Thursday, November 17, 2016

"Piketty’s fundamental laws notwithstanding, the capital share declines as fast as the labor share. The big winner is the profit share, which goes from 2 percent of GDP in 1984 to 16 percent in 2014."

The nub
"f both labor and capital share dropped, we cannot blame a decline in the price of labor, it must be a change in markups, i.e. in the ability of firms to charge more than their cost (pricing power)."

We see this

" if we distinguish between return to capital and profits"

"we can appreciate that sometimes profits may come from (non-replicable) barriers to entry and competition, not from capital accumulation. In these cases, additional investments may not be as profitable as past ones."

"  In other words, if what makes Coca-Cola so profitable is its magic formula, new capital investments will have a significantly lower return, because they will be unable to add to the formula. Hence, Coke can be very profitable and not invest a lot." 

Call them

Rents of enterprise 

"Does this mean that the decline in capital and labor shares is due to an increase in firms’ market power? Barkai provides a clue this might be true: a strong cross-sectional correlation between the increase in concentration of an industrial sector between 1997 and 2012 and the corresponding decline in the labor share in that sector. "

"This conclusion is strengthened by a recent Fed working paper, which finds that on average M&As significantly increase markups, but have no statistically significant effect on productivity."