This week's numbers from the BEA show that the share of profits in US national income has hit a new record, of 13.8% of GDP, prompting the question: can this last?
A simple trick with the national accounts might be illuminating. We know that national income is the sum of consumer spending, investment net of depreciation, government spending and net export and factor income from abroad:
Y = C + I + G + X - M
This is table 3 of the BEA's press release.
We know too that national income is the sum of corporate profits, wages, net taxes on production and other incomes like rent and self-employed incomes; this is table 9 of the BEA's release:
Y = P + W + T + O
Now, we can just rearrange these two identities to get an identity for profits:
P = (C - W) + (G - T) + (X - M) + (I - O)
That is, profits are high when: consumer spending is high relative to wages; when government spending is high relative to taxes; when net exports are high; and when capital spending is high relative to other incomes.
This table decomposes the share of profits into these four categories.
Profits C - W G - T X - M I - other
Now 13.79 14.46 13.66 -6.48 -7.84
Q3 01 (trough) 8.04 12.59 13.13 -3.88 -13.80
Q3 97 (peak) 12.17 12.22 12.06 -0.89 -11.23
Q4 88 (peak) 9.78 8.77 15.10 -1.81 -12.27
Q3 77 (peak) 11.30 5.17 14.29 0.02 -8.18
Trough-now 5.75 1.87 0.53 -2.60 5.95
97-now 1.62 2.24 1.60 -5.60 3.38
This shows that the rise in the profit share since its cyclical trough in Q3 2001 is largely the counterpart of a rise in capital spending, partly offset by rising imports (Think of it this way; higher investment raises the revenues and therefore profits of US capital goods suppliers, except insofar as the capital goods are imported).
However, if we compare the profit share now to previous peaks, especially those of the 70s and 80s, there's a slightly different picture. The current profit boom is very much the counterpart of high consumer spending relative to wages. Capitalists' revenues from workers - consumer spending - have exceeded the costs of those workers, wages.
And herein lies an obvious danger. If consumer spending were to fall relative to wages, say because falling house prices cause consumers to save more, the profit share would fall, unless - which is very unlikely - all the lower spending falls upon imports or the incomes of the self-employed.
A message I take form this is that - in aggregate - the corporate sector has less control over the profit share than you might think.
Note: G - T looks high. This is because it's only taxes on production that appear in the national accounts, and these are only a small portion of general taxes, most of which are transfer payments.
..Capitalists' revenues from workers - consumer spending - have exceeded the costs of those workers, wages...
Yes, and hidden behind these words is another factor, now that I've finally digested the mathematics - how have the workers seen fit to spend, relative to wages? The number one scourge of the west - credit. I have an article on this late today.
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