Home > Uncategorized > The machine is broken

The machine is broken

from David Ruccio

fredgraph

The capitalist machine is broken—and no one seems to know how to fix it.

The machine I’m referring to is the one whereby the “capitalist” (i.e., the boards of directors of large corporations) converts the “surplus” (i.e., corporate profits) into additional “capital” (i.e., nonresidential fixed investment)—thereby preserving the pact with the devil: the capitalists are the ones who get and decide on the distribution of the surplus, and then they’re supposed to use the surplus for investment, thereby creating economic growth and well-paying jobs.

The presumption of mainstream economists and business journalists (as well as political and economic elites) is that the capitalist machine is the only possible one, and that it will work.  

Except it’s not: corporate profits have been growing (the red line in the chart above) but investment has been falling (the blue line in the chart), both in the short run and in the long run. Between 2008 and 2015, corporate profits have soared (as a share of gross domestic income, from 3.9 to 6.3 percent) but investment has decreased (as a share of gross domestic product, from 13.5 to 12.4 percent). Starting from 1980, the differences are even more stark: corporate profits were lower (3.6 percent) and investment was much higher (14.5 percent).

The fact that the machine is not working—and, as a result, growth is slowing down and job-creation is not creating the much-promised rise in workers’ wages—has created a bit of a panic among mainstream economists and business journalists.

Larry Summers, for example, finds himself reaching back to Alvin Hansen and announcing we’re in a period of “secular stagnation”:

Most observers expected the unusually deep recession to be followed by an unusually rapid recovery, with output and employment returning to trend levels relatively quickly. Yet even with the U.S. Federal Reserve’s aggressive monetary policies, the recovery (both in the United States and around the globe) has fallen significantly short of predictions and has been far weaker than its predecessors. Had the American economy performed as the Congressional Budget Office fore­cast in August 2009—after the stimulus had been passed and the recovery had started—U.S. GDP today would be about $1.3 trillion higher than it is.

Clearly, the current recovery has fallen far short of expectations. But then Summers seeks to calm fears—”secular stagnation does not reveal a profound or inherent flaw in capitalism”—and suggests an easy fix: all that has to happen is an increase in government-financed infrastructure spending to raise aggregate demand and induce more private investment spending.

As if rising profitability is not enough of an incentive for capitalists.

Noah Smith, for his part, is also worried the machine isn’t working, especially since, with low interest-rates, credit for investment projects is cheap and abundant—and yet corporate investment remains low by historical standards. Contra Summers, Smith suggests the real problem is “credit rationing,” that is, small companies have been shut out of the necessary funding for their investment projects. So, he would like to see policies that promote access to capital:

That would mean encouraging venture capital, small-business lending and more effort on the part of banks to seek out promising borrowers — basically, an effort to get more businesses inside the gated community of capital abundance.

Except, of course, banks have an abundance of money to lend—and venture capital has certainly not been sitting on the sidelines.

Profitability, in other words, is not the problem. What neither Summers nor Smith is willing to ask is what corporations are actually doing with their growing profits (not to mention cheap credit and equity funding via the stock market) if not investing them.

fredgraph-1

We know that corporations are not paying higher taxes to the government. As a share of gross domestic income, they’re lower than they were in 2006, and much lower than they were in the 1950s and 1960s. So, the corporate tax-cuts proposed by the incoming administration are not likely to induce more investment. Corporations will just be able to retain more of the profits they get from their workers.

But corporations are distributing their profits to other uses. Dividends to shareholders have increased dramatically (as a share of gross domestic income, the green line in the chart at the top of the post): from 1.7 percent in 1980 to 4.6 percent in 2015.

buybacks

source (pdf)

Corporations are also using their profits to repurchase their own shares (thereby boosting stock indices to record levels), to finance mergers and acquisitions (which increase concentration, but not investment, and often involve cutting jobs), to raise the income and wealth of CEOs (thus further raising incomes of the top 1 percent and increasing conspicuous consumption), and to hold cash (at home and, especially, in overseas tax havens).

And that’s the current dilemma: the machine is working but only for a tiny group at the top. For everyone else, it’s not—not by a long shot.

We can expect, then, a long line of mainstream economists and business journalists who, like Summers and Smith, will suggest one or another tool to tinker with the broken machine. What they won’t do is state plainly the current machine is beyond repair—and that we need a radically different one to get things going again.

  1. January 3, 2017 at 10:09 pm

    One small step in the right direction would be to look after those that fall between the cracks in the system and give them a basic income. This would be a direct stimulus to the productive economy. And our central banks can issue that money directly, without letting the rentiers get their sticky hands on it.

  2. January 3, 2017 at 10:54 pm

    I very much appreciate the well-informed, well-documented criticism that this site offers of the weaknesses of mainstream economic theory (spoken as someone who was raised back in the 1960s on Samuelson).

    That said, how many more of these articles about how capitalism is broken do we have to read? We get it. The trends shown in these charts are not new.

    Instead of beating the same old bunch of dead horses (that Summers et. al. are just tinkering around and really have no idea what needs to be done to fix things), how about some critical reporting on possible alternatives?

    For example, ecological economists argue that we’ve come up against the very limits that were once so widely disparaged in the Limits to Growth report. If we’re pushing such limits, then no amount of government subsidies through tax cuts or tax credits is going to bring back the good old days.

    In France, I see there is a “de-growth” discussion going on.

    What about the concept of a “circular” economy?

    Helge Nome’s suggestion above about creating a basic income is another avenue which I have read Finland is beginning to tentatively explore.

    I’m sure there are additional ideas kicking around out there. Please start digging them up with the same high-quality approach that you’re using in your critiques of the existing model.

  3. January 4, 2017 at 3:24 am

    But what can you do when you have a captured democracy. The government is now a tool to provide protection to the corporate profits.

  4. antireifier
    January 4, 2017 at 6:14 am

    The overlords are likely quite happy. Why would they want to “fix” what they think is not broken? They have accomplished their goal. Expectations by the populace are lower. Clearly with the election of Trump and the Republicans democracy is no longer something to be feared. And education continues to be in decline with fewer people capable of logical thinking and thus not taking sciences and maths.

  5. January 4, 2017 at 7:19 pm

    The highly effective ‘cure’ is to show asset price histories INFLATION-ADJUSTED!
    http://ShowRealHist.com/yTRIAL.html
    In everybody’s face, every day, everywhere …

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