What are U.S. corporations doing with all the surplus they’re managing to rake in? Well, they’re not investing it. Instead, they’re paying it out to shareholders and upper-management, buying back their stock and expanding their portfolios of financial assets, and hoarding the rest in cash. The net effect is to dampen the rate of economic growth and the creation of new jobs.
And that’s worrying mainstream economists and others who celebrate capitalists, since they appear to be failing in their “historical mission” to accumulate capital.
According to a recent paper by Joseph W. Gruber and Steven B. Kamin (pdf), of the Board of Governors of the Federal Reserve System, in the years since the Great Financial Crash, investment spending by non-financial corporations (the red line in the chart above) has been much lower than their “savings” (undistributed profits, the blue line), which has placed them in the position of being net lenders (the black bars at the bottom of the chart).
we find that the counterpart of declines in resources devoted to investment has been rises in payouts to investors in the form of dividends and equity buybacks (often to a greater extent than predicted by models estimated through earlier periods), and, to a lesser extent, heightened net accumulation of financial assets. The strength of investor payouts suggests that increased risk aversion and a precautionary demand for financial buffers has not been the primary reason firms have cut back investment. Rather, our results are consistent with views that, for any number of reasons, there has been a decline in what firms perceive to be the availability of profitable investment opportunities.
In other words, corporations have been distributing their profits for many uses other than real investment, a process that started before the crash and has quickened in the years since.
As it turns out, I’ve been teaching about Marx’s theory of the accumulation of capital this week, using the following equation:
ΔK = Δc + Δv = βDI = s – [(1-β)DI + DO + DM + DR]
The idea is that the accumulation of capital (ΔK = Δc + Δv) represents a distribution of the surplus to internal managers (βDI), which is equal to the difference between the total surplus (s) and all other distributions of the surplus—to internal managers other than for the purpose of accumulation ([1-β]DI), to owners (DO), to merchants (DM), and all others (DR ). Obviously, if the distributions of the surplus in the form of CEOs salaries, dividends, merchants, and all others (e.g., taxes to the state, rent to landowners, interest payments, and so on), plus cash holdings, increase, then less accumulation of capital—that is, investment—will take take place.
And that’s exactly what’s been going in recent years—thus undermining the legitimacy of both capitalists and of capitalism.
As Marx wrote (in chapter 24 of volume 1 of Capital), in one of the most quoted and yet misinterpreted passages:
Accumulate, accumulate! That is Moses and the prophets! “Industry furnishes the material which saving accumulates.” Therefore, save, save, i.e., reconvert the greatest possible portion of surplus-value, or surplus-product into capital! Accumulation for accumulation’s sake, production for production’s sake: by this formula classical economy expressed the historical mission of the bourgeoisie, and did not for a single instant deceive itself over the birth-throes of wealth. But what avails lamentation in the face of historical necessity? If to classical economy, the proletarian is but a machine for the production of surplus-value; on the other hand, the capitalist is in its eyes only a machine for the conversion of this surplus-value into additional capital. Political Economy takes the historical function of the capitalist in bitter earnest.
Bitter earnest, indeed—on the part of classical economists then and mainstream (neoclassical and Keynesian) economists today.
Thanks to Bruce Norton, we know that that passage is not Marx’s assertion that capitalists are driven to accumulate capital. Instead, it’s what mainstream economists (then as now) claim is the role capitalists can and should play. It’s one side, if you will, of our 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 jobs.
When they fail to to fulfill that historical mission, and use the surplus to line their own pockets and to share it with their friends, they break the pact and lose their legitimacy in having sole control over the surplus.
Mainstream economists want to do everything possible to encourage the capitalists to accumulate capital. The rest of us recognize that the time has come to replace the capitalists and use the surplus to benefit the mass of people who, until now, created but have had no say in deciding what should be done with the surplus.
Remember Gravity Payments, the company that established a $70,000 minimum wage?
Well, according to Paul Keegan [ht: sm], things have been going pretty well since the change was made.
Six months after Price’s announcement, Gravity has defied doubters. Revenue is growing at double the previous rate. Profits have also doubled. Gravity did lose a few customers: Some objected to what seemed like a political statement that put pressure on them to raise their own wages; others feared price hikes or service cutbacks. But media reports suggesting that panicked customers were fleeing have proved false. In fact, Gravity’s customer retention rate rose from 91 to 95 percent in the second quarter. Only two employees quit — a nonevent. Jason Haley isn’t one of them. He is still an employee, and a better paid one.
But there is one problem:
the biggest threat to [Dan] Price’s company isn’t his strategy; it’s his brother. Lucas’s lawsuit, scheduled to be heard in May, could ruin Gravity. Price estimates legal fees will reach $1 million by then. The suit was filed on April 24, 11 days after the pay-raise announcement — perhaps to pressure Dan to sell when Gravity was in the limelight, thus maximizing the value of Lucas’s share. Dan says Lucas has refused his offer to buy him out for $4 to $5 million. (Lucas’s attorney says the suit is unrelated to the raises.)
I’ve been following and writing about the saga of Massey Energy and Don Blankenship even since the 5 April 2010 fire in their Upper Big Branch Mine when they killed 29 miners.
Now, Blankenship—who should have been charged with murder—is actually standing trial on three felony counts, including conspiracy to violate mining safety rules, conspiracy to block inspectors from carrying out their duties at the Upper Big Branch mine before the explosion, and misleading financial regulators about his company’s safety record after the explosion.
