(Note: this is a continuing series of key topics to build the foundation of a reboot to our democracy to create an economy that works for all not just the top 1%)
The COVID-19 crisis is causing deep psychological shock combining panic, depression and recession. It is a new type of crisis or ‘panipression’. To create this new word we combined three word stems: pan for all and Greek word for their god of terror in the word panic, press a state of pressing down and sion for state or quality of something. People are stressed, not sleeping well, and worried about their families as in other recessions butnow health is added to their worries.It is a sense of falling, that doesn’t seem to stop. This worldwidevirus contagion is incredibly pervasive going right to the heart, soul and experience of every American. The social fabric of our society has been shredded. Now, we are trying to stitch our social fabric back together.Everyday our way of living is turned upside down. The previous ways of doing things have disappeared, instead social interaction has shifted to digital networks. Yet, we are social beings we need to be hugged, touched and feel close together.
The coronavirus pandemic has ‘uncloaked’ the vast gap between the top 1 % in wealth and their safety net versus the free fall of the working class. Our first responders, nurses, doctors, delivery people, grocery store clerks, restaurant attendants, farm workers, meat packing employees and others are putting themselves at risk for us and many of them only make a minimum wage or less with no sick leave. While Wall Street investment banks get low interest loans, or even have the Federal Reserve buy their speculative debt, workers are left with one-time $1200 checks, temporary sick leave and unemployment bonus of $600 ending in eight weeks. Over 31M small business owners of which only 40% are profitable are applying for temporary loans which may be converted into grants if they keep employees on payroll for eight weeks. The virus panipression has stunned consumers to the point where they will be nervous and anxious about going out to stores to shop. Businesses will not rehire workers until they see renewed demand. What happens to the 36M on unemployment assistance when the eight week bonus stops and they are on 60% of their hourly wage for 26 weeks?
So, what is the path ahead? There is in embedded in this crisis an opportunity to transform our democracy into a more secure, resilient society where the economy works for all. What will get us through the convulsions of these times? The foundation of change in our nation has been the American Spirit has served us well through the Civil War, both World Wars, Civil Rights Reform, Vietnam War, and The Great Recession. It is time to renew that spirit and move ahead using it as a compass to navigate our future path in rebuilding our government, economy, education, and society – a reboot to version – P 2.0 (People). Below is a diagram of the key institutions that sustain our democratic values, ideals and functions to serve us:
Source: Patrick Hill – 5/22/20
The American Spirit is the foundation of our democracy. The American Spirit is typified by entrepreneurship, hard work, ingenuity, self-sacrifice, innovation, inclusiveness, equal opportunity, freedom of choice, and caring for others.
The American Spirit supports the creation of the Common Good. The Common Good are those values, things or institutions that support the ability of citizens to pursue their dreams from a common base unfettered by imbalances in what all people need to live. We all need clean air, water, and land to live each day. We need good health, a sense of personal safety and economic security. In common we desire that our families be protected, secured and allowed to grow in any way they desire. Our country was founded by those persecuted for their religious beliefs we need to have our religious beliefs respected, tolerated and protected. Core to a well-functioning democracy of citizens making wise choices is a public education system to ensure that every citizen is well educated to make intelligent choices. A well educated citizenry will make good choices voting for those leaders that will implement laws and policies for the common good and welfare of themselves and their country.
Consent of the governed is a guiding principle for our democracy and protected by the Constitution. This consent is carried out by voting, Voting is a right guaranteed in the Constitution and succeeding amendments to all people regardless of race, wealth, religion, or nationality. We will explore how voting has changed in America and future alternatives for safeguarding this core act of democracy.
There are three branches of federal government that sustain our democracy: Supreme Court, Congress, and Executive. Congress has become quite distant from the Will of the People, as well as the objectivity of the Supreme Court. The Executive branch has become a power center all unto itself with limited checks on it power. We will look at ideas for reform that ensure they are focused yet again on the People and the Common Good. Two other institutions are crucial to our democracy. The Press and Education. The Press acts to point a light into the darkness with facts, investigative journalism into the actions of our leaders and ongoing education of our government on our lives. Our educational institutions ensure that we continue to learn, grow and understand our world, ourselves and the universe in a way to build of society and live happier lives. We will look at how to strengthen these institutions and make them more accessible to all and how to support a more civil dialog.
Our federal government establishes laws and policies that establish the rules of our economy. The evolution of the highest concentration of wealth in the top 1% since 1929 has distorted our economy to the extent that the middle class is dwindling and with it the core strength of our democracy. A strong democracy is typified by a vibrant, robust, thriving middle class. The development of growing middle class has to be a goal of our next version of democracy.
The concentration of capital into a few families has left labor out of the benefits of a growing economy. The pandemic has targeted the consumer in ways we never imagined and now threaten the lives of most workers. Our federal government has scrambled to apply a financial band aid to a financially chronically ill workforce. Labor must have equal economic power with capital for a democracy to thrive and renew itself. We’ll look at how to bring labor into equilibrium with capital.
All Americans want to pursue happiness in their own way, whether it be wealth, family life, religious pursuits or service. Our democracy needs to focus on the core values of the American Spirit and ensure they are represented powerfully thorough the institutions that run the day to day operations of our government.
The ideas presented are founded on facts, so you will see a few charts or data references. Yet, each idea will be explained simply so that you as a citizen can be informed and participate in our democracy to your utmost ability. The 2018 election had 49.3% of the electorate vote the highest for a mid-term election since 1914. We would like to see more citizens participate in our electoral process, run of office and use civil dialog in the pursuit of law and policy making. You may disagree with some ideas presented here to get the dialog rolling toward a Democracy version P 2.0, and that’s great. The idea is to move to participation of everyone, not to be ‘right’ yet to be in tune with the American Spirit of progress for every citizen. You will find a focus on identifying a problem by using facts, and much larger focus on solutions. We need more focus on solutions. The solutions then become larger than the problems and we overcome the obstacles to achieving the positive result.
This is a time of unprecedented events. A virus induced panipression like we have never felt before or know what to do about. Yet, we can have faith that by going back to the American Spirit that binds us and unifies us we can all get through this together. To support our institutions that sustain our rights, due process and justice we need to do our duty. We all must take responsibility for forming a more perfect society. We need to participate in the democratic process with all earnestness. Plus, we must trust and obey our leaders when they formulate policies that promote, ensure and build the common good. We need to balance our rights with the duty to ensure the safety, security and happiness of our fellow citizens. Let’s build consensus across all points of view toward a more perfect union Because, on the other side of this transformation we will have a more equitable, just and prosperous democracy that works for all.
A recession is emerging with interest rate curves inverted, the end of the business cycle at hand, world trade falling and consumers and businesses beginning to pull back spending. The question is: will monetary or fiscal stimulus turn around a recession? In this post, we find both stimulus alternatives likely to be too weak to have the necessary economic impact to lift the economy out of a recession and will not help the middle class out of a stagnant financial position. Finally, we identify a new approach to government intervention based onan innovative ‘seed’ and multi-partner program to lift the middle class out of economic decline.
Our
economy is at the nexus of several major economic trends formed over decades
that are limiting monetary and fiscal options. The monetary policy of central
banks has caused world economies to be immersed in liquidity yet resulting in limited
growth. Central bankers in Japan and Europe have been trying to revive growth
with $17 trillion injections using negative interest rates. Japan can barely keep its economy growing with
an estimate of GDP at .5 % thru 2019. The Japanese central bank, holds 200 % of
GDP in government debt. The European
Central Bank holds, 85 % of GDP in debt and uses negative interest rates as
well. Germany is in a manufacturing recession with the most recent PMI in
manufacturing activity at 47.3 and other European economies contracting toward
near zero GDP growth.
