John Edward, who teaches economics at Bentley and UMass Lowell, frequently contributes columns on economic issues.
The chief business of the American people is business.
– President Calvin Coolidge
Wrong! The chief business of the American people is the American people.
A healthy business environment is necessary to promote economic development. However, it is not sufficient. An obsessive focus on business obstructs economic and social development.
When Paul Tsongas was running for President he made it clear where he stood. In A Call to Economic Arms he described his platform:
Pro-business some would call it. And so it is. Aggressively so. But commonwealth is what it is as well.
This does not mean that we put aside our concern about social and economic justice. That standard must remain in the forefront of our consciousness.
Unfortunately, most of the current presidential candidates are more like Coolidge than Tsongas.
The recent obsession on business is apparent by looking at tax receipts. Back in the 1950s, corporate taxes were about 30% of federal tax revenue. Now it is about 10%. Business was doing fine in the 50s. The overall economy was doing much better than it is now.
Corporations have always benefited greatly from government programs. The difference is that they used to pay a much larger share of the dues necessary for a civil society and a functioning economy.
Looking at it another way, in 1952 corporate taxes were 5.9% of Gross Domestic Product (GDP). Now it is 1.6%. Businesses are doing well these days. They are doing exceedingly well avoiding taxes through loopholes.
In fact, corporate profits after taxes as a percentage of GDP hit an all-time high in the last quarter of 2014. Meanwhile, overall society is not doing well. Per-capita income is lower now, adjusted for inflation, than it was in 1999.
Instead of trickling down to workers, most of corporate profits are going to executives and shareholders, who are often one and the same. CNN Money recently reported that “cash in corporate vaults” hit a record high of $1.4 trillion. The Federal Reserve Bank cites companies having over $5 trillion of liquid assets on hand. Last year’s federal budget deficit seems small by comparison at $483 billion.
Professor William Lazonick from UMass Lowell has drawn well-deserved attention to what companies are doing with all this money. In a recent Harvard Business Review article he states:
While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.
He points a finger at stock buybacks in particular. In 2013, Standard & Poor companies used 36% of their cash flow to pay out dividends to shareholders and to buy back stock. A decade earlier it was 18%. During those ten years, companies used over half of their earnings or $2.4 trillion on just buying back stock.
Professor Lazonick points out that a 1982 Securities and Exchange ruling allowed companies to “repurchase their shares on the open market with virtually no regulatory limits.” He considers buybacks stock manipulation that primarily benefits executives, and therefore should be illegal.
Executives are certainly enjoying the benefits. Due in large part to stock options, executive pay has exploded. The Economic Policy Institute looked at the pay of Chief Executive Officers in the 350 largest publically owned companies. A half-century ago they were getting paid 20 times the average worker in their companies. Now it is 300 times average worker pay.
Business is a means, not an end. When business is thriving average incomes increase. However, averages mean little when we have excessive inequality. The same policies that obsessively promote business at the expense of people are sending us toward The Social Cliff.
In 1914, Calvin Coolidge gave his first speech as Massachusetts Senate President (referred to as his “Have faith in Massachusetts” speech). He started on the right track:
The welfare of the weakest and the welfare of the most powerful are inseparably bound together…
Then he went off the rails:
… it may be that the fostering and protection of large aggregations of wealth are the only foundation on which to build the prosperity of the whole people.
He could not have been more wrong! The country was experiencing a dramatic increase in inequality that would peak in 1929. It is believed that when President Coolidge said “I do not choose to run for President in 1928” it was in part because he suspected the economy was about to go bust. On that point he was certainly correct.
An economist from Harvard predicted the bust during Coolidge’s second term. Coolidge was aware of this analysis and it is believed (there was a reason why he was known as “Silent Cal”) he thought the prediction credible. However, the President did not believe it was the federal government’s job to do anything about it.
Coolidge’s reluctance to act (another reason why silent Cal is apt) was in part expressed by his dictum:
If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.
We now have almost twenty people who have chosen to run for President. I see troubles coming down the road with almost all of them. Many are running on an obsessively pro-business platform.
We need government policies that help businesses compete and operate more efficiently. We do not need policies that favor business interests over workers, shareholders over stakeholders, or profits over social progress. We need pro-business policies that promote the commonwealth that Tsongas called for.
A healthy business sector is essential. An obsession on pro-business policies to the detriment of social and economic justice is unhealthy. Be conscious of that when you decide which of the twenty presidential candidates to support.