These Charts Show What is Wrong With American Capitalism

For the last 30 years, neoliberals have fixated on a simple program: “Get government out of the way,” which meant reduce taxes and regulations. Business will invest more, which will produce a higher growth rate and greater prosperity for all. The belief was that unfettered capitalism could solve all ills.

Policymakers have dutifully followed this script. Corporations have gotten more and more tax breaks, with the result that the GAO found that their effective Federal tax rate in 2010 was 13% of worldwide income for companies with profits. Corporate income taxes represent a mere 11% of total Federal tax receipts, down from 30% in the mid-1950s. And we’ve also seen substantial deregulation in many sectors of the economy, particularly financial services, transportation, and telecommunications.

So have companies lived up to their half of the neoliberal bargain? Take a look at this chart from Andrew Smithers, which was published at the Financial Times. He prepared it to demonstrate how stock market prices have been driven almost entirely by corporate buying. But it serves to make an additional point: that the stock market for a very long time has not served mainly (or lately, much at all) as a vehicle for companies to raise funds to expand their business. Instead, it serves as a machine for manipulating stock prices.


Notice that US corporations have been buyers in aggregate since 1985. Now admittedly, that does not mean they stopped investing, since the primary source of investment capital is retained earnings, and companies also typically prefer to borrow rather than issue stock. But as of the 1980s, they were already preferring buying stocks (then mainly of other companies rather than their own, as in acquisitions) to the harder work of expanding their business de novo. Deals are much sexier than building factories or sweating new product launches.

But by the mid 2000, companies had indeed shifted to being net savers rather than net borrowers, which was an unheard of behavior in an expansion. That is tantamount to disinvesting. As Rob Parenteau and I wrote in 2010:

Unbeknownst to most commentators, corporations in the US and many advanced economies have been underinvesting for some time.

The normal state of affairs is for households to save for large purchases, retirement and emergencies, and for businesses to tap those savings via borrowings or equity investments to help fund the expansion of their businesses.

But many economies have abandoned that pattern. For instance, IMF and World Bank studies found a reduced reinvestment rate of profits in many Asian nations following the 1998 crisis. Similarly, a 2005 JPMorgan report noted with concern that since 2002, US corporations on average ran a net financial surplus of 1.7 percent of GDP, which contrasted with an average deficit of 1.2 percent of GDP for the preceding forty years. Companies as a whole historically ran fiscal surpluses, meaning in aggregate they saved rather than expanded, in economic downturns, not expansion phases.

The big culprit in America is that public companies are obsessed with quarterly earnings. Investing in future growth often reduces profits short term. The enterprise has to spend money, say on additional staff or extra marketing, before any new revenues come in the door. And for bolder initiatives like developing new products, the up front costs can be considerable (marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors). Thus a fall in business investment short circuits a major driver of growth in capitalist economies.

Companies, while claiming they maximize shareholder value, increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in financial speculation. They turn their backs on the traditional role of a capitalist – to find and exploit profitable opportunities to expand his activities

And ZIRP has perversely enabled this behavior. As Smithers writes:

US top managements are receiving huge bonuses which are typically linked to earnings per share or the return on corporate equity. This means that buybacks increase their pay and investing in equipment pushes it down. The result is that companies spend less of their cash flow than ever before on capital investment and have increased their buybacks to near record levels (chart three).


As it is in the interest of their managements, I expect companies to go on buying back shares until their cash flows fall off and I don’t expect this to happen soon.

Smithers isn’t the only economist who believes that companies have the ability to prop up this long-in-tooth bull market for quite some time. For instance, about ten days ago when nerves were frayed over Russia’s troop movements into the Crimea, market indexes around the world fell sharply, typically in 1.5% to 2.0%. The US market was down less than 1%. The cause wasn’t distance from Europe or late-breaking news that calmed rattled investors. It was corporate buying. One hedgie told me that the Morgan Stanley desk told him that corporate buyers were placing large orders that day.

So with large corporations finding it more attractive to game their stock than duke it out in the marketplace, and small companies generally gun-shy in a tepid economy, we have the foundations for the corporate elite to continue looting. Meanwhile, ordinary citizens contend with a hostile job market and have little reason to hope that their financial condition will improve. Welcome to the neoliberal paradise.

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  1. John

    Indeed. It is clear many commenters have never worked in a public company. Because if they did they would understand the over-riding goal to the firm’s upper brass is the quarterly sales number. Nothing else matters for these narrow minded folks, even if it means cooking the books one quarter to get the results they are looking for. The whole system is rigged towards meeting pie in the sky numbers — Big 4 accounting firms, risk departments, sales, CEOs, CFOs, etc…. all do their part in showing the Street the company has what it takes.

  2. Christer Kamb

    Couldn´t agree more! One reason to this development is the hijacking of Bigcorp-boards, meaning there is no longterm-investing in internal production due to the lack of majority-ownership. Instead fund-ownership always prefer stock-yield which of course means that management can and wiill give priority to their own stock-options, maximizing private whealth.

  3. Hugh

    While I agree with the general tenor of the post, the issue should not be about growth but about how well corporations (which are socially sanctioned entities) are serving to create the society we want. Viewed from this standpoint, it is clear that they are at war with us and any society we might want. This is a far deeper and more fundamental problem than just their investment patterns.

