Yves Smith writes a piece in Salon where he calls out the notion that Corporations are currently
sitting on historic piles of cash because of "business uncertainty."
If you read the business and even the political press, you've doubtless encountered the claim that
the economy is a mess because the threat to reregulate in the wake of a global-economy-wrecking
financial crisis is creating "uncertainty." That is touted as the reason why corporations are
sitting on their hands and not doing much in the way of hiring and investing.
This is propaganda that needs to be laughed out of the room....
Commerce is all about making decisions and committing resources with the hope of earning profit when
the managers cannot know the future. "Uncertainty" is used casually by the media, but when trying to
confront the vagaries of what might happen, analysts distinguish risk from "uncertainty", which for
them has a very specific meaning. "Risk" is what Donald Rumsfeld characterized as a known unknown.
You can still estimate the range of likely outcomes and make a good stab at estimating probabilities
within that range. For instance, if you open an ice cream store in a resort area, you can make a
very good estimate of what the fixed costs and the margins on sales will be. It is much harder to
predict how much ice cream you will actually sell. That is turn depends largely on foot traffic
which in turn is largely a function of the weather (and you can look at past weather patterns to get
a rough idea) and how many people visit that town (which is likely a function of the economy and how
that particular resort area does in a weak economy).
Uncertainty, by contrast, is unknown unknowns. It is the sort of risk you can't estimate in advance.
So businesses also have to be good at adapting when Shit Happens. Sometimes that Shit Happening can
be favorable, but they still need to be able to exploit opportunities (like an exceptionally hot
summer producing off the charts demand for ice cream) or disaster (like the Fukushima meltdown
disrupting global supply chains). That implies having some slack or extra resources at your
disposal, or being able to get ready access to them at not too catastrophic a cost.
So why aren't businesses investing or hiring? "Uncertainty" as far as regulations are concerned is
not a major driver. Surveys show that the "uncertainty" bandied about in the press really translates
into "the economy stinks, I'm not in a business that benefits from a bad economy, and I'm not going
to take a chance when I have no idea when things might turn around."
The "certainty" they are looking for is concrete evidence that prevailing conditions have really
turned. But with so many people unemployed, growth flagging in advanced economies, China and other
emerging economies putting on the brake as their inflation rates become too high, and a very real
risk of another financial crisis kicking off in the Eurozone, there isn't any reason to hope for
things to magically get better on their own any time soon. In fact, if you look at the discussion
above, we actually have a very high degree of certainty, just of the wrong sort, namely that growth
will low to negative for easily the next two years, and quite possibly for a Japan-style extended
The problem with the "blame the government" canard is that it does not stand up to scrutiny. The
pattern businesses are trying to blame on the authorities, that they aren't hiring and investing due
to intrusive interference, was in fact deeply entrenched before the crisis and was rampant during
the corporate friendly Bush era. I wrote about it back in 2005 for the Conference Board's magazine.
In simple form, this pattern resulted from the toxic combination of short-termism among investors
and an irrational focus on unaudited corporate quarterly earnings announcements and
stock-price-related executive pay, which became a fixture in the early 1990s. I called the pattern
"corporate dysmorphia", since like body builders preparing for contests, major corporations go to
unnatural extremes to make themselves look good for their quarterly announcements....
Despite the cliché “employees are our most important asset,” many companies are doing everything
in their power to live without them, and to pay the ones they have minimally. This practice may
sound like prudent business, but in fact it is a reversal of the insight by Henry Ford that built
the middle class and set the foundation for America’s prosperity in the twentieth century: that by
paying workers well, companies created a virtuous circle, since better-paid staff would consume more
goods, enabling companies to hire yet more worker/consumers.
Instead, the Wal-Mart logic increasingly prevails: Pay workers as little as they will accept,
skimp on benefits, and wring as much production out of them as possible (sometimes illegally, such
as having them clock out and work unpaid hours). The argument is that this pattern is good for the
laboring classes, since Wal-Mart can sell goods at lower prices, providing savings to lower-income
consumers like, for instance, its employees. The logic is specious: Wal-Mart’s workers spend most of
their income on goods and services they can’t buy at Wal-Mart, such as housing, health care,
transportation, and gas, so whatever gains they recoup from Wal-Mart’s low prices are more than
offset by the rock-bottom pay.
