In the Wake of the Crisis: Bully Capitalism

A shorter version of this article appears today at Economy Lab, the Globe and Mail’s on-line business feature. 

Capitalism has entered an ugly new era, one that may work well for the shareholders of world, but not for the rest of us.

I couldn’t help but notice that, on the very same day Caterpillar shuttered the doors of its London, Ontario locomotive plant and headed to low-wage Indiana, the Wall Street Journal reported federal corporate tax receipts as a share of profits had dropped to their lowest level in at least 40 years in the US.  Sadly, that’s not just an American story.

Lower taxes and lower wages: it’s a one-two punch that has been hard to duck in the post-crisis period, and not because business is on the ropes. Like Caterpillar, the American business sector as a whole has been booking record-breaking profits.

Stubbornly high unemployment, talk of austerity and huge household debt levels have got people worried, on both sides of the border, and some employers are using that fear to their advantage.  Newly aggressive demands that workers give up income join the decades-old demands that governments give up revenue. The implicit deal is lower taxes create more investment and  competitive cost structures create more demand. Both supposedly create more (good-paying) jobs. Lower taxes, check. Lower payroll costs, check. More good-paying jobs here at home: Insert sound of crickets chirping.

According to the Congressional Budget Office, the effective tax rate on the business sector in the US — federal corporate tax receipts as a share of domestic profits — had fallen to 12.1% by fiscal 2010-11. It had averaged 25.6% between 1987 and 2008.

In Canada, too, federal taxes on profit have been falling for decades, dropping to 16.6% by fiscal 2010-11 after briefly dipping to 13.2% in 2008, a level not seen since the Great Depression. The long-term trajectory is headed towards effective corporate taxation rates of the Dirty Thirties as federal rates continue their steady downward march, through recession and recovery.


Source: Fiscal Reference Tables and Statistics Canada

Unlike the 1930s, corporate profits in Canada have rebounded since the 2008-9 crisis, nearing the previous high water mark ($204 billion in the third quarter of 2011 — hit by roller-coaster stock markets — up from $135.8B in the second quarter of 2009 but shy of the peak, $247 billion in 2008′s third quarter).

Back in the 1960s, a successful corporation could expect to turn over at least 25 cents on every dollar made to the federal government, to help build Canada. It didn’t seem to stop them from building business and profits too.  In fact the economy was on a growth spurt.

Despite growth today, there is no shortage of profitable firms telling workers they can keep their jobs only if they agree to get less.  Yes, today growth is slower, and yes, more companies now compete on a global stage. But slow growth is exacerbated by a view — dominated by business interests, and shared by many bureaucrats and politicians —  that lower taxes and lower wages are the best way forward.  Call it sociopathic economics.

Boiled down, the Caterpillar story was about a company making a union an offer it had to refuse: cut wages in half, eliminate cost of living increases, eliminate defined benefit pensions and increase copays on benefits.   It was all end-game, no discussion.  Production headed for Muncie, Indiana, where wages are $12.50 to $14.50 an hour, less than half the $35 skilled welders in Canada were making until December.  The local daily in Muncie notes how tough it is to find and retain skilled workers at that pay, and the struggle faced by local businesses whose clientele is losing economic ground.

The Cat fight released fresh blood in the water for the sharks. But it’s just the latest, most egregious example in a string of stories that have emerged in the aftermath of the global economic meltdown.

In Quebec, Rio Tinto wants to increase the number of contractors in the workforce, from 10.7% now to 27%. They are paid at half the wages of unionized workforce. Company earnings over the last year, at $15.5B,  beat records and market expectations.

In BC, workers at Extra Foods are resisting Loblaw’s attempt to cut wages in half.  Loblaws, with almost $40 billion in annual business, announced a 19.8% increase in quarterly profits in November.

In Fort Frances Ontario, workers with Resolute Forest Products (aka Abitibi Bowater) took a $10/hour pay cut, lost vacation pay, and now pay $180 a month for short term disability pensions, totalling an 18% pay cut last year. The company is not hurting. It’s buying another firm for $71.5 million.

Global mining giant Vale saw its revenues double to $46.5 billion in 2010 from the previous year while withstanding a 14 month strike in Ontario and an 18 month strike in Voisey’s Bay, Labrador. Vale sought, and got, concessions that brought Canadian operations more in line with the rest of its production network, which is mostly in developing nations.

