Don’t look now, but corporate profit margins — earnings as a percent of sales — are back to where they were before the Great Recession began three years ago. A major reason is that companies are not hiring, thereby holding down their costs. Thus, unemployment stays high and consumer anxiety worsens. In the second quarter of this year, profits rose 8.9 percent for 500 of the largest companies but revenues went up only 5.8 percent.
Do you see what’s wrong with this picture? For the past 25 years, American corporations’ obsession with profits — focusing on the reduction of payrolls in any way possible — has succeeded in drying up those corporations’ very own markets. After all, the American consumer represents more than 70 percent of the economy, and personal income has been weak except among the richest.
As Howard Silverblatt of Standard & Poor’s told the New York Times, “The same thing that caused the profit gains is squeezing now. It’s the lack of jobs.”
In short, American companies have fouled their own nest by letting their greed lower the purchasing power of their customers. Today’s industrialists have forgotten that in 1914, Henry Ford more than doubled his employees’ wages to $5 a day (equivalent to $111 a day now), so they could afford to buy the cars that rolled off their company’s production line. Ford was also able to attract and retain the best employees.
Frankly, profits of American corporations are too high to sustain economic and societal stability in the current environment. The mentality that the shareholder is the only significant constituency of the board of directors is ruining capitalism, which is the only workable system ever devised, although it’s desperately in need of reform.
Thus, I am disappointed to see companies plunking money into two profit-bloating initiatives on the November 2 California ballot, using disingenuous employment claims to promote their position. The big money is pushing Proposition 23, which would suspend, if not kill, California’s Global Warming Solutions Act of 2006, or AB 32, which requires the state to reduce greenhouse gas emissions back to 1990 levels by the year 2020. If the initiative passes, oil companies’ profits would zoom while antipollution efforts would go in reverse.
Proposition 23 is deceptive. It decrees that AB 32 would not go into effect until the state unemployment rate stays at 5.5 percent or lower for four consecutive quarters. Backers claim that this has happened 20 times since 1988. Opponents, using different figures, say it has happened only 8 times in that period. But there is no point arguing the statistics: economists agree that California’s unemployment rate will not see 5.5 percent for several years at the earliest. It’s now above 12 percent.
Passage of Proposition 23 would be a huge windfall for an industry that already reaps tax subsidies galore. A 2005 study by the Congressional Budget Office indicated that oil-industry capital investments such as drilling equipment are taxed at an effective rate of 9 percent versus an average 25 percent for other industries. Oil’s 9 percent is the lowest of any industry.
Transocean, the company that owns the oil-drilling platform where the British Petroleum leak occurred, moved its headquarters from Houston to Switzerland in 2008 to avoid paying American taxes. It has 1300 employees in Houston and 12 in Switzerland. It had moved to the Cayman Islands, another tax haven, in 1999. In leasing the platform, British Petroleum got a tax break that adds up to $82 million a year.
Thus far, companies have raised $6.2 million to promote Proposition 23. Two Texas companies, Valero Energy and Tesoro, account for three-fourths of that total, according to opponents of the measure. Oil-related companies account for 96 percent of contributions. Many donors are from California — Bakersfield, Sacramento, Long Beach, Auburn, Los Angeles, Glendale, San Jose, Modesto, Upland, Pacific Palisades, Menlo Park, Folsom, Orange, Torrance, and South Gate.
Physicist Roger W. Cohen of La Jolla, retired manager of strategic planning and programs of Exxon Mobil, gave $1000 this year in support of Proposition 23.
Business lobbying interests are trying to defeat the second initiative, Proposition 24, which would block tax breaks that hand corporations $1.3 billion a year. The tax subsidies were part of 2008 budget agreements.
The proposition would eliminate three breaks in particular. One is the “single sales factor,” which allows multistate companies to choose whether they will be taxed on property, payroll, or sales. (Do you get to select which taxes you will pay and which you won’t?) The second is loss carrybacks, which allow companies losing money in California to get refunds for taxes paid up to two years previously. The third allows companies that have more tax credits than they can use to distribute those credits to affiliates.
The California Teachers Association is the main backer of Proposition 24. It argues that 26,000 teachers face layoffs as school budgets have been slashed by $17 billion. There is no reason to dole out corporate tax breaks when education is suffering, say the teachers.
Opponents of Proposition 24 have raised more than $1.3 million this year. San Diego companies and institutions are giving heavily to the opposition: Qualcomm has given $100,000 to fight it. Biotechs Gen-Probe and Life Technologies have plunked in $10,000 each. BioMed Realty, which provides real estate to life sciences companies, is a backer. Other San Diego institutions backing it are BIOCOM, the regional life sciences association; CONNECT, the group trying to accelerate technical innovation; the Escondido Chamber of Commerce; the San Diego Regional Economic Development Corporation; and the San Diego Regional Chamber of Commerce.
And what arguments do the companies use to tout Proposition 23 and to oppose Proposition 24? They haul out that old political bait and switch: jobs. Yes, jobs, jobs, jobs. Backers say that Proposition 23 is the “California Jobs Initiative.”
Those opposed to Proposition 24 shout, “Stop the Jobs Tax!” Proposition 24 would tax new job creation, send jobs out of California, tax small businesses and their employees out of existence, and stifle job growth in promising industries such as high tech, biotech, and clean energy, insist the backers of this measure to permit more profit-friendly accounting.
Under capitalist theory, high profits should lead to job creation. But now, rising profits are leading to job destruction. Indeed, job destruction is a major reason for higher profits.
By obsessing over profits, American companies live to please Wall Street. It’s time they lived to please Main Street. For their own sake.