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

The Consumption rate from Capital Income (Labor Day special)

In honor of LABOR DAY…

Yesterday, I posted a graph showing the percentage of capital income that is used for consumption. It is a new graph being developed. Since yesterday, I have gone back and changed just one number that determines the consumption rate of capital income. I replaced the number for “net government saving”, line 26 from table 3.1 Government Current Receipts and Expenditures of the BEA web site,with the number for “net lending or net borrowing (-)”, line 38 from the same table. One reason this number is better is because it includes gross government investment, which is an important factor for lending and borrowing by the government.

After substituting in the new number, I re-ran the chart. Here it is…

capital C 4a

link to Graph #1.

Here is the previous graph from yesterday for comparison…

capital C

Link to graph #2.

The plot of the graph changed quite a bit for the data before 1972. But since 1972, the general shape of the plot has stayed pretty much the same. The revised graph #1 shows that capital income consumption sort of bounced along 0% from 1980 to 2003. It moved within a range from -5% to 9%. The fact that the plot went occasionally negative may be a sign that the numbers still need some calibration, but the shape and placement of the plot is what would be expected. A lower percentage of capital income used for consumption would be expected, because it is primarily used for investment and lending.

It may be useful in graph #1 how the plot fell before the last two recessions, which would be an indicator that a recession is forming. Capital income “feels” economic trouble ahead before labor.

In graph #1 when we look at the plot since 1993, we see that capital income is stepping upward its ability to consume from recession to recession. (purple arrow) What does this mean? Is this something we should be concerned about? Does it imply that the next recession might be even more intense?

An increased use of capital income for consumption implies increased liquidity among capital income. Where is this liquidity going? What is it doing? The economy looks to be even more “top-heavy”, which would be a source of greater instability.

Using the newest data for 2nd quarter 2013, graph #1 says that the consumption rate of capital income is currently 21.7%. This rate hasn’t been seen since right before the 1973 recession. How much higher can this rate go before it turns back down toward a recession?

OH, and just in case you wanted to see Labor income’s consumption rate…

capital C 5a

Link to graph #3.

Is it any surprise that labor has had to use more and more of its income for consumption? Even through the days of easy consumer credit? Do you see the imbalance becoming clearer between labor and capital since 2001? My view is that labor uses more of its income for consumption because it has to. Capital uses more of its income for consumption because it has extra money.

HAPPY LABOR DAY!

Update… The graphs above were adjusted for data before 1960.

Note: The numbers in the graphs are not to be taken as accurate until they can be calibrated. Nevertheless, the pattern of the plots is the message of this post.

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Looking at the Consumption rate of Capital Income

Theoretically, capital income, especially in the form of retained earnings by corporations and some capital gains would be used for saving and investment in the means of production, while labor income is used for consumption of finished goods and services from production. However, a portion of capital income is used for consumption, when the incentives and extra liquidity are there.

What is the percentage of capital income that is used for consumption of finished goods and services? And is it helpful to know?

Here is the graph I put together showing the changes in the consumption rate of capital income since 1953…

capital C

Link to Graph #1.

The consumption rate of capital income reached 40% in the 1960s and then fell to almost 0% during the 1980 recession. Why the dramatic drop? And if we look to 2013, we see that the rate is making a comeback.

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Behavior of capital income is a precursor to a recession

A precursor is something that signals the arrival of something else. There are precursors to a recession. The trick is finding them. I want to show a precursor to the 2007 recession looking at the spending behavior of capital income.

Let’s look at a flow chart for the 1st quarter of 2007.

CF 07-1Q

Graph of 2007 flow chart

Now we look at the flow chart for 1st quarter 2008. The recession actually started in 4th quarter 2007 (December). Between the first graph and the second graph here, the recession formed and then started. Somewhere between these two graphs is a precursor to the recession.

CF 08-1Q

Graph of 2008 flow chart

I want to attract your attention to some numbers.

