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Saturday, January 1, 2011

How US companies profit & Americans don't benefit

Have you sometimes wondered how companies are doing so well when unemployment is 9.8% (real employment is near 20%) and for most of the economy, there's no recovery?

I will try to explain in a simple and concise way...

Let's start with a pretend company for our example- call it XYZ, Inc. and I, your humble writer, is its CEO & President. This company sells dolls; everything from cheap plastic play toys to high quality porcelain collectibles.

XYZ is a big company- so big, that it is a publicly traded company on the New York Stock Exchange, and currently XYZ is turning in some Huge profits amid this global recession.    OK, so how?

First, understand my company sells dolls throughout the world, not just in the US.  So it isn't dependent on the American consumer to make its sales quotas.  Now the Fed Chair, Ben Bernanke continues to weaken the US dollar.  And while this makes my dolls more expensive for the American consumer to buy, overall it works out as a greater benefit for me-- my dolls are now much cheaper to sell abroad to foreign markets.  

XYZ's ability to sell more dolls may seem like this would benefit the US economy- it doesn't.  See, I am an US company but I do not make the dolls in the US.  I make them in China or India or Vietnam or Madagascar at $1-2dollars/day in labor...or if its more cost-effective, I will have the dolls assembled in Mexico or Honduras or El Salvador using US materials.

The American worker does not have any involvement in the creation or production of my dolls so there's no economic benefit.  And when Americans spend their hard earned money on my products, it will provide me additional capital needed to invest in operations in other nations like Ghana, Cambodia and Jordan where perhaps labor is even cheaper.

The American money spent by American consumers does not go back into the American 'community' in any noticeable or meaningful way.

Now, any US workers that I may employ will be either at distribution warehouses or the sales/promotion side of the business and it will be specific to the US.  I will hire Europeans to focus on the European side of my business; Australians to cover Australia, etc...

The vast majority of these workers will not require high degrees of skill or training, and will mean my salaries can be kept low.  I may also employ a large temp force, which I can hire and fire at any time for any reason without paying any benefits or severance.  Or XYZ may keep all workers on a 30-35hr work week to ensure no one gets 'full time' benefits or overtime.

As I said before, XYZ is an American company, but I hire very few Americans so I pay very little in Soc. Sec & FICA taxes. In addition, I do not want to pay a penny more in American corporate taxes than I have to.  So I establish corporate banking accounts offshore in the Caribbean, which is perfectly legal.

 I also make sure that an XYZ, Inc. headquarters is located in a nation like Ireland where corporate tax rates are the lowest in the world.  I also enact something called "transfer pricing" which allows XYZ to transfer goods and assets between internal divisions in my company so they can record income in a jurisdiction with low tax rates...

You're wondering- Certainly Americans must benefit in some way from my success?

Well--  not really.  Now, any American who is an investor or shareholder in XYZ will benefit from the profits the company is making.  And as I said before, I will need some American employees to run distribution and sales/advertising. But remember, most Americans' wealth is not in the markets- its tied into their depreciating homes.

So even if XYZ is the most profitable company in the world, unless you are directly invested, you receive Zero financial benefit from its success. And statistically, the top 1% of the population own over 50% of all the stocks, so the chances are remote that everyday people will benefit from my prosperity.

Unfortunately, there are some people who will blindly attach an emotional USA #1 pride factor to XYZ's financial success, especially if its the Top doll company in the world- but idolatry towards companies who are American in name only, does not put food on the table or gas in the car.

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