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

Best to own a business rather than work for one

by Rebecca Wilder

Best to own a business rather than work for one

In my effort to move away from covering Europe exclusively on this blog, I’ve returned to a little niche of economic data that had intrigued me in the past: US national income accounts/accounting. This time I’ll look at national income, specifically corporate profits – I’ve written about it before, and my colleague Ed Dolan covered it on Economonitor in June.

It’s best to own a company rather than work for one

Ed Dolan reports that corporate profits are rising as a share of gross domestic product at the expense of small business income and presents normative solutions. This redistribution of business income toward large corporations is a relatively recent phenomenon. Proprietor’s income as a share of national income peaked in the mid 2000s and has broadly declined; but before that point, proprietor’s income (green line) and corporate profits (purple line) jointly trended higher as a share of national income while gross employee compensation declined (blue line). It’s the business employees that are the real losers in this cross section of income.

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Machines are labor, but they don’t buy gifts

CNBC has a video on youtube about the concern over machines replacing people. They actually touch upon many relevant aspects of the issue… high unemployment, increasing corporate profits, productivity of machines, rising real GDP, stagnating median household incomes, low minimum wages and even social instability.

Replacing people with machines, like paying lower real wages, is a fallacy of composition  It can be more profitable for an individual business to replace people with machines and pay less wages, but if more and more businesses do this, people overall will have less income and less purchasing power to buy the finished goods of production.

Production seeks demand. Demand depends on people getting paid for producing. So even though there may be a balanced trade off in production as utilization of capital rises and utilization of labor falls, production will be progressively limited by weaker demand.

The United States has a demand-constrained economy.  The fact that some people are being replaced by machines is only part of the story. We will explore the subject of macro-economic demand here on Angry Bear blog in future posts.


TheBankNews. The Great Divide Economics of Wall Street. 7/22/2013.



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Investing in the New Normal – interviews from John Mauldin

A quick post about a video that came out on July 17th on youtube. It is a video over one hour long where John Mauldin has a series of interviews with Mohamed El-Erian, David Rosenberg, Barry Ritholtz, John Hussman and Kyle Bass. These economists give their insights into “investing in the New Normal” economy. The New Normal economy grows slower with higher unemployment. They give their insights into where the global economy is going. I am not endorsing any view presented in the video. Yet, the views are being made available for you to evaluate.

However, Barry Ritholtz makes a point about what a recession is for… You have to clean out the inefficient businesses, let the efficient businesses survive by their merit, and start building the economy over again. John Hussman makes the point that the Fed’s monetary policy has been undermining the quality of investment by encouraging speculation. They have a lively and informative discussion.

The interview with Kyle Bass takes place at a level that most people never see in economics and the media. He has the capacity to make economists change their interpretations of reality.

I also want to add this link to a document produced by Kyle Bass, Hayman Capital Management L.P., that was circulated on twitter. Kyle Bass has important insights into Japan and China in this document. I find the insights of Kyle Bass quite intriguing.



Bass, Kyle. Abenomics: Lost in Translation. Scribd. June 5, 2013. Accessed July 21, 2013.

Mauldin, John. John Mauldin’s ‘Investing In The New Normal’ – FULL VERSION. July 17, 2013. Accessed July 22, 2013.


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Paul Krugman leads us to Effective Demand

On June 10th, 2009, Paul Krugman gave a lecture at the London School of Economics on how economics should be taught differently after the crisis. (It was actually the third lecture over 3 days. All 3 lectures are available on youtube and I highly recommend them even after 4 years.)

Paul Krugman made 3 references to Keynes’ concept of effective demand in that 3rd lecture. The basic tone is that we need to work on making effective demand useful. It is evident that Paul Krugman has an interest and a respect for the concept of effective demand.

I have developed a new model for effective demand. In future posts at Angry Bear blog, Steve Roth and I are going to be explaining what this new model of effective demand is, how it works and how it can be useful.

For the moment Paul Krugman will lead us to look at effective demand.

Effective demand & an equilibrium limit on employment

In the video on youtube for Krugman’s lecture, at the 20 minute point, Paul Krugman is talking about some criticisms against Keynes. One is that Keynes didn’t have a notion about equilibrium. From the lecture Paul Krugman says…

“You’ll also see people say, well, you know, economists have this notion of equilibrium and Keynes didn’t do that. But, this is Chapter 3 where he lays out the essentials of the general theory. And he says very much, “I am looking for an equilibrium that determines the level of unemployment. I’m looking for, you know… It’s actually in economics style where one curve crosses another curve. And then we’re going to talk about what moves those curves around.””

