By John Lawrence
Classical economics divided income into two types: earned and unearned. Earned income came from productive labor combined with capital investment. Unearned income was considered parasitical and consisted of rent, interest and dividends.
It was not considered as adding to GDP but as subtracting from it. It was money made by manipulating money much as feudal landlords made their money in what has been called a rentier economy.
Today, most of the money earned by the 1% driving the income inequality gap is being made in the financialized, rentier economy but is now considered earned income.
New methods have been devised to make money not by productive labor and investment but by manipulating financial instruments. One such manipulation consists of stock buybacks.
Why would a company buy back its own stock, stock issued in the first place supposedly to give the company money it needed for productive investment to produce goods and services? The answer is very simple. When a corporation buys its own stock (often with borrowed money), the stock usually goes up at least temporarily. That gives the executives of the company and activist hedge funds time to cash in their stock grants, options and garden variety stocks and make a killing. The boost in stock value also impresses Wall Street which cares solely about the short-term financial indicators for a company and not at all about what the company did to achieve those indicators.
When a company uses its profits or even borrowed money to buy back its own stock, that’s money that is not being used for research and development or to expand production or to make a better product. The money that the executives and hedge funds make is strictly because of financial manipulation, but in a financialized economy it’s considered to be additive to GDP. The measurement of GDP is no longer linked wholly or even mainly to production, but now consists to a large extent of income that is made in the rentier economy.
Carl Icahn, a big investor in Apple, is always trying to get them to buy back their stock so he can cash in. The billionaire activist investor lobbied Apple to buy back billions worth of its shares to boost value to shareholders. In April 2014 Apple boosted its buyback plans by $30 billion and even split its stock for the first time in nine years. Satisfied? Never. Icahn’s taking another swing at getting Apple to buy back even more stock, saying the shares could double to more than $200 apiece.
Another way the parasites make money which makes the GDP figures look good is to not pay taxes. The tax code has been completely captured by the large corporations and their lobbyists who have shifted the burden away from corporations and onto the average working person – the 99%. Both Democrats and Republicans are complicit in this arrangement, one example of which is the tax giveaway they are getting ready to implement.
William Greider in an article entitled Democrats and Republicans Are Quietly Planning a Corporate Giveaway—to the Tune of $400 Billion writes the following:
The bad news is that key leaders of the Democratic Party—including the president—are getting on board with Republicans, despite some talk about confronting income inequality. Influential Democrats intend to negotiate with Republican counterparts on the size and terms of post-facto tax “forgiveness” for America’s globalized companies. This is real money they’re talking about—a giveaway of hundreds of billions
Why haven’t voters heard about this from candidates? Because Republicans and Democrats both know it would make angry voters even angrier.
The major multinationals complain about a tax problem that most citizens would love to have for themselves: Thanks to a loophole in the tax code, the companies do not have to pay US taxes on profits they have earned in foreign countries until they bring the money home to American shores. Altogether, the globalized US companies have accumulated $2.1 trillion in untaxed profits, most of it parked in overseas tax havens.
The multinationals are waiting for Congress to forgive them their debts.
Oh, but forgive the debts of the little guy? Never!! While corporations expect to have their debts forgiven, there is no such help for for the average American or average debtor nation like Argentina or Greece. For the rest of us the commandment is “Thou shalt PAY UP.” Wall Street has adamantly stuck to this first Principal of Finance which is sacrosanct, so sacrosanct in fact that bankruptcy rules for the average American are being tightened while at the same time they are being loosened for corporations.You think student loan debtors can go bankrupt? Guess again.
After all part of the vulture capitalist’s playbook is to buy a company with borrowed money, load it down with debt, strip its assets, raid its pension fund, then take it into bankruptcy in order to destroy its union. Having accomplished all that and by the way added to GDP while so doing, the company can then be taken out of bankruptcy, taken private and then taken public again in order to get another infusion of cash from an Initial Public Offering (IPO) which is immediately gobbled up by the hedge fund (another name for vulture capitalist) itself. All of these shenanigans make money off of money, do nothing for productive investment but do add to GDP.
Congress let these corporations have a “tax holiday” in 2004 on the hope and promise that these corporations would spend their largesse doing research, investing in America and creating jobs. What happened? The 15 companies that benefited the most from a 2004 tax break for the return of their overseas profits cut more than 20,000 net jobs and decreased the pace of their research spending.
One of the beneficiaries was Qualcomm, a major whiner for another tax holiday. On his way out the door, Paul Jacobs exhorted his employees and shareholders to “Send your Congress people your opinion that you’d like American companies to be able to bring offshore money back to the United States to either reinvest or return to shareholders.” Qualcomm had $21.6 billion in overseas profits in 2014. And those poor shareholders – most of them in the 1% – are having to make do without their money. Oh, Boo Hoo.
As a result, GDP is no longer a measure of the health of an economy. If a tornado wipes out a town, the money spent to rebuild that town adds to GDP, but does not constitute a contribution to the economy that adds anything except to restore what was already there. In the same way hedge funds add nothing productive to the American economy, but they do increase GDP. So GDP as a measure of anything productive is passe. It is merely a measure of the cash that changes hands regardless if it changed hands as a result of winning a bet in a casino or in the casino of Wall Street or it changed hands because someone bought something that was actually useful.
