While quarterly earnings reports flooded the financial pages last week, the head of the Securities and Exchange Commission warned that the profits of American firms are "dangerously low."
Harold M. Williams called press re-reports that particular well-known corporations have reported "record" or "all-time earnings" are "deceptive," and said they contribute to a general confusion "about the level and role of corporate profits." Williams spoke last week at a business journalism banquet here.
Williams said that inflation and other factors are not taken into consideration when corporate earnings are reported, causing the public as well as investors and government policy makers to have the impression that business is doing better than it actually is.
According to one analysis cited by Williams, inflation an the failure of the tax system to recognize "its distortion of corporate profits" have resulted, in effect, in a 50 per cent tax increase for industry over the past decade - "without congressional action of any sort."
"A debate would certainly occur if a legislative increase of 50 per cent in the corporate tax rate were proposed," he said.
Williams stressed the need for a financially healthy private sector to enable the country to pay for its social and political goals - such as pollution abatement, energy independence and full employment.
"The widespread failure to understand both the function and level, in real terms, of corporate profits and cash flow is blinding many to the fact that business is simply not accumulating and retaining the resources required to meet the challenges facing it," Williams said.
The SEC head, a Carter appointee, said that with "national objectives which are as important and as diverse as full employment, energy independence, and environment protection . . . the problem of marshalling sufficient capital in order that business may discharge its role in accomplishing these goals is a serious one."
Although the financial press may report that a firm has achieved "record" earnings, Williams pointed out, the opposite may in fact be true.
"In terms of absolute number of dollars involved, these statements are of course, true," he said of such reports, adding, "it is, however, useful and important to put these figures in perspective. And when the perspective is business' ability to generate required new capital, 'record' earnings figures may . . . prove to be distressingly low."
Williams said that when profit figures are adjusted to "more accurately reflect both the manner in which capital equipment is consumed and the cost - in inflated, current dollars - of replacing it," a more realistic profit picture is painted.
But when inflated earnins are reported, Williams said, "this mis-impression leads inevitably to demands that the government take steps - often through tax policy - to moderate those profits and divert them to the common weal."
He blamed both the financial press and "current corporate disclosure practices, particularly with regard to depreciation," for lulling policy makers, corporate managers and the public "into a false sense of security regarding investment needs."
Ultimately, Williams claimed, the tax system "reinforces these misperceptions, and the net result is likely to be overtaxation, skewed balance sheets, and, ultimately, a handicapping of the corporate sector's ability to raise the capital which it must have to play the role we demand of it."