    1. Banger

      Digging deeper, as you suggest, is not something most people want to do at this historical moment. Before we ask the question of whether the corporate structure, as constituted, meets society’s needs we need to ask some questions. What sort of society do we want to live in? What is life really about? These sorts of basic questions are begging to be asked and until we get a dialogue on the deeper issues things will continue as they are.

      I’m not sure most people even understand that we live in a society or even what social capital is. After all one of the great prophets of our age, Margaret Thatcher, claimed there was no such thing as society.

    2. Ignacio

      Following your reasoning companies are at war with their clients. Even companies that serve mainly to other companies depend ultimately on consumers. This suggests that the good old axioms about satisfied customers have passed away.

    3. MikeNY

      Since the top 1% of households owns 40% of equities in the US, and the top 10% owns 80%, we need to tax corporations and redistribute that as income to workers. If you graph corporate profits/GDP with wages and salaries/GDP, it looks like an X.

      I estimate that the cost of bringing all workers in the US to a living wage of $22 / hour would be something ~25% of PRE-TAX corporate profits. This is rough math, but I think I’m in the ballpark.

      1. James Levy

        I’ve had this argument with my older brother who is in corporate finance, and he maintains that all corporate taxes are passed on to the consumer, anyway, so raising taxes on corporations is pointless. I have no idea if this is true, or how to prove that it is or isn’t, but would love to hear what others think of that thesis.

        1. 1 Kings

          So, let’s assume Exxon-Mobil profits $10 bil a quarter(give/or take depending on what excuse they use to jack up prices), and they are ‘located’ at their p.o. box in the Caymans, and the CEO recently stated regarding taxes that he doesn’t even see himself, nay his company as ‘American’, and, wait, what was the question?..
          Oh, all these so called ‘international’ corporations don’t pay any taxes at this point, and in fact, most get tax breaks(Exxon-Mobile, GE etc), so tell your corporate finance bro what in the laffer-curve he’s talking about ,and also to stop with the ‘they pass-along-to-we’ b.s.
          Double oh: At the next family gathering you should all read Nicholas Shaxxon’s book ‘Treasure Islands’. Be sure to have plenty of liquid-refresh nearby because it’s a depressing read, though a well-written one.

        2. MikeNY

          I think it’s utter nonsense. Corporate profits and margins are at all-time highs because of i) wage compression, and ii) because the effective tax rate is something like 12% as a result of favorable tax treatment, i.e., because of tax policy decisions.

          We as a nation have chosen this state of affairs. It hasn’t always been so, and we as a nation can chose to reverse it.

        3. Larry Barber

          Assuming that the corporations are paying their taxes (no offshore shelters and the like), the cost of the taxes will be passed through either to the customers, or the shareholders in the form of reduced profits. This latter possibility is what gets finance types in a lather.

        4. MyLessThanPrimeBeef


          If corporate taxes are higher, they will try to pass it to the consumer.

          If corporate taxes are lower, they will pocket the windfall.

          That is to say, not all corporate taxes are ALWAYS passed on to the consumer.

          The temptation to pass on (not that they will succeed) is only operative when the change occurs in one direction (higher).

          In any case, the statement, all corporate taxes are passed on (always), is thus shown to be false.

          1. John A

            Corporations are not taxpayers, only tax collectors. The guy’s brother in corporate finance is correct. Whatever taxes are paid by the corporation come from either higher prices to the consumer, lower dividends to shareholders, lower wages to the company’s employees or some combination of the three. It’s a simple accounting formula and not some kind of societal problem.

            1. John A

              One thing that could be done is to eliminate corporate income taxes altogether, tax dividends at the regular rate and tax capital gains at the regular rate, whether long-term or not. Perhaps also a tax on corporations buying-back their own shares?

              1. MikeNY

                BTW, I think I’m theoretically OK with this approach. Either way we get at both the corporatocracy and the 1%, which are basically the same thing.

            2. MikeNY

              I’ll have the lower dividends to shareholders option, with lower executive comp on the side.


          2. huxley

            Taxes aren’t passed on to the consumer. They’re recycled as corporate welfare. That’s why you can tax the rich at 90% and they still get richer. The 99% pays more in taxes than they ever get as government services because they also pay into corporate welfare, just to make sure as many people as possible are subsidizing the rich.

            Corporate profits don’t get passed on to the consumer either. Those get stashed in the Cayman Islands by the trillions to ensure they’ll serve no worthwhile purpose whatsoever.

            1. MyLessThanPrimeBeef

              If they could, they would have charged more – already – without the higher taxes motivation. Believe me, these are smart and intelligent (but not wise) people. You know, they went to Harvard, Yale, MIT, Wharton and Chicago School.

              Given that fact, if you charge the corporations 1 dollar more, and give that 1 dollar to the consumer, and the corporations succeed in charging 30 cents more, the consumer is still 70 cents ahead.

