Class warfare through stock markets

Income re-distribution is always in the eye of the beholder, but never seen as such by those for whom more is never enough. The insatiable greed of financiers has reached the point where large corporations are now spending almost all profits on stock buybacks and dividends. And, despite that largesse, those companies are sitting on trillions of dollars in cash.

All this at the same time that wages are stagnant and living expenses are rising. These developments, of course, are not independent of one another.

Stock buybacks and dividends are one form of ongoing class warfare, in which income flows upward. The corporations comprising the Standard & Poor’s 500 Index alone spent US$914 billion on buybacks and dividends in 2014, and they are on course to spend more than $1 trillion in 2015. That $1 trillion will be nearly equal to all of the operating earnings produced by S&P 500 companies.

New York Stock Exchange (photo by Elisa Rolle)

New York Stock Exchange (photo by Elisa Rolle)

Stock buybacks are also becoming more common in Europe. European firms bought back more than US$2 trillion in stock from 2009 and 2014, according to Reuters, and European firms are sitting on $1.5 trillion (€1.37 trillion) in cash.

As aggregate profits have increased, so have the payouts to financiers. Bloomberg reports that payouts by U.S. companies are outpacing income:

“Excluding the recession years 2001 and 2008, dividends and stock buybacks have represented, on average, 85 percent of corporate earnings since 1998. … Stock repurchases worth almost $2 trillion have helped buoy the bull market since March 2009. … Even as sales were stuck at an average growth rate of 2.6 percent a quarter in the past two years, per-share earnings expanded more than twice as fast, 6.1 percent, data compiled by Bloomberg show.”

Starving investment for short-term gains

To pay for that acceleration of money flowing to financiers, spending on investment is declining, The Wall Street Journal notes. In an analysis of these trends, the Journal reports:

“[C]ompanies in the S&P 500 index sharply increased their spending on dividends and buybacks to a median 36% of operating cash flow in 2013, from 18% in 2003. Over that same decade, those companies cut spending on plants and equipment to 29% of operating cash flow, from 33% in 2003. At S&P 500 companies targeted by activists, the spending cuts were more dramatic. Targeted companies reduced capital expenditures in the five years after activists bought their shares to 29% of operating cash flow, from 42% the year before.”

Let’s unpack that paragraph. What the Journal is reporting is that Wall Street is applying pressure to corporate managements to hand over income to it, and those corporations who are particularly targeted are even more compliant than the average. The “activists” who are referenced aren’t activists in any customary sense. In ordinary language, an activist is someone who advocates and organizes for social advancement. But in the looking-glass language of the corporate world, an “activist” is a shareholder who has bought stock in a company for the purpose of demanding the maximum possible short-term profit, regardless of cost to others or even to the company itself.

Wall Street, and the financial industry in general, is both a whip and a parasite in relation to productive capital (producers and merchants of tangible goods and services). The financial industry is a “whip” because its institutions (stock, bond and currency-exchange markets and the firms that trade those and other instruments on those markets) bid up or drive down prices, and do so strictly according to their own interests. The financial industry is also a “parasite” because its ownership of stocks, bonds and other instruments entitles it to skim off massive amounts of money as its share of the profits. People in the financial industry don’t make tangible products; they trade, buy and sell stocks, bonds, derivatives and other securities, continually inventing new instruments to profit off virtually every aspect of commercial activity.

“Shareholder activists” are ultra-rich speculators who are particularly aggressive in demanding that profits be handed over to them. Financiers and industrialists fight over the money that workers produce — profits ultimately derive from the capitalist paying the employee much less than the value of what the employee produces — but they agree they should have all of it.

So although you and your co-workers make the pie, you don’t get anything more than crumbs. And there are a lot of pies out there.

Piles of cash, here, there and everywhere

Not all of those pies are siphoned into financiers’ bottomless pockets. The St. Louis branch of the Federal Reserve estimates that, in 2011, U.S. corporations were sitting on almost $5 trillion of cash, a hoard that had been increasing by 10 percent a year. No more recent estimates exist, but it is likely that total has increased. And much of that hoard is kept out of reach — as of early 2015, an estimated $2.1 trillion in cash was being held overseas by U.S. corporations.

