U.S. job growth is stagnating even as corporations report record profits. There is a critical link between these two phenomena.
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.”
For the past two years American workers have 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 report from the Organization for Economic Cooperation and Development (OECD), the U.S. accounted for half of all job losses among the 31 richest countries from 2007 to mid-2010. The rise of U.S. unemployment greatly exceeded the fall in economic output. The American gross domestic product (GDP) actually declined less than the GDP of any of the other richest countries – besides Canada ¬– between 2008 and 2010.
Washington’s embrace of labour-market flexibility ensured that companies encountered little resistance when they launched their brutal recovery plans. Entering the recession, the U.S. had the weakest worker protections against individual and collective dismissals in the world, according to a 2008 OECD study. 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.” The U.S. now has the highest unemployment rate among the 10 major developed countries.
The private sector has been the chief source of massive dislocation in the labour market, but it has also been a beneficiary. Over the past two years, productivity has soared while unit labour costs have plummeted. By imposing layoffs and wage concessions, U.S. companies are supplying their own demand for a tractable labour market. Private-sector union membership is the lowest on record. 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.”
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 10th 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 their careers. In November, temporary labour represented an astonishing 80 per cent of private-sector job growth. Companies are transforming temporary labour into a permanent feature of the American workforce. UPI reports, “This year, 26.2 per cent of new private-sector jobs are temporary compared to 10.9 per cent in the recovery after the 1990s recession and 7.1 per cent in previous recoveries.” The remainder of 2010 private-sector job growth has consisted mainly of low-wage, scant-benefit, service-sector jobs – especially in bars and restaurants – which added 143,000 jobs, growing at four times the rate of the rest of the economy.
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 for this 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 workforces (21.1 million out of 31.2 million) from the U.S. Corporate executives are hammering American workers precisely because they are so dependent on them.
An annual study by USA Today found that private-sector paycheques, as a share of Americans’ total income, fell to 41.9 per cent earlier this year – a record low. Conservative analysts seized the report as proof of President Obama’s agenda to, in their words, take wealth from those “pulling the cart” and redistribute it to those “simply riding in it.” Their accusation withstands the evidence – only it’s corporate executives and wealthy investors who are 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 that corporate profits represented a near-record 11.2 per cent of the national income in the second quarter.
Non-financial companies have amassed nearly two trillion in cash, representing 11 per cent 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.”
Companies invested roughly $262 billion in equipment and software investment in the third quarter. That compares with nearly $80 billion in share buybacks. 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 have 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.”
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 were the lowest on record, sitting just above one per cent.
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 per cent 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,” or send back, the profits to the U.S.
American corporations have increased their overseas stash by 70 per cent in the last four years, so that it is now sitting at over $1 trillion. They have done this largely by dodging U.S taxes through a practice known as “transfer pricing.” 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. According to a study by Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon, American companies are using transfer pricing to avoid U.S. tax obligations to the tune of $60 billion annually.
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 would 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. Eight hundred and forty-two companies participated in the program, repatriating $312 billion back to the U.S. at 5.25 per cent rather than 35 per cent. In 2009, the Congressional Research Service concluded that most of the money went to stock buybacks and dividends – in direct violation of the Act.
The Obama administration and corporate executives saved American capitalism. The U.S. economy may never recover.
This article originally appeared under the title “The Greatest Recovery, Part II” at the Dissident Voice.