Relevant and even prescient commentary on news, politics and the economy.

How do Americans get rich? (and stay rich?)

Originally published at Evonomics and reposted at Naked Capitalism, Angry Bear Steve Roth continues his conversation on riches, income, debt, and expectations. Steve Roth serves as Publisher of Evonomics.

By Steve Roth

How do Americans get rich?  (and stay rich?)

It’s the American dream. A third of Americans think they’ll be rich someday. More than half of 18–29 year olds think they will be.

Less than 5% actually make it.* And many of those do it the old-fashioned way: they inherit it. About 60% of U.S. household wealth is inherited. Between a quarter and a third of Forbes 400 billionaires got rich that way. It may not be the most common way to get there, but it’s widespread, and it’s surely the easiest way.

That aspiration to wealth is deeply understandable. Getting high income from a good job is all well and good, but because wealth begets more wealth — people are compensated simply for owning things — wealth is, potentially, forever. It persists, and spreads through families and dynasties. Wealth can, and often does, endure for generations.

So it’s worth asking: how do Americans accumulate wealth? And how does that vary across income and wealth classes? How do the bottom 50% accumulate wealth, for instance, compared to the top 1%?

The Distributional National Accounts

A huge aid to answering that question arrived last month. Gabriel Zucman, Emmanuel Saez, and Thomas Piketty (PSZ) released one of the most important pieces of economic research in the last century. Their Distributional National Accounts (DINAs) reveal the distribution of national income to different income classes, wealth classes, age groups, and genders (and potentially different races, etc. etc.). This has been unavailable in the national accounts, and as a result it’s absent in most macroeconomic empirical work.

Here’s one poster exhibit:

Collect the whole set.

Tags: Comments (17) | |

Okay Fine, Let’s Call Investment “Saving.” Or…Not

I really like Hellestal’s comment and linguistic take on this whole business:

I’m comfortable changing my language in order to communicate. I have very little patience for people who aren’t similarly capable of changing their definitions.

This discussion is really about the words we use to describe different accounting constructs. Nick totally gets that as well.

So I’m ready to say, “fine, let’s call investment saving.” That’s perfectly in keeping with the very sensible understanding found in Kuznets, father of the national accounts. He characterized real capital — the actual stuff we can use to create more stuff in the future — as “the real savings of the nation.” (Capital in the American Economy, p. 391.)

So when you spend money to produce something that has long-lived (and especially productive) value, you’re “saving.”

But still, I gotta wonder: why don’t we just call it…investment?

Because this S=I business confuses the heck out of everyone. Some of the smartest econobloggers on the web have spilled hundreds of thousands of words over the last several years trying to sort out this confusion. I’ve read most of them, and I’m still confused. And I’m quite sure that all non-economists who’ve looked at this (and many or even most economists) are as well.

And that’s not a surprise. Here are a few reasons why:

1. When you invest in real assets, you’re spending. That’s why it’s called investment spending. So spending = saving. Really?

2. When you pay someone to build you a drill press, you’re saving. When you don’t eat some of this year’s corn crop, you’re saving. When you pay off some of your money debt, you’re saving. When you don’t spend some of the money in your checking account, you’re saving. Each of these is true within a given (usually implicit) balance-sheet/income-statement accounting construct. But are they anything like the same thing?

3. As I showed in my last post, f you look at the “real” domestic private sector — households and nonfinancial businesses (most people’s implicit default context) — the amount of saving (income minus expenditures) has absolutely no relationship to the amount of investment spending. Saving is always insufficient to “fund” investment. And the changes in the two measures don’t move together, either in magnitude or direction. (Aside from the long, multi-decadal growth in both as the economy grows.)

4. When you “save” by investing, you decrease the amount of money on the left-hand (asset) side of your balance sheet, while increasing the amount of real assets on that tally. Your total assets are unchanged. Have you saved?

5. When you pay someone to write a piece of software, you get a long-lived real asset. You’ve saved. But the money you gave them is income for them, so it contributes to their (money) savings as well. Do you double-count those savings, or did “the economy” get that software for free?

