corporate profits

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Business Taxes, Or the Lack Thereof

There is an alternative universe somewhere in which America’s biggest businesses actually pay taxes. I know, I know, I am being idealistic. Well some of them do, even here on earth – blessed be Monsanto! Last year anyway. But many don’t. Indeed many seem to be able to collect refunds of grotesque proportions.

Ask most anyone in Washington policy circles and you will be told that American companies face a major global disadvantage: our corporate tax rate is one of the highest around. This, supposedly, is a huge burden on the poor dears, and is just one more reason why these put-upon patriots are groaning rather than beaming. Listen to their apologists and you begin to wonder how they survive at all in this intense anti-business, hostile, and undeserving nation of big business haters. That no company worth its salt actually pays anything close to the tax rate is never mentioned in polite circles.

It is uncouth to mention reality when big business wants to make its case.

And I am realistic: this is an imperfect world, soany tax paid by big corporations is simply passed along to consumers ultimately, just as any cost of business is.

Nonetheless, if we have a corporate tax we ought to try to collect some corporate taxes. Our current effort is embarrassing in its ineffectiveness.

The Citizens for Tax Justice and the Institute on Taxation and Economic Policy have just issued a joint report documenting just how far we are from even that minimal goal. According to their report, corporate taxes covered over 25% of federal expenditure during the first two post-war decades. Then big business started to attack through their lobbying efforts. They managed to buy off enough of our legislature that by the 1990’s that percentage had fallen to around 11%. Not content, they pressed on. So by 2010 corporate taxes covered a mere 6% of federal outlays.

That is an epic lobbying success story. Or corruption on a grand scale.

This is, of course, a byline in the long pro-business deregulatory narrative of the last three decades. At each step along the way big business bleated away complaining of its unfair burden. It coupled this with threats of imminent collapse, outsourcing, offshoring, and all sorts of dire threats. As true patriots these companies wanted – they told us – to continue to employ people here, but these taxes were breaking their backs. Our tax rate of 35% is simply the last straw. No wonder we are not competitive anymore. It was able to purchase protection and subsidy. It showed its gratitude by pouring cash into politicians pockets. By way of free speech naturally. Companies are people too, as Mitt Romney blurted out last month.

That none of this conforms with the facts should surprise no one who listens to either modern politics or economics. Most all of economic theory has nothing to do with actual economies and the facts found within them. And no element of reality stands between our policy makers and their craven efforts to pander to those who pay for their election.

A few facts from the report:

  • Verizon: reported a profit of about $12 billion in 2010. It didn’t pay any taxes. No. It received a refund of $703 million.
  • General Electric – whose CEO is playing a role for Obama as jobs czar – earned $10.4 billion in profit in 2010. It managed to scam a refund of $4.7 billion. If I were the Verizon CEO I would be firing my army of lawyers and accountants and hiring GE’s.
  • Pepco, a power company in DC, hit the jackpot. It scammed a refund of $508 million on profits of $882 million.
  • 37 of America’s largest companies pay no taxes at all. None. That is to say that you or I pay more than DuPont, Wells Fargo, Boeing, and the aforesaid Verizon and GE added together. I bet that makes you feel good. Patriots all.
  • The 56% of all tax subsidies and tax breaks went to four industries: finance, utilities, telecom, and oil/gas/pipelines.
  • The list of companies getting the biggest subsidies includes the poverty stricken: Wells Fargo, AT&T, Goldman Sachs, Exxon, IBM, Boeing, Verizon, GE, Proctor and Gamble, and PNC Financial.

Clearly it pays to hire that army of lawyers and accountants: Federal Express scammed sufficiently to get its tax rate down to 0.9% averaged over the last three years. UPS, in the same business and a direct competitor, paid 24.1% If you are a UPS shareholder its time to join the line complaining.

The report is worth your while reading. It is an endless indictment of our tax code. It will make you annoyed, angry or outright murderous.

And it will have no impact.

This is because, as the report writers point out, the prevailing wisdom in Washington is that our top companies need help. If there was ever a more direct example of how corrupt American politics has become it is this. These companies are on the public dole, and yet they want more. Those corporate jets are getting a tad old after all. And those CEO’s all need shiny new cufflinks – and I include the new female CEO of IBM in that category after having checked out what she was wearing in her PR campaign after her recent promotion.

