By Pete Dolack
Although it may appear that manufacturers and financiers have different interests, they have a symbiotic relationship. There is a continual rivalry between them, but the push and pull of that rivalry shouldn’t be mistaken for a contradiction.
To be clear about what we are discussing here, capitalists broadly divide into two basic camps: industrialists (producers and distributors of tangible goods and services) and financiers (those whose business is financial transactions). A frequent “reading” of that divide is to imagine that bankers reign unchallenged at the top, subordinating even industrialists.
It is true that the two camps have different interests that sometimes conflict. But there is no neat division between the two; the two groups partially overlap and, ultimately, neither is independent from the other. Theirs is a relationship of mutual benefit and not a case of a “real” economy hijacked by a “fictitious” financial economy. Any rivalry between them, and any rivalry among specific capitalists, is quickly set aside when it comes to ensuring the functioning of the system that enriches both camps.
As an example, let’s examine three items that surfaced in the news during the past couple of weeks.
- Apple Inc. announced it would buy back shares of its stock and begin paying cash dividends.
- The United States Congress approved a bill that would exempt from existing oversight rules most companies preparing to issue initial public offerings.
- The Federal Reserve gave passing grades in its “stress tests” to almost all of the largest U.S. financial institutions, giving them green lights to hand out huge payouts to insiders.
Apple apparently reacted to mounting grumbling from within the financial industry that it is sitting on too much cash. The New York Times, on March 20, reported that Apple possesses nearly US$100 billion in cash and that, even after handing some of it to shareholders, its hoard of cash is expected to grow. Apple certainly earns a big profit: it reported net income of $26 billion on sales of $108 billion for its 2011 fiscal year, and also reported that its cash on hand had increased more than fourfold in the past five years.
In response to what is genteelly called “market pressure,” Apple will spend $45 billion during the next three years to buy back stock and to pay out dividends to shareholders. A stock buyback is when a company offers to buy stock from its shareholders at a premium to the trading price, giving a profit to those who accept the offer and leaving fewer shareholders to share in the profits for those who hold on to the stock. A stock buyback is another way to distribute profits.
The sharp-eyed reader may have noticed that none of the cash is going to, say, employees at the sweatshops who churn out Apple’s products for pennies. I touched on that issue in my Feb. 29 post on the exploitation of Chinese labor by non-Chinese multinational corporations. Chinese laborers earn, on average, about five percent of U.S. wages and endure work days of 12 or more hours six and seven days a week. A recent commentary in The Guardian noted that employees at Foxconn, Apple’s best-known sweatshop, work up to 16 hours a day while being forbidden to talk, with only a few minutes for toilet breaks. The factory came to the world’s attention after a rash of suicides by employees, so grim were the conditions.
We of course are bombarded with messages extolling the genius of the recently deceased Steven Jobs, the Apple founder who is said to have single-handedly created a desirable line of gadgets. (This post is being written on one of them.) Jobs was something of a visionary, but he had a staff of engineers to help him bring those products to tangible form, and an army of sweatshop workers to manufacture them.
Could Jobs have designed, built prototypes and assembled the finished products all by himself? I think not. It was the employees of Apple and Apple’s contractors who did those things. Why shouldn’t they get some of the rewards? Yet in the capitalist system, such a thought is beyond the pale. Profits — and all the money that originates in profits that is siphoned off by financiers — are created by paying employees much less than the value of what they produce. An infinitesimal portion, for those Foxconn sweatshop workers.
The more intense the exploitation, the bigger the profits. (I will take up this concept in more detailed fashion in future posts.) Industrialists and financiers argue over which gets the bigger piece of the pie, but they agree they should have the pie to themselves.
Dividends, of a somewhat different form, are part of the story of the second example, that of the congressional bill eliminating consumer protections in initial public offerings. In one of those wonderful Orwellian touches the U.S. Congress, in particular Republicans, are so capable of, the bill was given a title that would give it the acronym “JOBS Act.”
It would seem that the “JOBS Act” primarily will promote jobs at stock-market boiler rooms that peddle dubious stocks, unless we count the retirees who will have to go back to work when the next wave of scandals crests. The act will exempt “emerging growth” companies (that’s a euphemism for “smallish”) from financial-disclosure and corporate-governance rules for five years after an initial public offering (the conversion from a privately owned company to one that has stock traded on a stock market).
Regulations put in place after the corporate scandals of the past decade, such as the auditing requirements of the Sarbanes-Oxley Act, will not apply to “emerging growth” companies. Congress, however, has an expansive view of what falls into this category: companies with annual sales of up to $1 billion, vastly bigger than the growing small businesses the act’s supports claim to be helping.
The bubbles of the past two decades, the precursors to the current economic malaise, were inflated partly due to the lack of financial controls and oversight. So the solution put forth by capitalists, via their loyal congressional members, is to encourage a new bubble through reducing regulation. Less regulation means more short-term profits. That inflating asset bubbles is mistaken for a functioning economy speaks volumes.
And that brings us to the third of the three examples, that of the Federal Reserve allowing major financial institutions to resume business as usual. The “stress tests” administered to the 19 largest U.S. financial corporations — promoted as an examination to determine if the banks have enough reserves to withstand another economic downturn — are a public relations exercise designed to “assure” the public that the crisis is safely in the past and all is now well. Almost all passed.
We can breath a sigh of relief because those banks that passed can now shower their insiders with gigantic piles of money. The banks are now free to, here we are again, buy back stock and pay out bigger dividends. In an odd touch, JP Morgan Chase & Co. said two days before the Federal Reserve’s announcement granting permission that it would spend US$15 billion to buy back stock and raise its dividend payments sixfold. The New York Times reported that the $12 billion dedicated to the stock buybacks in 2012 alone would consume roughly two-thirds of the year’s expected earnings. JP Morgan was far from alone; almost every other big bank immediately said it would buy back stock, increase dividends or do both.
These are the same banks that were bailed out three years ago and continue to receive money from the Federal Reserve nearly interest-free. Many have operations in the European Union, where the European Central Bank is loaning money to banks at one percent interest, so that those banks can then buy the bonds that E.U. national governments are issuing at four, five or six percent interest.
Let’s summarize this process in two paragraphs: Governments borrow money from the rich and from corporations instead of taxing them, then have to pay higher interest rates on those borrowings because the rich and the corporations complain that too much is being borrowed. To ameliorate the demand for higher interest rates, the governments’ central banks are lending money nearly interest-free to the financial institutions and corporations so that they will continue to buy the governments’ loans at the higher interest rates. In exchange for continuing to buy government debt (which will earn them a nice profit because they are using the cheap money to buy the debt), the financial institutions demand that the governments cut social services, lay off workers, sell assets and impose other austerity measures.
As a result of the austerity, governments take in less revenue, so they have to borrow more from the rich and corporations, who have hoarded the country’s wealth, at the same time the governments’ central banks are giving financial institutions more cheap money and giving them the green light to hand out more money to insiders, leaving them more vulnerable to the next economic downturn, when, because they are “too big to fail,” they are confident they will receive another bailout.
Industrialists extract profits from their employees, with some of those profits going to financial institutions, in the form of interest on loans, as payouts to stockholders and as fees for services, and some of it goes there for purposes of speculation. Financiers can do nothing without pools of money, which are created in production. Financial speculators demand ever more profits and the top executives who deliver them can give themselves ever more stratospheric pay checks and bonuses. Mutual greed requires more be extracted, even though the profits are vastly beyond any reasonable need for investment or personal consumption.
The less given to employees, the more those at the top have to play with. Until we say no.