6. Investment means “gross investment” — all the money spent on long-lived goods, including replacement of long-lived assets that have been consumed in the period (through use, decay, and obsolescence, and — for inventory of consumer goods — actual consumption). But in KuznetsWorld, shouldn’t we be talking about net investment — the additions to our stock of long-lived assets? Gross consumption minus consumption of fixed assets (and inventory changes)? Shouldn’t we call net investment “saving”?

I know: there’s (at least apparent) confusion in some of these, but that’s rather my point. And there are answers to all of these in the context of S=I. (All of them, I think, based on the flawed [neo]classical accounting constructs embodied in the NIPAs. That’s my next post.) I’ve read them all, every which way from Sunday. But do they help anybody understand how the economy works, or…quite the contrary? If they do, why do all those econobloggers feel the need to worry at this, constantly?

I’m not sure this really solves the problem, but I’d like to suggest that saving should mean what everybody in a monetary economy means when they use the word: money saving. Monetary income minus money expenditures. In dollars, or whatever. (And while we’re about it, when you take out a loan or spend out of your savings, let’s call those “borrowing” and “spending,” not “dissaving.”)

Meanwhile investment (in economics discussions) should mean what economists mean when they use the word: “spending to create fixed assets and inventory.” (Because the national accounts only count spending on structures, equipment, software, and inventory as investment.)

And actually, that’s what it already means.

Why do we need to call it saving?

Cross-posted at Asymptosis.

Tags: Comments (3) | |

Saving, Investment, and Lending in the Real Economy (Graphs). S=I?

With all the chaff that’s been flying around (recently, and for years now) about saving and investment, dissaving, and lending/borrowing, I felt the need to go back to the numbers and see how they’ve played out over the decades in what we tend to call the “real” economy — domestic households and nonfinancial business. Click for larger:

Update: The signs were reversed for lending/borrowing. Graphs corrected and updated.

Screen shot 2013-04-16 at 7.17.56 AM

Here’s the lending/borrowing broken out for you:

Screen shot 2013-04-16 at 7.36.17 AM

This is all from the Fed FFAs. Saving is household/nonprofit net saving (after-tax/transfer income minus expenditures) + undistributed business profits (after-tax/transfer income minus expenditures and distributed profits [distributed profits are part of household income]). Details/spreadsheet on request.

I’ve actually written at least three (long) posts on this in course of building out these graphs, but now that the graphs are complete I find myself fairly flummoxed. Saving seems to always be wildly insufficient to fund investment (and no, lending/borrowing + saving has no relationship either). S=I seems to provide exactly zero illumination here.

And the post-1990 lending/borrowing swings I see don’t fit with any real-sector saving/dissaving story I’ve heard (or can remember). We see borrowing spike during the internet boom, dive following the bust, then spike again during the real-estate bust.  ?

So I’m going to leave this open to my gentle readers for the moment. What in the heck is going on here? What story (or stories) would you tell to explain what you see?

If anyone wants to see earlier periods zoomed in to get a better feel what’s going on, let me know. I’m thinking 1946-1975 (to see what seems like a period of consistency), and 1970-1990 (from the fall of Bretton Woods to the start of the internet bubble and the Clinton surplus).

Cross-posted at Angry Bear.

Tags: Comments (3) | |

Reading Mankiw in Seattle

A while back Nick Rowe challenged amateur internet econocranks (my word, not Nick’s) like me to actually go read an intro econ textbook. (He was specifically targeting the author of Unlearning Economics — who I, at least, don’t consider to be an econocrank, he’s far better-versed than I am, though Nick might.)

I took him up on the challenge, and am finally writing up my thoughts because I need to reference this from another post.

