Feeding Piketty’s Capital Monster
Paul Krugman continues his illumination into the significance of a falling labor share, as he reads Thomas Piketty’s Capital in the 21st Century. Mr. Krugman rarely writes about labor share but that looks to be changing.
Piketty describes the growing power of capital income as “patrimonial capitalism”, where an elite gain control through inheritance and gained favor. Beatriz Webb explained this process over a century ago, so it is not a completely new insight. Capital income has been a monster of sorts growing in its power and dominance of the global economy.
Mr. Krugman points to the GOP as the culprit who set policies towards patrimonial capitalism…
“In short, the GOP is more and more a party that consistently, indeed reflexively, supports the interests of capital over those of labor. But why?”
Mr. Krugman is realizing the danger of a falling labor share of national income…
“So what we’re seeing is that half the political spectrum now instinctively accords much more respect to capital than to labor, at a time when capital income is growing ever more concentrated in a few hands — and is surely on its way to being concentrated largely in the hands of people who inherited their wealth.
“Curious, isn’t it?”
What is really curious is why Mr. Krugman and many other progressive economists support a monetary policy that is feeding the patrimonial capital monster. They think that accommodative monetary policy is the proper medicine for the economy, and they even ask for more of it… even to push beyond full employment with it. What they must eventually realize is that accommodative monetary policy is not a medicine but a substantial part of the overall poison that is slowly killing the wonderful economy that once was… when labor was able to influence politics and economic growth.
The fall in labor share must be reversed in order to have an effective Fed policy, a healthy inflation, healthy employment, a healthy population, a healthy society… a healthy world.
I have been writing about the fall in labor share through the lens of Effective Demand for a year. I have equations, models and predictions all laid out. I see the fall in labor share as the true poison in the economy and the reason why monetary policy is ineffective.
Now Mark Thoma is mentioning weak effective demand as a cause for low inflation and ineffective monetary policy. (video of lecture… 53:00 to 55:30) At the 55:15 point of the video, he mentions effective demand. But from what I see, I am the only economist calculating an effective demand limit upon the economy. What equation would Mark Thoma use to calculate effective demand? How does he evaluate it? I periodically send an email to Mark about my work. I was a constant commentator on his blog for a couple years. I highly respect his contributions to the econoblogosphere. Maybe he is seeing something in what I say.
Some say that raising the Fed rate would kill the economy and cause a recession. Well, Volcker raised the Fed rate to kill the inflation monster which resulted in a recession… and most praise his courage now. Raising the Fed rate now would cause a contraction, but it would go a long way to debilitating the patrimonial capital monster growing in power as it preys upon “our” economy. As Mr. Piketty focuses upon r-g, raising the Fed rate would lower r. Think about it Mr. Krugman. … a step toward putting economic power back into the hands of labor.
As Volcker saw inflation as a greater monster than a temporary recession, so we now can see patrimonial capitalism as a greater monster than a temporary recession. The capital monster must be attacked and wounded. If it isn’t, it will grow stronger and stronger, until we have a neo-feudalistic economy fulfilling M. Friedman’s dream of a government ruled by a benevolent dictator solely focusing on the order of law and military protection, while the free market becomes a glorious …. “thing”… where maximizing shareholder profits is the guiding rule.
Just look at the graph at Mr. Krugman’s post to see how maximizing shareholder profits is stacking up… The economy is terribly sick and the medicine is feeding the sickness.
To wrap up… Yes, accommodative monetary policy should have created more inflation and more investment, but due to the political-economic environment which leads to patrimonial capitalism and low effective demand, it is actually a poison making the economy worse as time goes on.
I continue to observe Mr. Krugman’s illumination into labor share.
So you wish to have Labor pay again for the mistakes of Wall Street and TBTF and their gambling on Non-Labor investments? Volcker basically abandoned Labor with his move back in the eighties and the FED never really worked towards theoretical full employment since then. I would think you would gain the same if we were to separate commercial banks away from Wall Street Investing and remove the banking status away from Investment firms (GS).
Edward, you, and some others, are still blaming the Fed for other failed economic policies, which include the massive fiscal expansion beginning in 2009, with tax cuts that were too small and too slow, followed by the massive fiscal contraction, of tax hikes and spending cuts, that began in 2013, more regulation on top of excessive regulation, which is regressive (and many states added more regulation and regressive taxes, fees, fines, fares, tolls, etc., to balance their budgets), massive household deleveraging after years of overconsumption, the housing market collpasing, the E.U. in recession, while in a deep depression., etc..
