Why Aren’t Corporations Investing and Expanding?

By a variety of measures, America’s corporations are experiencing record profits over the last couple of years. Indeed, profits to corporations amounted to 11 percent of the economy in the 3rd quarter of 2012, compared to 8 percent during the previous expansion.

Further, last year, corporations’ share of the national income was at its highest point since the 1950s, at 14.2 percent after the 3rd quarter of 2012, while the worker share of all income earned in the U.S. was at the lowest point since 1966.

But rather than invest that money at home in enterprises that create quality jobs for American workers, corporations are keeping the money on the sidelines. Last year, America’s 60 biggest companies sent massive amounts of money overseas – $183 billion – rather than keep it at home where it can keep American workers on the job. That adds up to a cumulative total of $1.7 trillion dollars in money controlled by U.S. corporations, but which is not invested at home.

Investors have benefited: The Dow has spent much of the year at or close to a record high, north of the 15,000 mark. Large-cap investors have more or less recovered from the recession, simply looking at stock and bond prices.

But the rich gains experienced by American corporations are not translating to prosperity for the American worker. Wages are still relatively depressed, the all-important labor-force participation rate has been falling, and unemployment is creeping back up. It’s currently at 7.6 percent, and would be much higher if it weren’t for those going on disability benefits and ‘discouraged workers.’

The economy created 195,000 jobs last month. But it was a more pathetic showing than the raw number indicated. Most of those jobs were part-time jobs, while the economy hemorrhaged full-time jobs.

Why is this? In part, blame Obamacare. Employers face stiff penalties if they fail to provide workers logging over 30 hours a week with a qualified health insurance plan, under the ill-advised law. And so they are responding rationally by slashing full-time staff and replacing them with part-timers. As one observer put it, your local “Taco Bell just went from 30 employees working 40 hours each to 40 employees working 30 hours.”

Incidentally, the new dismal unemployment numbers came out on Friday, the 5th of July. Coincidentally (not!) the Obama Administration moved to delay the onset of the coverage requirement to – conveniently – after the Congressional midterms. They also hid the announcement at the onset of the extended 4th of July 4 day weekend, hoping no one would notice. (We did!)

You can also blame a brutal U.S. tax policy, with regard to C corporations, which is all the publicly traded ones. The U.S. has the highest corporate income tax rate in the world, bar none, at 40 percent. Only Japan comes close, and they aren’t exactly tearing the economic cover off the ball. What this means is that no sane company would bring profits earned overseas back to the U.S., only to get to keep only 60 cents on the dollar, when they can continue to reinvest them in, say, Ireland, which only charges 12.5 percent tax.

So that money is going to hire foreign workers, not American workers, and instead of getting 25 or 30 percent of a workers net earnings (including Social Security taxes), the federal government is generally getting 40 percent of nothing on this money.

Democrats, however, have been resisting calls for a tax amnesty period or across-the-board cut in the corporate income tax rate, however.

The CFO Journal also notes a structural issue that deters corporations from investing accumulating cash in job-creating endeavors: The increasing uncertainty of the stock market, with troubles in IPOs (Facebook!) and evidence of massive insider trading by favored clients in the high-frequency trading world have combined to increase the equity risk premium. In plain English, this means that acquisitions of companies are trickier. Acquisitions are a time-honored way for companies to rescue others, or to breathe new life into stagnant enterprises who lack the capital to carry out their business plans.

That latter part isn’t going away any time soon. But Obamacare and our confiscatory tax rates on foreign earnings are self-inflicted wounds.

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8 Responses to Why Aren’t Corporations Investing and Expanding?

  1. Karl Liechty says:

    The answer is the present controlling power in the US government does not want them to invest and expand locally or they would provide incentives for them to do so, thus the employment problem. Statistically speaking, unemployed people, young and old, share the responsibility for keeping them in control by how they vote. Too much voting according to one’s political history, background and upbringing, not enough voting based upon knowledge of the issues.

  2. Anthony B Ross, Sr CPA, CGMA, CIA, CFE says:

    The article is a bit partisan. The principal reasons that were given are Obamacare and U.S. tax policy. Other related causes are uncertainty in Europe, in tax policy in other countries, and in US legislative dithering. It’s a mess…

  3. Paul Hill says:

    Regulation, taxation and litigation.

  4. J. "J.R." Rossman says:

    Vitaver should have given more insight in this article of how much of the market economy that they made in the third quarter of 2012 in relation of being a contracted HR.

  5. Paul Adams says:

    I worked for a company where the CEO thought all his workers were his team mates and tried to make us owners, but we rejected him and we sure need men or women like that running our companies.

  6. Daniel Peters says:

    Because the pay your fair share crowd scares the crap out of them. Why should they when the govt is devising plans right now to put yet more burdens in the way. The looters are lining up and corporations are acting rationally. Furthermore, they discovered that a large portion of their employees were not adding value after the layoffs happened and the ship didn’t sink. Perhaps people shouldn’t order shoes on the clock, then companies will invest in the labor force

  7. @Anthony Ross.

    I wish the legislature dithered more. They wouldn’t have passed the ACA disaster.

    Everything else you named are things beyond the ability of the U.S. to control.

  8. I cannot comment on Vitaver’s earnings and have no familiarity with them. But according to this info graphic from the New York Times, Kelly Services – a temp agency, of all things — is America’s 2nd largest employer.

    http://www.nytimes.com/interactive/2012/01/20/business/the-iphone-economy.html?ref=business&_r=0

    Whether that is a sign of a healthy employment market or not is left as an exercise for the reader.

    I am not terribly inclined to blame “uncertainty” in Europe for America’s woes, because either Europe or Asia or the Middle East is ALWAYS uncertain. But why, pray tell, is Europe in trouble? Well, it’s mostly due to unsupportable fiscal policies, socialism, and disincentives to work. Taxes on employment, foolish and unsupportable mandates, the creation of oppressive and business-killing bureaucracies, national health care systems, vast swathes of cities on the dole, etc. etc. and stupid trade and currency ideas that Maggie Thatcher warned against in the early 80s.

    So it’s always amusing to me when liberal observers suggest ‘no, don’t blame Obamacare for our lousy job market! It’s really because of a lousy economy in Europe!” as if Europe got that way because it lost a bar bet or something.

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