Everybody's Dividend

Speaking to a group of Polish Americans, President Johnson noted last week that some Communist countries are beginning to appreciate the value of the main motive force of the capitalist economy: profits. "In Eastern Europe," said he, "profits are coming to be understood as a better measure of productivity." Almost as the President was speaking, his top economist, Gardner Ackley, was publicly faulting U.S. corporate profits. Indeed, much of the current nervousness in the stock market and most of the worry among businessmen stem from fear that whatever the Administration does to fight inflation--through taxes, credit policy or controls --will somehow be aimed mainly at business profits.

Ackley's prime point was that, in the five years of the U.S. prosperity explosion, profits have climbed twice as fast as the gross national product, personal income or wages, and they should not continue to do so. Such a profitable performance, said Ackley, means that "either prices have been raised more than costs, or prices have not been reduced where costs have fallen." And so, if businessmen continue to raise prices to increase their profit margins, then labor will make far more extravagant demands--and inflation will take off unfettered.

Stocks & Pensions. What is often overlooked in such a discussion is that the welfare of workers, shareholders, pensioners--indeed the entire economy --depends very directly upon corporate profits. When profits rise, companies are much more generous in raising salaries and wages. Equally important, profits are what make the stock market move; the price of a company's stock is determined essentially by its profits and prospects for earnings growth. Almost one-quarter of the nation's families now own stock; in addition, one-half of all Americans have indirect holdings in stock through pension and profit-sharing funds and variable-annuity insurance policies. The value of private U.S. pension funds alone climbed from $12 billion in 1950 to $77 billion in 1964, thanks in large part to rising profits and stock prices.

The fact that practically half of corporate profits goes to the Government --the current tax rate is 48%--led John Kennedy to remark that, "If American business does not cash a fair profit, this Government cannot earn sufficient revenues to cover its outlays." Almost all of the rest goes to the owners of American business--millions of ordinary Americans, who last year collected $18.9 billion in dividends--or is plowed back by business for expansion, modernization, automation and research. Business must be profitable in order to attract investors to put up still more risk capital. Such high-profit industries as electronics and office equipment find it much easier to get capital than such low-profit industries as textiles and steel. Says Shell Oil President Richard McCurdy: "We have to earn profit to generate money. It is the first thing that investors look at." The result is the economy's cycle: profits create investments, which in turn create jobs, which in turn create wages and consumer demand, which in turn create more profits. As the late Supreme Court Justice Louis D. Brandeis observed, profits are not only the proof, but also the essential condition of success.

Risk & Inventiveness. How much profit is enough--or too much? It depends on the amount of risk and inventiveness involved in different industries. A profit of 6% on invested capital would surely be reasonable for a stable, secure business like a public utility; a drug, chemical or other company that needs a big bundle for research might require 12% ; and a company selling an iffy, transitory product like skateboards might warrant 20% or more.

Almost everyone agrees that statistics about this year's high corporate profit can be misinterpreted. Increases result not only from stronger demand and higher prices, but also from creativeness. "Some of the best gains," reports Manhattan's First National City Bank, "were scored by innovators marketing such relatively new products as color TV, advanced types of still and movie cameras, office copying machines, studded snow tires and jet airliners."

It is a fact that profits have soared. Despite increased social security taxes, profits in 1966's first quarter were 12% higher than a year ago. The margins of profit have also climbed. By the best measure, return on invested capital, earnings after taxes in manufacturing have risen from 10.1% in 1961 to 13.8% in 1965. Even so, the margin is still far below the postwar peak of 19% in 1948, and below the 15% that investors aim for in order to recapture their capital in seven years.

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