How Corporations Create Profits: Inflation, Tax breaks and Free Trade

There are many ways that corporations earn money. They manufacture goods and services, for example. However, there are other ways, as well. For example, they use their political clout to redistribute income from the 99 to the 1 percent.

Notice from the graph above that corporate profits as a percentage of GNP dropped from the mid 1960′s to the early 1980s. So did the taxes they paid. After the 1 percent began to take complete control of the US government in 1980, which was called the Reagan Revolution and rightly so, the off shoring of American jobs accelerated. Corporations increased profits because of the difference between the old US wages and the new lower wages overseas, as well as the differences in salaries, benefits and environmental costs.

That’s one of the major reasons corporate profits are rising higher and higher, during this time of weak demand, breaking record after record. Every year, one to three million jobs are exported. Because free trade treaties pave the way, millions of other potential American jobs are created by US companies in foreign nations. Without those treaties, it wouldn’t be possible for corporations to do this. Those jobs would be created in the US in the absence of those treaties.

As those jobs are shipped or created overseas, our roads, bridges, schools and social safety nets have been in a slow motion thirty-year collapse because much of our tax base has been shipped or created overseas.

Under President Ronald Reagan, the 1 percent and their tools known as corporations began to receive tax cuts and more and more tax loop holes with which to avoid the payment of taxes. New overseas tax havens allowed the rich and corporations to avoid paying bazillions of dollars in US taxes. That’s another one of the reasons why our roads, bridges and schools are crumbling. Our tax base has been weakened.

Pushing corporate after-tax profits higher and higher is one of the primary goals of Wall Street. This keeps stock and corporate bond prices rising. If profits sink, especially in the long-term, rich investors (such as hedge funds) are likely to sell their stocks and bonds, which sinks the price of corporate shares and weakens the ability of corporations to issue bonds.

Corporations also create profits by jacking up prices. We’ve been brainwashed to believe that only an increase in the supply of money creates inflation. To some degree, that’s true. Post-World War I Germany is a prime example. However, in that case, the excess printed money made its way down to the people, who bid up the price of goods. That’s not happening now. The Federal Reserve has been printing up tens of trillions dollars for several years now and inflation is relatively in check because that money has gone to rich investors, hedge funds and banks, rather than to the people.

However, that hasn’t stopped US corporations from simply jacking up prices for working folks. Look at the graph below. Notice how closely the real inflation rate has mirrored the rise in corporate profits. This suggests that market after market is largely controlled by a few major corporations that control their prices.

Typically, a major corporate player in any market will jack up prices, which will be announced in the corporate press. If its rivals follow, then the increased prices will stick. If the so-called rivals refuse to jack up their prices, the company that jacked up its prices will retract the price increase. This phenomenon was first noticed by the economist John Kenneth Galbraith in his book Economics and the Public Purpose. I studied it and noticed how correct he was.

Here’s the real bitter part of this truth. The US government has changed how it measures inflation twenty times since 1980. This allows corporations to jack-up prices in hundreds of markets without anybody knowing. Sure, people notice price increases in the number of products and services they purchase. However, most people don’t have any idea how pervasive this income redistribution scam is. The US government is a partner is this coverup.

Simply raising prices allows corporations to increase profits. So the money you pay for something goes into the pockets of the rich via higher corporate earnings, dividends and share prices.

The graph below measures inflation the way it used to be measured by the government and shows how the modern and official government statistics for inflation differ from what they would’ve been had the government continued to measure inflation the way it did back in 1980.

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How Happy Are US Citizens Compared to the Citizens of Other Nations?

How happy are United States citizens compared to citizens of other nations? Not as happy as you might think, especially given the massive amount of income redistribution from the 99 to the 1 percent that has been conducted by the US government for thirty-plus years.

Iceland rates in at first place. The people of Iceland recently revolted against the banksters. The United States is far down the list. There are several interesting features about the list. One of them is that the lower income inequality, the happier people are. This, of course, is a no-brainer.

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Why and Can Americans Work Less, Like the Germans

Dean Baker of the Guardian newspaper in the United Kingdom reports that the United States could solve its unemployment problem if the government encouraged businesses to spread out their work to include more people. Some people would take a cut in hours so that others could step in and take up the slack. Baker points out that people in Germany and the Netherlands work 20 percent less than we Americans. However, there are some serious flaws in his logic.

