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

In the New Gilded Age, Capital is not for Investment

Many years ago, Goldman Sachs published research showing that, from about 1995 to 2004, more money had been taken out of S&P 500 companies in dividends and share buybacks than the companies had earned during that period.

You would think Boards of Directors and Shareholders would know better than to do it again. You would be wrong (registration required):

Stock buyback activity in US equity markets is simply staggering at present: $646 billion for the 12 months ending June 2018 for the companies of the S&P 500. Total dividend payments aren’t far behind, at $436 billion. The bright spot: the total of the two is $1,082 billion, only 90% of 12 month trailing operating earnings of $1,197 billion. That’s a better buffer than existed in 2015/2016, and an underappreciated positive for US stocks….

Unlike 2015/2016, the companies of the S&P 500 are no longer spending 100% or more of their operating profits on buybacks-plus-dividends. In those years, the ratios were 108% and 102%, respectively.[all emphases mine]

Companies are not re-investing.  Anyone who expects productivity growth in such an environment is probably going to be gulled into believing there is a Great Stagnation, and not the Return of the Robber Barons.

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Is this Short Covering, or Are the Suckers Flooding the Market?

Via ElNuevoDia at LG&M, “Gamblers are now betting that Kavanaugh will not be confirmed.”

The market in question, at PredictIt, seems rather straightforward. Note, though, that the contract only opened five days ago (18 September) and traded consistently in the 60-70% range through yesterday (22 Sep), closing at 61% and only reaching as low as 55%.

In the past two hours, more than 20,000 transactions has occurred, which is greater than the volume on any previous day, with no trade higher than 60, and none in the past hour above 42. (It is 9:13 EDT as I write this.) The 24-hour graphic is impressive in its consistency:

until it’s not.

The open question is whether the buyers at the lower level are the same people who were selling in the 60s and 70s (the ratio of Trades to Shares is roughly 2:1; some of the previous activity was clearly coverage) locking in a profit against new, relatively low-information buyers, or if the route is on.

It appears the opportunity for buying at the bottom has passed; it remains to be seen if the market will stabilize at low levels or recover as time passes without new information and/or the termination of the contract.

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Ten Years Have Got Behind You

It has been almost ten years since:

  1. Bear Stearns folded
  2. Lehmann collapsed of its own free will
  3. I posted on this blog
  4. All of the above

Those who guessed “c” or “d” are optimists. Those who are expecting a long series of posts dwelling on the correct answer of “b” (with some references to “a” and AIGFP) will not be disappointed.

But this is an introduction. I have been trying to think of how to simplify ten years of lessons as if there were one root cause. And I think I finally have it.

Two friends were claiming that Democratic politicians have to be nice, noting that otherwise Republicans will obstruct anything they try to do if there is ever a free election in the United States again. My response of “So what?” (a more direct version of my usual “Ma nishta ha’lailah hazim?“) was met with reminiscence from them of the Good Old Days when the Democrats had a fighter in the mix: James Carville.

So I have been thinking about Carville today, and especially his most famous quote:

I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.*

And therein lies the problem. He said this in the early 1990s. By the time fifteen years had passed and the world economy went over a securitization cliff abetted by “Weapons of Mass Destruction” that are used in ways so obviously non-economic that an economist looking at the market for the first time called them out ten years ago—and virtually nothing (on net) has been done to ameliorate the situation since.

But back to the bond market. If there is one lesson from basically Hallowe’en of 2006 to September of 2008 should have taught everyone, that should have been that the problem isn’t that the bond market is feared; the problem is “What if the bond market is correct?”

Select for full-size view

To be continued…

*His most accurate quote may well be “What I’m suggesting is, stand for yourself, be for something and the hell with it. Because the hand-wringers and the editorialists and the sigh-and-pontificate crowd will be against you, whatever you do.”

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Minimum Wage Effects with Non-Living Wages

I’m teaching “Economics for Non-Economists” this semester. This is an interesting experiment, and is strongly testing my belief that you can teach economics without mathematics so long as people understand graphs and tables. (It appears that people primarily learn how to read graphs and tables in mathematics-related courses. Did everyone except me know this?)

Since economics is All About Trade-offs, our textbook notes that minimum wage increases should also mean some people are not employed. Yet, as I noted to the students, in the past several decades, none of the empirical research in the United States shows this to be true. (From Card and Kreuger (1994) to Card and Kreuger (2000) to the City of Seattle, in fact, all of the evidence has run the other way, as noted by the Forbes link.)

