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(What’s Left of) Our Economy: Inside the U.S. Research and Development Slump

14 Monday Nov 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

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Bank for Intenational Settlements, Bernie Sanders, Elizabeth Warren, innovation, National Science Foundation, neo-liberalism, private sector, Project-Syndicate.org, research and development, science, stock buybacks, technology, William H. Janeway, {What's Left of) Our Economy

At the risk of sounding like an Elizabeth Warren or Bernie Sanders clone, I’ve just come across some data showing that stock buybacks by U.S. public companies have really gotten out of hand. That matters because it looks like they’ve been denying these firms major resources for performing the research and development (R&D) needed to keep creating new products, services, and processes, and maintain the U.S. economy’s global competitiveness.

I got interested in these trends due to a post at the Project-Syndicate.com website by William H. Janeway. According to this business and economics writer, for decades through the first half of the twentieth century, America’s industrial giants in particular spent significant shares of their profits on “Scientific research and development of technological applications,” and indeed virtually monopolized such activity in the United States up to the start of World War II.

Once the war broke out, and long after (including of course during the early Cold War), these efforts were powerfully supplemented by the federal government. And beginning in the 1960s (roughly), when for various reasons, the profits that powered private sector R&D began drying up, Washington’s funding actually was able to fill the gap pretty satisfactorily.

Yet starting in the early 1980s (and I’m simplifying terribly here), market-friendly neo-liberal national economic policies like regulatory reform and tax cutting revived corporate profits. But these measures also presented business with a less risky, more immediately lucrative, and therefore more appealing way to use this new windfall than figuring out how to provide new and better goods and services – buybacks of their own shares of stock, a practice that was legalized in 1982.

I’ve found data going back to 1995, and from then through 2019, reports the Bank for International Settlements (a grouping of the world’s major central banks) annual U.S. gross stock buybacks soared more than ten-fold – from $73.16 billion to $829.18 billion. Yearly net buybacks jumped even faster – from $34.41 billion to $605.22 billion.

And since then, annual gross buybacks have jumped still higher. Investment banking firm Goldman Sachs pegs the 2021 gross buyback total at $992 billion, and not surprisingly predicts that the number for this year will hit $1 trillion. The slow growth stems partly from a one percent excise tax on the largest buybacks that kicks in next year.

Private sector R&D hasn’t exactly stood still during this period. But the National Science Foundation (NSF) says it rose only four-fold, from $129.83 billion to $498.18 billion. (See the spreadsheet provided at the first link here.) Put differently, in 1995, annual gross buybacks were 56.35 percent of annual R&D outlays. In 2019, annual gross buybacks just over 60 percent higher.

The NSF believes that private sector R&D neared $532 billion in 2020. But even that nice increase wouldn’t change the ratio much.

During these decades, moreover, federally funded R&D hasn’t remotely filled the gap. It increased nearly 150 percent from 1995 to 2019, but in absolute terms, the latter total was only $62.80 billion. And in 2020, it’s estimated to have risen only to $65.69 billion.

Further, neo-liberalism (or market fundamentalism, or whatever you want to call it0 is just as much to blame for this sluggish pace as it is for Wall Street deregulation, for it resulted from the same, reflexive anti-government impulses.

I don’t mean to demonize private business or finance or free markets, or to lionize government. But clearly something’s gone very wrong with the incentive structures shaping business decisions, and just as clearly, lots of business lobbying has had lots to do with it. Ditto for inadequate federal funding. Without major changes, don’t expect the U.S. economy from escaping the dangerous trap of heavy reliance on debt-based growth any time soon.

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(What’s Left of) Our Economy: Could Trump’s Business Tax Cuts Be Working (Kind of) as Advertised?