    4. susan the other

      Productive profits and capital versus financialized profits and capital. Either way there is an imperative to make new capital profitable ad infinitum. Clearly financialism is not productive so it is beyond the argument; and any production purely for profit at the expense of the environment cannot be justified because it just passes an enormous expense on the the rest of the world – so who can call that “productive?” Then there is the quandary of competitive turbo productivity which defeats its own purpose by ultimately eliminating jobs and the consumer. And all these varieties of productivity are stuck in a tragic cycle of reinvesting for yet more gain. Productivity for profit in order to make yet more profit is the most destructive force on the planet. What we need is a redefinition of productivity. We all keep coming back to an environmentalist metaphor – that fake productivity is worse than no productivity at all. Where is this discussion? What if we were all New Century Homesteaders? Each household with 25 acres; decentralized organic farming; factories producing necessary products and doing on-site reclamation of their toxics; grass roots medical clinics equipped to keep everyone healthy with no insurance scam middlemanning; we can’t go on manufacturing automobiles which were the drivers of the economy in the last century so where is the replacement? Productivity needs to be sensibly planned but probably more important, since time is of the essence, the old models need to be discredited and eliminated. And since finance became such a growth-mirage and shell game, it too needs to be discredited so that competition for returns is reality based.

      1. allcoppedout

        We’re all shareholders since Thatcher in the UK. All you had to do was find some guy called Sid. The plan was a copy of a newspaper one in which you went round asking for Lobby Ludd and he stumped up a fiver. You bought your council house with the capital Sid gave you and after that sat back living on the rest of the world relying on the American military shield in case those doing actual work got restless. It’s so hunky-dory over here the US should apply for Commonwealth membership and let the Queen sort out these graphs of doom merchants with a spell in the Tower.

        Joseph Garber published ‘Rascal Money’, a novel on this and similar, in 1990. We should really have made our case very widely long ago. We are up against ideology even more ludicrous than the paragraph above. In a sense, I met people who knew Yves’ graph in 1972. They were unemployed men on the streets in Cumbria (I was on a university rugby tour). It looked like something from ‘The Grapes of Wrath’ only without cars. Someone has to do the numerical analysis, but I suspect the other side knows all this and has long believed it can defeat any rational attacks.

        We need something as radical as Susan suggests. And something to beat the trump card of the right. Their joker is the threat of the thought of life without the US military umbrella. Graphs like this, however ‘obvious’ to you and more less mean ‘switch off’ to your average punter. Some other guy/gal in a suit puts up the opposite and where does that leave the innumerate hordes? Then along slithers Al Gore with a hockey stick.

        1. MyLessThanPrimeBeef

          Q: What do shareholders do?

          A: They share and hold hands. Thus, they are called share/hold-ers.

      2. John A

        New Century Homesteaders? What about the people, like most of the 99%, who do not want to be new-fangled homesteaders? What do you do with them? Do you force them to adhere to your five-year plan, comrade?

        1. susan the other

          People are getting forced out of their share of the commonwealth of this country now. It’s not so big a stretch to wonder if many people might like a New Deal of some kind. Maybe not everybody wants to grow an edible landscape and sell organic veggies; but there are other industries that can be encouraged in a decentralized manner. I’d say that the term “comrade” applies to the globalist agenda, not mine.

          1. John A

            Sorry for the knee-jerk reaction. Maybe many people would like a New Deal type of thing but what about those that do not? What do you tell them? “Well, 60% of the voters want you to pay (more) taxes so that we can spend it how we like in order to “help” people. Sorry if you do not consent but we’re going to do it anyway because we know what is best.”

            Probably better to only allow individuals to contribute to political candidates. No corporate contributions, no PACs. Actual living, breathing people only. Or maybe no contributions at all. Fixed, taxpayer-funding of campaigns. Not sure if that’s feasible, I’m just throwing that out there. Two-term limits for every single elected office. One term limit for president. Stop paying people to reproduce. Stop paying people to borrow money to buy a home. Stop bailing out corporations.

  4. dcb

    What’s missing in this is a link to the article in the links section about krugman and long term unemployed. While he endorses endless zirp and ignores how it creates inequality and long term unemployed. As usual the hypocrisy from krugman is beyond rational understanding

    and of course he complains about the republicans today and how their create inequality. yes they do, but it’s he fails to address the structural problems as usual

    1. James Levy

      Krugman accepts certain things as axiomatically true. That’s the way Economists are trained–like theologians. To break with the old time religion is to lose face, be considered “not serious”, and no longer be allowed to play in any reindeer games. Therefore, what you see as hypocrisy is really denial and cognitive dissonance being played out for all to see on the pages of the NY Times.

      1. huxley

        The economics profession has long since been perverted into a tool of the overlords. There is still a science called economics, but it is systematically suppressed and bears little resemblance to ‘economics’ as a corporate tool.

        Krugman does speak the truth. The problem with Krugman is that he doesn’t tell all the truth, which he’s very good at avoiding. He’s made out to be a ‘leftist’, but only by the slight virtue of not being a right-wing extremist, and in that role is useful to the PTB. For that he received a Nobel prize, which is, after all, only granted to tools. I know it, he knows it, and now you know it.

  5. Dan Kervick

    How much of this is driven by the ownership society and its transformation of the nation’s retirement system? All of those investment funds are ever on the lookout for high quarterly and annual yields they can be market to their participants to keep them on board.

    1. Yves Smith Post author

      No, this started in the 1980s with LBO funds. They used financial engineering, asset stripping, and expense cutting to make tons of money for themselves. As the later 1980s show, they also created a lot of bankruptcies. That gave impetus to a movement, with Harvard’s Michael Jensen, to “pay CEOs like entrepreneurs” as in have much more stock based pay (well, they still get an awful lot of cold, hard cash too). So the execs now have huge incentives to mange the business to keep the stock price high rather than do what is best for the company in the long term.

