Friday, March 27, 2020

Socialism for the rich: America's $532bn bailout of big companies

The top executives of most of America's biggest corporations are adept at dodging taxes, overpaying themselves, and buying back shares that they are invested in themselves rather than building rainy day funds. The Federal government and Federal Reserve are the backstops in the mythical land of free markets while the genesis of commercial pharmaceutical and tech innovations are often in public laboratories or institutions.

Fortune magazine noted last August that more than half of all share buybacks were funded by debt.

According to a January 2020 article in the Harvard Business Review, "in 2018, only 43% of companies in the S&P 500 Index recorded any R&D expenses, with just 38 companies accounting for 75% of the R&D spending of all 500 companies....The 465 companies in the S&P 500 Index in January 2019 that were publicly listed in 2009-2018 spent $4.3tn on buybacks, equal to 52% of net income, and another $3.3tn on dividends — an additional 39% of net income. In 2018 alone, even with after-tax profits at record levels because of the Republican tax cuts, buybacks by S&P 500 companies reached an astounding 68% of net income, with dividends absorbing another 41%."

Since Q1 2009, S&P 500 companies have spent, cumulatively, $5.4tn on stock buybacks, according to Yardeni Research. US GDP in 2019 was $21.4tn.

The US House of Representatives is expected to approve the current $2.2bn stimulus bill today, in response to the coronavirus emergency that resulted in 3.3m new American jobless claims last week. The Johns Hopkins University Coronavirus Resource Center reported earlier today that US infection cases at 85,500 had surpassed China's 81,800 total cases and Italy's 80,600.

Big corporations will get grants and loans up to $532bn but the $150bn that is allocated to states and local governments is considered to be inadequate. However, the Federal Reserve may create credit worth trillions more for states, municipalities and companies not specifically covered by the law’s programs for airlines and small business.

Nancy Pelosi, speaker of Congress, said in an interview with Bloomberg TV on Thursday morning, on her 80th birthday, that a further bill "will lean toward recovery — how we can create good-paying jobs and to go forward, perhaps building the infrastructure of America."

Corporate America got a big boost in 2017 when the headline federal corporate tax rate was cut from 35% to 21%.

The tax reform was to be self-financing but before the coronavirus emergency, it was forecast that the annual US budget deficit in the fiscal year Oct 2019-Sept 2020 would exceed $1tn.

In 2018 the effective US corporate tax rate was at 11%.

While the Democrats succeeded in excluding the Trump family from availing of a bailout, the stimulus package has earmarked $61bn in grants and loans for American airlines.

Trump pushed for a bailout of cruise lines even though Carnival, the biggest, avoids US taxes via residency in Panama and Britain and the Treasury Department will dole out an unspecified amount to the companies.

Economists writing in 'USA Today,' note that "Rather than using their profits from the past five years to pay off debts and save for a rainy day, the big 4 US airlines — American, United, Delta and Southwest — (they control more than 80% of the American passenger market) instead grew their combined liabilities to $166bn, all while spending $39bn on share repurchases...Similarly, the 3 largest cruise companies — Carnival, Norwegian (founded in 1966 and based in the United States), and Royal Caribbean—have liabilities of $47.5bn and engaged in share repurchases of $8bn.

The top airline executives paid themselves $666m in compensation over the 5-year period while the top cruise executives got $448m.

“I don’t think we’re ever going to lose money again,” Doug Parker, American Airlines CEO told the CNBC channel in Sept 2017.

Robert Isom, the president of the airline said it expected to be able to extract more ancillary revenues such as baggage fees from passengers. He said the airline was “just scratching the surface” in ancillary revenues. Slimmer, and more, seats on its planes were also planned.

The New York Times has noted that "From 2014 to 2020, in an attempt to increase its earnings per share, American spent more than $15bn buying back its own stock. It managed, despite the risk of the proverbial rainy day, to shrink its cash reserves. At the same time it was blowing cash on buybacks."

The buybacks, of course, boosted the value of the executives' shareholdings.

An estimated 30m passengers are transported on 272 cruise ships worldwide each year.

Carnival has a fleet of 104 ships and this month, Wells Fargo*, a bank, recommended that investors buy stock in the company as it is “almost ‘too big to fail” and “there probably will be broad... government support.”

The 'National Review,' a conservative magazine, noted:

"Carnival is a Florida-based company that, as of 2018, employed 12,000 corporate employees and another 88,000 crew. Of those 88,000 working on Carnival ships, only 4.4% come from North and Central America (they don’t specify the number of Americans). The ultra-loose monetary policy unleashed by the Federal Reserve in the wake of the 2008 financial crisis has been particularly good to Carnival, which used the resulting low-interest-rate environment to load up on debt. And while it borrowed a lot, Carnival is actually the least indebted of the major cruise lines: At the end of 2019 it had only twice as much debt as it earned in a year before interest, taxes, depreciation, and amortization, compared with about 3.5 times for both Norwegian Cruise Lines and Royal Caribbean."

Boeing last week called for a bailout of at least $60bn for US aerospace companies. The aircraft maker and its suppliers are facing a financial crisis after Boeing halted production of the 737 MAX in Jan 2020. It had ignored safety warnings and fired ahead with building about 400 units before the plane was grounded across the world after two fatal crashes.

"Boeing employees mocked federal rules, talked about deceiving regulators and joked about potential flaws in the 737 Max as it was being developed, according to over a hundred pages of internal messages congressional investigators," the New York Times has reported.