This is the part from Keynes’ chapter 3 of the General Theory book that Krugman referred to.

“The value of D at the point of the aggregate demand function, where it is intersected by the aggregate supply function, will be called the effective demand. Since this is the substance of the General Theory of Employment, which it will be our object to expound, the succeeding chapters will be largely occupied with examining the various factors upon which these two functions depend.”

Keynes is looking for an equilibrium between demand and supply that determines the limit upon employment. He refers to this equilibrium limit as effective demand.

The principles of effective demand that I put forth state that the SRAS (short-run aggregate supply) curve and the effective demand curve will cross at the LRAS (long-run aggregate supply) curve. The LRAS curve is the notion of the natural real GDP at full-employment where output will not increase, but the price level will. The LRAS also gives us the NAIRU level of unemployment.


Graph #1

The equilibrium that Keynes is looking for is the intersection of the SRAS, LRAS and effective demand curves. Employment will be limited at this intersection which represents potential output. Keynes wanted to tell us that effective demand can establish this intersection even at a level below what economists would consider full-employment.

As Krugman explains Keynes thoughts on effective demand, the key issue is an equilibrium with effective demand that determines the level of unemployment. The graph above shows this with the NAIRU determined at the LRAS curve.

Keynes wrote this in chapter 3…

“Thus the volume of employment is not determined by the marginal disutility of labour measured in terms of real wages, except in so far as the supply of labour available at a given real wage sets a maximum level to employment. 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 wages — not 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. The insufficiency of effective demand will inhibit the process of production in spite of the fact that the marginal product of labour still exceeds in value the marginal disutility of employment.”

Keynes is defining effective demand as a limit upon employment. He first says that employment is not determined by the point at which business is no longer willing to pay a certain real wage, but rather by levels of consumption and new investment. Thus, if consumption and new investment result in deficient demand, employment will be capped at a level below which business would still be willing to hire more workers based on the real wage. In other words, business would hire more workers, but there isn’t enough consumption and new investment to justify it.

Keynes is implying in the quote above that an increase in real wages can increase employment. How does this happen? Demand is the constraint on employment, not real wages. Thus real wages would increase and as you increase demand through higher real wages, the result is increased employment. because you have relaxed the demand constraint.

Effective demand & recessions

Then comes the issue of recessions and business cycles. At the 48 minute point of the video, Paul Krugman says…

“Keynes really put the question of why demand fluctuates on one side. But certainly it’s something we ought to be interested in. Particularly we ought to have some way of thinking about when it is that the bottom is likely to fall out on the economy. But almost nothing done on that.”

I recently posted a series of graphs looking at how effective demand determines the point at which a recession is likely to occur. So we know that the preliminary insights of Keynes into effective demand are within our grasp. Effective demand not only sets the stage for a recession, but it also caps employment and capital utilization before the recession starts.

Effective demand… making it happen

Keynes refuted Say’s law that “Supply creates its own demand”. Keynes stated that demand determines supply. Effective demand speaks to the relative purchasing power of consumers to determine supply. For instance, imagine an economy where labor gets paid 25% of national income. The domestic market for goods would simply provide less to consumers.

At the 53 minute point of the video, Krugman emphasizes Keynes’ focus on demand…

“Where do we go from here? First of all, I think, economists have really got to go back and say that these basic Keynesian type models need to be studied. People need to know that there is this issue about demand. They need to know that sometimes things that can’t be fully justified in terms of maximization are really important… that we need to have a whole different style of teaching. I don’t quite know how we make that happen.”

After all the above, what can I conclude?

Krugman says we need to develop the concept of effective demand better… make it more useful.

Well, 4 years later, we now have a model of effective demand; Steve Roth and I are going to work it out for you in future posts.

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Book review

by Tom aka Rusty Rustbelt

Book Review:

So I got to spend most of Saturday evening and Sunday morning in the emergency department of the local hospital, once again proving to my wife that men are stupid.
Not to waste time I took Alan Blinder’s new book with me.
After the Music Stopped is a terrific book on the causes of  and reactions to the financial crisis and recommendations for the future. There is enough data for the geekiest geek, but plenty of plain English commentary.
I’ve read just about every book  written on the financial crisis and this one, written after some time has passed, is really excellent.

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Health Care Thoughts: Question for the readers

by Tom aka Rusty Rustbelt

Health Care Thoughts: Question for the readers

I’m in the mood to think about technology, and have the following questions:

Which of these would be your preferred method of receiving health care updates, more detailed than a typical health care thought AB post?

specialty blog/s

pod casts

Internet radio (see for example)

You tube

whitepapers/commentaries available in Dropbox or Issuu or Scribd’s sites

enough is enough

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Labor participation rate

Bill McBride at Calculated Risk offers this comment on labor force participation rates:

Note: A significant portion of the decline in the unemployment rate from 10.0% in October 2009 to 7.6% in June 2013 was related to a decline in the participation rate from 65.0% in Oct 2009 to 63.5% in June 2013. If the participation rate had held steady, the unemployment rate would be 9.7% (assuming an increase in the participation rate with the same employment level).

