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

Not Spending is Not Investment

I see this logical error so constantly, almost every day, that I feel the need to reiterate. Personal saving, virtuous and useful as it is for individuals, does not increase investment. This is what I call the “lump of money” fallacy (a.k.a. the loanable funds model).

Ask yourself:

If you transfer $10K from your bank account to mine for a vacation package (spend), do the banks have more money to lend for investment?

If you don’t transfer the $10K to my account (save), do the banks have more money to lend for investment?

In which scenario am I more likely to invest in cabaña improvements? In which scenario will my employees produce more massages?

A huge amount of the thinking you see out there re: spending, saving, consumption, and investment is crippled by this simple error of composition.

“Saving” ≠ “Saving Resources”

“Saving” Versus Saving for the Future

Cross-posted at Asymptosis.

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What is the story of wages and growth?

Lifted from comments:

Run 75411 reacts to Daniel Alpert at Economonitor. :

It appears much of the job growth has been in low wage opportunity which forces people to do with less and detracts from demand led economic growth. The economic bump in taking a lower wage paying job is just not that great; average Unemployment Wages ($12.86/hr) as opposed to a Retail Opportunity at $15.80/hr. “less taxes say about $80—or the paltry sum of $4,160 per year of additional consumption.”Daniel Alpert

Interesting comment on falling Participation Rate being tied to baby boomers retirement:

“The Labor Force Participation Rate has also declined and is, more or less, continuing to decline—but its downward trend began well before the Great Recession. There is therefore a correlation between the falling LFPR and certain ongoing demographic changes in the CNIP.

Chiefly, such demographic changes arise from an aging U.S. population with growing longevity—typified by the ongoing aging-out of the enormous baby boom cohort from the labor force. But as real as those changes may be, the fact remains that the LFPR declined by all of 1 percent—to 66 percent from around 67 percent between 2000 and the beginning of the Great Recession. Since 2009, however, the LFPR has fallen nearly an additional 3 percent. This acceleration of the earlier trend is unlikely to merely be a demographic phenomenon.”Daniel Alpert

And what if the PPACA is behind much of the low wage and temp job growth?

Some have surmised that this year’s increase in part-time workers is related to employer concerns about being forced to provide health care benefits for full time workers under the Patient Protection and Affordable Care Act (Obamacare). That might be a more plausible argument if newly created jobs were more evenly spread among low-wage and high-wage sectors. Anecdotal Obamacare-scare stories abound, but they seem pretty specious at best. After all, when 70 percent of the jobs created in Q2 2013 were in low-wage sectors in which casual and limited-hours hiring is not atypical (restaurants, temporary services and retail sales, for example), what else could be expected? There is no empirical evidence that hiring practices relate to concerns over benefits, and a heck of a lot of evidence that the people being hired for new jobs are earning less than workers already employed and that the jobs that a significant proportion of jobs being created are not full time because of the sectors they are in. If the Obamacare hiring meme were accurate, the tendency game the law would be to game the system by hiring people to work just under the 30 hour “full time” cut off under the act. But that does not appear to be the case either (see the next section). It’s the nature of the jobs, not the fears of the employer.” Daniel Alpert

I can not find myself disagreeing with much in Daniel’s article and I am glad Dan took the time to put the portal and the intro up on Angry Bear. This is a great review of Employment in the US, where the jobs are, what is happening with wages, BLS stats, etc. It is worth the read.

Some Charts:

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Understanding Effective Demand with Edward Lambert

A few people have asked me to provide a quick introduction to Edward Lambert’s recent work on Effective Demand, which work I’ve mentioned a few times. That’s ironic, because I made those mentions  in hopes that more-accomplished others would do the same for me.

That help hasn’t been forthcoming, because quite a bit of work and thinking is required to plumb the depths of Edward’s model. So I’ve asked Ed to help me put together a basic introduction. Hopefully I’ll benefit from the blowback of ensuing discussions.

In Chapter 3 of General Theory, Keynes bruits the notion of effective demand. It’s very much the centerpiece of his thinking, but it is almost uniformly ignored in textbooks. He describes it as the intersection of the aggregate demand and aggregate supply curves. Edward adheres to that notion.

While I grasp that thinking in an abstract way, Keynes fails to provide what I need; he’s neither general nor specific enough for me to really grok it. ( “to understand thoroughly and intuitively.”)

In a general sense, I want to understand what effective demand is, in narrative, descriptive terms explaining human incentives: why people and groups act as they do.

In a specific sense, I want to know the formula to calculate effective demand, so I can plug in publicly available measures (or watch others do so), plot changes in this measure over time, and see what happens.

Edward’s work particularly stands out for me in providing that formula. Whether his formula is “right” or useful remains to be seen. But it’s important; to my knowledge (and Edward’s), no effective-demand theorist, including Keynes, has provided a workable formula. It seems to be the very thing Paul Krugman was asking for four years ago in his lecture on effective demand.

Here’s the formula:

Effective Demand = Real GDP x Labor Share of Income / Capacity Utilization x (1 – Unemployment Rate)

I’ll unpack that below. But first my explanation and understanding.

