Why are corporate profits so high compared to a generation ago?

From the Washington Post:

With executive pay, rich pull away from rest of America 

It was the 1970s, and the chief executive of a leading U.S. dairy company, Kenneth J. Douglas, lived the good life. He earned the equivalent of about $1 million today. He and his family moved from a three-bedroom home to a four-bedroom home, about a half-mile away, in River Forest, Ill., an upscale Chicago suburb. He joined a country club. The company gave him a Cadillac. The money was good enough, in fact, that he sometimes turned down raises. He said making too much was bad for morale. 

Forty years later, the trappings at the top of Dean Foods, as at most U.S. big companies, are more lavish. The current chief executive, Gregg L. Engles, averages 10 times as much in compensation as Douglas did, or about $10 million in a typical year. He owns a $6 million home in an elite suburb of Dallas and 64 acres near Vail, Colo., an area he frequently visits. He belongs to as many as four golf clubs at a time — two in Texas and two in Colorado. While Douglas’s office sat on the second floor of a milk distribution center, Engles’s stylish new headquarters occupies the top nine floors of a 41-story Dallas office tower. When Engles leaves town, he takes the company’s $10 million Challenger 604 jet, which is largely dedicated to his needs, both business and personal. ... 

Other recent research, moreover, indicates that executive compensation at the nation’s largest firms has roughly quadrupled in real terms since the 1970s, even as pay for 90 percent of America has stalled. 

This trend held at Dean Foods. Over the period from the ’70s until today, while pay for Dean Foods chief executives was rising 10 times over, wages for the unionized workers actually declined slightly. The hourly wage rate for the people who process, pasteurize and package the milk at the company’s dairies declined by 9 percent in real terms, according to union contract records. It is now about $23 an hour. ... 

While no company over this period of time — from the 1970s to today — can be considered completely typical, Dean Foods offers a better comparison than most because fundamentally it hasn’t changed. 

The dairy business is still the root of the company; it was on the Fortune 500 by the late ’70s and remains there today. It grew then and more recently through acquisition.
Moreover, both chief executives — Douglas and Engles — could boast records of growing the company and profits. 

From 1970 to 1979, while Douglas was the chief executive, sales at Dean Foods tripled and profits increased tenfold, to $9.8 million, according to company records. Similarly, from 2000 to 2009, sales at what would be Dean Foods had roughly doubled, and so had profits, to $228 million. (Engles became chief executive after the company he led bought Dean Foods in 2001 and adopted its name.)

I'm guessing from all this that the CEO's compensation as a % of corporate profits went up from about 3% in the 1970s to about 4% these days. So, there's no apparent economy of scale in CEO pay. 

That change from 3 to 4% is not insignificant, but the big change since the 1970s seems to me to be the huge growth in corporate profits. 

And that seems kind of odd. I paid a lot of attention to the business world from, say, 1979 into the early to mid 1990s, but the size of corporate profits these days seems hard to reconcile with economic theory.Adam Smith 101 says that more perfect competition will lead to lower profits.

You might think that regional monopolies and oligopolies that allowed higher profits than the risk adjusted cost of capital would have been worn down over the decades by increased competition caused by the huge improvements in shipping, communications, data processing, and globalization. But I don't see much evidence for that.

I'm not surprised that Apple has very high profit margins on innovative products, but why does, say, P&G do so well these days on toothpaste and detergent?

I mean, sure, we all know that corporate executives have been winning in the struggle with workers over pay. But why hasn't increased competition between corporations competed away the profits won away from employees?

My old articles are archived at iSteve.com -- Steve Sailer

Japan

For 20 years, you've always heard about how horrible Japan's economy is. In 2008 you heard over and over about how the worst thing that could happen to America is a Japanese-style Lost Decade. It always sounds like Godzilla, or maybe the B-29s, have come back. 

And yet, Japan doesn't actually seem to be a post-apocalyptic wasteland. A friend of mine who has lived in Japan since about 1980 said a couple of years ago that although he's always reading in the English-language press about how badly off Japan is, it doesn't see so bad when he steps outside. When he first arrived in Japan, the country was full of badly-dressed people and ugly buildings. Now it's full of well-dressed people and attractive buildings.

I guess I'm just obtuse. It finally dawned on me that the reason you hear about how horrible Japan is all the time is that it has been horrible for financiers since 1990. The Nikkei index is now only one-third what it was in 1990 at the end of a ridiculous real estate bubble in which the grounds of the Imperial Palace in Tokyo were theoretically worth more than all the real estate in California.

The New York Times runs a contrarian article about how you can make a lot of money investing in Japan because all investors hate Japan:

Japan’s government finances are on the verge of collapse, and its economy has floundered for two decades.  ...

“Japan is by far one of the cheapest markets in the world,“ said Charles de Vaulx of International Value Advisers, a New York-based investment firm. “It’s so universally hated, yet it might be one of the world’s best-performing markets over the next five years.” 

 Or, then, again, it might not. But the point is that all investors hate Japan.

“So many Japanese companies are well managed from an industrial standpoint,“ he said. 

