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Brad DeLong is Soooo right about Labor Share & Effective Demand… YEAH!

Brad DeLong responds to Paul Krugman’s post on The Profits-Investment Disconnect. Why are profits high, but investment low?

Brad DeLong says…

“Profits are not high now because demand is high, throughput is high, and capacity is being fully used. Profits are high now because the labor share is unusually low. Firms almost surely, given the collapse in the labor share over the past fifteen years, operating with too much capital and too little labor along the isoquant to be profit maximizing.”

Did the Fed caused inequality? No… Like I wrote two days ago… (link)

“The real change that led to increased inequality is the conspicuous drop in labor share after the crisis. Record profits by firms were not being transmitted to labor. That was not the fault of the Fed.”

Paul Krugman does not see the impact of this drop in labor share, Brad DeLong does. Yeah for Brad DeLong!

Why are productive investments low? Like Keynes said with an insufficiency of effective demand… (link)

“… The propensity to consume and the rate of new investment determine between them the volume of employment, and the volume of employment is uniquely related to a given level of real wagesnot the other way round. If the propensity to consume and the rate of new investment result in a deficient effective demand, the actual level of employment will fall short of the supply of labour potentially available at the existing real wage, and the equilibrium real wage will be greater than the marginal disutility of the equilibrium level of employment.

“This analysis supplies us with an explanation of the paradox of poverty in the midst of plenty. For the mere existence of an insufficiency of effective demand may, and often will, bring the increase of employment to a standstill before a level of full employment has been reached.”

As for why Brad DeLong included a graph of the real GDP shortfall, Keynes says this about insufficient effective demand… (same link as above)

“Moreover the richer the community, the wider will tend to be the gap between its actual and its potential production… a wealthy community will have to discover much ampler opportunities for investment if the saving propensities of its wealthier members are to be compatible with the employment of its poorer members.”

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Two little comments on Matt O’Brien

The main point (if any) is that wonkblog without Ezra Klein is still excellent. Matt O’Brien wrote an excellent post on what’s wrong with Europe. It includes an excellent intro to Krugmanian macro and a description of the problem.

I had two tiny comments. O’Brien discusses “structural reform” well, but accepts the German view that they lead in the field without question. Also he notes that Germany might threaten to leave the Euro.

My comments

2 things. Italy and Spain had “structural reforms” making it easier to fire long before Germany (Italy in 1997). This matters a lot because all 3 reforms grandfathered those who had job security. Germany hadn’t had time to build up a large number of people with insecure jobs. The tardiness of the Schroeder reform does more to explain the difference in employment performance than its existence. I am quite sure that Germans don’t know about the Treu, Suarez and Gonzalez reforms.

2. Why would a German discussion of leaving the Euro be a threat ? Why wouldn’t the remaining Euro block say good buy*, good luck, and good riddance & don’t let the door hit you where das Herrgott split you ? The resurrected Deutschmark would appreciate, so Germany would import more, which is exactly what the rest of Europe needs.

*this was an honest typo, but it actually is the whole point. Right now good buys in Germany are attracting Israeli immigrants (yes really http://www.haaretz.com/weekend/weekend-opinions/.premium-1.622536). If Germany leaves the Euro, exchange rates will adjust until prices aren’t absurdly low in Germany.

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SEASIDE SOCIALISM

Back in 2007 the state of Florida changed the way to insure beach properties and is mentioned at Angry Bear here.

Reuters reports here here and Waters edge crisis.

SEASIDE SOCIALISM

Breakneck development at the shore has trapped Florida in a costly Sisyphean effort to maintain its perpetually eroding beaches. More than a tourist attraction, the beaches protect all those buildings from the waves. Nearly half of Florida’s beachfront is designated under state law as “critically eroding.”

But that designation doesn’t limit further development; instead, it triggers taxpayer subsidies that support the status quo. Since 1990, government “beach renourishment” programs have dumped more than 135 million cubic yards of sand on Florida shores.

The state accounts for about a quarter of the roughly $7 billion spent on sand projects nationwide, in current dollars, according to Andy Coburn, associate director of the Program for the Study of Developed Shorelines at Western Carolina University in Cullowhee, North Carolina. Federal taxes covered about three quarters of the cost; state and local government paid the rest, minus a small share contributed by private landowners.

Congress this session approved five new sand projects that will require an estimated $400 million in federal help. Among them: Replenishment of the 19-mile stretch of beach that passes Huckabee’s vacation house, with $43 million in federal subsidies.

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Chris Christie Says We Should Not Treat Ebola Patients, Because No One Wants Their Kids to Get Ebola, and Anyway We’re Trying to Develop an Ebola Vaccine.

