Archive for the ‘Economics’ Category

Thinking About Piketty’s “Capital”

April 6th, 2014 1 comment

The quotes in this post’s subject line are very much intended as a double entendre. I’m of course referring to the title of Piketty’s book (which I’ve read about 80% of, jumping around). But even more, I’m talking about his definition of “capital.”

I’ve ranted frequently about economists’ failure to define this term or agree on what it means, and Piketty is very much laboring under the burden of that failure.

Don’t take my word for it. This confusion about the nature of capital (and the associated term, wealth) is the central point of James Galbraith’s critique of the book:

First, he conflates physical capital equipment with all forms of money-valued wealth, including land and housing, whether that wealth is in productive use or not. He excludes only what neoclassical economists call “human capital,” presumably because it can’t be bought and sold. Then he estimates the market value of that wealth. His measure of capital is not physical but financial.

You’ll find that “capital” conundrum lurking or leaping out within every review you read.

Piketty deserves great credit. Unlike many or most economists, he makes a good-faith effort to define his usage of the term, and a not-altogether-successful effort to think coherently and consistently within the terms of that definition. He addresses his definition head-on on pages 47-49, and wrestles with various aspects of it throughout the book. See for instance page 149 (on the market value of assets), page 163 (on “human capital” that can be bought and sold in a slave society), page 188 (again on the market value of real capital), and page 210 (on “real” vs. “nominal” assets).

I’ll just highlight one subject: In the course of things he expresses disdain for the notion of “human capital.” Many will find this to be problematic, since most estimates would suggest that human capital — our ability to work and produce in the future — constitutes the great bulk of world and national capital. But Piketty’s stance is reasonable or even inevitable: it’s largely impossible to measure this kind of capital outside a slave society (and then you’re only measuring the “value” of the slaves). So for his purposes of analyzing the subject based on recorded numerical data, human capital is a non-starter.

But still, Piketty fails to address the extent to which human capital is increasingly being “capitalized” or “finacialized.” Think, for instance, of the extraordinary runup in U.S. student-loan debt, and asset-backed securities packaging those loans — debt and securities whose only collateral is those students’ enhanced ability to…work and produce in the future.

Here one measure that is at least a proxy for that runup: government-held student loans as a percent of GDP.

Where are the lines between “real” capital, “human” capital, and “financial” capital? What are their economic relationships? (If you’re under the impression that they’re obvious or clearly understood and agreed-upon, you’re not thinking very hard. At all.)

My purpose here is not to solve that capital conundrum — far be it from me. I come not to bury Piketty, but to praise him. His usages and definitions provide a very useful framework in which to discuss issues that have been hard to discuss coherently absent such framing. The evidence he’s assembled within that framework, and his remarkably cogent discussion of that evidence, gives ample evidence of that.

But even more: By tackling these definitional issues head-on (if not always successfully), he has brought an inconclusively theorized crux of economic thinking — the nature of capital (plus wealth, value, and even money) — back to the forefront of discussion. We can all hope that much good will come from that.

Cross-posted at Angry Bear.


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.

Jared Bernstein Gives Us The Best Graph on the Employment Effects of Minimum Wage Increases

February 21st, 2014 2 comments

They say sample size matters. A handful of sample points in a study doesn’t tell you much, because they could just be showing random variation. This is also true not when you’re looking at many studies. You need to look at lots of research that uses different methodologies and data sets to get a confident feel for the facts on the ground.

Jared Bernstein points us to exactly such an effort, looking at 64 studies on the employment effects of minimum-wage increases, with a wonderfully informative display:

Note: “se” refers to standard error; 1/se is a measure of statistical significance. The dots up high are generally more believable.

“Employment elasticity” is a measure of the impact of minimum-wage increases. A measure of -.1 (left of the zero line) suggests that 10% MW increase reduces employment by 1%.

All the high-statistical-significance studies put elasticity at zero: no employment effect.

There’s some clustering to the left of the line versus the right down at the bottom, suggesting a small negative employment effect, but none of those studies has high statistical significance.

And this doesn’t consider “file-drawer/publication bias”: studies that find no effect don’t get published, because researchers don’t submit them or journals don’t accept them for publication. The CBO explains this in its new report on minimum-wage effects (PDF). Emphasis mine.

an unexpectedly large number of studies report a negative effect on employment with a degree of precision just above conventional thresholds for publication. That would suggest that journals’ failure to publish studies finding weak effects of minimum-wage changes on employment may have led to a published literature skewed toward stronger effects.

