In his recent book, Ed Yardeni clears up confusion — and ideologues’ deceptions — about corporate profits.
In his recent book, Ed Yardeni clears up confusion — and ideologues’ deceptions — about corporate profits.
In Praise of Profits!, by Edward Yardeni (YRI Press, 234 pp., $15.99)
F or more than four decades, Ed Yardeni has been one of the most respected economists and investment strategists on Wall Street. In the early 1980s, Yardeni, serving as the chief economist at Prudential-Bache Securities, partnered with his colleague, strategist Greg Smith, to tell “the greatest financial story ever told,” predicting that the equities markets would see participation and investment levels never before imagined, as the Baby Boomers entered their prime earning years. That bold and profoundly important call, along with countless others over the decades, was driven by Yardeni’s chief defining personal characteristic — his perpetual and irresistible optimism. Today, that optimism has pushed the economist and strategist — now one of the most prominent independent research providers on the Street — to commit to paper his thoughts on profits and “the profit motive,” which he adroitly argues are the animating forces behind growth, productivity, and the slow but steady end to debilitating endemic poverty.
Yardeni’s most recent book, In Praise of Profits! (2021), is what the author calls a “topical study,” that is to say an expanded look at one of the important topics first discussed in his 2018 book, Predicting the Markets: A Professional Autobiography. In this more thorough study, Yardeni tells us that he intends to clear up the confusion about corporate profits and to rebut what he sees as “sloppy analysis and misinformed discussion of such important issues as the central role of profits in economic growth, the trend of profits [and] profits’ share of national income.”
After nearly a half century of explaining complex financial and economic concepts, theories, and ideas to analysts, portfolio managers, and countless other extremely busy market professionals, Yardeni has refined his thought processes and his writing style to accommodate those who need the maximum amount of information with the minimum expenditure of time and effort. His book is concise and to the point, wasting no time on filler; his prose is never overly complex but explains ideas and concepts succinctly and directly.
Among the bite-sized nuggets of knowledge that Yardeni feeds his readers are two that are especially useful and especially timely. One of these deals with the role of small businesses in creating profits and creating jobs. By extension, it also deals with the dishonesty of left-leaning politicians and policy advocates who misrepresent the role of nameless, faceless, wicked “corporations” in the American economy. Yardeni writes:
In the early 1980s, C corporations produced almost all business income. By 2013, only 44% of business owners’ income was earned through C corporations. Now the percentage is about half, with owners of S corporations and other pass-through businesses earning the other half. . . .
The IRS reports that there were 5.0 million S corporations in the United States in 2020—almost three times the number of C corporations. . . .
Since S corporations tend to distribute most of their earnings to their limited number of shareholders as dividends, which are then taxed as personal income, they boost corporate profits even though they directly benefit the income of owners of the S corporations who receive dividends and are taxed on them.
This helps to explain why NIPA’s [national income and product accounts, produced by the Bureau of Labor Statistics] effective corporate tax rate has been well below the statutory rate. To reiterate, S corporations’ profits are in the NIPA measure, but their profits are taxed as dividends in personal income.
What this means, in turn, is that when politicians and other ideologues shriek about corporate profits, corporate dividends, and the taxes paid on average by corporations, they are being deceptive, whether wittingly or not. S corporations — which are small businesses, limited by law to 100 shareholders or less — earn a huge portion of “corporate” profits and pay a huge portion of “corporate” dividends, but because they pay no corporate taxes (all their profits being dividends that are taxed as income), they make corporate tax payments appear artificially low. When politicians attack “corporations,” they are, in reality, attacking Mom and Pop’s Hardware Store every bit as much as they are ExxonMobil or Amazon. Whether this is purposeful or mere sloppiness is largely irrelevant. It’s deceptive, inaccurate, and potentially destructive. And it skews the debate.
A second useful nugget Yardeni tosses out to his readers is the distinction he draws between capitalists who succeed because of their vision and market savvy and those who succeed because they have learned how to manipulate the political system. “Capitalism,” he writes, “comes in two flavors: entrepreneurial capitalism and crony capitalism. The former tends to be highly competitive, the latter, not so much.” Crony capitalists, Yardeni continues, “are selfish. They form associations and hire lobbyists and lawyers to protect their businesses from upstart competitors. Political power is an important part of their business model. Buying political influence matters more to them than winning the game in a competitive market with a level playing field.”
In a rational world, “crony capitalism” would be called by more accurate names: “rent-seeking” or, better yet, “corporatism.” But, of course, this is not a rational world, and today, some of the most successful “capitalists” in the West are advocates of this variety of corporatism. These crony capitalists refer to the grifts they run by placid, “progressive” names like “stakeholder capitalism” or “environmental, social, and governance investing” (ESG). And then there’s the innocuous-sounding “common prosperity,” a central feature, allegedly, of the most recent shift in China’s economic policy. Common prosperity has lately been singled out for praise by Ray Dalio, the founder and co–chief investment officer of the $150 billion hedge fund Bridgewater Associates.
As reported by Bloomberg in January, Dalio
urged countries including the U.S. to narrow their wealth gaps, while praising China’s drive for common prosperity.
President Xi Jinping’s push helps redistribute wealth and opportunities more equally among its population, allowing the economy to draw upon a wider talent pool, Dalio said at a UBS Group AG investment conference on Monday. The campaign is often misunderstood by international investors, who fear the country is returning to the communist model under Chairman Mao Zedong, he added.
“First you get rich, then you make a point of distributing those opportunities in a more equal way,” Dalio, known as a long-time China enthusiast, said via video link. “The U.S., through its own system, needs more common prosperity, and a lot of other countries do.”
However benign that might sound, a more cynical (or should that be realistic?) view is that Dalio has succumbed, at least partly, to the corporatist temptation, and that he hopes, someday, to convince American politicians to embrace a similar approach, one that deputizes successful erstwhile entrepreneurs like himself to oversee the distribution of some crumbs of his (and others’) wealth to the poor, benighted masses.
Ed Yardeni, for his part, responded to Dalio, noting that this is precisely the distinction that his book addresses, the difference between entrepreneurs and cronies. When Dalio says, for example, that the ideal situation is that “first you get rich, then you make a point of distributing those opportunities in a more equal way,” what he means, argues Yardeni, is “first you are an entrepreneur, then you try to pull the rope up behind you.” In my estimation, as in Yardeni’s, this is the way many big businesses operate today, and it threatens the future of capitalism.
American business and Americans’ appreciation for business success are being undermined from within, by ignorance, sloppy analysis, and self-serving corruption. In Praise of Profits is Ed Yardeni’s brave and thoughtful attempt to set the record straight and restore the nation’s faith in entrepreneurship, success, and wealth creation.