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

INCOME INEQUALITY

Jarad Berstein at
http://www.tpmcafe.com/blog/coffeehouse/2007/dec/13/boy_have_we_got_an_inequality_problem just reported that the

The Congressional Budget Office (CBO) just updated their invaluable data series on income inequality.

In looking at them I came up with a couple of very interesting charts.


In recent years there has been one big factor in this redistribution of income that
has not been discussed much. That is the massive increase in profits share of GDP
that happened this cycle.

The primary factor behind this large increase in profits has been firms ability to
capture the large productivity gains this cycle in higher profit margins rather
than in labor compensation.

Standard economic theory says this large gain in profits should be reflected in higher
savings and/or higher capital spending. But we have not seen either response.
However, the much higher income inequality and large cyclical increase in profits
have generated somewhat higher tax receipts than we had at the bottom of the cycle.
So through these mechanisms we do seem to be getting something of a supply side
impact on tax receipts, but given these other developments it is amazingly small.

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NOVEMBER RETAIL SALES DATA

The November retail sales data clearly do no support a recession scenario.

Nov(3)

Oct

sept

total

385,753

381,088

380,231

grocery

43,417

43,003

42,805

gas

39,438

36,919

35,806

Nonstore retailers………………………….

25,611

25,127

25,016

REMAINDER

277,287

276,039

276,604

About half of the nonstore retailers is fuel oil deliveries. So if you take out the price driven
large increases in food,gas, and nonstore retail there is still about a 0.5% gain. Moreover, for most of this it is real gains as prices for most retail goods are actually flat to down.

%

total

1.2

grocery

1.0

gas

6.8

nonstore retail

1.9

remainder

0.5

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How Modern Capitalism Really Works

This is from the Oregonian via Division of labor

Big Boxes to the Rescue

On Wal-Mart et al. in the recent Northwestern deluge:

In cases of extreme weather and natural disasters, some of the nation’s largest retailers now behave like municipalities — sometimes better.

Retailers have created specialized divisions — or hired outside firms — to gird for emergencies. The goal: to speed recovery for customers, employees and ultimately sales.

No one is clear how many retailers operate internal emergency units, but the practice is now standard among the biggest players, including Target Corp. and Lowe’s Cos. Inc.

This past week, Wal-Mart donated a 40-foot tanker of potable water to Vernonia, [Oregon,] while up north Home Depot opened its still-waterlogged Chehalis store for the town’s Chamber of Commerce to pick up face masks and cleaning supplies free of charge.

Such coordination became clear during Hurricane Katrina in 2005, when local governments praised initial responses from retailers as more expedient than those of the Federal Emergency Management Agency.

http://divisionoflabour.com/archives/004257.php

http://www.oregonlive.com/news/oregonian/index.ssf?/base/business/1197095130228920.xml&coll=7&thispage=1

Division of Labor does not allow comments, but I so wanted to make a common not to send this article to Don Boudreau at Café Hayek of other libertarians . Because they seem to be believe the only way to get supplies to natural disaster victims is some guy in the back of a pick-up truck gouging them with high prices.

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EMPLOYMENT REPORT

Just a quick follow up on the employment report.

Not only did wage growth come in weak, but the prior data was revised down.
People had been looking at the downward revisions of the personal income data
and expecting to to see employment revised down. But rather than employment,
it was average hourly earnings that were revised lower. In particular, look at
sharp slowdown for the three month growth rate.

Interestingly, the new experimental measure of average hourly earnings had
been reporting weaker wage growth. This revision bring the standard measure
down to what the experimental had been reporting.

This has significant negative implications for consumer spending prospects.

The slow down in wage growth should be expected as growth weakens.
Surprisingly, my estimate of inflation expectations — a moving average of
the last three years trailing headline CPI — is the main reason my equation
implies that wages should be higher. This suggest that labors ability to off-set
higher inflation with higher wages is weaker then it use to be.

But it also implies that the Fed is likely to continue cutting rates.

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employment report


The employment report data continues to imply that the economy is slowly sliding into a
stagnation scenario.

I let others argue, but I do not see how one can avoid that conclusion.

