Krippner, Mason, and Nonfinancial Corporate Business

In Corporate cashflows, 1960-2016 JW Mason writes:

It is simply not the case that nonfinancial corporations in the aggregate have turned themselves into hedge funds – have replaced profits from operations with income from financial assets. The Greta Krippner article that seems to be the most influential version of this claim is a perfect example of the dangers of focusing on one piece of the cashflow picture in isolation. She looks at financial income received by corporations but ignores financial payments made by corporations (mostly interest in both cases). So as shown in Figure 3, she mistakes a general rise in interest rates for a change in the activities of nonfinancial businesses.

Figure 3. Because she focuses on the heavy black segment in isolation,
Krippner mistakes a period of high interest rates for a reorientation
of nonfinancial corporations to financial profits.

Mason rejects the view that nonfinancial corporations "replaced profits from operations with income from financial assets". It troubles me that he does not address the slowdown of output growth that would result from such a change. It irks me that he ignores the economic slowdown that occurred in the 1970s. However, my purpose here, like his, is to consider the financial side of the economy.

Mason shows a graph comparing interest flows to interest rates and declares that Krippner "mistakes a period of high interest rates for a reorientation of nonfinancial corporations to financial profits."

That is not only a challenge to Krippner. It challenges the whole focus of my thinking. So I looked at interest income relative to interest cost. For nonfinancial business, if the ratio increases, that's financialization.

Graph #1: Interest Received as a Percent of Interest Paid
for Nonfinancial Corporate Business

The ratio runs flat in the 1950s and shows just a little increase in the '60s. In the 1970s there is a massive increase of interest income, relative to interest cost. After the 1970s slow increase again, to 2006. This graph shows increasing financialization.

And let me suggest that the financial crisis was the economy's way of trying to solve the problem of excessive financialization.

 

Interest rates trended downhill since 1981. Neither my graph nor Mason's supports his view that "a general rise [and fall] in interest rates" explains the flows of interest in the nonfinancial corporate business sector. 

In a follow-up post, Mason says

it’s true there is a rise in interest income from the 1960s through the 1980s. But, as discussed in the previous post, this is outweighed by a rise in interest payments ...

His Figure 3 shows interest income and payments, but does not show the one in comparison to the other. The FRED graph shows the comparison. The FRED graph shows that the rise in interest payments did not "outweigh" the rise in interest income. It shows the opposite. It shows that from 1970 to the financial crisis, the increase of interest income far outweighed the increase in interest payments. The FRED graph shows financialization.

After 2006, the coincidentally financial crisis creates a sharp decline on both graphs. On the FRED graph, the decline continues till 2016. After 2017 the ratio rises for two years and rises sharply -- even more sharply than in the 1970s. I take this rapid increase to be financialization's recovery from the financial crisis, a recovery interrupted by the pandemic of 2020.

I do not explain the increase of the 1970s, except to say it was not caused by rising interest rates. My guess would be that there was a change in the tax code or some other policy, perhaps in the late '60s, which caused the increase. The readiness of the ratio to increase after 2017 suggests that this policy was still in effect. The decline after 2006, due to the financial crisis, was temporary. As I interpret it, that 10-year decline was not a change in trend. The decline was a reaction to the crisis, and a temporary departure from the trend. Mason seems to see the comparable decline on Figure 3 as the natural result of downtrending interest rates. But the financial crisis was not a natural event. It was the result of decades of bad policy.

Mason references the Integrated Macroeconomic Accounts in his post. I went with FRED. I'll try it his way, using the IMA "all tables in XLSX format" file. Table S.5.a shows the Nonfinancial Corporate Business data at annual frequency, in millions, 1960 to 2020:

Graph #2: Data Comparison, IMA and FRED Data

Funny how the two lines follow each other so closely except before 1970.

Funny how the IMA data shows nothing before 1960.

Funny how FRED shows the increase from near the 25% level to near 50%: roughly a doubling in a decade. IMA, though it runs a good deal higher, shows only about half a doubling during that decade.

Funny that the IMA link brings you to BEA, which is also the source of the FRED data. Ha ha.

Mason says "Krippner mistakes a period of high interest rates for a reorientation of nonfinancial corporations to financial profits." He is saying the increase that looks like financialization is really due to the increase of interest rates. He apparently assumes that the interest cost increase and the interest income increase are similar in size. They are not.

Both FRED and the IMA show definite increase of interest income relative to interest cost in the 1970s and after. This difference between income and cost has little or nothing to do with the change of interest rates, far as I can see.

The FRED data makes it easy to see the financialization of nonfinancial corporate business. It is not as easy to see that the IMA ratio shows it, because the data starts late and goes downhill. But there is the increase of the 1970s, and the increase of the 1990s, and the increase leading up to the financial crisis. Each increase peaks at a higher level than the one before, and all of them are higher than IMA's 1960 data point. That's financialization.

For both datasets, interest income increased relative to interest cost from 1970 to the financial crisis. And for both, financialization resumed with vigor after 2017. Increase of interest income relative to interest cost is a measure of financialization. I have to accept Krippner's view on this, not Mason's.