The Usual

doughtrain According to a Wall Street Journal report on the latest Commerce Department statistics, the system is functioning normally:

U.S. corporate profits hit new highs last year, driven by the tight lid firms have kept on hiring and spending almost five years into the economic recovery.

A closely watched measure of after-tax corporate profits rose to $1.9 trillion in the final three months of the year, the Commerce Department said Thursday. Corporate profits stood at 11.1% of gross domestic product, up a bit from the prior quarter.

The latest uptick underscored a factor that has dogged the economy since it emerged from recession: Many companies are guarding their cash rather than putting it back into the economy in the form of new hiring.

The normalcy extends in all the usual directions, too.  According to Advertising Age, big business marketing also grows apace:

Why would major U.S. corporations keep a tight rein on almost all costs last year — except advertising?

By continuing their firm grip on hiring and spending, U.S. corporate profits reached new highs for 2013, The Wall Street Journal reported.

Advertising expenses, at least for the top 1,000 companies, was the exception. According to Kantar Media, the biggest marketers boosted spending 3.3%, while smaller advertisers cut ad budgets 6.6%.

What’s going on?

Maybe companies figured it was cheaper to spend money on advertising than to invest in research and development to try to stay one step ahead of the competition.

But that meant advertising’s job [even more] often was to divert attention from the product itself and toward emotional and purpose-driven benefits.

What’s going on? As one of the fake product differentiators says in its ads, it’s not complicated: Corporate capitalism is succeeding at serving its one and only purpose.

Ideology and Intuition

The Associated Press ran a story yesterday on still more record-setting income flow for the overclass.  Penned by Bernard Condon and Paul Wiseman, it is a true monument to our market-totalitarian times.  The authors express perplexity in the face of the basic facts:

Profits have a curious, sometimes counterintuitive, impact on the economy.  Unexpectedly strong earnings don’t necessarily translate into surprising economic strength.  Consider that profits have surged since the Great Recession ended in 2009, even as the economy has struggled to recover.  That’s because companies made profits mostly by slashing jobs and cutting costs.

What?  You mean not all capital that gets amassed returns to “job creation”?  Giving the rich more money might not be the best answer to all problems?  Who’d have thunk it?  Could there be something wrong with mainstream intuition, not to mention the central political tenet of the last 32 years?  What could it be?

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…

Piling Up the Fs

pyramid 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?

And a Triplet…

If you doubted the accuracy of yesterday’s twin quotes, the second of which suggested that the overclass is enjoying a luxury boom even as the mass of the population sinks toward and through 99er status, consider this item from today’s edition of The New York Times:

The nation’s workers may be struggling, but American companies just had their best quarter ever.

American businesses earned profits at an annual rate of $1.66 trillion in the third quarter, according to a Commerce Department report released Tuesday. That is the highest figure recorded since the government began keeping track over 60 years ago, at least in nominal or non-inflation-adjusted terms.

Corporate profits have been going gangbusters for a while. Since their cyclical low in the fourth quarter of 2008, profits have grown for seven consecutive quarters, at some of the fastest rates in history.

This breakneck pace can be partly attributed to strong productivity growth — which means companies have been able to make more with less.

NYT Finds Capitalists are Capitalists

capitalist_pig Reality has gotten harsh enough to compel even the professional addlers to peek behind the curtains:

Many companies are focusing on cost-cutting to keep profits growing, but the benefits are mostly going to shareholders instead of the broader economy, as management conserves cash rather than bolstering hiring and production. Harley, for example, has announced plans to cut 1,400 to 1,600 more jobs by the end of next year. That is on top of 2,000 job cuts last year — more than a fifth of its work force.

As companies this month report earnings for the second quarter, news of healthy profits has helped the stock market — the Standard & Poor’s 500-stock index is up 7 percent for July — but the source of those gains raises deep questions about the sustainability of the growth, as well as the fate of more than 14 million unemployed workers hoping to rejoin the work force as the economy recovers.

“Because of high unemployment, management is using its leverage to get more hours out of workers,” said Robert C. Pozen, a senior lecturer at Harvard Business School and the former president of Fidelity Investments. “What’s worrisome is that American business has gotten used to being a lot leaner, and it could take a while before they start hiring again.”

And some of those businesses, including Harley-Davidson, are preparing for a future where they can prosper even if sales do not recover. Harley’s goal is to permanently be in a position to generate strong profits on a lower revenue base.

In some ways, the ability to raise profits in the face of declining sales is a triumph of productivity that makes the United States more globally competitive. The problem is that companies are not investing those earnings, instead letting cash pile up to levels not reached in nearly half a century.

“As long as corporations are reinvesting, the economy can grow,” said Ethan Harris, chief economist at Bank of America Merrill Lynch. “But if they’re taking those profits and saving them, rather than buying new equipment, it hurts overall growth. The longer this goes on, the more you worry about income being diverted to a sector that’s not spending.”

“There’s no question that there is an income shift going on in the economy,” Mr. Harris added. “Companies are squeezing their labor costs to build profits.”

The trend is hardly limited to Harley. Giants like General Electric and JPMorgan Chase, as well as smaller companies like Hasbro, the toymaker, all improved their bottom lines despite slowing sales in the second quarter. Among the S.& P. 500 companies that have reported second-quarter results, more than one in 10 had higher profits on lower sales, nearly twice the number in a typical quarter before the recession, according to Thomson Reuters.

“Whole industries are operating at new levels of profitability,” said David J. Kostin, chief United States equity strategist at Goldman Sachs. “In the downturn, companies managed to maintain higher profit margins than ever before.”

Profit margins — the percentage of revenue left over after expenses — crumble in most recessions, as overall sales fall but fixed costs like infrastructure, commodities and rent remain the same. In 2002, during the recession that followed the bursting of the technology bubble in addition to the Sept. 11 attacks, margins sank to 4.7 percent. Although the most recent downturn was far more severe, profit margins bottomed out at 5.9 percent in 2009 and quickly rebounded. By next year, analysts expect margins to hit 8.9 percent, a record high.

[Source: The New York Times, July 26, 2010]

The New York Times, of course, implies that all this is some kind of anomaly, rather than still more evidence that corporate capitalism works as it is intended to work — it puts the rich first in any and all situations.

The truth is that the basic institutional logic of the system was explained in 1966 by suppressed Harvard and Stanford men Paul Baran and Paul Sweezy. Take a look at that book, plus Harry Braverman’s sequel, Labor and Monopoly Capital, and see if the above reportage conveys anything that ought to be surprising.