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Robert Shiller: Raise taxes on rich if inequality gets worse

Here is a 12 minute video on youtube of an interview from Davos, Switzerland, with Robert Shiller from Yale University.

He says in the video that taxes should be raised on the rich if inequality gets worse. He seems content with the current level of inequality.

He says that economics is not an exact science. We cannot know the future with certainty.

All in all, he seems pretty relaxed about the future of the economy.



BollyWoodEvent. Economics is not exact science Robert J Shiller. 7/24/2013. Retrieved from

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Offshoring profits with captive reinsurance

by Linda Beale

Offshoring profits with captive reinsurance

One of the ways that corporations manage to cut their federal income tax bills way, way below the statutory rate is by setting up reinsurance affiliates offshore.  While some of these reinsurance affiliates may actually function as full-service reinsurance companies to many different customers, those truly taking on and diversifying risk, most are scams, in that they are just ways to offshore U.S. profits through premium payments for self-insurance.

Two bills now before Congress, H.R. 2054 and S.991, reintroduced recently by Rep. Richard Neal (D-MA), Rep. Bill Pascrell(D-NJ) and Sen. Robert Menendez (D-NJ), are intended to end this run around the US corporate tax laws, picking up a proposal from the President’s  FY2014 budget to deny tax deductions for certain reinsurance premiums paid to foreign-based affiliates of domestic insurers.

Naturally, the GOP-Big-Business-Friendly machine is up in arms about any bill that would take away this kind of tax subsidy for multinational corporations.

[Although the GOP professes to believe in a ‘free market’, that is demonstrably false, in that every preferential tax subsidy for Big Business is highly lobbied for, and at the same time, “reforms” (like further preferential capital gains rates or regressive consumption taxes) that would push the burden of supporting federal government programs that are immensely important for ordinary people are pushed.]

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Examining the Entrails of the U.S. Employment Situation –

Daniel Alpert at Nouriel Roubini’s Economonitors offers a through, data supported (but in real English as well), description of what is happening in our economy, and why some things that might look puzzling  are not so hard to see with some careful reading:

I have a story to tell you about the U.S. employment picture. A story that you may find far more interesting than the media and government-led backslapping that has been forthcoming on “jobs days” in the first half of 2013:

“Economists are notorious for getting worked up by numbers, and these days no data dump triggers a sharper frisson of excitement than the two dozen or so tables of employment numbers released at exactly 8:30 a.m. on the first Friday of every month by the Bureau of Labor Statistics at the U.S. Department of Labor.

It’s not just economists who eagerly await—or dread—the U.S. “Jobs Day,” as this Friday has become known in Washington. It’s also politicians, stock analysts, policy wonks, and journalists. Amid the worst economic run of our lifetime—a crisis that keeps morphing and whacking us again—everyone is looking for signs of what’s coming next.

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Round and around the revolving door does spin…

Lifted from comments from open thread July 23 by reader Jack

Round and around the revolving door does spin. Those who take the ride are 
guaranteed to win, in the game of securities enforcement law. In yet another 
move between public and private practice John Khuzami moves from the SEC to “….a 
job that pays more than $5 million a year at Kirkland & Ellis, one of the 
nation’s biggest corporate law firms. In doing so, he is following the 
quintessential Washington script: an influential government insider becoming a 
paid advocate for industries he once policed.” NY Times, July 23, 2013.

    “We started out knowing that everybody and anybody wanted him,” said Mark 
Filip, who leads Kirkland’s government and regulatory defense group.”
    Mr. Khuzami’s skills were so sought after that “…Visa and Bridgewater, the 
giant hedge fund, were among the companies that approached Mr. Khuzami for 
in-house counsel jobs. The fervor grew so great that Fox Business declared it 
the “biggest bidding war on Wall Street.”

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Federal Judge Finds Ohio Can’t Refuse to Recognize Couple’s Out-of-State Same-Sex Marriage

by Linda Beale

Federal Judge Finds Ohio Can’t Refuse to Recognize Couple’s Out-of-State Same-Sex Marriage

Dear Readers:

This has been a much needed break for me, but now I am ready to resume daily postings on tax, economics, and the potential for a just and fair society.  As you all are undoubtedly aware, Messrs Camp and Baucus continue their claim that they will accomplish “tax reform” before Baucus leaves the Senate in January 2015.  I remain unconvinced that this pair will put together the kind of reform that could merit passage.  Too much likelihood of favoritism for capital income at the expense of ordinary workers; too much likelihood of favoritism for multinationals and natural resource extractives, etc.

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Say it like it is?

Via the Washington Post comes some interesting language.

Employers are raising education requirements even for entry-level positions.

Thirty-two percent of hiring managers and human resource professionals said they are hiring more employees with college degrees for positions that were historically held by high school graduates, according to a survey by CareerBuilder.

“While some of this may be attributed to a competitive job market that lends itself to college grads taking lower skill jobs, it also speaks to companies raising performance expectations for roles within their firms to enhance overall productivity, product quality and sales,” said Brent Rasmussen, president of CareerBuilder North America.

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