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The Global “Capital” Glut

April 17th, 2014 No comments

No, I’m not talking about Piketty hitting the Times bestseller list. And it’s not just wild-eyed lefty Frenchman who are expressing concern about the state of world capital these days. Mitt Romney’s shop was beating this drum loudly more than a year ago.

One of the central takeaways from Piketty’s Capital in the 21st Century is the U-shaped long-term trend in the capital-to-income ratio, especially in rich countries. He uses “capital” synonymously with “wealth.” Here are the latest numbers for the U.S. from his compatriots Saez and Zucman (source PDF):

Screen shot 2014-04-17 at 12.46.35 PM

The economic relationship between wealth (or net worth, financial assets minus liabilities) and real capital  is a sticky one, even if you’re only considering “fixed capital” — structures, equipment (hardware), and software. It’s even more so if you consider  human skills, knowledge (i.e. patents), organizational capital, etc. (The line between organizational capital and “software” is getting especially blurry these days; what would Vanguard’s, much less Google’s, value be without their web presence?) And more so again if you consider natural capital like land and what’s on/under it.

But “Wealth in the 21st Century” wouldn’t have had quite the same ring to it, so let’s just go with it, with the knowledge that we’re talking about wealth (“financial capital”), and wealth has some indeterminate but somewhat representative relationship to real assets/capital. We can at least say, loosely, that financial assets are claims on real assets, or on the production that’s enabled by those assets.

So what about Bain Capital, Romney’s shop? Here from their December 10, 2012 report (PDF; hat tip to the always-remarkable Izabella Kaminska, and to Climateer Investing).

World awash in nearly one quadrillion of cheap capital by end of decade, according to new Bain & Company report

Their takeaways include:

The capital glut will be accompanied by persistently low real interest rates, high volatility and thin real rates of return.

Sound like secular stagnation to you?

Also:

The ever-present danger of asset inflation will contribute to an overall steepening of the investment risk curve… companies will need to strengthen their bubble-detection capabilities

In short, there’s a huge amount of money floating around out there relative to income and production. (In Steve World, all financial assets embody money, and the money stock is the total value of financial assets — including dollar bills, deeds, or other formal financial claims — regardless of how currency-like those things are. Equating currency and currency-like things with money is conceptually incoherent.)

With so much money around, is it any surprise that people are lending it cheap?

As usual I have much more to say on this but instead I’ll hand it off to Jesse Livermore, who recently wrote one of the clearest and most cogent posts I’ve seen in years on financial asset values, hence wealth. I’ve been meaning to link to it. Read the whole thing.

The Single Greatest Predictor of Future Stock Market Returns

Hint: it’s about what the herd does with all that money.

Cross-posted at Angry Bear.

ALEC: Destroying the American Economy, One State at a Time

April 14th, 2014 No comments

The American Legislative Exchange Council — which authors ultra-conservative legislation and promulgates it to state legislatures nationwide — has a little index measure of states’ “competitiveness,” which supposedly results in greater prosperity for those states that rank highly.

Does it? Let’s let the numbers speak for themselves:

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Source (PDF).

Cross-posted at Angry Bear.

The Global Labor Glut

February 17th, 2014 30 comments

Ryan Avent’s excellent post at The Economist finally provides me the impetus to respond to Josh Mason’s comments on my recent post.

I suggested:

 What we have instead of a Global Savings Glut is:

1. A Global Labor Glut: more human effort and ability available than is needed to provide goods that provide high aggregate marginal utility, and,

2. A global financial and political system that — despite the reality of #1 — fails to transform that abundance into maximum aggregate human utility via reasonable distribution of that abundance.

Josh sed:

I think your conclusion that unemployment must be a glut of labor is both wrong and politically destructive. By turning this into a labor-market problem, you are implicitly accepting Say’s law and rejecting the principle of aggregate demand. And you are wrong factually. All factors of production are in excess supply in a recession, not just labor.

What you are saying here is that changes in (realized or desired) balance sheet positions never affect the real economy. I’m sure you don’t think that’s what you’re saying, but it is.

