Archive

Author Archive

How Do Households Build Wealth? Probably Not the Way You Think. Three Graphs

October 28th, 2014 8 comments

Work hard. Save your money. Spend less than you earn. That’s how you become wealthy, right?

That’s not totally wrong, but if you think that’s the whole story — or even a large part of the story — you may be surprised by this graph:

Screen shot 2014-10-28 at 8.45.12 AM

(Note: these are not realized capital gains, which really only matter for tax purposes. If the value of your stock portfolio or house goes up for twenty or thirty years, you’ve made cap gains even if you haven’t “realized” them by selling.)

Household “saving” — households spending less than they “earn” — contributes a remarkably small amount to increasing household net worth. And that contribution has shrunk a lot since the 90s.

Screen shot 2014-10-28 at 9.00.09 AM

The accounting explanation is simple: “Income” doesn’t include capital gains; it comprises all household income except capital gains. So capital gains are also absent from “Saving” — Income minus (Consumption) Expenditures. (This is why HouseholdSavings1 + HouseholdSaving ≠ HouseholdSavings2 — not even vaguely close.)

The capital gains mechanism appears to dominate the ultimate, net delivery of rewards to household economic actors. Earning more and spending less is weak beer by comparison.

What does this say about our understandings of how the economy works? Does economists’ fixation with “saving” provide a useful picture of macro flows in the economy? Since asset ownership is hugely concentrated among the wealthy (even real estate), can we think about the economy’s workings at all without looking at distribution? Does this dominant mechanism allocate resources “efficiently,” or deliver the kind of incentives that make us all better off? And etc.

There’s much more I’d like to say about this reality, but I’ll just provide one more graph for the time being and let my gentle readers ponder the bare facts.

Screen shot 2014-10-28 at 9.10.30 AM

The spreadsheet’s here. Have your way with it. (It’s kind of messy; drop a line with questions).

Cross-posted at Angry Bear.

Bill Gates Agrees with Me on Piketty

October 14th, 2014 3 comments

He really likes the book, but expresses frustration that Piketty (emphasis mine):

doesn’t adequately differentiate among different kinds of capital

Imagine three types of wealthy people. One guy is putting his capital into building his business. Then there’s a woman who’s giving most of her wealth to charity. A third person is mostly consuming, spending a lot of money on things like a yacht and plane. While it’s true that the wealth of all three people is contributing to inequality, I would argue that the first two are delivering more value to society than the third. I wish Piketty had made this distinction.

This is not exactly my point (here), but still it cuts right to the crux. There’s a conceptual flaw at the book’s core that makes it hard or impossible to think coherently about the levels, trends, and mechanisms that Piketty portrays:

Piketty defines capital as synonymous with wealth.

Wealth consists of all the tradable claims on real capital (specific ownership claims, generalized claims like dollar bills, and everything in between). The market constantly reprices those claims, resulting in a constantly-adjusted best-guess market estimate of what the underlying assets are worth — ultimately expressed as household net worth (with all firm net worth imputed to household shareholders).

The market reprices the claims, based on its revaluation of what the underlying assets are worth. If it thinks the assets are worth more (will produce more in the future), it bids up the prices on the claims.

Important: that stock of real assets is not just the “fixed capital” tallied (because it can be measured) in the national accounts; that’s actually a small part. Knowledge, skills, and abilities (think: education, training, health), business/organizational systems (this is huge), and similar unmeasurables constitute the bulk of real capital — the stuff that allows us to produce in the future. Most of that stock is not specifically claimed, but it is that whole body of real capital that the market it trying to value properly via pricing of claims — basically, holding up its collective thumb and squinting.

Piketty should have called it Wealth in the 21st Century. That’s what he’s really talking about, because we really have no idea (beyond the market’s best guess expressed in household net worth) what our real capital is worth.

“Financial capital” is an oxymoron.

Cross-posted at Angry Bear.

Are Poor People Consuming More than They Used To? Six Graphs

October 12th, 2014 5 comments

“Poor people today have air conditioners and smart phones!”