Boeing spent over $43bn buying back shares over the past decade.

This poster was produced by the Works Progress Administration (WPA), which was an American New Deal agency, employing millions of job-seekers in public works projects, including the construction of public buildings and roads. Sinclair Lewis (1885-1951) American novelist and social critic, won the Nobel Prize for Literature in 1930. "It Can’t Happen Here" (1935) was on the possibilities of a Fascist takeover of the United States.

Farmers will get $23.5bn, after receiving $26bn in subsidies/ welfare in recent years to offset losses from Trump’s trade war with China. Farmers are still operating as normal and in this election year, some Republican senators were pushing for $50bn.

In 1986 President Ronald Reagan said in a speech "The nine most terrifying words in the English language are: I'm from the Government, and I'm here to help."

However the religion of "small government" is only important to Republicans when they do not hold the levers of power.

The issue of the size of the public debt and annual budget deficits are no longer priorities.

There is a corrupt bargain with the rich to keep taxes and regulations low, while relying on federal backstops, in return for financial support.

A Monmouth University survey published in May 2019 found that only 29% of Americans viewed socialism to be compatible with American values, yet 50% believe socialism is “a way to make things fairer for working people.”

...and America today again has socialism for the rich and poor in the latest stimulus program — the latter thanks to the Democrats.

In a speech during the 1952 presidential election campaign, President Harry Truman said in a speech:

"[Republican Senator Robert] Taft explained that the great issue in this campaign is 'creeping socialism.' Now that is the patented trademark of the special interest lobbies. Socialism is a scare word they have hurled at every advance the people have made in the last 20 years.

Socialism is what they called public power.

Socialism is what they called social security.

Socialism is what they called farm price supports.

Socialism is what they called bank deposit insurance.

Socialism is what they called the growth of free and independent labor organizations.

Socialism is their name for almost anything that helps all the people.

When the Republican candidate inscribes the slogan “Down With Socialism” on the banner of his “great crusade,” that is really not what he means at all.

What he really means is, 'Down with Progress — down with Franklin Roosevelt’s New Deal,' and 'down with Harry Truman’s fair Deal.' That is what he means."

In 2008 there was a Bush administration $700bn bailout of Wall Street, led by AIG the insurance giant, and Citigroup. In Sept 2008 the US Treasury Department was authorized to purchase up to $100bn in preferred stock of the federal mortgage financiers Fannie Mae and Freddie Mac. In Jan 2009, 598,000 jobs were lost in the worst month since Dec 1974 — 1.8m jobs were lost in 3 months and 3.6m since Jan 2008.

The $82bn bailout of General Motors and Chrysler involved both the Bush administration and President Obama from Jan 20, 2009.

The new Obama administration proposed a $787bn stimulus package. It got no Republican vote in the House of Representatives and 3 Republican senators voted for it.

White conservatives established the Tea Party Movement within the Republican Party. Its leaders would later become Trump's Praetorian Guard.

A public backlash to bailouts was fanned by a rant by a CNBC reporter, Rick Santelli, broadcast live on television in Feb 2009.

Standing on the floor of the Chicago Mercantile Exchange, Santelli shouted "Don't help these losers with their mortgages," as traders cheered him.

Protests against "big government" began across the country and Tea Party supporters helped the Republican Party to retake the House of Representatives in 2010. Opposition to providing health insurance to the uninsured was also an issue — some of Tea Party folk who rejected what was called Obamacare as a prime example of big government, were recipients of federal Medicare (available to people from 65 years of age) themselves and those from Red (conservative) states were likely to be receiving federal per capita funds that were higher than in Blue (liberal) states.

Paul Krugman, the New York Times columnist, wrote last year, "does anyone still believe that the Tea Party uprising was a protest against deficits? From the beginning, it was basically about race — about the government spending money to help Those People. And that’s true of a lot of what pretends to be fiscal conservatism."

Trump's loyal base is unlikely to revolt against the latest federal bailouts.

The Tea Party Movement took its name from the 'Boston Tea Party' when Americans boarded 3 ships owned by the East India Company and dumped tea into the harbour on December 16, 1773.

The apparent revolt against taxes is a myth.

In 1773 when the British East India Company (EIC) shipped Chinese tea that was dumped in Boston Harbor, the tea had likely been paid for via proceeds of the opium trade, while the Boston merchants were not protesting high-taxed tea as presented in the history books. The Tea Act of 1773 was passed in London to enable a cash-strapped EIC to offload tea in the American Colonies at a reduced price and the Boston merchants who organised the Boston Tea Party were smugglers of cheaper Dutch supplied tea!

*Wells Fargo, America's fourth-biggest bank, is the subject of an ongoing criminal investigation of the fraudulent opening of about 3.5 m customer accounts without existing customers agreement, for the purpose of impressing Wall Street with its cross-selling ratio and to steal fees from customers.

Low-paid staff were bullied to meet new account targets (every customer was expected to have 8 accounts) and John Stumpf, the former chief executive of Wells Fargo (2007-2016), has agreed to a lifetime ban from the banking industry. He blames a colleague for the fraud.

Stumpf has so far avoided prison and he has accepted $17m civil fine imposed in Jan 2020 but in 2016 he was forced out with a payout of $130m. Stumpf was due nearly $200m before the fake account fraud was revealed.

But as the national outrage grew, Stumpf announced that he would forfeit stock awards worth $41m, as well as his 2016 salary and bonus.

Netflix: Watch Season 2 of Dirty Money- Wells Fargo