Archive for March, 2009

Small is Beautiful? Maybe. But Big is Bad.

March 28th, 2009 2 comments

At least this headline holds true for banks. Steve Randy Waldman, as so often, gives us cogency–in this case on why big banks are a problem. My favorite part (and my emphasis):

Scale breeds agency problems. Earning an extra five basis points on $100B in assets amounts to $50M in extra income a year, a fraction of which can make a manager very wealthy in an eat-what-you-kill bank. Making that same five basis points on a $100M portfolio earns a small bank 50K, a fraction of which amounts to a nice bonus, but not a lifestyle change.

For both managers, the downside if something goes wrong is the same: they lose their jobs.

For the managers, big is good. For the rest of us, not so much.

Want Prosperity and Stability? It’s About Wages and Salaries

March 23rd, 2009 Comments off

What caused the Great Depression? What caused the current…whatever it is?

According to James Livingston, the roots of both lie in shares of income. When not enough people are getting not enough wages and salaries–and when a large share of income is derived from financial investments, not work–we’re in bubble land, and things fall apart.

(My explanation: because income is not widely distributed, aggregate demand cannot support productive industry, hence there are not enough productive investments available, hence financial assets seek out imaginary returns. We know the result.)

Here’s what that picture looks like (BEA; data here):

income shares

The story this mirror-image picture tells: In 1929, the percent of income received in wages and salaries was at a historic low (see below for 1920s data). There was a strong (and volatile) correction during the Depression and war/post-war years, followed by a long period of stable and historic highs during The Great Prosperity.

Those highs started declining in the seventies, continued down under the sway of Reaganomics, and fell even further under Bush II. By 2008, wage-and-salary share had reached profoundly historic lows.

Did we see the same type of decline pre-1929? Yes—even more so. The BEA time series doesn’t extend before 1929, and I haven’t found a comparable/contiguous series going farther back. But we can get a picture of the 1920s from tax return data. (Large scanned PDFs here [Table 196 p. 203] and here [Table 173 p. 173]). Here’s what that picture looks like:

20s wages and salaries

By this measure, in just a few years the wages-and-salaries share of personal income plummeted from the 50/60% range to less than 40%. ’25 to ’29 represented a truly profound historic low. (Wage-and-salaries’ share snapped back after the crash, of course, because financial profits constituted a proportionally much smaller share of income.)

What about this time? It took a long time for those decades of decline to achieve their ill effects. There are many plausible explanations for this. Here are a few.

• The Fed got a lot more competent at managing the economy’s volatility.

• There was much wider participation in the housing/asset markets/bubbles–maintaining the illusion was a larger group effort.

• Consumer credit became ever-more widely available, temporarily counteracting the declining/stagnating income share.

• Increasing government redistribution (15% of total income in 2008, up from 3% in 1945 and 9% in 1970) buoyed aggregate demand by giving people money to spend even while wage-and-salary share declined.

But the fact remains: both crashes occurred at a time of historically low ebbs in wage/salaries’ share of total income.

Caveat: It must be admitted that total employee compensation (including benefits and employers’ social insurance expenditures) has not shown quite as clear a picture as have wages/salaries alone:

employee comp

Total compensation in 2008 was nowhere near the lows of 1929 (when there was no Social Security and benefits were quite limited). But even with those huge benefit boosts, it had declined to a level not seen since the ’40s—well below the level that prevailed during the Great Prosperity.

This is perfectly in keeping with both a common-sense and an empirical behavioral view of economic incentives. The actual dollars people receive in their paychecks (and/or their transfer payments) every week or two provide them with a far more moving (if short-term) gauge and incentive than the uncertain, rarely perused, and long-deferred benefits that are (only implicitly) promised in boxes 4 and 6 of their annual W-2s.

When people are taking home good money from their paychecks, they spend it on goods and services. That demand supports productive enterprises. That provides truly productive investment vehicles for financial assets. And so the log keeps rolling.

Businesses Constrained by Lack of Investment? Oh, Maybe Not.

March 18th, 2009 Comments off

A while back I pointed out that in 2007, only 9 percent of U.S. privately-held businesses cited a shortage of investment money as a constraint on their growth. In response to a rather maniacal comment on that post, I went looking to see what things are like today.

Answer: about the same. The National Federation of Independent Businesses gives us this up-to-the-minute snapshot. (Update: yes that is a mislabeling–should be February 2009. It’s from the March 2009 report and the other tables in that report are properly labeled. Update 2: the March report seems to have disappeared from the site; I’ve updated the link to point to the April report, which tells the same story.)

business constraints

Just as in the 2007 survey (from another outfit) cited in the previous post, financing and interest rates come in dead last (selected by only 3% of businesses–same as a year ago) among small businesspeople’s concerns. Their problems, which should be obvious to anyone with eyes and a mind, are on the demand side.

Drill Here Drill Now! Oh….Wait…

March 15th, 2009 3 comments

It’s now clear that the McCain/Palin shout-outs for more domestic drilling were not, in fact, tawdry and childish pitches to get votes from jingoistic know-nothings. They were, in fact, calls for an energy policy that would lead this country into a future of responsibility, prosperity, and well-being.


The free market is speaking…

Seattle’s a Happy Place! Outstate Washington, Appalachia: Not So Much

March 13th, 2009 1 comment

Showing that great minds think alike, my friend Steve also noticed the new national survey of well-being from Gallup. Though he only seems to have read an article about it, and based on that he wonders:

» Would Washington be the “Happiest” State if Seattle Was Elsewhere?.

Research from Gallup puts Washington State near the top of states
rated for happiness.

