The Business of America is No Longer Business — It’s Finance
By John Lawrence
The rich today are making money not from making things, but by manipulating money. This is being done in such a way that it is driving the inequality process. It is ruining the middle class while exporting their jobs. The tax structure of the US engineered by Ronald Reagan, Alan Greenspan and their Republican followers has incentivized the creation of great wealth in a few hands while driving the majority of people into poverty.
So-called trickle down economics has only spurted up. While the rich have many ways of escaping paying taxes, middle class people are stuck paying them to a larger and larger extent. The government needs money to operate, and, if the rich don’t pay their fair share, the middle class has to make up for it. US tax policy makes sure that it does.
GE used to be a company that made things — refrigerators, stoves, appliances of every kind and stripe. But in the 1980s under CEO Jack Welsh and pressure from Wall Street to be more profitable, they started to concentrate more on the GE finance division at the same time as they started shipping jobs overseas. GE Capital became the largest issuer of commercial paper in the world and borrowed billions of dollars to make even more money. GE Capital made up 60 percent of GE’s earnings growth between 1990 and 2005. “Under Welch, GE came to rely on financial wizardry rather than new technological breakthroughs to satisfy investors,” Rana Foroohar writes in her book Makers and Takers: The Rise of Finance and the Fall of American Business.
One might ask why pressure from Wall Street to become more profitable is even a relevant consideration. Why should Wall Street be dictating to GE? Why does Wall Street know more about GE’s business than GE does? Wall Street controls a lot of the levers that GE needs to stay in business. They recommend stock buys and sells; they control the flow of investor money. They control most everything concerning whether the company is profitable or not. Main Street is intimidated by Wall Street. They can give a thumbs up or a thumbs down, and they’re only interested in short term profits. The needs of investors, not the needs of average middle class people, are paramount.
This is From Finance is Ruining America:
But as GE Capital was making money, GE was laying off staff, outsourcing jobs, and shifting more costs onto employees. Welch laid off 100,000 in five years and cut research-and-development spending as a percentage of sales by half, according to Foroohar. GE closed an Indiana refrigerator plant and relocated some of the production of models to Mexico. It cut 2,500 jobs in a turbine division to save $1 billion. In 2007, it shuttered a 1.4 million-square-foot plant in Bridgeport that had once, in the heyday of American manufacturing, made clocks, fans, radios, washing machines, and vacuums, and employed thousands of people. In short, investors were getting wealthy, but working class-people weren’t sharing the rewards. Instead, they were losing their jobs.
Executives Get Stock Options to Avoid Paying Taxes
Executives are increasingly taking their pay in the form of stock options and then doing whatever is necessary to drive short term stock prices up so they can cash in. Capital, including stock, is taxed at a lower rate than is income from actually working for a living. While the average slob pays taxes through the nose, the rich get a free ride.
Especially payroll taxes, which are impossible to escape, are stacked against the poor and the middle. They amount to a regressive flat tax, the kind conservatives are for and progressives are against. Progressive taxation means that those who make more pay a higher percentage, but payroll taxes are worse than regressive. If you’re rich, you will pay a diminishing percentage of your income for FICA taxes because only $118,500 of your income is subject to the tax. Everything beyond that is tax free. But if you’re self-employed, you will pay both the employee’s and the employer’s share of payroll or FICA taxes. The self-employed person’s FICA tax rate for the year 2016 consists of the Social Security tax of 12.4% (6.2% + 6.2%) of the first $118,500 of net income plus the Medicare tax of 2.9% (1.45% + 1.45%) of every dollar of net income for a grand total of 15.3%, and that’s before you even pay income tax.
One of the tricks corporations use to drive up short term stock prices is to buy back their own stock. The stock’s value eventually falls again but not until after executives have cashed in. The investor class can take advantage of all these short term vagaries in the stock market while the working person with a 401(k) lacks the financial sophistication and literacy to do so. Working for a living sucks when the real money is being made by the “investor class,” including hedge fund managers. CEOs figure out ways to drive up profits and get the approval from Wall Street by moving their companies, as well as their jobs, overseas to low tax or no tax jurisdictions. When stocks soar, CEOs cash in. The government then has to raise taxes on the middle class.
