In response to my recent post, Profits call the tune, 26 June 2012, Doug Henwood (see Doug’s excellent site at http://lbo-news.com/) seemingly criticised my analysis of US profitability (http://lbo-news.com/2012/06/26/profitability-high-and-maybe-past-its-peak/#comment-6105.)
Doug starts by saying that “As every Marxist schoolchild knows, the profits “call the tune” for the capitalist economy, as Michael Roberts put it recently.”
Then Doug quoted from my post: “Despite the very high mass of profit that has been generated since the economic recovery began, the rate of profit stopped rising in 2011. That’s a sign that the US capitalist economy will not achieve any significant sustainable growth over the next year so so. The rate remains below the peak of 1997. But the rate is clearly higher than in was in the late 1970s and early 1980s at its trough. That can be explained by one counteracting factor, namely the record high rate of surplus value in recent years. But it also suggests that there is still a long way down to go for US capitalism before it reaches the bottom of the current down phase.”
Doug does not agree. “That is not how I see it. I see a rather high rate of profit that has maybe begun to roll over—but only after a remarkable recovery from the Great Recession’s lows.” Doug then presents his measure of US profitability as the profits of nonfinancial corporations (before- and after-tax) divided by the value of the tangible capital stock (at replacement cost). Now there are lots of caveats about this measure of the US rate of profit – anybody who reads my blog regularly will know what they are: replacement or historic cost for tangible fixed assets, whole economy profits or corporate profits or just non-financial corporate profits – I could go on. But let’s just take Doug’s measure, reproduced below.
As far as I can see Doug’s data confirm exactly what I said in the quote above that he criticises. US profitability peaked in 1997 to end the neoliberal era and, although profitability recovered after the Great Recession, it is still below that 1997 peak. My argument is that it will be downhill from here towards lows not seen since 2001 or the early 1980s. Doug’s disagreement seems to boil down to him being less ambitious in his forecast than I am. He puts it: ” I see a rather high rate of profit that has maybe begun to roll over…”. That’s a nuance maybe, unless it is more.
Doug goes onto highlight the huge build-up in cash by US corporations and their failure to invest it, instead passing it onto shareholders or abroad. On this blog, I have also done so (see Why is US recovery so weak? Look at profitability 3 April 2012). But I reckon that is happening because, although domestic profitablity has recovered, it is not back to neoliberal heights, and will be heading down from here. And the latest US GDP data for Q1 2012, released this week, would seem to confirm that.
The BEA data show that corporate profits in Q1 were weaker than previously thought. The broadest measure, corporate profits before tax with capital consumption allowance and inventory adjustment, decreased by 0.3% compared with Q4 2011. That was the first decrease in the mass of profits since they hit their recession low in mid-2008. After tax profits with adjustments decreased much more sharply, by 5.9%.
Interestingly, profits fell entirely because of declines in foreign markets, not because of business problems at home. Profits from domestic business rose at a seasonally adjusted annual rate of $41.7bn in the first quarter, while the rest-of-the-world component of profits decreased $48.1 bn. So, for the moment, it is the crisis in Europe that is hitting US profits. Whatever the reason, if the mass of profits have stopped rising, the rate of profit is very likely falling. As I have pointed out in previous posts (and referred to in my Profits call the tune post), we don’t yet have the data to confirm this with my preferred measure of the rate of profit. But I have made estimates for 2011 that seem to show it. And I checked Doug’s measurement data for the US rate of profit (pretax, non-financial) and found that it was 5.1% in 2009; 7.0% in 2010 and 6.9% in 2011. So I stick to the assertions made in the quote highlighted by Doug.