Josh may be right. But I really don’t think that’s what I was saying, and my gentle readers will know that it’s very much not what I want to be saying. I think he’s framing my argument in terms that implicitly concede the exact false assumption I was dismantling in my post — that more saving causes lower rates so more borrowing so more investment.

This gets messy so I’ll just say: We have the amusing situation where Josh and I — who as far as I can tell agree on almost everything — are mutually accusing each other of sleeping with the enemy.

In any case, what Josh thinks I’m saying is certainly not what Ryan Avent is saying, when he says exactly the same thing I was saying:

…full employment is no longer compatible with full utilisation of capital. The “great savings glut” story may indeed be a tale of insufficient investment opportunity. The return on capital is low because the return on labour is low: because society is allowing the market to become glutted with labour, none of the potential high-return capital investments are economical. The global savings glut might well be thought of as a global labour glut.

This is an abundance versus scarcity argument, not a production-causes-income argument. The dominant resource — effective, efficient, productive human labor – is not scarce. As productivity steadily increases, it’s ever more abundant.

And the takeaway? I’ll leave that to Ryan:

Fiscal expansion could help, but the gain from fiscal policy is likely to be limited unless it is structured to try and reduce labour supply. That’s right, reduce labour supply.

In other words, the very anathema of the right: paying people not to work.

The ultimate goal of increased productivity is straightforward: more stuff, less work. The problem is that those who own the stuff don’t want the people who don’t own the stuff to slack off or get a larger share of the stuff. They only like that mantra when it applies to them.

And they don’t understand the inexorably destructive arithmetic of their selfish rivalry in a high-productivity economy — that their refusal to share the wealth, their frantic hoarding, results in us all having less wealth. It’s a classic coordination failure, a tragedy of the common good.

I’m pretty sure Josh agrees with me (and Ryan) on that 100%.

Cross-posted at Angry Bear.

It’s Working: Pubs’ Polls Plummeting

October 4th, 2013 No comments

Give the Republicans enough rope and they’ll hang themselves? It seems to be working.

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Yeah, it looks like Dems have taken a hit from this whole business, as Republicans hoped they would. But like the debate in general, it’s very much not symmetrical.

Combine this with the Pubs’ internal discord: are they reaching the point that the Whigs came to in 1852, where they couldn’t even nominate their own incumbent president as their candidate?

This is is just one polling outfit; I don’t have the time to compile or compare others. But given the magnitude of the move, I’d be surprised to see polls that directly contradict this trend.

Cross-posted at Angry Bear.

Currency is Equity, Equity is Currency

April 27th, 2013 3 comments

This is utterly brilliant:

Twitter / izakaminska: Why equity is a type of privately issued currency

Steve Randy Waldman has been here before, with the idea that currency issued by government (ultimately through deficit spending) is “equity” in government, or in America. But this reverses it beautifully, with the notion that private equity issuance is also currency issuance. Google stock is currency.

I won’t recap the argument here; you really need to read it. Just some thoughts:

I think different words might help make it clearer. I would say that there are many units of exchange in the world —  dollar bills, t-bills, stock shares, etc. Financial assets. They have various characteristics, a key one being limits on what they can be exchanged for. In general when we say “currency” we mean physical tokens that can be exchanged for (small quantities of) real goods. But we confuse things by not realizing that “currency” is a somewhat vaguely defined subset of “units of exchange.”

(Key distinction: the “units” I’m talking about are not measurement units like inches, degrees, or “the dollar” — units of account. Rather, in the sense of discrete units, chunks. As when a factory produces a certain number of units, which can have their value described relative to a unit of measurement/account, such as the dollar. More on the distinction between “unit” and “medium” of account/exchange here.)

You can’t buy a car or a government bond with quarters. So are quarters currency? Likewise, you can’t buy a pack of gum with a treasury bond — but you can use it to buy Fed reserves (if you’re a bank). Is the bond currency? You decide. But both quarters and bonds (and Google shares) are units of exchange. (This is why I’m still struggling with JP Konig’s “moneyness” concept: it seems to hinge on a single axis of “liquidity,” when in fact different units of exchange are differently liquid.)