Yeah, but who cares about that?

... An attraction for the bulls is the fire-sale prices. Although the benchmark Nikkei recently hit a nearly 10-month high, it is still more than two-thirds off its peak before Japan’s real estate and stock market bubble burst in 1990.

Shares in Tokyo are also about 20 percent off their levels before the financial crisis hit in 2008 — one of the few major markets that have yet to rebound. ...

Certainly Japan can still give investors reasons for doubt — like the long-term effects of the government’s high debt and aging population. There is also the paltry profitability of companies like Sony, which has averaged a 3 percent return on equity over the last five years while its Korean rival, Samsung Electronics, has surpassed 13 percent by the same measure....

More Japanese companies have also tried to counter investors’ longstanding complaints that companies here hoard too much cash, instead of investing it or returning it to shareholders. 

...Some activist investors, meanwhile, are trying to coax Japanese companies into creating more value for shareholders, rekindling an issue that ignited contentious battles between foreign investors and Japanese management in the mid-2000s.

``My old articles are archived at iSteve.com -- Steve Sailer

Cell Phoney Cost

There are many reasons why I'm not rich. Firstly, I give away all my great ideas for free. Secondly, I falsely think that all my ideas are great and wealth-worthy. [3rd to 78th reasons deleted] Anyway, here's my latest genius-y idea regarding cell phones:


Okay, here are some BASIC FACTS that you'll need:

1) Cell phones are a great idea.
2) Texting is a great idea.
3) Cell phone companies are either: colluding to screw you, or they don't want to truly win the cell phone war.
4) Talking costs them a lot, but isn't charged out as a lot.
5) Texting costs them a pittance, but is charged out at an obscene profit.


All cell phone companies basically have the same plan of charging what the sheep (mainly texters) will bear, while offering a combo of area coverage, data storage, phone calls, internet, and texting. It's not exactly an essential service, so charge whatever. What I'd like to see is a Bill Gates or a Richard Branson get involved. You know, someone who REALLY wants to win and will take risks and think outside the box to do it. "But Paul," you say, "they're gosh darn doing their best...they've cut staff, made more commercials with ambiguous graphics and animals, and made a cell phone an apparent necessity." True, but follow me to the next paragraph anyway...


Here's the deal: Back up in point 2, I said that texting is a great idea. It is - it's a quickie communication that can be non-invasive and efficient. It's mostly irrationally used though, and that's why you pay through the nose for it, but that's a different rant. A maximum of 160 bytes of data, delivered with low priority, should be the cheapest thing in the world of cell telephony. Indeed it is - about 0.3 cents/message - for the cell phone companies anyway.

[geek]
The message is actually piggybacked onto the info going down the lines that the cell towers need to communicate with each other - that's why it's a max of 160 characters. Clever, and virtually free.
[/geek]

That's in the vicinity of a 6000% profit margin!!! That's cool. Attaboy/attagirl, Go Go Gadget Profit, etc. But what if you're a company and want to WIN the cell phone wars - or at least deal a body-blow, grab a huge chunk of market share, get famous/infamous, and force everyone to follow your lead? Then follow my plan:

i) Offer a price that starts off on the higher end.
ii) Force people to buy their phones through you.
iii) Offer DISCOUNTS FOR TEXTING!!!
iv) Advertise/market your plan with things like:
- "Those other guys are screwing you big time - here's how." I'll let you picture how to integrate your cell phone marketing animals into the screwing-you portion. You sicko.
- Use meaningless, jingoistic, emotional phrases like: "Right To Text", "Freedom To Text", "Liberty Texting", etc.
- Use those TV commercial cheque-cashing bimbos and himbos to introduce idiotic phrases ("It's like 3 bucks on a hun") into the cell phone lexicon. You know, something like: "They're PAYING ME to text my friends!" or "Texting bought me this beer!"
- Offer to have a portion of your Text Savings go to charity.


Here's why this would work:

- People would FEEL like they're smarter, dealing with your honest product.
- People WOULD be smarter, saving money by dealing with your honest product.
- You'd appeal to peoples' IRRATIONAL behaviour.
- You'd appeal to peoples' RATIONAL behaviour.
- You'd appeal to peoples' GIVING nature.
- Money would go to CHARITY.
- People would text more, thus wearing out the phones that you fix/repair for them at a cost - making you more MONEY.
- Your COSTS would go down, as people would use expensive-to-deliver talking less, and cheap-to-deliver texting more.


All I ask from you, the budding or established cell phone company, is that you offer me one or more of the following:

- CASH.
- An ongoing PERCENTAGE of your [new profit - old profit].
- A one-time or ongoing influx of money into a CHARITY of my/your/our choosing.
- Just a touch of CREDIT somewhere...even on Wikipedia.
- An honorary DOCTORATE in Business Communications.
- A KNIGHTHOOD or lordship.


Now I'll leave it up to you Mr/Mrs Rogers, Telus, Virgin, Koodo, etc.


Thank you,

Lord Sir Paul of Edmonton, PhD
Naive Business Guy