Corporate profits

Think corporate profits are a supply chain scam? Better take a longer view

It’s hard for the audience to focus on something because there’s always another crisis or an amazing thing or a diversion to get attention.

Until the outrage recently turned into geopolitical instability, it was over inflation, the rising cost of living, and also the booming level of corporate profits. People passed on memes watching how much money certain companies were making by raising prices.

An example: Exxon making a profit of nearly $8.8 billion in the last quarter of 2021 according to data from S&P Global Market Intelligence. The quick explanations, while captivating, do not look at any other numbers, such as the loss of almost $20.1 billion during the same period of the year, because the intention is to manipulate public opinion. McDonald’s? Gross and net profits are at record highs, although their revenues are down from six to eight years ago, as they massively cut the cost of manufacturing their products, but also sold last year an investment that made things look bigger.

This does not mean that what is happening is acceptable. It’s not. The emphasis on immediacy and the suggestions companies have been making like bandits due to rising supply chain prices misses a huge point. The companies are constantly increasing their profits at an easy-to-forget rate.

Take a look at the chart below, generated from the Federal Reserve Bank of St. Louis’ FRED data site.

The chart compares personal disposable income per capita — the average amount per person in the United States left over after paying taxes — to after-tax corporate profits.

Each data series is indexed to the value of 1975, which means that that year, when so much started to go off the rails in a balance between business and personal income, represents a reference value of 100%. Any further points after are expressed as a multiple of the starting value, i.e. a percentage of the starting.

Many have fueled their gauge with outrage at today’s higher prices which they believe are just ways to get ahead at people’s expense. There is nothing different now. Between higher prices and low wage increases, there was a significant transfer of wealth from individuals to corporations beginning around 1993, when the federal government began to emphasize the fiscal welfare of companies.

The growth of the 1990s eventually turned into a recession. But then, wow, did corporate profits skyrocket outside of recessions.

What has people’s disposable income done? It grew at a moderate pace that barely kept pace with the rate of inflation.

The improvement in profits comes from two sources: either increased revenues or decreased costs. Companies have done both for decades. The prices of goods and services have continued to rise. Sometimes the price increases explicitly. Other times you pay the same price but get less, such as when the contents of packaged foods are quietly reduced, improving the unit profit for the manufacturer.

Employees, on the other hand, were kept with just enough income to stay alive and continue logging time at work. For decades since the mid-1970s, household incomes had not gained ground, at best at the rate of average inflation. Since some areas, such as health care, housing and higher education, are growing much faster, depending on each individual’s specific situation, the impact has been much greater, leaving people in deficit positions.

Have many companies faced large cost increases lately? Absoutely. Are many using higher prices to try to fill their gaps during the pandemic? Yes. Does it catch consumers in their wallet? Sure.

Even so, the issue of transferring wealth from citizens to corporations is not only related to a pandemic and supply chain issues. Prices are on the rise again and the real (after inflation) average hourly earnings of workers have been down 2.4% from December 2020 to December 2021. Companies are forcing people to contribute to increase company profits by not only charging them more, but paying them less.

The problem is systemic and must change if the country is to have social and economic stability.