Big Untruths about Big Business

Beth Kowitt of Bloomberg Opinion has a video on X about wealthy individuals and corporations:

Before you even watch, the text in the post alone should prompt a question: When, exactly, did the top 1 percent not have the largest share of wealth? By definition, no matter how much wealth there is, the top 1 percent will have the most wealth.

You learn from watching the video that Kowitt means the top 1 percent did not always have more wealth than the middle 40 percent. Why that is a relevant number, she does not say. Why not the middle 35 percent? Why not the middle 75 percent? Should government policy really be structured to ensure something so arbitrary as that the middle 40 percent have more wealth than the top 1 percent? It’s doubtful government policy even could be structured to reliably effect such an outcome.

She also bases this claim off the inequality data from a team of economists that includes Emmanuel Saez and Gabriel Zucman. Saez and Zucman’s methodology in calculating and explaining inequality has major flaws, as has been pointed out by several economists over several years. (See this post today from Vincent Geloso on the topic.) Yet their work continues to be quoted uncritically by the press.

So why did this explosion of wealth based on questionable data occur? Kowitt blames Milton Friedman. She claims he won the Nobel Prize in Economics “partly for the idea that increasing profits was a company’s one and only social responsibility.” This is false. His Nobel Prize citation was “for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy.” It makes no mention of his 1970 New York Times Magazine essay on corporations’ obligation to make profits. It would be weird if it did, since Nobel prizes in economics are not awarded for New York Times Magazine essays.

The publication of this essay of Friedman’s is treated as a seminal moment in world history by opponents of free markets. Kowitt claims that in response to it, “companies focused on putting profits and shareholders above all else.”

It’s a good essay, and you should read Marc Sidwell’s reflections on it here. But it simply did not have the effect Kowitt says it did in real life. Like the Nobel Prize committee, businesses don’t make decisions based on New York Times Magazine essays. Here’s a graph of U.S. corporate profits as a percentage of GDP since 1960, ten years before Friedman’s essay was published:

The increase in profits from 1970 to 1974 probably has more to do with the conclusion of an eleven-month recession in November 1970 than with the publication of Friedman’s essay. And if Friedman’s essay represented a turning point in how businesses approached profits more generally, it’s weird that profits as a share of GDP were generally lower in the 1980s than they were in the 1960s. Corporate profits don’t really take off until after the dot-com bubble in the 2000s. There’s an interesting story to be told here, but it doesn’t begin in the 1970s, and it doesn’t have anything to do with Milton Friedman.

Kowitt, like David Leonhardt and Sohrab Ahmari, romanticizes the U.S. economy of the 1950s and 1960s, which she says was better for workers because “the gap between the poorest and the wealthiest Americans closed.” In her telling, “some argue that’s because of the strength of unions, which were in their heyday, and a progressive tax code.”

Some do argue that, but it doesn’t make a lot of sense. Even at the peak of union membership in the U.S., about two-thirds of workers were not union members. And the rate of union membership has been declining steadily since about 1960 — before and after Friedman wrote his evil essay, during administrations of Democrats and Republicans, and regardless of how large corporate profits are. Even as Joe Biden has said he wants to be the most pro-union president in American history and the press has led a campaign of positive PR for organized labor, the union-membership rate is at a record low.

The tax code today is extremely progressive. In 2021, those evil one-percenters paid 62 percent of individual income taxes and 36 percent of all federal taxes. That was somewhat of an anomaly due to the pandemic. But even in 2019, before the pandemic, the top 1 percent of taxpayers paid about 40 percent of individual income taxes and about 25 percent of all federal taxes. That’s roughly double the share they paid of each in 1980.

“The question is: How do we get back to the universal prosperity after World War II?” Kowitt asks. Characterizing an economy with a far lower share of women employed and beset by widespread racial segregation as “universal prosperity” is quite a stretch. The postwar economy was great for white men in well-compensated occupations, and part of the reason for that was the exclusion of competition from women, African Americans of both sexes, non-union workers, and foreigners.

Not to mention that “universal prosperity” in the 1950s meant lower real household income and a longer average work week; didn’t include air conditioning, washing machines, or dishwashers for most Americans or microwaves, computers, or smartphones for anyone; and included much less variety in food and drink, much lower levels of education, lower life expectancy, and higher rates of poverty, child mortality, and workplace injuries. It’s also strange when people who complain about excessively free markets yearn for the economy that existed before the welfare state ballooned to consume most of federal revenue.

Kowitt frames this video as a response to polling indicating low trust in big business, something about which she says she is concerned. Part of the reason for that low trust is the rampant spread of false narratives, like the one found in this video, in respected and widely read business publications.