LBO News from Doug Henwood

fresh audio product: Stanford and Thiel, Sri Lanka

Just added to my radio archive (click on date for link):

August 18, 2022 David Palumbo-Liu on the politics of Stanford University and its infamous alum, Peter Thiel • the political and economic crisis in Sri Lanka, analyzed by the writer Indrajit Samarajiva

Underscoring the “con” in semiconductors

Well that didn’t take long.

Just nine days ago I wrote about how Washington was picking up the check for the semiconductor industry’s aggressive stock buyback programs, distributing billions in subsidies to an industry that could have funded itself if it hadn’t chosen to shower its shareholders with cash. And despite the passage of the wittily named CHIPS Act, which was supposed to encourage real investment in research and production, they’re turning the taps on the cash shower on again. The Financial Times reports:

On the same day that Congress passed the law, Intel, which is expected to be the biggest beneficiary of government grants, sliced $4bn from its capital spending plans for the rest of this year, although it said that it was still committed to a “strong and growing dividend” for its shareholders.

Meanwhile, Micron, which celebrated President Joe Biden’s signing of the legislation last week with the announcement that it planned to invest $40bn in the US by the end of the decade, was forced just a day later to say it would cut its capital spending “meaningfully” next year because of the downturn.

OK, business is slowing. But investment—in real things, not financial assets—is supposed to be governed by the long view. Clearly it isn’t. Once again, American capitalism proves that shareholder value is the most sacred value of all.

Fresh audio product: nuclear power and the Russian & Ukrainian ruling classes

Just added to my radio archive (click on date for link):

August 11, 2022 Leigh Phillips on why nuclear power has to be part of any serious decarbonization program • Volodymyr Ishchenko on Putin’s invasion of Ukraine as part of a bid to consolidate power, and how the ruling classes of both countries are political capitalists of a sort unknown in the West

Corporate tax whiners

Corporate America is mad that the Inflation Reduction Act (IRA)—which may actually reduce inflationary pressures over the long term, if not now—will raise its taxes. The Financial Times has a nice collection of bleats from their trade associations:

The bill would impose “significant new tax increases and unprecedented government price controls”, the US Chamber of Commerce warned. Its tax provisions would deal “a blow to our industry’s ability to raise wages, hire workers and invest in our communities”, said the National Association of Manufacturers.

The Business Roundtable, which represents blue-chip companies in Washington, estimated that the package would impose $300bn of new costs on industry just as the economy was turning downhill.

The Chamber’s policy director Neil Bradley offered some perspective: “If 2017’s tax reforms were a 10 and Build Back Better [Biden’s original plan] was a zero, where is this? I guess I’d say it’s a five. It didn’t cut taxes; it raised taxes, but it’s a lot better than Build Back Better.”

Further perspective was provided by a UBS analyst, who, according to the FT, estimates that the IRA would impose a hit to profits for the 500 blue-chip companies that make up the S&P 500 index of about 1%. Quite the “blow” indeed.

It’s worth looking at why Bradley loves 2017 so much: it brought an enormous tax cut for companies whose tax burden had already been shrinking for decades. Here’s a history of corporate taxes drawn from the national income accounts. The keepers of those accounts adjust profits to match economic reality and not what firms tell their shareholders (sometimes artificially high) or the IRS (as low as possible). As this graph shows, the effective tax rate for nonfinancial corporations—what they pay as a percentage of profits—has been declining steadily since the quarterly accounts began in 1947.

Effective tax rate, NFCB

In the 1950s, the rate averaged 50%. It declined with almost every subsequent decade—to 41% in the 1970s, to 31% in the 1980s, and 26% in the 2000s. Bradley’s beloved 2017 cut took the rate from 22% in 2016 to 15% in 2018, saving companies $93 billion in taxes. The effective tax rate popped up a bit, to not quite 19%, in the first quarter of this year, but that’s still lower than any full year between 1934 and 2016.

Taking the corporate tax rate back to 1950s levels, assuming no reduction in profits, would yield almost $620 billion in revenue (not, of course, that that’s likely to happen any time soon). According to cost estimates by the Committee for a Responsible Federal Budget, no friend of social spending, that would more than cover the family benefits in the original Build Back Better (BBB) bill. Taking the effective tax rate back to the average in the first decade of this century would yield almost $200 billion, which would cover the family and medical leave provisions of BBB. Merely taking it back to 2016’s level, just before the Trump tax cuts, would yield over $120 billion, a bit more than the universal pre-K component of BBB.

But we don’t want to make Neil Bradley and his comrades sad.