Now the participation rate is forecast to mostly move sideways – or maybe even increase a little in the short term – so we probably shouldn’t expect a decline in the participation rate to help push down the unemployment rate over the next year or two. Instead, and decline in the unemployment rate will probably because of an increase in employment.

Longer term the participation rate will probably continue to decline until 2030 or 2040. I expect the rate to fall from the current 63.4% to around 60% in 2030 based on recent trends and demographics.

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An addendum to McD’s budget advice

An NPR article and a Marketplace piece, which feature Milwaukee fast-food workers, highlight a hidden issue among low-wage jobs — many have such random work schedules, they can’t even get a second job to supplement their income.

A new NELP report highlights   “Taking the Low Road: How the Federal Government Promotes Poverty-Wage Jobs Through its Contracting Practices,” finds that three in four of low-wage federally contracted workers make less than $10 an hour, nearly 60 percent struggle to pay monthly bills and nearly 40 percent depend on public assistance to get by.

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Subsidy Megadeals Out of Control Since Great Recession

The recent Good Jobs First report Megadeals is the most detailed compilation to date of the largest economic development incentive packages ever given by state and local governments. Defined as incentive packages of $75 million or more in nominal value, these deals have multiplied in both number and value in recent years as governments compete for a smaller pool of large investments.

 Starting with Pennsylvania’s 1976 $100 million deal for Volkswagen, the report details 240 megadeals through May 2013. The total cumulative amount of the deals comes to $64 billion. The report uncovers many deals of which I had been unaware, including a new number one subsidy of $5.6 billion for Alcoa in 2007 consisting of discounted electricity from the New York Power Authority, a state agency.

 Consistent with reports I have made on several occasions, but with a better database of incentive packages, Megadeals finds more and bigger deals than before the Great Recession. To be exact, since 2008 the number of such deals has doubled from about 10 per year (in the previous 10 years) to about 20 per year, with the average total of such deals doubling to about $5 billion per year over the same period.

 As Good Jobs First reported earlier this year in The Job Creation Shell Game, the number of significant investment projects as reported by Conway Data (publisher of Site Selection magazine) has fallen from a 1999 peak of over 12,000 per year to less than 6,000 per year in every year since 2005. This means that states and local governments are desperate to land the few projects that are available and therefore they are willing to pay more for them. Note that Conway Data reports projects meeting any one of three criteria: fifty new jobs, $1 million in investment, or facility size of at least 20,000 square feet. In particular, $1 million in investment is a low threshold.

 One thing we should realize is that while megadeals generate the most press coverage for obvious reasons, they are only the tip of the iceberg of total state and local investment incentives. The reason, of course, is that there are so many more smaller deals that collectively account for large amounts of money. The smaller ones receive little or no media coverage, which makes it hard to track them.

My only real criticism of the report is that I believe it would be more accurate to calculate present values for the subsidies that are given, rather than reporting only nominal values. Companies themselves will calculate the present value of an incentive package, and the European Commission does so as well in its supervision of EU subsidy rules. It should be more widely done in reporting in this country. $3.2 billion over 20 years (Boeing in Washington state) is not the same thing as $3.2 billion in cash; by my calculations, it is about $1.98 billion, as I first published in Investment Incentives and the Global Competition for Capital. Similarly, the $5.6 billion nominal subsidy for Alcoa comes to $3.22 billion present value, by my calculations. This is still more than 50% bigger than the Boeing incentive package and easily the largest single subsidy in U.S. history.

 In addition, I think it is a tossup whether to count Nike’s 2012 deal with Oregon for 30 more years of single sales factor (SSF) as a subsidy. SSF is already law in Oregon; Nike’s bargain only guarantees that it will not change. Still, Nike obviously thought it was important enough to bargain for, and it is possible to estimate the company’s savings relative to the pre-SSF apportionment formula, so its inclusion is certainly justifiable.

 Besides the great report, you can download a spreadsheet with all the data and sources at the link above.

 Disclosure: Good Jobs First shared its megadeals database with me in conjunction with a paper I gave in May, and I exchanged notes with authors Phil Mattera and Kasia Tarczynska as I prepared the paper and they finalized the report.

Cross-posted at Middle Class Political Economist.

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