Figuring I ought to go straight to the belly of the beast, I picked up a used copy of Greg Mankiw’s Principles of Microeconomics. I didn’t read every word — I’ve been poring through various econ textbooks online, plus innumerable papers and blog posts, for years, so I knew a lot of it already. But I did go through it fairly carefully (especially the diagrams), and it had some of the effect that Nick was hoping for. Some of the things that I didn’t think were (sensibly) covered in intro econ, in fact are. And not surprisingly given my autodidact’s typical spotlight (and spotty) pattern of knowledge, I learned quite a few new things.

But still, my overall impression was amazement at what is not covered, and in particular what is not covered right up front.

In place of Mankiw’s nostrums about tradeoffs, opportunity costs, margins, incentives, etc., I would expect to see discussion of the fundamentals that underpin all that:

Value. What in the heck is it? How do we measure it? This was the topic of the opening class in my one accounting class, at the NYU MBA school. Basically: accounting for non-accountants, teaching us to deconstruct balance sheets and income statements into flows of funds. A darned rigorous course, taught by a funny and cranky old guy, formerly on the Federal Accounting Standards Board, with a young assistant prof playing the straight man and the enforcer. That first class was one of the most valuable (?) I’ve ever sat through.

The phrase “theory of value” doesn’t even appear in Mankiw’s text, even though he uses the term “value” constantly, and it’s obviously a term that has some import in economics. Imagine an undergraduate who’s had zero exposure to the ideas of subjective versus objective value, or the centuries of (continuing) discussion and debate on the subject, trying to parse the following sentence, and think critically about what it really means.

…we must convert the marginal product of labor (which is measured in bushels of apples) into the value of the marginal product (which is measured in dollars).

Money. What is it? What’s its value relationship to real goods, and in particular real capital? How is it embodied in financial assets? Where did it come from? (Hint: from credit tallies and for coins, military payments of soldiers, not barter between the butcher and the baker. That’s an armchair-created fairy tale.) The phrases “medium of account” and “medium of exchange” don’t appear in the book. Since economics is all about monetary economies, this seems like a significant omission.

Utility. The most fundamental construct in economics — the demand curve — is derived from utility maps. But Mankiw doesn’t even mention the term until page 447, where it’s discussed as “an alternative way to describe prices and optimization.” Alternative? There’s no discussion of ordinal and cardinal utility, or of the troublesome doctrine of revealed preferences (which 1. is the doctrine that allows economists to avoid talking about utility, 2. constitutes a circular definition, and 3. is never mentioned in the book).

All this gives me a feeling of indoctrination into a self-validating, hermetically sealed body of beliefs floating in space, with no egress outside that bubble, into thinking about the thinking going on therein. There are huge and not-wacky bodies of thinking out there that seriously question what goes on inside, often refuting it on its very own terms, and in the words of its own most eminent practitioners.

Yes, you could argue that I’m asking too much of undergraduates, but I would suggest that you’re asking too little (or the wrong thing) of undergraduate professors.

Is Mankiw teaching his “customers” to understandthe hallmark of the North-American higher-education system, in my opinion, compared to most other countries — or is he teaching them to adopt an undeniably ideological world view (no, neoclassical economics is not purely “positive,” not even close), and to just go obediently through the motions as prescribed in the textbook? In my opinion, he’s doing the latter.

I’m tempted to suggest that this is all true because (neoclassical?) economists don’t have a coherent or non-circular theory of value, and money, and utility. (Neither do I, but I’m working on it!) But saying that would make me sound like an internet econocrank.

Cross-posted at Asymptosis.

Tags: Comments (9) | |

Solow on Bernanke (and both, on Libertopians)

I’m just sayin’. (Emphasis mine, words Solow’s):

[Bernanke’s] preferred answer is better and more system-oriented regulation. One has to ask then why regulation failed to see the crisis of 2007–2008 coming and take action to head it off. Bernanke suggests that regulators were lulled into inattention by the so-called Great Moderation. Our masters are all too eager to take the Panglossian view that a system of “free markets,” including financial markets, is self-regulating and self-stabilizing. Bernanke is surely right about this. The scholar of the 1930s has to be aware that there was similar talk about the New Era in the years before 1929. Dr. Pangloss has lots of helpers among the sharpshooters who profit most from the absence of effective oversight, and among simpleminded ideologues. They are still with us.

