This week President Biden will pay a visit to Saudi Arabia. As it has been widely pointed out, this marks a shift for the president who came into office calling Saudi Arabia a “pariah” state for its many human rights violations. The kingdom’s reputation in the U.S. media has shadowy since the murder of journalist Jamal Khashoggi inside the Saudi consulate in Istanbul in October 2018.
Obviously this was not the first time the House of Saud has found itself in bad favor. Barack Obama was once spouting similar rhetoric about the Saudis being ‘so-called allies’ until he eventually came around. Yet since it came to light that 15 of the 19 September 11th hijackers were Saudi citizens, the American public has had some expectation that the U.S. partnership with the House of Saud would at some point come to an end. A lawsuit against the kingdom brought by families of 9/11 victims has been ongoing for 20 years.
The main thing, along with a massive amount of arms sales, that keeps the relationship cemented, is what it always has been: oil. Even though as result of the fracking revolution of the past decade the United States now actually produces more oil than Saudi Arabia, Saudi Arabia is still the world’s largest oil exporter. While the U.S. imports only a small percentage of its oil from Saudi Arabia, Saudi Arabia and OPEC affect global prices. Such is one reason the U.S. government has for years supported the Saudi bombing of Yemen. With the war in Ukraine showing no signs of slowing down, the price of oil being over $100 a barrel for months, and the price of gas hitting an average of $5 barrel in the U.S., the Biden Administration is fearing the wrath of Americans in the coming midterm elections. Biden’s approval ratings have reached Trumpian lows. The administration spent weeks trying to get OPAC to increase oil production. On June 2nd, OPEC did agree to increase production by 648,000 barrels in July and August but it is unclear how much effect that amount will have. Overall, OPEC is supplying about 2.5 million barrels a day less than in the spring of 2020 before the COVID pandemic exploded.
While the idea of ‘energy independence’ is basically impossible, for instance at this point American refineries can’t process that much of the lighter crude that comes from fracking, they’re still geared to process heavier crude from places like Canada, Venezuela, and Russia, there is now the question of American oil production. Are oil producers in the U.S. increasing production to help bring down the price of gas and help tame inflation? No, they are buying back their stocks. The seven major Western oil companies are poised to spend $38 billion buying back stocks this year- almost double the amount they spent the last time oil was at $100 a barrel. The Wall Street Journal reported on Feb 18th,‘America’s largest frackers are reporting huge profits but plan to keep oil production in low gear this year, adhering to an agreement with Wall Street.’ Having recently been through overproduction and the collapse in oil prices in 2014 and 2020, investors are demanding discipline. If it seems strange that oil producers are buying back stock and paying dividends at a time when Americans are suffering at the pump and inflation is at a four decades high, it shouldn’t be. On one hand, oil companies obviously like high prices. On the other hand, this is what the entire private sector has long been doing.
According to analysts at Goldman Sachs, buybacks are on pace to reach a record of $1 trillion this year. This number would break the record amount of $850 billion set just last year. Take another step back to the tax cut passed by Republicans in December 2017. Cutting corporate taxes is always presented as a way to increase wages, investment and productivity. However evidence shows that much of the surplus is neither invested in production nor paid out to workers. According to the research firm Birinyi Associates in February 2018, companies announced $171 billion worth of stock buybacks, which was a record high at the time for that point in the year. That compared to $6 billion in worker bonuses and wage hikes. A survey released by Morgan Stanley that same month found that companies would only pass 13 percent of the tax cut savings to workers while giving 43 percent of it to investors. For manufacturing, it was 9 percent and 47 percent.
Actually, since the mid-1980s corporations have become by far the most important buyers of their own stock. The dirty fact is that in a period of global overcapacity and declining rates of profit, money cannot be made as fast by actually investing in production, meaning new plants, equipment, workers, etc., as it can by pumping up stock prices. Most top executives get paid with stock packages anyway, and certainly based on stock performance. Since 2010, companies on the S&P 500 have poured out over $5.3 trillion repurchasing their own stocks and nearly the same in dividends. Over just about the same period, nonfinancial corporations have made net investments (‘net’ means after allowing for the depreciation of existing assets, depreciation being an accounting maneuver that allows an owner to write off the value of property over time) of about $2 trillion. Plus more than two-thirds of total U.S. net industrial investment from 2009 to 2019 just went into oil and gas extraction.
