Archive for the 'Economics 101' Category
Thursday, October 27th, 2011
Adam Smith Has Left the Building
The rather Cardassian-looking personage at right is Robert A. “Bob” McDonald, Chairman of the Board, President, and CEO of the Procter & Gamble corporation. He was interviewed recently by Advertising Age on the topic of why P&G continues to pump out dividends to its shareholders, despite the Great Recession. The answers he gave are textbook confirmation of the profound difference between corporate and classic capitalism.
Recall that, despite the centrality of price-slashing to the ideal capitalist system described by Adam Smith, in practice, nobody hates price reductions more than capitalists. Explaining his 1892 decision to sell Edison Electric to the investment ring that was seeking to form the General Electric corporation, Thomas Alva Edison confided to The New York Times:
Recently, there has been a sharp rivalry between the [existing] companies, and prices have been cut so that there is little profit in the manufacture of electrical machinery for anybody. The consolidation of the companies will give the added advantage that a large concern has over a small one. It will give a larger working capital. It will do away with a competition that has become so sharp that the product of the factories has been worth little more than ordinary hardware… I do not know that there will be any increase in prices, but there should be an increase of 3 or 4 percent in the profits by the simple advantage of placing all of the interests under one management….I simply want to get as large dividends as possible from such stock as I hold.
Big, conglomerate, merger-forming, unregulated corporations (a.k.a., our ruling institutions today) were knowingly sought and obtained by frustrated capitalist investors precisely as a means of restricting price competition.
Within a few decades, the newly empowered investor-barons found that their success in this direction also made it possible to launch what we now know as marketing, a.k.a. studied managerial manipulation of the off-the-job behaviors of prospective customers, and to thereby further accelerate profit-making.
By diverting to marketing some of the steadily rising revenues made possible by constant price increases, big businesses could have their cake and eat it, too. People paid higher and higher prices, funding not only expanding returns on shareholder investments, but also the ever-expanding brainwashing effort on which those returns were increasingly premised. In essence, the new pricing power permitted corporate capitalists to collect a private tax and spend it on the marketing race, to the primary benefit of their owners’ portfolios.
I mention all this again because, in his Ad Age interview, Mr. McDonald confirms how the whole thing works.
“[W]e don’t signal pricing to competition, which is illegal and unethical,” says McDonald, in the mandatory pro forma nod to the prevailing agreement that a lack of old-fashioned price-fixing klatches somehow means co-respective pricing isn’t the norm.
So what do P&G managers do instead?
McDonald explains:
They make price increases, then “it takes competitors about a month or two to recognize you are pricing and about a month or two to decide to execute their price increase and then another six months to actually execute their price increase.”
In other words, they “don’t signal pricing to competition,” but they do make price changes then pay very close attention to whether competitors will co-operate on the hikes (and they usually do).
So, no (or at least not usually) secret meeting, but everybody knows how the system works, and very few ever buck it. Different process, same intent and same results:
P&G plans additional price hikes early next calendar year to recoup commodity costs and currency changes, but is about two-thirds of the way through price increases, he said.
Overall, P&G posted results in-line with analyst expectations, with organic sales up 4% to $21.9 billion and fully diluted net earnings per share up 1% to $1.03, as commodity costs continued to eat into margins despite price increases.
Under Bob’s leadership, P&G has grown sales by an average of nearly four percent per year over the past two years; core earnings per share an average of nearly seven percent; and adjusted free cash flow 106%. The Company has delivered these results despite significant economic headwinds, including slow to no growth in developed markets and rising commodity costs.
On the strength of these results, P&G has paid about $5.5 billion in dividends, returned over $6 billion to shareholders through the repurchase of P&G stock, and marked the 121st consecutive year that P&G has paid a dividend.
P.S. Bob also makes a highly interesting comment on the continuing polarization of American society:
“I don’t really see a dramatic change in consumer behavior,” Mr. McDonald said, compared to what consumers have been doing since 2008. Unemployed consumers continue to look for good value and sometimes trade down, he said. “But at the same time you’ve got people at the higher end of the economic pyramid doing extremely well and continuing to trade up.
In mainstream politics and media, it’s still a “middle-class” society. At the commanding heights of “the economic pyramid,” they know better.
Wednesday, October 12th, 2011
The Pepsi Generation (of Profits)
For major corporations, competition through the marketing race is the preferred alternative to the old-school price competition that was supposedly an unavoidable part of capitalism, but turned out to be both despised by actual capitalists and controllable via corporate oligopoly. Why the preference for expensive marketing efforts over unfettered Adam Smithian price cutting?
The answer? Cutting prices almost always hurts profits, while the pricing power bestowed by an organization enjoying oligopolistic market power ordinarily permits both increased brainwashing outlays and increased profits.
Exhibit A: “Higher Prices Profit Pepsico,” a report from today’s edition of Advertising Age.
PepsiCo, the world’s largest snack-food maker, posted a 4% jump in third-quarter profits, aided by price increases on snack and beverage products around the world.
“PepsiCo has been more aggressive raising prices than they have in a long time,” said Jack Russo, an analyst with Edward Jones & Co. in St. Louis, Missouri. “All the staples companies are seeing cost pressures.”
Despite its long-standing projection of a youthful, silly, fun-loving image in its numerous marketing campaigns for its various junk food products, Pepsico is about as stolid a corporate capitalist cash engine as you can find. Its board of directors includes a Rockefeller and ye olde John Sculley.
Hence, the advancing profitability of operations like Pepsico is the main reason the overclass continues to hoard cash amid the jobless “recovery.” Indeed, such is the very heart of the reason large corporations remain the clear core of the system, despite the more publicized continuing expansion of the financial sector. As a big-time investor, you can’t beat them, in boom times or bust. They continue to pump out the dough that ends up in third homes, private jets, and hedge funds.
