Archive for March, 2014

The Incredible Vanishing Takeaway from the CBO Report on Minimum Wage

March 10th, 2014 1 comment

I’m surprised that nobody highlights what for me is the key takeaway from that report.

They predict, with a $10.10/indexed increase:

Low-end incomes increase $19 billion.

High-end incomes decline $17 billion.

For a net GDI increase of $2 billion.

Table 1, page 2:

Screen shot 2014-03-10 at 12.18.13 PM

Pie gets bigger, all that rot.

The increase is presumably explained by the last phrase in footnote F to that table:

increases in income generated by higher demand for goods and services.

Cross-posted at Angry Bear.

Why the Fed Hates Inflation: 1.2 Trillion Dollars of Why

March 10th, 2014 38 comments

Upate: Those who have qualms about the methodology and underlying assumptions here would do well to consider Thomas Piketty’s thinking on page 210 of Capital in the 21st Century. He distinguishes between “real” and “nominal” assets, pointing out that real asset values climb along with inflation and growth, while nominal asset values don’t.

A simple rule of economic arithmetic that economists seem to studiously ignore:

Inflation transfers real buying power from creditors to debtors, with nary an account transfer visible anywhere on anyone’s account books. Inflation means that debtors pay off their loans over time with less-valuable dollars — dollars that can’t buy as much bread, butter, and guns.*

Higher inflation causes, is, a massive transfer from creditors to debtors.**

And the Fed is run by creditors. Inflation is, always and everywhere, very very bad for them.

How bad? Look at the fixed-income assets and liabilities of financial corporations:

Screen shot 2014-03-10 at 8.41.15 AM

Financial businesses are net creditors to the tune of $9-$14 trillion dollars.

If inflation was 1% higher than it is, it would transfer between $90 and $140 billion dollars to their debtors. Every year. For every extra point of inflation.

Add it up: an extra point of inflation over the last ten years would have cost financial businesses $1.2 trillion dollars.

It’s enough to get a banker’s attention.

And that’s before you even consider the Fed powers-that-be in their roles as equity shareholders, and the Fed’s dual mandate. By emphasizing low inflation over low unemployment — and stomping on growth whenever the bogieman wage inflation threatens to rear its head*** — the Fed maintains a pool of unemployed and weakly compensated employees that cripples labor’s bargain power and empowers the steady growth of corporate profits over labor earnings.

It kinda makes you think about Mankiw’s fourth principle of economics: “People respond to incentives.”

I’ve said it before: if it weren’t for inflation, the rich really would own everything, instead of almost everything.

* Some will caveat: this is only true of unexpected inflation, because contracts are written with expected inflation in mind. The proper response: since the future is impossibly uncertain, all changes in the inflation rate are unexpected.

** Meanwhile economists fetishize notions about menu costs and the like, which in their largest estimations are an order of magnitude smaller than the inexorable arithmetic effect described here.

*** It’s happening now.

Cross-posted at Angry Bear.

Dean Baker on Piketty’s Capital: Or, How FDR Proved Marx Wrong

March 10th, 2014 5 comments

Thomas Piketty’s important new book, Capital in the Twenty-First Centurypredicts a bleak future of increasing concentrations of financial assets in few hands, stagnant wages and labor share of income, and declining returns to capital — secular stagnation. He enunciates and demonstrates the part of Marx that Marx got exactly right.

But Dean Baker points out where Marx got it wrong, and where an optimist  can hope that Piketty’s got it wrong. By changing our institutions, laws, and regulations — the rules of the capitalist game — we can head off that seemingly inevitable downward spiral. Dean gives several examples of institutional changes that could prevent or even reverse it, from patent laws to cable monopolies to financial-transaction taxes.

Which prompts me to finish this post, started long ago, and to point to Steve Randy Waldman’s eloquent rejoinder to the pessimistic view. Steve ingested this contrary view with his mother’s milk:

I remember pride in my businessman father’s voice when he explained to me that this [pessimistic view] was wrong. Marx had underestimated the ingenuity and flexibility of capitalist societies, and particularly of the United States during the New Deal. Government intervened to solve Marx’s collective action problem, enabling capitalists secure their enlightened self-interest by keeping a distribution of prosperity sufficiently broad that the predicted collapse could be avoided. … To my father, American capitalism’s adaptability and ingenuity had proved Marx definitively wrong, in the best possible way — by producing a stable society that served the vast majority of its citizens, while countries whose politicians had followed Marx’s prescriptions grew into monsters.

So Marx was wrong both ways — economically and politically — even while he was right. The capitalist tendency to concentrate financial assets at everyone’s expense is inevitable — unless we as a society decide to do something(s) about it.

You’ll find this very same thinking elsewhere, for instance in this line from Joseph Stiglitz’s review of Robert Skidelsky’s Keynes: The Return of the Master.

Keynes’s great contribution was to save capitalism from the capitalists

And in this 2001 article from The Hoover Digest:

How FDR Saved Capitalism

This is a clear, cogent, and coherent story, but one I rarely hear from the left. I’d like to suggest that progressives should be moving this rather moving narrative to the front of the rhetorical bookshelf.

Now if someone could just convince Obama to go all FDR on us…

Cross-posted at Angry Bear.