In the comments on other posts, I have seen questions addressed to me about "excessive corporate profits." I am going to answer this question in very basic terms.
The way that national income accounting works, we have:
net private saving = government deficit + trade surplus
That is always true, just as 4 = 2 + 2 is always true. If you do not believe me, consult an economics textbook or look up "flow of funds identity." A Google search for that term yields this, which is a perfectly servicable explanation.
Let's ignore the trade surplus. If you want to bring it back into the story, feel free. But for now it adds complexity without illumination. So we have:
net private saving = government deficit
We can decompose net private saving as:
net private saving = household saving + corporate saving - investment
Some consequences:
1. When the government runs a large deficit, net private saving must be high.
2. When net private saving is high, either household saving is high, corporate saving (i.e. corporate profits) is high, or investment is low.
3. This is a consequence of the identity. It has nothing to do with crowding out or the multiplier. If you think that crowding out is high and the multiplier is low, then you expect the identity to resolve itself at a low level of investment. If you are more of a Keynesian, you expect the identity to resolve itself at a high level of investment.
4. The legitimate complaint is that investment is low. We all wish investment were higher.
5. If investment were higher, then the combination of personal saving and corporate profits would have to be higher.
6. Given the large government deficit, then if corporate profits were lower, we would necessarily have either higher household saving or lower investment. This is not a statement about economic behavior. It simply is a matter of accounting logic.
So, if you want to complain about "excessive" corporate profits, you are sort of backed into a corner. You have to be arguing that personal saving should be higher and corporate profits should be lower. But that is mostly a matter of how people hold their savings. If I hold my savings in the form of Treasuries, that is personal saving. If I own shares in corporations that own Treasuries, that shows up as corporate profits. Either way, it is net private saving, and ultimately people are doing the saving, either in personal accounts or through corporations that they own.
As an aside, I think that the mix of corporate saving is a problem. That is, I think that profits are too high at banks and too low at non-bank corporations. I think we would see more investment and employment growth if more of those profits were going to non-bank corporations.
Why are the banks doing well relative to non-banks? I cannot say for certain, but I suspect that the "success of TARP" has a lot to do with it. However, that strays into opinion, and I wanted to keep this post focused on plain logic.
My guess is that the vast majority of household saving via corporate ownership occurs in the top 10% of the population. I am not worried about them. I would like to see higher personal saving among the bottom 90% via deleveraging. Record corporate profits (as a % of GDP) just seems like yet another wealth/power concentration mechanism at this point in time.
Let's take the hypothetical example of an industry going from oligopolistic behavior to true competition and margins falling by half. Those who save via shares of those corporations will lose; those who purchase products of any of those corporations will win (it allows for more saving among those individuals). This seems like it would make a lot of sense as a redistribution mechanism - the costs would be incurred mostly by those who promoted anti-competitive behavior and the gains would be felt broadly.
And yes, I believe we have quite a few industries that practice anti-competitive behavior. Not illegal behavior, simply anti-competitive - e.g., regulatory capture, price signaling, obtuse contracts. I see many industries from the inside and they have become very, very good about making the system work for them (and avoiding taxation, but that's another issue).
As for the argument that healthy corporations invest more, I think that argument is less true than it used to be. A disproportionate amount of investment occurs ex-US and via CEO/Executive pay.
Given how narrow corporate ownership has become, it seems that reducing corporate profits would result in a public good.
The other thing we can say is as government interest rates remain historically low, the government deficit is low relative to it.
Another problem with corporation savings is a sizable portion is owned internationally.
Basic economics notwithstanding, I do not understand the relationship between the deficit and private savings.
The largest holders of treasury securities are (in order): the federal reserve, china, and japan.
Those 3 hold a LOT of treasury securities (4T?). How is this private savings?
Another good concise econ lesson. Thank you!
effem: I believe we have quite a few industries that practice anti-competitive behavior. Not illegal behavior, simply anti-competitive - e.g., regulatory capture, price signaling, obtuse contracts.
I think a lot of people across the political spectrum agree with you on that point. The question is what to do about it. Most conservatives and libertarians would say the problem is that our oversized and overreaching government makes it inevitable: the highest returns come from investment in lobbyists at their ilk. I think most liberals would tend to call it an argument for tweaking the tax rules or adding another pile of regulation (Lord might want to disagree on that, though).
A disproportionate amount of investment occurs ex-US and via CEO/Executive pay.
I've read arguments that this is a result of the high tax that must be paid to bring corporate profits into the U.S... 35% if memory serves. Does this sound correct?
The trouble with math is that it only works insofar as your definitions and your axioms correspond to reality.
The macroeconomic "net private savings" = "government deficit" equation is tautologically true, for a very weird definition of "net private savings". Under this definition, if I breed a goose that lays golden eggs, neither raising it for 20 years nor killing it for pâté tonight counts as "savings". Using macroeconomists' definitions leads to the conclusion that thrifty people should not prefer one decision over the other.
Comparison to a less misleading set of definitions leads to the conclusion that thrifty people should not prefer listening to macroeconomists.
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