Ford

A tale of two corporations

PNRJ core principles, critique of neoclassical economics, ethics, inequality , , , , , , , , , , , , , , , , , , ,

May 10 JDN 246171

Consider two corporations.

Corporation A has net income equal to 2.9% of its total revenue, and pretax income equal to 4.1% of its total revenue. The cost of its goods sold accounts for 77% of its revenue, with most of the remainder going to wages.

This seems reasonable, right? It doesn’t seem like this corporation is being especially exploitative.

Corporation B has 2.1 million employees, and made net income of $21.8 billion, meaning that it could afford to pay every single employee an additional $10,000 and still be profitable. The median employee at this corporation makes approximately $16 per hour, meaning that this would an income increase of over 30%—an absolutely huge jump in income that would make a big difference in millions of lives. Yet instead they have chosen to buy back $30 billion in shares to raise their stock price even higher.

Corporation B seems like they are obviously exploiting their workers and favoring their shareholders, and directly contributing to the extreme inequality in our society.

But I have a bit of a surprise for you.

They are the same corporation. All of these facts are true of Walmart: Here is their income statement, here is their announced stock buyback, and here are estimates of their number of employees and median pay.

Walmart is not a particularly exceptional case. Similar stories hold for most major corporations: the profit margin doesn’t sound that high as a proportion of revenue, but it still amounts to an enormous sum of money that is being hoarded by shareholders instead of paid to workers.

Amazon’s net income of $90 billion on $742 billion in revenue gives it a profit margin of 12%, but would be enough to give all 1.6 million employees an additional $56,000—in many cases doubling their incomes.

United Health Group made $12 billion in profit on $447 billion in revenue, which is only 2.7%; and yet with 400,000 employees, they could still afford to give each one an extra $30,000. How many nurses would be very happy to see another $30,000?

Exxon Mobil’s $28 billion profit was made on $324 billion in revenue, a reasonable-sounding margin of 8.6%. Yet with only 58,000 employees, that’s $480,000 each.

McDonald’s made $8.5 billion on $26 billion in revenue, a margin of 33% (which is actually pretty high). Yet more than 1.8 million people work at McDonald’s including all its franchises, so it could really only afford to give each one an extra $4,700—which sounds small compared to these other figures, but for a minimum-wage employee ($7.25 per hour is about $14,500 per year), that’s still an extra 32%.

This is something I think we have failed to reckon with as a society.

Once a corporation becomes sufficiently large, it doesn’t need to have a big-sounding profit margin to nonetheless control staggering amounts of wealth and funnel it away from employees into the hands of shareholders. Especially with regard to Walmart and United Health Group, those margins honestly sound small as a proportion of revenue—and yet, they still amount to incredibly vast sums of wealth that are being hoarded away from thousands or millions of workers that desperately need help.

I don’t know exactly what to do about this. More progressive taxes, especially on capital income, might help, and would certainly raise much-needed revenue; but they don’t seem like enough on their own. I think we may need something more radical, like requiring employee ownership of a certain proportion of shares—essentially turning corporations into co-ops.

Another option would be simply not allowing corporations to ever get this big, and splitting them up if they already are. Perhaps being CEO of a corporation with billions of dollars in revenue really is just too much power for one person to have. But I am genuinely concerned that this could reduce economic efficiency and thereby lower the standard of living of everyone.

Some corporations actually seem to behave more fairly.

Car companies, for instance, don’t seem to hoard huge amounts.

Ford actually lost money last year, losing $6 billion on $189 billion in revenue (3.1%). With 168,000 employees, that’s $35,000 each—essentially they gave each employee a free car. And Ford employees do fine: Median annual compensation is $126,000.

General Motors made $2.4 billion in profit on $184 billion in revenue, a margin of only 1.3%. With 150,000 employees, it could give each one an extra $16,000. Given that most of its employees are well-paid (median employee salary is $99,000), I actually don’t begrudge them this. Accounting for the risk of bad years like Ford had, I think GM is being reasonable by not simply plowing that $2.4 billion back into their own employees.

Even Tesla isn’t really an exception to this pattern. Tesla made $3.8 billion on $98 billion in revenue, which is 3.9%. With 135,000 employees, this is $28,000 each—more than GM, but still not completely crazy. Median employee pay at Tesla is over $160,000, so these workers are doing well. What’s weird about Tesla, however, is that its revenue is half that of Ford or GM, yet its market capitalization is a staggering $1.5 trillionwhile Ford’s is only $46 billion and GM’s is only $71 billion. A P/E ratio of 20 is considered reasonable. Tesla’s is 365.)

