Tuesday, July 3, 2012

Fortune 500 Companies Are Doing Fine

This part of the private sector is doing just fine.

A few weeks ago the media and the Romney campaign jumped all over President Obama's remark that the "private sector is doing fine." He was making a general point that it was doing fine compared to the public sector, which has been shedding hundreds of thousands of jobs since the economic crisis started in 2008.

Perhaps people didn't see this story in the Huffington Post that the Fortune 500 Companies are in fact doing a lot better than fine. In fact they've never been finer.
Fortune released its annual list of the country's 500 biggest companies this week, and it turns out to have been a good year for corporate America. In 2011, the Fortune 500 generated a combined $824.5 billion in earnings -- an all-time record, and a 16 percent jump from the previous year.

The report echos others indicating corporate America is experiencing boom times. U.S. corporate profits returned to pre-recession levels, according to the International Institute for Labour Studies released Friday, hitting 15 percent of gross domestic product.


But much like the too-big-to-fail banks -- whose assets now exceed half the size of the U.S. economy, and which have made more profits since the financial crisis than they did in the eight years prior -- corporations don't seem bothered by the bleak weather on Main Street. They just keep growing.
Here is the entire chart.

One company that caught my eye was Verizon Communications at #15 on the list, who made $2.4B in profit last year (that's profit, not revenue). And then I thought of another story I had read recently by Matt Yglesias at Slate. Yglesias makes the argument that the state of poor quality broadband access is really due to the customers not willing to pay more money for faster speeds. Here's Yglesias' main point:
....But in this particular case, we're not really talking about innovation at all. What's galling—to those of us who are galled by it—about America's broadband infrastructure is that we don't need more innovation. The relevant technology has been invented. What we need are more holes in the ground so that we can fill them with fiber optic cables. This is an expensive proposition, and the basic problem here is that when Verizon dipped its toes into making the investment it turned out that customers didn't want to pay for it. People who write about tech policy on the internet for a living place an unusually high subject value on high-speed internet access, so the resulting situation is frustrating for us. But the problem is really with the customers rather than the companies. There simply aren't enough people who want to pay a premium price for premium service.
When I first read Yglesias' post, I didn't totally buy it. But after thinking about it, Verizon just made $2.4B in profit during a poor economic year for the country overall. So they had a great year. And FiOS implementation is clearly one of the best sources of growth for their business during this time. So with that kind of money available to invest in further roll-outs. it seems much more plausible that the reason Verizon halted this is because not enough customers were willing to pay the higher price.

A few possible solutions proposed by Yglesias [bold mine]:
One way to change that would be to broadly increase household income. This is the kind of situation in which economic inequality spurs technological stagnation. A household earning 20 times the national average income isn't going to buy 20 broadband connections. But if the median household were richer, it might be more willing to pay up for better internet service.
Incentivizing broadband internet investment seems more sensible than incentivizing large houses, and if we want to make that policy choice, there are any number of ways to make that happen either through direct subsidies or through regulations designed to create cross-subsidy.
Expanding access to broadband and wireless connectivity is a real key to growing the economy in the future. The more people who are able to use the fastest possible internet speed will spur other internet-related innovation. Think about what a 56K modem connection limited you to on the Internet 15 years ago compared to what you can do with a fiber-optic cable connection now. iTunes, You Tube, and untold other products or sites wouldn't have been possible without large numbers of people able to connect to the internet at higher speeds.

And this scenario where big corporations have record profits that they aren't using to grow their business is the fundamental macro-economic problem of our time. Businesses didn't stop hiring because of the Confidence Fairy, the Uncertainty Fairy, new regulations, or fear of increased taxes. They aren't expanding or hiring because consumer demand is low and therefore it makes no sense to expand your business and hire more people until consumer demand returns to normal levels. It seems anything short of another round of stimulus spending by the government or some type of changes to the corporate tax code to spur hiring and spending by big corporations and/or a deterrent to sitting on record profits (e.g. a windfall profits tax) will not change this stagnation. And it's hard to understand how cutting corporate taxes even more (the GOP plan) will create more hiring and growth, given these profits.

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