That money is kept overseas for one reason, to avoid paying taxes. U.S. elites are encouraged to do this because U.S. tax law allows profits and income to be shifted offshore, where they remain untaxed. Profits booked in other countries are instead subject to the local tax rate, even if zero. Such financial engineering is simply another manifestation of “capitalist innovation.”

Sometimes it is suggested that a “tax holiday” be granted. That is, let multi-national corporations bring their money home tax-free and that hoard will be magically put to work. But such has not been in the case in the past. An analysis by research firm Capital Economics of a 2004 tax holiday found that 95 percent of the cash brought back home went to stock buybacks and dividends. Nor were any jobs created. An NBC News report said:

“A Democratic congressional report indicated that the biggest companies receiving the benefits of $360 billion in repatriated funds actually cut a net 20,000 jobs, and that the holiday cost Treasury coffers $3.3 billion. ‘This is supported by the results of a 2009 study by the (National Bureau of Economic Research), which found that every $1 that was repatriated during the tax holiday resulted in an increase of almost $1 in shareholder payouts,’ the Capital note said. ‘Around $0.80 went towards share buybacks and $0.15 to dividend payments.’ ”

Total after-tax profits of U.S. corporations, as compiled by the St. Louis Federal Reserve, totaled $7.3 trillion in 2014 — the highest ever recorded. Adjusted for inflation, that is nearly triple the aggregate profits of 2001.

So when we are continually told we must cut back because there is no money, it isn’t true.

Big raises if money were directed to employees

Let’s take Wal-Mart as an example. Wal-Mart has averaged $16 billion in annual profits during the past five years, helping make the Waltons the richest family in the world while Wal-Mart workers are forced to rely on food stamps, other social-welfare programs and charity. The Walton family owns about 50 percent of Wal-Mart’s stock, and thus haul in billions of dollars a year just from dividends. Additional billions are spent on stock buybacks, which benefits stockholders (especially the Walton family) because the profits are spread among fewer people.

What if, instead, those billions of dollars were directed to Wal-Mart employees so that they could at least be closer to a living wage? The public policy organization Demos makes this suggestion:

“We find that if Walmart redirected the $7.6 billion it spends annually on repurchases of its own company stock, these funds could be used to give Walmart’s low-paid workers a raise of $5.83 an hour, more than enough to ensure that all Walmart workers are paid a wage equivalent to at least $25,000 a year for full-time work. Curtailing share buybacks would not harm the company’s retail competitiveness or raise prices for consumers.”

Ah, but “competitiveness” is not the issue; rather it is shoveling as much money as possible into the pockets of the Walton family, other major shareholders and the top executives. Money that is extracted from Wal-Mart’s employees through low wages and benefits, augmented by the massive public subsidies the company extracts.

Earlier this year, General Motors announced it would spend $5 billion on stock buybacks, in an attempt to boost its stock price. PBS NewsHour summarized that development this way:

“To make those purchases, GM is reducing its cash reserves from $25 billion to $20 billion. (Recall that you, the taxpayer, helped prop up GM’s cash reserves with a $49.5 billion bailout in 2009.) The stock buyback, combined with higher dividends, is expected to result in $10 billion for shareholders through 2016. It’s a grand time to be holding GM stock. And a bad time to have been behind the wheel of one of the thousands of defective vehicles for which GM is currently under investigation by the Department of Justice.”

And what of the cost of those defective vehicles to General Motors? The company set aside $400 million — less than one-tenth of what it is spending to buy back stock — as compensation for serious injuries or deaths resulting from recalled automobiles. Not all that money will necessarily be paid; Kenneth Feinberg, the administration of the compensation fund, has ruled three-quarters of claimants ineligible.

