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Course of corporate profit rate in US

P. R. Brahmananda

THE Bureau of Economic Analysis of the US periodically presents data on national income, capital stock, international investment position, and so on. With some of the best technical economic experts on its staff, it regularly publishes surveys of the cur rent businesses of the US. The information is also up to date.

One of the important series it publishes concerns reproducible net fixed capital stock in the US, both at current and constant prices. By adding to the above value of inventories, the figures of total net capital stock in the US economy can be worked out . It is also possible to work out the net capital stock in the corporate sector; there is information on aggregate pre-tax and post-tax profits of the above sector.

The rate of return to capital, or the rate of profit in the corporate sector can then be derived, and a time series of the same constructed. Figures of the tax liability of the corporate sector are available. Deducting the latter, the rate of profit in t he corporate sector post-tax can be derived. Graph 1 gives the above information from 1965 to 1998.

It may be noticed that the rate of return, or the corporate rate of profit, pre-tax, was as high as 11 per cent plus in the mid-1960s. In the 1970s, because of to the oil crisis and the international problems for the US economy on the exchange rate front , the rate started falling, and reached a low of 4.8 per cent in 1982. Thereafter, it was generally moving up, and in the late 1990s, was 8-9 per cent.

The importance of the business cycle can be seen in the course of the corporate profit rate. But the cycles are due both to external shocks and internal factors. The tax proportion on corporate profits was high in the early 1960s and started coming down thereafter, though there are outlayers in 1986 and 1987. The tax proportion, about 35 per cent in 1990, has been falling thereafter. In 1998, it was about 32 per cent. These are effective rates and expressed as a proportion of the pre-tax-profit rate.

The post-tax profit rate in the corporate sector ranged between 4.6 per cent and 6.9 per cent in the 1960s and 1970s. In the 1980s, it slid further down. Only from the mid-1970s did it rise above 6 per cent.

Graph 1 also indicates the course of the nominal interest rate on the 10-year treasury bond. This moved up from the 1970s to early 1980s. It reached a high of 13.92 per cent in 1982 and was 12.46 per cent in 1984. Thereafter, it has been on a downtrend a nd, in 1988, was about 5.3 per cent. The lowest level reached by it was in 1965, when it was about 4.3 per cent.

There is a broad upward drift of the 10-year bond yield rate from the mid-1960s to the early 1980s. Thereafter, there has been a broad downward drift in the yield. The corporate profit rate pre-tax, was higher than the 10-year bond yield from 1970 to 197 5. It was lower than the bond yield from 1979 to 1992. Thereafter, it was higher than the bond yield. There is no rule that the corporate profit rate must always be higher than the bond yields. The changing relation between the two rates needs further ex amination. No administrative policy making the profit rate above the nominal yield rate seems to be justified.

Graph 2 gives the courses of the corporate profit rate pre-tax, the real rate on 10-year bond and the rate of growth of real national income. The data is for 38 years and bears closer examination. The corporate profit rate is, almost throughout, the real rate on 10-year bond.

Can we derive an economic law that the corporate profit rate will always tend to be above the real rate of interest? What is the effect of the gap between the two in different years on the growth rate? This problem needs further probing. The gap sometime s narrows when the growth rate is also high. The gap is also sometimes high when the growth rate is low.

Interestingly, the corporate pre-tax profit rate is generally above the real growth rate for most years except, again, between 1984 and 1986. Is there a law that the corporate profit rate will always tend to be above the real growth rate of the economy? Economic laws, as Marshall said and Solow justified, are approximate truths, but there can be exceptions.

Economic laws are about the real world and have an empirical and contingent significance. They cannot be equated with scientific truths. The latter are also deemed to be based on probability laws. But there is some similarity between economic and scienti fic laws. Economists are justified in pursuing their quest for economic laws.

We must follow the practice of scientists in making their laws subject to experiment, but in economics the parallel to experiments is empirical examination. This requires enormous information. Fortunately, in the US this information is available, and acc essible to all. The costs are rather low. It is the privilege of US organisations to supply information freely to the public.

There may be costs in collecting and processing the information. But for the public, this is a free lunch! The position is quite the opposite in India. Those authorities who collect information are very reluctant to part with it. They want to use it for their own advancement, and the great World Bank and such organisations encourage them in this.

Can we draw a generalisation from the study of Graph 2 that corporate profit rates are high when real growth rates are high. We must resist the temptation to generalise, as above. Note that post-1990s, till about 1998, the corporate profit rate was movin g up. But the growth rate does fluctuate in this period.

Probably there is some basis for concluding tentatively that when the real rate of interest is moving up, the corporate profit rate moves down, and vice versa.

What is interesting is that by 1998 the corporate profit rate had dipped, so had the real rate. We know that 2000 and 2001 are recession years. Could we have foreseen this by looking at the course of the profit and interest rates? Did the American econom ists miss this hunch?

If there is a business cycle, what goes down must come up. This means there will be a recovery in the US economy, though when this occurs cannot be foretold. The NBER is still working on this problem. It has not pronounced judgement on when the recovery will come.

Of course, it is dangerous -- as we know from the experience of 1929 and thereafter -- to assume that an up will always follow a down. There could be a huge time lag and we may land ourselves in a slump.