You hear that a lot. “You should be looking at poor people’s consumption, not their income. By that measure, they’re doing great.”

The basic point is very true. If poor people today have more and better stuff, can buy more and better stuff each year, maybe we should stop worrying about all those other measures that show stagnation or decline.

Does this measure tell a different story? Curious cat that I am, I decided to go see. I had no idea what I’d find.

The first thing I found: this simple data series isn’t available out there, at least where I could find it. Notably, the people who claim it’s so revealing don’t seem to have assembled it.

Consistent, high-quality expenditure data is available going back to 1984, from the BLS Consumer Expenditure Survey (CES). (Pre–2011 here. 2012 and after here. See “Quintiles of income before taxes.”) But you have to open a table for each year and pull out these numbers, which I did. The spreadsheet’s here. It’s simple, clear, and easy to work with, so please have your way with it. (Note: CES measures “consumer units” — “households” precisely defined for the purpose of measuring consumption. All the CES terms are defined here.)

The household spending measure is in nominal dollars. I converted the values to 2013 “real” dollars using the BEA’s deflator for Personal Consumption Expenditures. Here are the results (mean values; medians would be somewhat lower).

Screen shot 2014-10-11 at 5.11.24 PM

By this measure poor people’s consumption is up 5% since 1984 — not exactly the rocket-ship prosperity growth for the poor that consumptionistas proclaim.

But truth be told, this isn’t a very good measure as it stands — because households have gotten smaller. For the bottom 20% that looks like this:

Screen shot 2014-10-11 at 10.08.20 AM

Declining household size means:

1. Per-person spending would trend up (if income per household is the same, with less people per household).

2. But: you have to adjust because living with more people is cheaper per person because of shared rent, utilities, etc. If you don’t, it looks like the average person in a four-person household consumes vastly less than a person in a one- or two-person household — which clearly isn’t correct.

I corrected for that with the household-size adjustment method used by the Pew Research Center. This standard method is somewhat synthetic (more on that below), but it also clearly yields a more useful and accurately representative measure of poor people’s consumption. Here’s what those results look like:

Screen shot 2014-10-11 at 5.10.15 PM

By this measure, things have gotten more better: poor people’s consumption is up 14% since 1984, compared to 5% using the other measure. But really, that’s still nothing to crow about; real GDP per capita grew 63% in that period — four times as fast.

Screen shot 2014-10-12 at 7.43.01 AM

More comparison: the real price of a share in the S&P 500 has increased 370% over that period. That’s not counting dividends.

To get an apples-to-apples comparison, here’s a look at annualized growth rates for various periods:

Screen shot 2014-10-11 at 5.29.11 PM

Poor people have gained a little bit of ground in absolute terms. But they’ve lagged way behind the rest of the country. Growth in every period except the 1990s Clinton heyday was moribund or negative — notably ’84–90, the last twelve years, and (especially) the last four years of economic “recovery.”

The consumptionistas are absolutely right: this is a really good measure.

And it tells exactly the same story as the other measures.

No child left behind?

- – – – – – – – – – – -

Before I leave you, some proleptic responses to the predictable objections:

But, the Brookings study! Many point to this study (PDF) by the (liberal!) Brookings Institution. The study devises and tracks a measure they call “consumption poverty.” Here’s the money graph:

By this measure, very few people these days are living in “consumption poverty.”

Here’s the thing: this study uses the same data set you saw above. But you’re looking at it through a very synthetic lens: a somewhat-arbitrary “poverty threshold.” What percent of people are below that threshold? Which means you gotta ask: Is that a relative or absolute poverty threshold? How does it change year to year? How’s it calculated? Etc.

To say it another way: This measure is some calculation steps removed from — it’s a second or third or fourth derivative of — the data as measured by the BLS. I’m not saying it’s a bad or un-useful measure. I haven’t gone into the weeds with it. And Brookings tells you exactly how the threshold is calculated. But you have to understand the lens’s multiple assumptions and hold them in your head while you’re peering through the lens.

