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Company cash hoards in the main countries of the developed world are rising
to an astounding $8tn -- the annual GDP (gross domestic product) of the United
States was $15tn in 2011 - - as a three decade process of rising capital and
falling labour shares in economies is coupled with massive tax avoidance. US
companies are seeking a tax amnesty to 'repatriate' cash that is mainly already
in the United States.
US worker pay has fallen to a 50-year low as a ratio of company sales and US GDP
according to JP Morgan Chase, one of America's biggest financial firms, in 2011.
Profit margins were at their highest level in 2010 since the mid-1960s,
according to Michael Cembalest, the chief investment officer of JP Morgan Chase.
Cembalest examined the rise in profit margins “from peak to peak” -- from their
high point in 2000, just before the dot-com bust, to their high point in 2007,
before the financial crisis. In that period, profit margins rose from just under
11% of the S&P 500’s revenue to just over 12% and rose further to 13% in 2010.
As to the reason for the rise, Cembalest wrote in the July 11 issue of the
on the Market' (pdf) client newsletter: “There are a lot of moving parts in
the margin equation,” but “reductions
in wages and benefits explain the majority of the net improvement in margins.” This
decline in wages and benefits, Cembalest calculated, is responsible for about
75% of the increase in major US corporations’ profit margins.
Harold Meyerson, Washington Post columnist, asked: "What’s behind this drop in
the share of revenue going to wages? After all, the workforce of the S&P 500
companies contains many more college graduates today than it did in earlier
decades. Cembalest cites high unemployment and the addition of 2bn Asians to
the world’s labour force since 1980 as the reasons for workers’ declining ability
to secure their former share of company revenue. He’s right, of course, but his
list is hardly exhaustive. Surely the fact that the great majority of American
employers no longer have to sit down and hammer out collective bargaining
contracts with their workers has contributed to the increase in profits at
wages’ expense. And many of those employers want to keep it that way."
Bill Gross, the billionaire founder of PIMCO, the bond fund manager,
wrote in October 2011 that there
is a current imbalance is obvious from Chart 1, which
shows before-tax corporate profits as a percentage of Gross National Income
(GNI). It is obvious that “capital” as opposed to “labour” - - moving from 8 to
13% of GNI over the past three or even 30 years - - has been the cyclical and
secular champion. Why one or the other should be policy and politically
advantaged is not commonsensically clear. Granted, the return on capital as
opposed to the return to labour should logically be higher if only to encourage
savings. But once an historical midpoint or range has been established, a
relative equilibrium should be observed. Even conservatives must acknowledge
that return on capital investment, and the liquid stocks and bonds that mimic
it, are ultimately dependent on returns to labour in the form of jobs and real
wage gains. "If Main Street is unemployed and undercompensated, capital can only
travel so far down Prosperity Road. Until recently, economic recovery has been
relatively robust if one were a deployer of capital as opposed to the labourer
who made that deployment possible. Near zero percent interest rates have allowed
profit margins to widen even in the face of anemic end demand. As well,
'productivity' has remained high, but only because of layoffs and the production
of goods and services with fewer people. While that is a benefit to capital, it
obviously comes at a great cost to labour."
The bond fund manger added: "ultimately, however, both
labour and capital suffer as a
deleveraging household sector in the throes of a jobless recovery refuses - - if
only through fear and consumptive exhaustion - - to play their historic role in
the capitalistic system. This 'labour trap' phenomenon -- in which consumers stop
spending out of fear of unemployment or perhaps negative real wages, shrinking
home prices or an overall loss of faith in the American Dream - - is what
markets or 'capital' should now begin to recognize. Long-term profits cannot
ultimately grow unless they are partnered with near equal benefits for labour.
Washington, London, Berlin and yes, even Beijing must accept this commonsensical
reality alongside several other structural initiatives that seek to rebalance
the global economy. The United States in particular requires an enhanced safety
net of benefits for the unemployed unless and until it can produce enough jobs
to return to our prior economic model which suggested opportunity for all who
were willing to grab for the brass ring - - a ring that is now tarnished if not
unavailable for the grasping. Policies promoting 'Buy American' goods and
services - - which in turn would employ more Americans - - should also be
reintroduced. China and Brazil do it. Why not us?"
