Corporate power grows stronger as government wanes

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Market Beat

In the dreams of the Occupy Wall Street movement, America will look like a very different place five years from now.

The power and influence of corporations will be sharply curbed, good jobs will be plentiful and income disparities will have narrowed significantly.

Now imagine another scenario, the “Rollerball” scenario, from the 1975 movie of that name: Corporations have replaced national governments and effectively control the world. There are no more wars, but people surrender their humanity to the primacy of the corporation.


“Rollerball” still seems pretty far-fetched, but the occupiers are right to ring the alarm about the trend. In the aftermath of the 2008 market and economic crash, the financial and political power of major companies has only increased while workers’ power has faded amid a global labor glut.

What’s more, corporations grow stronger while developed-world governments are badly weakened — in no small part because of the heavier debt burdens they’ve taken on to try to save their economies with stimulus spending, bank bailouts and payments to the unemployed.

In August, the U.S. for the first time lost its top-rung AAA credit grade from Standard & Poor’s, which cut the nation’s rating to AA+, citing ballooning debt.

No such downgrade has befallen Exxon Mobil Corp., which remains AAA in S&P’s eyes.

Europe’s debt crisis is all about governments being too deep in hock, of course. For the moment, that crisis is overshadowing what remains a dire situation for Washington and for many state governments.

Congress’ special “super committee” of legislators faces a Wednesday deadline to suggest at least $1.5 trillion in deficit reduction over the next 10 years.

But even if they meet that goal, the debt will continue to grow. The U.S. ran a deficit of $1.3 trillion in the last fiscal year alone.


California is staring into its own abyss: With tax revenue running well below projections, the state faces the prospect of further deep spending cuts for education, child-care programs and other social services in 2012.

Meanwhile, dollars pile up in corporate coffers. The blue-chip companies in the S&P 500 index are sitting on a record $1 trillion in cash now, according to S&P. That’s up from $647 billion just before the 2008 economic and financial crash.

Clearly, despite the global economy’s disappointing growth over the last three years, multinational firms overall have prospered. Operating earnings of the S&P companies are estimated to have reached $231 billion in the third quarter, a new all-time high. Per-share earnings were up 13% from a year earlier.

“We have an economy that works for corporate America even if it doesn’t work for anybody else,” said Lawrence Mishel, head of the left-leaning Economic Policy Institute in Washington.

After slashing jobs during the recession, even modest increases in sales have translated into fat profits for many companies. Also, far-flung U.S. multinational firms have been able to cash in on stronger economic growth in developing nations, such as China and Brazil, even as domestic growth has remained tepid at best.

Businesses also have benefited directly and indirectly from governments’ deficit spending. Those dollars have funded infrastructure projects, for example, and paid jobless benefits, food stamps and other support to the 14 million unemployed Americans, who then consume what companies produce.


“Companies depend on governments for all sorts of things,” notes Dean Baker, co-director of the Center for Economic & Policy Research in Washington.

The corporate sector also has been a key beneficiary of the Federal Reserve’s efforts to keep long-term interest rates depressed. That has allowed companies to refinance debt at lower rates, further bolstering their finances.

Deeply indebted homeowners with no equity in their houses aren’t so lucky.

As corporate earnings have recovered to new highs, pressure has mounted on businesses to explain why hiring has been slow to follow. Yet many companies say that demand for goods and services overall has remained too weak to justify a hiring binge.

“Companies will start to spend their cash when they can’t meet demand” with existing staff, said Martin Regalia, chief economist at the U.S. Chamber of Commerce in Washington. “They can’t just turn around and increase the revenue spigot when they want to.”

Businesses also justify their caution by pointing to the severity of the 2007-09 recession, and legitimate fears that the economy could stumble again. Europe may already be back in recession.

Still, if money is power, corporate America has it. That cash can be used to reward shareholders with bigger dividends, an idea that more companies have embraced this year. That puts profit back into the economy.


But corporations also can spend their money to influence the policies of the severely stressed governments that regulate them.

No one needs an explanation of the power of corporate lobbies in Washington. The Supreme Court’s 2010 ruling that affirmed “corporate personhood” — the idea that companies ought to be entitled to basic human rights — broadened their ability to directly contribute to candidates for public office.

In short, unlike average people, businesses now have an even greater chance of buying the laws, regulations and tax loopholes that they want.

Barry Ritholtz, a New York money manager, wonders why Americans aren’t more upset about all of this. He used his blog this week to declare that the U.S. has become a “Corporate Monarchy.”

“Our new overlords are enormously well-funded, well-connected, relentless and perhaps most of all, patient,” Ritholtz said.

Is that over the top?

If the stock market were convinced that we’re entering a new era of business supremacy, you might assume that share prices would be reflecting it. Yet the S&P 500 index is down 3.3% this year even as corporate earnings have continued to rise.


Investors may be wary because they know that governments still have one authority that companies don’t: the ability to tax.

But with economies starved for jobs, and labor in surplus, companies worldwide are likely to find it easier to fend off any threat of higher taxes, which they’ll argue could further inhibit private-sector job creation.

Mishel, at the Economic Policy Institute, sees little likelihood that the shift of power toward business and away from government and workers will reverse anytime soon.

Corporations know, he said, that “this economy is not going to weaken their hand.”