By the Blouin News Business staff

The distorted incentive of idle profits

by in U.S..

A screen over the trading floor displays the final tally for the S&P 500 at the New York Stock Exchange, March 28, 2013.

High stocks, low pay. Photo Credit: Reuters/Brendan McDermid

Why are U.S. stock indices breaking records when the U.S. economy is so sluggish? U.S. corporate profits as a share of GDP are at their second highest level on record. ‘Nuff said.

Companies are letting their excess revenues pile up on their balance sheets rather then spend them, on, say, new hires or capital investment. When they do hire, the global deflationary pressure on wages keeps what they do have to pay to less than what it once was. The new productivity.

It may be that U.S. executives are nervous about spending their companies’ cash on people or plant given the uncertain economic outlook and long haul of the recovery from the depths of the Great Recession. Up to a point, Lord Copper. But nor do executives have have much incentive to plough those profits into capital investment, with its long-term pay back and an equally uncertain outcome, when they can sit on the money while letting the stock market boost the value of their stock options and performance-related bonuses. The same incentive could be said to apply to institutional shareholders, who, too, get measured against stock-market benchmarks.

Capital may be lording it over labor these days, but it may also be making a rational choice in doing so.