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What's The Source Of Soaring Corporate Profits? Stagnant Wages

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

What if all the low-hanging fruit of outsourcing jobs and financialization have already been plucked by Corporate America?

The connection between soaring corporate profits and stagnant wages is both common sense and inflammatory: common sense because less for you, more for me and inflammatory because this harkens back to the core problem with the bad old capitalism Marx critiqued: that capital dominates labor and thus can extract profits even as the purchasing power of wages declines.

(What Marx missed because he was early in the cycle was capital's dominance over the central state's political machinery--a topic covered here in The Purchase of Our Republic.)
 
New good capitalism generates wealth for everyone via soaring profits which drives the valuations of stocks ever-higher, enriching workers' pension funds and boosting spending, some of which trickles down to those who don't own any stocks, either directly or indirectly.
 
Bad old capitalism trumps new good capitalism if the soaring profits are basically wages diverted to the few who own most of the financial capital. In Marx's analysis, this gradual impoverishment of labor eventually erodes capital's ability to sell products, undermining capital's ability to reap profits.
 
The endgame of this is obvious: once capital can no longer make profits selling goods and services and wage-earners can no longer afford to buy goods and services, the system disintegrates.
 
The magic "solution" of the past 40 years is to enable labor's continuing consumption with debt. And when labor is over-indebted and can no longer service more debt, then the central state (government) borrows and spends trillions of dollars to replace sagging private consumption.
 
This reliance on debt doesn't void Marx's endgame, it simply give it another twist:the system collapses in a credit/currency crisis rather than a labor/capital confrontation.
 
Longtime correspondent David P. recently submitted two charts which reflect the diversion of wages to corporate profits. Here are David's commentary and charts:
 

John Hussman said something interesting a while back - he was talking about whether or not the current level of corporate profits was sustainable, and he pointed out that in order to have those profits rise as a % of GDP, they had to be snatched from somewhere else. I was intrigued and asked myself, where might they be snatched from? 

Here’s a chart that appears to show at least a chunk of where they came from. Wages & Salaries/GDP dropped from about 47% of GDP in 2001 down to 42.7% of GDP today. At the same time, (non-financial) corporate profits rose from about 2% to 6% of GDP. So wage earners lost 4.3%, while non-financial companies gained 4%. 

There was a very steep climb in corporate profitability from 2001-2008, during the height of the housing bubble, and a brisk drop off in the chunk of the economy provided to wage earners. Perhaps - globalization? Jobs lost to China? That’s the period where China started to really become a powerhouse. Yet after a brief drop during the recession, it's now back up to its peak levels.

 

And here’s one more chart, aligning corporate profits (total) as a % of GDP - includes financial companies too. Notice how the S&P 500 (SPX) tends to follow (more or less) the profits skim off the economy. The linkage isn’t there during the 1995-2000 period, but it sure is for the rest of the period. So - unless and until the corporate skim drops as a % of GDP, I think our S&P 500 (SPX) is going to remain elevated. 

Can this Corporate Profits/GDP series grow to the sky? I don’t know. But it is certainly doing pretty well right now. A combination of outsourcing and low rates = a great corporate environment for profits, taken from savers and wage-earners. 

Who do we blame? Debt constructed from the housing bubble (which went to increase financial corp profits) as well as outsourcing, which allowed companies to snatch that % of GDP from workers (increasing non financial corp profits).
So to Hussman’s point - is this sustainable? As long as work continues being outsourced, unemployment is relatively high (i.e. wage pressures are low) and as long as the debt remains intact, I think it is.

 
Thank you, David, for the charts and commentary. I think David's conclusion raises two further questions:
 
1. What if all the low-hanging fruit of outsourcing jobs and financialization have already been plucked by Corporate America?
 
2. What happens when wage-earners can no longer substitute debt for earned income to sustain their consumption?
 
If these two conditions are running out steam, then the endgame of corporate profit growth is closer than we might imagine.
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Mon, 06/09/2014 - 11:10 | 4837074 JRobby
JRobby's picture

Price Increase

Stagnant wages

Part timers, Job "sharers" 1099ers = no benefits

Who will they sell to? 

Ad's and promotions currently slanting toward capturing a larger piece of a shrinking pie by employing claims and pricing that can never be substantiated or sustained.

Mon, 06/09/2014 - 11:12 | 4837093 Relentless101
Relentless101's picture

Bingo. Its easy to see when you compare profits agains profits at companies with high operating leverage, such as IBM.

Mon, 06/09/2014 - 11:27 | 4837132 dryam
dryam's picture

Don't click on this Hilliary link if you are susceptible to vomiting.  I saw this on Drudge this morning.....

http://www.realclearpolitics.com/video/2014/06/09/hillary_clinton_we_cam...

