Home > The Economy > Unemployment and the corporate profit glut

Unemployment and the corporate profit glut

from David Ruccio

Mainstream economists continue their endless debate about whether the obscene level of unemployment in the United States is structural or cyclical. It’s neither: it’s the result of the corporate profit glut. 

Rebecca Wilder makes a convincing case that the “corporate saving glut”—the excess corporate saving rate as the residual of the Current Account (external saving) net of government and household excess saving—explains a large part of the current unemployment rate. The idea is that “when firms do not reinvest corporate profits, the lack of income flow manifests itself into the unemployment rate.” Her conclusion is that

If the corporate excess saving glut just equaled zero, i.e., firms invested and saved at the same rate, the unemployment rate would be 5.8%. Now, if the corporate saving glut fell below zero to -2%, i.e., firms reinvested in the economy by way of capital investment in excess of saving, the simple model implies an unemployment rate of 4.7%.

One approach, then, is to figure out how to get corporate America “to drop the saving glut and re-invest in the economy.” The other is to allow those who actually produce the profits to decide how they should be reinvested in order to create more jobs.

  1. Ken Zimmerman
    March 29, 2011 at 1:12 am

    Would need a Keynesian world to make this world. Don’t have one as things currently sit.

  2. Merijn Knibbe
    March 29, 2011 at 6:37 am

    According to Keynes, investment were driven by ánimal spirits’and not by low interest rates. As far as I know, modern research indicates that investments are driven by;

    A. Available money
    B. Perceived chances

    And not by low interest rates.

    Companies have, at the moment, plenty of money. At this moment, however, the large and unexpected productivity increase in the USA means that companies don’t need chances and investments – profits are increasing anyway. A lower dollar might change that: higher resource costs, more export chances.

  3. Merijn Knibbe
    March 29, 2011 at 2:09 pm

    Ooops. The ‘unexpected productivity increase’ of the USA economy I mention above may be due to non-downturn resistent accounting. I’ve not yet figured it all out, but value added, measured as (sales minus use of intermediate inputs) might have been miscalculated as some changes in inventories were mistakenly seen as output or as use of intermediate inputs, or something like that. This means that the USA economic downturn was quite a bit deeper and the rise of unemployment less of an anomaly than was indicated by the present data.


  4. Peter T
    March 30, 2011 at 4:32 am

    The underlying explanation here looks like it owes something to Marx as well as Keynes.

  5. March 31, 2011 at 6:39 pm

    How about taxing businesses’ returns on financial investments at a far higher rate? This because fixed investments have an inherent disadvantage — they depreciate/decay. After ten years with a financial investment, you still have all the principal. Not true with a fixed investment.

    So tax returns on businesses’ financial investments at 30%, and profit (excluding those returns) at 0%.

    From the perspective of a business owner, this puts fixed investments on a level playing field with financial investments.

  6. Bruciebaby
    November 22, 2012 at 10:01 pm

    Investment isn’t led or driven by either available money or percieved chances but by profits or to be more precise the rate of profit. there is too much dead labour in the system. Only a destruction of capital value can restore the profit rate and then boost investment.

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