March 14, 2015
The Federal Reserve Board released data on profits for 2014 this week. The good news, for those who are not Mitt Romney-types, is that the profit share fell in 2014 from its 2013 peak. Before-tax profits were 0.6 percentage points lower as a share of GDP than they had been in 2013. After-tax profits were 1.2 percentage points lower.
Source: Federal Reserve Board.
There are several points worth noting here. First, the drop in profits as the labor market has begun to tighten some lends credence to the view that a substantial portion of the rise in corporate profits was cyclical, not secular.
The point is that we are not seeing a surge in profit shares because of the inherent dynamic of capitalism. We are seeing a rise in profit shares because incompetents who couldn’t see an $8 trillion housing bubble were running the economy. When the bubble burst and the economy collapsed, the resulting weakness in the labor market led to a huge rise in profit shares.
Folks may point to a similar rise in profit shares in the earlier part of the last decade. For those old enough to remember, this also followed the collapse of an asset bubble. And contrary to popular belief, the resulting recession was actually very severe from the standpoint of the labor market. We did not get back the jobs lost in the downturn until January of 2005. This was the longest stretch without net job growth since the Great Depression, until the current downturn. In short, weak labor markets lead to high profits.
This takes us to the Federal Reserve Board. The plan to raise interest rates is a plan to weaken job growth. And, it looks like it also might mean a plan to prevent profit shares from falling and wage shares from rising.
That might sound like bad news to most folks, but of course most folks will probably never hear it. We’ll just hear highly paid economist types wringing their hands over the rise in inequality. No doubt the major foundations will make large grants to researchers trying to understand the problem.
Comments