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

Productivity & Effective Demand: An Intriguing and Disturbing Story . . .

Edward Lambert at Effective Demand; Effective Demand = Effective Labor Income/(cu*(1-u)) points to the result of an economy left to maximize Profits at the expense of Labor. I have my own version or underlying causes of this issue and Edward gives the economic side of it.

I am going to show a graph of Productivity against Effective demand. It is an intriguing and a disturbing graph. Let me start by giving the equation for the productivity used in the graph.

Productivity = real compensation per hour: business sector/(labor share: business sector * 0.78)

The data for this equation comes from this graph at FRED.

The equation for effective demand is…

Effective Demand = real GDP * (labor share: business sector * 0.78)/TFUR

TFUR (total factor utilization rate) = capacity utilization * (1 – unemployment rate)

Let me just show the graph and then start explaining . . .

Productivity and Effective Demanda

The graph shows quarterly data from 1967 to the 1st quarter of 2013. The red dashed line is a trend line for the data. We can see that from 1967 to 1997, the plot stayed very tight on the trend line. There were deviations from this line during times of shocks and recessions. But it is very interesting how closely the plot followed the trend line before 1997.

Before 1997, the plot going below the trend line was associated with a recession. The explanation of this is that effective demand rises more during a recession because of more available capacity of labor and capital. At the same time. productivity tends to fall behind the trend line due to rising labor share, not falling real compensation.

When the plot goes above the trend line, productivity is ahead of effective demand. Productivity rises due to labor share settling down and real compensation rising. Effective demand tends to stay still during the expansionary phase of a business cycle. The economy grows up to the effective demand limit and then gets set for a contraction.

We used to have a balance between productivity and effective demand. The economy moved directly on top of the trend line for many many quarters. And now the economy has lost that balance. Since the late 90’s it is a fleeting moment when productivity and effective demand come together on the trend line.

Before 1997, there was very little movement away from the trend line. Then something unusual happened between 1997 and 2001, the dotcom bubble years. The plot went progressively below the trend line even though there was no recession. Productivity was rising during these years, but effective demand was rising at such an unusual rate that productivity could not keep up with it. Effective demand was being artificially created and inflated. The recession of 2001 followed the same unusual path as before the recession.

In 2002, the economy had to make an adjustment. Productivity had to rise or effective demand had to fall. During the housing bubble years (from 2002 to the quarter right before the 2008 recession), productivity rose, while effective demand basically stayed steady. The plot went back above the trend line showing that productivity was beyond the capacity of effective demand and that productivity was at a non-sustainable level. The economy sustained this high level of productivity in the face of low effective demand for a few years, but eventually the correction would come in 2008. The correction was a collapse.

Look at where the economy is now. Since the end of 2010, the plot has barely moved from a productivity just below 1.4 and an effective demand around $14.1 trillion. The plot is way above the trend line and has been just sitting in the same spot for over 2 years. Effective demand is too low for the current productivity in the US. This is an economic bomb building energy that will eventually go off when real GDP approaches $14.1 trillion.

A friend of mine had a dream a few nights ago, where a spirit said that the economy is dying. The graph above would lead one to think the same.
Think about it… where can the economy go now from here?
There are 2 options . . .

Option #1 looks at the equation for Productivity: You have to lower productivity by increasing labor share in relation to real compensation.

1. If you lower real compensation, labor share would fall, but it would have to fall slower than real compensation. Keep in mind though that a lower labor share would lower effective demand too, which would work against the objective. However, if labor share actually rose in the face of lowering real compensation, you would see an economic contraction. So lowering real compensation is not a good option.
2. On the other hand, if you raised labor share faster than raising real compensation, productivity would come down as effective demand increased from higher labor share. This is a safe and sensible way to correct the huge imbalance we find ourselves in.

Option #2 looks at the equation for Effective Demand: You have to increase effective demand back up to $16 trillion. There are two options here as well.

1. Utilization of labor and capital would have fall. (TFUR in the equation above would have to fall.) This would mean a rise in unemployment, which would mean another collapse.
2. Labor share would have to rise. This would also have the beneficial effect of lowering productivity, as long as real compensation rose moderately.

As we can see, the only real option to avert another collapse is to raise labor share of income. This is not likely as businesses are even now fighting an increase in just the minimum wage. Businesses are trying to maximize their profits and do not want to raise labor costs. Yet this objective of theirs is going to kill the economy.

