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.

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.





Conclusion:

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.

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.

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.

v3

Government Employment

Falling government employment is reducing the US GDP growth rate and prolonging the recession. A better idea is to keep level government payrolls while reducing military spending and provided support for workers making the military to civilian transition. I another idea is to time the reduction to when the economy is better.

The chart below shows total government employment for the federal, state and local governments combined.



The next chart show the split between the three types of government employment during the same period: Total, Federal, State and Local



One of the interesting things to note is that the huge decrease in government employment is entirely at the local level. That spending is used for education(teachers), police and fire protection. The federal government employment is flat, the state is down about 100K and local is down 500K. So basically all the job losses have come from state and local governments.

Another note: I have not figured out how to count contractors in government employment.

Mortgage Discrimination Suit Settled for $335 Million

The US Department of Justice settled a mortgage discrimination lawsuit with Countrywide Financial Corporation (CFC) for $335 million dollars on December 21, 2011. Here. The payment will resolve charges that Countrywide engaged in widespread discriminatory lending practices against Black and Hispanic consumers. The discrimination too place between 2004 and 2008. Countrywide Financial Corporation is now part of Bank of America.

The DOJ alleges that Countrywide would charge non-White consumers, with credit histories equivalent to Whites, higher fees and higher interest rates. It would also "steer" them to risky types of loans such as sub-prime mortgages or balloon payment schemes.

The DOJ stated that 200,000 Black and Hispanic borrowers were affected. "The complaint alleges that borrowers were charged higher fees and interest rates because of their race or national origin rather than their creditworthiness or risk."



You can read the DOJ complaint here.

Black’s slammed hard in November’s positive unemployment report

Black’s slammed hard in November’s positive unemployment report

The unemployment rate dropped nearly half a percent to 8.6% and 120,000 (140,000 private) jobs were added. However, the civilian labor force decreased by 315,000 on a seasonally adjusted basis (and 405K non adjusted) . So the rate fell as a huge number of people give up on finding work.

The participation rate went down by minus %0.2, meaning the total population grew (+172K) but the labor force was smaller (-315K). So the labor force is adjusting to smaller demand. We don’t talk about how those people are surviving.

Black unemployment rose 0.4% to 15.5% which is scary since 137,000 Black people left the labor force and the population increased by 31,000. Blacks were 44% of the unemployed who left the labor force in November. The employment population ratio fell to 51.7%, so only about half of the Black population is working. For Whites the ratio is 59.5%.

The overall unemployment rate was 8.6%. The White unemployment rate dropped to 7.6% as an additional 267,000 Whites found jobs. The numbers of the White unemployed have decreased by nearly 500K last month because of jobs and labor dropouts. During the same period, the Black unemployment rate moved up to 15.5% and 193,000 Blacks lost jobs.

Retail employment added 50,000 positions (25K in retail clothing), leisure added 22,000 jobs and healthcare added 17,000 spots. Amazingly, non-farm payrolls were revised in September from +158K to +210K, the first time the economy generated over 200,000 jobs since June of 2007.

The rate for Hispanics (11.4%) was little changed but 54,000 Hispanic works left the labor force. The teenage unemployment rate was 23.7% and the Black teenage unemployment rate was 40%.

The number of long-term unemployed was recorded at 5.7 million (long term was 43% of total unemployed). The part-time employed for economic reasons was 8.5 Million and the marginally attached stayed the same at 2.6 Million.

Politically, the house republicans extended the payroll tax cut. The markets reacted to record corporate profits and weekly unemployment claims below 400,000.

Non-Farm Payrolls

In the news from the Establishments, hiring was strong very strong in retail, business services, health and education and leisure. Non farm payrolls increased 120,000 (140,000 private jobs offset by a loss of -20K). The number was above 100K but way below 200K, so the report is rated as “fair”.

