How many horror flicks have you sat through where some problem started out small, but by the middle of the film grew to terrifying proportions?
A little business news story from the Associated Press was released this morning — a Saturday morning on a holiday weekend — letting us know that profit growth at America’s largest companies is just not going to be as big as expected. Guess what, there’s only so many quarters that a company let alone a group of companies can deliver 12-20% year-over-year increases in earnings. That’s only about three to five times the growth of our entire Gross Domestic Product. Now please keep in mind, nobody is talking about these huge companies losing money, nobody’s even talking about them making less money than last year. We are talking about the fact that they maybe only grow profits by 7-8% over last year. That’s a little less than twice GDP growth.
Now, how can these companies grow so much faster than the economy in general for so long? Accounting regulations have firmed up enough that we can — crossing our fingers of course — assume no Enronian fraud in the numbers. And these are not tiny startups that have relatively small, easily increased profits. These are huge corporations, 500 of the largest businesses and employers in the nation. The money certainly isn’t coming from overseas trade, since we yet again have a record trade deficit: more American money is being spent on foreign goods than foreign money is being spent on American goods. I believe CAFTA will not improve this situation.
But wait a minute, maybe the profits of these companies are bringing the GDP up. Maybe the high-lfying profits are the only thing keeping “Supertanker America” afloat. If that is the case, the rest of the economy really stinks.
Where is the money coming from and where is it going?
The short answer that it is coming from us and going to them.
We are spending the money that results in these companies having earnings, and frankly a lot of us are borrowing money to do so. There are signs this may be slowing down. In any event, it’s a dangerous game to keep running up debt in a nation where rules for getting out of debt are tightening and the number of debtors may be shrinking. (For the record, I think that Band of America buying MBNA is a bad idea and shouldn’t be allowed to go through. I also thought this about B of A buying FleetBoston, the Chase/J.P. Morgan deal, and the Citibank/Traveller’s deal. My opinion clearly carries no weight over at the Federal Trade Commission.) This is an even bigger deal if there is anything to yesterday’s news item that 15 states representing 35% of the American economy are vulnerable to a housing “correction.”
This wouldn’t be such a bad thing if the money these companies were earning went on to be paid to employees, or spent with other companies (that have employees) that in turn would stimulate the economy. However, if this were the case, the money in question would be an expense, not part of the profit. Accounting wonks will note that if money is spent on capital expenses — big ticket items like manufacturing equipment that helps a company make money in the future — has to be depreciated; only a portion of the expense can be claimed each year the equipment is in place. That still doesn’t account for the long term profit growth in question.
Since dividends — money a company pays to it’s shareholders — can only be paid from profits, it is reasonable to expect that some of this money will be paid out as dividends. Needless to say, this only benefits people who own shares of companies that pay dividends. Since on the whole, rich people own more stock than middle and lower class people, any dividends paid will mostly benefit rich people, who by the way are getting a tax break on the deal too.
And to top it all off, a lot of these companies are laying people off. Remember, it isn’t that these companies are losing money, it’s that they are not earning as much more money than last year as they thought. Companies that provide “good jobs with benefits” like Ford, GM, Lear HP, IBM and others. Even “new economy” Silicon Valley feels the crunch of businesses getting bigger, but few additional jobs being created.
So now you see why the economy looks great from Wall Street and kind of anemic from Main Street.
In closing, I don’t want to say much about the esteemed Ms. O’Connor’s resignation, but she has been a pretty decent Supreme Court Justice, and I would hate to see her replaced by someone like, oh, Pricilla Owen. I recommend reading and acting upon this list of suggestions from Daily Kos. As Ms. Marcotte at Pandagon points out, “Women are 50% of the population. People who know women are 100% of the population. Women’s rights are not a minority issue.” We need a Supreme Court nominee who will apply the Constitution, the Law, and his/her Conscience, in that order.