Will Our Economy Ever Recover From the “Greatest Recovery”?

In a January 2009 ABC interview with George Stephanopoulos, then President-elect Barack Obama said fixing the economy required shared sacrifice: “Everybody’s going to have to give. Everybody’s going to have to have some skin in the game.” [1]

For the past two years, American workers submitted to the president’s appeal – taking steep paycuts despite hectic productivity growth. By contrast, corporate executives have extracted record profits by sabotaging the recovery on every front – eliminating employees, repressing wages, withholding investment and shirking federal taxes.

The global recession increased unemployment in every country, but the American experience is unparalleled. According to a July Organization for Economic Cooperation and Development (OECD) report, the US accounted for half of all job losses among the 31 richest countries from 2007 to mid-2010.[2] The rise of US unemployment greatly exceeded the fall in economic output. Aside from Canada, US Gross Domestic Product (GDP) actually declined less than any other rich country from mid-2008 to mid-2010.[3]

Washington’s embrace of labor market flexibility ensured companies encountered little resistance when they launched their brutal recovery plans. Leading into the recession, the US had the weakest worker protections against individual and collective dismissals in the world, according to a 2008 OECD study.[4] Blackrock’s Robert Doll explains, “When the markets faltered in 2008 and revenue growth stalled, US companies moved decisively to cut costs – unlike their European and Japanese counterparts.” [5] The US now has the highest unemployment rate among the ten major developed countries.[6]

The private sector has not only been the chief source of massive dislocation in the labor market, but has also been a beneficiary. Over the past two years, productivity has soared while unit labor costs have plummeted. By imposing layoffs and wage concessions, US companies are supplying their own demand for a tractable labor market. Private sector union membership is the lowest on record.[7] Deutsche Bank Chief Economist Joseph LaVorgna notes that profits-per-employee are the highest on record, adding, “I think what investors are missing – and even the Federal Reserve – is the phenomenal health of the corporate sector.” [8]

Due to falling tax revenues, state and local government layoffs are accelerating. In contrast, US companies increased their headcounts in November at the fastest pace in three years, marking the tenth consecutive month of private sector job creation. The headline numbers conceal a dismal reality; after a lost decade of employment growth, the private sector cannot keep pace with new entrants into the workforce.

The few new jobs are unlikely to satisfy Americans who lost careers. In November, temporary labor represented an astonishing 80 percent of private sector job growth. Companies are transforming temporary labor into a permanent feature of the American workforce. United Press International (UPI) reports that, “This year, 26.2 percent of new private sector jobs are temporary, compared to 10.9 percent in the recovery after the 1990s recession and 7.1 percent in previous recoveries.” [9] The remainder of 2010 private sector job growth has consisted mainly of low-wage, scant-benefit service sector jobs, especially bars and restaurants, which added 143,000 jobs, growing at four times the rate of the rest of the economy.[10]

Aside from job fairs, large corporations have been conspicuously absent from the tepid jobs recovery – but they are leading the profit recovery. Part of the reason is the expansion of overseas sales, but the profit recovery is primarily coming off the backs of American workers. After decades of globalization, US multinationals still employ two-thirds of their global workforce from the US (21.1 million workers out of a total 31.2 million).[11] Corporate executives are hammering American workers precisely because they are so dependent on them.

An annual study by USA Today found that private sector paychecks as a share of Americans’ total income fell to 41.9 percent earlier this year, a record low. [12] Conservative analysts seized on the report as proof of President Obama’s agenda to redistribute wealth from, in their words, those “pulling the cart” to those “simply riding in it.” Their accusation withstands the evidence – only it’s corporate executives and wealthy investors enjoying the free ride. Corporate executives have found a simple formula: the less they contribute to the economy, the more they keep for themselves and shareholders. A Federal Reserve flow of funds report reveals corporate profits represented a near-record 11.2 percent of national income in the second quarter.[13]

Nonfinancial companies have amassed nearly $2 trillion in cash, representing 11 percent of total assets, a sixty-year high. Companies have not deployed the cash on hiring as weak demand and excess capacity plague most industries. Companies have found better use for the cash. As Robert Doll explains, “High cash levels are already generating dividend increases, share buybacks, capital investments and M&A [mergers and acquisitions] activity – all extremely shareholder-friendly.”