Defenders may argue that in a global economy, Americans must accept competitive (read: lower)
wages. But critics such as William Greider and Thomas Frank argue that America has become hostage to
a free-trade ideology, while its trading partners have chosen to operate under systems of managed
trade. There’s little question that other advanced economies do a better job of both protecting
their labor markets and producing a better balance of trade—in most cases, a surplus.
The dangers of the U.S. approach are systemic. Real wages have been stagnant since the
mid-1970s, but consumer spending keeps climbing. As of June, household savings were .02 percent of
income (note the placement of the decimal point), and Americans are carrying historically high
levels of debt. According to the Federal Reserve, consumer debt service is 13 percent of income. The
Economist noted, “Household savings have dwindled to negligible levels as Americans have run down
assets and taken on debt to keep the spending binge going.” As with their employers, consumers are
keeping up the appearance of wealth while their personal financial health decays.
Part of the problem is that companies have not recycled the fruits of their growth back to their
workers as they did in the past. In all previous postwar economic recoveries, the lion’s share of
the increase in national income went to labor compensation (meaning increases in hiring, wages, and
benefits) rather than corporate profits, according to the National Bureau of Economic Analysis. In
the current upturn, not only is the proportion going to workers far lower than ever before—it is the
first time that the share of GDP growth going to corporate coffers has exceeded the labor share.
And businesses weren't using their high profits to invest either:
Companies typically invest in times like these, when profits are high and interest rates low.
Yet a recent JP Morgan report notes that, since 2002, American companies have incurred an average
net financial surplus of 1.7 percent of GDP, which contrasts with an average deficit of 1.2 percent
of GDP for the preceding forty years. While firms in aggregate have occasionally run a surplus, “. .
. the recent level of saving by corporates is unprecedented. . . .It is important to stress that the
present situation is in some sense unnatural. A more normal situation would be for the global
corporate sector—in both the G6 and emerging economies—to be borrowing, and for households in the G6
economies to be saving more, ahead of the deterioration in demographics.”
The problem is that the "certainty" language reveals what the real game is, which is certainty in
top executive pay at the expense of the health of the enterprise, and ultimately, the economy as a
whole. Cutting costs is as easy way to produce profits, since the certainty of a good return on your
"investment" is high. By contrast, doing what capitalists of legend are supposed to do, find ways to
serve customer better by producing better or novel products, is much harder and involves taking real
chances and dealing with very real odds of disappointing results. Even though we like to celebrate
Apple, all too many companies have shunned that path of finding other easier ways to burnish their
bottom lines. and it has become even more extreme. Companies have managed to achieve record profits
in a verging-on-recession setting.
Indeed, the bigger problem they face is that they have played their cost-focused business paradigm
out. You can't grow an economy on cost cutting unless you have offsetting factors in play, such as
an export led growth strategy, or an ever rising fiscal deficit, or a falling household saving rate
that has not yet reached zero, or some basis for an investment spending boom. But if you go down the
list, and check off each item for the US, you will see they have exhausted the possibilities. The
only one that could in theory operate is having consumers go back on a borrowing spree. But with
unemployment as high as it is and many families desperately trying to recover from losses in the
biggest item on their personal balance sheet, their home, that seems highly unlikely. Game over for
the cost cutting strategy....
So this haranguing about certainty simply reveals how warped big commerce has become in the US. Top
management of supposedly capitalist enterprises want a high degree of certainty in their own profits
and pay. Rather than earn their returns the old fashioned way, by serving customers well, by
innovating, by expanding into new markets, their 'certainty' amounts to being paid handsomely for
doing things that carry no risk. But since risk and uncertainty are inherent to the human condition,
what they instead have engaged in is a massive scheme of risk transfer, of increasing rewards to
themselves to the long term detriment of their enterprises and ultimately society as a whole.