Our statistic for corporate profitability is not the gross dollars of profit, and not even dollars adjusted for inflation, but profits as a percentage of total national income. This might raise some antennae sensitive to "designer" statistics. Our measure is not created to hide the gross profits or growth in profits, however, which becomes obvious when we realize the percentage figure implies a larger piece of what is revealed in the previous GDP statistics as a larger pie. The percentage thus cannot hide a gross figure if it favors Democrats because the product of the two must favor Democrats. The point of our "piece of the pie" statistic is to show that investment is sensitive to profitability.
The proportion of total income that found its way into corporate profits was 11.4 percent under Democrats and 9.9 percent under Republicans. Corporate profits are not as unambiguous as might be at first imagined. Profits are revenues in excess of costs, and a company which perceive the potential for greater profits in the future might be willing to forego present gains to invest. The reverse might also be true. If long-term prospects did not seem promising, a company might reduce investment in the short term, cutting costs and increasing the gap between revenues and costs, which is profit. Countering these, as discussed in Chapter 5, is the tremendous incentive for corporate managers to magnify current profits, since they often translate to stock prices, and stock prices directly influence managers' compensation. All of which cautions us that present year profits are not necessarily related to the health or prospects of a company. Still, however ambiguous, the relationship is there.
As we pointed out in Chapter 3's look at the Reagan years, the Supply Side construction that investment relates to costs of inputs, taxes, or savings rates does not find verification in experience. By contrast, Demand Side strengths - employment and income (as described by GDP) - do follow with investment and profitability.
