A psalm of balance

The use of credit gives the economy a boost, but also creates debt which eventually undermines the "boost" effect.

Policymakers are well aware that the use of credit boosts the economy. They create all sorts of policies to encourage the use of credit: deductible interest expense, financial deregulation, low interest rates and quantitative easing, for example.

Except in times of crisis, these policies cause the use of credit to grow at an accelerated rate. Therefore, debt ordinarily grows at an accelerated rate.

We have no policy designed to accelerate the repayment of debt. Therefore, debt grows at an accelerated rate until it accumulates enough to create a crisis.

If we insist on having policies that encourage the use of credit, then we must also have policies that accelerate the repayment of private debt.

Shitting on the Cato guy

From Cato: Labor’s Share of GDP: Wrong Answers to a Wrong Question by Alan Reynolds.

The opening paragraph:

A recent paper by David Autor of MIT, Lawrence Katz of Harvard and others, “The Fall of the Labor Share and the Rise of Superstar Firms,” begins by posing a mystery: “The fall of labor’s share of GDP in the United States and many other countries in recent decades is well documented but its causes remain uncertain.”  They construct a model to blame it on U.S. businesses that are too successful with consumers.

"They construct a model to blame it on U.S. businesses that are too successful with consumers." The writing reeks of attitude. Attitude often makes for a good read, but it seldom makes for a good argument.

I'm interested because I have trouble understanding what "labor share" represents. I mean, at FRED, Labor Share for the business sector, and also for the nonfarm business sector, are shown as indexes, not as percent of GDP. I can guess that the indexes show changes in labor share as a percent of GDP over time, yes, but I can't tell what the percent values actually are.

There is a "Share of Labour Compensation in GDP" series with "ratio" units. It's a simple thing to get "percent" values from that one. And the overall trend of this series is like the others: downhill. But at a slightly closer glance it doesn't really match either of the "labor share" series. So I'm left hanging. I thought maybe the Cato article would help.

Heh.

Second paragraph:

Five broad industries, they found, became more dominated by fewer firms between 1982 and 2012: retailing, finance, wholesaling, manufacturing and services. But those aren’t industries at all, much less relevant markets: they’re gigantic, diverse sectors. Is all manufacturing becoming monopolized? Really? Census data ignores imports, but why ruin this bad story with good facts.

So the guy is complaining that Autor and Katz left out the word sectors? Because they said "industries" instead of "industrial sectors"? Really?

And again, attitude: Five gigantic, diverse sectors became more dominated by fewer firms, "but why ruin this bad story with good facts."

At last, in the third paragraph, a possibly useful observation:

Jason Furman and Peter Orszag found “the decline in the labor share of income is not due to an increase in the share of income going to productive capital—which has largely been stable—but instead is due to the increased share of income going to housing capital.”

The useful observation is Orszag and Furman's, not Cato's, but at least the Cato guy provides a link.

In paragraph four, Cato guy is complaining about "industries" versus "industrial sectors" again:

President Obama’s Council of Economic Advisers, under Jason Furman, nonetheless worried that the 50 [!] largest firms in just 10 “industries” (if you can imagine retailing and real estate to be industries) had a larger share of sales in 2012 than in 1997 ...

But yeah, I can imagine retailing and real estate as industries. Cato guy is being ridiculous. Finally, in the rest of paragraph four, he moves on to a different complaint:

They concluded that, “many industries may be becoming more concentrated.” Noah Smith, Paul Krugman and many others have suggested that this nebulous “concentration” allowed monopoly profits to rise at the expense of the working class, supposedly explaining labor’s falling share of GDP during the high-tech boom. A quixotic search for even one actual example of monopoly soon morphed into advice about using unconstrained antitrust to constrain Amazon, which is apparently feared to have monopoly profits invisible to the rest of us.

Now he cannot see the boom in corporate consolidation, and cannot figure out why monopoly might be a problem. And look what he does there at the end: "Invisible to the rest of us," he says. Cato guy takes us, his readers, and imagines we stand with him, blind to the monopoly profits that may or may not exist in the one particular place where my wife does all her shopping: Prime.