Cross-posted at Asymptosis.

Tags: Comments (0) | |

How Money Moves

The title should actually be “How Dollar Bills Move,” but it’s not as alliterative.

A fascinating item on the work of Dirk Brockmann, who’s used WheresGeorge.com to map the movement of dollar bills, and the boundaries over which they’re least likely to cross:

I have no idea what to do with this, or whether it even has any useful application. But it’s at least a fine example of the fruits of human curiosity.

Cross-posted at Asymptosis.

Tags: Comments (5) | |

Saving and "Government Saving"

Steve Randy Waldman and Scott Sumner (plus many others, linked from Steve’s post) wade in on notions of saving and investment.

(I’m endlessly amazed that the best econothinkers on the web — add Nick Rowe, Andy Harless, David Beckworth, Josh Mason, and many others to the list — constantly feel the need to think, re-think, and debate this fundamental economic concept. Economists haven’t figured this out yet?)

I’d like to reply to one assertion of Scott’s, because I think it cuts to the crux. This time I’ll keep it brief, at risk of obscurity. Scott:

In every case where an individual seems to be saving more and yet investment doesn’t rise, someone else is dissaving.

Scott’s far from alone in asserting this; it’s central to Krugman’s thinking.

But: This only seems right if you’re imagining an isolated private domestic nonfinancial sector, in which no new financial assets can be created. (Essentially the “loanable funds” notion.)

If you bolt on a (international) financial sector that constantly creates new/additional financial assets, and (especially) a sovereign fiat-money-issuing government sector (with the arabesques of bond issuance and OMOs), and other sovereign- (and bond-)issuing governments worldwide, and account for flows to and from those sectors, I don’t think the statement is true.

Because: “government saving” (in particular) is a meaningless concept, akin to a bowling alley “saving” points.

Cross-posted at Asymptosis.

Tags: Comments (1) | |

My Patriotic Millionaires Pitch

Erica Payne sent out a request for writeups from Patriotic Millionaires members, and I provided this. I hate not to re-use perfectly good copy…

I live (quite well) off financial investments — no need to work any more — and my taxes every year are ridiculously, embarrassingly low. Meanwhile tens, hundreds of millions of hard workers who spend all their money — enriching entrepreneurs like me, and spurring economic growth — are throttled by tax bites that far exceed mine.

This tax structure and its terrible incentives are destroying, for my children and grandchildren, the opportunities for personal fulfillment and enrichment that America provided me. I wholeheartedly support the specific initiatives of Patriotic Millionaires, but I think far more is needed to create a national tax structure that actually is progressive above $60 or $80K a year in income. Us rich folks aren’t paying nearly our share of the bill — paying for what we receive — or re-investing in the country that gave us such remarkable opportunities. Don’t we care about our kids?

Americans have told us what they want — rich and poor, tea partiers and raging liberals (the polls aren’t hard to read) — and we need to pay for it. True conservatives pay their bills.

Cross-posted at Asymptosis.

Tags: Comments (8) | |

Does Reduced Consumption, and Increased "Saving," Result in "Capital" Formation?

Matthew Yglesias riffs off my recent post, “Saving” ≠ “Saving Resources,” and there’s been quite a bit of commentary there, plus on Asymptosis and Angry Bear (plus a bit of twitter talk that I can’t figure out how to link to easily and usefully).

There are a dozen things I want to discuss on the topic, but I’d like to address the key belief underpinning much of the commentary (including Matthew’s). In my words:

If you don’t spend all your income, the unspent part is used by others to produce/purchase* “fixed” or “real” or “productive” assets. More money gets spent on investment, and less on consumption.

There are all sorts of problems with this notion, empirical and theoretical (notably the confusion of an accounting identity, “S is identical to I,” with economic incentives). I want to try and cut to the crux, with this:

A. If I transfer $100K from my bank to yours to purchase goods or labor, is there more money to produce/procure productive assets?