These trends go hand in hand with the sharply increasing inequality that has seen incomes at the top skyrocket while most people’s wages stagnate or decline.

This is what plutocracy looks like: The vast majority work hard so that a minuscule layer at the top of the pyramid can earn fabulous wealth, more than they can spend or invest. This also fuels speculation because there aren’t enough investment opportunities for the massive amounts of wealth accumulated, so excess money goes into speculation instead. Stock buybacks are one more method for funneling money to speculators — profits are divided among fewer people and those who do sell their shares are paid a premium above the trading price.

In an economic democracy, the people who do the work would be the ones who earn the rewards. Our current economic plutocracy is far removed from that ideal.

Sure billionaires deserve their money: Killing jobs is hard work

More is never enough. A few examples of the wrath of speculators illustrate the “whip” of finance capital as the world’s corporations announced their results in recent weeks.

Among the words that do not go together are “shareholder activist.” Whether a sign of the debasement of language, or that the corporate media’s myopia has degenerated to the point where speculators trying to extract every possible dollar out of a corporation is what constitutes “activism” to them, as if this was some sort of selfless activity, these are the words often used to describe wolf packs that grow ever hungrier. Not even one of the world’s biggest corporations, E.I. du Pont de Nemours & Company, is immune.

DuPont, a chemical multi-national that produces many products that dominate their market, has racked up about US$17.8 billion in profits over the past five years, including $3.6 billion in 2014. Its stock price increased by 20 percent last year, better than the benchmark S&P 500 Index. DuPont recently sold off its performance chemicals business, and will hand out $4 billion to shareholders from the proceeds of the sale. Surely enough you say? Nope.

A hedge-fund manager — yep, one those “shareholder activists” — has declared war on DuPont management. The hedge funder, Nelson Peltz, is demanding that DuPont be broken up into two companies, under the theory that more profit can be extracted, and he is demanding that four seats on the DuPont board be given to him. So far, at least, DuPont management is resisting the hedge funder, but did announce $1 billion in cuts in a bid to pacify Wall Street. That means that more employees will pay for heightened extraction of money with their jobs. Mr. Peltz’s hedge fund specializes in buying “undervalued stocks,” according to Bloomberg, which is code for corporate raiding. It must pay well, for he is worth $1.9 billion.

DuPont chemical plant on Houston Ship Channel (photo by Blair Pittman for the U.S. Environmental Protection Agency)

DuPont chemical plant on Houston Ship Channel (photo by Blair Pittman for the U.S. Environmental Protection Agency)

One company that has given into speculators by selling off its best asset is Yahoo Inc. Although widely attacked in the business press for having no coherent plan for growth, Yahoo did report net income of $1.3 billion on revenue of $4.7 billion for 2013, a hefty profit margin, and remained profitable in 2014. Nonetheless, Yahoo said it will spin off into a separate company its most valuable asset, its stake in the Chinese online merchant Alibaba. This is being done so that more of the profits can distributed to speculators.

If Yahoo were to simply sell its stake, it would have to pay taxes. By spinning off its holding into a separate company, there will be no taxes paid, and thus more money will be stuffed into financiers’ pockets. “The decision,” The New York Times reported, “cheered shareholders because they will directly reap all the remaining profit from Yahoo’s prescient investment.” Yahoo will also lose its most valuable asset, making the company weaker (and presumably more likely to get rid of some of its workforce), but speculators will make a windfall. That is all that matters in these calculations.

Even an Internet darling, Google Inc., is losing its Wall Street halo. Grumbling was heard when Google’s revenue for the fourth quarter of 2014 was “only” 10 percent higher than the fourth quarter of a year earlier, a slower rate of growth than in the past. For the full year 2014, Google reported net income of $14.4 billion on revenue of $66 billion. Based on these results, it looks as if Google will remain a going concern. Nonetheless, Google stock is down 12 percent since September, a sign of financiers’ displeasure.

