THE PRIME Minister, Mr Paul Keating, recently claimed: "In the national accounts today profits are now without historical precedent, ever, I mean it is the highest profit share in the country's history."
He also rejected any suggestion that uncertainty about the future course of interest rates could delay business investment. "I don't think business investment has got anything to do with interest rates at this stage of the cycle. It is just to do with profits."
Since then, a debate has raged about the reasons for continued sluggishness in business investment, given that the recovery has now been running for about three years. Many possible causes have been advanced, including the likelihood that, with the economy recovering at a much slower pace than in previous recoveries, businesses still have on average a fair amount of excess capacity. Improvements in workplace arrangements may also have allowed existing capital to be used more intensively, thereby postponing the need for new investment.
Other possible factors inhibiting investment include the uncertain overseas economic outlook (particularly for commodities) and the additional uncertainties created on the domestic scene by developments such as Mabo and (notwithstanding Mr Keating's comment) the recent increase in longer-term interest rates.
Surprisingly, nobody appears to have taken the trouble to examine closely the Prime Minister's claim about the record share of GDP going to profits. If they had done so, a rather different picture would have been revealed.
For one thing, the profit share of the private company sector did not reach its highest point ever in the March quarter of 1994; it was higher in the September quarter of 1985. More importantly, while the real rate of return (that is, profits as a proportion of capital) has improved in the past couple of years, it is still below what it was in the mid and late 1980s, and well below levels reached in the 1960s.
There is also considerable doubt about the usefulness of this particular profit share as an indicator of the profitability of the private sector as a whole. For one thing, private trading enterprises include both incorporated and unincorporated enterprises, and, if the profit share of the trading enterprise sector as a whole is examined, we find that the present level is still lower than it was in any of the seven years 1983-84 to 1989-90. What seems to have been happening is that, while the profit share of incorporated enterprises has been increasing, this has been more than offset by a decline in the profit share of unincorporated enterprises. The most likely explanation of this development is that an increasing proportion of trading enterprises have become incorporated. To the extent that the increase in the profit share of the corporate sector is due to this factor it does not, of course, necessarily reflect an increase in profitability.
Also relevant is the fact that, while the share of GDP going to wage and salary earners has fallen from the high levels to which it jumped in the 1970s and early 1980s as a result of two wages "explosions" generated by the trade union movement (which were in turn the major cause of the large increase in unemployment), it is only in the past year that it has fallen to the levels which we sustained for an extended period in the early 1950s and early 1960s. This suggests that, if we are to get the investment needed to reduce unemployment to rates even approaching those of the 1950s and 1960s (about 2.5 per cent), wage and salary earners need to continue to exercise restraint for a further extended period.
Between 1989-90 and 1992-93 the share of GDP going to wages and salaries actually rose slightly while the profit share fell. If Australia did not have such a constipated industrial relations system, the share of wages and salaries would have dropped quite sharply over this period -- but unemployment would not have risen to anywhere near the same extent and business investment would not have dropped to the same extent either.
In sum, while the profitability of Australian businesses has increased in the past year or so, real rates of return are not yet providing sufficient incentive to bring forth the business investment needed to generate the jobs that will reduce unemployment to more acceptable levels. There would be a better understanding of the reasons for relatively sluggish investment and what to do about it if, instead of making exaggerated claims based on a partial analysis, senior ministers gave an accurate and comprehensive assessment of the situation.
ADVERTISEMENT
No comments:
Post a Comment