‘Their Inflation Strategy Is Working’: Corporate Profits Soared to Record High in 2021

‘Their Inflation Strategy Is Working’: Corporate Profits Soared to Record High in 2021 1

Yves here. We’ve regularly described how the corporate profits as a share of GDP has been at close to 12% for years, which is twice the level Warren Buffet deemed to be unsustainably high in the early 2000s. These egregious profits are at the expense of low and mid level worker. We’ve seen how top executive have come to see their lofty pay as a matter of right when they are short changing their own front line staff to line their pockets. One of the most grotesque examples is hospitals, where C-level executives, who never faced contagion risk, exhaustion, and the emotional distress of dealing with dying patients, give themselves hefty bonuses, while barely boosting nurse pay.

We noticed this pattern way back in 2005, in a Conference Board Review article titled The Incredible Shrinking Corporation:

In a 2002 Brookings Institution paper, Yale economist William Nordhaus noted a decline in corporate profits, reflected in the National Income and Product accounts, from mid-1997 through early 2000 and a further slight fall into 2001. But S&P-reported profits for that period showed a very different picture—they grew 70 percent from the beginning of 1998 through early 2000, before fall ing by nearly 50 percent from early 2000 to early 2001.

What created this divergence? Robert Gordon, a professor at Northwestern University and a member of the
National Bureau of Economic Research, commented on Nordhaus’ analysis: “During the 1990s corporate com-
pensation had shifted to relying substantially on stock options, leading first to the temptation to engage in accounting tricks during 1998-2000 to maintain the momentum of earnings growth, and then sheer desperation to cut costs in response to the post-2000 collapse in reported S&P earnings and in the stock market. The stock market collapse had an independent impact on the pres sure for corporate cost cutting . . . by shifting many corporate-sponsored defined-benefit pension plans from overfunded to underfunded status.”….

Part of the problem is that companies have not recycled the fruits of their growth back to their workers as
they did in the past. In all previous postwar economic recoveries, the lion’s share of the increase in national income went to labor compensation (meaning increases in hiring, wages, and benefits) rather than corporate profits, according to the National Bureau of Economic Analysis. In the current upturn, not only is the proportion going to workers far lower than ever before—it is the first time that the share of GDP growth going to corporate coffers has exceeded the labor share.

Notice the profits issue is central. High profits serve as the justification for fat executive compensation. And it does not have to be this way. In Japan, also a capitalist society, entrepreneurs are revered not for making themselves rich but for creating employment.

By Jake Johnson. Originally published at Common Dreams

Federal data released Wednesday shows that U.S. corporate profits jumped 25% to record highs in 2021 even as the coronavirus pandemic wreaked havoc on the nation’s economy, disrupting supply chains, hammering low-wage workers, and helping to push inflation to levels not seen in decades.

According to the Commerce Department’s Bureau of Economic Analysis (BEA), domestic corporate profits adjusted for inventory valuation and capital consumption reached $2.8 trillion last year, up from $2.2 trillion in 2020—the largest increase since 1976.

Employee compensation also increased in 2021, just not at the pace of corporate profits. Citing the new BEA data, Bloomberg reported that “employee compensation rose 11%, but the so-called labor share of national income—essentially, the portion that’s paid out as wages and salaries—fell back to pre-pandemic levels.”

“That tends to undermine the argument that soaring labor costs are what’s driving the current surge in inflation, a case the Federal Reserve is starting to make as it accelerates interest-rate increases,” Bloomberg noted.

Lindsay Owens, executive director at the Groundwork Collaborative, argued in a statement that the new profit figures show that corporate America is successfully weathering inflationary pressures across the economy by pushing higher costs onto consumers—a tactic some CEOs have openly touted during recent calls with investors.

“CEOs can’t stop bragging on corporate earnings calls about jacking up prices on consumers to keep their profits soaring—and today’s annual profit data shows just how well their inflation strategy is working,” Owens said. “These megacorporations are cashing in and getting richer—and consumers are paying the price.”

The American Economic Liberties Project expressed a similar view on Twitter:

A number of major U.S. corporations, from Amazon to Starbucks to the Dollar Tree, have announced in recent months that they’re moving to hike prices on consumers, often blaming the broader “inflationary environment.” Outgoing Starbucks CEO Kevin Johnson—who saw his compensation soar by 39% to $20.4 million in 2021—said during his company’s fourth-quarter earnings call that impending price increases are aimed at mitigating “cost pressures including inflation.”

But recent survey data indicates that Americans aren’t buying the companies’ justifications for higher costs. A Data for Progress poll released last month found that a majority of U.S. voters believe that “large corporations are taking advantage of the pandemic to raise prices unfairly on consumers and increase profits,” a position also taken by progressive members of Congress.

Next week, Senate Budget Committee Chair Bernie Sanders (I-Vt.) is planning to hold a hearing titled, “Corporate Profits Are Soaring as Prices Rise: Are Corporate Greed and Profiteering Fueling Inflation?”

During a separate hearing Wednesday on President Joe Biden’s latest budget proposal, Sanders said that “to a significant degree, pathetically, large corporations are using the war in Ukraine and the pandemic as an excuse to raise prices significantly to make record-breaking profits.”

“This is taking place at the gas pump, at the grocery store, and virtually every other sector of the economy,” said the Vermont senator. “This is why we need a windfall profits tax, and why this committee will be holding a hearing on Tuesday of next week on the unprecedented level of corporate greed that is taking place in America today.”

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