As I said: the realist in me knows that fixing the loopholes that create this mess will merely pass the higher taxes along to customers. None of these companies are known to swallow such costs in the name of competition. And most, as you will have noticed, are in heavily subsidized and protected industries. They are not typically under entrepreneurial cost or competitive pressure. They are used to twisting Washington around, and fleecing customers at the same time.

Ultimately knowing all this will simply annoy us rather than lead to change. For all the storm being kicked up about tax reform, we all know that big business will be able to buy enough votes to protect its turf. Reform will go nowhere other than to continue to shift the tax burden onto the little people who have no representation in Congress. Taxation without representation – now that’s a rallying cry worth using. I wish somebody had thought of that.

Perhaps we should save ourselves the trouble and just surrender to the plutocrats. Let’s abolish corporate taxes altogether. That way they can fire all those tax lawyers and accountants and make even more profit. After all they need more profits. It’s not like corporate profits are at a seventy year high or anything.

Oh. Wait. Yes they are.

Now that makes me even more upset.

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Why Is It? Wages, Profits, and Civil Unrest

Why is it that when pressure builds to modify laws and regulations so that our national wealth can be spread a little more evenly it is called class warfare, but when those laws and regulations are abolished so that the wealthiest among us can exploit the rest of us more than in the past, it isn’t?

Why is it that class warfare is asymmetrical? When the poor push back it is class warfare, but when the rich scarf up billions it isn’t.

Why is it that the current crisis seems to have been caused by “free spending governments”? Was there not a private sector crisis prior to the onset of government budget woes in most of the western world?

Why is it that businesses are apparently beset with uncertainty and thus incapable of hiring because they perceive a flood of new regulations that would eat into profits? Profits that are at bloated fifty year highs, and which have recovered since the low point of 2008. Profits that are being generated by productivity gains that are not being shared with workers. Record profits that have been created during the tenure of a Democrat in the White House, a Democrat who is attacked as anti-business despite those record profits.

Why is it that we are bombarded with commentaries demanding the “fixing” of Social Security, when that system isn’t even broken?

Why is it that our workers are hapless, old fashioned, and lacking in the skills to compete, when they seemed to be doing just fine before the crisis erupted when unemployment was low? Did they all suddenly forget their skills? Are we suffering from some massive worker amnesia that requires us to to endure long term high unemployment because our workers are simply not high quality?

And why is it that we are introducing policies to fight inflation when there isn’t any?

All these things vex me. All these examples are drawn from the press of the last few days.

All are illustrations of just how much in control of the public discourse business interests have become.

The skew towards profit and away from wages in terms of sharing of productivity is one of the major reasons our middle class is shrinking. It is a reason that it borrowed so much. Faced with the attack from a business community intent on creating shareholder value – at all costs – our middle class had to resort to desperate measures to maintain an increasing living standard. First it was two wage earning families, then it was debt. Now those are exhausted and the middle class is faced with a bleak future. No wonder some of them have turned to right wing extremism. The loss of the future is enough to make anyone angry. It is only now, with the “Occupy Wall Street” movement that we are seeing an equivalent left wing effort. And already our the plutocracy is hitting back: the mayor on New York accuses the occupiers as attacking struggling people. Wall Street? Struggling people? Only in a twisted world.

Back in the mid-1950’s Kaldor developed a Keynesian theory of distribution. Its essence was that there is, or ought to be, a balance in the way in which we allocate profit and wages from productivity gains. In periods when wages are dominant, the incentive for capitalists to invest drops because profits are low. Conversely, when profits gain the upper hand wage earners are squeezed and become rebellious. Either extreme represents danger for the economy. Too much emphasis on wages and we suffer excess demand and under-investment. Too much emphasis on profit and we suffer too little demand and idle capacity. Guess where we are today.

The model is simple and has been forgotten. But it deserves another look. It provides a sensible prism through which to look at contemporary events.

Wages are at a fifty year low as a percentage of GDP. Profits are at a fifty year high. The economy is out of balance. We lack demand. We have an excess of supply. The solution surely screams at us: we need more demand. We need to restore the balance. Wages must rise. That will add to demand and allow debt to be paid down. It will get us back on track.

So why is it that all those comments I gathered from the press tilt the other way?

Why is it that our elite and our media appear to think we need to double down on encouraging more profit and less regulation?

Because “we the people” no longer run our democracy.