Productivity stinker

In yesterday’s post about chronically low levels of investment, I concluded that they’ve “given us stagnant productivity growth and a collapsing infrastructure.” This morning, the Bureau of Labor Statistics (BLS) confirmed the productivity part. For the year ending in the second quarter, it was down 2.5%, the worst in the series’ 75-year history. 

Productivity sounds like one of those things only the orthodox worry about, but it doesn’t have to be. Its most common form, labor productivity, is a measure of how much a worker can produce in an hour on the job. While that sounds conceptually simple, measuring output is no simple task; few of us are producing “widgets,” that discrete, standardized, and mythical commodity beloved of the homilies in economics textbooks. The standard way of measuring output is its “real” (inflation-adjusted) dollar value (or whatever your national currency is). That may seem like a bit of a kludge, but that’s capitalism for you—it is all ultimately about monetary values.

Output is one thing; how the proceeds of that output are divided are entirely another. Some go to wages, some go to the boss, some go to the shareholders. Over the last couple of decades, the share going to the worker has declined, from about 65% of value-added in the 1960s to around 60% today. But however those proceeds are divided, their growth puts an upper limit on the growth in incomes and with them, material well-being.

Here’s a graph of the history of productivity growth for all nonfarm businesses in the US. Since the quarter-to-quarter numbers can be very volatile, I’ve added a trendline (of the Hodrick-Prescott variety—it’s been criticized as imperfect but what isn’t in this fallen world?).

Productivity yty

It looks awful, though the downdraft in the trendline may be partly exaggerated by the record-low reading for the most recent quarter. But if that trendline is approximately right, then the current situation is echoing that of the 1970s, a time of falling real wages and rising inflation. (Sound familiar?) 

Real wage growth has been terrible lately. According to the measure published in the monthly employment reports, which excludes fringe benefits, the hourly wage has lost over 5% of its value since December 2020. The compensation measure reported along with these productivity members includes fringes, and has lost about half that much over the same period. In any case, it’s striking that in what is by most measures the tightest labor market in decades, a situation that is suppose to enhance labor’s bargaining power with capital, we’re seeing real wage declines. To put that in perspective, here’s a full history of this compensation measure. It looks awful too.

Real compensation

The spike in 2020 is the result not of pandemic-induced wage increases, but the job losses, both temporary and permanent, experienced by low-wage workers in food service and retail in the early lockdown phase. That drove up the average wage. As that was reversed, the average was dragged down. Those disruptions are now largely complete and the measure is back to reflecting reality (as well as any average can).

But a lot of this wage story, especially recently, is driven by inflation. Here’s a history of nominal (not adjusted for inflation) hourly compensation. Like the 1970s, the strong nominal wage gains of the last couple of years have been entirely eaten up by inflation.

Nominal compensation

As a result of strong nominal wage gains and weak productivity growth, unit labor costs—the wage costs of producing a unit of output—have been rising. Again, the only precedent for recent experience is the high-inflation years of the 1970s.


Rising unit labor costs are generally a prescription for sustained inflation. And the idea, common in some precincts of the left, that inflation is a concern mainly of the rich has no basis in fact. Rich people have been doing fine of late, while middle- and lower-income households are struggling to pay for basics.

But instead of blaming greedy workers for the inflation, as a reactionary might, I want to blame low levels of investment. For evidence, look at what happened in the late 1990s. The graphs in yesterday’s investment post show a rise in net investment in the 1990s—from 1992 to 2000, to be precise. These graphs show a sustained acceleration in both productivity and real wage growth over roughly that period—and no rise in unit labor costs. But it was the byproduct of the bubble, when for a brief time Wall Street welcomed high levels of real investment. When the bubble burst, so did financiers’ interest in boosting capital spending.

Perhaps these are just pandemic disruptions that will peter out over time. But it does seem like the management of Corporate America, and especially its shareholders, have embraced the low-investment, low-productivity model. And the payoff from that is riches for them and high inflation and declining real wages for the rest. Standard austerity programs—fiscal and monetary tightening leading to recession and unemployment—won’t address the underlying problem. An austerity program could lower inflation, but it’s not going to bring about mass prosperity. For that we need higher investment of a sort the system seems incapable of producing.


Washington will pick up the check

Semiconductor firms are about to get showered with cash thanks to a new bill, The CHIPS and Science Act of 2022—CHIPS standing for, cleverly, The CREATING HELPFUL INCENTIVES TO PRODUCE SEMICONDUCTORS Act. Because it involved free money for capitalists, 17 Republicans (out of 50) voted for it despite their habit of voting against almost anything supported by Democrats except money for the Pentagon. Biden is scheduled to sign it on Tuesday, August 9.

