The other 500 pound gorilla

We all know about the 500 pound gorilla that stands in the way of the Republicans in 2008, the war in Iraq. Today Paul Krugman talks about an equally important gorilla, the economy. The Bush economy has been really good for a really small percentage of the American people. The vast majority have been left behind as a direct result of the Bush/Republican economic policy. one of the reasons is
Another Economic Disconnect

Last fall Edward Lazear, the Bush administration’s top economist, explained that what’s good for corporations is good for America. “Profits,” he declared, “provide the incentive for physical capital investment, and physical capital growth contributes to productivity growth. Thus profits are important not only for investors but also for the workers who benefit from the growth in productivity.”

In other words, ask not for whom the closing bell tolls; it tolls for thee.

Unfortunately, these days none of what Mr. Lazear said seems to be true. In the Bush years high profits haven’t led to high investment, and rising productivity hasn’t led to rising wages.

The second of those two disconnects has gotten a lot of attention because of its political consequences. The administration and its allies whine that they aren’t getting credit for a great economy, but because wages have been stagnant — the median worker’s earnings, adjusted for inflation, haven’t gone up at all since the current economic expansion began in 2001 — the economy feels anything but great to most Americans.

Less attention, however, has been given to the first disconnect: the failure of high profits to produce an investment boom.

Since President Bush took office, the combination of rising productivity and stagnant wages — workers are producing more, but they aren’t getting paid more — has led to a veritable profit gusher, with corporate profits more than doubling since 2000. Last year, profits as a share of national income were at the highest level ever recorded.

You might have expected this gusher of profits, which surely owes something to the Bush administration’s pro-corporate, anti-labor tilt, to produce a corresponding gusher of business investment. But the reality has been more of a trickle. Nonresidential investment — that is, investment other than housing construction — has grown very slowly by historical standards. As a share of G.D.P., nonresidential investment remains far below its levels of the late 1990s, and it has been declining for the last two quarters.

Why aren’t corporations investing, and what does the lack of business investment mean for the economy?

To say they haven't been investing is not exactly true, they have been investing in the personal wealth of their executives and stock holders.

It’s possible that sluggish business investment reflects lack of confidence in the economic outlook — a lack of confidence that’s understandable given the bursting of the housing bubble, which has already caused G.D.P. growth to slow to a crawl.

But as Floyd Norris recently reported in The Times, there is a more disturbing possibility. Instead of investing in physical capital, many companies are using profits to buy back their own stock. And cynics suggest that the purpose of these buybacks is to produce a temporary rise in stock prices that increases the value of executives’ stock options, even if it’s against the long-term interests of investors.

If the majority of Americans are asked the question "are you better off than you were when Bush and the Republicans took control?", the answer will be no. The other 500 pound gorilla.

FAIR USE NOTICE

This article contains copyrighted material, the use of which has not always been specifically authorized by the copyright owner. I am making such material available in my efforts to advance understanding of democracy, economic, environmental, human rights, political, scientific, and social justice issues, among others. I believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material in this article is distributed without profit for research and educational purposes.