Excessive Corporate Profits ... Yum!

I am amused by stories like this one that demonstrate how some people don't understand how business operate within the total economy. It is only possible to be horrified by corporate profits if you assume that the capitalism and free markets are evil, where money is being transferred from our pockets to the balance sheets of large corporations. That isn't how it works.

Banks don't earn money. Really. A bank, like any company, is a fictitious entity that only exists on a piece of paper. A bank does not drive fast cars, do drugs or chase after loose women. It's the bank's owners -- the shareholders -- that earn money from the company's profits (dividends), and capital gains (hopefully!) from increases in enterprise value. Society as a whole gains through taxation of those corporate profits, which, conceptually at least, keep taxation of private individuals at a lower level, unless of course if you're a bank shareholder and must pay taxes on dividends and capital gains.

Investors have an easy solution to this phantom problem: buy shares in companies that make obscene profits. Credit card interest rates and bank fees too high while savings interest rates are too low? Buy bank shares. You whimper in pain every time you fill the tank on your SUV? Buy shares of petroleum producers. Your cable bill has gone up again and again? Buy shares in the cable companies. When done well, you can gain more through investing than you lose through being a customer of those companies.

Not to be too dismissive about these companies' prices, there is one segment of society that is hurt: the poor. They generally are unable to invest enough to compensate for the price increases while also maintaining their standard of living. While this has no easy answer, at least corporate profits generate government tax revenue (both corporate taxes and taxation of individual shareholders who partake of the banks' profits) that is then used to provide social services and keep the marginal tax rates low for those at the lower end of the income scale.

I am just not able to feel any outrage at all when I see stories like the one referenced above. It simply isn't a problem.