But perhaps happier days are on their way. The Associated Press reports that a “pep talk” by the company’s chief financial officer “left open the possibility that the company might funnel some of its $64 billion in cash back to shareholders, especially if a law is passed to allow money stashed in overseas accounts to be brought to the U.S. at lower tax rates.”

Ah, yes, all would be well if only multi-national corporations did not have to pay taxes. But despite the ceaseless demands by the world’s financiers for more governmental austerity, more cuts to jobs, wages and benefits, more punishment, the world can afford a raise. An Al Jazeera report by David Cay Johnston concludes that U.S.-based corporations held almost $7.9 trillion of liquid assets worldwide. That is more than double the yearly budget of the U.S. government.

The results are those familiar to all who are paying attention: Rising inequality and persistent economic stagnation as working people can no longer spend what they don’t have. Almost all of the gains in income are going to the top: From 2009 to 2012, 95 percent of all gains in income went to the top one percent. The “efficiency” that financiers demand is that ever larger cascades of money flow upward. How long will we allow this to go on?

The Federal Reserve inflates another bubble, but not for you

If you haven’t experienced the “recovery” from the Great Recession the corporate media keeps insisting is here, that’s because “quantitative easing” is a new way to say “trickle-down.” In this latest version, the Federal Reserve has pumped trillions of dollars into financial markets to create a stock market bubble.

Panic at the New York Stock Exchange (image via U.S. Library of Congress)

Panic at the New York Stock Exchange (image via U.S. Library of Congress)

Other than a small secondary effect of re-animating real estate prices, a growing bubble in stock prices has constituted the extent of the economic impact. Good for the one percent, not so good for the rest of us.

“Quantitative easing” is the technical name for a Federal Reserve program in which it buys U.S. government debt and mortgage-backed securities in massive amounts. In conjunction with keeping interest rates near zero, quantitative easing is supposedly intended to stimulate the economy by encouraging investment. A reduction in long-term interests rates would encourage working people to buy or refinance homes; for businesses to invest because they could borrow cheaply; and push down the value of the dollar, thereby boosting exports by making U.S.-made products more competitive.

In real life, however, the effect has been an upward distribution of money and an increase in speculation. This new form of trickle-down has not worked any differently than it did during the Reagan administration. Now that the Federal Reserve will gradually reduce the amount of bonds it purchases (announced last month) and perhaps end the program by the end of 2014, Wall Street and corporate executives worry that their latest party might be over.

What hasn’t changed, and won’t anytime soon, is the weakness of the global economy, particularly for the world’s advanced capitalist countries. If you aren’t making enough money to get by, you aren’t planning a shopping spree. If working people, collectively, continue to see wages erode, happy days are not at hand. They aren’t.

The top one percent has captured almost all of the “recovery,” which is why the corporate media continues to peddle its mantra. Emmanuel Saez, an economist at the University of California, calculates that 95 percent of all U.S. income gains from 2009 to 2012 went to the top one percent. That result is an intensification of a pattern — Professor Saez calculates that 68 percent of all income gains for the longer period of 1993 to 2012 went to the top one percent.

Fueling a speculative binge

How is this connected to quantitative easing? The money borrowed by corporations has not gone toward investment or hiring new workers, but rather into buying back stock and speculation. Financiers and executives riding the crest of this wave of cheap money in turn use their gains to further speculate, or to buy expensive works of art, itself speculation that the wildly rising prices for collectible works will continue.

U.S. corporations bought back about $750 billion of their stock in 2013. When a corporation buys back its stock, it is spreading its profits among fewer stockholders, thereby boosting its stock price. That’s more profits for financiers and bigger bonuses for executives, achieved without investing in the enterprise.

The billionaire Stanley Druckenmiller in a television interview called the Federal Reserve’s quantitative easing program:

“[T]he biggest redistribution of wealth from the middle class and the poor to the rich ever. … I mean, maybe this trickle-down monetary policy that gives money to billionaires and hopefully we go spend it is going to work. But it hasn’t worked for five years.”

