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

How Amazon’s Accounting Makes Rich People’s Income Invisible

By Steve Roth (reposted)

How Amazon’s Accounting Makes Rich People’s Income Invisible

Increasingly, businesses don’t generate profits. They generate capital gains. It’s fiendishly clever.

Image you’re Jeff Bezos, circa 1998. You’re building a company (Amazon) that stands to make you and your compatriots vastly rich.

But looking forward, you see a problem: if your company makes profits, it will have to pay taxes on them. (At least nominally, in theory, 35%!) Then you and your investors will have to pay taxes on them again when they’re distributed to you as dividends. (Though yes, at a far lower 20% rate than what high earners pay on earned income.) Add those two up over many years, and you’re talking tens, hundreds of billions of dollars in taxes.

You’re a very smart guy. How are you going to avoid that?

Simple: don’t show any profits (or, hence, distribute them as dividends). Consistently set prices so you constantly break even. This has at least three effects:

1. You undercut all your competitors’ prices, driving them out of business. Nobody who’s trying to make a profit can possibly compete.

2. You control more and more market share.

3. You build a bigger and bigger business.

Number 3 is how you monetize this, personally. The value of the company (its share price/market cap) rises steadily. Obviously, a business with $136 billion in revenues (2016) is going to be worth more than one with $10 or $50 billion in revenues — even if it never shows a “profit.” You take your profits in capital gains.

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Minority unemployment: progress vs. prejudice

Minority unemployment: progress vs. prejudice

On this Martin Luther King Day, let’s take a look at minority unemployment. This got a little attention earlier this month when the December jobs report showed the smallest gap ever between the unemployment rates of blacks and whites.
So let’s start by confirming the good news.  Indeed last month saw the smallest gap ever between the unemployment rates of the two groups:

The secular trend over the last 40 years has been very slow progress, as the relative low in unemployment from the early 1970s was superseded in the 1990s, which in turn was superseded by that of the 2000s, and now that too has been eclipsed.  But of course, the black unemployment rate has for that entire time been higher than that for whites.

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Real wages in 2017

Real wages in 2017

Now that we have the report on consumer prices for December, let’s take a look at what happened with real wages in 2017.

Consumer prices increased +0.1% in December, and wages for non-managerial workers rose 0.3%,  This for that month the average worker earned 0.2% more.

For the year, the nominal wages of non-managerial workers rose 2.4%, while prices increased 2.1%, meaning that for the entire year workers saw a whopping 0.3% increase in real pay:

Here’s a close-up of the last 5 years:

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Interview with Jamie Galbraith

Via Marketwatch Jamie Galbraith states his thoughts on a how the current US economy functions.  Here are a few snippets:

University of Texas economist Galbraith, the son of the famous Harvard economist John Kenneth Galbraith, believes mainstream economists and the Federal Reserve are too wedded to old ideas to see what is really going on in the economy. Specifically, Galbraith is worried that the consumer is the only game in town — and that can’t last.

Galbraith used his latest book “The End of Normal” to lay out his case that the 2007-08 financial crisis wasn’t just a brief interruption in the life of an otherwise healthy economy but instead the latest crisis for an economy that lost its footing back in the 1980s.

At the American Economic Association meeting in Philadelphia, MarketWatch asked Galbraith to share his views on the economic landscape.

(On inflation and labor) There is no Phillips Curve, and there hasn’t been for decades. The supply of labor is not a constraint. If you wish to pay people higher wages, you could lure people back out of retirement. Net immigration has basically stopped. If you needed more workers, it would start up again. So we don’t have a real labor-force constraint. We are not going to get inflationary pressure from the labor markets. It has been 40 years. Economists are slow learners, and central bankers are a slow-learning subset. They should recognize that things did change in the 1980s.

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JOLTS report confirms November payrolls strength

JOLTS report confirms November payrolls strength

I’m changing my presentation of JOLTS data somewhat compared with the last year or two.  At this point I’ve pretty much beaten the dead horses of (1) “job openings” are soft and unreliable data, and should be ignored in contrast with the hard “hires” series; and (2) the overall trend is that of late expansion but no imminent downturn.So let’s start a little differently, by comparing nonfarm payrolls from the jobs report with what should theoretically be identical data: total hires minus total separations in the JOTLS report, monthly (first graph) and quarterly (second graph):

While there can be a considerable disparity in any one month, once we start looking longer term there is an incredibly tight fit.

