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Thursday, August 7, 2014

Symbiosis in the Economy: Households and Corporations

                             A Breakdown in Symbiosis    

      
                      income_inequality

Symbiosis is a mutually beneficial relationship between two or more organisms or different people or groups. Between households and corporations there was a symbiosis, now it's broken. 
The Corporate economy is at war with the Household Economy. 

Screen Shot 2013-03-04 at 12.37.51 PM.png
(from an Atlantic Monthly article, 2013
Are corporations re-investing their profits productively back into the economy?  The recent history of net fixed investment: 

Another graph replicates the above one from the Atlantic Monthly article, with the title "Net Business Fixed Investments" at a CBO report, see page 36. 
And this long-term look from an article at EconoMonitor
Nominal U.S. private domestic fixed investment as a fraction of nominal GDP, annually 1929-2013, from BEA Table 1.1.5.  Horizontal line represents median value over the full period.  Shaded regions indicate NBER dates for economic contractions.

This from an article in the NYTimes by Laura Tyson and Susan Lund. The authors state: 

When measured as a share of G.D.P., this trend is even more worrisome. Net productive investment averaged roughly 4 percent of G.D.P. in the United States in the postwar period until 2000. The share plummeted after the 2001 recession and again after the 2008-9 recession, falling to a historic low of just 0.63 percent of G.D.P. in 2009.
In 2012, after four years of [so called] recovery, the share was still below 2 percent of G.D.P., less than half of its 2000 peak of 4.7 percent.
(I add the [so called] because, in Heidi Sheirholz' words, of July 3, 2014, "the unemployment rate would be 9.6 percent instead of 6.1 percent."  In other words, we are definitely in a recession, un-recovered.)
A look at the correlation between business investment and job growth, from the same Tyson and Lund article:










The left axis shows year-on-year change in real private investment in equipment and software; the right axis shows year-on-year change in private-sector employment.Credit Sources: Bureau of Economic Analysis, Federal Reserve Bank of St. Louis, Bureau of Labor Statistics, McKinsey analysis


This article calls for $150 billion per year in federal government infrastructure spending. 
"The last piece of the growth puzzle is infrastructure investment. The United States has been underinvesting in infrastructure for the last two decades, and the result is plain to see: congested roads, crumbling bridges and delays at airports. The cost of such underinvestment is more than just a test of endurance for commuters. Without modern infrastructure, products can’t move quickly and efficiently. Supply chains become more vulnerable, and businesses are more reluctant to invest."

This $150 to $180 billion per year government infrastructure  spending should be compared with the Progressive Caucus proposal to increase by $450 billion a year for three years a public jobs program. Instead of creating 1.8 million new jobs, the Tyson/Lund approach, the Progressive Caucus would create 4.6 million. Tyson recently wrote an article on the Highway Trust Fund, see here, and we learn that the gasoline tax has not been adjusted for inflation increase in 21 years, and "Investment in public infrastructure in the US has plunged to less than 2% of GDP, its lowest level since the federal government started tracking these data in 1992. The American Society of Civil Engineers (ASCE) gives a grade of D+ to infrastructure in the United States, reflecting both delayed maintenance and underinvestment." I think Tyson should have argued for a financial transaction tax to fund the investments she calls for. She limits her options, and implies their are no viable alternatives. See the CPEG report on a financial transaction tax, see here. 

Here is a brief quote from the CPEG paper's concluding section:
"In sum, I have made the following arguments concerning an FTT. First, an FTT should be designed to apply to all classes or financial assets and to apply across the range of products traded in financial asset markets. Second, a financial transaction tax has the potential for raising a significant amount of revenue. Third, at current trading levels an FTT could generate as much as $1 trillion in revenue." Given the windfall of wealth gains over the past six years ($24.5 trillion in six years, a gain of 30.2% per capita -- while the rest of the nation suffered), and over the past 35 years, to a minority of the population, such a tax is fair. The top earning one percent increased their post-tax income (not wealth) share from 8% to 17% between 1979 and 2007, all at the expense of the lower-earning 80%, see CBO report. That is a $1.26 trillion increase in annual income (every year) to just 1.2 million households, over $1 million in income yearly to each of these wealthy households, while 80% of households have seen their incomes and wealth share decline. 