16 Sunday Dec 2018

Posted by Alan Tonelson in (What's Left of) Our Economy

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capex, capital spending, dividends, Factset.com, mergers and acquisitions, research and development, Standard & Poor's 500, stock buybacks, tax cuts, taxes, Trump, Washington Post, {What's Left of) Our Economy

One of the biggest stories in economics and politics over the past year has been the tax bill championed successfully by both the Trump administration and the Republican-controlled Congress. Economically it’s widely judged to have failed in its primary stated mission: encouraging more productive investment in the U.S. economy. And because it supposedly did little more than shower cash on already profit-rich corporations that overwhelmingly put it to supposedly unproductive uses like share buybacks and dividend payments (see, e.g., here and here), the American public rightly recognized it as a giveaway to tycoons and The Rich generally, and viewed it as one big reason to vote GOP candidates out of office in the recent midterm elections.

What a surprise, then, to come across evidence that the $1.5 trillion in business tax cuts so far have done a respectable job of working as advertised.

According to the Washington Post‘s Michael Heath, new research from Standard and Poor’s shows that since the tax package was passed, the firm’s well-known group of the 500 largest publicly traded U.S. companies have performed as follows:

>Through the first three quarters of this year, they’ve boosted share buybacks – which support the value of company stock and in the process enrich executives paid largely based on the increase (or decrease) in these stocks’ value – by 11.84 percent.

>During the same period, they’ve hiked capital spending (on new plant and equipment) by 19 percent.

>Over this span, they’ve boosted research and development spending by 34 percent.

>During the first eleven months of the year, their dividend payouts have been virtually unchanged.

When the entire American business universe is examined, the picture looks somewhat different – at least through the first half of this year. According to this summary of research from Goldman Sachs:

>buybacks rose 48 percent

>capital spending rose 19 percent

>research and development spending rose 14 percent.

What’s noteworthy about these figures, though, is that they indicate that the larger, indeed multinational U.S.-based companies spent their tax windfalls more productively than smaller, largely domestically focused firms. That’s noteworthy because one of the principal objectives of the tax cuts was to persuade the multinationals to stop stashing so much of their earnings abroad and bring these monies back home to stoke growth and jobs. So it appears that, to a significant extent, that’s what they’ve done.

Of course, the real results of the effects of the tax cuts (or any other policy initiative) can only be assessed accurately not simply by comparing year-on-year rates of change in various metrics, but examining how these rates of change have differed (if at all) from those of years before the initiative went into effect. I haven’t yet located the data for most of these indicators, but the chart below combined with the Washington Post figures for capital spending for the S&P 500 makes clear that it’s been growing much faster since the cuts were passed than before.

One area the Post didn’t look at, though, can’t be neglected: mergers and acquisitions. The numbers indicate that, measured by value, such activity increased much faster between 2017 and 2018 (for the first three quarters of the year) than between 2016 and 2017 – by 33.47 percent to 1.05 percent. (My sources are the 2016-18 data published by Factset.com.  Here’s its latest report.) The absolute numbers are sizable, too – the value of these transactions rose by more than $387.5 billion from January-through-September, 2017 to the same period this year. (Note: These figures are only authorized expenditures – but reportedly there’s evidence that 85 percent wind up getting made.)

But here (as elsewhere, for that matter) is where we run into a big complication that comes up whenever a policy initiative is judged: What changes are attributable to this move, and what changes to other factors? These other factors include other policies (like interest rate movements both announced and suggested by the Federal Reserve, or regulatory or trade policy changes), or existing or evolving business decisions on deploying capital (based on corporate judgments regarding likely customer demand that stem from the overall state of the economy or particular markets, and on how these situations are considered likely to change).

But all the same, a reasonable, defensible bottom line conclusion seems to be that productive business spending since the tax cuts’ passage is rising at a faster rate than before passage, and that the tax package has played a discernible role. Moreover, some of the other plausible reasons for this acceleration also are arguably attributable to Trump administration policies – at least in part.  Faster overall economic growth and regulatory reform are two examples. Trade policy might be a third.

Moreover, I’m making these points as someone who’s argued that President Trump’s prioritization of the tax cuts and Obamacare repeal was a major first-year mistakes, at least politically. Both should have taken a backseat to infrastructure building in particular. I’ve even expressed skepticism about the cuts’ likely economic impact.

But economically, the administration and its supporters seem to have had (and still have) a pretty good story to tell about the tax cuts – which could have bolstered their political appeal. Which means that a bigger mystery than the cuts’ actual effects could be why the administration told it so ineffectively.

