On Capitalism Part 3 (The 401(k) fallacy and Identity Disorder)

As I’ve argued against the excesses of capitalism and the failure of the trickle-down economic model I’ve heard multiple conservatives argue that feeding money into the top and boosting the value of the company is a win for everyone, including the workers at the bottom.  They contend that most all of us have 401(k)’s and those retirement vehicles invest in mutual funds that hold stock in various companies across corporate America.  So, when circumstances are created to boost corporate profits (i.e. Tax Cuts and Jobs Act) we all benefit.  The only problem is that an actual look at real numbers proves they’re argument is a red herring.

As an example, Jeff Bezos owns 78,893,280 shares of Amazon stock, making him the largest shareholder by far.  The largest institutional holder is Vanguard with a mere 27,872,279 shares.  Amazon has 487,740,000 total shares.  So Bezos, the CEO of Amazon, controls roughly 16% of the shares.  Amazon does not currently pay dividends.  Instead the company chooses to hold on to profits and reinvest.  A strategy that, in general, helps push the stock price higher.  So let’s see what a $50 jump in the price of Amazon stock does for Mr. Bezos and the portion of my retirement account held outside my current 401(k) (Note: Amazon’s stock has had multiple days with price jumps of $50 or greater this year).  Mr. Bezos would see the value of his holdings increase a whopping $3,944,664,000 or nearly $4 BILLION.  Meanwhile the impact on the value of my retirement account, once the increase is filtered through all the shares held by my various mutual funds and then shared among all the other investors in those mutual funds, goes up by a pathetic $8.09.

Now let’s shift the scenario to a company that does regularly pay dividends – Microsoft.  Microsoft just paid a dividend of 1.56% on 8/17/18.  Closing price that day was $107.58.  Running the figures (again without attempting to account for fees & expenses) shows that dividend netted my retirement account a scant $5.21.  Bill Gates on the other hand earned $280,255,557.50.  CEO Satya Nadella earned $1,880,270.46.  (Figures for Gates and Nadella based on most recent public figures on shares held).

So when conservatives try to argue that boosting corporate profits is a win for everyone, it’s a bit Orwellian – everyone wins, but some win more than others.  For starters there are no reasonable circumstances where one person earning $5.21 can claim the same win as someone who just earned over $280 million.  My $8 isn’t even a drop compared to the $4B Jeff Bezos earned.

Even if you wanted to try and claim that I still won, there’s a key difference in my winnings versus those of Gates and Nadella.  When Bill Gates gets his dividend check, that’s money he can spend immediately.  My measly $5 is stuck in a retirement vehicle that I can’t touch until I’m in my 60’s.  I realize that $5 will grow in the account and help me retire someday, but it would definitely be nice to have a bit more in my pocket now as well.  And that’s the real rub, retirement me can appreciate the small growth of my retirement account.  However, current me is dealing with real life and trying to pay all the bills.

Thomas Friedman, in his book The World is Flat makes some interesting distinctions regarding the multiple roles we all hold – consumer, taxpayer, employee, stockholder.  These roles are not all aligned to the same goals.  Friedman compares Wal-Mart and Costco to help demonstrate the differing roles.  Citing a November 1, 2004 article in the New York Times, Friedman notes that Wal-Mart insures fewer employees at higher rates than Costco.  As a result, Costco has smaller profit margins that Wal-Mart.  At the same time, taxpayers end up subsidizing Wal-Mart employees’ health care because so many of them are either on Medicaid or have no insurance.  The consumer in us wants Wal-Mart’s low prices and the stockholder wants their profit margin.  At the same time, the employee and the taxpayer want Costco’s benefits package.  Friedman correctly notes that we are going to have to sort these roles out to continue moving forward in today’s global economy.

For the most part, Millennials are more interested in the employee and taxpayer roles.  Quite frankly, as already noted, we’re not getting much real benefit from the stockholder role.  And we’ve come to the logical conclusion that we would prefer to pay a slightly higher price and have the company fairly compensate its employees.  Because here’s the thing, we can either pay a bit more for the goods and services we want from a company, or we can pay more in taxes to keep various assistance programs afloat.