Back in the 1970’s the business community broke away from the great post-war social contract that had powered the economy during the 1950’s and 1960’s. In the face of nascent globalization and rising competition profits were under pressure. So business poured cash into right wing politics. It funded the establishment of think tanks. It provided cash to lobbyists. It gave freely to politicians who advocated deregulation. It was a sustained and well financed attack on democracy. The result was the advent of Reaganism, which has subsequently morphed into modern Republicanism and its intransigent opposition to all social programs, regulation, and public or collective activity. Money talks. Money won.

The rising cost of getting elected caused both parties to become beholden to corporate money. Inevitably this moved the center of gravity of politics to the right. So much so that even Reagan who raised taxes several times appears to the left of today’s Republican mainstream.

This flood of money perverted democracy, twisted it, and ensured that business was able to dominate the debate. It was abetted by the legal process that made cash equivalent to free speech – a limit on the cash flow was seen as being a limit on the freedom of speech.

All this took place simultaneously with the emergence of the concept of “shareholder value” as the driving ideal of business. Other aspects of running a balanced business were marginalized. Nothing was to stop the generation of profit for the shareholders. Nothing. Downsizing, outsourcing, offshoring, gutting middle management, eliminating worker training, cutting benefits, switching from defined benefit to defined contribution retirement programs, opposition to unionization, opposition to minimum wages and a host of other approaches became the mantra of business. All in the pursuit of shareholder value.

Capitalism exposed it mean spirited and raw self.

Modern socio-economic history has been largely defined by the ongoing tussle between capitalism and democracy. They are antagonists. They are not, as they are frequently presented, complementary. Capitalism seeks to create wealth, and fares best in an environment where that wealth can be concentrated. It depends on the sanctity private property and exchange. It conflates these things with freedom. It ignores other sources of freedom. Unfettered capitalist style freedom inevitably allows wealth to cluster because wealth begets more wealth. And it tends to concentrate power too. Monopolies pop up. The supposed benefits of the struggle within free markets gets overwhelmed by the darker side of human nature. The urge to profit eliminates, eventually, all the feedback from competition that the textbook tells us mitigates the wilder excesses of capitalism.

Capitalism in the real world, rather than in the fantasy of right wing economics, needs to be limited.

By democracy.

The democratic urge is to share the wealth. Hence the creation of safety nets for retirement, unemployment, and health care. Hence regulation to protect the environment. Hence the introduction of worker rights in the work place and the protection of child labor laws. Inevitably the cost of such programs weighs more heavily on the wealthy, and on business owners than on the poor. But the poor are in the majority so they dominate in a purely democratic process. All these programs have been fought by business as being costly and as hampering employment. Without the power of democratic – collective – action none would exist today. As long as we are a democracy they will survive.

As long, that is, as money doesn’t intrude to destroy democracy.

The tension between the two rival systems prevents either from dominating. In a well balanced society we benefit from both. Capitalism creates wealth and rewards the innovation that allows growth in productivity. Society breaks free from the Malthusian trap of scarcity and squeezes ever more stuff from its limited resources. Hayek was right when he saw a capitalist economy as a great big learning device – it is that learning, that continual discovery spurred by the lure of profit, that induces the productivity we all benefit from. Democracy ensures that we do, indeed, all benefit, and that the few do not dominate the many. And by making sure the wealth is spread democracy produces a strong middle class able to spend on the goods and services the capitalists produce.

This is the virtuous cycle the apologists of capitalism so frequently point to.

It is also the cycle that has broken down since the 1970’s.

When business can avoid sharing the fruits of productivity improvement by capturing the system of government, and by playing off foreign workers against domestic workers, democracy can no longer act to mute capitalism. Big business by being trans-national can ignore the purely national. Capital flows more easily than labor. Shareholders reap rewards from activities that harm their country of residence. But, to them, the damage to their homeland is offset – more than offset – by the gains from increasing their share of the productivity improvement.

And as long as big business distorts politics the imbalance in wealth will grow, the middle class will wither, and social unrest will emerge.

This is the central issue of our time. It is the root of the crisis. And we will not restore balance until we eliminate the kinds of biased comments that I reacted against at the beginning of this essay.

Why is it that more people aren’t angry?

They will be. Just you wait.

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Where Are We?

It’s tough to tell exactly how the recovery is going. Since this is a busy week for data reports it behooves us to step back and set the stage.