The Fed did what it had to do to prevent a liquidity trap and generate growth. It’s ridiculous to blame the Fed for massive problems, and ineffective and counterproductive solutions, caused by politicians/lawyers.
Another recession with the current political philosophy would totally destroy labor. Perhaps a fall into a full fledged depression is necessary, but it would cause untold suffering
Labor is paying and will pay even more in the future if policies continue to feed the imbalance. A recession will eventually come and everybody pays, capital and labor. But capital profits from a recovery much more than labor because of policies that benefit capital. Those policies are in place because economists and the Federal Reserve believe that economic growth occurs through capital income. Well, when labor income is weak, there is little incentive to invest in order to capture labor’s weak income.
Volcker did not abandon labor. Volcker saw that inflation was getting overly established in the economic institutions at all levels. He saw that inflation was not in the favor of anybody.
Mixing banking and investment is another policy that feeds the capital monster. Monetary policy is supporting that policy.
Labor share is falling and has not started to rise just yet. There is a movement to raise minimum wages, but we will see how far that goes.
What do you want? Do you want things to get so bad that there is chaos? The US is not capable of a revolution, but it capable of chaos. The global suffering from US chaos would be huge. I would rather take a stand now and raise the costs of capital… weed out the low-road firms that take advantage of low interest rates and low wages… weed out the investments that plan to prey upon low labor income by relying on low long-term interest costs… they are establishing that patrimonial capitalism which we should fear…
There is a lot of money going into Spain right now to buy up the real estate market. Investors are buying residential and non-residential. They hope to own the country and receive rents. They are doing this at a time when labor income and employment are pathetic. The general populous is unable to defend themselves. As we go into the future, more people will be subservient to the owners of capital.
What will be better for the world?…
patrimonial capitalism where a government must defend the rights and assets of capital against labor…
or a democracy trying to control the chaos between labor and capital…
I will take a stand for democracy to control chaos. Just wait until we start seeing violence against people in the US who simply protest too much. This nation will snap.
Raising the cost of capital now will help control the intensity of the chaos.
First, the Fed acted appropriately when the crisis hit. They had to drop the Fed rate to zero. But then as the economy recovered they misread potential output, which caused them to calculate a Fed rate that continues too low. Imbalances are growing due to that.
Second, I am not blaming the Fed for fiscal policies or even tax policies. I am saying that the Fed’s actions are working along the same lines as those policies.
Third, the Fed is misunderstanding the effect of low labor share upon their own policy. The Fed is confused about how the economy is responding. The real test will be inflation. The Fed members expect inflation to pop back up, but it may not due to low labor share. Inflation is still falling in Europe. And now Japan faces the test to see if it can raise labor income in order to boost inflation for good. We have to wait to see if labor’s efforts to raise wages in the US can raise effective demand.
Fourth, when you look at government, you have to include local, state and Federal. What you see as expansion at the Federal level may be combined with contraction at the state level.
Fifth, when you look at tax rates, you have to look at effective tax rates. From what I see, the effective tax rate on aggregate capital income in 2007 was 23%. It fell to 13 to 14% in 2010. And has risen to only 15% now. So where are the tax increases that you refer to?
Sixth, the massive household deleveraging you refer to is made worse by low labor share of income and policies made to benefit capital and not labor.
Seventh, the economic problems in Europe are also related to low labor share and low effective demand which stops any productivity increases. Those countries are hoping to export themselves out of trouble. So instead of raising wages to increase effective demand, they are dropping wages to increase global competitiveness… So effective demand falls more everywhere. It is a failure to understand.
Eighth, when the Fed creates growth, you have to evaluate the quality of that growth. Is the growth sustainably beneficial to society? For example, if you were Chinese, you would be heralding the growth there. But we know that they over-invested. They are seeing many non-performing loans. They are seeing capacity utilization fall. Therefore, the poor quality of a lot of their investments will cause big problems later.
THE LIBERTIES YOU HAVE ARE THE LIBERTIES YOU TAKE.
