Sunday, March 27, 2011

A Really Big Question, part 4

Last time we looked at how Americans' unholy obsession with more and bigger everything explains why the nation can no longer provide many basics that it could 40 or 50 years ago. We see this in the $40,000-$60,000 luxury SUVs, Mercedes, Lexus and other high end cars on the road today. Those are no longer the exception, toys of the rich; instead, they're so commonplace as to not even warrant the special attention that such a car would have gotten back in the day. Compare this to 1965, when the average new car cost $2650. Then there are our homes, averaging $355,000 in San Diego today, vs. $20,500 in 1965. Of course, cars, houses, and most everything else have better features now than they did in 1965, but still - people paying 18 times as much for cars and 17 times as much for homes, when overall prices are only 7 times higher today than back then? Hmmm......

I'm going to let others calculate how much we've got tied up in housing, cars, electronics, etc. today, vs. back in the 1960s. But can we just agree that it's probably tens of trillions of dollars, many more than in 1965 even after adjusting for inflation? Still, I wonder how much of our money has ended up in the pockets of Wall Street pirates, corporate fat cats and foreign billionaires, thus hobbling the nation's capacity to function smoothly. I mean, it's one thing if we stupidly but knowingly sacrificed the nation's future for the benefit of our own conspicuous consumption, yet it's quite another to have been duped out of billions or trillions by these unsavory characters.

I guess that's the question: Is it many billions, or is it trillions? Because if the big bankers ripped us off for tens of billions over the years, corporations lined their pockets and those of their stockholders with tens of billions more, and we've sent tens of billions in wealth abroad without it coming back to us in some form or another, then that's a bummer, but hardly explains the mess we're in. On the other hand, if the big banks and brokerage firms have pocketed many hundreds of billions or even trillions in ill-gotten gains, while corporations and foreigners have matched their thievery or - especially in the case of foreigners - perhaps rather fairly-gotten gains, well - that's a pretty big deal, isn't it?

I'm not sure which it is. Nor am I sure I want to do all the research to figure it out. But I'd like to have some idea, and think Americans (or at least readers of this blog) should know which is more likely. No sense blaming corporate America and avaricious foreigners for all for our ills if it's not really their fault!

Where to start? Well, knowing how much Wall Street firms and the big banks made over, say, the last 20 years would be a good starting point. Next, we could take a look at total pay (including bonuses & stock options) for top corporate executives over the past 20 years, using perhaps the 30 companies in the Dow Jones Industrial Average. Measuring how much foreigners have "ripped us off" over that same time period would be, I think, just too difficult. There are so many variables there, not the least of which is the incredible growth in their own country's markets, the degree to which they became wealthy "fair and square", and other considerations. So, now that I think of it, I'm just going to focus on home-grown theft by "Wall Street" and "Corporate America".

You don't know it, but I just took some days off to look for the kind of information mentioned in the previous paragraph. Didn't have a lot of luck. Bits and pieces, such as the nation's brokerage firms made $61 billion in 2009, a record year, but lost $23 billion in 2008. Well, I'm going to use those bits and pieces, some knowledge of the business world and economics, and some common sense to come up with some "guesstimates". These are not hard, reliable figures, but they're a start; an honest effort to gauge where some of our money has gone.

Going back to the early '90s, it seems that Wall Street lost money only a few times, but otherwise made something like $10 billion-20 billion a year most of the time, with plus $69 B and minus $23 B being the outliers. Let's take the middle of the range, and say that they averaged $15 billion a year in profits, or $300 billion total over the last twenty years. But what about all the bonuses they paid out? In most cases, those would have come out before figuring profits, so there's another big chunk of money that Wall Street walked away with. Last year those amounted to nearly $21 billion, the 5th largest amount ever. Let's go out on a limb somewhat and guess that maybe those have averaged about $15 billion a year also, or another $300 billion over twenty years.

