How Corporate America and the Republicans in Congress Blew It


Federal Reserve Chair Janet Yellen announced yesterday that the Fed will hike interest rates for the first time in almost a decade.

The last time that the fed raised rates was June 2006, shortly before domestic and global markets crashed and the Fed was forced to dramatically lower rates to nearly zero.

The idea is simple: when interest rates are low, business and the government are encouraged to borrow at those low rates; ideally to use that super-cheap money for productivity improvements.

In the private sector, that means things like upgrading factories with new machinery and purchasing new technologies to make their operations more efficient.

In the public sector, the federal government in the past, like with Eisenhower's national highway system, takes the opportunity of near-zero rate loans to build out infrastructure, and for other large projects that provide positive returns over time.

And for the past 7 years - most of the past decade - the private and public sector could take advantage of a near-zero borrowing rate.

For 7 years, if Congress had passed a sweeping infrastructure bill, it would have only had to pay one-quarter of one percent interest on the loan, or very low rates in that neighborhood.

That means if we had borrowed 1 trillion dollars to rebuild our nation's crumbling roads and bridges, we would have only had to pay back 2.5 billion dollars of interest at the end of the borrowing period.

To put that in perspective, he EPI estimated in last year that if the federal government borrowed just a quarter of a trillion dollars - 250 billion dollars - and invested it in infrastructure, we would see a 400 billion dollar ANNUAL boost to GDP.

That 250 billion dollar investment would also create 3 million new jobs in just the first year. And all those now-employed people would be paying taxes into the federal coffers, instead of taking unemployment benefits out of the federal coffers.

But the radical right-wingers in the House and Senate blocked every attempt in Congress to boost federal investment in infrastructure, and now that window for borrowing at near-zero rates is closing.

Whether Republicans pursued this strategy out of stupidity, ideology, or a desire to prevent President Obama from taking credit for a growing economy is unknown - although it's probably the latter - they did it.

And the result has been a very, very slow recover from the Bush Great Crash.

In the private sector on the other hand, the corporations did borrow.

But thanks to Reagan and his changes in tax law governing executive compensation, America's CEOs didn't bother to invest their very-cheaply-borrowed money in increasing the productivity of their factories or their companies.

Because ever since Reagan, the billionaires in the one percent have gotten most of their income from stocks rather than salaries.

In 2012 for instance, the 500 highest-paid executives received up to 83% of their compensation from stock options and stock awards, which are taxed at a much lower rate than regular income, thanks to the policies of both Bushes, Clinton, and Reagan.

So when the corporate CEOs borrowed at near-zero rates, they didn't spend that borrowed cash to improve their companies and to generate wealth for the economy.

Since 2009, only 2% of what companies earned by issuing "bonds", borrowing at low interest rates, was spent towards investing in new machines and technologies to improve operations, according to the New York Times.

Instead, they used that money to have their companies buy back shares of their own stocks.

This decreased the number of shares in circulation, which increases the price of each individual share of stock.

And since the CEOs and senior executives are making so much of their income from getting stock from their companies, they were able to cash in and make billions in personal profits, at the expense of the companies, the workers, and our society as a whole.

In the decade between 2003 and 2012, the 449 companies in the S&P 500 used 54% of their earnings to buy back their own stocks, and they used another 37% of their earnings to pay out dividends to wealthy investors and their CEOs.

That leaves only 9% of what those companies earned for things like increasing wages, improving technology, and generally creating real wealth for the American economy.

And this year, CNN Money expects the total value of stock buybacks and dividends to hit 1 trillion dollars this year, for the first time, ever.

That's 1 trillion dollars that is mostly going straight to the top 1% in this country.

That's 1 trillion dollars that's being siphoned out of the American economy, and the bulk of it is simply off-shored into Swiss bank accounts and other tax havens by multimillionaire and billionaire CEOs.

