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Posted at 10:58 AM ET, 11/24/2010

The real story on corporate profits -- plus a chart

By Ezra Klein

As mentioned in Wonkbook today, the news stories saying that corporate profits have set a new record use nominal dollars -- that is to say, they don't adjust for inflation. So as the Harvard Business Review's Justin Fox says, using corporate profits as a share of the economy is probably a better measure. Here's what that looks like:

profit-chart.JPG

"The third-quarter 2010 profit share, at 9.46%, is slightly below the peak of 9.58% in the third-quarter of 2006," writes Fox. "But it's still quite high by historical standards." Compare that to employment, or wages, which are not anywhere near their all-time highs.

So why are businesses so annoyed? Well, not all corporations are pulling in near-record profits. "Pre-tax domestic nonfinancial corporate profits" -- that is to say, corporations that sell stuff here and that don't make their money from Wall Street -- are much further from their all-time high. Their profits account for about 7 percent of national income, which is well below their past high of 15 percent. Fox concludes:

So the reason that corporate profits are near their all-time highs would appear to be that financial corporations (mainly big financial corporations) and multinationals are making lots of money and paying less of it out in taxes. Hmmmm.

The corporate profit picture would seem to mirror what's been going on in income distribution for individuals for the past few decades. The money is increasingly going to a select group at the very top of the economic food chain, who are able to reap the rewards of global growth, play the financial system astutely, and avoid taxes. You can spin this in a moderately positive way: These are very dynamic economic times, and the rewards are going to those companies and individuals who position themselves to take advantage of this dynamism. But there are an awful lot of negative ways you can spin it, too.

By Ezra Klein  | November 24, 2010; 10:58 AM ET
 
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Comments

Once any company that actually makes or does stuff starts making really significant profits, it's fairly easy for the financial people to "put it in play" and arrange a merger, leveraged buyout or other acquisition trick that sucks away all the profit (and more) into debt repayment. When things go south, they can just "restructure" and play the game again. So of course the financial industry ends up with the profits. As long as there are piles of credit available for acquisitions and buyouts, the game is stacked.

Posted by: paul314 | November 24, 2010 11:14 AM | Report abuse

It is true that giving money to the banks at a very low interest rate and letting them loan it to the government and collect interest on it is a very easy way to make a lot of money. I don't know where he gets the idea that they are paying less taxes, I think Fox just makes things up.

This, on the other hand, is utter and complete BS:
"The money is increasingly going to a select group at the very top of the economic food chain, who are able to reap the rewards of global growth, play the financial system astutely, and avoid taxes."
What makes people not understand that this is not a zero-sum gain? We have so much more stuff than we had 10 years ago, it's amazing. The top 10% are paying 70% of the federal income tax.

It's true that we need to encourage a little less financial innovation and phony accounting, but why pretend that people are taking money from other people when it is just ratios that are changing.

Look at how many people were making more that $50k in 2000 compared to how many people are made more than that in 2009. (not percentages, numbers)

Posted by: staticvars | November 24, 2010 11:45 AM | Report abuse

Poor Ez. Once again his lack of EDU shows. Did you bother to notice that corp's are ALSO carrying record levels of debt?

Of course not. ROFLMAO

Posted by: illogicbuster | November 24, 2010 11:49 AM | Report abuse

Uh, staticvars. Since the US population was 10% larger in 2009 than 2000, you would want at least 10% more people to be making more than $50K in 2009 than 2000. Actually, you'd like the 2009 people to be making more than $60K, since that's worth about the same as $50K was in 2000.

Posted by: paul314 | November 24, 2010 11:57 AM | Report abuse

The days of mass marches and pitchforks are coming and i cant wait to see some of these hotshot CEO's be tarred and feathered and put in chains for economic Crimes against America.

Posted by: PennyWisetheClown | November 24, 2010 12:07 PM | Report abuse

These are the same Financial Corporations, Hedge Fund Managers, and Multinationals that brought the 2008 crash of Wall Street and the Banking industry to our front doors.

The same ones that the Conservative Supreme Court, U.S., Chamber of Commerce and folks like Karl Rove have been supporting and backing for over a decade now.

The same ones who received billions of dollars in bail out tax payer funding. Now they are back on their war path to do it again.

It's too bad that those who are always screaming and shouting "Capitalism" and "Free Markets", are good for the country, and yet, are back to putting the Global Economy at risks, while billions of people suffer around the world and they sit on trillions of dollars.

I would tell them NO, not anymore is Capitalism good for the country, or the world when countries around the world are holding trillions of debt and billions of people, including Americans are suffering due to no fault of their own.

