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Why hasn’t increased household formation led to increased housing construction?

by New Deal democrat

Why hasn’t increased household formation led to increased housing construction?

Tim Taylor has an interesting article about “What was different about housing this time?”  Specifically, why has housing in both building terms and as a share of GDP risen so slowly since 2009.

To cut to the chase, he writes that while prices have been increasing:

There are two possible categories of reasons for the very low level of residential building since 2009. On the supply side, it may not seem profitable to build, given what was already built back before 2008 and the lower prices. On the demand side, … the demand for housing is tied up with the rate of “household formation”–that is, the number of people who are starting new households…..  The level of household formation was low for years after 2009 ……..
Together, the declines in household formation and homeownership contributed to the decline in residential expenditures as a share of GDP.

As an initial matter, I again note that it is important not to overlook the surge in all-cash purchases of large houses by foreigners – who are hedging their bets and/or shielding financial assets – since 2009.

But what caught my eye was Taylor’s graph showing household formation:

It certainly *was* low after 2009 – until 2015, when it rose sharply, to an annualized rate of 1.750 million.

And now look at housing starts for the last 10 years:

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Aside from a shortage in starter housing for Millennials,there is NO inflation

by New Deal democrat

Aside from a shortage in starter housing for Millennials,there is NO inflation

Yesterday’s CPI report seems to be read as potentially justifying an interest rate increase in June.  For example, here’s Professor Tim Duy, on Fed hawks:

Inflation rose on the back of higher gas prices. Headline CPI gained 0.4 percent, although core rose a more modest 0.2 percent. Core CPI inflation is hovering just above 2 per cent….Fed hawks will be nervous that rising gas prices will quickly filter through to core inflation; doves will remind them that the Fed’s target is PCE inflation, which remains well below 2 percent.

As to his own opinion, he says:

I don’t think June is a go; the data isn’t quite there yet.

And here is Yian Mui of the Washington Post:

The solid [consumer inflation] data helps bolster the case for the Federal Reserve to raise binterest rates at its next meeting in June…..Fed officials have long said that they expect inflation to pick up once the effects of the stronger dollar and low oil prices dissipate. Although the central bank relies on separate data to calculate price increases, Wednesday’s report on consumer costs appears to support the central bank’s claim.

Whether or not the Fed is listening, the fact is that yesterday’s inflation data does no such thing.

Consumer prices less shelter are only up +0.1%. Not month owner month, but Year over Year! This is one of the lowest rates in the entire 75 year history of the series:

Here’s a close-up of the last two years just to drive home the point:

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Trump Falls to His Knees PLEEEADING for Republican ESTABLISHMENT Donors to Fund His Campaign—Offering Them the Ultimate Gift: Supreme Court Proxies. Toldya.

Tomorrow, behind closed doors with Paul Ryan & Friends, he will swear fealty to Mitt Romney’s platform.  And not just the part written literally, it turns out, by the Heritage Foundation and CNBC!  Also the part written by the Federalist Society. Including on Supreme Court and lower-court appointments.  Suffice it to say that his promise to hand Supreme Court and lower federal court appointments back to the Federalist Society would bode well for the Koch legal agenda.  And for the continued life of Citizens United.

For unions and people who aren’t so fond of Wall Street, though, not so much.

The Most Successful Trojan Horse Since the Trojan War, Me, May 11

Soooo sorry about this, Rust Belt blue-collar folks.  I know these names don’t mean anything to you.  But, oh, by November, they will.  Won’t they, Secretary Clinton?  Won’t they?

Won’t they?

Promise me they will.  Promise.  Promise!  And promise me you’ll actually discuss, oh, say, the Fab Five’s Federal Arbitration Act opinions.  And their National Labor Relations Act opinions. And their opinions setting out who actually has access to court.  Such as how long beyond the moment when someone files a lawsuit he or she can manage to have the case stay in court?  And who is ordered to pay who’s legal fees?  And who has immunity from lawsuits? Obscure things of that sort.

Y’know; the things that these donors actually get for all that money they donate?  The things that they’re so damn sure no attempt will be made to explain to the public, because, well, these things are just toooo complicated for ordinary folk to comprehend?  The things that rarely have anything to do with the culture wars issues that most people think are all that the Supreme Court decides but that most billionaire donors don’t actually give a damn about?

