Structural Economics 101

One of the “goals” of almost every business, regardless of size, is to increase revenue and profits, and those targets are almost always increases exceeding ten percent per year. Executives in those companies are under enormous pressure to meet such targets. For most business, such targets are not only unrealistic, but taken as a whole, the proliferation of such high target growth rates will actually hurt overall economic growth. This is a point that I’ve never seen addressed, and if it has, it’s certainly been buried.

First is the issue of realism. In hard economic terms, businesses as a whole can only increase growth by the amount that the economy and exports grow.  If, as has been the case with the United States, imports exceed exports, what that means is that any growth rate above the national average means that growth on the part of any business or set of businesses means that other businesses are growing less, or even declining.   

To meet these high profit, sales, and revenue targets, the majority of businesses in the United States, particularly in the manufacturing and service sectors, have resorted to cost-cutting through automation, greater use of part-time employees, and by eliminating or limiting wage and salary increases for all but senior executives. This process also effectively re-distributes income from workers to higher paid professionals and executives. Higher-paid individuals spend a lower percentage of their income on goods and services. Another factor that can increase demand and  income is population growth, but when the working-class wages stagnate, that also decreases the birth rate and the level of total immigration. In effect, that reduces the total income available for the purchase of goods and services, and that in turn reduces the ability of the economy to grow. 

In short, while emphasis on high growth of businesses at the expense of workers may increase profits for an individual business, it’s counter-productive for the economy as a whole.

What’s also overlooked in this equation is the question of who benefits from high profit targets. Obviously, no one benefits if a business loses money, but what happens if an already profitable business increases profits?  Where do those additional profits go, and why do businesses insist on and require such high profit margins?  Because, first executives don’t get hefty bonuses without meeting those targets.  Second, because high profits raise stock prices and dividends, and thus the returns to owners and investors.  But what’s not mentioned in this equation is who those executives, investors, and owners are… and they’re almost all in the top ten percent of earners.

In effect, high profit targets are set by those in the top income levels for the benefit of others in the same income levels… but the more this happens, the more the spiral tightens and the fewer and more highly paid are the beneficiaries because the vast majority of Americans, whose wages and salaries are stagnant, can afford to buy less and less, and, in the long run, that hurts everyone.

But then, since when have the majority of those very well off ever considered the long term… or even listened to the minority of the well-off who do see and fear the long-term consequences?

4 thoughts on “Structural Economics 101”

  1. Grey says:

    I think we are at the point where hyper-efficient capitalism starts eating itself. The question I keep asking is, if we have an economy which we are told is 2/3 driven by consumer spending, what happens to our economy when the consumers can’t afford to buy anything?

    I am reminded of the (possibly apocryphal) exchange from the ’50s:

    CIO President Walter Reuther was being shown through the Ford Motor plant in Cleveland recently.

    A company official proudly pointed to some new automatically controlled machines and asked Reuther: “How are you going to collect union dues from these guys?”

    Reuther replied: “How are you going to get them to buy Fords?”

  2. Janet L. Chennault says:

    I would like to point out that your comments apply to large companies that are publicly traded. As the VP, and co-founder, of a small medical software company, I respond that an increase in our profits allows us to grow.

    If we make more profits by, for example, selling outside of the US, we can hire more programmers and make more ‘neat stuff’ that saves people’s lives. Because our software is reasonably priced (even in third world countries) and increases the efficiency of data management (free benefit – you already have done the work, if you can leverage the data to mean more, then you have a net plus in health care for no further investment), we are not locked into a closed system of profit and benefit.

    In such a case as ours (and we are certainly not the only ones who use this model) greater profits = greater achievements.

    Win-win.

    Jan

    1. That’s true in your individual case, but there’s only so much income in the system, and that becomes a limiting factor.

  3. Alison Hamway says:

    I can certainly see that our current economic system is faltering. More and more wealth is concentrated in fewer and fewer hand, and we are definitely losing our middle class. What I can’t really predict is what will replace our version of capitalism.

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