How is it that corporations continue to enhance their profits when so many workers lack employment or suffer flat or even declining wages? After all, if the Rest of Us are no longer spending the way we used to, because we haven’t as much money, then corporate revenues should suffer. But firms are doing just fine, thank you very much. Moreover, they see no collective need to alter the status quo by, for example, allowing a broader distribution of income.
Paul Krugman has been wrestling with this phenomenon of lower demand and higher profits.
The point is that we have a depressed economy for workers, but not at all for corporations. How much of this is due to the bargaining-power issue is obviously something we don’t know, but the disconnect between the economy at large and profits is undeniable. A depressed economy may or may not actually be good for corporations, but it evidently doesn’t hurt them much.
Here’s an interesting graph from the St. Louis FED.
Unless I’m reading the graph wrong, after-tax profits (red) are considerably higher than pre-tax profits (blue) over the last two decades. Huh? It wasn’t always that way, as the graph illustrates. If we subtract one from the other, we get this:
One commenter to Krugman’s post wrote this:
Meanwhile, US based transnational corporations continue to move labor intensive activities to fast growing overseas markets and replacing labor for machines domestically.
Given the scenario described above, two conclusions. First, the US market is no longer the most important market for larger transnational corporations. Second, wages in the US continue to be eroded and converging downward to lower paid competing countries.
In sum, the US economy — via the political system — became increasingly biased against labor and more favorable to capital. Labor is fixed while capital became more mobile. As a result, labor loses and capital wins.
Let’s suppose that the commenter has a point, and that U.S. wages will steadily fall, ultimately converging with the international mean. If the latter does not rise over time, then the American worker’s fall will be dramatic, indeed. Yet, whenever the convergence occurs, we can justifiably assume that corporate profits will continue their rise until then, if not beyond.
I find myself being described by Krugman: “A lot people have the instinctive reaction that it can’t be possible — that businesses would prefer to have stronger demand, even if it means that they have to pay their workers more and treat them better.” But the numbers indicate an obvious disconnect between profits and demand.
Perhaps the conventional wisdom about our economy—that people buying things increases corporate earnings—no longer applies, since profits rise despite diminished domestic demand. Corporations evidently find no need to expand their operations in order to pad their bottom line. What’s going on?
The commenter suggests that demand is rising elsewhere even as ours falls. If we imagine millions of people in China and India, for example, seeing incremental increases in their paychecks, even though their total wages pale in comparison to ours, their ability to purchase goods and services improves. Apple, for one, will now sell its phones in China, the largest market on the planet. If only five percent of the Chinese population can afford a new iPhone, that’s still a lot of new customers for Cupertino.
But I also wonder if corporations make more money these days outside their respective businesses. Suppose, for example, that firms invest their net earnings in financial instruments that have nothing to do with their core enterprise. Instead of increasing productive capacity to sell more widgets (an iffy proposition in a depressed economy) the companies buy stocks or bonds or both.
I await Krugman’s further exploration of the conundrum.