Companies invested $262 billion in equipment and software investment in the third quarter;[14] that compares with nearly $80 billion in share buybacks.[15] The paradox of substantial liquid assets accompanying a shortfall in investment validates Keynes’s idea that slumps are caused by excess savings. Three decades of lopsided expansions have hampered demand by clotting the circulation of national income in corporate balance sheets. An article in the July issue of The Economist observes that, “business investment is as low as it has ever been as a share of GDP.” [16]

The decades-long shift in the tax burden from corporations to working Americans has accelerated under President Obama. For the past two years, executives have reported record profits to their shareholders, partially because they are paying a pittance in federal taxes. Corporate taxes as a percentage of GDP in 2009 and 2010 are the lowest on record at just over 1 percent.[17]

Corporate executives complain that the US has the highest corporate tax rate in the world, but there’s a considerable difference between the statutory 35 percent rate and what companies actually pay (the effective rate). Here again, large corporations lead the charge in tax arbitrage. US tax law allows multinationals to indefinitely defer their tax obligations on foreign earned profits until they “repatriate” (send back) the profits to the US. US corporations have increased their overseas stash by 70 percent in four years, now over $1 trillion – largely by dodging US taxes through a practice known as “transfer pricing.” Transfer pricing allows companies to allocate costs in countries with high tax rates and book profits in low-tax jurisdictions and tax havens – regardless of the origin of sale. US companies are using transfer pricing to avoid US tax obligations to the tune of $60 billion dollars annually, according to a study by Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon.[18]

The corporate cash glut has become a point of recurrent contention between the Obama administration and corporate executives. In mid-December, a group of 20 corporate executives met with the Obama administration and pleaded for a tax holiday on the $1 trillion stashed overseas, claiming the money will spur jobs and investment. In 2004, corporate executives convinced President Bush and Congress to include a similar amnesty provision in the American Jobs Creation Act; 842 companies participated in the program, repatriating $312 billion back to the US at 5.25 percent rather than at 35 percent.[19] In 2009, the Congressional Research Service concluded that most of the money went to stock buybacks and dividends – in direct violation of the Act.[20]

The Obama administration and corporate executives saved American capitalism. The US economy may never recover.

1. “This Week,” ABC News with George Stephanopoulos, January 2009.

2. “OECD report, U.S. lost most jobs among rich countries,” ABC News. July 7, 2010.

3. “Five Surprises of the Great Recession,” Carnegie Endowment for International Peace, Policy Brief 89, Uri Dadush and Vera Eidelman. November, 2010.

4. OECD Indicators of Employment Protection.

5. “The Bullish Case for U.S. Equities.” Robert Doll, The Wall Street Journal, June 8, 2010.

6. Bureau of Labor Statistics. International Labor Comparisons. Updated December 2, 2010.

7. “Union membership in the private sector declines to record low,” Holly Rosenkrantz, Bloomberg Businessweek. January 22, 2010.

8. “When will profits translate into jobs?” CNBC, Joseph Lavorgna quote.

9. “Temp work becomes a fixture,” UPI. December 20th, 2010.

10. “Restaurant industry’s hiring helping to revive economy,” Dayton Daily News – McClatchy-Tribune Information Services via COMTEX, November 28, 2010.

11. “U.S. Multinationals Cut U.S. Jobs While Expanding Abroad,” Martin A. Sullivan, Tax Notes.

12. “Private pay shrinks to historic lows as gov’t payouts rise,” USA Today, May 26, 2010.

13. “Visualizing Booming Profits,” Catherine Rampell, New York Times Economix blog, November 23, 2010.

14. $262 billion in equipment and software investment, calculated from EconStats.

15. “S&P 500 Companies More Than Double Buybacks in 3Q,” Mark Jewell, ABC News. December 20, 2010.

16. “Show us the money,” The Economist.

17. Corporate Income Tax as a Share of GDP, 1946-2009.

18. “U.S. Companies Dodge $60 Billion in Taxes with Global Odyssey,” Bloomberg, May 13, 2010.

19. “Dodging Repatriation Tax Lets U.S. Companies Bring Home Cash,” Jesse Drucker, Bloomberg. December 29, 2010.

20. “Proposed Tax Break For Multinationals Would Be Poor Stimulus,” Robert Greenstein and Chye-Ching Huang, Center for Budget and Policy Priorities. February 2009.