Consumption by Capital Income surges in 2nd Quarter
I track an estimation of consumption by capital income through the NIPA numbers and labor’s income share. Changes in this estimation give insights into how well capital income is doing. What do I find? The percentage of capital’s income used for consumption surged in the 2nd quarter 2015.
To me, this is crazy. The dynamics of the economy are making the rich feel even richer.
One problem is that the economy is becoming more unstable, more top heavy. We see this because capital income’s consumption sagged before the previous recessions. This isn’t happening yet though. But we need to watch for it. Measures around the world from loose monetary policy are propping up capital income. But the situation is just becoming more unstable as time goes on.
The balanced economy of the past is a thing of the past.
Labor needs more income.
Update:
If you wonder how capital income could be so strong, here is a video to watch.
The question is, how do we get labor more income?
The question is, how do we get labor more income?
Warren,
In time, the republicans and fresh water economists will eventually have to wake up. The situation will get so extreme that there will be no denying the truth.
Edward,
We certainly agree that labor needs more income. But the fix is in, if labor gets more income, it will be an accident.
The Black Death in England killed so many people that those remaining could demand higher wages for their services. The response was predictable.
From Page 120 of ‘A Distant Mirror’ by Barbara Tuchman
“In the effort to hold wages at pre-plague levels, the English issued an ordinance in 1349 requiring everyone to work for the same pay as in 1347. Penalties were established for refusal to work, for leaving a place of employment to seek higher pay, and for the offer of higher pay by an employer. Proclaimed when Parliament was not sitting, the ordinance was reissued in 1351 as the Statute of Laborers. It denounced not only laborers who demanded higher wages, but particularly those who chose “rather to beg in idleness than to earn their bread in labor” ”
That last sentence smacks of the modern complaints about the large numbers of people getting food stamps.
Could you tell us what is your source for the Capital Consumption data? And Labor Consumption data on the graph on your website?
Hi Jim,
I will direct you to an original post from about 2 years ago…
http://effectivedemand.typepad.com/ed/2013/08/back-from-the-circular-flow-laboratory.html
In the circular flow, the green boxes of consumption is what’s being tracked above.
One important factor… The effective tax rates of labor and capital have been kept steady for a number of years in this range… labor 10% to 12%, capital 14% to 16%. This constraint allows the numbers to baseline.
Jim,
Sure is interesting that excerpt that you posted. I realize that it was over 600 years ago, but China and other countries are setting much of the mood in the global economy and they are culturally still way back in history. Western cultures have regressed.
We get a fairer system by treating companies and corporation like we treat other felons, we exclude them and their money from the political process.
Edward,
Thanks for the link.
In my opinion, China’s leadership has wasted a wonderful opportunity. China should have been fostering a domestic consumption economy from at least 2000 onward.
Instead they plowed forward with an export based economy, never seeming to realize that their export economy was doomed.(Someone has to import!) As more and more US domestic production was moved overseas, US consumers’ wages became stagnant. Those US consumers then maintained spending by borrowing until they could not do that any longer by 2008. Somehow the game continued after 2008, probably by the capital real consumption that you have documented above.
Now China’s exports are going down but so are South Korea’s and Taiwan’s. This would seem to track with a decrease of demand in the developed world.
See: http://www.cnbc.com/2015/09/07/china-exports-imports-decline-in-august-as-slowdown-weighs.html
As China’s exports go down, they are importing even less from the developed world. Thus magnifying the effect in the developed countries. That will be one of the factors which pushes us into recession.
China has failed to build a large domestic consumption economy and we have been taking some of ours apart.
That is my opinion anyway.
Beene, I think that only those who can VOTE in an election should be able to donate to those elections. No corporations can vote, so no corporate donations would be allowed. Unions cannot vote, so no union donations would be allowed.
Edward, recognizing the truth is the easy part. Actually changing it is harder. Any suggestions?
Warren, any means that eliminates or limits congressional dependence on money or fear of competition in next election helps.
I would add to my post also any members of corporation that were convicted or settle out of court.
JIm,
You are describing effective demand… the demand that limits economic potential.
