In Paul Krugman's op-ed today on "Another Economic Disconnect" in the New York Times at A23 (again, available electronically for free only to those with a Times Select subscription), he discusses the anomaly of rising corporate profits and falling worker wages. What's good for corporate America may be good for investors and managers who are able to make out with lucrative stock options, but it doesn't appear to be very good for the workers whose median "earnings, adjusted for inflation, haven't gone up at all since the current economic expansion began in 2001--the economy feels anything but great to most Americans." Id.
But that profits-wages disconnect is just one of the weird results of the lopsided markets operating in the US today. Our economic news reveals something unlike what the Bush economic team said was going to happen as a result of its "pro-corporate, anti-labor tilt"--a "profits gusher" that is producing an investment "trickle." Id. Corporate profits have doubled since 2000 while nonresidential investment "remains fear below its levels of the late 1990s, and it has been declining for the last two quarters." Id.
Krugman notes that the explanation may be merely business pessimism--"sluggish business investment reflects lack of confidence in the economic outlook". But he suggests it may also be due to a more disturbing development--"companies [use] profits to buy back their own stock ...to produce a temporary rise in stock prices that increase the value of executives' stock options, even if it is against the long-term interests of investors." Id. Whatever the reason, the consequences may be long-term: a stalling of productivity growth and a significant impact on the economy.
Interestingly, the Times op-ed page has a central graphic that shows piggy banks gushing out of the US towards the Caribbean. Maybe the cartoonist was riffing on the Morgenthau op-ed "Who's Watching Your Money?" urging Congress to permit state regulation of the banking industry rather than leaving us with one single easily captured federal regulator (the comptroller's office) that is financed almost entirely by the banks it oversees. (See my own riff on that, below.) But the cartoon is equally applicable to Krugman's piece. Much of that corporate profit is being paid to investors and managers who put the money in offshore hedge funds and overseas equity investments rather than investing it in U.S. industry. Maybe the cartoon should also show some piggies returning to the US, but with solid strings attached to their mother countries representing the increasingly large US debt burden financing those capitalist profits. That's the third economic disconnect--the outflow of investors' and managers' outsized capital returns (that were facilitated by administrative anti-tax, anti-labor, pro-corporate policies) to other, more lucrative markets, coupled with the deficit-funding inflow of burdensome US debt funded by China, Japan, the UK, and those island tax haven countries, among others.
(ASIDE: The bank problem is a real one. Banks, insurance companies and other financial institutions are especially adept at working the system for their own benefit. Being able to capture regulators just adds to their power. Look at the way the US Congress has handled student loan programs--direct subsidy loans cost taxpayers much less, but banks have been able to get the Congress to put most of the money in loan programs where Universities do the adminstrative work and banks get a government guarantee. Not a bad deal for the banks (no real losses to deal with, high interest rates so high returns, and little effort). Not a good deal for the students. And, have you ever been charged 32% interest on a credit card for being one-day overdue when the bank randomly changed its due date and you didn't notice? They seem to be doing that more now, I hear from my student and just-out-of-student-status contacts. How about those fat "processing fees" and "administrative charges" and on and on that banks charge for mortgage closings? And then there're the banks that charge high interest rates immediately when interest rates rise, but lower their deposit interest to .25% when interest rates go down and then keep it low for a very very long time after interest rates rise.)