Wednesday, July 24, 2013

Corporate cost revisited

Graph #1: Interest Costs Rise as Employee Compensation Falls

On mine of 17 Feb 2012, Jazzbumpa remarked:

Where did you get the interest and compensation as a % of deductions data?
I've never seen anything like that before.

The cost numbers are from NIPA tables: NIPA Table 1.13 for Employee Compensation, and NIPA Table 7.11 for Interest Deductions. But those tables have been revised. I can't even find Table 1.13 any more. And the link I offered in my reply to Jazz is no longer working. It's time to take another look at this.

At FRED I found Compensation of Employees: Wages & Salary Accruals, and Monetary interest paid: Domestic business. Here they are:

Graph #2: Employee Compensation (blue) and Business Interest Cost (red)

I didn't find business deductions at FRED, so I can't re-create Graph #1 exactly. What I did was look at Employee Compensation and Domestic Business Interest Paid, each as a percent of the total of the two together. So we can see Compensation as a percent of Compensation-plus-Interest-Paid, and Interest as a percent of same. Here:

Graph #3: Employee Compensation (blue) and Business Interest Cost (red) as Percent of their Sum

The first half of Graph #3, through 1980, is a pretty good match to Graph #1. Not the position, but the shape of the first half of the red line on #3 looks like the whole of the blue line on #1. And the first half of the blue on #3 looks like the whole of the red on #1.

Sorry about the color confusion.

So we're looking at essentially the same trends, employee compensation and business interest costs, in both graphs. Now, to the details.

Interest (Red line on Graph #3): A gentle sweep up from maybe 4% in the late 1940s to the 1974 recession, with a small rough spot at the 1970 recession. It crosses the 10% level some time around 1966 and climbs to near 30% by the time of the 1982 recession. It shows a lot of indecisiveness since the latter 1970s. Still, the average value since 1980 has been around 25% of the interest-plus-compensation number.

Compensation (Blue on Graph #3): This line is the mirror-image of the other. It starts around 96% of the total, falls below 90% around 1966, and drops to near 70% in the early 1980s. After that it averages about 75% of the total.

One could argue that the graph shows a smoothness of trend until the 1970s, a Great Moderation of sorts in the early years, and then since the seventies a great deal of instability. If you think Moderation is worth noting.

One could argue there is a threshold at the 90% level, and when compensation falls below this level it brings an end to times of prosperity. Like Reinhart and Rogoff.

I would argue that interest was only about 5% of the total through the 1950s, and only about 10% of the total through the 1960s, but it has been about 25% of the total since 1980 -- five times what it was in the 1950s. That's twenty cents out of four dollars in the 1950s, one dollar out of four since 1980.

I would point out that the general uptrend of the red line, from 1946 to 1981, occurred during the general uptrend of interest rates. And that the 30-year "stall" at the 25% level happened despite a secular decline of interest rates to the zero bound.

I would also point out that the money a business spends to pay interest is money unavailable for wages and profit.

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