My Head Talking on the Thom Hartmann Show

February 17th, 2014 1 comment

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.

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.

SMART CAPITALISTS FOR AMERICAN PROSPERITY

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 agendaproject.org) 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.

No: Saving Does Not Increase Savings

January 28th, 2014 33 comments

The misconceptions embodied in this post’s headline sow more confusion in economic discussions than any others.

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

In short: if you disagree with this post’s headline, you are thinking (perhaps unconsciously) in the “Loanable Funds” model. And the loanable funds model is complete, incoherent bunk. (I’m not even going to bother citing the hundreds of supporting links here, including unequivocal papers from central bank research departments worldwide; Google them.) 

Think this through with me:

Your employer transfers $100K from their bank account to yours to pay you for your work. You’ve saved.

But is there more savings in the banks? More money to lend? Obviously not.

You buy $50K in goods from your employer, transferring the money from your account to theirs. They’ve saved. You’ve dissaved (spent).

But is there more or less savings in the banks? More or less money to lend? Obviously not.

You transfer $50K from your bank to your employer’s, in exchange for $50K in Apple stock or government bonds.

Did you just “save” again? Is there more savings? More money to lend? Obviously not.

When people save up money, they do not add to the stock of monetary savings — the mythical stock of “loanable funds.” Monetary saving does not increase monetary savings.

And since saving up money doesn’t increase the stock (supply) of money, it doesn’t lower the cost (interest rate) of money. On the aggregate level, saving doesn’t “fund” lending. (Banks lend by creating new money ex nihilo if they think they’ll make a profit; that’s what they’re licensed/chartered to do.)

This error and misunderstanding exists partially because there are two ways to “save,” which are widely confuted, conflated, and confused:

Pay people to create real assets — drill presses, houses, ideas, skills, etc. — that you own or have a claim on. Paradoxically, in this case you save by spending.

Increase holdings of financial assets (net of debt) — from dollars to debt securities to Dell stock to CDOs. (It’s much easier to think about this coherently if both dollar bills and deeds are viewed as financial assets: legal constructs designating particular rights or claims on real assets.)

The confution of these two, of course, was all hashed out many decades ago in the Cambridge Capital Controversy — when the MIT/classical Cambridgeans admitted defeat at the hands of the Cambridge Cambridgeans, including acknowledging their central point. (The classicals have proceeded to ignore the whole thing ever since, acting and thinking just as they did before, as if it never happened.)

…the measurement of the “amount of capital” involves adding up quite incomparable physical objects – adding the number of trucks to the number of lasers, for example. That is, just as one cannot add heterogeneous “apples and oranges,” we cannot simply add up simple units of “capital.” As Robinson argued, there is no such thing as “leets,” an inherent element of each capital good that can be added up independent of the prices of those goods.

(This also explains why the the Q in MV=PQ is utterly incoherent: the only unit that can be used to measure Q — dollars — varies with P. It’s like measuring a rubber band using a ruler whose inches vary in length with the changing length of the rubber band.)

People get confused about this partially because “saving” in the national accounts encompasses both real capital created (measured by dollars spent to create it), and net acquisition of financial assets. It’s not what people think it is: a simple sum of everybody’s money saving (income minus expenditures) — not even close.

Here’s how monetary saving happens — aggregate increases in people’s net holdings of financial assets:

People spend money (some of it borrowed from the financial sector), paying people to create real assets. (Purchases of existing real assets can spur creation of new ones — a second-order effect — but the creation’s the thing.)

The market decides that the financial assets that are claims on those assets are worth more than was paid to create the real assets. (Sometimes the market overestimates; this is a problem.)

The people’s debt is unchanged, but their financial assets are worth more. Their net worth has increased. They’ve saved up money. (When the market optimistically bids up financial assets, there’s suddenly, magically, more money.)

Saving (not-spending) money doesn’t increase monetary savings. We saw that obvious reality at the top of this post. Spending (partially enabled by new money creation via bank lending and government deficit spending), coupled with market re-pricing of financial assets, increases monetary savings. This is how the financial system monetizes the accumulated surplus from production.

Since saving money is not-spending, more saving results in there being less savings (relative to the counterfactual of more spending). Or if you must call them this, less loanable funds.

Spending increases savings.

