Markets

The Restoration of the Corporate Profit Share

In the exchange with Brenner, we were talking about profit rates which are defined as the ratio of profit to capital stock. In what follows we will document the empirical evidence for another measure of corporate profitability, the profit share, ie the ratio of corporate profits to GDP. This alternate metric is useful because measures of capital stock are highly sensitive to methodology, especially the treatment of depreciation. The profit share is not the answer to, How profitable are US firms? It is the right answer to, What portion of national income ends up in the coffers of US corporations?

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Figure 1. Pretax profit of US firms, 1935-2016.

Figure 1 displays the ratio of pretax profit of all US corporations since 1935. We see that the profit share was very low during the great depression, rose mightily after the US entry into World War II, largely stayed in double digits until 1969, and fell dramatically thereafter. The profit share was restored partially in the mid-nineties, and much more robustly by the mid-2000s. Since the GFC, the profit share has been close to its historic peak.

Brenner would argue that financial sector profits are an artifact of asset price booms; that we should be looking at the profits of nonfinancial firms. Figure 2 displays the profit share of US nonfinancial corporations. We see that their profit share has also been restored to the postwar level of around 8 percent of GDP.

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Figure 2. Profit share of US nonfinancial firms.

The complement of Figure 2 is the profit share of the financial sector, here operationalized as FIRE (finance, insurance, and real-estate). Figure 3 displays the financial sector share. Financial profits are at their highest level in the postwar period; about 0.5 percent of GDP, roughly $100bn, higher than the average of the postwar period; largely by central bank design—aimed to strengthen the balance sheets of US financial institutions. Note the dramatic crash during the GFC.

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Figure 3. Pretax profit share of US FIRE sector.

Figure 4 displays the effective tax rate on US corporations, obtained by dividing the difference between pretax and post-tax profit by the former. We see that the effective corporate tax rate rose dramatically in World War II, stayed above 40% in the fifties, and has been stepping down since. Remarkably, it is now back at levels last seen before the war.

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Figure 4. Effective corporate tax rate for US firms.

Unsurprisingly, this has led to a dramatic revival in the post-tax profit share. See Figure 5. After-tax profit share is now about 3-4% of GDP higher than that prevailing in most of the 20th century. US GDP is about $18.5 trillion, so corporations are pulling in around $600-700 billion more than they ever did.

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Figure 5. After-tax profit share.

What have the firms done with all this cash? Figure 6 displays the distributed earnings as a percentage of after-tax profits. Whereas in the postwar era, firms retained around 60 percent, in the neoliberal era, they have disgorged around 60 percent of their earnings to investors in the form dividends, and increasingly, share buybacks.

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Figure 6. Distributed profits.

Figure 7 displays the decomposition of US corporate profits into broad sectors. Nonfinancial Nonmanufacturing is the residual category, largely made up of services and extractive industries; FIRE is finance, insurance, and real-estate; ROW is receipts from abroad in gross terms, ie we have not deducted the profits earned by foreign firms. A number of observations are in order.

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Figure 7. Corporate profit decomposition.

First, the share of manufacturers declined steadily from around 6 percent in the fifties to about 2 percent of GDP by the 1980s. It has since fluctuated around the 2 percent level. Some of the decline in the manufacturing share is definitely real; profitability was never really restored in the great mid-century rust-belt industries. But some of it is only apparent. Due on the one hand to servicification, whereby value-added that had hitherto been embodied in the manufactured product is now provided as a service. And on the other, to Baldwin’s “second unbundling” whereby firms relocate production processes offshore, often within a few hours flying distance. In the former case, the same profit ends up in the nonfinancial nonmanufacturing sector. In the latter case, it shows up as receipts from abroad (the ROW sector).

Second, whether or not due to the supply chain revolution, receipts from abroad now amount to 4 percent of GDP. That comes to more than $600 billion a year. Since the GFC, US firms have booked slightly more than 5 trillion dollars of profit earned overseas. In the same period, manufacturers’ profit came to $2.85tn and that for FIRE to $2.35tn. So the rest of the world is roughly as big as finance, insurance, real-estate and all of US manufacturing put together. This is of signal importance to the political economy of the United States.

Third, services and industries that make up the residual nonfinancial nonmanufacturing sector seems to have become the dominant sector in the economy. Yet, unpacking it one is hard put to find an actual sector of sufficient mass. Figure 8 displays some sectors of interest. We choose sectors with an eye to US political economy. “Oil-based” includes all sectors heavily reliant on fossil fuels—oil and gas exploration, petroleum products, chemicals and plastics; “Tech” includes computer design and manufacture, information processing, media and entertainment; “Finance” includes only securities and credit intermediation; “Trade” includes wholesale trade, retail trade, warehousing and transportation. We sum up the profits of each of these sectors for two three-year late-cycle periods, 2004-2006 and 2012-2014.

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Figure 8. After-tax profits of selected sectors.

The dominance of multinationals and finance is manifest. Receipts from abroad alone amounted to slightly more than $2tn in 2012-2014, dwarfing the $155bn in healthcare, $340bn in Tech, $375bn in oil-based, and $616bn in trade. It is more than twice as big as US manufacturing whose profits in 2012-2014 were $910bn. At $1.5 trillion, only finance can compete with the multinationals.

In the frame of the investment theory of party competition, I posited that finance and multinational firms have congruent interests and their political alliance constitutes a hegemonic bloc of investors in the system of 1980; and that this was the source of the stability of the neoliberal consensus. The evidence suggests that we should think of multinational firms as the stronger party in that alliance.

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