Corporate Profits are Soaring, and That’s Bad

U.S.  corporations made $1.8 trillion dollars in profits – after tax – in 2011, the highest level on record, even after adjusting for inflation. Corporate profits now are 12 percent of GDP, nearly the highest they’ve been since 1950.

And that’s too high.

In Econ 101 they teach the Gordon Gekko-like mantra that Profits are Good. Profits reward companies for making good products and keeping costs low. How can profits be “too high”?Corporate Profits

If markets were  perfectly efficient and competitive, it would be hard to argue for any “just right” profit level. But you have to ask, why are profits soaring. While many things affect profits, signs point to a lack of efficiency and competition as a core cause of the current run-up in profits. And that’s bad. For the economy, for consumers, and for workers.

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I see it as two tug-of-wars that corporation constantly have to wage. One is with workers, and one is with customers. Normally, these two forces keep corporate profits from getting out of hand. But conditions now are such that there’s little check on corporations, and they hold the upper hand in both of these battles. To the detriment of most of the country.

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If corporations are making lots of profits, then workers might expect some of that to be passed along to them. They’re the ones doing the work, after all. Shouldn’t they share in the spoils?

Unfortunately, whether corporations have to share the wealth depends on the relative bargaining power of labor. With unemployment rates high, employees are too scared of losing their jobs to demand much of anything. Not to mention that union membership is low and falling. Corporations needn’t fear organized opposition from unorganized workers. And even if they did, there’s always the threat of moving operations overseas.

So corporations have have much more influence than labor. They’re easily pulling workers right into the mudpit.

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Corporations’ other tug-of-war is with their customers. In theory, corporations have to serve their customers and provide them with good products at the low prices. But the reality’s not that simple.

Dwayne Andreas of ADM infamy once famously said, “The customer is our enemy.” Customers want as much as possible for as little as possible. All customers do is bargain prices down and whittle away at corporations’ profits.

But customers — consumers — must have bargaining power to do this, and that depends on competition. If corporations have to compete hard for customers, customers can force companies to lower prices and pass along some of the would-be profits to them.

tugofwarBut these days, many factors are conspiring to decrease competition. High industry concentrations, large market shares, network effects, intentional incompatibility, high switching costs, abuse of patents – the list is long.

And don’t underestimate the importance of information. Accurate, clear, and accessible information is critical for markets to work efficiently. Customers have to be able to compare products and prices, or else there’s going to be little real competition, no matter how many products are out there.

With products growing more complex, getting good information about prices and products is hard to come by, internet or not. Googling “cell phone reviews” brings up 116 million results. And have fun trying to figure out which reviews were written by the cell phone companies themselves.

These problems are decreasing competition in industries across the economy, allowing corporations to take more and more money from consumers, resulting in unprecedented profit levels.

That puts consumers right in the middle of the mudpit alongside the workers.

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Soaring corporate profits have serious implications for the economy. In the midst of a slow recovery, we need consumers who are willing and able to spend. For that they need to have money and feel confident about the future. Embattled workers who fear for their livelihoods don’t make good consumers.

And then there’s the inequality factor. Income inequality has been growing for decades. Higher corporate profits just make that worse. It’s the rich who own stocks, and higher profits are just going to make them richer.

And what’s the message from the Right? Cut already-low tax rates, and decrease spending on those most in need. Stop regulating corporations, and stop trying to protect consumers.

We need to be moving in the opposite direction. More responsible regulation of large corporations, particularly financial institutions. More protection of consumers and workers. And more financial support for those in need.

How to pay for this? That’s a topic for another post. But for now, let me just note that corporate tax rates also coincidentally are at near-all-time lows.

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