Professor Jack Rasmus published a good article relating to real  investment, income increases, aggregate demand, and speculative investment (gambling), see here, with a comment I made. 

From 1960 to 2000 this "fixed" investment averaged around 4% of GDP (equivalent to today's $680 billion), since 2000 it averages around 2%. In 1999 it held at about 5%, in 2010 it was around 0.9% -- a huge plunge. 

Corporate Profits, at an all time high

Corporate profits are at a historical high as a portion of GDP (see this article with this graph). 

I also checked the BEA.gov web page and made a graph of expanding corporate profits since 2000 to 2014 (Table 6.16D). Adjusted for inflation,  profits jumped from $895 billion to $1,704 billion (or 10% of GDP), a 90% increase while the GDP/capita increased by 12% in 14 years, 200 - 2014. 

Corporate profits, up 90%
GDP per capita, up 12% 
Median household income down 8.4%  --- 2000 to 2013 
                           (see NYTimes for median income)
Or a longer view from the Federal Reserve


A summary graph (from this source): 
Source: BEA.
Source: BEA.

And this last chart -- Return on Equity -- that will not reproduce here.


View 4,000+ financial data types
View Full Chart

Target Return on Equity (TTM) Chart



For a view of "Return on Equity" 2002 to 2014 click here.
     --- it's a hidden graph at this blog page (won't copy over). 
 "Prior to 1994 there were only three years in the post Second World War period where the ratio of after tax profits even reached 16 percent for manufacturing companies . . ." -- from Samuel Rosenberg's American Economic Development Since 1945, page 298. From 2002 to 2013 ROE averaged around 19%. 

Balancing Corporate Profits and Household Income -- 
               A Key Concept
If you know only one thing about modern economies, with mass production, economies of scale, and mass consumption, it should be this idea: corporations and their consumers must balance,  symbiotically, their share of economic surplus. When corporate profits remove most of the surplus from the economy, there are too few consumers, and the national economy must contract. If workers/consumers sop-up too much surplus in the form of household income, then corporations shrink, the economy contracts. An on-going balance is required. Jeff Madrick's book Why Economies Grow is the best exposition on this theme I know of. With inequality, consumer savings and credit eventually run dry and consumption stalls, a recession sets in. The one-sided surplus exhausts productive routes for re-investment, stock asset prices soar to a point. And then, let's say, stock prices drop by 20% from their recent run-up; then consumption among the higher-income households will drop, and unemployment and hardship at the lower-earning level will increase. That is why it should be common knowledge. 

Where do people work?
The US Census,  in 2008, stated that half of "paid employees" (over 60 million workers) work in firms or "establishments" with more than 500 employees, and almost 66% work in firms with more than 100 employees, and about one sixth work in firms with less than 20 employees, out of 120.9 million total "paid employees". This data, in 2008, would cover 83% of everyone working in the U.S (see this BLS page).

What happens then to corporate profits?
Professor Wm Lazonick at Huffington Post a few years ago wrote: "For 2001-2010, 459 companies in the S&P 500 Index in January 2011 distributed $1.9 trillion in dividends, equivalent to 40 percent of their combined net income, and $2.6 trillion in buybacks, equal to another 54 percent of their net income. After all that, what was left over for investments in innovation, including upgrading the capabilities of their workforces? Not much."

94% of profits over ten years going into non-productive purposes, not fixed investment. This is a disaster, the breakdown of an indispensable symbiosis. For a 50 page book excerpt, dated 2012, by Lazonick, see here


A Snapshot of the U.S. Economy, 1984 to 2014

Median household income  ----------------------- up 8%
Typical worker compensation -------------------  up 8%

Productivity ----------------------------------------  up 64% 
"Disposable personal income per capita in chained 2009 dollars"     -----------------------------------------------------------------------  up 64%
Per capita GDP  ------------------------------------  up 62%
"Real" inflation adjusted GDP -------------------  up 116%
Sources: median household income, page 33, "disposable personal income" Table 2.1, personal income, per capita GDP growth and "real" GDP growth at BEA.gov, and for productivity and worker compensation, read next paragraph.

