Guest Post: Corporate Profits Soaring Thanks To Record Unemployment

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Submitted by Mark Provost of The Economic Populist

Corporate Profits Soaring Thanks to Record Unemployment

In a January 2009 ABC interview with George
Stephanopoulos, then President-elect Barack Obama said fixing the
economy required shared sacrifice, "Everybody’s going to have to give.
Everybody’s going to have to have some skin in the game." (1)
For the past two years, American workers submitted to the President’s
appeal—taking steep pay cuts despite hectic productivity growth. By
contrast, corporate executives have extracted record profits by
sabotaging the recovery on every front—eliminating employees, repressing
wages, withholding investment, and shirking federal taxes.

The global recession increased unemployment in every country, but the
American experience is unparalleled. According to a July OECD report,
the U.S. accounted for half of all job losses among the 31 richest
countries from 2007 to mid-2010. (2) The rise of U.S. unemployment
greatly exceeded the fall in economic output. Aside from Canada, U.S.
GDP actually declined less than any other rich country, from mid-2008 to
mid 2010. (3)

Washington’s embrace of labor market flexibility ensured companies
encountered little resistance when they launched their brutal recovery
plans. Leading into the recession, the US had the weakest worker
protections against individual and collective dismissals in the world,
according to a 2008 OECD study. (4) Blackrock’s Robert Doll explains,
“When the markets faltered in 2008 and revenue growth stalled, U.S.
companies moved decisively to cut costs—unlike their European and
Japanese counterparts.” (5) The U.S. now has the highest unemployment
rate among the ten major developed countries. (6).

The private sector has not only been the chief source of massive
dislocation in the labor market, but it is also a beneficiary. Over the
past two years, productivity has soared while unit labor costs have
plummeted. By imposing layoffs and wage concessions, U.S. companies are
supplying their own demand for a tractable labor market. Private sector
union membership is the lowest on record. (7) Deutsche Bank Chief
Economist Joseph LaVorgna notes that profits-per-employee are the
highest on record, adding, “I think what investors are missing - and
even the Federal Reserve - is the phenomenal health of the corporate
sector.” (8)

Due to falling tax revenues, state and local government layoffs are
accelerating. By contrast, U.S. companies increased their headcount in
November at the fastest pace in three years, marking the tenth
consecutive month of private sector job creation. The headline numbers
conceal a dismal reality; after a lost decade of employment growth, the
private sector cannot keep pace with new entrants into the workforce.

The few new jobs are unlikely to satisfy Americans who lost careers.
In November, temporary labor represented an astonishing 80% of private
sector job growth. Companies are transforming temporary labor into a
permanent feature of the American workforce. UPI reports, “This year,
26.2 percent of new private sector jobs are temporary, compared to 10.9
percent in the recovery after the 1990s recession and 7.1 percent in
previous recoveries.” (9) The remainder of 2010 private sector job
growth has consisted mainly of low-wage, scant-benefit service sector
jobs, especially bars and restaurants, which added 143,000 jobs, growing
at four times the rate of the rest of the economy. (10)

Aside from job fairs, large corporations have been conspicuously
absent from the tepid jobs recovery. But they are leading the profit
recovery. Part of the reason is the expansion of overseas sales, but
the profit recovery is primarily coming off the backs of American
workers. After decades of globalization, U.S. multinationals still
employ two-thirds of their global workforce from the U.S. (21.1 million
out of 31.2 million). (11) Corporate executives are hammering American
workers precisely because they are so dependent on them.

An annual study by USA Today found that private sector paychecks as a
share of Americans’ total income fell to 41.9 percent earlier this
year, a record low. (12) Conservative analysts seized on the report as
proof of President Obama’s agenda to redistribute wealth from, in their
words, those ‘pulling the cart’ to those ‘simply riding in it’. Their
accusation withstands the evidence—only it’s corporate executives and
wealthy investors enjoying the free ride. Corporate executives have
found a simple formula: the less they contribute to the economy, the
more they keep for themselves and shareholders. The Fed’s Flow of Funds
reveals corporate profits represented a near record 11.2% of national
income in the second quarter. (13)
Non-financial companies have amassed nearly two-trillion in cash,
representing 11% of total assets, a sixty year high. Companies have not
deployed the cash on hiring as weak demand and excess capacity plague
most industries. Companies have found better use for the cash, as
Robert Doll explains, “high cash levels are already generating dividend
increases, share buybacks, capital investments and M&A activity—all
extremely shareholder friendly.” (5)

Companies invested roughly $262 billion in equipment and software
investment in the third quarter. (14) That compares with nearly $80
billion in share buybacks. (15) The paradox of substantial liquid
assets accompanying a shortfall in investment validates Keynes’ idea
that slumps are caused by excess savings. Three decades of lopsided
expansions has hampered demand by clotting the circulation of national
income in corporate balance sheets. An article in the July issue of The
Economist observes: “business investment is as low as it has ever been
as a share of GDP.” (16)

The decades-long shift in the tax burden from corporations to working
Americans has accelerated under President Obama. For the past two
years, executives have reported record profits to their shareholders
partially because they are paying a pittance in federal taxes.
Corporate taxes as a percentage of GDP in 2009 and 2010 are the lowest
on record, just above 1%. (17)

