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Saving, Investment, and Lending in the Real Economy (Graphs). S=I?

With all the chaff that’s been flying around (recently, and for years now) about saving and investment, dissaving, and lending/borrowing, I felt the need to go back to the numbers and see how they’ve played out over the decades in what we tend to call the “real” economy — domestic households and nonfinancial business. Click for larger:

Update: The signs were reversed for lending/borrowing. Graphs corrected and updated.

Screen shot 2013-04-16 at 7.17.56 AM

Here’s the lending/borrowing broken out for you:

Screen shot 2013-04-16 at 7.36.17 AM

This is all from the Fed FFAs. Saving is household/nonprofit net saving (after-tax/transfer income minus expenditures) + undistributed business profits (after-tax/transfer income minus expenditures and distributed profits [distributed profits are part of household income]). Details/spreadsheet on request.

I’ve actually written at least three (long) posts on this in course of building out these graphs, but now that the graphs are complete I find myself fairly flummoxed. Saving seems to always be wildly insufficient to fund investment (and no, lending/borrowing + saving has no relationship either). S=I seems to provide exactly zero illumination here.

And the post-1990 lending/borrowing swings I see don’t fit with any real-sector saving/dissaving story I’ve heard (or can remember). We see borrowing spike during the internet boom, dive following the bust, then spike again during the real-estate bust.  ?

So I’m going to leave this open to my gentle readers for the moment. What in the heck is going on here? What story (or stories) would you tell to explain what you see?

If anyone wants to see earlier periods zoomed in to get a better feel what’s going on, let me know. I’m thinking 1946-1975 (to see what seems like a period of consistency), and 1970-1990 (from the fall of Bretton Woods to the start of the internet bubble and the Clinton surplus).

Cross-posted at Angry Bear.

Lifted from comments: Program sustainability is?

Lifted from comments comes a beginning thought on the term ‘sustainability’ for programs…Sustainability

Rusty asks:

Is there an accepted definition for “sustainability?”
I tend to think of it in an environmental context, but apparently it is used more broadly.
Your thoughts?

Bruce Webb’s quick reply:

STR, well in Social Security lingo ‘sustainable’ is mostly used in a hyper-specialized way. So to the extent that SS policy has injected the word into discourse it might not be fully representative. I’ll think about it.

Operationally ‘sustainable solvency’ for SS means not just being solvent (as defined) over the projection period (there 75 years) but having the metric of solvency (in this case Trust Fund ratio) trending up at the end of the period and so likely to be longer-term or permanent.

Rhetorically it is an argument against ‘patching up’ a problem or as the Fix the Debt people put it in their messaging “Kicking the Can (Down the Road)”. If the need is permanent so too should be the structure that provides it, come what may there will be some need to provide transit of goods and people from San Francisco to Oakland as long as those cities exist. Showing that both BART and the new Bay Bridge will proper maintenance will suffice for 35 years is not good enough, long range planners need to think about year 36 and year 50.

Now whether given all the uncertainties in the specific case of Social Security we should be worrying about years 76-100 (sustainable solvency) or all years to Heat Death of the Sun (unfunded liability over the Infinite Future Horizon), that is whether this is just reasonable prudence or pointless crisis-mongering to ‘sustain’ a ‘current’ ‘crisis’, is an open question. For example the current funding ‘crisis’ in the Post Office forcing shutdown in Saturday delivery is the result of a requirement to pre fund retiree health care for 75 years, or for the new hires of 2053.

Similarly Congressional restrictions on Social Security Administration have forced field office consolidation and early closing even though those expenses are billed back against a Trust Fund with $2.6 trillion in legally available assets (which presumably have to be paid back SOMEDAY, why starve SS today?)

I am not really aware of ‘sustainable’ being deployed in that many other policy areas, then again I have a certain amount of tunnel vision on this topic. So to the degree that SS has actually been the source of injection of this term into political discourse it’s precise usage may not be illuminating to your overall question.

How high does senior poverty have to go?

It’s official: President Obama has proposed cutting Social Security by replacing the program’s current inflation adjustment with the stingier “chained” Consumer Price Index. As I’ve discussed before, this risks undoing all the progress made against senior poverty since the passage of Medicare and Medicaid in 1965. 25% of seniors were poor according to official poverty line in 1968, compared to just 9.4% in 2006. Note, however, that the Supplemental Poverty Measure, which includes things like out of pocket health care expenses which hit seniors disproportionately, already shows a 16.1% rate by 2009. And our senior poverty rate, measured by the international standard of 50% of median income, is already 25%, much higher than most developed countries, more than three times Sweden’s rate and over four times as high as Canada.