Don’t want to be ruled over by monstercap? Then take that capital away from them. Put the PRESSURE ON congress. After all its no longer a 50/50 deal its 99 to 1.
Edward, you’re right. The Fed isn’t responsible for fiscal policy or tax policy. Monetary policy has been a powerful tool in smoothing-out business cycles, and accommodative monetary policy stimulates demand, directly and indirectly, which the economy needs.
Accommodative monetary policy stimulates demand, e.g. through lower interest rates for consumer borrowing (which reduces monthly payments and raises discretionary income), refinancing mortgages at lower rates, a lower cost of capital for businesses, including for business start-ups and expansions, higher home prices and more home equity, more money in retirement accounts (to reduce saving for retirement – both bond and stock prices rose substantially), etc.
Low interest rates and high asset prices cause people to save less, spend more, and borrow more, to stimulate demand, raise output = income, and therefore, raise income = consumption + saving.
The goal of quantitative easing was to generate a self-sustaining cycle of consumption-employment. Unfortunately, there were too many headwinds, over the past few years, for the virtuous cycle to take hold. That wasn’t the Fed’s fault. It wasn’t getting the help it, and the economy, needed. You can’t blame the Fed for doing what needed to be done.
Congress determines TAX policy, to be sure. The Fed can, indeed, print all the dollar documents it wants and purchase what it will.
QE is nothing but WELFARE for those banks that lost their ass at the roulette table, nothing more. They lost the rent and grocery money and got their BANKER FOOD STAMPS. They didn’t create jobs or “save” the economy with it. They sat on it and gave themselves a bonus.
Nothing was changed, no new oversight, no return to Glass-Steagall, no prosecutions of the culprits, nothing learned, no avoiding a repeat of the same disaster.
Suppose the Fed announced a higher FFR and a higher inflation target? (They have to do something; there’s no such thing as them doing nothing. Doing nothing is doing something.)
What do you think would happen in the real economy?
Now what if they announced say a 3% inflation target, and that they would maintain that higher target until they see, say, two quarters of “strong” labor-share growth? (Choose your measure and amount for “strong.”)
If FRB policy continues to be myopically focused on banks or other corporates for the transmision of monetary policy into the broader economy it will always be subject to limitations.
Why decrease costs on banks for increased lending or higher asset prices when you can directly increase money balances of the broad public?
Steve, raising the Fed Funds Rate from zero to 3%, e.g. within a year, which requires removing quantitative easing, because the Fed sets the Fed Funds Rate through open market operations, would likely cause a severe recession.
Even with “QE-infinity,” the Fed didn’t reach its 2% inflation target. Inflation (the annual change in the price index for personal consumption expenditures) has been around 1.2%.
PT: Should read my comment again.
Sorry, I misread. The Fed hasn’t achieved the 2% inflation target with QE-infinity. So, what will it take to achieve a 3% inflation target?
Steve, you sure are fast. I posted my last comment before seeing your last comment.
Dannyb2b has the inflationary answer, dump the money on the general public.
Inflation TERRIFIES the rich. (a trip to GITMO???) Inflation without a return to Glass-Steagall or something of a like nature will simply feed-the-greed in this debt oriented economy. Put money in mortgaged home owners and the banks will jump up the foreclosure rates in an effort to swallow the nugget. Sell T-Bills to finance a Mainstreet bailout and the debt is transferred to THE TAXPAYER. The rich will scream about free money to the poor, fear inflation.
TAX THE RICH at extremely high rates BUT leave loopholes that help the poor and society in general such as charities, scholarships, paying high wages, etc., make them FIGHT to keep EVERY penny.
Dump the money into public works, infrastructure, education to creating ACTUAL jobs that pay well. Let the rich stay busy just trying to hang on to what is left after TAXES and they will soon stop worrying about “What’s In Your Wallet”.
Steve: Now what if they announced say a 3% inflation target, and that they would maintain that higher target until they see, say, two quarters of “strong” labor-share growth?
I may be off here, but I believe (or at least it felt like it) in the 90’s Greenspan seemed to always raise the rate right about the time labor was about to make some gains. It got us here.
My proposal isn’t inflationary. I’m not saying the fed should abolish inflation targeting. All I’m saying is that it should interact with counterparties which have a higher average MPC (the general public). If the fed directly interacts with people the money supply can increase without increasing debt. People with higher debt spend less also.
