Storm over Surging Profits

A political problem for Carter and an embarrassment for companies

Profits are a little like pregnancy: usually a cause for celebration--but not always. A large increase in earnings brings more complaints than cheers when citizens are up in arms over soaring prices, workers are pressing for higher wages, and the White House is looking for someone, or something, to blame for its losing battle against inflation. In these circumstances, last week's report of an earnings surge created a serious political dilemma for President Carter and a public relations migraine for business.

The Commerce Department's preliminary figures for corporate profits in the final three months of 1978 seemed to suggest that pretax earnings had risen at an annual rate of more than 26%. Other calculations put the rise even higher. The reports of these large gains coincided with news that the Consumer Price Index in February had jumped at an annual rate of 15.4%, the worst rise in 4 1/2 years. The result: an avalanche of criticism that business must be doing something nefarious to make so much and that the White House was failing to enforce price guidelines.

Alfred Kahn, the anti-inflation chief, warned that "business is now on trial in the eyes of the American people."; Carter Aide Hamilton Jordan echoed that profits are "unnecessarily high."; The strongest rebuke came from George Meany, 84, president of the AFL-CIO. Said he: "This demonstrates the greed of corporations. Business is guilty of the grossest demonstration of profit-gouging since the opening days of the Korean War.";

Company executives counterpunched with arguments that the reported gains were misleadingly big and that profits really have been rising too slowly. Said R. Heath Larry, president of the National Association of Manufacturers: "We will not become the scapegoat of the Administration. High profits are not inflationary; they promote new technology and investment, reduce pressure on the credit market and lift corporate taxes. You have to feed the cow instead of kicking it if you want the milk.";

There were wildly differing figures being bandied about on just how fast profits have risen, in part because the Commerce Department study can be read in different ways. Annual pretax profits for the last quarter of 1978, when adjusted for the impact of inflation on depreciation and inventories, came to $177 billion. That was a compounded rise of 44% on an annual basis over the third quarter and 19.4% over the fourth quarter of 1977. Pretax profits, without inflation adjustments, rose 26.4% compared with a year earlier.

Other studies, out last week, suggest that those gains are exaggerated. An N.A.M. analysis of the Commerce figures concluded that after-tax earnings, adjusted for the effect of inflation on depreciation and inventories, rose only 10.9% from the fourth quarter of '78. Meanwhile, New York City's Citibank separately calculated that real earnings from operations over the whole year rose only 2 1/2%. Said the bank's Monthly Economic Letter: "Despite glowing earnings reports, many U.S. corporations are scrambling desperately to hold even against the inroads of inflation."

Yet it is true that earnings were stronger than expected. Among the reasons: a bouncy economy that grew at a real annual rate of 6.9%, plants working at near capacity levels, and the guidelines themselves, which encouraged companies to lift prices by the maximum allowed. Said Economist Otto Eckstein, chief of Data Resources, Inc.: "The Government policymakers created a situation that was too favorable for business. They overstimulated the economy."

But, viewed historically, profits are not particularly high or out of line. As a percentage of the country's gross national product, earnings have been on a declining trend since the early 1950s, to 9.5% last year. Largely because of inflation and recessions, there was a severe squeeze in the early 1970s and again in 1975. So-called profit margins--that is, earnings as a percentage of sales--fell fairly steadily from 12.5% early in 1966 to 6.7% late in 1970 and then started to struggle back, though not to previous peaks. Margins last year climbed from 9.5% in the first quarter to 11% in the high-flying fourth quarter.

Both critics and champions of high earnings have not seen anything yet. The current quarter should show another surge from the first quarter of 1978, when profits were depressed by extreme cold and the coal strike. The economy continues to be stronger than previously anticipated, and the corporate tax rate on Jan. 1 declined from 48% to 46%. Higher fuel prices will cause oil company earnings to spurt--unless some form of excess-profits tax is rushed into place. Economist Alan Greenspan, head of Townsend-Greenspan & Co., estimates that profits after taxes in the three months will rise at an annual rate of about 20%.

The row over "excessive" profits comes at a politically sensitive moment when the Administration is increasingly looking at business to take the rap for the failure of the anti-inflation campaign. While it is true that many companies are flush enough to hold down some planned price increases, it would be unfortunate if the Government took steps to punish those who earn an honest, if depreciating, dollar. Says Greenspan: "By any long-term standard, profits are still inadequate to create the type of capital investment that this country needs."

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