It is not hard to understand why the rich are getting richer and the poor, poorer. That’s the way present day America is set up. While Republicans want to lower taxes, what they don’t tell you is they want to lower taxes primarily on the rich. Any lowering of taxes on the middle class is puny in comparison with the result that taxes, in one form or other, are actually raised on the middle class by other means such as usage fees. The only other alternative is for the US to go further into debt. But US government debt is no big deal any more as long as Fed policy keeps interest rates low, which also cheats savers out of any return on their money. But if the Fed raised interest rates, the US government would have to pay more on its Treasury bonds, and that would drive government debt even higher.
Investors Helping the Homeless — NOT
Much less investor money today is going into productive investments — investments that actually create jobs. According to a study from the Roosevelt Institute, every dollar of earnings or borrowing used to be associated with a 40-cent increase in productive investment. Since the 1980s, though, less than 10 cents of each earned or borrowed dollar is invested. This means fewer jobs created and more money winding up as shareholders’ profits.
Even “productive” investments provide millions of dollars for trivial games like Pokemon Go. At the same time the world is crying out for investments to forestall global warming, reduce poverty, house the homeless and repair roads and bridges. The way America is set up, however, investor money only goes to software trivia which creates few jobs instead of being for a multitude of other things which might solve vital problems. The world plays games while the earth burns and people are forced out on the streets because they can’t pay skyrocketing rents. As Warren Buffet has said, “My class – the rentier class — has won the class struggle.”
As an example of the trivial apps that investors are willing to spend millions of dollars on, the San Diego Union reported on October 1, 2016 about Metaverse, “a kind of parallel universe that employs augmented reality in the same fashion as Pokemon Go.” Just what the world needs now, right? That app will take people on a scavenger hunt through the streets of San Diego in search of a $500 cash prize. Whoopee!! This company, GoMeta Inc, will provide you with another way to waste your time and investor money as if Pokemon Go wasn’t enough. “Pokemon Go showed people that it’s fun to walk around and discover things in the world,” said Dmitry Shapiro, 47, who is CEO and co-founder of GoMeta. “And we’re saying, ‘Yes!'”
I’m sure all the homeless in downtown will be very amused especially at the prospect of finding the $500. And the “scavengers” will have to watch a thousand ads while they’re in the process of scavenging. That’s how the company makes money. After all it’s a “free” app.
The Union reported that “the local company behind it has raised an undisclosed sum of seed funding…”. You see money is available for such trivia such as this, but money isn’t available to solve the problems of homelessness or global warming. That’s the way capitalism works. Americans play trivial games while earth burns and people are forced to live on the public streets. And a few guys will probably get rich. If this is what you call job creation, then you can have it. Money is available for entertainment, and we’re being entertained to death. Do you suppose I would get any “seed funding” if I started a company to provide housing for the homeless?
To add insult to injury in terms of the way capitalism circa 2016 works, it was reported in the October 7, 2016 Union (Snapchat May Have $25 Billion IPO in Focus) that Snapchat, an app that was developed to facilitate sexting, is now going for an IPO which will net the company $25 billion. What for? There’s no labor intensivity in an app like Snapchat. It’ll all go to make the execs billionaires.
Snapchat also allowed people to take photos of themselves while going 100 mph. The New York Times reported (Snapchat at 107 M.P.H.? Lawsuit Blames Teenager (and Snapchat)):
Even in the age of social media, this particular selfie seemed extreme: a teenager strapped into a gurney, with blood running down her forehead, somehow taking the time to tap out a message to her Snapchat friends: “Lucky to be alive.”
The selfie quickly went viral and is a component of a lawsuit filed by a Georgia man accusing the teenager, Christal McGee, of recklessly using Snapchat while driving over 100 miles per hour and slamming into his vehicle last year, leaving him with severe injuries. He is also suing Snapchat, accusing the company of negligence.
So these guys who developed Snapchat are now to become billionaires? Where is the IPO for global warming? Where is the IPO for the homeless? That’s just the way our economic system works. What the world doesn’t need now is another app especially one like Snapchat. But they are rewarded while those who try to do good work get shafted. Rewarding those who don’t deserve it while leaving the deserving by the wayside. And the economic divide widens. The rich get billions while there is a big fight over a few dollar increase in the minimum wage.