A subtle factor influencing Fed thinking is the growing divergence in economic gains. AI is accelerating the share of GDP going to corporate profits, boosting company resilience. Meanwhile, labor's share is more muted, with many workers struggling. This dynamic complicates the traditional view of the labor market's health and its role in policy decisions.

Corporate profits now command a record 16.7% share of national income. While a reduced labor share is a factor, a more significant driver has been the long-term decline in corporate interest payments. This reduction in borrowing costs has directly inflated corporate profits to historic highs.

Free cash flow has outpaced earnings growth primarily for two reasons: a smaller share of corporate output is going to labor wages, and firms have been able to generate profits without significant capital expenditure. This surplus cash flows directly to shareholders, boosting valuations.

The post-WWII GI Bill created a generation of wealth through education and homeownership. A modern equivalent should focus on broad-based stock ownership, giving the middle class access to the primary wealth-generating asset of our time: corporate equity.

While high salaries can place individuals in the top 10% of earners, the composition of income shifts dramatically at the highest levels. For the top 0.1%, the majority of income comes from business ownership, not labor. This illustrates that owning equity, not just earning a salary, is the primary mechanism for accumulating extreme wealth.

The economy is splitting into two paths. Asset owners see their wealth grow (the top of the K), while wage earners struggle (the bottom). The primary strategy for financial security is to transition from being solely a worker to an asset owner.

In an economy where technology is diminishing the value of labor, simply raising wages is a temporary fix. A more sustainable solution to inequality is enabling widespread ownership of assets like homes, businesses, and shares. This allows people to participate in capitalism's benefits beyond just selling their time, creating real, lasting wealth.

From 2001 to 2021, the value added per worker in pass-through businesses grew by $18,000. Of that growth, owners captured $15,000, while workers received only $3,000. This demonstrates that rising inequality is driven heavily by profit capture, not just overall economic growth.

A key paradox in the Q1 data is the strength of corporate profits despite weak overall economic income (GDI). This divergence suggests a distributional shift where businesses are capturing a larger share of the economic pie, likely due to labor's diminished bargaining power and aggressive price increases.