And that what’s at least as important as Supreme Court appointments to the folks to whom this candidate is ostentatiously offering himself as their policy-and-appointments puppet is the makeup of the lower federal court bench?

Pleease, Secretary Clinton?  Pretty, pretty, pretty please?


Okay, on a serious note (the above is a serious note, too; it just doesn’t sound like one): This—this—is exactly the kind of thing that Bill Clinton could explain easily to people with no background in this stuff.  Most people couldn’t.  But he could.

And here’s another serious note: This candidate is an absolute monkey.  People just feed him policy stuff and he parrots it.  He asked someone to get him the names of rightwing appellate judges, and that someone obliged.  The candidate himself couldn’t tell you a thing of substance about any of them, or for that matter a thing of substance on legal issues at all.

Apparently, he’s decided to hand not only his fiscal-policy proposals but also his judicial nominations to the, um, Heritage Foundation.  Literally.  The Heritage Foundation.  So this should be a good time for Clinton to apprise the public of who, exactly, comprises this organization’s board of directors.  And who funds it.  Not too many labor union folks there.

President Chauncey Gardiner: ‘Being There’ at the Bait-and-Switch.  I’m batting 1,000 on this stuff.  The Democrats SHOULD LISTEN TO ME.  They should read AB.  This is a brilliant, prescient blog!

OMG.  I’m sounding like Donald Trump.  This election is getting to me.


CLARIFICATION (which apparently is needed): Reader J.Goodwin and I exchanged the following comments in the Comments thread:

J. Goodwin/May 19, 2016 8:34 am

I’m sure that she is already familiar with the names on this list.

Me/ May 19, 2016 3:58 pm

I wasn’t saying that Clinton isn’t familiar with the names. I was saying that the general public, the voters, aren’t–and that Clinton should fill them in. And that she also should inform the voters about the Heritage Foundation–what it is, and that Trump is delegating major policy proposals and prospective appointees like Supreme Court justices to this organization.

She absolutely needs to inform the voters of key things that the Republican donors know that Trump is promising them with. That was my point. My intended one, anyway.

It’s a critically important point, I think, so I wanted to clarify it. My cryptic reference to “the Fab Five”, also to be clear, meant the four winger Supreme Court justices who remain on the court and their recently-late comrade in arms.

Added 5/19 at 4:31 p.m.

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Major Foreign Holders of U.S. Treasuries: now with greater country breakouts


Don’t have a lot to say except to note that previous versions of this table lumped together “Oil Producers” and “Caribbean Banking Centers” while this disaggregates them. This leaves the Cayman Islands in third place at $265 bn while putting Saudi Arabia down to 13th with $116 bn.

Also of interest is how many of the top twelve are known banking centers and tax havens. Ireland (#4) isn’t holding $266 bn on its own account, Great Britain (#7) includes Crown Dependencies like the Channel Islands and the Isle of Man and we have our old friends Switzerland (#5) and the BeNeLux countries: Belgium (#11), Netherlands (#25), Luxembourg(#8). This is important because an unknown percentage of those ‘foreign’ holdings are actually the accounts of U.S. citizens and corporations.


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Are Economists Idiots or Just Delusional?

I apologize for actual discussing economics and health care today, but this one I couldn’t let lie.

The University of Chicago’s Booth School of Business’s IGM Forum Mark Thoma) reports; you decide.

If reducing the value of the policies held by those who are continuously employed, either by taxing them or forcing those people to move to a less comprehensive plan than their risk-aversion preferences, is going to “reduce costly distortions in U.S. health care,” the only possible conclusion is that total health care spending is going to get costlier on average.

Yes, you might argue this will reduce “distortion.” But you would have to be an idiot—or, apparently, Alan Auerbach (Strongly) or Austan Goolsbee—to believe that is a good thing.

Note the eminently-sane, just as certain, Carolyn Hoxby’s comment:

The Cad[illac] tax is meant to counter other distortions so this is a q[uestion] of whether 4th best fixes 3rd best. An economist who says he knows is wrong.

which acknowledges that this is a distortion of a distortion and, as a first-order approximation, less ideal than the status quo.

Contrast this with the silence in the face of blithering certitude from Auerbach and Goolsbee, who are happy to reduce “distortion” without noting the concomitant reduction in overall utility.

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Oil and Gas Pipeline Construction vs. Massive Public Infrastructure Construction: Why do the Building Trades unions want the FORMER rather than the LATTER? I have no idea. [TITLE CORRECTED, 5/18 at 10:46 a.m.]

