by Michael Roberts
A number of readers of this blog have remarked or asked me to comment on a recent article in the Economist magazine that asserted that both profits and even the return on capital or profitability in the US are at “near-record highs”. As quoted, “The past two decades have seen most firms make more money than they used to. And more firms have become very profitable”.
This would seem to be in contradiction to the assertions and evidence
continually made by me in this blog and elsewhere that US profitability
has been in secular decline since 1945 and is near post-war lows not
This contradiction can be resolved in several ways. The first is
what one blog reader pointed out: we are comparing apples with pears;
the second is that we are comparing harvests of apples and pears at
different times; and third, we are looking at the best apples, and not
the bulk of the rotten ones.
On apples and pears: it is obviously true that US corporate
profits are higher in absolute terms than they were 30 years ago. US
national output is higher, the population is higher, employment of
labour is higher, investment is higher.
Of course, the Economist is not so crude as to measure the health of
the US economy in absolute profits. This is what it said: “The last
year has seen a slight dip in aggregate profits because of the high
dollar and the effect of the oil price on energy firms. But profits are
at near-record highs relative to GDP and free cash flow—the money firms
generate after capital investment has been subtracted—has grown yet more
strikingly. Return on capital is at near-record levels, too (adjusted
for goodwill). The past two decades have seen most firms make more money
than they used to. And more firms have become very profitable.”
Now some of this is true. Corporate profits to GDP are still near
post-war highs. But this measure is not a measure of profitability
against capital. Profitability of capital invested is measured as
profits divided by the value of stock of the means of production owned
and used by corporations and the cost of employing the labour force to
use them. In Marx’s formula, this is s/c+v. Profits to GDP is really
the share of value created going to capital and is much closer to the
Marxist rate of surplus value, s/v. That’s why it is possible to have
high corporate profits to GDP and low profitability of capital. Which
is more relevant to how well US capitalism will do is open to
discussion: is it the apples of profit share or the pears of
The Economist purports to measure the profitability of capital too
with its ‘global return on capital’. However, this is a measure not of
the profitability of the stock of capital in US corporations but the annual rate of return on invested capital (including financial assets)
domestically and globally by US corporations, as compiled by the
McKinsey Institute. That annual return, according to the graph, was
actually flat until 2002 and then rocketed. That reflects US
corporations’ investment returns from buying its own shares and
investing in foreign assets in the period since 2002, not the overall
profitability of US capital stock in productive assets. Again, it is a
matter of debate whether the Marxist measure of profitability is more
relevant than the rate of return on American capital as defined by
Moreover, the McKinsey measure reflects the profitability of the
largest and most profitable US corporations. As the Economist piece
explains, taking its data from the McKinsey Institute annual corporate
valuation report, there is a huge variance in profitability among US
companies, with the lion’s share going to the top four firms in each
sector of US industry and services. As the Economist says,
profitability is highest and has risen most in the more oligopolistic
sectors. “Revenues in fragmented industries—those in which the
biggest four firms together control less than a third of the
market—dropped from 72% of the total in 1997 to 58% in 2012.
Concentrated industries, in which the top four firms control between a
third and two-thirds of the market, have seen their share of revenues
rise from 24% to 33%.” So some apples are doing very well, but many apples are in a sorry state.
Actually, the Economist does not like this monopolistic development
in the US corporate sector: it wants ‘more competition’. More
competition would mean lower profitability but would also drive
corporations to be more efficient. “High profits across a whole
economy can be a sign of sickness. They can signal the existence of
firms more adept at siphoning wealth off than creating it afresh, such
as those that exploit monopolies. If companies capture more profits than
they can spend, it can lead to a shortfall of demand. This has been a
pressing problem in America. It is not that firms are underinvesting by
historical standards. Relative to assets, sales and GDP, the level of
investment is pretty normal. But domestic cash flows are so high that
they still have pots of cash left over after investment: about $800
billion a year.”
Much of this argument is nonsense. As I have explained in a recent article in the Jacobin magazine that took up similar arguments by Goldman Sachs: “Goldman
Sachs’s declaration that falling profit margins are a measure of the
“efficacy” of capitalism and a return to “normal” sounds pretty hollow.
