Corporate Profits

Price Gouging

Many of the increasingly clamorous inflation hawks are convinced that the main culprits behind the recent rise in prices are Congressional Democrats and the Biden Administration. Other observers point to supply chain problems or escalating wage demands. Yet there has been surprisingly little focus on the parties responsible for actually setting most of the prices: large corporations.

That’s why it was refreshing to see a front-page article in the Wall Street Journal the other day that provided a more honest account of what is happening. Its headline was: “Inflation Helps Boost Profit Margins: Companies Seize Rare Opportunity to Increase Prices and Outrun their Own Rising Costs.”

The second part of that is the most significant: corporations are raising prices not only to cover their rising costs but well beyond. In other words, they are exploiting a crisis situation to fatten their bottom lines. There is a term for this: price gouging.

Companies such as high-end mattress producer Sleep Number and heating/cooling equipment manufacturer Carrier Corp., the Journal noted, have each pushed through three major price increases this year. As a result, corporate profits are booming. The Journal article cited figures showing that many large companies are reporting margins at least 50 percent above 2019 levels.

It was appropriate for the Biden Administration to call on the Federal Trade Commission to investigate whether illegal conduct by petroleum companies is responsible for the spike in gasoline prices. Other sectors should also be scrutinized.

Given the high level of concentration in many industries, it is likely that anti-competitive practices may be at play. Sometimes this can verge into explicitly criminal behavior. Earlier this year, for example, poultry processor Pilgrim’s Pride pleaded guilty and was sentenced to pay $107 million in criminal fines for its participation in a conspiracy to fix prices and rig bids for broiler chicken products.

Around the same time, Argos USA had to pay $20 million to resolve criminal allegations that it participated in a conspiracy to fix prices, rig bids, and allocate markets for sales of ready-mix concrete in the Southern District of Georgia and elsewhere.

Those who have studied economics will probably recall this comment by Adam Smith in The Wealth of Nations: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices.” These days, the contrivance probably occurs in emails or Zoom calls, but the result is the same.

A key component of the effort to bring inflation under control is to prevent corporations from exploiting the country’s transition from the pandemic in a way that harms the rest of us.

Corporate Subsidies and Economic Inequality

The intensification of economic inequality, one of the defining issues of our times, has many causes, ranging from the weakening of labor unions to the decimation of inheritance taxes. In Tax Breaks and Inequality, a report my colleagues and I at Good Jobs First have just published, we argue that another factor belongs on the list: subsidies given by state and local governments to large corporations in the name of economic development.

This conclusion is based on a mash-up of data from our Subsidy Tracker with two groups of corporations: firms linked to members of the Forbes 400 list of the wealthiest Americans and a list we created of large low-road employers.

The first part of the report is in effect a rebuttal to Forbes, which in this year’s edition of the 400 plays up those individuals who supposedly built fortunes entirely on their own (rather than through inheritance). We show that many of many of the super-rich – both those Forbes calls “bootstrappers” and those labeled “silver spooners” – received help of another kind: government assistance to the corporations through which they got filthy rich.

Development subsidies – in the form of business property tax abatements, corporate income tax credits, sales tax exemptions, training grants, infrastructure improvements and the like – are supposed to promote job creation and broad-based economic growth. Yet they are often awarded to profitable, growing companies that do not need tax breaks to finance a project, meaning that the subsidies serve mainly to increase profits. When these companies are owned in whole or substantial part by wealthy individuals or families, especially the billionaires in the 400, the subsidies are serving to enlarge those private fortunes — directly in privately held firms or through stock price appreciation and dividends in publicly traded ones.

We find that more than one-third of the 258 companies currently linked to members of the Forbes list are substantial recipients of subsidies. Ninety-nine of them have received awards totaling $1 million or more. The combined value of those awards is $19.4 billion, or an average of $196 million per company.

Five of the 99 firms have been awarded more than $1 billion in subsidies, including Intel ($5.9 billion), Nike ($2 billion), Cerner ($1.7 billion), Tesla Motors ($1.3 billion) and Berkshire Hathaway ($1.2 billion).

