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Is There a Puzzle to sluggish consumption?… No, Look to Capital Income

In a post by Shobhana Chandra and Jeanna Smialek at Bloomberg called Yellen Spending Mix lacks Ingredient of Higher Pay, there is a quote…

“It doesn’t “add up,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research in New York. “Consumer confidence is at a cycle high, and consumption is declining. You also have a situation where real disposable income is rising significantly over the first five months of the year, and consumption is falling. It’s sort of like, which of these is not like the other?”

Like I wrote elsewhere, as the stock market and housing market slow down, declining consumption by capital income will offset consumption gains by labor. This is how I would explain the dilemma. We have to wait a couple of months for the data to show this. But the puzzlement of Neil Dutta will have an explanation.

And today the Dow is back to hovering around 16,800, a level which I saw as the limit of the Dow back in April. It is sitting at 16,804 as I write this post. Stocks are stagnant. Stocks are not conducive to consumption by capital income which reached very high levels during the stock rise of the past two years.

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A Bit of History… Bernanke 2003


This video of a speech by Ben Bernanke in 2003, is quite interesting. In the speech he laid the groundwork for what would eventually be his policy to combat the Great Recession. He talked about inflation, slack in the economy, price stability and even the possibility of taking the Fed funds rate to the zero lower bound in 2003. He made a case for loose monetary policy in the context of longer run trends.

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“Does Chief Justice John Roberts show a certain casualness about the truth?”

Each week I get an email from Slate telling me what the latest articles are there, this one caught my attention; Richard Posner on Roberts” For those of you who may not know, Richard Posner writes articles on the economy; but, he is also an 7th District Appeals Court Justice. The 7th District is the same district handling Scott Walker’s election snafu except the justice in that appeal is Frank Easterbrook.

What I find interesting about this article is Justice Posner is talking about SCOTUS Chief Justice Roberts and seemingly questioning McCutcheon v. Federal Election Commission. Here is an abbreviated take on what is being said by Justice Posner:

“Which brings me to Chief Justice Roberts’ opinion in McCutcheon v. Federal Election Commission, the decision in April that, in the name of free speech, further diminished Congress’ power to limit spending on political campaigns. The opinion states that Congress may target only a specific type of corruption—quid pro quo corruption—that is, an agreement between donor and candidate that in exchange for the donation the candidate will support policies that will provide financial or other benefits to the donor. If there is no agreement, the opinion states, the donation must be allowed because ‘constituents have the right to support candidates who share their views and concerns. Representatives are not to follow constituent orders, but can be expected to be cognizant of and respon­sive to those concerns. Such responsiveness is key to the very concept of self-governance through elected officials.

Can so naive-seeming a conception of the political process reflect the actual beliefs of the intellectually sophisticated chief justice? Maybe so, but one is entitled to be skeptical. Obviously, wealthy businessmen and large corporations often make substantial political contributions in the hope (often fulfilled) that by doing so they will be buying the support of politicians for policies that yield financial benefits to the donors. The legislator who does not honor the implicit deal is unlikely to receive similar donations in the future. By honoring the deal he is not just being ‘responsive’ to the political ‘views and concerns’ of constituents; he is buying their financial support with currency consisting of votes for legislation valuable to his benefactors. Isn’t this obviously a form of corruption?'”

Mind you, I have not see a lower level judge question a higher level judge’s viewpoint and legal opinion. So this is rather unusual for me having been through all of the court levels. This comes outside of the realm of an appeal which would change a lower court’s ruling if a justice found a lower court’s ruling in error or not to their interpretation. Maybe other readers such as JackD and Bev can offer a better opinion than mine.

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NY Fed’s Bogus Estimate of Return on College and Brookings Institute Misses the Student Loan Crisis

Yves at Naked Capitalism writes “NY Fed’s Bogus Estimate of Return on College and the Neglect of the Intellectual Commons”

Yesterday, the New York Fed released a new report by Jaison R. Abel and Richard Dietz, Do the Benefits of College Still Outweigh the Costs? which is getting good coverage in the mainstream media. Its major finding is that despite the fall in wages to college graduates due to the crappy economy, a college degree is still worth the expense because wages of high-school graduates have fallen too, keeping the wage premium of a college education high while reducing the opportunity cost of staying in school.