From casino workers in Atlantic City, to electricians in England and meatpackers in New Zealand, hugely profitable firms are telling workers they can’t keep what they’ve got.

These stories display, at their core, a shockingly naked desire to reduce the incomes and bargaining power of workers. It’s not because there is no money.

To these blatant ways of redistributing income, from poor to rich, add other, more subtle strategies.

Domestic and foreign firms are “insourcing” low-wage workers, through temporary foreign work permits for low- and higher-skilled jobs.  Others are creating two- and three-tier workforces, the better to reduce payroll costs and divide workers’ interests. It’s putting downward pressure on the wages and incomes of the associated supply chains and local economies.

The costs of production in some job-starved US markets are closing in on the costs of producing in emerging markets, once transportation and productivity concerns are factored in.  Low-wage havens can be found, and created, at home.

These trends are not just happening in the US.

Ontario’s Society of Energy Professionals stood their ground against Hydro One for a 105 day strike in 2005 to prevent two-tiering of the workforce, hoping to protect the next generation of hires, mostly young women and racial minorities. They won then, but two-tiering has become staple fare at the collective bargaining table in the last couple of years, a routine demand of employers in both the public and private sectors.

The use of temporary foreign workers has also exploded since the recession began, strictly a matter of federal public policy. Different compensation for people doing the same job is increasing in unionized settings and non-unionized settings alike, partly due to the accelerating use of contractors and temporary workers.  The result:  Newcomers and youth are pitted against workers with more seniority and job permanence, and everyone’s attention is distracted from the employer’s ability to pay.

The wage floor is sagging, pulling the prospects for everyone but the elite downwards. A recent study by the Metcalf Foundation showed that the proportion of working poor in Toronto soared by 42% from 2000 to 2005, while the economy was still growing.  Of the working poor, 73% were not born in Canada.

Where is the middle class supposed to come from for our children and the immigrants, the people on whom we will rely and who will create the new Canada?

True, this is not the first time employers have told workers to suck it up. After the free trade deals of the 1980s and 1990s, companies simply moved operations to lower-wage climes, shedding hundreds of thousands of good-paying Canadian jobs in the process.  Back in the 1930s, when such options were not so readily available, bosses fought unions mightily, but to stave off paying more, not ram through cuts.

You have to go all the way back to the robber barons of the 1880s and 1890s to see growing, successful companies — like the railroads and coal mines — boost profits further by extracting wage concessions from existing workers.

Today, a growing number of employers in advanced economies are demanding terms of employment that roll the clock back decades.  Keeping your job means accepting wages and working conditions that narrow the margin between workers here and in emerging markets.

If memory serves, globalization was sold as an opportunity to export the First World economy and conditions, not import a Third World standard for workers.

Some, not all, corporations view both governments and unions as pesky impediments to making money.  These corporations don’t talk. Or give. But they’ll take.  And there is no end to what they’ll take.  It’s a real concern if their numbers keep growing.

Democracies and collective bargaining provide ways to air multiple views and find a working balance between interests.  Without processes of talking, giving and taking, the bullies prevail.  Of late, there has been a rise in the number of bullies, and a celebration of corporate strength … as if that is all that matters to an economy or a society.

The snatch-and-grab ethos that has emerged in the wake of the global economic crisis may fatten an individual corporation’s bottom line; but if too many companies play this game, everyone but the giants lose.

As these big corporate players drive down their costs and rack up ever-higher profits, they build up their war-chests to buy up the competition.  That turns workers, suppliers and governments alike into price-takers, and has us all scrambling to attract capital and jobs with, you guessed it, lower taxes and lower wages.

It’s like a bad joke: the more successful the business sector is at driving down its costs, the harder it gets for families and communities to go about their business.

The chart above shows the scorecard of success on the tax front.  Rapidly escalating income inequality will track the legacy of the new war on labour, making past trends look like a walk in the park.

This is not the type of capitalism anybody should be rooting for, in the search for enduring recovery, growth and prosperity.


  • Christopher Albertyn

    And, of course, who’s going to be able to buy the goods produced by all these cost-cutting companies? What is so sensible for the ruthless individual capitalist undermines the system that depends on consumers who can afford to buy the goods.

  • This article accurately portrays how corporations in league with conservative politicians are effectively redistributing wealthy from the poor to the rich. But I am sure the author has no idea what it will be like if Stephen Harper’s plan to import into Canada, corporations owned and operated by the Communist Party of China, goes ahead. The folks at PetroChina think corporate players in North America are wimps.