About one-third of the individuals on the Forbes 400 are linked to one or more of the 99 highly subsidized companies, including every one of the 11 wealthiest individuals and all but two of the top 25. These include Bill Gates, whose $81 billion fortune comes mainly from his holdings in Microsoft, which has been awarded $203 million in subsidies; Warren Buffett, whose $67 billion net worth derives from Berkshire Hathaway, which has been awarded $1.2 billion in subsidies; Larry Ellison, whose $50 billion net worth comes from Oracle, which has been awarded $18 million in subsidies; the Koch Brothers, each worth $42 billion from Koch Industries, whose subsidies total $154 million; and four members of the Walton Family, each worth more than $35 billion from Wal-Mart Stores, which has been awarded more than $161 million in subsidies.

The second part of the report looks at subsidies awarded to corporations notorious for stingy pay rates and other low-road employment practices. We identify 87 such companies that have each been awarded more than $1 million in state and local subsidies, for a total of $3.3 billion. Retailers dominate the list, with 60 firms awarded more than $2.6 billion in subsidies. Twelve firms in the hospitality sector (restaurants, hotels and foodservice companies) account for more than $245 million in subsidies. The low-wage companies with the most in subsidies are: Sears ($536 million), Amazon.com ($419 million), Cabela’s ($247 million), Convergys ($202 million), Starwood Hotels & Resorts ($166 million) and Wal-Mart Stores ($161 million).

Eight companies are both linked to members of the Forbes 400 and pay low wages. Listed in order of their subsidy totals, they are: Sears, Amazon.com, Wal-Mart, Best Buy, Bass Pro, Meijer, Menard, and Allegis Group. These are all retailers except for the staffing services company Allegis.

Subsidies are not the primary source of the Forbes 400’s wealth, but they contribute to it in a way that makes things more difficult for working families. When large corporations controlled by billionaires are given lavish taxpayer subsidies, the rest of society — especially working families — gets stuck with a larger share of the cost of essential public services. And when those subsidies go to low-road employers, they are promoting the substandard jobs that keep so many people at the bottom of the income spectrum.

By enriching those at the top and helping to impoverish those at the bottom, subsidies are part of the inequality problem rather than part of the solution.

What’s the Point of Profits?

mrmoneybags According to conventional economic theory, corporations earn profits in large part to finance expansion, which means both additional investment and more hiring. How old fashioned. As an article the other day in the Wall Street Journal points out, today’s executives at publicly traded firms increasingly think that the most important use of excess cash is to buy back portions of the company’s stock from investors. The Journal notes that one in four companies in the S&P 500 index have recently carried out stock buybacks.

This practice, which was once limited to troubled companies seeking to prop up a faltering stock price, is now becoming an epidemic. In an earlier article, the Journal reported that buybacks in the first half of this year totaled $338 billion, putting 2014 on track to break last year’s figure of $600 billion.

Out-of-control buybacks are symptomatic both of rampant executive greed and the growing unwillingness of large corporations to grow in a way that will bring about broad-based economic prosperity. The greed comes into play because the buybacks automatically increase corporate earnings-per-share figures, which are widely used as a basis for determining executive compensation levels.

In addition to lining their own pockets, executives who carry out buybacks are refusing to invest in growth. As the Journal put it: “While the economy has crawled back to life, many businesses remain reluctant to buy new equipment, build factories or hire workers.” For these top managers, all that matters is their personal enrichment.

It’s significant that the company listed by the Journal as one of the most aggressive users of buybacks is Ingersoll-Rand, which has employed the technique to boost its EPS figure about 90 percent over the past year. What the Journal does not mention is that Ingersoll-Rand is one the corporations that has reincorporated abroad to dodge U.S. taxes, moving on paper first to Bermuda and then to Ireland.

Like other companies going through so-called inversions, Ingersoll-Rand did not change where it did its actual business. The purportedly Irish company derives 59 percent of its revenues from the United States and has 80 percent of its long-lived assets there.

Apologists for inversions claim they help generate higher net profits that companies use for investment and job creation, yet Ingersoll-Rand shows how such a firm is instead using its ill-gotten gains to buy back stock and thus propel its top executives higher into the 1 Percent.

The edition of the Journal with the buyback article also ran a piece with the headline “As Life Span Grows, So do Worries on Pensions.” The fact that people are living longer is apparently seen as a problem for those companies that still provide defined-benefit retirement plans. New actuarial data show that the average 65-year-old will live more than two years longer (to 88.8 years for women, 86.6 years for men) than was estimated in 2000. This is expected to increase retirement plan liabilities by about 7 percent.

