Making Losses In A High Profit Economy

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From top: Grafton Street, Dublin 2; Michael Taft

Measuring wages in an economy is pretty straight-forward – take the total amount of wages and find the proportion it makes up of GDP. That is called the ‘labour share’. Measuring profits should also be pretty-straight forward. But Irish economic data is anything but.

Why measure profits? Because they are vital to a market economy (but see below for important caveats). Investment comes out of capital compensation which is a proxy for profits. Investment in a market economy – whether private or public – is key to productivity, growth, employment and wages.

But measuring Irish profits is more than problematic. In our EU peer-group, profits make up 38 percent of GDP; in Ireland, it exceeds 63 percent.

We know this is not real – no more real than our GDP, largely due to the interaction of multi-national accounting practices and Eurostat’s new way of measuring GDP.

Given that normal data can’t provide us a clear picture, we have to use the CSO’s GNI (a measure of gross national income unique to Ireland). This excludes outflows from the economy (e.g. repatriated profits) along with a range of distorting features such as re-domiciled profits, aircraft leasing and intellectual property. We find profits by subtracting wages, and taxes on products and taxes from GNI. This is not an ideal measurement but it’s the best we have.

So how do we measure up?

Even with all the distortions removed, Ireland is still a highly-profit economy. Of course, this doesn’t tell us how those profits are distributed. Revenue Commissioners tell us that as much as 40 percent of corporate tax revenue comes from just 10 companies, which is highly concentrated (and fiscally reckless).

However, much of this tax revenue does not come from profits generated here whereas the GNI strives to give a picture of domestic economic activity.

Nor does it tell us how these profits are used. If high profits lead to high investment then there is a social benefit.

However, such investment can be directed to unproductive activities. This happened prior to the crash when a number of domestic companies used profits to speculate in the property market.

Profits can also just be thrown on a big cash pile, or used to over-compensate senior executives, or distribute excessive dividends. When this is done at the expense of investment, wages or employee benefits, then real economic harm is perpetrated.

If Ireland’s share of wages and profits equalled the average of our peer group, this would mean an additional €14 billion for wages, equivalent to a 17 percent rise in employee compensation.

Such a rise would assist in reducing low-pay, reducing government subsidies (e.g. Family Income Supplement) and increasing tax revenue which could be re-invested into social and public services.

Does an economy need high profits to be ‘competitive’? It does not appear so. All the countries in the chart above – all below Irish profit levels – rank higher in the Global Competitiveness Index.

To re-balance the economy, there is a need to strengthen labour rights in the workplace so that employees can more effectively bargain with their employer (discussed here).

But how do we ensure that profits are directed into productive investment?

This is a more difficult proposition.

First, we would need hard data on the profitability of domestic firms, in order to calibrate efficient incentives. In particular, instead of grant-aiding and lending we could invest in new and existing domestic firms and take equity.

Second, we need to promote investment-rich foreign direct investment – something that will become an imperative as the rules regarding multi-national taxation change. This will require greater emphasis on education, skills and infrastructure such as housing to attract FDI.

Third, we need to create and expand companies that are essentially investment-driven; namely, public enterprises. Public enterprises do not create profits for shareholder value (though during the recession the Government milked these enterprises for dividend payments); they pursue profits to boost investment which is paid out of retained earnings.

And between all three we need new hybrid models – public, domestic private and foreign multi-national – so that we can make these companies work together for the productive economy.

We need a profitable economy – to invest productively, to compensate labour, to raise productivity, and spread prosperity throughout society.

We have the profits. It is debatable whether they are being put to best use.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday

Rollingnews

12 thoughts on “Making Losses In A High Profit Economy

  1. Jake38

    “…….Third, we need to create and expand companies that are essentially investment-driven; namely, public enterprises……………”

    So more CIE then, run by unions and holding the customer and taxpayer to ransom.

    No thanks.

    Reply
    1. JD

      A good point in CIE. The challenge with the debate is that it is couched in terms of right wing or left wing ideology. CIE needs reform in terms of governance and transparency. There needs to be more blending of public and private options but not throw the baby and bathwater out. There is some serious questioning in the UK of the legacy of privatising the rail services. (At the same time, the WIFI on Irish rail is reason enough alone to privatise the company)…

      Reply
      1. Fact Checker

        Ireland is home to some very well run state-controlled bodies, and some very poor ones.

        Ireland is home to some very well run private enterprises, and some very poor ones.