It’s a $280 billion package designed to encourage semiconductor manufacturing and research in the US. Pundits and generals have watched with increasing alarm as chipmaking moved from an industry dominated by the US and to a lesser extent Western Europe to a heavily Asian affair, meaning Taiwan, South Korea, and China (the big threat lurking behind all the worry, of course). The covid crisis highlighted how dependent US and European producers—carmakers, computer companies, appliance manufacturers—have become on Asian chipmakers.

The CHIPS Act is supposed to address all that, bringing the industry back home and restoring the Silicon Valley to its rightful place of global dominance. But that’s not all. When she wasn’t stoking war with China (which would require plenty of advanced chips, presumably sourced from countries other than China), Nancy Pelosi took time out to say that the CHIPS Act would create “nearly 100,000 good-paying, union jobs.” One is skeptical.


Among its provisions is $53 billion in subsidies to the US chip industry to encourage domestic R&D. Of that, $39 billion is a direct subsidy, and the rest is for “workforce development” and speeding up the “lab to fab” pipeline. The bill also includes large tax writeoffs for companies that expand chip facilities in the US, which would theoretically close the cost gap between building here and abroad. Aid won’t be confined to American firms; industry leader Taiwan Semiconductor Manufacturing Co. (TMSC) will be eligible as long as they do the work here.

The Biden administration is touting a plant Intel is building in Ohio—he even devoted 147 words to it in his State of the Union address—as proof of the CHIPS Act’s powers, but Intel has been playing politics with the project. In June, impatient with Congressional dithering on the bill, it canceled a formal groundbreaking ceremony, emphasizing that it’s building plants in countries that have gotten their subsidy act together. (Mercifully, the EU has its own Chips Act.) Intel also said its long-term plans for the site would depend on the continuing flow of free federal cash. (TSMC said its investment plans also depended on adoption of the bill.) On its passage, ​Intel CEO Pat Gelsinger said, “I’m excited to put shovels in the ground as Intel moves full speed ahead to start building in Ohio,” though I suspect Gelsinger himself won’t be operating any shovels. Intel may be happy, but just last month some smaller firms were complaining that it and the other giants would get all the money and they’d be frozen out.

About $200 billion will be also devoted to basic research in computing, robotics, and semiconductors through the National Science Foundation and other federal agencies. Universities getting grants under the program would be prohibiting from participating in educational partnerships with the Chinese government known as Confucius Institutes. These have been under relentless attack for nearly a decade, as the anti-China campaign ramped up.

Worries have been raised about the return of “industrial policy,” pronounced dead in the 1980s (though the Reagan administration did craft a giant aid package for the chip industry known as SEMATECH). Rather than the return of industrial policy, what’s actually distressing is watching public money go into private coffers with so little coming in return.

The CHIPS Act bars its beneficiaries from using the money to do stock buybacks or pay dividends, though it’s not clear how one set of a few billion dollars can be distinguished from another. It would also deny money to firms expanding in China and other countries deemed unfriendly. Economic warfare is ramping up.

billions in buybacks

Criticism of the bill from the left has largely focused on the quickness of US firms to expand abroad. Bernie Sanders said, “Any company who is prepared to go abroad, who has ignored the needs of the American people, will then say to the Congress, ‘Hey, if you want us to stay here, you better give us a handout.’”

He is right, though that is pretty standard practice in American capitalism. His colleague Sherrod Brown, who might have been relied on for a denunciation, likes the bill because of the Intel plant in his state, Ohio. And few Congresspeople could turn down cash for universities in their states and districts.

It was probably an oversight, but Sanders could also have pointed out how much the likely recipients have already spent on stock buybacks. It’s a small fortune. 

Between 2010 and 2021, ten top semiconductor firms spent $168 billion buying their own stock.* Here’s a graph of the running total of buybacks for those ten firms, and Intel, the biggest chip firm. It alone spent $86 billion over the same period. Both sums vastly exceed the $39 billion the gov is showering on the industry in direct subsidies.

Stock buybacks, chip firms, cume

As this graph shows, there was a burst of buyback activity in 2018 and 2019. Probably not coincidentally, 2017 was the year when Trump’s corporate tax cuts took effect. In theory, those were supposed to contribute to a burst of investment; they didn’t. Though the buyback pace eased after covid hit, 2021’s total was still higher than all but one year between 2010 and 2017.

Stock buybacks, chip companies

Buybacks do little but boost stock prices, making stockholders happy and fattening CEO paychecks, which are largely based on stock prices. They could have invested the money, but that sort of thing is frowned upon in the higher Wall Street consciousness. Better to “return” the cash to shareholders, as they say, even though they actually provided no cash in the first place. Stockholders just buy their shares from previous stockholders, not the company.

