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Balanced Fare: We Report, You Deride

Wednesday, May 22, 2002

The K-Files

The X-Files, with its gothic tales of elaborate conspiracy, has ended. But the spirit lives on, and Paul Krugman is tending the flame. In his Tuesday column, we learn that:

" For corporate America as a whole, 1997 was a watershed year. According to government statistics, overall corporate profits grew rapidly between 1992 and 1997, but then stalled; after-tax profits in the third quarter of 2000 were barely higher than they were three years earlier. But the operating earnings of the S.&P. 500 — that is, the profits companies reported to investors — grew 46 percent over those three years.

There are technical reasons that these measures of profits need not grow at exactly the same rate, but they have historically tracked each other fairly well. So why did they suddenly diverge? Surely the main reason was that after 1997 companies made increasingly aggressive use of accounting gimmicks to create the illusion of profit growth.

You see, corporate leaders were desperate to keep their stock prices rising, in an environment where anything short of 20 percent profit growth was considered failure. ..."

There you have it - an increasing use of gimmicks by desperate managers. Forget the 80's, when underperforming companies were subject to hostile takeovers. Managers weren't desperate then. And don't bore us with alternative hypotheses about the apparent divergence in accounting results mentioned above. Managers got greedy in the late 90's, and it is all George Bush's fault.

Dana Sculley is skeptical, as usual. Writing as Jane Galt, she grapples with these theories in her regular "Krugman Watch". As a bonus, she gets some interesting comments from folks I presume to be the Lone Gunmen.

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