Is What’s Good For GM Good For Your Members?

August 26, 2014 at 9:29 am Leave a comment

 

Janet Yellen gets it even if the markets don’t.  How much richer do you feel today with the news that the SAP 500 Index reached record highs yesterday? The ostensible reason for the burst in enthusiasm is that with the Fed Chairman, at best, luke warm to the idea of raising rates anytime soon, the stimulus provided by these artificially low rates will keep the economy growing or so the theory goes.

But I would suggest a more cynical reason for the latest burst of enthusiasm: low interest rates delay the moment when the latest stock market rally comes to an end as people find safer places to put their money that provides them yield. 

Which brings me to the point of today’s blog.  Increasingly, there is a disconnect between Wall Street and Main Street which is distorting economic incentives and creating a system of haves and have nots where fewer and fewer of your members join in the nation’s economic growth.  Chairman Yellen hints at this when she repeatedly points out that the economy, while improving, isn’t nearly as strong as the traditional indicators say it is.

The simple truth is that corporations aren’t investing the way they should at this point of an economic rebound. Talk to your tellers: are members happier or still fretting about economizing? Look at your mortgages: Are members rushing out to get their piece of the American dream? Not even close.  Why then is there such a disconnect between the stock market and reality? 

One of the research papers sited by Chairman Yellen in her speech on Friday points out that labor’s share of national income has declined dramatically over the last 25 years.  Between the end of WWII and the mid-80s, the employees’ share of national income was 64%. Today that share has dipped as low as 58%.  The trend was interrupted in the mid 90’s but since then has picked up with a vengeance.

What’s going on? When capitalism is at its best, increased production raises demand to increase wages. The company wins and so does its employees. But today, companies are sitting on record amount of cash and stock buybacks are at an all-time high. In other words, it’s cheaper to invest in markets than it is to invest in employees.  

Don’t take my word for it. As the OECD concluded in a research paper last year: 

Right now the incentive structure implied by very low interest rates, which may be sustained for a long time, together with tax incentives, works directly against long-term investment. Debt finance is cheap, while the cost of equity capital needed for risky long-term investment is still high (unaffected by low rates). This combination provides a direct incentive for borrowing to carry out buybacks.

Of course, more is going on here than cheap money.  The causes of these trends are complex and varied, ranging from a global marketplace to tax policy to an uneven education system, but let’s not ignore the reality that something is going on that will likely impact the prosperity of your members and the growth of your credit union for the foreseeable future.

In the meantime when the stock market goes down, and I mean really down, for a week or two it will actually show the economy is getting better. Companies will have to start investing in real growth again and your average worker will benefit.

Entry filed under: Economy.

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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