Or: It’s The Velocity, Stupid.


I got quite a bit of blowback on my recent post suggesting that economists don’t understand accounting.

In response I give you Exhibit A: the almost-ubiquitous notion that more saving increases the supply of “loanable funds” — hence that more saving causes or at least allows more investment. (The absolute classic fallacy of the S=I accounting identity.)

On casual consideration, it seems like it would be right, right? You spend less than your income, so you have more money (stuffed in your mattress?), and you can lend it out.

Or more likely: you “put money in the bank” – deposit more than you withdraw — so the bank has more money; it can lend more.

It’s A Wonderful Life.

Here’s Mankiw in his textbook, saying exactly that:
Saving is the supply of loanable funds — households lend their saving to investors or deposit their saving in a bank that then loans the funds out. But:

1. A little careful consideration shows that this casual consideration is logically incoherent — just plain wrong, by accounting identity.

And:

2. Economists are not supposed to be thinking, giving their sage advice, or corrupting our youth based on casual consideration.

Think about it:

You get $100,000 in wages. Your employers’ bank account is debited, and yours is credited. Your bank can lend against your higher balance; your employer’s bank can’t. Net zero.* You spend $75,000. It’s transferred from your account to other people’s/businesses’ bank accounts. Their banks can lend more, yours can lend less.
Is the total stock of loanable funds affected by whether the money is on deposit at your bank, your employer’s bank, or the banks of people you bought stuff from? No.

Meantime, you don’t spend $25,000. You “save” it. The money sits there in your checking account. If the action of spending — transferring money from one account to another — doesn’t change the total stock, how could not transferring money do so? Your bank still has the money, which it can lend out. Other banks still don’t, and can’t.

It may help to think about this as if there was only one bank. (Which is not so far off. Bank deposits all consolidate back to accounts at the Fed.) Every person and business has an account. All the spending/transfers (or non-transfers, a.k.a. “saving”) just shift deposits between accounts, with no change in the (single) bank’s total deposits.

So the saving/spending mix has no effect on the stock of loanable funds. Shifting (or not shifting) those stocks around has no aggregate effect on the total stock.

But what about the flow — new loans from banks? Again: no.

Here’s a behavioral, rather than accounting-based assertion — not a controversial one, I think: In any period, banks in aggregate lend more — “print” more new money and deposit it in people’s/businesses’ accounts — because they think they can make money doing it at current interest rates. They think that for one primary reason: they are confidently optimistic about future prosperity — borrowers’ future income streams. If they’re less confidently optimistic they lend less, or ask for higher interest rates — which has the same effect: less lending.

Likewise borrowers: they borrow because they think future conditions will be good, and they’ll be able to service their loans at the asking rate out of strong income streams (and/including rising financial asset values).

Likewise spenders: they spend (that new) money because they think it will yield good returns from investment, and/or because they think they can consume today and be able to earn more money to pay for it (repay the loans) in the future.

So how does the saving/spending mix affect those expectations? Another behavioral assertion: Those expectations are set, to a great degree, by current conditions, because they’re the best predictor we’ve got. It’s difficult at best to predict future “shocks” that will change those conditions. Or as the Eight Ball says: “The future is … unclear.” Life is uncertain.

So how does a higher proportion of saving to spending affect current conditions?

It makes them worse. GDP is spending. Less spending (as a proportion of either income or wealth) means less economic activity. Less velocity. Less transactions. Less surplus from trade. Lower GDP. People, businesses, and banks, borrowers and lenders, are less prosperous, and less optimistic. So banks lend less, borrowers borrow less, and (in a potential downward spiral) spenders spend less.

Takeaway: An increased saving/spending proportion has no effect on the stock of loanable funds (it can’t), and it has only a second-order, expectation-driven behavioral effect on flows — it decreases them.

You really have to wonder sometimes where economists get this stuff that they put in their textbooks.

Nick Rowe attempted to save this conceptual situation recently in a comment posted hereabouts (emphasis mine):

Suppose there’s an increased demand for financial assets by households (a rightward shift in the demand curve). Will that increased demand lead to an increased quantity of investment by firms and an increased quantity of financial assets sold to households (a movement along a supply curve)? It may do. That depends on the model. It’s a behavioural question, not an accounting question.
His questions in the middle, and the last statement, are completely on the money. But his explanation begins right in the midst of the conceptual confusion, putting the modeling cart before the behavioral horse. The behavior doesn’t “depend on the model”; the model’s accuracy and usefulness depends on its assumed human response to incentives and constraints.

Or perhaps, rather, he’s climbed aboard the wrong behavioral horse — one that is wandering off rather aimlessly.

The “desire to save” is a conceptual representation, a mini-model, if you will, of one aspect of the economic situation. I’m suggesting that that construct is outside of, peripheral and irrelevant to, the behavioral chain of cause and effect.

People might want to save more/spend less in aggregate for various reasons:

• Times are tough — GDP and employment are weak — and they’re worried about future ability to consumption.

• Times are good, and they’re satisfying all their consumption desires.

• Rich people have a larger proportion of income and wealth, and their lower marginal propensity to consume drags down aggregate spending, relative to income and wealth.

Or some other scenario. (As Keynes said — not looking up the exact quote here – all economic activity is driven by the desire to consume.)

In the second scenario banks will want to lend more — but not because people and businesses (want to) save more. If that were true, banks would also want to lend more in the first scenario — which is completely contrary to what actually happens. (The results in the third scenario seem uncertain.)

