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

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.

update perc capital consump b

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.


If you wonder how capital income could be so strong, here is a video to watch.


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Wages and the Fed.

Both bulls and bears are examining wage growth for signs of incipient inflationary pressures. The current debate seems to assume that wages are completely determined by how much slack there is in the labor market and overall economy. Both conservatives and liberals seem to believe that if employment fall below current levels that wage growth must accelerate. Standard analysis seems to completely ignore the point that inflation expectations plays a significant role in the wage setting mechanisms.

I have been using a wage equation that I first developed some 20 years ago and it has worked extremely well to explain average hourly earnings growth as far back as the wage data goes, 1964. The equation has three variables, unemployment, manufacturing capacity utilization and the trailing three year change in the CPI. This is used as a proxy for inflation expectations because other measures of inflation expectations do not have a long enough consistent history. For those of you that like to duplicate work they see online, the equation does have a fourth variable that I call Nixon. It is a dummy variable for wage price controls in the early 1970s.3 yr cpi
As you can see the equation explains wages very well through the acceleration of wage growth in the 1960s and 1970 and wage moderation in the 1980s and 1990s. The only time it fails is when it called for wages to fall after the great recession. I believe this is just another example of how wages are sticky and that business had good reasons to not implement widespread wage cuts after the Great Recession.
cpi 3

The second chart shows the three year trailing CPI. At 1.3% is at the lowest level experienced since the 1950s. Moreover, it is in line with other widely quoted measures of inflation expectations. This means that low inflation expectations are offsetting some of the upward pressure on wages from the low unemployment rate and high capacity utilization. Consequently, I believe that the Fed – as well as those who have been warnings that runaway inflation is just around the corner — are overly concerned with the risk of employment gains leading to higher wages and inflation. This fed can easily leave rates at low levels with little fear that wages growth and inflation will accelerate.

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Can the World Find $14 a day to feed Syrian Refugees ?

While the world is focused on the Syrian refugee crisis (now that the refugees have arrived in Europe) aid to refugees in Turkey, Lebanon and, especially, Jordan has been cut.

The cash-strapped World Food Programme has had to drop one-third of Syrian refugees from its food voucher program in Middle Eastern host countries this year, including 229,000 in Jordan who stopped receiving food aid in September, a spokeswoman said.

This is crazy. It would cost Europeans much less to feed refugees in Jordan than to host them in Germany. The moral obligation is equal for the USA even if few refugees are crossing the Atlantic. I really don’t understand what is going on.

Partly I don’t understand the UN at all — why is this financed by the World Food Program not the High Commission for Refugees project ? Why did I find an alarming article dated December 2014 making the same warning of an imminent interruption of the food voucher program ?

I assume the UN collectively is declaring a crisis of this program right now, because it is the best way to scare up contributions. I also don’t care much. No matter what the UN PR strategy might be, the world’s response to the refugee crisis is unreasonable and emergency funding for the WFP vouchers makes sense.

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Obamacare hasn’t killed full-time jobs, either

When we last looked at Obamacare as an alleged “job-killer,” Matt Yglesias had just pointed out that 2014, the first full year of insurance on the exchanges, was also the best year for job creation since 1999. But recently a non-blogging friend reminded me of a related anti-Obamacare meme, the idea that employers have been cutting their workers below 32 hours per week so they would not have to provide them with health insurance. His argument was, logically enough, that this would mean a loss of full-time jobs.

As with so many other anecdotal Obamacare horror stories, this one does not stand up to even simple inspection. Just like total job creation, it turns out that full-time (BLS uses 35 hours/week, not 32, by the way) job creation has quickly increased since December 2013, just before exchange insurance went into effect. Not only that, part-time employment has fallen slightly. The Bureau of Labor Statistics’ monthly “Employment Situation” (Table A-9 in both cases) tells the tale.

Date            Full or Part Time     Not Seasonally Adjusted Jobs          Seasonally Adjusted Jobs

December 2013   Full-time          116,661,000                                      117,278,000

July 2015             Full-time           123,142,000                                     121,589,000

Change                                                 + 6,481,000                                      + 4,311,000


December 2013   Part-time           27,762,000                                        27,372,000

July 2015             Part-time            26,850,000                                        27,265,000

Change                                                     – 912,000                                          – 107,000

I included both seasonally adjusted and not seasonally adjusted data for completeness sake, but when we are comparing a summer month to a winter month, surely the seasonally adjusted figures are the correct ones to use. For those of you keeping score at home, then, full-time jobs have increased by 4.3 million since Obamacare exchange insurance went into effect, whereas part-time jobs have fallen by 107,000. Neither of these fits the anecdotes of workers being shunted from full-time to part-time work to avoid providing insurance. This increase in full-time work has been accomplished in the span of just 19 months, or an average of over 226,000 new full-time jobs per month.