Mr. Druckenmiller said this on CNBC, a cable-television business news station whose anchors openly cheer news of rising corporate profits and celebrate wealth accumulation. The “five years” he mentioned is a reference to the three successive programs of quantitative easing that began in the final weeks of the Bush II/Cheney administration. In a separate report, CNBC journalist Robert Frank writes that it has become “increasingly clear” that the wealthiest one percent are the big winners:

“The largesse of the Federal Reserve over the past five years has amounted to one of the largest ever subsidies to the American wealthy — fueling record fortunes, record numbers of new millionaires and billionaires, and an unprecedented shopping spree for everything from Ferraris to Francis Bacon paintings. The prices of the assets owned by the wealthy, and the things they buy, have gone parabolic, bearing little relationship to the weak, broader economy. …

Fed policy has fueled a surge in the value of financial assets. Since the wealthiest 5 percent of Americans own 60 percent of financial assets, and the top 10 percent own 80 percent of the stocks, those gains in financial assets have gone disproportionately to a small group at the top.”

Stock prices reaching unsustainable levels

More speculative money is poured into stock markets because the heavy Federal Reserve buying of bonds dampens demand in that sector. Ted Levin, writing for the business publication SmallCap Network, summarizes this effect:

“[Q]uantitative easing involves buying long-term bonds, which in turn drives down the interest rates on these. The reason for this is that when there is a strong demand for bonds — which is exactly what quantitative easing artificially creates — bond issuers do not have to offer such high interest rates in order to attract investors. This in turn means that bonds are less attractive to non-governmental investors, and so they turn to stocks instead — driving up the price.

The second reason is that quantitative easing makes more capital available to businesses at lower rates. This allows them to swap high-cost debt for low-cost debt and buy back stock — improving their earnings per share and driving up the value of the remaining stock.”

The most basic measure of a stock, or the stock markets as a whole, is the “price/earnings ratio.” The P/E ratio is a company’s yearly profit divided by the price of one share. As of January 14, the P/E ratio for the S&P 500, the standard barometer, was at about 19.5 and has been rising steadily the past couple of years. A handful of times in history, the P/E ratio has risen above 20, only to crash each time. The historical average is 14.5 — meaning that stocks are currently overvalued.

Stock prices have become unmoored from underlying economic conditions — and are frequently pure speculation. Most trading is done through computer programs, often with a stock bought and sold in fractions of a second to take advantage of quick pricing changes, and increasingly exotic derivatives to draw in ever more speculative money by the wealthy who are awash in far more money that can possibly invest rationally.

Wall Street’s party will wind down as slowly and gently as the Federal Reserve can manage, and it may yet reverse itself and continue its quantitative-easing program. As of the end of December 2013, the Fed has spent a total of $3.7 trillion over five years on quantitative easing and the Bank of England has committed £375 billion to its quantitative easing.

How much could these enormous sums of money have benefited working people had this money instead been used to create jobs directly or for productive social investment? And these barrels of money thrown to financiers are merely the latest tranches — the U.S., E.U., Japan and China committed 16.3 trillion dollars in 2008 and 2009 alone on bailouts of the financiers who brought down the global economy and, to a far smaller extent, for economic stimulus. For the rest of us, it’s been austerity and mounting inequality.

Going beyond the obvious question of why such absurdly one-sided policies should be tolerated, it also necessary to ask: Why do we continue to believe an economic system that requires such massive subsidies “works”?

Social security cuts: Work until you drop

A social movement to preserve Social Security has never been as urgent as it is today. Tempting as it might be to send a dictionary to the White House explaining the difference between “compromise” and “capitulation,” we should not be overly generous — Barack Obama’s intention to gut Social Security is not so much a pre-emptive capitulation as it is yet another demonstration of his adherence to neoliberal ideology.

