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

Keynes and Picasso: Stimulative Conspicuous Consumption?

by Bruce Webb

Digby points us to the following NYT piece: At $106.5 Million, a Picasso Sets an Auction Record with what is in one sense an understandable bitter comment “Hey, dead artists need work too.” And as a comment on the odd priorities of our plutocracy a reasonable moral judgement, but as an economic evaluation? Maybe not. And perhaps some of the real economists can fill me in here.

Per the story the last time this work changed hands it was for $19,800. Which should mean that someone is exposed to capital gains on pretty much the full amount of the sales price. Even at 15% that is a reasonable chunk of change. Plus the seller has to put the net dollars SOMEWHERE, even if that is just buying more fine art. Now nothing guarantees that the proceeds will get spent/invested in the U.S., but unless the seller spends it all on tons of Bolivian blow it all gets injected somewhere in the world economy. Meanwhile the buyer had to free up capital from somewhere in order to pay for the painting, and while it is possible this was done by selling assets for a loss, or in the course of a tax-free exchange, chances are good that this ended up with another taxable event and/or unlocked previously unproductive capital. Plus the buyer had to come up with a substantial commission, another taxable event (to the dealer) and one likely to inject some spending of its own. Plus someone is going to receive a good sized insurance premium payment, and who knows the proximate result might be some blue collar jobs going to armed guards.

Now not every instance of conspicuous consumption has benign effects, huge money spent on diamonds, or ivory, or furs from endangered species means dollars ending up in the hands of organized crime or to the extent that there is a difference in the hands of kleptocratic dictators, but the transfer of existing pieces of fine art is on balance pretty benign (as opposed to true antiquities).

Obviously circumstances alter cases, there are a bazillion possible variables that might make this deal actually economically pernicious, but on balance aren’t the odds much better than even that this injection of $120 million (including commission and costs) into the economy has a net Keynesian effect? I am not saying that the path to economic nirvana runs along the road of the worlds top 400 billionaires deciding to spend $150,000,000 each on fine art, or collectible stamps or coin, particularly if they are just selling things back and forth within the same pool, but at a minimum some dollars are shaken free in the form of tax, commissions or wages at each transaction. And it is not like they are crowding most of us out of that particular market, I will never be bidding on a Picasso anything.

Tags: , Comments (52) | |

Who Committed Excess Borrowing?

With a hat tip to Rebecca’s post below, normalized borrowing growth in several sectors over the past 25 years. (Source: FRB Flow of Funds data)

Yes, there are three very similar (shades of blue) lines—but they are all household and non-profit data. (The growth in “credit market instruments” is, presumably, primarily driven by the non-profit sector.)

Note also—as Rusty would certainly tell you if I didn’t—that borrowing in the non-financial sector (the red line) has the flatest line of all (it’s at the top through the early 1990s and near the bottom as of last year.

Compare this with Mike Konczal’s graphic of corporate profit shares over the same period (h/t Brad DeLong) and there is a fairly clear case that accusations from bankers that consumers are suffering because of their foolish, excessive borrowing is a case of a very grimy pot talking to a copper kettle.

Tags: , , Comments (8) | |

Drop the corporate saving rate, please…

Update: The term corporate savings below refers to excess saving, gross saving over gross domestic investment, as a percentage of GDP. This is the defined 3-sector financial balance model (referred to below).

The Federal Reserve Flow of Funds showed a third quarter shift in the financial sector balances: the corporate saving rate declined 0,25% to 2,7% of GDP; the household saving rate fell 0,13% to 3,8% of GDP; the current account fell 0,11% to 3,5% of GDP; and the government increased its saving rate 0,27% to -10,0% of GDP.

Basically, the government was able to increase saving slightly, even as foreigners increased surpluses against the US, at the cost of reduced household and firm saving.


The chart above illustrates the 3-sector financial balances approach, which is the identity that the private sector and public sector saving rates must equal that of the foreign sector (the current account). The private sector is broken into the household and corproate sectors. For a discussion of the 3-sector financial balances, see Scott Fullwiler, Rob Parenteau; and I’ve written on this as well.

(Note: I am in Deutschland, where the keyboard and number system are slightly different from that in the US – so for this post, I can write ß whenever I want to, but I won’t, and all numbers with “,” represent an American decimal point, “.”. Funny thing is, when I use the Blogger spellcheck here, everything is highlighted yellow, so I plead “in Deutschland” for any misspellings :))

Some people may see the large government deficit, still -10% of GDP, as the ‘problem child’ of the sectoral financial balances. Me, I see the government deficit as a red herring of the corporate saving rate, which remains stickily in the 2-3% range. Until the corporate saving rate falls markedly, let’s say to zero or below, the unemployment rate is to remain high, and the household deleveraging process slower than would otherwise be if wages and disposable incomes were growing more quickly.


The chart illustrates the corporate saving rate and the unemployment rate, both have an 84% correlation. Therefore, adjusting for the standard deviations, corporate saving and the unemployment rate move roughly in sync. When the corporate saving rate is negative, firms purchase new capital goods and hire labor for production faster than they accumulate financial assets, thereby reducing the unemployment rate. In contrast, when the saving rate is positive, firms are investing in financial assets (or consuming capital at a higher rate) faster than they are increasing the capital stock and labor force, thereby increasing or leveling the unemployment rate.

In a very simple linear regression model (chart below), the relationship betwen the corporate saving rate and the unemployment rate exhibits an R2 of 70%. Accordingly, reducing the corporate saving rate to zero corresponds with a near-3ppt drop in the unemployment rate to 7%, all else equal, of course.