Here’s a syllogism to make this widespread confusion clearer:

More investment results in more prosperity.

More saving results in more investment.

More pessimism (or less-confident optimism) results in more saving. (I think monetarists will stipulate to this.)

So more pessimism results in more prosperity!

Mankiw’s conceptual confusion is inevitable, and arises from two causes:

1. He’s starting with snaky (and conceptually confused) assumptions about the sources of human behavior, and:

2. New but related subject: He’s trying to think about flows (and get tender young minds to think about flows) using static, of-an-instant models like the standard S/D and IS-LM diagrams. The problem, when you’re trying to think about “supply,” is that a flow can’t exist in an instant (only stocks can); it’s a meaningless, impossible concept. And since stocks in our discussion here are unaffected by saving, he’s in a pickle, cause it’s all about flows. (And no: “comparative-static” methods don’t solve the conceptual confusion; they arguably only contribute to it because they impart the illusion of time and dynamism.)

The only way (that I know of) to model “flow supply” in a conceptually coherent way – or even think or talk about it really, which is mental modeling — is using a dynamic simulation model. Of late I’ve been quite taken with the power grid as a good metaphor for a dynamic model of the economy — one that I’ll expand and expound upon in a future post.

For now I’ll leave you with this: Clower/Burshaw on the difference between “stock supply” and “flow supply,” or peruse the literature here. Nick also talks quite a bit about the largely forgotten old 70s notion of “nominal” (roughly: “potential”) supply and demand — though mainly regarding money, not real goods.

I almost never see any consideration of these seemingly crucial concepts in economic discussions — much less cogent analysis, or incorporation of said concepts.

Which leads me to ask a question of economists:

Are you sure that you’re perfectly clear on what you mean when you use the words “supply” and “demand”?
Are we?



* I won’t even touch here on the widespread misconception among economists regarding bank lending, except to say that in practice bank lending is not constrained by deposits — banks lend most of their deposits then lend (much) more based on their excess capital (times X) — which, thus, is their effective constraint on lending. Not deposits.
Cross-posted at Asymptosis.

by Dale Coberly

LES MISERABLES: SOCIAL SECURITY
Javert And Evil

From a message from the National Consumer Law Center (reference msaunders@nclc.org):
"It’s perfectly fine for a person who failed to pay their child support to end up penniless and living in their car, and to die that way.”
– High Ranking U.S. Treasury Official, in response to a request for help with Treasury’s rules which allow 100% of Social Security benefits to be taken to pay for decades-old child support. February 3, 2012. As the result of the concurrence of two new Treasury rules, elderly and disabled Social Security recipients will soon lose all of their benefits to old child support orders.
• As of March, 2013, all recipients of federal benefits must receive benefits through electronic deposit, either through deposit directly into a bank account, or using the Treasury authorized Direct Express Card. (31 CFR § 208.4.)  · Treasury’s new garnishment rule, intended to protect benefits in bank accounts from garnishment allows child support orders to garnish all of the funds in the accounts. (31 CFR 221.4.)   As a result, 65% of the recipient’s benefits will be withheld pursuant to administrative seizures and paid directly to the child support office. The remaining 35% will be deposited into the beneficiary’s bank account, where it will be seized in full through a bank garnishment.
Most SS recipients who owe child support are old and or disabled.  Their children are grown and the child support is owed to the state. The amounts of the orders have ballooned to tens of thousands because of annual 10 or 12% interest rates applied.
· Although blind and elderly, Mr. W. found a legal services lawyer in September 2010 when the Office of Child Support Enforcement (OCSE) ordered Treasury to take $217 from his Social Security check (which normally is $775).  Five weeks after the legal services lawyer filed papers, the OCSE stopped the garnishment as it was required to do under New York State law. But in January 2011, the OCSE's computer matched and froze Mr. W. 's bank account, depriving him of his entire Social Security payment. Again the legal services lawyer interceded, and after several weeks, the OCSE returned Mr. W. 's Social Security. But in July 2011, the OCSE's computer froze Mr. W. 's account again. South Brooklyn Legal Services fought to retrieve his Social Security payment so Mr. W. could pay his rent. 
· Mr. R. is sixty two years old, homebound, and lives entirely off of his $780 Social Security payment. In June 2011, the OCSE ordered the U.S. Treasury to garnish 65% of Mr. R. Social Security check for child support arrears owed to his adult children. This reduced his check to $273. Unable to pay his rent or feed himself for an entire month, R. protested to the OCSE. After reviewing evidence in July 2011 showing Mr. R. lived below the poverty line, the OCSE stopped the garnishment as New York law requires. But the OCSE did not reprogram its computers. On August 5, 2011, Mr. Richard's bank account containing his restored, direct deposit Social Security check was matched and seized by the OCSE's computer.  Although a legal services lawyer sent Mr. R.'s bank records to the OSCE, the account remains restrained. So desperate remains Mr. R. that he went by access-a-ride in his wheelchair to the local OSCE office in person, begging for money for rent. An indifferent bureaucrat told him to come back with an award letter form Social Security and perhaps he would do something. Mr. R. called Social Security and was told he would receive an award letter in seven to ten business days. And because the Social Security Administration could not switch his electronic check to paper until 6 weeks later, his next month’s check sailed electronically into his frozen account where it was also unreachable to him. I have argued in this space that Social Security is the only way ordinary workers have to save their own money for retirement in a way that is protected from inflation and market losses. People of a Libertarian Persuasion have argued that the money is NOT safe from “the government.” In general that has not been the case... only one person has lost his Social Security money because of “the government,” and he was a deported communist. that is, someone we the people, though our government, are perfectly willing to cheat and cause great harm. I have thought the government would not be able to cheat and harm the entire population of Social Security contributors and recipients.