Why is Obama doing this? We just rejected the candidate who wanted to cut Social Security and Medicare. Perhaps, as Krugman (link above) suggests, he chasing the fantasy of “being the adult in the room,” but this is a losing proposition. As Brian Beutler points out:

Just like that, Chained CPI morphs from a thing President Obama is willing to offer Republicans into a thing Republicans dismiss as a “shocking attack on seniors.”

We’ve seen this game before. The Heritage Foundation’s health care plan became “death panels” when President Obama endorsed it.  And, as Beutler’s title makes clear, we have plenty of examples of the President negotiating with himself to bad effect, most notably in the 2011 debt ceiling battle.

If this cut really happens, Social Security benefits will steadily fall in true inflation-adjusted terms due to the magic of compounding. Moreover, with 49% of the workforce having no retirement plan at work and another 31% with only a grossly inadequate 401(k), the cuts will worsen the coming retirement crisis. The only question will then be: how high will senior poverty have to go before we do something about it?

Cross-posted from Middle Class Political Economist.

Obama caves yet again: offering Social Security cuts to appease the right…

by Linda Beale
Obama caves yet again: offering Social Security cuts to appease the right…

Obama’s budget isn’t even released yet and he’s already caving to the “let’s make the rich richer and forget the rest” crowd.  That crowd that claims that we need a capital gains preference so the rich can gather all that extra money to purportedly create jobs.  The crowd, that is, that fails to acknowledge that the rich tend to take all that extra money to Singapore, the Bahamas, or the Cayman Islands or hide it away in some Swiss bank, none of which does any good for our economy compared to what the government investing that money in infrastructure projects would do. See, e.g., David Leigh, Leaks reveal secrets of the rich who hide cash offshore, The Guardian (Apr. 3, 2013);  The corporatist crowd that refuses to admit the empirical evidence that says government investment is as important as private investment in creating jobs.  It is the government that makes the market go round.  And government money–our money–spent for schools, bridges, safer communities provides jobs and improves lives.  Without that government investment, there is no market, just barter.

President Obama seems to have forgotten that he was elected. as a Democrat, over the Republican candidate.  Obama has no business proposing cuts to Social Security benefits as part of a purported deficit reduction package.  Social Security is not a deficit driver: it is a social insurance program earned by those who receive it by payments over lifetimes of hard work.  It is the only stable retirement income most have.  The average Social Security beneficiary receives just short of $14,000 a year from Social Security–that’s just 125% of the poverty line, which of course is defined so low as to guarantee that anyone living at or below that line is indeed in abject poverty and unable to move out of it.

The Republican Party has argued for cuts to Social Security benefits for decades, using whatever crisis of the momen they can engender to argue that we can’t afford the system in place.  They’ve invented the perjorative term “entitlement” to imply that those who rely on social insurance because of disabilities or old age are just ‘freeloaders’ who are mooching off others.   Not so, since Social Security is an earned benefit program like insurance: workers pay premiums throughout their working life, and then once they reach retirement age they may draw benefits.

There are a number of reasons for the amount of debt that the US government has–most of them related to the four-decade-long drive by the Republican Party to protect the wealthy and the corporations they own from much of a tax burden and to allow the accumulation of immense wealth by a few at the top of the income distribution.  Outsize military expenditures driven by Bush’s preemptive wars undertaken at the same time that the Bush Administration pushed through tax cuts that favored the rich are of course a big problem.  The Bush tax cuts threw us from surplus to deficit and we haven’t gotten beyond them yet.  The almost complete capture of the financial regulatory agencies by Wall Street, and the resulting financial crisis driven by casino capitalism spiked with the heady bubbles of derivative inflation is of course another part of the problem, and we haven’t gotten beyond that yet, as Big Banks still exercise far too much power over their own regulation, proven by the LIBOR scandal that demonstrated their ability to manipulate the purportedly objective market rate to suit their profit machines.

