A vocal contingent of scholars, advocates, and elected officials has raised alarms about the economy becoming too concentrated at the expense of competition, innovation, prices, and wages. Their arguments hinge on the idea that corporate profits have been rising. But a new report released today by the Information Technology and Innovation Foundation (ITIF), the world’s leading think tank for science and technology policy, finds that corporate profits actually are now lower than they were in the 1960s.
“Profits are difficult to calculate accurately, especially as a measure of market power. Some studies do show a rise in profits over the last few decades, but they rely on simplifying assumptions that limit their policy relevance,” says Joe Kennedy, senior fellow at ITIF, who authored the report. “As a percentage of GDP, profits are actually lower now than they were 60 years ago—a period of strict antitrust enforcement—and they have been decreasing for the last five years.”
The report shows that the modest increase in profits seen in the last two decades has mainly come from U.S. firms’ foreign profits—not a U.S. antitrust issue—and from the financial services industry. Meanwhile, domestic profits from nonfinancial companies have been trending downward since the 1950s, which undermines alarmists’ claims.
“You might think the easy way to resolve this issue would be to look at profit data by itself. But that distorts the picture,” adds Kennedy. “For many pundits and advocates, there is no question that corporate profits have risen substantially. But when you control for factors such as the change in industry composition in the overall economy and consider profits as a share of this big pie, the long-term trend has been in decline.”