We can also call these units of exchange “financial assets.”

I do not define a “bushel of apples” as a unit of exchange or a financial asset, but as a unit of commodity. Ditto an ounce of gold. Because in my definition:

1. Units of exchange/financial assets cannot be consumed by humans to produce human utility, and

2. Their creation requires no (or vanishingly little) input to production.

Returning to a previous (excessively long) post, these units of exchange/financial assets embody exchange value — money. Hence (alert: precise definition here) money is exchange value as embodied in financial assets. Money does not, cannot exist, absent such embodiment. A bushel of apples does not embody money: That bushel has exchange value, but the value is not embodied in non-consumable, only-exchangeable form.

Not sure how much this will help others, but it’s working for me.

Cross posted at Angry Bear.

Does Saving “Fund” Investment?

February 27th, 2013 6 comments

If this blog has any tiny claim to any important influence, it might be that anonymous and magisterial commenter JKH used the comments section here to first bruit his insight (both tautological and profound) that S = I + (S – I).

He revisited that construct and concept again recently, and I’ll leave it to you to explore his very interesting thinking.

But I do want to address a central issue in that discussion: the notion of “funding.”

JKH quite properly uses standard flow-of-funds accounting terminology to explain that private-sector “saving” “funds” both its “investment” (buying/creating drill-presses and such), and its acquisition of newly created financial assets.

Quite properly, but: it’s important to understand what that key accounting verb (“funds”) actually means. It describes an after-the-fact and arguably largely arbitrary accounting allocation of income streams to outflow streams.

Imagine 2011, a year in the life of BFC Corp.:

INFLOWS
Profits (revenues – expenses): $100,000
Net Borrowing (borrowing – loan payoffs): $100,000

OUTFLOWS
Investment (spending on drill presses and such): $100,000
Dividends paid to shareholders: $100,000

Looking back: Of the $200K in inflows, which part “funded” the investment spending on drill presses? What funded the dividend payout? The accountant’s allocation decision, absent any other information, is after-the-fact and completely arbitrary. Funds are fungible — especially when viewed in retrospect.

Before-the-fact conditions and restrictions might well give justification for a given after-the-fact accounting allocation decision. If BFC decided in 2010 to spend X% of profits on drill presses in 2011, and that X% came to $100,000, an accountant after the fact might quite reasonably say that the drill-press purchases were “funded” by that year’sprofits.

Alternately: Imagine BFC “set aside” $100,000 from 2010 profits for future drill-press purchases by “funding” a drill-press holding account on their books, debiting their 2010 profits to “fund” that holding account. (Maybe it even created an actual external bank account to hold and segregate those funds, though that’s not actually material to this discussion.) It then spent down that holding account in 2011 to buy drill presses. Were those purchases “funded” by 2011 profits or borrowing? The proper accounting answer here is “neither.” Looking backwards you might/could/would say that they were funded, ultimately if somewhat arbitrarilly, from 2010 profits, or from the holding account. Either is accurate, depending on how you telescope your “funding” pipeline, in both time and account-space. (This is all rather like discussions of the Social Security Trust Fund.)

When we say, in a backward-looking flow-of-funds statement, that “X funded Y,” that is an ex-post description that is informed, and arguably justified — but not fully or authoritatively determined — by knowledge of before-the-fact intentions.

So when we say that “…the marginal dollar borrowed by a nonfinancial business [post-'85] was simply handed on to shareholders, without funding any productive expenditure at all,” we are making a statement about what “funds” what. We’re saying that all the borrowing went to payouts, and all the profits went to investment. The reverse could be equally accurate, given that shareholders from ’04 to ’08 were paid about $200 billion more than their companies earned in profits.

Let’s try this on the level of national/international accounts, and sectoral flows. Here’s mythical 2011 accounting for Bandalaria:

Assume (purely for simplicity in explaining the “funding” concept) that:

1. There is no net trade surplus or deficit, and the country’s capital account balance sheet remains unchanged.

2. The central bank does not increase or decrease its holdings on net.

3. The financial system does not increase or decrease its loan book to the private sector.

That leaves two sectors, with (looking back) no accounting impact from the above:

• Federal government (Treasury)

• The nonfinancial private sector (nonfinancial firms and households)

What do Bandalaria’s net money flows look like?