Loukas Karabarbounis and Brent Neiman , economists at the University of Chicago,
say in a
that a "global decline in the cost of capital beginning around 1980 induced
firms to shift away from labour and toward capital, financed in part with an
increase in corporate saving. Whereas in 1975 a majority of global investment
was funded by household saving, in recent years global investment is funded
primarily from corporate saving. "
They document that the global labour share has significantly declined over the
last 30 years. This decline was associated with a significant increase in the
flow of corporate saving, which is generally the largest component of national
saving. A global decline in the cost of capital beginning around 1980 induced
firms to shift away from labour and toward capital, financed in part with an
increase in corporate saving.
Of the 51 countries with more than 10 years of data between 1975 and 2007, 36
exhibited downward trends in their corporate labour share. Of the trend
estimates that are statistically significant, 29 are negative while only 10 are
Margaret Jacobson and Filippo Occhino of the
Cleveland Fed said
last September: "Labour income has declined as a share of total income earned
in the United States. This decline was caused by several factors, including a
change in the technology used to produce goods and services, increased
globalization and trade openness, and developments in labour market institutions
and policies." (See figure 1)
The economists says that according to data from the
Bureau of Economic Analysis, labour's share of gross national income fluctuated
around 67% during the 1980s, 1990s, and early 2000s, but it has declined since
then and now stands at 63.8%. According to the Bureau of Labour Statistics, the
ratio of compensation to output for the nonfarm business sector fluctuated
around 65% until the early 1980s and has declined steadily since, from 63%
during the 1980s and 1990s to 58.2% most recently. Finally, a 2011 study of
income tax returns and demographic data by the CBO (CBO 2011) finds that
labour’s share of income decreased from 75% in 1979 to 67% in 2007.
In these times of recession, most workers have
little bargaining power. So a rise in sales goes into profits rather than being
recycled out as wages. Profits should finance investments and therefore
ultimately boost economic activity. However, the low consumer demand is keeping
business investment low.
The Wall Street Journal reported last month that the Bureau of
Labour Statistics (BLS) estimates about 9.2m Americans are
members of private or federal unions from a workforce in an employed nonfarm
workforce of 143m.
median private-sector union member made $878 a week in 2011 compared to $716
for nonmembers, a nearly 23% premium. (The premium was somewhat smaller in
the manufacturing sector: $836 per week for union members for $780 per week
for nonmembers.) Such comparisons have limited value since there are
numerous other variables that affect wages. But to the extent there is a
union wage premium, the added cost of dues doesn’t appear to negate it.
there’s the question of benefits: 94% of private-sector union members have
access to health-care benefits, versus 67% of nonunion members, according
to BLS. And employers cover on average 83% of health insurance premiums
for union members and their families versus 66% for nonunion members. Union
members are also more likely to get paid vacation and sick time and
retirement and life insurance benefits. BLS doesn’t put a dollar value on
all those benefits, but worker benefits typically account for about 30% of
employers’ compensation costs."
most of the past century, a good job was a ticket to the middle
class. Hitched to the locomotive of rapid economic growth, the wages
of the typical worker seemed to go in only one direction: up. From
1950 to 1970, the average earnings of male workers increased by
about 25 percent each decade. And these gains were not concentrated
among some lucky few. Rather, earnings rose for most workers, and
almost every prime-aged male (ages 25-64) worked...Over the past 40
years, a period in which US GDP per capita more than doubled after
adjusting for inflation, the annual earnings of the median
prime-aged male has actually fallen by 28%.
The current recovery is clearly the
weakest one in recent history.
Review, Trends article,
Michael Greenstone, a professor of economics at MIT, a senior fellow
at the Brookings Institution and the director of the Hamilton
Project, and Adam Looney, a senior fellow at Brookings and the
policy director of the Hamilton Project.
In December 2009, Apple and Microsoft had cash and near equivalents of $79bn
and three years later the sum had risen to $205bn - - more than a third
higher than Ireland's GDP.
In March 2012, Simon Tilford of
the Centre for European Reform think-tank estimated that corporate cash
holdings were at €2tn in the Eurozone and "an astonishing £750bn in the UK." He
said the ratio of investment to GDP in Europe was at a 60-year low even as
companies pile on cash.
American nonfinancial corporations held $1.74tn in cash and other
liquid assets at the end of the third quarter, the Federal Reserve said last
month in its flow of funds report. That is $44bn more than three months earlier and more than erases
the prior quarter's slight decline.
