Escalating inequality in the American economy and its most recent “turnaround” has led to a disturbing juxtaposition of record corporate profits and soaring executive pay while wages for average workers hit record lows as a percentage of the nation’s economic output.
It’s the ultimate repudiation of “trickle down” economics that busts the myth of business success leading to shared prosperity. After a recession where the middle class and poor saw the greatest loss of wealth, the very top of the economic food chain has seen their fiscal health rebound to levels even greater than before the market crash of 2008.
But ordinary Americans have failed to come out of the recessionary nosedive, with the corporate boom now thrilling Wall Street coming at the expense of average wage-earners.
Shaking off whatever lingering malaise may have existed since the Great Recession, profits among American corporations are now routinely setting new records. Data from the third quarter of 2012 finds that profits are up nearly 20 percent over last year, and their share of the overall US economy has reached double-digits for the first time in history.
Corporate executives are certainly reaping the lavish rewards of those profits. Among the few sectors of the economy where pay is rising, CEO’s saw their average compensation shoot up by 6 percent in 2011. Executives now make an average of nearly $10 million in compensation, the highest figure since executive pay has been tracked.
Why are those profits and executive bonuses so high? Many factors are in play, but the most troubling example is that businesses are simply paying their employees less. That’s why as corporate profits hit record highs, wages for average workers have simultaneously plummeted to their lowest ever share of the economy — dropping to just above 40 percent. In a healthy economy, wages would account for at least half of the nation’s economic growth.
Some of the drop in wages can be attributed to recession-era job cuts. But instead of rebounding with the rest of the economy, or matching the eye-popping success of private corporations, wages as a percentage of GDP have continued their rapid descent.
Unfortunately, the broken link between corporate profits and wages is considered the new normal of the American business community. One economist explained that big profits built on the suffering of employees is just “how it works.”
Just four years after the worst shock to the economy since the Great Depression, U.S. corporate profits are stronger than ever.
In the third quarter, corporate earnings were $1.75 trillion, up 18.6% from a year ago, according to last week’si gross domestic product report. That took after-tax profits to their greatest percentage of GDP in history.
But the record profits come at the same time that workers’ wages have fallen to their lowest-ever share of GDP.
“That’s how it works,” said Robert Brusca, economist with FAO Research in New York, who said there is a natural tension between profits and the cost of labor. “If one gets bigger, the other gets smaller.”
Profits accounted for 11.1% of the U.S. economy last quarter, compared with an average of 8% during the previous economic expansion. They fell as low as 4.6% of GDP during the recession.
The slice of wages in the national economic pie has actually been shrinking for at least a decade, even before the latest recession. That’s why the disconnect between wages and corporate profits has become so pronounced in the wake of an economic crisis; the 2008 crash simply accelerated the trend of businesses maximizing profits on the backs of their own workforce.
Any idea of shared prosperity between the private sector and the bulk of the country that makes up their employee and consumer base is simply a false proposition. From tax cuts to corporate welfare to fiscal policies that enable such bloated profit-making, “business-friendly” policies have come to only help businesses, not employees, job seekers, or the overall economy.
As Henry Blodget writes at Business Insider, the “obsession” with “shareholder value” has destroyed what had been generally routine long-term planning by corporate leaders, replaced by a rush to capitalize on near-term profits that please Wall Street but leave players like their own employees underpaid and barely able to make ends meet.
With three-quarters of the US economy based on spending by those employees and their families, such corporate cannibalization is a recipe for economic stagnation in perpetuity.
What’s wrong with this picture?
What’s wrong is that an obsession with a very narrow view of “shareholder value” has led companies to put “maximizing current earnings growth” ahead of another critical priority in a healthy economy:
The happiness and well-being of employees.
What those who obsess exclusively about profits forget is that one company’s wages (costs) are other companies’ revenues.
If American companies were willing to trade off some of their current earnings growth to make investments in wage increases and hiring, American workers would have more money to spend. And as American workers spent more money, the economy would begin to grow more quickly again. And the growing economy would help the companies begin to grow more quickly again. And so on.
But, instead, U.S. companies have become obsessed with generating near-term profits at the expense of paying their employees more, making capital investments, and investing in future growth.
This may help make their shareholders temporarily richer.
But it doesn’t make the economy healthier.
Indicative of the refusal by the corporate world to embrace the theory of shared prosperity as well as shared sacrifice is the case of Hostess Brands, the dying company famous for making Twinkies. Taken over by Wall Street venture capital investors, the company is on the verge of liquidation for which executives blame unionized workers. But critics note that the same executives took massive cash bonuses while slashing employee pay and complaining of big financial losses.
Now the head of a “restructuring” investment firm installed as CEO of Hostess to oversee its dismantling is protecting his own $1.5 million salary while forcing 8 percent pay cuts on all remaining employees. All other Hostess executives are also allowed to keep their scheduled cash bonuses even as the company liquidates and lays of more than 18,000 people.
The acting CEO of Hostess Brands, the failed Twinkies-maker, will not take part in a company-wide pay cut.
Though he imposed an 8 percent pay cut for all Hostess workers, Gregory Rayburn’s monthly $125,000 pay — or $1.5 million a year — will remain unchanged, a company spokesman told The Huffington Post on Monday. Rayburn is not on the Hostess payroll and therefore isn’t subject to the imposed pay cut, the spokesman explained.
Hostess appointed Rayburn, founder and owner of Kobi Partners, a restructuring advisory firm, as acting CEO in March, two months after the company filed for bankruptcy a second time.