Number 523 January 23, 2013

This Week: Profit is Beautiful?

"Quote" of the Week: "A Longstanding Pattern of Poorer Health"
Profit is Beautiful, or So We're (Indirectly) Told
"Profits Soar." Workers Sore.

To read this issue of Nygaard Notes in PDF format, click here.


I'm back from vacation, and this issue features a couple of pieces on profit. In one, I take apart an article from the New York Times, which caught my attention when the economics reporter stated that "Profit is one of the most potent incentives known to man." That's not the only weird thing he said. In the other piece I highlight a little-noticed news item that talks about the phenomenal increase in corporate profits under Obama. The "anti-business" President? I don't think so.

The "Quote" of the Week is a little preview of a piece I'm planning about the media's role in teaching us what is scary and what is not. As always, most of the important stuff is hidden between the lines. We'll have a look in the next week or two in the pages of Nygaard Notes.

See you then!



I'm starting a new billing system this month for paper subscriptions. As you know, I've always calculated the cost of a subscription simply by adding up the cost of
printing and mailing and dividing it by the number of issues you receive. However, now that I seem to be publishing so many more double issues, which cost more
than "regular" issues, my system is not working so well. So, from now on, I will be calculating the actual cost of each issue, and subtracting it from your balance.
Then I'll notify you when your subscription is about to expire. I hope this makes sense.
I've explained this on the website, too, under "Subscribe/Support."


"Quote" of the Year: "A Longstanding Pattern of Poorer Health"

On January 9th a major study on health in the United States was released. Sponsored by the National Institutes of Health (NIH) and U.S. Department of Health and Human Services, the report was entitled "U.S. Health in International Perspective: Shorter Lives, Poorer Health."

A brief put out by the NIH upon the release began by saying, "The United States is among the wealthiest nations in the world, but it is far from the healthiest. Although Americans' life expectancy and health have improved over the past century, these gains have lagged behind those in other high-income countries. This health disadvantage prevails even though the United States spends far more per person on health care than any other nation."

The NIH convened a panel of experts to study the issue, and in the section of the report summary called "Possible Explanations for the U.S. Health Disadvantage" we find this week's "Quote" of the Week:

"The panel's search for potential explanations revealed that important antecedents of good health. . . are also frequently problematic in the United States. For example, the U.S. health system is highly fragmented, with limited public health and primary care resources and a large uninsured population. Compared with people in other countries, Americans are more likely to find care inaccessible or unaffordable and to report lapses in the quality and safety of care outside of hospitals."


Profit is Beautiful, or So We're (Indirectly) Told

Eduardo Porter is an economics columnist at the New York Times, specializing in "business, regulation, trade and international economic relations." He's been at the Times for quite a while, and sat on the editorial board of that agenda-setting newspaper from 2007 until last year.

On January 16th Mr. Porter decided to write about the privatization of public services, using the example of British Petroleum. British Petroleum, now called BP, was largely state-owned until the 1980s, when the conservative Thatcher government sold off the British government's shares. Porter's opinion on that process is made clear in his opening paragraph: "Few corporate sagas capture the virtues and vices of state-owned companies and private enterprise better than the drama of BP's roller-coaster ride between failure and success."

"Success" equals profits, as is made clear in the second paragraph, where we are told that BP is considered by "the energy world" to be "the unprofitable duckling" which had been "transformed by privatization under the government of Margaret Thatcher into a highly profitable swan." The Danish folk tale being referenced here is the story of the "ugly duckling" growing into the beautiful swan. In Porter's version, we substitute "unprofitable" for "ugly," and "profitable" for "beautiful." Get it?

