Posts Tagged ‘stock market’

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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.

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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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It sure looks like a recovery: consumer confidence, corporate profits, and the stock market are all up. Way up over their Great Recession lows, as is clear from the chart above.

But the U.S. Conference of Mayors [ht: ja] is also reporting an increase in the demand for emergency food assistance. Forty-one percent of surveyed cities reported that the number of requests for emergency food assistance increased over the past year, while 71 percent of the cities reported an increase in the number of people requesting food assistance for the first time.

From the report (pdf):

Increased requests for food assistance were accompanied by more frequent visits to food pantries and emergency kitchens. Forty-one percent reported an increase in the frequency of visits to food pantries and/or emergency kitchens each month. . .

When asked to identify the three main causes of hunger in their cities, 88 percent named low wages; also 59 percent said high housing costs and poverty. Forty-one percent cited unemployment and 23 cited medical or health costs.

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Since the end of the recession, wage increases (almost 23 percent, in nominal terms) have not been able to keep pace with the increase in rental rates for housing (which are up 26 percent).

And the situation is even worse for extremely low-income households, according to the National Housing Trust Fund (pdf). The more than 10 million extremely low-income households accounted for 24 percent of all renter households and 9 percent of all U.S. households—and they face a shortage of more than 7 million affordable rental units. Thus, 75 percent of extremely low-income households are severely cost-burdened, spending more than half of their income on rent and utilities. And that means they don’t have enough money left over for food.

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Which is why cities across the country, from Charleston to Seattle, have had to increase the amount of food they distribute—7 years into the so-called recovery.

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The folks at the Federal Reserve Bank of St. Louis find a correlation between inequality and stock prices. And, to their credit, they get half of the story: rising stock prices (and therefore increasing returns on equity wealth) have contributed to increasing inequality in the United States.

Comparing stock prices with the Gini coefficient provides further evidence of financial movement with income inequality. The steady increase in U.S. income inequality from the 1970s through the early 2000s was accompanied by strong gains in the stock market. The S&P 500 composite index grew from 92 in 1977 to over 1476 in 2007—about a 140 percent increase. These gains were huge. By comparison, the gains in the prior 30 years (1947-77) were only 50 percent. The correlation between the Gini coefficient and stock prices from 1947 to 2013 is strongly positive. As stock prices rise, the gains are disproportionately distributed to the wealthy. Lower- and middle-income families who are also wealth-poor are less likely to expose their savings to the higher risks of equity markets.

What they don’t get is the other side of the story: rising inequality has caused higher stock prices. A combination of higher profits for large, publicly traded corporations (which has served to boost the underlying returns on equity and allowed corporations to engage in stock buybacks) and a larger share of income going to the top 1 percent (as their share of the surplus has risen, which allowed them to purchase even more shares) fueled the increase in stock prices.

Once we put both sides of the story together, the conclusion is clear: rising inequality in the United States has been both a condition and consequence of rising stock prices from the late-1970s onward.

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