Okay, here’s what Christie actually said:

I’m tired of hearing about the minimum wage. I really am. I don’t think there’s a mother or father sitting around the kitchen table tonight in America saying, ‘You know, honey, if our son or daughter could just make a higher minimum wage, my God all of our dreams would be realized.’ Is that what parents aspire to?

That’s from a transcript posted yesterday on the New York Times website in a Taking Note blog post by Eleanor Randolph.  Christie said this during his already infamous luncheon speech to the Chamber of Commerce in Washington on Wednesday.  (Thanks, Governor!)  Randolph reported that “[e]ven that crowd had the decency not to applaud” Christie’s Marie Antoinette impersonation.

My guess is that the absence of applause was partly in reaction to the jarring non sequitur—and to the realization that this guy, who’s apparently planning to run for the Republican nomination for president, thinks we need to choose between addressing a current situation and trying to prevent the situation from reoccurring, or continuing to occur, in the years and decades to come.  Or maybe it occurred to them that Christie promises that there will be no such thing as low-paying jobs in America once the Republicans gain full control of the government.*

Ms. Randolph writes that there are nearly half a million people in New Jersey who earn less than $10.10 an hour, the rate that Democrats in New Jersey and elsewhere are proposing as the minimum wage.  There also are many thousands of Ebola cases in West Africa right now, and the possibility that the disease will spread at some point in this country beyond the three cases diagnosed here.  But there’s the potential to develop an Ebola vaccine—if the NIH receives sufficient funding to proceed—so there’s no reason to try to treat anyone who has the disease.

And anyway, I’m tired of hearing about Ebola.  I really am.

Christie for President!

*Paragraph typo-corrected and edited slightly for clarity. 10/24 at 10:11 p.m.

____

UPDATE: Ah.  I knew the Comments thread on this post would be fun.  Here’s the thread as of 6:14 p.m.:

Axt113/ October 24, 2014 3:10 pm

It’s not about the final aspiration, it’s about having enough to not only live on, but also to achieve said aspirations.

College ain’t cheap fatass.

—-

Mark Jamison/ October 24, 2014 3:19 pm

There are more than a few people sitting around the kitchen table wondering about how they are going to make it on their minimum wage jobs. I wonder what the impact is on their kids as they sit and listen to Mom and Dad worry about making the rent or putting food on the table.

Christie and his ilk live in a fantasy land where everyone just magically pulls on their bootstraps and dreams come true.

—-

Urban Legend/ October 24, 2014 3:26 pm

If he would stop fighting it and just listened to the American people — who by a strong majority want it — he wouldn’t hear as much about it. What a jerk!

—-

 ME/ October 24, 2014 5:57 pm

Normally, I would say that all three of your comments are spot-on, guys. But on second thought, I think you all just have no foresight. Once Republicans control all branches of all levels of government, and we start taxing only people who make less than $10.10 an hour, we’ll be able to fund development of a vaccine for Ebola AND replace all those jobs at Walmart and McDonald’s with management positions at Koch Industries or entry-level trader positions on Wall Street.

Trickle-up economics is awesome.

Yup.  This is fun.

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Productivity, Recessions & New Levels of Productive Capacity

Noah Smith provoked a conversation here at Angry Bear by wondering what causes recessions. Recessions are not such a mystery when you see the interaction between effective demand and such things as productivity.

The conversation took place in the comments section of a previous post on Productivity’s role as a cause of recession. The issue is whether increasing productivity causes recessions, as opposed to tight money policy or something else.

Truly, a recession is caused by a blend of factors, including monetary policy, effective demand, vulnerable profits and pressures in the economy from an urge to increase productivity. Yet, here I want to show a graph of productivity gains since 1967. I will use a graph previously posted. (link) The graph shows real GDP on y-axis, and utilization of labor and capital on x-axis to represent expansions and contractions of the business cycle.

attractor PC shifts beyond

In this graph, we see how real GDP jumps to a new attractor level after a recession. (Recessions are seen when the plot goes to the left.) Each new attractor level points toward a higher and identifiable productive capacity. Surely, productivity needs to increase in order for the economy to jump to new levels, right? Well, we can visualize when productivity jumps in this process of jumping up to higher and higher levels of productive capacity.

For each data point of real GDP, I change its size to represent the productivity growth over the preceding year.

attractor PC shifts beyond w bubbles

What do we need to see here? The larger bubbles show larger increases in productivity. You will notice that the larger bubbles primarily appear during those recessionary transition periods. (between the lines & to the left)

So are productivity gains “causing” recessions? Well, they are part of the dynamics that cause recessions.

