While the U.S. economy staggers through one of its slowest recoveries since the Great Depression, American companies are poised to report strong earnings for the second quarter—exposing a dichotomy between corporate performance and the overall health of the economy.
Two years after the official end of the recession, a range of indicators show that the economic recovery has been the worst, or one of the worst, since the government began tracking such data after World War II: Unemployment is too high, bank lending necessary to spur spending is too low, home prices are depressed while household expectations for financial well-being are near record low levels. Many economists predict the sluggish rebound may continue for years.
Against this backdrop, many U.S. companies are expecting to report surprisingly robust profits when second-quarter earnings are announced later this month. Combined earnings of companies in the Standard & Poor's 500-stock index are projected to rise 13.6% from a year ago for the second quarter, according to an analysis of Wall Street forecasts by Brown Brothers Harriman.
Corporate taxes as a percentage of GDP are at modern lows. GDP is higher now than it was prior to the recession and yet growth in wages during our recovery account for just 1% of growth in national income, while corporate profits account for 88% of that growth.
And we're supposed to believe people like Paul Ryan when they say the problem is that we're not doing enough to help those who create the jobs?
Supply-side economics is a tenuous theory at best, but it's an especially bad theory if corporations aren't interested in sharing their remarkable gains with their U.S. workers who are trying to buy their products, pay for their homes, and send their kids to college.
I'm not saying the answer to this conundrum is more government spending. But it's downright naive to pretend that giving more tax breaks to corporations is going to unleash a waterfall of wealth that will help everyday workers. Corporations have taken their existing tax breaks, built a giant dam ahead of the waterfall, and are diverting all the water into their swimming pools. Why would anyone be dumb enough to think that behavior will change if we give them more water?
10 comments:
Umnnhhhh....
1) "Corporate profits" relates to "unemployment" precisely how?
2) Are you telling us that increasing taxes paid by "corporations" will not, ever, result in higher prices for their goods?
3) You ARE aware that "profits" are often re-invested in R&D and machinery/equipment, yes? And that cash-on-the-sidelines is a reservoir against UN-profitable years?
A noticeable amount of "profit" is made by labor arbitrage, yes--that is, by using offshore labor. But it's not only labor which is cheaper offshore; the regulatory burden is less, as are taxes. Do you propose that the US either: A) ratchet down its reg/tax burden to match that of (say) Thailand, or B) ratchet up its tariffs to account for the reg/tax differential?
Inquiring minds, and all that.
Oh, by the way....
Cash reserves are also useful when Gummint policy is unpredictable, OR predictably going to cost a lot of money.
Such as the EPA's several-billion dollar anti-coal announcement.
Dad29,
You are overthinking this into circles. In its most simple of terms, supply-side economics says that if you cut taxes on the rich, corporations, business owners (i.e. the "top"), it will trickle down to the middle class and average worker (i.e. the "bottom").
So, here we have the "top" with the lowest tax rates they've seen, sitting on the largest piles of cash they've seen. Simply, they have an unprecedented supply of wealth.
For supply-side, trickle-down economics to hold water, this supply should be trickling down. Yet unemployment is ridiculously high. Today's jobless numbers show unemployment is actually growing. Wages for the average worker, adjusted for inflation, are actually down and have gone down for decades.
The facts on the ground are simply inconsistent with the economic theory. The top is doing better than it ever has yet the bottom is in a horrible and prolonged rut.
What do YOU propose that the US do? Let me guess, lower taxes on the top? Get them more cash?
At some point you have to stop and say that the supply-siders have gotten everything they have asked for year after year, they are sitting on the wealth to prove it, but the second half of their theory has failed, and the bottom has nothing to show for it except 9.2% unemployment and depressed real wages.
Here is a left-leaning take on this same issue called The Final Nail In The Supply Side Coffin.
Dad29, profits are not reinvested in R&D and equipment. Profits are what's left after expenses (including R&D and capital expenditures) are subtracted from revenues.
If you do not understand that simple fact about economics, it's no wonder you and your fellow travelers buy into the supply side economics myth.
Mostly, those high corporate profits go to insanely inflated salaries and bonuses for CEOs, and occasionally dividends.
Umnnnhhh...Jill....
You don't seem to understand that businesses actually operate on MORE than a 1-year plan.
Yes, "profits" are end-of-year snapshots. But you also assume (ass-you-me) that the cash will sit in the mythical 'bank' forever. IOW, it does NOT go towards R&D, nor M&E, in the next fiscal year, or the one after that.
