Krugman starts talking about labor share… Have hope middle class
I sense that we are witnessing a special moment in economics with Paul Krugman’s article today, Notes on Piketty. He is exploring the new work by Thomas Piketty, Capital in the 21st century. He focuses on the difference between r, the rate of return on assets, and g, the overall rate of economic growth. When r is greater than g, wealth will accumulate in the hands of capitalists. When r is less than g, capital wealth falls and labor’s wealth rises through increased return to labor.
He then says that the economy (global) will converge overtime to a steady-state growth rate of n, which is the sum of labor force growth and technological progress. Piketty points to a period from 1913 to 2012, when n grew fast. And r was less than g. We saw the great rise of the middle class labor sector during that time. Now Piketty says that n is falling, that the global labor force and technological progress is slowing down. There are many reasons to think this. I might point to a series of videos from a lecture by Dr. Philip Lawn (video #1).
Krugman points to an extremely critical idea…
“a decline in n will lead to a rise in the capital-output ratio and a fall in both r and g. Which falls more? Well, it depends on what happens to the capital share in output”
Exactly… He is finally starting to talk about capital and labor share.
When n declines, the rich capitalists protect their wealth by raising their share of output. They are able to push r up relative to g as both fall. Thus their accumulated wealth will not deteriorate and may even grow more. The middle class will lose wealth in the process.
Then Mr. Krugman asks the greatest question of all. We are witnessing a special moment.
“How much of the decline in r relative to g in the 20th century reflected fast growth, and how much reflected policies that either taxed or in effect confiscated inherited wealth?”
Can you smell the flowers blossoming? Yes, the New Deal helped build a strong middle class. Yes, higher tax rates on capital and high incomes helped build the middle class. Yes, social insurance policies helped build the middle class. But what about monetary policy?
This is where Mr. Krugman may see the light. Loose monetary policy has been complementing not only the recent rise in capital share, but also the unraveling of policies that spread wealth from capital to labor. I refer specifically to policies of deregulation of the financial sector, of lower taxes on capital income and of wages falling behind a living wage standard. These policies increase the debt burden on labor by the way.
Loose monetary policy is also a policy that pushes up r relative to g. The rate of return on assets is increased when the cost of capital is lowered. Thus loose monetary policy is adding to the wealth inequality that is bringing down the US and other advanced economies. The US must protect its middle class. The solution is to raise the cost of capital through a combination of tightening monetary policy, raising taxes on capital & higher incomes and strengthening once again the transmission mechanisms of wealth to labor, namely unions, living wages and investing in locally owned businesses.
Mr. Krugman is realizing that the cost of capital must rise in order to change the tide for wealth to flow back to the middle class. The effective rate of return on “global” assets, r, must be pushed down by policy, which includes monetary policy. Look, transmission mechanisms of wealth to labor are extremely weak. So, loose monetary policy has been causing a lot of damage by establishing greater long-term wealth inequality. Piketty is warning us about this.
Mr. Krugman’s post ends unfinished. I sense that he needs time to think some things through. I can hardly wait for his follow-up.
One note: Let’s give credit where credit is due. The period from 1913 to 2012 when the middle class surged was forged in large respect by Beatrice Webb. Her work supported Keynes and the Institutional Economics later forwarded by John Commons. Students of John Commons later developed the New Deal under FDR. She even supported the role of cooperatives to strengthen local ownership of business and assets.
“In 1913, she co-founded with her husband the New Statesman, a political weekly edited by Clifford Sharp with contributions from many philosophers, economists and politicians of the time including George Bernard Shaw and John Maynard Keynes.” (Wikipedia on Beatrice Webb)
Mr. Krugman is realizing something that was understood by Beatrice Webb long ago. I reference this paper by Bruce Kaufman… Sidney and Beatrice Webb’s Institutional Theory of Labor Markets and Wage Determination
I wonder how he explains when U.S. income inequality increased dramatically from 1982-07, U.S. living standards, along with labor standards (or working conditions), and environmental standards also improved dramatically.
Of course, people need to generate income before that income can be redistributed, and more people generating more income means more income can be redistributed.