Mon, 06/09/2014 - 11:37 | 4837166 CCanuck
CCanuck's picture

Take dryam's advice, I have a strong tolerance for disgusting information...I gagged, and even threw-up alittle.

What a vile piece of shit that lying cunt is!

Mon, 06/09/2014 - 11:57 | 4837244 dryam
dryam's picture

Surprised the Tyler's haven't given this a dedicated article.

Mon, 06/09/2014 - 11:40 | 4837185 Relentless101
Relentless101's picture

Holy shit...

Mon, 06/09/2014 - 15:18 | 4838053 Miggy
Miggy's picture

These articles always get it wrong for whatever reason. It's simple supply and demand. Less jobs due to NAFTA-GATT, favored nation status to China. More labor due to open borders.

 

If a business can get a solid employee at 8 bucks an hour with no benefits they will do so. Also, because of the health care fiasco businesses are more and more looking toward emloyment agencies who get a cut of the wage.

Mon, 06/09/2014 - 11:40 | 4837189 JRobby
JRobby's picture

Wow! Power spew.

Such a model couple sticking it out like they have. Bill had to go out and earn double because.............. I lost conciousness from the convulsions at that point.

Mon, 06/09/2014 - 11:41 | 4837198 Relentless101
Relentless101's picture

because..... blow jobs aint cheap anymore.

Mon, 06/09/2014 - 11:44 | 4837203 Joe Davola
Joe Davola's picture

She was such a whiz with cattle futures after reading Barrons, why didn't she just make that her career?

Mon, 06/09/2014 - 11:53 | 4837225 RaceToTheBottom
RaceToTheBottom's picture

OK, regardless of the trueness of the link, don't steal someones VALID and INFORMATIVE post to push your unrelated agenda.

There is common civility even in fight club...

Mon, 06/09/2014 - 12:22 | 4837300 dryam
dryam's picture

"Stealing"?  It was clearly stated where that link came from.  Agenda?  I have no agenda.  The point of that information is the extent of the dishonesty in our political system/elites....

a millionaire many times over with great earning power ahead of them who is portraying themselves as someone who is simply struggling along the likes of most hard working Americans.  It's actual video with those words coming out of the own person's mouth.  There's no editing, twisting, or manipulation of what the person said.  People with agendas manipulate the facts.  I ask, what was manipulated in this posting?

I had no intent to distract from Charles Hugh Smith's article.  He commented on common wage earners.  My post related to common wage earners and how Hilliary was trying to make herself sound as though she was one of them.  I doubt Charles Hugh Smith would frown on me shedding light on the elites being dishonest.

Mon, 06/09/2014 - 12:36 | 4837369 RaceToTheBottom
RaceToTheBottom's picture

I did not say you stole the link, I said you stole value from the previous persons post by adding your unrelated post to the end of it.

You very much have an agenda, hense your post.  Everyone has an agenda, at least be honest to yourself about yours.

 

Mon, 06/09/2014 - 13:13 | 4837482 dryam
dryam's picture

It would have been more correct for me to say that I have no *hidden* agenda.  My agenda is for truth whatever that may be, period.

Mon, 06/09/2014 - 12:45 | 4837373 RaceToTheBottom
RaceToTheBottom's picture

deleted

Mon, 06/09/2014 - 14:31 | 4837857 boogerbently
boogerbently's picture

Vomit????

I'm getting all misty.

These valiant, public servants !

Mon, 06/09/2014 - 11:13 | 4837098 Occident Mortal
Occident Mortal's picture

Trickle down doesn't work because by the time the money has trickled down inflation has already devalued it.

Mon, 06/09/2014 - 11:40 | 4837183 Ignatius
Ignatius's picture

The parasite consumes the host.

Corporations, due to their extraordinary political power ($), can and do exclude competition and control the process (ObummerCare, etc.).

The latest I read this morning was that the FDA was outlawing the use of wood as a base for aging heritage/craft cheese because it's "unsanitary".

Mon, 06/09/2014 - 11:48 | 4837212 BLOTTO
BLOTTO's picture

Don't worry gang, 'their' dysfunction will be their downfall one day, it is inevitable.

.

Evil is dysfunctional...

 

Mon, 06/09/2014 - 23:34 | 4839503 boogerbently
boogerbently's picture

True, that.

At some point, we (Americans) will be in the "news" behaving like other 3rd world nations, throwing off their tyrannical rulers.

.....and in Cincinnati, USA, today.....

(film of rebels throwing rocks at "police" from behind a wall of burning tires.)

Mon, 06/09/2014 - 12:23 | 4837313 overmedicatedun...
overmedicatedundersexed's picture

back to the land thats the answer?? LOL after you get thru paying your taxes, like most small farmers you get a job in town to try to make ends meet, and end up working hours more than a coolee..bank robbery now there's an option that could pay off. the robin hood fable was for times like these..if you ain't in crime, your not happening bro..

