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A message for the NDP: profits are people, too

Yours truly, Stephen Gordon


 

The preamble of the NDP’s constitution contains this passage:

The principles of democratic socialism can be defined briefly as:

That the production and distribution of goods and services shall be directed to meeting the social and individual needs of people within a sustainable environment and economy and not to the making of profit; …

This sentiment — usually summarized by the slogans “People before profits” or “People, not profits” — is a ubiquitous theme in politics. But it reflects a fundamental misunderstanding of the role of profits in the modern economy, and the NDP would do well to follow through on the proposal(s) to remove it when the party convenes in Montreal this weekend.

Firstly, profits aren’t sent to another planet once they’re paid out: they stay among the people of Earth. I don’t suppose that revelation surprises anyone — the presumption supposedly is that profits are for the rich.

Equating profits with high incomes made sense for almost all of economic history: wages were too low for workers to save much, and the only way to generate large incomes was to obtain correspondingly large asset holdings, typically land. This was certainly the case when The Communist Manifesto was published in 1848, and still the case, generally, for Canada one hundred years later. In 1948, 47.6 per cent of the income of the top 0.01 per cent came from their capital holdings, another 24.2 per cent was generated by the self-employed; only 28.2 per cent of their income was in the form of wages (Read more on that here).

Two things have changed since then. First, wages have increased, and some people have seen their wages increase by dizzying multiples. The well-documented concentration of income at the top of the distribution in Canada and the United States has been driven by increases in wages and salaries, and not by investment income — wages now account for about 70 per cent of income at the top end. Bank presidents’ 10-figure incomes are being generated by their activities as wage slaves, not their asset holdings.

The other thing is that not all profits go to the rich. Below I’ve charted the various types of income according to the cumulative shares for each income group (check here for more details. The 2010 tax data are available here):

  • Employment income: wages and salaries account for about two-thirds of total income.
  • Investment income: this is passive income generated from asset holdings: dividends, interest payments and pensions. (Since only 50 per cent of capital gains are reported in the tax return, reported capital gains income is multiplied by two.)
  • Business income: this is essentially income from self-employment. It is listed separately, because it’s not clear to me how to separate total self-employment income into its wage and investment components.

Roughly 10 per cent of tax files report total incomes of less than $5,000, and about a third of all tax filers report no taxable income: even if you pay no taxes, you must file a return in order to be eligible for tax credit programs like the GST/HST rebate and the Working Income Tax Benefit.

Here’s how to read the chart: The horizontal axis is the total income reported by tax filers, with a log scale. The vertical scale is the cumulative share. Moving horizontally along a given percentage, we can see that (say) 30 per cent of the tax files reported total incomes under $15,000,  30 per cent of total income went to those earning less than $42,000, 30 per cent of business income went to those earning $45,000 or less, 30 per cent of investment income went to those earning less than $40,000, and 30 per cent of wage income went to those earning less than $50,000. Moving vertically, we see that those earning (say) $30,000 or less accounted for 50 per cent of all tax files, 20 per cent of business income, about 18 per cent of investment income and total income, and about 12 per cent of wage income.

Let’s look at the right-hand tail of the income distribution. The graph is truncated at $250,000, which is where the Canada Revenue Agency truncates the data in that table. People with incomes of more than $250,000 account for 0.75 per cent of tax files, 8.3 per cent of employment income and 17.9 per cent of investment income. Equivalently, the  bottom 99.25 per cent of tax files account for 91.7 per cent of employment income and 82.1 per cent of investment income. Yet another way of saying the same thing is noting that the red investment cumulative share line is below the green employment cumulative share.

This is what one would expect: the top end gets a big piece of the labour pie and an even bigger piece of the capital pie. But it’s not always the case that higher incomes are associated with a higher share of investment income. Look what happens further to the left: the employment and investment income shares cross at the $80,000 income level. For income levels below $80,000, it is no longer the case that those with higher incomes have investment shares greater then employment shares. For example, people with incomes of $40,000 or less account for 63.4 per cent of tax files, 28.7 per cent of investment income and only 20.8 per cent of employment income. It’s not clear how shifting income from capital to labour is going to help people in the bottom two-thirds or bottom three-quarters of the income distribution: their share of investment income is greater than their share of employment income.