Following Up: Casino Capitalism is Everywhere But in the Macroeconomic Data

26 Wednesday Aug 2015

Posted by Alan Tonelson in Following Up

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business investment, casino capitalism, expansions, Financial Crisis, financial deregulation, Following Up, GDP, Great Recession, growth, inflation adjustment, recoveries, stakeholder capitalism, stock buybacks, stock market, Wall Street reform

Over the last year I’ve published an op-ed and a book review that both challenged the widespread claim that the Wall Street deregulation dating from the late-1970s turned American business leaders in general from responsible stakeholders dedicated to creating real wealth for society into shortsighted casino capitalists. My evidence was government data on the macroeconomy showing the contribution to growth made by business investment both before and after that de-regulatory Big Bang. If the claims – most notably made by Democratic presidential contender Hillary Clinton in a ballyhooed speech – are right, I reasoned, then such investment (on factories and labs and warehouses and equipment and the like) should have made a much smaller contribution after the supposed Age of Short-term-ism began than before.

My article found just the opposite, but recently someone in the field whose work I respect expressed some skepticism, and suggested that if I had used different data, I’d get significantly different results. So that’s how I spent some of this afternoon, and just found out that the story remains the same. That is, when you look at the economy, as opposed to anecdotes about corporate greed, there are just no figures that point to a fundamental degeneration in the nature of American capitalism.

My challenger objected mainly to my use of inflation-adjusted data. My rationale was, and still is, that for all the difficulties of accurately measuring price changes, it’s better to use figures that try to distinguish between real economic output and its increase on the one hand, and the impact of rising prices on the other. But the pre-inflation data fails to turn up any noteworthy Big Bang effects, either.

My original article looked at long American expansions since the 1960s, since the 1950s economy was surprisingly choppy, and growth kept getting interrupted, and since comparing expansions (or recessions) is the best way to get apples-to-apples data. This exercise clearly showed that business spending played a smaller role in the post-deregulation 1980s recovery than during the pre-deregulation 1960s expansion (generating 10.75 percent and 9.78 percent of their growth, respectively).

But during the 1990s boom and the bubbly recovery of the previous decade, business spending’s contribution to growth was twice as great – even though business is thought to have become even more obsessed with crackpot financial engineering. And during the current recovery, such investment has been responsible for substantially more than than one quarter of the historically weak real growth that’s been recorded.

Remove the inflation adjustment and the numbers change only modestly – and not nearly enough to even begin supporting the casino capitalism thesis. During the 1960s expansion, business spending generated 13.80 percent of total growth. As with the post-inflation data, this share dropped during the 1980s recovery (to 10.41 percent). But thereafter it rose and stayed much higher than its level in the 1960s – to 17.33 percent during the 1990s expansion, 14.33 percent during the 2000s bubble, and 18.09 percent during the current recovery.

I’ve focused on business investment’s contribution to growth because I wanted data that wouldn’t “penalize” corporations when they were making these spending decisions at times when the economy was faltering for other reasons. Moreover, fueling growth is one of the main reasons we value business spending in the first place. But my challenger wanted to know whether it was correct to argue that business spending as a share of the economy on a static basis peaked in the 1970s – before the financial deregulatory wave was triggered. The answer? Yes, but not even these results show anything like a late-1970s watershed. And that’s even using pre-inflation figures, as I was asked to.

During that decade’s relatively short 1975-1980 recovery from its oil shock-induced miasma, business investment represented 12.92 percent of gross domestic product before factoring in inflation. During the 1980s expansion, that figure dropped off significantly (consistent with the growth contribution figures), to 11.02 percent. But that so-called Reagan boom represented the nadir. During the expansion of the Clinton years – marked by, among other developments, a huge telecommunications- and internet-led technology build-out – the figure bounced back to 12.66 percent.

Business as a share of the economy did fall during the bubble decade, when Wall Street shenanigans were peaking. But the falloff was minimal – to 12.48 percent. It’s been lower during the current recovery – currently averaging 12.12 percent. But that’s still higher than its level during the pre-deregulation 1960s expansion (11.11 percent).