And the well-known bifurcation of compensation vs. productivity  is shown in this EPI graph: Just remember that productivity rose by 64%, compensation rose by 8%.


Disconnect between productivity and typical worker compensation,* 1948–2013

YearHourly compensationProductivity
19480.0%0.0%
19496.3%1.5%
195010.5%9.3%
195111.8%12.4%
195215.0%15.6%
195320.8%19.5%
195423.5%21.6%
195528.7%26.5%
195633.9%26.7%
195737.1%30.1%
195838.2%32.8%
195942.6%37.6%
196045.5%40.0%
196148.0%44.4%
196252.5%49.8%
196355.0%55.0%
196458.5%60.0%
196562.5%64.9%
196664.9%70.0%
196766.9%72.1%
196870.7%77.2%
196974.7%77.9%
197076.6%80.4%
197182.0%87.1%
197291.3%92.0%
197391.3%96.7%
197487.0%93.6%
197586.9%97.9%
197689.7%103.4%
197793.2%105.8%
197896.0%107.8%
197993.4%108.1%
198088.6%106.5%
198187.6%111.0%
198287.8%107.9%
198388.3%114.1%
198487.0%119.7%
198586.4%123.4%
198687.3%128.0%
198784.6%129.1%
198883.9%131.8%
198983.7%133.7%
199082.2%137.0%
199182.1%138.9%
199283.1%147.6%
199383.4%148.4%
199483.8%150.8%
199582.7%150.9%
199682.8%157.0%
199784.8%160.6%
199889.2%165.9%
199992.0%172.8%
200093.0%179.2%
200195.7%183.5%
200299.6%191.4%
2003101.8%200.9%
2004101.1%209.1%
2005100.3%214.5%
2006100.4%216.5%
2007101.9%218.8%
2008102.1%219.4%
2009110.1%226.0%
2010112.1%235.4%
2011109.6%236.7%
2012107.7%240.9%
2013109.2%243.1%
Cumulative percent change since 1948243.1%109.2%ProductivityHourly compensation196019802000050100150200250300%
Note: From 1948 to 1979, productivity rose 108.1 percent, and hourly compensation increased 93.4 percent. From 1979 to 2013, productivity rose 64.9 percent, and hourly compensation rose 8.2 percent.
* Data are for compensation of production/nonsupervisory workers in the private sector and net productivity (growth of 


YearHourly compensationProductivity
19480.0%0.0%
19496.3%1.5%
195010.5%9.3%
195111.8%12.4%
195215.0%15.6%
195320.8%19.5%
195423.5%21.6%
195528.7%26.5%
195633.9%26.7%
195737.1%30.1%
195838.2%32.8%
195942.6%37.6%
196045.5%40.0%
196148.0%44.4%
196252.5%49.8%
196355.0%55.0%
196458.5%60.0%
196562.5%64.9%
196664.9%70.0%
196766.9%72.1%
196870.7%77.2%
196974.7%77.9%
197076.6%80.4%
197182.0%87.1%
197291.3%92.0%
197391.3%96.7%
197487.0%93.6%
197586.9%97.9%
197689.7%103.4%
197793.2%105.8%
197896.0%107.8%
197993.4%108.1%
198088.6%106.5%
198187.6%111.0%
198287.8%107.9%
198388.3%114.1%
198487.0%119.7%
198586.4%123.4%
198687.3%128.0%
198784.6%129.1%
198883.9%131.8%
198983.7%133.7%
199082.2%137.0%
199182.1%138.9%
199283.1%147.6%
199383.4%148.4%
199483.8%150.8%
199582.7%150.9%
199682.8%157.0%
199784.8%160.6%
199889.2%165.9%
199992.0%172.8%
200093.0%179.2%
200195.7%183.5%
200299.6%191.4%
2003101.8%200.9%
2004101.1%209.1%
2005100.3%214.5%
2006100.4%216.5%
2007101.9%218.8%
2008102.1%219.4%
2009110.1%226.0%
2010112.1%235.4%
2011109.6%236.7%
2012107.7%240.9%
2013109.2%243.1%
Note again the growth figures of 8.2% and 64%, not between median household income and average "disposable income" per capita over a 30 year period, but in hourly worker compensation vs productivity. 