But Social Security is not one of those drivers of the debt.  And the debt is not so outsize that it merits sacrificing the most vulnerable amongst us to mollify the wealthy who merely want to avoid paying their fair share of the revenues needed to get rail service up to snuff, bridges safe, and public schools owned by the public again.

The average Social Security benefit is just under $14,000: the use of chained CPI will result in a loss to the average recipient of “$4,631 in Social Security benefits by age 75, $13,910 by age 85; and $28,004 by age 95″ (from release by Social Security Works, based on “Inflation Indexation in Major Federal Benefit Programs: Impact of the Chained CPI,” Alison Shelton, AARP Public Policy Institute, March 2013.).

Obama has no business facilitating the gluttony of the rich.  He should drop the proposal to use “chained CPI” that will  result in a cut benefits for Social Security recipients.

cross posted with ataxingmatter

Employment Situation

The headline numbers in the employment report were very weak as  payroll employment rose by only 88,000  and the household survey reported a -206,000 drop in employment while the labor force fell by -496,000.  The futures markets are reacting very badly.  But the workweek expanded and aggregrate hours worked increased 0.3% as compared to 0.5% last month.

Private payrolls grew  96,000  and government employment fell 7,000 implying that the sequester is not yet having a significant impact.

After falling to  below trend last year hours worked is now back on the 0.2% trend displayed earlier in the cycle.   So basically it looks like the headline numbers are overstating the weakness.

Interestingly, my bond valuation model still says that the 10 year T Bond yield should be about 1.5%.
 The model still has fed funds in it, but  nothing else to capture other measure of fed policy..

Average hourly earnings were essentially unchanged last month, but the smoothed data still implies that wage gains have bottomed.

Average weekly earnings also still looks like it has  bottomed.

Employment Situation

This was one of the better employment reports of this cycle.  Private payroll employment grew 246,00
while  government employment fell about 10,000 for a net gian of of 236,000.  The household survey also showed a nice gain of 170,000.


On a year over year change basis both series are showing nice gains.

You would never know it to listen to the news, but employment in this cycle continues to better than in the previous   cycle.

The workweek also increased 0.1% and the index of aggregate hours worked grew 0.5% of all workers and 0.9% for production workers.  The index is now back to the trend established early in the cycle.

Average hourly earnings growth has bottomed and are starting to move up very nicely.

And this is leading to an improvement in weekly earnings.

The employment situation

This was another tepid employment report not much different than the reports in 2012.

Payroll employment rose 168,000 and the household survey showed a gain of only 17,000


Private payrolls expanded 168,000 while government employment fell 9,000.

 Perhaps more importantly the year over year change in employment is showing significant signs of weakness,  Both the household survey and payroll data show that the year over year gain in employment has peaked.

 Moreover, this weakness is appearing despite the fact that the annual benchmark revisions showed stronger employment growth in 2012 than originally reported.

 The revisions also significantly changed the pattern of hours worked in 2012.  Originally, hours worked fell well below trend in mid-2012 and were strengthening back to trend at year-end.  Now
it appears that hours worked were not as weak as originally reported. But with the average workweek unchanged in January, the January hours worked fell 0.2%.


 On the other hand the apparent bottoming of average hourly earnings growth  is still intact and was actually strengthening in January. 

 The growth in average weekly earnings fell back to only 1.2%  versus 1.7% in December and the low of 1.0% in October.  It is going to be very hard for consumer to absorb the increase in payroll and income taxes in early 2013.  Prospects for consumer spending in early 2013 do not appear promising.



At first glance the December employment report shows that the trends throughout 2012 were unchanged in December.  But within the report there were some greater signs of strength.

Private payroll employment showed a gain of 155,000 and the household survey reported a much smaller gain of only 28,000.  These changes are about the same  as they have been all year.

Private payroll employment was up 166,000 as government employment fell again.

But on a year over year change the two reports are still showing very similar gains.

 The workweek increased from 33.7 to 33.8  the second consecutive month of  a 0.4% gain.

As a result, the index of aggregrate hours worked rose 0.5% after a 0.4% jump last month.

These are some of the largest gain this cycle and the chart shows how the rate of gain is moving back up to the trend experienced earlier in the cycle.

Moreover, average hourly earnings rose 0.3%.   The year over year increase and the smoothed three month growth rate strongly suggest that wage growth is bottoming.   This is good news.  But on the other hand it is exactly the type of change the inflation hawks are warning us about