The graphs above, by contrast, are much closer to “the facts on the ground.” Assuming you’re interested in those.

Worth noting: the people who might prefer the story told by the Brookings poverty-threshold measure are the very same people who are forever complaining about measures that use arbitrary (and relative) poverty thresholds. Just saying.

The inflation adjustment misrepresents poor people’s reality. The “real” consumption spending in the graphs is also filtered through a lens: the BEA’s price index for personal consumption expenditures. What if that index is wrong? It is based on “hedonic” estimates, after all: what’s the value (as opposed to price) of today’s laptop compared to 1990’s? Cars are far more reliable than they used to be; knowing that your car will start every time you turn the key has real value. Air conditioning is more valuable than box fans. And think of all the free digital goods that poor people have access to now — from Google to online banking to… Those have no “pricing,” so they’re undercounted or uncounted in this measure.

This is basically saying, “you should create your own, different Consumer Price Index.” It’s exactly the same argument as the ShadowStats craziness, but in reverse: there’s not more inflation than is shown in the CPI, there’s less — more deflation. There’s a “true” index that’s misrepresented by the rather remarkable and diligent efforts of BEA statisticians.

Scott Sumner is rather the poster-child for this position. He says exactly this:

we should ignore all the official data, and use our eyes.  Travel around the country.  Go into poor people’s houses.  … I think I do have a rough sense of the different sorts of consumption bundles purchased by different classes of people.

You should construct your own CPI index by holding up your thumb and squinting, eyeballing poor people’s consumption bundles. Because…the official CPI is not saying what Scott Sumner would like it to say.

Scott’s been going on about his superior CPI estimates for years. Karl Smith probably gave the best response, a year back:

basically anyone with MS Excel and a rudimentary knowledge of the subject matter in question can create a workable index…. a task that brilliant people have devoted their life to

The thing is, Sumner doesn’t even use a spreadsheet. He does it in his head. (Now that’s brilliant.) We should clearly do likewise, or just adopt his index — if we knew what it was.

Finally, note: the comparisons above — to real GDP and S&P growth — use the BEA’s GDP-deflator and CPI indexes, which are only slightly different from the PCE index used here for consumption. Almost-identical apples to almost-identical apples. Feel free to mess with that in the spreadsheet if you’re so inclined. It won’t get you much of anywhere.

The household-size adjustment is invalid. This is another lens interceding between you and the measured data, on top of the inflation adjustment. No doubt about it. But as with inflation adjustment, you can’t get around it. You can’t ignore shrinking household size any more than you can ignore today’s less-valuable dollars. And you can’t just divide household income by people per household, or people in four-person households look like they have vastly lower consumption than people in one-person households. That just isn’t reality.

One part you might reasonably question: The Pew size-adjustment methodology uses a chosen variable that can be from 0 to 1; they choose 0.5 based on some decent research over the years. I tried values between 0.1 and 0.9. Lower numbers lower and flatten the red line, and show a consistent upward trend from ’84 to ’01 (flat thereafter). But the basic story is unchanged.

- – – – – – – – – – – -

Look: no method is going to give you the perfect gauge of human well-being — the”obvious,” magic-bullet measure that conservatives seem to forever be after in their eternal Search For The Simple. This consumption measure is no exception. But advocates of this measurement approach are absolutely right: it’s much simpler and easier to measure than most other measures, and it’s a very good measure of how poor people are doing.

Bottom line: Poor Americans’ consumption grew, very slowly, over the past three decades. Meanwhile the rest of the country grew four times faster, and a typical stock-market investment grew at least 27 times faster.

Do with that what you will. Adjust your priors as appropriate, if that’s something you do.

Then take a look at some closely related measures that might tell other important parts of the big story:

How much of this picture is about young versus old? The population is aging; do we need to change the story this measure tells based on changing demographics?

Did poor people take on more debt to achieve that higher consumption? How has that affected their lifetime well-being?