From Treasury -> Private
Deficit (purchases minus taxes): $100 million

From Private -> Treasury
Treasury bond purchases : $100 million

Looking back, how would you describe these flows? Are are the bond purchases “funding” the deficit, or is the deficit spending “funding” the bond purchases?

The correct answer is “Yes.”

Likewise: when JKH says (my words actually) that saving (income – expenditure) by the private domestic nonfinancial sector “funds” both its investment spending and its net acquisition of new financial assets (including government bonds), his description is perfectly correct.

But he would equally correct if he said that government deficits (less trade deficits) “fund” some of the investment, or (all of) the acquisition of new financial assets (notably government bonds), by the private domestic nonfinancial sector (or some of each).

Obviously, the two accounting-based descriptions, both accurate, have very different rhetorical implications.

This just reiterates the point I made in the post to which JKH responded with his revelatory identity: accounting tells us nothing about economics, except that it often tells us when economic thinking doesn’t make any logical/arithmetic sense.

I guess my main point here, perhaps obvious to many, is that accounting descriptions — choices about how to describe the past in accounting-speak, especially regarding “saving” and “funding” — are, inevitably, rhetorical hence normative. Or at least, those choices of descriptions have inevitable rhetorical hence normative implications.

Or to put it simply: accounting is normative.

My impression is that many economic discussions and disagreements, especially in the “MM” worlds, are at their root disagreements about what “funds” what (frequently compounded by imprecise sector definitions with different parties using different implicit definitions), and the rhetorical hence normative implications of those competing descriptions.

Cross-posted at Angry Bear.

Leading Economists Vote on Raising the Minimum Wage

February 26th, 2013 No comments

I’m delighted to see the U Chicago IGM Forum ask a really useful, non-softball question.

The panelists are evenly split on whether an increase to $9 would make it “noticeably harder for low-skilled workers to find employment.”

A 4:1 majority thinks that weighing the costs and benefits, “this would be a desirable policy.”

I note how many who commented bring up the EITC, suggesting that an increase in that support might be better than a minimum-wage increase.

I note further that they apparently haven’t read the very good reasoning and research suggesting that the two together very effectively address the problems of each.

But Paul Krugman has. And his surprise helps explain why the others haven’t thought about this:

Second — and this is news to me — the usual notion that minimum wages and the Earned Income Tax Credit are competing ways to help low-wage workers is wrong. On the contrary, raising the minimum wage is a way to make the EITC work better, ensuring that its benefits go to workers rather than getting shared with employers. This actually is Econ 101, but done right

Cross-posted at Angry Bear.

Republican Strategy: “When you’re playing with house money, it makes sense to go all in on every hand.”

January 3rd, 2013 1 comment

David Atkins succinctly nails the situation we face:

No matter what Obama does, Republicans won’t care and won’t fold

…This is what makes the poker analogy so often used to criticize the President’s negotiating tactics such a weak metaphor. Obama is often said to be the worst poker player in history, consistently bluffing then folding. But the problem with that analogy is that Republican House members aren’t playing with their own chips: they’re playing with the country’s. The Republican electoral chips are stashed safely in gerrymandered hands, and any losses over fiscal cliffs or debt ceilings only hurt the President and the nation’s perception of government. There’s no downside for the GOP in bluffing every time in the hopes that the President will fold. Why not? When you’re playing with house money, it makes sense to go all in on every hand.

When you’re playing chicken and your opponent has thrown their steering wheel out the window, the only alternative to losing is  to do likewise. Obama is justifiably reluctant to do so, because he actually cares about America and the rest of the world, and is unwilling to destroy them for electoral advantage.

For the gritty details of Republican gerrymandering and Democratic-voter disenfranchisement, see Sam Wang here and here.