This isn't necessarily Porter's opinion, but that of "the energy world." The question that Porter is addressing, he says, is "What does the private sector do better than government, and what does it do worse?" But the underlying idea that profit is inherently good colors the article, as we can see in this paragraph:

"While in government hands, British Petroleum paid too little attention to profitability, constrained by its need to please elected officials who often cared more about keeping energy cheap and employment high. But in private hands, it may have cared about profits far too much, at the expense of other objectives. 'BP veered from being a company that made sure nothing blew up to one focusing on cost-cutting at all costs,' Professor Fisman said." [That's Ray Fisman, a professor at Columbia Business School whose book about organizational culture Porter cites in his column.]

That's a pretty bizarre paragraph, so let's take it apart a little bit.

Profits, or Jobs? Hmmm....

The first point of this paragraph highlights a conflict between "profitability" on the one hand and, on the other, affordable ("cheap") energy and jobs. Really, now. Other than the people taking in the profits, is there anyone who would not choose cheap energy and high employment over profitability? That is, if you could have a state-owned company that breaks even while providing good jobs and boosting the overall economy by keeping energy prices low, wouldn't you come down in favor of that? We are told that choices made by the company will have to please either "elected officials" or "private hands." The "private hands," of course, are not elected, but are simply the hands with money in them.

(Speaking of the hands with money in them, Porter doesn't mention who receives the beautiful profits when public functions are privatized. It may surprise you to learn that only about one-half of U.S. households own any stock at all—and that's including retirement accounts and other managed assets. When we break it down by income, another issue emerges: While 91 percent of households in the top 10 percent in terms of income—$109,000/year or more—hold stocks, fewer than 15 percent of households in the bottom fifth hold any stock at all. And the average value of the stock held by the top 10 percent is more than 30 times the value of that held by the few lower-income households who have any. So we can see that any profits from privatization tend to go to the wealthier sectors of society. By the way, the people who could do something about this—members of the U.S. Congress—are all in the top ten percent of income earners, with salaries of $174,000 per year. Many are far wealthier than that, but we don't know their total incomes since most of them refuse to reveal those numbers.

A second point made in this paragraph is that there is a tradeoff between higher profits and "things blowing up." Isn't this another no-brainer? It's not hypothetical, actually, as BP has been associated with 8,000 spills, besides the 2010 Gulf disaster, since 1990. (Use your search engine to find out about BP accidents in Texas City—15 killed—and Prudhoe Bay, Alaska.) I wasn't able to find statistics for BP accidents for the years before it was privatized.

Profit: The Primary Incentive?

Later on in the article Porter mentions "the debate over the competence of public and private organizations" where we find "a significant difference in how they meet their goals." Then he says that "Profit is one of the most potent incentives known to man—a powerful tool to align managers' interests with corporate goals. But it also has drawbacks. With earnings as the overriding, nonnegotiable priority, private enterprise often has little wiggle room to handle the tension between conflicting objectives."

That's another bizarre statement. Profit, he says, is an "incentive" to align something with "corporate goals." But in any company with publicly-traded stock, it's true that "earnings" (the corporate term for "profit") are the "overriding, nonnegotiable priority." That is, profit is and must be the "goal." So, what Porter is saying here is that "profit" is the "incentive" to align managers' "interests" with the "goal" of . . . profit!

"Powerful incentives" other than profit do exist—compassion, honor, empathy, ethics, altruism, solidarity come to mind. Untold numbers of people have already organized themselves into cooperatives, transition communities, worker-owned businesses, and many other economic entities that reject profit as the main organizing principle. So the real "tension" in this equation is the tension between human values like these and the self-serving profit-seeking that is assumed in conventional economics to be the motor that drives us all. (That is, "one of the most potent incentives known to man.")

Porter insists that "There are instances in which privatization can help achieve broad social goals," but the only success story he cites is the case of Argentina, which "privatized many of its municipal water supply systems in the 1990s," after which, says Porter, "investment soared, the network expanded into previously underserved poor areas and the number of children dying of infectious and parasitic diseases tumbled." For another opinion on this "success" I recommend a look at a Canadian television program from 2004 called "Argentina: A Grand Experiment in Water Privatization That Failed."