      As for investor short-termism, you can thank the SEC for that. It’s pushed for lower and lower transaction costs and lower and lower spread quotations. When I was a kid, commissions were vastly higher and the bid-asked spread was 1/8. Transaction costs were high enough that you thought twice before buying or selling a stock. That was a much healthier regime than the one we have now.

      1. Jeff

        Sometimes its helpful to look at a problem from a different angle.

        Thesis: If CEOs, government policy [per SEC commentary above], etc. are driving total stock purchases and volume, perhaps that artificial stimulus will manifest itself in stock valuation.

        I looked at Shiller’s data base for the sp500 dating back to 1871. I sliced the 142 years into six nearly identical quarter century periods. The first from January 1880 through December 1899, the next four 25 years each, and the last from January 2000 through December 2013. I derived average cyclically adjusted price/earnings ratios for each period. I also derived average annual price earnings ratios for each period.

        The five periods ending December 1999, had an average CAPE of 15.55, and a range of 12.84 through 17.19. For the same five periods, the average annual PE was 14.60, with a range of 12.34 to 16.33. Hold on to your hats: The CAPE and annual PE average for the 2000s …. a whopping 25.26 and 27.31 respectively. So much for the comment that the two bear cycles in the 2000s had a malignant affect on valuation!

        Something is clearly out of kilter when valuations over the past 14 years are between 60% and 87% higher than during similar durations over the past 140 years.

  6. Banger

    The interesting thing is that these trends have been in place for quite some time. Yet there is, outside of the Marxist ghettos, little discussions about the structure of our political-economy. Most people still support the very things we who comment at NC tend to abhor.

    We should be discussing whether or not we want to live in what looks like a neo-feudal future dominated by an entrenched oligarchy. Occupy tried to discuss this situation and did so very crudely but few people were interested–and now what? Still no dissident movement, still no political opposition to the status-quo.

    1. financial matters

      Twitter has proved to be a quick sort of communication and interaction and provides a number of ways to get involved…

      Occupy Wall Street ‏ @OccupyWallStNYC
      Occupying Wall Street since #S17, 2011. Standing with the global #Occupy movement. We are the 99%. Contribute: #ows

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      We envision a truly free & just society where human needs are valued over profit, ensuring decent standards of living without which a just society is impossible

      Occupy Together ‏ @OccupyTogether
      We have been working since Sept 2011 in solidarity with @OccupyWallSt to get people engaged politically with their local community

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      #OccupyLSX #OccupyLondon #olsx started outside St Paul’s Cathedral on Saturday 15 Oct now across London. Be ready to create a better world! RTs =/= endorsement.

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      Taking the ‘If you see something, say something’-approach to the corruption of democracy. General Assemblies @ 6pm Tu/Th/Sa/Su. Media Contact: 202-540-0155

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      More hideous crimes have been committed in the name of obedience than have ever been committed in the name of rebellion. -CP Snow #occupytoronto#occto #ows

    2. Ulysses

      I believe many people outside of “Marxist ghettos” are very concerned to change course so that we don’t devolve further into a neoliberal dystopia. The problem is most folks have been so thoroughly brainwashed by corporate propaganda– over their entire lives– that they are very easily duped. They often accept uncritically the media spin on things and tend to blame themselves for their “failure to succeed” in a system rigged to favor only a handful of kleptocrats.

      It is a very scary moment when one realizes that the entrenched oligarchs have no interest in producing a “rising tide that lifts all boats.” Therefore, people shrink from recognizing what’s really happening and cling to whatever delusions offer them comfort.

      What disturbs me the most is the ease with which essentially decent folks are co-opted into serving the interests of the kleptocracy. I know personally several talented, intelligent individuals who have been seduced into working for ostensibly “progressive” NGOs that are nothing but a warm and fuzzy front for the continued ruthless, anti-social activities of the kleptocrats.

      1. Banger

        Many social critics from very diverse POVs and backgrounds believe that, because of the heavy influence of the lying media, there is no hope for change or reform. The media have created what is, to me, a largely fictional world that melts easily when you look at it closely. But the fact remains is most people, even those who suspect something in rotten in Denmark, choose to not look–we are facing a crisis in morality and consciousness not economics or even politics.

        1. Dan Kervick

          I wonder if one by-product of the internet age is that people have acquired such large and diverse intellectual portfolios of individual concerns and preoccupations that the ground for social solidarity has been lost. I have read dozens of ten-point plans for progressive change over the past few years, and they all have much to be said for them, but most of them don’t focus on the things I would focus on personally. And by the same token, I’m sure others feel the same way about the proposals or political agendas I have advanced.

          The world is so complex now, and people don’t fall into just a few well-defined classes with broad commonalities of interest. When each person is able to seek and create a highly individualized personal niche in the world, and is faced with 500 potential social issues worthy of attention, it becomes hard to see how any two of them can settle on a single consensus program for social change.

          1. MyLessThanPrimeBeef

            And yet, underlying the myriad of social, political or financial issues are a few core ones.

            When people starve, it matters little for what reason or how we character it all so subtly differently.

          2. Banger

            Much of the cause of such varied views is that we live in a culture of narcissism. This means we aren’t good at dialogue or conversation that would shape our ideas through the give and take of a dialectical process.

