The macroeconomic cause of today’s profits bubble can be understood as a quarter century of politically facilitated globalization. During the 50 years following WWII, we lived in an open global developed economy containing less than one billion people in Europe, North America, Australia, Japan, Korea, Taiwan, and a handful of others. Some countries were growing faster, some slower, but the technological level and population growth rates were not very different across the predominant countries within this relatively open global economy. The shares of income to labor and capital varied cyclically but tended to revert toward long-term averages.
Beginning in the 1990s, we experienced a seismic shift in our global political economy. Approximately three billion people began to join this open global economy: about one billion each in China and India and another billion or so in Russia, Eastern Europe, South America, and Southeast Asia. Average wages, level of technology, and amount of accumulated capital in the countries of the aspiring three billion lagged far behind those enjoyed by the one billion in the developed world. Imitation and appropriation is far easier than innovation and invention, so catching up has been rapid for those nations willing to make even modest concessions to the aspirations of their citizenry. For the past quarter century, the capital and technology accumulated by the old equilibrium advanced global economy has been suddenly shared across a labor force and populace that quadrupled.
This tectonic shift in our global political economy produced some winners and some losers. Incomes of many of the three billion newly joined rose quickly. Global poverty rates have plummeted. Meanwhile, wages in the old advanced economy countries stalled at least partly in response to competition from the lower wages welcomed by workers in developing countries.
Profits grew to a much larger share of output and an unprecedented percentage of wages and salaries (see Figure 2). To be sure, if we adjust wages to include the value of benefit programs and entitlements, we aren’t quite at all-time highs in profits-to-total compensation ratios. But, even here, we’re darned close to unprecedented records. In both cases, the five- and ten-year averages are at new highs. These longer-term trends are fueling popular unrest.