One is that the US middle class is working more and earning less, which is the reverse of what is going on in Germany. Also, the German economy didn’t experience a housing or a tech bubble, so people aren’t underwater on their houses in Germany to the same degree as in the USA. Millions of people in the US need to keep working more and more just to stay afloat. They can’t afford to take a cut in hours.

There are a ton of other differences between the two nations, all in favor of the Germans. How about this?

Half of the seats of every board of directors in every German corporation are filled by labor union members. These people most likely aren’t all that interested in shipping their jobs to China and Vietnam and redistributing the difference between the higher paying jobs in Germany and the new lower wages in some third world country from the 99 percent of Germans to the 1 percent via higher corporate earnings, rising share prices and soaring dividends. That’s a primary reason why the Germans have higher wages and rising standards of living, which is the opposite of their American counterparts.

That’s why Dean’s logic to cut worker hours is utterly ridiculous. The German economy is managed so that the vast majority of Germans share in their rising prosperity, while US economic policy for 30 years has been to redistribute the income and wealth of the 99 percent to the 1 percent. Both governments have been extremely successful in their policy objectives.

Click on the link below, if you like, and read Baker’s article.

Why Americans Should Work Less the Way the Germans Do

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Greece is about the leave the Eurozone

The Greek government is limited in its abilities to use fiscal policy to stimulate its economy because Greece is attached to the euro. Germany governs how and when an expansion of the euro will take place, and the Germans are mostly worried about inflation, which is not a problem that Greece has. Attachment to the euro has created a disaster for Greece. Now the government there is preparing to leave the Eurozone. Staying in the eurozone redistributes income from Greek citizens to foreign bankers because the government needs to borrow money in order to stimulate the economy, and the terms of the borrowing has been onerous for the citizens of Greece since linkage to the euro has pushed the nation into a deep and long lasting recession since 2009.

Banks prepare for the return of the Greek drachma

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German public sector workers to get 6.3% pay rise

The public workers of Germany will receive a 6.3% pay increase over the next year. In the United States, we’re cutting public sector pay and laying off workers. Why the difference? The Germans are more heavily unionized, half of all corporate boards are filled with union members, and the German government doesn’t offshore jobs, at least to the extent the US government does.

But there’s something more important here. The Germans know what an economy is for. It’s for the German people, all of them. In the United States, the economy is ruled by Wall Street and the rich at the expense of the 99 percent.

Click here for complete story

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German Economy Among the Strongest in the World

Germany provided a rare ray of light in the eurozone gloom on Wednesday, with record low unemployment and surprisingly good retail data showing Europe’s top economy is holding up well in the crisis.

Germany’s unemployment rate fell to 6.4 percent in November, its lowest level since reunification more than two decades ago, with the number of people out of work declining much faster than economists had expected.

“The German labour market is benefiting from the good economic trend until now. In November, there was no clouding over,” saidHeinrich Alt from the federal labour agency.

“Unemployment is going down, employment is still rising and the demand for labour has also increased,” added Alt.

Last week, a disappointing bond auction in Germany fuelled fears that the eurozone debt crisis was seeping from the edges of the bloc to the core.

Markets were concerned that if European powerhouse Germany was having difficulty selling its bonds, then there was little hope for the likes of Italy and Spain.

However, despite a flood of doom-and-gloom headlines from around Europe, Germany continues to show resilience.

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Nobel Prize Winning Economist Paul Krugman Explains the Crisis of the Euro

I agree with Paul Krugman and his take on the Euro crisis, but there is one thing Mr. Krugman doesn’t mention. At least two of the nations, Spain and Italy, shipped away much of their manufacturing base long ago in order to redistribute income and wealth from working people to the politically powerful affluent class. The same thing happened in the UK. Sweden and Germany didn’t do the same thing nearly so much, so these nations remain economically vibrant because the working classes there have good paying jobs. –John Hively

By PAUL KRUGMAN
Published: November 10, 2011 in the New York Times

This is the way the euro ends — not with a bang but with bunga bunga. Not long ago, European leaders were insisting that Greece could and should stay on the euro while paying its debts in full. Now, with Italy falling off a cliff, it’s hard to see how the euro can survive at all.
Fred R. Conrad/The New York Times

But what’s the meaning of the eurodebacle? As always happens when disaster strikes, there’s a rush by ideologues to claim that the disaster vindicates their views. So it’s time to start debunking.