  • The focus on pay differences between London and Muncie is what allows Kevin O’Leary, Andrew Coyne, Diane Francis, etc. to argue that the union should have settled for half a loaf. I am not convinced that Caterpillar’s decision to relocate had much to do with labour costs (which must be a pretty small share of total costs at a locomotive plant). As I noted on Lang & O’Leary (20 minutes into the episode), Caterpillar was consolidating locomotive production with existing facilities in Indiana and received subsidies from the state government to do so.

  • If they where going to shut down the plant anyway, why bother with the lockout? So they could justify (in a few people’s minds) keeping the $5 million of Canadian funding?

  • Good question. Caterpillar might have chosen to close the plant after the collective agreement expired to try to avoid paying severance. Doing so in the midst of a labour dispute might toughen the company’s reputation for negotiations elsewhere. Delaying the announcement until after Indiana passed “right to work” legislation might help validate a policy that Caterpillar supports.

  • Armine did a fantastic job at stimulating conversation on a series of observations that the left has been trying to get into more conventional commentary(over 500 comments at the Globe).

    Yet I do wonder about the title. What would a non-bully capitalism look like? It strikes me that social dems with their abandonment of public sector ownership of key sectors along with an embrace of liberalized trade and capital flows were setting the structural stage for capitalism as it ever was.

  • There is something going on in the inner circles of the 1%. It is almost as though their response to the Occupy movement is to yank the leash and tell that indeed as Armine suggests, time to show their stick and how strong they think they are.

    What alternative does capital have right now, but to beat the workers into submission. The last 30 years have been a slow decline of the middle class, and with the housing bust in the US, and the decline of good jobs everywhere and now austerity for ripping public services and social safety nets, what option do they have. Capitalism, will always choose this way, because as they have been de-regulated by the state or alternatively re-regulated by the 1%, they will always choose more power. And the only solution to regulate labour under this regime of accumulation is to beat the workers in the race to the bottom.

    Of course there are many alternatives, but as Travis points out, much of the organized alternatives have capitulated. I am thinking it was because capital was more successful in creating such a lengthy decline before finally crashing and burning in 2008 and without a massive crisis, although the long decline has produced quite a few, but never enough to fuel a massive resistance, similar to the recent uprising.

    Greece could be the future of all countries, as today’s activities, and numbers show that the nation state no longer matters when you fall into a space that the 1% believe are not allowed. Unelected governments, draconian social changes, massive economic and social decline.

    So potentially the left can now find new alternatives to gain traction with voters and instead of shifting to the center make a stand for a new rebuilding of the middle class. The question is, can the reality filter through to the masses and bring out democratic change. It seems liek once you fall too far past the borders of acceptable capitalism, like Greece has, you will be democratically neutered. One thing for sure, we have witnessed capitalism destroy a nation. Isn’t the whole point to build civilized nations.

    The contradictions do build quite loudly these days.

  • I guess the NDP will be a great starting point in testing my theory, for if the membership elect a centering individual like Tom Mulclair then I could be wrong.

  • The parliamentary left is lagging not leading. The non parliamentary left is whimpering not revolutionizing. No structural change…more of the same.

  • I have a couple of questions rather than comments. To what extent has the emphasis on shareholder value driven this situation? Has the stockmarket become the new driver of the economy rather than wages? It seemed in the past that the health of the economy was tied to the citizen /consumer where now it’s all about the shareholder. Paul Krugman once wrote that it was possible to have a healthy economy of low wage workers producing luxury goods for an elite; however I suspect such an economy would not look like a place that most of us want to live. It just seems that people don’t understand that this is the future they face if things continue as they are.

  • Good article. But Armine’s last sentence (“This is not the type of capitalism anybody should be rooting for, in the search for enduring recovery, growth and prosperity.”) lays bare, as well as most of the posted comments, the bankruptcy of social democratic/social liberal responses to the the contemporary problems faced by workers.

    How can anyone describe the ruinous symptoms of a disease and at the same time demand an improved “type” of the disease.

    This is the contradiction faced by social democrats/liberals -they can intellectualize the symptoms of capitalism but are incapable of pursing these symptoms to their inherent causes based on the political and economic nature of capitalism.

    Armine and the commentators to her article are only left with “blood letting” as a supposed cure for these symptoms.

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