By Robert Reich
Published: March 24 2010 02:00 | Last updated: March 24 2010 02:00
Can the American economy recover if only its big global companies, Wall Street and high-income Americans are doing better, but its small businesses and middle and lower-income Americans are not? The short answer is no.
The earnings of companies in the Standard & Poor's 500 stock index tripled in the fourth quarter, but this does not mean the rest of the US economy is doing well. Much of their sales were into fast-growing markets in places like India, China and Brazil. Meanwhile, they continued to slash jobs and cut costs at home.
Alcoa, for example, had $1.5bn in cash at the end of 2009, double what it had on hand at the end of 2008. Sounds terrific until you realise how it did it. By cutting 28,000 jobs - 32 per cent of its workforce - and slashing capital expenditures 43 per cent.
Nor does the fact that big US companies have lots of cash signal a broader recovery. The S&P 500 are now holding $932bn in cash and short-term investments and can borrow cheaply. So far in 2010, big US corporations have issued $195.2bn of debt, excluding government-guaranteed bonds. But this cash is not going into new investment. Much is being used to buy other companies, which usually leads to more job losses.
Much of the rest is being used to buy back their own stock in order to boost their share prices. There were 62 such buy-backs in February, valued at $40.1bn - the biggest share buy-back since September 2008. The major beneficiaries are shareholders, including top executives, whose pay is linked to share prices. But the buy-backs do nothing for most Americans.
None of this is stopping supply-side fanatics from arguing government needs to cut taxes on big corporations to spur the recovery. Their argument is absurd. Big companies do not know what to do with all the cash they have as it is. They are not investing it in new plant or jobs. So why should the government cut their taxes and enlarge their cash hoards even more?
The picture on Main Street is the opposite. Small businesses are not selling much as they have to rely on American consumers and Americans still are not buying much.
Small businesses are also finding it hard to get credit. In a credit survey in February from the National Federation of Independent Businesses, only 34 per cent of small businesses reported normal and adequate access to credit. Not incidentally, the NFIB's Small Business Optimism Index fell 1.3 points last month.
While big companies are finding it easy to borrow in the bond markets, smaller companies depend on bank credit, whose supply remains limited. Last year, total bank lending fell 7.4 per cent, the biggest decline in almost 60 years, and there is no sign of a turnround. To the contrary, a rising number of commercial loans are going bad. Banks still face further losses on mortgages and commercial loans so lack the reserves to increase lending.
This is a problem because companies with fewer than 100 employees accounted for almost half of net job growth during the last two recoveries, according to the US Labor Department's Bureau of Labor Statistics. ,,,
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