As the Presidential Race starts to build steam I keep hearing the debate concerning living conditions of the poor and excess profits of corporations. Many people discuss these two topics as if they are diametrically opposing points of view (much like creationism and evolution, another posted for another day). They are not. They are intertwined in a concept called capitalism.
Profit is not a tangible object that can be obtained and sat on a shelf. Profit is fundamentally a unit of measure used to evaluate the success of a business campaign. It’s like a river constantly moving down stream. At any given moment the volume is unique to that moment. For Tax purposes the IRS has selected December 31 of each year as the benchmark date. It uses the measurement of profit since the previous January first to determine taxes. But by the time a corporation actually pays their tax, the profit measurement has changed. Storing up profit is nothing more than a form of savings. Within a corporation the means of “storing” Profit is complex. There are obvious things like treasure notes and certificates of deposit, but there are less obvious vehicles like capital investment, stock buybacks and even increased employment. The point is that the value of Profit is in its spending, not its ownership. Excessive profit like excessive savings only deprives the owner of its value. Profits have to be invested to have value.
Most people can see that some level of Profit is required to stay in business. What challenges them is “excessive profit”. I don’t know exactly how to define “excessive profit” except to say it is the amount of profit perceived to be more than a person is comfortable seeing in a corporation. It’s clearly subjective. Today many people believe that Oil Companies are making an excessive profit. This excess profit is made up of both the high level of profits reported to the IRS and the rising cost of gasoline. Most of the arguments, that I have heard, center on the concept of the oil companies sharing their profit by lowering the price of gasoline. But in Capitalism that is accomplished through supply and demand. One of the reasons that the Oil Companies have produced large profits is because the buying public has not changed it oil consumption habits even in light of large price increases in gasoline. Demand continues to grow in spite of price increases.
So here’s the really complicated part for most people. Using BP as an example: Their Profit in 2006 was $22.0B and in 2005 it was $22.3B. Revenue was $270B and $243B respectively. Average Retail price of gas (adjusted for inflation) was $3.00 per gal in 2006 and $2.35 in 2005, that’s a 27% increase. BP also spent $16.9B in capital expenditures, $15.5B in dividends to the stockholders and $3.5B in stock repurchases. So you think that this just reinforces the rich getting richer and poor getting nothing. The companies that make the capital equipment that BP bought received $16B in new sales, thus hiring more people. If the investors were banks, they had more dividend money to reinvest. If they were consumers they bought things, both providing more employment. And by the way more tax dollars to be redistributed. If BP just reduced the cost of gas at the gas pump, capital equipment sales would go down, dividends and their reinvestment would go down and taxes would decrease. Lower skilled jobs would be lost in both the private and public sectors. Some of the lower economic workers would get cheaper transportation and heating cost, but others would lose their jobs. Each dollar reinvested provides a multiplier effect in the market. That means $16B can become $112B in increased opportunity
The best long-term program for helping the poor is to provide opportunity. Opportunity comes from corporate investment in the future. The sources of those funds are profits. Only the government can print money and when they do we generally get inflation as a by-product.
The worst crime against working people is a company, which fails to operate at a profit. - Samuel Gompers,
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