 How much of that consumption growth resulted from government spending, and how much from the market doing its job of allocating resources efficiently? (i.e., to those who will value them highly?)

Are poor people working more hours to get that consumption increase? Do they have more or less leisure and family time?

How economically secure are people? What is the typical person’s chance of falling into this bottom-20% consumption group? How has that changed?

I’ll try to address some of those questions in future posts.

Cross-posted at Angry Bear.

Amazon and Hachette: What’s Really at Issue?

October 5th, 2014 No comments

I just sent the following to David Streitfeld, the main reporter covering this dispute for the New York Times. If any of my gentle readers has an answer, I’d love to hear it:

Dear Mr. Streitfeld:

What I have never found in any coverage (perhaps I’ve missed it?):

What is the precise dispute between Amazon and Hachette?

What does Amazon want from Hachette that Hachette is unwilling to concede to? (And/or vice versa.)

“Control over pricing” is vague, doesn’t answer that.

Prima facie, it seems that Hachette could charge whatever wholesale price it wants for books, and Amazon could charge whatever retail price it wants.

But that’s apparently not the case?

Absent a fundamental understanding of the specific matters at issue, I find it very hard to think coherently about the subject or draw any conclusions.

I have a long and diverse history in book publishing, by the way, from publisher to editor to author, and everything in between. I’d really like to figure out what I think about this.

Thanks for listening,

Steve

Is this Amazon saying, “Sure, charge whatever you want. But we don’t make money selling your books at our prices, so we’re going to downgrade their visibility in various ways to more prominently display books we do make money on.”

To which I’d respond, “Then raise the prices on Hachette books. If Hachette sells less books and sacrifices market share, why does Amazon care?”

Cross-posted at Angry Bear.

Explaining “The most important chart about the American economy you’ll see this year”

October 4th, 2014 1 comment

See update at bottom.

Pavlina Tcherneva’s chart has been getting a lot of play out there:

Vox/Matthew Yglesias labeled it “The most important chart about the American economy you’ll see this year.”

Scott Winship at Fortune came back at it on methodological grounds, with the headline “No, the Rich Are Not Taking All of the Economic Pie (In 8 Charts).” He ends up with what he calls the “money chart,” supporting his headline:

Yglesias responded, and Winship responded to him.

The basic contention at this point: who is actually “explaining” the situation?

Do Scott’s corrections explain the situation better? Do they paint a 1. more accurate, and/or 2. more complete picture? By those two standards, is he more honestly and fully informative? Let’s run through his changes.

1. The household method as opposed to tax-unit method is at least a useful additional measure, and is arguably more accurate and explanatory. It’s also less complete because the data only goes back to ’79. But he completes it with Tcherneva’s (by this standard less-accurate) earlier data. It’s a useful addition to understanding, but with little change in the story it tells.

2. The full-business-cycle approach (as opposed to just showing expansions) is also arguably more accurate hence informative. But it (necessarily?) ignores the post-2007 period because the current business cycle isn’t over yet. By Tcherneva’s measure this period is far and away the most egregious demonstration of the inequality trend we’re examining. Scott could have included recent years, with visual and verbal caveats explaining that the cycle is not complete, so the measure that period is not directly comparable. It has less explanatory power, but that doesn’t mean it has none. Omitting the very period that by Tcherneva’s measure are the “money proof” of the trend (and so omitting explanations of that period) arguably explains less about that trend.

3. Looking at the non-elderly population is arguably more accurate and is at least quite informative. It paints roughly the same picture, though less extreme.

4. Post-tax-and-transfer measures are arguably more accurate and informative, but again with the completeness problem. And he should explain that the pre-’79 picture would look quite different if it displayed post-T&T data; the bottom 90% would have been getting more of the pie, which would make the inequality trend look more pronounced than it does in his graph.

I do wish he’d shown a graph as he suggested, including health/medical benefits in T&T (assigning a value other than $0), despite the methodological difficulties he points to. I have no idea how or how much this would change the picture.

