Posts Tagged ‘profits’


Thanks to Thomas Piketty’s new book, the returns to capital are now back on the intellectual—if not the political—agenda. But, as one of my students (who just completed a wonderful senior thesis on “The Gilt and the Glitter: Thorsten Veblen, The Theory of the Leisure Class, and the Second Gilded Age”) noticed, the composition of incomes of the leisure class changed between the first and second Gilded Ages: in 1916, most of their income came from “capital”; now, a large portion comes from “salaries”—although, as we can see below (in data from 2007), that’s less true of the top 0.1 percent than of the rest of the top 1 percent.


Robert Solow, in the clearest review of Piketty’s book to date, is the first to notice this change.

You get the picture: modern capitalism is an unequal society, and the rich-get-richer dynamic strongly suggest that it will get more so. But there is one more loose end to tie up, already hinted at, and it has to do with the advent of very high wage incomes. First, here are some facts about the composition of top incomes. About 60 percent of the income of the top 1 percent in the United States today is labor income. Only when you get to the top tenth of 1 percent does income from capital start to predominate. The income of the top hundredth of 1 percent is 70 percent from capital. The story for France is not very different, though the proportion of labor income is a bit higher at every level. Evidently there are some very high wage incomes, as if you didn’t know.

This is a fairly recent development. In the 1960s, the top 1 percent of wage earners collected a little more than 5 percent of all wage incomes. This fraction has risen pretty steadily until nowadays, when the top 1 percent of wage earners receive 10–12 percent of all wages. This time the story is rather different in France. There the share of total wages going to the top percentile was steady at 6 percent until very recently, when it climbed to 7 percent. The recent surge of extreme inequality at the top of the wage distribution may be primarily an American development. Piketty, who with Emmanuel Saez has made a careful study of high-income tax returns in the United States, attributes this to the rise of what he calls “supermanagers.” The very highest income class consists to a substantial extent of top executives of large corporations, with very rich compensation packages. (A disproportionate number of these, but by no means all of them, come from the financial services industry.) With or without stock options, these large pay packages get converted to wealth and future income from wealth. But the fact remains that much of the increased income (and wealth) inequality in the United States is driven by the rise of these supermanagers.

And Solow’s interpretation?

It is of course possible that “supermanagers” really are supermanagers, and their very high pay merely reflects their very large contributions to corporate profits. It is even possible that their increased dominance since the 1960s has an identifiable cause along that line. This explanation would be harder to maintain if the phenomenon turns out to be uniquely American. It does not occur in France or, on casual observation, in Germany or Japan. Can their top executives lack a certain gene? If so, it would be a fruitful field for transplants.

Another possibility, tempting but still rather vague, is that top management compensation, at least some of it, does not really belong in the category of labor income, but represents instead a sort of adjunct to capital, and should be treated in part as a way of sharing in income from capital. There is a puzzle here whose solution would shed some light on the recent increase in inequality at the top of the pyramid in the United States. The puzzle may not be soluble because the variety of circumstances and outcomes is just too large.

Solow seems to be onto something: the source of the salary incomes of the top 1 percent is just as much capital as are the other sources of their income, such as profits, dividends, interest, rent, and capital gains. All of them—including the salaries of “supermanagers”—represent distributions of the surplus initially appropriated by capital.

Therefore, as Solow concludes, “it is pretty clear that the class of supermanagers belongs socially and politically with the rentiers, not with the larger body of salaried and independent professionals and middle managers.”


Special mention

147124_600 147148_600


Special mention

toles04142014 147014_600


Special mention

146938_600 146961_600-1


Special mention

146870_600 146890_600


Special mention

146631_600 146671_600


I have to spend the rest of the day preparing Upton Sinclair’s The Jungle for class tomorrow (for the labor section of my course on Commodities: The Making of Market Society). But before I get to that. . .

The campaign against college players forming unions, as exemplified by Patrick T. Harker in his column today, continues to repeat the false impression that what the “student-athlete-employees” are demanding is to be paid for their efforts. (Even Joe Nocera, who has been very good on exposing the NCAA’s mistreatment of college athletes, makes the mistake.) No, what these employees are asking for is a voice in setting and enforcing the rules that govern their employment in NCAA-supervised athletic competitions—nontrivial things like how much time they are forced to spend in preparing for their sports, what majors and courses they can take, whether or not athletes who are injured will be given adequate medical care, and so on. No one—except the cavalcade of critics—is talking about making the athletes paid employees.