But “the government” appears to be embarked on a course to give aid and comfort to those who say “you can’t trust the government.”

Well, you can’t.  Unless WE have the decency to protect “the least of these” against the evil that can and does appear from time to time in “our government,” we can expect the time will come when we are among that select minority which the government can cheat and harm with impunity because “we the people” don’t give a damn.

It’s not Social Security that is at fault here. It is us.

Let it be understood that I am not arguing that folks should not be required to pay their child support. But hitting someone old or disabled with a decades old bill, with accrued interest, that takes everything they have to live on, and saying, “It’s perfectly fine for a person who failed to pay their child support to end up penniless and living in their car, and to die that way," ...is evil.

I don't know if this is part of an ongoing "conspiracy" to discredit Social Security, or if it is just the random evil that can occur at all times... in government or out of it. But it is evil. And we should stop it.

(Dan here...some formatting changes have been made but not the prose)

Let's ignore that three of his four wins (including two last night) have come in non-binding caucuses and take a quick look at The Size of the Santorum Surge.

Over at Skippy, Our Leader posted a link to a discussion of whether "Romney's strengths" could beat Obama. I wisecracked, without looking at the data, that the total Republican votes in all three states were lower than the daily NYC subway ridership.

My bad. That's not even a ballpark comparison. On its lowest day, the NYC subway averages more than 2,350,000 riders. (That's a lot of elitists, Newt.) It averages more than three million (3,000,000) on Saturdays, more than four million (4,000,000) riders a day, and more than five million (5,000,000) every weekday.

By comparison, here are the number of votes cast yesterday in Republican primaries/caucuses:

Clearly, we need a smaller comparative to make the turnout appear more impressive. So let's look at one of my favorite demographic measures, Metropolitan Statistical Areas (MSAs).

Keeping in mind that the MSA includes the areas around the cities named, the total voters in the three Republican elections yesterday would occupy...the 144th largest MSA,* just behind Eugene-Springfield, Oregon (351,715).

The Santorum Surge: Smaller than Peoria (#135), bigger than Kalamazoo (#148).


*I resist saying "Gross!" at this point.

by Rebecca Wilder

Temporary Employment: A New Ugly Rearing its Head in Europe?

Last week Clive Crook opined on some fallacies of labor reform, specifically related to the unions and through the Spanish experience. Labor reform is a highly contentious subject, given its close ties to welfare and politics. Based on Clive Crook’s article, I delved into global temporary employment using OECD data and noticed two things: (1) not only is it too ‘simple-minded’ to attribute labor problems to one or two broad agents (unions, in the case of Europe), but it’s impossible to compare one country’s problem to another; and (2) other global economies – Ireland being the most worrisome candidate – saw respective shares of temporary employment surge in recent years. To me, this highlights the fact that known labor issues are just the beginning – new problems are surfacing that will require attention in the future.

As highlighted by Clive Crook via Bentolila, Dolado, and Jimeno (or the Vox version), the cyclical aspect of Spain’s two-tier labor market – the two tier system consists of a large share of temporary workers ‘outside’ the permanent employment positions – can explain in part the boom in employment during the bubble and its crash during the recession. But that doesn’t explain the experience of the US. In 2005 (the last measured date for the US), temporary workers accounted for just over 4% of employment compared to 33% in Spain; however, like that in Spain, the US unemployment doubled during the crisis. What’s one country’s problem is not necessarily another country’s structural issue.



In contrast to other key players in Europe, the Spanish rate of temporary employment fell 8.4 ppt since 2005, where most of the drop occurred in 2009 and 2010. The crisis eradicated some of the inefficiencies of Spanish temporary employment by consolidating those industries that tended to favor temporary employment during the bubble, construction for one. More worrisome, though, is the trend in temporary employment in other European markets. The rate of temporary employment increased 3.5 ppt, 3 ppt, and 5.7 ppt in Portugal, the Netherlands, and Ireland, respectively, spanning 2005-2010.



The problem with Spain’s two-tier labor market is well known, while that in Ireland and Portugal, for example, is emerging. The 2002 OECD Employment Outlook Chapter 3 outlines some adverse impacts of temporary employment. Temporary employment is associated with higher wage gaps among the temporary and permanent employees, fewer health benefits, negative effects on well-being for individuals and families, and minimal job security. I haven’t read recent research to this point; however, those countries with outsized surges in temporary employment – Ireland, Portugal, Netherlands, Italy, Greece, and the UK are among the highest in the sample above – are likely to experience a drop in welfare relative to other countries, all else equal.

Another interesting aspect of the Spanish labor market on a relative basis is that while Spain has a large presence of temporary workers, these workers do have a relative advantage relating to claim of unfair dismissal than do other global workers. The implication could be, that as the share of temporary workers rise in Ireland, Portugal, or the Netherlands, for example, the employment becomes more volatile and reduces expected lifetime income, hence spending or growth. (Data from the OECD.)



