No, It Is Not a Law of Capitalism That You Pay Your Employees As Little As Possible

That squiggly red line to the left that heads inexorably down is the share of wages paid as a percentage of US Gross Domestic Product. And yes, that chart does cover the past 70 years, or two generations if you want to get personal about it.

What it illustrates is that wages paid to employees, staff, workers, consumers - however you prefer to characterize them - as a driver of the US economy are lower than they have ever been. Ever, as in history, being one of those words whose finality generally deserves an exclamation point for emphasis.

Now, we could make an argument about fairness, or rather the absence thereof, and that would not be misplaced or inaccurate, but it would probably be irrelevant. The policies that led the US to this state of affairs were crafted with an understanding of the implications. Some people would win. Big. Some would lose. Bigger. This has been framed as the natural outcome of economic forces which only the irresponsible and envious would challenge. In other words, this is how it is supposed to be and everyone affected should feel grateful for what they have rather than resentful for what they don't.

But the reality is that there is nothing 'natural' or 'organic' - or 'free range,' for that matter - about this or about how the US arrived at this place. This is the result of a steady diminution of returns to those who comprise the bulk of the workforce and an equally steady increase in provision of what economists call 'excess rents' to those whose financial acumen and political power gave them the leverage, literal and figurative, to obtain this result.

There are two major problems with it: the first is that when you get to that point where the word 'ever' becomes a commonplace, it is unlikely that the trend line can continue, making this situation unsustainable and change, inevitable. The second is that one of the reasons why this can not continue is that the very people required to drive the economy in order to provide those excess returns are being starved of the means to do so, thereby hastening the change previously noted. Change, particularly of the scope and scale determined by policies of this sort, is messy. It creates 'friction' which reduces margins and results in lots of discomfort, even for those who thought themselves immune or at least well-buffered. So we should treasure these snap-shots of life as we know it, because the laws of capital are going to impose a reaction to the action this chart represent. JL

Henry Blodget reports in Business Insider:

One of the big reasons the U.S. economy is so lousy is that big American companies are hoarding cash and "maximizing profits" instead of investing in their people and future projects.

This behavior is contributing to record income inequality in the country and starving the primary engine of U.S. economic growth — the vast American middle class — of purchasing power. (See charts below).
If average Americans don't get paid living wages, they can't spend much money buying products and services. And when average Americans can't buy products and services, the companies that sell products and services to average Americans can't grow. So the profit obsession of America's big companies is, ironically, hurting their ability to accelerate revenue growth.
One obvious solution to this problem is for big companies to pay their people more — to share more of the vast wealth that they create with the people who create it.
The companies have record profit margins, so they can certainly afford to do this.
But, unfortunately, over the past three decades, what began as a healthy and necessary effort to make our companies more efficient has evolved into a warped consensus that the only value that companies create is financial (cash) and that the only thing managers and owners should ever worry about is making more of it.
This view is an insult to anyone who has ever dreamed of having a job that is about more than money. And it is a short-sighted and destructive view of capitalism, an economic system that sustains not just this country but most countries in the world.
This view has become deeply entrenched, though.
These days, if you suggest that great companies should serve several constituencies (customers, employees, and shareholders) and that American companies should share more of their wealth with the people who generate it (employees), you get called a "socialist." You get called a "liberal." You get told that you "don't understand economics." You get accused of promoting "wealth confiscation." You get told that, in America, people get paid what they deserve to get paid: Anyone who wants more money should go out and "start their own company" or "demand a raise" or "get a better job."
In other words, you get told that anyone who suggests that great companies should share the value they create with all three constituencies instead of just lining the pockets of shareholders is an idiot.
After all, these folks say, one law of capitalism is that employers pay their employees as little as possible. Employees are just "costs." You should try to minimize those "costs" whenever and wherever you can.
This view, unfortunately, is not just selfish and demeaning. It's also economically stupid. Those "costs" you are minimizing (employees) are also current and prospective customers for your company and other companies. And the less money they have, the fewer products and services they are going to buy.
Obviously, the folks who own and run America's big corporations want to do as well as they can for themselves. But the key point is this:
It is not a law that they pay their employees as little as possible.
It is a choice.
It is a choice made by senior managers and owners who want to keep the highest possible percentage of a company's wealth for themselves.
It is, in other words, a selfish choice.
It is a choice that reveals that, regardless of what they say about how much they value their employees, regardless of what euphemism they use to describe their employees ("associate," "partner," "representative," "team-member"), they, in fact, don't give a damn about their employees.
These senior managers and owners, after all, are earning record profits while choosing to pay their employees so little in many cases that the employees have to live in poverty.
And the senior managers and owners add insult to injury by blaming the employees for this: "If they want to get paid more, they should start their own company. Or get a better job."
It is no mystery why America's senior managers and owners describe the decision to pay employees as little as possible as a "law of capitalism": Because doing this masks the fact that they are making a choice.
But it is a choice.
Importantly, if big American companies were struggling to earn money, as they were in the early 1980s, we would not be having this conversation. Even if big American companies were only earning average profits, this wouldn't be an issue. But the "efficiency" and "shareholder-value" drive that began in the 1980s has now gone too far the other way. Just look at these charts...
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" 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, Bureau of Labor Statistics

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 balancing the value created for 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 hurting the economy.