Long-Term Trends in Corporate Profits
Over most of the late-20th century, corporate profits fell in proportion to the overall economy, but it has roared back since 2000. One can interpret these changes in several ways.
Figure 1 (below) describes changes in the ratio of US corporate profits to GDP from 1945 to 2013. Data are from the Federal Reserve:1
The graph suggests that corporate profits fell steadily between World War II and the mid-1990s, but rebounded after 2000. Concretely, this means that corporations collectively took in progressively less operational profit between the end of World War II until 2001, relative to the overall value of what the economy produces. After 2001, corporate profits grew in proportion to overall economic activity. How might we interpret this trend?
One possible interpretation focuses on distributional struggles between corporations and other societal actors. During the 1940s through 1970s, economic policies tended to be more progressively redistributive. They taxes and regulated corporations more heavily, and were quicker to implement policies that redistributed wealth or bestowed bargaining power to workers and consumers. These policies are said to have been widely dismantled under neoliberalism and globalization of the 1980s through 2000s, which has led corporate profits to rise. This story line involves corporations losing a distributional battle with workers and consumers for decades, then an abrupt reversal of fortunes to our present situation in which they are now winning this distributional battle.
Other perspectives interpret these changes as a product of businesses working less well under postwar “big government” capitalism, then turning around to do great business after the Reagan Revolution and globalization. This narrative stresses the ways in which government taxes, spending, or regulations cause businesses and society to waste resources, suppress innovation, or focus on the ways in which lobbying for political favor becomes more important than being economically competitive. Here, the focus is on profit as a byproduct of fielding successful businesses, rather than a matter of redistribution. Through this view, one might infer that neoliberalism and globalization slowed American business’ precipitous fall into decrepitude, and ultimately set it on a path towards renewed profitability.
One explanation that interests me involves the erosion of America’s postwar position of international economic dominance. Most highly developed countries emerged from World War II greatly weakened, while the US economy and society remained largely unscathed, well-resourced, and ready to capitalize on the great technological advancements of the wartime era. American businesses did not face the strong foreign competition to which they are now subject, and America was well-positioned to dictated very favorable international economic terms with other countries. As the other Western countries recovered from the war, and became better able to assert themselves in the market and in international affairs, America’s competitive advantages eroded and its businesses found it harder to earn big. This explanation does not discuss why profits recovered after 2000.
Other explanations are possible. Whatever the reason, it seems clear that corporate profit shrank in proportion to the overall economy up until the 1980s or 1990s, and has slowly but steadily grown since then.
Originally published at Fragile Finances.