I’m worried and just conjecturing here. But, not only have countries not reformed labor issues already in the pipeline – the Spanish two-tier labor issues date back to 1984 – we’re creating new ones. The Great Recession and forced austerity is likely a very big factor in the surge in Irish temporary unemployment employment. This will bring with it unintended consequences that may require further reform (or alternative scenarios like exit from the EMU) at some point in the future

Mish at Global Economic Analysis says it loud and clear as well as Mike Kimel and Ken Houghton here at Angry Bear:
I will stick with what I have said on many occasions "People are dropping out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low." The reason is not a recount based on the 2010 census, nor is it purely demographics, nor is it Obamanomics. The reason is severe and sustained fundamental economic weakness, coupled with existing purposely-distorted definitions of what constitutes "unemployment".

Rick Hasen at Election Law Blog instructs us on super pacs and 501c4s:
These days, I probably spend more time speaking to reporters (from as far away as Brazil and Italy) about Super PACs than about any other election law subject. There is a lot of misinformation floating out there about what Super PACs are, where they came from, the relationship to Citizens United, and the ability of super PACs to coordinate with candidates without running afoul of the FEC disclosure rules. For those looking for basic information from what I’ve written, I point reporters to my recent CNN oped, this blog post on whether Citizens United created Super PACs, and this blog post which highlights the kinds of coordination which are currently permissible under FEC rules.
...
. The Secret Money is Shifting to 501c4s, and It Demands a Legislative Response. Last night ace election lawyer Rob Kelner tweeted: “Biggest story today: Crossroads’ c4 raised more than its Super PAC. Confirming that media is missing the boat by focusing on Super PACs.”

My big concern before yesterday was that we would see a lot of transfers of money from 501c4s to affiliated Super PACs to shield the identity of donors to Super PACs. I’m still trying to get a handle on how much of this took place (apparently less than I thought). But the reason these transfers are not taking place is that it appears the 501c4s are engaging in much more direct election-related activity than they have in the past. That is, we are seeing some 501c4s becoming pure election vehicles. The relation of 501c4s to super pacs is now like the past relation between 527s and pacs—these are now the vehicles of questionable legality to influence elections. While Adam Skaggs is rightly focused on fixing the coordination rules for Super PACs, this seems to be fighting yesterday’s war already. The key is to stop 501c4s from becoming shadow super PACs. Yes, campaign finance reform community, it has become this bad: I want more super PACs, because the 501c4 alternative is worse...

By Noni Mausa

Double Double --  The Absolute Simplest Look at Wages and Pensions  
    
One of the best loved Canadian drinks is the famed Double-Double, a
big coffee with two creams and two sugars from the Tim Horton’s coffee
shop chain.  Millions of double-doubles warm grateful workers hands
and wake up their brains on the way to work each morning.  Want to
raise a cheer from a Canadian crowd?  Just toast the double-double.
But Canadian workers need more than coffee to see them through.  They
need wages and pensions.  How big do they need to be?  In a time of
drooping wages and wavering pensions, we need to know.  Let’s approach
the wages, retirement and pension discussion by simplifying it as much
as possible.

Let’s assume that the work life extends from age 20 to 60.  The work
that people do before and after those ages is balanced by people who
are not able to work at all, for whatever reason.  We’re talking
averages here, spread across 33 million Canadians.
So for half your life you work, and for half (birth to 20, and 60 to
80) you don’t.


As you can see, on average every person working must earn double what
it costs him to live.  That extra money pays for the child the worker
is before he goes to work, and the senior he is afterwards.  For the
population of Canada to stay level, each Canadian must raise one
child, and he must support himself once he retires.  What it costs to
do that is the “lifetime wage.”

How can we calculate that?

Well, to start we can set a lower limit.  Each individual must earn or
somehow acquire no less than what he needs to stay alive.  A rough
guess for that number is around $800/month.  That’s in the range of
what single welfare recipients receive.  I have no idea how they live
on that, but thousands of them do.

Full time minimum wage is roughly double that, about $1600/month
before taxes, about $1350 after. (Manitoba minimum wage currently
$10/hour.)   This is still not enough to be a lifetime wage.  Also,
most minimum wage jobs are not full time or continuous employment, so
the effective income from minimum wage employment is closer to welfare
rates.

Canadians are being exhorted to live responsibly, only bearing
children if they can afford to raise them, saving for their education
and also for the their own retirement.  The smallest sufficient income
to accomplish this seems to be about double current minimum wages, or
about $20/hour in Manitoba, $35,000 to $45,000 per year averaged over
a working life.

Business won’t pay such wages if they aren’t forced to.  But somebody
must.  Why?  Not for moral reasons, we’re not dealing with morality
here, just practicality.  Whatever way you try to jig the numbers,
half the population depends on the other half just to live.  In a
nation, these life-stages overlap so the burden levels out over time,
but effectively one half is always supporting the other.
Paying out to each worker less than double the bare cost of living in
a closed system will result in collapse or shrinkage of the system.
But suppose you don’t treat your nation as a closed system?  Maybe you
can outsource some of the cost at the two “nonproductive” ends of the
lifespan.  If you want to cut your costs to the bone so your workers
can be paid only their immediate costs of living, you have to tackle
the problem at the child end and the senior end.

At the child end, you can outsource the production of new workers to
other, poorer countries – i.e. depend on immigration for population
growth.  That’s one thing Canada is doing.