So one way to quicken the household deleveraging process is to reduce the corporate saving rate. Reducing the corporate saving rate corresponds to a falling unemployment rate, so that workers accrue SOME pricing power (they have none at this point).

Another way is to increase the fiscal deficit, to Mark Thoma’s point in The Fiscal Times this week. The correlation between the government financial deficit and the unemployment rate is -92%.

This is where the two come together: fiscal policy needs to provide incentives to lower the corporate saving rate.

Rebecca Wilder

Tags: , , , Comments (22) | |

4th quarter Real GDP

With the release of the November data on real personal consumption expenditures it looks like real PCE growth in the fourth quarter will be over 4% (SAAR) as compared to growth rates of 0.9%, 1.9%,2.2% and 2.8% over the last four quarters, respectively.

October real PCE increased 0.5% and November was up 0.3%. So if December is only up only o.1% the fourth quarter real PCE growth rate would be 4.1%.

This would be the strongest growth in real PCE since the first quarter of 2006.

You can make your own guesses about the other component of real GDP but it now looks like fourth quarter growth will exceed almost everyone’s expectations.

May everyone have a Merry Christmas.

Comments (15) | |

CBO Sleight-of-Hand

I’m late to seeing this, and Bruce has probably already covered it, but Doug Elmendorg at the CBO inadvertently gives away the game on the Administration’s approach to—let alone opinion of—the Social Security “Trust Fund”:

The balances in trust funds have accrued because income associated with those programs has exceeded the expenses; when that happens, the surplus cash flow is used to finance the government’s ongoing activities, and the trust fund is credited with a corresponding amount of Treasury securities. Although trust funds have an important legal meaning, in that they may constrain the amount a program can spend, they are essentially an accounting mechanism and have little relevance in an economic or budgetary sense. The value of Treasury securities held by trust funds and other government accounts measures only some of the commitments the government has made, and it includes some amounts that may not represent future obligations at all. [emphases mine]

Pay particular attention to that last; it’s the closest you’ll find to an acknowledgement from a government official that There is No Crisis.

As Bruce has noted, only by distorting the worst-case and median cases does the Administration produce scenarios under which the Social Security Trust Fund—if credited with its accruals as the Greenspan Commission intended (see “Off-Budget” Again-“; h/t PGL here)—does not have the funds to pay its obligations in perpetuity. (As Dean Baker once observed, if you take those scenarios and apply them to the equity markets, the case for privatization disappears even more quickly.)

Doug Elmendorf’s admission that there may well be a perpetual Social Security surplus, even if it is phrased as “some amounts that may not represent future obligations, stands in stark relief of the most notable “unforced error” of the Obama Administration.

Tags: , , Comments (70) | |

Health Care: Regulatory Inconsistency

by Tom aka Rusty Rustbelt

Health Care: Regulatory Inconsistency

When an elderly patient is in the hospital suffering from dementia, depression or schizophrenia, the hospital nurses may administer any psychoactive or anti-psychotic drug ordered by the physician within normal protocols and practices.

When the patient becomes a nursing home resident a few days later, the resident will often be denied the medication (even possibly anti-seizure meds) because the medication is assumed to be a “chemical restraint,” and the facility needs time to clear the regulatory hurdles.

(The federal government assumes nurses drug residents into stupors so the nurses don’t have to work as hard, ignoring that nurses cannot administer a vitamin without a physician’s order.)

This pharna roller coaster hurts the patients, but it is the law of the land.

Tom aka Rusty Rustbelt

Tags: Comments (4) | |

The 2% (non) Solution: Part Two

Had a long day of Social Security related blogginess so will just put up this to spark some discussion:

In Part One of this post I discussed the danger that the 2% ‘temporary’ payroll tax cut might be a Trojan Horse destined never to expire in full or at all only to have any continuing backfill from the General Fund (by then surely to be described as a ‘subsidy’) subject to an ongoing series of ‘compromises’ that gradually phase in benefit cuts rather than take the whole thing at one gulp.

In Part Two I want to discuss a quite different threat. In this scenario the employee share of the payroll tax is allowed to reset to it 6.2% but as a seeming sweetener taxpayers will be allowed or perhaps required to divert it into a Personal Savings Account with the explanation that it really wasn’t a tax increase at all! Nope the money is still ‘yours’, just tucked away for your own future use rather than being co-mingled in the Trust Funds where you don’t have an ownership interest at all, why the Supreme Court said so in Flemming .v. Nestor. Well a visit to the link shows that this doesn’t mean what opponents often take it to mean, but the idea that the PRAs would be in any fundamental sense different is illusory, but before getting to that I want to point out a curious coincidence (or not). The 2% payroll tax holiday is the same amount of diversion proposed in most straight PRA proposals out there. Cynical people might suggest that this number was not just plucked out of the air, or back computed to approximate the typical effect of the expiring Make Work Pay tax credit which it is replacing, but instead to put in place elements of say Obama advisor Jeff Liebman’s Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan or even the more recent Galston-MacGuineas Plan which has a mandatory diversion of exactly this amount.

As I have said in other contexts, I don’t much believe in coincidences. This 2% cut is somewhat under-motivated in policy terms, there were other, simpler, and more targetted ways of putting dollars in workers’ pockets. But as part of a co-ordinated plan to sell some sort of PRA carve out as part of a larger Social Security ‘reform’ it makes all too much sense.

Tags: , , Comments (43) | |