YahooOne of the big problems in the U.S. economy right now is that big corporations are generating record profits not by growing revenues but by cutting costs.
“Costs,” as everyone who works for a big corporation knows, are a synonym for employees, employee wages, employee perks, capital investment, and research and development.
The employees whose collective wages are stagnant or dropping account for most of the spending that drives the economy. So if employees aren’t getting paid well, and corporations aren’t spending, the economy can’t grow quickly.
Gary Shilling observes that, from a philosophical perspective, what is happening is that “capital” (the owners of corporations) are dominating “labour” (the rank and file employees who make and sell corporate products and services). And he notes that, in a democracy, these imbalances do not usually persist for long.
The Obama Administration, Gary points out, is trying to “redistribute” the country’s wealth from rich corporations and their owners to average Americans–an effort that drives free-market advocates, some rich Americans, and some stockholders insane with rage. But given that less than 10% of the country is benefitting from the current capital-labour imbalance, and the other 90% is losing ground, it’s not surprising that the Obama Administration has the country’s support.
I asked Gary whether there wasn’t a private-sector solution to the problem–whether corporations could be persuaded to just voluntarily pay their employees more. After all, I pointed out, the employees are the folks who are creating the value for the corporations and their stockholders. And given that profit margins are already at record highs, the corporations can certainly afford to pay employees more.
Gary smiled and called me a “Marxist.”
And that is indeed a very common reaction to the suggestion that companies pay people more.
Which is too bad!
Corporations voluntarily paying their employees more has nothing to do with politics, or government, or political philosophies. It also has nothing to do with “handouts” or “subsidies” or the other types of government spending that free-market advocates abhor. And it has nothing to do with unions forcing shareholders to share more, and often stifling their companies’s innovation, competitiveness, and nimbleness in the process.
Paying employees more simply means sharing more of the vast wealth that corporations generate with the people who generate it. It means investing in your people, so they don’t have to work full time for you and yet still be poor (hello, Walmart). It means investing in the economy and your customers. It means creating value for all four constituencies that great companies serve:
In short, persuading companies to pay their employees more has nothing to do with “Marxism” or “Communism,” which are philosophies of centralized government and economies.
For what it’s worth, people are right to reject Marxism and Communism. They simply don’t work. They ruin economies and impoverish populations. If you don’t believe that, all you have to do is look at the Soviet Union and China of a couple of decades ago.
But there’s nothing stopping great companies in free-market economies from sharing more of their wealth with the people who generate it and from investing more aggressively for the long term.
Great companies do this not just because they are forced to by unions or taxation, but because it’s the right thing to do. It’s the right thing for employees, customers, shareholders, and the broader economy. And, for companies with a long-term focus, it’s the right thing to do for the companies themselves.
Amazon is a classic example of a company that constantly generates less profit than it could so it can continue to invest aggressively for the long term. And, over the long term, Amazon’s shareholders have done just fine.
Gary Shilling is right that today’s record-high profit margins and labour-capital imbalance won’t persist, because it never does. But the question companies should be asking themselves is how they want this imbalance to be addressed. Do they want to wait until they are forced to share more of their wealth by unions or the government? Or do they want to do it voluntarily, because it’s the right thing to do?
For the sake of average Americans and the U.S. economy, let’s hope it’s the latter.