StatsCan tells us “In 2006, international migration accounted for
two-thirds of Canadian population growth… in the mid-1990s, a reversal
occurred: the migratory component became the main engine of Canadian
growth, particularly because of low fertility and the aging of the
population… Around 2030, deaths are expected to start outnumbering
births. From that point forward, immigration would be the only growth
factor for the Canadian population…”

In Canada in 2010, of the 280,000 immigrants, 60% were “economic”
(adults ready to work.)  Another 28% were classed as “family.” The
hard lifting of childbirth and childrearing and child mortality was
done by other countries with no cost to Canada. In fact, immigrants
pay a small but significant landing fee, $500 to $1000 depending on
entry class.   We further maximized the value of the outsourced new
citizens by selecting capable applicants free of serious medical
problems.

At the senior end of the lifespan, you can cut elder supports as much
as possible.  This is harder to do because elders are aware of the
process and often have younger relatives to advocate for them, but
though it’s going slowly, it is a work in progress.
A maximally efficient economy in a non-closed system would be one
where you import all your workers, keep them as long as you need them,
and repatriate them afterwards.  But that is not a nation.  Nations
grow their own people, they don’t rent them.

Canada-the-nation may not need to support home-grown population
growth, because we are a nation that encourages many cultures.   The
fact that our immigration policy skims good citizens from poorer
nations doesn’t bother anyone except, I suppose, the poorer nations.
But Canada-the-nation must support seniors.  Business won’t pay enough
in wages for workers to save money for retirement, and for many people
saving or investing isn’t a reliable strategy.  Private business
pensions are becoming quaint luxuries (unless you’re in the government
or you’re a CEO.)

We pride ourselves on being a secure, stable nation.  The chaotic,
competitive and short term business community won’t and probably can’t
supply that stability; only a government has the ability over
generations to ensure stability.

A centralized, national fixed-benefit pension, solid and boring and
guaranteed by the government, is the only practical approach for most
Canadians.  Additional savings are fine, for people who can afford
them, but millions cannot.  Cutting and privatizing senior supports
(Canadian Pension Plan, Old Age Security, and for the very poorest,
the Guaranteed Income Supplement) is the opposite of what
Canada-the-nation needs to be doing.
------------------
(This was written in the Canadian context, where our right-wing prime
minister is in the fast lane to transform Canada to conform more
closely to US antisocial policy.)

by  Rebecca Wilder

I Still Don’t Get Why the ECB Hiked Rates

I still don’t get why the ECB hiked rates in April and July of 2011. I questioned this using bond market pricing back in August 2011. Now I question it once more using the ex post trajectory of mortgage rates.

Across the Euro area, 43% of total home loans are made on a variable rate basis – this means that mortgage rates are highly elastic to ECB rate setting policy.
Average mortgage rates started rising well before the ECB actually hiked rates. The bottom in mortgage rates was seen in June 2010 and hit a local peak in August 2011 when rate cut expectations started to pass through. But the high correlation between ECB policy and average mortgage rates was to be expected and very harmful to those economies with a rising household desire to save.




It would be one thing if the variable mortgages were concentrated in the core countries; but they’re not. The Periphery economies drive up the average share of variable rate mortgages. In the most extreme case, Portugal, 99% of all home loans are made at a variable interest rate. It doesn’t take a PhD to figure out the speed at which tighter monetary policy will pass through to the real economy when 99% of all loans are made at a variable rate.



Like I said, I still don’t get why the ECB hiked rates.
Source data: ECB for current rate data, and an ECB structural issues report on EA housing for the variable rate shares.

originally published at The Wilder View...Economonitors

The President of the Federal Reserve Bank of Philadelphia:
We have been putting out credit in a period of depression, when it is not wanted and could not be used, and will have to withdraw credit when it is wanted and can be used.
But this is not Charles I. Plosser, no matter how similar the sound. It's from September of 1930,* presumably George W. Norris (PDF; see page 4).**

Indeed, reviewing the Calmoris and Wheelock article from which I pulled that quote, we find the same mistakes being made: excess reserves confused with circulating money and therefore treated as harbingers of inflation, squealing for austerity,*** sterilization of shifts in reserves in a desperate attempt to avoid non-visible inflation.

As Owen Wilson's Gil says in Midnight in Paris, we have antibiotics; the people in Fin de siècle Paris didn't. It's just one of our other "sciences" that appears not to have advanced.


*Michael D. Bordo;Claudia Goldin;Eugene N. White. The Defining Moment: The Great Depression and the American Economy in the Twentieth Century (National Bureau of Economic Research Project Report) (p. 36). Kindle Edition.

**Not to be confused with George W. Norris, the Nebraska Senator discussed in Profiles in Courage

***The Norris quote above begins:
We believe that the correction must come about through reduced production, reduced inventories, the gradual reduction of consumer credit, the liquidation of security loans, and the accumulation of savings through the exercise of thrift. These are slow and simple remedies, but just as there is no "royal road to knowledge," we believe there is no short cut or panacea for the rectification of existing conditions.
Chancellor of the Exchequer George Osborne, not to mention EC President Herman von Rompuy, would be proud.

We've already seen in previous installments of this series that since about 1980, I: corporate profits have soared, II: the slice of profits going to finance has soared even more, and III:  wages have stagnated.  Here we see what corporations have done with all that money.   There is a limited selection set: pay taxes, distribute as dividends, pay down debt, invest, make acquisitions, speculate, and hold as cash.

