The Upside Down Economy

Corporate profits are soaring despite declining sales and temps are working longer hours than regular employees. What gives?

One aspect that defines our current economy is that things are happening that shouldn't be happening. I don't mean that things are happening that are illegal or immoral. (Well, some of them are immoral, but that's not what I mean.) Rather, things are happening that defy economic logic--a slippery term that really means, the economic patterns of roughly the past half-century.

The first such logic-defying thing is that corporate profits are soaring even as corporate revenues limp along. The quarterly reports of S&P 500 corporations for the first three months of 2013 are almost entirely in now, and they show profits rising by more than 5 percent even while revenues have risen by less than 1 percent. Seventy percent of these companies--the largest publicly traded U.S. firms--exceeded the analysts' profit projections. On the other hand, 60 percent came in under the projections for their sales.

American capitalism has become a zero-sum game, and it's American workers who've been zeroed out.

Were this disjuncture just a one-time epiphenomenon, we could pass it off as a statistical oddity, but it's not. Profits of American corporations have become decoupled from the other indices of American economic well-being with which they've historically been linked. They currently comprise the largest share of the nation's economy that they have since World War II. Yet the increase in consumer spending in the 15 quarters since the recession's official end is lower than its increase 15 quarters after the recessions of 1982, 1991, and 2001 ended. Similarly, 15 quarters after the recession ended, the increase in GDP is lower than it was in those three preceding recessions. So spending and growth are lagging while profits soar. What gives?

Part of the answer is that the S&P 500 now sell roughly half their wares abroad, so they're less dependent on the health of the U.S. economy to hit or exceed their profit targets. But how to account for the increase in profits when revenues--which, like profits, are measured globally--also decline?

The answer is that profits are increasing because corporations are getting by with fewer workers than they employed before the crash of 2008, and they're paying those workers less. Wages and compensation (that is, wages plus benefits) now make up the smallest shares of GDP that they have in 50 years, and their decline has proceeded without interruption since 2001. According to a report from JP Morgan Chase's Chief Investment Office, two-thirds of the increase in corporate profits between the end of the dot-com bust and the collapse of 2008 is directly attributable to the decline in the wages they paid their employees. As the share going to profits has continued to increase since that report appeared, and the share going to wages has kept on decreasing, the centrality of wage suppression to profit maximization has continued to grow.

Certainly, companies have been replacing workers with machines wherever possible. But they are also replacing their own employees with temps--workers hired from employment agencies to whom they pay no benefits and whose wages can be lower than those of regular employees. Which brings us to the second anomaly in recent economic statistics: For the first time in modern economic history, temps are working longer hours than regular employees. Historically, an employer's own workers have worked longer hours than those brought in on a temporary basis from employment agencies. But in 2009, the average workweek of temps began to exceed the average workweek of all employees. The average number of hours that Americans work still hovered at 34.4 in March, the latest month for which we have figures. Temps, however, worked an average of 35.2 hours - more than they did not only during the Recession, as TheNew York Times' Catherine Rampell points out, but during the years preceding the recession as well. We can reasonably infer that employers are opting to substitute temps for workers they once would have hired outright.

The metrics of the American economy may have gone topsy-turvy on us, but that doesn't mean they're inexplicable. If profits are rising while revenues flatline, and if employees from temp agencies are putting in longer hours than anybody else, it's chiefly because American workers have lost the capacity to defend their interests, and their employers are exploiting their weakness to extract profits they could not otherwise attain. American capitalism has become a zero-sum game, and it's American workers who've been zeroed out.

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