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Record corporate profits: As usual, workers pay the price

By Shlomo  Maital   

     Corp Profits


The Economist’s Buttonwood column, Nov. 2,  features a striking graph (see above), showing that “American corporate profits have defied gravity” and now are at record levels, at 11 per cent of GDP, well above levels seen since 1945. 

  If things are so bad, if the US economy is so weak, why are companies making so much money? 

   Well, interest rates are low, so their finance costs are small.

   But the main reason is low wages.  Pay has not kept pace with productivity.  With a weak labor market, employers squeeze ever-higher productivity and work out of workers, terrified of losing their jobs.  But pay has not kept pace with higher productivity. So all the gains have gone to capital.  All over the world, labor’s share of national income has fallen.  Capital’s share has risen. 

    Another cause, notes Buttonwood, is share buybacks.  CEO’s get share options that ‘vest’ (i.e. can be cashed in)   in four years.  So when they take the top job, they have an interest in maximizing share prices, cashing out, and scramming.  To do this, they engage in ‘share buybacks’ – they use corporate money to buy the company’s own shares.   This is a terrible idea for the long run, because businesses should have far better things to invest in (R&D, equipment, technology, human capital) than their own shares.  But myopic shareholders love it, CEO’s love it – and the practice is widespread.  Share buybacks reduce the number of shares outstanding, raise earnings per share,  and boost profit margins.   Often companies borrow money to buy back their own shares. This is definitely NOT what the Fed had in mind, when it slashed interest rates. The idea is to get businesses to invest. Instead they use their lending to buy their own shares.    Workers, as usual, are getting ripped off.


Blog entries written by Prof. Shlomo Maital

Shlomo Maital