Here is a look at taxes through 2008 and dividends through 2010, as percentages of profits; data from BEA table 7.16, lines 19, 20 and 38. For my purposes, profits are divided among taxes, dividends, and all the other things mentioned above, which I'll call the Residual.



Dividends/ Profits are in green; Taxes/Profits in red.  I've added 13 year moving averages to clarify the trends over time.  The Dividend percentage bottomed in 1978 at 20.6%.  I've marked that year on both curves with a yellow dot.  After that, dividend payments took off sharply and have been mostly in the 40 to 50 % range since 1989.  The tax rate on dividends was reduced to 15% in 2003, also marked with a yellow dot, but I don't think that change has had much effect on dividend payout.  The gyrations in the payout percentage since 2003 are largely due to the denominator affect, as profitability increased after the 2001-2 recession, and plummeted during the recent Great Recession.  Notably, 2010 profits are the highest ever. 
 
The tax payout drop lagged the dividend increase by several years, and didn't start dropping until 1987.   In 1986, the tax payout rate was 45.2%.  After a sharp drop to 27.7% in 1992, the payout rate increased throughout the Clinton administration, topping at 34.5% in 2000.  Then, there was another sharp drop.  It has since leveled off, averaging 25% since 2004.

In 1978, the 13 year averages were 24.2% for dividends and 42.4% for taxes.  Those averages are now 28.3, and dropping; and 45.7 and rising, respectively  45.7 and rising for dividends; and 28.3% and dropping for taxes - essentially a reversal of positions.  The net result is a massive funneling of money from government to dividend recipients who now are paying only 15% tax on their dividend income.

This is not only "Starve the Beast" in action, it is a massive redistribution of wealth into the hands of those who already have the most.   Say what you will about the relative efficiencies of the private and public sectors in using resources, the public sector places money into the hands of people who will spend it and keep the economy moving.  The private sector largely funnels it into rent seeking.

For the sake of completeness, here is a look at the Residual - as defined above - with a 13 year moving average and a best fit straight trend line.



This provides a partial explanation for Jon Hammond's observation that net corporate investment has been down over the duration.  There is less residual to invest.

Bottom line:  Corporate profits have been skewed to dividend payments, to the detriment of worker salaries, government tax revenues, and corporate investment.

Cross posted at Retirement Blues.

With apologies to Stan Collender’s Beautiful and Talented Wife (not to mention mine):

James had gathered a mix of friends, acquaintances, and random strangers at his Rent Party, but no one was talking to anyone else. So he decided to get people to talk to each other, using the easiest non-visible variable available:
"Don, what’s your IQ?"
"171."
"Sharon, what’s your IQ"
"169."
"Maybe you should take with Don"
James watched as Sharon and Don began a discussion of elementary particle theory, astrophysics, and Ken Rogoff’s chess games.

Encouraged, James continued his efforts.
"Lynn, what’s your IQ?" "151"
"Jorge, what’s your IQ?"
"149."
"You should talk with Lynn."

And they were soon discussing the biophysics of bacteriorhodopsin and Hilbert Space.

Thrilled this was working so well, James tried again.

"Steve, what’s your IQ?"
"51."
"Lucy, what’s your IQ?" "49."
"You two should probably talk," James said.

Lucy turned to Steve, "So where do you teach Real Business Cycle Theory?" (h/t Mark Thoma)

David Frum was excommunicated from the Righties Club a few years back because he insisted on occasionally saying sane and accurate things.

He continues that aberrational behavior today in his review of AEI uber-zealot Charles Murray’s new book, Coming Apart: The State of White America, 1960-2010 (which I will not link to here — no Google love from me).

Frum’s takedown is so good that I won’t try to recap it. I’ll just comment on one quote that he provides from Murray (paragraph break and emphasis added):

Recall figure 2.1 at the beginning of the book, showing stagnant incomes for people below the 50th income percentile.** High-paying unionized jobs have become scarce and real wages for all kinds of blue-collar jobs have been stagnant or falling since the 1970s.

But these trends don’t explain why [working-class white] men in the 2000s worked fewer jobs, found it harder to get jobs than other Americans did, and more often dropped out of the labor market than they had in the 1960s.

It doesn’t? Doesn’t “textbook economics” — not to mention common sense — tell us that if you pay people less, they’ll have less incentive to work?

But Murray knows better — they’ve got plenty of incentive:

Insofar as men need to work to survive – an important proviso – falling hourly income does not discourage work.

As long people are reduced to the level of survival — so people have to take any available job, no matter how shitty or badly compensated, or die (along with their families and children) — it’s no problem getting them to work.

That takes a big load off my mind.

Cross-posted at Asymptosis.

by  Rebecca Wilder

Which Economy Is Pursuing Procyclical Fiscal Policy?

Today the BLS reported that the US unemployment rate dropped to 8.3% in January 2012. This is the lowest measured rate since February 2009 – a local trough. Also this week, Eurostat reported that the Euro area (EA) unemployment rate stabilized in December at 10.4%. This is the highest level since inception of the euro – a global peak (so far).

It’s pretty easy to see through relative labor performance which economy is pursuing procyclical fiscal policy, namely deficits rise when the economy is booming and fall when the economy is contracting: the EA.





originally published at The Wilder View...Economonitors

Taxprofblog
points to research suggesting a tipping point about the notion that small businesses drive the economy: Martin A. Sullivan (Tax Analysts), New Research Weakens Case for Small Business Tax Relief
The National Federation of Independent Business states on its website: "Small business has created about two of every three net new jobs in the United States since at least the early 1970s." And on its website, the Small Business Administration claims, "Small firms accounted for 65 percent (or 9.8 million) of the 15 million net new jobs created between 1993 and 2009." These claims are endlessly repeated on television and in print. And both political parties are perfectly happy to leave them unchallenged. But two new strands of academic research are quietly shredding the idea that policies to support small businesses hold the key to job creation.