First things first: The attempt to create a common European currency was one of those ideas that cut across the usual ideological lines. It was cheered on by American right-wingers, who saw it as the next best thing to a revived gold standard, and by Britain’s left, which saw it as a big step toward a social-democratic Europe. But it was opposed by British conservatives, who also saw it as a step toward a social-democratic Europe. And it was questioned by American liberals, who worried — rightly, I’d say (but then I would, wouldn’t I?) — about what would happen if countries couldn’t use monetary and fiscal policy to fight recessions.

So now that the euro project is on the rocks, what lessons should we draw?

I’ve been hearing two claims, both false: that Europe’s woes reflect the failure of welfare states in general, and that Europe’s crisis makes the case for immediate fiscal austerity in the United States.

The assertion that Europe’s crisis proves that the welfare state doesn’t work comes from many Republicans. For example, Mitt Romney has accused President Obama of taking his inspiration from European “socialist democrats” and asserted that “Europe isn’t working in Europe.” The idea, presumably, is that the crisis countries are in trouble because they’re groaning under the burden of high government spending. But the facts say otherwise.

It’s true that all European countries have more generous social benefits — including universal health care — and higher government spending than America does. But the nations now in crisis don’t have bigger welfare states than the nations doing well — if anything, the correlation runs the other way. Sweden, with its famously high benefits, is a star performer, one of the few countries whose G.D.P. is now higher than it was before the crisis. Meanwhile, before the crisis, “social expenditure” — spending on welfare-state programs — was lower, as a percentage of national income, in all of the nations now in trouble than in Germany, let alone Sweden.

Oh, and Canada, which has universal health care and much more generous aid to the poor than the United States, has weathered the crisis better than we have.

The euro crisis, then, says nothing about the sustainability of the welfare state. But does it make the case for belt-tightening in a depressed economy?

You hear that claim all the time. America, we’re told, had better slash spending right away or we’ll end up like Greece or Italy. Again, however, the facts tell a different story.

First, if you look around the world you see that the big determining factor for interest rates isn’t the level of government debt but whether a government borrows in its own currency. Japan is much more deeply in debt than Italy, but the interest rate on long-term Japanese bonds is only about 1 percent to Italy’s 7 percent. Britain’s fiscal prospects look worse than Spain’s, but Britain can borrow at just a bit over 2 percent, while Spain is paying almost 6 percent.

What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.

The other thing you need to know is that in the face of the current crisis, austerity has been a failure everywhere it has been tried: no country with significant debts has managed to slash its way back into the good graces of the financial markets. For example, Ireland is the good boy of Europe, having responded to its debt problems with savage austerity that has driven its unemployment rate to 14 percent. Yet the interest rate on Irish bonds is still above 8 percent — worse than Italy.

The moral of the story, then, is to beware of ideologues who are trying to hijack the European crisis on behalf of their agendas. If we listen to those ideologues, all we’ll end up doing is making our own problems — which are different from Europe’s, but arguably just as severe — even worse.

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If we are at the end of Democracy in Europe, Has it also died in America?

Democracy went down in a blaze of glory last week. Both the German Bundestag and our own House of Commons put up one hell of a fight against the dying of the light. Maybe history will record that fact in an elegy on the demise of the great 18th-century experiment in government by the people: they were eloquent to the end. Because at the end, eloquence was all they had.

Trying to hold back the resurgence of oligarchy – the final dismantling of democratic responsibility in the governing of Europe – has been looking pretty hopeless for a long time. That eruption of excellent rhetoric and faultless argument which sprang to the defence of the rights of the governed (and in Germany’s case, of constitutional legality) made the loss seem all the more tragic, but no less inevitable.

So this is where we are. The agreed EU “stability union” triumphantly paraded before the media in Brussels will have the power to approve or disapprove budgets of countries in the eurozone – that is, to vet and police them – before they are submitted to the elected parliaments of those countries. In other words, parliaments which are directly mandated by, and answerable to, their own populations will not control the most essential functions of government: decisions on taxation and spending. Even without the ultimate institutions of economic and political union, which still elude the EU, actual power over fiscal policy will be taken from the hands of national leaders. And if, as a voter, you cannot influence your prospective government’s tax and spending policies, what exactly are you voting for?

