The corporate ruling elite, deficit spending and the expendable American worker

America's corporate ruling elite have ultimately made this decision: American consumers and workers are not needed anymore..."

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By Rocky Boschert
Financial Editor

As we enter 2011, corporate business profits are doing pretty well, in spite of, or perhaps because of, poor economic conditions for most American workers. In fact, corporate profits are the only area of the US economy that has been expanding at a good clip since the 2008 recession.

In the third quarter of 2010, profits of domestic corporations were running at an annual rate of $1.27 trillion, just shy of their peak of $1.40 trillion in pre-recession 2007, well on the way to that high mark. Even after an adjustment for inflation, corporate profits are in relatively good shape, in a V shaped recovery, if you will.

So it is not too hard to see why the American ruling elite – whose incomes are tied to corporate business profits and Wall Street investments – are loathe to allowing a major shift of economic policy that may curtail their profits and their power. Yet in the past, normal economic analysis would have you think that more economic growth would provide even more profits, especially to corporations.

Profits, however, depend on two things: 1) the amount of economic wealth that gets created, and 2) where that share of the wealth goes – and how it is distributed.

Currently, for the business elite and the wealthy, with the current high level of unemployment, workers remain in a poor position to demand higher wages – i.e., a larger share of the economic wealth, either current or future. So corporations - and the ruling wealthy that get their income from owning corporate businesses – do not really want unemployment to fall much — especially to fall low enough to give workers more competitive bargaining power to demand higher wages and more benefits. And the weak position of workers in the current economy affects more than just wages and benefits.

As the Main Street / employment recession continues, businesses, especially the larger corporations, are able to force regulatory leniency and corporate-beneficial tax changes while controlling their expenses more easily than in “normal” times. For example, they can change work rules, scream over-regulation is hurting profits, get rid of older and/or higher paid workers, reduce benefits, and bring in new technology more easily, since workers are in a much weaker and poorer position to resist the changes imposed by business and the wealthy.

Moreover, the financial “shock” imposed on society by bad economic conditions and incompetent past business decisions is often used to manipulate their servitude politicians, making it easy for businesses and the wealthy to demand huge concessions from government to bail them out.

We are seeing these “demands” now with the new Republican/Tea Party dominated House of Representatives and the DINO corporate liberals. Still, from the perspective of the wealthy, one would think they would know more growth would be better for their profits – as more growth would also mean more consumption.

But here lies the new American economic conundrum: More demand for goods and services would necessitate more employment, giving the working class more power, hence weakening the power of the wealthy ruling class business owners.

With regard to the new global economy, America’s corporate ruling elite have ultimately made this decision: American consumers and workers are not needed anymore when the Wall Street American corporations have China, India, Latin America, Eastern Europe, and soon the Middle East and Africa to sell their goods to – produced by globally rotating cheaper labor on those same continents.

In essence, American workers are expendable unless a company gets a renewed case of American patriotism. Yet it has become apparent corporate America is not going to invest their free bailout money to help American workers. If a productive US growth stimulus policy required governments to spend more by running deficits, the wealthy are not going to be very patriotic. Why? Because they know that higher deficits would mean more taxes for the wealthy down the line.

In part, the wealthy fear that higher taxes would be needed to pay off the debt the government would incur when it ran deficits to stimulate growth, growth that would be designed to mostly help the struggling middle and poorer classes.

Equally important, and a valid concern to all political persuasions, upping government spending today will most likely entrench a higher level of government activity, which may also require higher taxes on a long-term basis. And the wealthy – with their vast army of lobbyists yielding suitcases of payola for our federal and state politicians – are very skilled at being able to push higher tax obligations onto lower income groups, as they have recently done again with the extension of the Bush tax cuts for the rich.

Concerns and fears over higher taxes – much of it fabricated by the ruling corporate elite generates a strong anti-big-government ideology, and that ideology can trump pro-worker common sense and unemployment solving economic logic. And there are plenty of people who because they are trained to oppose “big government” – also oppose the spending that would be involved in any program that would provide significant economic stimulus and employment through more deficit spending.

Strangely, most Americans who oppose government spending are not among the wealthy; yet they share the same anti-government, anti-tax ideology. After all, since they are not allowed to improve their incomes by voting for higher wages, they think they can improve their incomes by voting against taxes, which means voting against “big government,” which means voting against deficits spending.

All this said, most of today’s large federal budget deficit is not the result of spending designed to stimulate the economy. In 2001, the Congressional Budget Office (CBO) estimated the federal government was on course for a 2009 surplus of $700 billion. But in fiscal year 2009, the budget deficit was about $1.4 trillion. Where, then, is this $2.1 trillion difference between the 2001 CBO estimate and the current 2009 reality?

Lost in the “conservative” (or should we say Republican Party) rhetoric, is that slow economic growth in the early 2000s, followed by severe downturn in 2008 and 2009, accounted for over 40% of the difference, as tax income declined sharply and spending automatically increased (e.g., unemployment compensation) due to the recession which started in late 2007. In fact, about 50% of the difference resulted from legislation enacted in the Bush years – over half of which was war spending, tax breaks for the wealthy, and the bank bailout (under Bush, but ultimately enabled by the Democrats). In reality, the stimulus package of the Obama administration accounted for less than 10% of the difference, a relatively small share of the current deficit.

In the end, business interests and the wealthy who rail against the deficit have real financial interests and power that they want to protect. But what is more impressive is how the wealthy and powerful business interests have done a very effective job – with big help from a compliant and ignorant media – to convince economically weakened middle class conservatives and independents into believing their economic interests are the same as the ruling class who control domestic US economic policy.

“…One nation, indivisible; With Liberty and Justice for some.”

Rocky Boschert, Owner and Managing Principal of Arrowhead Asset Management, a fee-only investment management firm in Wimberley, Texas, is a Registered Investment Advisor and has over 25 years experience in the money management and investment business. Rocky writes a weekly financial tips column in the Personal Finance Page of the RoundUp.