Monica Potts writes:

Not only is Wal-Mart at the top of the Fortune 500 list with $14 billion in profits last year, its top executives took home record pay as well. The Wal-Mart folks told Arkansas Democrat-Gazette reporter Steve Painter that changes in federal reporting rules requiring them to include total compensation packages in executive pay figures artificially skewed the numbers upward, but the truth is that the president and chief executive officer, Mike Duke, made almost $20 million last year. To put that in context, Arkansas, where the company is based, is ranked 48 in terms of median income.

This is hard to believe because $14 billion is such a large number, but if you look at profits as a percent of revenue you’ll see that Wal-Mart isn’t actually an especially profitable firm. Here’s a chart I made showing the profit rate of the top ten firms on the Fortune 500:

Wal-Mart’s total profits are enormous because the company is so large. But mass-market retail is not a high-margin line of business and being the company that undersells other mass-market retailers is really not that lucrative. Ironically, this is part of what makes Wal-Mart’s position so secure. Nothing about the firm’s profit rate suggests that trying to compete with it would be a great way to get rich.

At any rate, looking at this chart I think it’s hard to avoid the conclusion that Wal-Mart is the last thing we should be worried about. The worrying trend is the domination of the corporate landscape by super-profitable firms in the heavily regulated energy, banking, and telecom sectors. Similarly, if you want a CEO pay outrage note that ConocoPhillips paid CEO Jim Mulva $10.44 billion in 2009 even though the firm he runs was spectacularly less successful than its two American competitors. Poor Christophe de Margerie, CEO of Total SA in France, had to settle for a mere € 1,552,875.00 to run an oil company that’s both larger and more profitable than Mulva’s.

As I’ve said before, I think many liberals are underrating the extent to which both the House reg reform bill and the Dodd reg reform bill will, in fact, do a lot to help prevent future bailouts and panics. At the same time, it’s quite true to say that these proposals don’t appear to do much of anything to address broader concerns about the role of modern finance in the American economy.

Today, for example, I spent some time with Andrei Schleifer and Robert Vishny’s “Unstable Banking” in which they attempt to explore the question of whether anything socially beneficial has arose from widespread securitization. They construct a coherent model in which the answer is no:

In this model, banks that cannot securitize loans smooth their lending over time. When banks participate in financial markets, however, they respond to investor sentiment. Banks use their scarce capital to co-invest in newly securitized loans when asset prices are high, and to buy or hold onto distressed securities when asset prices are low. Expanding the balance sheet to securitize is so profitable in good times, however, that banks borrow short term and accept the risk of having to liquidate their portfolio holdings at below fundamental values in bad times. Such liquidations further destabilize security prices. By stretching their balance sheets to the limit in good times, banks give up the opportunity to finance investment or buy distressed assets in bad times.

Under these circumstances, bank profits and balance sheets, as well as real investment, are highly cyclical. Investment is strictly higher with securitization than without it, but may be distorted in favor of projects available for securitization during bubbles. This can reduce efficiency even without any costs of cyclical fluctuations. The central message is that financial intermediation transmits security market fluctuations into the real economy; the volatility of sentiment turns into the volatility of real activity.

The important conclusion here is that the impact of this volatility is bad even apart from any potential costs of a crisis. The inefficiency comes about simply because everyone is willing to finance investments all at the same time, and then everyone is unwilling at the same time. Absent securitization, banks can only lend so much during the boom and thus have a limited ability/incentive to cut back during the downturn. With securitization, that changes and reasonable projects have difficulty getting funding during the downturn. Which, in turn, makes it harder to return to growth.

As a followup to this morning’s post on why nobody is marketing broccoli to kids, reader DL offered this link:

The Atkins Foundation seeks to positively impact disease prevention and health management worldwide by supporting nutritional research and educational programs. Established with a $40 million endowment in August 2003, the Foundation, which is managed by National Philanthropic Trust, provides grants to support scientific, evidence-based and clinical research that examines the role of metabolic and nutrition protocols in obesity, heart disease, diabetes and other major health issues confronting our society today. Sesame Workshop will use the Foundation grant to fund a replication and expansion of the “Elmo/ Broccoli” study to see whether the Muppets from Sesame Street influence food choice. This study will be similar to the initial one, but research experts will be using real foods, rather than pictures, to see if children actually eat foods that have characters associated with them. [...]

Findings from Sesame Workshop’s initial “Elmo/ Broccoli” study indicated that intake of a particular food increased if it carried a sticker of a Sesame Street character. For example, in the control group (no characters on either food) 78 percent of children participating in the study chose a chocolate bar over broccoli, whereas 22 percent chose the broccoli. However, when an Elmo sticker was placed on the broccoli and an unknown character was placed on the chocolate bar, 50 percent chose the chocolate bar and 50 percent chose the broccoli. Such outcomes suggest that the Sesame Street characters could play a strong role in increasing the appeal of healthy foods.

This is arguably a reason that existing studies of subsidizing healthy foods may be misleading. Advertising dollars tend to flow to high-margin products and vegetables don’t fit the bill. But if subsidies turned broccoli into a high margin item, that would spur investment in broccoli marketing which, in turn, might do more to boost consumption than any price change at the margin.