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

Krugman is dancing around a root cause… labor share

Paul Krugman is developing the ideas to understand one of the root causes of the economic problems. His present line of logic leads to understanding the effective demand constraint upon output. He writes…

“Profits took a hit during the financial crisis, but have soared since then, and are now 60 percent above pre-crisis levels; meanwhile compensation has grown hardly at all, and indeed fallen in real per capita terms.

“The point is that we have a depressed economy for workers, but not at all for corporations. How much of this is due to the bargaining-power issue is obviously something we don’t know, but the disconnect between the economy at large and profits is undeniable.”

He is describing the fall in labor’s share of national income since the crisis. It would be nice if he just used the term “labor share”, but he seems to always steer away from that term…

Firms do not care about producing more output. They only care about producing more profits. If producing more output means less profits, firms will not produce more. Keynes described this effect using the term effective demand in Chapter 3 of General Theory. Effective demand is based on labor share. The point at which profits start to decrease with production is the effective demand limit.

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Pet Industry Figures

Via American Pet Products comes these figures on yearly expenditures for product and care of our pets, in the range of over $53 billion a year lately.  It doesn’t look like that includes dog walking.

Pet Industry Market Size & Ownership Statistics

U.S. Pet Industry Spending Figures & Future Outlook

The following spending statistics are gathered by APPA from various market reseach sources and are not included in the organization’s bi-annual National Pet Owners Survey.

Total U.S. Pet Industry Expenditures

Year                 Billion

2013                 $55.53 Estimate

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A Story at Christmas time

by Rev. Nathan Detering (Unitarian Universalist Church at First Parish Sherborn, MA)

Once upon a time in those days after Thanksgiving when Rt. 9 is transformed from its normal craziness into something like a hornet’s nest after you poke it with a stick,there was a minister, a pastor, who thought it was a good idea to pick his children up from school and take them to Shopper’s World.

Earlier that day he had been planning with his staff team all those worship services in December, including two children’s pageants, one Quaker service, a sermon on the four kinds of prayer (oops, please, thanks and wow!), a Music Sunday last week in which the choir was singing things about The Christian God that this minister knows many of them have at least some doubts (which is maybe why the music director Joe had them singing in German), and, last but not least, this Christmas Eve worship.

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by Dale Coberly




A group that calls itself “Committee For A Responsible Federal Budget” wrote what it claims to be “Setting the Record Straight on Social Security.”  The article needs to be responded to at some length, both to correct its errors and to show how it goes about its business of lying to people.

A lie is a statement or statements intended to deceive another person. Professional liars can usually manage to lie to their victims and lead them to harm by carefully selecting “facts” so as to lead to a false conclusion without ever actually saying anything that is “technically not true.”

CRFB statements follow in italics.  My replies in plain text.

This post recently appeared in CRFB’s Bottom Line Blog.

Recently, many policymakers and commentators have called for expanding Social Security benefits rather than slowing the program’s costs, suggesting that the program’s current shortfalls are modest and easily addressed. Below, we answer some questions about Social Security to help explain why many of these calls are misguided.

Is Social Security’s Financing Problem Real?

Unfortunately, suggestions that Social Security does not face a financing problem are not based in fact. Already, the costs of  benefits are well in excess of revenue from payroll taxes. Social Security’s cash-flow deficit will add $75 billion to the deficit in 2014, $1.0 trillion over the next decade, and $3.8 trillion in the decade following. As  we’ve explained, the program’s past surpluses do nothing to change its very real current cash deficits. Regardless of whether past surpluses were saved in an economic sense or not, the federal government will have to borrow more to make up for the Social Security system’s cash flow deficit.

I am not sure that anyone has suggested Social Security does not face a financing problem. The question is, or should be, what is the best way to address this problem… and how big is it anyway?

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Preliminary sign of a coming contraction

Enjoy this Christmas because next year Christmas may not be as Merry…

As real GDP nears the effective demand limit, we should see some signs of the economy turning the corner toward a contraction. So, do we see any signs? … Well, yes.

