Personal Finance

Think Corporate Profits Are A Supply Chain Scam? Better Take A Longer View

It’s hard for the public to focus on something because there’s always another crisis or amazing thing or diversion to attract attention.

Until outrage recently turned to geopolitical instability, it was on inflation, the growing cost of living, and also the amply expanding level of corporate profits. People have been passing on memes looking at how much money certain companies were making by raising prices.

An example: Exxon having a profit of nearly $8.8 billion in the last quarter of 2021 according to data from S&P Global Market Intelligence. The quick explanations, while catch, don’t look at any other figures, like the close to $20.1 billion loss in the same period the year, because the intent is to manipulate public opinion. McDonald’s? Gross and net profits were at record levels, although their revenue is lower than six to eight years ago, because they massively cut the cost of making their products starting but also last year sold off an investment that made things look bigger.  

Not to say that what is happening is acceptable. It’s not. The focus on immediacy and suggestions that companies made out like bandits due to supply chain price increases miss an enormous point. Corporations are constantly increasing their profits at a rate that’s easy to forget.

Look at the graph below, generated from the FRED data site of the Federal Reserve Bank of St. Louis.

The graph compares disposable per capita personal income—the average amount per person in the U.S. left after they pay taxes—to post-tax corporate profits.

Each data series is indexed to the value in 1975, which means that year, when so much started to come off the rails in a balance between corporate and personal income, represents a baseline value of 100%. Every other point after is expressed as a multiple of the starting value, meaning a percentage of the start.

Many have fueled their outrage gauge over today’s higher prices that they think are just ways to get ahead at the expense of people. There is nothing different about now. Between higher prices and low pay increases, there’s been a big transfer of wealth from individuals to companies starting around 1993, when the federal government began to emphasize the fiscal well-being of companies.

Growth during the 1990s eventually fizzled out into a recession. But afterward, wow, did corporate profits soar outside of recessions.

What did people’s disposable income do? It grew at a moderate pace that barely kept up with the rate of inflation.

Profits improvements come from two sources: either increasing revenue or decreasing costs. Companies have done both for decades. Prices of goods and services have kept increasing. Sometimes the price goes up explicitly. Other times, you pay the same but get less, like when the contents of packaged foods get quietly downsized, improving the unit profit for the manufacturer.

Employees, on the other hand, have been kept on just enough income to stay alive and continue logging time at work. For decades since the mid-1970s, household incomes had not gained ground, pacing average inflation at best. Given how some areas, like healthcare and housing and higher education grow so much faster, depending on one’s specific situation, the impact has been much heavier, leaving people in deficit positions.

Have many companies faced heavy increases in their costs of late? Absolutely. Are many using higher prices to try and regain shortcoming during the pandemic? Yes. Does that catch consumers in their wallets? Of course.

Even so, the issue of wealth transfer from citizens to corporations isn’t one only of a pandemic and supply chain issues. Prices are up, again, and real (after inflation) average hourly earnings of workers were down 2.4% from December 2020 to December 2021. Corporations force people to chip in to bolster corporate profits not only by charging them more, but by paying them less.

The problem is systemic and needs to change if the country is to have social and economic stability.

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