And that doesn’t consider (pas possible!) negative-effect researchers finding ways to get to that publishable statistical-significance level. (It’s curious that those finding a positive effect don’t display this anomaly…)

So at least, you can mentally add a whole lot more unpublished dots to that tall vertical line. At most, you can shift a bunch of those published dots on the left farther to the right, and down.

Cross-posted at Angry Bear.

The Conservative Case for a Minimum Wage Hike

February 18th, 2014 2 comments

Most conservatives disparage minimum-wage laws with straightforward economic reasoning, based on Econ 101 textbook theory: demand curves slope down. If you institute a price floor, raising the price of labor, you’ll get less labor demanded — less jobs. This hurts poor people, especially entry-level folks like teenagers.

At first blush, the argument’s got legs. And there’s been a fair amount of research over the decades suggesting that higher minimum wages do hurt employment. But conservative economists know that life’s more complicated than that. There’s also good research suggesting that this effect isn’t very strong in the low-wage labor market; many other economic effects are at play.

One of those other effects — also based on textbook Econ-101 reasoning – bears serious consideration by conservatives: economic incidenceIt’s often darned hard to know where the effects (the “incidence”) of a policy or system will land — who will get the benefits and bear the burdens — especially in a complex system with lots of moving parts. That’s a core conservative belief (“unintended consequences”).

On the minimum wage, it’s not crazy to suggest that minimum-wage employers — many of whose workers inevitably rely on government benefits — are the actual beneficiaries of those benefits. Those employers are able to get workers at lower wages than they would absent those benefits, so to some extent at least (depending on incidence) those businesses thrive at the expense of taxpayers. The dole goes, largely or partially, to the employer’s bottom line.

How do we suss out these incidence effects? In recent years we’ve seen some excellent new research on the employment and earnings effects of different minimum-wage laws, in particular great work by Arindrajit Dube et. al. comparing adjacent counties across state lines with different minimum wages (levels and changes).

This research has a big leg up on all the previous studies. It very cleverly exploits the implicit “control group” of an ongoing natural experiment across the whole country, over a quarter-century, to tease out cause, effect, and result. Dube and his cohort are incredibly careful, diligent, competent, and thoughtful researchers and analysts. Read their stuff. I think you’ll be hard-pressed to disagree.

Results? They find that minimum-wage laws have had little influence on employment levels, at the minimum-wage levels we’ve seen over past decades — too small to consider either statistically or truly significant. But they find significant increases in earnings from higher minimum wages. Minimum-wage laws have the rather intuitive  effect of increasing poor people’s earnings. (Some might deride this intuition as unsophisticated “folk economics,” but: 1. it’s actually much more economically sophisticated than the Econ-101 thinking, and 2. it seems to be correct.)

And here’s the key takeaway for conservatives: if higher minimum wages increase poor people’s market incomes, they reduce their reliance on government handouts, and reduce government spending. That’s not even Econ 101. It’s just arithmetic.

Conservatives oughtta love that. And they should also like the part about responsibility: require all business owners to do what most already do: make a profit while paying the actual cost of keeping their workers alive, in decent health, trained, educated, mobile, and employable, rather than irresponsibly externalizing those costs onto taxpayers and pocketing the profits.

How do workers’ livings get paid for — through government benefits or employers’ wages? Conservatives would naturally vote for private enterprise.

But here’s where it gets a lot more interesting. A new study out of the Chicago Fed (PDF) uses the same adjacent-county, natural-experiment methodology, and looks at what happens to companies in higher minimum-wage environments:

Firm entry and exit both rise.

Again, they find minor employment effects and significant earnings effects. But there’s more churn among companies. New companies emerge that thrive and profit in the higher minimum-wage environment, because their business models are more labor-efficient and they invest more in productive capital. (Not just drill presses, but human and organizational capital developed through training, retention, efficient business processes, etc.)

Companies that are less labor-efficient and more reliant on low wages (and, hence, taxpayer subsidies/handouts) are less successful in this environment. Inefficient businesses that can’t pay the full cost of their workers and still make a profit, fade away and go out of business.

Schumpeter. Creative destruction.