  1. Investment as a percentage of GDP dropped from 17.9% to 16.9%.  However, investment stayed at 18% through the 3rd quarter of 2007, so we cannot call it a precursor.
  2. Now look at capital consumption as a percentage of income. It dropped from 14.3% to 0.1%. Was it a dramatic drop in the 4th quarter? First realize that this capital consumption rate was running between 11% and 16% from 2004 to 2007. It reached its peak in 2006. Here is how capital consumption fell during 2007. (1st quarter=14.3%…. 2nd quarter=12.3%… 3rd quarter=9.0%… 4th quarter=3.6%… 1st quarter 2008=0%) By 1st quarter 2009 one year later, capital consumption had inched back up to 2.1% of its income.
  3. There is another number that is not seen directly in the flow charts and has to be calculated. The percentage that labor saves to the total gross saving. In the chart, it is… “(Saving/Imports)/Gross $$ Saving. (Saving is not divided by imports. Just use the value in the box labeled “Saving/Imports” in the labor income section.) This number was running at 55% during 2006 until the 1st quarter of 2007. Here is how it fell during 2007. (1st quarter=55%… 2nd quarter=53%… 3rd quarter=51%… 4th quarter=50%) The number eventually kept falling to its current level of around 48%, which has held since 2009.

The idea is that we could use the capital consumption rate and labor’s percentage of gross saving as precursors to a recession, because they start dropping months in advance of the actual recession.

When capital starts consuming less a couple of quarters before a recession, they see the writing on the wall that there is trouble. They tighten their spending or are forced to tighten their spending. Capital sees this trouble before the general public and changes their behavior. Capital starts saving money instead of using it for consumption. Once the recession began, capital income stopped being used for consumption.

2001 recession (started 1st quarter 2001)

Capital consumption rate (1stQ 1999=12.3%…  4thQ 1999=5.8%…  1stQ 2000=0%…  2ndQ 2000=3.9%…  3rdQ 2000=2.0%…  4thQ 2000=1.1%…  1stQ 2001=0.5%…  1stQ 2002=3.1%…  1stQ 2003=7.2%) We see the same behavior. Capital consumption was falling at least a year before the recession. It finally reached a capital consumption rate near zero for the quarter when the recession started. Then two years after, it had climbed back up to 7.2% on its way to 16.4% in 2006.

(Note: Do you find it interesting that the capital consumption rate fell from 5.8%% to 0% from 4th quarter 1999 to 1st quarter 2000? It seems capital had its hopes up to make money off of Y2K. When the problems didn’t appear, capital didn’t consume. Capital income consumed again in 2nd quarter 2000, but then decreased its consumption until the recession.)

The key to these numbers is to see them as guidelines showing the behavior of capital consumption. In the case of 4th quarter 2000, a 1.1% would have signaled major problems brewing a month or two before the actual start of the recession in March of 2001. Even so, we would have been aware of problems 8 months ahead of the recession by seeing a low capital consumption rate of 3.9% in 2nd quarter 2000.

Currently the capital consumption rate is running around 21%. The rate had reached 16% by the 1st quarter of 2012. Even before the 2007 recession, capital had never used more than 17% of its income for consumption. The most I have seen so far in the flow charts I have done is 24% in 1980. So, capital is consuming a lot at the moment. Capital’s consumption may be close to peaking, and in such a case would make a good “sensitivity” precursor for economic trouble ahead… the “canary in the coal mine” for a recession as it were.

From these flow charts, we can see what the rich are thinking. They cannot hide their consumption or lack thereof. Within a couple of months, we see their behavior through these charts. We know what they are doing with their money. I might think that if capital’s consumption rate fell to 17%, for example, a yellow flag might go up for economic trouble ahead. If it fell to 14%, maybe a red flag. If it fell below 10%, recession imminent.

We will just keep an eye on how capital spends their income. So far they seem to be enjoying the income they have.

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Are we close to a recession? (update)

Last week the 2nd quarter numbers for labor share of national income came out. Labor share ticked up a bit from the previous quarter, but pretty much exactly the same.

There is a graph I use to detect if a recession is imminent. The graph gets updated as the labor share number is revised. Here is the graph produced from FRED.

recession

link to graph.

When the blue line goes below the yellow line, a recession was imminent 7 out of 8 times since 1967. As you can see, a recession was not imminent as of the 2nd quarter 2013.

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Brad Delong does not see a sign for low path of potential GDP

Brad Delong wrote today…

“There are no signs in the pace of technological progress, in the level of investment, in the pace at which the American labor force educates itself, in measures of capacity utilization, in signs of upward wage pressure due to labor quality bottlenecks, or in surging commodity prices due to supply bottlenecks to suggest that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007.”

But there is a sign and I have showed this before on Angry Bear blog (and here too)… A lower labor share of income will result in a lower equilibrium level of GDP. It does not matter if the economy is functioning perfectly. A lower labor share of income will create a dynamic to lower the equilibrium level of GDP.