Lance
Roberts notes that world economy is not running on a solid economic foundation
if there is $17 trillion in negative yielding debt in his blog, Powell Fails, Trump Rails, The
Failure of Negative Rates
. He questions the ability of negative interest policies to stabilize world
economies,
“You
don’t have $17 Trillion in negative-yielding sovereign debt if there is
economic and fiscal stability.”
Negative interest rates and extreme monetary stimulus
policies have distorted financial relationships between debt and risk assets. This
financial distortion has created a significantly wider gap between the 90 % and
the top 1 % in wealth.
Roberts outlines in the 6 panel chart below how personal income, employment, industrial production, real consumer spending, real wages and real GDP are all weakening in the U.S.:
Sources: Real Investment Advice – 8/23/19
Trillions of dollars of monetary stimulus has not created prosperity for all. The chart below shows how liquidity fueled a dramatic increase in asset prices while world GDP declined by about 25 %:
Sources:World Inequality Lab, Thomas Piketty, Gabriel Zucman et al – 2018
There are a number of reasons monetary stimulus by itself has not lifted the incomes of the middle class. One of the major reasons is stimulus money has not translated into wage increases for most workers. U.S. real earnings for men have essentially been flat since 1975, while earnings for women have increased though basically flat since 2000:
Source: U.S Census Bureau – 9/10/19
If monetary
policy is not working, then fiscal investment from private and public sectors is
necessary to drive an economic reversal.
But, will private and public sector sectors have the necessary tools to
bring new life to an economy in decline?
Wealth Creation Has Gone to the
Private Sector
The last 40 years has seen the rise of private capital worldwide while public capital has declined. In 2015, the value of net public wealth (or public capital) in the US was negative -17% of net national income while the value of net private wealth (or private capital) was 500% of national income. In comparison to 1970, net public wealth amounted to 36% of national income while the for net private wealth was at 326 %.
Source: Wealth Inequality Lab, Thomas Picketty, Garbriel Zucman et al – 2018
Essentially, world banks and
governments have built monetary and fiscal economic systems that increased
private wealth at the expense of public wealth.
The lack of public capital makes
the creation of public goods and services nearly impossible. The development of
public goods and services like basic research and development, education and
health services are necessary for an economic rebound. The economy will need a
huge stimulus ‘lifting’ program and yet
the capital necessary to do the job is in the private sector where private
individuals make investment allocation decisions.
Why is
building high levels of private capital a problem? Because as we have discussed private wealth
is now concentrated in the top 1 %, while 70 % of U.S GDP is dependent on
consumer spending. The 90 % have been working
for stagnant wages for decades, right along with diminishing GDP growth. There is a direct correlation between wealth
creation for all the people and GDP growth.
Corporations Are Not In A Position
to Invest
Some
corporations certainly have invested in their businesses, people and
technology. The issue is the majority of
corporations are financially strapped.
Many corporate executives have made profit allocation decisions to pay
themselves and their stockholders well at the expense of workers, their
communities and the economy.
S & P 500 corporations are paying out more cash than they are taking in, creating a cash flow crunch at a – 15 % rate (that’s right they are burning cash) to maintain stock buyback and dividend levels:
In 2018 stock buy backs were over $1.01 trillion are at the highest level they have ever been since buybacks were allowed under the 1982 SEC safe harbor provision decision. It is interesting to consider where our economy would be today, if corporations spent the money they were wasting on boosting stock prices and instead invested in long term value creation. One trillion dollars invested in raising wages, research and development, cutting prices, employee education, and reducing health care premiums would have made a significant impact lifting the financial position of millions. This year stock buybacks have fallen back slightly as debt loads increase and sales fall:
Source: Dow Jones – 7/2019
Many corporations with tight cash flows have borrowed to keep their stock price elevated causing corporate debt to hit new highs as a percentage of GDP (note recessions followed three peaks):
Source: Federal Reserve Bank of Dallas – 3/6/19
Corporate
debt has ballooned to 46 % of GDP totaling $5.7 trillion in 2018 versus $2.2
trillion in 2008. While the bulk of
these nonfinancial corporate bonds have been investment grade, many bond
covenants have become lighter as corporations seek more funding. Some bond
holders may find their investment not as secure as they thought resulting in
less than 100 % return of principal at maturity.
In a
recession corporate sales fall, cash flow goes negative, high debt payments
become hard to make, employees are laid off and management is trying to hold
on. Only a select set of major
corporations have cash hoards to ride out a recession, others may be able obtain
loans at steep interest rates, if at all.
Other companies may try going to the stock market which will be
problematic with low valuations. Plus,
investors will be reluctant to buy stock in negative cash flow companies.
Thus, most
corporations will be hard pressed to invest the billions of dollars necessary
to turnaround a recession. Instead, they will be just trying to keep the doors
open, the lights on, and maintain staffing levels to hold on until the day
sales stop falling and finally turn up.
Public Sector is Tapped Out Too
In past
recessions, federal policy makers have turned to fiscal policy – public
spending on infrastructure projects, research development, training, corporate
partnerships and public services to revive the economy. When the 2008 financial crisis was at its peak
the Bush administration, followed by the Obama government pumped fiscal stimulus of $983 billion in spending
over four years on roads, bridges, airports, and other projects. The Fed funds
interest rate was at 5.25 % at the peak, so interest rate reductions had a
significant impact versus today at 2.25 %. It
was the combined monetary and fiscal stimulus that created a V-shaped recession
with the economy back on a path to recovery in 18 months. It was not monetary
policy alone that moved the economy forward. However, the recession caused lasting
financial damage to wealth of millions. Many retirement portfolios lost 40 – 60
% of their value, millions of home owners lost their homes, thousands of workers
were laid off late in their careers and unable to find comparable jobs. The Great Recession changed many people’s
lives permanently, yet it was relatively short lived compared to the Great
Depression.
As noted in the chart above, public sector wealth has actually moved to negative levels in the U.S. at – 17 % of national income. Our federal government is running a $1 trillion deficit per year. In 2007, the federal government debt level was at 39 % of GDP. The Congressional Budget Office projects that by 2028 the Federal deficit will be at 100 % of GDP.
Source: Congressional Budget Office – 4/9/19
We are at
a different time economically than 2008. Today with 80 % of GDP public debt, a
Fed balance sheet with $4 trillion while the federal debt level is projected to
grow to 100 % of GDP by 2028. In a recession federal policymakers will likely
make spending cuts to keep the deficit from going logarithmic. Policy makers
will be limited by the twin deficits of $22.0 trillion national debt and
ongoing deficits of $1 trillion a year eroding investor confidence in U.S. bonds.
The problem is the political consensus for fiscal stimulus in 2008 – 2009 does
not exist today, or probably even after the 2020 election. Our cultural, social
and political fabric is so frayed as a result of decades of divisive politics
it is likely to take years to sort out during a recession. Our political leaders will be fixing the politics of our country while
searching for intelligent stimulus solutions to be developed, agreed upon and
implemented.
What Will the Next Recession Look
Like?
We don’t know when the next recession will come. Yet, present trends do tell us what the structure of a recession might look like, as a deep U- shaped slow period over years, hurting the poor and working class the hardest:
Corporations
Short of Cash – Corporations already strapped are short on cash, lay off
workers, pull back spending, are stuck paying off huge debts.
