[PEN-L:4886] Re: profit-rate equalization -Reply

[dhenwood@xxxxxxxxx (Doug Henwood)]

At 6:09 AM 4/29/95, Patrick Bond wrote:

>Whichever, my own point would be that such uneven development (over
>sectors or space or even scale) is exacerbated during those periods -
>like the 1980s `Deal Decade' - when financial capital is ascendant. I
>wonder whether Doug's citation underestimates the problem, by failing
>to distinguish between profits derived from financial as opposed to
>productive activities (I am guessing, based on the Brookings source).
>Intuitively, I would guess those profit differentials would be even
>more divergent if such a breakdown was available. Doug, this
>distinction is in your Wall Street book, no doubt?

The Brookings figures refer to industrial sectors, things, not finance. Of
course, with GMAC and all, it gets hard to tell the difference, but the
firms in the sample were manufacturers.

Don't know exactly what you mean by "breakdown."

Let me quote the conclusion from the Blair/Schary paper:

"Our industry-level measures indicate the cost of capital...rose
dramatically in the first half of the 1980s.... The decade was also
different from its predecessors in that the realized returns to capital in
many industries fell.... [C]learly the climate for new investment in many
industries was hit with a double whammy. The expected profitability of
future investments fell just as the profitability required by the capital
markets climbed to unprecedented heights.... Taken together, the squeeze on
capital and the cash generation rate suggest that from 1982 through 1989,
the U.S. corporate sector was caught up in an epidemic of free cash flow."
[Margaret M. Blair and Martha A. Schary, "Industry-Level Indicators of Free
Cash Flow," in Blair, ed., *The Deal Decade* (Brookings, 1994)].

Doug

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Doug Henwood
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