5. Omitting capital gains (because they’re hard to measure) for the final “money chart” — suggesting that it’s the most accurate, complete, informative, and definitive chart — is a massive hit to accuracy and explanation. Cap gains are the very vehicle, the primary means, by which the increasing inequality we’re trying to understand is realized. “The data might not be accurate” begs the question: Is excluding that data more accurate? To use Scott’s own words, “assigning a value of $0 is surely not right.”

So some of Scott’s corrections help to usefully and informatively explain the situation better, or at least more. But to summarize the changes that are less informative or downright misinformative:

• The blatant inaccuracy of ignoring cap gains in #5. It completely misrepresents the situation.

• The omission of recent years in #2 — the very years where the trend is arguably most apparent and egregious. Hiding the elephant under the rug?

• The blithely dismissive headline of Scott’s first post.

With these combined, I hope Scott can understand why many see his post as an effort to pooh-pooh and obfuscate the whole subject — the very antithesis of “explaining.”

Part of that hand-waving, obfuscation, and general chaff-dispersal is the proleptic but of course you’re right” rhetorical ploy, right up front in Scott’s second paragraph:

Let’s stipulate that income inequality is at staggering levels in the U.S., and that income concentration at the top has probably risen (probably)

One really must ask: if income inequality is at “staggering” levels, how did it get there…if it hasn’t risen?

How do you square that staggering stipulated reality with Scott’s headline assertion: that “the Rich Are Not Taking All of the Economic Pie.”

I can’t see how to draw any other conclusion from this direct self-contradiction: he’s talking out of both sides of his mouth. I’ll leave it to my gentle readers to decide why.

Takeaway: obfuscation is the opposite of explanation.

Update: Scott has taken issue with my only-barely-implicit imputation of his motives. He’s right on that. I both regret that and apologize for it. I still think the import of his post (especially the “money chart” and title) — that inequality’s not that bad and not that important — contradicts his “staggering” stipulation, and is rhetorically pernicious. But that’s not the same as bad faith. I withdraw and apologize for any suggestion of the latter.

Cross-posted at Angry Bear.

Again: Saving Does Not Increase Savings

October 1st, 2014 40 comments

I’m reprising a previous (and longer) post here in hopefully simplified and clarified form, for a discussion I’m in the midst of.

“Saving” and “Savings” seem like simple concepts, but they’re not. They have many different meanings, and writers’ different usages and definitions (often implicit or even unconscious) make coherent understanding and discussion impossible — even, often, in writings by those who have otherwise clear understandings of the workings of financial systems.

I’m going to talk about a particular meaning of Saving here: Personal Saving (by households) as defined in the NIPAs. Quite simply, it’s household income minus spending on newly produced goods and services. (It doesn’t include so-called spending to buy financial assets or collectibles like art.) It’s a very different measure from household-sector Gross or Net Saving, which I won’t describe here.

Now think this through with me:

Your employer has $100K in its bank account. You have zero.

Your employer transfers $100K from its bank account to yours to pay you for work. You’ve saved (in the Personal Saving sense).

But is there more Savings in the banks? Obviously not.

Now you buy $100K in goods from your employer, transferring the money from your account to its. You’ve dissaved (spent).

Is there more or less Savings in the banks? Obviously not.

Now say instead that, being frugal, you only transfer $75K to your employer for goods. You’ve “saved” $25K. That’s “Personal Saving” in the NIPAs.

Is there more or less Savings in the banks compared to the first scenario? Obviously not.

When households save money, that (non-)act doesn’t add to the stock of monetary savings (the mythical stock of “loanable funds”).

Thinking about the accounting entries may help explain this. “Saving” is a flow, as opposed to a stock. Every accounting measure must be one or the other. (Saving is measured over a period, not at a particular moment.) But it doesn’t represent an actual flow, or transfer between accounts. It’s a residual of two actual flows: income minus expenditures. You could say it’s nothing more than an artificial accounting construct — though a useful one for thinking about balance sheets and flow-of-funds and income statements.