Part of that is intuitive. If you’re running a viable business and able to generate $50 an hour, it hardly makes sense not to hire someone for $7.25, or even $9.25, to free up an hour of your time. The tradeoff is that your workers make more and your customers can afford to pay or buy more. Ask Henry Ford how that worked for him.

The generic counterargument (notably not an argument well-grounded in economic theory) was summarized accurately by Tim Worstall in one of his early attempts to hype the later-superseded initial UW study for the Seattle Minimum Wage Study Team.

[T]here is some level of the minimum wage where the unemployment effects become a greater cost than the benefits of the higher wages going to those who remain in work.

This seems intuitive in the short-term and problematic in the long term, even ignoring the sketchiness of the details and the curious assumption of an overall increase in unemployment (or at least underemployment) if you assume a rising Aggregate Demand environment. To confirm the assumptions would seem to require either a rather more open economy than exists anywhere or a rather severe privileging of capital over labor.*

On slightly more solid ground is the assumption that minimum wage should be approximately half of the median hourly wage. But then you hit issues such as median weekly real earnings not having increased much in almost forty years, while a minimum wage at the median nominal wage rate suggests that the Federal minimum wage should be somewhere between about $12.75 and $14.25 an hour. (Links are to FRED graphics and data; per hour derivations based on the 35-hour work week standard for “full-time.”)

So all of the benchmark data indicates that reasonable minimum wage increases will have virtually no effect, and none on established, well-managed businesses. The question becomes: why would that be so?

One baseline assumption of economic models is that working full-time provides at least the necessary income to cover basic expenses. Employment and Income models assume it, and it’s either fundamental to Arrow-Debreu or you have to assume that people either (a) are not rational, (b) die horrible deaths, or (c) both.

If you test that assumption, it has not obvkiously been so for at least 30 years:


The last two increases of the Carter Administration slightly lag inflation, but they are during a period of high inflation as well; the four-year plan may just have underestimated the effect of G. William Miller. (They would hardly be unique in this.)

By the next Federal increase, though—more than nine years of inflation, major deficit spending, a shift to noticeably negative net exports, and a couple of bubble-licious rounds of asset growth (1987, 1989) later—the minimum wage was long past the possibility of paying a living wage, so any relative increase in it would, by definition, increase Aggregate Demand as people came closer to being able to subsist.

The gap is greater than $1.50 an hour by the end of the 1991 increase. The 1996-1997 increase barely manages to slow the acceleration of the gap (to nearly $1.70), leaving the 10-year gap in increases to require three 70-cent increases just to get the gap back down to $1.86 by their end in 2009.

Nine years later, almost another $1.50 has been eroded, even in an inflation-controlled environment.

Card and Kreuger, in the context of increasing gap between “making minimum wage” and “making subsistence wage,” appear to have discovered not so much that minimum wage increases are not negatives to well-run businesses so much as that any negative impact of an increase, under the condition that the minimum wage does not provide for subsistence income, will be more than ameliorated by the increase in Aggregate Demand at the lower end.

My non-economist students had very little trouble understanding that.

*The general retort of “well, then, why not $100/hour” would create a severe discontinuity, making standard models ineffective in the short term and require recalibration to estimate the longer term. Claiming that such a statement is “economic reality,” then, empirically would be a statement of ignorance.

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Any Economist Who Talks about Rational Investment is Full of Shit, Hoosier Edition

CPAC had a gathering of Republican Governors today. As Jennifer Hayden (@Scout_Finch) on Twitter noted, the Brownback/Walker/etc. panel was called “How to ruin your state’s economy with one easy tax cut.”

So naturally my thoughts shifted to the one way blowing up your state’s economy could be ameliorated: if some unearned windfall occurred. Could a Legislature be saved from itself?

Lo and behold, the PowerBall jackpot was won by a ticket in Lafayette, IN, last night. The Indianapolis Star (Dan Quayle’s ancestral paper, fwiw) notes that this is the second large-value ticket won in the Hoosier State in the past nine months:

A Powerball ticket purchased in Lafayette is worth about $435 million this morning, a Hoosier Lottery official said Thursday….

In July, another Hoosier hit a big jackpot in the Mega Millions game. That ticket, worth about $541 million, was sold at a Speedway gas station in Cambridge City.

One great thing about having people win nearly $1,000,000,000 in the lottery is the tax windfall for the State.

So what is the brilliant Indiana State Senate planning to do with those windfall profits? If you guessed “invest in human capital,” you must be an idiot or an economist (but I repeat myself):

A powerful Indiana Senate panel on Thursday slashed a proposed funding increase for a state program that sends poor children to preschool, jeopardizing a major pillar of Republican Gov. Eric Holcomb’s agenda.

