thenewnormal.world

In the corporate world, mean is so over

Lex is perplexed.

The Financial Times’ “agenda-setting” daily column on business and finance wonders how come U.S. corporate profit margins just keep going up and up — “hovering near 50-year highs for some time now.” There should have been a “mean reversion” by now; that is, a return to the more customary average, or “mean” the U.S. economy has been used to.

Two possible explanations, for which Lex provides links with more detail. One, “that the growing slice of executive remuneration that comes from bonuses linked to near-term performance, and shortening executive tenures, encourages bosses to choose near-term profit over long-term investment.” (The Wall Street Journal last month described the current level of business investment as “historically weak” and a major drag on the economy). And/or, two “the ‘this time is really different’ ilk,” characterized in part by the rise of “pseudo-monopolies,” e.g., Google, Facebook, the decline of labor as a countervailing force, and the widening inequality between big companies and small, in terms of both size and profit margins.

Lex appears to be unpersuaded. “Competition is the economy’s gravity,” he writes. What goes up must come down. The ‘this time is really different’ theory— I would include executive compensation — seems pretty persuasive, however.