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

Corporations are not people and Thomas Hartmann

by Beverly Mann

Thomas Hartmann writes via Truthout:

Most Americans don’t realize that the idea that ‘corporations are people’ and ‘money is speech’ are concepts that were never, ever considered or promoted or even passed by any legislature in the history of America. Neither were they ever promoted or signed into law by any president – if anything, the opposite, with presidents from Grover Cleveland in 1887 to Barack Obama in 2010 condemning them.

And Congress and the executive branch are the two of the three branches of government that are elected by the people, and thus the only two to which the founders of this country and the framers of the Constitution gave the right to create laws.

The Supreme Court is so much not supposed to create law, that Article 3, Section 2 of the Constitution even says that it must operate ‘under such Regulations as the Congress shall make.

There are two problems with what Hartmann writes. First of all, there needs to be an explicit distinction made between the idea of “corporate personhood” in law, generally, and “corporate personhood” in a constitutional-rights sense. Hartmann, like so many others who are appropriately outraged by Citizens United and earlier corporate-free-speech Supreme Court opinions, clearly intends his comments to apply only to the corporate-free-speech Supreme-Court-created laws, just as the drafters of the proposed constitutional amendment regarding corporate personhood do.

But the “corporate personhood” fiction actually was created, I believe, simply as a practical way to allow corporations to own property. Later, that fiction enabled corporations to sue and be sued, to be subject to criminal laws and civil regulatory law and to be charged with violations of those laws and to be fined for violations and required by court order to comply with (say) a particular environmental or securities regulation or whatever. State statutes, which provide for the creation of corporations, and federal statutes do provide for these things, and although they don’t use the term “corporate person,” these laws (e.g., tax laws, environmental laws, lawsuit procedural laws) do include corporations in the statute’s “definitions” section, in defining the term “person”, in order to make clear that the statute or regulation does apply to corporations.

So the problem of corporate personhood is that the Supreme Court has pronounced corporations “persons” for purposes of First Amendment speech rights. Constitutional rights apply only to persons, so this pronouncement of personhood for corporations in a constitutional sense, rather than just a statutory sense (as in, say, corporations can own property), was a prerequisite to the accordance of First Amendment free-speech rights to corporations. This is a really important distinction.

The distinction gets complicated when you consider that there are some constitutional rights that most people would think do and should pertain to corporations: the Fourth Amendment’s guarantee against warrantless searches and seizures, and the Fifth and Fourteenth Amendments’ due and property “takings” provisions, for example. But that’s because actual people do own direct monetary shares of corporations, and so corporate property does belong to real people, and because the constitutional protections at issue there—against warrantless searches and seizures of documents, for example—would compromise those rights of real persons (the corporation’s employees or customers, for example).

The First Amendment right to advocate for a particular political candidate or party or political position, using shareholders’ money, though, is hardly a right that logically can be said to derive from those shareholders’ First Amendment speech rights, the exercise of which is cannot reasonably be said to be intentionally collective; the specific expenditure is not foreseeable to shareholders, many of whom would be horrified by it. Of course, the Fab Five majority in Citizens United did pretend otherwise. But then, declaring clearly false facts in order to arrive at their result in that case is the very hallmark of that opinion.

But here’s another problem with what Hartmann and others are arguing: This claim of theirs that the courts have no authority to declare render decisions—rules of law—concerning issues of constitutional law is profoundly dangerous. It mirrors what Clarence Thomas and Antonin Scalia regularly claim, except of course when they themselves are simply fabricating some new rule of constitutional law.

I love Thom Hartmann. But I think his position here needs some refinement.


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A Surfeit of Dearth Revisited: The Global Shortage of Safe Assets

David Beckworth:

global economic growth over the past few decades has outpaced the capacity of the world economy to produce truly safe assets

Really? The U.S. could have just deficit-spent more, crediting people’s/businesses’ checking accounts and thereby increasing the global stock of the world’s safest asset: U.S. dollars.

It could (by U.S. law is required to) simultaneously issue bonds in/borrow an equivalent amount, but it comes to the same thing as regards the inflationary impact. (Issuing bonds is actually a bit more inflationary because of the future money-creation needed to pay the interest.)

That fear of inflation — and the resultant unwillingness to provide the safe assets that Beckworth thinks the world needs — is the only constraint on Beckworth’s “capacity.”