            My view has always been that we have to agree on foundational issues and have that discussion before we can do anything else. We build our ideas as an ongoing process or we build nothing at all.

    3. Dan Kervick

      It seems to me that most dissent about the economic order has still not advanced beyond escapism and sophomoric flights of fancy.

      1. MyLessThanPrimeBeef


        But sometimes, escapism today is foresight in a few centuries or was the wisdom millennia ago.

        Sharing? Been there. Done that. When? The Age of the Neanderthals.

        Democracy? What would King Louis say about that? Fast forward to today. Was it escapism?

        1. Dan Kervick

          People had to fight for democracy. Today we have a lot of people who have convinced themselves they don’t have to fight to wrest control of the world from the landlords and barons who own it, but that their masters will let them carve out some little niche of freedom and niceness on the plantation.

  7. Jim Haygood

    ‘They turn their backs on the traditional role of a capitalist – to find and exploit profitable opportunities to expand his activities.’

    This sounds highly unlikely. In a competitive, low-yield economic landscape with high asset prices, it is extremely difficult to make high-yielding investments.

    To take a specific example, Starbucks (a member of the S&P 500) announced that it’s going to introduce alcohol sales to thousands of its outlets. By adding capacity to a retail alcohol sector that’s already well served, is Starbucks’ move going to produce a high ROI? More likely, it will produce a marginal bump in per-store sales, which keeps analysts happy. Arguably SBUX instead should hike its dividend (which has doubled since 2011, but still produces only a 1.35% yield).

    Large entities ultimately saturate their markets. Then there’s the largest entity on the planet, Usgov, with its vast malinvestments in a negative rate-of-return global military empire and a hypertrophied, low-productivity health sector. Small is beautiful.

    1. Yves Smith Post author

      Not true. My contacts at McKinsey have been telling me, for over ten years that it is almost impossible to get any client to invest in growth idea, no matter how fast the payback, because they aren’t willing to take even an itty bitty blip in quarterly earnings (and they’ve given me specific examples of the types of projects they’ve turned down, and they should have been no-brainers).

      Any meaningful new business/investment project has costs you need to expense rather than put on the balance sheet: marketing, R&D, hiring/training new staff, building and carrying inventory, etc. Companies are so gun shy of that that they refuse to make most expansion-oriented investments altogether, and defer the maintenance-type ones they have to make as long as possible.

      1. allcoppedout

        EF Schumacher the guy who wrote ‘Small is Beautiful’ also produced ‘A Guide for the Perplexed’, which included rot on a Swedish guy directly writing the word of god and a cheery fat woman living on only daily Eucharist as fact. Habermas had it he also sold out the German left.

        Why invest in growth when you can steal tax? Does $Bucks intend to sell alcohol with royalties built in so it can pay (almost) no tax in Amsterdam? Whenever I’ve been involved with our buzzing entrepreneurial talent at least two-thirds of it wanted to set up coffee shops, hairdressing and similar ‘now’ (meaning long past sell-by) small is beautiful businesses. The business plans, which I’ve seen sucker people up to Deputy Prime Minister, often scream failure. In the internet age, how about a high-tech booth in (closing) Post Offices to do your Council business in)! £750K down this drain. The same government office was also subsidising McCrony and other consulting firms to offer advice to the entrepreneurial wizards.

        The problem is finance makes internally logical sense and is entirely inconsistent with what we need. I like small is beautiful in human rights. We need bigger thinking on money and finance as a means to creating a fair society. In the current system this is a contradiction. If we had fairness there would be no unfair returns. Now work out how they have us thinking we need the super-returns at all. We just aren’t sensible enough to work without the unfairness.

        A big no-brainer would be much “cheaper” education delivered mostly via public domain databases of knowledge and teaching. There is no doubt we can do this. Problem? We can’t think big enough. Most financial thinking is small.

      2. huxley

        Just to be clear, these people who are risk-averse to the point of paranoia, if not sheer terror, are the same ones who complement themselves on being ‘risk-takers’, so as to ‘justify’ their celestial compensation.

        How phony can they get? Even phonier than that. They also complement themselves on being ‘job creators’ while permanently destroying millions of jobs, again, so as to ‘justify’ their rapacity.

  8. A Real Black Person

    Banger wrote “Most people still support the very things we who comment at NC tend to abhor. ”

    Banger brings up a salient point. We, and by “we” I mean people who visit this blog and think “deeply” about things are a minority. As long as most people get can a piece of the action, in other words, their smartphone, gas guzzler, mindless day job, and the social inclusion that comes with those things they couldn’t be bothered.

    Some people among us have said that most people are too stupid to care
    but what if that’s an oversimplified view of the situation? What if their priorities are different?
    What if they care more about the present than tomorrow? I see the sentiments about “living in the moment” and “living life to its fullest” and the otherwise “don’t worry, be happy” really about a vast majority of people believing that getting what they can get now is more important than an uncertain future.

    It’s easy to blame the elites but the elites have have a very compliant global population…well, except for the terrorists and criminals, who are, like us, a minority.

    We’re headed for “Self-destruction”? So, what? It says that in the Bible. Why should God-fearing people TRY to ALTER what God has decreed should happen? That is the attitude of most people.

