By: Henry Blodget
November 19, 2013
Yesterday, it was revealed that employees at a Cleveland Wal-Mart are holding a holiday food drive for other Wal-Mart employees.
This situation says everything about what’s wrong with the U.S. economy right now.
Wal-Mart is one of the richest companies in the world.
Wal-Mart has a market value of $260 billion and made $17 billion in profit last year.
But Wal-Mart does not pay its employees enough to buy food for the holidays.
America’s corporations and investors have never had it better. The stock market is setting new highs, and corporate profits and profit margins are higher than they have ever been. Average Americans, meanwhile, have rarely had it worse. Wages as a percent of the economy are at an all-time low, and fewer people are working as a percent of the population than at any time in the past 30 years.
In addition to violating just about every conceivable ideal of community fairness and decency, this state of affairs is hurting the economy. Average Americans account for most of the spending in the country. And thanks to the refusal of rich companies like Wal-Mart to share more of their wealth with the people who create it, average Americans are broke.
When people are broke, they can’t buy things. When people can’t buy things, companies can’t grow. And when companies can’t grow, they cut costs (fire more people). And, in so doing, they make more people broke.
In the past 30 years, American business has become ever-more obsessed with “shareholder value,” a concept that unfortunately has come to be defined as short-term profit maximization. And as a result, America’s corporations have lost sight of the other kinds of value that great companies can create.
Great companies do not simply “maximize profits,” as so many of America’s companies are now doing.
Rather, great companies create value for all three of their major constituencies: customers, shareholders, and employees.
It’s time companies like Wal-Mart began doing that, instead of “maximizing profits” and treating the people who produce those profits like costs to be minimized.
In a healthy economy at healthy companies, customers should get good products and prices, shareholders should get a good return, and employees should earn a good living.
But, right now in America, customers are getting good products and prices, shareholders are getting absolutely fantastic returns, and employees are getting screwed.
That’s not just greedy and unfair, it’s also hurting the economy.
Let’s go to the charts …
1) Corporate profit margins are at an all-time high. Companies are making more per dollar of sales than they ever have before. (And some people are still saying that companies are suffering from “too much regulation” and “too many taxes.” Maybe little companies are, but big ones certainly aren’t. What they’re suffering from is a myopic obsession with short-term profits at the expense of long-term value creation).
2) Wages as a percent of the economy are at an all-time low. Why are corporate profits so high? One reason is that companies are paying employees less than they ever have as a share of GDP. And that, in turn, is one reason the economy is so weak: Those “wages” represent spending power for consumers. And consumer spending is “revenue” for other companies. So the profit obsession is actually starving the rest of the economy of revenue growth.
3) Fewer Americans are working than at any time in the past three decades. The other reason corporations are so profitable is that they don’t employ as many Americans as they used to. As a result, the employment-to-population ratio has collapsed. We’re back at 1980s levels now.
In short, our current “profit maximization” philosophy is creating a country of a few million overlords and 300+ million serfs.
That’s not what has made America a great country. It’s also not what most people think America is supposed to be about.
So we might want to rethink that.
Specifically, we might want the goal of our corporations be to create long-term value for all of their constituencies (customers, employees, and shareholders), not just short-term profit for their shareholders.
Gold Goliath is not your typical gold dealer.