4.2.2 The Response

The problem is that these differentials are purely and entirely man-made. They are created, principally, by the tax code: by the favorable treatment of capital in general, or more specifically about all the legal and tax rules regarding the inclusion of generous business expenses, the amortization of certain real estate, the favorable treatment of capital gains, etc. All of the rules favor capital.

And as a result, the return on capital is greater than economic growth—that, precisely, is the extraction of capital, the extraction of value from the corporate enterprise that can be achieved by means of the code of capital. So, if you compare the GDP growth rates for the United States to the growth of the S&P 500 (including dividends), what you see is precisely the amount of extraction that is made possible by our tax and corporate laws:271

Date GDP Growth (%) Annual Change S&P 500 S&P 500 Growth less GDP Growth (%)
12/31/99 4.7532 0.27 20.89% 16.14
12/31/00 4.1275 -0.63 -9.03% -13.16
12/31/01 0.9983 -3.13 -11.85% -12.85
12/31/02 1.7417 0.74 -21.97% -23.71
12/31/03 2.8612 1.12 28.36% 25.50
12/31/04 3.7989 0.94 10.74% 6.94
12/31/05 3.5132 -0.29 4.83% 1.32
12/31/06 2.855 -0.66 15.61% 12.76
12/31/07 1.8762 -0.98 5.48% 3.60
12/31/08 -0.1366 -2.01 -36.55% -36.41
12/31/09 -2.5368 -2.4 25.94% 28.48
12/31/10 2.5638 5.1 14.82% 12.26
12/31/11 1.5508 -1.01 2.10% 0.55
12/31/12 2.2495 0.7 15.89% 13.64
12/31/13 1.8421 -0.41 32.15% 30.31
12/31/14 2.452 0.61 13.52% 11.07
12/31/15 2.8809 0.43 1.38% -1.50
12/31/16 1.5672 -1.31 11.77% 10.20
12/31/17 2.217 0.65 21.61% 19.39
12/31/18 3.1839 0.97 -4.23% -7.41
12/31/19 2.3336 -0.85 31.22% 28.89
SUM: 125.99

In real economic terms, all of that surplus of return on capital over basic economic growth—126% over twenty years—is the product of the legal and tax rules favoring capital. And that surplus is all man-made. It is not inherent to capital investment. In other words, the 9.5% rate of return is not natural. It is the pure by-product of a legal-political-economic regime that favors the capital investor. In a similar fashion, the 4.8% return on Treasury bonds is a man-made artifact, produced by the flow of capital to stock markets and by the U.S. government’s promise to repay. In great part, it is an artifact of the shared belief that the U.S. government is stable and will repay its loans. It is the product of the political promise of the federal government. In other words, it is a political product.

Add to that that most major public corporations finesse the tax rules in such a way as to actually glean tax revenues from the federal government. So, for instance, in 2015, American Airlines made profits of over $4.6 billion, but received a tax refund of almost $3 billion. From 2001 to 2014, Boeing made profits of $52.5 billion, yet received a net federal tax refund of $757 million and received as well $55 million in state tax refunds.272

There are then several man-made dimensions to the purportedly natural higher return on capital investments.

First, the Treasury can attract investors by means of security and safety, and as a result does not need to reward with rates of return equal to the riskier corporate equity. That, of course, is a factor of the United States’ geopolitical position and recent history of stability. It is a political artifact and would change dramatically if, for instance, large sovereign investors, like China, sold their Treasuries or decided to no longer buy any. It is entirely related to how much debt the country has—although even that seems somewhat disconnected lately—and its political track record of honoring its debt. The situation is clearly very different for a country like Venezuela.

Second, capital returns are artificially inflated by the general exploitation of labor: by not paying workers adequately, by perpetuating huge disparities with management compensation, by not distributing profits to the workers, and by relying on the federal government and states to support workers. So, for instance, because Walmart does not pay a living wage, many of its employees rely on Medicaid for health insurance, food stamps to feed their families, and government subsidized housing for their shelter. As a result, American taxpayers support Walmart employees—and therefore underwrite Walmart itself—to the tune of about $6.2 billion each year. Meanwhile, Walmart made almost $15 billion in profits in 2015. For the fast-food industry, again because of unacceptably low wages, American taxpayers spend about $7 billion a year subsidizing companies like McDonald’s, Burger King, and Wendy’s.273

Third, the differential is inflated because the management of public companies extract and hoard the profits for capital investors. They distribute the profit entirely to themselves, paying out dividends and buying back stock, gearing everything toward profiting the shareholder and not the other persons affiliated with their commerce.

Fourth, and most importantly, the differential is the product, mostly, of state dirigisme that favors capital investors: bailouts in bad times; tax loopholes for capitalists; tax breaks for capital gains; etc. If these were eliminated, the rates of return on capital investments would decline because the profits would be distributed more evenly and there would not be the hoarding or state-sanctioned profiteering. So, the higher return on capital, again, is entirely man-made.

It is time to reverse those differentials so as to promote coöperation, equality, and social justice.

Those differentials are man-made. They can be reengineered.

The laws of incorporation, the tax code, the government bailouts—they can all be reconfigured to privilege mutuals and coöperatives so that the consumers, workers, producers in this country get the benefit of economic growth.

It is simply a question of will.

Coöperation can be made to be more profitable.