But forget that Cato crap about "invisible" profits which are "apparently feared" by some unidentified but obviously stupid bunch of people. Forget that. I'll tell you what really bothers me about Amazon. And it's not the so-called "free" shipping. What bothers me is that Amazon is doing to the rest of the economy what supermarkets and big-box did to Mom and Pop. Nobody even knows anymore what a mom-and-pop is. Amazon is doing the same to everyone else: Putting them out of business.

Paragraph five:

Research that starts with such a meaningless question as “labor’s share of GDP” was never likely to lead us to any profound answers. Workers do not receive shares of GDP – they receive shares of personal or household income.

I thought Cato guy might be on to something with that. Hey, you know? I always figure after a guy has two or three stupid ideas in a row he's bound to come up with a good one, just by dumb luck.

Nah. "Workers do not receive shares of GDP" he says, emphatically. But GDP is a measure of income. And workers do receive income. So it is okay to talk about “labor’s share of GDP”. Sure, to appease Cato guy, you could use GDI instead of GDP. But those two are really supposed to be equal, so Cato guy is complaining about nothing. Again.

That's enough. This Cato guy is not worth reading.


No, I can't let it go. I have to point out one more thing. Cato guy says

Workers do not receive shares of GDP – they receive shares of personal or household income.

Cato guy takes "labor share" and turns it into "worker's share". He takes the relevant macroeconomic concept (the split between labor and capital) and tosses it aside. In its place he puts you and your weekly paycheck. He brings it down to a personal level, and (bad as the argument is) we like him for it. Then he says that our weekly paychecks don't get counted in GDP. That part is just not true.

Cato guy turns "labor share" into a story of "the individual and his paycheck". And he tells us our weekly paychecks don't count in GDP. He mixes up ideas, and he lies.

Excerpts

From mine of 7 April 2016:

I predict a boom of "golden age" vigor, beginning in 2016 and lasting eight to ten years. It has already begun. In two years everyone will be predicting it.

From mine of 3 March 2016:

This is not going to be your typical anemic recovery. This is going to be the full tilt, rapid output growth, rapid productivity growth, high performance boom.

From NEWS RELEASE: PRODUCTIVITY AND COSTS, Third Quarter 2017, Preliminary (PDF)

Nonfarm business sector labor productivity increased 3.0 percent during the third quarter of 2017... From the third quarter of 2016 to the third quarter of 2017, productivity increased 1.5 percent...

John Kay and Mary Bonsu on UBI

Paying everyone a basic income is not a realistic or fairer way to tackle poverty by John Kay at johnkay.com.

Frankly I prefer what Yves said. It is brief. It is clear. It presents specific objections that sound right to me. But John Kay tells an interesting tale. Here is part of it:

What goes around comes around, and Atkinson and Meade were themselves reprising a debate which had occurred 30 years before. At that earlier time, the two sides were represented by Lady Juliet Rhys Williams, the architect of social dividend, and Sir William Beveridge. Each had devised their schemes in reaction to the injustices of the 1930s

The Beveridge view was encapsulated in what he called social insurance. The idea was to eliminate poverty by eliminating the causes of poverty. The state should organise insurance against the contingencies of misfortune, such as disability, unemployment, sickness and old age. Beveridge envisaged that these benefits would be supplemented by minimal social support for the few people who fell through the cracks

In the Rhys Williams vision ... poverty was the result of low incomes, and would be eliminated by ensuring that nobody had low incomes.

Beveridge was an economist, and had some idea how the economy works. Rhys Williams was concerned for people's welfare but obviously had no idea how the economy works.

I'm making assumptions here. I don't know anything about either Rhys Williams or Beveridge. But I see how people are, these days. There are a lot of people these days who are concerned for people's welfare but have no idea how the economy works. They seem to think they don't need to know how the economy works because you can just pass a law and that's the end of it. But it doesn't work like that.