If he is correct that the supply of dollars is, has been, insufficient to meet global demand, then inflation is not currently a concern — arguably quite the contrary.

Cross-posted at Asymptosis.

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Income and Consumption

This is another look at the idea I put forth here, that – contra the standard economic idea that consumption depends on wealth – I believe that consumption depends on income.  It’s worth stressing that wealth and income are not independent variables.  Wealth is the accumulation of unspent income plus returns generated on that wealth over time.  Is it proper to say that wealth is a stock, and income is a flow? 

I believe the evidence very strongly indicates that consumption – also a flow – is tied tightly and directly to income.  This does not mean that wealth cannot play a part in consumption decisions.  People make all kinds of decisions about all kinds of things, for all kinds of reasons.  But consumption decisions are constrained, and there is no reason why they can’t be constrained in more than one way. 

I think the idea that consumption depends primarily on wealth is intuitively weak because consumption is aggregated over the population, while wealth is concentrated in a small segment of that population.  A person with little or no wealth will spend the next dollar meeting some unsatisfied need, while the person with lots of wealth has the option of devoting it to rent-seeking or accumulation in an off-shore shelter.  According to data now more than a decade old, the richest 1% of households owned 38% of all the wealth; the top 5% owned over half, and the top 20% owned over 80% of the wealth.  The trend towards rising inequality started in the mid 70’s.

A couple of proxies for wealth are home and common stock ownership.  Excluding home-ownership, the wealth concentration is even more extreme, with the top 1% owning 50% of the non-home wealth.  It’s difficult to determine the actual amount of stock ownership in private hands.  A number arrived at by elimination leaves 36% among households, non-profits, endowments and hedge funds.   Therefore, realistically, the bottom 99% of individuals share about 18% of all stocks with those other institutions.  At the bottom end, the lowest 20% have either no wealth, or negative net worth.

People at the low end live close to subsistence.  People in the middle live pay check to pay check.  For the vast majority of the population, the next marginal dollar has a high probability of being used as a consumption expense. 

That is my narrative to support the idea that consumption must necessarily be strongly dependent on income.  Now, let’s look at some data, through 2009, from the U.S. Census Bureau, Table 678.  The first graph shows Disposible Income (green) and personal Consumption Expenditures (red) back to 1929.

A careful look suggests a narrative about this relationship.  First, consider the depression years.  From 1932 to ’34, consumption averaged 99% of disposable income.  People had needs, and used their limited incomes to satisfy them, as best they could.   Then, during WW II, with rationing and other constraints, saving was forced, and consumption was artificially low.  Consumption reached an all-time low of 73.3% of Disposable Income in 1944.  Since shortly after WW II, changes in Disposable Income and Consumption have been in virtual lock-step.   I’ve put lines in a contrasting color connecting selected points in the Disposable Income curve, and dropped parallel lines for the same years onto the Consumption curve.  Since 1951, very wiggle in Income corresponds to a wiggle in Consumption.

Here is a scattergram of the two subject variables, with a best-fit straight line provided by Excel.

As has been pointed out to me, correlation is not causation.  But – when one can construct a rational narrative that explains the data, the two series display absolutely congruous motion over several decades, and R^2 is over 0.99, I’m willing to go out on a limb and say the burden of proof is on the denialists.

Here is a look at Consumption as a percentage of Disposable Income, since 1951.

I’ve expanded the Y-axis.  In a view of the entire 0 to 100% scale, the post-1950 line barely wiggles.  Over a span of 6 decades, Personal Consumption has averaged 90.1% of Disposable Income, with a standard deviation of 2.12%. 

The data points, average, and an envelope one Std Dev above and below the average are all displayed on the graph.  Despite having two clearly defined and opposite tending trends, this is still a well behaved data set, with 39 of 58 (67%) of the points within the envelope.

The two minima are in 1982 and 1984, and the bottom trend lines converge in 1982, so that is a reasonable time to define as the break point.  This also suggests a narrative.  During the post WW II golden age, typical wage earners moved incrementally above the subsistence level.  This gave them the opportunity to save a little bit.   Since 1982,  as wages stagnated, it became necessary to devote a higher percentage to Consumption.  Sure enough, savings grew through the mid 70’s, and have dropped dramatically since 1982 (or a bit earlier,) as this FRED graph demonstrates.