Disconect the demand for debt and the demand for money. The demand for money is much higher than the demand for debt.
Dannyb2b: The Fed is and always has been a function of the banking industry. It NEVER has been concerned with the population at large and will not interact with the people concerning the money supply. It interests are banking, its connection with “The People” is strictly through Congress. Its mission is DEBT. That’s what ALL banks are for, THE CREATION OF DEBT.
To disconnect the demand for debt from the demand for money then PRESSURE Congress to DEMAND THE MONEY.
PeakTrader: “Edward, you, and some others, are still blaming the Fed for other failed economic policies, which include …”
In that entire paragraph you are citing background noise. (The band played on as the Titanic sank.)
None of it deals with our real problem which I have characterized as “Consumers can not spend what they do not have, and producers will not produce what they can not sell”. (And thus producers will not hire new employee/consumers or pay them more.) Here is the real trap that we should fear, not the liquidity trap.
Edward Lambert has a much more formal characterization with his documentation of lower labor share and it’s effect on Effective Demand Limit which acts to limit growth in GDP. And he has the data and graphs of the data over time to back up his theory.
When the next recession comes, it will probably be deeper and longer than the last. And the one after that will be worse still because as Edward Lambert has noted, he is seeing a drop in labor share in each recession.
“Labor share falls during recessions as businesses clean out labor and wages. Yet, labor share can only fall so fast during a recession. There are limitations of time and rigidities. There is probably still some pressure to lower labor share even more, and that adjustment will have to wait for the next recession.”
If this doesn’t scare you I don’t know what would.
The Great Depression was finally ended when consumers had accumulated a lot of personal savings and rationing had created pent up demand. In 1945 WWII ended, 8 million men came home and many of them married, and the newly married couple went on a spending spree to set up their own households. In 1946 the inflation rate was 18.1% as industry converted from war materials production to the production of consumer goods. While the Great Recession is not the Great Depression, the cure is the same, increase the income of consumers.
Krugman’s statements, although both political and economic, are important:
“In short, the GOP is more and more a party that consistently, indeed reflexively, supports the interests of capital over those of labor. But why?”…“So what we’re seeing is that half the political spectrum now instinctively accords much more respect to capital than to labor, at a time when capital income is growing ever more concentrated in a few hands — and is surely on its way to being concentrated largely in the hands of people who inherited their wealth…“Curious, isn’t it?”
The U.S. needs more pro-growth policies, including more incentives to work (for both rich and poor), and fewer anti-growth policies. It should be easier for Americans to pursue the “American Dream,” not through inheritance or entitlements, through work.
I don’t know who’s worse. Do nothing Republicans, who can’t even recognize a problem, or do too much Democrats, who too often create more problems than they solve.
Can you imagine if your doctor was like these politicians?
JimH says: “Consumers can not spend what they do not have, and producers will not produce what they can not sell”
So, you don’t believe lower interest rates, higher asset prices, a lower cost of capital, and lower prices induce demand?
I recently refinance my car. I’m paying roughly $200 a month less. So, I have more money to spend on other goods or save each month. Moreover, I got a 3% annual raise at work last week.
Trying to use non-legislative tactics to deal with a problem that has been baked into our system of laws is not a solution that will restore civilization to a long term growth trend.
Daniel: “I may be off here, but I believe (or at least it felt like it) in the 90′s Greenspan seemed to always raise the rate right about the time labor was about to make some gains. It got us here.”
Keerect. I’m proposing a policy that explicitly breaks that dynamic.
“I recently refinance my car. I’m paying roughly $200 a month less. So, I have more money to spend on other goods or save each month.”
Besides the fact that “save” does not “induce demand” how is it possible that you do not see anything wrong with this thinking?
It is bad enough we have to swallow your constant unsupported randiansociopathic mantras like “less regulations”, etc.
But you need to refrain from putting up examples like “$200 less a month” on the refinance of your car without giving some details.
Cause quite frankly, as someone with three decades of experience in auto finance, I find this claim insane.
EMichael, why can’t you understand the marginal propensity to consume, along with the marginal propensity to save?
Umm, I understand it.
I also understand math.
Give me the details of your refinance, and I’ll show you the math.
EMichael, also, you don’t seem to understand the difference between regulation and overregulation.
