Category: Employees

Corporate Debt Bubble Increases Probability of Recession

On January 9, 2019

In Corporate Debt, Corporate Reform, Debt, Economy, Employees, Stock Buybacks, Uncategorized

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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 4^th 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 1^st quarter of 2019 due to pull up buying by companies in the 4^th 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.

Supreme Court Hands Corporations Another Win Over Employees

By Patrick Hill

On May 22, 2018

In Arbitration, Corporate Nation State, Employees, Wages

Photo: Central Penn Business Journal

Yesterday, the Supreme Court announced a major decision that further limits employee rights. Newly appointed Supreme Court, Justice Neil M. Gorsch wrote the majority opinion holding that a 1925 Arbitration held over a 1935 National Labor relations law allowing employees to sue their employers. The court held that employees can not bind together in class action law suits where they have common interests in a complaint against a company, they must use arbitration specified in the agreement. Employees are coerced into employee agreements in that they must sign them to take the job, corporations have the power in a job negotiation as they can just go to the Internet and find another 25 or 100 candidates for many jobs. The candidate cannot negotiate clauses in employment contracts with their own attorney because they want the job more than worrying about a contract clause.

Supreme Court Justice Ruth Bader Ginsberg wrote the minority opinion outlining how unjust this decision is, a part of the opinion she read aloud in court:

“The court today holds enforceable these arm-twisted, take-it-or-leave-it contracts — including the provisions requiring employees to litigate wage and hours claims only one-by-one,” she said. “Federal labor law does not countenance such isolation of employees.”

Research supports Justice Ginsberg’s finding, in most cases the employee is more likely to lose a case in arbitration versus court suits and when judgements are won the final awards are much smaller.

Source: The Economic Policy Institute – 10/14/2016

The decision clearly is another win for corporations increasing their power over employees by severely limiting the ability of an employee to equalize the leverage with their employer in bringing a complaint. Corporations can now take on employees one by one where they will not have the attorney fire power that corporations wield.

Next Steps:

Congress needs to pass a law to make clear that the National Labor Relations Act takes precedence over the Arbitration Law which was passed to use arbitration processes for company to company complaints. Then over the years since 1925 corporations have use their lobbying influence and ability to buy control of presidents appointed justices to extend the law to covering consumers in credit agreements and employee contracts. Corporate control of campaign funding with the Citizens United decision, succeeding Super PACs and extreme lobbying spending strengthens the hegemony of corporations over employees. It is obvious that employee power is at an all-time low as we have the lowest unemployment rate in 10 year while wages for the 80 % in income stagnant.

Consumers Squeezed Between Debt and Stagnant Wages

By Patrick Hill

On May 8, 2018

In Consumer Squeeze, Debt, Employees, Executive Compensation, Low Income Finance, Student Debt, Wages

Image: americanprogress.org

The Federal Reserve just reported that consumer debt related to auto and student loans are at the highest level they have ever been since 1970 (2^nd chart). As we have noted wages have stagnated since the Great Recession with 90 % of the income gains going to the top 10 % in income. The middle class has been left out of the mainstream of the economic recovery over the past 10 years.

Sources: The Federal Reserve Bank – St. Louis, The Wall Street Journal, The Daily Shot – 5/8/18

While revolving debt from credit cards has fallen (top chart) since the recession, non revolving debt for autos and student loans has soared. Consumers are caught in a squeeze between debt and flat wages. The Commerce Department reported on 1^st Quarter GDP noted that consumer spending had decelerated during the quarter. Sentiment surveys have also shown a reduction in buying plans due to trade issues and any benefit from the tax cuts being lost due to rising prices from tariffs. Banks have posted 7 straight months of an increasing percentage of charge offs on bad loans where consumers are not making payments on non-mortgage debt.

As interest rates go up, payments grow larger per month, with the added tightening of increased prices. The middle class is caught trying to maintain their standard of living by borrowing money to mitigate flat wages.

Next Steps –

There are two sides to the squeeze – increasing wages and reducing loan payment size and principal.

We have endorsed Sen. Cory Booker’s bill called the Worker Dividend Act to share billions of dollars in stock buyback dollars 50/50 with employees. We see a need for incentives for employers to share management extreme wealth now at 300 times average worker salary with the line staff. Or if they can’t do it with incentives we like the City of Portland’s plan to require corporations share their funding above the 150 times level with employees. In our blog about why Wages Are Stuck we outline a series of steps including: placing workers on Boards, ending outsourcing overseas, end H1-B low wage visas, allow repatriated funds be brought back to the US only for wages, productivity or training investments, end stock buybacks and raise employee wages with the funds, breakup anti-competitive oligarchies of huge corporations to create more competition and jobs, balance the recruiting and hiring process for candidates, and offer incentives for employee training and development.

On the loan side, we recommend that student loan rates be brought back to reasonably fair rates as a percentage of the Fed Funds rate, and offer a series of forgiveness programs for universal service, community teaching and caregiving. For auto loans, we request that the Consumer Finance Protection Bureau evaluate major bank auto loans to ensure they are fair and do not have hidden fees or unusual interest rate riders.

Employers Not Passing Along Drug Cost Rebates

By Patrick Hill

On April 4, 2018

In Drug Pricing, Employees

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Image: Kaiser Health Network

Almost 70 % of all employers who are the payers for employee drug insurance programs do not pass along the rebates they receive from insurers who receive them from drug manufacturers. Employers say they use the funds to reduce costs. Though we do see corporations passing along the costs to employees with higher deductibles according to the Kaiser Family Foundation research report discussed in our blog on Health Insurers and keeping the rebates to themselves.

Source: Pharmacy Benefit Management Institute, The Wall Street Journal – 3/6/18

What is really happening is drug insurers like United Healthcare, are offering discounts to employers who can pass them along to employees but they don’t pass the dollars along. Instead they say they put them into reducing the costs of drugs overall. Yet, that is not happening, as a Kaiser survey found that with drug costs going up 58 % from 2006 to 2016 yet the cost of worker contributions went up 78 %. Companies are picking up a health insurance reduction premium saving it for themselves of 20 %.

When companies reduce health costs, the result is increased profits (made from increasing costs to employees), which increase the value of company stock which is held mostly by executives and shareholders who are in the top 10 % in income.

Next Steps:

We applaud that United Healthcare is going to begin offering next year direct to consumer drug rebates for a subset of their employer based programs. Yet, that not enough, we see a need for legislation calling for transparency in drug pricing and insurance similar to the laws in place on bank mortgages disclosing the real cost of a home loan. Second, we recommend legislation that requires drug insurers pass along any drug manufacturer rebates, discount or other cost savings directly to consumers to prevent the cost reductions from being syphoned off by employers.

In the end, the added layer of insurers we don’t need when we already have the Medicare program in place for 55 million Americans and 44 million of those are enrolled in Medicare Part D for drug insurance. We have one drug formulary in Medicare, let’s use it, let the Medicare administration to directly negotiate drug prices, end stock buybacks by drug companies and direct advertising of prescriptions drugs, then we would see a significant reduction in drug costs.