By now, such a demonstration should not be necessary. Remember that one of the president’s first appointments was Lawrence Summers, who once wrote a memo while chief economist at the World Bank advocating industries creating toxic waste be transferred to Africa because the continent is “vastly UNDER-polluted” (emphasis in original). Professor Summers’ appointment in 2008 as President Obama’s leading economic adviser after his career of promoting Reaganite, neoliberal policies, including leading the Clinton administration’s deregulation of banking and scrapping of regulations for derivative contracts, set the tone for what was to come.

Let us not fall out of our chairs — neoliberal austerity is a bipartisan policy. Voters alternate between their dominant parties in North America, Europe and the Asia-Pacific region, yet the train stays in motion. Fans of the movie Avatar likely remember an early scene in which Sigourney Weaver’s character mocks the macho, militaristic approach of the Marines who intend to unilaterally take the mineral “unobtainium” from the Pandora natives by bulldozing their homes and forest. Her intention was to negotiate with the natives and have them agree to give up their homes and forest.

Note that there was no difference in the goal of the Marines, exemplar of the conservative approach, and that of the would-be negotiator, representative of the supposedly more enlightened approach. I remember thinking to myself while watching Avatar that Ms. Weaver’s character represented the Democratic Party wing of neoliberalism. Indeed, Democrats and their “left-of-center” counterparts among the world’s advanced capitalist countries — even parties in Europe that call themselves “socialist” — routinely implement ever more harsh policies that punish working people to further enrich the wealthy.

So we have something here bigger than Barack Obama and whatever character flaws he might be perceived as possessing. Republicans want to privatize Social Security — the ultimate dream of Wall Street and good for industrialists, too, as retirements become a quaint relic of the past. More people are forced to remain in the job market longer; more competition for jobs means lower wages and more profits. President Obama simply wants to phase this in more slowly.

Photo by A. Blackman, England

Photo by A. Blackman, England

Specifically, President Obama is unilaterally offering Republicans the first step in the gutting of Social Security — reducing benefits. His method to do this is to change the formula for calculating cost-of-living increases from the standard Consumer Price Index to a different methodology known as the “Chained Consumer Price Index,” under which the rate of inflation is lower.

In the standard CPI, the basket of goods used to calculate inflation does not change. In the “Chained CPI,” items that rise in price are substituted with a cheaper product under the theory that consumers will switch to lower-priced alternatives. That may sometimes be so, but such actions do not alter the fact that the desired product is more expensive and thus represents the true extent of inflation. Nor does it account for the fact that many high-cost expenses, such as rent and electricity, don’t have readily available alternatives.

If they want inflation to be less, they shall make it so

This substitution of the standard CPI for the “Chained CPI” is a long-standing demand of Right-wing ideologues, and President Obama has offered it to them on a silver platter. The New York Times, the first to report of the proposed Social Security cuts (and which, uncharacteristically, called the cuts cuts instead of using a euphemism), anonymously quoted Obama administration officials who intimated that this was part of an elaborate plan to force Republicans in Congress to agree to modest tax increases. The Times quoted an official as claiming:

“That means … that the things like [Chained] C.P.I. that Republican leaders have pushed hard for will only be accepted if Congressional Republicans are willing to do more on revenues.”

But the president’s offer contains far more cuts for working people and retirees than attempts to make corporations and the wealth pay taxes at a slightly more reasonable level. The Times reported:

“He will propose more than $600 billion in new revenues — his last offer had called for $1.2 trillion in taxes — mostly by limiting to 28 percent the deductions that individuals in higher tax brackets can claim. Congress has ignored that idea in past years. Deficits would be reduced another $930 billion through 2023 as a result of spending cuts and other cost-saving changes to domestic programs. … Mr. Obama’s proposed spending reductions include about $400 billion from health programs and $200 billion from other areas, including farm subsidies, federal employee retirement programs, the Postal Service and the unemployment compensation system.”

That sounds like a whole lot of new austerity. Austerity hasn’t been working out so well in Europe, where, for instance, eurozone unemployment is at 12 percent and rising. That, sadly, is not the point. The ongoing economic crisis is an opportunity for corporate executives and financiers to push through what they’ve always wanted anyway. An oft-quoted summation of this thinking was offered several years ago by Stephen Moore of the far right Club for Growth and the Cato Institute: “Social Security is the soft underbelly of the welfare state. If you can jab your spear through that, you can undermine the whole welfare state.”

