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Are High Corporate Profits A Problem?

October 15, 2012

A few days ago, I commented on record corporate profits. It might sound like a silly question but can corporate profits ever be too high? Of course, the answer depends on why they are high and how they are measured. Rising Corporate Profits that come as a result of strong economic growth are – without much question – very desirable. But when they come at the expense of employees wages…

The National Income has been fairly steady at about 87-90% of GDP for several decades. The two biggest components of National Income are: Employee Compensation and Corporate Profits. We’ve already seen that Corporate Profits are at record levels. Now let’s take a look at Employee Compensation:

The recent jump in Corporate Profits as a percent of GDP has come at the same time as a big fall in Employee Compensation – now at records lows. It turns out that some things are a zero sum game.

Throughout the 1950’s and 1960’s – the Golden Age for the middle class – Employee Compensation stayed above 50% of GDP. During this period, the US enjoyed strong economic growth, low unemployment, low household debt loads and declining government debt.

After declining for the last 30+ years, Employee Compensation is now only 44% of GDP and we have weak economic growth, high unemployment, high household debt loads and rising government debt. Coincidence? I think not.

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