Federal
Government Spending Cuts – The federal government caught with falling revenues
from corporations and individuals, is forced to make deep cuts first in
discretionary spending then social services and transfer funding programs. The
reduction transfer programs will drive slower consumer spending.
Consumers
Pull Back Spending – Consumers will be forced to tighten budgets, pay off
expensive car loans and student debt, and for those laid off seeking work
anywhere they can find a job.
World
Trade Declines – World trade will not be a source of rebuilding sales growth as
a result of the China – US trade war, and tariffs with Europe. We expect no trade deal or a small deal with
the majority of tariffs to stay in place. In other words, just reversing some
tariffs will not be enough to restart sales. New buyer – seller relationships
are already set closing sales channels to US companies. New country alliances are
already in place leaving the US closed out of emerging high growth
markets. A successor Trans Pacific
Partnership (TPP) agreement with Japan
and eleven other countries was signed in March, 2018 without the US, China is
negotiating a new agreement with the EU. EU and China trade totals 365 billion
euros per year. China is working with a federation of African countries to gain
favorable trade access to their markets.
Pension
Payments in Jeopardy – Workers dependent on corporate and public pensions may
see their benefits cut from pensions which are poorly funded today. GE
announced freezing pensions for 20,000 employees, the harbinger of a possible trend
that will reduce consumer spending
Investment
Environment Uncertain – Uncertainty in investments will be extremely high, ‘get
rich quick’ schemes will flourish as they did in 2008 – 2009 and 2000.
Fed Implements Low Rates & QE – The Fed is likely to implement very low interest rates (though not negative rates), and QE with liquidity in abundance but the economy will have low inflation, and declining GDP feeling like the Japanese economic stasis – ‘locked in irons’.
Unemployment Soars – workers in low wage jobs, support, non-core (HR, IT, Admin) jobs will be laid off first. Industries already weak in the economy feel the downward spiral the most: retail, materials, manufacturing, and energy. As the recession deepens, small businesses that can not get loans to get through the rough times so they close. Even medium businesses are hit hard, as they do not have the access to worldwide markets to offset declining US sales. The rate of multiple job holders is at an all time high now, it will continue to soar as workers try to sustain their standard of living in a contractor economy with no safety net for workers.
Next Steps:
A recession of the magnitude we expect will hit the middle class hard as they are the most vulnerable. Their wages have been flat for most of the decade while the top 10 % have enjoyed the majority of income and wealth increases. Due to the private sector holding most of the positive wealth in the U.S. a new approach to simulating the economy will be necessary.
1.Corporate Stimulus
While most corporations will be cash poor, some companies will be cash rich. Firms like Apple, Alphabet (Google), Microsoft all hold over $100 billion in cash. Cisco and Oracle both have over $50 billion cash on hand. These tech giants hold most of their cash overseas. To spur spending in the right places for the economy, tax laws could be passed to reduce taxes when repatriated funds are spent on employee development, research and development, productivity and wage increases. Google, Facebook, and Apple have taken a good first step on housing, with all three donating about $4 billion to housing programs. While housing may not seem like a ‘public good’ it has become a major issue in the San Francisco Bay Area from high growth businesses and long commutes to inexpensive housing 2 hours away. We would like to see the emergence of the ‘servant’ CEO from these companies and others in sectors of the economy with cash like banking, pharma, and health insurance. Over 180 Business Roundtable executives released a declaration that corporations need to take responsibility for their communities, not just seeking profits. The introduction to their statement notes
“Americans
deserve an economy that allows each person to succeed through hard work and
creativity and to lead a life of meaning and dignity. We believe the
free-market system is the best means of generating good jobs, a strong and
sustainable economy, innovation, a healthy environment and economic opportunity
for all.”
Ensuring economic opportunity for all means corporate executives make investments in the future financial health of their communities. Business leaders can take the lead by ending stock buybacks which totaled $1.01 trillion last year and investment those funds in employee development, pension plans, price reductions, productivity enhancements, maintain staffing levels and innovative research. Otherwise the safe harbor policy the SEC approved in 1982 can be revoked to prod executives to make investment decisions to ensure the future of both their businesses and communities.
2. Transfer of Private Wealth and Income to Public Sector
Wealthy business people and
individuals can take the lead in driving the passage of legislation transferring
some wealth back to the public sector. In November, 2017 over 400 millionaires
and billionaires sent a letter to Congress to strongly recommend against the
passage of the Tax Cut bill which created a $1.5 trillion additional federal
deficit while 80 % of the benefits went to the top 5%. We will need more of this kind of active
leadership across the political spectrum to make the necessary shift to finance
the creation of public goods and services necessary to turnaround a recession. Other wealthy individuals have called for
increased taxes on income and wealth of the top 5 to 10 %. Just changing the present tax laws back to
2016 levels would help to boost funding to fund fiscal stimulus programs in
innovative ways. There is backing by some wealthy leaders to end the carry tax
exclusion that hedge fund managers and others in the financial industry use to
reduce taxes.
Taxes as a percentage of profits has continued to fall from 1960 at 45 % to 15 % in the last year. Corporate lobbying of Congress worked to reduce company tax rates, create loopholes and subsidies for some industries.
Sources: The Wall Street Journal, The Daily Shot – 6/29/19
Corporate taxes can be evaluated as a percentage of GDP as well where it is clear corporations were able to lower their federal tax burden from a peak of 6% in 1955 to a low of 2 % in 2012 a 66 % reduction, and is estimated to be lower with the Tax Cut Bill of 2017 lowering the standard tax rate from 35 % to 22 %. The GAO in 2012 evaluated all the tax law benefits and deductions corporations enjoyed and found the effective tax rate was really 12.9 %. Today, the effective tax rates is even lower as corporate federal tax receipts fell to an all-time low of $204 billion for fiscal 2018 a 31 percent decline from 2017. Some corporations are paying no federal tax at all. Amazon declared $11 billion in income for 2018 and paid no taxes.
Source: GAO – 5/13
One way corporations evade US taxes is by depositing billions in profits in offshore tax havens to shelter their profits from taxes.
Sources: Zucman – UC Berkelty, Torslov & Wier – University of Copenhagen, The Wall Street Journal, The Daily Shot – 11/13/17
Clearly
the use of tax havens needs to end, as our federal government is losing
billions of dollars of receipts to invest in the public goods this country so
desperately needs.. Corporate taxes raised and loopholes
plugged make sense to begin shifting the necessary funds over to the federal
government.
The tax legislation process is critical for long term success and support. Bringing corporate taxes back to levels seen over a decade ago would go a long way toward reducing the federal deficit and fund public services at necessary levels to create more economic opportunities for all. Multiple points of view across the political spectrum need to be sought out and brought together in a special congressional committee focused on writing a fair tax bill to get the federal budget on a firm foundation and fund Medicare and Social Security programs.
3, Deploy Innovative Multi Partner Economic Innovation Programs to Solve Economic Challenges – Heartland Region Development
At the heart of political divisions in our country today is
the decline of a strong middle class and economic inequality at the highest
level since 1929. Building a strong
middle class that enjoys the economic benefits of a secure home, job, health
care and safe community will result in people seeing a common good emerging for
everyone. Monetary policy has failed to provide economic benefits to the middle
class, while boosting the values of financial assets largely held by the top
1%. If a recession comes, what will
happen to the middle class, and vulnerable people in our economy?
