Tuesday, July 26, 2011

Capitalism and Corporate Profits

On vacation this week; our annual Poconos family vacation/reunion. Attendees are from five states (including Pennsylvania), include direct family, girlfriends of family, in-laws of family, friends of family, and lots of family. Last night we all went out to dinner together; 28 people, ranging in age from 2 to 85. Really cool.

Part one of my three part capitalism series detailed my view of the current state of capitalism as it relates to employment. Part two will review capitalism and corporate profits in today's environment.

In addition to the Philadelphia Inquirer, I also deliver the Wall Street Journal and the weekly Bloomberg Business Magazine. Occasionally, I glance through these publications, as well as reading the Inquirer's business section. To be fair, my interest in business is not a primary driving force for me. As I have said before, I admire those entrepreneurs who risk their time, money and (at times) home and family, to create and grow a business. Most of the opinions I am about to express are not directed to these small business persons. They still reflect the exercise of capitalism that existed in the post World War II years right up until the dawn of the multi-national corporation. It is in the continued growth of small businesses and their ability to create jobs that I feel we should direct more of our national resources.

I can not say that about capitalism and corporate profits. As stated above, I am aware of the business world via the reading matter mentioned already, as well as Internet searches for information related to these blogs. As always, I encourage anyone who reads my writing to corroborate what I write via the business news of your choice. What I am finding is that corporate profits are doing very well in this post-recession period. Second quarter numbers indicate much higher profits across the board for most reporting companies. Now, don’t get me wrong. I am not saying that I would prefer that our largest corporations be non-profitable. We need successful business concerns to drive our economy through invention of new technologies, the creation of new markets and opportunities and the increased employment of American workers. It is a cycle that has begun since the economic meltdown of 2008, but one which is not moving forward quickly enough.

My problem is that a significant portion of the increased profits is a result of a reduction in labor costs. I saw a report by one of the more prestigious players in the business world that estimated that 88% of the growth in GDP was going to corporate profits and only 1% to wages for employees. If we are to rely on the cycle of corporations receiving tax breaks and incentives to improve profitability so they can hire more workers then we need the beneficiaries of those activities to actually do their part. By most reputable reports, the largest corporations of America are sitting on $2 trillion of cash reserves. In other words, they have the money via profits and reserves, but are not hiring.

I maintain that they are not hiring because corporate profitability is their ONLY concern. The corporate boards and executives are only focused on meeting their targets. If it is, say 12%, and the numbers are pointing to 11.1%, the CEO and other responsible executives know they will be held accountable. (Of course, if they can’t attain that target and have to resign, they will still receive their multi-million dollar compensation packages as well as a generous parting gift, but that is grist for another blog). In the end though, decisions are made to reach that corporate profit goal, and those decisions focus first and foremost on costs. Labor costs. So, the labor force, the average worker who mans the assembly lines, drives the trucks, answers the phones, and, in general, makes up the vast majority of the work force for that corporation, gets reduced. Or loses a benefit. Or becomes part time. The result? The profitability number is reached, the CEO and executive board gets bonuses and unemployment/under employment in America stays unchanged.
Corporate profit has now morphed into an obstacle to higher employment rather than a creator of jobs.

To me, the mantra that reduced corporate taxes will increase employment seems outdated at best, a complete lie at worst. As long as profitability is the only yardstick, then expecting our large corporations to solve our unemployment problem is fruitless.
I am no economist as I have said before and will say again. But my 25 years in private sector jobs tell me that companies hire more workers when the orders increase. When more people are buying sporting goods, then more workers are needed to process, pick, pack and ship those orders. When more companies are shipping orders, more workers are needed to drive the trucks to move that freight and arrange the logistics to organize the flow of that production. Businesses, whether small or large, hire employees to meet the demand of the customers. Anyone who tells you hiring is slow because employers are afraid of the future cost of health care or the potential for higher corporate taxes are reflecting a scenario that just does not blend with reality. New orders, new customers, new sales are the main driving force of new hiring. More money in the hands of everyday Americans and more jobs will help stimulate those orders and sales.

Perhaps then we should ask those various corporate CEO’s and corporate board members to reflect on their part in the cycle and whether, in the long run, today's corporate profit might actually be a roadblock to tomorrow's improvement in business and increased growth in overall revenue. If, as the conservatives claim, government stimulus is not the answer then what stimulus can/should the private sector provide to gain traction against the stagnant level of unemployment. What profits are they willing to sacrifice today, to prove that the proper exercise of capitalism will enable growth in middle class incomes resulting in increased demand for products and services tomorrow.

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