I have been puttering around with some of the arguments from The Great Stagnation. One line that stood out to me went something like this
If the capital isn’t doing any better and labor isn’t doing any better then where is all of this supposed innovation going?
My knee jerk reaction was what about human capital. However, I decided to see whether or not capital was doing any better. One of my favorite measures the return to capital is the national dividend yield. That is, what portion of national income is paid out to the holders of US stock.
I was actually a bit shocked at the result. I had assumed that the rise in retained earning would mask some of the “real returns” to capital and that perhaps some of innovation was being sent down the tubes by a corporate bureaucracy that spent profits on empire building rather than paying them out to shareholders.
Yet, dividends as a percent of GDP are rising. That is the owners of corporations are getting paid out an ever larger share of GDP.
Part of this is because corporate profits as a percent of GDP are rising but it looks like significantly more corporate profits are actually going out of the door.
Here is dividends as a percentage of after tax corporate profits
Maybe this is coming at the expense of small business owners. Lets add in proprietors profits
Interesting. Well that warrants looking at Proprietors’ Profits on their own.
The fall in proprietors’ income up until 1980 seems to be the dominant story, the rise in dividends the dominant story after 1980.
Basically less and less on the nations income was going towards business owners until 1980 when that turned around, both for small business owners and the owners of corporate capital.
This is not a story of the owners of capital doing worse. Indeed, it might even suggest that workers wages were being boosted by the decline in income going to the owners of capital.
An obvious question is – what about interest? I am not sure how to deal with that. On the one hand those are payments to capital but they seem of the kind most likely benefiting the median household. If a working class family was going to save typically that would have been in some interest bearing vehicle.
Plus we have problems with teasing out money demand and inflation fluctuations. Though off the cuff I am not exactly sure how to treat inflation when thinking about these variables. It seems like it ought to matter even when normalizing by GDP.
A high inflation economy is one where a larger fraction of nominal GDP is paid out to bond holders to compensate them for loss in purchasing power. This in theory should depress profits. However, should it depress dividends and proprietors income after capital adjustments? I am not sure.
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Monday ~ February 7th, 2011 at 7:18 pm
JW Mason
You should think about subtracting net stock issues (which are negative in most years) from this. Stock repurchases are the functional equivalent of dividends — a means of paying out cashflow to shareowners. Would make your point even stronger.
Monday ~ February 7th, 2011 at 10:05 pm
Crissa
But what about the portion of stock that no longer gets dividends? As a penny-investor (to borrow a phrase, I don’t actually mean pennies), very few stocks in reach pay dividends. And options traders don’t do dividends, either.
Maybe dividends are being split up either more or less, masking a different trend?
Tuesday ~ February 8th, 2011 at 11:25 am
Econ Skeptic
This is all perfectly consistent with the broader theme of human labor being replaced by machine labor. I’d expect the trend to continue in the future.
Tuesday ~ February 8th, 2011 at 1:01 pm
Robert Waldmann
I too am amazed that no one noticed this. I would guess that this partially explains the decline in (total household income)/GDP as people tend to understate capital income in surveys (honestly forgetting I think).
I’d also notice an increase in depreciation of capital as a fraction of GDP (that is NDP/GDP has declined). This doesn’t appear as corporate profits or proprietors’ income but does appear in GDP (that’s what the G is there for).
I think this has increased, although not as much as dividends.
http://bit.ly/f9tSqR
On your last question, I’d say that accounting profits are reduced by inflation (because physical plant isn’t marked to market so inflation causes assets to be understated on balance sheets) but that this shouldn’t affect real dividends at all — firms know that the dollar value of their fixed capital is going up even if this isn’t recorded on the balance sheet, so they don’t feel the need to re-invest to keep the ratio of present value sales to historical value fixed capital from going up.
Tuesday ~ February 8th, 2011 at 2:04 pm
Dividends/GDP have gone up a lot | Bear Market Investments
[...] 8, 2011 by admin Karl Smith notes that the ratio of total Dividends to GDP increased from 2 to 5% since 1980 (it was 6% before t… He is amazed that he didn’t know this already. I am amazed that I didn’t know this [...]
Wednesday ~ February 9th, 2011 at 5:09 pm
Maybe it's here
http://www.bis.org/publ/work231.htm
This 2007 paper shows that profit shares have gone up in many countries. It is too early to be China and has the wrong sign relationship to be labor market deregulation. It’s technology, but of a particular kind that gives firms more bargaining power. Robert Waldmann’s observation above is consistent with the authors’ claim.
Monday ~ May 16th, 2011 at 7:51 pm
Look no further
Distribution of income is a function of bargaining power between different actors in the economy, employees, employers, management, small business owners etc.
There has been redistribution of power in a favor of management and shareholders thanks to union busting, decline in the labor movement and globalization.