Thread by @michaelxpettis

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According to Greg Ip, in the US economy today, "rewards are going disproportionately toward capital instead of labor. Profits have soared since the pandemic. The result: Capital is triumphant, while the average worker ekes out marginal gains."
wsj.com/economy/jobs/c…

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And as Marriner Eccles, FDR's Fed chairman, explained in the 1930s, this creates a dangerous illusion. The extent of business profits depends almost wholly on the purchasing power of ordinary people, which in turn depends on wages.

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In a rapidly-growing developing economy, with huge unmet investment needs, it may be possible (even necessary) for profits to rise faster than wages because the resulting rise in saving can be deployed to productive investment.

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But in advanced economies, where investment is more likely to be constrained by scarce demand than by scarce saving, profits can grow faster than wages only when household demand is boosted by a rise in household debt. This is happening, but it isn't infinitely sustainable.

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Polish economist Michael Kalecki made the same argument (also, not coincidentally, in the 1930s), A single business, he pointed out, can boost profits by suppressing wages. But, paradoxically, when businesses collectively suppress wages, they also suppress...

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demand for the goods and services they produce, in which case total profits must decline.

Between unbalanced trade, the dominance of finance, high levels of income inequality, and the associated rise in populist anger, it seems we are in for a revival of 1930s economics.