B. If I (or all of us) instead transfer $75K, leaving (“saving”) $25K in my bank, is there more money to produce/procure productive assets?

The answer to B is obviously “no.”

I hope not skipping too many steps here, so as to render this incomprehensible, I think Dan Kervick makes the key point in his comment on Matthew’s post:

a significant portion of monetary saving is just used to purchase government bonds

I would add, “directly or indirectly.” And: government bonds are only part of it.

This imparts the crucial understanding of aggregate, inter-sectoral balances that people lose sight of when thinking in terms of personal, individual “saving” of “money.” (Usually, implicitly, people are thinking about an isolated, domestic, private, non-financial sector — U.S. households and non-financial businesses.)

The financial system (including treasury and Fed) is constantly creating new, more, financial assets. New government bonds and currency, in particular, have no direct relationship to real investment. When you (or your bank) buy(s) a newly-issued government bond, you’re not funding/financing/incentivizing real private-sector investment in productive/useful capacity. (Though in one accounting view, you could argue that you’re “funding” government investment.)

So in a very real sense those financial assets (and arguably many [private-though-not-necessarily-“real”-sector] others) “absorb” “money” without creating new productive capacity. (This does not imply “crowding out.” Interest rates are at historic lows, and corporate cash hoards are at historic highs, even while government bond issuance has also been at historic highs.)

Funds flow from the private domestic nonfinancial sector into the the financial and government sectors (in return for an increased stock of IOUs). But absent intentional action (lending by the banks, deficit spending by government), they don’t flow back into the private domestic nonfinancial sector — and even less certainly into investment by that sector.

This is greatly simplified, and there’s much more I’d like to say, but I’m hoping to impart a straighforward (though incomplete) understanding of this view.

Here’s how I see it (this is the most important part of this post):

Production produces surplus. Output > Input.

That aggregate surplus is monetized by trade and a financial system (including treasury and fed), in a stunningly complex process that I won’t detail here. That’s why the quantity of financial assets (“money”) keeps increasing — because the surplus increases the stock of real assets, and the stock of financial assets (loosely) represents the value of those real assets.

If producers can’t sell (trade) their goods — in the process monetizing the value of the surplus created — they don’t produce them (as a successful serial entrepreneur, I’m here to tell you…), and you get less surplus. So less saving. My saving happened because people spent.

Spending causes saving. (Counterintuitive, huh?)

Though I prefer the term “accumulation.” The moral valences associated with “saving” — and the misunderstandings of its technical meaning(s?) in the national accounts — have resulted in no end of economic confusion (and confution*).

And yes: spending — and the production/trade/surplus-creation it spurs — causes monetary saving. The creation of surplus effectively forces the financial system to create new financial assets, so the producers of that surplus (workers and businesses) can monetize that surplus, and store it in their accounts. If the financial system doesn’t effectively monetize workers’ and producers’ surpluses via wages and profits, they have less incentive to work and produce, so a weak economy/slow growth results. Fed governors get replaced, politicians get voted out, and banks lose money or at least lose out to competitors who are willing to monetize the surplus.

I really have to finish this up by citing Dan Becker again, in a response to Pete Petepete at Angry Bear:

As I read your postings, it seems you are moving the discussion toward the chicken or the egg type.

But it’s not just Pete Petepete. We’re all really rehashing the old Say’s Law argument here: does production cause consumption (“demand creates its own supply”), or the reverse? The obvious answer is “Yes. Both.” But I think it’s clear which side I fall on, and I fall on that side because we have a sovereign-currency-issuing government, and a massive financial system which also constantly creates new financial assets. Say’s Law only makes sense if 1. there’s full employment***, and 2. there are no new financial assets to monetize/store/”hoard” the surplus from production and trade.