What if? 
What if median household income had grown at 64%?  Then today's median household income would be --- 
      $77,376 instead of $51,107 -- 64% higher.
The graph is part of a seminal paper from the EPI which states:
"This paper argues that broad-based wage growth is necessary to address a constellation of economic challenges the United States faces: boosting income growth for low- and moderate-income Americans, checking or reversing the rise of income inequality, enhancing social mobility, reducing poverty, and aiding asset-building and retirement security. The paper also points out that strong wage growth for the vast majority can boost macroeconomic growth and stability in the medium run by closing the chronic shortfall in aggregate demand (a problem sometimes referred to as “secular stagnation”). Finally, the paper argues that any analyses of the causes of rising inequality and wage stagnation must consider the role of changes in labor market policies and business practices, which are given far too little attention by researchers and policymakers."

WEALTH, again
Here's a nice graphic about wealth. From left to right, 
bottom 40%, middle 20%, 4th 20%, then next 10%, next 5%, next 4%, final top 1%:


The graph does not concur with the facts cited by the source. Edward Wolff's paper of 2012, page 58, states that in 2010 the bottom 80% owned 11%,
the next 10% (80 to 90 percentile)owned 12.2%, 
next 5% owned 13.6%,               
the next 4% owned 27.7%, 
the final 1% owned 35.4%. The graph does not look similar. It may be showing the average savings per household in each group. That looks more accurate.      Let's look at another wealth graph, from msnbc, same sort of thing but easier to visualize: 
   

_____________________________________________


Wealth Gains over 30% in last six years (adjusted per capita and for inflation) while most households see their incomes drop by 8%. 
A Gain of over $24.5 Trillion
The total gross national debt is around $17 trillion, the annual GDP is about $17 trillion, the Social Security Trust Fund is about $2.7 trillion, in comparison. 
I wrote the Federal Reserve about an article, and Brian Noeth, an economist, sent a table back showing that net worth had gained, per capita and inflation adjusted, by 30.2% since 2008. 
Part of the justification for the Federal Reserve's program called QE 3 was that low interest rates would stimulate more loan creation for investment in fixed assets, resulting in more jobs. But with historically high profits, raising capital is not a concern for corporations. And as I stated in the most recent essay at this blog, total "household net worth" since 2008 has risen by $24.5 trillion, or by $200,000 for every U.S. household! The median household in 2010 owned $77,300, and half owned less while half owned more. If the gain in wealth had been distributed equally to all household, the median would have nearly quadrupled to $277,300 per household. But the majority, or 75%, of this gain of $24.5 T. in net assets went to the top-saving 5% who own 75% of all financial assets, about $3 million per household to all 6 million households in this top echelon. See Federal Reserve report here, page 2. 



There is a symbiotic relationship -- to restate my thesis -- between household economies and corporate economies, and that symbiosis is broken. I think corporate tax rules should penalize companies that do not re-invest profits, and if they maintain a severe salary ratio between executive and low-paid employees. The corporation is a fabulously productive invention, but it has to serve its purpose of enriching the workers and the nation. The top corporations ---- with 94% of profits to dividends and stock buy backs! -- obviously are serving ONLY themselves, and have been hijacked by a culture of greed. 

Last, an example  --- WalMart in 2013 I believe had $7.6 billion in profits to deal with, it chose to buy back stock, but it could have raised average annual wages to $25,000 for 825,000 employees, an hourly raise from about $9.06 an hour to $14.83, a 64% pay raise. (This is at Demos or at Mother Jones if you want to look for it.) WalMart didn't raise wages, the Walton's took it all for themselves.   

02FEB2014

Income Inequality in 2014

income_inequality
Solutions: 
I don't hear any politician talking about restructuring corporate taxes along democratic standards of high pay. Labor was 66% of total income, and now it's 58% according to Harold Meyerson writing at American Prospect  and by the Federal Reserve graph shown above --- that 8% drop in total compensation is about $12,000 income loss per ALL lower-earning 80% of families. Add $12,000 to all the lowest 20% of households and poverty might be nearly eliminated. 
This US Census bar graph shows that 13.5% of households have total income of less than $15,000 per year. Most of them would be lifted out of poverty with an additional $12,000 of income. 
Household Income Distribution


The $12,000 per year income loss for all 80% of U.S. households is also mentioned in this CBO report, page xiii, that states: 

"As a result of those changes, the share of household 
income after transfers and federal taxes going to the 
highest income quintile [or20% of households] grew from 43 percent in 1979 to 53 percent in 2007 (see Summary Figure 3). The share of after-tax household income for the 1 percent of the population with the highest income more than doubled, 
climbing from nearly 8 percent in 1979 to 17 percent in 
2007."