The assumption is college educated students with student debt are still coming out ahead over the long term. In an earlier post on Angry Bear using graphs as taken from Student Debt is Challenging the Reason for Getting that Long Sought After College Degree I was able to show those without student loan debt appear to come out financially better over the years.

“Based on its projections, the indebted household will suffer a lifetime wealth loss of nearly $208,000, compared to “baseline” of the debt-free household. Nearly two-thirds of this loss ($134,000) comes from the lower retirement savings of the indebted household, while more than one-third ($70,000) comes from lower accumulated home equity; because of the two withdrawals from savings later in their lives, the liquid savings gap is just $4,000. The gap in retirement savings is particularly large because the household with student debt was forced to save significantly less for retirement early in their working lives while paying back their student loans, a gap which was exacerbated because of the significant compound interest that would have been earned had they been able to save the same amount as the household without student loan debt.”

Simply stated, Abels and Dietz assumptions do not appear to be true.

Yves takes on their analysis and the use of IRR as opposed to NPV. “Instead of performing a proper NPV analysis, the authors used internal rate of return. We’ve debunked that at length in a previous post, and even McKinsey hectored CFOs for relying on it precisely because it tends to overstate investment returns. Emphasis ours:

Maybe finance managers just enjoy living on the edge. What else would explain their weakness for using the internal rate of return (IRR) to assess capital projects? For decades, finance textbooks and academics have warned that typical IRR calculations build in reinvestment assumptions that make bad projects look better and good ones look great…the most dangerous problems with IRR are neither isolated nor immaterial, and they can have serious implications for capital budget managers. When managers decide to finance only the projects with the highest IRRs, they may be looking at the most distorted calculations — and thereby destroying shareholder value by selecting the wrong projects altogether.

But let me turn briefly to a much more important issue, which is the perverse nature of thinking about education as an investment. This is yet another manifestation of the degree to which citizens are inculcated to view the social order through the lens of markets.” There are reasons not to use Fair Market Valuation of student loans which I will get into later.

Coincidentally, the NYT ran an article by David Leonhardt featuring a Beth Akers and Matthew Chingos Paper, Is a Student Loan Crisis on the Horizon?. Suprisingly, the dynamic conservative dual used 2010 Fed data as opposed to the more current 2012 data as caught by News Busters Tom Blumer

“the study’s authors, directly contradicts the sunshine they’re trying blow up our keisters. What’s even worse is that you don’t even need to dig into the detail once you learn which year’s data they used — 2010. For heaven’s sake, guys, total student loan debt has grown by between 50 percent and 60 percent since then. and to $1.2 trillion rather than the ~$770 billion used by Akers and Chingos. It gets more interesting as you read Yves Smith article, the Fed study, Akers and Chingos authored study, and my comment on Yves article. TheFed, Akers and Chingos grossly underestimate the impact of student loans on the economy and on students.

In my reply on Yves thread, I attempt to bring to light some of the concerns I have:

I just finished reading both Beths and Matt’s paper “Is a Student Loan Crisis on the Horizon?” and as before they make light of the issue with student loans. Toss in with them Jason Delisle of The New America Foundation and we have the three amigos of conservative origin telling main stream America there is no problem with student loans. I have problems with their origins and we are not just talking attending a conservative university. Their backgrounds reads like an up and coming who is who of conservatism who are getting their experience at more liberal orgs only to join AEI or Heritage down the road.

– Ms. Akers spent 2007/8 as “Staff Economist, White House Council of Economic Advisers (2007-2008).” How does she fit into this other than being a closet conservative?

– Mr. Chingos has been the recipient of support from the “Smith Richardson Foundation, the American Enterprise Institute, and the Lumina Foundation, where three former Sallie Mae directors are board members.”

– Mr. Delisile was “a senior analyst on the Republican staff of the U.S. Senate Budget Committee, where he played a key role in developing education legislation. From 2000 to 2006 he was a legislative aide in the office of Rep. Thomas Petri (R-WI).”

Yet the three of them write for organizations which I would term as centrist (am I wrong on this?) organizations. What am I missing here???