And it's also too bad that those who scream Capitalism, do so to "game the system" for their own self greed.

The Republican Congress allowed this to happen, starting with Reagan and are now back to continuing their deceptions and manipulations with the help of the U.S., Conservative Supreme Court, Conservative Chamber of Commerce, and folks like Karl Rove, Dick Armey, Rupert Murdock, et al.

Posted by: lcarter0311 | November 24, 2010 12:41 PM | Report abuse

All Bush era tax cuts should expire, but the tax code should be simplified with a minimum rate of 15~20% for all individuals and corporations. The corporate tax rate of 35% is a Joke when loopholes allow companies to write off 100% of their taxes and force small business and individuals to bear the greatest blunt of America’s tax burden. America needs a minimum tax rate of 15~20% for all businesses and individuals after all deductions

http://www.forbes.com/2010/04/01/ge-exxon-walmart-business-washington-corporate-taxes_slide.html?partner=abcnews

“It's the tax benefit of overseas operations that is the biggest reason why multinationals end up with lower tax rates than the rest of us. It only makes sense that multinationals "put costs in high-tax countries and profits in low-tax countries," says Scott Hodge, president of the Tax Foundation.”

http://voices.washingtonpost.com/ezra-klein/2010/09/our_dumb_corporate_tax_system.html

“A lot of businesses, like S-corporations and partnerships, don't pay corporate taxes. Others use loopholes and exemptions and deductions to push their actual rate way down. We could have a simpler code with lower rates that would raise more money.”

Posted by: Airborne82 | November 24, 2010 12:47 PM | Report abuse

These profit levels demonstrate triumph of crony capitalism and rent seeking in the financial sector. The federal government is directly subsidizing these profits through QE2 and other measures.

http://www.rollingstone.com/politics/matt-taibbi/blogs/TaibbiData_May2010/233953/83512

The details of the value of "financial innovation"

http://www.newyorker.com/reporting/2010/11/29/101129fa_fact_cassidy

Posted by: jnc4p | November 24, 2010 1:34 PM | Report abuse

It also demonstrates that for all practical purposes Wall Street is an oligopoly.

http://www.washingtonpost.com/wp-dyn/content/article/2010/08/19/AR2010081906574.html

The solution would be for the Justice Department to initiate an anti-trust suit against the largest Wall Street banks to break them up.

Posted by: jnc4p | November 24, 2010 1:35 PM | Report abuse

Now this juice-boxer is an expert on business? Wotta hoot.

Posted by: thebump | November 24, 2010 1:38 PM | Report abuse

So virtual profits are roaring again but the economy in general is a turkey. They could keep doing this spin control right up until the lights go out on the country leaving them wondering what happened. Same way with Washington riding on top of the foaming bubble and drinking the same $1000 champagne that wall street does and feeling no pain at all.

Posted by: Wildthing1 | November 24, 2010 3:09 PM | Report abuse

" ... in a moderately positive way: These are very dynamic economic times, and the rewards are going to those companies and individuals who position themselves to take advantage of this dynamism. But there are an awful lot of negative ways you can spin it, too."
================================
First observation: "The Real Story on Corporate Profits" is always spin. Second observation: "moderately positive" spin is from Top to Bottom. Third observation: "negative ways" are therefore from Bottom to Top. Conclusion: any negative argument which starts with "your opinions are not shared by those at the top, ..." is circular trash.

That said, Ezra, you are about to miss the story of your career: Being dazzled by the "growth" of money hides the underlying changes to Society that the growth represents. In particular, not only is the Financial Services "Industry" doing well; but their future is bright because they (now) keep everyone's money in play, as if it were eternal, although the best they get from frail humans is to be eventually carried out the factory door feet first. How sad for them, but if you were awake you might have seen it coming when "Business" chased cheap labor around the globe. Labor is cheap two ways: Low wage or Low salary (for maximum hours). As long as you hide the suicides, there is no reason to think that some frail human on the other side of the world can't work more for less. After all, their money works 24x7. That's spin.

Marie Antoinette never said "let them eat cake". It was spin (true story). When your Banker tells you to put out the fire consuming your savings with Champagne, you know what you have to do.

Posted by: gannon_dick | November 24, 2010 5:14 PM | Report abuse

What part of the ancient identification of USURY

(and not "partial" -quantified- usury, either,)

doesn't "modern civilization" understand?

MONEY DOES NOT AND SHOULD NOT BE REPRESENTED AS MULTIPLYING OR PERPETUATING ITSELF.