PT,
One explanation… debt that was engineered by the financial sector. Did you notice how the financial sector grew in its percentage of national profits? Did you notice that as taxes on capital dropped, government debt grew? Did you notice that as real wages stagnated, consumer debt grew? The financial sector engineered these things through the 1990’s. I was among investors who saw this change coming in the late 1980’s. Some of them positioned themselves very well and made money. Thus, we now see increased inequality that is stifling the economy. This is what Piketty is seeing.
There are other explanations too.
Edward, the “financial sector” is a broad term. Are you talking about financial firms that facilitated U.S. firms to become more productive, which raised U.S. living standards, and earned substantial profits as a result? Or, are you talking about offshoring older U.S. industries, while facilitating growth in U.S. emerging industries, which boosted profits and also raised U.S. living standards? Maybe, you’re talking about the moral hazard Congress created in the housing market or Fannie and Freddie?
Yes, the tax rate on capital gains fell and the economy boomed. Also, government collected more tax revenue and spent more. There should’ve been more “middle class” or working class tax cuts instead. Real wages were stagnant, while real compensation rose, and some estimate inflation was overstated substantially. Low prices and interest rates induce demand. So, Americans spent and borrowed rather than saved. Certainly, Americans lived better in the 2000s than in the 1970s.
He’s talking about a financial sector that doubled in size as a share of gdp , doubled its share of corporate profits , and increased the compensation of its top execs by an order of magnitude , all while the debt/gdp load across the economy doubled. This provided no benefit in faster economic growth as compared to the pre-financialization era. It did however leave us with a bad debt overhang , just as happened to Japan. We’ll be paying for this screw-up for a long time.
http://www.economicnoise.com/wp-content/uploads/2009/12/debt_gdp2.png
Is it really a mystery that finance sector compensation closely tracks the deregulation of the industry ? Buy off a politician , then the next time you can buy off ten with your increased wealth. Pretty soon , you’ve got them all :
http://i.huffpost.com/gen/157446/KWAK.jpg
Since the economy doesn’t grow any faster , those outsize incomes at the top had to come out of someone’s hide :
http://www.tcf.org/assets/images/blog_images/20130225-graph-how-the-financial-sector-consumed-americas-economic-growth.png
Financial deepening is a benefit to developing countries who are at a low level of financial development. For advanced economies like the U.S. and U.K. , all of the evidence suggests we’re well past the point of diminishing returns. Shrinking our debt load and our financial sector , as well as the fat wallets of of the finance execs , is , quite simply , the only game in town.
Better tell the bosses who pay you to spread your tripe that they should prepare for a good reaming , because it’s coming , sooner or later.
PT,
Can you shift the LRAS curve to the right by lowering real wages?
And you may need to look at this log graph of real compensation per hour. Where did real compensation rise?
http://research.stlouisfed.org/fredgraph.png?g=t60
Marko, yes, they created a lot of debt, but created even more assets. Chart:
http://en.wikipedia.org/wiki/File:Graphic.png
You seem to have something against our bosses, i.e. the government.
Edward, the aggregate supply curve can be shifted to the right through lower prices (of goods & services), not for lower wages, unless they’re too high.
Real compensation increased, and I’ve explained before there are other mechanisms that raise living standards than just a rise in wages.
Also, I’ve stated before, low-wages haven’t kept up with productivity growth. Also, there’ve been changes in the economy, since the Information-Age accelerated after 1982, that suggest inflation has been increasingly overstated. Some adjustments in the late ’90s to account for some of those changes were very conservative.
Acres of foreclosed homes rotting away and cities in bankruptcy are NOT assets. They are liabilities.—-(The OTHER column on the spreadsheet.)
A high level of inflation in health care reduces real compensation. And, some workers are overpaid and some are underpaid. However, that doesn’t necessarily mean a CEO, musician, or sports star earning $10 million a year is overpaid.
Mike, perhaps, they haven’t been fully marked-down, since the economy peaked in 2007.
However, it seems, many houses are appraised for property taxes at a price lower than the market price.
It’s more accurate to say inflation in health care slows real compensation, because more businesses, including new businesses, cannot afford a high quality PPO and buy a lower quality HMO, etc..
PT: Perhaps CORRUPT practices such as LIBOR manipulation could be the problem.
” ..yes, they created a lot of debt, but created even more assets. ”
Wow! Look how net worth shoots up in that chart !
