Thursday, March 26, 2009

Profits Collapsing-Labor's Share Of National Income Rising

Remember when leftist economists kept talking about how corporate profits kept increasing as a share of income, while labor income kept falling, something which they mainly blamed on Bush, with some also throwing in free trade and some paleoconservatives adding immigration.

Actually, though, as I explained several times here, this was mainly (though perhaps not entirely) a cyclical phenomenon, caused by Alan Greenspan. Labor's share of national income always decrease during cyclical booms while increasing during recessions (usually it starts increasing a few quarters before the recession starts), with corporate profits displaying the opposite trends. The effects of this on inequality is further reinforced by swings in stock market valuation and corporate executive pay.

During this boom, corporate profits peaked during Q3 2006, at 10.8% of gross domestic income (GDI), a big increase from 5.8% of GDI in 2001. At the same time, labor's share of GDI fell from 58.2% in 2001 to 55.5% in Q3 2006. Yet now almost the entire trend has been reversed. Since then (until Q4 2008), labor's share of GDI has jumped to 57.8% and profits have plummeted to 6.2%. It seems almost certain that before this slump ends, labor's share of GDI will exceed the 2001 peak, while the profit share will fall below the 2001 low. And it also seems likely that profits will fall below the 1982 low of 5.4%. It is however less likely that there will be a repeat of the negative profits seen during the Great Depression*.

This crisis is as we all know what helped push Obama and the Democrats in general into power. Yet the crisis has ironically at the same time deprived them of one of their key issues, namely the increase in inequality and the decline in labor income relative to profits. And the irony becomes even greater when these alleged foes of inequality and excess capital gains are proposing schemes, like the Geithner plan, which subsidize rich investors with hundreds of billions of taxpayers' dollars.

*=Note that this definition of profits exclude things like writedowns and goodwill impairment. Including writedowns and goodwill impairment, aggregate profits did turn negative in Q4 2008.


Blogger Ke said...

Stefan, I came to a similar and less well thought out conclusion a few years ago after reading basic economics. Why is it that these so-called "experts" with double digit years of experience and studies in ivy leagues still have yet to figure it out?

7:38 PM  

Post a Comment

<< Home