High Corporate Profits do not cause hiring. High demand causes hiring

Last quarter, corporate profits were at an all time record as a percentage of GDP.    Yet, we still have high unemployment.

This isn’t a mystery – it’s historical fact.

Keep the meme alive!

Businesses hire when they are swamped with demand, not when they have high profits.   

Business owners say they need more demand

The Wall Street Journal notices the reason why there is no hiring – there is no demand for more product.

“The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey.

“There is no demand,” said Paul Ashworth of Capital Economics. “Businesses aren’t confident enough, and the longer this goes on the harder it is to convince them that they should be.”

Holy smokes!  We need more demand.  There has actually been a slew of articles about this exact thing.  I guess the meme is catching on:

Businesses hire when they are swamped with demand, not when they have high profits.

Credit Card Swipe fee reductions to add significantly to U.S. economy

If you haven’t heard the news, credit card swipe fees are about to be reduced by the government.  I think these fees are close to being criminal, so any reduction in these fees is good news.

The amounts that will be added back into the economy by this reduction in fees will be rather large.   It will end up being noticable in GDP over the next 20 years.  In fact, we’ll get close to an extra year of growth in the next 20 years just by reducing these fees.

It’s a bold, but provable claim.

The current rate is about $.44 per transaction or $16bn a year in revenue.  Just using simple math, we can figure out how much more money will be injected into the economy by the reduction in fees.

The proposed fees are $.20 from the fed, but they might go down too. The debate isn’t over.  $.12 has also been floated.

At the top is a quick table.  It’s remarkable just how large this boost will be.

My first thought is the impact will be even greater due to where the savings will accrue.  It’s going to go to lower income consumers, and small retail business owners.

Lower income consumers do much of their shopping at Walmart and small retail establishments.

Walmart won’t have as much savings as most business, but their fees will be reduced. Walmart agressivly negotiates all of its contracts, and swipe fees will be part of this.  They are rather cutthroat about passing savings onto consumers, so there will be very slight, but meaningful in aggregate, reductions in costs for Walmart customers.

I don’t expect prices to go down much in smaller retail establishments.  But the owners of these small business just got a decent boost to their profits.  The owners of small retail establishments are not rich – they will increase their spending.  I’d say it’s reasonable to expect mulitpliers on the order of a payroll tax cut for these fees.

If the multiplier is 1.3, we’re going to see close to a .1% increase in GDP due to lower swipe fees.

Kevin Drum knows the simple truth about hiring

Kevin Drum:

“…but companies don’t expand and hire more people because their corporate treasuries are flush. They expand and hire more people when they think demand for their goods and services is strong.”

It’s really true.  Companies hire when they are swamped with demand, not when profits are high.

Then, he goes on to show that the corporate tax holiday for repatriated profits is a scam.  It’s a great post all around.

 

 

High Corporate Profits do not cause Businesses to Hire

Red is employment, Blue is Corporate Profits

I know, I am beating a dead horse here.  But us liberals need to get used to saying things more than once, and in more than one way.   I took the same old chart I’ve been using for a while.  It shows the growth in Corporate profits in Blue, and the growth in employment in Red.

In the 1990’s Corporate profits were growing well, but not great.  Employment was going gangbusters.  In the 2000’s, Corporate profits were incredible – but hiring was bad.

If we just compare the decades for the two different lines, it is quite clear.  The 2000’s had 5 straight years where corporate profits were higher than the best growth in the 1990’s.  The 1990’s had nearly 5 straight years where employment was growing as the best growth in the 2000’s.

I added some captions to the chart.  Feel free to pass it around so people understand this.  High corporate profits do not cause businesses to hire.

I do not know why anyone would claim that high corporate profits causes hiring more than high demand.

Businesses hire more people when they are swamped with demand, not when they have high profits.

Businesses hire more people when they are swamped with demand, not when they have high profits.

We just lived through the fastest rebound in corporate profits since the 1940’s.  Did your company hire?

Here is Bloomberg making an astounding observation:

“Earnings will climb an average 10 percent a year through 2013, more than three times quicker than the economy, after what has already been the fastest rebound since the late 1940s, JPMorgan Chase & Co. projects. ”

The fastest since the late 1940’s!   Where is the hiring now?

There is a weak relationship between corporate profits and hiring.   We’ve had high corporate profits for nearly 2 full years – but last month we added employed only 54,000 more people.  High Corporate profits do not cause businesses to hire!

Businesses hire more people when they are swamped with demand, not when they have high profits.

I made this unsupported statement about how high demand causes hiring, and not corporate profits.   But unsupported does not mean untrue.

Over at the Big Picture, Invictus does the work I did not.  He shows a comparison of retail sales and employed people.   Raising retail sales means greater demand.  Retail sales and hiring are strongly correlated.  The chart is quite clear about the relationship, but Invictus goes into nice detail about how this works.   The reason for this is because retail sales is a direct measure of demand.

The Bloomberg article makes a claim that simply is not supported by any evidence.  They claim in this article that high corporate profits are about to cause a hiring spree.  I don’t see this in the data at all.

If you read the entire Bloomberg article, you’ll see that there are almost no lines about actual hiring in the entire article.   There is plenty of talk about increased corporate profits. There is talk about “Gunpowder” to hire, or “growing businesses” due to high profits.   But there is not much talk about how that means actual hiring.

I am far more concerned about where and how actual hiring will take place.

Hiring tends to take place when companies have to turn away business to their competitors because they do not have the manpower to take that business.

Red is employment, Blue is Corporate Profits

Look at the late 1990’s in this chart of corporate profits against changes in employment.   The late 1990s did not have rapidly growing corporate profits, but the hiring was just incredible.  That’s because businesses were swamped with demand.

Businesses hire when they are swamped with business, not when they have high profits. High profits can be related to demand, but high demand is not necessary for high profits.

Focusing on making businesses more profitable will not end our slump.  Focusing on increasing demand will end our slump.

Businesses hire more people when they are swamped with demand, not when they have high profits.