Britain being outside the eurozone, we will not have to present our fiscal arrangements for authorisation before submitting them to the scrutiny of our legislators (and their constituents). But since our own economic recovery relies so heavily on the stability of the euro, we find ourselves (or at least, George Osborne has found himself) enthusiastically supporting this rape of democratic principle in countries which regard their freedom and self-determination as precious in much the same way, remarkably enough, that free-born Englishmen do.

And among those hapless, soon-to-be-disenfranchised peoples, hatreds have been awakened that the EU was, ironically, designed to bury. The Greeks hugely resent what they consider to be the implicitly racist contempt of the Germans: the political opposition in Athens on both Left and Right rejects the idea of being “bailed out” of a crisis (with all the compliance that entails) that they believe to have been caused by the artificial constraints of euro membership rather than by national character flaws. Even their moderate spokesmen are beginning to characterise Germany’s economic impositions as a revival of its wartime attempt at conquest.
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Through Greece’s historical perspective, it is not difficult to read German intentions as world domination by other means. Instead of burying the old enmities and blood feuds, the enforced conditions of the EU have reinvigorated them. When dissatisfied national populations become convinced that their democratic institutions are useless or irrelevant, they will take to the streets. How long before the resentments and the powerlessness ignite and Greece, in its desperation, turns once again to the colonels? Will we see tanks on the streets of Athens at the same time as growing neo-fascist movements in Germany and Italy? And does our own government really believe that we will be safe from the consequences of democratic decline in Europe, just because we are not in the eurozone?

When Angela Merkel warned last week about the possible end of the blessedly long post-war peace in Europe, she meant that the failure of the euro (and thus of the EU project) would precipitate economic chaos and possibly lead to war. But she and her colleagues seem oblivious to the resurgence of hostility that is being brought about by every move closer to “successful” European integration.

Indeed, it is often quite eerie how the statements and mannerisms of EU officials, seemingly so dedicated to being the precise opposite of earlier, infamous generations, end up echoing (or parodying) the more memorable moments of the war-torn 20th century. When the president of the European Commission, José Manuel Barroso, proclaimed, “I am pleased to stand before you this morning and confirm that Europe is closer to resolving its financial and economic crisis… We are showing that we can unite in the most difficult of times”, I half expected him to wave a piece of paper in the air and proclaim economic stability in our time.

In reality, everybody’s historical experience stands in the way of the EU economic and political union steamroller. Germany cannot comply with demands that it plunge enthusiastically into a quantitative easing programme – even though that would be one way of supplying the needed bail-out funds for Greece (and Italy, and Spain, and whoever goes belly up next) – because its terrifying collective memory of Weimar inflation puts such an option beyond the pale. And Mrs Merkel, however enthusiastic she may be about curtailing the democratic accountability of her euro-partners, is fully aware of her own electoral vulnerability: there will be no funny money run off the German printing presses even if her economy is probably robust enough now to cope with the consequences.

In an interview last week, George Soros said that this slow-motion train crash of the single currency reminds him of the fall of the Soviet Union. I assume that what he meant was that there was the same sense of inexorability – the inevitable collapse being forestalled by lots of last-ditch reforms and too little, too late measures that only nibbled at the edges of the real problem. The unthinkable remained unthought: this is a system that is inherently flawed, and therefore cannot be made to work in the terms in which it was envisaged.

Far from being an antidote to the ideological delusions of the past century, a trans-national superstate is the same sort of utopian, unnatural, ahistorical folly that earlier generations attempted to foist on the recalcitrant populations of Europe. Its doctrine of “co-operation” is simply coercion by another name. It relies on unswerving belief and enforced conformity, just like all the “year zero” political movements that ended in totalitarianism and terror in the past. The one hope is that the great mass of the people, unlike most of their political leaders, seem to understand all this quite clearly. It remains to be seen whether they will have to go out on the streets to make their case.

The United States cannot be far behind. Free trade agreements are giving corporations more and more power to influence government at all levels. NAFTA, for example, has secret tribunals when corporate parties have disputes among themselves. The decisions of these tribunals can constitutionally take precedent over government decisions at all levels. State governments have had to reverse their own decisions in deference to NAFTA’s tribunals.

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