Moreover, it’s crucial to remember that a crash in business investment was one of the main drivers of the Great Recession – when credit seized up all around the world and Armageddon fears were rife. It shouldn’t be any surprise that corporations didn’t reopen the spigots all at once. But reopen them they have, to a great extent. In fact, starting from a low of 11.08 percent of GDP in 2010, this business spending ratio hit 12.88 percent of GDP by 2014, and stood at 12.82 percent during the first half of this year – just marginally below those late-1970s levels. And although it’s true that Wall Street reform efforts have reduced financial engineering possibilities by American financiers, the role played by share buybacks in powering the stock market’s post-recessionary surge makes clear that they’re alive and well elsewhere in U.S. business ranks.

None of this is to say that business spending levels today are adequate, and that (as just mentioned), the financial regulatory regime doesn’t enable too much capital to be expended in too many unproductive ways. But anyone yearning for re-regulation to bring back a golden age of corporate stakeholder capitalism should keep in mind that the business spending data, at least, say that America never had one to begin with.

(What’s Left of) Our Economy: A Gathering Storm?

24 Monday Aug 2015

Posted by Alan Tonelson in (What's Left of) Our Economy

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Alan Greenspan, bottom line growth, bubbles, China, commodities, currency, currency wars, devaluation, emerging markets, executive compensation, Federal Reserve, Financial Crisis, free trade agreements, George W. Bush, infrastructure, interest rates, Janet Yellen, mergers and acquisitions, Obama, productivity, profits, quantitative easing, recovery, secular stagnation, stimulus, stock buybacks, stock markets, stocks, top line growth, Trade, valuations, yuan, {What's Left of) Our Economy

The wild swings of stock markets around the world today should caution anyone against reading too much into recent global financial turmoil. As should be obvious to everyone – but is so easy to forget – these stock market declines are anything but the first that have been seen, and they’re anything but the worst that have been seen. The same goes for the economic situation in China and elsewhere – which matters much more.

But although this clearly is no end-of-the-world moment or even close, the latest news is a warning that the dangerous weaknesses that plunged the world into genuinely terrifying financial crisis and then savage recession just seven years ago have only been papered over, and have begun worsening again. More seriously, the United States and the rest of the world look much less capable of resisting powerful downdrafts.

Just to review very quickly, as I see it, the last crisis resulted fundamentally not from failures to regulate Wall Street adequately, the housing bubble, or any largely financial conditions. These were simply symptoms of mounting weaknesses in America’s real economy stemming largely from disastrously shortsighted trade policies. Both major parties became so enamored with offshoring-friendly trade deals and other policies that they sent overseas a critical mass of the U.S. productive base, and therefore a critical mass of the income-earning opportunities available to middle- and working-class families.

The George W. Bush administration, the Congress, and the Federal Reserve under then-Chairman Alan Greenspan could have reversed or even slowed this trade policy approach in order to restore these crucial domestic sources of income- and wealth-creation. Instead, they decided to double down on the offshoring. But to enable consumers (who are after all voters) to preserve their living standards, they decided to create then-unprecedented amounts of easy money, which made possible substituting borrowings (typically based on the bubble-ized home prices) for inadequate paychecks. Until that bubble’s inevitable bursting, the results were widely praised as having produced an economy whose “fundamentals” were “strong.“

Once the crisis struck, the Fed and other major world central banks have sought to reestablish and preserve national and global economic momentum through yet greater money printing and thus credit-creation. National governments in the United States (during President Obama’s first year in office) and especially in China lent a big hand through stimulus programs aimed at creating new government-supported demand for goods and services, and therefore for workers.

Seven years later, the results are in, and it’s fair to say that they have produced growth and employment levels that keep lagging historical standards not only in the United States, but everywhere. In fact, largely because the Fed so quickly and energetically capitalized on its massive credit-creation powers, America is a conspicuous out-performer. But as I’ve also pointed out, the makeup of the U.S. economy still strongly resembles that of the housing- and consumption-heavy bubble decade, which is why a more compelling description of America’s situation is not “ho-hum recovery” but “secular stagnation.” This concept, popularized by former Clinton-era Treasury Secretary and Obama chief economic adviser Larry Summers, holds that the nation has lost so much productive oomph that it’s forced to rely on Fed-created bubbles for whatever growth it can muster – and thus to run the ongoing risks of bubble-bursting as well.