Of course, it’s theoretically possible that using sophisticated statistical controls might uncover a hidden negative relationship; that we’d have even more full-time jobs than we do if the exchanges hadn’t gone into effect. Even if that were true, it’s obvious that everything else going on in the Obama economy is having a much bigger effect on full-time employment, so there’s no justification for using the epithet “job-killing” on the off chance that it’s true.

Cross-posted from Middle Class Political Economist.

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Is Effective Demand showing the limit of the Business Cycle… again?

Effective Demand is basically a demand limit upon the business cycle. Wouldn’t it be great if it could be determined? Then we would know where the limit of a business cycles is. Well maybe we can determine effective demand.
A simple equation for the Effective Demand Limit relates labor share to the utilization of labor and capital. Labor share represents the Effective Demand limit.

EDL = Non-farm business labor share * 0.762  –  (capacity utilization*(1 – unemployment rate))

EDL will want to stay above zero, such that, labor share*0.762 (underlined on left) will stay above the utilization of labor and capital (underlined on right).

Here is the graph of the data. (link)

update UT index

Recessions are in gray. The zero x-axis in the graph represents when the plot falls to near zero before each recession. EDL again has hit the same point that was hit twice before the 2008 recession.

I do not see a recession yet. Some are saying that we are close. Anyway, if a recession was to form again with the plot staying above zero, the equation would show an unusual consistency in predicting the limit of business cycles.

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The Confederate Ideology: "At this cost the system is maintained."

by  Sandwichman  

The Confederate Ideology: “At this cost the system is maintained.”

invisible hand

Cornell students leaving Willard Straight Hall
“We presume that the citizens of Virginia are much like the ‘rest of mankind,’ and under ordinary circumstances have as much nerve as falls to the lot of common humanity. But they have long lived under the shadow of a great terror. Each slaveholder keeps a grim skeleton in his social closet, which may start into life at any moment. The ‘demon of hate’ which his life of wrong and outrage has invoked, haunts him night and day. He listens for the roar of the slumbering fires of the volcano upon whose sides he sleeps, and every sound that hurtles through the air, every footfall behind him, makes him fancy that the avenger is on his truck.” — Frederick Douglass, “The Reign of Terror in the South”

The sub-sub-title to John Ellis Cairnes’s eloquent The Slave Power described the 1862 book as “an attempt to explain the real issues involved in the American contest.” This blog post is an attempt to explain the real issues involved in the (too) long-enduring contest over “political correctness.” It comes to the conclusion that it is pretty much the same real issue as Cairnes identified. The spectre of political correctness emanates from the “grim skeleton in [America’s… capitalism’s] social closet, which may start into life at any moment.”

Undoubtedly, the “political-correctness police” exact a tremendous toll on the psyches of White Americans and have been doing so for several decades. To put all that torment in perspective, one is advised to read Alexander Cockburn from 1992, “Bush & P.C. — A conspiracy so immense…” Lewis Lapham from 2004, “Tentacles of Rage: The Republican Propaganda Mill, a brief history,” and Martin Jay from 2010, “Dialectic of Counter-Enlightenment: The Frankfurt School as scapegoat of the lunatic fringe.”

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Global Volatility, Domestic Markets

by Joseph Joyce

Global Volatility, Domestic Markets

Unlike the global financial crisis of 2008-09, the current disruption in the financial markets of emerging market nations was anticipated. The “taper tantrum” of 2013 revealed the precarious position of many of these nations, particularly those dependent on commodity exports. The combination of a slowdown in Chinese growth, collapsing stock prices and a change in the Chinese central bank’s exchange rate policy indicated that the world’s second-largest economy has its own set of problems. But global volatility itself can roil financial markets, and good fundamentals may be of little help for a government trying to shelter its economy from the instability in world markets.

The importance of global (or “push”) factors for capital flows to emerging markets was studied by Eugenio Cerutti, Stijn Claessens and Damien Puy of the IMF. They looked at capital flows to 34 emerging markets during the period of 2001-2013, and found that global factors such as the VIX, a measure of anticipated volatility in the U.S. stock market, accounted for much of the variation in flows. Not all forms of capital were equally affected: bank-related and portfolio flows (bonds and equity) were strongly influenced by the global factors, but foreign direct investment was not.

Cerutti, Claessens and Puy also investigated whether the emerging markets could insulate themselves from the global environment with good domestic macro fundamentals. They reported that the sensitivity of emerging markets to the external factors depended in large part upon the identity of a country’s investors. The presence of global investors, such as international mutual funds in the case of portfolio flows and global banks in the case of bank finance, drove up the response to the global environment. The authors concluded: “…there is no robust evidence that “good” macroeconomic (e.g., public debt, growth) or institutional fundamentals (e.g., Investment Climate and Rule of Law) have a role in explaining EM different sensitivities to global push factors.”

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