Where Has All The Money Gone – Pt. III, Not to You and Me
Part I showed the money going to corporate profits, not to the salaries of working people. Part II showed that the finance sector has captured an increasing slice of the profit pie. Here is a different look at where the money hasn’t gone.
The first graph shows Real GDP/capita and Real Disposable Income/Cap since 1950 on a log scale. (Data through 2009, from The Census Bureau. Table 678 at the link.)
I’ve left the 50’s out of the argument (but not the graph,) as a courtesy to Ike, since his relative performance suffers due to the post war baby boom. The population grew at an above normal rate for over a decade, and that skews the GDP/Cap data.
If you’ve been paying any attention to time series economic data, you know there are break points in almost any econ measure, somewhere in the vicinity of 1980. I’ve added trend lines, breaking the data sets arbitrarily at 1980. These trend lines here tell the same story – it’s deja vu all over again. Pre-1980 trend lines start with 1960 data. I stopped the post ’80 trend line data sets at 2007, to avoid the influence of The Great Recession, which would have have further deceased their slopes.
What I want to emphasize here is the difference between the two lines. Though both have a knee, the Disposable Income break is much sharper. Here is a graph of the difference between the two, linear scale. And, BTW, this time I left the ’08 and ’09 data in the trend line determination.
Well – since 1980(-ish) not only has GDP growth slowed, the amount captured in disposable income has decreased, quite dramatically.
That’s a whole lot of wealth that is NOT ending up in the hands of ordinary people. Which is why it doesn’t get spent. But that is another story.
An earlier version of this post was published at Retirement Blues, back in June.
—
That’s a whole lot of wealth that is NOT ending up in the hands of ordinary people. Which is why it doesn’t get spent.
—
I can buy some decent farmland and save money by planting crops without using soil amendments. Probably decent money for a few years, but not giving back eventually ruins the asset as well as my income.
Then I can go on Fox and blame government for the fact that my farmland has played out.
My litany includes the now-$600B/yr trade deficit.
In my naive understanding, this is money that is leaving the paycheck economy, never to return as wages.
While I guess some of the money that gets captured by sovereign wealth returns to us as venture capital and whatnot, the Fed sure stopped reporting M3 at a convenient time . . .
http://research.stlouisfed.org/fred2/graph/?g=4G8
Same thing with our $8000 per-capita health care costs, twice that of global average. It’s something of a joke how medical professionals have long had investment clubs to stash their ill-gotten loot, but this rent-seeking is really getting out of hand. $4000 per capita in pure rent capture is an immense amount of money leaving the paycheck economy every year.
Then there’s the trillion or so of ground rents we all must pay to landlords, rents by which they are getting something for nothing.
All this is obvious to me but few others have it in their thesis of what’s wrong with this economy. Which is really perplexing to me, since these are really big flows!
Another interesting posting. It looks like the change in Figure 2 occured in the later half the the 1980s, rather than close to 1980. I’m not trying to be picky, I’m just wondering in general about the change in income tax laws and rates after 1986. In some ways, these late-80s changes were much bigger than the changes of the early-80s.
There was a sea-change in systemic leverage in the mid-late 1980s:
http://research.stlouisfed.org/fred2/graph/?g=4Ge
The only part of our economy that is not governed by the concept of the free market is the labor sector. Labor cannot effectively unite in most states. Labor has lost much of its clout to a political/business class that sees wages as an aspect of the economy needing to be tightly controlled. No free market bull shit for the common workers. That would be called socialism or somethiing worse, though workers uniting for their own self interests has nothing to do with state enterprise. Why pick on only the medical profession? At least they do an honest day’s work in most cases. The medical profession is a necessary part of our economy. So too are teachers, toll takers, sanitation workers, pilots, engineers, etc. workers with required skills that help keep the economy moving forward if not always upwards.
What’s not needed are the executive class. There’s far too much duplication of mangerial services. Finance managers are particularly superfluous. These managers are some times confused with, or confuse themselves with, entrepreneurs, that group of people who are often said to create jobs. Close examination of the tasks of the managerial class will quickly expose that misrepresentation. Managers create nothing. There tasks more likely include controling the growth of jobs and the correlated costs of labor. If the earnings of doctors and other types of workers are in need of being brought “under control,” why then not also control the earnings of the managerial class given the minimal contribution members of that class make to the economy. That’s where the money is, in the controll of the management class. The one activity that managers have been found to be most capable at is the enhancement of executive pay scales.
If you run the analysis bak to the 30 ( as I did) you could notice that the pre crash (the 20 ) distribution of incomes and rents shared the same characteristics with the pre (crash? ) Recession period. Another facet of the distribution is the debt bubble formed around the skewed income distribution.
In other words, there must be something that links distribution and financial crisis.
Another comment: The “de leveraging” talk is another confirmation that the asset/debt relations , directly linked to income distribution is important to understand and overcome the crisis . Wrote about that in my blog ( prefer not no enter here into details )
http://enriquefleischmann.blogspot.com/2012/01/deleveraging-debts-and-distribution.html
PJR –
I’m not going to quibble if anyone prefers a different inflection point. When data bounces and changes direction, defining the inflection is tricky and inexact. In the paper Roger Farmer referred me to last week, he says this:
I broke the data in 1979q3 because there is evidence that many macroeconomic
time series behave very differently before and after this date (Beyer and
Farmer, 2003, 2007; Clarida, Galí, and Gertler, 2000; Lubik and Schorfheide,
2004; Sims and Zha, 2006).
Still, In the first graph, 1973 might be a better choice for the break. If you click through the Real Disposible Income/Cap link in the post, I have some more graphs.
