Why Profits are Trending Down
October 21, 2002
The rate of profit in the U.S. economy has been trending downward for decades. According to a new report from the Commerce Department, the rate of return on corporate capital averaged better than 10 percent in the 1960s (see chart).
- But in the 1990s it was one-third lower, averaging 6.3 percent.
- Even at the height of the 1990s economic boom, profits peaked at just 7.8 percent in 1997.
- By contrast, profitability reached 12.1 percent in the 1960s.
- Thus it appears that there is less fuel for the stock market today than there was a generation ago -- meaning less investment, lower productivity, fewer jobs and a lower standard of living than we would have if corporate profits were higher.
Fortunately, after-tax profits have not fallen as much as before-tax profits. Whereas gross profits have fallen by about a third since the 1960s, after-tax profits have only fallen by about a quarter.
Of greater importance, in terms of the economy, is that all measures of corporate profitability have fallen over time. Indeed, to the extent that companies have been able to offset some of the decline in gross profits by using the law to reduce their taxes, it has moderated the decline in after-tax profits.
At the end of the day, after-tax profits are what matter, because that is what is left over to finance investment and pay the dividends upon which stock prices are based. Since it is not clear what the government could do to raise the overall level of profitability, it must necessarily concentrate on cutting taxes to raise after-tax profits -- something Treasury Secretary Paul O'Neill would like to do it by abolishing the corporate income tax altogether.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, October 21, 2002
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