The Economist Declares American Profits are too High

Huh, even The Economist says American profits are too high. Wow, that’s pretty damning.

The world has taken note of the anger in American voters and I’m sure there are many articles about the causes. This magazine has noted that the various speculations of the cause range from rigged economy in favor of the elite to free trade deals and Wall Street bad behavior. But, they say everybody is missing out on one of the true cause of the rigged economy:

“But one problem with American capitalism has been overlooked: a corrosive lack of competition. The naughty secret of American firms is that life at home is much easier: their returns on equity are 40% higher in the United States than they are abroad. Aggressive domestic profits are at near-record levels relative to the GDP. America is meant to be a temple of free enterprise. It isn’t.”  The Economist, p. 11, March 26 – April 1, 2016.

That’s a new one and may well be an indicator of a disturbing trend toward a rigged economy. I don’t think it’s a reason why Americans are angry but the non-competitiveness could be just another one of the many problems we have. I’ll have to think about this. But the article does state some convincing data to support their contention that the economy may be rigged.

The article also says that some of the proposed solutions are not workable. The magazine disagrees that higher taxes would be a solution: instead, they feel that it’s likely to deter investment. Well, when we lowered taxes in the early part of this century, I don’t think businesses did much more investments. Data suggests they didn’t invest in people and they probably didn’t do other kinds of investments. Instead the money flowed into the executives’ pockets and to the mysterious shareholders.

The magazine says that the rise in minimum wage would deter hiring. Well, businesses were not really hiring either during the last few years (although recent news seem to indicate hiring is picking up). And it won’t matter when automation kicks in: if businesses can get labor costs close to zero, then they will go there.

So there were some things I disagreed with in the article but all in all, it has provided some food for thought.