January 27, 2014

1099 words 6 mins read

Let's Not Prove Karl Marx Right

Karl Marx foresaw something that’s now playing out. As corporations cut labor costs to increase profits, they also destroy the markets for their goods and services.

This chart shows corporate profits (red) and wages as a percentage of GDP (blue) from 1944 to 2012:

[caption id=“attachment_14282” align=“aligncenter” width=“634”]profits vs. wages Corporate Profits vs. Wages as Percentage of GDP, 1944-2012[/caption]

When the blue line is higher than the red line, you get savings. For the red line to hang above the blue line, you need debt. (I’m guessing on this, but I think I’m right.)

Henry Blodget explained it perfectly last year.

Because when inequality gets bad enough, serfs can’t afford to buy products from overlords. This hurts the overlords' ability to get even richer.

And that’s what’s wrong with the American economy right now. The serfs are tapped out. The overlords are responding by cutting costs (firing serfs), to increase profits. Unfortunately, one person’s “costs” are another person’s “wages,” so this is making the problem worse.

From 2002 to now, the United States have racked up massive debt. The profits companies have amassed came from debt and labor cuts. I know the government says that unemployment is falling, but the government is lying. Here’s the labor force participation rate from the US Bureau of Labor Statistics as of January, 2014:

[caption id=“attachment_14288” align=“aligncenter” width=“600”]Labor Force Participation Labor Force Participation, 1950 to 2013[/caption]

The labor force participation rate has fallen to mid-1970s levels, and it shows no sign of coming back up.

Yes, there were 2 million new jobs created since the official end of the recession. But many of those jobs were never filled. As the government pumps more money into income redistribution programs that allow companies to eliminate workers (without eliminating jobs), people give up and decide to go on the dole. Plus, most companies suck at recruitment.

So what fuels the massive corporate profits and the ridiculous stock market bubble is pure, unmitigated debt. And its government debt in the forms of Treasury bills and bonds. The food stamp program is corporate welfare, allowing corporations to pay unrealistically low labor costs.

Guess what would happen if these companies failed to pay high enough wages and food stamps didn’t exist? There would be massive employee organizing and ultimately the companies would have to change tact. This of course doesn’t happen when the taxpayer makes up the difference, and that is exactly what they want.

In other words, our business and political leaders seem bent on proving Marx right. Or driving workers into the arms of the SEIU.

Conservatives Don’t Help When They Defend Big Business

The problem with some conservatives' blind embrace of big business is that big business hates free markets. Big business leaders are no friends of liberty, freedom, and free markets, but they say all the words conservatives love to hear. The business and finance lions are just cynical crony capitalists who eat out your existence while the government holds you down.

Here’s how it works:

  • Government proposes legislation that might hurt big business
  • Big Business sends swarms of lobbyists to Washington
  • Congress and the White House accommodate the lobbyists by letting the lobbyists write the legislation (“It’s only fair.")
  • The supposedly anti-business legislation kills competition and protects the businesses that wrote the law

We’ve seen this process repeat more than season three of Friends.  Every cycle of legislative reform makes it harder for new, insurgent companies to compete while making it nearly impossible for big, established firms to suffer. This cycle resulted in the “too big to fail” myth, as a handful of American companies commanded so much of the US economy that their paid moutpieces in Congress and the White House stole trillions of dollars from Millennials (and younger) to keep the billionaires full of billions.

Meanwhile, most large American companies recognize only one principle: maximize shareholder wealth. That’s it. And that maximum wealth principle applies only to the immediate future, not long-term, sustainable company growth. That’s why Carl Icahn wants Apple to, essentially, sell off its assets and give him the proceeds. In a sick and perverted way, Icahn has been taught that he has moral right to all the value Apple employees have produced.

When you combine this myopic pursuit of short-term profits with lack of accountability and easy government money, you get the chart at the top of the page.

But that will all change.

Either the economy will crash or the non-elites will revolt. And by revolt, I mean something really ugly with much loss of life and, possibly, the end of Western Civilization. What would happen to the economy if China and Japan go to war?

What Can We Do?

First, stop thinking Republican and Democrat, liberal and conservative, right and left. The real fight today is between the elites of politics, business, finance, and media, and the rest of us. There are more things that unite Tea Partiers and Occupy Wall Streeters than divide us, but we got all caught up in the emotional things that seem to separate us.

Next, stop playing the electoral politics game. Stop worrying about issues. Issues are what the elite use to keep us from taking back power. Forget issues, and start working on your personal power.

Finally, stop running to the defense of big corporations. Start analyzing corporations for their commitment to value creation, not profits. Yes, companies have to make a profit. But profits are a by-product of excellence. Profits are not the reason companies exist. You can learn more about the real purpose of companies at ConsciousCapitalism.org.

The gap between profits wages cannot continue to grow. That gap cannot event remain constant. It will shrink. It will shrink because markets (aka, people) refuse to work for or with crony capitalist companies, or it will shrink because of a collapse.

If the markets discipline corporations, the correction will be painful but bearable. If, however, the market collapses, a lot of us won’t be around to see what comes next.

UPDATE: I’m not the only one thinking this way. Joe Weisenthal at Business Insider quotes Nouriel Roubini:

”…between technology, globalization, trade, the winner-take-all superstar effect, inequality is rising. This is not just a “moral” issue but also an issue of too little consumption too little savings that is bad for global growth. So it becomes vicious cycle. It’s a bit like the old Marxist idea that if profits grow too much compared to wages, there’s not going to be enough consumption, and capitalism is going to self destruct. So I think that insight of Karl Marx is as useful today as it was 100 years ago."