Something, though, has clearly changed in recent weeks. The one-word description is “China” but the real answer is of course much more complicated, and looks to be a function of a seemingly fatal flaw of global easy-money policies: They’ve fostered way too little productive, growth-boosting investment, and way too much mal-investment. The latter has barely kept growth in positive territory but that’s gifted Wall Street and executives at big publicly traded companies with huge windfalls thanks to a (so far) mutually reinforcing cycle of share buybacks and rising stock prices that has supercharged their largely stock price-based pay. Other uses for cash and credit that have seemed more tempting than servicing economically fragile and in many cases still-cautious American consumers included buying up other companies and, mainly for Wall Street, simply parking the money at the Fed, where big finance firms could earn a bit of interest on trillions of dollars for doing absolutely nothing.

But still other distorted investment choices have included so-called emerging markets. In those lower income countries, higher levels of risk brought attractive levels of return, but investors (and not just financiers) were also impressed with relatively high growth rates. And that’s where much of the latest round of troubles is rooted.

Several big and chronic weaknesses and vulnerabilities of these countries – including China – were largely overlooked. First, because incomes were comparatively low, these countries were never able to grow mainly by turning out goods and services for their own populations. Growing fast enough to spur significant economic progress required finding markets “where the money is,” which meant abroad generally and disproportionately in the United States. When growth in the United States merely kept slogging along, many of the new factories that were built with American consumers in mind began looking awfully risky.

Just as bad, many of these emerging market countries themselves got greedy. Their governments and central banks took advantage of low global interest rates by trying to juice extra growth and rising incomes by offering easy credit to their consumers, home-builders, and other businesses, too. But they weren’t able to borrow sufficiently in their own currencies, and many jumped at the chance to take on abundant dollar-denominated debt – including companies that could borrow on their own, without working directly through their governments. Moreover, many of these low-income countries (and some wealthy counterparts, like Australia and Canada) had gotten an added boost from China’s seemingly endless demand for their raw materials, which produced the lion’s share of their growth. But they failed to use earnings from the resulting high commodity prices to diversify their economies and take at least a few eggs out of that basket.

Lately, both China and the Federal Reserve have hit the emerging world with several punishing whammies. China itself continued to depend heavily on exports for its growth, and therefore started slowing itself as global demand continued disappointing. Its performance was additionally undermined by a decision to let permit the yuan to strengthen, in order to win it reserve currency status and greater long-term economic independence.

Beijing had also been trying to subsidize more growth led by domestic demand. But as with other third world countries, because Chinese incomes remain so low even after impressive pay raises, massive amounts of stimulus ranging from infrastructure and housing investment to (most recently) stock market manipulation did more to saddle that country with immense debts than to keep growth and job-creation at levels that were both economically acceptable, and politically essential – i.e., strong enough to keep the masses reasonably happy.

If official data is close to accurate (hardly a certainty), China’s growth rate is still world-class. But even its recent decline from previous blistering levels clearly has been enough to ravage global demand for fuels, industrial metals, and foodstuffs alike – and in turn the economic prospects of the commodity producers. Since the economic prospects of these erstwhile johnny-one-note high-riders began worsening so markedly, foreign investors began pulling money out, putting downward pressure on their currencies, and consequently on their ability to import – including from the United States. At the same time, China’s own recent yuan devaluation deepened this predicament – by further diminishing the PRC’s own purchasing power, and by reducing the price competitiveness of all the finished goods that the commodity producers and their more manufacturing-oriented third world counterparts needed to sell.

If anything, the Fed’s impact on the developing world has been still more destructive. Like the United States, much and even most of its recent growth has depended on artificially cheap credit. But unlike the United States, it can’t borrow in its own currencies. As a result, these countries are exposed to exchange-rate risk (created mainly by the rising dollar) as well as to interest rate risk (which can be created not only by the actual Fed interest rate hike that Chairman Janet Yellen and colleagues have been promising, but by a perception of impending hikes that reduces the third world’s creditworthiness and thus their access to affordable new money.

