Are Profits Hurting Capitalism?
By YVES SMITH and ROB PARENTEAU
NYT
A STREAM of disheartening economic news last week, including flagging consumer confidence and meager private-sector job growth, is leading experts to worry that the recession is coming back. At the same time, many policymakers, particularly in Europe, are slashing government budgets in an effort to lower debt levels and thereby restore investor confidence, reduce interest rates and promote growth.
There is an unrecognized problem with this approach: Reductions in deficits have implications for the private sector. Higher taxes draw cash from households and businesses, while lower government expenditures withhold money from the economy. Making matters worse, businesses are already plowing fewer profits back into their own enterprises.
Over the past decade and a half, corporations have been saving more and investing less in their own businesses. A 2005 report from JPMorgan Research noted with concern that, since 2002, American corporations on average ran a net financial surplus of 1.7 percent of the gross domestic product — a drastic change from the previous 40 years, when they had maintained an average deficit of 1.2 percent of G.D.P. More recent studies have indicated that companies in Europe, Japan and China are also running unprecedented surpluses.
The reason for all this saving in the United States is that public companies have become obsessed with quarterly earnings. To show short-term profits, they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on.
(More here.)
NYT
A STREAM of disheartening economic news last week, including flagging consumer confidence and meager private-sector job growth, is leading experts to worry that the recession is coming back. At the same time, many policymakers, particularly in Europe, are slashing government budgets in an effort to lower debt levels and thereby restore investor confidence, reduce interest rates and promote growth.
There is an unrecognized problem with this approach: Reductions in deficits have implications for the private sector. Higher taxes draw cash from households and businesses, while lower government expenditures withhold money from the economy. Making matters worse, businesses are already plowing fewer profits back into their own enterprises.
Over the past decade and a half, corporations have been saving more and investing less in their own businesses. A 2005 report from JPMorgan Research noted with concern that, since 2002, American corporations on average ran a net financial surplus of 1.7 percent of the gross domestic product — a drastic change from the previous 40 years, when they had maintained an average deficit of 1.2 percent of G.D.P. More recent studies have indicated that companies in Europe, Japan and China are also running unprecedented surpluses.
The reason for all this saving in the United States is that public companies have become obsessed with quarterly earnings. To show short-term profits, they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on.
(More here.)
Powered by Blogger
0 Comments:
Post a Comment
<< Home