Then starting in 2002 they grew rapidly until they hit 1.9 trillion before tax, and 1.4 trillion before tax in 2006.
So over the course of 4 years corporate profits tripled.
Why/how did that happen in such a short period? How could it be globalization if globalization had been going on since the 80s? Also, if it was a GOP administration why did it happen in that window of 2002-2006? Why not the 90s when the GOP controlled congress? Was this strictly a US phenomena, or did the same thing happen in other nations?
What companies saw these profits? Was it spread across industry, or did some industries really excel while others fell apart?
What caused this event, and what did they do with the profits? Did they reinvest them? If so, in what? Did it go to shareholders?
A lot of things happened. For one, the Bush Administration and Congressional Republicans did a lot of things that benefited America’s corporations. For one, they repealed all sorts of regulations, ranging from environmental restrictions to labor laws to just about anything else. Minimum wage was not raised until 2007, allowing service industries to get work for lower (inflation-adjusted) prices. Of course the financial industry got the biggest and best deregulation, which has been in the news a lot lately.
Also, even for those laws that did remain on the books, the Bush Administration made clear that it wouldn’t enforce many of them. For example, it’s illegal to fire workers merely because they’re attempting to form a union. Big companies such as Walmart routinely do it anyway and don’t get punished.
One fairly obvious thing is that the federal government simply gave huge contracts to a lot of companies. The wars in Iraq and Afghanistan have costs in the trillions on top of the military’s normal $700-billion budget. Where do you suppose all that money is going? Not to little Mom-and-Pop stores, I don’t think. Big agriculture scooped up hundreds of billions of dollars in subsidies even before the requirement that corn ethanol be added to fuel. The Medicare Prescription Drug Bill was basically a $737-billion-dollar handout to big pharmaceutical companies.
Corporate America also benefited from trends such as rising fuel prices. Exxon-Mobil alone can account for about fifty-billion dollars a year in increased profits.
I’m glad that you started this thread; I was intending to start one like it. One thing worth nothing is that corporate profits as a percentage of GDP reached an all-time high in 2007. The previous all-time high was in 1928. We all know what the years 2008 and 1929. So there’s a suggestion (not a proof) that huge corporate profits may be bad for the economy. Basically when corporate profits are surging, it’s likely that much of the trend is built on risky schemes and outright crime, which then comes crashing down all at once.
There was a change to the tax treatment of dividends versus retained earnings in early 2003. I would imagine this is what caused the change in profit status, as money was shifted around to attract the best tax rates and impress investors.
Not just that but high corporate profits as a % of GDP mean that consumers have less disposable income to deal with risk. As a result health care and mortgage issues bankrupt wide swaths of people and put the entire economy at risk.
I don’t know for a fact, but I would suspect there was a change in accounting standards that caused a surge in reported profits. Here’s a recent example of that type of thing. I don’t know of any change that would be that dramatic, but I’ll look.
That spike also seems to parallel the housing bubblegraph somewhat, so that might be a part of it as well.
The difference between real profit and book profit.
Asset inflation, particularly real estate and investment property. Yes, if the average property value in your area has gone up 10% and you have a case that your property is better than average then putting 12-15% extra value into your balance sheet would likely be accepted by the auditors. That’s the asking price, not the realised value.
Of course when everybody turned seller, the valuations melted.
While corporate profits tripled, median household income declined over the same period at a time when expenses (real estate, health care, education) increased dramatically.
If x% GDP is going to corporate profits, that is a lower % that can go to wage earners, making them more insecure. Granted, GDP still grows but if all the growth goes to corporate profits and the wealthiest 5%, then it really doesn’t matter.
That’s just not true. GDP doesn’t “go to” anybody, it’s just a measure of overall economic output. The fact that corporate profits as a percentage of GDP increases says nothing by itself about whether wage earners made more or less money.
