Monday, January 30, 2012

Profit for whom ?

I just heard someone make a distinction between corporate profits and who benefits from the profits. What if the profits accrued to labor or labor owned the capital, would that increase equity in society. Would such a company be less efficient in the market place.

Monday, January 16, 2012

Corporate profits are high by historical standards

We are going to look at corporate profits. We want to check the claims made by Occupy Wall Street and others that: 1) corporate profits are at record levels; 2) labor's share of GDP is shrinking and 3) the US is overly dependent on financial profits. The data comes from the US Commerce department's National Income and Product Accounts.

The chart directly below shows corporate profits (CP) as a percent of gross domestic product since 1947. You can clearly see corporate profits are are at a historic high. They have never been higher except once during the 1950s. The trends has been upward since 1980. Corporate profits are at record levels.

Employee compensation as a percent of GDP has fallen since April 1980 from a high of 68% to the current 61%. That's an 11% share drop. Labors share of GDP is dropping.

The third chart displays the ratio of corporate profits to employee compensation. In the 1980s corporate income was about 11% of the size of employee income. In other words, income earned by employees was 9 times larger than corporate profits. Now, in 2011, the ratio of profits to wages is 24%, meaning the amount of income for wages is only 4 times larger. The growth in corporate profits has come largely at the expense of employee compensation.

The next chart graphs the profit / wage ratio during recessions. It is a good check on our logic of declining employee compensation. It shows the profit to wage ratio shrinks during a recession and recovers during growth periods. One must think about short term wages and employment being relatively fixed compared to corporate profits.

Finally, we break corporate profits into non-financial and financial components. You can see profits from financial transactions constitute about 42% of total profits since the 1950s. This trend has been consistent for the past 60 years. They did top 50% during the late 70s and 80s. They also topped 50% in July 2008.

However, "overly" dependent is relative. There is a market for many of these financial products and services. There has been tremendous innovation, job creation and wealth creation in the financial services sector. We cannot yet judge whether this is a net plus or minus for the economy.


1) We seen evidence of employee compensation and increased profits. Steps must be taken to stabilize the wage part of GDP. We can raise the minimum wage, lowering the cost of education, and establishing a basic right to unemployment compensation and training.

2) Unfortunately, we you add 1.5 billion low wage workers to the global system they are going to depress wages. Until they become net consumers they will continue to drag down wages. We are seeing the effects. Corporate profits are simply a by product of the lower wages.

Note: Additional data come for the St. Louis "FRED" database.

Friday, January 6, 2012

How do governments make better choices ?

Policy makers need to consider the economic impact of decisions

Many government decisions are made with a complete lack of basic economic understanding. Whether at the local, state and federal government level. Government decisions are hard to make. The special interests are powerful and few people care about the details. We all can see examples for poor decisions everywhere: such as the bridge to no where in Alaska, over spending on the military, under spending on education, our in ability to save at any level (no rainy day funds) and the lack of a jobs problems during the recent recession. I am now almost a complete skeptic on our legislators making the right decisions.

What I would like to see is some basic cost benefit analysis done on our basic legislative investments. Legislators should have the tools

So what are those tools. They are a common set of data and a basic cost benefit tools for analysis(excel) and training on basic economic decision making. The conservative has some things right: the basic principles of business investment should apply to public investment as well. If an expenditure does not generate future benefits, for the public, not the legislator, in increased general happiness and well being greater than the money spent, they should think twice about spending the money.

Wednesday, January 4, 2012

Time to raise the minumum wage to $11.50

It is time to raise the minumum wage to at least $11.50. The wage has steadily declined due to inflation since 2004 when it was set at $7.25. The minimum wage is an arbitrary wage which has no relations to any standard. It is below a basic survival wage. No one who makes minimum wage could actually live off that wage alone. Instead, thanks to food stamps(SNAP) and medicaid, many can have a basic life.

It is time give the people a little more. It is time for a general increase in the minimum wage.

The minimum wage is a floor for all labor activities in the US. It sets the standard for the baseline wage for which all ultimately almost all Americans work. The wage portion of GDP is at it's lowest ever, while corporate profits have never been higher.

Raising the minumum wage is an effective way to get money into the pockets of those who need it most. It also rewards work. It also get a little inflation going to help the economy grow.

Many worry that raising the minimum wage will increase unemployment. The minimum wage has been proven to have little effect on employment levels, while greatly increasing the money in the pockets of the poor. Most studies show some small, direct impact on teenage, immigrant and marginal worker employment. Yet the same studies fail to account for the additional jobs from the increased spending of minimum wage earners.

Another reason the minimum wage has little effect on the number of jobs is that most employers pay above the minimum wage. Second, is that employers consider much than the wage rate when hiring. They consider whether they can do the job, how reliable they are, and do we have the demand to support a new position.

Several cities have raised the wage to $10 bucks, the largest being San Francisco, with little effect on the local employment. Now is the time to raise the wage to a decent level, get a little inflation going, and help out the poor.


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