In the comments on other posts, I have seen questions addressed to me about “excessive corporate profits.” I am going to answer this question in very basic terms.

The way that national income accounting works, we have:

net private saving = government deficit + trade surplus

That is always true, just as 4 = 2 + 2 is always true. If you do not believe me, consult an economics textbook or look up “flow of funds identity.” A Google search for that term yields this, which is a perfectly servicable explanation.

Let’s ignore the trade surplus. If you want to bring it back into the story, feel free. But for now it adds complexity without illumination. So we have:

net private saving = government deficit

We can decompose net private saving as:

net private saving = household saving + corporate saving – investment

Some consequences:

1. When the government runs a large deficit, net private saving must be high.

2. When net private saving is high, either household saving is high, corporate saving (i.e. corporate profits) is high, or investment is low.

3. This is a consequence of the identity. It has nothing to do with crowding out or the multiplier. If you think that crowding out is high and the multiplier is low, then you expect the identity to resolve itself at a low level of investment. If you are more of a Keynesian, you expect the identity to resolve itself at a high level of investment.

4. The legitimate complaint is that investment is low. We all wish investment were higher.

5. If investment were higher, then the combination of personal saving and corporate profits would have to be higher.

6. Given the large government deficit, then if corporate profits were lower, we would necessarily have either higher household saving or lower investment. This is not a statement about economic behavior. It simply is a matter of accounting logic.

So, if you want to complain about “excessive” corporate profits, you are sort of backed into a corner. You have to be arguing that personal saving should be higher and corporate profits should be lower. But that is mostly a matter of how people hold their savings. If I hold my savings in the form of Treasuries, that is personal saving. If I own shares in corporations that own Treasuries, that shows up as corporate profits. Either way, it is net private saving, and ultimately people are doing the saving, either in personal accounts or through corporations that they own.

As an aside, I think that the mix of corporate saving is a problem. That is, I think that profits are too high at banks and too low at non-bank corporations. I think we would see more investment and employment growth if more of those profits were going to non-bank corporations.

Why are the banks doing well relative to non-banks? I cannot say for certain, but I suspect that the “success of TARP” has a lot to do with it. However, that strays into opinion, and I wanted to keep this post focused on plain logic.