Mon, 06/09/2014 - 13:26 | 4837543 11b40
11b40's picture

Same for small businesses throughout the land.  Work, work, and more work for ever shrinking returns.  Meanwhile, I work with some very large retail accounts, and they have NEVER been more margin greedy.  It really is amazing to see how they have expanded margins over the past 10-15 years, while driving down margins for suppliers.  Unless you have a dominant brand name they really need, they will beat you to death to drive down your prices, all the while raising their own.

And, it's not just prices.  Everyone wants you to do more for them, too, and do it faster.

Mon, 06/09/2014 - 13:39 | 4837592 Stuck on Zero
Stuck on Zero's picture

Ignatius you are right,  The only thing that can drive corporate profits above wages is lack of competition.  All the government would need to do is break up the Fortune 500 companies and creat a little competition.

 

Mon, 06/09/2014 - 12:22 | 4837312 silentboom
silentboom's picture

So what you're actually saying is that inflation doesn't work and I would agree with that.

Mon, 06/09/2014 - 11:16 | 4837102 Stuck on Zero
Stuck on Zero's picture

Who will they sell to?

Billionaires.  The 0.01%.  The elite.  The rest are useless eaters.

 

Mon, 06/09/2014 - 11:29 | 4837115 JRobby
JRobby's picture

Wow! What a day I am having! A billionaire just called and ordered 42,000 of these:

 

http://www.toysrus.com/buy/sprinklers-water-slides/blast-zone-tropical-s...

Mon, 06/09/2014 - 12:37 | 4837375 Shizzmoney
Shizzmoney's picture

Hey guys, help is on the way as "Wall St worries about the common man"

http://www.boston.com/business/markets/2014/06/09/wall-street-worries-ab...

These assholes have no idea whats coming to them.

Mon, 06/09/2014 - 16:34 | 4838401 Jumbotron
Jumbotron's picture
What's The Source Of Soaring Corporate Profits? Stagnant Wages

 

No.....Fucking.......SHIT  !!!!!!!!

Mon, 06/09/2014 - 11:07 | 4837079 Sick
Sick's picture

What we have been witnessing is total destruction.  As consumption declines, production declines, fixed costs must be absorbed by fewer produced goods and costs rise, prices rise, profits decline.....it is a cycle that then gets repeated until we all go down the drain.

Mon, 06/09/2014 - 11:48 | 4837213 101 years and c...
101 years and counting's picture

it shouldve been noted that is non GAAP earnings.  which simply means corp balance sheets are being filled up with piles of shit.  which all get released during recessions....which drops profits 30-40% because of all these "1 time charges".

Mon, 06/09/2014 - 11:11 | 4837085 buzzsaw99
buzzsaw99's picture

where is the pious commentary that states: crony crapitalism at work ??

Mon, 06/09/2014 - 11:22 | 4837120 zaphod42
zaphod42's picture

I guess you're it, Buzz.

 

Craig

Mon, 06/09/2014 - 11:15 | 4837100 OC Sure
OC Sure's picture

The reasoning set forth in this article is unreasonable.

"The endgame of this is obvious: once capital can no longer make profits selling goods and services and wage-earners can no longer afford to buy goods and services, the system disintegrates."

Instead of pitting employers against workers, why not ask the question, "What is the reason capital can no longer make profits and wage-earners can no longer afford goods?" The answer is that there is a 3rd party on a multi-generational tyranny of modern economics which decreases the purchasing power of the currency. The tyranny steals from both the employer and the worker. http://ocsure.blogspot.com/2014/06/tyranny-of-modern-economics.html

Mon, 06/09/2014 - 11:22 | 4837116 Headbanger
Headbanger's picture

No it's not unreasonable.  It's a valid question to ask what will happen when debt serfs can't afford to buy much anymore.

And it doesn't matter what the reason is as you're asking because it's going to happen and the whole system collapses into a pile of shit.

Mon, 06/09/2014 - 11:35 | 4837128 OC Sure
OC Sure's picture

What is the reason they are becoming serfs to debt? Is the employer to blame or the central banks?

It matters very much what the cause is. It is the politicians, bureacrats and business quislings who are to blame and not honest hard working employers whose peripheral effect of pursuing their own happiness is to offer someone else a job.

Who creates productive work and who steals from it?

Mon, 06/09/2014 - 11:37 | 4837173 ebworthen
ebworthen's picture

"...honest hard working employers..."

Well, there are a few left, here and there.

Too bad the small business person is being crucified by the New Rome.

Mon, 06/09/2014 - 11:40 | 4837188 OC Sure
OC Sure's picture

One drop of poison anywhere dilutes into the system everywhere.

