Post by unlawflcombatnt on May 2, 2007 4:30:07 GMT -6
Below is an excerpt from an article from Naked Capitalism that gives an excellent description of the disconnect between high Corporate profits, declining capital investment, stagnant wages, and the emphasis on quarterly stock values over long-term gains. The article begins as commentary on Paul Kruman's latest article, titled Another Economic Disconnect, and briefly discusses the current economic situation. It later goes on to elaborate further on the focus Corporate America has with quarterly gains at the expense of long-term growth.
"this recovery has been starkly different from past ones in the share of GDP growth going to profits versus labor. In every previous recovery, the preponderance of GDP growth (on average, over 60%) has gone to wages (a combination of wage increases and increased hiring). The lowest proportion heretofore was 55%. Our current recovery? 29%. This is a huge disparity, one that merits comment...."
from Krugman's article:
"Nonresidential investment — that is, investment other than housing construction — has grown very slowly by historical standards. As a share of G.D.P., nonresidential investment remains far below its levels of the late 1990s, and it has been declining for the last two quarters.
Why aren’t corporations investing, and what does the lack of business investment mean for the economy?
It’s possible that sluggish business investment reflects lack of confidence in the economic outlook — a lack of confidence that’s understandable given the bursting of the housing bubble, which has already caused G.D.P. growth to slow to a crawl.
But as Floyd Norris recently reported in The Times, there is a more disturbing possibility. Instead of investing in physical capital, many companies are using profits to buy back their own stock. And cynics suggest that the purpose of these buybacks is to produce a temporary rise in stock prices that increases the value of executives’ stock options, even if it’s against the long-term interests of investors....
In any case, next time someone tells you that any action that might reduce corporate profits a bit — like actually enforcing health and safety regulations or making it easier for workers to organize — will reduce business investment, bear in mind that today’s record profits aren’t being invested. Instead, they’re being used to enrich executives and a few lucky stock owners...."
From NakedCapitalism:
"I see corporate chieftans as much victims as perps. The people really pulling the strings are Wall Street, specifically analysts, investment bankers, and the financial press (I used to be one of them, so I speak with some knowledge). That's why accusing CEOs of greed isn't a sufficient explanation. Yes, there are some who are pigs at the trough. But most won't (can't?) see themselves in that light, in part because they are surrounded by enablers (particularly compensation consultants) who have an incentive to push pay to even higher levels (but that's another long discussion).
The main driver of this behavior isn't so much greed as extreme short-termism and insecurity. Once upon a time, most companies had 5 and 10 year planning horizons. Now they are fixated on the quarter. And if your focus is very short term, the only activity that produces certain results is cutting costs. That will provide an quick uptick in profits. Anything else takes time and involves risk. I have heard stories from all fronts of companies cutting investments essential to growth, like marketing and advertising, to "make the numbers." One telecom would not spend to advertise a second line service, its most profitable activity, even though the campaign had an 11 month payback. That wasn't good enough. Simiarly, major companies will routinely impose firm-wide hiring freezes. That makes no sense, since some areas will clearly have high growth potential and would recoup the investment in increased staff.
So how does this cost fixation relate to wage stagnation? Easy. Costs key off of headcount. So the first line of defense is to contain or better yet reduce headcount. And the shrinking employment at large corporations gives them considerable bargaining power over those who remain. Although white collar wages haven't suffered like manufacturing pay, everyone I know who is at a large company is doing at least 1 1/2 jobs. So their pay has effectively been cut too...."
The full article can be read at:
Naked Capitalism
"this recovery has been starkly different from past ones in the share of GDP growth going to profits versus labor. In every previous recovery, the preponderance of GDP growth (on average, over 60%) has gone to wages (a combination of wage increases and increased hiring). The lowest proportion heretofore was 55%. Our current recovery? 29%. This is a huge disparity, one that merits comment...."
from Krugman's article:
"Nonresidential investment — that is, investment other than housing construction — has grown very slowly by historical standards. As a share of G.D.P., nonresidential investment remains far below its levels of the late 1990s, and it has been declining for the last two quarters.
Why aren’t corporations investing, and what does the lack of business investment mean for the economy?
It’s possible that sluggish business investment reflects lack of confidence in the economic outlook — a lack of confidence that’s understandable given the bursting of the housing bubble, which has already caused G.D.P. growth to slow to a crawl.
But as Floyd Norris recently reported in The Times, there is a more disturbing possibility. Instead of investing in physical capital, many companies are using profits to buy back their own stock. And cynics suggest that the purpose of these buybacks is to produce a temporary rise in stock prices that increases the value of executives’ stock options, even if it’s against the long-term interests of investors....
In any case, next time someone tells you that any action that might reduce corporate profits a bit — like actually enforcing health and safety regulations or making it easier for workers to organize — will reduce business investment, bear in mind that today’s record profits aren’t being invested. Instead, they’re being used to enrich executives and a few lucky stock owners...."
From NakedCapitalism:
"I see corporate chieftans as much victims as perps. The people really pulling the strings are Wall Street, specifically analysts, investment bankers, and the financial press (I used to be one of them, so I speak with some knowledge). That's why accusing CEOs of greed isn't a sufficient explanation. Yes, there are some who are pigs at the trough. But most won't (can't?) see themselves in that light, in part because they are surrounded by enablers (particularly compensation consultants) who have an incentive to push pay to even higher levels (but that's another long discussion).
The main driver of this behavior isn't so much greed as extreme short-termism and insecurity. Once upon a time, most companies had 5 and 10 year planning horizons. Now they are fixated on the quarter. And if your focus is very short term, the only activity that produces certain results is cutting costs. That will provide an quick uptick in profits. Anything else takes time and involves risk. I have heard stories from all fronts of companies cutting investments essential to growth, like marketing and advertising, to "make the numbers." One telecom would not spend to advertise a second line service, its most profitable activity, even though the campaign had an 11 month payback. That wasn't good enough. Simiarly, major companies will routinely impose firm-wide hiring freezes. That makes no sense, since some areas will clearly have high growth potential and would recoup the investment in increased staff.
So how does this cost fixation relate to wage stagnation? Easy. Costs key off of headcount. So the first line of defense is to contain or better yet reduce headcount. And the shrinking employment at large corporations gives them considerable bargaining power over those who remain. Although white collar wages haven't suffered like manufacturing pay, everyone I know who is at a large company is doing at least 1 1/2 jobs. So their pay has effectively been cut too...."
The full article can be read at:
Naked Capitalism