The graph above shows that there is a bomb ticking, and it is a bigger bomb than we saw in 2008. Higher productivity in the face of low effective demand is unsustainable. Yet, we have been sustaining it for over 2 years now with an incredible expansionary monetary policy in the face of an incredibly low labor share of income.

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Corporations Never Had It So Good

by Linda Beale

Corporations Never Had It So Good

The  press is covering the GAO‘s latest report on corporate taxes:  Corporate Income Tax: Effective Tax Rates Can Differ Significantly from Statutory Rate(May 30, 2013). The study, looking at income and taxes reported in financial filing statements for 2008-2010, was conducted because

Proponents of lowering the U.S. corporate income tax rate commonly point to evidence that the U.S. statutory corporate tax rate of 35 percent, as well as its average effective tax rate, which equals the amount of income tax corporations pay divided by their pretax income, are high relative to other countries. However, GAO’s 2008 report on corporate tax liabilities (GAO-08-957) found that nearly 55 percent of all large U.S.-controlled corporations reported no federal tax liability in at least one year between 1998 and 2005. Id. (from “highlight”).

The report looks  good for corporations.  The GAO report shows that corporate taxes paid to the US are going down, down, down.  Corporations paid 15.3% in 2008, 13% in 2009 and only 12/6% in 2010–that’s less than have the corporate tax rate of 35% for each of those years! The proportion of federal revenues raised from corporate taxes has been decreasing over the years as well–the GAO reports that for 2012 it is estimated that corporate taxes will have raised only 242 billion, compared to 1.1 trillion in individual taxes and 845 billion in payroll taxes.

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Senate Finance Leaders push "blank slate" to tax reform

by Linda Beale

Senate Finance Leaders push “blank slate” to tax reform

Senators Baucus and Hatch, the Chair and ranking minority member of the Senate Finance Committee, respectively, launched a bid for completing a Code reform before Baucus leaves office with a letter to Senators telling them that they should get their bids in within the month for any tax expenditures they want to preserve. See Letter from Baucus and Hatch (June 27, 2013).

At first glance, this doesn’t sound like a terrible idea. There are, indeed, too many tax breaks in the Code for huge estates, owners of capital, Big Oil, Big Pharma, “Non-Profit” hospitals, and corporate executives’ deferred pay. Wiping them away and then thinking through things fresh might be a part of a process for real tax reform that makes sense.

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SCOTUS Rules Again . . .

As found on our Open Thread of June 28, 2013, jurisdebtor decided to leave a gem behind. Juris debtor can be found on his Blog J.URIS D.EBTOR, My Own Meanderings Through Economics, Law, and Policy Having been in the courts for the last decade, I find this to be a good interpretation of what one might expect from the courts. It is never what you believe it to be coming from the gods dressed in black sitting behind their pulpit looking down at you (there is distinct reason for this). The days of Gideon are forever past (happy fiftiest Gideon in 2013). Try writing SCOTUS yourself today.

Don’t Let DOMA Fool You — the Supreme Court is Restricting Your Rights By David Cole, Washington Post, 6/28/2013. As taken from the Open Thread, jurisdebtor posts David Cole’s appraisal of SCOTUS decisions as rendered by the Kennedy Court (my interpretation).

The Supreme Court’s 5 to 4 decision to strike down a key part of the Defense of Marriage Act was undeniably historic, a victory not just for gay rights advocates but for anyone committed to advancing equal rights in America.

It was also an anomaly.

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Recess Appoint Mel Watt

Congress is in recess, actual recess with no pro forma sessions.  Barack Obama can recess appoint people.  Tomorrow Ed DeMarco could cease to be acting director of the FHFA (Federal Housing Finance Agency).  I think that Obama should, indeed must, recess appoint Mel Watt to be FHFA director.

As acting director DeMarco has blocked all efforts to relieve homeowners who can’t pay their mortgages.  His argument was that his job as Fannie/Freddie conservator was only to minimize the loss to the Treasury from the rescue.  Note the past tense.  This argument ceased to be operative when he vetoed a  proposal to use TARP money so that relief would cost Fannie and Freddie less than nothing.

I think the easiest way to reconcile DeMarco’s behavior with the rational utility maximizing hypothesis is to assume his aim is to minimize US GDP.

As is well known the current recovery is anomalous because of declining public spending and stagnant home construction at an extremely low level.  In contrast consumption, investment in equipment and software an net exports have behaved normally.  It is clear that nothing will be done about public spending.  An oddly widespread view is that the very sluggish recovery of housing construction shows that we must focus on the Fed, because … well I don’t get the rest.  I think it is clear that the key public entities which is failing to do its job is the FHFA and Congress.  While Congress is out of town, Obama can solve one of those huge problems.