Since Intel is so big, we also looked at its earlier buybacks, starting in 1990. That prehistory adds another $69 billion to the company’s total buying spree, taking the 31-year total up to $152 billion.

As I argue in today’s semi-companion post, the US economy has long been plagued by low and declining levels of net investment, a result of the shareholders-first doctrine of the last four decades. Fortunately for the semiconductor industry, Uncle Sam is effectively picking up the tab for its buyback spree.

* The ten firms are, in declining order of total buybacks, are Intel, Texas Instruments, Applied Materials, Broadcom, Analog Devices, NVIDIA, Micron, KLA, Marvell, and AMD.

America: the rot goes on

NYC subway rot s

It’s been a while since I looked at one of the major reasons for the pervasive sense of rot about the US: the low level of investment—investment in real things, that is, not crypto. It’s barely keeping up with the forces of decay. If you’re wondering why nothing works and everything seems to be falling apart, here are some explanations.

First a definition: investment is spending by businesses, governments, and individuals on long-lived physical assets like buildings and machinery. Gross investment is the dollar value of such spending; net is what remains after deducting depreciation, aka wear and tear. That’s not an easy process to put a dollar value on, but it’s all we’ve got. And besides, these are numbers the capitalist state produces to understand its economy, so why not take them seriously, even if the bourgeoisie seems unalarmed about them?

Graphed below is the average value of net public and private investment as a percentage of GDP by decade. Civilian public investment means expenditures on long-lived assets like schools and roads, but excluding the military. (To anticipate a question I sometimes get: yes, prisons are in there too, but they don’t count for much; almost all the costs of maintaining the carceral state come from day-to-day operations.) Private investment consists of purchases of buildings, equipment, and intellectual property (IP) by businesses and. Not shown on this first graph: residential investment, the purchase of housing by individuals and improvements to that housing.

Net investment by decade

Averages for the 1930s reflect the extraordinary circumstances of the Great Depression: private investment collapsed and New Deal-driven public investment soared. Those high levels of public investment gave us an infrastructure that we still use today—schools, post offices, and parks. (For a catalog of those projects, check out the Living New Deal.) Public investment sagged during the 1940s, reflecting World War II, but rose in the 1950s and 1960s, matching the 1930s level as the public sector expanded. It was not to last: austerity and privatization consciousness took over, and now net public investment is at a record low.

Private investment rose in the decades after World War II, peaking in the 1970s. But the Wall Street-driven imperatives of profit maximization that got the upper hand via the Shareholder Revolution of the 1980s, which transformed corporate practices, put the squeeze on investment. Investing too large a share of corporate profits in things came to be seen as wasteful—better instead to hand the cash over to the shareholders, via stock buybacks and traditional dividends.

Here’s a yearly view of the trajectory of decline, a path traced by the dotted trendlines. The graphs begin in 1950 because the extremes of the 1930s and 1940s would have distorted the scale.

Net investment, public & private, yearly

These graphs show a relative stability in net private investment from the late 1950s through the early 1980s, when Wall Street’s grip on corporate cash flow tightened. There was a surge in the late 1990s, the period of the New Economy mania and the early commercial internet—an enthusiasm which was at least backed up with investment in the technology that was supposed to bring about the future. We haven’t seen much of that in the latest iteration of tech mania, the era of Uber and Airbnb.

Here’s a look at some components of private investment. The equipment and especially the structures trendlines show a persistent downward path. Against that, IP’s rise stands out—to the point where it’s surpassed investment in buildings and is rivaling equipment. Both equipment and structures used to be several times IP. Capitalists are spending less money on things that are supposed to promote general prosperity and more on legal arrangements that protect theirs.

Net private investment by type

Low levels of net private investment aren’t driven by declines in gross investment, which has been pretty stable. Instead, the major reasons for the decline are a shift towards shorter-lived equipment and the immateriality of intellectual property (IP) and a shift away from buildings. From 1950–1999, net fixed private investment averaged 32% of gross; since 2000, it’s averaged 20%—and 16% since 2020. Every asset category has seen that shift—even buildings.

Intellectual property investment, whose share of business investment grew from 8% in 1950 to 40% today, adds another layer of fleetingness to the story. Business ideologues love to tout IP as a stimulant to innovation; who’d invent anything if they couldn’t patent it? Lots of people would, actually. That aside, most basic innovation in sectors like computing and pharmaceuticals have been funded by public entities, not private companies, who then appropriate those innovations to make profits from research they didn’t pay for. Instead of supporting innovations, a lot of IP investment is about trying to establish monopolies, be it in the latest variation on an antidepressant or a Disney cartoon character. But even here the trend towards shorter-lived assets is visible: net IP investment went from 27% of gross in the 1950s and 1960s to 16% since.