In the language of (neo)classical economics, higher minimum wages (again, within the ranges we’ve seen over past decades) seem to push the whole system to a new, higher equilibrium. Employees earn more. Businesses invest more in productivity. All boats rise. The pie gets bigger. We all take another step, together, up toward that shining city on the hill.

The real (inflation-adjusted) minimum wage is at a historically quite low level right now, so it’s reasonable to expect that the effects of increases that have played out over past decades will also play out over the next ten, twenty, or thirty years. We’ll all be better off in three decades if we raise the minimum wage today.

But suppose that isn’t true. Suppose we end up in the same place thirty years from now that we would without a minimum-wage hike. Over the course of those decades, tens of millions of workers and their families will have lived better, more prosperous lives — for decades on end. The promise of American opportunity, embodied. To quote the great economist Abba Lerner, “In the long run, we’re always in the short run.”

If you’re a conservative who wants to:

• Get people off the government dole

• Reduce government spending

• Encourage investment in productive capital

• Spur the process of creative destruction, and

• Demonstrate the manifest benefits of hard work and American opportunity…

You might consider throwing your full-throated support behind a minimum-wage increase.

Dozens of the country’s most prominent economists, of diverse political persuasions, agree 4:1 that an increase “would be a desirable policy.” Bill O’Reilly supports it. So do hundreds of Patriotic Millionaires and Smart Capitalists for American Prosperity

Here’s to suggest that other conservatives and business leaders might find a very comfortable seat on this bandwagon.

Cross-posted at Angry Bear.

My Head Talking on the Thom Hartmann Show

February 17th, 2014 1 comment

John Cochrane: I Would Never Dream of Suggesting that this Correlation Implies Causation!

February 5th, 2014 No comments

Let’s say you come across this on the interwebs:

Then the person who posted it says this:

I purposely did not make any argument, draw any conclusions or anything else.

And the person who posted it is a prominent, high-profile right-wing economist.

What conclusions do you draw about that economist? About the economic effect of unemployment benefits?

Then you find this, from another high-profile economist:

Now what conclusions do you draw?

Cross-posted at Angry Bear.

Letter: Smart Capitalists and Patriotic Millionaires Say Hike the Minimum Wage

February 3rd, 2014 No comments

The Agenda Project (which is behind Patriotic Millionaires, Top Wonks, and other progressive initiatives) is preparing an open letter supporting an increase in the minimum wage.

They’re looking for more signatories.


Dear Mr. President and Honorable Members of the U.S. Senate and House of Representatives,

We are writing to ask you to put partisan differences aside to advance growth, prosperity and economic freedom by raising the minimum wage to at least $11.00 per hour and indexing it to inflation.

We make this request as business owners, employers and investors who are members of the so-called Top 1%.

We make this request for the following reasons:

1.       IT’S GOOD FOR AMERICAN BUSINESS.  Workers with higher wages are consumers with greater disposable income.  More customers with more money = higher profits for American businesses.

2.       IT’S GOOD FOR AMERICAN TAXPAYERS.  Minimum wage earners don’t make enough to support their families and as a result many rely on government programs to make ends meet.  A decent wage would increase the number of self-reliant Americans and decrease government expenditures.

3.       IT’S GOOD FOR AMERICA’S GLOBAL LEADERSHIP.   The US is the richest county in the world but its minimum wage significantly trails that of other developed countries.   In order to maintain its global leadership, the U.S. must ensure decent earnings for its working citizens.

Raise the minimum wage.

Thank you,

Smart Capitalists for American Prosperity

If you’re in that rarified company, your voice is incredibly powerful. Drop a line to Erica Payne (epayne at to add your signature. And if you know anybody who’s in that category, psssst: pass it on.

Cross posted at Angry Bear.

Does Upward Redistribution Cause Secular Stagnation?

February 3rd, 2014 2 comments

A while back I built a  model to look at the long-term economic effects of upward and downward redistribution. Posts here and here.

Commenter JGF pointed out an error in the model. I’ve revised and corrected it. The spreadsheet’s here.

The model is based on marginal propensities to spend out of wealth and income. Poor people spend more of their wealth and income each year than rich people, so if income and wealth are less concentrated, there’s more spending.

The model displays only one economic effect (there are many others, of course), and the effect is purely arithmetic. But as such, the effect is arithmetically inexorable.

Here are the results. Explanations below.

