Surowiecki: “But This Time It Is Different”

Just because the stock market is up doesn’t mean it’s a bubble. Nor does it mean that the rally is unsustainable. In the New Yorker, James Surowiecki says that this time, things really are different.

Take taxes: one big reason that after-tax corporate profits are much higher than their historical norm is that corporations pay much less in taxes than they used to. In 1951, corporations had to pay almost half of reported profits in taxes. In 1965, they had to pay more than thirty per cent. Today, they pay only around twenty per cent.

Then, there’s globalization. Many of the “American” companies in the S. & P. 500 are multinationals: a study of two hundred and sixty-two of them found that, on average, they got forty-six per cent of their earnings from abroad. This is a relatively new phenomenon. As late as 1990, foreign earnings accounted for only a small fraction of corporate profits in the U.S. Today, they account for almost a third of corporate earnings, and they’ve nearly tripled since 2000. So comparing corporate profits only to American G.D.P. yields a false picture of how companies are doing. The global economy, even with its current woes, is projected to grow more briskly than the U.S. economy over the next decade, so corporations will continue to benefit.

Finally, the decline of unions and the sluggish labor market have enabled corporations to cut payrolls, thus keeping profits high. The result is that labor’s share of the economy has fallen steeply. Skilled workers are still in demand, but most workers have little bargaining power. This could change if there is another economic boom—during the tech bubble, in the late nineties, wages did rise briskly—but, even in that case, corporate profits would likely stay high, as increased sales would make up for narrowing profit margins.

Surowiecki concludes that the boom is real, but workers are being left on the sidelines.

Posted by on May 21st, 2013 at 11:53 am


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