Here's Who's To Blame For America's Zombie Economy

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SAN DIEGO, CA - JULY 19:  A zombie character greets people along 5th Avenue in the Gaslamp Quarter at Comic Con on July 19, 2013 in San Diego, California.  Comic Con International Convention is the world's largest comic and entertainment event and hosts celebrity movie panels, a trade floor with comic book, science fiction and action film-related booths, as well as artist workshops and movie premieres. (Photo by Sandy Huffaker/Getty Images)
Sandy Huffaker, Getty Images

By Henry Blodget

U.S. economic growth for the second quarter was 1.7 percent.

That's better than expected, but only because the expectations were so low. In absolute terms, for an economy in mid-recovery, 1.7 percent is a lousy growth rate. And growth in the first quarter was revised down to a pathetic 1 percent.

If you turn on the TV today, you'll see a parade of our elected representatives blaming each other for this.

You can mostly ignore them.

If you're curious who is actually responsible for our crappy economy, just look at the following charts.

But, first, a basic economic equation. Ignoring imports and exports (for simplicity), the size of our economy is the sum of the following parts:

PERSONAL CONSUMPTION (Consumer Spending)
+
PRIVATE INVESTMENT (Business Investment)
+
GOVERNMENT SPENDING


Right now, those three buckets of spending are adding up to a meh GDP number.

So which one is to blame?

Well, first let's look at the biggest component of GDP--Personal Consumption (consumer spending). Personal Consumption these days is a higher-than-average -- 71 percent of GDP. Importantly, personal consumption has stayed at about that level for the last several years. It's actually higher than it was from 2000-2007 and much higher than it was in the halcyon days of the 1990s. So if we're wondering who to blame for our crappy economy, we can't blame American consumers. Despite high unemployment and lousy wage growth, consumers are still spending.


So, how about government spending? Is the government doing its part? Well, here we're going to find one of the big culprits. Unlike consumer spending, total government spending (federal, state, and local) has dropped sharply as a percent of GDP -- from 39 percent of GDP a few years ago to only 35 percent today. This drop in government spending is acting as a big drag on GDP growth.
Business Insider/ St. Louis Fed

But our government--the Republicans, mostly--have declared that it is crucial that we cut government spending. Republicans insist that we have to take our medicine now (while a Democratic president can be blamed for it) or die in agony later. And Democrats are unable to persuade enough Americans that this is a mistake. So we're stuck with government spending cuts, at least for this year.

So that leaves the third category of GDP--business investment. How are businesses doing? Are they investing aggressively in their future and our country?

Hell, no!

If you're looking for the real group to blame for our crappy GDP, you've found it: American corporations.

American corporations have become so greedy and short-term focused that they're barely investing at all.

Don't believe it?

Here's a look at private investment as a percent of GDP:
Business Insider/ St. Louis Fed
American business investment has increased since the depths of the recession, but it is still at a level that is normally only seen in recessions (e.g., pathetic).

So, why is it that American businesses aren't investing?

Well, if you listen to some of the people on TV, they'll tell you that it's the result of "policy uncertainty" or "high taxes" or "too much regulation."

This might sound persuasive, but it is self-serving nonsense.

The real reason American corporations aren't investing is that the folks who control and run them have become so selfish and greedy that they are focused on only one thing: Maximizing short-term profitability.

When the folks who control and run American corporations get together to set future goals, for example, they don't agree to, say, hire and invest heavily for the next several years in order to produce higher earnings and stock prices 5-10 years from now. In a business and investment culture ruled by annual bonuses and quarterly earnings reports, 5-10 years from now is so far into the future that it's barely worth considering. Instead, the folks who control and run American corporations set annual bonus and quarterly earnings targets designed to maximize profits and stock prices today.

In a period in which economic growth is weak (because corporations aren't investing), the way to hit annual profit targets and get those bonuses is to "increase efficiency." And "increasing efficiency," everyone knows, is usually just a synonym for cutting costs, firing employees, and scrimping on investment.

So big American corporations are maximizing their profits and letting mountains of cash build up on their balance sheets while, in the process, starving the economy and their employees of cash that would otherwise turbo-charge consumer spending and economic growth.

Don't believe it? Think that "too much regulation" and "too high taxes" are really to blame?

