Corporate Profits: Breaking records

Capitalists are grabbing a rising share of national income at the expense of workers says Corporate Profits: Breaking records in The Economist. The accompanying graph shows the company profit share for the G7 to be 14% of GDP in 2004 - up from 10% in the earlier 1980's. The article says this is the highest in 75 years.

...Over the past three years American corporate profits have risen by 60%, wage income by only 10%.

While this is good for capitalists in the short term (because they are getting a greater ROI), the longer term picture is not so good because the proportion of GDP available to purchase goods is less. Currently consumers are either using savings or borrowings to maintain their consumption patterns in the face of declining real wages. Eventually this source of extra income will be exhausted. The consumers are gambling that real income will rise in the long term, or that asset appreciation will be faster than inflation to be converted into income to cover the accumulated debt.

If the share of wages in GDP continues to slide, there could be a backlash from workers who feel short-changed. Yet the chances of this are lower than before. The old divide between “them” and “us” is becoming blurred: many workers also own shares directly or through pension funds, which sooner or later will give them a slice of profits. In any case, there are good reasons to believe that profits growth will soon slow sharply and that workers will make up some of their lost ground.

Emphasis Mine

This is the fallacy of the Ownership Society - decreasing wages is compensated by increasing dividends. Dividends paid into pension funds are forced savings - they are not current income. Because the capitalists still own the majority of shares, most of the increased dividends will accure to them not to the workers. Thus, the increased dividends will only partially offset the decline in real wages and then only to workers who have accumulated shares through savings. The nett effect to move wealth from the least paid workers to the capitalists with some of this wealth being diverted to the higher waged workers.

...History suggests [that it] is normal for the share of profits in national income to rise during the early stages of a technological revolution, but then those extra profits tend to be competed away. ...

... However, there is another factor that might have raised the return on capital relative to labour in a lasting way, namely the integration of China and India into the world economy, along with their vast supply of cheap labour. To the extent that this increases the global ratio of labour to capital, it will lift the relative return to capital. ...

What this means is that consumption will grow in China and India because of the increased wages earned there and will decline in the West as jobs are out-sourced there. This will power the GDP of China and India even further through investment and wages. Conversely, the reverse will happen in the West.

Previous economic booms were powered by cheap labour moving to the factories. Now, factories are moving to where the cheap labour is.

The article ends with a warning about a sharemarket collapse because the shares are overvalued in anticipation of continued ROI at current levels.