How Wall Street Stole Main Street
This graph speaks volumes:
Profits as a Percent of GDP: Financial Corporations vs. Nonfinancial Corporations
We saw a big decline in real businesses’ profit share in the 40s, then a slower semi-steady decline through the 70s, as wages constituted a larger share of GDP. Financial corps doubled, expanding and increasing profits, but they remained small in the big picture.
Then post-80, we saw two big moves: a dive in real business profit share below any historical norm, and the beginning of the long secular rise in financial corp profits share (quadrupling between 1980 and 2010).
How did financial corps achieve this? Simple: they’re licensed to print money, and they devoted that money to paying off the managers of real businesses to hand over those businesses’ profits. The C suite of America’s corporations went from being managers of real businesses creating real value, to being financial prestidigitators. And those individuals were handsomely rewarded for their obeisance to the financial corps.
The people who work for those real companies, of course — the vast pyramid of sub-C-suite toilers who don’t get a share of the kickbacks…haven’t gotten a share of the kickbacks.
Compensation of Employees/GDP
That 4% or 5% of GDP income flow — remember, that’s every year — was transferred from households to financial corporations, courtesy of bought-and-paid-for real-corp CEOs.
Got incentives?
Cross-posted at Asymptosis.
It is important to look at the years between 1998 and 2007. Those are the years of the bubble economy. Financial profits really increased after 1998. Effective demand was being artificially manufactured.
(Compare to 2nd graph at this link, http://effectivedemand.typepad.com/ed/2013/05/update-on-potential-real-gdp-from-the-effective-demand-model.html)
You can also see in the second graph above that employee compensation also increased at the beginning of the bubble. Then after the recession of 2001, financial profits continued to increase, but employee compensation decreased.
Thus, 2001 to 2004 is the true dividing line.
After 2004 until the crisis of 2008, the economy was up against the effective demand limit. And we see two things. Employee compensation held steady and financial profits declined. Employee benefits cannot decrease against the effective demand limit without causing a continued contraction. And aggregate profit rates don’t increase. They actually decrease at the effective demand limit if business keep trying to produce more. That is why we see a decline in financial profits along with a decline in non-financial profits.
Since the crisis we see the same scenario. As aggregate profit rates increase in the economic expansion after the recession, financial corporations receive the profits, but labor does not.
When the economy reaches the effective demand limit around the end of 2014, we will see the drop in employee compensation stop (2nd graph above). We will also see financial profits start to decrease as a share of GDP, just as you have it depicted Steve.
Whether the economy can sit on the effective demand limit this time delaying a recession, while financial corporations watch their profit share decrease, is another question. My view is that the recession will come more quickly this time. For just a couple of quick reasons…
– Monetary easing will stop and liquidity will start to dry up for the financial corporations.
– If employment rises quickly at the end of the year, profit rates of business will fall drastically because of being up against the effective demand limit. That will signal a recession within months afterward.
– Normally inflation will kick in at the effective demand limit, but we will still have a low capacity utilization (80%) and high unemployment (7%). Without a good inflation option, the economy will tend to contract.
The bad thing about all this is that labor never gets a chance to recover their lost profit share. From 1950 to 1982, you will see in the 2nd graph above that labor recovers its profit share as the economy expands after a recession. That dynamic stopped after 1982. The dynamic we have now is that labor share will increase some at the end of an expansion. But since most profits are already taken by financial corporations and since it is the end of the expansion, labor gains back just a little before we go into a recession.
If labor share falls after the next recession, the US economy will collapse to a lower equilibrium.
Example 1001 of the looting of America and for the 1001th time: nothing is going to get America back except re-unionization — putting enough noses to enough window to match looting noses (nobody is minding the stores, plural, at the moment) — all the while supply equal finance and most all the votes to watch out for the broad spectrum of Americans’ interests.
Of course, for my 1001th time: the realistic only way to re-unionize is legally mandated, sector-wide labor agreements. Be nice if some progressive professional somewhere would at least mention the concept out loud — the only labor market setup that works over the decades and around the world should at least be a part of the public discussion.
I pledge a million dollar (rubber) check to anyone who can present any workable alternative.
This morning on the Bill Press Show (Current TV) I caught Sen. Sherrod Brown. He noted the following: 20 years ago the top 6 banks combined had assets worth 20% of GDP. Now they are 60%.
I just googled and found this from Bill Moyer’s show April 22, 2010:
(economist) James Kwak: They have assets equivalent to 60 percent of our gross national product. And to put this in perspective, in the mid-1990s, these six banks or their predecessors, since there have been a lot of mergers, had less than 20 percent. Their assets were less than 20 percent of the gross national product.
— THE REAL AND FINANCIAL COMPONENTS
OF PROFITABILITY
(USA 1948-2000)
G¶erard DUMENIL and Dominique L ¶ EVY ¶
MODEM-CNRS and CEPREMAP-CNRS
http://www.jourdan.ens.fr/levy/dle2004g.pdf [PDF]
Or
http://www.jourdan.ens.fr/levy/biblioa.htm
Goldilocks Meets a Bear
How Bad Will the U.S. Recession Be?