For our immediate purposes, it’s likely that the strength in the JOLTS hiring data over the last several months is the same trend as the very good post-hurricane October and November jobs reports, both of  which showed that more than 200,000 jobs had been added. While any given month can be off significantly, it’s a fair bet that when the December JOLTS report is released in one month, it too will be weaker, just as was the December jobs report.

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Negative Interest Rates and a Term Structure Puzzle

Negative Interest Rates and a Term Structure Puzzle

James Hamilton provided us with another interesting discussion on negative interest rates:

we now have several years of experience from Sweden, Denmark, Switzerland, Japan, and the European Central Bank in which the central bank successfully induced negative interest rates in hopes of stimulating a greater level of spending on goods and services.

Please read the entire post including some interesting comments. Alas I must be late to the party as I could not provide a reply to an interesting query from Barkley Rosser:

Does anybody have an explanation as to why when a nation has negative nominal target interest rates it often seems that the time horizon of government securities that end up having the most negative rates are often at the two years time horizon? Look at the Sweden case, where this has been the case, and it has also been in quite a few other nations as well. I have yet to see an explanation of this peculiarly non-monotonic yield curve in this situation so often.

Maybe Europe has turned Japanese. I’ve been looking at an Excel file of their government bond rates provided by the Ministry of Finance (not the Bank of Japan). Japan had low but not negative interest rates before 2012 with a somewhat upward sloping term structure. Since 2012, two features describe this data: (1) one-year rates hovering around zero – sometimes positive and sometimes negative; (2) two-year rates hovering near the one-year rate and it times just below them. What is driving this? I have no answer.

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Does the United States Have A “Poland Problem”?

Does the United States Have A “Poland Problem”?

It certainly looks like it.

Again, for anybody not having seen one of these, a “Poland problem” involves an apparent disconnect between economics and politics, nations with reasonably well performing economies where the populace becomes unhappy and supports opposition, especially “populist” nationalist authoritarian candidates, with 2015 victory in Poland of the Law and Justice Party the poster boy for this, even though Poland has been one of the best performing economies in Europe for quite some time.

The funny thing is that we may be seeing two separate rounds of this in the US. Thus we had Trump defeating Hillary even though the economy had been steadily growing for many years, unemployment steadily falling, and the stock market rising.  Now that Trump is in he has been trying to assert all this that has been going on for some time is due to him, which is silly apart perhaps from some of the upward stock market moves thanks to his pro-corporate profits policies.  But his popularity has fallen and is at lows not seen in many decades for a recently installed president.  Indeed, increasingly columnists of various stripes have begun to notice this disjuncture, alrhough they have not been providing a name for the syndrome as I have with “Poland problem.”

Of course it can be argued that things have not been and really are still not all that good economically.  We all know that that the widely touted unemployment rate overstates the strength  of the labor market given so many having dropped out of the labor force, and upward pressure on wages has remained weak, despite some improvement on that front recently.  Of course, Trump, having heard the story about labor force participation claimed at one point while running that the UR was really 42% and also  accused the BLS of cooking the unemployment numbers for political reasons, only to turn on a dime after getting in office to tout the low and falling standard UR numbers.

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Why Economists Don’t Know How to Think about Wealth (or Profits)

By Steve Roth    (re posted)

Why Economists Don’t Know How to Think about Wealth (or Profits)

Until 2006, they quite literally weren’t playing with a full (accounting) deck. Most still aren’t

In the next evolution of economics taking shape around us and among us, perhaps no school has been so transformational over recent decades as a loose, worldwide group best described as “accounting-based” economists. Modern Monetary Theory (MMT), with its central tenet of “stock-flow consistency” (or stock-flow coherence) is at the center and forefront of this group.

These accounting-based economists more than any others managed to accurately predict our recent Global Great Whatever. And Wynne Godley, rather the pater familias of MMT, predicted the current Euro crisis in amazingly precise and accurate detail — in 1992, before the project was even launched. These economists’ nerdy and businesslike, green-eyeshade and steel-tipped-pen approach gives them unique and accurate insights into the state of the economy, and its likely futures.