    1. James Levy

      I wouldn’t be so pessimistic if I thought the people weren’t so panicky. I’d be prepared to wait for things to really go to hell in a handbasket before expecting most people to move, but I’m haunted by Romero’s “Diary of the Dead”, wherein it is simply assumed that an atomized and hysterical population will not be able to rally, organize, and fight back against the zombies, but will blindly scatter to the winds and end up zombie chow. Not very highbrow, but I worry that Romero has a better idea of what will happen when the shit hits the fan than most here (including me) would like to assume.

  9. GlassHammer

    “They turn their backs on the traditional role of a capitalist – to find and exploit profitable opportunities to expand his activities”

    Nothing is more traditional than exploiting a flawed system for self-enrichment.

    1. huxley

      Nothing is more traditional that creating systemic flaws that can be exploited for self-enrichment. Banksters have been doing it for centuries, and they’re gearing up to do it again.

  10. washunate

    Agree with the passion, but I would add this angle to the mix:

    “neoliberals have fixated on a simple program: “Get government out of the way,””

    I would suggest public policy is characterized by exactly the opposite of that sentiment. That’s the real story of the past few decades. Not how government has shrunk, but how it has grown, how it claims far more power and control than at any other time in American history. In peacetime we are functioning as if we’re in the midst of a war.

    By the way, that’s not hyperbole. For those who don’t know, the Presidents have continued a state of emergency since September 14, 2001.

    1. Yves Smith Post author

      It is absolutely untrue that government has grown relative to the size of the economy.

      Taxes on corporations and the rich are lower than they’ve been in generations, and Federal taxes relative to GDP are lower than they were in the Reagan administration, except during the worst of the crisis, when they reverted to Reagan-era levels due to GDP contraction. It is false to say that government has grown; we’ve been subject to a long-term campaign to curtail it. The US now has one of the lowest levels of government spending of any advanced economy, and it shows in all sorts of ways: our declining educational attainment levels, crumbling infrastructure, falling lifespans among white rural women. And a lot once capable and feared agencies, like the SEC and the FDA, are shadows of their former selves.

      Much of the looting isn’t taking place through spending so much as through failure to enforce existing laws, including antitrust. And remember, the surveillance state is every bit as much a private sector as a NSA exercise. Experian and data brokers also are hoovering up all sorts of info about you from your spending and Web habits.

      1. diptherio

        I think you’re talking about different things. ISTM we have reduced regulatory and social spending (the size of gov’t) while also beefing up NSA and DHS (the power of gov’t). Take a billion away from SNAP and Headstart and give $100 mill to NSA, CIA, DIA, etc. Reduces the gov’t budget while increasing gov’t power. And then we must always remember that it is individuals who use both the power of the gov’t and the power of the private sector to achieve their own ends (staying in control). In that sense, talking about gov’t vs. business is somewhat misleading. It’s actually the people controlling those institutions vs. the rest of us.

      2. washunate

        Yves, sorry if that language is unclear. I’m not saying anything at all about the ratio of federal outlays to GDP over time. I just meant growth in terms of power, control, reach, claim on how other people should live their lives.

        I think it’s a fundamental misread of the prevailing paradigm to paint them as trying to get government out of the way. Public policy is the most critical component of the authoritarianism, the driving force behind the assault on Constitutional governance and rule of law. It is leading the looting. This is the antithesis of government getting out of the way of private markets, where everyone from GM to GS would be out of business.

        That chart of investment shrinking over the past three decades shows exactly what the USFG has been preaching. It even has the bubble there in the late 1990s and early 2000s, exactly as public policy was pushing asset inflation as a way to hide the failure of the system.

      3. Jim

        Thomas Piketty in his recent “Capital in the Twenty-First Century” has argued that “the role of government is greater than ever.” (see page 476).

        Piketty notes that: “the simplest way to measure the change in the government’s role in the economy and society is to look at the total amount of taxes relative to national income.” Piketty states that total tax revenues consumed less than than 10 of national income in the United States, Britain, France and Sweden until 1900-1910. They represent between 30% and 55% of national income in the period 2000-2010. (see pages 474-477).

        Piketty goes on to note that between 1980 and 2010 the tax share stabilized. “This stabilization took place at different levels in each country, however: just over 30% of national income in the United States, around 40% in Britain, and between 45 and 55 percent in the European continent (45 percent in Germany, 50% in France and nearly 55% in Sweden.”

        He concludes with the observation that “Nevertheless, in terms of tax receipts and government outlays the state has never played as important an economic role as it has in recent decades.” (see page476).

        He speculates further that “In the wake of the Depression, World War II, and postwar construction, it was reasonable to think that the solution to the problems of capitalism was to expand the role of the state and increase social spending as much as necessary. Today’s choices are necessarily more complex. The state’s great leap forward has already taken place: the will be no second leap—not like the first one, in any event.” (see page 477).

        We need to develop a theoretical framework which will tame both Big Capital and Big State.

        1. Dan Kervick

          Maybe the point is to increase its regulatory role, not necessarily the spending role.

      4. huxley

        “It is false to say that government has grown; we’ve been subject to a long-term campaign to curtail it.”

        The effect is even more pronounced if you exclude expenditures accounted to the military-industrial complex and the national security state, easily estimated at more than two-thirds of the federal budget and still growing. In time the country will simply cave in from sheer lack of maintenance, so much the easier to subjugate the population.