It is unlikely given the present financial structure of our
economy that monetary policy alone which has failed the middle class with
stagnant wages will somehow turn the economic status around for the middle
class. The decline of the middle class
is happening in parallel with a fall in
GDP to 1.9 % forecast for the 3rd quarter of 2019. Part of the decline in GDP is associated with
a declining labor participation rate. There were 7.6 million job openings, last
January with more than 8.6 million unemployed for a gap of 1 million jobs. This gap started in the spring of 2018 for
the first time in 18 years. Part of the
reason for the gap between job openings and job seekers is the imbalance in our
labor force by skills and regional limitations. Millions are not working due to
lack of education, skills, health, lack of child care or limited work
opportunities in their area. For the
core workforce between ages 25 – 54 the participation rate recently has been
declining since the peak in 2000.
Sources: Federal Reserve – St. Louis, The Wall Street Journal, The Daily Shot – 6/10/19Sources: Bureau of Labor Statistics, CBO, NBER, Morgan Stanley – 8/9/19
The most vulnerable regions are in non-metro areas of our country where the economic boom on the coasts and big cities has passed them by. Research indicates a key contributing factor to the decline in participation of 18 – 24 years old group is the lack of young workers in non-metro regions.
Source: USDA – 2017
Poverty remains a major issue in rural areas of the country, Midwest and South. These areas have lost millions of manufacturing jobs due to automation and moving factories offshore. Lack of economic health, forces supporting businesses to leave, closing of hospitals and support services. The opioid epidemic is highest in rural regions of the country.
Sources: US Census Bureau, The Economist, The Wall Street Journal, The Daily Shot – 10/18/19
Many of these rural, Midwest and Southern counties have been left out of the economic mainstream for decades as noted by the darkest purple areas of the chart. While, there single factor programs like enterprise zones with reduced taxes, or innovation institutes at major land grant universities we have not seen multi-factor programs that give a ‘focused force’ of economic impact necessary to turnaround these regions. The Heartland was chosen for the first implementation in addition to the reasons above, there are additional cultural, health and education issues that need to be addressed.
The
Heartland is where: (1) mobility to take new jobs is the lowest in rural and
small cities in the Midwest and South (2) there is the highest concentration of
young people without a 4-year degree (3) the lowest concentration of
entrepreneurs is holding back business formation and development to create new
higher paying jobs with a future (4) the largest number of people without
health insurance are found in the South and rural areas of the Southwest and
West (5) slow speed Internet connections are the norm leaving many
heartland regions way behind in the digital revolution where new jobs,
opportunities for education and quality health are being developed and accessed
(6) accounting for births, deaths and migration rural population has declined
for five consecutive years. It is
deplorable that a complete socio-economic region of the country has so many
factors that have not been addressed to extent necessary to transform people’s
lives toward good health and fair share of prosperity.
Rural
and small town America enjoyed a renaissance of increasing jobs and prosperity
into the mid 1990s. During this time rural counties were home to more than
one-third of all net new businesses establishments fueling the job creation
engine. Yet, in the past ten years the economic conditions have changed
dramatically, leaving these regions out of robust growth in coastal areas since
the Great Recession. For more details
and research please read our blog: The
Hallowing Out of Heartland America.
We think that the multi-partner program outlined below besides working in rural regions will work as well in economically depressed neighborhoods of our inner cities on the coasts or major cities of the Midwest with local modifications to take into account cultural, ethnic and societal differences.
The Multi-Partner Economic Innovation Initiative
The Silicon Valley innovation process is a multi-organization
model used as a base for the Multi-Partner Economic Innovation Initiative
(MPEII). Universities working as
incubators, with investors, local and state government support, investors,
highly educated workforce, and immigrants all contributed to making the Silicon
Valley model successful in giving birth to Google, Facebook, Apple, LinkedIn,
Twitter, and hundreds of other companies. We have added other necessary
elements to jump start a slow growth economic regions like non-government
organizations providing training or
recovery services, health providers to take on major issues like opioid
addiction, faith-based organizations for counseling and financial assistance.
Finally, federal government agencies will need to play a key role in turning
around a slow growth region vulnerable in a recession to a spiraling down turn.
We introduce the idea of a Federal Reserve Labor Bank, organized much like the
present Federal Reserve for monetary policy yet with a charter to constantly
build and renew our labor force for unimagined new jobs.
The MPEII would be structured as a non-profit corporation
with representatives from all the organizations necessary to drive the
coalition to success in meeting the economic objectives of the region. The federal government rather than building a
large bureaucracy would seed the development of the MPEII entities called
Development Centers with $25 – 50 million, joined by corporate foundations,
local and state government and social entrepreneurs. In our first imitative The
Heartland Development Center (HDC) is the central innovative entity bringing
all the partners together and taking leadership to drive solutions in rural
regions. The HDC is formed as an investment organization, putting out a call
for business plans from local social entrepreneurs to solve a local regional
problem with the help of the MPEII organizations. The economic goals could be
achieved by profit making companies or non-profit organizations where making a
profit is not appropriate or not fitting within the development goals.
The People
– At the center of this economic imitative are the people. The voter
participation level during the 2018 – mid-term election hit a 50 year high at
47.5 % with 110 million Americans voting in congressional races. This
engagement in the political process at the local, state and federal is crucial
if we are to develop the consensus moving forward to solve our economic
problems. Voters need to demand that
corporate, private investors, government and related organizations needs to
change polices to focus on building the middle class, protecting our
environment, cutting the costs of education and ensuring equal opportunities
and a level playing field for all that participate in our economy. In our
Heartland example implementation to bring our rural and southern regions into
the economic mainstream, local communities, and leaders from multiple
institutions need to be involved in making the changes necessary to bring a
lasting economic boost to the Heartland.
Universities
– The HDCs in selected rural and southern regions would be located in nearby
universities for support to be forward looking with local students and
professors – consultants as core staff along with local leaders to solve major
challenges. The Heartland Development Center acts as a catalyst creating an
innovation ecosystem to jumpstart local economics and social structures.
HDCs would focus on all the key issues that a region needs to address to
rebuild their economy and people’s lives: business formation, education and
training, digital infrastructure, affordable housing, engaged local innovation
media and health care. There already is an imitative by Congressman Ro Khanna,
to fund a modern version of the Morrill Act, that funded the development of
land grant universities to support agricultural development in the U.S in 1862.
Fifty universities would receive grants of $50 – 100 million to fund technology
centers to focus on training and development programs for 21st
century jobs. This bill is a good start, the HDC is extension of this imitative
to provide a ‘focused force’ on solving regional
economic problems and create an innovation ecosystem that is self-renewing.
Federal, State, Local Government
– Federal government funding is necessary for a cross regional program with
multiple components along the scale of the Marshall Plan after WWII for re
construction of Europe. State and Local
governments have the local knowledge, leadership and links to local
universities, health providers and non-government organizations that will be
helpful in forming the consensus required to focus people and resources on the
key problems with workable solutions. The Federal Reserve has analysts who have
completed research and continue to monitor the economic health of the 12
Federal Reserve districts that will be helpful to base programs on patterns in
the facts. We propose that a pilot
‘Federal Labor Reserve Bank’ (FLRB) be
created in the 12 districts to focus on the labor issues, composed of governors
in the 12 areas with labor expertise in corporations, universities or labor
leaders. The FLRB would set minimum
wages for key regions conduct studies like the Fed beige report, called a
‘lavender’ report on the health of the workforce in each region. The report would identify key labor trends,
wage issues, and obstacles to creating a thriving workforce. The FLRB would
offer loans to key entities with assistance from the Federal Reserve to
providing of key training and development initiatives, in a timely manner. The
FLRB’s mission is to build a thriving labor force and take on major challenges
like identifying why the labor participation rate is so low compared to pre –
2008 levels and implement programs accordingly to increase the rate. Every month
the FLRB would review how well it is doing in achieving goals of increased
labor participation rate, increasing wages for the middle class and other goals
as established by the Governors.
