Recession Good for Profits
Gerald Epstein: Low wages and interest rates create rocketing profits and stock markets
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. And welcome to this week’s edition of The PERI Report with Gerry Epstein, who now joins us from Amherst, Massachusetts. Gerry is codirector of the Political Economy Research Institute. He’s also a professor of economics.
Thanks for joining us again, Gerry.
GERALD EPSTEIN, CODIRECTOR, PERI: Thank you, Paul.
JAY: So what have you been following this week?
EPSTEIN: Well, I’ve been following this startling statistic which shows that the profit share of income in the United States has hit another record high. That is, the share of total national income going to profits, as opposed to wages, is now above 25 percent. This is the highest it’s been since 1950, 1951. And, in fact, if you look at the after-tax profit share, it’s higher than it’s been since the 1930s.
JAY: So how do we account for that, given that unemployment is still high, the economy is stagnant, more or less?
EPSTEIN: Well, in fact, the unemployment and the stagnation of the economy in this case may be helping the increase in the profit share. Workers, as you know, can’t find jobs, so they’re willing to work for lower wages. They have to work harder or they’re going to be fired, and they can’t find a job. What Marx calls the reserve army effect has had a huge impact on keeping wages low, productivity high. And that’s translating into record profit shares for corporations.
JAY: Now, there’s obviously a point where, because of lack of demand, they must reach some kind of limits. How much can you increase your profit through what they call more productivity, squeezing more out of workers, when–but your actual market is getting smaller and smaller ’cause exactly these same workers can’t buy very much?
EPSTEIN: Exactly. And so this is the contradiction here that Keynes pointed out, and other post-Keynesian economists since his time, that income for wages has two functions. It’s a cost of business, so reduces profits. But on the other hand, workers’ incomes are used to buy products and create aggregate demand. So there is a serious limit here.
But corporations, to the extent to which they can continue to export abroad, for example, they can find their markets elsewhere. And corporate executives seem to be pretty happy with the situation at the moment.
JAY: And I suppose it’s not really about how much you sell. That’s not the measure of whether your company is successful or not. It’s really how much are you returning on your capital invested. It’s about return on capital, not sell a lot of widgets, ’cause you could sell a lot of widgets with lower margins and actually not have as high a return on your capital invested as you would under a situation where you might sell less but make more ’cause you’re paying such lower wages.
EPSTEIN: That’s right. And if you look at the profits that corporations are getting relative to their total assets, they’re also at very, very high levels.
And the other thing that helps out these corporate executives who are running the show here is they can borrow money at very low interest rates, with the Federal Reserve keeping interest rates at zero percent. Of course, all interest rates aren’t at zero percent. There’s a whole spectrum of interest rates. But it’s broadly come down. And so these corporations can borrow at very low interest rates. And so they have it good going both ways.
JAY: I was talking to a friend of mine who’s a class action lawyer, and we were discussing, you know, who benefits from austerity measures. And certainly at least one of the areas or interests that benefit from more austerity–’cause everybody knows more austerity, more cuts in the public sector is going to slow down any recovery from the recession, it’s going to keep unemployment levels higher, which means it’s going to keep interest rates lower. So one of the perhaps driving reasons for all this austerity is to keep interest rates low.
I asked him what would happen to the stock markets if interest rates were about to go up or did go up, and he said this current bubble we’re in would probably burst, because this low-interest money is helping leverage equity purchases. Companies are borrowing at much lower rates, as you pointed out, for various things, but including buying new technology, which leads to less workers and more productivity. So there’s a lot of interest, I think, in more recession.
EPSTEIN: Well, it’s certainly the case that the monetary policy of the Federal Reserve keeping interest rates at zero percent–without, by the way, causing much inflation–is a very good policy for those with wealth. They can borrow. They can speculate. Maybe they can buy new technology. They can buy back their stocks and raise the stock price so that the CEOs who have stock options can make a lot of money. So this is for them a pretty good situation.
But for society as a whole it’s a disaster. I mean, there’s kind of an implicit bargain in capitalism that society is willing to let these entrepreneurs, these capitalists make profits, because in exchange they will–are supposed to invest in real plant and equipment, and generate jobs, create innovation and new technology. That bargain has totally broken down. Profit share is at a record level, but investment is at a relatively low level. And these firms are building up their stores of liquidity. They’re buying their stocks back. So this total bargain between capital and labor has broken down in our economy entirely.
JAY: And I think something you just mentioned, I think, is so important about this phase of where we’re at is that even with all this cheap money and all this almost zero money to the banks–and as you say, relatively low as you work your way through borrowing stratum–but it hasn’t been inflationary. And is it because even though they are in theory increasing the money supply, it’s actually not getting out there? Like, you’ve shoveled all this money, cheap money to the banks. But if they don’t loan it, if people aren’t getting credit, and you can’t–you know, credit cards are still hard to get, and small businesses can’t borrow, and all the rest, then how are you actually increasing the money supply in the general economy if it’s not passing through the banks in the form of credit? So is that why it’s not inflationary?
EPSTEIN: Well, that’s part of the reason. But the root cause is is that there’s so little aggregate demand, there’s no big pressure on most prices, though there is some pressure on commodity prices, partly ’cause of speculation. And labor is flat on its back. It can’t bargain for higher wages. And so there’s no cost pressure coming on the labor side as well. And so in combination, that’s why there’s not so much inflation.
So what we need, really, is a new political coalition out there that says, look, this bargain has broken down. We need governments to tax these huge profits these corporations are getting, invest in public investment and infrastructure, generate the jobs, make the green transition. And the Democratic Party isn’t moving in that direction at all. They’re talking about cutting taxes further for corporations, even though the profit share is at a record high. So this is just another reason why we need a completely different political coalition here with much more radical policies.
JAY: President Obama is talking about infrastructure projects, but his emphasis seems to be on this private-public partnership, using some public money to leverage a lot of private money. But private money doesn’t get involved unless there’s some form of privatization of this infrastructure. What’s the motivation for private money to get into this game?
EPSTEIN: That’s right. I think it’s a very dangerous road to go down. Of course, we have to look at the details, which I haven’t done, but there are many ways in which this could be a very dangerous road if it’s turning over public assets to–more public assets to private corporations, giving them large subsidies to do this, when in fact the government could be doing this very efficiently, much more cheaply, individually, if they were willing to tax these corporations.
JAY: Yeah, I mean, it looks like it’s just opening up other areas of the economy for financialization.
EPSTEIN: Absolutely. Completely agreed.
JAY: Alright. Thanks for joining us, Gerry.
EPSTEIN: Thank you, Paul.
JAY: And thank you for joining us on The Real News Network.
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