Real American economy and “legalized looting” by big US companies
On Monday Lawrence Summers, Harvard economist, former Treasury secretary and director of the National Economic Council in the first term of President Obama, in effect called President Trump’s top 3 economic advisers lying fraudsters in his monthly column in The Washington Post and The Financial Times. He said their tax-cutting proposal was “a melange of ideas put forth without precision or arithmetic” and it was easy to demonstrate that the claims, including the assertion that domestic investment will be spurred by corporate tax cuts, were “some combination of ignorant, disingenuous and dishonest.” Meanwhile, William Lazonick, professor of economics, University of Massachusetts Lowell, has published a paper on the disconnect between the real American economy and what he calls “the legalized looting of the US business corporation.”
The average value of shares held (direct or indirect, for example, mutual funds) by the lower half of income earners in the US fell from $53,800 in 2007 to $52,300 in 2016 while the average for the top 10% rose 39% in 2007-2016, to $1.365m.
Apple will be a big beneficiary of President Trump's tax reform plan, according to a top Wall Street firm this week.
The sketchy Trump/Republican plan proposes a corporate tax rate reduction to 20% from 35% and a special repatriation tax rate of about 10% for US firms with accumulated foreign earnings – about $2.6tn in cash is technically held overseas but for example Apple has most of it in US banks or in government Treasury bonds.
Bank of America Merrill Lynch yesterday reconfirmed its buy rating on Apple shares, saying the company's earnings would surge under the tax plan.
William Lazonick cites Apple in his new Institute for New Economic Thinking (INET) paper “Innovative Enterprise Solves the Agency Problem,” and he says agency theorists don’t have a theory of innovative enterprise.
They believe that to be efficient, business corporations should be run to “maximize shareholder value.” But public shareholders are not investors in a company’s productive capabilities.
“If you work for a company, even if its innovative strategy is a big success, you run a big risk because under the current regime of ‘maximizing shareholder value’ a group of hedge fund activists can suck the value that you’ve created right out, driving your company down and making you worse off and the company financially fragile. And they are not the only predators you have to deal with. Incentivized with huge amounts of stock-based pay, senior corporate executives will, and often do, extract value from the company for their own personal gain — at your expense. As Professor Jang-Sup Shin and I argue in a forthcoming book, senior executives often become value-extracting insiders. And they open the corporate coffers to hedge fund activists, the value-extracting outsiders. Large institutional investors can use their proxy votes to support corporate raids, acting as value-extracting enablers.
You put in your ideas, knowledge, time, and effort to make the company a huge success, and still you may get laid off or find your pay check shrinking. The losers are not only the mass of corporate employees — if you’re a taxpayer, your money provides the business corporation with physical infrastructure, like roads and bridges, and human knowledge, like scientific discoveries, that it needs to innovate and profit. Senior corporate executives are constantly complaining that they need lower corporate taxes in order to compete, when what they really want is more cash to distribute to shareholders and boost stock prices.”
On 9 October 2017, the closing market capitalisations of the following companies were: Apple $805bn; Alphabet (parent of Google) $677bn; Microsoft $588bn; Amazon $476bn; ExxonMobil $347bn and General Electric (GE) $203bn.
Lazonick says that from 2012 through the second quarter of 2017 Apple spent $151bn on buybacks and $54bn on dividends under its “Capital Return Program.”
“Yet the only time in its history that Apple ever raised funds on the public stock market was in 1980, when it collected $97m in its initial public offering (IPO). How can a corporation return capital to parties that never supplied it with capital? The vast majority of those who hold Apple’s publicly listed shares have simply bought outstanding shares on the stock market. They have contributed nothing to Apple’s value-creating capabilities."
The evidence is overwhelming that lack of cash is not restraining domestic investment by America’s 1,900 big corporations.*
According to Prof Lazonick in 2016: “Over the years 2006-2015, the 459 companies in the S&P 500 Index in January 2016 that were publicly listed over the ten-year period expended $3.9tn on stock buybacks, representing 53.6% of net income, plus another 36.7% of net income on dividends. Much of the remaining 9.7% of profits were held abroad, sheltered from US taxes…mean buybacks (see chart) for these 459 companies ranged from $291 million in 2009, when the stock markets had collapsed, to $1,205 million in 2007, when the stock market peaked before the Great Financial Crisis. In 2015, with the stock market booming, mean (average) buybacks for these companies were $1,173 million. Meanwhile, dividends declined moderately in 2009, but over the period 2006-2015 they trended up in real terms (data in chart have not been adjusted for inflation). Many of America’s largest corporations routinely distribute more than 100% of net income to shareholders, generating the extra cash by reducing cash reserves, selling off assets, taking on debt, or laying off employees.”
Last August, the Institute for Policy Studies said in a report that “America’s 92 most consistently profitable tax-dodging firms registered median job growth of negative 1% between 2008 and 2016. The job growth rate over those same years among U.S. private sector firms as a whole: 6%. More than half of the 92 tax-avoiders, 48 firms in all, eliminated jobs between 2008 and 2016, downsizing by a combined total of 483,000 positions.”
More concentration, less competition
The Economist wrote in 2016: “America is meant to be a temple of free enterprise. It isn’t.”
Analysis of census data suggests that two-thirds of the economy’s 900-odd industries have become more concentrated since 1997. The magazine/ newspaper says that a tenth of the economy is at the mercy of a handful of firms — from dog food and batteries to airlines, telecoms and credit cards. “A $10 trillion wave of mergers since 2008 has raised levels of concentration further. "American firms involved in such deals have promised to cut costs by $150bn or more, which would add a tenth to overall profits. Few plan to pass the gains on to consumers.”