Here’s an example. Say a country has two “people,” a corporation and Bob. In year 1, Bob makes 50 and the corporation makes 50. In year 2, Bob makes 75 and the corporation makes 125. So, corporate profits as a percentage of GDP increased (from 50% to 63%), but Bob didn’t make less (in fact, he made more).
Also, the amount of Bob’s income that is “disposable” nvolves another analysis that is not necessarily directly affected by corporate profits as a percentage of GDP.
consumers don’t care about what percent of GDP they (or the corporations) get. They care about how much absolute purchasing power they have. I don’t think there are lots of corporate profits in North Korea, but their consumers don’t benefit from that. Meanwhile in China workers’ share of the GDP is pretty small (because the government spends it for its own purposes, like to push down the yuan) but many of them are fairly happy because their purchasing power is ok, given overall low prices for key expenses like housing.
In America the problem nowadays is precisely the stagnation of consumer purchasing power, due to lower wages, exorbitantly expensive housing and health care and, which is worse, due to loss of jobs. Which loss will only accelerate from every new ill-conceived soak-the-rich scheme. Well, and not to mention the structural problems like troubles of various categories of people from getting any job at all, like for young people without formal work experience.
Given a constant level or productivity, profits could be cut by either cutting prices (which might increase profits in certain cases, but let’s assume it doesn’t) or, more reasonably, increasing wages. This really increases disposable income, cutting prices doesn’t strictly speaking, but does leave more for other purchases.
Now, it is possible that increased profits and increased wages go together, but that isn’t what happened in the past decade, given salary stagnation.
Some of the profits could be reinvested, which is fine assuming there is demand, but some goes to dividends, which is weighted towards richer investors, or supports higher bonuses, which is also. (A bonus is not from profits, obviously, but the more profits the bigger the bonus.)
I am not arguing that bigger profits are bad, but they don’t seem to have helped disposable income in the past decade, and, as mentioned, much of the higher profits were built on sand.
If health care and education costs grow at 7% a year, they double every 10 years. If wages are growing at 3%, they double every 24 years. It isn’t a sustainable system.
I don’t agree that GDP doesn’t go to anyone. If a country has a Gini coefficient of 0.30 it will have a stronger working class/middle class/anti-poverty efforts than one with a Gini coefficient of 0.60.
Check your mathematical reasoning again. One doesn’t have to DOUBLE the numbers to make it work. Rand Rover’s example with 2x totals just happen to make nice round numbers, because, OMG, numbers with decimal points in them are really scary sometimes.
Increase Bob a tiny amount from $50k to $51k.
Increase corporation a tiny amount from $50k to $52k.
Bob now has 49.5% of the $103k output even though he earned $1k more.
Corporation now has 50.5% of the $103k output.
The point remains that the Corporation’s increase from 50% to 50.5% does not reveal that Bob also got an extra $1k.
I love the fact that you saw the GDP double in my hypo and you thought that that HAD to be the case for the numbers to work. I hope you don’t expect to be taken seriously by anyone with two brain cells to rub together in the future.
Your “It’s all Bush’s Fault” thesis is interesting. Perhaps you could then explain why the increase in corporate profits was a global phenomenon? How did the evil Bush administration affect corporate profits in Canada, which also set records in the last decade?
As for whether it was big oil, finances, the military-industrial complex, or any of those, Here’s a set of tables breaking it down by industry. There are no clear patterns I could see. I suspect it was a combination of the general economic bubble and the rise of China as a trading partner.
It would also be worth noting that corporate profits are again declining, and are now back to just about the level they were in 2004 - and possibly still declining after that.
Well, this is not always true – corporations write up and write down asset values all the time without selling the asset. They certainly do that for marketable securities, and they do it for other assets if the values have moved a long way.
I suspect that the reason Rand Rover used the word “typically” is because most of the time assets can not be written up in value. Sure, marketable securities may be written up, but most companies aren’t in the business of owning marketable securities. Assets such as inventory and PP&E are not written up to current market value; they are booked based on a historical cost.
