SOMETHING I NEVER REALLY UNDERSTOOD – UNTIL NOW

Okay, I will be the first to admit there is a lot in the wide world that I do not understand. And even that statement is complicated because it is different from saying something like, “I don’t understand why a kazillion billion dollars is not enough for some people.” I totally get why they want a kazillion billion dollars – because for some people, all the money in the freaking world isn’t enough. What I DON’T get is why some people are built that way. And that’s a whole different level of non-understanding.

But here’s something I am having a comprehension problem with right at the moment – how come some people in our country are getting so rich when a bunch of others are staying poor? Why isn’t it the economy working for everybody, like, trickling down, or floating all boats, or whatever? I found an article that claims to simplify this question, but even it was too complicated for my tiny feeble brain to process. So I had to make it even MORE basic, just so I could get it. And here it is.

There’s this word: “stagpression”. It is a combo word of “stagnant” and “depression”. “Stagnant” is when nothing happens because the economy is just sort of sitting there. A “depression” is a sustained, long-term downturn in economic activity. So far, so good. We are definitely stagnant, and definitely in some kind of depression event, judging from a lot of people’s circumstances. Thus – “stagpression”. Got it.

How can this be happening, though? Housing is coming back, the job market is increasing slowly but steadily, corporate profits are at record highs, and the stock market is off the charts. So how come so many of us are still stuck in stagpression?

Well… THIS is why. There’s still a lot of unemployment, and stagnant wages haven’t shifted since Reagan was Prez. The middle class’s wealth is being methodically stripped away until the thinnest of shells remains. Massive student loan debt ties young people to servicing loans instead of buying houses, having families, and spending money on stuff, which puts those dollaroos back into circulation. All this leads to consumers with zero confidence in the future, at least as it seems likely to play out for them.

But on paper, the economy should be booming, right? Look at the profits! Look at the stock market!  And it IS booming … for really, really rich people. They are doing GREAT. But the vast majority of Americans who AREN’T fabulously wealthy have been economically laying around like logs in the woods. Nothing changes, except for inexorable slow decay. No movement, unless something bad happens, and then it’s straight into poverty.

Why are we stuck here?

Observe: a chart that measures”free cash flow.” According to Investopedia, “free cash flow” is “measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base.” Okay, I think I get this definition – free cash flow is the money that a business has AFTER it pays out all its expenses to maintain the business – like wages, raw materials, operating costs, etc.

Chart 1

Wow, look at that peak! Cash flow is at an all time high, right? Lots of dough to reinvest, make the business better, hire more workers!

Eek. But here’s what is happening instead …

Chart 2

What the hell is “non-residential fixed investment” anyway?  In economic theory, non-residential fixed investment is “the amount purchased per unit time of goods which are not consumed but are to be used for future production (i.e. capital).” So,in other words, those high points in the chart represent money being plowed back into the economy. The low points are money stockpiled by businesses, or, the equivalent of being buried in a Folger’s can in some rich person’s yard. And don’t tell me, “Oh, it’s getting better!”, because even on an upward trend, it is STILL lower than it has ever been!

We have dropped taxes on businesses to alarming lows – in fact, many of the biggest, most wealthy businesses pay no taxes at all. There is less regulation (think “Freedom Industries”, responsible for the poisoned Charlottesville water debacle), and many tax funded price supports ( aka, subsidies). Unions have been shackled, so wages dropped. Technology developed by tax-supported government programs is distributed to businesses for free.  And STILL, business is investing less.

Jeepers! Big business is sure saving a lot of money these days! What the heck are they doing with it, anyway?

Glad you asked! Rather than invest in plants, equipment, or hiring, businesses are using most of their funds to repurchase their own stocks in order to boost management earnings (CEO bonuses!) and ward off hostile take-overs (which is when other, even bigger and richer companies try to grab enough stock to control the company they are taking over – excellent strategy to reduce competition!), pay dividends to stockholders (those wealthy stockholders again), and accumulate large cash and bond holdings. In other words, businesses are “swimming in money, and they haven’t shown the slightest inclination to use all this cash for investment or employment.”

We work, buy their products, and most of the lucre we give them goes into that Folger’s can, which they then bury.

This does not help the nation – at all. No matter how good your small-business plan is, if most of the nation’s capital is tied up in bonds, dividends, and CEO bonuses, and regular people are making the same wage as they did in 1980, there aren’t going to be a lot of customers for you. When money is cycled to the bottom, it circulates. When it cycles into the bank accounts of the rich, it just sits there.

Here’s what’s been tried …
1.Price and pay freezes (Let’s play the austerity game! You be Greece and I’ll be Spain!)
2.Government set and regulated prices. (Regulations: source of ENDLESS business bitching and moaning)
3.Lower tax rates.
4.Cash incentives from taxpayers to reinvest.
5.Pleas and entreaties from the Oval Office. (Yeah, like THAT ever works. The leaders of giant corporations are paid bales of money to disregard shame. In fact, many of them are SELECTED for their complete imperviousness to negative public opinion)
6.Higher marginal tax rates. (“Marginal tax rate” is the fancy way to say the more money you bring in, the higher your tax rate goes)

The only one that has worked is HIGHER TAX RATES. When a business invests in itself, it earns a lower tax rate. When it just grabs money from a lot of other places – like taxpayers, and bailouts and subsidies and slackening regulation – why bother with reinvesting in your company? You have the cake, and you can eat it too!

Look at the Fixed Investment chart. Rates of reinvestment climbed during each of these presidencies: Eisenhower, Kennedy-Johnson, Carter, and Clinton. Each time, Congress legislated higher marginal tax rates.

Remember Bush 2’s tax cuts? The ones that big business went into whining-overdrive about, and Republicans practically killed themselves to defend? The ones Obama held on to? Reinvestment sank like a rock, and is barely rising now.

Are you starting to get it? I am.

I guess corporations are a lot like people – for some, everything is still not enough. And who cares how many people have to scrabble, so long as the money keeps flowing to the top.

It’s the American Way!

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