Experts quoted in the article expect that corporations will respond to the change primarily by accelerating their move into 401(k)s and other defined-contribution benefits which relieve the employer of long-term financial responsibilities. It does not seem to occur to business leaders that all that excess cash going into stock buybacks could instead be devoted to pension plans that now have even more need for better funding.

A Rogues Gallery of the One Percent

For the past 30 years, Forbes magazine has used its annual list of the 400 richest Americans as a platform for celebrating the wealthy. This year, amid the persistent jobs crisis and the growing challenge posed by the Occupy movement, the Forbes list has to be viewed in a different light. Rather than a scorecard of success, it comes across as a rogues gallery of the 1 Percent who have hijacked the U.S. economy.

Start with the overall numbers. Combined, the 400 are worth an estimated $1.5 trillion, up 12 percent from the year before. This at a time when both the net worth and annual income of the typical American household have been sinking. When the first Forbes list was published in 1982 there were only about a dozen billionaires. Today, every single member of the 400 has a ten-figure fortune. Their average net worth is $3.8 billion.

And where did this wealth come from? Forbes tries to justify the skyrocketing assets of the 400 by saying that “an alltime-high 70% are self-made…This is the working elite.” New riches may indeed be better than inherited wealth, but how did this “elite” climb the ladder of success?

The question is all the more pertinent, given the current inclination of conservatives to refer to the wealthy as “job-creators” as a way of rebuffing efforts to get the plutocrats to pay their fair share of taxes.

How much job creation can be attributed to the Forbes 400? In a chart on Sources of Wealth, the magazine notes that the largest single “industry” is investments, accounting for the fortunes of 96 of the 400. By contrast, manufacturing, which is more labor intensive, is listed as the source for only 17 of the tycoons.

Within the investments category, about one-sixth of the people in the top 100 made their fortunes from hedge funds, private equity and leveraged buyouts—activities that are more likely to result in the destruction than the creation of jobs. For example, Sam Zell (net worth: $4.7 billion) was ruthless in laying off workers after his takeover of the Tribune newspaper company.

Forbes no doubt would respond by pointing to the 48 people on the list who got fabulously wealthy from the technology sector. Yet many of these companies create very few jobs: Facebook, which made Mark Zuckerberg worth $17.5 billion, has only about 2,000 employees. Or, like Apple, which gave the late Steve Jobs a $7 billion fortune, they create most of their jobs abroad in low-wage countries such as China rather than manufacturing their gadgets in the United States. The same is now true for Dell—source of Michael Dell’s $15 billion fortune—which has closed most of its U.S. assembly operations.

The few people on the list who are associated with large-scale job creation in the United States got rich from a company known for paying lousy wages and fighting unions. Christy Walton and her immediate family enjoy a net worth of more than $24 billion deriving from the notorious Wal-Mart retail empire (other Waltons are worth billions more). The Koch Brothers ($25 billion) are bankrolling the effort to weaken collective bargaining rights and thereby depress wage levels, while satellite TV pioneer Stanley Hubbard ($1.9 billion) has been an outspoken critic of labor unions and was an aggressive campaigner against the Employee Free Choice Act.

Poor job creation performance and anti-union animus are not the only sins of the 400 and their companies. Some of them have a checkered record when it comes to other aspects of accountability and good corporate behavior.

Start at the top of the list. Bill Gates, whose $59 billion net worth makes him the richest individual in the United States, is known today mainly for his philanthropic activities. Yet it was not long ago that Gates was viewed as a modern-day robber baron and Microsoft was being prosecuted by the European Commission, the U.S. Justice Department and some 20 states for anti-competitive practices. In the 1990s there were widespread calls for the company to be broken up, but Microsoft reached a controversial settlement with the Bush Administration that kept it largely intact.

Today it is Google, whose founders Sergey Brin and Larry Page are estimated by Forbes to be worth $16.7 billion, that is at the center of accusations of monopolistic practices.

Amazon.com, headed by Jeff Bezos ($19.1 billion), has fought against the efforts of a variety of state governments to get the online retailer to collect sales taxes from its customers. By failing to collect taxes on most transactions, Amazon gains an advantage over its brick-and-mortar competitors but deprives states of billions of dollars in badly needed revenue.

