Thursday, July 29, 2010

Robert Reich, Profits & Jobs

Leftist economist and former Clinton Labor Secretary Robert Reich notes "a great decoupling of corporate profits from jobs", by which he means that corporate profits have recovered faster than employment.

He argues that there are three explanations: 1) That much of the profits come from foreign subsidiaries 2) That some of the profits come from productivity improvements 3) That corporations finds that shareholders will benefit more from dividends & share buy backs (which is essentially the same as dividends, except in its technical form).

These explanations are actually more or less correct, though Reich's interpretation of them is misleading. That is particularly true with regard to the third point.

Reich interprets the fact that corporations haven't responded to higher profits by hiring more workers this way:

"Higher corporate profits no longer lead to higher employment. We’re witnessing a great decoupling of company profits from jobs.

The next supply-side economist who tells you companies need more incentive (i.e. lower taxes) before they’ll hire is living on another planet."

But corporations don't and have never based employment decisions on current profits (at least not beyond the basic profitability that enables the company to survive), but on the expected marginal profit generated by new workers.

The current relatively low level of investments and hiring of workers illustrates that businesses often don't expect new investments to generate new profits, which in turn in fact justifies (and certainly not refutes) the supply-side argument that incentives needs to be improved.