Take a look at these charts, which we also published yesterday.

CHART ONE: Corporate profits and profit margins are at an all-time high. American companies are making more money and more per dollar of sales than they ever have before. Full stop. This means that the companies have oceans of cash to invest. But they're not investing it. Because they're too risk averse, profit-obsessed, and short-term greedy.
Business Insider/ St. Louis Fed


CHART TWO: Wages as a percent of the economy are at an all-time low. Why are corporate profits so high? One reason is that companies are paying employees less than they ever have as a share of GDP. And that, in turn, is another reason the economy is so weak. Those "wages" represent spending power for American consumers. American consumer spending is revenue for other companies. So the profit maximization obsession of American corporations is actually starving the rest of the economy of revenue growth.
Business Insider/ St. Louis Fed


CHART THREE: Fewer Americans are employed than at any time in the past three decades. Another reason corporations are so profitable is that they don't employ as many Americans as they used to. This is in part because companies today regard employees as "costs" and "inputs" instead of human beings who are dedicating their lives to the organizations that, in turn, are supporting them and their families. (Symbiosis! Imagine that!) As a result of frantic firing in the name of "efficiency" and "return on capital," the U.S. employment-to-population ratio has collapsed. We're back at 1970s-1980s levels now.
Business Insider/ St. Louis Fed

CHART FOUR: The share of our national income that American corporations are sharing with the people who do the work ("labor") is at an all-time low. The rest of our national income, naturally, is going to owners and senior managers ("capital"), who have it better today than they have ever had it before.
Business Insider/ St. Louis Fed
In short, the obsession with "maximizing short-term profits" that has developed in America over the past 30 years has created a business culture in which executives dance to the tune of short-term traders and quarterly earnings reports, instead of investing aggressively on behalf of employees, customers, and long-term owners.

That's not what has made America a great country. It is not what has made some excellent American corporations the envy of the world. It's also, importantly, not the way it has to be.

Want an example of a corporation that can thrive--and deliver enormous returns to its shareholders--while ignoring short-term profitability and investing aggressively for the long-term?

Amazon.

Here's a chart of Amazon's revenue and profits over the past 15 years.
Business Insider/Ben Evans





















As you can see, unlike almost every other major American corporation, Amazon has invested aggressively almost every year that it has been in business. Amazon has invested so aggressively, in fact, that it has earned almost nothing.

And yet...

Amazon has become the dominant global eCommerce company, and it is growing at an extraordinary rate.

And, just as important, Amazon's stock keeps hitting new all-time highs.

Read that again.

Amazon has traded off near-term profits for long-term investment for as long as it has been in business. It has been the target of ridicule by myopic and greedy short-term investors who want it to deliver "blowout quarters" and "upside surprises." It has ignored the screams of everyone who has ever said it "couldn't make money" or "doesn't make enough money." Instead, for more than 15 years now, Amazon has calmly, quietly, and aggressively invested in the future. And it has delivered extraordinary returns to long-term investors in the process.

The Bottom Line

One of the big reasons the U.S. economy sucks is that, after three decades of ever-more obsessive focus on "shareholder value," our corporations and their owners have become myopic and greedy. Instead of investing in the future, and sharing more of their vast wealth with the people who generate it (their employees), they are hoarding their cash and maximizing their short-term profitability.

This business philosophy might--might--prop up their stock prices for the near-term.

But it's also gutting the middle class and crippling the overall economy. And, in the process, ironically, it is constraining revenue growth for the same corporations that are trying to scrimp and save their way to maximized profitability.

It's time for Americans to rethink our current business philosophy.

Coming out of the malaise of the 1970s and early 1980s, we needed a "get tough" period in which we got our corporations in shape. But now we've taken this "return on capital" religion too far. And it's hurting the country.

Specifically, it's time to make the goal of our corporations be to create long-term value for all of their constituencies (customers, employees, and shareholders), not just short-term profits.

Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.


Read More:
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If You're Wondering What's Wrong with America, Look at These Four Charts
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Peter

The article was written by Henry Blodget, a former securities analyst who was accused of securities fraud and banned from the industry for life. So, Mr. Blodget, if you want to know who's to blame for the zombie economy, look in the mirror!