The AFL-CIO’s plans for a super PAC to take down Donald Trump ran into a big snag Monday, when one of the labor federation’s major affiliates objected to the involvement of billionaire climate activist Tom Steyer.

Sean McGarvey, president of the AFL-CIO-affiliated North America’s Building Trades Unions, co-signed a letter with seven other union presidents urging federation President Richard Trumka to cut ties with Steyer, a hedge fund manager who had spent money to aid environmental groups’ successful crusade to kill the Keystone XL oil pipeline. Building Trades had been a big supporter of the pipeline, in contrast with unions that sided with green groups’ opposition to the project.

The labor groups sent the letter less than a week after POLITICO revealed the impending launch of a new super PAC led by the AFL-CIO, Steyer’s NextGen Climate and three labor unions.

“We respectfully request that the AFL-CIO cut ties with Mr. Steyer and his political operation,” the letter said, “as we do not want any of our members’ financial support for the federation to be used against them and their economic well being in pursuit of this endeavor.”

The Obama administration’s rejection of the Keystone project riled the Building Trades when the president announced it last year. Laborers’ International Union of North America President Terry O’Sullivan, also a signatory of Monday’s letter, accused President Barack Obama at the time of “kowtowing to green-collar elitists.”

A major AFL-CIO affiliate called on the labor federation to end a new relationship with environmentalist billionaire Tom Steyer. Brian Mahoney and Anna Palmer, Politico, yesterday

This strikes me as a really easy rift to repair.  The Democrats—both presidential candidates and (I believe) most of their Senate and House candidates—strongly support massive public infrastructure projects, ranging from public transportation and bridge reconstruction projects to rehabbing or reconstructing inner-city public schools, to water system reconstruction projects in order to avoid further Flint, MI-type problems.

I’m certainly no expert on such matters, but it seems inconceivable to me that these major nationwide public infrastructure projects wouldn’t create far, far more building-trades jobs than oil and gas pipeline construction would, and do so in many more regions of the country.

So, what is it that I’m missing here?  Why isn’t this the quick, clear response by the AFL-CIO to this concern, to this demand by these Building Trades union presidents?  And to the anger of many of their rank-and-file members?  I don’t get it.

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Tempus Fugitall, Cold Dog Soup version

My post of 13 days ago is now current events.

R.I.P., with a couple of reprises:

Lyle Lovett discussing and covering the first song Clark ever wrote (and never himself recorded). I don’t know if Guy Clark was ever young, but I defy anyone this side of Prince or Bruce Cockburn to figure out what things are wrong with it:

See also Loomis at LG&M, of course.

ETA: And Charles Pierce, who features several selections included by neither of us.

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Circular Flow of Labor & Capital

In the study of economics, one learns the circular flow of the economy between firms and households. This post however presents another circular flow model based on capital and labor. (It is a closed economy with no government for simplification.) There are 4 pools within this circular flow related to the income and utilization of labor and capital.

cap lab circ flow

In the center of the model is the percentage of national income from production that goes to owners of capital. We do have a capitalistic economy. The control of capital is at the center of the economy. Capital income is central to determining the pools around it… the percentage of national income going to labor and the percentage utilizations of labor and capital.

This circular model is different because we do not see money going back and forth between entities. Instead we see dynamics of utilization and distribution between one pool and another.

Share of Income between Capital & Labor

At the top of the circular flow is the relationship between how much of national income goes to capital and labor. For the most part, this is determined by owners of capital because they control the equipment, investment funds and other capital used for production. Then they hire labor to work with the capital.

There is a historical power struggle between capital and labor for sharing the income from production. Strikes, walk-outs and killings define the history. When labor loses bargaining power, labor share of income tends to fall. What effect then do changes in labor share affect the utilization of labor and capital?

Relationship between Labor Share & % Utilization of Labor (Green line in model)

In production, labor needs to be hired. The amount of available labor supplied depends on labor’s share of income from production. Here are some graphs to show this relationship. (update: The following graph presents the Unemployment rate as the percentage employed, instead of unemployed.)

update ls unrate

As the labor index rose to over 112 in the 1950’s and 1960’s, unemployment increased. The utilization rate of labor looked to be limited by the demand of capital owners.  Since then, labor share has fallen. Now it looks as though labor is limiting its own supply. The implication is that labor is less willing to supply its labor when its share of income is low.