Both groups are dedicated to cutting taxes for corporations and putting an end to any social safety net. The Club for Growth founder is connected to groups like the Heritage Foundation and to Tea Party impresario Dick Armey, while the Cato Institute recently experienced a power struggle in which the billionaire Koch brothers, David and Charles, ousted the leadership for being insufficiently severe. Cato sent six alumni to the Bush II/Cheney administration, four of whom served on the latter’s Orwellian named “Commission to Strengthen Social Security.”

A better slogan than ‘work until you drop’

Because “work until you drop” is not an effective slogan to rally people to your side, Wall Street financiers and those opposed to social safety nets float scare stories that Social Security will soon run out of money, and you’d do better putting all your money in the stock market. Neither is true. Let’s start with the second of these two mythologies. In 2005, I researched the historical performance of the U.S. stock market for an article published in Z Magazine and found that the gains are small, when adjusted for inflation, and the gains only materialize when bubbles are near their peak.

As bubbles peak about once every 35 years, it is difficult to time these just right. When adjusted for inflation, the Dow Jones Industrial Average — the ultimate index of stock-market health and which has its components continually adjusted so as to replace low-performing stocks with high-performing ones — was below its 1929 peak as late as 1991. Here are some long-term results:

  • The Dow peaked at 995 in February 1965. Adjusted for inflation, that was 42 percent more than it was worth at its previous bubble peak in 1929, not so impressive when it took 36 years to get there.
  • The ensuring crash bottomed out in December 1974. At this point, the Dow, adjusted for inflation, was worth only half of what it was worth in 1929 and little more than one-third of its 1965 peak.
  • The most recent crash bottomed out in March 2009, at which point the Dow was three percent below its 1965 peak, adjusted for inflation.
  • Yesterday’s Dow closing of 14,673, when adjusted for inflation, is almost precisely double that of its 1965 peak, but a 100 percent gain over 48 years isn’t terribly dazzling.

And with the price/earnings, or P/E, ratio, of the S&P 500 Index now at 18.35, stocks are again over-valued when measured historically. The ratio’s average, calculated back to 1872, is 14. Five times in history this ratio, which is a company’s yearly profit divided by one share, has surpassed 20; each time was followed by a crash.

The biggest canard, however, is how financial chicken littles frame their case. The claim that Social Security will run out of money in perhaps three decades is based on predicting a low rate of future stock-market gains while the claim that privatizing Social Security will produce more money is based on predicting a rate of future stock-market gains double that of the former rate.

There are examples of privatizing social security systems, and the results have been a bonanza for financiers and disastrous for retirees. In Chile, where the privatization was done at the end of a gun barrel during the Pinochet dictatorship, a worker who retired in 2005 received less than half of what he or she would have received had he or she been able to stay in the old system. The six companies that administer the private plans, not coincidentally, constitute one of Chile’s most profitable industries.

It took tens of thousands of deaths, and hundreds of thousands of arrests, torture sessions, “disappearances” and exiles to implement Milton Friedman’s Chicago School shock therapy in Chile. Nowadays, such levels of violence are not necessary as elected governments implement neoliberalism in a series of measured doses, and four decades of incessant propaganda has acculturated the peoples of the world to the ahistorical idea that “there is no alternative.” Violence nonetheless remains the system’s handmaiden, as the coordinated crushing of the Occupy Wall Street movement and the tolerated rise of fascist groups like Golden Dawn in Greece demonstrate.

There is an alternative — ceasing to placing your hopes in parties that disagree only over the best method to implement neoliberalism, whether the one’s candidate sneers at “government-dependent” voters or the other’s candidate makes speeches vowing to tackle inequality while acting to make it worse. Change comes social movements, not from elections.

More for the one percent, less for the 99 percent

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.