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Robert J. Samuelson: The ultra-cautious capitalists

Published: Tuesday, Sept. 10 2013 12:00 a.m. MDT

What would improve the odds is more exuberance from the custodians of capital. CEOs seem content to sit on their profits and invest only when the needs and the returns are indisputable. Careless capital, which fostered the financial crisis, has given way to ultra-cautious capital, which is making a lackluster economy self-fulfilling.

Richard Drew, AP

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WASHINGTON — In the struggle between capital and labor, capital is winning — and that's hurting the feeble economic recovery. To simplify slightly: Labor (wage-earners and consumers) can't spend; and capital (businesses and shareholders) won't spend. Without a powerful growth engine, the economy advances haltingly. I wrote about this last week from labor's perspective, but the subject deserves deeper treatment.

One way to chart the fortunes of capital and labor is to show how much of the nation's income goes to each. Labor's share is straightforward. It covers workers' wages, salaries and fringe benefits. Capital is more complicated. It includes corporate profits, the income of small businesses and professional partnerships, rents from real estate, and net interest on bank deposits, bonds and loans.

Since World War II, labor's and capital's shares of income have fluctuated within a narrow band, reports the White House Council of Economic Advisers (CEA). Prosperity boosted both groups by roughly equal proportions. In 1947, labor's share of nonfarm business income was 65 percent; in 2000, it was 63 percent. Everyone benefits when labor and capital work in tandem, not in opposition. But as I reported last week, labor's share has plunged in the past decade. In 2013, it's 57 percent. This shifts about $750 billion annually from labor to capital.

Rampant greed, howl critics. Policies favor the rich. Granted, the shift worsens economic inequality, because capital income — dominated by profits — is skewed toward the wealthy. But the explanation is not a simple story of unbridled greed and undue influence.

Actually, there's no universally accepted explanation. What we know is that the shift to capital is worldwide. In its study, the CEA examined 22 other advanced countries. In this group, labor's share fell from 73 percent in 1980 to 65 percent in 2011. The trend also occurs in poorer countries, including China, Turkey and Mexico, reports Timothy Taylor, managing editor of the Journal of Economic Perspectives.

"When a trend cuts across so many countries, it seems likely that the cause is something cutting across all countries, too," writes Taylor on his blog. "Looking for a 'cause' based on some policy of Republicans or Democrats in the U.S. almost certainly misses the point. The same is true of ... policies more common in Europe, or in China."

Broader theories include globalization, new technologies and weaker unions. All tend to beat down wages through intensified competition, the substitution of machines for people and the loss of bargaining power. Meanwhile, financial-market pressures have increased on companies to raise profits. Labor is getting crushed. It's not "fair," say critics.

True. But the more important effect is less visible: It dampens the recovery. Labor's shrinking share curbs consumer spending. The economy will then falter if the recipients of capital income don't offset the weakness with increased spending on buildings, equipment, research and new products. Unfortunately, this doesn't seem to be happening.

Corporate America is husbanding its profits. It invests mainly in the safest projects. From 2007 (the previous business cycle peak) to 2012, domestic corporate profits climbed 35 percent while investment in plants and equipment rose only 2.6 percent. American companies have accumulated a huge cash hoard, $1.8 trillion at the end of 2012.

A well-functioning economy is a circular process by which one person's spending becomes another person's income, which is then spent again. Today, there's a damaging disconnect between capital's rising share and its subsequent spending. So the economy sputters.

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