Investing in a country better than investing in a corporation
August 22, 2008
by Rob Lafferty
"For the first time in the history of our nation there's the possibility that this generation faces less opportunity than the prior generation." – Eileen Quigley of Qvisory.com
Eight years ago the United States had a $230 billion budget surplus, the largest in the nation's history. Two years later we had a $159 billion deficit – and that was before the invasion and occupation of Iraq began. This year, we are told, will end with the largest budget deficit in our history – a staggering $425 billion or more.
At the current rate of decline, real wages will be lower in January of 2009 than they were January of 2001, when the Bush/Cheney administration began. Average family income has fallen by 1.6 percent during the past eight years while the private sector is now losing jobs at the rate of almost 100,000 a month.
Consumer prices overall were 5.6 percent higher in July this year than they were in July of 2007, while food prices have risen 5.8 percent. The last time we saw that high a spike in the annual cost of living was in 1991, when George H. W. Bush was in office – but not for much longer, as his bid for re-election was doomed by a bad economy and his lack of charisma.
So the government is headed downstream in debt and most of us are, too. The number of poor people rises as fast as the value of their wages drop; that's a ratio which has proven to be a very bad sign for societies in the past. But there's still a lot of money flowing around out there, enough to reverse that ominous trend if we can redirect some of it into a more productive channel.
According the Standard&Poor index of the top 500 U.S. corporations, their average return over the last decade to investors who own stocks, after adjusting for inflation, has been 3.2 percent per year. That's a surprisingly low number, and also a bit misleading; it flattens the curves created by all the stock losses and gains over that period. But Wall Street investors tend to expect a better return for their risk than they can get from a bank account.
Speculating in stocks is a money game similar to the table games in Las Vegas casinos where in the end there's a few big winners, a few more who break even and a lot of small-time losers. The risk is lower on Wall Street than in Vegas, and the return is greater on a hot stock than a hot run at the table, but for the small-money player it's pretty much a crapshoot either way.
There's also more money to be made from stocks than at the casino, too. If a corporation can offer a ten percent dividend from $50 million in profit, investors get to divide a pie worth $5 million. That's not big money these days but it's a profit, and it's a better return than any bank will pay in interest. For investors it's income they didn't work to earn, just a reward for the risks they took. But it's all income to the IRS, and investors are expected to pay taxes on their dividends.
So it was a little surprising when the Government Accountability Office reported this month that more than 3,500 large American corporations – all with an income above $50 million – paid no income taxes in 2005. According to the GAO, foreign corporations doing business in America were even less likely to pay taxes here. During the eight years noted in the report, 72 percent of foreign corporations and 55 percent of domestic corporations paid zero income taxes in at least one of those years.
There's also the problem of a considerable amount of money owed in back taxes, most of which is owed by corporations. Senator Max Baucus of Montana, who chairs the Finance Committee, recently issued a statement saying, "I'm committed to finding ways to improve compliance and reduce taxpayer burden so that we begin to bridge the tax gap, which accounts for $345 billion in legally owed but uncollected federal revenues each year."
Some of that untaxed or uncollected money is then poured into political campaigns through corporate executives. According to a recent review of campaign finance reports, the chief executive officers of the 100 biggest corporations have given John McCain $208,200. For Barack Obama's campaign the top 100 CEO's have chipped in just $20,400.
That amount is in direct personal donations, often for the limit allowed by law, and it's a miniscule amount of overall campaign funding. There's a whole lot more money flowing into both campaigns from soft contributions of corporate money into political action committees and to the national parties they're linked with.
But those donations by CEO's are public statements of support, given as an enticement for others to follow. For these are the captains of modern industry; they are accustomed to leading, they expect to be followed, and they will be.
Those CEO's also expect to be very well paid for their work even when they do it poorly. Robert Nardelli spent five years as CEO of Home Depot. The company lost more than $25 billion, or 40 percent of its value, under his leadership. For that performance he was given a walk-away package worth more than $200 million – part of it coming from the same people whose money he lost.
Angelo Mozilo, co-founder and CEO of Countrywide Financial, was paid $142 million in 2006 and sold over $400 million in shares during a time when the company's stock price fell 80 percent. He managed to avoid bankruptcy by selling the retail bank's 57 million accounts to Bank of America for $4 billion this year. Mozilo will receive a severance package worth about $40 million.
"It's astonishing to me that a CEO who has destroyed 80 percent of shareholder value, at the same time forcing millions of people to lose their homes, would be rewarded in such a way," said Rich Ferlauto of the American Federation of State, Council and Municipal Employees during an interview with Andrew Clark for The Guardian UK.
Jobs that get relocated overseas are the losses that hit the economy hardest, as those jobs are gone forever. There's been a massive relocation of corporate jobs out of America over the past decade, including the recent announcement by Goodyear Tire & Rubber Co. that it will close 92 stores and lay off at least 600 workers.
"People are driving less and it obviously affects every facet of the U.S. auto industry, including how often they replace tires or buy new cars," Goodyear spokesman Keith Price said after the announcement. "The current economic condition further impacted the stores, but they were not performing well before this year. And we don't expect them to perform well."
Those jobs won't be coming back even if the economy improves. As recently as June, Goodyear was telling its investors of plans to expand in specific world markets and to move half of the company's tire production facilities out of the U.S. by 2012.
Somewhere in the recent past of the free market economy, too many people crossed a fine line between investment and speculation. Investment implies a long-term commitment; speculation implies a quick profit-taking. A lot of folks with money stopped investing for the future once they were lured into the stock and commodities speculation game, where the value of the moment is all that matters. But it's a game where a nice profit can be made in a week or a day or even a few hours if you gamble well, so a lot of folks have tried their hand at it.
Everyone else with money to invest seems to have put it into the real estate market, it seems. It was like a gold rush at first, but in the long run it hasn't worked out too well for a lot of folks, either, as more than a few have seen their status change from homeowner to homeless in just a few months.
This month Barron's newspaper reported that government officials might choose to essentially re-nationalize Fannie Mae and Freddie Mac, two government-sponsored enterprises which own or back almost half of all outstanding U.S. mortgages, because the growing number of defaults on home mortgages threatens to destroy both companies. Freddie Mac's stock is now at its lowest level since 1990, and Fannie Mae shares are at 1988 levels.
So we may soon have an officially socialized home mortgage system in a land where socialized medicine is a dirty word that invokes images of underpaid doctors performing sloppy surgery with dull instruments. The best chance Americans have for a national health care system might come in the wake of a collapse of the pharmaceutical industry similar to the mortgage company crisis – but don't count on that happening, as the drug manufacturers are enjoying record profits on the same scale as the oil industry.
Over the past 40 years the country has had 12 years of Democratic presidents and 28 years of Republican presidents. The quality of life for Americans has gone downhill pretty steadily during that time. We now live with an economy where the budget for the athletic department of a state university can be larger than the entire operating budget for the surrounding county. And we can't completely blame politicians for our money woes, as we choose to invest more money in the spectacle of athletics and the quest for fat stock dividends than our government has invested in raising the quality of life.
The long road to economic recovery starts with people spending and investing their money wisely. Buying Wall Street stocks was once considered a smart move; given the low rate of return and the negative impact of those investments, the smart money is already looking for greener, healthier markets to mine for profit. Each of us, in our own little ways, needs to spend our money just as wisely.