That's perhaps $600 billion that Wall Street's taken home since 1990. Certainly much of that found its way into the pockets of millions of Americans, either in the form of dividends or the trickle-down effects of the wealthy spending their money. And a big chunk went for taxes; despite the conventional wisdom that the rich avoid paying taxes, the fact is that something like 70% of all income taxes collected come from the richest 10% of Americans. Let's cut to the chase: I'm guessing that Wall Street fat cats have pocketed, held onto, squirreled away perhaps $200-300 billion over the last twenty years; that's $200-300 billion moved into Swiss bank accounts, $20 million houses, $10 million works of art, etc.

That's a lot of do-re-mi, as they say. But not enough to explain why we're $15 trillion in debt, can't afford to fix our roads, and so forth. There's also the corporate profits, and increase in stockholder wealth, though. Again, it's really hard to get a handle on those numbers, at least without going out and doing the serious research that - well, let's be honest - I don't want to bother with right now.

What I do know is that the 5000 largest corporations were worth about $4.5 trillion in 1990, and are worth nearly $17 trillion today. That change would about account for the increase in our national debt over the same time period, but such a comparison would be totally bogus. First, because those corporations grew by creating tens of trillions of dollars worth of goods and services that went to us Americans, so it's hardly saying that they "stole" their greater value. Second, because nowadays more than half of all Americans own stock, either directly, indirectly, or both. So much of that increased value has, again, gone into the pockets of tens of millions of Americans, not just a relatively few fat-cats.

Another thing to consider is how much profits have been earned by U.S. corporations. This is different from how much the companies are worth (the subject of the previous paragraph); a big chunk of the profits are paid out every year, and thus become income for stockholders. Twenty years ago, U.S. corporations had total profits of about $400 billion a year; by the end of the 1990s, profits were over $800 billion a year. In the last five years, however, total profits have been in the $1 trillion - $1.6 trillion range a year. That implies that total corporate profits these days are about three times as high (or more) as they were twenty years ago and, by extension, we might suppose that an "extra" $10 trillion or more has gone to corporate America in the last 20 years.

Now, not all that money was paid out in the form of dividends; only about 50% of profits get paid out that way. But still - an "extra" $5 trillion or so going into the pockets of U.S. stockholders in the last 20 years? That's a lot! Still, let's remember that while a big chunk of that ends up in the accounts of the $20 million mansion crowd, quite a bit goes to many millions of more ordinary Americans.

Let's try to connect the dots now. First of all, the data is really scattered and it would be unwise to make definite conclusions out of what I've presented here. Nevertheless, it DOES seem a safe bet that many hundreds of billions, probably trillions, of dollars have found their way into the hands of corporate big-wigs, wealthy investors, and other Wall Street types in the last twenty years or so. Probably much of that was earned fair and square, but it's just as likely that much of it was excessive, unwarranted, and unfair. CEOs making 30 or 40 times what their average employee makes? OK - probably deserved. CEOs making 500 times the typical employee's salary? Not so much. Guys like Bill Gates, who revolutionized our world and created incalculable real value for all of us, becoming a multi-billionaire? Well done, Bill! The 22-year old kid becoming a multi-billionaire for creating an on-line chat room, or big bankers earning $300 million bonuses for figuring out new ways to game bloated, dysfunctional mortgage markets? I don't think so.

So is the nation a poorer place, unable to pay for good schools, roads, and avoid government shutdowns because of Wall Street's greed? Probably so, at least in part. Let's remember, however, that there's plenty of blame to go around - as discussed in earlier parts of this blog. Wall Street avarice and the full-contact form of American capitalism may be the bad guys, but they are hardly the only ones.


Alex said...

As always, the author is not scared to point the finger at people who he believes are responsible for the economic hardships that many find themselves in. This wouldn’t be acceptable, except for the fact that his claims are supported by facts, which without, his argument would be valueless. One of these claims is towards the national debt, which is 60 times greater than the time that is being used as a comparison. Even though there are positive points made about debt, the overall tone is very negative, as it should be.

Unknown said...

Overall the essay is good, but hampered by a few things. does a good job pointing out some common misconceptions, even if it does rely heavily on estimations and approximates. The biggest flaw is that while it shows that big business is not responsible for the majority of the economic gap there is no explanation as to where it has actually gone.