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Business profits soar, but not much trickles down to unemployed

Economist Lawrence Mishel, president of the Economic Policy Institute, was in town this week and spoke Tuesday at the Humphrey School about what ails the economy and what it will take to get the unemployment rate down.

Mishel (like the EPI) is liberal and pro-union, so you can guess the general direction of his analysis and recommendations. I’ll summarize them below. And, of course, you know that there is another — diametrically different — set of prescriptions favored by big business and the Republican Party that involves tax cuts for corporations, investors and the wealthy.

Lawrence Mishel
Lawrence Mishel

But while I was waiting for Mishel to start talking, I happened to be reading the Strib business section (which, I must confess, I don’t read every day). And a story from Bloomberg News seriously left me wondering why the general get-government-off-the-backs-of-the-job-creators set of policy prescriptions can still be cited with a straight face. The Bloomberg headline:

“Biggest Profit Gain Since 1900 Sustains S&P 500 After Rally.”

It began:

“The biggest increase in profits in more than a century is telling investors that this is no time to sell stocks, even after the Standard & Poor’s 500 Index rallied 97 percent." (Emphasis added.)

S&P 500 earnings are poised to surpass the 2007 peak of $90 a share in the third quarter after surging from $7 in March 2009, the quickest recovery since at least 1900, according to data from S&P and Yale University’s Robert Shiller compiled by Bloomberg. The gap between projected 12-month profits and average earnings over the last 10 years is set to widen the most since 1951, the data show.

PNC Wealth Management, Federated Investors Inc. and ING Investment Management, which together oversee about $1 trillion, say consumer spending will sustain the recovery after government stimulus helped lift profits (emphasis added) from the lowest level since the Great Depression.”

I encourage you to read the whole story. A few facts from it:

  • The profits of S&P 500 companies will set a record high this year, up 13-fold from their law two years ago.
  • AIG, the insurance company that played such a big (and not constructive) role in decimating the economy, and which would not exist without a massive federal bailout, has posted the biggest turnaround of any of the S&P firms since March 2009 and posted a net income of $7.79 billion. It’s shares are up 497 percent.
  • Alcoa will post a 268 percent jump in first quarter net earnings.
  • As a whole, the S&P profits have beaten analysts estimates for eight straight quarters.

Could I just suggest that for these companies and their executives and their shareholders, the recession apparently is over.

How much better could they make out if government got even further off their backs on or their sides? We already have a business environment that creates record profits and a tax code that allowed GE to avoid paying any federal taxes in 2010 on its $14 billion in profits.

And yet, 8.8 percent of the rest of us, let's call us the "workforce," is unemployed. The Bureau of Labor Statistics says another 15.7 percent are underemployed. And Mishel said that, considering the fact people fall in and out of the ranks of the fully employed, about 30 percent of the workforce is un- or under-employed within the course of a year.

So, if the trickle-down doesn't turn into a flood right quick, do elected officials or policymakers, who claim to be all about jobs, jobs, jobs and who have been twisting the trickle-down tool, need to look into their policy toolkit for some different wrenches.

Mishel thinks so and he wasn't even citing the Bloomberg S&P numbers. I’m not economically smart enough to know which of Mishel’s recommended wrenches would work. But I’ll end with a quick summary of his six-point plan.

  1. Keep the safety net going (in other words, don’t cut off unemployment benefits). It’s not only the humane thing to do, but it puts money into the hands of those who are most certain to spend it.
  2. Infrastructure projects. (Yes, it will add to the deficit but, as an added bonus, the government can borrow at historically low rates and, in addition to creating jobs, we get to keep the infrastructure).
  3.  Federal aid to states. Mishel says this was among the most successful elements of the big stimulus program, but it’s expiring and the state cutbacks will make the economy worse.
  4. Direct government hiring. (Mishel didn’t give much detail on that one, especially on how it is different from paying for infrastructure projects.)
  5. Early retirement. (I hadn’t heard this one before myself. The idea is to offer early Social Security benefits to near-retirement-age workers. But he warned that the Treasury would have to pay the benefits, not the Social Security Trust Fund.)
  6. Realigning our exchange rates with China. (This one is way over my head. He said it has bipartisan support.)

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Comments (27)

"And a story from Bloomberg News seriously left me wondering why the general get-government-off-the-backs-of-the-job-creators set of policy prescriptions can still be cited with a straight face."

