Menus Subscribe Search

Sociological Images

money-pile

(Photo: Lightboxx/Shutterstock)

Businesses Are Swimming in Money: Profit Protection Will Not Help With Economic Recovery

• February 18, 2014 • 2:00 PM

(Photo: Lightboxx/Shutterstock)

Profits are being used to boost management earnings and pay dividends to stockholders, not improve worker wages.

One conventional explanation for our economic problems seems to be that our businesses are strapped for funds. Greater business earnings, it is said, will translate into needed investment, employment, consumption, and, finally, sustained economic recovery. Thus, the preferred policy response: Provide business with greater regulatory freedom and relief from high taxes and wages.

It is this view that underpins current business and government support for new corporate tax cuts and trade agreements designed to reduce government regulation of business activity, attacks on unions, and opposition to extending unemployment benefits and increasing the minimum wage.

One problem with this story is that businesses are already swimming in money and they haven’t shown the slightest inclination to use their funds for investment or employment.

The first chart below highlights the trend in free cash flow as a percentage of GDP. Free cash flow is one way to represent business profits. More specifically, it is a pretax measure of the money firms have after spending on wages and salaries, depreciation charges, amortization of past loans, and new investment. As you can see, that ratio remains at historic highs. In short, business is certainly not short of money.

1-1-24

So what are businesses doing with their funds? The next chart looks at the ratio of net private non-residential fixed investment to net domestic product (I use “net” rather than “gross” variables in order to focus on investment that goes beyond simply replacing worn out plants and equipment). The ratio makes clear that one reason for the large cash flow is that businesses are not committed to new investment. Indeed quite the opposite is true.

2-1-32

Rather than invest in plants and equipment, businesses are primarily using their funds to repurchase their own stocks in order to boost management earnings and ward off hostile take-overs, pay dividends to stockholders, and accumulate large cash and bond holdings.

Cutting taxes, deregulation, attacking unions, and slashing social programs will only intensify these very trends. Time for a new understanding of our problems and a very new response to them.


This post originally appeared on Sociological Images, a Pacific Standard partner site.

Martin Hart-Landsberg

A weekly roundup of the best of Pacific Standard and PSmag.com, delivered straight to your inbox.

Recent Posts

August 28 • 2:00 AM

Poverty and Geography: The Myth of Racial Segregation

Migration, regardless of race, ethnicity, gender, or sexuality (not to mention class), can be a poverty-buster.


August 27 • 4:00 PM

The ‘Non-Lethal’ Flash-Bang Grenades Used in Ferguson Can Actually Be Quite Lethal

A journalist says he was singed by a flash-bang fired by St. Louis County police trying to disperse a crowd, raising questions about how to use these military-style devices safely and appropriately.


August 27 • 2:00 PM

Do Better Looking People Have Better Personalities Too?

An experiment on users of the dating site OKCupid found that members judge both looks and personality by looks alone.


August 27 • 12:00 PM

Love Can Make You Stronger

A new study links oxytocin, the hormone most commonly associated with social bonding, and the one that your body produces during an orgasm, with muscle regeneration.


August 27 • 11:05 AM

Education, Interrupted

When it comes to educational access, young Syrian refugees are becoming a “lost generation.”


August 27 • 9:47 AM

No, Smartphone-Loss Anxiety Disorder Isn’t Real

But people are anxious about losing their phones, even if they don’t do much to protect them.


August 27 • 8:00 AM

A Skeptic Meets a Psychic: When You Can See Into the Future, How Do You Handle Uncertainty?

For all the crystal balls and beaded doorways, some psychics provide a useful, non-paranormal service. The best ones—they give good advice.


August 27 • 6:00 AM

Speaking Eyebrow: Your Face Is Saying More Than You Think

Our involuntary gestures take on different “accents” depending on our cultural background.


August 27 • 4:00 AM

The Politics of Anti-NIMBYism and Addressing Housing Affordability

Respected expert economists like Paul Krugman and Edward Glaeser are confusing readers with their poor grasp of demography.


August 26 • 4:00 PM

Marching in Sync May Increase Aggression

Another danger of militarizing the police: Marching in lock step doesn’t just intimidate opponents. It impacts the mindset of the marchers.


August 26 • 3:03 PM

The Best Reporting on the Federal Push to Militarize Local Police With Riot Gear, Armored Vehicles, and Assault Rifles

A few facts you might have missed about the flow of military equipment and tactics to local law enforcement.


August 26 • 2:00 PM

How the Other 23 Percent Live

Almost one-fourth of all children in the United States are now living in poverty, an increase of three million kids since 2005.


August 26 • 12:00 PM

Why Sports Need Randomness

Noah Davis talks to David Sally, one of the authors of The Numbers Game: Why Everything You Know About Soccer Is Wrong, about how uncertainty affects and enhances the games we watch.


August 26 • 10:00 AM

Honor: The Cause of—and Solution to—All of Society’s Problems

Recent research on honor culture, associated with the American South and characterized by the need to retaliate against any perceived improper conduct, goes way beyond conventional situations involving disputes and aggression.



August 26 • 8:00 AM

The Transformative Effects of Bearing Witness

How witnessing inmate executions affects those who watch, and how having an audience present can also affect capital punishment process and policy.



August 26 • 7:15 AM

Being a Couch Potato: Not So Bad After All?

For those who feel guilty about watching TV, a new study provides redemption.


August 26 • 6:00 AM

Redesigning Birth Control in the Developing World

How single-use injectable contraceptives could change family planning in Africa.


August 26 • 4:15 AM

How Gay Men Feel About Aging

Coming to terms with growing old can be difficult in the gay community. But middle-aged men are inventing new strategies to cope.


August 25 • 4:00 PM

What to Look for In Dueling Autopsies of Michael Brown

The postmortem by Michael Baden is only the beginning as teams of specialists study the body of an 18-year-old African American killed by police in Ferguson, Missouri.


August 25 • 2:00 PM

Thoughts That Can’t Be Thought and Ideas That Can’t Be Formed: The Promise of Smart Drugs

Are we asking the right questions about smart drugs? Marek Kohn looks at what they can do for us—and what they can’t.


August 25 • 12:00 PM

Does Randomness Actually Exist?

Our human minds are incapable of truly answering that question.


August 25 • 10:31 AM

Cesareans Are Still Best for Feet-First Babies

A new study confirms that surgery is the safest way to deliver a breech fetus.


August 25 • 10:00 AM

What Can Hurricanes Teach Us About Socioeconomic Mobility?

Hurricane Katrina wrought havoc on New Orleans but, nine years later, is there a silver lining to be found?


Follow us


Subscribe Now

Education, Interrupted

When it comes to educational access, young Syrian refugees are becoming a “lost generation.”

No, Smartphone-Loss Anxiety Disorder Isn’t Real

But people are anxious about losing their phones, even if they don’t do much to protect them.

Being a Couch Potato: Not So Bad After All?

For those who feel guilty about watching TV, a new study provides redemption.

How Gay Men Feel About Aging

Coming to terms with growing old can be difficult in the gay community. But middle-aged men are inventing new strategies to cope.

Cesareans Are Still Best for Feet-First Babies

A new study confirms that surgery is the safest way to deliver a breech fetus.

The Big One

One in two full-time American fast-food workers' families are enrolled in public assistance programs, at a cost of $7 billion per year. July/August 2014 fast-food-big-one

Copyright © 2014 by Pacific Standard and The Miller-McCune Center for Research, Media, and Public Policy. All Rights Reserved.