By George Washington of Washington’s Blog .
Daniel Gross points out that part of the reason that the American stock markets are going up even though unemployment is rising and the real economy suffering is because multinational corporations headquartered in the U.S. are experiencing strong sales abroad:
Here’s a puzzle: The stock markets are doing very well, yet the performance of the underlying economy doesn’t seem to justify optimism. The buoyant S&P 500 has risen 53 percent since the March bottom. And while the economy expanded at a 3.5 percent rate in the third quarter, unemployment is high, incomes are stagnant, and consumers are shaky…
It could be that the notion the stock market is an accurate gauge of the domestic economy’s temperature is outdated.
The Dow, the S&P 500, and the NASDAQ are primarily indices of large U.S.-based companies, not main street businesses: more Davos than Chamber of Commerce. These increasingly cosmopolitan firms have been busy globalizing and expanding their operations overseas. In 2006, according to Standard & Poor’s, 238 members of the S&P 500 broke out revenues between U.S. and non-U.S. sales. These companies notched about 43.6 percent of sales outside the United States. For large companies that had already saturated the U.S. market, the home market was something of an afterthought. In the second quarter of 2007, 66 percent of Coca-Cola’s beverage business came from outside North America.
And thanks to the long recession, demand for products and services of all types in the United States has shrunk even since 2006. Yes, the global economy in 2008 experienced its first year of shrinkage since World War II. But growth has resumed, and in some places—Peru, China, India—it never stopped. As a result, the globe’s economic geography has continued to change, with the United States accounting for a smaller chunk of global output and demand each year. For much of the past two years, virtually all growth in economic activity has taken place outside America’s borders. As a result, U.S.-based companies are becoming even more reliant on non-U.S. customers and operations for sales… in two years, big companies’ proportion of sales coming from outside the United States rose 9.8 percent. It’s likely the 2009 figure will be something very close to 50 percent.
Don’t American Workers Win?
The fact that companies based in America are raking in profits from sales abroad is good for American workers, right?
No.
Gross points out that American workers don’t benefit because a lot of the goods sold abroad by American multinationals are made abroad:
If companies participated in foreign markets primarily by exporting U.S.-made goods, this shift would be good news for the U.S. economy and workers. But that’s not how it works. In fact, in the months after the global credit meltdown, U.S. exports plummeted. They bottomed in April, at $120.6 billion, and though they have been rising, the August 2009 total is still 20 percent below the August 2008 total. Globalization is changing the way we do business. It’s not a matter of U.S. companies exporting goods—burgers, soda, cars, software—made in the United States to Beijing but rather, making goods overseas and selling them overseas…
“Based on a Russian fairy tale and produced in Russia using local talent, the film is the latest step in Disney’s broad push into local language production,” the FT reports. As Disney CEO Robert Iger put it: “We would not be able to grow the Disney brand … if we just created product in the US and exported it to the rest of the world.” If Book of Masters succeeds, it will be good for Disney’s American shareholders but won’t do a whole lot of good for its U.S.-based employees. Or consider American icon General Motors. GM’s sales in China are rocking. In the first nine months, the company sold 1.3 million cars in China, including more than 181,000 in September. By contrast, GM in the United States in the first nine months sold 1.5 million cars in the United States, down 36.4 percent from the year before. And in September, GM sold just 156,673 cars in the United States. That growth in China is good for GM’s shareholders and for some of its executives. But since most of the cars sold in China are produced there, with parts produced by suppliers in China, rising sales in the Middle Kingdom won’t translate into jobs for unionized workers in the Middle West.
The rising U.S. stock market and a weak, slow-growing U.S. consumer sector aren’t really in contradiction. Given the large-scale trends transforming the global economy—and the role of large U.S. companies in it—it may be possible to have a sustainable rally in American stocks without a sustainable rally by American consumers.
Don’t Multinationals Pay A Lot in Taxes?
Well, at least the multinationals are paying a good chunk of taxes into the American economy, right?
Not exactly.
The Washington Post notes:
About two-thirds of corporations operating in the United States did not pay taxes annually from 1998 to 2005, according to a new report scheduled to be made public today from the U.S. Government Accountability Office…
In 2005, about 28 percent of large corporations paid no taxes…
Dorgan and Sen. Carl M. Levin (D-Mich.) requested the report out of concern that some corporations were using “transfer pricing” to reduce their tax bills. The practice allows multi-national companies to transfer goods and assets between internal divisions so they can record income in a jurisdiction with low tax rates…
[Senator] Levin said: “This report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.”
