Harvard Professor Surprised by Controversy Sparked by Studies of U.S. Business Profits
A Harvard professor said yesterday that he is surprised by the storm of controversy surrounding his study on the profitability of American business enterprises. The study was released last month.
Martin S. Feldstein, professor of Economics, said his study showed the decline in corporate profits since World War II reflected "the random churnings" of the business cycle and not any prolonged deterioration of the profit rate. He said political influences such as oil price controls also contributed to the declining profits.
Feldstein's findings conflict with those of William Nordhaus, a member of President Carter's Council of Economic Advisers.
The Nordhaus study, published in 1973, suggests the decline in profits is a basic long-term trend resulting mainly from increasing wages, taxes and prices.
The conflict between the two studies has caused a stir not only in academic circles but also in the upper levels of the Carter administration.
For Whom the Bell Tolls
Alan Greenspan, chairman of the Council of Economic Advisers during the Ford and Nixon administrations, told reporters yesterday that the Nordhaus study raises the key question of whether "changing institutions are pushing profits under a basic capitalist level" and he added that profits may be driven down so far that further growth will no longer be possible.
Greenspan said the controversy could affect policy decisions on what form of tax break to offer businesses in the next few years.
Nordhaus's contention of a trend' towards falling profits could be used in a case for substantial tax relief for businesses. Feldstein's study showing the declining profit rate to be cyclical could be used by opponents of tax relief arguing that such stimulus is not needed, he added.
Feldstein said there is a disagreement between the two findings because the studies differed in scope and methodology but that the conflict had been blown out of proportion.
Feldstein said Nordhaus based his pessimistic conclusion about the fate of capitalism on the declining share of the gross national product accounted for by corporate profits while he, Feldstein, measured the rate of profits as a return on invested capital. He said his study included data about the profit rate in 1974 that was unavailable to Nordhaus.
Feldstein said his study also differed in that he ran his findings through a computer in a test to determine the profit trend over a period of time, and substantiate his theory, while Nordhaus did not.
Nordhaus was unavailable for comment on the controversy yesterday.
Dwight W. Perkins, chairman of the Economics Department, declined to comment on the conflicting studies because he said he needed more time to review Feldstein's findings.