989, and even more—89 percent—in 2016. In other words, corporate equity is about 13 times as concentrated as expenditure.*

income

The authors estimate that the rise in market power in the United States has lowered the bottom 60 percent income share (from 21 to 19 percent) and raised the income share of the top 20 percent (from 61 to 64 percent).*

The other, more recent cause of growing inequality is of course the 2017 Republican tax cut, which has allowed large corporations to reshuffle their books, reduce their federal tax obligations and use their higher retained earnings to increase stock buybacks and the dividends they pay to already-wealthy individuals (who, in turn, have been able to use their higher post-tax incomes to purchase more shares in U.S. corporations).

taxes

As is clear in the chart above, corporate taxes—in both absolute terms (the red line, measured on the left) and as a share of federal tax receipts (the blue line, on the right)—have declined precipitously since the tax cuts were enacted.

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Meanwhile, as readers can see in the chart above, the dividends corporations are paying out to the richest Americans (as well as foreign stock owners) continue to hit record highs—thus adding fuel to the fire of rising inequality in the United States.

Both increased corporate concentration and last year’s tax cut have widened the gap between the haves and have-nots in the United States. That much is clear. But Americans have to face up to a much more fundamental problem, both in days gone by and now, which neither antitrust measures nor repealing the tax cut will fix.

The fact is, the surplus created by American workers is appropriated and distributed not by them, but by the boards of directors of the corporations where they are employed. Those who do most of the work have no say in what is done with the surplus they create—nor do they receive the proceeds, either in the form of increased pay (which has barely budged in recent decades) or stock dividends (which have soared).

Unless Americans resolve to tackle that problem, the economic “seas between us braid” will continue to roar.

 

*But the authors also make clear that rising concentration is only part of the problem: “The rise in income inequality over the period that we study has been considerable, and even in the absence of market power, incomes would be more concentrated in 2016 than they were in 1989.”

**According to my own calculations, in 2014, the top 1 percent owned almost two thirds of the financial or business wealth, while the bottom 90 percent had only six percent. That represents an enormous change from the already-unequal situation in 1978, when the shares were much closer: 28.6 percent for the top 1 percent and 23.2 percent for the bottom 90 percent.

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Those aren’t my words. The quotation that forms the title of this post is from a recent Federal Reserve Bank of St. Louis blog post.

And they’re important to keep in mind in light of the news coverage (e.g., by the New York Times) of last week’s Labor Department report on hiring and unemployment. Yes, 250 thousand jobs were added in the U.S. economy last month and average earnings did rise by 0.2 percent and are up 3.1 percent over the past year.

But. . .

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The rate of growth of American workers’ wages (the blue line in the chart above) is only a hair above the increase in consumer prices (the red line). So, for all intents and purposes, real wages remain stagnant.

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Meanwhile, the profits captured by American corporations continue to grow, reaching new record highs.

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It should come as no surprise, then, that the labor share of national income (the light blue line in the chart above) remains below its pre-crash level (and much lower than any earlier year in postwar history), while the share of national income that is distributed to wealthy households in the form of dividends (the light green line) is still much higher than it’s been throughout the postwar period.

Never have corporate profits and dividends outgrown workers’ wages so clearly and for so long. And the political party dominating all three branches of the U.S. government is doing everything in its power to make sure that trend continues.

That’s the proper context for the latest jobs report—and for tomorrow’s elections across America.

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The capitalist machine is broken—and no one seems to know how to fix it.

The machine I’m referring to is the one whereby the “capitalist” (i.e., the boards of directors of large corporations) converts the “surplus” (i.e., corporate profits) into additional “capital” (i.e., nonresidential fixed investment)—thereby preserving the pact with the devil: the capitalists are the ones who get and decide on the distribution of the surplus, and then they’re supposed to use the surplus for investment, thereby creating economic growth and well-paying jobs.

The presumption of mainstream economists and business journalists (as well as political and economic elites) is that the capitalist machine is the only possible one, and that it will work.

