Purely domestic firms are not sharing in the profit boom.
Sunday, January 9, 2011 at 11:57AM Justin Fox, editorial director of the Harvard Business Review, has been disaggregating the corporate profit data that seem so encouraging and here is what he found (h/t Michael Powell at NYT):
Pre-tax domestic nonfinancial corporate profits — a mouthful, but also seemingly a fair measure of the underlying health of business in America — are nowhere near record levels as a share of national income. They exceeded 15% of national income once in the late 1940s, and repeatedly topped 12% in the 1950s and 1960s; in the third quarter of this year, they were 7.03% of national income.
This might go some way toward explaining the seeming disconnect between booming corporate profits on the one hand and a very cranky business community on the other. For much of the business community, profits aren't that high by historical standards. These people have every right to be cranky.
Who is doing better? Well, according to the BEA's data, financial industry profits and "rest of world" profits — that is, the money U.S.-based corporations make overseas — are relatively much higher now than they were in the 1950s or 1960s. And the taxes paid by corporations are much lower now than they were then, as a share of national income.
So the reason that corporate profits are near their all-time highs would appear to be that financial corporations (mainly big financial corporations) and multinationals are making lots of money and paying less of it out in taxes. Hmmmm.
The corporate profit picture would seem to mirror what's been going on in the income distribution for individuals for the past few decades. The money is increasingly going to a select group at the very top of the economic food chain, who are able to reap the rewards of global growth, play the financial system astutely, and avoid taxes. You can spin this in a moderately positive way: these are very dynamic economic times, and the rewards are going to those companies and individuals who position themselves to take advantage of this dynamism. But there are an awful lot of negative ways you can spin it, too.
Related post: Only the little people pay taxes.
Skeptic
Being purely domestic is a great disadvantage. Being small and domestic is even worse:
While nationalistic rules that favor Chinese companies affect technology and entertainment giants, China’s cheap currency undercuts tens of thousands of small-scale American manufacturers — companies that still make their products at home.
“The small mom-and-pop companies, which are getting crushed by the renminbi, you never hear from them,” said Nicholas R. Lardy, an expert on the Chinese economy at the Peterson Institute for International Economics. “They don’t really have a voice. They just shrink and go out of business.”
From today's NYT lead story reporting that US-based MNCs are starting to support a get-tough-with-China policy on trade.