If you recall, at the end of last year the economy was growing at around 3.0% to 3.5% at annual rates. That was a marked improvement, but not earth shattering in the context of post-war recoveries. The general opinion was that we would pick up speed into the first quarter before settling down into a post-recovery ‘normal’ period of steady growth. I was always a slight dissenter to this view because I put more emphasis on our lingering unemployment problems, the risk still abundant in banking, and the downward weight resulting from the real estate collapse. Plus the fourth quarter had one or two oddities – trade and inventories – that pulled reported growth from its underlying trajectory. So my view was that growth would stick in that 3.0% range and then fall a little as we went through this year.

It looks as if we were all wrong.

The problem with the first quarter, we sill see the initial estimate this week, is that the string of oddities has continued. This time things like the very bad weather have taken their toll, and so we should all expect a much lower growth rate than originally thought. If we use the so-called Blue Chip consensus as our guide, the original commonly accepted growth rate was somewhere near 4.0%. This was based on the idea that the recovery was still accelerating, and had not yet peaked, and that consumer demand was bouncing nicely away from the depths plumbed in the recession.

Now that same consensus is looking for a first quarter of 1.7%, with the dramatic revision due to the weather and the fact that consumers have turned much more pessimistic again.

Apparently, one bad winter, and a sudden spike in oil and food prices, have done the recovery in.

So much for robust.

This, in a roundabout way, supports my view, although I make no claim for prescience. The issue is straightforward: as long as unemployment is high, and as long as home prices are weak, households will not shake off their sense of siege completely. It won’t take much to set them back into a savings mode. Likewise, banks may be reporting solid profits – or at least some of them are – but much of the improvement is coming from changes in loss rates, and trading rather form the basic banking that engages with the real economy. This is why I still think we are in a long haul and slow recovery, rather than in the middle stages of a typical post-war bounce back.

Add in the short term rise in consumer inflation caused by those food and oil price increases, and the mood has changed quickly.

This morning’s data on real estate is illustrative.

Sales of new homes in March climbed well: up 11% from February. On its face this is solid. But February was especially depresses because of that bad weather, so a large share of the rebound is simply the working off of a mild backlog. The average between the two months gives us a better longer term measure of sales, and that is essentially flat. Couple this with the news that builder expectations are still at incredibly low levels, and that the inventory of unsold new homes, at 183,000, is stuck somewhere around its 1967 levels – i.e. at near all time lows – and any image of recovery pales away to be replaced by one of decidedly abnormal and low activity. Certainly nothing in real estate suggests a return to good growth. Right now moderate growth would suffice.

The reason I am belaboring this is that when GDP for the first quarter is announced we will all be trying to divine its import for the rest of the year. I am arguing that it may not be much of a signpost at all. It may be too riddled with quirks. That implies we are better served looking at the more frequently announced numbers to get an idea of the general health of the economy.

And those numbers support a very modest outlook.

So what are the risks or problems that prevent us from moving along at a great clip?

