Corporate profits

Study shows corporate excess profits in the US have become ‘widespread’

A new document released on Tuesday shows U.S. corporate profit margins and profits hit their highest levels since the 1950s last year, bolstering the case for an excess profits tax as a way to curb inflation. vertiginous.

Written by Mike Konczal and Niko Lusiani of the Roosevelt Institute, the analysis finds that markups – the difference between the actual cost of a good or service and the sale price – “were both the highest level on record and the largest year-on-year increase” in 2021.

“Nearly 100% of these companies’ profits from margins are distributed to shareholders rather than retained and reinvested.”

“Such high margins mean they can be reversed with little economic damage and likely societal benefit,” Konczal said in a statement. “To fight inflation, we need a comprehensive administrative and legislative approach that includes interventions on demand, supply and market power.”

In their new memoir, Konczal and Lusiani note that higher margins don’t always mean higher profits.

“But they did it in 2021,” the researchers write, showing that net profit margins for U.S. businesses have fallen from an annual average of 5.5% between 1960 and 1980 to 9.5% in 2021 as companies were raising prices, citing inflationary pressures around the world. economics as justification.

“The level to which companies can increase their sales beyond their costs…is important for the economy more generally, as these margins distribute economic gains from workers and consumers to companies and shareholders,” Lusiani said. . “This is especially the case when nearly 100% of these companies’ profits from margins are distributed upwards to shareholders rather than retained and reinvested.”

“Getting businesses back to being price takers rather than price makers,” Lusiani added, “will help bring prices down and ultimately lead to a fairer and more innovative economy.”

The new research comes as the White House struggles to formulate a cohesive and effective response to a surge in inflation that has become a serious economic and political issue, particularly as we approach the 2022 midterms.

Survey data shows that American voters, including those in key battleground states, overwhelmingly want the Biden administration to challenge corporate power and support a windfall profit tax to counter soaring prices in grocery stores, gas stations and elsewhere in the economy.

Konczal and Lusiani’s brief argues for a new tax to tackle excess profits which they say have become “widespread”. Such a tax, the researchers say, would help redistribute “runaway economic gains while simultaneously eroding companies’ incentives to increase profit margins.”

Moreover, they write, “increasing competition and reducing market power” through antitrust action “would reduce inflation to some extent, whatever the cause.”

But influential US economists – former Treasury Secretary Larry Summers leading them – have argued that solving high inflation will require lower wages and throw millions of people out of work.

“We need five years of unemployment above 5% to contain inflation – in other words, we need two years of unemployment at 7.5% or five years of unemployment at 6% or one year of 10% unemployment,” said Summers, who spoke with President Joe Biden. by phone Monday morning, said to a London address later the same day.

Federal Reserve Chairman Jerome Powell, who is leading an effort to curb inflation by aggressively raising interest rates, also cited modest salary increases over the past two years as a factor in rising inflation, expressing a desire to “cut wages” despite evidence that wage growth has slow motion These last months.

Konczal and Lusiani argue in their paper that “While the idea that we face the threat of spiraling wages and prices becomes conventional wisdom, this brief and other research reveals that changes to the hand labor and worker compensation are not driving factors in the recent increases.”

“If margins are abnormally high, profits and margins may decline as supply opens or demand cools, removing price pressure,” they write. “Such a high profit margin also means there is room for wages to rise without necessarily raising prices – an important dynamic in a hot labor market.”