There’s more I’d like to say, but I’ll leave this with a question for my gentle readers:

The IS/LM model seems to be inescapably based on the misconception detailed above — that more saving results in more savings hence, because of supply and demand for loanable funds, lower interest rates.

But: if Krugman’s constantly repeated assertions are correct, that model seems to perform very well.

Why is this true? What am I not understanding?

Cross-posted at Angry Bear.

The “Decent Life” Argument

January 27th, 2014 1 comment

I was having a discussion with a conservative friend recently, and challenged him to write up a budget for a decent life for a responsible, hard-working American:

Living in Shoreline, a relatively inexpensive area north of Seattle.

Divorced, two kids.

Not very smart or capable, but has worked hard their whole adult life.

He has so far demurred to do so. Said:

Ahhhhh. “Decent.” Sadly the scarcity red herring rears its head again.

I replied:

This is why I want you to do a budget. Because I think your baseline minimum — “not starving or freezing in the streets” — is Dickensian, cruel, utopian in a very dystopian way, and wildly unrealistic.

With very good reasons, none of us wants a large portion of our population living on that edge. I think you included.

We’re all worse off at that dystopian baseline.

Is there a scarcity of money in America? If that means “not enough for everyone to live a decent life,” no. (Though of course there’s competition for money. Not the same thing.)

I don’t think you understand what you’re really saying:

If income/wealth were less concentrated, inflation would be rampant because demand would be banging against scarce supply of real resources.

But that’s a fundamental misunderstanding of monetary economics, and of scarcity and resources in a modern economy.

In an 80% service economy where many physical goods are produced on demand (basically a service itself):

• The totally dominant “resource” is human effort/work hours/labor. (You know that your theories are are only true in a full-employment economy, right?)

• More spending causes more production (quantity). Close to 1:1. Think massages, and iPhones. If you don’t buy it, it doesn’t get produced. The primary adjustment mechanism is not via price. (The real market is not like the financial markets that way.) It’s via quantity.

IOW, in a market with huge untapped labor resources (limited “scarcity” of “resources”), the quantity elasticity of labor (“resources”) is high.

More spending (demand) causes more production (supply).

Another way to think about it: as the demand curve shifts up, it pulls the supply curve right. Quantity adjusts (mainly), not price.

Higher GDP (and GDP/capita), not higher inflation.

This is not, of course, an argument for perfect equality (don’t try that straw man). We know that would be a dystopia too. Other (i.e. incentive) effects are at play. Lots of moving parts.

But bottom line: in the high-productivity American services economy as it exists, Say’s law is pretty much 180 degrees wrong.

And we haven’t even bolted on lending/borrowing/debt/credit yet, much less fiat money or central banks.

The fundamental notion of scarcity is not the simplistic real-goods/barter-economy thing you think it is.

The policies you promote would result in a return to a more Dickensian society. Exactly what we see in countries with high inequality and small governments. Not a country you want to live in.

Truly, taking America back.

Show me a realistic budget for a decent life for the responsible, hard-working American I’ve described.

And tell me why — if we can have a country where everyone can have that decent baseline, while huge upsides still exist for smart stivers — we shouldn’t do so.

Since you’re so fond of pooh-poohing “fairness” arguments, a reason beyond “It’s not fair to confiscate my money!”

Cross-posted at Angry Bear.

Bleg: Accounting for the Real Sector

January 17th, 2014 8 comments

I’m hoping my gentle accounting-dweeby readers can help me.

I’m very interested in looking at economic measures (i.e. debt/lending/borrowing) for the U.S. “real” sector: households plus nonfinancial business.

My problem: with some exceptions, various national accounts (NIPA, FOFA, IMA) don’t provide tables for this “sector.”

I don’t think I can simply sum up household and nonfinancial business, because some of the lending/borrowing is between these two sectors. Is it possible to net that out based on published tables?

I’d really like to see a sectoral balance chart (really a “balance of flows”) displaying the following sectors:

Domestic Real
Domestic Financial
Government
Rest of World

I’d really love to see the lending/borrowing flows from each sector, to each other sector. Sized arrows between each. Is this possible?

That sectoral breakout is tricky, of course, because firms —  especially financial firms — are heavily engaged in ROW. Is it even possible to realistically estimate the financial sector as a purely domestic entity?

Any thoughts and suggestions are welcome. Thanks.

