Tuesday, March 5, 2013

A Musing About Incentives, Profits, And Stagnant Salaries

The Sioux Falls Argus Leader reports, "No one testified against Building South Dakota, part of Senate Bill 235. Several lawmakers had skeptical questions about part of the proposal, but the committee voted 12-0 to send SB 235 to the full House." The legislation is an effort to bribe provide incentives for corporations to locate in South Dakota:
The complex proposal includes tax incentive for large business projects, grants for local infrastructure and affordable housing, and millions of dollars for education.
It would be funded by tax revenue from projects incentivized by the fund, and from part of the state’s “unclaimed property” revenue from banks.
Meanwhile, the New York Times reports that the Dow has hit a record high.
The Dow Jones industrial average, which measures the performance of 30 blue-chip companies, rose more than 100 points in morning trading on Tuesday, surpassing its previous record close of 14,164.53, which it achieved nearly five and a half years ago, as well as its record intraday high, set around the same time, of 14,198.10.
The Times also reports, "the split between American workers and the companies that employ them is widening and could worsen in the next few months as federal budget cuts take hold." That trend seems unlikely to change:
With millions still out of work, companies face little pressure to raise salaries, while productivity gains allow them to increase sales without adding workers.
“So far in this recovery, corporations have captured an unusually high share of the income gains,” said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch. “The U.S. corporate sector is in a lot better health than the overall economy. And until we get a full recovery in the labor market, this will persist.”
The result has been a golden age for corporate profits, especially among multinational giants that are also benefiting from faster growth in emerging economies like China and India.
The Times also reports that this golden age of corporate profits has not been seen in decades:
As a percentage of national income, corporate profits stood at 14.2 percent in the third quarter of 2012, the largest share at any time since 1950, while the portion of income that went to employees was 61.7 percent, near its lowest point since 1966. In recent years, the shift has accelerated during the slow recovery that followed the financial crisis and ensuing recession of 2008 and 2009, said Dean Maki, chief United States economist at Barclays.
Corporate earnings have risen at an annualized rate of 20.1 percent since the end of 2008, he said, but disposable income inched ahead by 1.4 percent annually over the same period, after adjusting for inflation.
“There hasn’t been a period in the last 50 years where these trends have been so pronounced,” Mr. Maki said
.Let's review:
1. South Dakota legislators believe that companies that are making record profits can be given incentives to come to South Dakota
2. Despite record profits corporations aren't hiring new workers and the workers who are on the payroll are not getting raises.
3. In effect, South Dakota is going to give corporations awash in cash a chance to make more money even though the evidence indicates that they will not do anything to employ more workers or raise the salaries of the workers they do employ.
Why is this a good idea?

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