The figure, which isn't adjusted for inflation, narrowly eclipsed the high
set in the first quarter, but only because the Fed revised down its estimate of
corporate cash holdings from earlier periods after receiving more data. The Wall
said after two downward revisions, the Fed now says US companies held less
than $1.70tn in cash at the end of last year, down from an initial
estimate of more than $2.23tn.
Nonfinancial companies now have about 5.6% of their assets in cash, down
slightly from a peak of 6.3% in late 2009 but high compared with the 1980s, when
companies kept less than 4% of their assets liquid.
The Canadian Labour Congress
said yesterday that Statistics Canada data show that cash reserves held by
private non-financial corporations in Canada jumped to C$575bn in the last
quarter of 2011 from C$187bn in the first quarter of 2001 - - despite three of
those years being deep in recessions.
Between 2010 and 2011, corporate cash reserves grew an extra C$72bn, while
the federal government was reporting a C$33bn deficit.
European public companies have more than €750bn in
cash - - close to a record level in the past two decades -- to boost low private
investment which has plunged €354bn since 2007, four times the fall in real GDP
and 20 times the plunge in private consumption, according to a report by
McKinsey, the management consultancy.
Download Full Report (PDF–2MB)
McKinsey says that although the decline in Europe’s
level of private investment from 2007 to 2011 is rarely highlighted as a feature
of the region’s financial crisis, it was unprecedented. In fact, during that
period, private investment in the European Union’s 27 member states (the EU-27)
plunged by a combined total of €354bn - - 20 and 4 times the fall in private
consumption and real GDP, respectively according to a new report.
Research by the McKinsey Global Institute (MGI)
finds that while private investment was the hardest-hit component of GDP, it is
also vital for recovery. Even in the face of weak demand and high uncertainty,
some investors would start spending again if governments took bold measures to
remove barriers that now stand in the way. And companies need not rely
exclusively on regulatory changes to take a more fine-grained look at their own
In October 2010, in The Wall Street Journal, John
Chambers, Cisco chairman and CEO, and Safra Catz, Oracle president, wrote an
op-ed on the topic of repatriation of foreign earnings. Entitled, 'The
Overseas Profits Elephant in the Room: There’s a trillion dollars waiting to be
repatriated if tax policy is right,' (subscription required) Chambers and
Catz stated: “One trillion dollars is roughly the amount of earnings that
American companies have in their foreign operations - - and that they could
repatriate to the United States. That money, in turn, could be invested in US
jobs, capital assets, research and development, and more. But for US companies
such repatriation of earnings carries a significant penalty: a federal tax of up
This means that US companies can, without
significant consequence, could use their foreign earnings to invest in any country in
the world -- except here.” Chambers/ Catz said a foreign earnings at a low tax
rate - - say, 5% - - would create a privately funded stimulus of up to a trillion
dollars. However, of the $312bn repatriated back to the United States in
2004/05 at a special rate of 5%, 92% of that money was returned to shareholders
in the form of dividends and stock buybacks, according to a study by
the nonpartisan National Bureau of Economic Research. However,
this is a misleading debate as American companies' 'overseas/ trapped' cash is
mainly held in the US.
It is estimated that the overseas portion of the $1.7tn in
cash or near equivalents held by US subsidiaries overseas, that is technically
overseas to avoid paying the 35% federal corporate tax rate, is mainly held in
the United States.
The Wall Street Journal says some
companies, including Internet giant Google, software maker Microsoft and
data-storage specialist EMC, keep
more than three-quarters of the cash owned by their foreign subsidiaries at US
banks, held in US dollars or parked in US government and corporate securities,
according to people familiar with the companies' cash positions.
The Journal says that in the eyes of the law, the
Internal Revenue Service and company executives, however, this money is
overseas. As long as it doesn't flow back to the US parent company, the
US doesn't tax it. And as long as it sits in US bank accounts or in US
Treasuries, it is safer than if it were invested into potentially risky foreign
"One of the major reasons that US companies' foreign subsidiaries reinvest
earnings in US-dollar-denominated investments is to avoid gains and losses from
changes in foreign-exchange rates," EMC spokeswoman Lesley Ogrodnick wrote in an
emailed response to questions about the company's cash holdings.
CBS 60 Minutes on tax havens
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