Corporations & Investors
– Companies in these slow growth regions need support in multiple areas that
are unique to the economics of each area.
Major employers should be included in the steering councils of the HDCs
to provide valuable local guidance to HDC leaders on where to focus resources,
training for job candidates and the product and sales direction of their
businesses. Many corporations have investment groups and can be invited to
participate in the HDC program, to achieve results for their business that they
are willing to share with the community. Venture capitalists, angels and
private equity firms will be encouraged to participate and may be invited to be
on the HDC steering council. Telecom firms need to be invited to bid on digital
infrastructure projects which may be funded by government grants. It is likely
that some of these Internet projects may not be profitable for telecom
companies or they would have already laid the fiber optic cables and setup the
links to homes in these areas. Like the Rural Electrification program in the
1930s, the digital infrastructure must be in place for rural areas to gain fast
access to the Internet. Plus, high speed
Internet access is a requirement to build innovation centers and create
businesses with 21st century high technology jobs.
Non-Government Organizations, Foundations & Health Providers – Health services in many rural regions has deteriorated along with companies leaving the loss of jobs. Unemployment rates are often twice the national average. The lack of health service providers and hopelessness of not having a job is driving disease and death rates higher. The CDC reports deaths due to cancer, heart disease and respiratory illness are 15 – 35 % higher in rural areas since the Great Recession. A number of communities have no hospital closer than 2 – 3 hours away. Doctors setup a practice based on government rural doctor incentive programs, then leave after they have put in their required tenure. Opioid overdoses are concentrated in rural states and Midwest region.
Source: CDC – 2017
A health services
revitalization plan needs to be developed by region which includes hospitals,
clinics and incentives for doctors to come, stay and build a practice in reach
region. Often, the lack of high speed Internet limits the opportunities for
health providers to shift to electronic records, services and even use of tele-medicine
which would be helpful to reach out over long distances. Health and job
candidate support are related as one research organization found that for many
manufacturing employers in Indiana that for factory floor jobs as many as 45 %
of the workers tested positive for drugs.
Training, career development, and apprenticeship working closely
with universities can make a major contribution in a coordinated effort to put unemployed
workers to work. NGO groups like the Opportunity@Work
program are one approach to attack the job training challenge. The
training group started in the Obama White House focuses on providing Internet
economy job training to workers in the heartland to gain digital skills for
jobs in fields like programming and information technology.
Colorado
has invested in its CareerWiseto
bring businesses, colleges and vocational training groups into partnerships
providing all Colorado high school juniors and seniors with a dual career path
leading to a community college associates degree plus key skills.
Students can begin working on the factory floor as juniors learning key company
job skills, and are guaranteed full time employment at the end of their
apprenticeship along with financial support to earn a community college
degree.
Faith Based Organizations – many faith based organizations provide counseling services, welfare, foods services and other resources to those in need. Working closely in the HDCs with their steering councils programs can be coordinated and focused in areas where churches, synagogues or mosques are located. FBO groups often have been in neighborhoods for many years, with a deep understanding of the needs, trends and social issues that are unique to their area. Leaders and staff in the HDC would do well to establish good connections with these groups to gain insights into which programs, services and resources are needed to turnaround the economic situation in their community.
In the end, Americans have always pulled together, solved problems and moved ahead
toward an even better future. After a reversion to the mean in our capital
markets and an economic recession things will get better. A reversion in social and culture values is
likely to happen in parallel to the financial reversion. The complacency, greed
and selfishness that drove the present economic extremes will give way to a new
appreciation of values like self-sacrifice, service, fairness, fair wages and
benefits for workers, and creation of a renewed economy that creates financial opportunities
for all not just the few.
On Bloomberg TV, VMware CEO, Pat Gelsinger, observed that with
escalation of the trade war he sees, “two
separate trading blocks forming the United States and China, we want to be a
player in both and will have to adjust, our
strategy, investments, supply chains and operations as a result.” He sees both countries digging in for the
foreseeable future.
The evolution of a two trading block global economy has a major
impact on how businesses operate in the next five to ten years and integrated
economies. Those companies with major
operations in China that ship products to the U.S. will continue to be
adversely affected by U.S. tariffs on Chinese goods. Growing trade headwinds
also face U.S. companies shipping goods to China. Besides tariffs, trade
research shows Chinese importers will need to deal with U.S. non-tariff
barriers that are the most stringent and time consuming. Recently, China has
allowed the exchange rate for its currency to rise against the dollar
effectively mitigating about 5 % of increasing tariff costs on U.S. imports.
Here is a list of industry sectors most impacted by the trade war with businesses exports and imports to China:
Sources: Census Bureau, Marketwatch – 6/27/19
Major software and electronics companies like Apple with $56b in
sales making up 20% of total global revenue from China will continue to see declining
sales. Apple, and other companies in the same shoes, will have to radically
shift supply chain and sourcing for manufacturing. CISCO, a global network systems manufacturer recently
reported to shareholders a 25 % drop in sales of network products to both state
owned and private corporations in China. Many American manufacturers’ source
components and sub-assemblies from China and are shipped to the U.S. mainland
for final manufacturing. These supply chains will have to change if they are to
sustain profits. Caterpillar, in the transportation sector, recognizes 10 % of
global revenue from China, and has experienced a significant drop in
sales. Tariffs have significantly
reduced soybean exports to China by U.S. farmers to nearly zero. The Federal
Reserve in Minneapolis reports farm bankruptcies have reached 2008 levels. These are just a few examples. Each day the
list of impacted industries and companies grows longer.
What does a
two block trading world mean to our democracy? The trade war seems to be here to stay. As such,
we need to go to the strengths of our democratic government and our
multilateral approach to global development to ensure peace.
Tariff Alternatives – blanket tariffs as the present GOP Administration has implemented are driving up prices for consumers, created reduced sales for corporations and crated a world economic environment of confusion and uncertainty. Working with our alliance partners in the EU, Australia, Japan, South Korea and others to pressure China to change its laws related to intellectual property theft, state subsidized industries and unfair tariffs would be a far more effective approach than America trying to go at China alone. The U.S. needs to reach out to the free trade capitalist leaning economic entities that the government allows to operate – like entrepreneur owned and operated companies within China to build both economic and political links.
Trade Policy Consensus Development – Democrats
and moderate GOP congressional members need to drive the national dialog instead
of letting our POTUS use threatening, bullying and constantly flip-flopping tactics
in trade discussions. Reasonable well
thought out policies built on consensus from both parties is crucial otherwise
any agreement may not be ratified by Congress.
Federal Reserve Independence – our President has continued in a blitz of tweets to attack Chairman Jay Powell, and the Federal Reserve’s policies totally not respecting the independence of Fed to make decisions in what is in the best interests of the country. POTUS wants the Fed to reduce interest rates to push the U.S. economy so he can continue his trade war with China. The political use of Federal Reserve powers never be implemented. Democrats and Republicans need to come to the defense of the Federal Reserve and push back on these attacks and ensure in every legislature way possible to ensure the Federal Reserve stays independent of politics. Analysis by researchers shows that independent government central banks far better in both economy growth and recession cycles than politically motivated central banks. When central banks are focused on the long term health of the economy they may raise interest rates even when it may cause a reduction in GDP growth or recession to burst the bubble of low rates and speculation in risk assets.