For the public sector, the decline in net investment has been more dramatic, falling from around 2% of GDP in the early decades on the graph to 0.4% since 2020. (It’s 0.3% so far in 2022.) Like the private sector, we’ve seen a shift towards shorter-lived assets, but unlike the private sector, we’ve also seen a decline in gross investment, which fell by almost half between the 1960s and 2020s. Net public investment as a percentage of gross went from 67% in the 1950s and 1960s to 27% in the 2020s. Net federal civilian investment is just 0.1% of GDP so far this decade, a third its 1950–1999 average. State and local investment has fallen harder, down by almost three quarters from that 50-year average to 0.5% in the 2020s (0.3% so far this year).

Net residential investment

And as the graph above shows, residential net investment isn’t doing too great either: it went from an average of 2.8% of GDP from 1950 to 1999 to 1.7% in the 2020s. Unlike the mid-2000s housing bubble, which took net residential investment up to 3.8%, the highest since the early post-World War II years, the latest bubble took net housing investment up to just 1.9% of GDP last year. It’s fallen back to 1.4% in 2022. That’s not the way to meet a housing deficit estimated by Freddie Mac at 3.8 million units.

The burst of net private investment in the late 1990s gave us a major productivity acceleration, but it was not to last. And the burst in civilian public investment from the early 1950s through the late 1960s gave us interstate highways, schools, and state university systems. The long declines in net investment, both private and public, have given us stagnant productivity growth and a collapsing infrastructure.

As I put it when I wrote about net investment five years ago, “If I were a debased purveyor of clickbait, I’d call this “Everything that’s wrong with America in two charts.” But I’m not, so I won’t. But still….”

More true than ever.

Photo is by me, of the 7th Ave stop on the G line of the New York City subway.

Fresh audio product: two views of British politics, Tory and Labour

Just added to my radio archive (click on date for link):

August 4, 2022 Simon KuperFinancial Times columnist and author of Chumson the upper-class caste that’s been ruling Britain for a decade • James Meadway, director of the Progressive Economy Forum, on the dispiriting economics of the leader of the Labour Party, the drab Kier Starmer

Fresh audio product: Italian politics, union finances

Just added to my radio archive (click on date for link):

July 28, 2022 Paolo Gerbaudo on the failure of technocracy and the imminence of right-wing rule in Italy • Chris Bohner on the huge stash unions have but aren’t spending (report hereJacobin summary here)

Fresh audio product: the right’s war on education, the political economy of Ukraine

Just added to my radio archive (click on date for link):

July 21, 2022 Jennifer Berkshire on Pete HegsethChristopher Rufo, and the right’s latest fronts in their war on public education • Peter Korotaev looks at the political economy of Ukraine, before, during, and after the war

Fresh audio product: post-leftism, Afropessimism

Just added to my radio archive (click on date for link):

July 14, 2022 Erik Baker, author of this piece, takes another look at a recent BtN obsession: post-leftism • José Sanchez, author of this critique of Afropessimism, looks at the school of thought and its contradictions

Fresh audio product: abortion and Nazis

Just added to my radio archive (click on date for link):

July 7, 2022 Jenny Brown of National Women’s Liberation (and author of Without Apology and Birth Strike) on the early struggle for abortion rights that led to Roe and what we can learn from it for today • journalist David De Jong, author of Nazi Billionaires, on how respectable German businessmen became loyal Nazis

Fresh audio product: reining in the cops, the limits to sensitive money management

Just added to my radio archive (click on date for link):

June 30, 2022 George Maher, author of A World Without Police, on the movement to defund and eventually abolish the cops • Tariq Fancy, author of this series of articles, on the (severe) limits to using finance to fix the climate

Fresh audio product: middle classness, transness

Just added to my radio archive (click on date for link):

June 23, 2022 David Roediger, author of The Sinking Middle Class, on the uses of that term in US politics • Paisley Currah, author of Sex Is as Sex Does, on trans politics

Fresh audio product: racial wealth gap, Jack Welch

Just added to my radio archive (click on date for link):

June 16, 2022 Ellora Derenoncourt, co-author of this paper, on the racial wealth gap, 1860–2020 • David Gelles, author of The Man Who Broke Capitalismon Jack Welch, CEO of GE from 1981–2001

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