Cleaning products giant S.C. Johnson & Son, the source of the combined $11.5 billion fortune of the Johnson family, recently admitted that it has used aggressive tax avoidance practices to the extent that it pays no corporate income taxes at all in its home state of Wisconsin. Forbes ignores this issue, but instead describes in detail the criminal sexual molestation charges that have been filed against one member of the family.

And then there are the environmental offenders, such as Ira Rennert ($5.9 billion.) His Renco Group was for years one of the country’s biggest polluters, and the Peruvian lead smelter of his Doe Run operation is one of the most hazardous sites in the world.

This is only a small sampling of the transgressions of the 400 and their companies. Rather than being hailed as job creators, they should be made to answer for their job destruction, their tax avoidance, their anti-competitive practices, their environmental violations and much more. Rather than celebration, the Forbes 400 and the rest of the 1 Percent are in need of investigation.

Capping the Oil Profits Gusher

You know the gas price problem is getting bad when even leading Republicans need to make noise about petroleum industry tax breaks.

John Boehner caused a stir the other day when he seemed to be telling an interviewer from ABC News that he was in favor of cutting federal subsidies for the oil giants. “It’s certainly something we should be looking at,” he said.

My initial reaction was that a Boehner look-alike working with the Yes Men had made the remarkable statement. Alas, it turned out to be a tease or a case of temporary sanity, for Boehner’s people later clarified that the Speaker was not actually calling for reductions in the giveaways. Perhaps he meant to say that we should examine the subsidies to be sure they are high enough.

Before Boehner’s true position became clear, President Obama seized on the moment to remind Congress about the Administration’s proposal to do away with “unwarranted” oil industry tax breaks. Such a move would be welcome but far from adequate.

Consider the size of those tax breaks. The Administration’s 2012 budget estimates that the repeal of eight oil & gas tax preferences would save all of $3.5 billion in 2012. The amount would rise to $5.4 billion in 2013 and then fall to $4.6 billion by 2016. The total increase in federal revenues over five years would be only $23 billion.

Compare these amounts to the profits being reported by the U.S.-based oil supermajors. For 2010, Exxon Mobil alone posted total profits of $30 billion, up 58 percent from the year before. Chevron’s net income was $19 billion and that of ConocoPhillips $11 billion. This year those amounts are expected to soar again.

If the entire loss of tax breaks were to be shouldered by these three companies alone, their combined profits would sink by only a couple of percentage points.

Rather than simply eliminating some subsidies, now is the time to revive the push for a windfall profits tax. That will not be music to the ears of Obama, who had made the idea a centerpiece of his 2008 presidential campaign, only to drop it shortly after being elected. That plan was expected to collect $65 billion over five years—much more than the savings from eliminating current tax breaks—and the proceeds were meant to help people pay for higher energy costs, not to make a small dent in the national debt.

Corporate apologists say that the federal government has no reason to complain about galloping oil industry profits because it collects more in tax revenues. Unfortunately, that federal share has been shrinking. In 2008 Exxon Mobil paid about $3 billion to Uncle Sam on pretax U.S. earnings of $10.1 billion, or about 30 percent. Last year Exxon’s domestic federal tax rate was only 16 percent. The rates paid by Chevron and ConocoPhillips also fell sharply. Moreover, Exxon and Chevron pay meager amounts of state income tax.

Rather than mitigating the profits windfall, the tax system—as manipulated by the oil giants—is exacerbating the problem.

It’s difficult to believe, but an oil industry windfall profits tax was once part of the mainstream policy agenda, even in the Republican Party. In his 1975 State of the Union Address, President Ford promoted the idea to compensate for the elimination of controls on domestic oil prices. In 1980 Congress enacted such a tax (actually an excise tax on crude oil) that remained in place for eight years.

Conventional wisdom these days is that aggressive tax policies—not to mention price controls—are counter-productive. Yet even Big Oil seems somewhat uncomfortable about its good fortune.

The American Petroleum Institute issued a press release the other day that used an unusual argument to try to blunt popular anger over the industry’s embarrassment of riches. API touted a new study purporting to show that oil and gas stock holdings have been providing a big boost to public pension funds.