Many people are concerned about low productivity at the moment. Yet, we can expect productivity to increase through the next economic contraction. Is that saying that pent up productivity will cause the next recession? Well, pent up productivity gains are part of the pressures that cause recessions, in combination with the changes of the effective demand limit. Pent up productivity gains are released through the recession process after effective demand expands. (see article below)

prod growth

When effective demand (blue line) increases during an economic contraction, productivity (red line) increases with a bit of a lag. The times when productivity growth is low or zero, coincide with a tightening of effective demand. Basically, effective demand can be seen as a leading indicator of productivity changes.

Related Articles

Lambert, Edward. Relax DeLong & Krugman… Productivity advances will appear when there is demand space. Effective Demand blog. December 3, 2013.

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Martin Wolf’s Warning

by Joseph Joyce

Martin Wolf’s Warning

It is time for the 2014 Globie—a (somewhat fictitious) prize I award once a year to a book that deserves recognition for its treatment of the consequences of globalization. (Previous winners can be found here.) The financial turmoil of the last week makes this year’s award-winner particularly appropriate: Martin Wolf for The Shifts and the Shocks: What We’ve Learned–and Have Still to Learn–from the Financial Crisis. Wolf, a distinguished writer for the Financial Times, once viewed globalization as a positive force that enhanced welfare. But the events of the last few years have changed his views of financial markets and institutions. He now views financial flows as inherently susceptible to the occurrence of crises. And Wolf’s intellectual evolution leaves him deeply concerned about the consequences of financial globalization.

Part I of the book deals with the “shocks” to the global economy. Wolf begins in the U.S. with the crisis of 2008-09 and the relatively weak recovery. He shares the view of Richard Koo of Nomura Research that this was a “balance sheet recession,” with the private sector seeking to shed the debt it had built up during the pre-crisis period. The cutback in private sector spending was initially matched by an increase in the government’s fiscal deficit, which arose as expenditures on unemployment benefits and other programs grew and revenues fell. The rise in the fiscal deficit was particularly appropriate as the “liquidity trap” limited the downward fall of interest rates and the expansionary effects of monetary policy. However, the political acceptance of deficits and debts ended prematurely in 2010, and the recovery has not been as robust as it needs to be.

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Both the rich and ordinary Americans misunderstand their economic interests

by Linda Beale

Both the rich and ordinary Americans misunderstand their economic interests

There is class warfare going on, right now, all across this country.  It’s highlighted by the election gimmicks and gambits of those on the right who claim to be supporting ordinary Americans but whose real intentions show in the results. And it is ultimately a sad statement about Americans’ understanding of what is required for a sustainable economy that supports decent lifestyles for all.

Let’s start by looking at the maps resulting from studies of well-being that identify the states where people are not at all well-off, such as the 2013 survey done by Gallup Healthways, available here.  Those poor states are the reddest of the red belt in Mississippi, Tennessee, Florida and elsewhere across the Deep South–places where I grew up in a decidedly Republican household that bought the GOP economic fallacies hook, line and sinker, and places where today’s populations are worse off in terms of the various measures of economic well-being and happiness than the more progressive northeast and west.

Isn’t it likely that the anti-government, low-tax and pro-wealthy/pro-big business policies of the GOP politicos that have run these states for several decades have something to do with these negative results, and that the more progressive policies in the northeast and northwest are reflected in the much more positive results in those areas?

Yet rural, southern populations continue to proudly proclaim their allegiance, against their own economic interest,  to ill-fated Reaganomics that favors tax cuts (for the wealthy and big business) coupled with  use of  old-time, regressive consumption taxes (toll roads, sales taxes and property taxes),  privatization of public functions (e.g., charter schools managed by for-profit, nontransparent corporations), socialization of losses, militarization, and de-regulation.

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Adding to Steve’s quest to define “money”. A couple short films.

Via Digby comes a couple short films talking about what is money.   They are part of an effort by a group/site called We The Economy that has 20 short films aimed:

 to drive awareness and establish a better understanding of the U.S. economy. Told through animation, comedy, musical, non-fiction, and scripted films, WE THE ECONOMY seeks to demystify a complicated topic while empowering the public to take control of their own economic futures.

I have to say I am a bit biased toward these two films as they promote the idea that I have presented here in various ways: trust.  It all comes down to trust.  All our wealth, power, security, prosperity and future.  Trust is the money.   And we have been doing our damnedest to destroy it in the quest for ever greater growth (financial or otherwise) via some concept referred to as freedom or more relatedly “free market”.

They are kind of humorous in parts too.

That Film about Money, part 1

The second part of That Film about Money

I’m going to go watch the rest of the films now.

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