Except it’s not: corporate profits have been growing (the red line in the chart above) but investment has been falling (the blue line in the chart), both in the short run and in the long run. Between 2008 and 2015, corporate profits have soared (as a share of gross domestic income, from 3.9 to 6.3 percent) but investment has decreased (as a share of gross domestic product, from 13.5 to 12.4 percent). Starting from 1980, the differences are even more stark: corporate profits were lower (3.6 percent) and investment was much higher (14.5 percent).

The fact that the machine is not working—and, as a result, growth is slowing down and job-creation is not creating the much-promised rise in workers’ wages—has created a bit of a panic among mainstream economists and business journalists.

Larry Summers, for example, finds himself reaching back to Alvin Hansen and announcing we’re in a period of “secular stagnation”:

Most observers expected the unusually deep recession to be followed by an unusually rapid recovery, with output and employment returning to trend levels relatively quickly. Yet even with the U.S. Federal Reserve’s aggressive monetary policies, the recovery (both in the United States and around the globe) has fallen significantly short of predictions and has been far weaker than its predecessors. Had the American economy performed as the Congressional Budget Office fore­cast in August 2009—after the stimulus had been passed and the recovery had started—U.S. GDP today would be about $1.3 trillion higher than it is.

Clearly, the current recovery has fallen far short of expectations. But then Summers seeks to calm fears—”secular stagnation does not reveal a profound or inherent flaw in capitalism”—and suggests an easy fix: all that has to happen is an increase in government-financed infrastructure spending to raise aggregate demand and induce more private investment spending.

As if rising profitability is not enough of an incentive for capitalists.

Noah Smith, for his part, is also worried the machine isn’t working, especially since, with low interest-rates, credit for investment projects is cheap and abundant—and yet corporate investment remains low by historical standards. Contra Summers, Smith suggests the real problem is “credit rationing,” that is, small companies have been shut out of the necessary funding for their investment projects. So, he would like to see policies that promote access to capital:

That would mean encouraging venture capital, small-business lending and more effort on the part of banks to seek out promising borrowers — basically, an effort to get more businesses inside the gated community of capital abundance.

Except, of course, banks have an abundance of money to lend—and venture capital has certainly not been sitting on the sidelines.

Profitability, in other words, is not the problem. What neither Summers nor Smith is willing to ask is what corporations are actually doing with their growing profits (not to mention cheap credit and equity funding via the stock market) if not investing them.

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We know that corporations are not paying higher taxes to the government. As a share of gross domestic income, they’re lower than they were in 2006, and much lower than they were in the 1950s and 1960s. So, the corporate tax-cuts proposed by the incoming administration are not likely to induce more investment. Corporations will just be able to retain more of the profits they get from their workers.

But corporations are distributing their profits to other uses. Dividends to shareholders have increased dramatically (as a share of gross domestic income, the green line in the chart at the top of the post): from 1.7 percent in 1980 to 4.6 percent in 2015.

buybacks

source (pdf)

Corporations are also using their profits to repurchase their own shares (thereby boosting stock indices to record levels), to finance mergers and acquisitions (which increase concentration, but not investment, and often involve cutting jobs), to raise the income and wealth of CEOs (thus further raising incomes of the top 1 percent and increasing conspicuous consumption), and to hold cash (at home and, especially, in overseas tax havens).

And that’s the current dilemma: the machine is working but only for a tiny group at the top. For everyone else, it’s not—not by a long shot.

We can expect, then, a long line of mainstream economists and business journalists who, like Summers and Smith, will suggest one or another tool to tinker with the broken machine. What they won’t do is state plainly the current machine is beyond repair—and that we need a radically different one to get things going again.

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Capitalism is a giant machine for pumping out the surplus from workers—just like feudalism, slavery, and other class-based economies before it.

That’s from one perspective. But the capitalist machine isn’t just about the “vampire thirst for the living blood of labor.” It also involves various mechanisms for capturing that surplus—in the form of dividends, CEO salaries, interest payments, and so on.