Screen shot 2014-02-03 at 7.48.34 AM

Here it is displayed as compounded annual change:

Screen shot 2014-02-03 at 7.56.06 AM

The change-in-income graphs look almost identical. (Because annual income in this model is a simple function of the previous year’s spending, and spending is a simple function of wealth.)

Short story:

• Total wealth grows in every scenario. (It’s a model of a growing economy.)

• Every individual’s wealth increases in almost every redistribution scenario. Rich and poor alike.

• Total wealth grows faster with downward redistribution.

• Poorer people’s wealth increases faster/more with more downward redistribution, and the rich people’s wealth doesn’t grow as fast. (But it still grows in most scenarios.)

• Maintaining the status quo wealth concentration  requires annual upward redistribution of about 3%. For the rich to maintain their relative wealth proportion, they have to be subsidized by the poor.

• Note the exponential curves, with steep slopes on the left. The effect of upward redistribution is more powerful than downward redistribution. As upward redistribution increases, the rich get richer, faster. The poor stagnate or get poorer, faster. Ditto total wealth (though that effect is more muted). The opposite is true with downward redistribution; as it increases, the ultimate effect on end-of period wealth gets steadily weaker.

Look at the 2% downward redistribution scenario:

• Poorer people’s wealth grows 2.5X.

• The richer person’s wealth (only) increases 1.2X.

• Total wealth grows 1.7X, compared to 1.65X in the status-quo scenario.

Is this Pareto efficient/Pareto optimal, “a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off”?

It depends on your counterfactual. “Worse off” compared to what? Compared to Year One, or compared to a different redistribution percentage?

Everybody’s better off than Year One at almost every redistribution percentage. The rich person is less better off with downward redistribution than they’d be with upward distribution. But they’re not worse off than they were at the beginning.

Meanwhile the poorer people are much better off with downward redistribution, and “everyone” is also better off. You decide.

Explanation of the Model

Spending drives production. In an 80%-service economy where many real goods are produced just-in-time, if you don’t spend, it doesn’t get produced. (Think: massages and iPhones.)

Production delivers a surplus. More value comes out than goes in. In this model as displayed the surplus is 5%. (This results in an average 3.3% annual increase in incomes/spending/GDP at 0% redistribution.)

More spending causes more production, so more surplus, so faster growth.

There is one richer person starting with 60% of the wealth, and ten poorer people starting with 4% each–40% total. (In the U.S. today, the top ten percent hold roughly 60-65% of the wealth.)

The rich person spends 30% of their wealth annually. The poorer people spend 80%.

Everyone receives all the  resulting income in proportion to their spending. So everyone gets more income and wealth every year. (There’s that 5% surplus from production. The economy is growing steadily.)

Some percent of income is transferred, redistributed, every year — upward from the poorer people to the richer person, or vice versa.

The model doesn’t consider how the redistribution takes place — what forms it takes (explicit transfers and subsidies, labor vs. investment tax rates, minimum-wage laws, free public education and health care, whatever). Rather it just looks at the results of upward and downward redistribution, and the resulting wealth and income growth, and concentration versus diffusion.

Assumptions. This model, I believe, makes only five assumptions:

Economic assumptions (you can change these numbers in the model):

1. Production yields a 5% surplus, which is transformed into monetary income via the magic of the private/central-bank/government financial system. Praised be the Lord. That production/transformation process is a black box.

2. Spending is a function of wealth. Rich people spend 30% of their wealth each year; poor people spend 80%. Since income is a function of wealth in this model, income and spending maintain a plausible relationship for all agents at all wealth levels. A more sophisticated consumption/spending function would incorporate interacting functions for spending out of income and spending out of wealth. But #3, below, would remain generally true.

Behavioral assumptions:

3. Rich people spend a smaller percentage of their wealth each year than poor people. (Declining marginal propensity to spend out of wealth.)

4. Producers respond to increased spending by increasing production. (Not prices — there’s zero percent inflation.)

5. There are no other behavioral effects.

Of course, there are other behavioral effects. Incentives matter, blah blah blah. And there is price and wage inflation. To repeat: This model displays just one, purely arithmetic effect. But as such, that effect is arithmetically inexorable.

The picture changes when you change the variables for the economic assumptions. The crossing point moves, and the curves change, but the basic shape doesn’t. I encourage my gentle readers to download the spreadsheet and run it through its paces.

Cross-posted at Angry Bear.