Corporate profits

The misguided war on corporate profits

Bernie Sanders relishes the contempt of America’s business elite, proudly displaying on his campaign website his anti-endorsements of corporate titans and their apologists. It’s the theme he’s championed his entire career – and it looks like he’s gaining ground on both sides of the aisle.

Fox News host Tucker Carlson calls American businesses the biggest threat to freedom in America. Senator Marco Rubio has a plan to ban share buybacks and force companies to invest more in American workers. And don’t forget Sanders’ Democratic colleague and rival Elizabeth Warren with her many anti-big business proposals.

There is only one problem with all of these proposals, aside from their awkwardness: the greed of the companies they are supposed to fight is hard to find in the data. In terms of profitability, US companies have stagnated since 2012, despite a huge tax cut in 2017.

What about pre-tax profits as a percentage of gross domestic product? It’s a more consistent measure of corporate power over time. It surged in the early 2000s, as the tech industry quickly recovered from the dot-com collapse and became hugely profitable, even as the rest of the economy collapsed. This push, however, has been easing off for quite some time. With the exception of a few brief increases, the economy’s percentage profits have been declining for the past seven years and are now almost exactly equal to the average since 1947.

Finally, there is the question of profits and wages. In profitable times, do companies tend to keep more to themselves and share less with workers? On the contrary: high profits tend to be good for workers. The sustained decline in profits as a percentage of GDP that began in the late 1970s corresponds to a period of declining wage growth for the working class. The 1950s and 1960s, on the other hand, saw a share of the profits similar to what they are today.

The most recent rise in profits, in the 2000s, was not a sign of excessive corporate greed or corporate “abandonment” to workers. Instead, it reflected a technological revolution that created both increased profits for tech companies and increased incomes for highly skilled workers.

This revolution is maturing and the share of corporate profits in GDP is now returning to normal. The wages of low-skilled workers are rising almost as fast as those of highly-skilled workers. If the United States is able to sustain economic expansion, this gap is likely to narrow further.

Too bad for the data. As for the policy: Sanders, Warren and others shouldn’t denigrate corporate profits. When they increase as a proportion of the economy, it means that the economy is doing well; they start to drop right before a recession.

In a sense, all the rhetoric around corporate greed is understandable: Politics always lag behind reality. The stagnation of wages and the rise in inequalities that accompany it are the product of a process that began almost two decades ago and is already taking place. Efforts to curb corporate profits or shatter big tech are like fighting the last war.

What the United States needs are pro-growth policies that keep the demand for workers high – and the wages of the less skilled on an upward trajectory. This means free trade, an internationally competitive tax structure, accommodating monetary policy, and regulatory policy that allows businesses to choose the best way to invest in their workers and businesses.

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