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

The Fed is not “Printing Money.” It’s Retiring Bonds and Issuing Reserves.

Mark Dow had a great post the other day:

There is zero correlation between the Fed printing and the money supply. Deal with it.

He points out (emphasis mine):

From 1981 to 2006 total credit assets held by US financial institutions grew by $32.3 trillion (744%). How much do you think bank reserves at the Federal Reserve grew by over that same period? They fell by $6.5 billion.

As he says:

if you are an investor, trader or economist, understanding—and I mean really understanding, not just recycling things you overheard on a trading desk or recall from econ 101—the mechanics of monetary policy should be at the top of your checklist. With the US, Japan, the UK and maybe soon Europe all with their pedals to the monetary metal, more hinges on understanding this now than ever before.

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Four easy fixes for corporate taxation

Everyone “knows” that the corporate income tax is a mess. Ask any company. They pay too much in corporate income tax, face rates higher than in any other OECD country, and are just following the law when they use tax havens to keep profits eternally deferred from taxation and to perform general sleight-of-hand.


Don’t believe a word of it. While some economists believe we shouldn’t tax corporations at all, the corporate income tax (CIT) is a necessary backstop to the personal income tax (PIT). With no CIT or a rate lower than the PIT, individuals have an incentive to incorporate their economic activities so they aren’t taxed on them, or are taxed less. Needless to say, this is something an average wage or salary worker would not have the ability to do. This is another area where we have one tax law for the 1%, and different rules for the rest of us.

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How Wall Street Stole Main Street

This graph speaks volumes:

Profits as a Percent of GDP: Financial Corporations vs. Nonfinancial Corporations

We saw a big decline in real businesses’ profit share in the 40s, then a slower semi-steady decline through the 70s, as wages constituted a larger share of GDP. Financial corps doubled, expanding and increasing profits, but they remained small in the big picture.

Then post-80, we saw two big moves: a dive in real business profit share below any historical norm, and the beginning of the long secular rise in financial corp profits share (quadrupling between 1980 and 2010).

How did financial corps achieve this? Simple: they’re licensed to print money, and they devoted that money to paying off the managers of real businesses to hand over those businesses’ profits. The C suite of America’s corporations went from being managers of real businesses creating real value, to being financial prestidigitators. And those individuals were handsomely rewarded for their obeisance to the financial corps.

The people who work for those real companies, of course — the vast pyramid of sub-C-suite toilers who don’t get a share of the kickbacks…haven’t gotten a share of the kickbacks.

Compensation of Employees/GDP

That 4% or 5% of GDP income flow — remember, that’s every year — was transferred from households to financial corporations, courtesy of bought-and-paid-for real-corp CEOs.

Got incentives?

Cross-posted at Asymptosis.

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More American Exceptionalism: Drowning the Baby in the Bathwater

The OECD has finally updated their national account data with 2011 info for most countries, so I thought I’d update this post from a couple of years ago.

If you’re thinking that the current (overblown) hoo-ra-ra about U.S. government deficits is a result of too much spending, or that U.S. taxes are insanely high and always going up, you might want to think again (click for larger):

Screen shot 2013-05-03 at 10.25.37 AM

While the U.S. number is up from it low or 24.1% in 2009, it’s still hovering at the bottom of the OECD league table.

Got tipping points?

Cross-posted at Asymptosis.

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Bleg: What’s Wrong with the MPC/Spending-Velocity Argument?

I’ve ground the axe quite a bit over the years for the argument that Kevin Drum makes — and dismisses — here.

In brief: poorer people spend a larger share of their income/wealth than richer people. So if poorer people have more income/wealth — if the distribution is more equal — there will be higher money velocity/more spending/more production/higher GDP.

(Search for “marginal propensity” and follow Related Links to see my stabs at this.)

But Kevin — who certainly has the political inclination to make this argument — says:

This sounds pretty plausible, doesn’t it? Higher inequality should generate less consumption, which in turn produces a weaker economy. Unfortunately, the data says something else. “I wish I could sign on to this thesis,” says Paul Krugman, “and I’d be politically very comfortable if I could. But I can’t see how this works.”

Me neither. I spent a couple of months trying to write a magazine piece based on this thesis, and I finally gave up. By the time I was done, I just didn’t believe it. So I gave up and spiked the idea.