The Republicans have gerrymandered a structural advantage that lets them play poker using other people’s chips. So the only only real solutions are structural and long-term. Atkins again:

The advantage Democrats have in this situation is that majority public opinion and the majority of actual American voters are on their side. The only thing that allows Republicans to take their hostages in the first place is a series of arcane rules that give the minority undue influence. Among those rules are:

    • Gerrymandered Congressional districts
    • Dysfunctional filibuster rules
    • Disproportionate Senate representation
    • Corrupt lobbying laws
    • Campaign finance laws that give outsized political influence to a few billionaires
    • Archaic electoral college rules
    • Discriminatory workday elections

And that’s just a start. If we want a future in which we do more than simply determine which hostages to save and which ones to shoot, the American People will need to figure out how to make these and other reforms to our broken political system that disempowers rational majorities in favor of extremist ideological minorities with nothing to lose. As the Republicans continue to suffer demographic decline, their base will only become more desperate and extreme.

They’re cornered, with their backs against the seawall, and a demographic tidal wave is looming over them. That makes them very, very dangerous.

Cross-posted at Angry Bear.

With Charity, Who Needs Taxes?

November 28th, 2012 2 comments

The idea that contributions to the public good, for provision of public goods, should be voluntary is certainly appealing. But I was curious about the numbers. Like most things libertarian, this notion is utopian and unrealistic.

Total charitable contributions by individuals, corporations, and foundations was an estimated $298.42 billion in 2011, up 4 percent in current dollars and 0.9 percent in inflation-adjusted dollars from a revised total of $286.91 billion in 2010, according to a report from the Giving USA Foundation and the Center on Philanthropy at Indiana University.

That’s 2% of GDP. Government spending over the years has been circa 30% of GDP. If taxes were eliminated, would charitable giving increase fifteen-fold?

Would it be donated to the sexy things like road maintenance and bank regulation?

American giving.

Jim Manzi: Correlation, Causation, Understanding, and Predicting

November 9th, 2012 4 comments

Jim Manzi, curious as always (especially about how to evaluate government policies), tries to plumb the problem of causality. Here’s where he begins:

Consider two questions:

  1. - Does A cause B?
  2. - If I take action A, will it cause outcome B?

I don’t care about the first, or more precisely, I might care about it, but only as scaffolding that might ultimately help me to answer the second.

I’ll risk going Manichaean here in an effort at (simplistic) clarity: I think this encapsulates a key difference between scientists and engineers.

Scientists want to understand how something works — not just “does A cause B?” but “what is the mechanism whereby A causes B?” Successful prediction is valuable (mainly? only?) because it validates or invalidates that understanding. Their main goal is to build coherent theory and understanding. Prediction is a happy by-product and necessary corrective.

Engineers want to understand how something works so that they can predict things — and create things that capitalize on that predictive power. They’re perfectly happy if they can predict successfully without understanding why the prediction works. Coherent theory is generally necessary to achieve this — they need to understand how things work — but it’s not their ultimate goal. Theory is a necessary evil.

An assertion of causality requires both. You need to show that B follows A reliably, but to be confident of causation, you need to explain — really tell a story — about how that causality works.

Both of these approaches are necessary and proper, of course, and they’re complementary. But I’d suggest that theory — the goal of science and most scientists — is what really matters in the long run. It’s easy enough to predict that the sun will rise in the east every day. Successfully predicting that yields many happy benefits. But understanding why — heliocentrism, earth rotation, gravity, momentum, etc. — now that is really profound. That coherent theory provides engineers with their necessary evil, so they can create and capitalize on further successful predictions.

With his “I don’t care about the first,” Jim puts himself squarely in the “engineers” camp that I’ve (again simplistically) described. Don’t get me wrong: I’m quite certain that Jim Manzi is quite curious and hungry for understanding (even while he’s skeptical about our ability to understand how complex human systems work). But by putting himself in that camp, he is aligning himself with, and providing aid and comfort to, a group that actively distrusts and dislikes egghead elitist types with all their fancy theories about evolution and climate and yes, economics. He aligns himself with a group that doesn’t really care about understanding, that just wants to know “which button should I push?”

It’s a group that tends to come up with answers like “Just cut taxes.”

Cross-posted at Angry Bear.