  1. The absolute size of the hole we dug back in 2008/2009. This was one mother of a recession, and it has left immense slack throughout the economy. Until that slack is picked up there is little to no incentive for businesses to invest. This is despite interest rates being at ludicrously low levels. Some analysts argue that the Fed’s loose monetary policy has had no discernible effect on investment and thus is a failure. I disagree. It wasn’t a bust. It wasn’t a roaring success either. It just was. It is tough to critique the Fed when the entire system was so close to crumbling. Let’s all remember: the private sector vanished in very short order. Were it not for the government we would have vanished along with it. Business is rightly cagey when faced with skittish consumers and goods of spare capacity. So we can take robust investment off the table as a driver of near term growth.
  2. Austerity budgets will cause at least short term pain. They probably will cause long term pain as well, but that’s not our issue here. Luckily for us the debate will ramble of for a while, so the impact of less government spending will not be hugely significant this year. But it will be a real and noticeable drag when it does show up.
  3. Unemployment is still way too high. Yes, the trends have improved, but by any standard we are a very long way from a return to normal. The labor markets are very fragile. I expect them to stay this way for many more quarters.
  4. World imbalances will leak over into the US economy. Particularly in the form of a continued run up in some consumer prices. There is an argument to make that the world economy is headed into a period of generally higher prices due to the rapid growth of emerging economies and the stress that puts on supply of raw materials and food. But the recent spike in prices is not necessarily indicative of where that longer term price level will be. Short term supply constraints and like the turmoil in the Middle East, and rotten harvests, are masking the long term trend. I expect prices to settle back down, rather than to escalate wildly out of control. Nonetheless in the near term this spike has illustrated jut how vulnerable consumers are.
  5. That is the lesson we need to absorb. Confidence is fragile. To the extent that we rely on consumption and a return to healthy levels of sustainable demand, we are a long way from cured. This past few months have taught us, vividly, that consumers are acting as if on a knife edge. They are pessimistic one day, then optimistic, and then back in the doldrums. The battering they have taken has numbed them sufficiently that they will take a great deal of persuasion before they declare the recovery complete enough to spend the way they once did.
  6. Banking is not yet safe. Since we didn’t reform the banks to make them less dangerous, we have to assume that they are busily constructing their next disaster. Which we, inevitably, will be expected to pay for. Like all habitual blackmailers, the banks will not reform of their own accord. They need to be forced to behave. We will not achieve long term sustainable growth whilst banks are more interested in gambling than in underwriting loans that support the real economy. This shouldn’t be hard to understand, But apparently it is.
  7. Imbalances within the economy lower its potential trajectory. This is a longer term effect and perhaps out of place here, but I would be remiss for not mentioning that our enormously divided economy, between the haves and the have nots, is in itself acting as a brake on growth. It is my view that when the middle class is deprived of disposable income over long periods it cannot act as the economy’s primary consumption engine. It is no secret that the American economy is now so split with respect to the fruits of productivity, and thus income allocation, that its the middle class is now no longer capable of driving spending with sufficient force to justify investment. This sets in motion a steady spiral downwards. As investment is restricted, so future income growth is impaired. This encourages short term thinking in business in the form of cost cutting and wage freezes in order to maintain profit growth. The net result being a shift in income allocation away from wages towards profits and the steady throttling back of potential growth. If this view is correct, then the very clear bias in favor of profits as opposed to wage growth that has dominated American business for the past three decades will end up reducing long term profit. The greed of shareholders will ultimately be self-defeating as they stifle the middle class and thus the very source of their profit.

This is not an exhaustive list, but one point I want to make quite clear: I don’t think that the Federal deficit or the near term bulge in US debt is a particular problem. Our response maybe. Meanwhile we have left unaddressed many of the more obvious sources of risk, like the ones listed above. So as long as were are exposed to such a list we should expect a bumpy and not very fast growth pattern. There’s just too much out there lurking to derail us, and too little policy focus on a long term strategy to reduce inequality, for us to be upbeat.

So look for a lot of sideways motion.

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Jobs: So What?

I don’t want to sound unduly negative. Today’s report on unemployment is good news. Sort of. The economy added 216,000 new jobs and the unemployment rate slipped very slightly to 8.8%. Terrific. Especially for the newly employed. Well done everyone.

But.

We all know what the caution should be. This is good news only if we recall that we are still stuck deeply in a massive employment hole. The percentage of Americans of working age who are actually employed is miserably disappointing. It is so far from the recent peaks that the chance we return there any time soon is as remote as those peaks now appear.

Plus wages are just not responding to the recovery. In the past twelve months wages have crawled up 1.7%. But inflation has been 2.2%, so real wages have actually declined, thus dampening demand.

The optimists are already out in force arguing that a few more of these reports and the Fed will pressed into raising interest rates in order to take the steam out of the economy. We pessimists and malcontents are being dismissed as wrong … again.

But, I ask, what steam?

I do not want to denigrate what is true progress. But I want, instead, to focus us all on the limp nature of our employment policies – or lack thereof – and on the real chance that we are about to reverse this progress by attacking government payrolls. Within the overall report was the news that government at all levels in the economy shed around 15,000 jobs last month, which makes it the fifth straight month of government job losses. There are those, of course, who imagine that losing government jobs is not a problem because they are not “real jobs”. Tell that to the families of the newly fired workers. Jobs are jobs, and we are risking the recovery by cutting any.

So, what steam?