This is nonsense:

“The basis for this theory is that, unlike physical capital, human capital—or the skills that one obtains through education—cannot effectively serve as collateral for a loan. This makes student lending inherently risky, because a lender cannot foreclose on a student’s education the same way it can foreclose on a borrower’s home if he goes into default. More generally, the federal loan program ensures that all students have access to higher education, regardless of their ability to pay.

as well as this too:

“Unlike the loans offered in the federal lending programs, private lenders offer loans with interest rates that reflect a borrower’s likelihood of default. This means that borrowers from low-income households or borrowers attending colleges with lower completion rates are likely to face the highest rates. In addition, private student loans carry less generous repayment terms than federal loans, an important distinction given that both federal and private student loans are more difficult to discharge in bankruptcy than other types of consumer debt.”

What Beth and Matt leave out is the inability of students to discharge student loans in bankruptcy. Students with a simple signature on a piece of paper, check into a proverbial ‘roach motel” to which there is no escape except by death or disability, portions can be done away with through public service, or wait 20-25 years on an Income Based Plan to escape the balance of the loan only to have it appear as income from the IRS. There is no default and neither can it be discharged through bankruptcy. The government with either Federal Direct Loans or with the equivalent Sallie Mae, etc. will garnish your payroll wages, your Social Security, your disability income to secure the money loaned to you. These outcomes are conveniently left out by the three of them.

When you look at Student Loans in this manner, what risk whether determined by NPV or IRR are we talking about here? The Department of Education has decades of history on student loan returns. Student loans make more money when the students quit paying on them and as Alan Collinge pointed out for every $1 loaned an unpaid loan through default makes $1.20, far greater than what Geithner let banks and investment firms off the hook. Why do student loans have to be measured according to risk when there is no escape from them and they make a return when paid back or in a technical default status. CBO Director Elmendorf would change to Fair Market Valuation in the blink of an eye except he is tied to other methodology by law. In the past, he has done the calculation both ways and has reported on it. Nothing new there and again the CBO Director has shown his partisanship.

Yes, people with college degrees make more money when compared to high school graduates who have increasing household income due to the over abundance of them and a lack of jobs requiring just a high school degree. At the same time, entry level jobs for first time college grads have experienced similar declines just not to the same extent as high school grads. Over the life time of those who did not have student loan debt compared to those who did have student loans, the ones without loans accumulated more wealth and income.

“Based on its projections, the indebted household will suffer a lifetime wealth loss of nearly $208,000, compared to “baseline” of the debt-free household. Nearly two-thirds of this loss ($134,000) comes from the lower retirement savings of the indebted household, while more than one-third ($70,000) comes from lower accumulated home equity; because of the two withdrawals from savings later in their lives, the liquid savings gap is just $4,000. The gap in retirement savings is particularly large because the household with student debt was forced to save significantly less for retirement early in their working lives while paying back their student loans, a gap which was exacerbated because of the significant compound interest that would have been earned had they been able to save the same amount as the household without student loan debt. Some of this gap in net assets also comes from the higher lifetime income of the household without student loan debt; though the indebted household begins their careers earning more, their income falls behind that of the debt-free household by its early 40s, and earns significantly less during the peak earning years of the mid-50s.“How Student Debt Reduces Lifetime Wealth”

And you might wonder why I have concerns about students and student loans?

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I keep wondering: Is anyone under the age of 40 ‘Ready for Hillary’?

Yves Smith linked this morning on her Naked Capital blog to my post from yesterday called “The Secretive Democracy Alliance’s Secret Is Out: Some of its members are elitist, racist and self-serving,” and added a comment about it:

Helpful, but does not follow the logic to the obvious conclusion. Why is the Dem apparatus harping on the Kochs and not issues that would motivate voters, like more jobs, better access to housing and education? Because they’ve done nothing on those fronts and don’t intend to. […]

The link and Yves’ comment “pinged back” as a comment to my post.  In response to Yves and to a comment by Daniel Becker, I wrote:

My intended point, Yves, was that harping on the IS harping on the issues that would motivate voters, like more jobs, better access to housing and education.  Steve Phillips, et al., think that only white men and married white women are smart enough to understand the connection between politicians’ financial benefactors and those politicians’ proposed legislation and attempts to block legislation.  I think Phillips is wrong.