Take a familiar example: raising the minimum wage. I can't say I'm against it because I would certainly like to see less disparity between rich and poor than we have today. And because I'm not altogether heartless. And no better solution is ever presented. But I can say raising the minimum wage does not solve the problem.

Raising the minimum wage may temporarily relieve some of the stress that low income creates, but it does not solve the problem that creates low income. See the difference?

"solid growth"

In an article titled US economy on solid growth path (27 October 2017) we read:

For all of 2017, forecasters believe the economy will grow at an annual rate of around 2.2 percent, rising to 2.4 percent next year. That would be an improvement from the meager 1.5 percent in 2016, but would still fall below the expectations of the Trump administration.

2017:	2.2
2018:	2.4
2019:	2.6
2020:	2.8
2021:	3.0
2022:	3.2
2023:	3.4
2024:	3.6
2025:	3.8
2026:	4.0

2.2 percent? Whoop-de-doo. And 2.4% next year. This is "solid growth"? Let's see, at this rate, a zero-point-two percent per year increase, we could reach 3% annual growth by 2021, and 4% growth in the middle of Trump's third term!

A solid growth path, my ass.

Actually, the numbers are better than indicated. The forecasters are undershooting. The article tells us

The US economy grew at a steady annual rate of 3 percent in the third quarter, marking the first time in three years that economic expansion hit at least 3 percent for two consecutive quarters

Graph #1: Real GDP Growth

They also note that

Consumer spending slowed to 2.4 percent growth in the third quarter. But that was offset by a strong 8.6-percent gain in business investment in equipment.

The investment number sounds good, but it sure could be better:

Graph #2: Real Business Investment in Equipment

You would have to ignore a lot of data to say we have a rising trend. But don't forget, we're also ignoring future data: data we don't have yet. I expect further improvement.

Actually, I wouldn't be surprised to see a spike in investment, similar to what happened after the 1982 recession. Back then, everyone was excited about the possibilities that came with President Reagan. As Graph #2 shows, investment growth fizzled out quickly, back then; but expectations did create a big, brief burst.

There's a lot of covert excitement these days, what with all the economic changes promised by President Trump. That excitement will become less bashful as the economy improves. The more visible excitement will amplify expectations. Thus I expect an investment spike, a Trump spike comparable to the Reagan spike.

Combine the expectations effect (as in the 1980s) with the effect created by a reduced accumulation of debt (as in the 1990s) and you should get a decade or so of impressive economic growth: maybe 4% in Trump's first term.

As I've been saying. But don't make the mistake of giving President Trump all the credit for the economic improvement. Trump gets credit only for the shock to expectations. The longer-term improvement is due to the drop in debt growth since the crisis, and the greater quantity of circulating money.

Three classes of incentives

Dietrich Vollrath says "The core of economics is that people respond to incentives."

I like that. I was thinking about different sources of incentives:

1. Policy creates incentives (including disincentives). That's why policy is useful. It moves the economy. Now, if only we could find the right policy...

2. Promises sometimes create incentives. Think of FDR or Reagan or (maybe) Donald Trump (we'll see) coming to office with a story that excites people and brings hope of economic improvement. Or, no that's not it: Every politician tries to bring hope of economic improvement. Instead, say coming to office at the right time, so that the new leader's "impending prosperity" story actually pans out.

3. Actual economic conditions offer the best incentives of all. Coming to office at the right time, and all that.

Yves on UBI

From Ilargi: Is Capitalism Dead or Merely Dying? at Naked Capitalism:

Yves here...

As readers know, we also are not fans of a universal basic income. First, if it were high enough to provide even for a subsistence living, it would be massively inflationary. That means it would at best be a stipend that would wind up subsidizing businesses, since it would allow them to pay lower wages. It would also be used to cut/end existing targeted programs, which are often far more generous to populations with specific needs. Second, it would reduce recipients to being mere consumers, held in contempt by supposedly more productive people. That also means, like the Speenhamland system, it would be at risk of being ended abruptly and displacing people who had long been largely or entirely out of the workforce and would not be able to find sufficient employment.

"Steady economic growth continues"

At Econbrowser: Steady economic growth continues, by James Hamilton. The title says it all.