Sure, as Mark Thoma explains, rent-seeking behavior can explain at least some of the rise in inequality we’ve seen in recent decades. But why go through such tortured explanations, which require one or another deviation from perfect competition, when we can explain inequality in a much simpler manner, even when there’s perfect competition: surplus-seeking behavior. Because that’s what we need to focus on: the ability of a tiny minority in today’s economy to capture and keep the surplus being produced by the majority of workers. And how do they manage to get that surplus? Through high corporate profits that flow into CEO salaries, the growth of the financial sector, and capital gains, which in turn are taxed at low rates. And then, on top of those “normal” flows of surplus, we can consider various forms of market power that culminate in economic rents, which make the already-unequal distribution of income based on flows of the surplus even more unequal.

Speaking of inequality, how is it possible to write a paper on “Consumption Contagion: Does the Consumption of the Rich Drive the Consumption of the Less Rich?” in which Marianne Bertrand and Adair Morse [pdf] describe yet another departure from the Permanent Income Hypothesis, and never mention Thorstein Veblen and his Theory of the Leisure Class?

And, finally, under the heading of “let them eat flip-flops and cheap lingerie from Macy’s,” Thomas Edsall does a nice job summarizing the literature that explains why American workers might be wary about the claims that everyone gains from free trade and how the arguments of free-trade zealots like Jagdish Bhagwati ring so hollow these days.

Chart of the day

Posted: 28 March 2014 in Uncategorized
Tags: , , ,


As Ed Dolan explains,

The chart [above] assigns a value of 100 to each component’s share in 2007, the year before the recession began. This chart shows that corporate profits were hit hard in the first months of the recession, but began to recover already by the end of 2008, when GDP was still falling. By the time the economy had officially entered the recovery phase in mid-2009, corporate profits were surging to new highs.

Compensation of employees and proprietors’ income behaved differently. During the downslope of the recession, the shares of those two components held fairly steady, that is, they decreased but only at about the same rate as GDI [Gross Domestic Income] as a whole. After mid-2009, when the economy began to recover, the two diverged. Proprietors’ income grew faster than GDI as a whole, so that its share increased. Compensation of employees grew less rapidly than GDI, so its share began to fall, and is still falling.

These trends in the shares of GDI components provide another view of the substantial changes in the distribution of income and wealth that are underway in the twenty-first century United States. The data shown in our charts are only indirectly related to the more widely publicized increase in the share of total income accruing to top earners, but they explain part of what is going on. It is true that some high earners receive the major part of their income in the form of salaries and bonuses, and that many middle-class families receive some corporate profit income through mutual funds and retirement savings accounts. Still, corporate profits are more unequally distributed and compensation of employees less unequally distributed than income as a whole. That means the rising share in GDI of the former and the falling share of the latter are two of the factors behind the rising fortunes of the super-rich and the relative economic stagnation of the middle class.


Special mention

145759_600 145793_600


Many poor Americans face jail when they can’t pay steep fines for nonviolent crimes, like $1,000 for stealing a $2 beer. That’s because many courts have adopted the “offender-funded” probation model, which fills the coffers of private probation companies and forces taxpayers to pay for the incarceration of poor debtors.

In January 2013, Clifford Hayes, a homeless man suffering from lupus and looking for a night off the streets, walked into the sheriff’s office in Augusta, Georgia. It was a standard visit: he needed police clearance, a requirement of many homeless shelters, to stay overnight at the Salvation Army.

Hayes expected to go straight to the shelter. Instead, he was handcuffed and later thrown in jail. Hayes hadn’t committed a crime – or at least, he hadn’t in many years since 2007, when he committed several driving-related misdemeanor offenses, for which he pled guilty and was put on probation. That probation left him $2,000 in debt for court fines – and fees he was supposed to pay to a private company the state hired to monitor him until his probation ended. Hayes needed to pay $854 to the court to avoid a jail sentence; because he had no money except a $730-a-month disability check, he was thrown in Richmond County lockup.

The cost to taxpayers of Hayes’ eight-month jail sentence: $11,500, according to Georgia court documents.

This is the twenty-first century American equivalent of debtors’ prison.