Economic Modeling in the Post Great Recession Era

CHAPTER 6 Corporate Profits Reward, Incentive, and That Standard of Living

For the engine that drives enterprise is not thrift, but profit.

—John Maynard Keynes

INTRODUCTION: PROFITS AS ESSENTIAL PARTNER

By autumn, something appeared amiss. While the equity markets soared, there was talk of rising interest rates and questions about the viability, as well as the momentum, of corporate profits going forward. There was an increased willingness to overlook traditional metrics and certainly the existence of a credit/profit cycle. But, of course, that was 1999 and investors had learned their lesson. Or had they?¹

Our perspective is that there is a critical role of profits in economic growth in any economy and there is also a clear cycle in corporate profits within each economic recovery and over the long run. When those principles of cyclical variation are ignored, trouble usually follows. Now under way is our review of the historical patterns of profits over the business cycle.² In this chapter, we examine the role of profits in our society and the many links profits have throughout our economy, including providing future income for retirees or other investors. To anticipate, there is a clear pattern of profits over the business cycle, and, contrary to many critics, profits are an essential partner in the success of the overall economy.

Profits are frequently disparaged in our society. However, profits, in many forms, drive a large part of economic activity. We often find that ...