Thursday, March 28, 2013

What's Going On?

Many observers have commented on the strange constellation of facts pitting the record breaking stock market (S&P 500 at its highest today, DJIA closing in on 15000) against the gnawingly high unemployment rate (8% but closer to 13% if you count those that just gave up looking for a job), and the record use of food stamps in the U.S.  What's going on?

U.S. transnational companies are sitting on over $1 Trillion in cash, much of it in off-shore operations. They can't move it back into this country because they will be hit with a 35% tax bill (to feed the great sucking sound that is Washington). Paying such a bill when they don't have to would violate the companies' fiduciary to their (mostly, U.S.) shareholders.

If it were possible to repatriate this money, it would have gone into building factories, supporting infrastructure, training and educating workers, philanthropy, and the pockets of investors and pensioners.  Instead, the money is kept prisoner overseas because this Administration and the Congress is more concerned about the optics of fairness than they are about what really creates economic wealth and social welfare - free choice and free markets.

If the corporate tax rate was zero, the acceleration in wealth creation accompanied by the advancement of the middle class would be unprecedented.

1 comment:

  1. The markets are rising because of record performance from public companies. Wall Street, and executives at such companies, have realized they can do more (or as much as pre-recession performance) with less labor.

    The recession forced massive layoffs and as companies slowly started growing again, they realized they could get more out of their labor force (although they will tell you it's because capital remains on the sideline due to volatile/risky market conditions). In 2006, employee A and employee B were responsible for X business function. In 2013, employee A is responsible for X business function and employee B was laid off years ago.

    Why do you think the wealth gap has separated? Senior executives and major shareholders (the 1%) are being compensated better than ever because their management incentives are based on profitability and companies with lower overhead are more profitable. Employee A is still making the same money as 2006 (if fortunate relative to inflation) and employee B has probably taken a position at lower wages just to remain employed.

    And if the corporate tax rate was zero, the influx of cash would be distributed to shareholders and executives, doing absolutely nothing for the middle class. Well perhaps there would be more endowments for business schools and scholarships from wealthy namesakes, non-profit contributions and the like, but it sure as hell wouldn't make higher education any cheaper for students coming from middle class families. Don't get me wrong, Washington is a money suck and the most inefficient place on earth when it comes to cash management (actually it's the most inefficient place on earth for everything) but to suggest that the middle class would be the beneficiaries of new corporate tax policy is false.

    Fortune 500 CEOs today make 204 times regular workers on average and we're aren't talking retail where average workers are basically minimum wage. JC Penny has a staggering ratio of 1,795 times regular workers.

    You say "Congress is more concerned about the optics of fairness," in fact, they aren't do anything about fairness. The current executives of today's large companies were earning their chops in the 80s when Gordon Gekko was on the big screen saying greed is good. It was indoctrinated into that generation's business people who are now at the top.

    The lesson of "take the most money possible just because the labor market is allowing it," isn't a lesson taught in our business schools today but it is a lesson that lives in the C-suite.

    These are my observations from the real world and not behind the veil of academia.

    -Carey Business School Graduate and former student of Dr. Phan