I have been working on a project to put "effective" labor and capital incomes into the circular flow model of the economy. There were many details to work out.
- Getting the right numbers for national accounts.
- Setting up the correct model to represent the circular flow.
- Getting the effective tax rate for capital.
Some numbers that were able to be verified were...
- Net taxes on capital. (source)
- National Income Accounting numbers. (source)
- Government net borrowing/lending as a % of GDP. (source)
The rest of the numbers have benchmarks in the data, but they need to be able to adjust to the "effective" adjustment. For example, labor saving will be a little different, but close to, the official number for household saving, as opposed to domestic business saving. (The effective adjustment is now based on 2009 as the base year. The coefficient for "effective" adjustment is now 0.7657. When 2005 was the base year, 0.78 was the coefficient.)The assumptions I ended up having to make were...
- Capital income is 25% more likely than labor income to purchase imports. The reasoning is that capital money is able to purchase luxury items from abroad which cost more. Also, capital income has more ties to foreign countries.
- Personal saving rate applies to labor income as opposed to capital income.
Let's start by looking at 1985... (all dollar values are in 2009 dollars.)
Some numbers to highlight...
- 8.8% was the personal saving rate. I applied that to labor income.
- 4.8% government deficit to GDP.
- Marginal propensity to consume (MPC) of 91.2% for labor income.
- $446 billion for labor saving. (The $968 billion under labor saving includes labor saving plus the saving created by import dollars. The import dollars do not belong to labor but are created by labor. The same applies to capital saving.) Remember this number for labor saving because 25 years later, labor is actuall saving less in real dollars. (see 2013 below)
Now we jump to 1995...
A few notes...
- MPC of labor increased.
- Imports are increasing.
- Government deficit has decreased.
- Personal saving rate has decreased to 7.1%.
- Capital is still consuming about 6% to 7% of its total income.
Now we jump to the 1st quarter of this year, 2013...
A few notes...
- Labor is actually saving less than it did in 1985 in real dollar terms, $409 billion.
- Capital income has increased its consumption from around 7% in the past to around 20% now. That indicates excess income not needed for saving and investment.
- Savings rate for personal income has dropped to 4%.
- Labor is now having to use over 85% of its income for consumption, as opposed to 76% to 78% in the past. This indicates that labor has less liquidity for purchases, and that their income has not kept pace with prices.
- Imports continue to increase.
- Net taxes on capital have fallen from over 30% in the past to around 15% now. This has allowed capital to increase its percentage of consumption and saving over time.
The graphs above show how financial power has shifted from labor income to capital income.