The real U.S. economy is more than capable of staying relatively unscathed by this global turmoil. For despite the best efforts of American leaders, it’s still less reliant on trade, foreign investment, and the well-being of the rest of the world than practically any other economy. U.S. stock markets, by contrast, could be in for greater trouble, which could be the single most important reason for their recent drop (keeping in mind that their levels are always determined by a great variety of long and short-term influences).

The reason? Among the major props for stocks during the current feeble U.S. recovery has been American companies’ remarkable ability to grow profits despite the real economy’s woes. As widely noted, much of this growth has been on the bottom line – resulting from greater efficiencies rather than better revenues. Human ingenuity’s power should never be underestimated, but by the same token, it’s hard to believe that infinite amounts of blood can be drawn from that stone. Indeed, faltering recent American productivity performance strongly indicates that diminishing returns are in store for these efforts. Emerging markets, with their historically high growth rates and gargantuan populations, have long been viewed as business’ best future hope for accelerated top line growth, and so far they’ve performed well enough to justify considerable confidence.

This latest set of emerging market troubles, including China’s, signals that this ace in the hole really isn’t – which understandably raises questions about whether current stock valuations can be sustained. As usual, please take all forecasting efforts, including mine, with a big boulder of salt. But it seems to me at least conceivable that, just as Wall Street has for years comforted itself by observing that “the stock market is not the economy,” unless Washington screws up royally, Main Street will start becoming grateful for this divide.

But that doesn’t mean that a healthy speed up in the recovery is in sight. Speculation has abounded lately that the Fed might not only postpone those interest rate hikes but need to launch another round of bond-buying – i.e. “quantitative easing.” Yet why a new influx of easy money would generate more sustainable growth than its predecessors isn’t at all apparent.  Washington could return to greatly increased deficit spending, but with so much of U.S. consumer and business demand being satisfied by imports, and with foreign currency devaluations likely to continue, the growth and employment benefits seem more certain than ever to leak overseas.  In principle, this new spending could be targeted on domestic infrastructure, but however popular this idea has been in Washington, it hasn’t yet been popular enough to produce enacted programs, and the intensifying presidential cycle could well turn into a new obstacle.

What about tariffs on imports, which could spur growth by cutting the trade deficit – and without budget-busting tax cuts or stimulus programs? As usual, they’re completely off the table. Indeed, new trade agreements, and therefore higher deficits and even slower growth, appear to be next on that front – though perhaps not until both Democrats and Republicans are safely past the next election.

That leaves fostering an unhealthy speed up in the recovery – kicking the can down the road yet again secular stagnation-style, for the usual unspecified reasons expecting meaningfully different results, and acting surprised when crisis clouds begin gathering anew.        

 

(What’s Left of) Our Economy: It’s Not Just Inequality

14 Tuesday Oct 2014

Posted by Alan Tonelson in (What's Left of) Our Economy

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carried interest, family formation, Federal Reserve, housing, Immigration, inequality, lobbying, median income, millennials, offshoring, private equity, quantitative easing, recession, stock buybacks, tax loopholes, Trade, wages, {What's Left of) Our Economy

Folks at the Social Contract‘s Writers’ Workshop seemed so pleased with my talk on sources of inequality in the U.S. that it seemed worth sharing on RealityChek. Here goes.

Inequality clearly has been a major preoccupation of Americans this year, especially in the chattering classes. The most talked-about economics book in recent memory focused on the subject (Thomas Piketty’s Capital in in the Twenty-First Century). And although some polling evidence indicates that Main Street-ers are more concerned with jumpstarting economic growth than with reducing the rich-poor gap, politicians such as President Obama and likely presidential contender Hillary Clinton have called narrowing the gap a major national priority.

But for all the attention the subject has received, two important points are still generally overlooked. First, inequality is far from America’s leading income-related challenge nowadays. After adjusting for inflation, the median incomes of Americans aren’t simply falling behind those of the top one percent or however the affluent are labeled. They’re falling, period.

