In Praise of Profits – The Moving Defense of Capitalism by Ed Yardeni


“If you repeat a lie often enough, it becomes the truth” according to the saying widely, but wrongly, attributed to Joseph Goebbels.

It seems to be the basis of the widespread acceptance of many economic wisdoms that do not stand up to analysis.

For example, in the Sunday Times, barely a bastion of “progressive” views, Matthew Syed recently wrote that “in the past 40 years the median wage in America has not increased by a cent, once inflation taken into account ”.

This is repeated by commentators on the left and on the right of the political spectrum, but there is just one problem: it is not true. And this is just one of the many claims that Ed Yardeni refutes in his latest book, Praise for profits.

Income inequality is exaggerated – and that’s not necessarily a bad thing

In his new book, Ed Yardeni explains that this claim, that the median wage in America has not increased in decades, is based on an “extremely flawed August 2018 study from Pew Research,” later amplified by l President Biden’s bizarre claim that wages are the lowest in 70 years.

In fact, using the more reliable personal consumption expenditure deflator (PCE), a measure of inflation based on changes in personal consumption, rather than the consumer price index, real average hourly earnings have been achieved. increased at a solid average annual rate of 1.5% since 1995.

Median real household income, “a big favorite of economic pessimists and political progressives,” increased 9.2% between 2016 and 2019. Deflated by the CPI, the measure was up 24.4% since 1995 ; and by the PCE, up 36%.

Additionally, the data excludes Medicare, Medicaid, food stamps and other non-cash government benefits and does not take into account decreasing household size or increasing labor force participation. Finally, the Median Household Income Survey is based on census data rather than hard data such as salary statistics and income tax returns.

Syed’s claim that “the richest 1% of the population has increased their wealth faster than at any time since the founding of the republic” is more solid, but raises the question of why this matters . “Income inequality is an inherent consequence of capitalism,” Yardeni writes, “and capitalism causes the most income inequality during times of prosperity. The rich get richer, but almost everyone’s standard of living improves during good times.

As wealth accumulates, increasing life expectancy increases inequality. “Most of the Forbes 400 tend to be older Americans.” As Mr. Spock put it in Star Trek: “Live long and prosper”.

Wealth inequality, Yardeni agrees, has worsened slightly in recent years. But “restricting the ability of the rich to seize opportunities would affect the well-being of all of us.” Economic inequality was compounded by the Federal Reserve, as the central bank’s “ultra-simple monetary policies in response to the pandemic sent the stock market to an all-time high and boosted CEO incomes with pay heavily skewed toward compensation in shares ”.

Meanwhile, many households that depend on fixed interest rate yields saw their incomes plummet, and the real value of bank deposits began to decline as inflation rose. It is not entrepreneurial capitalism, but its antithesis, crony capitalism.

Social mobility is more widespread than you think

Most analyzes of the distribution of income and wealth over time ignore mobility or assume that it does not exist. In fact, some of the rich get richer, others get poorer while other poor get richer.

Some American oligarchs are middle class, others humble, but few are born with a silver spoon in their mouth. “Overall,” says Yardeni, “the data strongly suggests that mobility is on the rise.”

Yardeni rejects the idea that high profits are the result of low wages and warns that government attempts to raise wages could backfire. “The goal of any president should be to raise the standard of living of workers, but nominal wages can only rise faster than prices if productivity increases.”

The Economic Policy Institute began to claim in the 1990s that wages had decoupled from prices, but Yardeni exposes serious flaws in his analysis. Productivity, he shows, moves in decade-long cycles, but, after slowing from an annual rate of 4% in 2003 to 0.6% in 2015, it has since picked up.

The myth of low productivity is at the root of the diatribes against share buybacks, which are supposed to reward investors at the expense of productivity-enhancing investments. Yardeni shows that $ 5 billion in buybacks between 2011 and 2019 only improved earnings per share by 1%. The remainder offset the issuance of shares as compensation not only for senior executives, but also for other employees. This incentive may have helped increase productivity.

In his preface, Yardeni quotes economist David Ricardo; “Nothing contributes so much to the prosperity and happiness of a country as high profits” and also Winston Churchill; “It is a socialist idea that making a profit is a vice. I consider that the real vice is to make losses ”. He omitted the invaluable quote from Karl Marx’s wife Jenny: “I wish Karl spent a little less time talking about capital and a little more time accumulating it.”

Yardeni’s short and very readable book, supplemented by tables and charts as evidence, is a powerful but well-argued antidote to much of progressive thought. Progressives have major achievements under their belt in social protection and taxation, he says, and legitimate concerns about the corruption of crony capitalism – but “mission accomplished” is not and never will be part of their lexicon. .


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