I won’t say that Consumption Spending is solely dependent on Income.  But I will say that it is strongly, and even predominantly, dependent on income.   Wealth might enter into the decision for those who actually have some, but they are in the minority and have few needs that can be satisfied by the next dollar of consumption.

My conclusion is that the best solution to the aggregate demand shortfall problem is to put money into the hands of the people who will actually spend it, and that the best way to do that is to give them jobs.  As stop-gaps, various relief and welfare programs also have their place. This is the rational for fiscal stimulus.  Federal spending programs provide real jobs for real people, and they will spend their earnings.  Arguing about whether this is hole-filling or pump-priming strikes me as being just about as important as arguing about how many angels can dance on a pin head.

Cross posted at Retirement Blues

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Employment Situation

This report is now adjusted to show the impact of the population control adjustment.

The employment report was the strongest this cycle with payroll employment rising 243,000.
The household survey shows a gain of 843,000 but almost 250,000 of that is due to the new population adjustments so the net result is an increase of 631,000. This is what is in the chart, but
the January observation is not comparable to the 2011 observations.
Moreover, hours worked rose 0.6% as compared to the 0.2% norm over most of this cycle.In January government employment was little changed as compared to the 276,000 drop in government employment last year.

Despite all the talk about uncertainty employment gains this cycle continue to be better than last cycle.
The civilian employment/population ratio was little changed last month as it has been for months so the drop in the unemployment rate continued to stem more from the labor force falling rather than employment rising.

But hours worked for nonsupervisory workers rose 0.6% in January, the strongest gain this cycle.

Average hourly earnings only rose 0.2% and the year over year change in average hourly earnings is now 1.9%, the smallest increase on record.

The combination of very strong gains in hours worked and very weak average hourly earnings average weekly earnings appear to be bottoming.

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Refinancing bad for business?

Robert Waldmann comments on the Freddie Mac story recently in the news (lifted from Stochastic Thoughts):

Freddster (noun): Fraudster who profits from conflict of interest at Freddie Mac (the knife).

Jesse Eisinger, pf ProPublica and Chris Arnold, of the public sector NPR News have the most interesting article about ruthless greedy uh socialism I guess at public sector Freddie Mac.
The idea is that Freddie Went long on the interest payments on mortgages and not the principal repayments. This means the harder it is to refinance, the better for Freddie Mac. Freddie Mac also has huge regulatory power to decide how hard it is to refinance Freddie Mac insured loans. The conflict of interest is clear.

Via Kevin Drum where commenter Andrew Sprung wrote

Could Einsinger and Arnold”s story have been prompted by an administration leak as a prelude to a recess appointment to replace DeMarco at FHFA?

I hope so, or rather I wish I had any hope that it is so. But at least it is a hint that someone in the White House has decided to put pressure on DeMarco.  I also look forward to testimony by the Freddie Mac CEO Charles Haldeman who I expect will have considerable trouble recalling details (see HR Block).
Here is a summary of the conflict of interest from Eisenger and Arnold with human interest and Freddie Mac efforts to respond to the accusation deleted.

Those mortgages underpin securities that get divided into two basic categories.
One portion is backed mainly by principal, pays a low return, and was sold to investors who wanted a safe place to park their money. The other part, the inverse floater, is backed mainly by the interest payments on the mortgages … . So this portion of the security can pay a much higher return, and this is what Freddie retained.
In 2010 and ’11, Freddie purchased $3.4 billion worth of inverse floater portions — their value based mostly on interest payments on $19.5 billion in mortgage-backed securities, according to prospectuses for the deals.


It’s … a big problem if people … refinance their mortgages. That’s because a refi is a new loan; the borrower pays off the first loan early, stopping the interest payments. Since the security Freddie owns is backed mainly by those interest payments, Freddie loses.


Restricting credit for people who have done short sales isn’t the only way that Freddie Mac and Fannie Mae have tightened their lending criteria in the wake of the financial crisis, making it harder for borrowers to get housing loans.
just as it was escalating its inverse floater deals, it was also introducing new fees on borrowers, including those wanting to refinance. During Thanksgiving week in 2010, Freddie quietly announced that it was raising charges, called post-settlement delivery fees.
In a recent white paper on remedies for the stalled housing market, the Federal Reserve criticized Fannie and Freddie for the fees they have charged for refinancing. Such fees are “another possible reason for low rates of refinancing” and are “difficult to justify,” the Fed wrote.
A former Freddie employee, who spoke on condition he not be named, was even blunter: “Generally, it makes no sense whatsoever” for Freddie “to restrict refinancing” from expensive loans to ones borrowers can more easily pay, since the company remains on the hook if homeowners default.

