Capital Beats Labor in US Economic Results

The US national faith says that anybody who works hard enough can get ahead. Recent government statistics don’t disprove this, but they do suggest that getting ahead can be done more easily. It’s better to own stock than to sell labor or lend money.

The figures are telling. Profits from current production as a share of national income have risen from 7% in mid-2001 to 12.2% at the beginning of this year. GDP measures how much the economy generates, while the share of income explains who’s getting it. The 5.2% shift here is the biggest since 1947, when the nation was trying to switchto a peacetime economy. Also, profits have climbed by 123% over the same period (also a record), soaring from $714.5billion to $1.59 trillion, underscoring the shift.

Of course, there can only be 100% of a pie, so if profits go up, something else has to come down. US workers got 58.6% of the national income in the mid-2001 and just 56.2% in the first quarter of 2006. Labor costs represent 70% of corporate expenses, which is why job loss is the quickest way to balance the books when a company is in trouble. What that means is the national pie is going to the people who own stuff instead of the people who do stuff. In many cases, especially in small business and in entrepreneurial situations, the owner is the guy who does things, so the division is not between two mutually exclusive groups.

Another component of the national income is net interest. That figure has fallen from 5.6% in mid-2001 to 4.1% now. That is the result of a low interest-rate environment, and it points up the difference between holding stocks and holding bonds. Bondholders were better off than workers, but it was the equity investors who cleaned up in the first half of this decade.

Globalization is the main reason for this shift. Jobs are mobile, meaning US labor can’t scream for more money. And cash is even more mobile, meaning borrowing for capital expenditure is cheap in many countries (as proved by the low interest rates). Equity wins under this system every time. When interest rates go up, debt holders will benefit, but it is difficult to see how providers of labor will gain under any circumstance that doesn’t involve some kind of legal change to the system.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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