This graph plots the aggregate profit rate against the savings rate of capital income.

prof rate 7

Aggregate profit rate uses the left axis. Capital income’s saving rate uses the right axis. (vertical red lines are starts of recessions.) I have adjusted the axes so that the lines come together and then split apart through time. The economy reaches its limit of expansion when the lines are “far” apart. A recession occurs as the lines come back together.

The most recent data implies that the economy is reaching the limit of its expansion. Capital income’s savings rate tends to decline to a level around 59% since the 80’s. Then it rises before a recession. It jumped briskly up in the 3rd quarter 2013. You really only see increases like that before and during recessions.

In the 3rd quarter 2013, capital income is saving more because government borrowing and private investment both rose. That may not seem like a cause for a recession, but there is another side to this. Capital income consumption of final goods and services drops, which also happened in the 3rd quarter 2013.

Also, some capital over-extends itself at this moment of optimism to their future sorrow. Some capital income protects its assets too. This dynamic of some getting into trouble while others are getting out of trouble is a common dynamic at the end of the business cycle.

As for the aggregate profit rate, it has been flat, but high, for 2 years. A flat aggregate profit rate is a sign of real GDP reaching the effective demand limit. The aggregate profit rate is showing signs of reaching its expansion limit.

The trend would now be to see these lines move together over the next year increasing the likelihood of a contraction. We will have to wait until March 2014 to get a good reading for 4th quarter 2013.

I realize many economists celebrate the strong real GDP growth of over 4% in the 3rd quarter 2013, and they forecast more strong growth for years to come… Many people get enthusiastic too. It is easy to celebrate the height of an expansion. However, everything needs to be put into the context of a larger picture. The dynamics of profit and savings for capital income are signaling the limit of the economic expansion.

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Jared Bernstein’s “new normal” potential GDP is similar

Today Jared Bernstein published a graph with a red line representing a new normal for potential GDP.

I was surprised because the line looks very similar to the line I have been publishing for months for effective demand.

update ED recent

Mr. Bernstein does not give an equation for his line, but only a definition…

“The other two lines approximate the potential growth by extracting a smooth trend from the underlying G.D.P. series, controlling for cyclical movements.  The yellow line shows the trend if you stop that trend extraction process in 2007.  The red one shows what happens if you use the full series right through last week’s revision.”

The equation I use is “real-time” and not dependent on statistical smoothing. You can derive potential GDP just from the data in one quarter, You do not need a series of data in time.

Potential GDP = real GDP – a * (capacity utilization/effective labor share – 1)

a = business cycle amplitude constant in 2009 $$, currently estimated at $3.4 trillion… effective labor share is determined by a central tendency line (which crosses the origin of a graph) between capacity utilization and the index for labor share: business sector. The slope of that line for 2009 base year is estimated at 0.762.

Mark Thoma linked to my original graph back in April. No impact was noticed after that. So, it will interesting to see if Mr. Bernstein’s graph creates a reaction, because economists are less sure now of potential GDP than they were months ago.

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Taxes And Income Distribution: The Way It Was And The Way It Is

Via Econospeak Barkley Rosser ponders taxes and distribution:

Taxes And Income Distribution: The Way It Was And The Way It Is

Got invited on to the local TV station today to discuss income distribution thanks to the recent statements about the matter by President Obama and Pope Francis, only to upset the local anchorman by telling him things he had not known previously, such as the shocking fact that someone making $115,000 per year pays the same in fica/Social Security taxes as someone making $115 million per year, although, well, that must be just fine because “that is the way it has always been, right?”  As it was I advocated raising the income cap on fica and taxing capital gains as income, just as was put into place back in 1986 under Ronald Reagan.  In the very conservative Shenandoah Valley this is how one must pose such radical proposals.