The tribulations of the Dow Jones, symbolized by the pomp of the opening and closing bells, are covered as a daily event. In a way, it is strange that this is the case: stocks are owned by a very small percentage of the population. The top 1 percent owns 40 percent of them. The wealthiest 10 percent own 84 percent, the top 20 92 percent. Half of households own no stock at all, including any through mutual funds and 401ks. Roughly a third of households own some shares indirectly through 401ks but only 14 percent own any stock directly.
If stock prices seem beyond the public that may look to the stock market for assurance, in a major way it is also beyond the economy itself. The price-earnings (P/E ratio) measures a company’s current share (i.e. stock) price relative to its per share earnings. Since the mid-1930s the media P/E ratio for the Standard & Poor 500 stock index is 17. It now stands at just over 29. Another metric is the CAPE index, or ‘cyclically adjusted P/E ratio.’ It measures real earnings per share over a 10 year period and corrects for inflation. The historic median is 16. Currently it is at about 30. This number reflects the recent stock market decline, which was the worst half year for stocks since 1970, and rising interest rates. In January 2022 the CAPE Index was 37.
What this all means is the price of stocks isn’t reflecting productive economic activity. Instead it reflects a long-standing trend of corporations using low interest rates to borrow funds in order to buy back shares and elevate stock prices. To go along with cutting corporate tax cuts, it amounts to a rip off of the economy by the wealthiest people. Meanwhile U.S. productivity growth has been stagnant for a generation. On May 27, the New York Times asked ‘Why Isn’t New Technology Making Us More Productive?’ For years there has been an expectation that AI and cloud computing would finally get productivity cranking. Productivity growth stands at only about 1 percent a year, basically where it has been since 2010. This despite interests rates being rock bottom, even negative. Globally as of 2019, $17 trillion worth of outstanding loans with a negative yield, perhaps 30 percent of world debt.
American futurist Roy Amara famously observed what became known as Amara’s Law which states ‘We tend to overstate the effect of a technology in the short run and underestimate the effect in the long run.’ The idea being that there is a period of time between the development of new technologies and enterprises adjusting their operations and workforces to incorporate their use. It took decades for technologies such as electricity, tractors, and computers to have a large effect on productivity. The thing is, besides a brief period in the late 1990s to the early 2000s when productivity growth was 3-4 percent percent a year (70 percent of the late 1990s productivity growth has been attributed to computer technologies), which was in line with the 3.8 percent U.S. averaged from 1948 to 1972, it has been under 2 percent for the past 50 years. It is highly questionable such a long trend can be significantly reversed.
As for workers, while American workers work hundreds of hours more a year than workers in Europe, real wages have been stagnant for decades. Even with the much ballyhooed ‘great resignation’ in the midst of the pandemic, the situation hasn’t improved much for workers. The Wall Street Journal reported on May 31st, the share of national income in the first quarter of 2022 that went to wages and benefits was 62.9 percent, almost exactly the 62.7 percent in the fourth quarter of 2019, the last before the pandemic (workers switching jobs made some gains but such workers represent only a relatively small share of the workforce at a given time- and inflation is likely eating away those gains). While the unemployment rate, the measure of jobless people actively seeking employment, has been low in recent years, the workforce participation rate, the overall percentage of working age people participating in the workforce, has not recovered from the Great Recession of 2008-2009. It Feburary 2008 it was at 66 percent. By mid-2014 it was under 63 percent. It now hovers around 62 percent- showing many working age Americans have simply dropped out of the economy.
It all speaks to an economic system that is outliving its usefulness. Capitalism has grown stagnant. Increasingly from the pandemic to global warming, the planet faces crisis that cannot be solved locally. As the world has witness the past two years, whether it is with vaccines, testing kits, or masks a reliance on market forces leads to inefficiency, hoarding, and shortages. The current crisis of global food prices threatens more of the same. In its latest Global Economic Prospects report, the World Bak estimates that nearly half of the people in low-income countires are facing food shortages. It is imperative to move to an economy based on planning and workers’ democracy. As Marx wrote in the preface to A Contribution to the Critique of Political Economy, ‘At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production…From forms of development of the productive forces these relations turn into their fetters. Then begins an era of social revolution.’