This is the problem with the Republican version of capitalism and the single minded pursuit of profit.  It creates a system where employers are incentivized to pay as few benefits as possible in order to maximize profit.  Why do you think so many Wal-Mart employees work less than 30 hours a week?  Or that Amazon uses a lot of temp staffing agencies to staff its warehouses?  Full-time is defined as 30 hours or more per week.  Full-time employees have to receive benefits; part-timers don’t.  Amazon avoids paying benefits to the warehouse worker because, technically, that employee works for the temp agency and we all know temporary workers don’t count as full-time employees either (even if they’re working 30+ hours each week)  At the same time, Republicans are constantly telling us how people on welfare are just lazy and we should strip away funding for Medicaid, SNAP, TANF, and a whole host of assistance programs.  So Republicans don’t want to force employers to pay reasonable benefits, nor do they want to fund the assistance programs that many employees depend on to survive.  It doesn’t take a genius to figure out that this is a completely unsustainable dynamic.  The Millennials seem to be figuring that out.  It’s too bad the Baby Boomers and a fair number of Gen X haven’t figured this out.

On Capitalism Part 2 (What If Friedman is Right?)

In part 1 I took aim at Milton Friedman’s argument that the only responsibility of business is to make a profit.  It’s a theory that I fundamentally disagree with.  But, for arguments sake, I’m going to turn the tables here and assume we accept Friedman’s argument.  Friedman’s position stands in fairly stark contrast to a few recent judicial rulings that many conservatives cheered.

Friedman clearly distinguishes a business from a person.  “What does it mean to say that ‘business’ has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense.”  So accepting Friedman’s premise that the only responsibility of a business is to generate a profit also mean accepting the premise that a business is not a person.  That’s fine.  I’m actually okay with a position that states that a business is not a person.  Republicans are not.

Here’s why.  A person has certain responsibilities to society.  With those responsibilities come certain privileges.  If a business is not a person, then it can ignore societal responsibilities.  In that case, a business is also not entitled to the privileges associated with those societal responsibilities.  Two fairly recent cases have turned this notion upside down – allowing businesses the privileges while not forcing them to accept the responsibilities – and Republicans love it.

Let’s start with Citizen’s United.  Frankly, we can largely ignore the specifics of the case as the broad ruling and it implications are far more important and germane to this topic.  In their ruling in the Citizens United case, the Supreme Court removed limitations on political spending by companies.  Prior to their ruling unlimited spending was specifically restricted to individual donations.  Now, corporate profits can be funneled into any political cause or candidate the board wants to support.  So, a privilege of being a U.S. citizen has now been granted to corporations without changing the basic calculus that says a business is primarily and foremost about making the biggest profit possible.

For me, the more egregious ruling is Burwell v Hobby Lobby.  The case centered on the question of whether a closely held company could be forced to comply with the ACA’s contraceptive mandate.  The court ruled that such a mandate violated the sincerely held religious beliefs of the Green family (owners of Hobby Lobby).  Once again, the court has granted a privilege to a for-profit corporation without a corresponding demand for responsibilities.  Take Friedman’s earlier argument and replace “responsibilities” with “religion.”  I think Friedman would agree here that only people can have religion.  The Green family regularly attends church, I’m sure.  And they have very sincerely held religious beliefs that guide their daily lives.  I’ve got no problem with that.  However, the Green family is not Hobby Lobby.  As a for-profit corporation, Hobby Lobby is a separate entity from the members of the Green family who hold a stake in the company.  Hobby Lobby does not attend church.  Hobby Lobby has no sincerely held religious beliefs.  Therefore, Hobby Lobby cannot object to a legal obligation on religious grounds.

If Republicans are going to champion rulings that deem a corporation has sincerely held religious beliefs and that corporations can now make unlimited political contributions in the same manner as private citizens, then it would seem logical that they would also expect corporations to behave as socially responsible citizens.  This again, is essentially what Warren’s legislation proposes.  She wants to have a federal corporate charter that assigns responsibilities to corporations to go along with the privileges that courts have already granted.  Seems reasonable enough to me, and probably Friedman as well.  Although, he would more likely side with Democrats and argue that the privileges shouldn’t have been granted in the first place.