Mon, 06/09/2014 - 13:43 | 4837615 Seer
Seer's picture

"It matters very much what the cause is."

Correct.  BUT... your assessment is totally WRONG (refer to my reply above; also, Headbanger's answer/reply is also inline with mine).

Mon, 06/09/2014 - 14:27 | 4837838 OC Sure
OC Sure's picture

I found your reply below if that is the one you mean...

Decreasing the purchasing power of the currency is not growth. It is theft. There is no growth in the purchasing power of wage earners because the power to purchase is stolen from them by the counterfeiting. This counterfeiting steals from the employer too.

Resources are not scarce. It is about 4000 miles to the center of the earth; the deepest oil well is only about 7 miles. Instead of going inward, then outward the resources are unlimited.

Mon, 06/09/2014 - 11:33 | 4837159 JRobby
JRobby's picture

Of course the definition of insanity will pop up. It always does.

Lower borrowing standards again. inflate, explode. Repeat process. I thought they would at least wait until the TBTF's had completed "balance sheet repairs"

Demand NOW!!!!

 

How about serenity now instead?

Mon, 06/09/2014 - 11:34 | 4837161 ebworthen
ebworthen's picture

You could have just said "Gold backed currency and the end of central banking" and not dissed the Author or pushed your blog.

Mon, 06/09/2014 - 11:57 | 4837242 RaceToTheBottom
RaceToTheBottom's picture

"Instead of pitting employers against workers, "

The marketplace action of employers to employees is fundamental to capitalism.  It is an extremely valid question.

Mon, 06/09/2014 - 12:22 | 4837310 ejmoosa
ejmoosa's picture

With government forcing itself so forcefully into the equation between employers and employees, it's easy to conclude that the issue us employers versus employees.

It's really Employers vs. Government vs. Employess 

If you are in a union it's Employers vs. Government and Employees

 

Government is the single largest impediment to getting this economy going, which benefits Employers AND Employess.

 

Mon, 06/09/2014 - 13:50 | 4837641 Seer
Seer's picture

"Government is the single largest impediment to getting this economy going, which benefits Employers AND Employess."

Here's a dose of reality:

http://online.wsj.com/articles/an-australian-boom-town-feels-chill-of-co...

How is the Queensland govt impeding employers and employees?  Even if it [govt] totally disolved that wouldn't force the Chinese to ramp back up their wild growth orgy.

Mon, 06/09/2014 - 12:28 | 4837337 silentboom
silentboom's picture

That's a mutually beneficial relationship not a confrontational one.

Mon, 06/09/2014 - 13:22 | 4837519 ejmoosa
ejmoosa's picture

You cannot even sell your own labor for a value below minimum wage legally.  The government would rather have you unemployed.  

 

Tell me how that is beneficial to you.

Mon, 06/09/2014 - 13:41 | 4837602 Seer
Seer's picture

Do you understand the dynamics of growth?  Do you understand that all that you see around you is based on the notion of perpetual growth?  And, do you understand that without growth none of this works?

Everyone runs around pointing fingers at everyone else, but the PREMISE is NEVER QUESTIONED!  The premise being that we're running on a model of perpetual growth on a finite planet, meaning that it's mathematically certain that growth ends.  All the pressures of added control are occurring not because folks wish to stick-it-to-the-little-guy (when TPTB know very well what happens when a population goes unstable), but because of the need to more closely manage ever-scarcer resources: and eventually the control is lost (when nothing is available to substitute for the scarce resrouce).

We went on a global growth binge and the hockey-stick ramp-up is faultering.

"multi-generational tyranny of modern economics which decreases the purchasing power of the currency."

It's got more to do with the PREMISE than the players.  Exponential growth will ALWAYS force this outcome: exception would be that folks in power acknowledge that it's a failed premise, but I highly doubt that people will accept it (people are conditioned to see things as "others'" fault, and any suchj statements will be viewed as being some sort of trick).

Mon, 06/09/2014 - 14:26 | 4837824 OC Sure
OC Sure's picture

 * Duplicate

 

 

Mon, 06/09/2014 - 11:16 | 4837103 disabledvet
disabledvet's picture

Well...I have said from the Getco "there is a natural gas thesis at play" (since 2008 I've been saying this) and I've been also saying such transitions are "once in a century events" and are deflationary.

So far I've been spot on as natural gas prices utterly collapsed two years ago and now coal prices have collapsed as well.

For all you dip shits out there the USA produces One BILLION metric short tons of coal a year.

Don't even get me started on how stout the US energy grid is.

In other words it's not the collapse of labor but energy prices...while pricing power is being maintained.

This is absolutely NOT sustainable. There are truly massive shortages of dollars right now, interest rates are falling again and debt levels are at truly stupendous levels.

Profits must fall...defaults are right around the corner.

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