Update: A further condundrum: at least in the FOFAs, hedge funds are tallied under Households. This is presumably because like households but unlike commercial banks, they’re not licensed/chartered to print new money for lending (at least nominally, technically…). To the extent that “hedge funds” includes the whole goddam shadow-banking industry (?), it seems like this would (wildly?) distort numbers for the household hence the real sector. Also: Several  banks and holding companies, i.e. Goldman Sachs, magically transformed themselves into commercial banks during the financial crisis, so they could tap bailout funds. How did national accountants deal with that? How would it affect time series of debt/lending/borrowing for the financial and real sectors?

 

 

The Economy Is a Ponzi Scheme

January 13th, 2014 No comments

I don’t think there’s anything eye-popping or revolutionary this post, but it’s thinking that I’ve been finding useful.

Long before Larry Summers bruited his recent ideas about secular stagnation and the need for bubbles, I came up against this great line from Nick Rowe (April 2011):

The economy wants a Ponzi scheme.

I’ve been pondering that line ever since. (As usual with Nick, read the whole post.) Pretty quickly, I came to an even more radical belief:

The economy is a Ponzi scheme.

Economies are exercises in log-rolling, but with magical logs that expand when more people climb aboard and run faster, and and contract when people slow down or fall off. People can fall off because there’s not enough room on the log, because they can’t run fast enough, or because they try to stand still or run too slowly. (Sorry to torture the metaphor so.)

To put it another way:

Economies are confidence games.

When people are confidently optimistic (the two are not synonymous), more people jump on the log and run harder, because they think there will be personal profit in it.

But where does that confidence come from? I would suggest that most people form their expectations for the future based on the present and recent past. (A very reasonable Bayesian stance.) How much money do I have? How much is coming in? How do those compare to the recent past? (Market monetarists: Idle guesses, surmises, and predictions about the Fed’s future policy stance seem wan, weak, and feckless compared to those very tangible and tally-able present indicators.)

Which bring me back to a current favorite graphic, showing that every recession since 1960 was preceded by a decline in the inflation-adjusted (“real”) value of household assets:

There are only two instances (since 1960) where this measure fell below zero and there was not a recession: 2002 and 2011. Both look like aftershocks/carry-ons from the preceding recession. (Or: Maybe these times are different?? Think: massively higher household debt.)

The confidence story I’m telling here: people give huge weight to their current wealth/assets/net worth, and recent changes in those measures, when forming expectations for future growth — far more weight than they give, for instance, to their predictions of Fed behavior (the huge mass of people have no such predictions). This may be foolish or it may not be, but it’s what people do. (They undoubtedly also give big weight to current income and recent changes in income. I’ll let somebody else graph that.)

Or you could say: declines in household assets means there’s less money. (All financial assets embody money.) And at that point you can invoke a straightforward monetarist explanation — with a Minskyish self-perpetuating component added — for recessions.

The key point: the decline in real household assets always precedes the recession. It’s at least a leading indicator of real production declines, and at most a cause. When people feel poorer, they act poorer. (I told you this post wasn’t revolutionary thinking.) They spend less. So there’s less production. (In an 80% service economy with just-in-time production of many physical goods, if spending doesn’t happen, production doesn’t happen.) So there’s less (demand for) labor. The log shrinks and slows down. GDP and employment (growth) slow or decline.

Okay, yeah, Wealth Effect, blah blah blah. But the assertion I’m making is that people don’t just spend more when they feel wealthy or wealthier. They raise their expectations of future wealth, and consume/invest according to that. You get a positive or negative self-perpetuating feedback effect.

Going abstruse with this: Given the widespread belief that quantitative easing only really achieves any effect by buoying financial-asset prices (I include deeds in that class of assets), is it reasonable to suggest that the Fed is actually (and unconsciously, and arguably incompetently) engaged in Real Household Asset-Value Targeting (RHHAVT)? Can they limit the feedback effects? Should they shift to level targeting (RHHAVLT)?

Cross-posted at Angry Bear.

Underconsumption, Income, Wealth, and Capital Gains

January 12th, 2014 10 comments

I’m rather devastated to find (thanks to Tom Brown at Pragmatic Capitalism!) a discussion  I missed at Winterspeak’s place from mid-December, with some of my favorite commenters going after the underconsumption argument that I’ve been going on about.

