Tuesday, April 7, 2015

It’s the Stupid Economy

Back at the end of the previous century, before the advent of browsers and search engines, during the 1992 presidential campaign in the United States, Bill Clinton’s campaign strategist, James Carver, coined the phrase, “The economy, stupid.”  Very quickly, in a manner that George Orwell with his love of politics and the English language would have appreciated, the phrase morphed into its present usage, “It’s the economy, stupid.”

In this formulaic iteration, the noun “economy” is a stand-in for any concept one wishes, like loyalty, climate change, income equality, etc.; and “stupid” is a stand-in for anyone’s name.  It’s a brilliant construction.  Since no one wants to be referred to as stupid, there is an increased acceptance of the initial premise that, in this case, it is the economy that is the important issue.  Subtlety, the barriers of entering into an economic discourse for political reasons are lowered. 

Today, however, it is the stupid economy that it is the problem and the stupid manner in which it is conceptualized.
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Simply put, the tried and true economic measures of growth in the gross domestic product, low unemployment, low interest rates, and record high corporate profits, coupled with six year bull market in financial securities have not brought about a significant increase in the prosperity shared by the vast majority of people in North America.  In other words, what worked in the past is not working very well today.

With good reason, smart money doesn’t flow into the stupid economy, by that I mean the domestic national economy where the entire cycle of economic exchange from the raising of capital to the production and marketing of goods and services to the payment of taxes and dividends takes place within a single nation’s borders.

Indeed, greater profits for those who control North American enterprise are realized in the global economy and are generated by financial transactions, off shore incorporation, and multinational production chains that take advantage of lower production costs elsewhere.  So, if more money can be made outside of the domestic economy where people toil to bring forward goods and services for their compatriots, you would have to be stupid to invest where the return on investment is significantly lower.

According to a Bloomberg Business Report, the untaxed cash for US corporations held abroad keeps building up and few are choosing to bring it home, instead preferring to borrow for any domestic needs.  GE’s $110 billion leads US companies, followed by Microsoft’s $76.4 billion, Pfizer’s $69 billion, Merck & Co.’s $57.1 billion and Apple’s $54.4 billion.  It is estimated that US-based multinational companies have accumulated $2 trillion outside the country.

That’s a staggering amount of money that is not being reinvested back into the domestic economy.  Imagine the effect on the entire population if first these dollars were repatriated and subject to tax, thereby generating the much needed revenues that could be then reinvested in order to renew North America’s rapidly aging infrastructure.  That would create hundreds of thousands of good paying jobs as would the after tax profits if they were then redirected into the capital investments for the further production of tangible goods and services instead of being used for stock buybacks and other non-productive financial means of generating wealth.

Effective government policies could significantly reduce the amount of dollars that are being sucked out of the domestic economy by the corporate and financial sectors; however, that would take the political will of the people who live and toil in the domestic economy, and that’s something that Corporate America aided by the Supreme Court has been successful in circumventing by making the electoral process totally dependent on the ability to raise substantial amounts of money from the corporate and financial sectors, the very sectors that oppose any fundamental change to the manner in which wealth is accumulated.

To make matters worse, it has now become fashionable for our media star economists to say that our economic problems are not being caused by the rapacious greed of North American financial elites.  Instead, these problems arise out of factors endogenous to an economy that is experiencing “secular stagnation”.  Orwell would have fallen off his chair upon hearing such an assertion.

Previously, self-serving interests would invoke potential benefits to the economy if their preferred course of action were adopted.  For example, we should all remember the cant of supply side economic arguments that would have us believe that everyone would be better off by reducing the taxes of the rich, who would then reinvest their new found wealth back into the economy and, in the process, create new ventures with new jobs that would more than make up for the lost tax revenues.  Unfortunately, it was tried, and, as we know, nothing of the sort transpired.

Now, we are being asked to accept the idea the economy is very sick, suffering from secular stagnation (is that like the mumps?), brought on by an aging population, low interest rates, low inflation, and a lack of investment opportunities.  Like getting old, there is nothing that can be done.  We’ll simply have to keep a stiff upper lip and endure the sight of watching the quality of life of the vast majority sink further into decline.

Essentially, there are two economies, one of them is primarily domestic and the other is global.  They operate by different rules, with the players in the global economy getting preferential treatment with regard to taxes, so much so that they are limiting both their operations and investments in the domestic economy to the detriment of the players whose economic activities remain within national borders.  It is the domestic economy that is stagnating, while the multinational corporations and their principle beneficiaries, their shareholders and executive officers, are flourishing as they conduct their business beyond the regulatory reach of nation-states and their governments, a condition that only will be exacerbated by the implementation of Trans-Pacific and Trans-Atlantic trade agreements.

As the election cycles play out in North America over the next eighteen months, candidates will once again roll out their economic action plans for their respective domestic economies in Canada and the United States, and once again the electorate will be duped into thinking that these plans have some potential of making significant change in the lives of ordinary people.

However, without addressing the disparate treatment that multinational corporations and the financial sector receive, capital will be continued to be sucked out of the domestic economy and transferred to offshore accounts to be reinvested in securities and foreign investment projects that boost the economies of other nations and other individuals.

So, we can expect much to be said about the stupid economy that refuses to grow and create jobs in the months ahead and precious little about the dynamics of the global economy that creates vast riches for those who know how to position themselves to capture a portion of its vast revenue streams.