If all the “so-called” quotation marks in this post are driving you batty, my apologies. So many of the key terms in economics are used so sloppily and in so many ways, I often find it impossible to talk about the subject without constant parenthetical definitions of terms — which definitions themselves often deserve full blog posts. I hope this post will at least encourage my gentle readers to think very carefully about what I (and they) mean when using these terms.

* The produce/purchase distinction is conceptually problematic in itself (and as it’s tallied in the national accounts), as made clear by discussions among Kuznets and company back in the days when they were creating the national accounts; trade is the juncture where real surplus from production is monetized, which drops us into the thorny theoretical thickets of “value,” “capital,” and the mysteries of “money profits.”

** Yes I know that’s not a word. But it should be. Hey: good name for a new blog?!

*** Full employment is another problematic concept. Are there realistically imaginable scenarios — i.e. wage inflation without commensurate price inflation — in which large numbers of permanent non-workers would be coaxed into the work force, increasing employment without changing the percent “unemployed”? Full employment compared to what?

Cross-posted at Asymptosis.

Tags: Comments (2) | |

"Saving" ≠ "Saving Resources"*

Many economists — mostly the freshwater/neoclassical/supply-side/conservative types, but also many on the left — hold in their heads a very peculiar model of how economies work. It’s a model of a barter/real-goods economy in which money only plays the role of convenience.

In this model, if you don’t eat some portion of the corn you grew this year, you’ve “saved.” You can eat it next year. Makes perfect sense.

You can see this thinking played out in Scott Sumner’s justification for consumption taxes:

I’d tax people on the basis of how many resources they consume, or take out of society, not what they produce.

He describes the opposite approach — taxing returns on financial investments or “savings” — as “morally grotesque.”

Now let’s think about this, and think about how these economists think about this. They’re assuming that if you “save” (a.k.a. don’t spend), you don’t “consume resources.” You “save” them, and don’t “take them out of society.”

This makes absolutely no sense. If you forego a massage this week, or wait a few years to get your house painted, is the labor for that massage or paint job “saved”? How about this year’s sunlight — the ultimate source of that labor power? Can you use it next week, or next year? Understand: services comprise 80% of U.S. GDP. And that’s before you even think about Apple and similar, with their just-in-time, on-demand supply chains — when you buy it, and only when you buy it, they produce it.

If you don’t buy it, it doesn’t get produced.

And if you don’t buy it, and they don’t expect you to buy it soon, they don’t invest to build the capacity needed to produce more in the future. (That investment and real-capacity building is true “national saving.” S really is I.)

That mental model, which is so widely prevalent, is a fundamental error of composition: confusing the individual with the aggregate. (And a confution of money-saving and real saving.) Sure, you’ve saved money for your (or your great-grandchildren’s) future. And when you don’t get a massage, others can sign up for that time slot, or buy a massage for a lower price. This is about competition among individuals, not how many resources we as a society produce and consume. If we all consume less, as a society we produced (and “save”) less — both for current consumption and for future production.

So in a very real (dynamic) sense, it’s the savers who are “taking resources out of society.” (And in a somewhat abstract sense, you can imagine those foregone resources being stored, hoarded, and rendered impotent in ever-growing and largely inert Cayman-island bank accounts.)

This is not really revelatory; I know these economists understand the paradox of thrift. But they ignore and eschew it in their real-good, barter-based mental economic models. I would suggest that the explanation for this error of composition is revealed by Scott’s words: “morally grotesque.” Moralistic beliefs about how individual humans should behave make it impossible for many economists to embrace an aggregate economic reality of which they are fully cognizant.

* Yes: non-renewable natural resources are consumed when people produce, buy, and consume stuff (both goods and services). But 1. Compared to human effort, those resources constitute a small part of the inputs to GDP, and 2. this is not what economists who are subject to this thinking are talking about. All those in-ground resources are not counted as existing “capital” in the national accounts, for instance — so they can’t be depleted from those accounts — and the accounted “cost” of those resources consists almost entirely of the cost of digging them up. This is the subject for another post.

Cross-posted at Asymptosis.

Tags: Comments (20) | |