Corporate Profits


Yes I am playing with FRED. My thoughts about the graph after the jump.

First isn’t that a long name for a time series ? Profit measurement is controversial. Non-accountants such as myself are afraid to even go there.

Wouldn’t you have guessed a larger ratio ? So much effort seems to be directed at making that number high but it is 0.07 of total domestic income. Where does the rest of capital’s share of value added go ? OK I will try to answer. First a significant fraction of capital’s share of gross income is not net income at all — it is the cost of depretiation of capital (about 15% of GDP). Second some of it goes to creditors of corporations (bond owners and banks) as interest not to shareholders as profits. Indirect taxes aren’t negligeable — some of the value added which doesn’t go to employees goes the the IRS. Finally “corporate” — a large section of the economy but not all of it.

The ratio is amazingly stable (except for the great depression of course). In particular, it didn’t trend up during the period in which the income share of the top 1% shot up. Also it declined and reached a post depression minimum during the Reagan Bush years. Like all the other evidence, the graph suggests that Democratic presidents are good for business. During the perid in the graph, the corporate income tax was effectively slashed from a major source of revenue to the current sick joke. This means that pretax profits used to be a much higher of gross domestic income than they are now.

The ratio is procyclical (of course) but in an odd way with peaks of corporate profits’ share midway through expansions. This very much fits a Phillips curve type story with sluggish wages and wage inflation accelerating during an expansion.

The recent increase seems tiny compared to all the fuss, during the recovery the share increased by 0.6% of GDP.