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July 24, 2013


Other than ardent Marxists and assorted other economic commentators prone to anarchy, nearly all economic commentators agree that new wealth is created by increases in productivity. The dictionary defines a product as “that which is produced; an effect; result.” Production is defined as “an act of bringing forward, a product of physical or mental labor.” Productivity describes the overall process which is positively impacted by harder work by labor and/or improvements in methods and innovative processes or devices in the production of goods and services for sale. Innovation and hard work will result in efficiencies which lower unit costs and place such a producer at a competitive advantage over others in the business, thereby increasing profits and “new wealth” due to such increases in productivity, new wealth including the increase in profits and the increase in shareholder value and such additional benefits as lowered interest costs on commercial paper such as corporate notes and bonds to the successful producers may offer for sale to investors in that market.

Few will argue with this general understanding of the role of productivity in creating new wealth, and still fewer will disagree that such efficiencies add to shareholder value, whether such corporate producer is privately owned or whether its stock is traded publicly. When profits go up, so do stock values; and when stock values go up, shareholders are able to cash in on capital gains opportunities or hold on to such equities for dividends awaiting yet further gains to increase their investor wealth. Such stock investors have considerable leeway in making such a decision since the internal revenue code provides preferential tax treatment either way. Other uses for such enhanced stock value include its use as collateral for loans by such shareholders who are enriched by increases in productivity and the consequent increase in collateral value of its stock for bigger loans. With such increases in pledge value for loans and with interest rates at historic lows (and deductible even so), shareholders have the best of all worlds and should be very pleased with their company’s performance. All is well, and getting better. Their investment was and is sound; they have money (and access to more) in their pockets. The CEO gets a raise and a bigger bonus and there are no complaints about that at the annual shareholders’ meeting. Everybody is happy.

What is missing in this “capitalism at its best” story? We know shareholder value is enhanced, but what about the additional profits per se? The capitalists in this equation have already been richly rewarded by the increase in productivity resulting from “harder work and innovation” with their stock gains and (perhaps) dividends, both of which are taxed lightly. The CEO’s increase in compensation comes out of enhanced profits, of course, as do other executive salaries and bonuses up and down the corporate executive ladder. Did the CEO and his junior executives work harder, innovate, stand on the production line or drive the truck? Were they involved in suggesting some efficient shortcut in the productive process (as an assembly line worker or truck driver may have suggested to his/her foreman which resulted in innovative efficiency and increased productivity)?

The startling omission of the corporate workforce from sharing in such increases in productivity was not always thus. The post-WW II “feel good” era of corporate sharing of new wealth with its workforce lasted until circa 1974. It was an era in which such fair sharing of new wealth due to increases in productivity brought about a booming economy and the formation of a vibrant middle class. Both domestic and export markets (the latter due to wartime European devastation and the Marshall Plan) were on an upward trajectory hitherto unknown in the economic history of this country. What happened?

This is what happened. Wall Street and the corporate culture decided circa 1974 to hog all the profits arising from increases in productivity in an exercise of greed, an exercise that has exacerbated and is continuing to this day. One of the many negative results of this greedy posture in not sharing the fruits of our economy with those involved in producing such results is the great decline of middle class living standards and all of the economic havoc that has caused (see the enormous decline in aggregate domestic demand and the virtual end of social mobility, among other such disasters).

Overseas investments by corporate America in the eternal search for cheap labor with capital amassed here but spent there have had the effect here of massive importation of not only goods from such cheap labor venues, but the unemployment and poverty which necessarily accompany such imports of goods and services as our factories close and costs for social services go through the roof. Wall Street’s replies: That’s your problem, not ours. Tariffs on imported goods? Forget it, that’s protectionism, and America is a free trade venue (whatever that means). More tax money necessary for food, housing and healthcare for the displaced, and unemployed? They should have saved money for their healthcare and retirement. Author’s note – saved money from what? Unemployment compensation? Minimum wages?

Wall Street and the rich and corporate class do not follow their own propaganda, i.e., the right to big compensation for “risks taken” and “the contribution of executives” to corporate performance. They routinely INCREASE bonuses and other forms of compensation even when their corporations LOSE money. Especially disgusting to me were the bonuses given to the big Wall Street banks’ CEOs right after we bailed them out of their losing crapshoot with our money in 2008. What made things worse was that such bonuses were announced at or around the time they were announcing job cuts of thousands of their employees. Employees not only did not share in such expanded compensation; they were fired.

It is clear that people in the corporate workforce are mere ciphers, mere numbers in the productive process, whether in finance, transportation or what little is left of manufacturing. Even if it is their innovative idea that enhances shareholder value, shareholders hog the resulting gains in productivity in both shareholder value and the increased profits stemming from such innovations, while the innovating employee may have assured his or her own redundancy with, for instance, a labor-saving idea.

The United States came to its (perhaps formerly) preeminent position through having a continent full of natural resources to be exploited and hard working people that have made us the richest country in the world. The problem is not wealth. The problem is in its fair distribution in some reasonable proportion to contributions of labor, innovators and management. The distribution is now totally disproportionate and far removed from its pre-1974 ratio. This must change, and not just for the usual left-right political positioning; it must change because of what it is doing to our economy. At the current rate of demand in our domestic economy, and with substantial production overseas to satisfy that demand,  our overpayment of the financial sector (which comprises a tiny domestic demand) and underpayment of labor (which comprises a major demand factor) is an open invitation to Third World status.  GERALD  E


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