“Profits Without Production”

For me, Profits Without Production equates to Profits sans Direct Labor Input. In most manufacture in the US today, Direct Labor Input is an extremely small ~10% of the Cost of Manufacturing which will vary up and down dependent upon the industry. (For the accountants and the purists, this does not include customary or legislative benefits which I categorize as Overhead. Drucker and many other consultants [including myself] have repeatedly pointed out that whacking labor to reduce the costs of manufacturing is akin to beating a dead horse and this cost has been dropping because of efficiencies since the sixties. It no longer represents the mountain of cost even though it has been fictionalized and demonized by Delphi’s Miller while Delphi was angling for bankruptcy in the last decade.) Maybe I have not searched in the right areas or blogs to read up on this topic; but, Paul Krugman in his latest article dicusses what I believe has become more wide spread in the US over the last decade, Profits Sans Labor or as he points to Production. Yet this is a growing trend and I have not seen much on the topic of Profits sans Labor or Production.

“You can argue that Apple earned its special position — although I’m not sure how many would make a similar claim for … the financial industry… But here’s the puzzle: Since profits are high while borrowing costs are low, why aren’t we seeing a boom in business investment? …

Well, there’s no puzzle here if rising profits reflect rents, not returns on investment. A monopolist can, after all, be highly profitable yet see no good reason to expand its productive capacity. . . .”

While it is possible to produce a part without direct labor input to it with automated machines, my point in particular is about the rise of profits in certain industries (if one could call them such) with no direct labor input or material product in the end. Paul points to the financial industry as having spectacular profits as a percentage of the whole and most recently at 30% of Corporate Profits in the US. Pre-2008 Wal Sreet/TBTF recession, the percentage of corporate profits coming from the financial industry was even higher at 40%. Given not much has changed in the financial industry with new regulations and transparency of transactions, I suspect the financial industry will recoup this high with the government’s backing after almost committing self destruction in 2008.

“From 1990 to 2006, the GDP share of the financial sector in the broad sense increased in the United States from 23% to 31%, or by 8 percentage points. The figures on profits are even more striking. For example, the financial services industry’s share of corporate profits in the United States was around 10% in the early 1980s but peaked at 40% last year.How might the current financial crisis shape financial sector regulation and structure?

While I agree with Paul Krugman on the problem of growing monopoly rents or the profits without investment, I think he misses the larger picture. The growth of profit without production is coming at the expense of labor input and has been going on for a longer time than just recently. The financial industry has become gambling professionals with its CDS, naked CDS, etc. involving little or no investment in production or labor. That excessive profit-taking has expanded into nonfinancial industry such as Apple is no surprise. The tax rate supports such action by companies. Why should they invest?

Perhaps, I take it a bridge too far with Mr. Krugman’s comments; but until companies begin to expand utilizing Labor input, the problem with unemployment and a shrinking Particiaption Rate are not going to go away. In the end, we may yet reach the the Fed’s 7% unemployment goal as Participation Rate shrinks and U3 is determined from its smaller base.