[lbo-talk] GS on profits

[Wojtek Sokolowski]

Doug:
> Goldman Sachs economics writes:
> 
> >*	Since the recession ended in late 2001, aggregate US profit
margins
> >have risen to their highest level in postwar history.  This surge
partly
> >reflects lower interest rates,	lower taxes, and a weaker
dollar.  But the
> >most important factor is that firms, not workers, have captured
almost all
> >of the recent productivity gains.
> >*	The key driver of margins is the gap between productivity and
real
> >wage growth.  We expect this gap to remain positive in 2004, as the
> >still-slack labor market keeps	wages contained.  Thus, we
expect after-tax
> >profits to rise 15% in 2004 and 10% in 2005.  The margin expansion is
likely
> >to come to an end once the labor market tightens enough to push up
> >real wage growth.

If memory serves, the apparent inability to control wage growth did the
central planning Eastern European style in.  The planners had an "iron"
formula that the wage increases should be lower than productivity
growth, but they were unable to adhere to this formula for the following
reasons:

1.  Annual productivity growth rates were declining throughout the 1960s
and 1970s (see Chavance, _The Transformation of the Communist Systems_,
Westview Press, 1994).

2. The wage control mechanisms instituted under the central planning
system did not work as planned, chiefly due to the following factors:

  - regional shortages of skilled labor;

   - grey economy (at both enterprise level i.e. factory managers
subverting wage schedules to attract labor and individual level i.e.
employees stealing from their employers on a massive scale);
- social protest demanding higher wages and standards of living
- failure of administrative price control to compensate for
"inflationary" wage increases (i.e. those not warranted by productivity
gains); this failure was in a substantial part due to the social protest
in response to price increases.

It seems that the US brand of capitalism does much better in this
respect - as all productivity gains are appropriate by the employers or
are achieved by the reduction of labor input.

Wojtek