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IMPORTS AND A WEAK DOLLAR

Tyler Cowen has an interesting article on the weak dollar in the Times today that is also discussed at economistsview.

Just so everyone would have a good view of imports market share I though I would publish this chart.

Discussion on the dollar often center on the impact of a weak dollar on imports. But this chart raises the question of how much the currency matters. Maybe the strength of the domestic economy is much more important then the dollar on this issue. Just something to think about.

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income mobility

The WSJ took the data from this study and created this graphic:

The reason that I posted the data below on how age distorted this study is simply because
this data massively overstates the degree of income mobility in the US.

It is one of the most blatant misrepresentations I have ever seen on the WSJ editorial page.

All I trying to do is show why the WSJ article is a misrepresentation because it never said a word about how aging distorts the data.

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income mobility

The Treasury recently came out with a study of income mobility in the US that is receiving a lot of play in the Wall Street Journal and in several blogs.

Income mobility studies are very difficult to do properly and often are very misleading because they incompletely adjust for different factors.

The biggest factor driving income mobility in the US is age. People start working as young people and as they gain experience and earn promotions they receive higher incomes. The Census Bureau reports data that shows how this process. According to their data in 2006 median incomes by age bracket were:

MEDIAN INCOME

AGE

2006

% ch

15-24

$30,937

25-34

$49,164

58.9

35-44

$60,405

22.9

45-54

$64,874

7.4

55-65

$54,592

-15.8

0VER 65

$27,798

-49.1

2006 is typical or normal. If you looked at the data in 1975, 1985 or 1995 or any year in-between you would find a very similar pattern of income growing sharply as people age and starting to fall after the age of 55 and falling very sharply after age 65 when most individuals retire.

The Treasury study looked at income tax returns of people over 25. In this way they avoided the problem of showing the Doctors daughter making $5,000 at age 20 with her summer job as a life guard at the country club and $50,000 at age 30 as a drug company representative.

Income mobility is commonly described as an escalator moving everyone on the escalator up over time. It is a good analogy, and the three factors drive this move. One is economic growth. If you take a snapshot of everyone on the escalator in 1995 and another snapshot in 2005 you can see how the average has changed and get a picture of how economic growth influence the location of the escalator.

The second factor is the aging of the population. This is what dominates this Treasury study. They took a sample of the population in 1995 and came back and looked at the same individuals in 2005 when everyone in the sample was ten years older. This approach deals with some of the problems in the first methodology where the comparison between 1995 and 2005 would look at different people. In the first methodology in 2005 the people in the 15-24 year old age bracket were not included in the 1995 snapshot and the 15-24 year olds are now in the 25-34 year bracket.

There is nothing wrong with this methodology and it deals with some of the problems in the first approach. It is a valid approach. But you have to be careful in evaluating what the results mean. For example, if you look at what happens to the income of the lowest quintile you see that their income grows very rapidly. Their incomes will grow rapidly because of three factors. One is overall economic growth that moves everyone higher. A second is age which will move everyone in the 25-34 age bracket into the 35-44 age bracket, etc (See below).. A third is what we normally think of as economic mobility as individuals through hard work, education and good fortune or luck improve themselves. But since this study is dominated by people aging the lowest income group of the 25-34 age bracket in 1995 and in the 35-44 age bracket in 2005. Given that it is normal for the average income of the 35-44 age bracket to be around 25% higher than the 25-34 age bracket the study finding that over half the individuals in the lowest quintile moved to another quintile is not surprising. What is surprising to me is that about half of the lowest quintile were still in the lowest quintile ten years later.

AGE

POPULATION

CHANGE

1995-05

(%)

15-24

1.2

25-34

-6.5

35-44

-2.7

45-54

33.3

55-65

45.9

over 65

10.7

The problem with the Wall Street Journal and several blogs analysis of this data is that they tend to credit all the change from 1995 to 2005 to overall economic growth and/ or
individual economic mobility. But this is misleading as the dominant factor driving the changes reported in the Treasury study is the aging of the population. But we do not have the data to age adjust the data to see how much of the reported improvement was due to this factor.

