Jobless Profitability

While unemployment remains stuck near 10%, corporate profits are spiking to record levels.  Why?

For anti-corporate partisans, it’s a pretty easy explanation — corporations are evil, inhumane profit machines.  Trouble is that this explanation doesn’t make sense.  Even if we grant the emotional premise — that corporations are bad because they don’t care about anything but profits — it doesn’t explain why the corporations wouldn’t be hiring if they could make even more money by doing so.  The anti-corporation emotional explanation torpedoes itself with its own premise.

So the real question is why corporations don’t believe that increased hiring would lead to increased profits.  Put another way, why do they believe that they can increase profits better without hiring new employees?

One explanation is improvements in the productivity of individual employees.  But this explanation is hard to give much credence because productivity has been a driving force in corporate management for years.  To the extent that they are able to force employees to be more productive with office policies or to assist them with information management tools, they’ve already gone to that well throughout the 1990s and 2000s.  There is no obvious reason that it would suddenly spike now.

Some productivity increase could be the result of employees simply working harder and more diligently out of fear of being laid off.  That would cause the correlation between persistent unemployment and increased productivity make more sense.  But even that doesn’t explain the amount and persistence of increased corporate profits.  Most importantly, it could not explain the lack of hiring, since new employees would be influenced by the same desire to stay employed, perhaps even more so.

The favorite explanation among economists of a liberal bent (albeit those who resist the hyperbolic emotionalism of anti-corporation activists) is lack of demand.  They say corporations aren’t hiring because they aren’t seeing consumer demand that will make it worthwhile.  But if the lack of demand theory was true, the high profits wouldn’t be there either.  Instead, everything would be stagnant.

No, the only possible explanation for the increases in profits and the unwillingness to hire is this: Corporations believe that new employees will cost more than they will produce. And the only apparent reason for that belief is that the cost of employee pay and benefits will be more than the incremental increase in profits that would result, even given increases in employee productivity.

The implications for government policy are striking.  The government needs to stop making employees cost more.  That means reducing the load on businesses of the number one per-employee cost for business: Health care.

In short, repeal the portions of health care reform that are poised to cost businesses hundreds of billions over the next decade.

And do it now.

Some of the elements of health care reform are fine.  Prohibitions on rescission are fine.  Some limitations on denials due to pre-existing conditions are certainly justifiable.  These are all areas where Republicans would have been willing to go along.  But the attempt to create an entirely new health care system overseen in detail by government managers driven in part by anti-business animus caused the health care reform bill to balloon to thousands of pages of expensive new mandates.  And now we’re paying the piper.