Commit to a Just and Thriving World Economy – since
the end of WWII, and the devastation it caused to people throughout the world,
government leaders have been committed to ensuring that all countries are
growing, have strong economies and support integrated economies. It is a simple thesis: countries that are
trading and growing together become more trusted partners, depend on each other
for economic growth and thus are far less likely to see war as a mechanism for
economic gain and power. Certainly,
countries like China have taken advantage of US trade policies, not ensuring
worker protections, or protecting intellectual property rights. We need trade policies that focus on these
issues, using targeted trade tools not blanket massive tariffs applied at the
whim of a tweet. The U.S. should support using the World Trade Organization
which is a founding member, appoint staff left vacant right now, and adjudicate
disputes in an hearing of a world agency to ensure trade justice.
Integrate a One World Economy – by forcing a
two block trading world, the U.S. and China will be forcing other major trading
groups like the EU to choose sides. Other countries like Australia maybe become
bridging countries between the two dueling economies for world economic power.
This two block trend needs to be shifted into a one world view, where all
economies are working together to solve economic problems. To solve existential problems like global
climate change will require all countries to cooperate, make joint sacrifices
and innovate to ensure the existence of our planet 25 to 50 years from now.
Our democracy will thrive when we implement policies which our world allies and others see as just, providing equal opportunities for all businesses to thrive and ensure innovative solutions to world economic problems.
Goldman Sachs just completed an analysis of corporate payouts and found that dividend and stock buybacks were 103.8% of their free cash flow. Meaning that they were paying more out in cash than they had on hand! Free cash flow has dropped to – 15 %, while debt is up 8 %.
This squeeze is unprecedented, it is the worst cash flow crisis since 1980, and is unsustainable. Corporate executives have turned to extremely high borrowing levels to keep this financial merry-go-round going. While, turning to stock buybacks to hype the price of their stock and keep earnings per share high to the tune of $1.5 trillion by S & P 500 companies in the last year.
If sales and profits drop due to the trade war and consumer spending declines as it has in the last four months, corporations will default on their debt. A downward economic spiral will be triggered.
Maybe this is another reason the Fed announced a cut in interest rates and shift to an ‘inflation averaging framework’. JPMorgan recently commented to Marketwatch they believe Fed economists are shifting to a position of not worrying about inflation but instead on keeping money flowing to corporations at low interest rates possibly to zero. By keeping rates super low the Fed is enabling executives to waste profits on stock buybacks to hype their pay and stock price. We need strong companies making investments in research, development, innovation, productivity improvements and raising wages for workers. When the economy works for all then democracy is strengthened.
The financial music will stop when sales and profits decline, an already desperate cash flow position becomes untenable putting company viability in doubt. Looking out a year or two, we expect the Fed to come to the rescue after possible zero interest rates have panned out. Last March, former Fed Chair, Janet Yellen recommended that the Fed be authorized to purchase corporate stock and bonds to keep the economy going if a recession hits.
(Saving Democracy Series: this post focuses on how our POTUS has agreement by agreement ripped up the post WWII integrated global world that provided most of the people in the world with peace and prosperity that is unparalleled in history. He has replaced peace with random acts of impulsiveness, doubt, uncertainty and threats which have caused major economic, cultural and societal damage to both emerging and developing countries. A more dangerous world of nationalism along the lines of the 1930s is now emerging with all its possible horrible results. First economic loss, then war. It is time to establish a new global order fair to labor and capital in a world order of respect, freedom of thought and speech with economic opportunities for all to establish global stability and peace.)
On July 2nd, the US Trade Representative announced possible $4b in new tariffs on the EU for subsidizing of Airbus, responding to Boeing concerns. Another episode of impulsive threats happened last May when POTUS threatened Mexico with a 10 % tariff on all imported goods if the flow of immigrants across the border did not stop by June 10th. The action against Mexico threatened support for the just recently announced new trade treaty with Mexico – why sign a treaty when the US is just going to do whatever it wants. He backed down on the threat after the Mexican government made a commitment to redouble efforts at stopping the wave of immigrants from Central America. We can add these trade attacks to a long list of treaties, agreements or international organizations that our POTUS has taken the US out of (or renegotiated):
Nuclear
Arms Treaty – Russia
Iran
Nuclear Treaty – EU joint signators
Trans
Pacific Partnership – TPP – with 10 emerging countries, Mexico, Canada and
Japan
NAFTA
– replaced by two bilateral agreements under consideration by Congress
UNESCO
– UN cultural program
UNHRC
– UN Human Rights Council
UNRWA
– UN Refugee and Works Agency – supports 5M Palestinian refugees, when the US
pulled out riots broke out for a week
Paris
Climate Treaty
Global
Arms Treaty
G7 – developed countries council –
POTUS wants Russia added back in, they were barred after annexing the Crimea
Brexit – US has been cheering the UK
leaving the EU, offering a ‘big agreement’ if the UK leaves the EU
POTUS has continued
to bash NATO, a long standing military organization uniting Europe and the US
against an aggressor. The constant undermining of the group opens a divide that
adversaries may see as a crack to drive division and move ahead with probes or
territorial gains.
The president has also focused on economic agreements – taking a unilateral approach around the provisions of the World Trade Organization and standing economic agreements on tariffs. He calls himself the ‘Tariff Man’ and has implemented with the acquiesce of Congress tariffs on allies like Canada & Mexico (new separate agreements under Congressional review), competitors like China, and cancelled a favorable import agreement for India. Businesses are worried:
Source: Moody Analytics, The Wall Street Journal, The Daily Shot – 5/28/2019
Consumers have been hurt already in nine different product classes with increases in prices of over 10 %, as consumers or the importer pay the increase tariff on an imported goods including appliances (washer and dryer tariffs 12 months ago), furniture, bedding, floor coverings, auto parts, motorcycles, sport vehicles, housekeeping supplies and sewing equipment:
Sources: Department of Labor, Department of Commerce, Goldman Sachs, The Wall Street Journal, The Daily Shot – 5/13/19
The United States and China have been sparing since July 2018 in an escalating trade war, which seemed to be coming to a conclusion as recently as last April. Then, the President announced in a tweet that China a reneged on commitments it had made and was ending negotiations. The Chinese sent a delegation to try and restart negotiations but it was fruitless. For two months tensions escalated until a truce with a restart in negotiations was called as a result of a summit between President Trump and Chairman Xi at Osaka on June 29th. The US relented on planned additional tariffs on all China imports up to $325b, and eased restrictions on Huawei sales by American companies in return for a vague promise by the Chinese to purchase more farm goods and to negotiate.
Sources: The Peterson Institute, for International Economics, BBC, The Wall Street Journal, The Daily Shot – 5/15/19
The Chinese have dug in for a long haul, threatening to cut rare earth shipments to the US and curtail further purchase of US Treasury bonds, with additional $60 B in tariffs at 25 %. We must remember the Chinese form of capitalism is really not ‘state based capitalism’ as the financial media likes to label in a benign way. The China economy is really ‘authoritarianism cloaked in capitalism’. This is a mixed economy of state based industries subsidized with some free capital sectors kept in place by central planning. A key aspect of the this cloaking activity is the lack of transparency about who actually owns a Chinese company. In addition, the China Central Bank (PBOC) and sovereign wealth fund own about $200 B in US stocks providing insights and investment control. The Chinese government has deployed Orwellian digital surveillance to keep the people loyal to the state and not thinking or speaking freely. Internet news and social media sties are heavily censored by the state. That’s not democratic based capitalism. Another twist in the relationship with China, is Wall Street leaders have been instrumental in assisting the Chinese government in gaining approval to join the WTO years ago, and still make billions of dollars from fees and investments. The recent Chinese overture to open financial markets maybe a way for the Chinese to win over Wall Street and blunt the trade war of the GOP administration. The Trump Trade war with China is a failure, because it misses the true character of authoritarian government and economics how it uses the economy and capitalism to placate the masses to increase state control. Central government loyalty is the prime directive. Trust is missing between the people and the state – yet the people give up freedom for money when we here the Hong Kong protesters who vandalized the legislature building in late June criticized by mainlanders with comments like ‘they need to quit protesting and get a good job and buy things’. This is a bargain with manipulative leaders resulting in an unhappy ending, as people’s hearts and minds are imprisoned for money, the benefits with be fleeting and the costs dear.