The very essence of Personal Saving, its sine qua non, is that it’s not a flow. It’s leaving your money sitting where it is, instead of spending it by transferring it to others. It’s not-spending.

Since Personal Saving doesn’t flow anywhere, it can’t increase the stock variable, Savings.

What does cause Savings to increase? Spending.

Cross-posted at Angry Bear.

The Pernicious Myth of “Patient Savers and Lenders”

October 1st, 2014 15 comments

Banks are obviously different from households. But I think explaining two key differences goes far towards explaining why “endogenous money” theory — often pooh poohed as either confused or obvious — is important to economic thinking.

The first is a dweeby accounting difference. The other, which arises from that, is very, very real.

1. When the banks lend to households, the banks expand their collective balance  sheet. New assets (loans due) and new liabilities (deposits payable).

When households “lend” (deposit their currency in a bank, buy bonds), they do not expand their balance sheets. They just shift the composition of their asset portfolios (currency traded for deposits, deposits traded for bonds).

(Of course if households were lending directly to other households, that would expand household balance sheets. But they don’t, hardly at all.)

Unlike banks, households only expand their balance sheets by borrowing. New liabilities (loans payable) and new assets: houses residable, cars drivable, food eatable, education usable, health livable. The stuff of life.

This points to the other key difference:

2. Households consume their assets. They have to, in order to live. The very necessary business of living constantly pushes their balance sheets towards imbalance — topped up, for most households, only through labor.

Not so banks. They don’t consume their assets. They don’t have to, in fact can’t. Financial assets (claims against real assets) can’t be consumed.

Banks’ assets are never diminished through consumption, or through use, decay, illness, obsolescence, or death. Excepting borrowers’ payoff or default, their assets are eternal and immortal (as are the banks, for all intents and purposes).

Which exposes the whole notion of “patient lenders” and “impatient borrowers” as the wholesale claptrap that it is. When the banks expand their balance sheets by lending, they are not displaying “patience.” They are not “saving” in any sense of the word, and they are certainly not “patiently foregoing current consumption.” When a household displays “impatience,” it is the inevitable and inexorable impatience of life, passing.

Bankers face very little or no personal risk from expanding their balance sheets; it’s just how they make money. Households, quite otherwise.

Do with this reality what you will, but don’t tell me that the “patient savers and lenders” construct describes any real world that any of us lives in, or the incentives of the lenders in that world.

Cross-posted at Angry Bear.

 

Liberal Economists: Don’t Bring a Knife to a Gunfight

September 29th, 2014 No comments

Jared Bernstein has offered a muscular and cogent response to my recent take-down of his CAP paper on inequality and growth. (I called it “week-kneed.”)

I’d like to respond to his many excellent points in just two ways.

1. My critique is primarily of his rhetoric, not his reasoning. Progressives, IMO, should be shouting the manifest reality from the rooftops: progressive administrations in the U. S., over many decades and looked at every which way from Sunday, have delivered resoundingly superior economic performance by pretty much every economic measure. (Occam’s explanation: better economic policies.) By contrast, the skyrocketing wealth and income concentrations delivered by the Reagan Revolution have been accompanied by stagnation, instability, and — by many important measures — decline.

Is there incontrovertible evidence that the wealth and income concentration caused that? No. But: is there incontrovertible evidence that cutting taxes and shrinking government creates growth and prosperity? Quite the contrary. Does this prevent conservative economists from endlessly laying claim to such “manifest’ benefits? Hell no.

Liberal economists like Jared tend to be — and understandably like to see themselves as — reasonable, curious people. They like to look at the evidence and suss out what they can say definitively, then speak carefully when going beyond that. That’s understandable. But it’s also crippling to the progressive agenda. Economics and the constructs on which it is built are inescapably normative — centuries of faux-positivist theorizing notwithstanding. Conservatives pretend otherwise while unabashedly overstating their supposedly positivist case, to further their normative goals. Liberals — admirably, but unfortunately for the cause — do not respond in kind. Again: I think it’s time for liberal economists to start taking their own side in this inevitably normative argument.