But there are some corporations that don’t even sound reasonable.

Tech companies in particular tend to have very high profit margins.

Consider Apple; its net income of $122 billion on $451 billion in revenue gives it a net profit margin of 27%. It could give all 550,000 of the employees of not only Apple itself but also all its foreign suppliers a raise of $221,000. Some of these employees are sweatshop workers in China—they would be set for life on a sum like that.

Alphabet’s profit margins are even higher than that; its net income of $160 billion was on $422 billion in revenue, for a net profit margin of 37%. With 190,000 employees, that would be $840,000 each.

Yet Microsoft’s margins are even higher; its $125 billion net income was on only $318 billion in revenue, giving it a net profit margin of 39%. It has 228,000 employees, so it could give every single one an additional $540,000.

SpaceX isn’t publicly-traded, so they don’t have to disclose everything; but it is estimated that they made about $8 billion in profit on $16 billion in revenue—a staggering margin of 50%—and with only about 12,000 employees, it could give every single one an extra $660,000. In fact, Elon Musk himself owns enough stock that he could personally give every single SpaceX employee some $60 million in shares and still be a billionaire. That’s a life-changing sum for anyone who works for a living—neurosurgeons would be awed, and even NBA players would consider that a successful career unto itself. But Elon must see number go up!

This is why I’m still somewhat sympathetic to Marxism, despite not being a Marxist.

There really is something terrible going on here, with capital owners making absolutely obscene sums of money and using it to wield enormous power over our society, leaving their own workers to struggle even though they could easily give those employees enough additional pay to significantly change their lives—and if they all did so, even the capital owners wouldn’t be meaningfully worse off, because they already have more wealth than any human being could possibly need and the overall boost to the economy might even compensate them in the long run.

And turning corporations into co-ops (which is, arguably, seizing the means of production) could actually make a very big difference here, and both theory and empirical data suggests that it would greatly reduce inequality without greatly reducing economic efficiency.

But the labor theory of value is still garbage.

The TPP sounds… okay, I guess?

PNRJ development economics, public policy , , , , , , , , , , , , , , , , , , , , , , , , , , ,

JDN 2457308 EDT 12:56

So, the Trans-Pacific Partnership (TPP) agreement has been signed. This upsets a lot of people, from the far-left who say it gives corporations power over democracy to the far-right who say it makes Obama into a dictator. But more mainstream organizations have also come out against it, particularly from the center-left or “radical center”, such as the Electronic Frontier Foundation and Medecins Sans Frontieres.

Bernie Sanders was opposed to it from the beginning, and now Hillary Clinton is opposed as well—though given her long track record of support for trade agreements it’s unclear whether this opposition is sincere, or simply reflects the way that Sanders has shifted our Overton Window to the left. Many Republicans also opposed the deal, and they’re already calling it “Obamatrade”. (Apparently they didn’t learn their lesson from Obamacare, because it’s been wildly successful, and in about a generation people are going to say “Obamacare” in the same breath as “Medicare” and “the New Deal”, and sticking Obama’s name onto it is going to lionize him.)

In my previous post I explained why I am, like the vast majority of economists, strongly in favor of free trade. So you might think that I would support the TPP, and would want to criticize all these people who are coming out against it as naive protectionists.

But in fact, I feel deeply ambivalent about the TPP, and I’m not alone in that among economists. Indeed I feel a bit proud to say that my view on the agreement is almost exactly aligned with that of Nobel Laureate Paul Krugman. (Krugman is always one of the world’s best economists, but I’d say he should be especially trusted on issues of international trade—because that was the subject of his Nobel-winning research.) The original leaked version looked pretty awful, and not knowing exactly what’s in it worried me, but the more I hear tobacco and pharmaceutical companies complain about it, the more I like the sound of it.

First of all, let me say that I’m still very angry they haven’t released the full text. We have a right to know what our laws are, as a basic principle of democracy. If we are going to be bound by this agreement, we have a right to know what it says. This is non-negotiable. To be bound by laws you haven’t been told about is literally—and let me be clear on the full force I intend by that word, literally—Kafkaesque. Kafka’s The Trial is all about what happens when the government can punish you for disobeying a law they never told you exists.