Say you're a slip-and-fall lawyer who just cleaned up on the tobacco industry to the tune of $300 million after-tax. Should the lawyer hire 300,000 new attorneys at $100K each the next year, Jill?
Until you understand simple facts about running businesses, you ought to pipe down.
By the way, those "profits" are AFTER salary/bonus expense, Jill. But I didn't expect you to note your internal inconsistencies, either.
So, here we have the "top" with the lowest tax rates they've seen, sitting on the largest piles of cash they've seen. Simply, they have an unprecedented supply of wealth.
I'm not a doctinaire Sup-Sider, Max, but I'll play.
You seem to think that confiscating a bunch of that cash WILL 'revive' the economy.
Really? Confiscating profits will increase demand in an amount sufficient to push GDP up at a rate of 4%? 5%? 8%?
You can prove that, of course.
I'm not answering for Max, but I think one of the major problems in the equation is that typically the banking sector is responsible for ensuring that these unspent profits, while being held, are directed to those that are looking for capital. Except banks did such a piss-poor job of lending in the last decade that the pendulum has now swung ridiculously far in the other direction and perfectly worthy individuals/businesses can't get the capital they need to do the things that would help the economy to grow.
On a more general level, Clinton raised taxes and we saw a decade of unprecedented peacetime growth and even a couple of surplus budgets. GWB cut taxes and we saw a decade of economic stagnation, record deficits and a giant recession at the end. My point isn't that any president deserves credit or blame, or that one approach always works and the other doesn't, but rather that presidents have less to do with the success or failure of the economy than some other folks out there like to think.
typically the banking sector is responsible for ensuring that these unspent profits, while being held, are directed to those that are looking for capital. Except banks did such a piss-poor job of lending in the last decade that the pendulum has now swung ridiculously far in the other direction and perfectly worthy individuals/businesses can't get the capital they need to do the things that would help the economy to grow.
Let's use definitions. Banks actually don't supply "Capital" in the strict sense of the term; they lend money. "Capital" comes from investors, or capital gains. Banks merely provide liquidity. (When they provide too much liquidity, they become 'capital investors' when the business fails...)
And yes, the banks should have been allowed to fail. They screwed up royally. You can thank Dick Armey for f(*&^% up the banking system by ending Glass-Steagall (Clinton signed this, by the way.)
Well-said that Presidents aren't solely responsible for economic events; Congress and regulators of every stripe also interfere.
A good case can be made that the US consumer also screwed themselves by over-buying junk and mortgaging themselves to the wall.
How-some-ever, the truth remains: if you want less of something, tax it (raise its cost.) You want less economic activity? Raise the cost of same through tax or regulation.
Works for cigarettes, no?
Dad,
If you think raising taxes amounts to "confiscating" profits, then you live in a world of hyperbole. In my experience, it is not worth my time to debate matters with people that peddle hyperbole.
Moving on to some additional general thoughts of mine not directed at anyone . . .
I would simply pose this to a small business on main street (and I will digress for a moment to note that when a politician says "small business" or "main street" they usually mean anything but . . . just like all the "family farms" run by immigrant labor are anything but).
Would you, as a small business owner, prefer policies that will marginally lower your tax rate at the risk of further dampening an already pathetic recovery, or would you prefer policies that may marginally increase your tax rate but will put more money in the hands of your customers?
A true supply-sider will pick the former eleven times out of ten. I think an informed and analytical small business owner would take paying customers over more tax breaks and refunds and loopholes any day.
But then, I'm not a small business owner. I don't know the ins and outs of small business tax matters. I just know that myself and everyone I know is a consumer, and we aren't spending shit right now because we feel our pocketbooks have been punched in the gut thanks to the actions of people whose pocket books are not hurting right now (in fact theirs are better now than even before the collapse).
You can cut taxes all you want, but until myself and my friends have the spare change to go spend in commerce, businesses will not recover.
"Confiscation" is not inaccurate. They have the guns, AND the courts.
I'm one of those who believes that the Fair Tax (consumption tax) is the best alternative. Not the current system, no matter how "adjusted"; nor the Flat Tax, which is loved only by the very wealthy.
Having said that, you'll note that the Pubbies have offered to do a 'revenue-neutral' switcheroo on taxes, eliminating certain credits and deductions in return for a general lowering of the rate(s).
Obviously, the details are important--but that proposal is not out of bounds.
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