It's against the natural law of conservation.

Our so-called economy is really a pyramid or Ponzi scheme, wrapped in a shell game.

Posted by: WKCg | November 24, 2010 5:21 PM | Report abuse

If you're not making stuff to sell to other people then you don't need to hire up. We're still making deals, and that benefits only a small number of individuals even though lots of dollars are involved. Nice for them.

We need to get back to making stuff so we can hire up. More people that make more money spend more money. I am afraid to say the only way we can make new innovative stuff is with government investment. Small and moderate entrepreneurial business doesn't have the capital to lay down for start up. Credit is tight. It's not Obama doing the damage, it's lenders being tight with money. They don't want to lend money with interest rates so low b/c it's a narrow profit margin. Business is selfish, not altruistic. It needs to be pushed by government to do the right things.

Posted by: gfoster56 | November 24, 2010 5:50 PM | Report abuse

Breaking News from FOX News:

A jury in Texas has convicted former U.S. House Majority Leader Tom DeLay on charges he illegally funneled corporate money to Texas candidates in 2002.

Delay was once one of the most powerful Republicans in Congress. He now faces up to life in prison.

Jurors in Austin deliberated for 19 hours before returning guilty verdicts on Wednesday on charges of money laundering and conspiracy to commit money laundering.

Prosecutors say the former Houston-area congressman used his political action committee to illegally channel $190,000 in corporate donations into Texas legislative races through a money swap.

DeLay and his attorneys maintained no corporate funds went to Texas candidates and the money swap was legal.


Read more: http://www.foxnews.com/politics/2010/11/24/jury-convicts-delay-money-laundering-trial/#ixzz16FDXwOBe

Posted by: lcarter0311 | November 24, 2010 6:13 PM | Report abuse

It is taking a ridiculously long time for Americans to get it. Winner-take-all corporate capitalism guarantees that the vast majority loses out. Yet every little problem that comes up causes Americans to swing back to the (main) perpetrators of this crime: The GOP.
Take a look at today's news: Delay is convicted for illegally engineering corporate (GOP) rule, but the identity of the corporations involved is not revealed. Why not?

Posted by: troutcor | November 24, 2010 7:52 PM | Report abuse

"The money is increasingly going to a select group at the very top of the [appropriations] chain, who are able to reap the rewards of [governmental] growth, play the [legislative] system astutely, and avoid taxes [and fees]."

You mean civil service workers?

Posted by: cprferry | November 24, 2010 9:31 PM | Report abuse

"What part of the ancient identification of USURY

(and not "partial" -quantified- usury, either,)

doesn't "modern civilization" understand?"

Um, ancient civilization exhibited ubiquitous poverty and essentially zero economic growth. The acceptance of interest as legitimate is one of the reasons why modern civilization is so rich.

Interest isn't evil - it is merely the price of money. Debt isn't evil either - like fire, it can be very beneficial if used properly.

Posted by: justin84 | November 25, 2010 10:34 AM | Report abuse

What's the matter with Wall Street.

Fox has been criticized a good bit. I'm fairly sure that the issue isn't tax avoidance as both pre-tax and post-tax profits look good. Fox can't explain why managers are mad at Obama, because financiers are angry at Obama. They are definitely doing very well indeed largely due to brilliant and heroic efforts by the

Federal government including Obama appointees such as Ben Bernanke.

I think that no matter how you slice and dice the data, you have to face the fact that most top managers are ideologically right wing. They are not simply rational profit seekers. So, like many people, their political views are based on prejudice and not self interest.

This isn't wall street, but how else can you explain the fact that GM's only hope to avoid bankruptcy was Clinton-care yet they opposed it ?

The title of this comment is supposed to be a reference to "What's the Matter With Kansas ?" Progressives tend to assume that the super rich are cleaver liars who know what's what but choose to confuse the rubes. The actual situation is much worse. They aren't lying. They are delusional.

Oh and the economy depends on the hope that those arrogant delusional ideologues don't make huge mistakes next decade as they did in each of the past four decades.

Posted by: rjw88 | November 27, 2010 4:38 AM | Report abuse

The US Corporate Income Tax could not be hurting the average American worker anymore than it is doing right now. It decreases wages, sends new jobs overseas, raises the prices on all goods and services and is going to bust many of our nation's largest defined benefit pension plans. If you want to help the average American you need to fight to Eliminate the US Corporate Income Tax today. www.eliminatecorporateincometax.com

Posted by: dennis47 | December 1, 2010 11:37 PM | Report abuse

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