The economy is chugging along growing at around 3.0% to 3.5% a year. This is probably about as good as it will get for a while. Next year it will start to settle down from that number, and end up more in the 2.5% range. That’s scarcely at its long term trend line and is insufficient to break the back of our longer term problems. By any post-war standards this is a very lame recovery. To the extent that the economy is back on a secure growth path, all the pre-crisis problems have returned to haunt us. The banks remain unstable. The financial system is now more prone to disaster due to its increased concentration and reliance on government largesse, so we taxpayers are even more vulnerable to big bail out checks. Our long term budget is still out of balance, and no one seems inclined to do anything about it. Income and wealth inequalities are still growing, so the pressure on the average household is still increasing rather than decreasing. Businesses are still not investing their cash, so we are not refurbishing our factories, or innovating to boost productivity. And profits scarf up a disproportionate share of productivity anyway, so even if we improve productivity workers will not see the fruits of that extra effort.

In short, we have not moved forward.

After all that crisis, the expenditure, the pain, and the disruption, we have returned to the same spot we were in when the banks threw us over the cliff. The opportunity to change course has been spurned.

Some people obviously applaud that result. I don’t. The imbalance between rewards to wage earners, and those to capital holders, is a source of future instability. Both social and economic. Hard pressed families cannot ignore the neglect of their plight for ever. The hubris of capital cannot be prolonged before it becomes self defeating. The indifference of our elite to the problems of ordinary households is the hallmark of our times. It is the single salient explanatory factor that makes sense of our leadership’s efforts to preserve the past, and to return to the status quo ante.

Let me make this stark:

Last year profits rose 35%. That’s the best annual performance since 1950. Meanwhile wages fell after inflation by 0.5%. This is a long running story and that dichotomy is too dramatic to ignore. It is a reversal of the immediate psot-war years. That separation in the distribution of the benefits of our return to growth is the context within which we will play out the next decade of policy making.

Has our elite – our political, business and academic leadership – abandoned the rest of the country? If so, how do we force our way back onto the agenda? How do we communicate that we still exist? Through irrational action, or angry explosion, like the Tea Party movement? Or through a more thoughtful push back against the world view that so enthralls our leadership?

Back to the jobs report: the optimists are assuming that the status quo ante was sufficient. So today’s numbers look fine and suggest a trend back to “normal”. My view is that their “normal” was no good. In fact that normality produced the crisis due to it internal imbalances. Their tolerance for the imbalance is based upon the asymmetry of outcomes, or effects, they produce: the middle class, and workers generally, bear the burden of their correction, while the elite is unmoved and hardly touched. Exhibit ‘A’ being the ease with which our bankers have returned to their enormous pay checks as if the damage they wrought never occurred. Without introducing a re-balancing of the asymmetry we are doomed to repeat the crisis soon. Too soon.

Jobs: so what? We want more than that. We want wage growth too. Fairness is word not often used because it is so hard to identify what exactly we mean by it. But we need a fair economy. And we need to start working out what that implies before the elite vector too far away and can only be brought down by efforts more similar to the Tea Party.

That thought alone should jolt us all into action.

I hope so.

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Growth, But Not Enough

Solid is one of those words none of us wants to hear as a description of our abilities. Solid is not exciting. Solid is very middling. There is no va-va-voom in solid. But then again neither is it bad. No, solid is just dull. Very dull.

Our economy is solid.

Ugh.

Today’s reports on GDP for the fourth quarter 2010 has growth at an annualized 3.1% rate. That’s good. It just is not good enough. If you recall, the previous estimate was for growth at 2.8%, so evidently the later data has been on the plus side. The biggest contributors to the increase appear to have been a revised inventory number, which was less of a downward drag than previously thought; and a stronger business investment figure. Neither of these was the prime motor for growth, however, since the main boost came from a combination of higher personal consumption and a better trade balance. Since this is the third and final report of the fourth quarter this is the one that goes into the books. It also brings to a close the revising of the overall 2010 performance which is now settled at 2.9%, compared with the drop of 2.6% in 2009.

While that turn around appears terrific I must warn you that it is nowhere near good enough. A more typical recovery would have seen much faster growth in the first full year after a recession. Then again, the economy has gone through significant changes over the last three decades, one consequence of which is the the days of very fast recoveries seem to be over. The trajectory in the last three recessions has been for much less rapid recovery from a much longer decline. My view is that this change stems, at least in part, from the reduced emphasis on manufacturing in the overall economy. In the earlier post-war recessions, the cycle was dominated by sudden shifts in factory employment. The adjustments were quick and dramatic. But as finance, and other services, grew in importance those dramatic shifts have given way to much longer and more difficult adjustment periods. Those famous V shaped recessions have given way to elongated U’s. And the Great Recession was so deep, and so shocking, that we are still lingering near the bottom and are nowhere near climbing back to where we would have been had there been no downturn.

