The Agenda

Annie Lowrey on Corporate Profits

At Slate, Annie Lowrey has a useful primer on how record profits for U.S. firms relate to the broader economic environment:

 

[R]ecord-high profits do not necessarily translate into improvements in the economy—as the country’s 14 million jobless workers would be (not so) happy to tell you. For the past year, companies have hesitated to spend all of that cash, worried about a lack of good investment opportunities and fearful about demand. The upside is that it seems they are beginning to spend down their $1.9 trillion pile. The downside is that it does not seem that it will be to the immediate benefit of American workers.

Another hypothesis, advanced by the profoundly unpopular Alan Greenspan, is that U.S. firms have been reluctant to make illiquid investments due to anxieties concerning the extent of state intervention in the economy.

Suffice it to say, these thesis has been jeered by many of our friends on the left, and I do think that the crudest versions of the policy uncertainty thesis leave something to be desired. As many PPACA champions observe, repealing and replacing PPACA with an as-yet unknown institutional settlement creates policy uncertainty as well. I favor repeal-and-replace because I think that unsustainable policies contribute to uncertainty for the obvious reason that they will have to be replaced when they hit the proverbial wall. Not everyone agrees that PPACA is unsustainable, but it is certainly possible that many people in charge of making business investments in illiquid assets share my subjective assessment. 

Moving on from my tangent:

There are a few ways big businesses are starting to tap their cash reserves. For one, a number of companies have increased buy-backs of their own shares. Bloomberg reports that companies listed in the Standard & Poor’s 500 have approved $149.8 billion in buy-backs in the past three months—about 50 percent more than they did in the first three months of 2010. Second, the big corporate piles of cash have set off a flurry of mergers and acquisitions. A survey by Thomson Reuters and Freeman Consulting predicted a 36 percent rise in mergers in 2011, with North America cited as a particularly attractive region. Already, 2011 has seen signs of increased activity. For instance, this month, AT&T announced its plan to purchase the U.S. arm of T-Mobile for about $39 billion, much of it in cash. Finally, a number of companies have used or are planning on using their excess cash to bump up their dividend payments, giving investors a portion of the profits.

Buy-backs and dividend payments might make investors wealthier, and that has a positive impact on the economy. But it does not translate into jobs, at least not quickly. Plus, mergers often bring layoffs. In other words, corporate America isn’t using its historic hoard of cash in ways that will immediately benefit working America—meaning the long slog is not looking like it will get any shorter.

I’d say that the “at least not quickly” is an important caveat. If a new round of mergers, and indeed layoffs, increases the operating efficiency of U.S. firms, it seems clear to me that this would be a very good outcome. The employment problem, in my view, needs to be tackled with a more targeted approach, which relaxes labor market restrictions, starts to tackle the incarceration problem, and that shifts resources away from traditional social safety net measures, like pay-as-you-go entitlements, towards work supports, including direct wage subsidies. 

Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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