Is the Federal Debt Raising Corporate Profits and Reducing Labor's Share of National Income?

Abstract

The federal debt-to-GDP ratio has accelerated in recent years to levels unseen in the U.S. since the post-World War II decline. At the same time, the profit share of national income is at post-war highs and the employee compensation share of national income is at 40-year lows. The empirical evidence in this paper suggests that these facts are related. The paper provides evidence that government debt has crowded out business investment, which has led to a rising profit share and declining employee compensation share of income. This result suggests that the federal debt is contributing to income inequality. On the other hand, to the extent that the rise in profit share can be traced to economic fundamentals, it is likely to be more persistent than the rise in the mid-2000s, which was boosted by illusory profits in the financial sector.