That, I think, is what most people overlook.

Had we avoided the downturn we would have had an economy chugging along between 2.5% and 3.0% a year. OK, but not great. Solid in fact. But we blew a great hole in that history so the long term trend line now shows a big downward dip. If we plot our actual performance against the trend line we would all notice that we are not back to where we would have been. That means we still have lost momentum to recover. And don’t forget: to the extent we wallow about beneath the long term trend line we are forgoing wealth that we will never recover. Not, that is, unless we accelerate to growth rates well above the trend line.

And therein lies our problem.

GDP growth in 2010 was insufficient to recoup our lost wealth. So that loss is permanent. In effect we have recovered in name only. The deeper reality is that we have an impoverished economy more limping than running along.

The slowness of growth last year is very worrying because there are many signs pointing to weakness at the moment. Real estate is stuck so deep in a hole that no one can credibly suggest it returns to be the boost it was during the 2000’s. Which is probably good in view of the damage it wrought. Exports are our best shot at getting medium term growth, but for that to come to fruition we need a further devaluation of the dollar and some cooperative adjustments in our trading partners to deal with their own imbalances. In particular, the Chinese, Japanese, and Germans all need to reduce their export reliance by boosting their domestic consumption. Their economies are built around excessive employment in exporting businesses which deprives us of jobs and their own people of consumer goods. Unless there is a willingness to deal with these imbalances, I doubt that our trade position will provide the boost to our GDP growth I would like to see.

So what else could?

Not much.

Business investment could be one area of extra growth, but there is little sign of a boom there. Companies are sitting on piles of cash and are not deploying it productively at the moment. This is with historically low interest rates which implies very low investment hurdle rates. If business can’t find profitable opportunities at these rates I doubt they will suddenly burst into activity any time soon.

Consumption would be another possibility for higher growth, but that too looks set for drift rather than acceleration. Households are still grappling with rebuilding their balance sheets to compensate for lost home values While the stock market has recovered, and thus boosted some family portfolios, housing was always a bigger wealth provider for the majority of people. So as long as home prices remain weak, and they have just begun to decline again, most households will look to save more than before to create a cushion against uncertainty. This, obviously, shifts a portion of income from spending to savings and thus slows GDP down. The possible offset to this slowdown would be if those savings found their way into an expansion of investment, but as I just said, there is no evidence of much growth in that sector.

The last possible area for growth would be government spending, but as we are all painfully aware the current emphasis is on reducing not increasing government activity. So, far from being a net boost, I expect the cost cutting mania now sweeping the nation to become a net drag on growth. Yes, this is dumb. And, no, it won’t change. We appear hell bent on slowing growth down.

All of this means that the outlook for GDP is not too terrific. The economy is out of the deepest parts of the hole it fell into, but it is not yet healthy enough for us to breath easily. The ugly truth is that we appear set for drift. There is no appetite for fiscal policy remedies, which leaves us reliant on the Fed’s loose monetary policy. With interest rates at practically zero we have no room to maneuver. Not that this worries policy makers. They have all moved on to the deficit and debt as their problems to solve. The fact that the best solution would have been a rapidly expanding economy eludes them.

Oh. And one more thing. Buried on today’s report is data on corporate profits. Guess what? Despite all the moaning about the administration’s supposedly anti-business attitude, and despite the gloom and doom we hear constantly from the Chamber of Commerce, profits soared. And I mean soared. Before tax corporate profits grew 36.8% in 2010. Read that agin and digest it fully. Profits boomed. Last year was the best year for profits since 1950 which was an odd year itself as business boomed after the post war recession. No wonder stock prices rose. Couple this with the news that GE is getting a tax rebate of over $3 billion on gross profits of over $14.2 billion – of which $5.1 billion was in the US – and it easy to understand why workers might be perplexed by the idea that they need to give back more in order to solve our supposed “debt crisis”.

These are boom times for capitalists. Just not for the rest of us.Today’s report simply confirms this.

Until we restore a more equable balance the economy will remain merely solid. That’s not good enough.

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