And just how does Pepsico pull it all off financially, hiking both marketing spending and returns to shareholders?
According to Ad Age, Pepsico’s third-quarter sales were $17.6 billion. Its third-quarter 2011 cost of goods sold, the amount it had to pay for the raw materials and labor that went into making (as opposed to marketing) what it sold? $8.45 billion, less than half its sales revenue, says Ad Age. (Note: Because some of the COGS costs, of course, are marketing-mandated expenses — the costs of labels, specialized packages, etc. — this comparison actually understates the degree to which basic labor exploitation funds the whole marketing endeavor.)
And they say Karl Marx was wrong…
Monday, July 25th, 2011
Piling Up the Fs
While it remains a myth that, in the United States, the period from 1945 to 1980 was marked by increasing egalitarianism, neither was it a time of sharply increasing class exploitation. Then came the Great Restoration, as the overclass decided to get tougher and to step up its political salesmanship. Making more war, jailing more criminals, privatizing everything in sight were the secondary policies. At the core, of course, was “supply-side economics,” or the assertion that providing the rich with more and more money is the key to a permanent economic boom and the best of all possible societies. The rich invest, so the richer they are, the more they’ll invest, right?
Although the corporate media are incapable of asking the question, we might do so: How is this set of claims proving out? What grade should we, the citizens, award for the ongoing experiment in letting corporate capital dictate everything to a human society?
Well, as TCT readers know, the conditions for assessment could hardly be better. The overclass has been raking in cash right throughout the past several years. And the latest results? The Associated Press reports them:
NEW YORK — So much for fears that U.S. companies might stall out in the economy’s soft patch.
Corporate profits are coming in better than expected so far in second-quarter earnings season despite concerns about the potential for trouble ahead.
“The corporate sector’s in great shape,” says Joseph LaVorgna, chief U.S. economist at Deutsche Bank.
All told, 148 companies in the Standard & Poor’s 500 index have reported earnings and 73 percent have beaten the expectations of Wall Street. That’s somewhat ahead of the typical pace of two-thirds that surpass estimates.
Companies that had reported as of Friday had $24.52 per share in operating earnings — profits before subtracting interest and tax expenses — according to S&P senior index analyst Howard Silverblatt. The record of $24.06 per share was set in the second quarter of 2007.
Coming out of the recession, corporations first reported explosive earnings growth early last year. The pace has slowed, but it’s still going. At the current rate, second-quarter earnings would be 17 percent better than a year ago.
So, on supply-side/Great Restoration theory, we are now experiencing an investment boom and full employment.
Can you say epic fail?
Thursday, February 10th, 2011
Liberals Can’t Read Graphs
When I was a math student, and then again when I was studying social science, they taught me the principles of making and reading data graphs. When it comes to x-y line graphs, the basic idea is simple. The lines must take the best mathematical fit to the points that represent the known information, and judging trends is mostly a matter to reading the slant of the lines.
So, dig this very important graph, taken from Timothy Noah’s series on income inequality in the United States:
Notice how liberals read this: They describe the period from 1941 to 1979 as “The Great Compression.”
Now, look once again at the graph. During what period is there ever a downward-sloping trend line? A pre-schooler would see it immediately: 1941-1945 only.
From 1945 to 1979, the trend line is utterly flat, meaning that income inequality was staying the same, not compressing.
So, why do liberals always define “The Great Compression” as lasting until 1979? Because they are in the business of making excuses for corporate capitalism, which never does anything to equalize income and wealth.
Monday, February 7th, 2011
Overclass Charades, or Waiting for Zero
So, pretending that a mere harangue will get capitalists to stop hoarding cash, Black Reagan goes the Chamber of Commerce, where he pretends to ask:
“If there is a reason you don’t believe that this is the time to get off the sidelines — to hire and invest — I want to know about it. I want to fix it.”
In reply, the true and obvious answer gets mentioned by a Chamber member in attendance:
Mr. Obama’s suggestion that businesses can help the economy recover by spending their reserves was met with skepticism by some in the audience. Harold Jackson, a executive at Buffalo Supply Incorporated, a medical supply company, called it naive.
“Any business person has to look at the demand to their company for their product and services, and make hiring decisions,” Mr. Jackson said. “I think it’s a little outside the bounds to suggest that if we hire people we don’t need, there will be more demand.”
In other words, when all the money’s at the top, there’s no reason to stop hoarding it. Obama’s supply-side bailouts and apologetics are on exactly the wrong course.
Straight from the horse’s orifice, but don’t hold your breath waiting for Black Reagan and his moribund political party to get the point.
[Source: The New York Times, February 7, 2011]
Friday, January 28th, 2011
Trends in Unsustainability
I realize that “financial services” explains some of the number and that the baseline is last year’s anemia, but, nevertheless, this quote from today’s New York Times is worth noting:
“Things are better, but they’re not anywhere near where they need to be to make major inroads into unemployment,” said John Ryding, chief economist at RDQ Economics.
The item that is “not anywhere near enough” to trigger meaningful job creation by the Obama-worshipped, cash-hoarding “private sector?” Last quarter’s 3.2 percent rate of overall economic growth.
So, this is where we’ve allowed ourselves to be taken: A rate of economic growth of the bloated, hyper-distorted, massively wasteful U.S. economy that is wildly, insanely unsustainable in the ecological terms of the 21st century is now nowhere near fast enough to make capitalism do the first, tiniest bit of trickling down.
Such are the wages of letting the overclass buy up everything and impose its supply-side priorities* everywhere. Such is the decrepitude of this outdated, severely dangerous social order.
*“All for ourselves and nothing for other people seems in every age of the world to have been the vile maxim of the masters of mankind.” — Adam Smith, The Wealth of Nations
