Trump brags about corporate profits as wages stagnate.

Trump, Man of the People, Brags About Corporate Profits as Wages Stagnate

Trump, Man of the People, Brags About Corporate Profits as Wages Stagnate

Moneybox
A blog about business and economics.
Aug. 1 2017 1:50 PM

Trump, Man of the People, Brags About Corporate Profits as Wages Stagnate

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#Maga

Win McNamee/Getty Images

President Trump took to the Twitter-waves to broadcast some important economy news Tuesday morning.

Trump usually posts such tweets—another one Tuesday was on the media’s failure to report on the stock market’s gains this year—to take credit for the strength of the economy and reassure his audience (and himself) of his general awesomeness. Trump never tweets negative news, like, say, the crap sales this year from the auto industry, which is the largest manufacturing and retail sector of the economy.

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Never mind the absurdity of Trump taking credit for positive economic news and ignoring the negative—Trump arrived in the White House after an eight-year boom in corporate profits and the stock market that can hardly be attributed to him. There’s something else that’s amiss. The fact that American companies are making more than ever is actually a big part of the problem in this country. And its arguably one of the reasons we ended up with Trump.

Of course, corporate profits are better than corporate losses. And more corporate profits are generally better than less corporate profits. But the signal fact of the past decade or so is that, while the fortunes of the corporate sector recovered rapidly after the financial crisis (thanks, Obama and Bernanke!), the fortunes of American workers never quite did.

For a variety of reasons, in fact, the relationship between pay and profits—which was already  increasingly tenuous in the 1990s and the 2000s—broke down entirely during the Obama era. Companies, having survived the collective near-death experience of the 2008 financial crisis, were eager to keep costs down. With massive slack in the labor market—the unemployment rate was 10 percent in October 2009—and unions on their back, workers at all skill levels were not in much of a position to bargain for higher rates. If they did summon up the courage to ask for more, companies could wield the threat of automation, outsourcing, or offshoring. Oh, and thanks to Republican intransigence, the federal minimum wage has remained stuck at a measly $7.25 per hour for the past decade.

So even as median household income stagnated and wages grew a tiny bit, we saw a massive increase in pre-tax corporate profits, from $1.38 trillion in 2008 to $1.84 trillion in 2010, $2.13 trillion in 2012, and $2.16 trillion in 2016. That’s an increase of more than 56 percent in six years. More significantly, corporate profits as a percentage of GDP, which never topped 6.4 percent in the 1990s, rose from 7.3 percent in 2008 to 10.4 percent in 2014. Another way of looking at this, as Pedro da Costa points out in Business Insider, is that labor’s share of the overall economic pie has been plummeting during this expansion. America has been making a lot bigger pizzas in the past several years, but all the extra slices are being delivered to executives and shareholders.

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The strange, unpredicted thing is that this trend continued even as the expansion continued to roll on and the labor market tightened. There have been more than 5 million jobs open in the U.S. since August 2014. The unemployment rate stands at 4.4 percent. In many states and cities, the minimum wage is rising. And yet overall pay isn’t really budging much. Median household income adjusted for inflation in 2015 was below its level in 2006.

This state of affairs is maddening. It’s true that inflation has generally been muted since the onset of the financial crisis. And many important things have become cheaper, like clothes and wireless service. But some goods and services that people really need—say, housing, education, and health care—have become significantly more expensive in the past decade. What’s more, there is something soul-sapping about showing up to work every day and either getting the same as you did last year, or getting paid less than you did last year, and never getting a raise or bonus—especially when you can see that your company’s profits are rising dramatically. It’s almost as if the system was, dare I say it, rigged against those who work and toward rewarding those who sit on their rears and collect dividends.

To aggravate matters, in the past few years, the financial press (me included), Wall Street, the Obama administration, and the Federal Reserve were trumpeting the economic gains apparent in this long-running expansion. That disconnect between corporate prosperity and the struggles of workers was one of the factors that helped ignite Trump’s campaign. While he’s gleefully taking credit for the corporate prosperity now, the previous political establishment’s identification with that disconnect was a theme that Trump played off of masterfully throughout the campaign and even in his closing argument campaign ad.

In theory, of course, profits and wages should be rising in closer harmony. The demand for labor relative to the supply is relatively high. But the structural forces that allowed companies to keep wages down as they recovered—the weakness of unions, the threat from offshoring and automation, the insecurity of millions of people traumatized by the financial crisis—are still with us, even as the economy enters its ninth year of expansion. I’d add another less appreciated factor. A kind of pathology has taken root among business owners. They’ve convinced themselves not only that they shouldn’t have to raise wages in order to attract, motivate, and reward workers, but that it would be detrimental to their business if they were to do so.

Given that the president views every relationship as a zero-sum game, it’s not likely companies will come under any short-term pressure to share a higher proportion of their profits with their employees. But that doesn’t mean executives should rest easy. If jobs stop roaring as profits continue to levitate, Trump may flip the script.