A Blog by Jonathan Low


Jun 27, 2012

US Corporate Profits Hit an All Time High While Wages Mark an All Time Low

It's a problem.

And it has nothing to do with socialism, envy or class warfare.

But it has everything to do with competitiveness and sustainability.

Competitiveness is affected because if a consumer-driven economy like that of the US (40 to 70% of GDP, depending on whose statistics you use)denies its consumers the wherewithal to purchase, then it has created a mis-allocation of investment which, in turn, distorts the fundamental principles underpinning the economy.

The reasons for the distortion are complex but are based, in part, on the financialization that began in the 90s with deregulation and the political re-orientation fueled in part by excess profits produced by those self-same deregulatory forces. The result is that economies with more efficient and productive allocation regimens will, over time, generate greater profits that they can then plow into more beneficial projects, services and public works.

One side effect is that potential immigrants, for whom the US used to be a favored destination are now being diverted by other opportunities. Another impact is that capital, too, is flowing to a broader set of recipients. The advantages of diversification are responsible for some of this, but astute observers also understand that the US may have embarked on a less than optimal course due to the emergence of ideological factors not necessarily grounded in strategic business thinking.

All of which leads to the issue of sustainability. Not in the environmental sense, though peak oil and the cost of energy may become a factor, but in supporting a system that can be sustained due to the fundamental soundness of the forces that drive it. Until competitiveness and sustainability are restored to primacy in economic policy making, short term profits may be illusory and longer term gains unachievable. JL

Henry Blodget reports in Business Insider:
One of the defining characteristics of our imbalanced economy: Corporate profit margins just hit a record-high as wages just hit a record-low.

The juxtaposition of these two facts perfectly illustrates the fundamental problem with the U.S. economy.

What's the fundamental problem? The fundamental problem is that businesses are doing great, as exemplified by those record-high profit margins. But this corporate-and-owner prosperity is not flowing through to average Americans, as exemplified by the record-low wages.

Corporate profit margins just hit an all-time high. Click for more details...
This state of affairs, sadly, is completely unsustainable. Average Americans spend most of the money spent in this economy, and consumer spending accounts for 70% of the overall economy. So the higher profit margins go, and the lower wages go, the more top-heavy the economy becomes. And eventually, if this trend continues, the revenue-growth--and profit margins--of the companies will collapse. And that will be as bad for "the 1%" as it is for everyone else.

Henry Ford famously elected to pay his workers more than he needed to, with the goal of enabling them to buy the company's cars. This idea would be heresy in today's boardrooms, where the emphasis is on paying employees as little as you possibly can--and, thereby, driving every penny possible to the bottom line. Hopefully, soon, more companies will see the wisdom of Henry Ford's thinking and begin to share their unprecedented wealth with their employees.

In any event, some people persist in viewing today's record-high profit margins as a great thing.

Wages just hit an all-time low as a percent of the economy. Click for details...
They will perhaps be interested to know that Adam Smith, the progenitor and demi-god of free markets, actually thought precisely the opposite.

Check out this Smith quote from "Wealth of Nations," which was sent over by writer Moe Tkacik (follow her here):

"But the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin."

Got that?

The rate of profit is the highest in countries that are going to hell in a handbasket.

Today's record-high profit margins won't stay record-high forever. They'll correct themselves eventually, either because the US economy will just completely collapse...or, because, finally, corporations will realize that great companies do more than drop every penny possible to the bottom line.

Specifically, great companies create three kinds of value:

Value for customers
Value for employees
Value for shareholders

Our recent corporate religion, in which we have come to believe that the sole purpose of companies is to create value for shareholders, is not just contributing to the shocking inequality that has developed in our country. It has become so pervasive (and misguided) that it could destroy us in the end.


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