Of course , that’s what all nominal data looks like if it grows at a steady yearly rate. It says nothing about whether the bulk of Americans are wealthier relative to their incomes or gdp. It’s just propaganda porn.
Here’s household net worth (in black) , homeowners’ equity (in blue) , and hh net worth minus owners’ equity ( in red ) , all shown as a percentage of gdp:
https://research.stlouisfed.org/fred2/graph/?graph_id=162496&category_id=9418#
Homeowners’ equity is not too exciting , and that’s where the bottom 80-90 % have virtually all of their wealth , and the upper 10% own a good chunk of it it too. The red curve represents the non- home equity wealth , owned mainly by the rich in the form of various financial assets. They’ve done pretty well since 1980 , haven’t they?. In fact , that red curve looks like it’s well on the way to proving Piketty’s thesis.
What about the debt distribution ? Well , we’re beating the rich at that game , at least. The bottom 95% have about double the debt/income ratio of the top 5%. Not a game that’s much fun to win , unfortunately:
http://images.huffingtonpost.com/2014-02-17-Fig.3.Screenshot20140217at2.35.15PM.png
from :
http://pages.wustl.edu/files/pages/imce/fazz/cyn-fazz_consinequ_130113.pdf
Marko, the data you cite support my statements above, e.g. lower prices and interest rates induce demand and reduce saving. So, lower income Americans overconsumed and undersaved or overborrowed.
And, real median household income increased, while income inequality increased. Chart:
http://research.stlouisfed.org/fred2/graph/?id=MEHOINUSA672N
Note, since the government has attempted to reduce income inequality over the past few years, it achieved the opposite effect and also reduced aggregate real income.
Income or wealth inequality is a red herring. We should focus on how to raise living standards for lower income Americans, even if it means creating economic conditions that allow many more new billionaires.
I suggested raising the minimum wage up to $15 an hour, deregulating substantially, and reducing tax rates, particularly for the “middle class,” who start most businesses.
Furthermore, we need to promote incentives to work and get rid of disincentives to work.
Over the 1982-07 economic boom, there were many immigrants from poor countries with little education, who through hard work were able to buy a nice house and a new, or almost new, car, truck, or SUV. They also had health insurance from their employers. They may have been hired at a low wage initially. However, after five or 10 years, their wages and benefits increased substantially and many were willing to work overtime.
Hey PT:
“So, lower income Americans overconsumed and undersaved or overborrowed.”
You need to look at the charts I posted in 12/07 here: http://angrybearblog.strategydemo.com/2007/12/its-big-one-honey-i-know-it.html
And if I can find my other post, it will site and refer you to research showing that the people were not over consuming, under saving and over borrowing; they were using the only means available to them to maintain what standard of living they had.
Which gets us to my pet peeve I have with such comments as yours. In an economy designed such that consumption is the greatest by miles share of its means of making money then just what do you think all those asset/equity charts you posted would look like if all those “over consuming” citizens stayed within their cash flow means? It sure would have looked a lot different after 1996. In fact it would have looked a lot like it did before FDR’s era came around.
We should reduce disincentives to work and provide incentives to work. The primary way that government provides incentives and disincentives is through tax policy. When we want to discourage an activity we tax it at a higher rate than we tax an activity that we wish to encourage. Therefore there is no defensible reason to tax income from labor at a higher rate than income from capital. If we wish to incentivize labor, work, we should at the very least stop penalizing it in relationship to capital. Let’s create at the very least a level playing field here. There is no excuse but sophistry.
” Are you talking about financial firms that facilitated U.S. firms to become more productive, which raised U.S. living standards, and earned substantial profits as a result?” PT
Geez, thejhob creator bs.
Any chance you have numbers re successes and failures? Cause there was a whole lot of destruction going on by people who think “Other People’s Money” is a documentary.
“Is there any fairness in a system where a group of people can borrow a bunch of money to buy a company and pay themselves millions of dollars in dividends and fees, while the company itself ends up bankrupt and its employees lose their jobs, health insurance and pensions?
Can you imagine the owners then being celebrated in fancy society while the unfortunate workers are left to fend for themselves as the collateral damage of the system?
