NY Times
Profits Without Production
By _PAUL KRUGMAN_
(http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/paulkrugman/index.html)
Published: June 20, 2013
One lesson from recent economic troubles has been the usefulness of
history. Just as the crisis was unfolding, the Harvard economists Carmen
Reinhart
and Kenneth Rogoff — who unfortunately became famous for their worst work —
published a brilliant book with the sarcastic title “This Time Is
Different.” Their point, of course, was that there is a strong family
resemblance
among crises. Indeed, historical parallels — not just to the 1930s, but to
Japan in the 1990s, Britain in the 1920s, and more — have been vital guides
to the present.
Yet economies do change over time, and sometimes in fundamental ways. So
what’s really different about America in the 21st century?
The most significant answer, I’d suggest, is the growing importance of
monopoly rents: profits that don’t represent returns on investment, but
instead reflect the value of market dominance. Sometimes that dominance seems
deserved, sometimes not; but, either way, the growing importance of rents is
producing a new disconnect between profits and production and may be a
factor prolonging the slump.
To see what I’m talking about, consider the differences between the iconic
companies of two different eras: General Motors in the 1950s and 1960s,
and Apple today.
Obviously, G.M. in its heyday had a lot of market power. Nonetheless, the
company’s value came largely from its productive capacity: it owned
hundreds of factories and _employed around 1 percent_
(http://www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html)
of the
total nonfarm work force.
Apple, by contrast, seems barely tethered to the material world. Depending
on the vagaries of its stock price, it’s either the highest-valued or the
second-highest-valued company in America, but it employs less than 0.05
percent of our workers. To some extent, that’s because _it has outsourced
almost all its production overseas_
(http://www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html)
. But the truth is that the
Chinese aren’t making that much money from Apple sales either. To a large
extent, the price you pay for an iWhatever is disconnected from the cost of
producing the gadget. Apple simply charges what the traffic will bear, and
given the strength of its market position, the traffic will bear a lot.
Again, I’m not making a moral judgment here. You can argue that Apple
earned its special position — although I’m not sure how many would make a
similar claim for Microsoft, which made huge profits for many years, let alone
for the financial industry, which is also marked by a lot of what look like
monopoly rents, and these days accounts for roughly 30 percent of total
corporate profits. Anyway, whether corporations deserve their privileged
status or not, the economy is affected, and not in a good way, when profits
increasingly reflect market power rather than production.
Here’s an example. As many economists have lately been pointing out, these
days the old story about rising inequality, in which it was driven by a
growing premium on skill, has lost whatever relevance it may have had. Since
around 2000, the big story has, instead, been one of a sharp shift in the
distribution of income away from wages in general, and toward profits. But
here’s the puzzle: Since profits are high while borrowing costs are low, why
aren’t we seeing a boom in business investment? And, no, investment isn’t
depressed because President Obama has hurt the feelings of business leaders
or because they’re terrified by the prospect of universal health
insurance.
Well, there’s no puzzle here if rising profits reflect rents, not returns
on investment. A monopolist can, after all, be highly profitable yet see no
good reason to expand its productive capacity. And Apple again provides a
case in point: It is hugely profitable, _yet it’s sitting on a giant pile
of cash_
(http://appleinsider.com/articles/13/03/18/apple-cash-hoard-could-hit-170-billion-this-year)
, which it evidently sees no need to reinvest in
its business.
Or to put it differently, rising monopoly rents can and arguably have had
the effect of simultaneously depressing both wages and the perceived return
on investment.
You might suspect that this can’t be good for the broader economy, and you’
d be right. If household income and hence household spending is held down
because labor gets an ever-smaller share of national income, while
corporations, despite soaring profits, have little incentive to invest, you
have a
recipe for persistently depressed demand. I don’t think this is the only
reason our recovery has been so weak — weak recoveries are normal after
financial crises — but it’s probably a contributory factor.
Just to be clear, nothing I’ve said here makes the lessons of history
irrelevant. In particular, the widening disconnect between profits and
production does nothing to weaken the case for expansionary monetary and
fiscal
policy as long as the economy stays depressed. But the economy is changing,
and in future columns I’ll try to say something about what that means for
policy.
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