It disguises the real issue. High profit margins are masking a broader
decline in corporate profitability and the depressing likelihood that
an economic recession — and its inevitable negative impact on working
people in lost jobs, incomes and homes— is once again on the horizon,
only eight years after the end of biggest slump in the American economy
since the 1930s..This is the real measure of capitalism’s efficiency for
It’s not that profits are so high that they cannot be spent; it’s
that corporations don’t want to invest because profitability is too low
and debt is too high. It’s not true that the level of US business
investment is “pretty normal”. As a share of GDP, since the 1980s, it has been steadily falling and its growth is now slowing.
Moreover, corporate profits in the US are now falling and if this
continues, business investment will drop, not rise as the Economist
thinks. I have shown before how the correlation and causal connection flows from profits to investment. This something that even mainstream investment pundits like Albert Edwards have noticed recently (see Edwards’ graph below).
As for cash piles, I have discussed the nature of these cash reserves in posts before:
they are concentrated in the very large US multi-national and relative
to overall financial assets and rising debt, these cash reserves are not
Corporate cash piles among the largest US multi-nationals go alongside rising corporate debt for the majority.
US non-financial corporate debt to GDP (%)
I have shown this in several posts and the risk of corporate debt
defaults will rise as profits and profitability falls. Losses on bonds
from defaulted companies are likely to be higher than in previous
cycles, because U.S. issuers have more debt relative to their assets,
according to Bank of America Corp. strategists. Those high levels of
borrowings mean that if a company liquidates, the proceeds have to cover
Leverage levels have been rising as more US companies use borrowings
to refinance existing liabilities, buy back shares and take other steps
that do not increase asset values.
And global corporate debt is rising too. According to McKinsey, at
the end of 2007 the global stock of outstanding debt stood at $142
trillion. Then in 2008 the financial world fell apart. Less than seven
years later, in mid-2014, there is an additional $57 trillion
in global debt, and the data this year is going to show that we’ve hit
another record high. Debt as a percentage of GDP is even higher now than
it was in 2007: 286% vs. 269%. Total debt grew at a 5.3% annual rate
from 2007–14. But corporate debt grew even faster at 5.9% annually.
The global corporate default ratio has climbed to its highest level
in seven years, led by oil and gas companies. This month saw four new
major corporate defaults, which took the overall tally to 40 for 2016,
ratings agency Standard & Poor’s said. That’s the highest
year-to-date default tally since 2009. Of those, 14 defaults came from
the oil and gas sector and a further eight from the metals, mining, and
steel sector. The overall default tally for the same time last year was
29. Companies in the US saw the biggest default rate with 34, with five
in the emerging markets.
I referred to the McKinsey study in a previous post. What McKinsey (MGI Global Competition_Executive Summary_Sep 2015) found was that “the
world’s biggest corporations have been riding a three-decade wave of
profit growth, market expansion, and declining costs. Yet this
unprecedented run may be coming to an end”. According to McKinsey, the global corporate-profit pool, which currently stands at almost 10% of world GDP, could shrink to less than 8% by 2025—undoing in a single decade nearly all of the corporate gains achieved relative to the world economy during the past 30 years!
From 1980 to 2013, vast markets opened around the world while
corporate-tax rates, borrowing costs, and the price of labour,
equipment, and technology all fell. The net profits posted by the
world’s largest companies more than tripled in real terms from $2
trillion in 1980 to $7.2 trillion by 2013, pushing corporate profits as a
share of global GDP from 7.6% to almost 10%.
But McKinsey reckons that profit growth is coming under pressure.
This could cause the real-growth rate for the corporate-profit pool to
fall from around 5% to 1%, to practically the same share as in 1980,
before the boom began. According to McKinsey, margins are being
squeezed in capital-intensive industries, where operational efficiency
has become critical. Meanwhile, some of the external factors that
helped to drive profit growth in the past three decades, such as global
labour arbitrage (globalisation) and falling interest rates, are
reaching their limits.
So, in a way, the Economist is out of date. Corporate profits as a
share of GDP are falling and are set to fall further over the next
decade. The apple harvest will be less each year.
The boom days of the ‘neoliberal’ period of 1980 to 2007 are over. As I
have shown in previous posts, global corporate profit growth has ground
to a halt and in the US corporate profits are not only falling as a
share of GDP, but also in absolute terms.
Far from a reduction of ‘too high profits’ being a good thing in
boosting ‘competition and efficiency’ as the Economist claims, falling
US corporate profits and profitability will herald a drop in investment
and increase of corporate debt defaults and so lay the foundations for a
new economic slump.
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