Tag Archives: profits

Regulations Under Obama Cannot Be Blamed: Productivity and Profits Have Gone Up

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The Republican Presidential candidates, and especially Mitt Romney, have repeatedly asserted that burdensome regulations imposed by the Obama Administration are to blame for the disappointing performance of the economy during the recovery, and especially the disappointing job performance.  The evidence points to the opposite:  productivity has in fact performed quite well and profitability has sky-rocketed.  If regulations were a problem, one would have expected productivity to have declined and profitability to have suffered, and they haven’t.

The disappointing performance of the economy in recent years can rather be attributed to slow growth in aggregate demand.  Households have had to scale back consumption after the housing bubble burst, while conservative fiscal policies forced by a Republican Congress have not allowed government expenditures to fill in the resulting gap.

The chart above shows how labor productivity, unit labor costs, and unit profits have performed in recent years (for non-financial corporations), each indexed so that the 2005 average equals 100.  Labor productivity (in green in the chart) is the amount of output produced per unit of labor.  It was basically flat prior to Obama taking office, rising by just 2.2% total in those four years, but then jumped by 8.6% total in the subsequent 2 1/2 years.  If regulations imposed by Obama were a major hindrance, productivity would not have gone up like this.

But while labor productivity improved, labor compensation (not shown in the chart to reduce clutter) was basically flat.  Indeed, hourly wages in real terms have declined slightly since Obama took office (by 0.8% total).  This is consistent with a slack labor market, with high unemployment depressing wages.  With higher productivity and wages not increasing, the result was falling unit labor costs (labor costs per unit of output), as shown in blue in the chart.

What did shoot up after Obama took office was unit profits (profits per unit of output, in red in the chart).  This is much more volatile, but it is interesting to note that it peaked in the third quarter of 2006 and then fell sharply well before Obama took office.  If someone is to be “blamed” for this, it would have to be Bush.  Unit profits then reached its low point in the second quarter of 2009, as the recession came to an end, and then skyrocketed by over 75% up to the third quarter of 2011 (the most recent data available).  This is of course all consistent with what has been observed at the level of the aggregate National Income accounts, which was reviewed in an earlier post (see here) on this blog.

Mitt Romney and the other Republican candidates assert that burdensome regulations under Obama have stifled the ability of business to make a profit, and with that, businesses have been unwilling to employ more workers.  But productivity has improved and profitability has soared.  The evidence simply does not support their assertions.

Profits Are Up, While Employee Compensation Stagnates

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Aggregate profits in the national economy, while volatile, have grown rapidly over the past decade, while employee compensation has been lackluster.  Profits (defined here as including corporate profits [the largest component], proprietor’s income, rental income, net interest income and business transfers) plus Compensation of Employees (along with a smaller third category, for taxes on production and imports less subsidies, plus the net surplus or deficit on government enterprises such as the Post Office), sum up to National Income.  Note that Compensation of Employees is the total compensation for all workers as a group, and is not per worker.  The Bureau of Economic Analysis of the US Department of Commerce provides estimates as part of the National Income and Product Accounts, and the most recent figures were released on November 22.  The graphs and figures shown here come from analysis of that underlying data.

Profits, Employee Compensation, and overall National Income grew at similar (and slow) rates between 2001 and the third quarter of 2003.  Profits then took off, rising rapidly until mid-2006, after which they pulled back some (but with levels relative to 2001 still well above the levels for Employee Compensation; overall National Income will be in between).  Profits then fell rapidly with the 2008 economic collapse, as did Employee Compensation and hence overall National Income, so that by early 2009 they were each only 8% above (in real terms) their level in early 2001, eight years before.  But from that trough, Profits bounced back rapidly, so that by late 2010 they had surpassed their previous mid-2006 peak, and then continued to grow strongly in 2011.  Total Compensation of Employees, in contrast, has grown only modestly from its 2009 trough.  Overall National Income is now almost back to its previous peak, but Compensation of Employees is well below, while Profits are well above, their previous peaks.

One can also look at the changes over the cycle:  from 2001 to the peak in National Income in the first quarter of 2008, from that peak to the trough in the second quarter of 2009, and then from that trough to now (the third quarter of 2011).  In the table below, “Growth” is the growth of that component of National Income (in real terms) over the full period, while “Change” is the change over the period in the aggregate income of that group, in real (2005) dollars, in billions:

change in National Income Components

2001Q1 to Peak

 Peak to Trough

Trough to 2011Q3
2005 prices, % growth and billions of US$ Growth Change Growth Change Growth Change
Employee Compensation 12.6% $839b -5.5% -$415b 1.4% $98b
Profits 20.2% $562b -11.2% -$377b 21.6% $646b
Taxes + Gov’t Firms 19.7% $148b -4.9% -$44b 4.2% $36b
National Income 15.1% $1,549b -7.1% -$836b 7.1% $780b

The contrast in the truly abysmal growth in total Compensation of Employees in the recovery (of just 1.4% in real terms from the mid-2009 trough to now), with the rapid growth in Profits (of 21.6% in real terms over this same period), is stark.  Put another way, Profits obtained 83% of the growth in National Income from the trough in the second quarter of 2009 to now (83% = $646b/$780b), even though it only accounted for 27% of National Income at the trough (and 31% now).  Obama has been loudly blamed by Republican politicians for hurting business profits.  There is no evidence of that here.  There has been a strong growth in Profits in this recovery.  While the data analyzed here cannot allow us to determine the causes of these trends, they do allow us to see whether Profits are depressed in the economic recovery.  They clearly are not.

Finally, the data can be used to calculate the share of National Income going to Profits.  This is shown below.  The Profits share has grown strongly over the past decade, and while it fell in the economic collapse in the last year of the Bush Presidency, it has now bounced back to above its previous peak.