With the stock market roaring to new highs, New York Times reporter Nelson Schwartz is asking "why stock markets are thriving even as the economy is barely growing and unemployment remains stubbornly high."
Schwartzs puzzle: "While buoyant earnings are rewarded by investors and make American companies more competitive globally, they have not translated into additional jobs at home." Read Schwartz in the New York Times here.
Great question. To answer it, Schwartz focuses on companies drive to maintain profit margins, as well as increases in their productivity that enable them to reduce their workforce. Specifically, corporations are supposedly getting rich at the expense of employees.
But its not that simple. With the Federal Reserve expanding the money supply and driving down interest rates, markets soar as investors seek riskier assets. At the same time, a weak dollar slows the economy by discouraging investment and raising prices of commodities, such as gold, oil, and food. For more details, read my conversation last week with Carnegie Mellon professor Allan Meltzer here.
Understanding the Feds behavior, its not a contradiction that markets are rising even as GDP growth in the last quarter was barely positive, at one-tenth of 1%, and unemployment is close to 8%. All three factors are the result of an overly-expansive Fed policy.
One reason that multinationals profits are high is that companies are sitting on substantial amounts of cash, much of it overseas. The Senate Permanent Subcommittee on Investigations has estimated that American companies hold offshore around $1.7 trillion of earnings from foreign operations.
They are keeping these funds offshore because Americas corporate tax rate is one of the highest in the industrialized world. Currently, the U.S. corporate tax rate is 35%, compared with an average of 23% for our industrialized competitors in the Organisation for Economic Cooperation and Development. Plus, America is one of only seven of the 34 OECD countries that taxes companies on its worldwide income, not just income earned in the United States.
This means that if the profits are brought into the United States, companies would lose a large share to Uncle Sam.
No one knows precisely how much would be repatriated with a lower U.S. tax rate, but corporations would surely repatriate more of it than they do now, adding to investment and employment.
House Ways and Means Committee chairman David Camp (R-MI) has proposed exempting 95% of repatriated dividends as an inducement to corporations holding significant earnings abroad. Even if only half the funds held abroad, $850 billion, were repatriated, this would exceed the stimulus in the 2009 American Recovery and Reinvestment Act, and the federal government would get billions in tax revenues.
At the same time as the corporate tax rate discourages repatriation of earnings, additional mandates on employers are discouraging hiring, especially low-skill workers, resulting in a change in the capital labor ratio — fewer people and more machines in the production process.
The most visible example is from the Affordable Care Act, set to take full effect next January. "Obamacare," as it is known to its detractors, will cost employers $2,000 per worker per year if they dont have the right kind of health insurance. Moving from 49 to 50 workers will cost an employer $40,000 per year (because the first 30 are exempt).
The law also encourages employers to hire part-time rather than full-time workers, because if an employee works for fewer than 30 hours a week, the employer does not owe the $2,000 penalty. Some employers are either not hiring, or adding part-time employees.
Firms that are reportedly cutting hours due to health-care mandates include Pillar Hotels & Resorts (Hyatt, Sheraton, and Hampton Inn), Annas Linens, Carls Jr., Hardees, and Papa Johns.
In his State of the Union Address President Obama called for raising the hourly minimum wage to $9 from its current rate of $7.25. This would continue the trend of making labor more expensive, encouraging firms to use fewer employees and more machines.
Multinationals are hiring, but not in the United States. Commerce Department data show that between 2000 and 2010, offshore employment by majority-owned foreign affiliates of U.S. multinationals grew from 8.2 million to 10.9 million, a 33% increase. At the same time, U.S. employees of U.S multinationals declined by 9%, from 23.9 million to 21.7 million.
The Labor Department releases employment numbers for February on Friday. Economists are forecasting that 165,000 new nonfarm payroll jobs were created last month, and that the unemployment rate remained the same, at 7.9%.
With the current job growth trend, the unemployment rate will reach 6.5%, the rate at which Fed Chairman Ben Bernanke said he would allow interest rates to rise, in 2017. Thats a long time for a zero-interest rate policy. Read the Feds statement here.
As the Fed keeps interest rates low and continues to devalue the dollar, the stock market rises. Investors seek riskier assets to get returns. But the Feds actions make the economy weaker as commodity prices rise, GDP growth declines, and unemployment rises. Firms profits reflect their cash holdings both here and offshore, and their hiring has been rising faster offshore as we make it more expensive to hire here in America.
Its no mystery that the stock market is rising at the same time that economic growth is stagnant and unemployment is high. The only mystery is why the New York Times cant figure it out.
Original Source: http://www.marketwatch.com/story/why-does-the-dow-soar-while-economy-struggles-2013-03-08