        1. washunate

          Just curious here, how does one exclude expenditures accounted for in the MIC and NSS? Are you also excluding the malinvestment in Medicare and Medicaid? What about off-budget backing of private debt from Fannie, Freddie, student loans, and elsewhere? What about largely unfunded items, like NCLB mandates or IP law? What about tax credits that control behavior on the revenue side rather than the expense side? What about the massively unequal and unconstitutional two-tiered justice system?

          By the time one has excluded defense, healthcare, financial bailouts, intellectual property, education, tax loopholes, criminal justice system, etc., I agree, there’s not a whole lot else left the government does…

  11. A Real Black Person

    The thing most people care about are things like food stamps, which amounts to charity. They will fight to preserve things that make it appear that society is doing something about its losers. Conservatives will point out that for example: X program does not HELP most of its recipients get out of poverty, and that maybe we should examine how it works or stop it and they are predictably met with a backlash. Liberals get the same thing when they bring up military spending. Without the military spending we have now, there would be a lot more white ghettos. If we cut back government spending on government services, there would be lot more unemployed educated women. Cut back the quantitative easing and we’d be right back to 2008. To avoid the pain that would come from change or admitting the truth we work hard to maintain myths about our society. Myths about meritocracy, “making a difference” , and other pretentious stuff.

    Here’s a salient truth about human psychology:
    (I apologize for the caps.)

    Charity and throwing peanuts at the unfortunate satisfies our guilt, towards their situation but doesn’t help them improve. Large human social groups tend to be fundamentally anti-intellectual–and more about satisfying human emotions..well, some of the time.

    1. diptherio

      To avoid the pain that would come from change or admitting the truth we work hard to maintain myths about our society. Myths about meritocracy, “making a difference” , and other pretentious stuff.

      So true. If you admit that the down-and-out may not “deserve” what they’ve received, nor the super-wealthy, then you also have to question whether YOU’ve earned what you have either. The psyche rebels…I am a good person and have worked hard for what I have, is a common constituent of most people’s sense of themselves, especially those residing in the middle class. Take that away and what am I?

      No, no; that way lies madness. Easier and more comfortable to assume that people have gotten what they’ve gotten because of differences in ability/ambition/work-ethic and/or bad luck. Then you can give a few of your (unearned?) dollars to Save the Children and feel like you’re really doing something good, really making the world a better place.

      The facts are that our current economic system REQUIRES a certain level of unemployment. It isn’t even possible to help poor people, as a group, to better their position in the private economy because the private economy LITERALLY has no place for them. The best we could hope for is to have high turn-over in the unemployed/working-poor population, with lots of people experiencing short bouts of being poor. That would also mean, essentially, helping an unemployed person figure out how to take a job from a currently-employed person. Not exactly a way to deal with unemployment, but it’s the best our PTB can come up with, apparently.

      And imagine how much worse unemployment would be if we rationalized our drug laws. Millions more looking jobs–former cons and guards–and who would hire them? We need some new solutions, obviously. I suggest a Job Guarantee Program, run by municipalities and funded by the Feds.

    2. RanDomino

      Creating those long-term real solutions is not going to be done by the government, business sector, or NGO-industrial complex. So that makes it our job.

    3. Dan Kervick

      Good points. At some point the early and mid-20th century left’s drive toward social progress, social solidarity and social justice were swamped by the “safety net” mentality. Instead of aiming for ideals of a society in which everyone participates politically and economically, and everyone is rewarded more or less equally, they readjusted their vision in favor of a society in which progressive reformers agreed to leave the fundamental meat-grinders of capitalism alone, in exchange for charity programs to cushion the blow for the losers when they fall.

      The problem is that this approach allows the capitalist code of ruthless competition, deceit, exploitation, domination, commercial manipulation and avarice to remain in place as socially normative, so that now even the oppressed, the used and the losers have internalized it.

    1. susan the other

      Crapitalism indeed. I think it was Richard Smith or somebody maybe a week ago who suggested we go on a war time economy until we can fix the whole mess. For sure the free marketeers aren’t going to be able to achieve any remedies at all. We, as a world, are lucky because the globalists have not succeeded in killing off nations. Yesterday the National Front (Marine LePen) won most of the local elections in France. That prolly won’t advance TAFTA anytime soon.
      All we have to do is put our national governments to good use. If our economy were decentralized and all sorts of industries now monopolized for global profits were busted, things could be regulated in a sane and responsible manner over the next decade or so.

      1. allcoppedout

        FN did make some local gains, but polled 7%. If they won most local elections on that ballot percentage, the GOP would already have hired the FN spin doctors for the next round in the US!

        1. Massinissa

          Just what the republicans need: More immigrant baiting and bashing!

          I agree with FN on multiple things, but not when it comes to their naked ethnocentrism and islamophobia.

      1. diptherio

        21 years too late:

        crapitalism (uncountable)

        (pejorative) Corrupt or inauthentic capitalism; capitalism viewed as an inherently flawed or unjust system.
        1983, Walli F. Leff & Marilyn G. Haft, Time Without Work: People Who Are Not Working Tell Their Stories, How They Feel, What They Do, How They Survive, South End Press (1983), ISBN 0896081850, page 346:

        All you have to do is look around and see that the solution is here; there are better ways to handle the resources of the globe, there are better ways to do things than “crapitalism.”