Another, increasingly important such mechanism is hedge funds. And boy are they capturing a lot of the surplus these days!

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source

The hedge-fund industry continues to balloon in size (after a dip during the financial crash in 2008, and even though 2015 was by all accounts a rocky year), with something like $3 billion dollars in assets under management.

And, as the New York Times reports, the pay of the industry’s leaders has soared.

JPMorgan Chase paid its chief executive, Jamie Dimon, $27 million in 2015. In another Wall Street universe, the hedge fund manager Kenneth C. Griffin made $1.7 billion over the same year.

Even as regulators push to rein in compensation at Wall Street banks, top hedge fund managers earn more than 50 times what the top executives at banks are paid.

The 25 best-paid hedge fund managers took home a collective $12.94 billion in income last year

Yes, billions, with a “b.”

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That’s the list of the top 10 (courtesy of Institutional Investor’s Alpha magazine)—from Griffin (at $1.7 billion) to Joseph Edelman (at $300 million) in 2015.

Not only are Griffin and company capturing a large share of the surplus (even when some of their funds actually lost money for investors last year, just by virtue of their sheer size).* They’re spending it—on everything from art and luxury housing to funding politicians and political campaigns.**

So, with the rise to prominence of hedge funds and other financial instruments, it’s time to revise our definition: capitalism is a giant, vampire-like machine for pumping out, capturing, and spending the surplus from workers.

*Ray Dalio made $1.4 billion in 2015 through Bridgewater Associates, the world’s biggest hedge fund firm with $150 billion of assets under management. Dalio, who founded Bridgewater, is frequently quoted promoting a strategy he calls risk parity. Yet Bridgewater’s risk parity fund, called All Weather, lost investors 7 percent in 2015.

**Griffin was the biggest donor to the successful reelection campaign of Mayor Rahm Emanuel of Chicago.

fast food

Everyone knows we live in a fast-food nation (everyone, that is, who has read Eric Schlosser’s book or seen Richard Linklater’s movie). But not everyone is aware that it’s only a tiny portion of the nation that benefits—directly and indirectly—from the existence of fast food.*

Some, of course, benefit directly, because they either receive in CEO compensation or in the form of stock dividends a portion of the enormous profits created within the fast-food industry.

fast food finances

The reason profits are so high is because fast-food wages are very low (an average of $8.69 an hour for those working at least 27 weeks in a year and 10 hours a week), and fast-food employers are able to shift the cost of the low wages they pay their employees to public programs (such as Medicaid, the Children’s Health Insurance Program, Earned Income Tax Credits, food stamps, and Temporary Assistance for Needy Families).

Those at the very top of the nation also benefit from the fast-food industry because, as a result of low wages and public programs to assist the working poor, fast-food prices are kept down. Thus, the price of one of the elements of the wage bundle of all workers—food—is kept low. Thus, workers in all industries—not just fast food but the production of all goods and services—have to spend less of their day working for themselves and more of the day working for their employers. That, in turn, raises profits in those industries, a portion of which shows up in the executive-compensation packages and dividends of the tiny minority of income earners.

The prototypical high-net-worth individuals who are “coastal, educated, older, white and male,” certainly don’t consume fast food on a regular basis.** But they’re the folks who benefit, both directly and indirectly, from the existence of a fast-food nation.

 

*The information in this post comes from two recent reports: Super-Sizing Public Costs: How Low Wages at Top Fast-Food Chains Leave Taxpayers Footing the Bill [pdf], by the National Employment Law Project, and Fast Food, Poverty Wages: The Public Cost of Low-Wage Jobs in the Fast-Food Industry [pdf], by Sylvia Allegretto et al. at the University of California, Berkeley, Center for Labor Research and Education and the University of Illinois at Urbana-Champaign Department of Urban & Regional Planning.

**Although at least one neoclassical economist who opposes any increase in the minimum wage, John Cochrane, occasionally does.