In praise of profits – Ed Yardeni’s stirring defence of capitalism

“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 for the widespread acceptance of many economic wisdoms which do not stand up to analysis.

For example, in The Sunday Times, hardly a bastion of “progressive” opinions, Matthew Syed recently wrote that “over the past 40 years, the median wage in America hasn’t risen a cent, once inflation is taken into account”.

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This is repeated by commentators on both the left and right of the political spectrum, but there’s just one problem: it isn’t true. And it’s just one of a number of claims that Ed Yardeni refutes in his latest book, In Praise of Profits.

Income inequality is over-exaggerated – and it’s not necessarily a bad thing

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

In fact, using the more reliable Personal Consumption Expenditure (PCE) Deflator, a measure of inflation based on changes in personal consumption, rather than the Consumer Price Index, real average hourly earnings have been increasing at a solid average annual rate of 1.5% since 1995.

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

Moreover, the data excludes Medicare, Medicaid, food stamps and other non-cash government benefits and takes no account of the falling size of households or rising participation in the workforce. Finally, the median household income survey is based on census data rather than hard data such as payroll statistics and tax returns.

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

Since wealth compounds, rising life expectancy increases inequality. “Most of the Forbes 400 tend to be older Americans.” As Mr Spock said in Star Trek: “live long and prosper.”

Wealth inequality, Yardeni agrees, has worsened slightly in recent years. But “constraining the ability of the wealthy to seize opportunities would affect the wellbeing of us all”. Economic inequality has been worsened by the Federal Reserve as the central bank’s “ultra-easy monetary policies in response to the pandemic sent the stock market to a record high and boosted the incomes of CEOs with pay packages heavily skewed towards stock compensation”.

Meanwhile, lots of households that depend on fixed-interest returns saw their incomes dive and the real value of bank deposits started to fall as inflation rose. This is not entrepreneurial capitalism, but its antithesis, crony capitalism.

Social mobility is more widespread than realised

Most analyses of income and wealth distribution over time ignore mobility or assume that it doesn’t exist. In fact, some of the rich get richer, some get poorer while some of the poor get richer.

Some of America’s oligarchs have middle-class backgrounds, some humble backgrounds, but few were born with a silver spoon in their mouth. “On balance,” Yardeni says, “the data strongly suggests that mobility is on the upside.”

Yardeni dismisses the notion that high profits are the result of low wages and warns that government attempts to lift wages could backfire. “The goal of any president should be to increase workers’ standard of living but nominal wages can only increase faster than prices if productivity rises”.

The Economic Policy Institute started claiming in the 1990s that pay had decoupled from prices, but Yardeni exposes serious flaws in its analysis. Productivity, he shows, moves in decade-long cycles, but, having slowed from an annual rate of 4% in 2003 to 0.6% in 2015, has since accelerated.

The myth of low productivity is the basis for diatribes against stock buybacks, which supposedly reward investors at the expense of productivity-enhancing investment. Yardeni shows that $5trn of buybacks between 2011 and 2019 only enhanced earnings per share by 1%. The rest offset the issuance of stock as compensation not just to senior staff but other employees as well. This incentive may have helped enhance productivity.

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

Yardeni’s short and highly readable book, supplemented by tables and charts as evidence, is a powerful but well-argued antidote to much progressive thinking. Progressives have major achievements to their credit in terms of welfare 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.