Are Excessive Corporate Profits Hurting Growth?

Popular Economics Weekly

The third estimate for real GDP growth for the second quarter was left unchanged at an annualized rate of 2.5 percent compared to the second estimate and compared to a first quarter rise of  1.1 percent. But even 2.5 percent growth is not enough to increase job creation or bring down the unemployment rate further.


Graph: Calculated Risk

Full employment has always been associated with 3 percent plus growth. It has averaged 3.2 percent over the last 75 years, so there is a growing concern that the segment of economic growth that has expanded, corporate profits, may be the culprit. For though corporate profits have expanded to record levels, household incomes as well as wage and salary growth, have stagnated. Various studies verify income growth has not even kept up with inflation since the 1970s, or the productivity growth that is the reason for much of corporate profit growth.


Graph: The Atlantic

Above all, there is concern that too much of the taxation burden will fall on individuals. Going forward, the Obama administration predicts that Washington will rely more on individual income taxes and less on corporate taxes, yet corporations are investing less of their profits on expansion, more on CEO salaries and dividends for their shareholders. This hasn’t expanded economic growth since 2000, at least.

Between fiscal 2010 and fiscal 2018, individual income taxes will rise from 41.5 percent of federal revenues to 49.8 percent, an increase of 8.3 percentage points, the president’s proposed fiscal 2014 budget shows. Corporate income taxes – assuming current statutory rates – are expected to grow by only 2.4 percentage points from 8.9 percent in 2010 to 11.3 percent of federal revenues in 2018.

As a percentage of national income, corporate profits stood at 14.2 percent in the third quarter of 2012, reports the New York Times, the largest share at any time since 1950, while the portion of income that went to employees was 61.7 percent, near its lowest point since 1966. In recent years, the shift has accelerated during the slow recovery that followed the financial crisis and ensuing recession of 2008 and 2009, said Dean Maki, chief United States economist at Barclays.

Corporate earnings have risen at an annualized rate of 20.1 percent since the end of 2008, he said, but disposable income inched ahead by 1.4 percent annually over the same period, after adjusting for inflation. “There hasn’t been a period in the last 50 years where these trends have been so pronounced,” Mr. Maki said.

No, but there was a period before that—the Great Depression—when wealth was so concentrated. Instead of looking at the income inequality of the 1 percent, we need to look at corporate dominance of the American economy that has basically stopped domestic economic growth, while U.S. corporations invest and grow overseas. 

Raising the federal minimum wage above $7.25 per hour would be a starter.

Harlan Green © 2013

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About populareconomicsblog

Harlan Green is editor/publisher of, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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