Corporate profits

Corporate profits devour the economy

Here are two things that are true about today’s economy.

(1) The Dow Jones Industrial Average is poised to set a new record high as corporate profits hit all-time highs.

(2) There are even fewer American workers today than before the start of the Great Recession.

The fact that both of these things could be true at the same time might shock you. But that shouldn’t surprise you. Over the past 30 years, there has been a great divergence between growth and workers’ incomes, because New York Times reminds us today. Corporate profits have soared, especially over the past decade, for three reasons in particular: globalization has lowered the cost of labor available to multinational companies; technology has enabled companies to do more with fewer workers, in general; and big finance engulfed the economy, with banks’ share of total corporate profits tripling to around a third since the middle of the last century, according to Evan Soltas.

Here’s the short story of corporate profits, GDP and worker incomes since the Great Recession. As you can see, the companies went on a wild rollercoaster ride, but quickly found their way back to the top. GDP has been sluggish and aggregate labor income has struggled to keep up even with this slow pace.

Here is the longer view. Zoom out to the turn of the century and you can see that this is not a “recession” trend. It’s just a trend that the recession has amplified. Corporate profits began eating into the economy around 2003, around the time the housing market began to generate massive profits for finance companies.

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And the view even longer. Zoom into 1970 and you can see that corporate profits started to take off, relative to GDP growth, in the 1990s, before exploding in the last decade.

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For another look at the long story, here’s a chart that compares the labor share of the economy (BLUE) to the business profit share of the economy (RED). There has been a steady shift of workers towards capital since the early 1970s, but the real action comes around 2000. Corporate profits double their weight in the economy and the labor share, already at an all-time low after the Second World War, a further fall of four percentage points.

Taken together, these charts don’t tell us that businesses have fully decoupled from the economy. When the economy crashes, we all crash together: corporate profits, jobs and growth. But when the economy recovers, we don’t recover together. Companies are racking up historic profits thanks to strong global demand, cheap global labor and low interest rates, while American workers are struggling, their importance to these companies drastically diminished by a global market. goods and people.

A growing economy and falling unemployment should eventually give American workers a long-deserved raise (as should rising labor costs overseas which would persuade more companies to hire domestically) . But improvements in technology and the ability of companies to hire locally as they chase global demand are just two factors that should dampen any optimism that we can prevent corporate profits from increasingly gobbling up the economy. Workers still need help — and they definitely won’t find it in the escrow.