Well, the title says most of it. There is also this:

U.S. real GDP grew at a 3.0% annual rate in the third quarter. That is close to the long-term historical average of 3.1%, and better than the 2.1% we’ve seen on average since the Great Recession ended in 2009.

And this:

The U.S. remains clearly in the expansion phase of the business cycle.

So that's all good.

No doubt Hamilton's blog-buddy Menzie Chinn has also noticed the improvement in GDP growth. I wonder if Chinn remembers his old Making American Growth Great (by Spaceology*) from January of this year:

From the Trump-Pence website:

DONALD J. TRUMP’S VISION
…
Boost growth to 3.5 percent per year on average, with the potential to reach a 4 percent growth rate.

Menzie said growth in the 3.5-4% range was "unlikely". I wonder what he'd say today.

Looking at John Taylor's stuff

I found a link in my URL dropdown to John Taylor's Take Off the Muzzle and the Economy Will Roar. Great title! It's a little creepy to read, what with references to "Lucy and Susan" and The Lion, the Witch and the Wardrobe. But Taylor can write a powerful sentence, and he makes good graphs. So.

Take off the Muzzle links to Taylor's Slow economic growth as a phase in a policy performance cycle (PDF, 7 pages, here referenced as Policy). Another great title. There is a little sleight-of-hand, too: In a list of economists offering "evidence that the poor performance of the economy during the past decade—the Great Recession and the Not-So-Great Recovery—is largely due to poor economic policies", Taylor lists himself twice! He gets away with it because of that wonderful "Great Recession and Not-So-Great Recovery" line, and because he's not listing economists but rather references to their works. Still, in the writing, Taylor says:

While debate over the question is raging among economists, many, including [list] have offered evidence ...

His sentence calls for a list of economists. He provides a list of references.

When someone has the ability to write really well, you have to look askance at the writing. You have to overlook the good writing and concentrate on the discussion of economic forces. I've said that before, about Krugman. It applies to John Taylor as well.

Muzzle also links to Can We Restart the Recovery All Over Again? (PDF, 4 pages, here called Restart). This one I looked at before. That accounts for Muzzle showing up on my URL dropdown list.

"Economics and history," Taylor says, "tell us that changes in economic policy lead to changes in economic performance." Ayep. The trick is reading the tea leaves. Taylor's own read of those leaves is not in doubt. In Muzzle, for example, he says

To turn the economy around we need to take the muzzle off, and that means regulatory reform, tax reform, budget reform, and monetary reform.

John Taylor calls for reform, reform, reform, and reform. It's a complete list that tells us nothing. Reminds me of a glug I heard on MSNBC the other day: Trump has been telling his people to "talk about tax cuts, not tax reform." Whatever. Taylor offers a more informative version of his list of reforms in Restart, where he says

In my view, economics and history also tell us which policies produce good performance: tax reform to lower tax rates on people and businesses and thus reduce disincentives to work and invest; regulatory reforms to scale back and prevent regulations that fail cost-benefit tests; free trade agreements to open markets, entitlement reforms to prevent a debt explosion and improve incentives, and monetary reform to restore predictability and create output stability along with price stability.

Now that is a complete list! But of course when John Taylor writes of "preventing a debt explosion" he is talking about government debt, not private debt. Private debt didn't make his list. It's almost like there was no financial crisis.

And whyingodsname do people insist on thinking that the only way to "reform" taxes is by lowering the tax rate? I've said over and over that we need to create incentives to pay off private debt faster, as a way to reduce the imbalance created by existing incentives that encourage the use of credit. My plan has nothing to do with raising or lowering tax rates. You could use reduced rates as an incentive to pay off debt; that would be a good way to do it. But the important thing is to reverse the existing incentives that encourage the accumulation of private debt.

What affects people personally is tax rates. I get that. But what damages the economy as a whole is having policy that encourages credit use, without also having policy that encourages repayment of debt. We need to prevent the excessive accumulation of debt that occurs when the use of credit increases.

Good grief! There is so much more to consider than just tax rates.