2. I didn’t offer an alternative to Jared’s statistical construct because I don’t have the statistical chops. I’m an amateur. I dismissed his construct without offering an alternative — very fair point. But I did suggest the multiple-lag-based statistical methodology (Dube’s or similar) that I think professional economists should be employing. (And I showed a little amateurish example of it that I did manage to cobble together.) It requires some serious statistical skills that Jared may not have handy in his holster, but that he and his circle could easily lay hands on within his economics milieu.

Now maybe the newly launched Washington Center for Equality and Growth is currently funding exactly this kind of sophisticated analysis of the MPC/Velocity of Wealth hypothesis (a.k.a. “underconsumption”), and I just haven’t heard about it. But I am quite sure that liberal economists have not pursued that promising hypothesis with even a scintilla of the spectacular energy that conservatives have devoted to trickle-down, inequality-drives-growth arguments.

Should liberal economists be cherry-picking economic measures and analytic methods, and distorting the import of their findings, the way conservatives do? No. Should they at least be seeking out promising data and methodologies to explore (and support) the MPC argument? With only a hint of trepidation, I say yes. Don’t bring a knife to a gunfight.

The judicious thoughtfulness that Jared displays does have rhetorical value. It gives credibility to the progressive movement that he represents. Tyler Cowen is a great example on the other side. His curious thoughtfulness on so many subjects is a remarkably effective camouflage for the Mercatus Center that he heads, even while Mercatus is broadcasting blizzards of tweets about Fox-News hobby-horses like the Export Import Bank — relatively unimportant but base-rabidizing topics that Tyler (sensibly) has little or no time for.

Liberals have the judiciousness, but not the fire-eating that the judiciousness supports.

If you want to look “reasonable” in a gunfight, bring a gun.

As usual, Steve Randy Waldman has said this all far better — and more judiciously — than I.

Cross-posted at Angry Bear.

Lefty – Libertarian Cage Fight! Get Out the Popcorn…

September 29th, 2014 No comments

Matt Bruenig and Demos have thrown down the gauntlet against libertarian ideology. Trevor Burrus at Cato has picked it up. Should be worth tuning in.

Matt pulls no punches. He’s emerged in the last year as one of the mediasphere’s most convincing voices for progressive ideas and policies, based (IMO) on air-tight arguments and thinking, backed by solid, well-presented facts and data. He’s front and center for DemosGordon Gamm Initiative to counter libertarian ideology.

Matt’s not fussy about “civility” when incoherent, self-contradictory, bad-faith arguments are thrown in his face.

Trevor is one of those “voices of reason” at Cato (like Tyler Cowen, front-man for Mercatus) who mask the dark underbelly of libertarianism behind a facade of judicious, Reason-able moderation.

I’d like to offer up one knife for this fight. Trevor:

Libertarianism is the only prominent political ideology that consistently has to deal with questions about the imperfectness of our solutions as if they were de facto refutations of our position.

What cave has he been living in? Progressive ideas have been under unremitting and steadily-escalating attack by conservatives for four decades — actually since well before The New Deal — with many of those attacks based on the “imperfectness” of progressive policy solutions. (With all those attacks built on a scaffolding of libertarian truisms.)

“There’s Medicare fraud!” So progressive thinking must be incoherent. Progressives have been forced into an endless game of “imperfectness” Whack-a-Mole, with hundreds of billions in libertarian-enabled corporate funding backing the moles.

This reality is apparently invisible to Trevor, which speaks volumes about the reality orientation of libertarian ideology, and of its adherents.

Cross-posted at Angry Bear.

Contra Jared Bernstein: Stagnation, Spending, and The Velocity of Wealth — Five Graphs

September 28th, 2014 No comments

I’ve said many times: every economic assertion should be preceded by the words “by this measure.” For big economic questions, you need to look at lots of different measures, lots of different way, to get a feel for what’s going on.

