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Krugman Explains: Where Have All the Corporate Profits Gone? |
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As the Center on Budget and Policy Priorities noted in March, the share of national income going toward corporate profits hit an all-time high last year. (Meanwhile, the share of national income going to wages and salaries hit its lowest level since record keeping on these numbers began in 1929.)
The Bush administration has touted these record profit levels as good news because, as the argument goes, increased profits will “produce a corresponding gusher of business investment.”
But New York Times columnist Paul Krugman shows how this hasn’t been the case:
But the reality has been more of a trickle. Nonresidential investment—that is, investment other than housing construction—has grown very slowly by historical standards. As a share of G.D.P., nonresidential investment remains far below its levels of the late 1990s, and it has been declining for the last two quarters.
Krugman explains why record profits haven’t translated into higher levels of investment:
Why aren’t corporations investing, and what does the lack of business investment mean for the economy?
It’s possible that sluggish business investment reflects lack of confidence in the economic outlook—a lack of confidence that’s understandable given the bursting of the housing bubble, which has already caused G.D.P. growth to slow to a crawl.
But as Floyd Norris recently reported in The Times, there is a more disturbing possibility. Instead of investing in physical capital, many companies are using profits to buy back their own stock. And cynics suggest that the purpose of these buybacks is to produce a temporary rise in stock prices that increases the value of executives’ stock options, even if it’s against the long-term interests of investors.
Krugman has a message for those who wrongfully claim stronger worker safety standards and greater union participation will hurt business investment:
…[N]ext time someone tells you that any action that might reduce corporate profits a bit—like actually enforcing health and safety regulations or making it easier for workers to organize—will reduce business investment, bear in mind that today’s record profits aren’t being invested. Instead, they’re being used to enrich executives and a few lucky stock owners.
With that in mind, tell your senators and representative to co-sponsor the Protecting America’s Workers Act here, and tell your senators to support the Employee Free Choice Act here.
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