Where the Blame Lies

One of the gnawing preoccupations of U.S. businessmen is the profits squeeze.

Since 1948, profits before taxes have declined from 21.3% of the value of total U.S. corporate production to this year's 15.7%. What is to blame? Last week, in its monthly Survey of Current Business, the Commerce Department suggested some answers.

On the Commerce slide rule, the squeeze does not seem to come from the most commonly blamed factor: rising wages. Proportionately, U.S. labor costs today are exactly what they were in 1948--64% of the value of total corporate output. The trouble comes largely from two other factors, according to the Commerce Department's statistics. One is that indirect business taxes, particularly property taxes, have increased from 8.9% of the value of corporate production in 1948 to 10.5% now. More important, the amount of their gross income that U.S. corporations allocate to depreciation costs on plant and equipment has risen from 5.5% of the value of production to 9.5%.

Profits into Write-Offs. Depreciation charges have risen for a number of reasons. They were relatively low in 1948 because businessmen then were "writing-off" depreciation expenses on machinery that they had bought at relatively low prewar prices; lately businessmen have been depreciating much costlier postwar equipment. In addition, the laws have been greatly liberalized since 1948 to allow businessmen to take bigger write-offs over briefer periods, and thus charge off against "depreciation" a lot of income that otherwise would have been counted as straight, taxable profit.

The rise in depreciation charges is not as much of a burden on U.S. business as it might appear. Because depreciation charges are technically a cost, they are also not taxable--which means they actually give a businessman extra cash to spend, save or invest as he pleases. Many economists, in fact, argue that a company's strength lies not just in its net profit, but in its "cash flow," which is net profit plus depreciation write-offs. On this basis, the health of U.S. corporations as a whole is considerably sturdier than their profits figures alone would indicate. Though total net profits have risen only from $20.5 billion in 1948 to an estimated $26 billion in 1962, cash flow over the same years has increased from $27 billion to $52.25 billion. This has helped corporations increase their dividend payments since 1948 by 111%.

The Cost of Sluggishness. While not disputing the Commerce Department's figures, many businessmen argue that wage costs should actually have decreased as a percentage of output since 1948 because U.S. business has spent so heavily on labor-saving equipment since then.

They also contend that the rise in their equipment costs and depreciation charges stems partly from the rising wages of workers who produce that equipment.

Says Inland Steel Chairman Joseph Block: "Everything has some labor content in it." And the notion that depreciation write-offs are even a partial substitute for profits leaves many a businessman cold. Says Conrad Jamison, vice president of Los Angeles' Security First National Bank: "Sure, you can put depreciation money into securities or pay it out in dividends. But sooner or later, you're going to have to replace that worn-out machinery, and it's almost a certainty you will have to pay more for the replacement than you did for the original. When you treat depreciation as profits you're living off your seed grain." One fact that all sides can agree on is that profit margins in the U.S. would be far better if the economy had not expanded at such a slow pace over the last few years. The excess manufacturing capacity that burdens much of U.S. industry helps to keep corporate overhead costs high. At the same time, by encouraging U.S. corporations to produce more goods than the consumer demands, excess capacity prevents prices from rising as fast as costs--and thus keeps profits slim.

This file is automatically generated by a robot program, so reader's discretion is required.