Dominic Rossi, the global chief investment officer for equities at Fidelity Worldwide Investment, has argued in the FT that:
Over the past decade the distribution of wealth has increasingly favoured capital over labour. The trend is most conspicuous in the US, but it can be found in most developed economies.
Labour's share of output is now at historic lows, and may be at levels that are suboptimal to foster economic growth. The corresponding accumulation of capital has led to a corporate savings glut, rather than an investment boom, which may have further contributed to a lacklustre economic recovery.
Labour's share of non-financial output in the US is a statistical measure of labour compensation as a share of non-financial corporate gross domestic product. The data go back to 1950. For 50 years labour compensation meandered between 61 per cent and 65 per cent of business GDP, ebbing and flowing with the economic cycle. Then, something happened. From 2000, it plummeted and currently rests at an all-time low of 57 per cent.
As he continued when analysing the consequence of this:
A hallmark of today's corporate world is the cash hoard that sits idle on its balance sheet, and it is difficult to see who benefits from it. It is the surest sign that a management team lacks imagination.
Boards and shareholders have a role to play here. They are able to resist this trend, and executives can be pressed to either invest or distribute the excess cash flow. It does not take great skill or much of an imagination to squeeze a work force and hoard the proceeds; it is much harder to take risks and invest in a future. Shareholders would be better off if they reward the latter.
I am afraid Rossi has this all wrong. The answer to the excess cash piles that big business now sit upon is not either investment or distribution. As he has already noted the management of these companies lack the imagination to invest well. And distribution merely shifts the pile elsewhere to the small minority who have no need for that cash as they already have money beyond their reasonable needs. All Mr Rossi reveals is that fact that he lacks imagination by suggesting these solutions.
What is actually needed is something much more obvious and radical. Firstly, real wage levels have to be restored. That means wage increases! Real ones: inflation beating increases that boost the well being of the people who can buy the goods and services business can create. Without their ability to do that business is right not to invest: there is no return to be had on the investment right now as it is obvious people cannot afford what business has to offer.
And secondly, we need real corporate tax increases: in the Uk to 30% at least with a residence tax base in place again and with strong controlled foreign companies rules to beat tax haven use so that companies distribute their cash piles for the common good.
Only then can we get the economy going again.
It hasn't hard to see what's needed to solve this crisis: unless, of course, you're blinded by being part of the problem as investment managers are.
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I could not agree more, I have been calling for higher wages and taxes since the introduction of buyback programs by big corporations.
Taxes don’t have to be higher, it just need to be paid in full with no avoidance.
Twitter: @TradingBCN
im interested in where your 30% number comes from? is that based on anything or a gut feeling, obviously the rate has been higher than 30% in more recent times
30% was the rate for many years
ok so more a gut feeling then. It was 52% for longer than it was 30% but I assume you feel 50+% too high for CT rate?
I would, yes
Current parameters suggest 30% plausible and 52% not
Mr, M.,
I’d love my wage to go up and I suspect lots of other people would like to see theirs go up as well but what happens in industries where there is massive global competition and purchasing managers buy on price?
Are you suggesting pension funds will take lower payments as profits are lowered to pay more to workers? Let alone if buyers will pay more if wages go up and the pension funds still want a decent return…..
..and that’s leaving aside the question of whether companies would perhaps see workforces cut back to pay more wages to fewer workers or even move production off-shore.
It’s called increasing the minimum wage as a starter – which can, as Howard Reed has argued – increase GDP
And it is also paying above the odds because that aids staff retention, improves productivity, adds to the return in the investment in training and so much more
These are the real economics – short termism is what you describe and why our economy is in trouble
Allan
Before writing “I’d love my wage to go up and I suspect lots of other people would like to see theirs go up as well but what happens in industries where there is massive global competition and purchasing managers buy on price?” did you read the article?
The point being made is that a lot of corporations have more cash than they know what to do with. They aren’t at the point where a rise in wages paid would bankrupt them. If they wanted to, they could pay the workers more while holding prices steady & just reduce the cash reserves. Which is what they’d have had to do in the days before the neo-liberals rolled back almost everything achieved by the Tolpuddle Martyrs.
Wages need to be linked to the cost of housing – many now feel it is not worth working because of housing costs and are on a neo-liberal treadmill. The Tories answer to this is to blatantly turn the in-work poor against the out-of-work-poor -this seems to be working for the time being but, I suspect, will not hold indefinitely. No political parties are explaining the truth of why people feel so poor -we need one that does! Another issue is that many people are doing jobs that are inherently unrewarding – a new form of real productivity of social value is required.
I would suggest that house prices should reflect wages rather than the other way around. Surely your wage should be the thing that determines how much you can afford to spend on housing and consequently what the price of a house should be.
The problem lies with governments that take measures to prop up housing prices rather than allow them to fall to the level they should be at.
But that is not the case now
That is the point I am making
And we have to realise there will be a transition
It’s a no-brainer! It had been proved many times, certainly the 1960s was a perfect example of it.
Put money on ordinary people’s pockets so they can spend! Spending puts more money into circulation which can then be captured by businesses to create jobs.
Redistribution of wealth came about because the rich were taking too much capital out of the economy by hoarding and investing it, and not consuming. Putting corporation and income tax up helps put this money into the hands of those who do consume, that is, ordinary working people.
We need politicians to grow a pair and stop the huge misallocation of wealth. Breaking up the banks and strongly regulating the finance industry, would go some wa to achieving this.
But there needs to be huge government investment to make up for the fact that companies are sitting on a £750 billion plus cash pile.