Welcome to Mitt Romney’s America. This is the true story of how in October 1993 buyout firm Bain Capital LLC, which Romney founded and ran from 1984 to (roughly) 1999, and its partners bought a steel mill in Kansas City, Missouri, from Armco Steel Corp. for $75 million, merged it with other steel companies, loaded it with too much debt, paid themselves big dividends and ran the company into the ground. Bain’s behavior was all perfectly legal, of course, and many argue that this is an essential part of the creative destruction that is capitalism (except when there are huge bailouts, of course). ”
http://www.bloombergview.com/articles/2012-08-12/bain-s-creative-destruction-destroys-lives
Daniel Becker, you’re making an assumption based on very little economic data and your charts don’t support your assumption.
Real median household income rose sharply in the 1982-00 bull market and maintained that high level in a bear market, until recently.
Also, there were many other mechanisms that improved living standards for the masses, e.g. the U.S. consuming increasingly more than producing in the global economy (which subtract from domestic income growth); refinancing mortgages at lower rates to increase discretionary income, along with equity extraction, borrowing at lower interest rates with easier lending standards, falling prices for many goods & services, along with discounts, e.g. up to 75% off, etc..
Obviously, many Americans saved too little for retirement, because of induced demand. Also, capital gains have benefits, not only in raising 401(k)s and IRAs, and raising home equity, it lowers interest rates for households and firms to facilitate both consumption and production.
The U.S. created a tremendous amount of capital, since 1982, including through efficiencies in production, which allowed the U.S. to invest heavily in emerging industries, and move quickly from the Agricultural and Industrial economic revolutions into the Information and Biotech economic revolutions..
“Real median household income rose sharply in the 1982-00 bull market and maintained that high level in a bear market, until recently.”
Don’t let facts get in the way of a good story.
http://media.economist.com/sites/default/files/imagecache/original-size/20110917_WOC602.jpg
Course, if you add in the number of hours worked per household over the years, it is even worse.
But keep living that dream……………
EMichael, your inaccurate charts don’t support your statement.
Median income of the top 20% (not top 10%) of households (and households have become smaller over time) is over $150,000 (not substantially less than $150,000).
Also, real median household income rises and falls with business cycles. Note, when Clinton left office, after the Clinton economic boom, real median household income was a little over $54,500 and falling. When Bush took over, it fell only to $54,000 and then rose to $55,500 on top of the huge 1990s boom and increasingly larger 2000s trade deficits, which subtract from domestic income, because the U.S. consumed more than produced in the global economy.
Chart of real median household income and article:
http://research.stlouisfed.org/fred2/graph/?id=MEHOINUSA672N
Rising riches: 1 in 5 in U.S. reaches affluence
December 6, 2013
“New research suggests that affluent Americans are more numerous than government data depict, encompassing 21% of working-age adults for at least a year by the time they turn 60. That proportion has more than doubled since 1979.
Sometimes referred to by marketers as the “mass affluent,” the new rich make up roughly 25 million U.S. households and account for nearly 40% of total U.S. consumer spending.
In 2012, the top 20% of U.S. households took home a record 51% of the nation’s income. The median income of this group is more than $150,000.”
PT:
Nonsense as usual.
Labor’s Share, Spencer England
“This development was a secular decline in labor’s share of the pie. Prior to the 1982 recession there was a strong cyclical pattern of labor’s but it was around a long term or secular flat trend. But since the early 1980s labor’s share of the pie has fallen sharply by about ten percentage points. Note that the chart is of labor compensation divided by nominal output indexed to 1992 = 100. That is because the data for each series is reported as an index number at 1992=100 rather than in dollar terms. So the scale is set to 1992 =100 rather than in percentage points. But it still shows that labor payments as a share of nonfarm business total output has declined sharply over the last 20 years and prior to the latest cycle we did not even see the normal late cycle uptick in labor’s share.” For you PT, Labor has lost in Productivity gains. I would add that profits are being gained sans Labor and mostly coming from the Financial Services Industry.
The usage of the top quintile spreads out the gain. Much of the economic gain went to the top 10% with it being heavily skewed to the top 1%. Within the top 1% it is skewed with greater bias to the top 1 tenth of 1% of household taxpayers.