I’ve tweeted him and posted a comment, but haven’t heard: what made him give up on this? What convinced him otherwise?

And in response to a recent post where I ground this axe, Scott Sumner responded:

But you really need to give up on that MPC stuff, it was discredited decades ago. Monetary offset rulz.

This in keeping with his seeming assertion that nothing matters except monetary policy, because monetary policy will (or at least should) always offset it.

But still: Sumner, Drum, and Krugman all seem to think that the distribution/MPC/velocity argument has no legs. They’re quite categorical about this.

SRW took a stab at the subject recently, telling a story that I find quite convincing. But didn’t really explain to me why so many feel so certain that it’s not true.

Can folks (especially those who don’t believe this argument) point me to what might be considered definitive takedowns? I have notions about what they might say, but want to see the best argument(s) out there.

These takedowns should, just for instance, convincingly debunk this paper (sorry, gated), which suggests that rising income inequality ’67-’86 resulted in 12% lower consumption spending in ’86 than would have occurred if inequality had remained the same.

Cross-posted at Asymptosis.

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Edward Lambert on Effective Demand, Labor Share, Capacity Utilization, and Growth

He’s only been blogging since March. His credentials? “Independent Researcher on the equation for Effective Demand.”

That may explain why, aside from a lonely Steve Randy Waldman link, I’ve seen no mention of his work out there. Just another internet econocrank?

I’m wildly unqualified to pass judgment, but Lambert’s built what strikes me as a very interesting, cogent, and coherent model of effective demand, labor share, unemployment, and capacity utilization in growing economies. And he’s extending it fast, including into optimal monetary policy. (Mark Sadowski has been challenging him on the model in comments here.)

I won’t try to summarize his modeling or poke holes — go look at it. I’ll just give you a picture and a few post titles to whet your appetite.

Here’s his UT (“Unused Total”) Index:

The regularity of its coincidence with recessions (especially the ends of recessions), at least, seems like it should raise eyebrows.

Here are some posts to peruse:

What is Effective Demand?

What Non-inclusive Growth Looks LIke

When Labor Share does not rise in the Growth Model

Effective Demand Monetary Policy: the z coefficient

AS-ED Model: Raising Labor Share of Income

Update on AS-ED model: The future has a problem

Given Scott Sumner’s recent reversion to labor share as the appropriate target for monetary policy, I’m thinking that Market Monetarists might find Lambert’s work as interesting as effective-demand-obsessed Keynesians will. MMTers and other Post-Keynesians? His results certainly comport with their political predilections.

Cross-posted at Asymptosis.

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Stock Market Valuation

Mark Thoma had a tweet asking if the stock market is  in a bubble.

I do not think so.

The market PE  on trailing operating earnings is 15.5 and my model says that based on the historic relationship to interest rates and inflation the market PE should be 21.5%.

Obviously, either the market does not believe rates will stay this low and are using a higher interest rate or they expect  long-run trend earnings to slip far below the long run trend of  7%   The market PE is an expression of the present value of expected long-run earnings growth.  The long term historic average for the market PE is 15, almost exactly where it is now.  Of course there is no central tendency for the market to converge on a PE of 15.  If you do a histogram of the market PE you will find that the probability of the PE being on any number between 10 and 20 is about the same.


Clipboard01 pe

Maybe we just need to look at the market from a simpler perspective.

Clipboard02 sp

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Should The Inflation Target be 4.3%?

I’m quite tongue-in-cheek in asking that question, but nevertheless: I present for your delectation what at first blush seems like a revealing bit of chart porn (hat tip: Zero Hedge):

You could flip this upside down and replace “Earning Yield” with “PE ratio.”

The data displays a remarkably regular relationship. Equity investors seem to be most optimistic about future economic (or at least earnings) growth when the inflation rate is 4.3%. (It would be interesting to see: did this relationship hold, albeit with the inevitable noise from smaller samples, in shorter sub-periods — and if so, which sub-periods? In particular curious: did it hold equally pre- and post-1971?)

Can we draw any conclusion from this? i.e.:

• Market conditions that are most conducive to economic growth are revealed by a 4.3% inflation rate.

• Equity investors display the most “irrational exuberance” when the inflation rate is 4.3%.

I’d love to hear whether Market Monetarists and MMTers think this has any useful import.

Cross-posted at Asymptosis.

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