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What Will Be the New Economic Paradigm?

Matt Yglesias has a great post over at Moneybox (paragraph breaks added):

The need for regime change.

… The Depression discredited the gold standard and a whole set of related notions.

The Great Inflation discredited ideas about the Phillips Curve …

We had, until recently, the Great Moderation Consensus that … the Federal Reserve has the ability to stabilize the macroeconomy by fiddling with interest rates.

Well now here we are and the Federal Reserve can’t stabilize the macroeconomy by fiddling with interest rates.

That calls for the creation of a new regime.

I’ve dumbed it down a bit here. He also talks about employment, for instance, including this great line:

…if the government isn’t abandoning the idea of full employment then they have a mighty strange way of showing it.

But I think I’ve imparted the main question. We’ve been or are going through a paradigm-falsifying “moment.” (As always, some good thinking will be cast aside along with some bad.)

What will move into the vacuum left by the (at least partially) ravaged Great Moderation paradigm?

Courtesy of David Beckworth and The Kauffman Foundation (PDF), here’s how econobloggers would like that question to be answered (thanks, FTA, for the great question):

Personally, I fondly envision some coherent amalgam of the M&M gang: Market Monetarists (NGDPers) and Modern Monetary Theorists (with a decent dose of the Austrian’s insight into real-economy production and productivity). I’m guessing that some have already ventured (some parts of) this amalgamation, quite possibly in posts I’ve already read and since forgotten. Thoughts? Links?

(Even as I post this I find that vimothy, JKH, and Steve Randy Waldman are worrying productively at parts of this very question in the comments here.)

Cross-posted at Asymptosis.

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Is the ECB/EU Achieving Stated Objective of Balanced Growth

by Rebecca Wilder

Is the ECB/EU Achieving Stated Objective of Balanced Growth?

The primary objective of the European Central Bank is to maintain price stability; however, as a compliment to its primary objective, the Eurosystem shall also ‘support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union’. These include inter alia ‘full employment’ and ‘balanced economic growth’”. These objectives are laid out in Articles 3 and 127 of the Treaty on the Functioning of the European Union. I wonder whether or not the objectives related to ‘balanced economic growth’ and ‘full employment’ are indeed being achieved? One could argue that they are not.

Put more simply: nominal GDP is diverging across program and non-program countries. If this economic duress leads to early exit, I would posit that the balanced growth clause has been breached.

The charts above illustrate the dynamics of nominal GDP (NGDP) across the largest non-program and program countries (I explicitly refer to a program country as falling under an explicit EFSF program). These charts demonstrate that unbalanced growth may already be in the works. In Q3 2011, Ireland, Greece, and Portugal are producing an average 2.2% above their minimum level of NGDP during the crisis (Greece’s last data point was in March 2011, so this number is clearly biased upward). In contrast, the largest non-program countries are producing at 6.1% above their minimum levels of NGDP during the crisis – a 3.9% differential in recovery patterns. Germany alone is producing 110.3% 10.3% above its trough during the crisis. I suspect that the program country average will fall below 100 in coming quarters, as the debt deflationary cycle grabs hold. This view of the Euro area is anything but “balanced”.

Balanced, according to Merriam-Webster online, takes several definitions, but essentially it’s some measure of equality in weight on two sides of a vertical axis. Let’s call the vertical axis the Euro area average NGDP recovery. It’s a pretty close call because France is running just below the EA average – but compared to the minimum level of NGDP attained during the recovery through Q3 2011, 56% of the EA has recovered by a % less than the EA average of 6.3%, while 44% have recovered by more. I’m sure that there are many ways to define balanced growth – but in NGDP terms, this looks unbalanced.

Now, the Treaty defines no explicit time frame for ’balanced growth’ – if it’s a long-term objective, lets say 5-10 years, then one could argue that the forced structural reform in Ireland, Portugal, and Greece (even Spain, Italy, and France) will increase long-term potential growth, thereby not breaching the treaty.

