The NYT points the finger in the wrong direction in its editorial on the economy today. It correctly notes that wages have stagnated in this decade. However, it wrongly asserts that "corporate profits have soared." That's not what the numbers show. There was a cyclical upturn in profits from the lows hit during the recession, but when the final data is in, the profit share in 2006, the cyclical peak of the current business cycle, is almost certainly going to be lower than in 1997, the peak of the last cycle. According to the Bureau of Economic Analysis (NIPA, Table 1.14) the profit share of corporate income in 2006 was 20.8 percent. This is somewhat higher than the 20.1 percent peak share reached in 1997. However, the 2006 numbers have not yet been through comprehensive revisions. These revisions generally lower profits, primarily because the revisions assign a value to corporate stock options, most of which are not given any value in preliminary reporting. These revisions can be quite large, especially following large stock market gains. (The profit numbers originally reported for 2000 were subsequently revised down by 15 percent.) If the comprehensive revisions lower 2006 profits by just 4 percent, then the profit share in 2006 will be lower than in 1997. There is a second, perhaps more important, reason why 2006 profits are overstated. The profit data include the fees, commissions, and interest, associated with trillions of dollars of mortgage related debt, much of which is now being written off as uncollectible. In other words, these fees were not real profits. If we assume that the write-downs will eventually total $160 billion (a very conservative estimate) and that they were associated with profits booked over the three years from 2004-06, then this would lower true profits for 2006 by more than 4 percent, again pushing the profit share for the year below the 1997 level. In short, a careful examination of the data shows that profit shares have not risen from 1997 to 2006. So, if the money didn't go to ordinary workers and didn't go to profits, then where did it go? The answer is high-end workers, which include CEOs, the hedge fund boys, doctors, lawyers, and other highly educated professionals. One of the main reasons for this upward redistribution is trade policy -- but the NYT likes current trade policy. Oh well, so much for designing an economic policy that will help typical workers.
--Dean Baker