Oh, come on, Eric. You know the answer. It's ideology once again trumping good governance. Here in St Paul, the republicans want to totally eliminate business taxes (during a deficit crisis!) while MN corporations are sitting on boatloads of money and not hiring. Such actions are inexplicable until you realize that for them, ideology is all.

The trickle down theory always reminds me of Archie Bunker's second floor toilet.

More seriously, consumers spend money only if they have jobs. As long as unemployment is high consumer demand (and the economy) will be depressed. That makes the big business skim offs even more obscene. They have figured out how to increase 'productivity' (profits) with fewer workers, which is good for them, but not for the economy (and society) as a whole.

Huh? Wasn't Obama just on the teevee crowing about how payrolls increased 216,000 last month? And according to the Bureau of Labor Statistics, since November 2010, the nation's unemployment rate has fallen a full 1 percent.

Let's see now, what happened in November? Coincidence? I don't think so.

And don't be complaining about the stock market's performance. Tens of millions of people, including government employees, have their retirement plans tied to the stock market and so "profits of S&P 500 companies will set a record high this year, up 13-fold from their low two years ago" is a good thing for a lot of working and retired people.

While I didn't see Mishel speak, so I can't be completely sure on what he specifically meant, I think the difference between the Infrastructure Projects point and the Direct Government Employment point is not so ambiguous, even if they are historically and therefore I presume prescriptively linked.

In most infrastructure projects, the work is contracted to architecture, engineering, construction, etc. firms who bid for the privilege. Especially when you're mentioning "borrowing at historically low rates", it seems likely that Mishel is referring to proposals like Gov. Dayton's billion-dollar bonding bill which would borrow money to contract construction projects to private companies.

Direct government hiring has been brought up a few times in the past couple years and usually in reference to historical programs such as the WPA and the CCC.

I think the lack of distinction between the two comes from the common sense question which naturally arises when discussing infrastructure projects side-by-side with direct government hiring, namely -- why hire engineering and construction companies and pay for those companies' administration, marketing, and sales costs when there are plenty of people willing to work who are already qualified to do so? Seems like contracting just puts more public money in the hands of those who are already, as you note, scoring record profits.

It is a testament to their psychological dysfunctions, dysfunctions which mean they only have one type of tool in their toolbox: the economic equivalent of a box full of axes,...

That our "conserviatve" friends are trying to fix the fiscal/social/financial engine that drives our economy by hacking away at it, and claiming that they can improve the lives of average people by economically hacking away at those people.

This engine is a big, powerful, old V12, with one side being the private sector and one side being the public sector. Of course BOTH sides must work efficiently for the engine to run smoothly, but our conservative friends believe that the six cylinders in the "public sector" side of the engine (the side which also powers the lives of average citizens) are taking far too many resources away from the six cylinders on the "private sector" side.

They actually believe that the engine will run better if they completely separate the two sides of the engine (while it's still running) seeking to starve the "public sector" side of oil, coolant, fuel, and routine maintenance while providing so much of those things to the "private sector" side of the engine that it's overflowing to the point of making a huge, overheated, toxic mess on the floor (a mess which is likely to overheat and blow up the stock market in relatively short order).

Meanwhile, they're claiming they can fix the problems they believe the public sector side of the engine has (problems which they have created) by hacking away at it with their axes.

What they're doing, of course, is ignoring and even exacerbating the problems which have developed with that engine and, with their hacking away at the "public sector" side, while ignoring the toxic mess on the "private sector" floor, assuring that the entire engine will soon come to a grinding, screeching halt and be rendered VERY toxic and far too hot for anyone to approach until that mess on the floor burns off.

If we do not soon recognize that their overwhelming desire to hack away at everything "public" is a clear sign of a psychological dysfunction and recognize the destructive and damaging effects, for the public and private sectors both, of their hacking way, that just as with an old V12, ONE side of the engine cannot and WILL not run well without the other side also running well...

If we don't replace these current public sector smashers who have all the sophisticated level of understanding of a 4 year old using a hammer to "fix" his parent's big screen TV when it won't show him his favorite TV show, we will soon discover that the cost of repairing what has been destroyed will far exceed the cost to us of paying enough attention to prevent such destruction from being done in the first place.