Indeed, as Pulitzer prize winning journalist David Cay Johnston documents, American multinationals pay much less in taxes than they should through a variety of widespread schemes, including:
- Selling valuable assets of the American companies to foreign subsidiaries based in tax havens for next to nothing, so that those valuable assets can be taxed at much lower foreign rates
- Pretending that costs were spent in the United States, so that the companies can count them as costs or deductions in the U.S. and pay less taxes to the American government
- Booking profits as if they occurred in the subsidiary’s tax haven countries, so that taxes paid on profits are at the much lower safe haven rate
- Working out sweetheart deals with certain foreign governments, so that the companies can pretend they paid more in foreign taxes than they actually did, to obtain higher U.S. tax credits than are warranted
- Pretending they are headquartered in tax havens like Bermuda, the Cayman Islands or Panama, so that they can enjoy all of the benefits of actually being based in America (including the use of American law and the court system, listing on the Dow, etc.), with the tax benefits associated with having a principal address in a sunny tax haven.
- And myriad other scams
As Johnston documents, the American economy is hurt by the massive underpayment of taxes by the huge multinationals.
20 comments
Comments are closed.
Query: How much do we export to China vs how much do we import from China? What do we export to China vs what we import from China? What do we import from China, where we can actually provide a superior product for our own nation?
Can China provide us with shelter? http://www.usatoday.com/money/economy/housing/2009-03-16-chinese-drywall-sulfur_N.htm
Can China provide us with food? http://www.csmonitor.com/2008/0917/p01s03-woap.html
At some point we need to acknowledge that the trade deficit is bleeding wealth from our nation while providing little in return. For the year 2008 we imported $266.3 billion more then we exported, just from China. That cannot last forever. At some point the bleeding will end, and as some surgeons might joke, that will be when the patient runs out of blood.
This article implies that the much talked-about “decoupling” has already occurred, and the rest of the world will go merrily on its way while the majority of the US sinks further. Hope it ain’t true!
This is a remarkably silly post. Where are these corporate earnings? If they really existed, P/E ratios would not be at their current astronomical levels. There is also this weird combination of Peru, India, and China. Who knew these were the real source of these phantom US corporate profits. Weird.
I agree, Hugh. Consumption is growing significantly slower than overall GDP in China, and by definition there has been no currency adjustment. Either U.S. brands are mopping up market share, or something’s fishy.
The arguments also ignore the relative magnitude of consumption, and stagnant wages abroad. It would take Herculean growths in consumption as well as a serious expansion in consumer credit in a number of countries to matter.
I’m not buying it. It’s a nice-sounding argument that is completely “decoupled” from data and empirical evidence.
I suspect we’re seeing a little bit of a weak dollar effect, and a whoooole lot of multiple expansion, thanks to very low real interest rates. Still happy with Treasuries, thanks.
Yet more evidence for the already-proven fact that globalization does not benefit America.
It was always a flat-out lie that it would benefit American workers, and as we’ve seen in recent years its alleged benefit to “consumers” was also illusory.
(Of course Walmartization was always conceptually incoherent when it claimed you could smash the worker yet still keep the same person as a healthy “consumer”. Yet for some incomprehensible reason a lot of people tried to believe that.)
The globalization scam was never anything but another form of the trickle-down scam. Yet even liberal economists have blathered about how it’s “good for the economy”.
But all this ever proved is that there is no such thing as “the economy”. Cui bono.
We need to do a clear eyed cost-benefit analysis of what these ‘American’ corporations do for America.
If they don’t make the cut, kick them out.
I think a lot of them trade on the full faith and credit of the American economy and rely in a pinch on the power of American military.
But many are unwilling to pay taxes, unwilling to employ Americans, and unwilling to manufacture in this country. In that case, kick them out. Let them BE Indian or Brazillian or Chinese companies. Who needs them.
Good post. I would also suggest you think about this issue in light of the coming Supreme Court decision to allow more corporate money into the election process. If the Court does decide to allow this and overturn the existing law, how much influence will the foreign interests of multinational corporations influence even more the domestic agenda of the United States.
The gutting will continue.
