Profits are definitely up. In fact, as Doug Henwood reports in a post on his Left Business Observer blog, corporations are “flush with cash”:
At last count, U.S. nonfinancial corporations had nearly $16 trillion in financial assets on their balance sheets, almost as much as they have in tangible assets. The gap between internal funds available for investment and actual capital expenditures—what’s called free cash flow—is very wide at around 2% of GDP. That’s down from the high of 3% set a couple of years ago, but sill higher than at any point before 2005.
So, what are corporations doing with all their cash? Well, definitely not investing in new plant or equipment.
Quoting Henwood again:
What matters for the accumulation of real capital is net investment—the gross amount invested every year less the depreciation of the existing capital stock. We’ve just gotten numbers for 2012, and they’re remarkably low. Private sector net nonresidential fixed investment (as a percent of net domestic product, or NDP) fell below 1% in 2009. It’s recovered some, to just over 2% last year, but that’s half the 1950-2000 average, and lower than any year between 1945 and 2009. We won’t have 2013 numbers until August of next year, but it looks like they’ll stay in this depressed neighborhood.
Instead of investing, “corporations are shoveling cash out to their shareholders. Through takeovers, buybacks, and traditional dividends, nonfinancial corporations are transferring an amount equal to 5% of GDP to their shareholders these days—again, down some from recent highs, but very high by historical standards.”
These trends help explain how the top 1% of income earners were able to capture 95% of all the income gains over the period 2009 to 2012. They also help explain why continued stagnation appears the most likely outcome for the years ahead.
The following table reveals much about the way our economic system operates. It shows that the top 1% captured 68% of all the new income generated over the period 1993 to 2012.
Now that is a long time period, one that includes several recessions and expansions.
Looking just at our current expansion, from 2009 to 2012, we see that the top 1% captured 95% of all the real income growth. The great majority of Americans might find this expansion disappointing, but not the top earners. The current dominance of the top 1% is striking. The top 1% only captured 45% of the income growth during the Clinton expansion and 68% during the Bush expansion.
The following chart offers another perspective on how well top income earners are doing. In the words of the New York Times article that included the chart:
the top 10% of earners took more than half of the country’s total income in 2012, the highest level recorded since the government began collecting the relevant data a century ago . . . The top 1% took more than one-fifth of the income earned by Americans, one of the highest levels on record since 1913 when the government instituted an income tax.
We have a big economy. Slow growth isn’t such a big deal if you are in the top 1% and 22.5% of the total national income is yours and you can capture 95% of any increase. As for the rest of us . . .
One question rarely raised by those reporting on income trends: What policies are responsible for these trends?
The government announced that the unemployment rate fell in August, down to 7.3 percent from 7.4 percent in July. But there is little reason for cheer. As Business Week explained:
The worrisome part is why the rate fell. The size of the workforce declined by about 300,000 and the participation rate fell to 63.2 percent from 63.4 percent—the lowest since August 1978. The participation rate is the number of people either working or actively searching for work as a share of the working-age population. It rose steadily over the years as more women entered the workforce before falling sharply in the 2007-09 recession, and it hasn’t recovered since.
In other words, the unemployment rate continues to fall only because people continue to lose hope of finding a job. The chart below shows the trend in the U.S. labor force participation rate.
The following chart highlights one reason for our dismal employment record. In contrast to previous recoveries, state and local government spending has been slashed, resulting in an ongoing contraction in state and local employment, with negative consequences for private sector employment as well.
And, it is worth emphasizing, this shrinking labor force participation rate, which represents a clear failure on the part of our economic system to create jobs, is taking place during a period of economic expansion. One can only shudder at what lies ahead for working people when this expansion finally ends in a new recession.