After all, this engine was running VERY SMOOTHLY right up until thirty years ago when our "conservative" friends started trying to fix what was clearly NOT broken (even though it may have needed some routine maintenance and a tune up).

As soon as possible, let's shut down the chop shop currently being run by the axe wielders, lay THEM off, and replace them with well-qualified, deep-thinking, psychologically-healthy, mechanics who actually CAN fix our problems.

Chalk up another for sick capitalism...

When all the wealthy robber barons of industry can no longer sell their product because unemployed consumers can't afford to buy it...they'll be jumping ship, out their office windows; prelude from the last Depression?

But not to worry...they'll be wearing their golden parachutes...

Along with convincing sooooo many people to vote against their own best interests, one the biggest con's played on the American people over the last 60 years has been the idea that "trickle down" economics is an "experiment" worth conducting. This was Milton Friedman's big idea. The notion was on the ridiculous premiss that no one knew what would happen if we created a nation with vast wealth disparity, as if the Gilded Age had never happened. In fact we know from thousands of years of human experience and countless revolutions what happens when you poor all your wealth into a small number of pockets.

It's tempting to blame the Republicans but the truth is liberals bought into this program as well. If they hadn't it never could have gotten off the ground like it did.

As for Mishel's six point plan, it can be easily financed once one realizes that it's a bad idea to shelter the wealthy from any economic pain whatsoever. All we have to raise taxes and repair the revenue stream. Mishel's plan has been done in the past, and it worked. The difference is taxes, back in the 50s when these six suggestions were last enacted the wealthy has a tax rate of 93%. If we were to entertain 40%-60% for the wealthiest Americans we actually reignite a huge economic expansion. We could create millions of jobs just in infrastructure.

"Big business and the Republican Party"? The Repubs have had the House for a mere couple of months now, otherwise it's been Dems in all three for a few years now. GE paying no tax on $14 billion in profit and the autoworkers union, AT&T, Verizon, and who know how many others getting hundreds of millions of dollars to pay for early retire health benefits is not the Repubs doing. It must be reported that the Dems favor big business over the little guy.

Somehow we always forget that business' primary goal is to create profit for owners or shareholders, not create jobs. I invest in stocks that have high potential for return, but work for a living, trying to pick jobs that give me personally the best return. It's all arbitrage.

Dennis (#3): "Let's see now, what happened in November? Coincidence? I don't think so."

Okay, Dennis, help me out here. To what Republican-sponsored legislation that has been passed and put into effect since November 2010, on the State or Federal level, can these improving employment numbers be attributed? I'm truly interested to hear.

On the other hand, might it not have just something to do with stimulus spending starting to have its predicted effects?

Each day I feel as though I've been punched in the stomach by these "Captains of Industry."
Too much is never enough for them.
Logic does not apply.
Is the only way to survive to become one of them?
While our "Founding Fathers" pledged their fortunes to the Republic, these jerks are pledging their fortunes to destroying that same Republic.
The tipping point has been passed.

Don't knock trickle down. You have to give it time.

I finally got mine from the Reagan administration last year and proudly spent it all on a Happy Meal at McDonalds. I'm lovin' it.

Preposterous Headline of the Month, if not the year.

Business is always adjusting to become more efficient and thus more productive in the services they sell. The incentive is profit for the shareholders.

The incentive for government is to hire more workers and swell its employee’s ranks to insure more campaign contributions and a steady and reliable voting block for the DFL.

My favorite quote from the documentary "Inside Job" in response to a query about why corporations still ruled the day with the Democrats in charge-- "It's a Wall Street government."

Will (#1): I think greed is also right up there with ideology. Our government spent millions purchasing health insurance from AIG to provide coverage for any contract employees who were hurt or killed in Afghanistan or Iraq. It then denied the claims of as many contractors with PTSD or other physical or psychological injury as it could by calling them "preexisting conditions." It nevertheless received kabillions of dollars as bailout money. Was government not paying any attention?

Andrew (#4): I think it would be much more expensive for government to create engineering and construction firms, staff them, and pay for all raw materials and salaries than it is to contract with them for major projects. They already have the expertise in design and planning.

It might be good however, for the legislature to impose a "hire Minnesotans" rule to be sure the companies don't just import folks who would be happy to work for minimum wage instead of a union-rate wage on which workers can actually live.