And don’t forget the second Principle of Finance – “If Wall Street fucks up, thou shalt bail us out” in which case taxpayers will restore their financial rectitude and well-being like we did in 2008. Or maybe this time it will be a bail-in in which case citizens will make Wall St whole again with money from their savings accounts which by the way are the property of the banks. The bank has merely issued you what amounts to an IOU, and, what’s more, you’re treated to practically zero interest rates on your savings. How’s that you thrifty senior savers?
If GDP doesn’t measure the exchange of productive goods and services or productive investment, why does every politician and pundit insist on “growing the economy” meaning increasing GDP? We would be better off in some ways if GDP were diminished and the emphasis was on a sustainable economy, an economy which valued the health and welfare of the average person instead of the 1%. All the money that is made from the oil and gas industries needs to diminish if we are to make any progress with global warming. All the money made by Wall Street on fees, interest and derivatives needs to diminish if the economy is to be placed on a more solid financial footing.
Consumers contribute 70% of GDP. If we start growing our own food and fixing our own cars and buying less junk, this will diminish GDP, but the average American will be better off. They would have less debt. If we stop going into debt, GDP would go down. But so would the inequality gap as corporations earned less profit and Americans took on less debt. How to make America great again? Pay down your debt, do more for yourself instead of buying goods and services in the cash economy, buy and work local and stop patronizing large corporations and Wall Street banks.
The only way that the central bank of the US, the Fed, knows to grow the economy is to lower interest rates and force more debt on American citizens. This is what monetary policy amounts to. Fiscal policy, in which the government would create jobs directly by providing money for infrastructure revitalization, is non-existent thanks to Republicans who won’t approve government expenditures that actually create jobs and the military-industrial complex which gobbles up every available dollar.
If American citizens don’t take on more debt, the economy goes to hell in a handbag. The only way around this is to start a public bank. Then the local economy can be served directly including the creation of good jobs without reliance on Wall Street. By the way sports fans, the plan for the new San Diego “Convadium” would involve the City of San Diego issuing a billion dollars in bonds, a plan they are touting as requiring no taxpayer funding, but which will involve huge payments to Wall Street for fees and interest. These bonds will be backed by nothing except hotel taxes. Who’s liable here if the plan goes south?
Michael Hudson writes in his book, Killing the Host – How Financial Parasites and Debt Destroy the Global Economy:
“Trying to rise into the middle class these days is a road to debt peonage. It involves taking on mortgage debt to buy a home of one’s own, student loans to get the education needed to get a good job, an automobile loan to drive to work, and credit card debt just to maintain one’s living standards as the debtor falls deeper and deeper into the hole. Many recent graduates find that they have to pay so much on their student loans that they must live at home with their parents and cannot afford to get married and start a family, much less qualify for a mortgage. That is why consumer spending has not risen since 2008. Even when income rises, many families find their paychecks eaten up by debt service.”
Bernie Sanders is addressing the problem of debt peonage, which is gradually enslaving the American middle class, directly by calling for free public education and Medicare For All. He is also addressing the US tax code which has been rigged in favor of the wealthy and the corporations starting with Ronald Reagan’s and Alan Greenspan’s meddling. Republican Presidential candidates would only hasten the descent of the American middle class into debt peonage by giving further tax breaks to the rich while transferring even more of the tax burden onto the middle class and the poor.
The American dystopia that is becoming more likely is one in which a small percentage owns the means of production and rent-producing assets while the vast majority eke out a living doing menial labor that can’t be done by robots and automatons. Andrew F. Puzder, CEO of the parent company of Carl’s Jr., has announced he’s investing in machines because he doesn’t want to pay employees $15 an hour or to pay for their health care. Puzder makes more in one day ($17,192) than one of his minimum-wage employees working full time makes in a year ($15,080), The Nation reported last year.
Work for nothing or be replaced by a robot – that’s the choice for the 99%. But robots are taking middle-class jobs now and will take more in the future, minimum wage or no minimum wage. So what’s the solution? Start your own business, become self-employed, stay away from student loan debt or start or become a member of a cooperative enterprise. You have no future as a minimum wage employee regardless of the minimum wage. Take the bull by the horns instead of trying to convince the cow not to shit on you.
The American dystopian vision of the future is even more appalling than the feudal era in which human labor was actually needed to make the economy work. Sure the 1% controlled the wealth; it was a rentier economy but human labor was necessary. Now humans as well as their labor are expendable. The future could hold a life of abundance and leisure for everyone but that is not likely unless wealth is more evenly distributed. It won’t be more evenly distributed unless consumers stop consuming, take matters into their own hands and start producing for themselves. The sad truth is you can make more money as a self-employed laborer than you can
The future could hold a life of abundance and leisure for everyone but that is not likely unless wealth is more evenly distributed. It won’t be more evenly distributed unless consumers stop consuming, take matters into their own hands and start producing for themselves. The sad truth is you can make more money as a self-employed laborer than you can working a 40 hour week for MacDonald’s even if you just do a couple of jobs per week! Why work for $10. an hour for someone else when you can make five times that much as a self-employed doing exactly the same work?
Why work for $10. an hour for someone else when you can make five times that much as a self-employed doing exactly the same work?
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As both a stagnant-wage worker and a landlord, I find this analysis interesting. My husband and I only became landlords to counteract the stagnant wages (and we were lucky enough to just barely qualify to buy in with VA mortgage benefits after military service). The real 1% are way beyond the landlord class. We still have a decent amount of active work and inconvenience keeping property inhabitable and tenants happy to earn the passive landlord income. And, of course, our day jobs on top of it all!