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July 2010, Week 4

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Tue, 27 Jul 2010 20:55:08 -0400
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The Great Decoupling of Corporate Profits from Jobs

By Robert Reich

July 27, 2010, robertreich.org

http://robertreich.org/

Second-quarter earnings reports are coming in, and they're
making Wall Street smile. Corporate profits are up. And big
American companies are sitting on a gigantic pile of money.
The 500 largest non-financial firms held almost a trillion
dollars in the second quarter, and that money pile is growing
larger this quarter.  Profits that plummeted in the recession
have bounced back. Big businesses have recovered almost 90
percent of what they lost.

So with all this money and profit, they'll start hiring
again, right? Wrong - for three reasons.

First, lots of their profits are coming from their overseas
operations. So that's where they're investing and expanding
production.

GM now sells more cars in China than it does in the US, but
makes most of them there. The company now employs 32,000
hourly workers in China. But only 52,000 GM hourly workers
remain in the United States - down from 468,000 in 1970.

GM isn't just hiring low-tech assembly workers in China. Last
week the firm broke ground there on a $250 million advanced
technology center to develop batteries and other alternative
energy sources.

You and I and other American taxpayers still own over 60
percent of GM. We bought GM to save GM jobs, remember?

GM officials say no American taxpayer money is being used to
expand in China. But money is fungible. Because of our
generosity, GM can now use the dollars it doesn't have to
spend in the United States meeting its American payrolls and
repaying its creditors, for new investments in China.

Second, big U.S. businesses are investing their cash in
labor-saving technologies. This boosts their productivity,
but not their payrolls.

Last Friday, for example, Ford reported a $2.6 billion
second-quarter profit. The firm is already more than two-
thirds the way to equaling its record 1999 profits. But due
to labor-saving technologies, Ford now has half as many
employees as it did a decade ago.

Wall Street analysts are happy with Ford's "commitment to
keeping capacity in check," according to the Wall Street
Journal. Ford shares rose 5.2 percent Friday. "Keeping
capacity in check" is the Street's way of saying "no new
hiring." In fact, the Street is advising investors to sell
the stocks of companies that talk openly of expanding
capacity.

Finally, corporations are using their pile of money to pay
dividends to their shareholders and buy back their own stock
- thereby pushing up share prices.

Last Friday, GE announced it would raise its dividend by 20
percent and reinstate its share-buyback plan. It's GE's first
dividend increase since the company cut its dividend in early
2009. As a result, GE shares are up more than 5% in the past
few days.

Bottom line: Higher corporate profits no longer lead to
higher employment.  We're witnessing a great decoupling of
company profits from jobs.

The next supply-side economist who tells you companies need
more incentive (i.e. lower taxes) before they'll hire is
living on another planet.

The reality is this: Big American companies may never rehire
large numbers of workers. And they won't even begin to think
about hiring until they know American consumers will buy
their products. The problem is, American consumers won't
start buying against until they know they have reliable
paychecks. © 2010 robertreich.org

[Robert Reich is Professor of Public Policy at the University
of California at Berkeley. He has served in three national
administrations, most recently as secretary of labor under
President Bill Clinton. He has written twelve books,
including The Work of Nations, Locked in the Cabinet, and his
most recent book, Supercapitalism. His "Marketplace"
commentaries can be found on publicradio.com and iTunes.]

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