Average work week was unchanged at 34.3 hours and wages fell by -$0.05 cents in November following a $0.07 raise in October. The employment diffusion index (a hiring signal) was still positive (55.4) but down 0.2.

As mention earlier, there was some very good news on revisions. September NFP was raised from +158K to +210K and October was increased +80K to 100K.
ADP reported an increase in payrolls of 206,000 positions.

Monster Employment Index moved down to 147 to 151, up 10% compared to last year and down 2% for the month. Monster said the index was slowed by limited retail hiring.

Where do jobs really come from ?

Henry Bloget, the discraced internet analyst for Merill Lynch, has a great piece about where jobs come from. Here. His premise is that rich people do not create jobs, instead it is middle class spending and business response to that spending that really creates jobs.

A CEO who make 100 times what his workers make does not consume 100 times more. Instead they save the money. Instead, they consume only 3-5 times more than the average middle income family or if they are greedy 10-15 times more. Let's be honest the rich only need one yacht, 3 homes and 6 cars not 100 Hyundai's, 40 homes, 50 apartments and ten trailers. The middle class puts much more money back in the economy than the rich ever do.

Economists will argue the money eventually end up in the system as investments but then we have an over supply of investment capital and a shortage of consumption. However the investment capital is "parked" while a shortage of demand feeds the recession.

This central fact of supporting middle class spending has escaped trickle down, right wing economists for the last 30 years. It took Occupy Wall Street to awaken us to this simple fact. Inequality matters. It matters a lot. Economic theory is behind the curve again. Our models are chasing, not leading, the current reality.

New economic models, where broad happiness is the goal, show us that successful societies seek a balance of incomes and consumption across classes. Income equality and social justice lead to societies with greater happiness, civic participation, equality and happiness. The best societies, in our opinion, have an equal income distributions.

So how do we get there. We must support policies that reduce income inequality like a $10 minimum wage, unions, and progressive taxation. We must support government's responsibility to promote income equality that makes us all better off. But government alone is not he answer. We also have a responsibility to be smarter consumers; to support businesses that pay a decent wage and hire local employees; that innovate; and support social justice. We must demand better of government and ourselves.

Do we really need any more stuff ? (or the end of demand)

This Christmas, shopping is setting new records. In a slow growth economy, retail sales are off the charts(up 6.7%, on-line up 10%). The fear of a double dip recession is long past. This is the spending shot, the demand, the positive buying spree we are all looking for; so I say thank goodness., but trouble lie ahead. Consumer are buying on debt and not saving.

Unemployment has dropped thanks to a jump (50K [BLS]) in retail hiring in November. On a personal side note, I still can't get quick service at Wal-Mart, Starbucks or my local gas station. I guess this is a good thing. This is the demand we are looking for. All of the current liberal economists say we must increase demand to bring down unemployment. Demand increases both investment and short term consumption, both of which create jobs. But keep you eye on investments, capital and labor hiring, the sure sign of a positive business outlook.

We are out of the woods, but long-term, we may be at the limit of growth through material consumption. We are looking at a new frontier where demand is for services and experiences. The hospitality and entertainment industry are growing and construction is shrinking. We are spending on healthcare, entertainment, comfort and security not bigger homes, cars are TVs. We are materially satisfied.

Right now, even the poorest have a basic level of physical level of comfort. We have a car, TV, refrigrator, stove and clean water. We may not have personal security or quality education but we have a microwave.

We also have a safety net. We have unemployment insurance, TANF, and social security. No longer do the elderly suffer. But we must look ahead and see where the future demand will come from. Then we can position ourselves as Black people and as a country to meet this future demand. It is the only way to bring unemployment down long term.

Manufacturing Employment has bottomed out at 11.5 million

We are keeping our eye on Manufacturing employment because it means so much to the economy.

Here is the longer term trends from 1939. We peaked around 1980 and things have really tanked since the year 2000.






There is some hope: Since December 2009 the trend has been slightly positive.



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