“The Upper Half of the Top 1% Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting. Some hard working and clever physicians and attorneys can acquire as much as $15M-$20M before retirement but they are rare. Those in the top 0.5% have incomes over $500k if working and a net worth over $1.8M if retired. The higher we go up into the top 0.5% the more likely it is that their wealth is in some way tied to the investment industry and borrowed money than from personally selling goods or services or labor as do most in the bottom 99.5%. They are much more likely to have built their net worth from stock options and capital gains in stocks and real estate and private business sales, not from income which is taxed at a much higher rate. These opportunities are largely unavailable to the bottom 99.5%.”
Did you catch this? “They are much more likely to have built their net worth from stock options and capital gains in stocks and real estate and private business sales, not from income which is taxed at a much higher rate. These opportunities are largely unavailable to the bottom 99.5%.” I would include the sales of derivatives to this category. http://www2.ucsc.edu/whorulesamerica/power/investment_manager.html
Hey PT, You really are going to try to eat the cake and keep it too?
Your making an assumption I do have a lot of data. That chart was 12/07. Did you read the title?
Edward:
You and I had talked about this a ways back. The Financial Sector has seen a tremendous growth since the start of deregulation in 2001 and they should have considering the irrational exuberance they displayed. Glass-Steagall was removed and the Bank Act altered to accommodate bank investing directly on Wall Street. The investments did not come in the form of stocks and bonds; instead, we saw the lesser regulated investments such as CDS, naked CDS and tranched MBS rated AAA and insured by CDS to give the appearance of security. Banks and investment firm made billions in gambling on Wall Street with little in reserve to offset failure.
“From 1990 to 2006, the GDP share of the financial sector in the broad sense increased in the United States from 23% to 31%, or by 8 percentage points. During the same period, the increase in the GDP share was in excess of 10 percentage points in the United Kingdom but significantly less – around 6 percentage points – in both France and Germany. Graph 3 shows the development of the share of the financial sector in GDP for selected major advanced economies since the middle of the 1980s. The figures on profits are even more striking. For example, the financial services industry’s share of corporate profits in the United States was around 10% in the early 1980s but peaked at 40% last year.” “How might the current financial crisis shape financial sector regulation and structure?” Mr. Már Gudmundsson, Deputy Head of the Monetary and Economic Department of the BIS
Graph 3 from Mar’s speech give a rather interesting portrayal of the growth in the financial sector. 8% increase in GDP from 23% to 31%. By 2008, the financial sector owned 40% of the profits in the US. If you believe this was the result of hiring more loan officers and tellers, I have bridge to sell you. These are profits gained from the investment (if you wish to call it such) of capital in CDS, naked CDS, tranced MBS. Profits gained from Capital sans Labor. It is here where Mr. Krugman and economists should be looking as it still continues.
“The metamorphosis of the crisis from its initial stages to now is easier to understand when we realise that it had deeper causes than the faults in US subprime loan origination (me: most of this was the Alt-A mortgages and not the CRA) and the associated securitization process. The crisis was preceded by a period of low real interest rates and easy access to credit, which fuelled risk-taking and debt accumulation. In the United States, it was the case both for households and for the financial sector itself. However, although the increased indebtedness of the US household sector was plain for everybody to see, the increased leverage of the financial sector was somewhat hidden. One reason was that the leverage was partly accumulating in what is now being called the shadow banking system. Another reason was that the focus on risk metrics like value-at-risk and the use of short time series as inputs allowed the low recent volatility of asset prices to mask the increase in leverage.
In the United States, easy credit conditions were made even more so by global current account imbalances and the willingness of foreign governments to finance the US current account deficit (me: Fed Rates were at a low point and the next best bet was mortgage backed securities). Easy monetary policy in the aftermath of the bursting of the tech stock bubble in 2001 might also have contributed at the margin, although easy credit preceded it.
Last but not least, financial innovation (CDS, naked CDS, tranched MBS, CDO) contributed to debt accumulation. In particular, the originate-to-distribute model made it possible to originate loans – especially mortgages – to households, securitize them in large quantities, slice and dice them into differently rated tranches, and then sell them all over the world to both risk-averse and risk-seeking investors. The effect was that loan origination was less constrained by the balance sheet capacity of banks. (Does anybody remember Brooksley Born, Iris Mack, Senator Dorgan all of whom warned of the danger after the collapse of LTCM?)