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Poetic Justice for Justice Alito. Maybe.

U.C.-Berkeley law professor Goodwin Liu’s nomination to the Ninth Circuit Court of appeals was killed a couple years ago by Senate Republicans upon the pretext that Lui had trashed Alito to the Senate Judiciary Committee in testimony during Alito’s confirmation hearing.  Lui predicted that Alito as a justice would be exactly what Alito as a justice is.  Now that Lui’s prediction has proven spot-on*, Obama should nominate him, not for the Ninth Circuit but for Supreme Court upon Ginsburg’s retirement in a year or two.

It would be at least some small poetic justice for this justice.

But Alito’s demeaning, denigrating treatment of litigants and counsel is emblematic of a veritable hallmark of the Federalist Society-affiliated appellate judges.  Certainly not all of them do that, but also certainly, several high-profile Reagan/H.W. Bush-era appellate appointees have made that type of conduct a mark of peer prestige, and others, who don’t naturally have that personality—including some appointed by Clinton—emulate it.  Something about being in with the in-crowd.  It is, or at least for a long time was, the cool thing for them to do.

*The link is to a terrific article in Slate today by Mark Joseph Stern.  But credit also must be given to the Washington Post’s Dana Milbank, who in a column published earlier this week was, I believe, the first of the now-several commentators to report on this. 

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UPDATE: I posted a similar comment to Stern’s article in the article’s Comments thread on Slate.  In response, a commenter called Bigmouth wrote:

While I’d love to see Liu on the Supreme Court, I’d like to see the President pick fights he can actually win lol.

To which I responded:

This is one he would win if he chose to pick that fight. The high profile of the matter, coupled with the under-recognized importance of the generational change among voters–particularly the growing importance of the Millennials–and the overdue, very public highlighting of Alito’s votes and his conduct on and off the bench, would win it for Obama.

Not that I expect that lackluster, gutless wonder to actually pick this fight. But if he does, he’ll win it.

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Ms. Wendy Davis Goes to Austin, TX

As if the scene was taken out of “Mr. Smith Goes to Washington”, the 13 hour filibuster by Texas State Senator Wendy Davis succeeded in killing SB537 by minutes. The vote failed to happen in the allotted time killing the bill for the time being. While filibustering the passage of the bill, Texas State Senator Wendy Davis could not visit bathroom facilities, take a sip of water, lean on any pedestal or desk, receive assistance from anyone else, and had to remain on issue.

“On Monday, the Texas State House voted overwhelmingly to pass a draconian proposal Texas SB537 that would ban all abortions after 20 weeks, as well as adding stringent new restrictions on how clinics get licensed. The intent was clear: Supporters of the bill, known as SB 5, openly acknowledged that the law would have closed 37 of the state’s 42 clinics, leaving hundreds of thousands of women in Texas and neighboring states like Oklahoma with no way to access abortion care. With a conservative majority in the State Senate and the support of Governor Rick Perry, the measure seemed certain to become law.”

The vote happened at 12:02 PM two minutes too late to be passed. Attempts to postdate the time to earlier than 12:00 PM by Republicans met with challenges from the Democrats and the Media until the time was conceded.

Raised by a single mom and at 19 a single mom herself, Texas State Senator Wendy Davis has been leading the charge for women’s choice. The impact of her challenges has been felt with her offices allegedly being fire-bombed due to her support on Planned Parenthood. 31% of the women in Texas are uninsured. The passage of this bill would have closed down 37 of the 42 abortion clinics in Texas leaving residents of Texas and Oklahoma with few places to turn to.

The closure would not only place an undeserved economic burden on pregnant women who would have no place else in which to turn. The closures would have come on top of state-directed counseling designed to discourage them from having the procedure, a mandatory ultrasound where the provider describes the fetal image and a mandatory 24-hour wait.

It is not too often we see a person with the courage literally take a stand in a hostile environment for what they believe is right.

Mr. Smith: “I always get a great kick out of that part of the Declaration of Independence. Now you are not going to have a country that can make these kind of rules work, if you do not have men that learned to tell human rights from a punch in the nose.”

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The Solution to the Economy: Raise Social Standards and Social Efficiency

Guest post by Edward Lambert as taken from his Blog Effective Demand

Yes, the economy is a concern. There are problems to sort out. The problems run deep. What is the solution?