Fred Moseley (April 21, 2002)
http://monthlyreview.org/commentary/goldilocks-meets-a-bear
”The share of profit declined approximately 25 percent from 19.2 percent in 1997 to 14.0 percent 2001 (see Figure 1; these estimates are for the Non-Financial Corporate Business sector of the economy, and include interest as a broader measure of the “return to capital”).3 This sharp decline has wiped out the previous significant increase in the share of profit from 1992 to 1997, so that the share of profit in 2001 was even lower than it was in the early 1990s; indeed it was the lowest of the entire postwar period. In the late 1960s and 1970s, the share of profit declined approximately 35 percent and has never recovered (see Figure 1; see Moseley 1992 and 1997 for analyses of the decline in the rate and the share of profit in the postwar U.S. economy).”
1. Fred Moseley – The Long Trends Of Profit
http://www.workersliberty.org/story/2008/03/19/marxists-capitalist-crisis-1-fred-moseley-long-trends-profit
”There has not been a complete recovery of the rate of profit in recent years. I don’t want to overstate it. There are different measures of profit rates, but according to my estimates, which are for the total business sector of the economy, by 2006 the rate of profit was within 10% of its earlier post-war peak.”
System Failure: The Falling Rate of Profit and the Economic Crisis
Andrew Kliman, Jonathan Maunder
First published: 17 July, 2012
http://www.newleftproject.org/index.php/site/article_comments/system_failure_the_falling_rate_of_profit_and_the_economic_crisis
If we use the term rate of profit to mean what almost everyone––businesses, investors, Marx––means by it, namely the rate of return on investment, there was no sustained recovery of the rate of profit of U.S. corporations after the recessions of the mid-1970s and early 1980s. If we measure profit as the portion of corporations’ net output that their employees don’t receive, the rate of profit continued to trend downward quite sharply. The data needed to compute the rate of return on investment in other countries aren’t available, but there was a very widespread decline in U.S. multinational corporations’ rate of return on their foreign investment at the same time, which suggests that the global rate of profit probably fell as well. McNally’s claim that the rate of profit rose is based entirely on computations performed by a physicalist economist, Simon Mohun. The problem is that what Mohun and other physicalists mean by rate of profit isn’t a rate of profit in the normal sense…”
Michael Robert’s blog
Michael Heinrich, Marx’s law and crisis theory
http://thenextrecession.wordpress.com/2013/05/19/michael-heinrich-marxs-law-and-crisis-theory/
”In the case of the US economy, the rate of profit fell 24% from 1963 to a trough in 1982, because the organic composition of capital rose 16% and the rate of surplus value fell 16%. Then the rate of profit rose 15% to a peak in 1997, because although the organic composition of capital rose 9%, it was outstripped by a rise in the rate of surplus value of 22%. From 1997 to 2008, the rate of profit fell 12%, because the organic composition of capital rose 22%, outstripping the rate of surplus value, up only 2%. Again, all three phases fit Marx’s law, when the organic composition of capital rose faster than the rate of surplus value, the rate of profit fell and vice versa. Over the 45 years to 2008, the US rate of profit fell secularly by 21% because the organic composition of capital rose 51% while the rate of surplus value rose just 5%. The rate of profit was negatively correlated with the organic composition at -62%, while there was no significant correlation with the rise in the rate of surplus value.”
Others as well as one by Chicago Fed.
NB – rate of profit may be one of the most determinant of capital system’s condition but is certainly not the only metric.
”….from the early 1970s on, the world economy has seen a secular diminution in rates of economic growth, growth of capital stock, and slowing world trade (for the US see Shaikh, A. 1987 and 1999; and Kliman, A., 2010; for an overview of the developed economies more broadly, see Brenner, 2009; Palley, 2007). Taking a 10 year moving
average, John Ross has calculated that: ‘The long term annual growth rate of the US economy has slowed from its historical average of 3.4% … to a 10 year moving average of 1.7%’ (see Fig); According to World Bank data, the world economy used to grow in per capita terms at over 3% during the 1960s and 1970s, while since the 1980s it has been
growing at a rate of 1.4% per year (1980-2009)’ (Chang, H-J, 2010).
This long-term deflationary period, covering several business cycles, was precipitated by a series of exogenous shocks, not all of them consisting in directly economic factors. The tipping point was provided by a concatenation of exogenous elements. It would include the
working through of a series of factors, not all synchronous. The end of Bretton Woods is illustrative. The abrupt ending by the US of this dollar-based gold exchange standard was not only due to economic factors, but overlaid by political developments. The over-supply of dollars relative to US gold-holdings resulted from the need to fund both the war against
Vietnam and what President Johnson dubbed the “Great Society”. And the hitherto untrammelled ascendancy of the US was beginning to be challenged not only by a series of reviving European countries, headed by Germany, and somewhat later by Japan. It was even coming under pressure from some semi-colonial countries, such as South Korea. The
demise of Bretton Woods and the subsequent oil price hike were measured taken or inspired by the US aimed at weakening its imperialist challengers (Gowan, P, 1999).