The move imperils efforts by Republican and Democratic education advocates to help Indiana catch up with more than 40 other states that offer significant preschool programs, according to 2015 figures from the National Institute for Early Education Research at Rutgers University.

So much for that Rutgers-joining-the-Big-Ten thing meaning that Indiana State Senators pay attention to the needs of their constituents:

Increasing state funding for preschool programs was a major issue in the governor’s race last year. Democrat John Gregg called for a universal program, while Holcomb said he supported expanded access for poor kids. The state currently spends $10 million a year on a preschool pilot program, called On My Way Pre-k, which is offered in five counties. But advocates say demand far outstrips available funding and sought $50 million for preschool programs in the next state budget.

The Thursday vote by the Senate Appropriations Committee reduced a $10 million a year increase that Holcomb sought to $3 million.

Maybe that $7MM savings will go toward saving two more jobs at Carrier. Maybe the Fed could get interested; I hear an unpopular ex-Governor from that State might now have a position of power there.

The current pilot program was created at the behest of former Gov. Mike Pence, now the vice president, over the objection of many skeptics. But Pence shocked advocates when he opted not to seek $80 million in federal preschool funding for the effort.

Gosh, I wonder why he “shocked” them?

The adoption of a statewide program has proven politically difficult with tea party groups, religious conservatives and a network of home schoolers opposed.

Oh, right, because they were stupid enough to believe he cares about his constituents in the first place.

Short of destroying the entire Midwest with a neutron bomb, there is no chance those states will contribute positively to the economy this century. But economists will keep pretending that they aren’t destroying their seed corn, which may be even more pathetic.

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When to Stop Reading a “Non-Fiction” Article

(cross-posted from Skippy the Bush Kangaroo)

Mark Thoma sends us to Benjamin M. Friedman. Given that imprimatur, one expects precise analysis. (Mark, after all, is an econometrician by trade.)

So it was surprising to stop reading so early. Specifically, I gave up on this cretinous piece of garbage at:

especially during the president’s first year in office, when the Democrats held a filibuster-proof supermajority in the Senate

Just so you know I’m not pulling from context:

The most pressing among [other economic problems than that “roughly one in six Americans — 50 million in a population of 307 million — had no health insurance”] was, and remains, financial reform. Rather than advance its own set of proposals — especially during the president’s first year in office, when the Democrats held a filibuster-proof supermajority in the Senate — the administration largely left the matter to Congress.

So this is the usual argument. The stimulus had been passed, so “the Obama domestic agenda shifted to health care.” I consider this horseshit*, but your mileage may vary.

What is clearly horseshit though, except in the most technical of senses, is the claim that “the Democrats held a filibuster-proof supermajority in the Senate” as if that were for the entire first year of Obama’s presidency, not just from 07 July 2009 (when Al Franken was finally sworn in as the 60th Democrat) to 25 August 2009 (when Ted Kennedy died).

Less than two months isn’t even close to a year, and “a lie is a very poor way to say hello.”** It’s an even poorer way to premise the rest of your “but Obama didn’t try to deal with MY problems” article—especially when he did.

Billmon was correct ten years ago; the Washington Post should have been destroyed with fire and sword. (Indeed, Billmon just neglected to mention the need to salt the earth at 1150 15th street NW.) Jeff Bezos appears determined to continue the tradition.***


*The Administration did, after all, continue to support and argue for “financial reform”–the Consumer Financial Protection Board was founded on 21 July 2011.

**in the words of Edith Keeler and/or Harlan Ellison

***This is datapoint number 1,000,000 or so in favor of that.

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Tim Duy Explictly Declares Reality is Real

And confirms that his own position: is the same as that of Brad DeLong (et cetera.) and those of us who try paying bills

[T]he [Federal Funds Interest Rate target] debate has shifted in the opposite direction as market participants weigh the possibility of a rate cut. The Fed is probably not there yet, but internally they are probably increasingly regretting the unforced error of their own – last December’s rate hike. [emphasis mine]

Now he just has to come a few steps further to realize that the major U.S. money center banks remain insolvent. But that’s outside of his purview as Watcher to Feds, so we shouldn’t expect to see that in print anytime soon.

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The Fed Continues Trying to be Insane

The Fed did the right thing, and moved in the right direction, though in part for the wrong reason today.

Go to Tim Duy for the rational approach. For me, I quote the Fed

Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. [emphases mine]

check the market

bberg20150615

and conclude that, with one exception, the only question worth asking is, “What color is the sun on the planet of the Fed Governors?”

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