Brad Delong is completely missing this…

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Comparing Labor and Capital incomes (Past and Present)

Labor and capital both receive income. How do labor and capital consume products or contribute to savings differently? How have these differences changed over the years? What can we learn from the changes?

To answer these questions, I made a model based on the circular flow of the economy, where I separated labor income from capital income. Then using the official data for the National Income Accounts and other key pieces of data, I deduced the differences between labor income and capital income. Capital income refers to corporate profits and income received from capital ownership. Capital income has a primary function to be invested in maintaining and increasing the productive capacity of capital. Labor income refers to income received by people working. Labor income has a primary function to consume finished goods and services.

In the model, GDI (gross domestic income) starts flowing from firms and is paid to labor and to capital. But how does labor use its money? How does capital use its money?

I divided the use of the income into the standard variables of the national income equation…

  1. Consumption on finished goods and services,
  2. Net taxes,
  3. Saving for economy,
  4. Imports and Exports.

As the income flows through the economy, the financial sector is key through its lending and borrowing to turn net taxes into government spending, saving into investment and imports and exports into net exports. As the national income reaches firms in the form of consumption, government spending, investment and net exports, the result is gross domestic product, GDP. GDP is the product produced for consumption, government spending, investment and net exports.

This model shows an equilibrium state for the economy for one specified quarter in time. All numbers are balanced so that the beginning out-going gross domestic income for that quarter equals the money received by firms for their gross domestic product. In reality, the economy is dynamic, where the final GDP will be different than the beginning GDI. However, reducing the economy to an equilibrium model simulates a snapshot in time and allows the differences between labor and capital to be better determined.

Steps to setting up the circular flow model involved…

  • Getting an accounting format to incorporate all variables.
  • Getting the numbers for national accounts. (source)
  • Getting the effective tax rate for capital income. (source)
  • Government net borrowing/lending as a % of GDP. (source)
  • Getting the effective labor share of national income using my research into effective demand. Effective labor share determines effective demand limit upon real GDP.

I made two assumptions in the deduction process…

  • Capital’s consumption is 25% more likely than labor income to purchase imports. The reasoning is that capital money is able to purchase luxury items from abroad which cost more. Also, capital income has more ties to foreign countries. 25% as compared to 0% does not make much difference in the final numbers, but a set percentage improves comparison between years. If research is found that compares capital’s propensity to import as compared to labor’s propensity, then those numbers will be factored in.
  • Personal saving rate applies directly to labor income. This model uses effective labor income to determine the part of labor income that establishes the effective demand limit on the economy. I did not attempt to adjust the personal saving rate into an effective personal saving rate for effective labor income. I just kept the official personal saving rate as a commonly accepted rate for household income, as opposed to domestic business income.

The following models seek to give perspective on the economy. They provide an overall view in the bottom half where labor and capital income combine into national aggregate numbers. The models also provide a focused view of the differences between labor and capital incomes in the top half.

Let’s start by looking at 1985… (all dollar values are in real 2009 dollars in order to compare different years.) (The yellow highlighted boxes are marginal propensity to consume (MPC) and marginal propensity to save without imports (MPC) in relation to disposable income. Disposable income = Income – net taxes.)

CF 85-1Q
Graph of 1985

Some numbers to highlight…

  • 8.8% was the personal saving rate.
  • 4.8% government deficit as percentage of GDP.
  • Marginal propensity to consume (MPC) of 91.2% for labor income. (MPC applies to labor income minus labor net taxes.)
  • $446 billion for labor saving. (The $968 billion under labor saving includes labor saving plus the saving created by import dollars. The import dollars do not belong to labor but are created by labor’s consumption of imports. The same applies to capital saving.)
  • Keep note of the effective tax rate of Capital. In 1985 it was 33%.

Now we jump to 1995…

CF 95-1Q
Graph of 1995

A few highlights…

  • MPC of labor increased.
  • Imports are increasing as a percentage of GDP.
  • Government deficit has decreased.
  • Personal saving rate has decreased to 7.1%.
  • Capital was still using about 6% to 7% of its total income for consumption.
  • Capital’s effective tax rate was still over 30%.
  • Labor’s saving rate declined from 7.4% to 6.0% of total income.
  • Investment was still running 15.0% to 15.5% of GDP. Investment is non-governmental domestic investment. (In the early 1970s and 1960s, government spending was around 30% of real GDP. By 1995, the government was spending 22% of real GDP. Private domestic investment rose from 12% to 15% over that same period. The implication is that the government did more investing in productive capacity back in the 1970s and 1960s than in recent decades.)