We see this relationship also in the Labor Force participation rate.

update ls LF participation

When labor share was higher, the percentage of labor participating in production was higher. The steep decline in labor share since 2003 was accompanied by less labor participating in production. Granted there are other demographic influences. Still there looks to be some effect of lower labor share on the LF participation rate.

Relationship between Labor Share & % Utilization of Capital (Red line in model)

This relationship triggered by personal economic research in Effective Demand back in 2012.

As labor share of income falls, so does the upper limit of the utilization of capital (lower red line in the following graph.)

update ls cap util

Since the 1960’s, the maximum of capacity utilization in business cycles has fallen to lower levels with lower labor share. The effect of lower labor share upon capacity utilization is how I define Keynes’ concept of Effective Demand.

Relationship between Labor Share & both the % Utilization of Capital and Labor

This relationship involves the 3 circles around capital share in the circular flow model above.

Upon seeing how labor share limits the utilization of capital, I noticed an effect from the utilization rate of labor. So I developed a simple equation…

Labor share index * 0.76  >=  capacity utilization * (1 – unemployment rate)

The equation basically says that a labor share conversion (* 0.76) would set an upper limit to the value of multiplying together capacity utilization and (1 – the unemployment rate).  (0.76 was the slope of the midline tendency above in the plot between labor share and capacity utilization that zeros in on the limit.) So, in effect, the unemployment rate established the limits of capacity utilization in relation to labor share.

We see this in the following graph. (link to Fred data)

fred ut

The plot tends to stay above the zero line showing that the equation holds from business cycle to business cycle, including the current strange one. The converted labor share rate is seen to set a limit upon the multiplied utilization rates of labor and capital.

The Relationship between the % Utilization of Labor and Capital (Violet line in model)

As the business cycle recovers after a contraction, both the utilization rates of labor and capital increase. But there comes a point where the utilization of capital will stop increasing or fall. This point reflects an optimum use of capital as I show below. The utilization of labor may keep increasing or fall at that point.

How can this dynamic be put into an equation?

The following 3-dimensional equation gives a value for a z-vertical. As the z-vertical rises, capital and labor is used more optimally and the business cycle keeps progressing. The goal is to keep increasing the z-vertical as long as possible through a business cycle. A rising z-vertical shows optimum utilization of labor and capital.

z-vertical = m + k – am2k2
m = (1 – unemployment rate)
k = capacity utilization rate
a = 1.46 – 0.76 * labor share index

 The maximum of this equation is…

Max of z-vertical = √1/2ak … (square root of 1/2ak)

Here is a graph.

update path cobra

In the last year, capacity utilization has been falling while the utilization of labor has been increasing (unemployment falling). The equation predicted this. Yet has the z-vertical continued to rise? (link to following FRED graph)

update z-vertical

Yes, the z-vertical has continued to rise in this business cycle. However, the z-vertical is at lower levels in relation to the past which reflects the poor economic environment currently. A low z-vertical ultimately reflects under-utilization of both capital and labor which is a result of the lower than optimum labor share.

Now, I look at the derivatives of the above equation in terms of both capital and labor. A higher derivative means lower than optimum utilization.

First, the derivative in terms of capital. (FRED link)

in terms of capital z-vert

Capital utilization is always brought to its optimum during a business cycle. That is the priority of capital income at the center of the circular model. Capital has the advantage over labor.

Now, the derivative in terms of labor. (FRED link)

in terms of labor z-vert2

Unlike capital, labor never reaches its optimum utilization since it never reaches zero in the graph. Capital comes first in capitalism. And since the 1990’s, the utilization of labor has been getting worse as seen by the plot steadily trending upward. The increasingly unmet potential of labor utilization coupled with lower labor share is a problem.

Capital has not lost its advantages while labor has.

The utilization of labor has also been decaying since the end of 2014. So when economists say that the labor market is looking hopeful, I have seen the labor market getting progressively worse and heading toward an economic contraction.


The rise in power of the monopolies that Joseph Stiglitz writes about is giving more power to capital income. The above dynamics between labor and capital show the adverse impact upon labor. The result has been lower labor force participation, higher unemployment, lower capacity utilization, a weakening utilization of labor and an ever more sluggish economy.

Something needs to be done to give power back to labor.

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