Farmers in the Midwest, growing soybeans have seen their market collapse, other crops like corn, sorghum, wheat have seen huge price drops as China stopped buying from US suppliers. As soybean prices have fallen farm income has dropped almost 20 % and Midwest bankruptcies of farmers have risen above levels seen in the Great Recession.
Sources: Bloomberg, The Wall Street Journal, The Daily Shot – 7/15/18Sources: The Federal Reserve Bank – Minneapolis, US Courts – 11/28/18
Since last fall when this Federal Reserve report was filed, bankruptcies have continued to increase at an accelerated rate, as farmers cannot get loans from banks to buy seed when prices are so low. The Administration has promised subsidies to farmers totaling $16bn yet the president of Soybean Farmers Association says he has not been able to see Agriculture Secretary Perdue or any of the subsidy money nor farmers in his group. Many farmers believe that when the money does come from the government it will not be enough and not replace the contracts for farm goos lost to Brazil, Russia and other countries.
Next Steps:
World War II was catastrophe for the world, millions of people killed, whole societies wiped out, along with an aftermath of starvation and depressed economies. World leaders did not want to see a repeat of the WWII disaster. They knew if they built a set of world-wide agreements and regional organizations to sustain and enforce those agreements there might be a better chance to prevent war from happening again. The United Nations was founded in October of 1945 in San Francisco to provide a forum for discussion and implementation of world community building programs. The NATO alliance was founded by 29 countries who were WWII allies by approving the North Atlantic Treaty in Washington in April, 1949. Economic disputes were to be settled by adhering to the General Agreement on Trade and Tariffs approved by over 100 countries in 1948. The World Trade Organization charted in 1994 succeeded GATT, headquartered in Geneva, Switzerland. Thus, many treaties and organizations were founded by most developed countries and many emerging countries to give economic, cultural and governmental support toward building a world community. Presidents from both parties through the years since WWII have supported the uniting of diverse people around the globe so they all have a piece of the economic pie and security.
Now, our POTUS seems to think that ripping up global treaties and organizations, undermining them, and going it alone will somehow be better for the US. Maybe things will get better for a few companies or sectors for a little while. However the trade deficit continues to trend worse since the January 2017 term of POTUS to the highest deficit ever with $55 bn last May,
Source: Department of Commerce,, Federal Reserve of St.Louis, Marketwatch – 7/2/19
Some soybean contracts have returned, yet the US still imports more from Europe, Mexico and Canada than we export, the tariff war is just making the deficit worse. Already, we have seen with retaliatory tariffs from China, threats of reunification to take Taiwan – as a national publication likened to Lincoln unifying the United States. Today countries are going after their own goals spiraling downward into economic wars and eventually military action. The lessons of the Great Depression, the Smoot-Hawley Tariff Act, harsh reparations on Germany and nationalism (rising today in a hideous way) led to WWII. When other countries see the US leader of the free world embrace ‘America First’ ambitions, why should they sit back and let America get ahead, the fight is on. We should work with the capitalism elements and businesses in the China that are largely free of state control, building bridges to them, empowering them so country leaders see that the only path to lasting prosperity is when the people’s minds are free to innovate and create.
Yes, it is true, there were unbalanced agreements, the US did lose jobs to overseas countries, and maybe a few emerging countries took advantage the US. But, we need to be thinking about helping people build their economies, or they will want a piece of the economic pie by force from the US. Job safeguards for American workers should be in place in all agreements, and fair levees and access to markets, protection of intellectual property, yet we need to work within the world order to make structural changes supported by all countries.
(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)
Image: knowledge.wharton.upenn.edu
S & P 500 corporations have been borrowing money to buyback stock and increase dividends to investors. Increasing their debt bubble could increase the probability of defaults. Research shows that defaults spike when the corporate debt to GDP ratio exceeds 44 %.
Sources: Bloomberg, S & P, The Wall Street Journal, The Daily Shot – 1/9/19
When companies take on so much debt defaults become a real possibility when sales fall, or profits are squeezed as debt payments become due. Apple recently announced that iPhone sales were falling in China and has decided to cut production of all iPhones by 10 %. Apple has plenty of cash, but their suppliers may not. Fedex in December announced plans to offer domestic employees buyouts because ‘global trade has slowed in recent months and the company expects trade to slow further.’ We can expect more reduced earnings and sales guidance beginning next week when 4th quarter reports begin coming in.
Sources: Gavekal Data/Macrobond, The Wall Street Journal, The Daily Shot – 1/9/19
When corporate debt to GDP ratios close in on 44 % or exceed that level recessions are likely to follow as the chart above shows. There is much discussion in the financial press about whether there will be a recession or not. It seems quite possible that record corporate debt combined with a likely fall off of sales in the 1st quarter of 2019 due to pull up buying by companies in the 4th quarter of 2018, will cause an economic slowdown or recession. The slowdown is made much worse by corporations overindulging in debt to finance stock buybacks and dividend distributions. Plus, turning around these companies will be more difficult as defaults spiral downward, more companies are forced to close or layoff workers. As workers are laid off they reduce spending, then reduced spending causes broad sectors of the economy to experience sales and profit declines.
Next Steps:
Where is the oversight of spendthrift management policies? Directors are likely on stock bonus plans too, so they enjoy seeing the stock price goosed by share buybacks. Where is a voice of moderation looking out for the long term viability of the company for customers, employees, shareholders and communities going to come from? We need a national dialog on how to improve corporate governance taking into account the needs of all parties represented to reign in profligate borrowing . Certainly, corporate executives did not start the trade war but they have borrowed way too much placing their firms in peril. It is management’s responsibility to look out for the interests of all effected by company success or failure.
(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)
Image: GM Lordstown plant to be closed – gmauthority.com
Yesterday, GM announced a series of plant closings and layoffs of 15,000 workers in North America. GM attributed the need to shift its focus to electric car development, trucks and SUVs that consumers were buying, as sedan sales are falling. Actually, auto sales worldwide have been dropping for the past year.
Source: Bloomberg – 11/27/18
Jesse Colombo, analyst at Clarity Financial notes that while GM’s announcement focused on electric car development the plant shutdowns and layoffs really were driven by of slowing auto sales. The auto market has been shifting rapidly with the development of driverless cars, ride sharing reducing the need to own a car, and urbanization causing policy makers to fund more public transit. The auto maker announced that it will end production of the Chevy Volt electric sedan with sales falling short of targets. GM has targeted gig economy drivers for ride sharing companies like Uber and Lyft by offering an on demand service for the Chevy Volt at $225 per week in Austin. It is not clear what will happen with this on demand service marketing beta test with Volt production being halted. GM has partnered with Lyft, and made a $500 million dollar investment in the ride sharing company 2 years ago. Thus, GM has made some investments in key new markets and technologies, yet is behind in adjusting to sedan sales which fell by 11 % in third quarter.
