The Misfortune 500

Corporate America Brought its Profit Crash on Itself

Hard times are here again, and they touch us all — losing a job, taking a pay cut, or shutting down a small business. Even the massive corporations of the just-released 2009 Fortune 500 feel the pain. Sure, their pain comes in their total profit falling to just $98.9 billion last year — mere double-digit billions in profitability! ((Fortune, Pop! Went the Profit Bubble, May 4, 2009.)) As always, the new Fortune 500 list contains excellent analysis of our current economic condition and the role of America’s big businesses in it. And as always, it’s pretty embarrassing.

The centerpiece is the list of America’s 500 biggest corporations by revenues, but the big story this year was the steep dive in profit by the companies — under $99 billion in 2008 vs. $785 billion in 2006. That’s a crash of 85%, an incredible swing in fortunes for American capital. The magazine admits that there had been a “bubble” in earnings, mainly in finance, although it fails to identify the broad deregulation of that sector as the reason.

The analysts find one reason that profit had been so enormous during the bubble period was that “labor costs, which account for two-thirds of all corporate expenses, barely budged during the glory days.” This was in part due to “a pro-business administration” that kept down labor, and as the magazine puts it, “Wages rose modestly.” Very modestly — the Economic Policy Institute reports that real wages grew by 0.0% over 2000-2006. ((State of Working America 2008/2009, Ch. 3, Economic Policy Institute, 2008.))

And since the dollar was falling in the world markets, imports were more pricey, giving U.S. firms “plenty of space to raise their prices,” and with labor costs flat and productivity high, the profit margin on each unit sold shot up. Add in growing sales in the bubble environment, and total profit reaches its massive $785 billion peak. The oft-quoted economist Mark Zandi notes that “All of the increases in productivity went right to the bottom line. We’ll never see another profit period like it.” God willing!

We learn that the recent crash in profit had a few causes — the first being the collapse of U.S. banks and finance firms that overinvested in risky subprime assets. Their monumental losses make up about 70% of the decline in profit. But the second major sector of the economy to lose money was “consumer cyclicals” — representing any consumer goods that can be put off purchasing till later. The reason that this sector would face massive losses is that it “mirrors the fading fortunes of the U.S. consumer” who is “heavily, often ruinously in debt.” Of course, Fortune doesn’t connect this in-hock America to our stagnating real wages, which have failed to grow in purchasing power in thirty years. ((Ibid.)) But this debt has left Americans “sharply reducing their spending to cover monthly interest and pay down their debt.” Obviously, this is no fault of the corporations, which have illegally fired thousands of union organizers and gone to great lengths to bust the unions that might have raised pay and prevented our needing to rely on plastic for groceries. ((BusinessWeek, “Can This Man Save Labor?,” September 13, 2004.))

Looking forward, the magazine’s editors expect that profit will “recover as labor costs fall” and “the consumer is coaxed back to anything like normal spending.” Sounds like they learned their lesson!

The magazine contains a few other notable points, including a section on “market myths,” such as “the myth that stocks as a group are a fundamentally reliable investment over the long term . . . The topper came four years ago: President George W. Bush could even propose privatizing Social Security by letting beneficiaries invest in stocks and have the idea taken seriously.” Even business looks down on Fox News.

President Obama gives an exclusive interview to the magazine, and insists that while his Administration has a “responsibility to take aggressive action to avoid an even deeper recession” the real role of government is “not to stifle the market” and to “get out of the way.” Government only has a legitimate role cleaning up the market’s mess, apparently.

But best of all is the article predicting that business will now be more accountable, because of “broad populist anger.” Now “government is getting involved, with an eye toward restraining the worst corporate behavior. But even without federal involvement, businesses will have to answer to a higher authority,” apparently meaning the public. A consultant is quoted saying executives “are very sensitive to the societal pressure.”

With the Fortune 500 laying off America and hoarding capital, here’s hoping our sensitive execs get thrown out of business in a takeover by “a higher authority.”

* Rob Larson lost all his money betting on the dogs. He’s Assistant Professor of Economics at Ivy Tech Community College in Bloomington, Indiana.

Rob Larson is affiliated with the Bar by his house. He'?s an Assistant Professor of Economics at Ivy Tech Community College in Bloomington, Indiana. Read other articles by Robert, or visit Robert's website.