One result of this setup was that risk was apparently spread away from the institutions (Me: banks sold them to Freddie and Fannie, AIG insured them with CDS and S&P, Moodys rated them AAA) that are critical for the overall functioning and stability of the financial system, which should be good from the standpoint of financial stability. However, as it turned out, the distribution was less then met the eye, as the asset-backed securities were often held by special purpose vehicles closely associated with the banks originating them.”
run75441, you continue to ignore the real economy, dismiss other economic mechanisms, and the “pie” (in both quantity and quality) grew faster at the height of the Information Revolution from 1982-07. Moreover, you continue to cling to the same assumptions I’ve proven false to you before. So, why waste my time explaining it all over again?
PT:
The problem here is, you have not proven anything. You throw up erroneous data as EMichael states. Former CIA Economist’s Spencer’s data is true to the mark. You have not answered the issue. Finally Participation Rate is at its lowest level since the eighties which basically says less people in the Civilian Labor Force.
And by the way, start nesting your posts. Combine them into once cohesive post please.
Furthermore, I stated many times to you before, low-wage income hasn’t kept up with producitvity growth, and raising the minimum wage, up to $15 an hour, would go a long way to correct a “market failure.”
Also, I explained how a higher minimum wage would reduce income inequality, boost productivity, lower other production costs, and raise real income. Moreover, I explained how a higher minimum wage would likely reduce employment and how other policy changes can more than offset lower employment and expand the economy.
Peak,,
So because you support a higher minimum wage that means your bs numbers are real?
BTW,
Any chance you could stop posting links that do not have anything whatsoever to do with the quotes you then put up?
Or you could really do us all a favor by linking to your source after you post a quote.
Or you could try not to talk.
I’d be happy(ok, just happier) with any of those three.
run75441 and EMichael, a piece or two of a puzzle doesn’t provide you a clear picture of a large multidimensional puzzle, where everything fits together perfectly.
I’ve explained my statements before and more than once and yet your comments reflect that you either completely ignored them or dismissed them entirely.
For example, Y = C + I + G + NX. Negative net exports (NX) subtracts from Y. Trade deficits reduce income = GDP = output. The U.S. has been consuming more than producing in the global economy and in the long-run. I’ve explained related equations, which are supported by the data, with no contradictions. Yet, your statements continue to imply the opposite, e.g. U.S. income is low, and therefore, living standards or consumption is also low.
Also, I may add, you often respond to my statements with economic variables that are much less significant (or really insignificant in an equation or idea I’m stating).
Moreover, rather than declaring I’m wrong, or using one piece of economic data to explain it all. why don’t you prove I’m wrong?
You do not explain clearly. You do not explain with real data. You simply spout your ideology and “support” it with links to nowhere.
Case in point this:
“Rising riches: 1 in 5 in U.S. reaches affluence
December 6, 2013
“New research suggests that affluent Americans are more numerous than government data depict, encompassing 21% of working-age adults for at least a year by the time they turn 60. That proportion has more than doubled since 1979.”
Now, where did that come from? There is no link. I had to google it and found it was an AP story about some group’s book(unnamed) which has absolutely no real data at all, let alone where it came from.
And you have done this many times. Quite frankly, I am not interested in this kind of discussion, though it is better than your created graphs which seem to conflict with the graphs of far more trusted sources.
BTW,
Any discussion of how labor in the US is doing is meaningless without including:
“Among married couples, the combined weekly hours of husbands and wives are rising. In 1969, couples age 25-54 worked an average of 56 hours a week. By 2000, this had increased to 67 hours.
Couples with children under 18 tend to work somewhat fewer hours than those without children–66 hours compared with 70 hours. Nevertheless, average combined hours have increased by almost 20 percent over the past 3 decades for both groups.
The increase mostly reflects the fact that more and more women are working, with those who work increasingly likely to be employed year round. ”
http://www.bls.gov/opub/working/page17b.htm
EMichael, everything you say is meaningless. U.S. household size is also 20% smaller.
http://www.infoplease.com/ipa/A0884238.html
Maybe, you don’t like economics, along with extensive research by top academics, which even the mainstream media report.
Irrelevant garbage.
Hi Edward,
Are you saying that the Fed should raise the Fed Funds rate (tighten monetary policy), so as to reduce inequality? I don’t understand how that is supposed to work… could you explain? Thanks.