But there was much more to this secular shift than these underlying economic factors. The collapse of Bretton Woods was not just a shift from an international fixed to a floating exchange-rate regime. It signalled a body blow to the whole post-war architecture, encompassing the International Monetary Fund and World Bank. Up until then, the various
crises could be absorbed by a robust structure. This was the heyday of Keynesianism. Henceforth, even localised crises have had a tendency to shake the whole structure. It is this secular downward curve that has condition the business cycle over the past 4 decades. Successive business cycles do not exhibit repetitive (or, indeed, random) features. They are conditioned by more long-term trends. In this case an overarching downward curve has determined that the recovery after each recession has failed to lead to a sustained increase in rates of profit or rates of accumulation. However, recoveries there have been
.Moreover, different segments of the downward curve can be identified. .However a new downward inflection became evident in the early 1990s – as Reaganism/Thatcherism (monetarism) revealed itself as a cul-de-sac.2The upshot is that the world economy is in the early stages of a crisis of historic proportions….”
http://www.assoeconomiepolitique.org/political-economy-outlook-for-capitalism/wp-content/uploads/2012/06/Grogan-Brian-Its-the-falling-rate-of-profit-stupid.pdf [PDF]
Thanks Steve — It’s all related.
One more clip —
Chang: ‘The ratio of the stock of financial assets to world output rose from 1:2 to 4:4 between 1980 and 2007. The relative size of the financial sector was even greater in many rich countries… The ratio of financial assets to GDP in the UK reached 700% in 2007.’Chang fails to offer a convincing explanation for this reality except the victory of so-called neo-liberalism. It is easy to see that because of the falling rate of profit finance capital
began looking for a home that offered a greater return on capital advanced than would be received from investment in many sectors of industry. Accordingly we began to see the exponential growth of fictitious capital. Specifically, the growing role of derivatives and other complex financial instruments whose leverage and inherent instability periodically
rocked the system. ‘The years since the early 1970s,’ explains Charles Kindleberger in his Manias, Panics and Crashes ‘ are unprecedented in terms of the volatility in the prices of commodities, currencies, real estate and stocks, and frequency and severity of financial crises’ (Kindleberger and Aliber, 2005: 1). This observation was confirmed by the credit
crunch that set-in in the summer of 2008 and the fiscal crises beginning in 2010. This has progressively deepened – notably in the eurozone – but not only there.
It is through the trading of shares and bonds – and derivative instruments – that ownership rights are established and the allocation of capital decided. These markets function internationally to such a degree that trade in capital (debt) is more important than trade in goods and services. This is finance capital. Whilst the financial markets are the arenas for the most obscene forms of speculation, it is vital to understand that the
financial system is crucial to the overall reproduction of capitalist social relations. It cannot be lopped off from the actual arena of surplus value generation and circulation process –but is integral to it. On this basis, the presumed dichotomy between the “real” economy and the financial markets will be challenged. Instead the symbiosis will be identified.
…
..According to the Bank of International Settlements
‘The simple mean of household debtto-GDP for the US, the UK and Spain
declined by only 2 percentage points from 2007 to the end of 2010, while
over the same period for the same countries, government debt-to-GDP
rose 30 percentage points.’ (BIS, 2011). Other capital has gone into commodity speculation as raw materials including food become to be viewed as an asset class.
It is not possible to predict how exactly the present world economic and financial crisis is going to unfold. It would be foolish to try to identify the exact trigger of the next round –although likely culprits can be pointed to (the coming break-up of the euro, a new banking crisis – to name but two). But the trigger should not be confused with the underlying laws of motion, which can be identified. Investment and technological upgrade has continued only at the level of specific sectors and individual companies, as competition between capitals has intensified (as a consequence of the falling rate of profit). But such investment has not been capacity expanding but a process of downsizing – leaner but fitter. By the
same token, it is true that big business at the level of the firm has successfully increased both absolute surplus value (extending the working day) and relative surplus value (speedup, efficiency gains and increases in productivity). But such measures by themselves are not this time around sufficient to re-establish a new period of an upward trend in the rate of profit. The mass of surplus value has to be dramatically expanded overall and on a world scale. The whole imperialist system has to be strengthened. What is required is the drawing into productive employment of vast new layers of the working class. Instead we are seeing a sustained increase in the reserve army of unemployed. This is true even after
taking into account the massive influx of labour into industry in China and India.18 According to the ILO, worldwide 205 million were unemployed in 2010 – an increase of 27.6 million since the beginning of the crisis in 2007 (ILO, January 2011 http://www.ilo.org/global/about-the-ilo/press-and-media-centre/pressreleases/WCMS_150581/lang–en/index.htm
” The mass of surplus value has to be dramatically expanded overall and on a world scale. The whole imperialist system has to be strengthened. What is required is the drawing into productive employment of vast new layers of the working class.” – More intense and frequent competition[s] will prevent this from happening.