The failure of the Obama administration–courtesy largely of Tim Geithner and of Obama’s weird infatuation with him throughout Obama’s first term, but also to Obama’s laconic, detached, I’m-a-centrist! persona–to propose and then fight for substantial Keynesian fiscal policies and for other progressive policies–is not, say, Nancy Pelosi’s, or Dick Durbin’s, or Sherrod Brown’s, or Tom Harkin’s fault.

And, yes, the very last thing that the Dems need is yet another presidential nominee who’s never had an original policy idea in her life; who almost never takes a policy position that actually leads rather than follows (and in the one instance in which she did–drivers’ licenses for unauthorized immigrants–scrambles and backtracks at first sign of political harm to her; who spends her time posting to a silly Twitter account and trying to enhance her personal persona rather than ever, ever, ever actually thinking about and offering specific domestic policy proposals; and who apparently can’t function without the constant presence of an entourage of her “people,” i.e., her devotees.

How many other Secretaries of State had a constant go-fer?  How many other FORMER Secretaries of State brought along that same constant go-fer after leaving office? How many couldn’t manage without one?

I keep wondering: Is anyone under the age of 40 “ready for Hillary”? Best as I can tell, the answer is, no. What people ARE ready for is a politician–like Durbin, Harkin, Elizabeth Warren, Sherrod Brown, the former two who are too old to run for president, the latter two who don’t appear interpeted in doing so–who doesn’t have a Twitter account, or a personal entourage, or a daughter whose parents thought it was a good idea for her to sell her celebrity name (and nothing more) to a network news program for a huge amount of money, and talked their daughter into doing that.  Someone, in other words, who’s not famous for just being an ‘icon’, but who has built a mostly-quiet career as an economics populist in Congress or academia.

And, Daniel, I, like you, still cringe, as I did in 2008, at a campaign run almost entirely on a promise of Hope and Change, the substance of which the candidate never specified because he himself had no particular person convictions or policy ideas.  We don’t need another such standard bearer–not even one who replaces Hope and Change with WOMEN! WOMEN! WOMEN!  One Dem presidential candidate, and Dem president, of that ilk is more than enough, thank you very much.

Daniel, I think you and Yves have it backwards. The Dems can’t show progress in policy BECAUSE of the billionaire-controlled campaign-finance system.

So now I’ve gotten it off my chest.  It, being my dismay and utter frustration at the silly Hillary-or-bust obsession of the seemingly hypnotized Establishment Democrats and pundits.

This woman has written a narcissistic book for which she was paid handsomely-being paid handsomely appears to be her primary concern–and is in the process of blowing her book-tour interviews.  Which is nice, because now maybe–just maybe; it’s by no means certain–some actual longtime progressive policy person of some political stature, who doesn’t have a Twitter account or a personal entourage, and is not entirely self-obsessed–will step forward and run for the Dem presidential nomination, on a platform that details policy rather than relies upon personal celebrity and gender.

Hope springs eternal. Although the Kochs, the Chamber of Commerce, and some hedge fund folks have noticed, few political journalists–and apparently no Dem pols and political consultants–have.  This country is suddenly moving rapidly toward a progressive economic-populist era.  Instead, the over-40 professional political crowd thinks that the political sun rises and sets each morning with Hillary Clinton’s personal appearances and Twitter comments.  It doesn’t.


Post edited slightly for clarity after posting. 6/25 at 3:58 p.m.

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The Secretive Democracy Alliance’s Secret Is Out: Some of its members are elitist, racist and self-serving.

Clarification appended below.


[David] Brock, a former “right-wing hit-man”-turned-top-big-money-Democratic-operative, is part of a behind-the-scenes campaign to convince donors it’s OK to attack the Koch brothers for spending millions of dollars while doing the exact same thing for the left.

“You’re not in this room today trying to figure out how to rig the game so you can be free to make money poisoning little kids, and neither am I,” Brock told donors this month at a conference in Santa Fe, New Mexico, according to someone who attended the conference, but who declined to be identified because it was closed to the press.

