Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Sunday, October 15, 2006

Is the Profit Share Still Rising?

Dean Baker suspects (hopes?) that the swing to higher profits and away from wages has reached its end:

Beat the Press: Profits, Wages, and the Business Cycle: Today's NYT has a column reporting on the redistribution from wages to profits that has taken place in most wealthy countries over the last quarter century. While the piece is useful in calling attention to an important trend, it is somewhat sloppy because it fails to adjust for cyclical effects.

This is important because profits shares do follow well defined cyclical patterns: rising in a business cycle upturn, typically peaking before the actual peak of the cycle, and then falling sharply in the downturn. In the U.S. context, we see a substantial rise in the profit share from 2000 to 2005, which the column presents as the continuation of the trend of the last quarter century. However, the 2005 profit share was still slightly lower than the profit share in 1997, the profit peak of the last cycle, as explained in a short paper CEPR published last week.

Whether or not the profit peak of the current cycle exceeds the 1997 peak remains to be seen. My guess is that it won't, as the collapsing housing market will reveal much bad debt on the books of those hugely profitable financial firms, but the jury is still out on this one.

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