America’s largest corporations changed their tune in August. The Business Roundtable, an association of chief executive officers (CEOs) of some of America’s largest companies, including JPMorgan Chase, General Motors, Walmart and Johnson & Johnson, described in a statement the new and improved American corporations. They are no longer just about keeping shareholders happy, but they also want to give employees “dignity and respect,” among other things. Businesses’ singular pursuit of short-term profits over the past four decades has kept wages down and eroded America’s working-class. It is thus now difficult to trust corporations to do the right thing. They are unlikely to voluntarily shrink after years of increasing concentration and they will not give up power to unions after fighting off organized labor for decades. The Business Roundtable’s statement sets out lofty goals, but it is silent on these causes of the erosion of economic mobility and security for American working-class families. The answer then is to strengthen antitrust and labor regulations and enforcement. American families have lost ground for too long to wait for businesses to halfheartedly act on their newfound altruism.
American corporations have been highly profitable for the past few decades. Their profit rate – the ratio of before-tax profits to total assets – averaged 11.3% for the current business cycle that started in 2007 — the highest profit rate since the late 1960s. What makes this number so stunning is that it happened during a business cycle that included the worst recession since the Great Depression from 2007 to 2009. It also happened in an environment of low and declining corporate taxes. The after-tax profit rate thus reached a record high average of 9.6% from 2007 to 2019 (see figure below).
There is an adage that what is good for American businesses is good for America’s economy. This assumes that companies will use their riches to invest more in manufacturing plants, office buildings, trucks, cars, computers, among many other things. They will then hire more people to work with those investments. Business spending on those investments will also create jobs, especially in manufacturing and construction. That is a nice story, as far as it goes. It’s just not how the economy has worked for the past few decades.
Net business investment, after accounting for the depreciation of existing capital, has fallen to record lows. It stood at 2.4% of gross domestic product (GDP) for the current business cycle, its lowest level of any business cycle since World War II (see figure below).
Businesses don’t need to hire more people if they don’t invest and there are no big boosts to key industries such as manufacturing and construction. Employment growth has been well below historical averages for the past two decades. And wages for many workers have been flat during that time as businesses squeezed more and more profits out of a sluggishly growing economy. At the same time, families faced higher costs for health care, education and housing. The gap between wages and costs forced families deep into debt. Even after the declines of debt in the wake of the mortgage crisis of 2007 to 2009, families still owed on average 98.9% of their after-tax income by June 2019 (see figure below). High debt holds back economic mobility and creates a lot of economic insecurity for families.
Corporations spent most of their money on keeping shareholders happy in the past four decades, rather than investing in new capacity, creating jobs and boosting wages. On average, non-financial corporations spent all of their after-tax profits on paying out dividends and buying back their own shares, which boosts stock prices in the short-run. Income inequality grew to a record high in 2018, dating back to 1967. Wealth inequality has also grown with the top one percent of the wealthiest households now owning 32.2% of all wealth, the highest share on record, dating back to 1989. The corporate-profit driven economy has worked very well for the luckiest few, while it has held back America’s working-class families.
The ability of corporations to generate ever more profits and use those to keep shareholders happy has gone unchecked for decades. Businesses have gained more power by growing ever larger following merger wave after merger wave. Antitrust enforcement has been woefully inadequate in reining in these excesses. Large companies have held down workers’ wages and benefits for much of the past two decades. At the same time, corporate behemoths have fought labor law reforms that would have made it easier for workers to join a union. They also opposed unionization efforts, often illegally. The decline of unions has left workers without a good chance to counter corporations’ efforts to squeeze their wages and take away their benefits.
The track record of America’s companies shows blatant disregard for the wellbeing of America’s working families. Their singular pursuit of ever higher profits has squeezed workers’ wages and benefits and driven them deeper into debt to pay for the things that matter to them and their families – health care, housing and education. It’s good that businesses now recognize that workers actually matter. But leaving businesses to their own devices in the hope that they will rectify what has driven economic inequality to record highs is a fool’s errand. The real answer instead lies in policies to counter companies’ drive for more and more profits. This means establishing and enforcing meaningful antitrust and labor protections.