[an analysis of the 1930s Great Depression] [A short paper on that]

Draft: do not quote,

Unless favorably.

James Devine

Economics Department

Loyola Marymount University

The emphasis on increasing gaps within US society typically focuses entirely on disparities amongst wage and salary earners. (It stress can be seen in the work of both Paul Krugman and Robert Reich, who are usually policy foes.) But the fruit of globalization -- which gives capital in the U.S. more choices about where to locate -- so far has also been increased power of capital vis-a-vis labor, even if it sometimes means less power for many individual capitalists in relation to their fellows. This can be seen in recent rises in the profit rate.

Globalization helps explain why the real wages of nonsupervisory workers stagnated relative to the trend growth in their labor productivity. As Thomas Palley writes,

"Up until 1973, productivity and typical worker compensation [which includes benefits such as overpriced health insurance] moved closely together. In the mid-1970s, compensation started to fall behind but continued rising. Compensation peaked in 1978 (a little later than wages), and since then has fallen steadily"

even though labor productivity continued to rise. (See Plenty of Nothing: The Downsizing of the American Dream and the Case for Structural Keynesianism, Princeton, 1998, p. 53.) This did not automatically cause U.S. profitability to rise because of factors such as the growing weight on costs of the salaries of overhead workers, low capacity utilization, and falling output prices relative to consumer prices.

However, the profit share rose steeply soon after the surge of global investment that started in 1988, the wave of downsizings (thinning overhead employment), and the recovery from the recession of 1991-2.1 The share of domestic income taken by property income started soaring in 1992, exceeding the explicitly profit-boosting Reagan era of the 1980s (17.1 percent), though not nearing the Golden Age of the 1960s (21.5 percent). These data come from the Survey of Current Business (June 1998, p. 9, table 9 and chart 5). The rise in the profit share cannot solely be the result of rising capacity utilization rates since capacity use rates show a leveling out (or even a fall) rather than a rise after 1994 despite the dramatic fall in official unemployment rates.2

Not surprisingly, the rate of profit in the U.S. soared steeply starting in 1992, after the Bush-era recession ended. This was more than the usual cyclical uptick of profitability that results from improved capacity use: though it is true that the average for 1990 to 1997 (8.5 percent) was lower than that for the Golden Age (10.8 percent), it exceeds that for the 1970s and 1980s (8.0 and 7.5 percent, respectively).3

The rising profit rate, by the way, is part of the explanation of how the unemployment rate actually got to 4.5 percent in 1998. It was not the Fed's doing, in that its leadership continuously feared inflation and clung to established estimates of the unemployment rate (the NAIRU) below which inflation was "guaranteed" to explode. In fact, they started boosting interest rates in February 1994 in order to "preempt" inflation. Real interest rates -- a clear indicator of the contractionary tilt of monetary policy -- rose starting in 1993, leveling off in 1995 at more than one percentage point above the historical average since 1959.4 Despite this tightness and contractionary fiscal policy,5 between 1993 and 1997, private nonresidential fixed investment actually rose from 9.3 percent to 11.7 percent of GDP. This is partly because the profit rate rose by more than 2 percentage points compared to a real interest rate hike of about 1 percentage point for longer terms to maturity.6 This boom was also partly explained (via the "accelerator effect") by the rise in U.S. exports during these years, a trend unlikely to persist given the current international environment.

It is very unlikely that 4.5 percent official unemployment rates seen in mid-1998 can be sustained for long; the reserve army needed to maintain lofty profit rates is probably higher. Already, wages have begun a cyclical uptick,7 putting a cost pressure on profits, especially given import competition (intensified by the high dollar exchange rate) and the Fed's unwillingness to condone inflation. This threat seems to be only partly counteracted by the falling prices of oil and other imports. Adding in the threat to profit rates from the Asian crisis, investment demand should slacken and unemployment rates should climb soon.8 When the economy slows or falls, this will put an end to the recent profit boom.

For the most important data that this note is based on, click here. For a graph of profit rates, click here. For a graph of the share of interest in profits, click here. For a graph of the output-capital ratio, click here. For a graph of the effective tax rate on profit income, click here. All of these data come from, or are based on, the Survey of Current Business, June 1998.

1. This can be seen dramatically in figure 1 (p. 37) in Michael Reich ("Are U.S. Corporations Top Heavy? Managerial Ratios in Advanced Capitalist Countries," Review of Radical Political Economics, Summer 1998 30(3): 33-45). Unlike the normal pattern of economic prosperity periods of the 1947-90 period, managers and supervisors fell as percent of private nonfarm employment in the 1990s.
2. See the 1998 Economic Report of the President (ERP), table B-54. Rising capacity utilization boosts profit shares because of the role of overhead costs, including overhead salary costs.
3. These data come from the Survey of Current Business (SCB), June 1998, p. 9 (table 9 and chart 5). (For the web page, see http://www.bea.doc.gov/bea/ARTICLES/NATIONAL/NIPA/1998/0698bs.pdf) The rising profit rate results not only from the rising profit share but from rises in the output-capital ratio. The output-capital ratio (Y/K) -- implied by the SCB figures on profit rates R/K and profit shares R/Y -- rose steadily from 1991 on, attaining a level comparable to that of the 1960s. This Y/K increase seems linked to the 1980s and 1990s shake-out of U.S. manufacturing (disinvestment from old equipment and plant), investment in more modern fixed capital, and the falling prices of some capital goods (specifically, computers) and important raw materials such as oil. But until more research is done, this rise is somewhat of a mystery. For example, lot or most of the research on computerization has been about why it has not contributed to labor productivity, ignoring its possible effects on "capital productivity." (See, for example, Jeffrey Madrick, "Computers: Waiting for the Revolution," Challenge, 41(4) July-August 1998, pp. 42-65.) As with R/Y, the role of capacity utilization in explaining recent changes is minimal.
4. This calculation is based on a simple subtraction of the chained GDP price index inflation rate from treasury bond rates, based on tables B-3 and B-73 of the 1998 ERP. The fact that inflation has been slowing in recent years suggests that inflationary expectations have also fallen, so that these estimates are low compared to the expected real interest rate.
5. Robert J. Gordon, Macroeconomics, 7th ed., p. 141, diagram 5-9 shows a shrinking structural deficit after 1992, a sign of contractionary fiscal policy. Government purchases fell from 20.2 percent to 16.5 percent of GDP between 1993 and 1997.
6. This fits with the relative shrinkage of the share of interest income in property income seen in SCB, June 1998, p. 9, table 9, columns (5) and (8). The Investment/GDP ratio is based on ERP, 1998, table B-2. During this period, consumption was a relatively constant fraction of GDP. The more intense battle of competition implies increased pressure for businesses to invest to keep up with (or gain an edge versus) the competition and to avoid losing out permanently. The increased flexibility of capital equipment associated with the computer revolution also seems to have compensated for the increasing uncertainty associated with more intense competition.
7. See Left Business Observer, #8 July 21, 1998, p. 8 and Lawrence Mishel, Jared Bernstein, and John Schmitt of the Economic Policy Institute, "Finally, Real Wage Gains" at http://epinet.org in their section on labor market conditions.
8. As noted, fiscal policy has had a contractionary tilt, as part of the effort to balance the budget and to keep it balanced.

 [an analysis of the 1930s Great Depression] [A short paper on that]