On Capitalism - Part 1 (Why are Profits King?)

Recently, Vox ran an article on Elizabeth Warren’s plan to save capitalism.  This might seem strange given the push by many on the left, notably Bernie Sanders, for what is often called democratic socialism.  Warren herself is no stranger to the progressive wing of the Democratic Party and has often championed many of the proposals put forth by Sanders and others.  Yet, here she is with a plan to keep government out of the running of a business (a play towards conservatives) and work for a more equitable distribution of wealth (a play towards the progressive left).  At its core, Warren’s plan is an attempt to return corporate America to a place where it recognizes responsibilities to not only shareholders, but also employees, customers, and the community.

I’ve often wondered what caused corporate America to become singularly devoted to profits and shareholder equity.  Thankfully Vox pointed me in the direction of Milton Friedman’s 1970 article “The Social Responsibility of Business is to Increase its Profits.”  In it Friedman lays out the argument that business, and the executives running it, should pursue the goals set forth by the owners “which generally will be to make as much money as possible while conforming to the basic rules of the society.”   Friedman does constrain his comments to the corporate executive and removes the individual small business owner from consideration.    However, Friedman is arguing that executives running corporate America should be strictly interested in making money for the owners.  He is making the assumption that the only reason someone owns a business is to make money.  Admittedly, no one starts a business with a plan to lose money.  Investors buy stock to earn dividends and, eventually, sell it at a profit.  Obviously a business needs to turn a profit in order to be successful.  But, Friedman is arguing that profit should be the ONLY goal of the business.  What the owners do with their money is up to them, but that’s after it’s paid out to the owners.

Friedman’s real issue lies in how money is utilized before it’s paid out to the owners.  He goes on for several paragraphs regarding the executive’s use of funds that diverges from ways in which consumers, employees, and owners would use the funds.

        “What does it mean to say that the corporate executive has a "social responsibility" in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire "hardcore" unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.

In each of these cases, the corporate executive would be spending someone else's money for a general social interest. Insofar as his actions in accord with his "social responsibility" reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers' money. Insofar as his actions lower the wages of some employees, he is spending their money.”

Friedman describes this use of funds as “imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.”  Since this is a form of taxation, it should be subject to political processes, he argues.  Since business should be controlled by market forces, and not political ones, requiring the executive to exercise some “social responsibility” is antithetical to a capitalist economy.

Here’s the rub – using Friedman’s own examples, corporate executives across the United States are engaged in taxation every day.  In working to maximize the profits going toward the owners, the executive is regularly engaging in actions that spend the customers’ money and the employees’ money.  Raising prices and keeping wages down are two great ways to increase profits.  Corporate America does this quite regularly.  Capitalists are going to argue that consumers can take their business elsewhere if the price gets too high and employees can find new employment if wages are too low.  They’re going to say that these are market forces at work.  The only problem is that employees are being shut out of the conversation. 

Wage growth has stagnated even as the absolute wealth in this country continues to skyrocket.  The vast majority of the wealth created right now is being directed into the hands of the wealthiest individuals.  Money is being spent by the corporate executive in a way that is different from how the employees would spend it.  The bottom end of the corporate structure is being taxed so that the top end can grow even richer than it already is. 

This is why I find Friedman's argument wrong.  By single-mindedly pursuing profits, corporate executives are engaging in a political action.  An action in which not all parties have a vote.  If employees had an actual say in decisions made by the board, if they had representation as Warren proposes, then there would be a more equitable balance of the responsibilities of the corporate executive(s).

Cutting Taxes (yes) Creating Jobs (not so much)

It’s time to get back into writing about political issues and attempting to find common ground between Republicans and Democrats.  The house is bought, moving is done, and we are mostly settled into the new place.  So now there’s time to think and write again.  Also, there’s some recent major legislation that needs dissected and major mid-term elections to discuss.

Since we just recently “celebrated” Tax Day, I’ll start with the Tax Cuts and Jobs Act.  The bill certainly cuts taxs, especially for big companies.  Creating jobs – I don’t think so.  Since President Reagan, Republicans have held this notion that reducing corporate taxes will boost wages and create more jobs – the “trickle-down” theory.  The problem is this theory has never actually worked on the broad basis that Republicans keep claiming it will.  A quick look at the numbers coming out after the TCJA was passed prove the point.

