Whither The Economy?

The great problem with corporate capitalism is that publicly owned companies have short time horizons. Unlike a privately owned business, the top executives of a publicly owned corporation generally come to their positions late in life. Consequently, they have a few years in which to make their fortune.

As a consequence of the short-sightedness of reformers and Congress, the annual salaries of top executives were capped at $1 million. Amounts in excess are not deductible for the company as an expense. The exception is "performance-related" pay, which has no limit. The result is that the major part of executive pay comes in the form of performance bonuses. Performance means a rise in the price of the company's shares.

Performance bonuses can be honestly obtained by good management or mere luck that results in a rise in the company's profits. However, there are a number of ways in which performance bonuses can be less legitimately obtained, almost all of which result in short-term gains to executives and shareholders and long-term damage to the corporation and economy.

Replacing American workers with foreign workers is one way. The collapse of communism in Russia and China and the collapse of socialism in India resulted in the under-utilized Indian and Chinese labor forces becoming available to American corporations. Pushed by "shareholder advocates," Wall Street, and large retailers, US manufacturing corporations began closing their manufacturing plants in the US and producing offshore the goods, and later the services, that they market to Americans.

From the standpoint of the short-term interests of executives and shareholders, this decision made sense. But to transform manufacturing companies into marketing companies, as happened for example to Apple Computer, which apparently does not own a single factory, was a strategic mistake for the long-term. By offshoring the production of their products, US corporations transferred technology, physical plants, and business knowhow to China. American corporations are now dependent on China, a country that the idiots in Washington are endeavoring to turn into an enemy.

Further downside comes from the fact that research, development, and innovation are connected to the manufacturing process, because it is difficult for these important functions to be successful in a sterile atmosphere removed from the production process. As time goes by, US companies are transformed from manufacturing enterprises into sales organizations and lose connection to the work process, and these functions relocate abroad with the manufacturing jobs.

Offshoring manufacturing jobs left Americans with fewer high-value-added well-paid jobs, and the US middle class downsized. Ladders of upward mobility were taken down. Income and wealth distributions worsened. In effect, the One Percent got richer by giving away US incomes and GDP to China. Economists who shilled for the offshoring corporations promised new and better jobs to take the place of the lost manufacturing jobs, but as I have pointed out for years, there is no sign of these promised jobs in the payroll jobs releases or 10-year jobs projections.

Jobs offshoring began with manufacturing, but the rise of the high speed Internet made it possible to move offshore tradable professional skills, such as software engineering, Information Technology, various forms of engineering, architecture, accounting, and even the medical reading of MRIs and CT-Scans. The jobs and careers of university graduates were sent abroad and denied to Americans. Many of the jobs that remained in the US were given to foreign workers brought in on H1-B and L-1 work visas based on the obviously false claim that there was a shortage of talent in the US.

The gains in executive bonuses and shareholder capital gains were achieved by destroying the economic prospects of millions of Americans and by reducing the growth potential of the US economy. In the long-run this means the demise of the US as a world power. As I forecast in 2004, "the US will be a Third World country in 20 years."

As jobs offshoring ran its course and had fewer remaining gains to offer the One Percent, short-term greed turned to new ways of wrecking both corporations and the US economy in behalf of executive and shareholder gains. Executives of utility companies, for example, forewent maintenance and upgrades and used the money instead to buy back their own shares. If you have ever wondered why you can't get faster Internet in your area or why your electricity is constantly interrupted, this is probably the cause.

Executives also use the company's profits to repurchase shares, and when they lack profits, executives arrange bank loans to the companies in order to buy back shares. Executive "performance pay" goes up, but the corporations are left more heavily indebted and thus more vulnerable to recession and foreign competition. In recent years, buybacks and dividends have used up most of corporate profits, leaving the corporations bereft of updates and reserves.

Publicly owned capitalism's short-term time horizon is also apparent with regard to nature's resources and the environment. Ecological economists, such as Herman Daly, have established the fact that environmental destruction is the consequence of corporations moving many of the waste costs associated with their activities off their profit and loss statements and onto the environment. As other ways of artificially raising corporate profits and share prices become exhausted, expect corporations to push harder against pollution control measures. As the environment declines in its ability to produce new resources and to absorb wastes or pollution -- for example the large growing dead areas in the Gulf of Mexico -- the planet's ability to sustain life withers.

President Richard Nixon established the Environmental Protection Agency in order to reduce the external or social costs that corporations impose on the environment. However, the polluting industries were not slow in taking over or capturing the agency, as University of Chicago economist George Stigler predicted.

A basis of economic theory is the absurd assumption that man-made capital is a perfect substitute for nature's capital. This means that if the environment is used up and ruined, not to worry. Innovation and technology will substitute for nature. This absurd foundation of economic theory is why there are so few ecological economists. Economics teaches not to worry about the environment.

To sum up, the One Percent have enriched themselves at the expense of the economy's potential and everyone else.