The Federal Reserve Board released an item of good news that might be missed. The Financial Accounts for the fourth quarter showed a decline in profit share of national income to 12.0 percent, the lowest annual share since 2009. It is far too early to know if this shift will be enduring, but it is encouraging in any case. On the plus side, wages have been growing rapidly in recent months, so this shift to wages may continue for the immediate future....Beat the Press
Profit Shares Fall to the Lowest Level Since 2009
Dean Baker | Co-director of the Center for Economic and Policy Research in Washington, D.C
2 comments:
Tom,
The profit share is completely misleading. This is because of increased globalization and how corporate statistics are compiled.
This latter chart, CPATAX/GDP, and that of its twin brother, CPATAX/GNP, is an illusory result of flawed macroeconomic accounting. In the paragraphs that follow, I’m going to try to clearly and intuitively explain why. Hopefully, the chart will disappear once and for all.
Please note at the outset that the flaw in the chart has nothing to do with the fact that foreign sales are earned at a higher profit margin than domestic sales. That’s a separate issue. This issue is much more basic. The chart effectively treats foreign sales as if they were earned at an infinite profit margin, because it doesn’t account for their costs. The sharp upside breakout seen from 2003 onward is due in large part to this mistake.
The expression CPATAX/GDP contains an obvious distortion. CPATAX is a “national” term–it refers to the after-tax profit of all U.S. resident corporations, whether that profit is earned domestically, or from operations in a foreign country. GDP, in contrast, is a “domestic” term–it refers to the total gross output (and therefore the total gross income) produced (and earned) inside the United States, whether that income is earned by U.S. residents or by foreign entities.
Notice that if a U.S. corporation earns a profit from affiliate operations abroad, the profit will be added to the numerator of CPATAX/GDP, but the costs will not be added to the denominator, as they should be in a “profit margin” analysis. Those costs, the compensation that the U.S. corporation pays to the entire foreign value-added chain–the workers, supervisors, suppliers, contractors, advertisers, and so on–are not part of U.S. GDP. They are a part of the GDP of other countries. Additionally, the profit that accrues to the U.S. corporation will not be added to the denominator, as it should be–again, it was not earned from operations inside the United States. In effect, nothing will be added to the denominator, even though profit was added to the numerator.
General Motors (GM) operates numerous plants in China. Suppose that one of these plants produces and sells one extra car. The profit will be added to CPATAX–a U.S. resident corporation, through its foreign affiliate, has earned money. But the wages and salaries paid to the workers and supervisors at the plant, and the compensation paid to the domestic suppliers, advertisers, contractors, and so on, will not be added to GDP, because the activities did not take place inside the United States. They took place in China, and therefore they belong to Chinese GDP. So, in effect, CPATAX/GDP will increase as if the sale entailed a 100% profit margin–actually, an infinite profit margin. Positive profit on a revenue of zero.
Similarly, if a foreign corporation earns a profit from operations inside the United States, both the costs and the profit will be added to the denominator of CPATAX/GDP, but the profit will not be added to the numerator. That profit–which accrues to the foreign corporation operating domestically, and is part of U.S. GDP–is not part of CPATAX.
Volkswagen runs a very successful plant in Chattanooga, TN. Suppose that this plant produces and sells one additional car. The profit will not be added to CPATAX, because it was earned by an affiliate of a foreign resident corporation, rather than a U.S. resident corporation. But the wages paid to the workers that operate the plant will be added to GDP, because the production took take place inside U.S. borders. So, in effect, CPATAX/GDP will fall as if the sale had occurred at a 0% profit margin. No profit on positive revenue.
source: Profit Margins: The Death of a Chart
The profit share is completely misleading.
Very interesting.
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