Corporate executives complain that the U.S. has the highest corporate
tax rate in the world, but there’s a considerable difference between
the statutory 35% rate and what companies actually pay (the effective
rate). Here again, large corporations lead the charge in tax arbitrage.
U.S. tax law allows multinationals to indefinitely defer their tax
obligations on foreign earned profits until they ‘repatriate’ (send
back) the profits to the U.S. U.S. corporations have increased their
overseas stash by 70% in four years, now over $1 trillion—largely by
dodging U.S taxes through a practice known as “transfer pricing”.
(18)Transfer pricing allows companies to allocate costs in countries
with high tax rates and book profits in low-tax jurisdictions and tax
havens—regardless of the origin of sale. U.S. companies are using
transfer pricing to avoid U.S. tax obligations to the tune of $60
billion dollars annually, according to a study by Kimberly A. Clausing,
an economics professor at Reed College in Portland, Oregon. (18)

The corporate cash glut has become a point of recurrent contention
between the Obama administration and corporate executives. In mid
December, a group of 20 corporate executives met with the Obama
administration and pleaded for a tax holiday on the $1 trillion stashed
overseas, claiming the money will spur jobs and investment. In 2004,
corporate executives convinced President Bush and Congress to include a
similar amnesty provision in the American Jobs Creation Act; 842
companies participated in the program, repatriating $312 billion back to
the U.S. at 5.25% rather than 35%. (19) In 2009, the Congressional
Research Service concluded that most of the money went to stock buybacks
and dividends—in direct violation of the Act. (20)

The Obama administration and corporate executives saved American capitalism. The U.S. economy may never recover.

Sources:
1. ‘This Week’ ABC News with George Stephanopoulos, January 2009. http://abcnews.go.com/ThisWeek/Economy/story?id=6618199&page=2
2. OECD report, U.S. lost most jobs among rich countries. EMMA VANDORE AP Business Writer http://abcnews.go.com/Business/wireStory?id=11104432
3. Carnegie Endowment for International Peace. Policy Brief 89.
November, 2010. Uri Dadush & Vera Eidelman. Five Surprises of the
Great Recession. http://carnegieendowment.org/files/five_surprises.pdf
4. OECD Indicators of Employment Protection. http://www.oecd.org/document/11/0,3343,en_2649_37457_42695243_1_1_1_3745...
5. The Wall St. Journal. June 8, 2010. Robert Doll. Opinion. The Bullish Case for U.S. Equities. http://online.wsj.com/article/SB1000142405274870356160457528289379646147...
6. Bureau of Labor Statistics. International Labor Comparisons. Updated Dec. 2, 2010. http://www.bls.gov/ilc/intl_unemployment_rates_monthly.htm
7. Bloomberg Businessweek. January 22, 2010. Holly Rosenkrantz.Union membership in the private sector declines to record low: http://www.businessweek.com/news/2010-01-22/union-membership-in-the-priv...
8. Joseph Lavorgna quote: CNBC. When will profits translate into jobs? http://www.cnbc.com/id/40350345/When_Will_Record_Corporate_Profits_Trans...
9. UPI. Temp work becomes a fixture. Dec. 20th, 2010. http://www.upi.com/Business_News/2010/12/20/Temp-work-becomes-a-fixture/...
10. Restaurant industry’s hiring helping to revive economy. DAYTON, Nov
28, 2010 (Dayton Daily News - McClatchy-Tribune Information Services via
COMTEX): http://www.techzone360.com//news/2010/11/28/5161348.htm
11. Tax Notes, Martin A. Sullivan. U.S. Multinationals Cut U.S. Jobs While Expanding Abroad. http://taxprof.typepad.com/files/128tn1102.pdf
12. USA Today. May 26, 2010. Private pay shrinks to historic lows as gov't payouts rise. http://www.usatoday.com/money/economy/income/2010-05-24-income-shifts-fr...
13. New York Times. Economix blog. Catherine Rampell. Nov. 23, 2010. Visualizing Booming Profits. http://economix.blogs.nytimes.com/2010/11/23/visualizing-booming-profits/
14. $262 billion in equipment and software investment, calculated from EconStats. http://www.econstats.com/nipa/nipa_5__3___5q.htm
15. ABC News. Dec. 20, 2010. Mark Jewell. S&P 500 Companies More Than Double Buybacks in 3Q. http://abcnews.go.com/Business/wireStory?id=12440445
16. The Economist. Companies’ cash piles: Show us the Money.http://www.economist.com/node/16485673
17. Corporate Income Tax as a share of GDP, 1946-2009. http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=263
18. Bloomberg. May 13, 2010. U.S. Companies Dodge $60 Billion in Taxes with Global Odyssey. http://www.bloomberg.com/news/2010-05-13/american-companies-dodge-60-bil...
19. Bloomberg. Jesse Drucker. Dec 29, 2010. Dodging Repatriation Tax Lets U.S. Companies Bring Home Cash http://www.bloomberg.com/news/2010-12-29/dodging-repatriation-tax-lets-u...
20. Center for Budget priorities. Robert Greenstein and Chye-Ching
Huang. Feb. 2009. Proposed Tax Break For Multinationals Would Be Poor
Stimulus
“Dividend Repatriation Tax Holiday” Failed in 2004, Unlikely to Work Now. http://www.cbpp.org/cms/index.cfm?fa=view&id=2270