Tag: Income Distribution

Must-Read: Laura Tyson and James Manyika: Putting Profits in Perspective

Posted on by Brad DeLong

Must-Read: Laura Tyson and James Manyika: Putting Profits in Perspective: “Corporate profits may be near all-time highs…

but their variance among firms and industries has also increased significantly. The most profitable firms in the US are… in sectors that capitalize on research and development, brands, software, and algorithms. Companies in sectors like pharmaceuticals, media, finance, information technology, and business services have the highest profit margins… excluding finance, these sectors’ share of US corporate profits has increased significantly, from 25% in 1999 to 35% in 2013…. In the most digitally advanced sectors of the economy, margins have grown 2-3 times faster than average. And even within these sectors, there are enormous spreads between the top-performing companies and the rest of the pack. The ‘winner-take-most’ dynamic of the digital economy is not only producing record profits for leading firms; it may be accelerating the pace of innovation and broadening the areas in which companies can enter and quickly establish market power…

Must-read: Larry Summers: “Corporate Profits Near Record Highs Is a Problem”

Posted on by Brad DeLong

Must-Read: Larry Summers: Corporate Profits Near Record Highs Is a Problem: “The rate of profitability in the US is at a near-record-high level…

…All this might be taken as evidence that this is a time when the return on new capital investment is unusually high…. A high market value of corporations implies that ‘old capital’ is highly valued and suggests a high payoff to investment in new capital…. Yet matters are more complex. For some years now, real interest rates on safe financial instruments have been low and, for the most part, declining. And business investment is either in line with cyclical conditions or a little weaker than would be predicted…. This is anomalous…. An unusually high rate of investment would be expected to go along with a high rate of return on existing capital.

How can this anomaly be resolved? There are a number of logical possibilities…. [But] it could be that higher profits do not reflect increased productivity of capital but instead reflect an increase in monopoly power…. Is the increased monopoly power theory plausible?… (i) Many industries have become more concentrated; (ii) we are coming off a major merger wave; (iii) there is some evidence of greater profit persistence among major companies; (iv) new business formation has declined; (v) overlapping ownership of companies that compete has become more common with the rise of institutional investors; (vi) leading technology companies such as Google and Apple may be benefiting from increasing returns to scale and network effects…. Only the monopoly power story can convincingly account for the divergence between the profit rate and the behavior of real interest rates and investment…