Invest Globally, Stagnate Locally


By Daniel Gross

New York Times
April 2, 2006

In the United States and Europe, there has been a curious disconnect in recent years between the performance of the corporate sector and the performance of the overall economy.

For example, median incomes for American workers have barely budged since 2000, while corporate profits have nearly doubled. In Germany, wages have fallen in real terms in the last two years, while earnings for the companies in the DAX 30 index have more than doubled. And in Germany and much of the rest of Europe, the overall pace of economic growth has remained sluggish. "All in all, the widespread prosperity of companies does not lead to prosperity for domestic economies or wage earners in Germany, France or Japan," wrote Patrick Artus, chief economist of IXIS, the Paris bank, in a recent report.

In theory, corporate profits and wages shouldn't be a zero-sum game. Rising corporate profits are supposed to stimulate investment, which leads to job creation and rising consumer demand, which in turns tends to push up wages. But that process has broken down, at least within national borders, thanks to two related trends that stem largely from globalization.

It's a truism in the large developed economies that capital is strong and labor is weak. From 2001 to the fourth quarter of 2005, corporate profits as a percentage of United States G.D.P. rose significantly, to 11.6 percent from about 7 percent. Companies have been able to keep a larger share of the cash they generate, rather than pay it out in wages, in part "because the labor market recovery has been weak," said J. Bradford DeLong, professor of economics at the University of California, Berkeley. Professor DeLong notes that while unemployment is low, other measures of labor-market health, from hours worked to the employment-to-population ratio, show it to be less than robust.

In Europe, where unions remain strong, the growing ability and desire of French and German companies to invest beyond borders gives management new leverage over labor. "Capital has mobility in Europe," said Stephen King, chief economist at HSBC in London. "German companies are able to tell workers that they can either accept reduced pay, or see the company close factories and reopen new ones in Poland or India."

The heightened mobility of capital allows companies to invest their profits around the globe with considerable freedom. "American companies really haven't been sinking much of their gains back into domestic investment," said Jared Bernstein, senior economist at the Economic Policy Institute in Washington. In the United States, nonresidential fixed investment as a percentage of G.D.P. fell to 11.56 percent in 2005 from 12.55 percent in 2000. Thanks to globalization and the opening of new markets, Mr. King said, "it's increasingly difficult to argue that companies themselves are attached to a country." He notes, for example, that Vodafone, the giant British telecommunications company, has more than 80 percent of its sales and employment outside of Britain. And as of 2002, Mr. King found, the 50 largest multinational companies had 55 percent of their employees and 59 percent of their sales outside of their home countries.

The trend of corporate cosmopolitanism is most pronounced in Europe. In a report published last November, Mr. Artus of IXIS found that for the members of the German index, the DAX 30, about 53 percent of employment and 34 percent of sales were in Germany; for the companies in the CAC 40, the French index, 43 percent of employees and 35.5 percent of sales were in France. The trend is less pronounced in the United States. Standard & Poor's estimates that the companies in the S.& P. 500 derive about 60 percent of their sales at home, according to Alec Young, equity market strategist at S.& P. But for some of the largest companies, like McDonald's, the domestic market counts for only one-third of revenue.

More important, Mr. Young said, a disproportionate share of the revenue growth is coming from overseas, which means that domestic companies may be less likely to hire and invest in the United States as sales and profits grow. In Dell Computer's most recent quarter, foreign sales were 43 percent of total revenue, up from 40 percent in the previous quarter. Dell is hiring in the United States: last fall, it opened a plant in North Carolina that will employ 1,500 people within five years. In late March, Dell announced plans to hire 10,000 new employees over the next three years — in India.

Given these trends, the combination of rapidly rising corporate profits and stagnant or falling real wages seems less paradoxical. But some economists are wondering how much longer these trends can continue. "When you have labor shares shrinking relative to capital shares, you tend to get a rise in economic nationalism, which is a democratic response to some of the effects of globalization," Mr. King said.

In other words, the arguments over Chinese imports, cross-border mergers and investments by companies from the Middle East in America's infrastructure could just be the beginning.

More Information on Social and Economic Policy
More General Analysis on Transnational Corporations
More Information on Economic Growth and the Quality of Life