The explanation for this is of course the fact that pensions income is investment income. (This point was explored in depth in the Profit episode of the CBC Radio series The Invisible Hand. Its admittedly provocative hook — ‘your grandmother is a capitalist’ — generated a certain amount of indignation.) Another important consequence of rising wages is that more people can and do save for retirement, even if it’s only in the form of CPP/QPP contributions. These holdings are enormous, and pension plans have become major players in financial markets. Millions of people are counting on these assets to sustain them through retirement, and not all of them are plutocrats. In fact, as a larger fraction of the population ages into retirement, a major policy challenge will be to make sure that investment incomes increase at an even faster rate.

None of this is to say that the NDP should abandon inequality as an issue: the top 10 per cent receive 40 per cent of all investment income. But the top 10 per cent also receive 40 per cent of all employment income, and no-one is chanting “People, not salaries.” Income is income.

I don’t know if a new preamble that doesn’t single out profits as a target for opprobrium will receive the support of the NDP membership (did I tell you about the indignant responses to the profit episode of The Invisible Hand?), but it should.


 

A message for the NDP: profits are people, too

  1. Extremely well done and interesting. To me, it suggests that a large chunk of inequality is generated from extravagant salaries being paid out from the gross income of corporations *before* profit is calculated and redistributed to shareholders. Since most of us are shareholders in one way or another, why are we tolerating this? Why aren’t people demanding, as shareholders, that the highest salaries in corporations be reigned in?

  2. Talking about profit with most leftists is a bit like talking about growth with most environmentalists. There’s the actual profit that businesses make, and then there’s “profit” as a short-hand for greed and plutocracy; there’s actual growth in GDP, and then there’s “growth” meaning conspicuous consumption and environmental degradation.

    In both cases, it would help if they just understood the basic vocabulary of economics.

    The same is true with some conservatives and inflation versus “inflation”.

  3. “That the production and distribution of goods and services shall be
    directed to meeting the social and individual needs of people within a
    sustainable environment and economy and not to the making of profit; …”

    While the language could be updated to not sound quite so Marxist, this statement could easily be read as something like “Corporations have a responsibility towards the welfare of their employees, communities, and the environment, not just their shareholders.” Which, frankly, I don’t think is a sentiment that is particularly outlandish nor should it be a significant source of consternation. Even Adam Smith devoted a considerable proportion of his writings toward the idea of corporate responsibility.

    • I don’t disagree that the second statement is not outlandish or likely to be a source of consternation.
      I’m not sure I agree, though, that the second statement has much in common with the first.

    • How can corporations have responsibilities? They’re not people.

      • Corporations have rights (in fact, the Supreme court already ruled in 2007 that Charter rights can apply to corporations) even though they aren’t people, so there’s no reason that they shouldn’t be able to have responsibilities either.

        • That’s another problem. Too many people pay attention to the first part of “legal fiction” and forget about the second part. As Kevin Milligan points out, taking corporate personhood too seriously makes for bad policy.

      • Tom Mulcair should be the main attraction at the Charbonneau Commission not eating caviare and filet mignon in Ottawa. Not long ago Mulcair was in the National Assembly of Quebec surrounded by his Trudeauist friends, a good number of whom are now under criminal investigation by the police for conspiracy and gangsterism. Birds of a feather flock together. Where there is smoke there is fire. Tom Mulcair is an evil elite of the inferior ruling class of the morbid eastern establishment. Papa Harper should throw him in jail because that is where he belongs.
        Canada and the Canadian People shall live forever.
        God bless Her Majesty Elizabeth II, Queen of Canada.
        christopherrichardwadedettling@gmail.com

        • You want to live in a country where the government can throw the Opposition leader in jail without trail? Maybe Canada isn’t the place for you then. Iran or Russia might be more appealing to your sensibilities.

      • Most people who aren’t simply anal pedants can understand that when one says “corporations” they generally mean “Those who direct the corporation will ensure their organization”

        I mean, do you similarly ask, “How can corporations sue? They’re not people.” “How can corporations be sued? They’re not people.” “How can corporations commit crimes? They’re not people.” “How can corporations simply *do* anything, they’re not people.” All of which leads to the idea that if they don’t actually do anything, we should just dissolve corporations completely, and not allow there to be any veil between shareholders and corporate activities.