Investment has become decoupled from production in the sense that capital mobility now seeks the lowest-cost producer. It always has but so long as investment and production took place within the territorial confines of the nation-state, there was a connection between investment and production. One could and did argue that what was good for GM was good for the US. But presently, what may be good for GM shareholders is not automatically good for US production/workers. Hence the stock market could boom with the domestic economy languishing.
What has emerged over the course of the past four decades or so is a neo-fuedal corporate global order in which the techno-peasantry labors on disparate corporate manors throughout the capitalist fiefdom. The STATE is merely the means whereby the enforcement of contract and rule of law are maintained in return for an ever shrinking tax base. In this respect, the STATE is becoming decoupled from the NATION as well, finding itself the mere agent of capital accumulation irrespective of whether it benefits the nation – peoples within its borders as a whole – or not.
“It could be that the notion the stock market is an accurate gauge of the domestic economy’s temperature is outdated.”
Another part of the insiders money machine promoted as some sort of gauge of capitalism by the financial press is the so called equity markets. Its primary role is looting the nations savers providing easy access to money that is creamed off the top by corporate insiders and trading industry
officials.
I posted this on credit Writedowns. One way to restore the power of the nation-state as an agent that acts in the interest of its principal – its citizens – and not capital one would support protectionism. If one believes that the nation-state brings more welfare to its citizens than globalized capitalism, one has the moral obligation to support protectionism, not as an economic system, but as a moral system that maximizes utility. One can understand why capital opposes protectionism; the upper classes do not get hurt from high prices on imported labor intensive goods, the upper middle class suffers this deleterious consequence. They get hurt because a global protectionist regime redistributes power from capital to the state by reducing the bargining position of capital.
Again, I do not see what is so bad about a Smoot-Hawley II trade war.
I think this would work.
So what has developed is a way of circulating monies that never touch the average worker.
Companies can be profitable. The economy of a country can be growing, in bookkeeping terms, but the people who make that growth possible will never receive, nor benefit significantly from that wealth.
It’s starting to feel a lot like Angola, where the government essentially runs the country as a private corporation. So far, the chronic low-level rebellions there have been unsuccessful. Of course, Angolans are a bit poorer, less well educated and less well armed than people in the states. I wouldn’t make any bets on how things will turn out if things go sour in the USA.
“It’s starting to feel a lot like Angola, where the government essentially runs the country as a private corporation. So far, the chronic low-level rebellions there have been unsuccessful. Of course, Angolans are a bit poorer, less well educated and less well armed than people in the states. I wouldn’t make any bets on how things will turn out if things go sour in the USA.”
I don’t know if you get the hilarity inherent in this.
In Angola, the Communists actually won the civil war. Doesn’t make what you say any less true, just amusing.
“…the notion the stock market is an accurate gauge of the domestic economy’s temperature is outdated.”
This market is broken. It doesn’t manage risk it grows risk, it misallocates capital on an epic scale, and any connection it has to the real economy is quickly disappearing.
Is it possible to have a market where incentives would encourage a business model like Costco or Timberland (stable, profitable, create good jobs) instead of one that squeezes companies like lemons for short term profits?
I don’t buy the stock market is rising for any reason other than manipulation. But, I can understand the multinational, the looting of the United States that started in 1945 with Breton Woods. I would venture that it might be time to levy an inflation adjusted capital gains tax at the same rate as ordinary income or an alternative inflation adjusted at an even higher rate than ordinary income and a lower rate unadjusted. Income taxes were meant to be taxes for doing busines, not for working as they are now levied, which amounts to slavery. Taxation on capital in this case is a taxation on income as separated from the source. As it stands now, all taxation is on American labor and American corporations. We would be better off with no taxation in this matter, but as long as there is, it does the US no good to fail to tax very rich people in a lot of cases.
I had a blog about this topic, but it attracted so many spam comments I had to shut it. You seem to be doing a better job keeping out the spammers! Congratulations!
I’ve been active in taxes for lengthier then I care to admit, both on the individualized side (all my working life!!) and from a legal viewpoint since satisfying the bar and following up on tax law. I’ve supplied a lot of advice and redressed a lot of wrongs, and I must say that what you’ve put up makes utter sense. Please uphold the good work – the more individuals know the better they’ll be outfitted to comprehend with the tax man, and that’s what it’s all about.