Thread by @sonusvarghese

Thread on sectoral balances that make up the Levy-Kalecki corporate profit equation, & implications for the US economy today.

Corporate Profits =
Investment
+ Dividends
- Household Saving
- Government Saving
+ Current Account Surplus

Charts & useful links coming up 👇

1/

In short, business investment & a current account surplus are profit sources.

Household & government savings subtract from profits.

@RomanchukBrian has a really good primer on the profit equation here:

bondeconomics.com/2018/06/primer…

2/

Here's a link to a great discussion on the benefits of the sectoral financial balance approach, between @teasri and @DavidBeckworth on the Macro Musings podcast

macromusings.libsyn.com/srinivas-thiru…

3/

I used data from BEA's NIPA tables to compare corporate profits collected directly by BEA vs calculation using the profit equation.

Approach is very similar to the one used by @Jesse_Livermore in this blog post, which I highly recommend:

philosophicaleconomics.com/2013/11/cp/

4/

This chart shows corporate profits collected directly by BEA, versus calculation using the profit equation (1993-2019 Q3).

The match is good (not perfect).

5/

As @Jesse_Livermore writes, NIPA tables have a discrepancy term to account for errors in data gathering & statistical estimation.

Subtracting this term results in a perfect match.

With that, now we can look at the components of the profit equation i.e. profit sources.

6/

Chart shows cumulative growth of corporate profits & sectoral balances from 1993-2019 Q3.

As you can see, there are significant shifts - especially in household & government savings after the Great Recession.

Note: I didn't include the statistical discrepancy term.

7/

Useful to look at sub-periods, starting w/ Great Recession & its aftermath.

Here's cumulative growth of profits from 2008-2009.

Investment collapsed & households pulled back.

But profits recovered by end of 2009 (~ $184B) thanks to rising government deficits.

8/

It's not unusual to see govt making up for private sector pullback during recessions.

The situation reversed over the next 6 years (2010-2015).

Profits grew ~ $280B as investment recovered & countered household/govt savings.

9/

Notice orange bars in the previous chart really dragging from profits around 2013.

It was 10 yrs ago that Pres. Obama said "Like any cash-strapped family, we will work within a budget" in his State of the Union.

We got the Budget Control Act of 2011 & sequester in 2013.

10/

Things shifted in the 2016-2019 period.

Profits still grew ~ $280B, almost exactly as it did over prior 6 years.

But it was mostly on the back of rising govt deficits.

This started in 2016, amid mini-industrial recession (energy bust), but ramped up post Trump tax cuts.

11/

Business investment was a smaller source of profits than govt, and it slowed further in 2019.

The drag:
- A household sector that continued to deleverage
- Rising current account deficit, especially in the Trump era (though it started to reduce in 2019)

12/

To summarize, the fiscal deficit is currently holding up the economy, & profits.

Note: in addition to tax cuts, we also got repeal of sequester, and an increase in spending caps for 2020 & 2021.

13/

Brooking's Hutchins Center Fiscal Impact Measure is at its highest values since 2010 (when the Obama stimulus was supporting the economy).

h/t @SethHanlon

brookings.edu/interactives/h…

This is very unusual, given how far into the expansion we are.

Go all the way back to 1992-1999.

Profits grew ~ $263B, with business investment as the major source.

Rising govt savings & current account deficit subtracted. More so by decade end (recall Clinton surplus).

14/

But the end of the Tech bubble & the 2001 recession saw the deficit rising once again (incl. Bush tax cuts).

Profits grew ~ $220B from 2000-2002, despite a pullback in business investment & increasing household savings.

15/

Things reverted to form during 2003-2007 expansion.

Profits grew ~ $309B, on the back of business investment, Household "dis-saving" (housing bubble) was a profit source as well.

Govt savings & the current account deficit in particular, were a drag.

16/

The contrast to the current era is striking (posting 2016-2019 chart again).

As @teasri points out: "Were it not for the deficit, the economy would probably be in recession", via @aarontask

stitcher.com/podcast/seekin…

17/

Investment is critical to profits.

But the degree to which deficit spending counters falloff in investment in recessions is notable.

Speaks to the size of govt & counter-cyclical policies in place.

It prevents a depression spiral (Minsky), and puts a floor on profits.

18/

The odd period is now!

Technically, we're not in a recession & so we have "pro-cyclical" fiscal policy - but that's clearly making up for anemic business investment.

Question is: does this continue?

Ultimately a political decision. cc: @TheStalwart

/19

Ending with a quote from the President:

"Who the hell cares about the budget? We're going to have a country"

And profits.

/End