Moreover, the summation of each regulation has additional costs, in time, effort, and money (which are limited), and are paid for one way or another, e.g. through higher prices or slower economic growth, including less employment and lower wages.
And, I refinanced my car with another lender at a lower interest rate and extended the payments.
“And, I refinanced my car with another lender at a lower interest rate and extended the payments.”
No kidding? Who’d think it?
Concentrate on “extended the payments” and consider my only economic rule:
“Nothing happens until somebody buys something”.
You bought nothing. And you did not increase your marginal propensity to spend one single bit over the duration of the two loans. Can work for long term debts like mortgages, but not car loans.
Your example was just some fictitious example of the stimulative effects of lower interest rates. You have a point in your thinking, but car loans ain’t it.
EMichael, my discretionary income is higher.
And, for example, it’s better to be able to pay for a needed tune-up today than allow the car to break down tomorrow, call triple A, and get the car fixed.
And, I suggest, you “concentrate” on lower interest payments.
“EMichael, my discretionary income is higher.”
Yep. Right up until the point where the old loan would have been paid off and the new loan is not paid off.
On the other hand, perhaps you could explain to me how lower interest rates on a car loan(without extending the term) could possibly amount to $200 a month?
Give me the numbers. You and I both know the car refinance thing is sheer bs.
I have the same HP12C I have been using for almost 30 years. Give me the numbers and try to make your case. You cannot do it and stay in the realm of reality. Then again, you don’t spend much time there anyway.
I’ll just give you an idea before your try and come up with some fiction.
$40,000 @8% for 5 years paying $811 a month.
Refinanced after two years @4% for 3 years is $745 a month.
$66 is not $200.
And that is stretching possibilities to the utmost.
EMichael, you have no clue how much I had left on the old loan and how many months I extended the loan in the new loan.
My monthly car payment is less than half after refinancing at a much lower interest rate.
You’re making false assumptions based on very limited information.
I have no info cause you refuse to provide it. Provide it. Only three things I need for each loan. Term, rate, principal. Surely you know those.
But my example of a real deal is totally accurate, and quite frankly is at the limit of possible scenarios that you are talking about.
Before you make a bigger fool out of yourself, I should tell you that most of my time in finance was with sub prime auto lending. And I would suggest you not take rate, term or principal amount to levels that do not exist(or have never existed) to try and make sense of your fiction.
If I had $5,000 left on a $40,000 auto loan and refinanced at 5% from 8% for 18 months, I’d lower my monthly car payment by over $500 a month.
you are a buffoon.
Ever give any thought to how many months would have been left on the original loan to have a $5000 payoff?
Can you multiply that number of months by the payment and 18 times the new payment and figure out the net propensity to spend amount?
PeakTrader: “So, you don’t believe lower interest rates, higher asset prices, a lower cost of capital, and lower prices induce demand?”
This economy is not going to recover until consumers recover.
Lower interest rates:
Borrowing enables consumers to spend until they hit their credit limit. We seem to be at our collective credit limit and that was bound to happen if consumers did not have enough income.
See Page 3:
As you can see we hit our apparent collective limit at about $12.68Trillion dollars in the 3rd quarter of 2008. Since then borrowing went down to about $11.15Trillion in the 2nd quarter of 2013 and by the 4th quarter of 2013 borrowing was back up to $11.52Trillion. Not much movement compared to the past.
Higher asset prices:
If you are appealing to the wealth effect causing consumers to spend, then I wish you luck because you will need it. You can live in a home valued at $500,000 but mortgaged at $500,000, and have no increased capacity to spend. (See the item above with the heading Lower interest rates:)
Lower cost of capital:
Quoting myself: “Producers will not produce what they can not sell.” The only way the lower capital costs will affect consumers now is if we get full blown deflation and producers agree to produce items to sell for lower and lower prices. Where is the benefit of the current lower cost of capital except to fund speculation?
I don’t see lower prices for goods that consumers require. Lower prices probably did happen for a few discretionary items purchased around Christmas. But discretionary spending has been tightening for years. Consumers are driving autos longer and the average age of the fleet on the road is now over 11 years old. Just one more symptom of distress. https://www.polk.com/company/news/polk_finds_average_age_of_light_vehicles_continues_to_rise
I wish you were right. But wishing does not make it so!