Now we jump to the 1st quarter of this year, 2013…

CF 13-1Q
Graph of 2013

A few highlights…

  • Labor is actually saving less than it did in 1985 in real dollar terms, $409 billion as opposed to $446 billion, in spite of real GDP being more than double.
  • Capital income has increased its percentage of consumption from around 7% in 1985 to 20% now. That indicates that ownership of capital is currently producing more income in excess of what is needed for saving and domestic investment.
  • Net taxes on capital have fallen from over 30% in the past to around 15% now. This has allowed capital income to increase its percentage of both consumption and saving over time.
  • Savings rate for personal income has dropped to 3.6% of total income in spite of a lower effective tax rate. On the other hand, capital’s percentage of saving to total income has risen to 65.3%.
  • Labor is now having to use over 85% of its income for consumption, as opposed to 76% to 78% in the past. This indicates that labor is liquidity constrained for consumption, and that their income has not kept pace with prices.
  • Imports as a percentage of GDP continue to increase.
  • Investment has increased a little since 1995 going to 15.8% of real GDP.
  • Total net taxes used to be around 19% of real GDP before 1995. By 2013, it had dropped to 12.1%.
  • From 1995 to 2013, total real effective capital income increased by 99% going from %2,052 billion to $4,078 billion. On the other hand, total real effective labor income only increased 42% going from $8,090 billion to $11,521 billion.

The graphs above reveal a story of how financial power has shifted in favor of capital income.

Is there an unhealthy imbalance in the economy when capital income increases its consumption as a percent of total income from 7% to 20%? Has capital income risen beyond healthy levels for society as a whole?

Other years for reference…

link to 2006.

link to 1980.

link to 1970.

In 1970, labor income was very strong. Labor seemed to provide the savings for investment.

ling to 1960.

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What happens to the US dollars used to buy imports?

When we as US citizens use our income, whether labor or capital income, to buy a product from another country, those US dollars are remitted to a bank. Now the bank may be in the United States or in a foreign country.

If the US dollars are remitted to a foreign bank, that bank pays the exporter in local currency, and then sends those US dollars to that country’s central bank in exchange for local currency. The central bank of the foreign country then holds the US dollars in their Foreign Exchange Reserves.

The US dollars in the foreign exchange reserves can be used for investment anywhere, in Europe for example. Now Europe holds US dollars in their foreign exchange reserves.

What happens to those US dollars? Do they stay overseas? Do they ever come back? Some are used to buy our exports, but since we have a trade deficit, many of those US dollars remain overseas. This would result in an imbalance. However, through the Balance of Payments mechanisms, imbalances in the foreign exchange reserves can be corrected.

“When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries.” (Wikipedia)

Thus, we see that those US dollars that leaked out of the US economy from purchases of imports by labor or capital are counterbalanced in various ways, including foreign investment in the United States, loans from foreigners and the actions of foreign central banks. One reason why a foreign central bank would use its foreign exchange reserves of US dollars is to protect its own currency.

The purpose of writing this quick post is to show that US dollars going to imports are not lost. They don’t disappear. There are mechanisms to keep them balanced within the global presence of the US economy. An accounting of the US economy that keeps track of those US dollars in foreign exchange reserves would be considered more complete.

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More Reflections on the Circular Flow of National Income

After posting an article about how imports create saving for investment, a conversation was started. The conversation led to doing more research and developing new explanations to understand the basic circular flow model. This is actually a very important issue to get right. The circular flow is such a basic part of understanding the economy.

Normal Flow diagrams are misleading

If you look at a typical diagram for the circular flow on the internet or in a textbook, you will see exports feeding directly back into firms. Here is an example.
flow 1
The implication in the typical circular flow is that what flows out of households is equal to what flows into firms.
GDP flowing out = Cd + s + T + M  (1) … where s = net personal savings.
GDP flowing in = Cd + I + G + X  (2)

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Imports are National Saving used for Investment

In the circular flow model that I use, as imports rise so does gross saving. And does that increased saving show up in increased investment? How would imports lead to more investment?

Here is the model as a closed economy without imports and exports using 1st quarter-2011 data as an example.