Warren,
Any suggestions to raise labor’s income? Yes, more places need to keep raising the minimum wage more and more… we need to keep our sights on a living wage. That is why I get so upset with Krugman because he undermined the living wage movement in the 90’s and has never apologized. He must know he was wrong and the damage that he did.
“[More] places need to keep raising the minimum wage more and more.”
We’ve tried that, Edward. In 2007, we raised the minimum wage 13.6%. Then we raised it by 12.0% in 2008, and another 10.7% in 2009. In a span of two years, the Minimum Wage went up 40.8%. Labor share went up in 2007 and 2008, and immediately went back down again.
Prior to that, the last Minimum Wage increases were in 1990 and 1991. Labor share subsequently dropped, then rose to it’s all-time high in 2001.
Before that, the Minimum Wage increased every year between 1974 and 1981. I don’t know whether you remember, but that was not a Good Time. Labor share dropped at the beginning of that period, and rose at the end.
There just does not seem to be any correlation between the Minimum Wage and the Labor Share.
https://www.bea.gov/papers/pdf/laborshare1410.pdf
http://www.dol.gov/whd/minwage/chart.htm
This is not very good but the question is how do we rebalance the economy without semming to allow income redistribution?
We must rebalance the economy with the Balanced Trade Agenda through the use of the tariff until trading economies become more balanced. At the same time we must close the border to prevent the constant flood of free unchecked labor supply. How can company workers strike for higher wages if they all can be replaced by an endless supply of cheaper labor thus creating a false effective labor demand or rather labor supply. We must level the play field of the so called free traders while we limit the free labor market supply. All economics 101 stuff. Corporations should be limited to how much they can lobby in Washington and contribute to campaigns . Corporate stock buy backs should be limited and fair taxes should be paid on all capital gains and dividends incomes by all. Corporations should not vote and are not people as unions are also not people. I never saw a corporation or union come home in a body bag.
“…Before that, the Minimum Wage increased every year between 1974 and 1981. I don’t know whether you remember, but that was not a Good Time.”
I remember it , and compared to recent decades , that was a Great Time ( if we’re talking about for workers , that is ). The myth of the “stagflationary 70’s” only stems from the fact that people remember the gas lines , and that it followed the decade of the 60’s , which was better still.
The early 80’s is when workers really got kicked in the nuts , and the kicking has been non-stop ever since save a brief respite during the dotcom bubble.
Marko,
I agree with you. Better then than now.
Wages had to go up as a response to rising oil prices from 1972 to 1981. The price of oil went up by almost a factor of 5 between 1972 and 1980.
Labor still had some power to quit and find a better paying job elsewhere. The end result was higher wages and high inflation. I had not realized that the minimum wage was adjusted that much during that period but it does no offend me. The overall effect was much better than what we have seen over at least the last 15 years.
Any argument that workers/consumers should accept lower and lower real income in the face of higher and higher real prices would be just plain silly!
OK — so Obama is worse than Ford and Carter?
Frankly, I prefer lower inflation. I do understand, however, why the elderly would not — lower returns on debt instruments.
Well, be that as it may, the question remains, How can we increase wage share? Raising the Minimum Wage has not done that in the past, so there is no reason to expect it will in the future.
Having more people go to college does not seem to do the job, either. Since the 1970’s, more than half of new high school graduates have enrolled in college. (Many don’t graduate, but that’s another story.) More people have college degrees now than in the 1970’s, but wage share continues to decrease.
One might think that Employee Stock Purchase Plans, stock grants, matching 401(k)’s, etc., might help by shifting labor itself to capital. But the reality is that the lower 80% will generally sell whatever stock they get, and won’t contribute to a 401(k). Or they do contribute and put their contributions into money markets. Automatic enrollment in and index fund seems to help a little, but pretty much any idea the government has come up with to help the median-income guys has been used more and more effectively by the upper-level guys. And this is not just the execs, but the engineers, scientists, and middle managers over the secretaries and assistants.
To a great extent, those engineer, scientists, and middle manager are smarter and make better decisions than those lower down the totem pole. That’s why they are where they are. And every time we try to give the people lower down a rope to climb up, those higher up see the benefits and make use of the opportunity, but those lower down do not, and the wealth gap increases further.