At the same time the auto market is undergoing rapid change, GM executives have been taking care of themselves as a first priority. Wolf Richter, editor of the Wolf Report blog reports that GM spent $13.9 billion in stock buy backs since 2014.
Sources: Wolf Richter, Wolfstreet.com, Y- Charts, Marketwatch – 11/27/18
GM stock purchases took shares off the market to reduce supply, while expecting stock demand would move the share price up. However, as Richter notes GM share price has actually fallen 10 % in that four year period. So, much for boosting the price of shares to pad the executive stock compensation plan. Instead of investing in new technologies, research, new plants, employee training, increasing wages and other key transition programs GM completely wasted $13.9 billion dollars. Poor management judgement is now causing 15,000 workers to lose their jobs in the U.S. and Canada. While we will not know over the last four years if good business investments would have prevented all the layoffs it is certain the economic damage to Midwest and Canadian communities could have been significantly mitigated.
Next Steps:
Goldman Sachs estimates that S & P 500 corporations will complete $1.0 trillion dollars in stock buybacks this year. One trillion dollars will be wasted by U.S. corporations as productivity investments have lagged over the past 5 years, and average real wages have been stagnant for the 80 % in income since the Great Recession. As the GM example demonstrates, besides hurting employee wages, making U.S. companies less competitive and inflating stock prices now workers are losing jobs due to executive mismanagement and myopia on stock price.
Prior to 1982, the Securities Act of 1934 held that stock buybacks were a form of ‘stock price manipulation’ and were not allowed by the SEC. This policy was overturned by an E.F. Hutton executive, John Shad as SEC Chairman appointed by President Reagan. He created a ‘safe harbor’ policy where corporations could purchase their own stock, only a certain times during the trading day, with disclosure quarterly and blackout periods prior to earnings reports. Corporations have used buy backs since then but stock buy backs took off in 2015 to $695 billion and almost doubled to $1 trillion for 2018.
We recommend an end to the stock buyback safe harbor provisions and a return to the pre-1982 policy, management in many corporations has lost their bearings on why the company exists – first priorities being workers, their families, customer communities, society and the nation not their own compensation plan. Making the corporation profitable and valuable to shareholders is a means to achieving our societal goals of a decent wage, quality housing, and the ability of families to support their children. In October, we posted an analysis on how major corporations like Boeing, GE and American Airlines underfunded their pension plans while executing billions of dollars in stock buy backs. Executives need to take responsibility for full funding of all pensions not wasting money on stock buy backs. It is time with so many middle class and economic investment needs that corporations receive a direct SEC policy shift to end stock buy backs.
The biggest banks are enjoying high profit margins at the expense of consumers. Today, the rates on savings accounts are the lowest as a percentage of the Federal Funds rate and credit card rates are the highest in proportion to the respective Federal Funds rate. The Federal Funds rate is the rate the Federal Reserve charges banks to borrow money.
Sources: Federal Reserve St. Louis, The Wall Street Journal, The Daily Shot – 8/1/18
Sources: Federal Reserve St. Louis, The Wall Street Journal, The Daily Shot – 7/31/18
The divergence on both charts shows how the consumer is squeezed on both sides of the financial ledger – receiving less for their savings than they should historically and getting charged much more on credit cards than is fair.
Today, the top five banks control 50 % of all banking system assets in our $15.3 trillion dollar system. In 1990 the five largest banks held just 10 % of all bank assets. The assets that Wells Fargo holds by itself equal all the assets of the top five banks in 1990. As a result of the consolidation during the Great Recession our banking system is highly concentrated in just a few banks.
Next Steps:
The lack of competition is clearly hurting consumers in both financial directions, paying higher interest rates than are fair and not receiving the interest income they should. The key point is that present regulators are not doing their job requiring banks to pay higher interest and keep credit card interest charges in check. Next, from our post on bank concentration we recommended a break-up of the big five banks:
“Experts like Neil Kashkari who led the Bush Administration’s $700 billion bank bailout effort the Troubled Asset Relief Program, thinks these mega banks should be broken up. Now Kashkari is the Federal Reserve Governor for Minneapolis and has called for reducing the size of the big banks and distributing their power and control to provide a better shock absorber in the event of another banking crisis. He even calls for a 25 % capital reserve requirement many times the present capital reserve requirements the Federal Reserve has maintained in its stress test program. We have seen with the failure of Wells to protect its customers from 3.5 million fake checking accounts created by its sales staff how poorly bank management performs. Now, the bank is being investigated for improper referrals and transferring of funds in the wealth management division.
Enough is enough, our present financial system is too concentrated to effectively manage; distributing wealth, power and control back into regions is one way to ensure reasonable oversight and management can prevail. In addition, we support calls for a modern day Glass-Steagall Act to separate investment banking (were sub–prime derivatives of the Great Recession were created) and commercial banking for retail customers. We need to protect our citizens financial assets from the financial engineering and schemes of Wall Street. It is not a coincidence that today 90 % of all wealth is held by the fewest number of people since 1929.”
(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)
Image: Your Little Planet
In the past week, American Express won a gag order over merchants when the Supreme Court handed down a decision that allowed the huge financial services company to require all their merchants not to tell their consumers other cards had cheaper swipe fees. Amazon announced the acquisition of Pill Pack a mail order pharmacy company, which sent financial shock waves through the drug store industry. So, it goes on, a Corporate Nation State (CNS) like American Express or Amazon have their way limiting consumers choices to reduce costs and to take over the drug marketplace with no fair market rules in place.
Corporations run our federal government by donating hundreds of millions of dollars (they have no campaign donation limits) each year to congressional campaigns through super PACs. Some CNS entities have large lobbying offices in Washington, like Amazon with 94 lobbyists knocking on Representative and Senator doors every day! Do we have an army of lobbyists twisting arms for our interests? No.
Where can we look for corporate reform to build the common good? Larry Fink, the CEO of Blackrock, a $6.3 trillion institutional investment corporation, sent a letter to 1000 CEOs of companies they invest in telling them that beyond profits they would be evaluated on how well they are taking care of the environment, responding to climate change, having a diverse workforce, and fairness with their employees. We applaud Mr. Fink’s move, and look to more investors to call upon corporate management to be held accountable for their social responsibilities.
There are corporate accountability frameworks that have been receiving widespread acceptance and government support. In the European Union a group called the Economy for the Common Good (ECG), has over 2400 corporate endorsers and almost 10,000 individuals support their effort to require corporations report on a Common Good Balance Sheet their social responsibility activities. The EU has adopted a non-binding directive requiring companies of 500 employees and ‘public interest’ to report on human rights, diversity, labor rights, the environment, health and anti-corruption measures. The report is not included with the corporate annual report and is therefore not audited.
The Common Good Balance Sheet is divided into four key accountability areas: human dignity, solidarity and social justice, environmental sustainability, and transparency and co-determination:
Source: Economy for the Common Good – 6/29/18
The ECG is now working to make actual changes in corporate behavior by focusing on gaining support for these eight issues:
universal (all values and relevant issues)
legally binding
measurable and comparable (e. g. using points)
externally audited
generally understandable (for the public)
public (on all products, websites, shop doors)
developed in a participatory process
linked to legal incentives (taxes, tariffs, …)
The first phase has been completed of their initiative to gain EU nonbinding support next they look for a binding EU directive by 2020 followed by integration financial reporting.
We need to find corporate leaders in the US that see the vision of an Economy for the Common Good, embrace it and implement its ideas in their day to day operations – while measuring the results to show it is a better way to run a business. A business can build an economy that works for all and still be a thriving profitable enterprise.