In other words, the vast majority of Americans have gotten poorer in absolute terms according to the broadest measure of economic well-being (which includes benefits, rental and investment income, and other earnings as well as wages and salaries). Moreover, this decline didn’t start during the financial crisis and Great Recession. It dates back 25 years. And it’s continued into the recovery. At least as striking, although the nation has suffered worse economic times in its history, never before has such income deterioration lasted so long.

As never before, then, Americans are confronted with the question, “Why is a national economy developed and organized in the first place if not to help most people improve their lives?” An economy in which living standards are falling for the majority for more than two decades is an economy that can only be labeled a failure.

But not only is America’s income problem worse than widely recognized (at least by the powers-that-be). The roots of this problem are more numerous and widespread than commonly supposed. And those inequality engines that have been identified look even stronger, and work in a greater number of ways, than originally thought.

For example, critics of U.S. trade policy have long argued that recent American trade deals and related policy decisions have worsened income inequality by providing too many incentives for businesses to ship lucrative middle class jobs overseas. But it’s increasingly clear that jobs don’t actually need to be exported for these policies to drive down worker incomes. Simply making the offshoring option widely available to employers has surely curbed employees’ wage demands, much less willingness to strike.

Open Borders-style immigration policies, it should be equally clear, have pressured incomes on the bottom rungs of the U.S. economic ladder by flooding their job markets with millions of poorly skilled and educated foreign-born competitors. But such policies also fuel inequality, as I wrote in Fortune this summer, by increasing the demand for public services whose costs the rich can often evade or limit by their ability to exploit tax loopholes.

But the list of inequality engines hardly stops there. For example, even aside from immigration issues, tax loopholes tend to benefit the wealthy disproportionately because they reflect the kind of lobbying power that less wealthy Americans can rarely mobilize. One prime example: how private equity fund partners have persuaded Washington to tax the vast bulk of their earnings at the low long-term capital gains rate rather than at the much higher income rate.

And speaking of American finance, let’s not forget how regulations encourage publicly held companies to use debt to buy back enormous amounts of their own stock. These purchases of course boost stock prices and massively benefit top executives – who often are compensated with stock or paid based on share performance. But they can often harm non-managerial workers because they further divorce corporate financial performance from the vigor of the real economy whose fortunes they once depended on. Thus they tend to undercut business’ actual and perceived stakes in broadly based and shared national prosperity.

Once the equity markets began recovering in spring of 2009, largely due to cost-cutting that super-charged profits despite ongoing economic malaise, CEOs and their boards unquestionably realized that their company’s fates were no longer closely connected to those of their customers. And when investors began worrying about the sustainability of such bottom-line growth, the buyback spree enabled Corporate America to persist with customer- and worker-light strategies.

Macro-economic forces are also helping to weaken wages and incomes for huge percentages of the American people. On top of the recession’s impact on the entire economy, it’s been widely noted that it and the historically weak recovery have taken an especially heavy toll on younger Americans. Forced to postpone family formation and first-time home-buying, the typical millennial will face unprecedented obstacles to amassing the kind of nest egg that has underlay middle class and working class prosperity for decades.

Finally, just as stock buybacks have loosened the relationship between Corporate America and the rest of the economy, the Federal Reserve’s quantitative easing measures have loosened the relationship between those who do and don’t own capital, and inevitably fostered neglect of the latter. The main purpose of the Fed’s bond-buying has been to lower the returns on safe assets like treasury bills to induce investors to abandon them for riskier, higher-yielding assets with greater potential to quicken economic growth.

The growth effects have disappointed even the Fed, it’s just been learned. But QE has been a roaring success in boosting asset prices across the board, and thus immensely enriching those who owned them already or were capable of buying them.

My audience at the Writers’ Workshop consisted mainly of activists who have worked long and hard on the remarkably successful campaign to prevent a dramatic and disastrous loosening of controls over American immigration flows. I ended by congratulating them on their ability to resist the combined forces of Big Business, organized labor, the White House, the leaders of both major political parties, and Big Media – and by telling them how fervently I hoped that their counterparts working to dismantle other engines of income deterioration would get their acts together as effectively.