EMichael, rather being a “buffoon,” do you ever give any thought between the difference of paying $800 a month for eight months or $300 a month for 18 months, particularly on a five year old car that may need hundreds of dollars of work, sooner rather than later? It seems, you don’t understand the concept of “trade-offs” either, particularly when they’re to your benefit.
JimH, the economy benefits, because demand raises output = income, which generates more demand.
JimH says: “Where is the benefit of the current lower cost of capital except to fund speculation?”
A lower cost of capital, like other lower production costs, allows firms to sell at lower prices, facilitates business start-ups, and business expansions.
“Trade offs” have nothing to do with the topic.
You stated that lower interest rates on an auto refinance would add significant demand.
Bad enough I ignored costs in such a transaction and ignored the fact that no bank is going to give anyone an 18 month car loan on $5000 at 5%(yeah, there are a lot of banks that just love doing paperwork for a year and a half when their net on the deal is $178.67), now you change the change the entire story.
I was being kind using “buffoon”.
PeakTrader: “JimH, the economy benefits, because demand raises output = income, which generates more demand.”
Sir, now you seem to believe that sometimes ‘effects’ precede ’causes’. If your ideas were true, then our economy would be in full bloom and we would not be having this discussion.
In the real world, consumers create demand for a product when they desire it and when they can afford to buy it. But again quoting myself “Consumers can not spend what they do not have”. In the aggregate, consumers are in debt up to their eyeballs.
Go back and really read my last comment again.
We disagree completely. We are done. You have a good day.
EMichael, only a “buffoon” believes lower interest rates on consumer purchases have no effect on raising discretionary income and increasing demand.
And, the summation of lower consumer interest rates raises aggregate income and aggregate demand.
Moreover, lower consumer interest rates is just one component of accommodative monetary policy.
Furthermore, you even said refinancing causes paperwork, which obviously raises someone else’s income.
JimH, “Go back and really read my last comment again. We disagree completely. We are done. You have a good day.”
Peak Trader: If its a GM, look to start spending money on a regular basis for repairs at between 80—100 thousand miles. Most any Japanese car will easily get YOU 150-200 thousand miles before major repairs. Change the fluids often to get the miles. Fords can get 200 thousand .
Mike, thanks for the advice. Yes, I heard, cars are much more durable than 30 years ago.
“EMichael, only a “buffoon” believes lower interest rates on consumer purchases have no effect on raising discretionary income and increasing demand.”
You should look at my first post on this topic, concentrate on the word “mortgage”. I was talking about auto refinance and your idiotically false example.
Then you should try and figure out how refinancing a car is not a purchase, nor does it increase demand by any measurable amount, as even your absurdly impossible scenario shows.
Now think of this one finance fact. The lower the rates the higher risk protection must be. When rates are really low(combined with banks being a little sensitive about charges of predatory lending after getting away with it for years and therefore unwilling to even make prudent decisions to raise rates for credit “unworthiness”, let alone their inability to convince investors of the accuracy of their pricing cause the last time the banks did it they robbed the economy of $24 Trillion), you see a slowdown in demand.
Combine that with JimH’s unassailable fact about consumer spending and your entire premise(not just the inane car refinance joke), and it is plain that your fresh water mantras have no relation to facts at this moment in time, nor in any moment in time.
I have no credentials as an economist, but have been trying to educate myself (my formal education was in mathematics, and then actuarial “science”).
When I read this in the introduction to Piketty’s book, I knew I was onto something…
“There is one great advantage to being an academic economist in France: here, economists are not highly respected in the academic and intellectual world or by political and financial elites. Hence they must set aside their contempt for other disciplines and their absurd claim to greater scientific legitimacy, despite the fact that they know almost nothing about anything.
As far as I am concerned (and I am only 1/3 of the way through the book,) I have obtained a better feel for “economics” from his two simple formulas regarding first the share of capital in national income, and secondly, the rate of growth of that share, than from hours of toiling over intricate mathematical models, which in the end rely on assumptions that are difficult to assume have any relevance in the real world.
To my naive economic perspective, it almost seems as if he is presenting a a moment of Galilean, or Newtonian refocusing. We may end up with a new way of description and discussion.
In any event, I find his work, clear, and his constant reliance on well researched data, comforting.
Now I am on to his studies on income, and capital, inequality, and looking forward to it.