Profits up, Deficits Up, Economy Down

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when will sense prevail?

Buttonwood’s column in The Economist of 31 March 2012 points out that profit margins of companies in America are now higher than at any time in the past 65 years. Corporate investment as a percentage of GDP is at a 30 year low! This, Buttonwood quips, is ‘good for the corporate sector’ but ‘bad for workers and savers’. This stunning fact – which of course does not make headlines during recession times because it is so embarassing (and also somewhat unbelievable for the average citizen) – is only possible because corporates are employing fewer people, investing more in mergers and acquisitions and benefitting from huge government deficits. In other words, they get richer without adding value and feed off what is causing the misery of billions. But to make matters worse, corproates say they are underinvesting because of the high level of uncertainty. But by not investing to just to look good in the quarterly reports means the long-term future is being sacrificed for short-term gain. So while the G20 tinkers and economists philosophize about the ‘animal spirits’ that are needed to revive the economy, the rules incentivize the worst possible habits and routines. Surely there must be an alternative to this mess.

Mark Swilling, 15 April 2012