But what if the countries are forced to exit before the structural reform starts producing positive growth in average real GDP? Chapter III of the 2004 World Economic Report highlights two important points that should be considered: (1) it’s rare for countries to tackle multiple levels of structural reform at once; and (2) it takes a long time, as in the case of New Zealand, for aggressive structural reform to pass through to the real potential growth rate. The EA is attempting many levels of reform, including financial, labor, product, and tax. This is rare and history shows that this can take up to a decade to show results (as in New Zealand’s case).
I can only deduce that Greece, Ireland, and Portugal probably don’t have enough time and are likely going to be, if they haven’t started already, weighing the pros and cons of exit. If these countries do choose exit, it’d likely be under economic duress; hence, the EU would have failed to target ’balanced growth’, as outlined in Article 3.

I like the way that Megan Greene (@economistmeg) put it in her response to the Irish Times query “Is austerity the best policy?”: “There is a fighting chance that Ireland can eventually grow its way out of it – but I think the time is too short for Ireland to turn it around.”

The Wilder View…Economonitors

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Why Economists Don’t Understand Accounting, or Business

I just searched Harvard, U Chicago, and a few other top econ departments’ course offerings and major requirements. The string “account” barely appears.

Chicago says quite explicitly:

Courses such as accounting, investments, and entrepreneurship will not be considered for economics elective credit.

Much less requirements!

No wonder so many economists:

• Have such profound misunderstandings of the National Income and Product Accounts and the Fed Flow of Funds reports (and how they relate to each other). Nobody ever taught them how to read or understand the darn things.

• Have such crazy notions about how producers think when they’re setting prices.

Speaks volumes.

Cross-posted at Asymptosis.

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How Accounting "Constrains" Economics

There’s been a running discussion of this on various blogs (sorry if I missed linking some!), inflated simultaneously by Krugman and by magisterial and mysterious commenter JKH’s “paradigm riff,” here.

That discussion has brought me to the following conclusions.

Assuming you have a coherent and accurately representative System of National Accounts*:

• Accounting, and accounting identities, do (or should) impose a constraint on our economic reasoning and predictions.

• If some piece of economic reasoning predicts something that simply can’t happen according to the accounting (things don’t add up, balance), that reasoning/prediction is wrong.

• Accounting can’t tell us whether a piece of economic reasoning is right. It can only tell us if it’s wrong.

• Accounting won’t necessarily tell us that a piece of economic reasoning is wrong. There are plenty of economic ideas out there — behavioral notions about how people (will) respond to incentives and constraints – that conform to accounting identities and balances, but are nevertheless wrong.

• Accounting tells us exactly nothing about how people will behave, nor can it cause or constrain that behavior. It can only tell us that that it’s logically impossible for them (all) to behave in a given way.

Takeaway: Conformance to the rules and balances of accounting is a necessary but not sufficient condition for economic reasoning and predictions to be correct.

Or to put it another way: Accounting is a constraint on economics, not economies.

Simple example: if somebody suggests that all countries should/can get out of depression by increasing their net exports, it’s false/bad reasoning. Because global imports equals global exports; the books can’t add up that way.

Or suppose someone says:

1. We should reduce government debt.

2. There’s not much we can do about net imports, the trade imbalance. (Exports are determined largely by international demand, and we don’t want to use trade policy to deny our people the benefits of cheap imported goods.)

3. People should save more.

This is impossible, by accounting identity. The only way to increase private savings (the stock of net financial assets) without changing imports is to increase exports or run government deficits.

People, institutions, and policy makers could certainly try to achieve these mutually incompatible goals. They could even believe that it’s possible to achieve them all. But the arithmetic of stock-and-flow accounting tells us that they will fail — and that if they believe they will succeed, they’re wrong.

That’s all.

* Even though I have real qualms about the conceptual structure of the current system — I find it much easier to do good thinking using Wynne Godley’s modification of that system — the current system is coherent and accurately/usefully representative. It’s coherent in that all the stocks and flows balance out, and representative in that it covers most of the important stocks and flows. No system could be perfectly representative, of course; the map is not the territory. In both systems there’s a great deal that’s not considered — nonremunerated work, for instance. But that doesn’t discredit, is peripheral to, the logical thrust of this post.

Cross-posted at Asymptosis.

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