Universal Translator

Wednesday, August 10, 2011

The Stock Market is Bad for America

One of my pet peeves about financial and political reporting is that the stock market is often looked to as an economic indicator.  If the stock market is up, then this is claimed as evidence the economy is doing well.  Indeed, I remember listening just a few years ago to a radio interview with W.’s labor secretary, Mrs. Mitch McConnell Elaine Chao, who said the stock market’s performance is the only economic indicator anyone should ever be concerned with.  And this was the Secretary of Labor, forgawdsake!

Now I’ll admit that there may once have been a reason the stock market could legitimately be thought of as a valid indicator for how well the national economy was doing.  Basically, the idea was that stock prices reflect the market’s estimation of companies’ future profitability.  So if the market believed the economy was doing well or (more accurately) was going to do well in the future, then companies were expected to realize greater future profits.  Greater profit meant the companies would be worth more, and this would be reflected in their stock prices.  So if market investors were bullish on the American economy, then they were bullish on the stock market as well.

But there are two important things to note about this model.  First, the performance of the stock market doesn’t actually predict the nation’s economic future so much as it reflects what investors already think that future looks like.  Second – and more importantly – looking to the stock market to tell you how the United States economy is doing only makes sense if the value of the companies traded in that market does in fact depend on the U.S.’s national economy.

It is becoming increasingly clear that not only is Wall Street not dependent on the nation’s economy, its goals run directly contrary to the nation as a whole.  It has gotten to the point that when I see the Dow Jones has ticked up a notch I immediately think to myself, “I guess we’re all about to get screwed just a little harder.”

Okay, that last sentence was a bit hyperbolic, but not by much.  Check out this passage from AP Business Writer Stan Choe explaining why investors caused the Dow to soar after the Fed announced yesterday it intends to keep interest rates near zero percent for the next two years:
[Bob Doll, chief equity strategist at BlackRock] expects stocks to continue to rally because a slow-growing U.S. economy won’t harm corporate profits.  As a whole, the companies in the Standard & Poor’s 500 index reap more than half their revenue overseas.  What’s more, companies have already cut costs significantly, have hoarded cash and squeezed more production out of workers.  Even as the U.S. economy has slowed, the S&P 500 as a whole was expected to earn record profits this year. 
“Corporate America has demonstrated that it can generate good growth and profits despite a weaker U.S. economy,” Doll said.  
Packed into only a few sentences we learn quite a bit about the modern relationship between large, publicly traded U.S. companies and the American economy overall. 

First, when the government enacts policies that shower companies with cash those companies are much more likely to simply hoard that cash rather than, y’know, use it to create jobs to meet non-existent consumer demand.  Second, these companies don’t need America to do well in order to do well themselves.  Finally – and most importantly -- these companies’ profitability comes in large part by cutting costs.  Loosely translated, this means laying off as many employees as possible and “squeezing more production” out of those workers they haven’t yet been able to figure out how to fire.

It is that last fact that I think of when I point out that Wall Street’s interests today often run directly counter to the interests of the American economy as a whole.  Wall Street simply isn’t interested in the American economy; Wall Street is only interested in the profitability of the companies it trades.  If it is possible for those companies to become obscenely profitable by screwing over their employees, their customers, their suppliers, and the government to which they are supposed to pay taxes . . . then they will.  Not only will they do so, but they will then be feted on Wall Street for their ruthless business savvy and the stock market indexes will go through the roof.

Of course, if the S&P 500 firms could get away with all of these things that would be great for them but terrible for our national economy.  When fewer employees are required to do more work for less pay, the amount of money (wages) that can be spent as consumption goes down – and that is bad for America.  When a supplier is forced to wait months before being paid for the goods or services it already has provided then that supplier’s cash flow gets squeezed and puts the supplier in danger of being unable to meet its own expenses – and that is bad for America.  And when companies can devise ways to avoid paying taxes on their profit, they deprive the government of the revenue needed to keep the country itself functioning . . . even if only to pay off the debt the nation already has incurred – and that is bad for America.

And of course all of these things are already happening.  Unemployment is still up over 9%.  And,
[e]ven as corporate profits recover, big companies continue to squeeze their small vendors, stretching out payment terms and writing late checks.  Unfortunately, this blatant exploitation is damaging the small business economic engine that drives half of US GOP.  (emphasis added)

And for months now we have been hearing a growing drumbeat to enact a “temporary tax holiday” that would allow multi-national firms to repatriate the profits they have earned overseas while only paying a 5.25% -- that is not a typo – tax rate on those overseas profits.  Matt Taibbi has been trying to call attention to this shameless corporate giveaway for some time – you can read his latest report on its progress here.

Essentially, this proposed corporate giveaway is just a repeat of something that happened in 2004.  You see, unlike individual U.S. citizens – whose income is taxed when earned, no matter where in the world it is earned – corporate U.S. citizens don’t have to pay taxes on their overseas profits until those profits are “repatriated” by being brought back to the United States.  Of course, when those profits finally are repatriated the companies that earned them have to pay the applicable corporate income tax on that money.

In 2004 President Junior announced a “one-time tax holiday” whereby foreign profits could be repatriated at a special low, low rate.  The idea – as it always is when proposed by Conservatives – was that companies would bring all this money back into the country, pay a pittance to the United States of which they are citizens, and then use most of it to create jobs, stimulate the economy, blah blah blah.

Of course, it didn’t work out that way – it never works out that way.  Instead the companies brought this money back into the country, paid a pittance to the United States, and then kept it for themselves either by buying up their own stock, paying extravagant bonuses to their CEOs and other corporate executives, or simply hoarding it.

These companies also immediately took note of the fact that by stockpiling overseas profits they might be able to take advantage of the next economic downturn to demand another “one-time tax holiday” that would allow them to skate on their obligations as corporate citizens.  So they shipped more jobs and profit centers overseas and waited until the time was ripe to demand again that they be relieved from paying taxes.

Well, that time is now.  As Taibbi reports, Texas Republican Kevin Brady and Utah Democrat Jim Matheson are sponsoring the “Freedom to Invest Act(gotta love the names these goobers come up with) that would, as noted, allow the full repatriation of overseas profits – taxes on which have all been deferred for years already – at the low, low effective rate of only 5.25%.

If passed, this new “one-time” tax holiday will be great for multinational companies, wonderful for profits, and fantastic for Wall Street.  It will also be terrible for the rest of us, and will establish forever that multinational companies can avail themselves of all the privileges and protections afforded them as American companies, can earn huge profits employing low-wage workers outside of the United States, and will never, never, never have to pay anything close to a fair tax rate to they country they get to call home.

Truly, the stock market is bad for America.

1 comment:

  1. A good week to comment, when the Dow is down 600, up 400, down 500, up 400 -- and my guess is we will see another triple digit selloff again today. This no longer is a market of investors making careful decisions about values of corporations. It is a multi-trillion dollar gaming machine of computers making instant buy and sell decisions based on momentary conditions generated in part by the computers themselves. It is no longer a store of wealth for long-term value investors. Anyone in the market since 2000 when the DOW was at 14,000 has lost 15-20 percent in nominal terms and as much as 50 percent when taxes, commissions and inflation are factored in -- one reason why state, corporate and private pension plans that invest in equities are in sorry shape. These plans assume returns of 4-8 percent that are no longer possible. The burden to make up these shortfalls falls on tax payers and shareholders. The stock market is not your friend.