Heavy Lifting - thoughts and web finds by an economist
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Wednesday, August 30, 2006
Here's another interesting picture. However, the title is so misleading and misrepresentative that whatever information is included in the graphic is lost. The NYT puts the negative spin that profits are at an all time high, but fails to recognize a) that profits are remitted to share-holders, who are themselves often wage earners, and b) that profits and wages ONLY comprise 53% of GDP. Hence, the wages alone do not account for all worker compensation, even for the median worker.
Now, I'm no big-city macroeconomist, but here's what I remember from principals of macroeconomics:
GDP = C + I + G + (X-M)
In 2000, it was estimated that consumption (C) accounted for 67.5%, investment (I) for 17.5%, government (G) was 17.5%, exports (X) accounted for 11% and imports (M) accounted for 13.5%. of GDP.
If consumption accounts for two thirds of GDP, and wages and profits, which finance current and future (and partly past) consumption, only account for 58%, where is the difference coming from? Perhaps it is all debt spending, but I doubt it. My take is that the picture is too misleading to provide reasonable visual inference.
The historical norm is that pre-tax profits account for roughly 9-11% of GDP and the post-tax profits from 7.5-9% of GDP. Instead of taking the immediately negative view of this, consider this. We get a $12 trillion economy with all these goodies and all we have to do is throw seven to nine cents on the dollar to the folks who dream up the goodies, make the goodies, ship the goodies, and wait for us to come buy the goodies.
In that light, the profit rates might not be that outlandish and, indeed, might represent a swinging deal. If you turned it around and asked most people in the country, "would you put your heart, dreams, sweat, and inspiration into manufacturing a product, taking it to market, and hoping it would sell, while simultaneously dealing with all sorts of bureaucracy, unionization, intermediate good producers, taxation, regulation, litigation, and other such hindrances, all for an average return of 10 cents on the dollar?" I think most people would scoff and say "No Way!!"
Thankfully there are enough folks who say "Sure!" Perhaps we should be less critical and more thankful of these individuals.
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