According to the New York Times,
That he is being prosecuted at all is stunning, given his political clout in a state with a long, sordid history of coal-mine tragedies, stretching back to at least the late 1800s. He spent $5 million to elect one State Supreme Court justice, which prompted a documentary film labeling him “The Kingmaker,” and he was photographed on the French Riviera with another. Both later voted to throw out a $50 million jury verdict against Massey.
“Politicians, Democrats and Republicans, flocked to Blankenship,” said Patrick McGinley, a law professor at West Virginia University who contributed to the state inquiry. “He was viewed by many as untouchable, just like all the other corporate executives of coal companies that killed scores or hundreds or thousands of miners over the last century.”
That’s why the trial itself, regardless of the final verdict, is a sign of change in coal country:
Gary Quarles, a retired miner whose son, Gary Wayne Quarles, 33, died in the blast, was a miner himself. He and his wife, Patty, who has a tattoo on her left ankle of her son wearing his black miner’s hard hat, have been attending the proceedings.
The trial began last week; it is expected to run into November. By the end, Mr. Quarles said, the public will “see what kind of man Don really is.”
Five years after losing their son, the couple would like to see Mr. Blankenship convicted. But seeing him in court — surrounded by lawyers, listening to himself referred to as “the defendant” — is a kind of satisfaction in itself.
Not enough, perhaps, but change it is.
Alan B. Krueger wants the United States to raise the minimum from $7.25 an hour to $12 (“phased in over several years”) but not to $15 an hour.
Research suggests that a minimum wage set as high as $12 an hour will do more good than harm for low-wage workers, but a $15-an-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences. . .
Although the plight of low-wage workers is a national tragedy, the push for a nationwide $15 minimum wage strikes me as a risk not worth taking, especially because other tools, such as the earned-income tax credit, can be used in combination with a higher minimum wage to improve the livelihoods of low-wage workers.
Economics is all about understanding trade-offs and risks. The trade-off is likely to become more severe, and the risk greater, if the minimum wage is set beyond the range studied in past research.
While conservative mainstream economists want to abolish (or at least not raise) the minimum wage and to rely on the earned-income tax credit (which, remember, places all the burden on taxpayers and none on employers), liberal mainstream economists (like Krueger) suggest mixing the earned-income tax credit with a slightly higher minimum wage.
What both wings of mainstream economists share is a view of the labor market shown above, characterized by an equilibrium wage rate and the existence of unemployment at a minimum wage above that equilibrium rate. That, for them, is the trade-off: a higher minimum wage that will benefit the workers who keep their jobs versus the workers who will be laid off if the minimum wage is increased.
What Krueger and other mainstream economists don’t explain is a different tradeoff: between doing nothing and adopting measures to increase the demand for labor. As all of my Principles of Microeconomics understand, it’s possible to increase both the minimum wage and the demand for labor. As a result, all workers (including those who are currently earning more than the minimum wage) will be better off.
How is that possible? Well, the demand for labor on the part of employers can increase as a result of increases in the minimum wage itself, as poorly paid workers have more money to spend on goods that are produced by other minimum-wage workers. It can also increase through public jobs programs, if government revenues are used to hire unemployed and underemployed workers. (Together, those two effects would shift the demand for labor out to the right, through the point marked B on the chart.)
When mainstream economists like Krueger don’t present that possibility, of hiring the workers private employers are unwilling to take on at a higher minimum wage, they’re failing to present the real tradeoff we as a society face: on one hand, continuing to allow private employers to pay low wages to workers and to lay off any workers they don’t want to keep on if the minimum wage is actually increased and, on the other hand, making sure all workers are paid a decent wage and are guaranteed a job at that wage.
The only risk of doing the latter is to the standing of mainstream economists themselves—and, of course, to the private employers whose profit-making decisions they take as given.
The last time I brought up the issue, I was referring to mainstream economists’ presumption we would forever live in a Goldilocks economy: not too equal and not too unequal but just right.
But, as we know, the Goldilocks economy no longer exists (and hasn’t, for over three decades), as economic inequality has continued to grow.
Well, as Jeff Spross has discovered, the same principle applies to economic growth.
The presumption is, fast economic growth is a good thing. Everyone benefits from a larger economic pie. And slower-than-normal growth is something we should be worried about.
Not so fast. A dark and unpleasant truth is that many economic elites actually have a vested interest in anemic job growth and a slack labor market.
How so? As I explained to my students yesterday, faster economic growth means (usually) tightening labor markets and more worker bargaining power—and, as a result, higher wages. On one hand, those increasing wages mean more worker income and more mass consumption. But they also put the squeeze on profits, and the distributions of those profits to the rest of the economic elite.
To which Spross adds:
Finally, there’s a lifestyle issue at play. If the incomes of everyday workers go up, then elites’ real incomes must go down. The labor they’re buying is more costly. This completely changes where and how the elite can spend their money, and what they can and can’t consume. The rising “servant economy” rests on a wide relative gap between high and low incomes.
Put it all together and that’s why we’re seeing such an intense debate about Fed policy in the current economic situation. It’s not just about interest-rate spreads for banks. It’s about the larger and more complex issue of class bargaining power—inside corporations (between workers and capitalists over the size of profits, and between capitalists and the management to which they distribute a portion of the profits) and outside corporations (not only in terms of the commodities capitalists sell to workers, but also the “booty” they share with shareholders, investors, financial institutions, and others).
As Spross puts it,
Elites obviously don’t want to completely tank the economy. But it certainly works for them if it stays modestly stagnant, maximizing the growth of the pie while minimizing worker bargaining power.
It’s the Goldilocks principle: Don’t run the economy too hot or too cold. Run it just right.