Depreciation allowances bias both profit and cash-flow measures of financialization in opposite directions.

Evidence

In particular,it is important to take into account some of the problems associated with depreciation already discussed in conjunction with the portfolio income measure. As noted, the liberalization of depreciation allowances in recent years results in profit figures that are artificially low relative to figures from the 1950s and 1960s. Even more troubling, depreciation allowances are not evenly distributed across firms, but will be highest for firms in capital-intensive industries, like manufacturing. Thus, these problems will bias a comparison of the financial and non-financial sectors, overstating the growth of financial relative to non-financial profits, especially in recent years. In short, corporate profit data present too favourable an estimate of financialization. … But while in using corporate cash flow previously, I was interested in capturing the total capital available to firms, here I am actually interested in profits.As a proxy for accumulation, corporate cash flow data suffer from the opposite bias to that of corporate profit data. In particular, while liberalized depreciation allowances overstate true depreciation, true depreciation is not zero and represents a cost borne by firms against profits.As before, this cost is not evenly distributed across firms, but will be highest in capital-intensive industries. Thus, corporate cash flow data produce an inflated estimate of profits in industries such as manufacturing, understating financial profits relative to non-financial profits. In sum, then, corporate cash flow data present too conservative an estimate of financialization. — Greta R. Krippner, The Financialization of the American…, 71

Categorization

• XREF: Connects to the method of choosing profit proxies wisely; echoes debates in economic measurement where tax regimes distort underlying data. — connects to: Financialization is measured as the ratio of financial receipts to business receipts. — Ken-Hou Lin & Donald Tomaskovic-Devey, Financialization and U.S. Income…, 66; Measuring finance’s rise by profits misleads if grouped under services. — Greta R. Krippner, The Financialization of the American…, 21; Financialization can be measured by comparing non-financial firms’ portfolio income to their cash flow. — Greta R. Krippner, The Financialization of the American…, 47 (+2 more)

Related

• Financialization can be measured by comparing non-financial firms’ portfolio income to their cash flow. (similarity 0.83)
• Measuring finance’s rise by profits misleads if grouped under services. (similarity 0.83)
• Financial profits relative to non-financial profits rose three to fivefold by the late 1990s. (similarity 0.82)
• Financialization is measured as the ratio of financial receipts to business receipts. (similarity 0.80)
• Measuring profits rather than employment reveals financialization as the dominant economic trend (similarity 0.80)
• Financialization must be measured by profit generation, not employment or output (similarity 0.80)
• Nonfinancial firms’ portfolio income relative to cash flow surged by the late 1980s (similarity 0.80)
• Opposing measurement biases strengthen confidence in the financialization trend (similarity 0.79)

Broader Connections

• Opposing measurement biases strengthen confidence in the financialization trend #qualifies (0.82) — Greta R. Krippner, The Financialization of the American…, 85
• Corporate spin-offs inflate portfolio income measures independently of financial orientation #complicates (0.75) — Greta R. Krippner, The Financialization of the American…, 90