Profits surge to 40-year high - When will corporations spend some of

[BR_Parkway]

their hoard?

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BC4257910%2D8351%2D437A%2D8C00%2DE4CF3B782091%7D&siteid=mktw&dist=

WASHINGTON (MarketWatch) -- U.S. corporate profits have increased 21.3% in the past year and now account for the largest share of national income in 40 years, the Commerce Department said Thursday. Strong productivity gains and subdued wage growth boosted before-tax profits to 11.6% of national income in the fourth quarter of 2005, the biggest share since the summer of 1966. For all of 2005, before-tax profits totaled $1.35 trillion, up from $1.16 trillion in 2004 and just $767 billion in 2001.

Meanwhile, the share of national income going to wage and salary workers has fallen to 56.9%. Except for a brief period in 1997, that's the lowest share for labor income since 1966.

"It's a big puzzle," said Josh Bivens, an economist for the Economic Policy Institute. "If this is a knowledge economy, how come the brains aren't being compensated? Instead, the owners of physical capital are getting the rewards."

Despite the flood of cash coming in the door, corporations are investing comparatively little in expanding their operations. Capital spending has been below average, especially considering the strength of the economy, the level of profits and the special tax breaks given to boost investment.

************************

Trickle Down Economics in action. Aren't you tired of being Trickled on?

[BlueEyedSon]

1. Personal/family/household income is flat-to-down, IIRC

[AndyA]

2. Wonder how Bush & Co. will spin this

This would seem to indicate beyond any shadow of doubt that his economic policies aren't working, and are having a negative effect on the American people. Meanwhile, big corporate interests are raking it in.

We all knew this would happen, but it's difficult to argue with the facts. I think as 2006 closes, we'll see that our economy has been taking a dangerous direction under George Bush's policies. And I hope the elections in November reflect the anger and frustration of those who have been hurt by these foolish policies.

[BR_Parkway]

5. This is why the public disagrees with the pundits that the economy

is doing wonderful. They see it everyday as they take money from their stretched thin budget to pay more for gasoline so they can go to work. They take that paycheck home and try to figure out how to buy their kids all these high priced sneakers and electronic gadgets that they know aren't made by their neighbors anymore, but made by cheap labor overseas.

[Horse with no Name]

3. Do you think they will pull a Bill Gates and move their money

to the Euro and out of the country?
And yes, love that trickle down effect...it's a proverbial Golden Shower.

[liberal N proud]

4. Some trickle down.

The shit just keeps getting deeper.

[JHB]

6. What puzzle?

I really hope EPI economist Josh Bivens is being facetious: it should be obvious why "the brains" (not to mention all the other employees) are getting stiffed by "the owners of physical capital": because the owners have no reason to spend money on anyone but themselves. There are no barriers to discourage them from outsourcing, insourcing, or hiring illegals to cut their labor costs, and the tax structure no longer makes it more worthwhile to "invest" in their workforce than to just pocket the extra cash.

[JohnnyRingo]

7. And I thought "Billionaires For Buxh" was a parody

Certainly, if they don't get on their knees and thank Buxh for greasing their way to the top of the economic ladder, they're ingrates indeed.

Meanwhile, I hear from barstool Republicans going to bat for them with comments like: "I hear global warming is a natural cycle that's been going on for decades" "We can't blame industry".

My cockatoo is smarter than these working class conservatives who repeat what they hear on the AM radio.
When Buxh said he was granting tax cuts for "those who deserved it the most", they assumed he was talking about them.

[JHB]

8. EPI's Snapshot

http://www.epi.org/content.cfm/webfeatures_snapshots_20060330

Gross domestic income: profit growth swamps labor income

Data released by the Bureau of Economic Analysis (BEA) today show that in the fourth quarter of 2005 corporate profits claimed the largest share of gross domestic income (GDI) in 37 years.1 The last time profits claimed this large a share of GDI was in the 4th quarter of 1968 (see Figure A ). Since the last business cycle peak (the first quarter of 2001), the share of GDI going to corporate profits has risen by 3.9 percentage points, while the share going to labor compensation has fallen by 1.4 percentage points.


Within the corporate sector, where all income is classified as accruing to either capital (profits plus net interest) or labor (wages plus benefits), the picture is even starker: labor's share of corporate income has fallen by 5.6 percentage points, and capital income's share rose by the same amount. Corporate profits' share rose by 7.8 percentage points, while net interest payments shrank by 2.2 percentage points. This rise in corporate profits' share is, by far, the largest that has occurred 19 quarters after a business cycle peak since World War II, and it is about eight times as large as the average shift that has characterized previous recoveries (see Figure B ). If these shares had remained constant, labor incomes as an aggregate would be $346 billion higher today.



Gee, look at all those profits back when we had a "socialist" tax structure with a top marginal rate between 70 and 90%!

[The White Tree]

9. Interesting - could it be dividend payouts?

It seems to me that would be the most likely explanation. It should be easy enough to have a study that checks that.

The thoughtful rational for not taxing dividends was that companies were not paying them out and locking up the cash in large war chests (Microsoft was famous for this) and the reason was because of the tax that had to be paid(at least this is my understanding of it). Lowering the dividend tax (the chief tax break for the rich) was meant to spur lots and lots of investment as dividend got paid out and then reinvested in the companies allowing them to expand. I wonder if somewhere that just became a vicious cycle of using profits to pay dividends, then use the dividend reinvestment to rebuild the warchest and pay out more dividends as a lure to raising the stock price.

The problem with doing this is that, in order to make your company more attractive to dividend investors, you need to keep increasing your dividend. As more companies do this it puts pressure on all of them to keep up. As a result, less cash is funnelled into investing in the company and more is funnelled into appeasing investors. Also, lots of that cash is also probably not going back into reinvestment in companies directly, as mush as it is being spent on other things, like real estate investment.

If that is true, it would seem that the elements are in place for a big crash at some point when dividend payouts become less attractive and investors shift their assests elsewhere.

Of course this is all just my speculation and I am far from an expert at this but this seems at least plausable to me.

[JHB]

11. That "rationale" was a horsepucky bait-and-switch...

...just like Reagan's tax cuts. The "rationale" behind those was with the lightened tax burden, companies could afford to modernize their plant so that we could regain our industrial competitiveness. Instead, they moved the factories to Mexico or other places, and went on merger sprees which continue to this day.

Funny how all these tax cut rationales fail with the money flowing in the same direction. You'd amost think the actual reason was irrelevant, and all the advocates really wanted was the cut itself. :sarcasm:

[KharmaTrain]

10. They Already Have...You're Just Not A Stockholder

Have a portfolio loaded with energy and defense stocks? You're golden right now.

As a very, very wise person told me a long time ago, when someone loses money, someone is making money...it's just easier to see the one who is losing...the smart ones make the money and no one's the wiser.

Those higher prices you're paying end up somewhere...and with the market on a surge lately, that sure looks like some nice first quarter dividends are forthcoming. Also with the rise in interest rates, lenders will jumping into T-Bills and other bonds as your debt...all of our debt...is bought and sold...the rich always getting richer.

This economy is all but stagnant right now. I can't see a domestic industry (other than defense contracting) that's doing well...but if you're in the big money investment game, that doesn't matter because there's always going to be a profit and always going to be a dividend.

[Neil Lisst]

12. Daddy Bush was right in 1980 when he called it "Voo Doo economics"