The Actual Use of Corporate Capital

Any guesses what this graphic depicts?:

That is the percentage of free cash flow the firms included in the S&P 500 Index spent across the 2010s buying back their own shares, according to Bloomberg Business Week.

This is not an error or an optical illusion.

To say it again: From 2010 through 2019, U.S.-based big businesses, as a group, spent more than half their net profits buying back claims to their own future profits — i.e. helping their future shareholders extract even more wealth from forthcoming corporate endeavors. More than half.

Compare this fact to your Adam Smith model, pro-capitalist friends.

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.