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The Economic Policy Institute recently published one of their “economic snapshots” entitled “Economy built for profits not prosperity” without any explanation. Aside from the duh factor—most people are likely aware that profits are up, while employment still languishes—pronouncements like this need an explanation. What they did have to say is informative though:

Newly released data on corporate profitability for 2012 show the continuation of historic levels of profitability despite excessive unemployment and stagnant wages for most workers. Specifically, the share of capital income (such as profits and interest, which are hereafter referred to as ‘profits’) in the corporate sector increased to 25.6 percent in 2012, the highest in any year since 1950-1951. . . .

This historic share of income going to profits reflects historically high returns on investments, meaning more profit per dollar of assets. . . . Profitability used to be lower when there was high unemployment, but in this downturn we have already seen the share of income going to profit exceed the high point reached in the last recovery or at any time in the last five recoveries. We now have an economy built to assure high corporate profitability even when it’s operating far below capacity and when most families and workers are faring poorly.

There are likely other factors that caused this phenomenon, but two complimentary features of our economy stand out. That would be the global economy and outsourcing. By opening foreign markets through the free trade agreements over the past few decades, American manufacturers have expanded their market base. Then, and at the same time, outsourcing of American jobs has augmented the consumer base in those markets.

The 10,500,000 million jobs outsourced, according to Outrsaurus, has had the effect of lowering the cost for delivery of manufactured goods by nearly 40 percent, thus increasing the profit margin. In the financial and services sectors, sectors that are doing especially well, overhead related to employee payroll has decreased by as much as nearly 90 percent per outsourced job.

The effect in the domestic economy has been to create a glut of demand for jobs that has helped keep wages and salaries depressed, thus further adding to profitability. Essentially, what could be termed greed, and some would even label as a kind of treason, corporate America has turned Adam Smith’s formula for creating a consumer class, the basic driving force of prosperity, on it’s head. Prosperity, or “increasing national wealth,” as he put it required: “The liberal reward of labour, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. The scanty maintenance of the labouring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition, that they are going fast backwards.”

There you have it, but another factor enters into the equation as well. The capital gains tax further contributes to increased profit at the expense of prosperity by discouraging savings and investment in productive enterprise in favor of trading financial instruments. Again, this results in increased wealth, and lower employment due to the predatory nature of venture capital firms. Who can forget how Bain Capital operates!

In fairness to Adam Smith, it’s not that the way corporate America operates has reduced the wealth of the nation. America is still a wealthy nation, but corporate America no longer needs the American consumer—or the labor they once provided. The long term shift from an economy firmly founded on manufacture to one that is dependent on services and merchandising has augmented the decline of the consumer class—the middle class—and only the understanding that laissez faire policy leading to prosperity, as Smith envisioned it, was never intended to mean that government should not regulate business. Rather, it was intended that government should not favor business by granting monopolies or other advantages. In fact, Smith opposed regulation of labor with the exception of preventing mob rule when labor disputes erupted into violence.

America is still prosperous. It’s just not benefiting everyone.

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