        Which, if you put it that way, might have some merit.

    • I believe that this statement would be clearer if “and not to the making of a profit” were left off. This is where the confusion comes in. Putting the two sections of the statement quoted together are mixing up the levels. Business needs profit to exist, unless it is a non-profit specifically designed around principles that eschew profit. The first part functions perfectly well and is true while automatically including profit making. Combining that latter bit with the former creates a confusion because these must not be in conflict in our market economy. And I believe that is what the NDP platform must clarify for the party to be viable. Of course, an orientation to maximizing profits above all else IS immoral. When illness, including addictions, prejudice et al, waylaying political and legal process and most importantly for Canada corrupting Nature in our lands for which we hold a sacred duty toward stewardship for all the children, are tacitly accepted as the cost of getting more profits we are immoral — no one would agree it is right. Yet, government after government relies upon self-regulation and privatization. The NDP appears to accept that govt is necessary to control the bloody edge of capitalism.
      The wording must be improved because at this time it does show that the NDP are confused about their own platform at the highest levels. Sad and shameful, really.

  4. Great piece. In some sense, we live in a world that embodies the Marxist dream. Surplus is captured by labour (or at least the subset of labour that become CEOs and investment bankers) and capital earns a subsistence “wage” (witness the current near-zero real interest rates). Funny that the Marxists aren’t celebrating.

  5. 4 Boneheaded Biases Of Stupid Voters:

    The public has severe doubts about how much it can count on profit-seeking business to produce socially beneficial outcomes. People focus on the motives of business and neglect the discipline imposed by competition. While economists admit that profit maximization plus market imperfections can yield bad results, noneconomists tend to view successful greed as socially harmful per se.

    All that matters, then, is how much you empathize with the transfer’s recipient compared to the transfer’s provider. People tend, for example, to see profits as a gift to the rich. So unless you perversely pity the rich more than the poor, limiting profits seems like common sense.

    Yet profits are not a handout but a quid pro quo: If you want to get rich, you have to do something people will pay for. Profits give incentives to reduce production costs, move resources from less-valued to more-valued industries, and dream up new products. This is the central lesson of The Wealth of Nations: The “invisible hand” quietly persuades selfish businessmen to serve the public good.

    http://reason.com/archives/2007/09/26/the-4-boneheaded-biases-of-stu

    • The central lesson of recent experience is that the rich, and more-so for the ‘super-rich, do not provide anything that the people pay for WILLINGLY. Capital is used to skim further capital out of various financial systems to be held in personal ‘bubbles’ for private use. The incentives to give up capital to a society for multi-national plutocrats no longer engaged in ‘regular life’ is diminished. In part this comment has truth, but the above comment would have been fully valid no later than 20 years ago.

  6. “Firstly, profits aren’t sent to another planet once they’re paid out: they stay among the people of Earth.”

    This is a criticism of Globalism, that the profits don’t stay where they are earned.

    • Well, maybe not another planet … but occasionally skipping
      merrily around the globe through tax “friendly” enclaves to
      finally settle … who knows where, eh.

    • It gets investments to where there weren’t any before. I think if you ask the people who get the benefits of those jobs they aren’t worried about where the profits go but to how long the investments stay.

    • They stay, in general, among the extremely wealthy. They’re still on the planet, but they might as well not be as far as 99.9% of people are concerned.

  7. Tom Mulcair should be the main attraction at the Charbonneau Commission not eating caviare and filet mignon in Ottawa. Not long ago Mulcair was in the National Assembly of Quebec surrounded by his Trudeauist friends, a good number of whom are now under criminal investigation by the police for conspiracy and gangsterism. Birds of a feather flock together. Where there is smoke there is fire. Mulcair is an evil elite of the inferior ruling class of the morbid eastern establishment. Papa Harper should throw him in jail because that is where he belongs. Canada and the Canadian People shall live forever.
    God bless Her Majesty Elizabeth II, Queen of Canada.
    christopherrichardwadedettling@gmail.com

  8. The last 30 years have seen a maniacal focus on growth, with the entirety of such growth going into the pockets of the top 20%, and the overwhelming majority of it going to the top 0.1%. The middle and lower classes have seen their living standards stagnate or decline. So defending the continuation of that kind of economic policy, as every party except the NDP is doing, is madness.

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