I'll restate that: if the 10% shift in post-tax and post-transfer income were restored to 1979 proportions, then $1.162 trillion in income would go to the lower-earning 80% of households (98 million households). Each household among the 80% would receive on average  $12,000 more annual income, every year. And as I said, this would nearly eliminate poverty from the United States of America. 

Fixing the corporate fixed investment story, and increasing wage income in the lower-earning 80% to distribution levels seen 30 to 40 years ago would benefit the entire population and the economy. My major gripes are with the medical sector, the financial sector, the military sector, and the political campaign corruption system. Furthermore we need to subsidize child care and institute mandatory paid vacation for all full-time workers. All this.

Again, Professor Wm. Lazonick at Huffington Post, explains how $4.5 trillion over ten years was basically wasted by U.S. corporations: 

"For 2001-2010, 459 companies in the S&P 500 Index in January 2011 distributed $1.9 trillion in dividends, equivalent to 40 percent of their combined net income, and $2.6 trillion in buybacks, equal to another 54 percent of their net income. After all that, what was left over for investments in innovation, including upgrading the capabilities of their workforces? Not much." 

Reforms and Solutions
You might like to read. click here Jeff Madrick's solution to the unemployment crisis, April 9, 2014, or click here for a direct view. This proposal includes these 15 steps: 

CREATE MORE JOBS
1. Increase Fiscal Stimulus 
2. Invest In Infrastructure 
3. Fund Direct Employment 
4. Counteract Short-term Wall Street Strategies
5. Regulate Private Equity

CREATE BETTER JOBS

6. Raise the Minimum Wage

7. Expand the Earned Income Tax Credit

8. Institute National Paid Sick & Family Leave

9. Protect the Right to Organize

10. Enforce Labor Laws
CREATE FUTURE JOBS
11. Increase Public Funding of Research and Development
12. Invest in Clean Energy
13. Revamp Workforce Training
14. Expand Programs Aimed at Opportunity Youth

15. Reduce Child Poverty

The Chicago Political Economy Group, CPEG, published recently an article about their Financial Transaction Tax, the one that could raise $1 trillion per year to finance a national living wage jobs for all program. Read the article here.
Excerpt: 

I think it is essential that we find ways of making these statistics real to the people we talk to. Here is one way I try to do it. Imagine we could take all the officially unemployed and underemployed and line them up, shoulder to shoulder. The line would stretch from San Diego to Bangor, Maine, and back again – and there would still be about 2 million people trying to get into the line. That is a national disgrace – and a huge collection of personal tragedies.

Also needed: 
Corporate tax reform to encourage investment and discourage stock buy backs and excessive dividends, anyone? Tax capital gains at standard income level tax rates to save $88 billion per year. Eliminate tax deductions to corporations worth $77 billion a year on interest payments, anyone? (for last two suggestions, see Representative Jan Schakowsky's budget plan to reduce the deficit.) Raise the top marginal income tax rate on income over $1 million, anyone? 

Or the reader may like to read a comprehensive reform program, The Way Forward, (by Nouriel Roubini, Dan Alpert and Robert Hockett) which still today contains the requisite steps for restoring economic health. This plan has three pillars: 1, A Federal Jobs Program, 2, Debt Restructuring of both mortgage loans and technically defunct banks, 3, Establish Foreign Trade Balance. Combine these programs with a financial transaction tax and a tax on wealth in excess of $50 million -- and many of OUR societal ills would find a remedy. (And remember to read other recent essays I posted at this blog.)
As though this blog entry were not complex enough, I'm adding some reading suggestions for myself. First, an article by Lazonick at the Harvard Review of Business, September 2014. 
Then a recent article at the Next New Deal referencing a "white paper" by Joseph Stiglitz about tax reform (and see here).