This is not to say that there is anything wrong with the Treasury study, It is a common shortcoming of many such studies. That is the reason why the best studies on income mobility are the new series of studies that look at lifetime earnings and compare lifetime earnings of one generation to the lifetime earnings of their parents generation.

But it does mean that many of the advances in average income reported and incomes of the lowest income quintiles emphasized in the Wall Street Journal discussion of the study are misleading. They are attributing the sharp growth in the income of the lowest income brackets to overall economic growth and income mobility when it is largely due to people moving into the next age bracket. But they conveniently fail to point this out.

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FDR and CAPITAL SPENDING IN THE DEPRESSION

I see the history rewriters are tying to develop a new meme about FDR and the depression. They are now trying to argue that FDR scared businessmen and capitalist so badly that they were unwilling to invest and this was why the recovery was so weak and the depression lasted so long.

As usual, they take a historic fact, that investment in the recovery was weak, and blame it on the New Deal policies and conclude that the New Deal had a negative impact. As the chart below shows, real nonresidential fixed investment in the depression was very weak when you compare it to post war cycles. Note, that in the chart I have rescaled the post-war cycles so you can easily compare the differences. The data is rescaled in two ways. One, the post-war data is quarterly data while the depression data is annual data. Two, the post-war data is on the right scale and the depression data is on the left scale and the scales are set so that the magnitude of the downturns appears similar even though the depression downturn was much larger.

The argument is that the weaker depression rebound was because FDR scared investors. It ignors the possibility that other factors that normally drive investment might have been responsible. Over the years as a business economist I have concluded that three factors dominate business fixed investment. They are corporate profits, capacity utilization, and the stock market. The stock market is earnings times the market PE. So using stocks as a variable captures the cost 0f capital as the market PE is it’s inverse. But it also means the variables double counts profits. For capacity utilization I use the gap between potential real GDP published by the Congressional Budget Office and actual real GDP. Not to get into a detailed discussion, but the following chart shows how well changes in the three variables have explained changes in real nonresidential fixed investment since WW II.

So the next step is to see how well these variables explain real nonresidential fixed investment during the depression. If they do a poor job it might imply that New Deal did scare business and capitalist into not investing. There is one problem in doing an exact comparison. The CBO does not calculate a real potential GDP series for the pre-war era so I can not calculate the GDP Gap for the earlier era in the same way. But it is an easy problem to surmount. From 1900 to around 1975 trend real gdp growth in the US was 3.5%. as this chart shows. So it is easy to substitute this trend real GDP series for potential real GDP to calculate the GDP gap.

So what did I find? I find that these three variables, profits, the GDP gap and the stock market do a great job of explaining real nonresidential fixed investment during the 1930s. One of the interesting points to make is that the equation does an outstanding job of capturing the turning points at the 1933 bottom and around the 1937-38 second recession.

In two years, 1935 and 1936 actual real capital spending was right at the bottom of the one standard error band and in one year, 1937, capital spending was moderately higher then the equation implied it should have been. But it has to be obvious that overall, the three factors of profits, capacity utilization and the stock market do an outstanding job of explaining business fixed investment in the depression just as they do in the post-WW II era. On balance this work clearly implies that the argument that FDR scared businessmen and capitalist into not investing is strictly a myth that is not at all supported by the data. Compared to post WW II cycles capital spending was weak in the late 1930s, but it was weak largely because of the massive excess capacity created by the economic collapse from 1929 to 1933, not anything FDR did.

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No single approach to the dollar works all the time. But the most important is interest rate spreads.

The reason the dollar appreciated so much in the early 1980s is that interest rate spreads exploded upward to attract the foreign capital needed to finance the structural federal defictit created by the Reagan tax cuts. Int he early 1980’s “crowding out” worked through the dollar to crowd out the manufacturing and other sectors sensitive to the dollar rather then the interest rate sensitive sectors. Later after a new structure of large foreign capital inflows to the US economy been established as the new norm the currency moves did not have to be as large as they had been in the early 1980s. But interest rate spreads were still the dominant factor driving the exchange rate.

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