        The debate should focus on the governance of a body and how well it is aligned to achieve its objectives. The actual ownership (public, private or a bit of both) might not be too important.

        Reply
        1. Kolmo

          +1. Governance is key. We need a revolutionary change in the culture. Governance up until now is either wholly incompetent or complicit in the many, many scandals.
          Barely concealed vested interests dressed up as economic ideology is the problem, it manufactures a false quagmire in which well-placed insiders are creaming any profit while distracting us with the blame game, see: entire Health Service, insurance racket, legal industry, property racket. We spend more on our backward health system than other far more civilised and humane systems in Europe.

          Reply
    2. david

      When you make profit you pay tax and this is the key in business
      So expand ,expand ,and put those profits into acquisitions then keep on expanding and you limit your taxes
      Its time the IDA gave grants only to small indigenous companies not foreign multinationals that basically use our country as one big tax dodge
      As for anything tainted by the public sector they are the walking dead of industry
      As a country around 60% of what’s generated is taken by the government in taxes duty etc.
      And with the billions taken they cannot function without borrowing
      On the other hand a private sector company can survive after paying massive costs working on a maybe 10%net profit and flourish
      We never wonder why a government cannot function?
      Because they are top heavy with bloated public sector pay and pensions and totally unaccountable for their waste

      Reply
  2. Fact Checker

    Hi Michael

    You can indeed split the business economy into foreign and domestically controlled enterprises. You go to Eurostat’s SBS database, specifically foreign-controlled enterprises – inward FATS.

    I looked at 2014 where there about 3,000 foreign-controlled firms and 240k domestic ones in Ireland. The ratio of gross operating surplus to value added at factor cost (crude measure of profitability) differs hugely as you would expect. It is 76% for foreign-controlled firms and 38% for domestic ones.

    I did the equivalent for domestically-controlled firms in a few other countries. I got UK (49%), France (26%) and Germany (36%).

    Reply
    1. Michael Taft

      Fact Checker – Yes, the Eurostat dataset you reference can be helpful. However, there are problems. For instance, ‘domestic-controlled’ appears to now include re-domiciled companies. This can be seen by tracking the years in key sub-sectors (chem/pharm, ICT, etc.). Such companies are technically ‘domestic’ but in reality they aren’t. Further, one has to factor in composition of domestic firms to make comparisons across countries. For instance, value-added and gross operating surplus will differ between sectors – for example, manufacturing and hospitality. Therefore, if you compare Germany and Ireland you have to factor in the fact that Germany has a much higher proportion of manufacturing and Ireland has a much higher proportion of hospitality.

      This is not to say that the dataset you quote can’t help. But much work needs to be done on that – I understand the Nevin Economic and Research Institute is doing such work. And fortunately, the CSO is producing new data on productivity by domestic and foreign.

      But trying to – at this level -factor out the foreign-owned value-added and gross operating surplus would be a major, major job; if it can be done at all.

      Reply
      1. Fact Checker

        Thanks Michael – I hadn’t had time to drill into the detail and wasn’t aware the the re-doms are now in the domestically-controlled bin.

        What a mess!

        Reply
  3. Cian

    Micheal, interesting article (as usual).

    But I have a question on your estimate for Irish Profits.
    In 2016 the GDP was €275bn; you say profits were 63% which is €173.25; GDP-Profit = €101.75
    GNI* was €190bn (€85bn less than GDP); you say profits were 46.2% which is €87.8bn (€85.5bn less than the GDP-profits); GNI-Profit = €102.2bn

    So the only difference between GDP and GNI is profits? I thought GNI also excluded things like depreciation of the assets domiciled in Ireland.

    Am I missing something?

    Reply
    1. Michael Taft

      Cain, thanks for that. No, you’re not missing something – it’s Irish national accounts that are doing all the missing. I attempted to estimate a coherent profit level by using the GDP income method. In this method, GDP is made up of three components: labour income, profits (and I should have added in the text that this also includes self-employed income, or ‘mixed income’) and taxes on production and imports.

      Using Irish GDP, we would find that profits make up 63 percent of GDP but we know this is flawed given multi-national accounting’s impact on GDP. Therefore, I used the GNI*. This excludes depreciation redomiciled companies and aircraft leasing (the main culprits in distortion). Given that wages and taxes data are robust, I merely subtracted these from GNI* to get a profit estimate. I wouldn’t fight on the barricades over this number or method – but it is an attempt to extract something from flawed data.

      Reply

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