And nearly 900 billion dollars of investment-grade corporate debt had been issued, low-cost money borrowed, by August of this year alone.

In other words, in the first seven months of this year alone, corporate executives borrowed 900 billion dollars, and then instead of investing that into improving operations and adding wealth to the economy, they used it enrich themselves and their billionaire buddies.

And that doesn't even include the amount of money that those same corporations used to get pro-corporate politicians elected and to lobby against federal borrowing - and against federal investment.

With yesterday's announcement that it's getting more expensive to borrow money, the window of opportunity for serious economic stimulus driven by private and public borrowing and re-investment is closing.

The simple fact is, that the Republicans in Congress and their billionaire donors have spent the last 7 years ignoring an incredible opportunity to re-invest in America and to revitalize the American economy.

Instead, they siphoned money out of the economy to make themselves even richer.

The Fed rate will probably only increase over time for now, but if we want the federal government to take full advantage of the rates while they're still low, we need to vote the wholly-owned-Republican-shills of the billionaire class out of office.

And if we want corporate executives to stop siphoning the wealth out of our economy - and to invest in America instead - we need to demand that Congress roll back the Reagan tax cuts, end Reagan's program for stock compensation of CEOs, and make the Capital Gains tax rate the same as that for ordinary income.

Until we get the cancer of Reaganism out of our economy, even Fed's best efforts to keep our economy going will fail.

Which is why it's so very, very important to make sure you're registered to vote, and to get engaged in our political process right now.

Comments

humanitys team's picture
humanitys team 8 years 27 weeks ago
#1

Sounds like greed and selfishness on steroids .Perhaps it's just the playing out of our culture .Get what you can and get out ? Rigg the system in your favour first ,create monopolies and keep the general public out of the loop .

Have they ever been interested in the wider common good ?.Probably not as the system only serves the interests of the few over the many .So the common good is ignored .

The problem being is the nature of the economy that is all about creating profit for a few individuals as in its the fittest that survive or profit survival mentality .

humanitys team's picture
humanitys team 8 years 27 weeks ago
#2

Sounds like greed and selfishness on steroids .Perhaps it's just the playing out of our culture .Get what you can and get out ? Rigg the system in your favour first ,create monopolies and keep the general public out of the loop .

Have they ever been interested in the wider common good ?.Probably not as the system only serves the interests of the few over the many .So the common good is ignored .

The problem being is the nature of the economy that is all about creating profit for a few individuals as in its the fittest that survive or profit survival mentality .

Kilosqrd's picture
Kilosqrd 8 years 27 weeks ago
#3

I guess Thom has forgotten all about QE1, QE2, and QE3. The Obama admin has been giving money to Wall Street hand over fist and all Thom does is blame Republicans. You know, a one note song.

Dr PeterPalms's picture
Dr PeterPalms 8 years 26 weeks ago
#4

The details of what the Government is doing that is destroying our nation

can be found free at my 76 blogs regarding the fourth Federal Reserve Act

created by Congress after ending the first three due to massive inflation.

Insolvency actually is inherent in the system itself, a system called fractional reserve banking. The whole world is working to try to stop the dollar from becoming the only currency in the world.

http://seekingalpha.com/account/authorboard/instablog

http://seekingalpha.com/user/25783813/instablog/full_index

Aliceinwonderland's picture
Aliceinwonderland 8 years 26 weeks ago
#5

Reply to #3: Kilo, I agree that Republicans are not the only ones to blame. Corporate Democrats are also to blame. I think it's time they all get fired from Congress by we the voters, and go find themselves other jobs more suited to their values and priorities, like corporate jobs. That's where they belong.

Since these clowns are so in love with corporate money and hostile to democracy, they don't belong in government. This is why government isn't working, not because government is inherantly incompetent or evil. When we've got those greedy little psychopaths gumming up the works, then telling us government doesn't work, that's exactly what we get: incompetent, inefficient, wasteful government. Surprise!

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