This has come home to me as I’ve considered Jared Bernstein’s ongoing takedown of liberal beliefs regarding inequality, marginal propensity to consume (MPC), and economic growth — epitomized in this remarkably weak-kneed December 2013 paper for the (supposedly) liberal Center for American Progress.

Bernstein is a strong voice for progressive policies. But in this paper and widely elsewhere, he repeatedly pooh-poohs the MPC argument.

That argument briefly stated: poorer people spend a higher percentage of their income/wealth each year, so if income and wealth are less concentrated, more widely distributed, there will be more spending.

Even briefer: extreme wealth concentration strangles growth. I built a little model depicting that arithmetic effect here.

But Bernstein repeatedly points to certain measures suggesting that things don’t seem to have worked out that way. Even as inequality has increased over the last 35 years, real per-capita consumer spending has continued to rise:

Screen shot 2014-08-30 at 9.21.25 AM

Okay, by these measures (and with y axes tweaked to depict these measures in a certain way), the MPC argument doesn’t look like it’s been borne out.

But even as he puts great weight on this display, he acknowledges that it isn’t very good evidence. You need a counterfactual: Sure, spending went up, but if inequality had remained the same, would it have gone up faster?

He attempts to answer that question with some regression analyses:

Screen shot 2014-08-30 at 9.30.53 AM

This is a rather impenetrable data display; read the adjacent copy* to understand it. But in brief, his regression-constructed counterfactual says that if equality had remained the same, there would have been less spending.

This seems to bear out the conservative narrative you’d expect to be hearing from AEI or The Heritage Foundation: greater inequality causes faster growth. (Presumably through “incentive” effects on “the most productive members of our society”?)

But statistical savants will see almost instantly that this counterfactual is weakly constructed, is logically tenuous at best. And what if we look at some other measures — especially measures of wealth, as opposed to income? Bernstein does make some attempt to include wealth measures in his regressions — Case-Shiller house prices and (rather oddly) unemployment. And he goes on to discuss the rise in consumer debt as a likely explanation for the spending growth. But skyrocketing debt — a (negative) component of wealth — is completely absent from these regressions, and he doesn’t look at wealth explicitly

We have explicit measures of wealth. Here’s what consumption spending looks like relative to wealth over the last half century. Call this The Velocity of Wealth — how much of their wealth households turn over each year on purchases of newly-produced goods and services (the stuff of GDP). Click each graph to go to the FRED page.

Household Spending Relative to Household Financial Assets

Household Spending Relative to Household Total Assets

Household Spending Relative to Household Net Worth (Total Assets – Debt)

The last two measures are especially interesting because they incorporate home-equity wealth (which Bernstein tried to do, somewhat idiosyncratically, using a Case-Shiller variable in his regressions). And the last measure also incorporates household debt.

By all these measures, we see a massive, three-decade secular decline in spending relative to wealth over 35 years — the very same period over which we’ve seen massive growth in wealth inequality.

That’s exactly what the MPC argument predicts: as wealth concentration increases, the velocity of wealth declines. Ceteris paribus, more-concentrated wealth seems to result in less spending than moreless-concentrated wealth.

So what about the counterfactual? If wealth inequality had remained the same instead of skyrocketing, would we have seen these declines in wealth velocity? Some regressions might tease out some answers to that question. But given the apparent long-term nature of this effect, they’re going to have to include more than the rather arbitrary and singular, freshman-statistics-level two-year lag employed (only) in the last of Bernstein’s regressions. (The lag techniques Arin Dube used in his definitive and statistically sophisticated takedown of Reinhart-Rogoff’s 90%-debt foolishness seem especially well-suited to this work. Also take a look at these revealing if amateurish long-term cross-country regressions on wealth inequality and growth.)

So: more research needed. But that’s never stopped the conservatives from deploying their arguments, has it? One thing is certainly true: while that research is ongoing, it’s time for liberals to start taking their own side in this argument.

No names, just initials: Jared Bernstein.

* Update: The report PDF is one of those annoying ones that doesn’t let you copy large chunks. Have to read the description there.

Cross-posted at Angry Bear.