The American Paradox

Robert Reich has put his finger on a paradox that is blocking economic recovery in the US:

Second-quarter earnings reports are coming in, and they’re making Wall Street smile. Corporate profits are up. And big American companies are sitting on a gigantic pile of money. The 500 largest non-financial firms held almost a trillion dollars in the second quarter, and that money pile is growing larger this quarter. Profits that plummeted in the recession have bounced back. Big businesses have recovered almost 90 percent of what they lost.

So with all this money and profit, they’ll start hiring again, right? Wrong – for three reasons.

First, lots of their profits are coming from their overseas operations. So that’s where they’re investing and expanding production.

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Second, big U.S. businesses are investing their cash in labor-saving technologies. This boosts their productivity, but not their payrolls.

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Finally, corporations are using their pile of money to pay dividends to their shareholders and buy back their own stock – thereby pushing up share prices.

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The next supply-side economist who tells you companies need more incentive (i.e. lower taxes) before they’ll hire is living on another planet.

The reality is this: Big American companies may never rehire large numbers of workers. And they won’t even begin to think about hiring until they know American consumers will buy their products. The problem is, American consumers won’t start buying against until they know they have reliable paychecks.

Go read the full post on Reich's blog to get all the details.

The bottom line: the US will suffer a "lost decade" of lingering Great Recession because of this paradox. Business won't invest until people buy. People won't buy until they have jobs. In the Great Depression this paradox was resolved by WWII which forced massive government spending to get the economy out of the rut it was in. But today, the Republicans refuse to allow Obama to spend the necessary amounts (and Obama is too pusillanimous to stand up to the Republicans and demand that they put the interests of the country before petty politics). So you get a paradox: a head-butting between industry and consumers, neither wants to go first.