It starts by citing Mark Sadowski’s comment from Interfluidity “clarifying the difference between wealth and income.”

I found that rather puzzling at first because the first-blush, obvious difference between the two is that one’s a flow and one’s a stock. Duh. But I figured out that he’s actually distinguishing between income and capital gains, making the well-known point that in the language of national accounts, capital gains aren’t income.

I’d like to address two points here:

1. I think JKH would say that this is all as it must be — that it’s conceptually incoherent to think of capital gains as income. I understand why he would say that. But I’d like to push back on that.

Imagine a company in two counterfactuals — a simplified, stylized representation.

Scenario A: All earnings/profits are paid to shareholders as dividends every year. Book value remains unchanged.

Scenario B: All earnings are retained. Book value increases 1:1 with earnings.

Now: a shareholder holds shares for thirty years, then sells at book value. (Assuming the paid-out dividends and the retained earnings are “invested” identically — say in physical cash that earns no interest, to keep things simple.)

At the end of the period, the shareholder has received all those earnings in each scenario, and has identical wealth in each scenario.

Is it conceptually coherent to say that in scenario B, the shareholder had zero income?

Within the linguistic and logical constructs of the national accounts, yes. But in any reasonable economic construct, it’s crazy. The shareholder accrued those earnings every year; they were just “unrealized” via sale. Just because those earnings were tallied up on the corporation’s books, instead of the individual’s (and eventually transferred to the individual’s), can we reasonably say that the shareholder’s share of corporate earnings were not accrued income?

See JW Mason’s comments at Winterspeak for more on this, expressed more authoritatively than I can achieve.

2. Sadowski says “In underconsumption theory recessions and stagnation arise due to inadequate consumer demand relative to the production of new goods and services.”

That may be true. But I would suggest that underconsumption theory is not nearly so standardized — that in fact it’s wildly un(der)theorized. (I do wish [liberal] economists would get on this hobby horse…)

In my bruited notion of underconsumption, stagnation arise[s] due to inadequate consumer demand (“spending”) relative to wealth — which I define somewhat roughly as the total stock of financial assets. (Claims on real assets, or future production, which have a rough equivalence that I won’t discuss further here.*)

It’s a straightforward monetarist(ic)  velocity argument, but with “money” defined as “the exchange value embodied in financial assets.” (In this construct, all financial assets embody money, including those things like currency that have traditionally, in the vernacular, been called “money.”) So the “money stock” is the market value of all financial assets, from dollars to deeds (yes, deeds) to CDOs.

Because of declining marginal propensity to spend relative to wealth (which I think no one will contest), increased concentrations of wealth, arithmetically and inexorably, result in lower money velocity, ceteris paribus.

I posted two graphics to demonstrate this velocity/stagnation situation over the decades. (You can argue with the specific economic measures used here, but they’re reasonably representative of the big picture.)

Personal Consumption Expenditures as a percent of Household Financial Assets:

(Personal Consumption Expenditures + Business Investment Spending) / (Household Total Assets + Business Total Assets)

Now these are showing ratios, and it’s possible that an increased denominator (assets) is where the big secular change occurred: arguably many more of the country’s real assets were financialized/monetized/capitalized over the decades shown. (Think: student loans monetizing/present-value-capitalizing those student’s human capital and future earnings.)

But if we’re just surmising, we can say it’s equally possible that the declines here are numerator-driven — resulting from declining spending out of wealth due to wildly increased wealth and income concentrations. I’d expect that both are true.

Somewhat as an aside, I also made a straightforward “money-supply” assertion about recessions, again using my preferred definition of “money.” I’ll share it in the concise language that Twitter requires and encourages so admirably:

This is getting long so I’ll stop here, with one final assertion:

Any aggregate consumption function (viz: Keynes’) that doesn’t incorporate some measure(s) of wealth, that doesn’t incorporate some measure(s) of wealth and income distribution, and that doesn’t include (distinct and probably interdependent) functions for declining marginal propensity to spend out of wealth and out of income, is useless.

* I have to toss in one more pet peeve here: financial assets (often called financial “capital”) are not capital! They’re claims on capital. And contrary to much sloppy and often implicit thinking and discussion that you see out there from professionals and amateurs alike, they’re not an “input to production.” 

Cross-posted at Angry Bear.