“...high profits across a whole economy can be a sign of sickness. They can signal the existence of firms more adept at siphoning wealth off than creating it afresh, such as those that exploit monopolies. If companies capture more profits than they can spend, it can lead to a shortfall of demand. This has been a pressing problem in America. It is not that firms are underinvesting by historical standards. Relative to assets, sales and GDP, the level of investment is pretty normal. But domestic cash flows are so high that they still have pots of cash left over after investment: about $800bn a year.
High profits can deepen inequality in various ways. The pool of income to be split among employees could be squeezed. Consumers might pay too much for goods. In a market the size of America’s prices should be lower than in other industrialised economies. By and large, they are not. Though American companies now make a fifth of their profits abroad, their naughty secret is that their return-on-equity is 40% higher at home.”
…the corporate tax system is in need of reform but companies do not need a gift from taxpayers.
Before the 2008 financial crisis, 62% of U.S. adults, on average, said they owned shares/stocks, including individual stocks and stock market funds such as 401(k)s and individual retirement accounts (IRAs). Since then, the average has been 54%, including lows of 52% in 2013 and 2016. In Gallup's April 2017 update, 54% of Americans report having money invested in stocks.
Federal Reserve data issued last month show that the richest 10% of families had an average stock holding value of $1.365m in 2016, compared with $982,000 in 2007 while the bottom 50% had an average value of $52,300 in 2016 and $53,800 in 2007.
The Federal Reserve's Surveys of Consumer Finance show that America's top 1% now control 38.6% of the country’s wealth – an all-time high since the survey began in 1989 – while “the wealth share of the next highest 9% of families has been falling since 2010, reaching 38.5% in 2016. Similar to the situation with income, the wealth share of the bottom 90% of families has been falling over most of the past 25 years, dropping from 33.2% in 1989 to 22.8% in 2016.”
The Fed said that the share of income received by the top 1% of families was 20.3% in 2013 and rose to 23.8% in 2016. The top 1% of families now receive nearly as large a share of total income as the next highest 9% of families combined (percentiles 91 through 99), who received 26.5% of all income. This share has remained fairly stable over the past quarter of a century. Correspondingly, the rising income share of the top 1% mirrors the declining income share of the bottom 90% of the distribution, which fell to 49.7% in 2016.
Between 2013 and 2016, median (mid-point where 50% of a group are above and 50% below) income rose 9% for the top income decile, between 5 and 8% for the middle three quintiles, and 3% for the bottom income quintile. Mean (average) income also increased for all quintiles, with gains between 7 and 14% for the bottom four quintiles. The top decile’s mean (average) income rose 19%. These patterns are consistent with a widening of the income distribution between 2013 and 2016.
Marcus Ryu, a co-founder and the chief executive of Guidewire Software, in California, commented in an op-ed on tax cuts in The New York Times:
The tax cut framework recently put forward by President Trump relies on a central claim: that reducing taxes on corporations and wealthy individuals will open the wellsprings of entrepreneurship and investment, turbocharging job growth and the American economy. Were this premise true, reasonable people might countenance giving a vast majority of benefits to the very rich, as Mr. Trump’s plan does, in exchange for greater prosperity for all. But it’s not...As an entrepreneur myself and a friend to many others, I know that lower tax rates will not motivate more people to start companies. People start companies for many reasons: a compelling idea, ambition for fame and fortune, a desire to be one’s own boss, frustration with one’s employer. I have never heard someone say, “I would have started a company, but tax rates were too high” or “I wouldn’t have started this company, but then George W. Bush cut tax rates, so I did.”
Robert J. Samuelson Washington Post economics columnist writes:
Brink Lindsey of the Niskanen Center think> tank and Steven M. Teles, a political scientist at Johns Hopkins University...argue that the economy is riddled with self-serving arrangements, mainly benefiting the rich, that impose excess costs on the poor and middle class and reduce economic growth.
Take housing. Restrictive zoning arrangements drive up home prices, say Lindsey and Teles, citing detailed studies by Harvard University economist Edward Glaeser and his collaborators. In some areas, housing scarcities have resulted in huge premiums in home prices: 20% in Washington and Boston; 30% in Los Angeles; and 50% in Manhattan, San Francisco and San Jose. “Zoning exists to transfer wealth from new buyers to existing owners,” Lindsey and Teles write. But that is not the end of the story. The exorbitant real estate prices in many booming regions discourage people from moving in — homes are too expensive. This reduces overall economic growth. Fewer people can take advantage of the available opportunities.
Or consider occupational licensing: the requirement that some jobs and firms be certified by states. In 1970, only about 10% of jobs required licenses, Lindsey and Teles report. Now the share is 30%, they say. Across all states, some 1,100 occupations are subject to licensing, including barbers, manicurists and animal trainers. California is the leader, at 177.
*William Lazonick in a 2016 paper: "In 2012, 1,909 companies that had 5,000 or more employees in the United States, with an average workforce of 20,366, were only 0.033% of all U.S. businesses. But, with the business sector representing 81% of the total employed civilian labor force, these 1,909 companies had 11% of all establishments, 34% of employees, 38% of payrolls, and 44% of revenues. In addition, the prosperity of hundreds of thousands of smaller firms relies on the growth of these large firms."
Image on top: Federal Reserve 2017