Just a year ago today, Lane Kenworthy showed a 1973 break point for growth in median family income.
http://lanekenworthy.net/2011/01/31/the-great-decoupling/
I seen knees anywhere from 1973 to 1986 in various series.
To your point, during the Reagan administration, there were 2 or 3 tax cuts, and 11 increases. the net effect was a transfer of tax burden from higher to lower earners.
JzB
Jack –
That’s a pretty good rant, and I don’t disagree. In my time as a supervisor/manager I also did project work, so I wan’t a total leach. But I saw my most important function as protecting my people from the corporation. This meant being a bullshit shield so they could go about their jobs, and advocating for them, whenever I could.
The reason to pick on the medical industry (not the medical profession) is what Troy was getting at. We get far less for our health care dollar than any other civilized place on the planet.
JzB
Enrique –
Yes. I like your post. You seem to believe, as I do, that demand is more of an income than a wealth phonomenon. I’m working on another post that I hope to have up in a couple of days.
Cheers!
JzB
JzB,
Such behavior as you describe would put you in a very unique sub- category of managerial class. I too did my time as a manger in services to the developmentally disabled. I can’t say that there is never an exception to the rule, but exceptions they are. Those exceptions may also relate to level on the pyramid. Closer to the base is closer to the workers which means indentification thereof.
I don’t disagree with that analysis of the health care industry in America. I think it not unique that we get less than we pay for in almost all sectors of the American economy. Cost is said to be based on supply and demand. That does not always take into account cost of goods sold. If I’ve got all of the $2.00 bits and those bits are widely sought after I’ll be charging what that market can bear, at least until my patent of copyright expires.
“That’s a pretty good rant, and I don’t disagree.” Did you mean to say that it is a well thought out analysis? That differs significantly from a rant, which is recognizable by its lack of validity.
http://research.stlouisfed.org/fred2/series/CES6562000101?cid=32322
shows there’s 14 million people in healthcare.
Distributing our $2.5T national expense, that’s approaching $200,000 per health worker. Good work if you can get it!
The core challenge with health care is that it provides a service that has an immense natural market value — the value of being alive and having a functioning body is essentially unbounded.
This is where the rents lie, and have for a very long time, once doctors figured out how to actually treat peoples’ problems.
“You seem to believe, as I do, that demand is more of an income than a wealth phonomenon.”
You need to refine that thought just a bit. Demand based on wealth has a very narrow corridor of effect. Demand based on income is certainly more widely effective and especially so based on distribution of income.
I never associate “rant” with any kind of assesment of validity. It’s a passionate exposition of a postion. Thom Hartmann has righteous rants, Glen Beck has idiotic rants.
Those exceptions may also relate to level on the pyramid. Closer to the base is closer to the workers which means indentification thereof.
Right. And this is no accident. It’s not only coser identification with real paople, but also an unwillingness to drink the corporate koolaide. If you are not willing to spout the party line as if you mean it, there is a very rigid ceiling
JzB
There’s a complication, in that wealth and income are not independent variables. What is wealth but the accumulation of unspent income and the earnings it generates?
My quibble is with the stock econ idea that demand is a wealth efffect, rather than an income effect.
Demand based on wealth has a very narrow corridor of effect.
Can you elaborate?
JzB
Troy,
Don’t get attached to that average as it is extremely misleading. Health care wealth is very unevenly distributed based both on position and geography. I can’t site measures, but I’d venture to guess that for every high dollar doctor on the two coasts there are many grunts, the internists for example, who are much more modest earners throughout the country. That would be especially true away from metro centers and the coasts. And the rest of the industry workers such as the nurses and health aides are paid little more than average workers in any skilled profession. And there’s a lot of janitorial work being done at low wages.
The issue is complex with many hands in the till. Pharmaceuticals, ICFs, nursing homes and the insurance providers all have a stake in what may be our only truly essential industry. iPhones,etc. are little more than toys, but s sharp stick in the eye is more than a pain in the ass. They both require immediate medical attention.
yes, the long pole in the tent is hospitalization cost. That’s where the system comes with the knives out.
What I mean is that inorder for wealth to generate demand it must be in excess to the holder’s general needs. An individual that estimates his own wealth as providing a measure of assurance against need will feel free to spend beyond those needs. For example, if the stock market stalls for a period of time and/or loses value there may be a restriction on demand, but only within a narrow sector of economic participants. The effect of wealth on demand is, therefore, less potent than is the effect of income. Only superfluous income becomes savings or unspent, though even income that is saved will generate demand as it is redistributed as debt to others. Regarding demand, income trumps wealth. One may spend more freely when comforted by accumulated wealth, but even then the accumulation is the result of previous surplus income. All other income, that which is not surplus and available for accumulation, results in demand. That is to say, it is spent.
jazz
at the risk of sounding like an apologist for the corps or the rich, or worse, the financial corps
i find your argument a bit troubling if not just hard to follow
first, when you can put your inflection point anywhere you want it, it’s hard to have faith in the implication you are drawing.
second… i guess, don’t know.. that if all that productivity were siphoned off into taxes spent on raising the general welfare, you would find the same “gap” and maybe from your perspective not be as concerned about it as you are that it may be going to the “corps”, although where it goes from there is not clear to me. apparently it does not trickle down.
and that would be the source of my concern: all this “productivity” is not translated into reasonable living conditions, certainly not for the very poor, and i would argue not even for the upperish middle who do seem to lead lives of noisy desperation.
so while you may be on to something, or the beginning of something, i would rather see a real analysis of what is happening and how it might be better… something more convincing than more money in MT pocket, or more plastic toys for the masses.. than another “look at these statistics, doesn’t that just make your blood boil?”
that’s “MY” pocket.