27 December 2011

European Garage Sale

Filed under: Culture — ktismatics @ 10:17 am

Sometimes it seems as though the current global economic battle is being waged not between the 1% and the 99%, not between the private sector and the public sector, but between the owners of the central banks and the owners of other kinds of multinational corporations. The bankers want government spending austerity so they can get their loan money back plus interest. The other corporate heads want government borrowing to continue because, with high unemployment and low wages, the government is now the big spender in the marketplace. It’s no surprise that the Congressional Supercommittee couldn’t come up with a deficit reduction plan: their corporate sponsors don’t want it to happen.

I keep thinking that the bankers and the multinationals will eventually turn to the same page in the playbook. Most importantly, the multinationals would start spending more of their record-level retained earnings on expansion. So far they’ve done this by building capacity in the third world, where costs of labor and land are low. But because these people get paid so little they can’t afford to buy the products they make, meaning fewer sales and smaller profits. By hiring more workers in markets where margins are highest — the US and the EU — the multinationals would refuel those economies where they sell their products at the highest markups. Production costs will go up, but so will revenues. Two business nostrums come to mind: (1) It takes money to make money. (2) Make it up in volume.

With more money being paid to the first world’s 99%, tax revenues would rise even without raising tax rates for the 1%. Then the deficit could be reduced or at least stabilized. Then the bankers would be assured of getting their money. Everybody in the 1% is happy, while also ameliorating the discontent of the 99%.

So why isn’t this happening? Why do the big banks and the big corporations seem to be acting at cross purposes? It’s possible that there really is competition in the marketplace. Individual companies are trying to maximize their short-term profits, even if it means restricting growth which might yield higher-long term profits. But this growth strategy demands a coordinated effort to increase hiring and pay across the entire US and EU economies, a strategy that trades off short-term for long-term payoff. Any company trying to do this on its own will pay the price: higher operating costs for themselves means reducing profits and/or raising prices, putting them at a competitive disadvantage.

The other possibility is that big corporations are saving their retained earnings for the big going-out-of-business sales. When troubled national economies can’t pay back their sovereign debt, then both the governments and the banks lending to them face precarious circumstances. They may be forced to sell off assets in order to avoid bankruptcy and collapse. When that happens, plenty of bargains will be dumped on the marketplace. Big companies holding huge piles of retained earnings will be in the best position to snap up these bargain-basement assets. They’ll spend their profits not on expanding their own businesses and thereby growing the economy, but on consolidating ownership of existing businesses. In other words, maybe we’re witnessing the buildup for the next phase of the Shock-Doctrine acquisition and consolidation strategy of global capitalism.

I wrote the bulk of this post about a month ago, but it felt like I was asking the same question I’d posed before — why aren’t multinationals spending their huge piles of retained earnings? — without having any new information to suggest an answer. But now here’s an article from Sunday’s NY Times, offering evidence that big companies are pursuing the strategy of acquiring bargain-basement assets. Big American companies, banks included, are buying European assets in response to the EU’s austerity measures.

The Times article suggests that there are winners — American-owned banks and large corporations — and losers — European banks. But why should this be? As best I can tell, European firms are making good profits despite the downturn in the European economy — just as US firms are thriving in the midst of the US downturn. I understand that the EU is forcing second-tier European banks to disinvest from these assets, presumably in order both to strengthen the banks’ capitalization as a buffer against yet another round of failures as well as to free up more lending capacity to finance economic expansion which might put more people back to work. This policy is decidedly not being pursued by the Fed (or the UK central bank either), which accounts for the American banks’ snapping up these divested Eurobargains. But why aren’t the big European non-banking companies joining their big American counterparts in the feeding frenzy?

One possibility is that the European companies don’t retain as high a percentage of their corporate earnings on the balance sheets. Maybe they distribute larger dividends to shareholders than do US firms. Also, European countries impose higher corporate taxes than does the US, so more private-sector earnings wind up supporting public-sector services. Over the past five years the Dow Jones has grown more rapidly than the German stock market. Maybe that’s because the low US corporate tax rate makes American-domiciled businesses a better investment than European businesses. It’s not as though US companies are intrinsically American, or owned by Americans. In global capitalism the big money moves to wherever it can make more money, regardless of where the owner of that money happens to live.


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