Those would be the same public pension funds that are said to be desperately underfunded because of shortfalls in, among other things, corporate tax payments by the likes of the oil giants. Rather than depending on a bit of indirect capital appreciation, we would be much better off if the petroleum industry paid higher federal and state tax rates, especially when oil prices—and thus profits—are going through the roof.

Challenging Corporate America’s Hiring Freeze

You would never know it from the preoccupation with budget deficits and the attack on public unions, but there is still a severe jobs crisis in the United States.

The focus on the state and federal fiscal situation has deflected attention from what should be a major scandal: the failure of big business to accelerate hiring in step with the emerging recovery in overall economic activity.

In recent weeks the dimensions of that scandal have become increasingly apparent as corporations report lush earnings for 2010 while hiring remains depressed. To highlight this incongruity, I looked at the top 50 companies on the most recent Fortune 500 list. Twenty-nine of them have recently reported their annual profits while also disclosing the size of their payroll as of the end of the fiscal year.

On the earnings side, it is truly fat city. The 29 posted aggregate net income of $239 billion, a whopping 48 percent increase from the year before. Oil companies, of course, are raking it in. Exxon Mobil was up 58 percent and Chevron 81 percent. Service sector giants are also reporting much richer bottom lines. UPS showed an increase of 62 percent and AT&T 63 percent. Some blue chip industrials more than doubled their earnings. Boeing soared 152 percent and Ford Motor 141 percent.

By contrast, the employment figures are pitiful. Together, the 29 corporations reported a decline of about 3,500 positions in their aggregate head count of some 4.6 million. While most of the companies showed little change—and some banks increased their hiring a bit—a few of the corporate giants slashed payrolls. Telecommunications behemoth Verizon Communications reduced its workforce by 28,500 jobs while boosting its profits more than 13 percent. General Electric, whose CEO Jeff Immelt is advising the Obama Administration on job creation, got rid of 17,000 net positions during 2010 while enjoying a 6 percent rise in earnings. (GE is one of the few companies that provide a geographic breakdown of their workforce. In the U.S. GE’s head count was down by 1,000.)

It’s interesting that the percentage decrease in head count at Verizon and GE is almost identical to the percentage increase in profits at each of the companies.

Given these numbers, why is big business facing little criticism for its hiring freeze? There is a tendency to regard even large corporations as helpless in the face of economic conditions, and they are not expected to resume hiring until the market mandates it. Yet the overall economy is picking up and still there is a resistance to hiring.

Corporate apologists such as the U.S. Chamber of Commerce would have us believe that the reason is excessive workplace regulation. The Chamber has just come out with a report making the preposterous claim that if state governments would only curtail their employment rules to the lowest common denominator, 746,000 new jobs would magically materialize.

A major reasons hiring is anemic is that workplace rules—and union presence—are too weak rather than too strong. Companies can do more business and garner more profits without increasing their head count largely because there is nothing stopping them from squeezing more work out of the same number of employees. Stricter protections and more collective bargaining would result in higher employment levels.

One of the favorite policy prescriptions for high joblessness is to offer tax credits to companies to hire more people. The existence of those programs at the state and federal levels is, however, contributing little to job creation.

Rather than thinking up more incentives, perhaps there we should create a disincentive for corporations to continue their hiring boycott. There is a growing awareness these days that big business is not paying its fair share of taxes. We could begin to address this problem by creating tax penalties for profitable companies that refuse to use their earnings to alleviate understaffing.

Pressuring corporations to do more hiring would not only improve life for the overworked employed and reduce the ranks of the unemployed. The additional tax revenue that comes in—whether from the penalties or the withholding paid by the newly hired—would also alleviate the state and federal fiscal crunch and make it easier for us to ignore those who insist that cutting the size of government is the solution to everything.

Pressuring Big Business to Start Rehiring

hyatt The conventional wisdom is that the emerging economic rebound will be a jobless recovery for a long time to come. Yet there is no consensus on why this is the case.

Congressional Republicans are all too willing to cite the purported shortcomings of the Democrats’ stimulus program, but their ulterior political motives are transparent. Some claim that banks are keeping too tight a lid on business credit, while others suggest that newly frugal consumers are to blame for not spending more.

There is surprisingly little criticism being directed at those who are in the best position to do something about joblessness: employers, especially large ones. The assumption seems to be that corporations are helpless victims of economic turmoil and cannot be expected to start hiring again on their own initiative.