• [John Haltiwanger (University of Maryland, Department of Economics), Ron S. Jarmin (U.S. Census Bureau, Center for Economic Studies) & Javier Miranda (U.S. Census Bureau, Center for Economic Studies), Who Creates Jobs? Small vs. Large vs. Young
• Erik Hurst & Benjamin Pugsley (both of the University of Chicago, Department of Economics), What Do Small Businesses Do?]

‘Bank Transfer Day’, What Really Just Happened?

James Van Dyke points to some numbers on the move to transfer funds out of big banks:
Bank Transfer Day and the Occupy Movement have received tremendous attention, and for the first time we have market research data to measure the impact on the financial services industry. Javelin’s research estimates that 5.6 million U.S. adults with a banking relationship changed providers in the past 90 days. Of those switchers, 610,000 US adults (or 11% of the 5.6 million) cited Bank Transfer Day as their reason and actually moved their accounts from a large to a small institution. With a Google search of “bank transfer day” returning fully 22,000,000 responses we’re not surprised that these angry bank-switchers represent nearly a three-time increase over the amount of people who took their funds out of large banks for highly-similar reasons during the previous 90-day period in 2011.

by Linda Beale

Why we don't need corporate tax "overhaul"

GOP poormouthing on behalf of rich corporate allies(Part I in a series) These days, one hears a great deal from politicians on the right about how a corporate tax "overhaul" is needed because our taxes are "too complex" and/or "too anti-competitive" or because our tax rates are "too high". The same GOP politicians who whine and whimper about how huge the deficit is, and accuse President Obama of driving our country to ruin with the deficit are willing to lower the tax burden paid by highly profitable corporations considerably (thus increasing the deficit and adding to regressivity of the tax system)--so long as they are appeasing their multinational constituency, the huge corporations who are the new providers of campaign funds and the new decisionmakers in elections--even though the corporate entities have no vote. Claims of revenue neutrality are generally little more than PR cover for corporate giveaways.

Just a couple of examples from a recent Bloomberg piece:

• Republican Senator Robert Portman says he will unveil a new proposal soon that will cut taxes for multinational companies' repatriated offshore profits--i.e., a permanent tax holiday for multinationalsm as a first step towards a very MNE favorable move to a territorial tax system--that will remedy "an inefficient and complex maze of tax preferences". See, e.g., Kathleen Hunter, Portman Corporate Tax Plan to Include Low Repatriation Rate, Bloomberg.com (Feb. 1, 2012). Portman claims this huge tax cut for the high and mighty MNEs (and their managers/owners) is needed because they "pay[] a very steep tax bill if and when they choose to bring their money home." Ludicrous. There is a very generous foreign tax credit provision that allows many MNEs to reduce their taxes to near zero anyway. Further, the deferral they are allowed on active business income gives them the time value of money benefit. Most of what foreign corporations want to do is allow their taxes on non-US income to reduce their taxes on US income--which is a kind of subsidy for offshoring that costs US jobs. And of course, as I've noted in earlier posts on tax holidays and proposals for a territorial system to replace a worldwide system, corporations hold more money overseas when they think there is a good chance that their buddies (or "bought pols"?) will give them the tax break they have been lobbying for--so these proposals encourage corporations to engage in the activity that these proposals say they are addressing, thus giving them more ammunition to get the change they want. Portman, of course, says he wants to "streamline" the corporate tax and lower the rate to 25%. We have a statutory rate of 35% now and most corporations that pay taxes (which are not by any means all of the corporations that make significant profits) pay less than 25%. If we lower the statutory rate to 25%, it is quite likely that most corporations that actually end up paying taxes will be a smaller number than with the 35% rate and at a much lower rate--probably around 10-15% instead of 20-25%. Of course, what the result will be--as it was in the 1986 tax reform that lowered rates for ordinary income and ended a number of problematic tax preferences such as the capital gains preferential rate--is that the lower rates will stay, and all of the loopy tax preferences (and more) will be reenacted within a couple of years under heavy lobbying for the same by the corporations that benefit from this round.
• Dave Camp, Michigan Republicans and Chair of the House Ways and Means Committee, wants to exempt 95% of overseas profits.

Is there merit in this drumbeat of (lobbyist-induced) calls for "corporate tax overhaul legislation"? The simple answer is no.



On Complexity:

Most complexity in the code is there for one of two reasons.

The most likely reason for complexity is the creation of tax preferences heavily lobbied for by corporate lobbyists. One example is the so-called "domestic production activity deduction" that lowers the tax rate by 9% for most industries (even ones that don't really produce anything) and 6% for natural resource extractive industries. There are tax breaks on top of tax breaks for the resource industries, of course, that get numerous special benefits throughout the Code, while joining in various coalitions that lobby AGAINST even extraordinarily modest support for green industries (such as reasonably low cost loans for solar power).