But, it got me to thinking about what I should have said, particularly if I had more time, which one rarely has on TV, especially local TV.  So, when the anchorman, who really is reasonably smart and well-intentioned, asked me if it had always been this way, that people above a certain income level (really, wage and salary level) pay no more in fica taxes than those at that level, I should have reminded him of how things used to be.  Yes, that is the way it has always been, but in other areas of the tax code, things have changed so as to really help out those at the top end of the income hierarchy, even if they have not been made to pay their fair share for our rising Social Security expenditures (and I noted that if one raised the income cap and was revenue neutral, one could cut the overall rate, thus lowering taxes for the bottom 96% of the income distribution, sort of like how closing loopholes back in 1986, such as the special break for capital gains, allowed a general cut in income tax rates for Mr. Reagan).

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Temp workers and injury

Pro Publica points us to the expendable temp worker trend and with data.

Via Truth out comes more:

A groundbreaking 2010 study of Washington state’s workers’ comp claims found that temp workers in construction and manufacturing had twice the claims rate of regular workers doing the same type of work.

It’s not possible to track temp workers’ injuries nationwide through workers’ comp records. Many states, such as New Jersey, consider workers’ comp claims to be confidential and declined to release them to ProPublica. In other states, such as New York, there is no way to sift out temp workers from regular workers. In Texas, employers aren’t required to carry workers’ comp insurance, and many fail to report their employees’ injuries to state authorities.

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Sunday Reads

Senator Elizabeth Warren introduces bill to stop credit checks in job application process
A bad credit rating is far more often the result of unexpected medical costs, unemployment, economic downturns, or other bad breaks than it is a reflection on an individual’s character or abilities,Senator Warren said. “Families have not fully recovered from the 2008 financial crisis, and too many Americans are still searching for jobs. This is about basic fairness — let people compete on the merits, not on whether they already have enough money to pay all their bills.” Hat Tip Crooks and Liars

The Bureau of Labor Statistics shows us the frugal reality of life on the social safety net.
“This month, the Bureau of Labor Statistics compared yearly spending between families that use public assistance programs, such as food stamps and Medicaid, and families that don’t. Surprise, surprise, households that rely on the safety net lead some pretty frugal lifestyles. On average, they spend $30,582 in a year, compared to $66,525 for families not on public assistance. Meanwhile, they spend a third less on food, half as much on housing, and 60 percent less on entertainment.” Hat Tip Atlantic Magazine

Annual Spending

You Don’t Have the Right to Remain Silent
“On Monday, in a case called Salinas v. Texas that hasn’t gotten the attention it deserves, the Supreme Court held that you remain silent at your peril. The court said that this is true even before you’re arrested, when the police are just informally asking questions. The court’s move to cut off the right to remain silent is wrong and also dangerous—because it encourages the kind of high-pressure questioning that can elicit false confessions. Hat Tip Slate Magazine”

Who said the appointment of Federal Judges do not have much importance? A judge’s life time appointment sways the legal course of the nation for decades to come until SCOTUS again finds time enough to rule on cases impacting people and not big business.

Land of The Free?
25% of the world prison population resides in US prisons and jails at an ~ cost exceeding $22,000 annually. As I had written in “One In 31 Adults”, ~50% of those incarcerated have been convicted of nonviolent crimes. Maybe it is time to review sentencing guidelines. Hat Tip Crooks and Liars

The Death of The American Dream in a Single Chart
Upward Mobility in America has become increasingly difficult. Whether black or white, “Children from low-income families have only a 1 percent chance of reaching the top 5 percent of the income distribution.” The odds of advancing up a rung increase when racial background is included. Understanding Mobility in America Hat Tip David Atkins At Hullabaloo

Gatsby Curve

Wealth inequality is even more disturbing than income inequality

Distribution of Income by Source

“Democrats are often afraid to talk in these terms because it sounds positively Marxist to do so. But while I don’t consider myself a Marxist, I’ve been writing for a long time now that it’s important to recognize that we have an asset class and a wage-earner class–and their interests don’t align at all.” Hat Tip David Atkins Hullabaloo

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