The Profits Conversation

by Reihan Salam

Here is Justin Fox on corporate profits and here is Kevin Drum’s addendum

I’d just like to share a few tentative thoughts about profits. Firms will often engage in earnings management. That is, there are various ways to raise and lower flow payments. Say you know you’re going to have to spend money on something at some point: you sometimes have the option of spending the money now rather than later, knowing that you want to post higher profits next quarter. 

And then there are ways firms can burn capital while posting accounting profits, e.g., a firm that is firing on all cylinders during an economic downturn could be shedding staff and reducing morale in a lasting way for the remaining workforce. This is a cost that is not on the balance sheet. 

My sense is that the conversation about corporate profits has been kind of crude. Different firms in different sectors are posting profits for different reasons. Some are burning capital off the balance sheet, driving overworked middle managers to distraction. Some are financialized or globalized firms that are posting profits overseas. Some are flourishing with a leaner workforce, yet are keenly aware that they’re about to face ferocious competition as new entrants get hip to profit-making opportunities. The political valence of what this means for the “business community” is very far from clear because we’re taking about many, many different entities. 

Part of the problem is that, in my view, the break between the Bush and the Obama years isn’t as great as many of us, on the right and the left, have come to believe. Much of the employment growth during the Bush years came from increases in the state and local workforce and in the health sector. The firms that drove productivity increases in that era were firms that invested heavily in organizational capital, and that delivered compensation gains to upper-tail workers. Corporations and upper-tail workers have been flourishing while a large chunk of the country have not for some time now. One can characterize the relatively broad-based Clinton-era gains as an artifact of HMO’s briefly restricting growth in non-cash compensation, tech bubble froth, rising incarceration rates that took men who’d otherwise be marginally attached to the labor force off the books, etc. The U.S. economy has many virtues. It’s not bad news that U.S. firms have high levels of capital productivity, and that our relatively free labor market facilitates the trial-and-error process that contributes to productivity growth at the edge. But like any economy, we face a number of serious long-term challenges. 

That lots of firms are shedding less-skilled workers and making skilled workers work harder might mean higher profits and misery and anxiety in the managerial class. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.