Circular flow ext 12

link to Graph #1

This graph simply takes out imports and exports from the data. Now start at gross saving, $3,059 billion. Part of that money is then lent to the government, $1,391 billion. The remainder is used for investment, $1,668 billion. So we have the equality…

S – I = G – T

3059 – 1668 = 3012 – 1621

G = govt. spending… T = net taxes… S = gross saving… I = investment

There is another way to get the same equation in the model. The row for leakages is equal to the row for injections. Here is the equation and then simplified. (C = consumption)

C + T + S = C + G + I

C + T + S (leakages)… C + G + I (injections)

Cancel out C from both sides and rearrange…

T + S = G + I

(S – I) = (G – T)

Now we will open up this model to foreign markets. Here is the data from 1st quarter 2011 including imports and exports.

Circular flow ext 11

link to Graph #2

I want you to see that gross saving increased from $3,059 billion to $5,370 billion. The increase was $2,311 billion… the same amount as imports.

So how do imports directly raise gross saving?

When we buy an import, where does our money go? It goes into the foreign exchange market. The foreign exporter then receives their own currency from the foreign exchange market. And our dollars remain in the foreign exchange market.

But now what happens with the dollars sitting in the foreign exchange market? Theoretically they must come back to the United States to either purchase US assets, goods and services (exports) or to be invested in the United States. Theoretically, those dollars sitting in the foreign exchange markets are part of the gross saving of the United States. Thus, gross saving in graph #2 includes money in the foreign exchange market.

So what do we see happen in graph #2? Of the $2,311 billion that went into the foreign exchange market from imports, $1,855 billion came back from the foreign exchange market when foreigners bought US goods and services. We see that $1,855 billion leaving the financial sector “Lend (-)/borrow” entry going to the export entry.

So what happened with the $456 billion difference between imports and exports that was still left in the foreign exchange market? That $456 billion moved right down into the investment entry of $2,124 billion. That $456 billion was eventually invested in the United States. Notice that investment rose $456 billion from graph #1 to graph #2 (from $1,668 billion to $2,124 billion).

So then what does the entry for net exports of -$456 billion mean? In effect, the entry of -$456 billion of net exports is an accounting entry to close the books at the end of the year representing the money that flowed back from the foreign exchange market for investment in the US. In actuality, that $456 billion stayed in US gross saving account, even though it was transferred back by transactions with foreigners. The accounting entry simply balanced the books with the foreign sector.

They don’t call it National Income Accounting for nothing.

Correcting the Twin Deficits Hypothesis

In the circular flow model above, look at the row where the leakages are. The row has the equation…

C + T + S – M

C = consumption… T = net taxes… S = gross saving… M = imports

Now look at the row for “injection returns/expenditures”. The row has the equation…

C + G + I + X – M

C = consumption… G = govt spending… I = investment… X – M = net exports

Now the two equations above are equal.

C + T + S – M = C + G + I + X – M

We cancel out C and M from both sides.

T + S = G + I + X

Rearrange…

(S – I) + (T – G) = X

Some of you should be saying… “That can’t be right, the correct equation is…”

(S – I) + (T – G) = (X – M)

This is the equation usually seen from the Twin Deficits Hypothesis. The implication of this equation is that as the govt budget deficit increases, G>T, holding saving constant, that either investment must fall, or the trade deficit must increase. Basically, government deficits worsen the economy.

However, once you realize that imports create an equal amount of savings for investment, you realize that the correct equation is…

(S – I) + (T – G) = X

Imports are inside gross saving, S, by way of the foreign exchange market. From the above graph, the equation comes out like this…

(5370 – 2124) + (1621 – 3012) = 1855

1855 = 1855

The equation is like this… If you increase the government deficit by raising G in the equation, holding exports constant since it is determined by foreign demand, investment would fall. However, a country does have the option to raise gross saving by importing more. Imports are gross saving used for investment. Consequently, investment would not fall.

Currently, people want to support investment. Maybe by increasing imports, we can support investment. But really, raising labor income is still the best way to raise domestic investment. More labor income would increase consumption and it would increase saving through more personal savings and more purchases of imports.

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Been tinkering in the Circular Flow laboratory

My last post on the circular flow using labor and capital incomes sure was a mess. As you would see, some of the post had to be scratched out. I was not happy with the circular flow. What you are witnessing is a creative process.

The circular flow model needed a lot of work. So I went into the laboratory and tinkered.

I first had to get the accounting right. Then I had to find the right numbers. Then I had to apply a process of deduction to calculate numbers that are not available, like… how much imports are purchased by capital income? Where would you find such a number? Well, I had to deduce it. Most of the numbers were found through the U.S. Bureau of Economic Analysis website. They have interactive tables there for national income accounts. (I will specify the tables and the lines for numbers below.)

