More national income diverted to capital in 2013 than 2012…
Let’s compare 2012 to 2013.
- From 4th quarter 2011 to 4thQ-2012, real GDP rose $294 billion. During that time, capital income fell $225 billion, while labor income grew $519 billion.
- From 4thQ-2012 to 4thQ-2013, real GDP rose $432 billion. During that time, capital income grew $444 billion while labor income fell $12 billion.
Granted there was a big spike in labor income at the end of 2012, but we now see the spike going in the other direction, toward capital income. From 3rdQ-2013 to 4thQ-2013, capital income rose $113 billion, while labor income only rose $11 billion.
Looks like there were very small Christmas bonuses this year.
At the end of 2012, the strategy was to take personal income before the tax changes of 2013. The strategy this year seems to be boost earnings for some buybacks. We already see a buyback here from Apple.
Apple CEO Tim Cook: Company has repurchased $14 billion of its shares since reporting earnings – @WSJbreakingnews http://t.co/JTAgeZowLN
— Breaking News (@BreakingNews) February 7, 2014
Non-financial corporations are hoarding about $2 trillion in cash or cash equivalents (earning enough for capital preservation) and banks are hoarding another over $2 trillion in excess reserves. So, there’s a lot of idle capital, along with idle labor.
A higher minimum wage will replace some labor with capital, because capital becomes relatively cheaper. However, better jobs are created, because capital expenditures increase and workers create, build, ship, install, improve, maintain, operate, and manage those machines.
Currently, in the U.S., there’s an overabundance of capital and an education boom.
There are too many overeducated workers in low-skilled jobs.
Of course, some jobs cannot be replaced with capital equipment. However, capital equipment can raise labor productivity.
I think the cash hoarding may have another source. Recall that during late 2008 the credit markets essentially shut down, with short term commercial paper being hard to sell. As a result CFO’s IMHO have decided that they need more cushion in case they can’t borrow short term if another event like Lehman happens. They have decided that they need to be able to go some period without borrowing at all. Thus the need of a larger cash cushion.
Essentially the post Lehman crisis taught folks that the old idea of if your a healthy corporation you can borrow whenever you need to is not valid, thus leading to a decision to keep more cushion to allow the corporation to go longer without borrowing without going into chap 11.
Lyle,
Thank you… That is a good observation.
Lyle, I agree, that’s true to some extent. Also, large corporations believe government bailouts will be tougher, and major banks can’t rely on “too-big-to fail” (also, there are tougher regulations and higher standards, along with more oversight). So, there’s more risk-aversion. And, there’s more uncertainty, because of the deep depression, since June 2009 (when the Bush recession ended).
Here’s a relevant article by Paul Krugman how the economy has changed, particularly since 2000, although it doesn’t explain why banks are holding over $2 trillion in excess reserves.
Profits Without Production
June 20, 2013
“Economies do change over time, and sometimes in fundamental ways.
“…the growing importance of monopoly rents: profits that don’t represent returns on investment, but instead reflect the value of market dominance.
…consider the differences between the iconic companies of two different eras: General Motors in the 1950s and 1960s, and Apple today.
G.M. in its heyday had a lot of market power. Nonetheless, the company’s value came largely from its productive capacity: it owned hundreds of factories and employed around 1 percent of the total nonfarm work force.
Apple, by contrast…employs less than 0.05 percent of our workers. To some extent, that’s because it has outsourced almost all its production overseas. But the truth is that the Chinese aren’t making that much money from Apple sales either. To a large extent, the price you pay for an iWhatever is disconnected from the cost of producing the gadget. Apple simply charges what the traffic will bear, and given the strength of its market position, the traffic will bear a lot.
…the economy is affected…when profits increasingly reflect market power rather than production.
Since around 2000, the big story has been one of a sharp shift in the distribution of income away from wages in general, and toward profits. 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.
And Apple again provides a case in point: It is hugely profitable, yet it’s sitting on a giant pile of cash, which it evidently sees no need to reinvest in its business.
Or to put it differently, rising monopoly rents can and arguably have had the effect of simultaneously depressing both wages and the perceived return on investment.
If household income and hence household spending is held down because labor gets an ever-smaller share of national income, while corporations, despite soaring profits, have little incentive to invest, you have a recipe for persistently depressed demand. I don’t think this is the only reason our recovery has been so weak — but it’s probably a contributory factor.”
People forget how tapped out capital was after the Y2K/90’s boom. IMO they spent a decade+ building up savings and after 2008, went even further.
Notice for all the talk about national income diverted to capital in 2013, more investment was taking place. The spending spree has begun again.
Peak Trader,
Thank you for that article and highlights. Very good.