Paul,
You are certainly correct in the sense that national accounts seek to measure the income & expenditure which reflects the value of the net new output produced and the net new capital formation of investments.
That is precisely why, for example, the NIPA's exclude the realised "net gains of sale of property" by corporations in calculating the profit volume (in 2006, the last year for which data are available, those realised net gains were estimated in the US at $281.5 billion or 5.6% of GDP - see NIPA table 7.16). The central argument for doing this, is that such gains do not add net new value to the economy. But this does not mean that the profit income does not exist. The real income of financial institutions for example is understated in the product account, because, effectively, a chunk of that income is treated as a capital gain.
>From the IRS point of view, real incomes and expenditures are understated or overstated because of tax law, but from the NIPA point of view, they are additionally understated or overstated because of the concept of value added. This leads to a series of adjustments to bring the incomes and expenditures into line with the central concept of value added. But that just means that profit from capital gain or transfers is excluded, and some imputations are made.
You can validly argue that if I buy an asset for $1 million and I sell the asset to you for $1.2 million, the $0.2 million which is my profit income from the transaction does not "create new value", because the asset is the same asset, and I haven't added anything else that is new to the economy.
Nevertheless, (1) I now own an additional $0.2 million to spend, invest or borrow more money with, but more importantly (2) the asset itself is now revalued, because ceteris paribus its market value is now $1.2 million and not $1 million.
Because of that asset revaluation, other assets in the same class are, if such trading gains become widespread, also revalued upwards, and that means that the cost of newly producing or supplying such an asset also rises. Therefore, as the volume of capital gains rises, this will alter the cost structure of production - there is now permanently a new impost on production.
You could argue that asset revaluations are primarily demand-driven, and predicated on the expansion of the "real economy". If the demand for the asset was not there, the asset (and other similar assets) would not gain value, and in that sense the expansion of capital gains "rides on" the expansion of the real economy, to some extent adding to the latter expansion with additional demand. You can prove this easily because if real output growth falls, measured capital gains decline. But,
(1) in reality, the "demand" for the asset often has little to do with the fact that people want to own the asset as such, but rather with the expected future yield of the asset. So, in reality, the game is about income extraction from the trade in assets, and the revaluation of assets is almost completely dependent on the expectation of additional income that can be extracted from them.
(2) in reality, as I have frequently pointed out, the total non-productive capital assets of rich countries are nowadays larger in value that their productive assets, and thus in good part the capital gains have nothing to do with the expansion of production but with the monopolization of asset supply per se (but you can say that if in 2000-2008 the US gained 8 million immigrants (36% of the net population increase) those people need housing, which fuels a housing boom, which in turns fuels a boom in capital gains and asset speculation).
Is the capital gains income simply a redistribution of income? That depends on:
(a) whether the income extraction process is durable, and on whether the positive asset revaluations are durable.
(b) whether we look at it from the point of view of the domestic economy or the world economy.
As regards (a), if net assets are durably revalued upwards, the result is a net increase in capital income, and as regards (b) the redistribution may take the form of a durable net gain to the domestic economy, which results from addition income extraction from abroad. Effectively, countries are nowadays being revalued and devalued in the long term, on the basis of how much income can be reliably extracted from them.
My own argument as I have made in OPE-L in previous years is that, as historic trend, the value of real estate is being durably revalued upwards. That value may fall back during a few years, sometimes up to 30%, but the longer term trend is upward; short-term losses do not fully cancel out longterm gains. The most basic cause of this is simply population growth, but in addition it is also a matter of "productivity growth", i.e. the labour-exploitation rate, or the ability to extract income.
Modern capitalists get rich from (trading in) debt, but the overall result of that is a durable increase in real unemployment. At the same time, labour-saving technological change means that fewer workers can produce more output. This means that the level of real wages is nowadays under a triple downward pressure:
(1) the competition for jobs.
(2) the need for a rising rate of labour-exploitation to sustain the income extracted from the burgeoning debt claims.
(3) The reduction in labour requirements, due to increased productivity per worker.
The main ways final market demand can expand in that case are:
(1) if more people can be integrated in markets, and
(2) through expanding labour mobility, where people can earn higher wages by changing jobs.
Of course the haute bourgeoisie could also spend more on luxury consumption and weaponry, but they're only about 10 million people worldwide, and there's a limit to what they can consume or destroy.
Jurriaan
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Received on Sat Oct 31 08:10:13 2009
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