Sunday, June 08, 2014

What's the Source of Soaring Corporate Profits? Stagnant Wages

What if all the low-hanging fruit of outsourcing jobs and financialization have already been plucked by Corporate America?

The connection between soaring corporate profits and stagnant wages is both common sense and inflammatory: common sense because less for you, more for me and inflammatory because this harkens back to the core problem with the bad old capitalism Marx critiqued: that capital dominates labor and thus can extract profits even as the purchasing power of wages declines.

(What Marx missed because he was early in the cycle was capital's dominance over the central state's political machinery--a topic covered here in The Purchase of Our Republic.)

New good capitalism generates wealth for everyone via soaring profits which drives the valuations of stocks ever-higher, enriching workers' pension funds and boosting spending, some of which trickles down to those who don't own any stocks, either directly or indirectly.

Bad old capitalism trumps new good capitalism if the soaring profits are basically wages diverted to the few who own most of the financial capital. In Marx's analysis, this gradual impoverishment of labor eventually erodes capital's ability to sell products, undermining capital's ability to reap profits.

The endgame of this is obvious: once capital can no longer make profits selling goods and services and wage-earners can no longer afford to buy goods and services, the system disintegrates.

The magic "solution" of the past 40 years is to enable labor's continuing consumption with debt. And when labor is over-indebted and can no longer service more debt, then the central state (government) borrows and spends trillions of dollars to replace sagging private consumption.

This reliance on debt doesn't void Marx's endgame, it simply give it another twist:the system collapses in a credit/currency crisis rather than a labor/capital confrontation.

Longtime correspondent David P. recently submitted two charts which reflect the diversion of wages to corporate profits. Here are David's commentary and charts:
John Hussman said something interesting a while back - he was talking about whether or not the current level of corporate profits was sustainable, and he pointed out that in order to have those profits rise as a % of GDP, they had to be snatched from somewhere else. I was intrigued and asked myself, where might they be snatched from? 
Here’s a chart that appears to show at least a chunk of where they came from. Wages & Salaries/GDP dropped from about 47% of GDP in 2001 down to 42.7% of GDP today. At the same time, (non-financial) corporate profits rose from about 2% to 6% of GDP. So wage earners lost 4.3%, while non-financial companies gained 4%. 
There was a very steep climb in corporate profitability from 2001-2008, during the height of the housing bubble, and a brisk drop off in the chunk of the economy provided to wage earners. Perhaps - globalization? Jobs lost to China? That’s the period where China started to really become a powerhouse. Yet after a brief drop during the recession, it's now back up to its peak levels.
And here’s one more chart, aligning corporate profits (total) as a % of GDP - includes financial companies too. Notice how the S&P 500 (SPX) tends to follow (more or less) the profits skim off the economy. The linkage isn’t there during the 1995-2000 period, but it sure is for the rest of the period. So - unless and until the corporate skim drops as a % of GDP, I think our S&P 500 (SPX) is going to remain elevated. 
Can this Corporate Profits/GDP series grow to the sky? I don’t know. But it is certainly doing pretty well right now. A combination of outsourcing and low rates = a great corporate environment for profits, taken from savers and wage-earners. 
Who do we blame? Debt constructed from the housing bubble (which went to increase financial corp profits) as well as outsourcing, which allowed companies to snatch that % of GDP from workers (increasing non financial corp profits).
So to Hussman’s point - is this sustainable? As long as work continues being outsourced, unemployment is relatively high (i.e. wage pressures are low) and as long as the debt remains intact, I think it is.

Thank you, David, for the charts and commentary. I think David's conclusion raises two further questions:

1. What if all the low-hanging fruit of outsourcing jobs and financialization have already been plucked by Corporate America?

2. What happens when wage-earners can no longer substitute debt for earned income to sustain their consumption?

If these two conditions are running out steam, then the endgame of corporate profit growth is closer than we might imagine.

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