The Consumption rate from Capital Income (Labor Day special)
In honor of LABOR DAY…
Yesterday, I posted a graph showing the percentage of capital income that is used for consumption. It is a new graph being developed. Since yesterday, I have gone back and changed just one number that determines the consumption rate of capital income. I replaced the number for “net government saving”, line 26 from table 3.1 Government Current Receipts and Expenditures of the BEA web site,with the number for “net lending or net borrowing (-)”, line 38 from the same table. One reason this number is better is because it includes gross government investment, which is an important factor for lending and borrowing by the government.
After substituting in the new number, I re-ran the chart. Here it is…
Here is the previous graph from yesterday for comparison…
The plot of the graph changed quite a bit for the data before 1972. But since 1972, the general shape of the plot has stayed pretty much the same. The revised graph #1 shows that capital income consumption sort of bounced along 0% from 1980 to 2003. It moved within a range from -5% to 9%. The fact that the plot went occasionally negative may be a sign that the numbers still need some calibration, but the shape and placement of the plot is what would be expected. A lower percentage of capital income used for consumption would be expected, because it is primarily used for investment and lending.
It may be useful in graph #1 how the plot fell before the last two recessions, which would be an indicator that a recession is forming. Capital income “feels” economic trouble ahead before labor.
In graph #1 when we look at the plot since 1993, we see that capital income is stepping upward its ability to consume from recession to recession. (purple arrow) What does this mean? Is this something we should be concerned about? Does it imply that the next recession might be even more intense?
An increased use of capital income for consumption implies increased liquidity among capital income. Where is this liquidity going? What is it doing? The economy looks to be even more “top-heavy”, which would be a source of greater instability.
Using the newest data for 2nd quarter 2013, graph #1 says that the consumption rate of capital income is currently 21.7%. This rate hasn’t been seen since right before the 1973 recession. How much higher can this rate go before it turns back down toward a recession?
OH, and just in case you wanted to see Labor income’s consumption rate…
Is it any surprise that labor has had to use more and more of its income for consumption? Even through the days of easy consumer credit? Do you see the imbalance becoming clearer between labor and capital since 2001? My view is that labor uses more of its income for consumption because it has to. Capital uses more of its income for consumption because it has extra money.
HAPPY LABOR DAY!
Update… The graphs above were adjusted for data before 1960.
Note: The numbers in the graphs are not to be taken as accurate until they can be calibrated. Nevertheless, the pattern of the plots is the message of this post.
Hmm. Does capital “feel” recessions coming, or do their spending habits create recessions, or trigger them? How would you parse the data to see?
Your graph 3 is what I find most interesting. Right where your income touches 80% consumption is basically the same moment in years where my chart showed the share of income to the 99% crossing below total personal consumption. This was not so since 1941. It is also the point at which the share of income to the top 1% crossed above 15%. Again, not seen since it crossed below that in 1941.
Thus, like Mike Kimmels data with top marginal rates, I think we are finally starting to put real parameters on what a healthy economy looks like.
Top effective marginal rates at around 65%, top 1% income share below 15% (but not much below 10) and income used for consumption below 80%.
Also, by 2001 where you chart shows consumption staying above 80%, mine is showing income for the 99% going flat.
Additionally, my chart showed disposable personal income total and 99% income not coming into agreement until 1943. From that forward they track almost ontop of each other. 1968 to 1983 were the best years for the 99% as their income tracked above disposable income. However, in 1987 the crossed and the 99%’s tracks to ever greater separation from disposable income and as noted in 1996 fall below personal consumption.
If economics were a real science, it would look at such data/numbers along with what I showed in the 1936 tax table reconstuction and start presenting policy suggestions in terms of boundries as to defining what is a healthy economy, that is an economy that works for all.
What you are showing is also part of what I showed when I pointed out that the share of income to the 1% has been doubling faster than the GDP since the mid/late 80’s and the 99 % has not doubled at all.
*looking at graph again* Ed, what the h$&*$ happened in 1961? Did you tell us elsewhere but I missed it?
Interesting question if a fall in capital income’s consumption can trigger a recession. Normally it appears that labor income increases its consumption rate a bit before a recession. I don’t think a fall in capital’s consumption triggers a recession. I think capital sees the business cycle coming to an end and they begin to protect themselves while labor income increases spending and does not protect itself.
If a graph like this could alert labor to protect themselves before a recession, would they actual protect themselves?
But then what happened in 1961? i had the data wrong. Thanks for pointing that out. I have gone back and entered the correct data from table 3.1 line 38 of the BEA NIPA tables. Line 38 had no data before 1960. I had to calculate it using lines 29 thru 37.
You can see the new revised graphs above.
You are calling it right, when you say we are putting “real parameters on what a healthy economy looks like.”
Do you have a link to your graphs?
Here is the link to the post the charts are in, 12/12/07:
Your charts are interesting.