The solution to the problems of the economy will be found through “Social Efficiency” and raising the social standards that have been declining through the years. I will present 3 examples of lowered social efficiency, grade inflation in schools, the minimum wage and finally low interest rates. My purpose is to show that nominal interest rates need to rise, but that real wages must rise in unison too. 

Grade Inflation at Yale University

Let’s go to Yale University and see an example. Yale is currently working on a solution to its grade inflation. Grade inflation is when more students get A’s than before.

“…a full 62 percent — nearly two-thirds — of grades awarded in Yale College, the university’s undergraduate school, are A or A-. (That wasn’t case four decades ago, when just 1 out of 10 grades awarded fell in the A range.)”

Grade Inflationb

This quote is taken from an article about the problem of grade inflation at Yale. There is a comment below that article by Adam Glover. . .

“What do they call the person who graduates first in their medical class? Doctor
What do they call the person who graduates last in their medical class? Doctor
Rather than worrying about grades, I’m more concerned that students are sacrificing real learning for a better GPA.”

The problem is that standards, and more importantly, Social Standards of quality have been lowered. The issue of grade inflation at Yale is just one isolated example of declining Social Standards around the world. Just this week we see cheating in the schools of China is rampant, even as parents try to bribe teachers so their children get better grades.

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Redistribution and public production of public goods–not "let the markets handle it"

by Linda Beale

Redistribution and public production of public goods–not “let the markets handle it”

In recent posts, the Importance of Distribution and Markets, Minimum Wages, and the Sins of Friedmania,  I have noted the centrality to sustainable democratic institutions of corraling the market so that the power and wealth of the elite few does not work to impoverish the many.  That means that government either rungs many programs for the benefit of the many itself–such as Medicare, Veterans’ Care, public education, public utilities–or government ensures that it has systems in place to counter the power of the elite–such as redistributionist tax policies, social welfare policies that satisfy important needs such as health care and retirement security, with a good measure of “required self-help” through mandatory savings mechanisms.

Mark Thoma has a recent piece in the Fiscal Times that reflects the same ideas, from a slightly different perspective.  He enumerates 7 ways that markets don’t work and require government intervention: retirement savings, health care, carbon emissions, labor support, financial sector, government contracting, and economic and political power.  See Mark Thomas, 7 Important Examples of How Markets Can Fail, http://www.thefiscaltimes.com/Columns/2013/06/18/7-Important-Examples-of-How-Markets-Can-Fail.aspx#page1, Fiscal Times (   2013).

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My take on the NSA, Privacy and Protection

Let me just say, I’m no lawyer and what follows is not legal scholarship.

Of all the reading and listening I have done regarding the spying by our government via electronic data collection and storage, I have found nothing that specifically gets at the issue for me as to why it’s not a good thing.  This is mostly because the common response to defending such activity by our government falls into a couple of very broad moral concepts that are part of our cultural upbringing.  One is trust in the source of your protection. The other is self acknowledgment as being a morally conscious person.

Trust in the source of your protection is simply an aspect of experiencing parenting that is then extended to relationships external to the parent relationship as we mature.  The other, self acknowledgment as being morally conscious is culturally learned.

Thus we get “trust the government with protecting us” such that the data collection is not a problem and “don’t worry if you are not doing anything wrong” as simple answers to why this entire NSA issues is a none issue.   These answers have settled nothing.

Lack of trust creates all sorts of problems individually and for society. I’m not going to go there in this post.  I’m not going to go there because it seems this nation does not respond anymore to lists of harms and dangers and thus make corrective policy to preserve our sanity.  Just consider that we are continuing to pollute ourselves into extinction.  Or consider that there has been very little mentioned of the new directive that turns all government employees into untrusted co-workers as a means to stop the government secretes from becoming known.  Do we really think that the motivation for turning someone in will always be altruistic and not be for other selfish motives?  Here is a tip, racism is not dead, selfishness has become the dominate personality of a large swath of US citizens and greed is simply one expression of selfishness.  Oh yeah, we’re the government so why can I not know?

The trust your government issue has been discussed mostly by noting that one’s representative of their own ideology will not be in power at all times.  It is the idea that you can not trust your source of protection if it is not of you. This is quite the conundrum for all the ideological identities to resolve such that all can trust their source of protection, in this instance: government.  That source being the same for all ideological parties which have been taught to trust this source.

For me the real issue and concern is found in the morally conscious person argument.  It is the argument that suggest you have nothing to fear if you are doing nothing wrong.

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