Let's return to the question that Porter is considering: "What does the private sector do better than government, and what does it do worse?" This question, he says, "has acquired new urgency as governments from Washington to statehouses and city halls around the country consider privatizing everything from Medicare to the management of state parks as a possible solution to their budget woes."

When Porter says that profit is the "overriding, nonnegotiable priority" of private companies, he's right. A company that fails to please its stockholders by making sufficient profits will cease to exist, regardless of any good intentions on the part of its managers or workers. A company, or organization, that is controlled by the public, on the other hand, can be set up to rely on other incentives, like the ones I mentioned above: compassion, honor, empathy, ethics, altruism, solidarity. Scientists doing research on life-saving drugs don't need profit to motivate them, after all; they simply want to be allowed to make their contribution to public health. Transit workers don't need profit to motivate them; they want to be a part of an efficient, friendly service network. And so it goes: Actors want to act, autoworkers want to make cars, teachers want to teach. All of us want to do meaningful work, and will gladly do it in exchange for some security and enough income to raise our kids and take care of ourselves.

Great damage is done in articles like this, in which media tacitly accepts—and thus reinforces—the mainstream economic principle that people are motivated by narrow self-interest ("profit") above all else. Selfishness and greed are, no doubt, "potent incentives," but they're not the only ones. We're better than that, and our media should strive to remind us that we are.


"Profits Soar." Workers Sore.

Buried on the inside pages of the January 20th Star Tribune was an important article headlined "Executives Attack Obama's Policies While Profits Soar." Given the degree to which this story, by the business wire service Bloomberg News, counters the widely-held idea that Obama is somehow hostile to big business, this piece deserved front-page treatment.

For example, the third paragraph tells us that "U.S. corporations' after-tax profits have grown by 171 percent under Obama, more than under any president since World War II, and are now at their highest level relative to the size of the economy since the government began keeping records in 1947, according to data compiled by Bloomberg."

Surprised? There's more. "Business leaders," says Bloomberg, "cite low labor costs in an era of high unemployment" as the first reason for "the profit boom."

Sure enough, those "low labor costs" translate to falling household income. According to the Washington Post, household income fell 4.8 percent from 2009 to 2012, a drop of almost 5 percent. In other words: Corporations: Richer. People: Poorer.

"Profits Rose in Tandem with the Jobless Rate"

The relationship of high unemployment to profits is well-established, and the dynamic of an economy that consistently shifts wealth from the workers to the owners has been going on for decades in this country. This story explains the dynamic fairly clearly, even if the explanation is buried at the end of the article:

"In recent years, high unemployment kept labor costs in check while output surpassed pre-crisis levels. Employee compensation rose 7 percent from the end of 2008 through the third quarter of last year. That was less than half the increase registered in either of President George W. Bush's terms. Workers' compensation is claiming a 54 percent share of the economy, down from 59 percent as recently as 2001 and the lowest mark since March 1955. Through 2011, profits rose in tandem with the jobless rate. Over the past year, as the unemployment rate fell, earnings continued to climb, a trend that may be losing steam."

The above paragraph was edited out of the Star Tribune version of the article, so even people who read deep into the Business Pages were spared this insight.

The article hints at the double-whammy being experienced by workers. The first hit involves the shrinking of workers' paychecks as a result of high unemployment. Desperate, non-union workers, after all, can be and are forced to work for lower wages. The second blow being struck in favor of inequality is the result of the fact that the benefits of soaring profits accrue, obviously, only to those who hold stocks. And, as I pointed out in the previous article, those stocks are held overwhelmingly by the wealthy, not by you and me. It's worth noting, in addition, that the taxes on these stock dividends are significantly lower than the income taxes paid on most wages. It's a Win/Win/Win for the One Percent!

Inequality is not just a "business" matter; it's an urgent moral issue. That's why stories like this one should be on the front page of our newspapers, not at the bottom of an inside page in the Business Section.