Henry Blodget | Jun. 25, 2012

 

 

 Last week, we pointed out one of the defining characteristics of our imbalanced economy:

• Corporate profit margins just hit a record-high
• Wages just hit a record-low

The juxtaposition of these two facts perfectly illustrates the fundamental problem with the U.S. economy.

What's the fundamental problem? The fundamental problem is that businesses are doing great, as exemplified by those record-high profit margins. But this corporate-and-owner prosperity is not flowing through to average Americans, as exemplified by the record-low wages.

This state of affairs, sadly, is completely unsustainable. Average Americans spend most of the money spent in this economy, and consumer spending accounts for 70% of the overall economy. So the higher profit margins go, and the lower wages go, the more top-heavy the economy becomes. And eventually, if this trend continues, the revenue-growth--and profit margins--of the companies will collapse. And that will be as bad for "the 1%" as it is for everyone else.

Henry Ford famously elected to pay his workers more than he needed to, with the goal of enabling them to buy the company's cars. This idea would be heresy in today's boardrooms, where the emphasis is on paying employees as little as you possibly can--and, thereby, driving every penny possible to the bottom line. Hopefully, soon, more companies will see the wisdom of Henry Ford's thinking and begin to share their unprecedented wealth with their employees.

In any event, some people persist in viewing today's record-high profit margins as a great thing.

They will perhaps be interested to know that Adam Smith, the progenitor and demi-god of free markets, actually thought precisely the opposite.

Check out this Smith quote from "Wealth of Nations," which was sent over by writer Moe Tkacik (follow her here):

"But the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin."

Got that?

The rate of profit is the highest in countries that are going to hell in a handbasket.

Today's record-high profit margins won't stay record-high forever. They'll correct themselves eventually, either because the US economy will just completely collapse...or, because, finally, corporations will realize that great companies do more than drop every penny possible to the bottom line.

Specifically, great companies create three kinds of value:

• Value for customers
• Value for employees
• Value for shareholders