(What’s Left of) Our Economy: Be Careful What You Wish For on Labor Day

29 Friday Aug 2014

Posted by Alan Tonelson in (What's Left of) Our Economy

≈ 1 Comment

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AI, artificial intelligence, executive compensation, Jobs, Labor Day, productive investment, robotics, stock buybacks, technology, workers, {What's Left of) Our Economy

What better time than the run-up to Labor Day to lament the state of the American job market – including not just still-disturbingly high rates of un- & underemployment, but all the subpar indicators on the Federal Reserve dashboard? And what better time to blame corporate America’s recent splurge on unproductive spending of all kinds for the sorry state of so much of the nation’s workforce?

But here’s the funny (not “funny ha-ha”) thing about it. There does seem to be little question that unproductive uses of corporate resources are abundant. Two columns this week – from Harold Meyerson in The Washington Post and Paul Roberts in The Los Angeles Times — show that convincingly. The percentage of companies’ profits devoted to financing buybacks of shares of their own stock is especially outrageous, given how heavily executive compensation these days depends on stock prices.

But it could be seriously misguided to assume, in Roberts’ words, that a major answer, and probably the major answer, to U.S. workers’ woes is to “restore a broader sense of the corporation as a social citizen” and thereby encourage business to view “workers, communities and other stakeholders” as assets much more worthy of investing in.

I’m not doubting that more corporate spending on plant, equipment, technology, and worker training would expand employment. But given the continued rise of labor-saving technologies, it’s far from clear that such behavior would expand high wage employment by anything close to leaps and bounds – at least in the manufacturing and tech companies that Meyerson and Roberts obviously are thinking of first and foremost.

In fact, for what it’s worth, the academic and policy classes in America seem far more worried today that the current generation of business equipment and software, characterized by advanced robotics and artificial intelligence, will break the historic pattern and wind up displacing on net many more good jobs than it creates.

So let’s definitely use Labor Day as an opportunity to spotlight the need to make America’s economy much less of a casino focused tightly on enriching the already wealthy, and much more of an engine of healthy growth and rising living standards for the rest of the nation. But let’s not forget that, with so many massive demographic, social, and cultural as well as technological waves breaking over the economy, not to mention the (often but not completely policy-driven) globalization of production and investment, bashing the usual villains is bound to yield dramatically diminishing returns.

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The Snide World of Sports

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  • Golden Oldies
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  • Housekeeping
  • Housekeeping
  • Im-Politic
  • In the News
  • Making News
  • Our So-Called Foreign Policy
  • The Snide World of Sports
  • Those Stubborn Facts
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Guest Posts

  • (What's Left of) Our Economy
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  • Glad I Didn't Say That!
  • Golden Oldies
  • Guest Posts
  • Housekeeping
  • Housekeeping
  • Im-Politic
  • In the News
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  • Our So-Called Foreign Policy
  • The Snide World of Sports
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Current Thoughts on Trade

Terence P. Stewart

Protecting U.S. Workers

Marc to Market

So Much Nonsense Out There, So Little Time....

Alastair Winter

Chief Economist at Daniel Stewart & Co - Trying to make sense of Global Markets, Macroeconomics & Politics

Smaulgld

Real Estate + Economics + Gold + Silver

Reclaim the American Dream

So Much Nonsense Out There, So Little Time....

Mickey Kaus

Kausfiles

David Stockman's Contra Corner

Washington Decoded

So Much Nonsense Out There, So Little Time....

Upon Closer inspection

Keep America At Work

Sober Look

So Much Nonsense Out There, So Little Time....

Credit Writedowns

Finance, Economics and Markets

GubbmintCheese

So Much Nonsense Out There, So Little Time....

VoxEU.org: Recent Articles

So Much Nonsense Out There, So Little Time....

Michael Pettis' CHINA FINANCIAL MARKETS

RSS

So Much Nonsense Out There, So Little Time....

George Magnus

So Much Nonsense Out There, So Little Time....

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