Monday, August 12, 2013

Compensation as a portion of GDP

Here's a chart that is always good for some moral indignation:

That's wage compensation in blue and corporate profit in red.

The great news is below the fold.

It really looks like working people are taking a hit, and it's at the hand of those greedy corporations.  You can't turn your back on those guys, I swear.  By the way, I earned bonus points here for using separate scales.  It helps to add the drama.

But, are these measures comparable?  The denominators DO match, I suppose.  But what does it mean to compare something that is income for work performed to something that is income for risk taken and consumption postponed?  I think the denominators are very different.  Instead of GDP, it should be something like WASCUR/Hours Worked and CPATAX/Assets Invested.  That would look like this:

Hmmm... My logic seemed right, but this looks like a world where savers bid the profits from investments down to a relatively flat long term return level while each generation of workers enjoys newfound abundance for their labor........Doesn't seem right.  Let's forget about that.

But, even if we forget about that, are these two measures supposed to have a stationary relationship?  Here is a time series of capital consumption:

This is a measure of the productive capital we burn through as a percentage of GDP.  The profit is what is left over after this is used and replenished.  It's a lot larger part of our economy than it used to be.  Hypothetically speaking, if I was investing more savings into a larger amount of capital, every year, I wonder if I would expect more profit from that?

Should we expect the capital base to remain constant in relative terms even as we become wealthier and take more lifetime leisure?  Is there a reason to think that as an economy develops, grows, and becomes more wealthy that these two lines should move along a stationary mean?  Probably not.   But, I'll even grant that.

But, even granting that, let's look at this CPATAX measure for corporate profits.  There are alternatives:
The red line is the smoking gun that is usually used to show how the corporations are sucking up all the gains for themselves.  But the green line is domestic corporate profits.  This is the profit that is actually attributable to American operations.  Foreign operations of American corporations are subtracted out and American operations of foreign corporations are added in.

The thing is, as I touched on the other day, Americans invest abroad through our corporations, and we are kicking it on the international stage.  Now, it doesn't make any sense to me, if we're going to compare these profits to wages for American workers, that we should include profits that came from foreign workers.  If we're going to grant everything above, at least we should accept that it's the domestic portion of the profits that we should be comparing.

And, wouldn't you know, it's basically the same proportion of GDP that it was 40 years ago.

...but wait...I'm not done yet!.....Maybe I'm not being fair.  After all, profit is only one portion of the return to capital.  As any good analyst knows, there is cash flow to equity, and then there is cash flow to the firm.  And cash flow to the firm includes interest on debt, because capital is funded through a combination of debt and equity.

In fact, there are two additional series that we need to add to corporate profit to make this a full and fair comparison.  There is the share of GDI for domestic Interest Income and there is the share of GDI for income to proprietors.  Here is the share of employee compensation compared to the total of those three:

Still, no groundswell of capitalist pillage.  But, then who is getting all that money that used to belong to laborers.....Well, this whole exercise has been kind of a long route to a trick question.  It goes to...the workers.  That decline is basically the carve out for FICA, workers comp, unemployment insurance, and pension benefits (Table 1.11 at the link, which shows total compensation in a relatively flat band, divided between wages, which is slowly declining, and supplements to wages, which is slowly increasing).  Total compensation is basically the same it's been for 90 years - as far back as the BEA tracks it.  We're just saving some of it (well, for the FICA part, we're "saving" it).

But, there's still more...the portion of those non-wage earnings that aren't being managed by the federal government are going into pension funds.  Remember those foreign profits and interest that we subtracted to get to this chart?  It adds up to nearly 10% of GDP.  That extra capital that the corporations have been accumulating, partly funded by these pensions, is making money abroad.  And, as I pointed out in a previous post, that means foreigners keep shipping us almost a trillion dollars of free stuff every year for our troubles.  It's kind of like our annual GDP is a trillion dollars larger, and everybody is getting a portion.

"We are the 100%!"

Somehow, it seems like that's not nearly as gratifying as going on as if capitalists would be leaving labor to rot if not for our constant vigilance and opposition.

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