August 07 2013 at 10:48 PM Report abuse rate up rate down Reply
ktwj

Amazon may be hiring, but it is not growing the U.S. labor force. Amazon is putting Main Street bricks and mortar retail stores out of business because it is undercutting their margins. So, the net result is, jobs are moving to Seattle, Washington, and are being lost all over America as Borders Books goes bankrupt, Barnes and Noble shuts down stores, and Best Buy has to get restructured, etc.

August 05 2013 at 2:56 AM Report abuse rate up rate down Reply
slinebe10p

corporations aren't to blame for this lousy economy but the Government is. They have spent us into oblivion. The programs they keep coming up with and the laws that they pass when we have had programs and laws enough to take care of just about anything you can think of. But they don't stand behind the laws already on the books, they simply ignore them. Government needs to quit the spending and quit passing laws that further strap the people with more debt.

August 02 2013 at 2:33 PM Report abuse rate up rate down Reply
frankie

Government spending has gone down compared to GDP????? Where did he get those figures? Obama has increased government jobs by 100 grand. That's $7B dollars or more every year. Every agency has had their budget increased. Food stamps, disability and medicare got to be government spending. Just look at the debt. This is just a bunch of crap.

August 02 2013 at 12:02 PM Report abuse rate up rate down Reply
rashedul1

as Stanley explained I am impressed that anyone able to earn $8794 in four weeks on the computer. did you look at this site big44.com

August 02 2013 at 9:47 AM Report abuse rate up rate down Reply
tomthumb193

Interesting stuff. I think it is good to get both perspectives from both sides of the aisle, liberal and conserative. thanks

August 02 2013 at 9:44 AM Report abuse +2 rate up rate down Reply
jahydroseed

Pure garbage.

August 02 2013 at 6:59 AM Report abuse +1 rate up rate down Reply
dabookie1

When you use buzz words such as "greedy" and "the Republicans mostly" you immediately invalidate your argument. I suppose you believe that business owners are suppose to take money out of thier pockets and give it to someone else. As far as taxing business, when will people learn businesses do not pay tax the consumers pay the tax for the business. If you raise taxes on business they simply raise the cost and or lower thier expenses ie layoffs or in your words get more effecient. I agree that there should be more invest in this country economy by busineses but the way to do that is to make it profitable for them to do so. It's ridiculous to pay someone 50-60 dollars an hour to perform unskilled labor to make a car yet that is what must be done and hence cars cost more than some houses. Mmake it profitable to invest here at home and business will do exactly that why you ask because they are there to make money and if you make it profitable they will invest but if you just want them to give it away sorry jack it ain't happening. Pretty simple but as long as you hav greedy people that are not willing to put in the time and efort to develoope skills and prefer to party all the time it won't work.

August 02 2013 at 2:02 AM Report abuse +2 rate up rate down Reply
1 reply to dabookie1's comment
ladybegreen

Efficiency is increased by replacing low level skilled labor with automation, and exporting skilled workers electronically though the use of remote control over vast international spaces. It's not necessary for a skilled worker to live in the United States to work here if they interact using long distance interactive robotics. It's getting to the point where we'll need to have international labor laws that replace national labor laws. More and more, corporations need no longer blame the workers for their troubles since they have the whole world to draw on for needed labor at the lowest common denominator of compensation. This turns every worker into a business person who sells his skills within an international market place. The term "worker" is becoming an anachronism. Everyone must fit into society as an international burliness person to survive in this world of interactive automation and electronic communication,

August 02 2013 at 2:46 AM Report abuse rate up rate down Reply
ha6ai

Written by AOL/Huffpuffpost lefty propandists

Obama is responsible for the disastrous economy

August 02 2013 at 12:19 AM Report abuse -1 rate up rate down Reply
saultydog42

BS, The first thing said was the problem, the COLA isnt 1.7%, thius is called artificial COLA, when you add it all together the cost of livibng will be over 25% in the last 4 years. The problem is in the calculation, when adding everything, not just what tyhe government wabnts you to see you will see it come to pass. The government wont add FOOD AND ENERGY to the calculation because it will reflect that the LIBERALS are killing America, nuff said....

August 01 2013 at 11:51 PM Report abuse rate up rate down Reply