In a new book, Thomas Philippon challenges the conventional wisdom on numerous grounds. It turns out that the profitability of these mega-companies — called “superstars” by Philippon and other economists — isn’t that different from the superstars of the past.
Philippon, who teaches at New York University, examined the profitability of the five largest U.S. corporations for each decade since the 1950s. Profitability was measured by the companies’ profits divided by their sales. From the 1950s through the 1980s, there was stability. In the 1950s, the average profitability of the five largest firms was 20 percent; in the 1990s, the average was 19.5 percent.
Likewise, there was enormous stability in the companies that made the top five. General Motors, Exxon and AT&T were in the top group for every decade from the 1950s to the 1980s. To be sure, there were sometimes outliers. In the 1960s, AT&T’s profitability was 30.9 percent, but it was mostly offset by Exxon’s 13.5 percent in the same decade.
It was only in the new century that Microsoft, Apple and Google pushed aside these traditional corporate leaders. What has changed, Philippon says, are corporate taxes. As late as 1980, they were about 50 percent, he says. Now, they’re around 20 percent. The result is that, although pre-tax profitability is stable, after-tax profits have risen.
Philippon is also contemptuous of the idea that the rapid growth has sustained the rest of the economy. “The notion that the biggest tech firms are somehow the pillars of the U.S. economy is false on its face,” he writes. The reason: Today’s superstar firms hire less and buy less from the rest of the economy compared with earlier decades. Therefore, their stimulus for the rest of the economy is less. Since the 1950s, the share of employment represented by the top five companies has dropped from 2.59 percent to 0.44 percent.
Regular readers of this column might remember that I have already written once on Philippon’s book. That column focused mainly on the state of competition in the U.S. economy. I judged then (and still do) that squeezing both ideas into one column would have shortchanged one or perhaps both.
Philippon objects to the “unwarranted hype that these companies have generated. There is no doubt in my mind that [today’s superstar companies] are genuinely impressive companies, but so were GM, GE, IBM and AT&T before them. They are not special and should be treated with the respect and circumspection that other companies receive,” he writes.
That’s the crux of Philippon’s thesis. It may or may not be correct. It needs to be checked and double-checked to see whether the facts and the logic hold up against intense scholarly and practical examination. If it does prove true, it would change our view of how the economy works by emphasizing the importance of competitive markets as a source of national strength.