Share Of GDP Going To Profits Is Increasing, Highlighting Need For Strong Antitrust Enforcement

Kevin Drum had an interesting post the other day about the share of GDP that goes to labor and capital. We have known that the share of GDP going to labor has been shrinking for the past thirty years. The assumption has also been that the decreasing share of GDP going to labor was going to capital. But a recent study indicates that capital’s share has also been decreasing as well, both dropping by around 5% since the mid-1970s.

So, if both labor and capital’s share of GDP are decreasing, what’s making up the difference? Corporate profits. And the main reason that corporate profits have increased is that the markup that corporations take on the items they sell has risen to 67% today from 18% in the 1970s. And corporations have gotten away with these outrageous markups primarily because of deregulation, technology, and increased market concentration and power. With labor costs low and easily replaced by technology and most industries dominated by oligopolies who have incredible market power, the environment for generating large profits that gets passed on to shareholders. For many of these companies, there is simply no real competition to undercut these outrageous markups.

This has two important implications. First, it should make clear that offering massive tax cuts to corporations in order to keep jobs or bring jobs to your locality is a fool’s errand. The corporations certainly don’t need these tax breaks to be competition. And most of these massive tax breaks will be used to further automation within the company and reduce the total number of jobs, in essence paying the company to take more jobs away. You can see this with the Carrier deal in Indiana and the Foxconn deal in Wisconsin. And these corporations certainly don’t need another tax cut or even an extra incentive to repatriate their offshore profits. What they really need is an incentive to invest, something that can be accomplished by actually increasing the taxes on their profits.

More importantly, this once again highlights the need for stronger antitrust enforcement, a key plank in the Democratic “Better Deal” plan. Stronger antitrust enforcement will increase real competition, leading to reduced markups which means lower prices. It will mean an increase in jobs as new companies are able to enter existing markets and a resulting increase in wages as competition for workers increases. It will reduce corporate profits which will reduce at least minimally reduce income inequality as well as constrict some the political power of these corporate behemoths. As I’ve said before, what other single policy can give hit as many important political points as this.