Given these decades of focus on national accounts, it’s amazing that almost no economists are aware of a pretty remarkable fact:

Before 2006, the U. S. didn’t even have complete, stock-flow-consistent national accounts. That was the year that the BEA and the Fed released the Integrated Macroeconomic Accounts (IMAs; also presented as the “S” tables at the end of the Fed’s quarterly Z.1 report). They provided annual tables extending back to 1960, based on the latest international System of National Accounts (SNAs). Think: Generally Accepted Accounting Practices (GAAP), but for countries. We didn’t get quarterly tables in these accounts until 2012, only four years ago. And even today, we don’t have quarterly tables for subsectors of the financial sector.

In June 2013, the Z.1 report was renamed, from the Flow of Funds Accounts of the United States to the Financial Accounts of the United States, and the IMAs’ comprehensive data has been steadily more fully incorporated throughout the report — notably in the up-front Page i table, “Growth of Domestic Nonfinancial Debt,” which is now “Household Net Worth and Growth of Domestic Nonfinancial Debt.” See also Table B.1, “Net National Wealth,” which was added in the September 2015 release.

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“In the Beginning…Was the Unit of Account” – Twelve Myths About Money

by Steven Roth

“In the Beginning…Was the Unit of Account” – Twelve Myths About Money

November 19th, 2017

Jan Kregel presented a great dinner speech at the recent Modern Monetary Theory Conference, touching on some of the fundamental ways we think about money and economics. (Sorry, no recording or transcript available.) I had a brief conversation with him afterwards, and we followed up with a few emails.

The quotation in the title of this post is condensed from the final line of one of his emails — a line that made me laugh out loud:

“So I guess we start from that — in the beginning was the word, and the word was the unit of account?”

Okay, yes: money-dweeb humor. But the implications are kind of profound.

The Word. LogosIndeed. I’ve written about this before — how writing in its earliest forms emerged from tally sheets, accounting. Even, that its emergence was the first step on the road to outsourcing our memory onto iPhones, maybe even (only somewhat tongue in cheek) causing human brains to shrink over millennia.

Jan’s great line, and our conversations, prompt me to set down some thoughts on this ever-vexed subject. Herewith, twelve widespread usages and conceptions that, in my experience, tie our money discussions in knots. Please assume that anything you don’t like here is mine, not Jan’s, and apologies to those who have heard some of this from me before.

(A proleptic response to an inevitable digression: I’m assuming a closed national or world economy for simplicity. The “rest of world” sector, and the exchange rate with Martian currency, are not considered.)

#1. Money was invented around 700 BCE. No. That’s when coins were invented — handy physical tokens making it easy to transfer assets from one person’s (implicit) balance sheet to another’s. Money existed on something like balance sheets — tallies of who owns what and who owes what — long before that; those tallies go back thousands or tens of thousands of years. Mentions of monetary values in written documents — designated in staters, drachms, whatever — were widespread long before anyone thought of using coins for asset transfers.

The earliest coins, by the way, may well have been badges of honors and offices issued by religious authorities. Somehow people started exchanging them, and voila: physical currency. This had little or nothing to do with butchers and bakers or convenient time-shifting of purchases. That’s a made-up armchair myth (though the convenience benefit is real). Wampum, likewise, wasn’t used for trade exchange until Europeans captured that “money” system and transformed it.

#2. Money is a “medium of account.” (Whatever “medium” means in that phrase…) Money was invented when some clever tally-keeper, totting up cows and horses and bags of grain, invented the arbitrary unit of account — a unit that allows those heterogenous goods to be tallied on a single sheet, in a common unit of value. We find price lists of assorted goods on some of the earliest Sumerian tablets, for instance, and price lists can’t exist without a unit of account. It’s hard to know, but it seems like this clever technology might have been invented multiple times over the millennia.

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Where is the money going?

Devin Smioth at New Economic Perspective points us to ‘where does the money go?”:

After President Trump signed the GOP tax plan into law, some of the bill’s corporate beneficiaries have offered workers minor bonuses. But NEP’s Bill Black says they’re keeping most of the money for themselves — and starting a new global race to the bottom for corporate taxes. You can view here with a transcript.

Figure 1

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