Many of the largest companies in America have not expanded production or boosted employee pay; they’ve engaged in massive stock buybacks.  Essentially, the companies are repurchasing their stock back from investors.  Obviously the investor who sells recognizes a gain from the sale and has cash to invest elsewhere or spend.  However, the investor who holds onto the stock gains as well.  After a massive buyback there are fewer shares outstanding.  That means important measures such as shareholder equity and earnings per share go up.  This makes the company look good.  It also improves the dividends each share earns.  Same total dividend, just divided into fewer pieces means each piece is bigger.

So who are the biggest shareholders that hold onto their positions.  Typically it’s the Board of Directors and the so-called “C-Suite” (CEO, CFO, COO, etc); basically people who are already wealthy.  There will be plenty of advisors who point out that everyone with an IRA , 401(k), or other retirement account invested in mutual funds gets the same benefit.  That’s a bit misleading.  Yes, mutual funds get the same boost as other shareholders.  It’s just a matter of scale that makes this such an elegant misdirection.  I’ll use Wells Fargo as an example.

One of the largest institutional holders of Wells Fargo (WFC) stock is The Vanguard Group (Vanguard).  Vanguard holds 6.55% of WFC stock.  As one of the largest mutual fund companies in the U.S., Vanguard has hundreds of mutual funds.  That 6.55% of WFC shares held by Vanguard are held in dozens of different Vanguard mutual funds, of which you, the retirement investor, may be invested in one.  In all likelihood the WFC holdings represent less than 5% of the entire fund.  Depending on the size of your retirement account, you may hold just a few shares in the mutual fund to a few dozen, maybe even a few hundred.  Regardless, you are one of thousands of people invested in the fund.  All that to say that the cut of that increased dividend coming from Wells Fargo into your personal retirement account is going to be pretty darn small.

There’s another aspect of the buybacks that needs mention as well, and it’s the reason trickle-down economics doesn’t work.  The trickle-down theory works on the notion that companies that are flush with cash will turn around and hire more workers.  More people working and earning a paycheck will, in turn, increase demand for goods and services, thus justifying the increased hiring.  Run through this cycle a few times and Viola! you have economic growth.  Here’s the rub, companies are not going to employee more people than are needed to meet current demand.  If a manufacturing company needs 200 employees working the assembly line to meet current demand, it’s not going to hire an extra 50 people just because it got a big tax break – there’s no business justification for it.  Why should the manufacturing company hire more people when there is no indication that doing so will improve the bottom line?  That’s the cold hard reality in a society that judges companies first and foremost on profitability and return on equity.  The days of companies caring about employees first and profits second are long gone.  Yeah, a few examples still exist, but it’s no longer the norm. 

Some companies tried to show an investment in their employees like Home Depot.  After passage of the TCJA, Home Depot announced bonuses for all of their employees.  Sadly, the bonus was just a one-time event, despite the tax cuts being permanent.  That’s not to say the bonus wasn’t welcome by many of the employees; just that Home Depot could have done better.  With a permanent drop in the corporate tax rate, why not a larger annual raise for everyone?  That would be making a lasting impact on the employees.  The one-time bonus is really a token gesture meant to give the appearance of caring for the employees while still providing the biggest reward for the biggest stockholders

This brings up another major issue with the TCJA – the nature of the corporate tax changes versus the personal tax changes.  Republicans gave corporations a PERMANENT tax cut while giving individuals a TEMPORARY tax cut.  In other words, come 2025 your taxes will go up unless Congress does something.  Meanwhile, corporate America will continue sailing on with their lower tax rates.  Republicans continue to try and claim that they really do care about average Americans and they claim to want a strong middle-class.  Seems pretty clear to me that Wall Street is still more important to Republicans than Main Street.

The TCJA is, first and foremost, a boon to corporate America with just enough crumbs thrown in to make many on Main Street think they got a good deal.  It also puts a lie to everything Republicans has said about wanting a balanced budget – the subject of my next post.