Now, it is being said, we need to give companies an extra incentive to replenish their payrolls. Congress and the Obama Administration are reported to be giving serious consideration to the creation of a new tax credit for job creation. This would be a boon for those who get hired, but it is more than a bit infuriating that we now need to subsidize employers to do what used to happen routinely when the business cycle began to turn around.

The coddling of the employer class is all the more questionable given that, in many cases, large-scale layoffs appear to be a matter of choice rather than necessity. Take the case of computer maker Dell, which just announced that it will obliterate more than 900 jobs as part of its decision to close an assembly plant in Winston-Salem, North Carolina that it opened in 2005 after pressuring state and local governments to cough up some $300 million in subsidies. Dell said the move was “part of an ongoing initiative to enhance the long-term value it delivers to customers by simplifying operations and improving efficiency.” Translation: the company has been selling off its production facilities to cut costs and raise profits.

Or consider Simmons Bedding Company, which has laid off 1,000 workers and will probably shed more as it heads to bankruptcy court. Its problems are less the state of the economy than the effects of having been taken over by a series of private equity firms that have milked the operation dry.

Then there’s the situation of the housekeepers at Boston-area Hyatt hotels who were forced out of their $15 an hour jobs so the company could replace them with $8 an hour temps. Before being told that they were being booted out, the housekeepers were asked to train the temps, whom they were told would be filling in during vacations. The layoffs have prompted protests in Boston and around the country (photo).

In Fremont, California, nearly 5,000 workers at the New United Motor Manufacturing plant are losing their jobs because Toyota decided to get rid of its only unionized U.S. operation after the new federally subsidized General Motors exited what had been a 25-year joint venture between the two companies.

Last month, drugmaker Eli Lilly said it would eliminate 5,000 jobs as part of a restructuring designed to “speed medicines from its pipeline to patients.”

These recent examples are part of a trend that began well before the current crisis. For the past decade, U.S. private sector employment levels have been stagnant as corporations engaged in an orgy of offshore outsourcing, union-busting, downsizing and compelling the workers who remained to produce more than ever before.

This is not to say that all job losses can be blamed on restructuring and corporate greed, but neither is it accurate to attribute them all to forces beyond the control of employers. Instead of focusing exclusively on bribing corporations to hire people, it would be good to hear some criticism of big business for failing to do enough to help the country recover from the unemployment crisis—and for causing much of that crisis through its short-sighted and self-interested practices.

For years, large corporations announced layoffs as a way of currying favor with Wall Street. It would be refreshing to have them now feel pressure to announce new hiring to appease the rest of us.

An Embarrassment of Corporate Riches

Things are rough all over. Unemployment is rising, inflation is up, foreclosures are rampant, poor countries are experiencing food riots. Today the front page of the Wall Street Journal pointed out that major agribusiness companies are facing a challenge of their own: soaring profits.

The likes of Cargill, Archer Daniels Midland and Monsanto have joined the Exxon Mobils of the world in experiencing windfall profits. Cargill, which is privately held but releases summary financial results, reported earlier this month that its net income for the quarter ending February 29 was up 86 percent over the same period last year. Monsanto beat that with an increase of more than 100 percent.

While the percentage increases are more than healthy, the absolute amounts involved—$1.1 billion in Monsanto’s latest quarter, for example—pale in comparison to the profits being raked in by the oil majors. Exxon is scheduled to announce its first quarter results tomorrow—May Day—and a gusher is expected. The company earned $11.7 billion in the fourth quarter of 2007 and more than $40 billion for the year as a whole. Only a few dozen U.S. companies have $40 billion in revenues.

The Journal also had an article today on how food and energy companies are escaping the kind of public opprobrium that followed the run-up of oil prices in the 1970s. It seems that, apart from the relatively small number of angry truckers who have been protesting fuel prices in Washington, DC, most Americans are willing to accept soaring commodity prices with little more than a grumble. According to the Journal, this is because food and energy represent a smaller share of consumer expenditures than three decades ago. But that will inevitably change as those costs continue to rise while wage and salary levels remain largely stagnant. A point may come when the energy and agribusiness giants are seen not as accidental beneficiaries but as crisis profiteers.