        1. allcoppedout

          Not sure we have ever had the capitalism to go crap. Back in the thrusting old days when we put kids up chimneys and down mines there were restrictive practices. These days, thrusting free-market businesses ‘maintain competitive advantage’. There’s a lot of thrusting and I tend to the view this is how most people get stiffed.

  12. ursel doran

    Excellent work as usual, Yves.
    Is the share buy back more egregious than noted here? IBM for instance was famous for borrowing to buy back stock, and especially when management was exercising options to make sure the sales did not drive the price down,
    Any easy data available on this for the market as a whole or is it buried in the general market leverage data, which is now exceeding all old highs?

  13. allcoppedout

    Origins are notoriously difficult. LBOs look like a kick-off point. We had the Slater-Walker asset strippers long before and joint stock ventures for piracy and slaving. I think we underestimate the banality of evil finance amongst the transactors and the depravity they cause elsewhere. We are heretics, not heterodox. Part of our indoctrination is that all argument must be “intellectual” and the licensing of brainwork.

  14. MyLessThanPrimeBeef

    I don’t think wealth inequality is something we add up all the negative consequences and weigh it against the sum of all the positive consequence and decide whether we are for or against.

    Maybe the calculation turns out in our favor or maybe not.

    We are against wealth inequality because we can’t imagine a happy world with that sword hanging over our heads.

  15. Christer Kamb

    Chart no 3 is a little bit confusing to me. We know that stock buy backs indeed has increased dramatically. And also normally financed by internal capital, not by debt. Investments though are financed both with internal and external capital due to normal risk-distribution. BUT when interest-rates starts to drop significantly from 2001 I am sure corporations starts to finance investment more by credit, not by internal cash/profits/equity!
    You could say corporations have been, and still are, swaping equity for debt(even without stock buy backs).

    To sum up. Chart 3 is somewhat misleading imho!

    1. Yves Smith Post author

      There is no reason to finance by debt if you have enough in the way of retained earnings. Did you miss that profit share of GDP is at record levels, depending on how you measure it, between 11 and 12%, when Buffett once said 6% was the highest sustainable level?

      And you seem to miss that large companies have been borrowing massively since the crisis, yet NOT investing in their operations. You can look at any analysis of the share of GDP growth that is investment. It’s been low since the crisis. And analysts similarly have been arguing that growth can take off once companies use their cash hordes to invest. But as we discussed in the post, their incentives aren’t to do that. They perceive it to be too hard to increase EPS the old-fashioned way.

      1. Christer Kamb

        I totally agree with you about rising profits and falling investments(fixed organic production-factors). Also bout the corporate growing debts and cash-balances and how EPS is the most important factor in management-strategies(stockholder-value). But as I sai before, chart 3 regarding investments in relation to (net) cash flows “can be” missleading(a priori). Why?

        1. Corp. profits have been growing massively since WTO(China Most Favoured Nation) 2001 due to labor-arbitrage and outsourcing of productions-factors abroad. In theory investments could be nominally unchanged but falling in relation to unnaturally high profits since 2002.

        2. Fixed investments like domestic factory-plants and other company-related RE have been falling partly because of (1) above. But instead, software(and apps) and other “immaterial” assets have been growing(exept during crises 2008-2010). Still total investments have been stagnating since the early 80´s.

        3. When investments have been financed by 100% debt instead of equity(retained earnings), net cash-flow is not affected(exept from interest-payments(small) and amortizations(small)).

        We all know from history- experiance that there is a positive correlation between domestic investments and real-wage growth. Neolib/Neocon lobbying have undermined this reality in favour of Big Corp incl unregulating the bank-sectors while multinationals have been imitating the bankers doing arbitrage. “Comparative advantage(Ricardo)” have gone global and is soon biting the US´tail(Africa not yet ready). While debts risking the US dollar reserv-status long-term. This developments are partly because of long-term(exponential) US-inflation(until 1985) and the following diminishing returns. Consumtion has reached the end of the line(70% of GNP).

  16. Katie B.

    This post comes so close to making an important point, but falls short of actually spelling it out. That point is that this behavior is all for the sake of nonstop growth. To anyone who is familiar with the natural sciences, it is obvious that growth has limits. And it’s no wonder that, when facing resource and ecological limits (and limits on debt), companies have to resort to other tricks to show continued growth in their numbers. I generally like a lot of the information that is presented on this site, but I’ve been getting very frustrated with the reluctance to connect the dots in terms of our quest for infinite growth. Growth for the sake of growth is an insane goal, and one that is absolutely unsustainable. Can we please start acknowledging this?

    1. Yves Smith Post author

      No, your comment is off topic. This chart is about how companies manipulate their stocks rather than invest in their businesses. That investment can take the form of conservation, which for companies that have done it, has proven to increase profits. But managers find that annoying and unsexy and won’t do it unless top management or government pushes them.

      1. Vatch

        Katie’s point may be tangential to the textual body of this article, but she’s exactly on-target regarding the title of the article: “These Charts Show What is Wrong With American Capitalism”. The impossible quest for growth on a finite planet is what is wrong with American capitalism, Chinese capitalism, European capitalism, Japanese capitalism, or any capitalism. Never ending growth is impossible, and it is destructive to attempt it.

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