The second main source of complexity is the clear need for specific anti-abuse provisions to undo the harm done when corporations use what can most charitably be called aggressive and inventive interpretations of Code provisions--often ones that are hyper-literal in nature (the kind of analysis that allowed the Bush Treasury to redefine what "exchange" means in the reorganization provisions in order to allow taxpayers to manipulate the allocation of consideration to create a hitherto unrecognizable tax loss in the reorg transaction) or turn the Code's clear textual provision on its head (look at the briefs for the defendant--or for that matter the lousy statutory interpretation in the district court opinions-- in the Black & Decker contingent liability shelter case, where Black & Decker argued for application of a provision in section 357(c) (which says explicitly that it applies only where paragraph one of that provision applies) in a context where paragraph one did not apply).

As a result of the contingent liability shelters, Congress added various Code provisions, including section 358(h) (having to do with the basis for corporate assets in transactions with significant liabilities) and section 357(d) (having to do with calculating the amount of liability assumed).
Complexity, in other words, is not an evil in itself. Sophisticated taxpayers aren't harmed by complexity, and in fact complexity is needed to provide sufficient detail to prevent sophisticated taxpayers (with the help of their tax advisers) from cheating. There is generally less complexity in provisions that are relevant for unsophisticated taxpayers, though it is more clearly an obstacle to good tax compliance behavior there.

On Competitiveness:

Competitiveness is used so frequently that it seems doubtful that anybody really knows what they mean by it. If one company destroys a union and is able to pay their workers lower wages as a result, then a company that produces a similar product will claim that "competitiveness" requires that they be allowed to do the same. Of course, another approach would be for the company that retains an active union, and continues to provide pension and health care benefits could lobby Congress to enact stronger laws protecting worker rights to pension and health care benefits. In other words, competitiveness is consistently used as an argunent, when it comes to corporations, for taking away benefits to workers, communities, states and the nation for the benefit of the corporations.

Competitiveness could just as easily be used to argue for maintaining programs, procedures and benefits for workers, communities, states and the nation by considering what would be necessary to buttress the system that supports those benefit levels. And in fact that view of competition--that we are competing globally to create both profitable companies AND a secure and well-paid workforce that can support a healthy economy that can in turn support a quality of life in all dimensions--would lead to different decisions not only about taxation but also about anti-trust, excise taxes, trade treaties, environmental protection, and many regulatory projects.

Furthermore, competitiveness is often used as an argument in the abstract when the main competitors are both US based companies. There, the argument for reducing taxes to enhance competitiveness is at its weakest, but few competitiveness arguments reveal just how the competititon is playing out even on a globalized playing field.

On Rate Structures:

The 1986 tax reform act is a frequent reference these days when people talk about amending the Code generally and specifically about amending the corporate tax provisions. But the context for that act's passage was quite different. Individuals were taxed at rates that were reasonably progressive--with a top rate at 70% (though the brackets could probably have been better defined to differentiate among top income recipients). Further, the 1954 Code had built up a plethora of tax preferences (especially useful to the rich) and the Congress had realized that the preferential capital gains rate was wreaking havoc on sensible provisions because of the arbitrage opportunities it created. Thus, there was room for "base broadening" (removing ill-advised preferences spread throughout the 1954 Code) as a means of paying for "rate lowering" (lowering the fairly high rates about half, without costing the fisc because of the higher amount of income on which those rates would be charged).

We are not in the same situation today. We have very high deficits because of an economic crisis caused by two interwoven problems--(i) the lax regulatory oversight of 40 years of Reaganism, which permitted the financialization of the economy and led to excessive incomes for people at the top (managers and owners, hedge fund and equity fund managers, and speculators generally) and excessive debt for banks and especially people not at the top (because of their stagnant or reduced incomes in the face of growing costs, caused in part by the relaxation of regulations and anti-trust activity coupled with the anti-union attitudees and activity); and (ii) the success of a radical right-wing fringe in characterizing government and business as having adverse interests and progressive programs supporting social well being (from Social Security to Medicare to Medicaid to (modest) heatlh care reforms intended to reign in the cost of medical care to unemployment benefits to efforts to reign in contracts of adhesion in the consumer credit markets) as "unmerited" "entitlements or costly and anti-competitive regulation of businesses that counters the "free market" that will ensure "growth and jobs".

The result of the rhetoric is a citizenry that is ignorant of the actual income distribution, tax burdens, and impact of government spending on jobs and the health of the economy. The result of the 40-year "reaganomics" effort from the right to cut regulations, cut taxes, privatize and militarize is that this is no context for rate reduction but in fact a context in which those who can afford to do so--for sure those individuals and households in the top two quintiles of the income distribution that comprise the upper middle class and the upper class and all profit-making corporations--should be paying taxes at HIGHER rates, not lower rates.

It should be noted that President Obama--who is at best a middle of the roader on tax issues--also is said to plan to propose an "overhaul of the U.S. corporate tax system" in connection with his budget plan for FY 2013 that involves lowering rates and base broadening. See Steven Sloan, Obama said to propose corporate tax overhaul next month, Businessweek.com (Feb. 2, 2012). Again--lowering the rate is a bad idea. Lowering the rate without base broadening is a stupid idea. But the kind of base broadening that is included, if such a proposal eventually passes, matters an awful lot. The problem is that if Obama proposes such a reform, the GOP won't support it unless the "base broadening" is essentially inconsequential and can be undone easily later or affects only little guys and not the big-monied lobbyists. Thus this looks like another of those initiatives from the White House that play into the right's agenda and do little to advance any progressive idea.

originally published at ataxingmatter