//Business is always adjusting to become more efficient and thus more productive in the services they sell. The incentive is profit for the shareholders.

Yeah like all those fire and police workers to voted for Walker.

@#9 Cecil: "To what Republican-sponsored legislation that has been passed and put into effect since November 2010, on the State or Federal level, can these improving employment numbers be attributed? I'm truly interested to hear."

None, Cecil. You don't have to pass laws to improve the economy in a free market, you just have to get out of the way.

When the republicans took over the house of representatives, the business community recognized that Obama and the democrats no longer had the power to raise taxes or pass new regulations and there was a fighting chance that some of the obstacles to a healthy economy, like Obamacare, might eventally be reversed.

it didn't take any new laws to be passed for the business community to resume hiring, just the realization that the business climate had improved by having the republicans in charge of congress. can't fool too many know "trickle down" is a sick joke. If cutting taxes created jobs we'd have to import workers after 60 years of reduced income tax rates....How'd the Bush tax cuts trickle?

The S&P 500 represents the top-performing companies, thus the most profitable. It's incorrect to assume their high profits represent those of the millions of small firms in this country, and it's unfair to lump the needs and ethics of small companies together with those of big corporations.

Business owners aren't stupid. If they need more workers and sales can support them, they'll be hiring. But small firms employ the majority of Americans, and they're not hiring because sufficient revenue isn't yet available in that segment of the business world. S&P companies might dominate the headlines and trigger anti-business angst, but they have little in common with the vast majority of private firms and the risk takers who own them.

@Gotzman-- You mean, like the financial services industry?

The less we tax the rich, the more we decline. Check the figures. They're directly proportional. And, according the the Wall Street Journal, real unemployment here in LA at least is 20%. Judging by the number of Dads picking up kids at school, disappearance of our famous rush hour traffic, and general empty streets, I think it may be worse even than that.

This is the biggest lie of them all. The core excuse Republicans use to defend tax breaks for wealthy individuals and corporations alike. "If we cut their taxes, they'll create jobs!"
No they don't, they save it for themselves and figure out how to get the same work done with less people. Every city in America is shooting each other and themselves in the foot by competing on who can offer the best tax-free deal to get them to build their next store, headquarters, plant in their town. The results of not collecting taxes from these companies has already come home to roost when the budget gets tight and the GOP advocates more of the same!

The Republican budgets both in the various states and at the Fed level really are nothing more than big business pork, pork in the amount never seen before in this country. The social legislation tied to that is meant to guarantee that the flow of the fat doesn't stop any time soon. Union or no union it is past time that small business realizes it is caught in the same vise as the bulk of the citizenry. It is literally impossible to balance any kind of socially just budget while exempting so much of the economic return for participating.

"...small firms are risk takers..."

But if they're not hiring, doesn't sound like they're big risk takers?

If small firms have little in common with top-of-the-dog-pile, "S&P500", why do small town Chamber of Commerce organizations emulate them?

Maybe if small firm fellows stopped being duped; wagging their tails too often behind the greedy big fellows who are certainly laughing in their boardrooms on their overt profits...maybe if small business recognized they have more in common with the risk-taking worker than the big firm executive, they would find themselves actually empowered by a change of allegiance?

Now that's risk taking...that's capitalism with a healthy twist and it's simply called profit-sharing; workers on board and risk takers all,eh?

//Business owners aren't stupid. If they need more workers and sales can support them, they'll be hiring...

This raises another related issue, the fact that Republican policy and economics is actually bad for business. The business community in this country needs to wake up and realize that their state and national Chambers of Commerce have become wholly owned subsidiaries of the Republican party. As such they represent the S&P 500 companies at the expense of everyone else. Recessions are not good for business, but you'll notice that the corporations being represented are actually making more money even during the recession. Business people need to wake up and realize that when the Republicans talk about "business", they're not talking about you. Crumbling infrastructure, poor and expensive communications/internet service, unstable financial markets, low wages, poor consumers, and expensive health care, are NOT good for business and the economy.

Ron is basically suggesting that the trickle just hasn't arrived yet. The truth is a trickle is all your ever gonna get and your trickle is getting smaller and smaller. can't fool too many know "trickle down" is a sick joke. If cutting taxes created jobs we'd have to import workers after 60 years of reduced income tax rates....How'd the Bush tax cuts trickle?