Here is the product from the laboratory. Numbers are for 1st quarter 2011. (billions of 2009 $$). The model still looks the same, but the accounting is correct now. The main difference is that imports had to be negative.

circular flow ext 11

Link to graph

Let’s start at the bottom of the flow and work up. I will state the number and then how it was determined. For all tables, go to this BEA link. The numbers for 1st quarter 2011 are in the first column of the tables.

  • In-coming GDP… table 1.1.6, line 1. (real GDP)
  • Consumption… table 1.1.6, line 2
  • Govt. spending… table 1.1.6, line 22
  • Investment… table 1.1.6, line 7
  • Net exports… table 1.1.6, line 15

Note: The four account numbers do not add up to the real GDP number given in table 1.1.6, line 1, because there is a residual in the data.

  • Exports… table 1.1.6, line 16
  • Imports… table 1.1.6, line 19. (Imports is made negative because it is the loss of funds from the circular flow.)
  • Govt. borrowing… I did not find this number in real 2009 dollars, so I took the ratio of nominal numbers to determine this number. First number… Government consumption, table 1.1.5, line 22. Second number… Net government saving, table 3.1, line 26. I divided the second number by the first. Then I applied that ratio to the Government spending number in real 2009 dollars.
  • Net taxes (total) = Govt. spending – Govt. borrowing
  • Saving (total)… Difference between imports and total net taxes.
  • Lend (-)/borrow… This is the combined amount that the financial sector gives to the government and to currency exchanges for exports. It has two ways to be determined. One, Investment minus Saving. Two, the negative of exports and govt. borrowing added together.

Now we go to the upper half of the circular flow. I give the order that numbers need to be deduced.

  • Out-going GDI… table 1.1.6, line 1. (real GDP)
  • Effective labor income… effective labor share * GDI… effective labor share was 76.0% in 1st quarter 2011.
  • Net tax rate (labor)… table 2.1, line 26 divided by line 1.
  • Net taxes (labor) = net tax rate * effective labor income
  • Saving (labor)… I first find the percentage of household net saving to total net saving. Table 5.1, line 8 divided by line 3. Then I multiply that ratio by total saving, which is $5370 in the graph.
  • Imports (labor)… Determining this number is more involved. In this model, Total income = consumption + taxes + saving + imports. I subtract taxes from both sides to get disposable income. Disposable income = total income – taxes = consumption + saving + imports. We already know labor disposable income from effective labor income minus labor net taxes. Now, we need the personal saving rate to determine imports. The personal saving rate = (saving + imports)/disposable income. (Saving plus imports are the “saving” funds left over after consumption.) Now we can solve for imports. Imports = personal saving rate * disposable income – saving. We already have labor disposable income and labor saving. To find the personal saving rate go to table 2.1, line 35.

Note: The difference between imports and saving is what a person actually saves. If labor imports are greater than labor saving, households have a negative saving rate. If labor imports are less than labor saving, households have a positive saving rate.

  • Consumption (labor) = effective labor income – labor net taxes – labor saving – labor imports
  • MPC (labor) = labor consumption/labor disposable income… (marginal propensity to consume)
  • MPS (labor) = (labor saving – labor imports)/labor disposable income. (MPS = personal saving rate) … (marginal propensity to save)

Note: The percentages next to the labor numbers are just their percentage of total labor income. The same applies to capital.

This completes the labor section. Now we move on to the capital income section.

  • Effective capital share = 1 – effective labor share
  • Effective capital income = effective capital share * GDI
  • Net taxes (capital) = total net taxes – labor net taxes
  • Net tax rate (capital) = capital net taxes/effective capital income
  • Saving (capital) = total saving – labor saving
  • Imports (capital) = total imports – labor imports
  • Consumption (capital) = total consumption – labor consumption
  • MPC (capital) = capital consumption/capital disposable income ... (capital disposable income = capital income -capital net taxes)
  • MPS (capital) = (capital saving – capital imports)/capital disposable income

Note: The numbers from labor and capital combine into boxes that are checked against the numbers in the bottom half.

Comments on getting better numbers would be appreciated. The government does not provide data specifically for this flow. So some percentages were used to represent the “effective” laborer and the “effective” owner of capital. I am sure the numbers aren’t perfect, but they begin to reveal new insights.

There you have the living, breathing circular flow with working parts. I hope you find it as interesting as I do.

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