In the leaked draft version, the TPP would have been the largest handout of corporate welfare in world history. By placing the so-called “intellectual property” of corporations above basic human rights, it amounted to throwing several entire Third World countries under the bus in order to increase the profits of a handful of megacorporations. It would have expanded “investor-state dispute resolution authority” into an unprecedented level of power for multinational corporations to influence the decisions of national governments—what the President of the Capital Institute called “trading away our sovereignty”.

My fear was that the TPP would just be a redone and expanded version of the TRIPS accord, the “Agreement on Trade-Related Aspects of Intellectual Property Rights” (somehow that’s “TRIPS”), which expanded the monopoly power of “intellectual property” corporations, including the music industry, the film industry, and worst of all the pharmaceutical industry. The expansion of patent powers reduced the availability of drugs, including life-saving drugs, to some of the world’s poorest and most vulnerable people. There is supposed to be a system of flexibility provisions that allow exceptions to intellectual property laws in the service of public health, but in practice these are difficult to implement and many Third World governments don’t know how to use them. Based on UNCTAD estimates, Thomas Pogge found that TRIPS and related trade agreements amount to a transfer of wealth from the Third World to the First World on the order of $700 billion per year. (I’m also a bit confused by the WTO’s assertion that “For patents, [TRIPS] allows governments to make exceptions to patent holders’ rights such as in national emergencies, anti-competitive practices, […]”; aren’t patents by definition anti-competitive practices? We’ll protect your monopoly, as long as you don’t try to have a monopoly?) If TPP makes these already too-strong provisions stronger, millions of people could be denied medicines they need—which is why Medecins San Frontieres is among the organizations opposing the agreement.

Yet, in principle free trade is a good idea, and it’s definitely a good thing to remove the ridiculous tariffs we still have on Japanese cars. Of course, Ford Motor Company is complaining about the additional competition, but that’s a good sign—corporations complaining about extra competition is exactly the sort of response a good trade agreement would provoke. (Also, “razor-thin profit margins”? I think not; car manufacturing is near the very top of capital-intensive industries with high barriers to entry, and Ford Motor Company has a gross profit margin of 16% and net income margin of 5%. So, that 2.5% you might have to cut prices because you no longer get the tariff support… well, you could just take it out of your profits, and I don’t see why we should feel bad if you have to do that.)

It still angers me that they won’t tell us exactly what’s in the deal, but some of the things they have told us are actually quite encouraging. The New York Times has a summary that suggests lukewarm approval on their part.

The TPP opens up Internet traffic, creating international regulations that prohibit the censorship of cross-border data. (With that in mind, I’m a bit baffled that the EFF is so strongly opposed; isn’t free data exchange your raison d’etre?) China hasn’t signed on, and this might well be why—they’d love to sell us products without tariffs, but they aren’t prepared to stop censoring the Internet in order to do that.

It lowers barriers on the cross-border exchange of services (as opposed to only goods). Many services really can’t be traded much across borders (think restaurant meals and haircuts), and in practice this mostly means finance, which is a mixed bag to be sure; but in general I think allowing services to compete across borders is a good ideas.

The TPP also places limitations on government-owned enterprises, though not very strict ones (probably because we in the US aren’t likely to give up the US Postal Service or the Federal Reserve anytime soon). Basically this is designed to prevent the sort of mass state expropriation that has destroyed the economies of several authoritarian socialist countries, like Cuba and Venezuela. It’s unlikely they would be strong enough to stop more legitimate nationalizations of industry or applications of eminent domain, since Japan, Canada, and probably even the US would have been unwilling to sign onto such an agreement.

The leaked draft of the TPP would have given extremely strong protections to drug patents, but the fact that pharmaceutical companies are angry about it says to me that the strongest of these provisions must not have made it in. It sounds like patents are being made stronger but shorter, which like most compromises makes both sides mad.

Best of all, it includes some regulations on human rights, labor standards, and environmental policies, which is something that has been sorely lacking in previous trade agreements. While the details are still sketchy (Have I mentioned how angry I am that they won’t release the full text?) it is claimed that the agreement includes a system of tariff penalties that can be implemented against countries that oppress LGBT people and other marginalized groups. Because Brunei, Malaysia, and Singapore currently criminalize homosexuality, they would already be in noncompliance from the moment they sign the treaty, and would be subject to these penalties until they change their laws. If this is true, it actually sounds like a step toward the “human rights tariff” that I would like to see implemented worldwide.

In general, the TPP sounds like a mess, a jumble of awkward compromises that does some good things and some bad things, and doesn’t really satisfy anyone. In other words, it sounds like policy.