“Subscribing to a false moral equivalence is giving the Kochs exactly what they want: keeping us quiet about what they’re doing to destroy the very fabric of our nation,” added Brock, whose deep-pocketed nonprofit groups are leading the charge to make the conservative megadonors Charles and David Koch an issue in the 2014 midterms. …

But Brock’s pitch … isn’t sitting well with some major liberal donors and operatives, who worry the anti-Koch strategy could backfire big time. It has not yet been proven effective at motivating key Democratic voting blocs like unmarried women and minorities, and liberal critics also worry it risks undercutting more important issues, smacks of class warfare and opens themselves up to hypocrisy charges.

“The Democrats’ problem is off-year turnout, and I’m not clear how emphasizing the Koch brothers gets more black and brown folks to the polls,” said Steve Phillips, a member of the secretive Democracy Alliance club of major liberal donors. “My sense for voters of color is that the issues of income inequality, housing, education, immigration reform, health care and criminal justice reform would resonate more.

— “The existential crisis of the liberal millionaire,” Kenneth P. Vogel and Tarini Parti, Politico, today

And since voters of color are too stupid to recognize that the issues of income inequality, housing, education, immigration reform, health care and criminal justice reform would have, maybe, a little something to do with legislative and executive-branch policy on the issues of income inequality, housing, education, immigration reform, health care and criminal justice reform, it definitely would not resonate with them to point out that the Koch brothers are among a tiny group of billionaires and multi-millionaires who actually write legislation for their bought-and-paid-for elected officials to enact.

Black and brown folks are just fine with Citizens United and McCutcheon, if they’ve even heard of those Supreme Court rulings.  It’s only white people who know about the rulings and understand such complexities, like dot-connecting.  Well, white men and white married women do, anyway; white unmarried women don’t.

Got it!

I’m glad the Democracy Alliance is secretive.  Rather than, say, openly demeaningly elitist, racist and maybe even manipulatively self-serving.

Dan has asked me to clarify that this post is sarcastic. So: This post is SARCASTIC. REALLY. It’s SARCASTIC.

Yiiiikes. (And I’ve corrected the typo, too.)


I wrote in the Comments thread, in response to reader Cindy K, who said she’s glad I clarified that this post is sarcasm:I actually thought the title alone indicated satire, sarcasm. Silly me, I guess. As I told Dan in an email last night, I guess I’ve been reading too many Alexandra Petri and Gail Collins columns.

Updated 6/25 at 2:21 p.m. 


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Supply Creates Its Own Demon: Marc Andreessen and "Textbook Luddism"

by Sandwichman at Econospeak

Supply Creates Its Own Demon: Marc Andreessen and “Textbook Luddism”

Marc Andreessen has a column in the Financial Times with the headline, “Robots will not eat the jobs but will unleash our creativity.” Here are the first two paragraphs:

A growing number of people seem to fear that robots will eat all the jobs. Their worry boils down to this: computers can increasingly replace human labour thus displacing jobs and creating unemployment. Your job, and every job, will go to a machine.

It is textbook Luddism, relying on a “lump of labour” fallacy – the idea that there is a fixed amount of work to be done in the world by humans. The counterargument comes from economists such as Milton Friedman, who believe that human wants and needs are infinite, which means there is always more to do.

Mr. Andreessen knows as much about Luddites and the lumpoflabour fallacy as I do about programming browsers. Ordinarily, it might suffice to cite the ONLY published scholarly articles on the history of the phony fallacy: “Why economists dislike a lump of labor” and “The’lump of labor’case against work-sharing: Populist fallacy or marginalist throwback?” both by a fellow named Tom Walker. But Andreessen’s timing has caught me in the midst of a research/writing project that attempts to make sense of what Joan Robinson identified as “mumpsimus“: the persistence of discredited arguments in the face of overwhelming evidence.

I’m about 20 pages along in my new piece, Supply Creates Its Own Demon. The demon in the title refers to Maxwell’s demon and, by association, the chess-playing automaton (an elaborate hoax) built in the late 18th century by Baron Ludwig von Kempelen. I’ve just gotten to the section where I discuss Andrew Ure’s 1835 The Philosophy of Manufactures. Ure’s book contains a discussion of automatons, which includes the chess-player but doesn’t mention its imposture.

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Take a deep breath and breathe today

Perhaps something to slow down speeding thoughts this morning….or just fun.  Beautiful weather here near Boston at dawn.

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