At the same time, Seattle is ranked by Business
Week as one of America’s most “miserable” cities.
… one can’t help but wonder how the state would rank if Seattle
was not a factor.

Maybe if the residents chose to fund schools and cops instead of
monorails, trains, and nutty eco-nanny programs to eliminate plastic
bags, the people would be happier.

He could have found his answer quite easily by actually visiting the survey site (a pretty remarkable survey indeed: talking to a thousand people a day, every day, asking people about their well-being).

well being 1

Looks like they’re pretty miserable in Portland, too. Must be the mass transit, bike lanes, zoning policies, crap like that.

Especially interesting: it’s people in their prime family-raising years who are made especially miserable by all those pinko policies:

well being 2

Meanwhile the national map…

well being 3

…can’t but remind you of another that we’ve seen recently:

well being 4

(No, the well-being survey was not done after the election–mostly before.  It started in January 2008 and the data currently presented is aggregated through December. The survey’s slated to continue for 25 years. Methodology here.)

I’m sure that profound well-being in Appalachia is a result of their excellent mass-transit systems, top-notch education, and progressive environmental policies.

Steve’s right: the correlations here are obvious.

Banks? Who Needs ‘Em?

March 11th, 2009 Comments off

James Livingston once again sheds serious light on our current situation, as illuminated by the Great Depression.


  • Economic recovery was actually going gangbusters ’33-’37.
  • It wasn’t because banks started lending; they didn’t.
  • The government (Reconstruction Finance Corporation) was doing the lending.
  • We should try doing the same thing now.

More detail on those four statements below. Here’s the heart of his argument:

…reports of the Comptroller of the Currency tells us that the banks sat out the recovery.  The summary Table 47, “Total Assets and Liabilities of National Banks, June 1933-June 1937,” Report of the Comptroller of the Currency 1937 (Washington: GPO, 1938), pp. 488-94, shows that during the recovery, [banks’] total deposits increased 52 percent, holdings of government securities increased 57 percent, and (idle) reserves held with Federal Reserve banks increased 140 percent.  Meanwhile loans and discounts–that is, the extension of credit to businesses and/or consumers–increased only 8 percent.

So there was an economic recovery from the depths of the Great Depression with no financial fix, or rather with almost no participation by the banks, except of course that.they bought the government securities that financed net contributions to consumer expenditures out of federal deficits.  And no nationalization, either.  How is that possible?

In short: the Reconstruction Finance Corporation replaced the banking system as the lender of first resort to businesses large (the railroads) and small (most of its loans were under $100,000).  The volume of its loans and discounts during the four years of recovery was roughly five times that of the national banks.

The way to deal with the current crisis short of nationalization may, then, be to bypass the moribund banking system with a new RFC capitalized with the remainder of the TARP and other funds authorized by Congress.

Back to those four statements:

Economic recovery was actually going gangbusters ’33-’37.
The reversal and repudiation of Hooverite creative-destructionism under Roosevelt really, really worked, as evidenced by many economic indicators. The big impact was from monetary loosening after three years of churlish stupidity at the Fed and Treasury ’29-’32. But the fiscal stimulus policies (though actually rather tepid in those years) also contributed, at least by making the monetary moves more effective.

Tyler Cowen has been making this argument with some cogency for some time (with some serious pushback from moi in email back-and-forths, which he has been kind enough to engage in). I’m somewhat grudgingly coming around to his view, especially since Christina Romer made the same point very strongly just the other day at Brookings (PDF), concluding:

Had the U.S. not had the terrible policy-induced setback in 1937 [both monetary and fiscal], we, like most other countries in the world, would probably have been fully recovered before the outbreak of World War II.

She’s referring to both fiscal and monetary tightening in 1937–fiscal tightening (cutting spending and increasing taxes) driven by deficit fears, and monetary tightening driven by misplaced technical anxieties at the treasury and the fed.

Even the weakest indicator in this period–unemployment–had plummeted from 25% to 15% ’33-’37. It surged back in ’38, but then continued its downward trend into the war years.


Another crucial issue which has not been widely discussed: Alexander Field demonstrated in his 2003 paper, “The Most Technologically Progressive Decade of the Century” (PDF), that the 1930s saw growth in “multifactor productivity” (largely technology-driven) surpassing anything before or since. This goes a long way to explaining why employment and employees were slow to feel the benefits of the recovery. Productivity was skyrocketing, so less workers were needed for each unit of output.

It wasn’t because banks started lending; they didn’t.

Livingston lays out the numbers in the passage above, but even his numbers give the banks more credit than they deserve. Here are the numbers from All-Bank Statistics: United States 1896-1955, available as honking-huge scanned PDFs from the St. Louis Fed.


After diving off a cliff between ’29 and ’33, the size of banks’ loan books basically didn’t change at all in the years 1933-1940. (Thanks for the help, guys!)

The government (Reconstruction Finance Corporation) was doing the lending.

Compared to the banks’ failure to lend (despite massive government prop-ups), RFC lent approximately $5.8 billion in the years 1932-1937. This makes it look like the government accounted for all the new net lending over those years.

We should try doing the same thing now.

I don’t know enough to say whether direct government lending would offset the counterparty disasters that would result from letting the banks fail. But from a moral (and moral hazard) perspective, it sure is tempting to throw all those government dollars at direct loans–and let the banks go hang.

Finally! The Filibuster Explained

March 7th, 2009 Comments off

“Why doesn’t Harry Reid make them filibuster? We’ve got a majority in the Senate. Why do we need a 60-vote supermajority? Reid should make Republicans pay the political price for obstructionism: standing up there reading the phone book before C-Span and the world. What’s the gig?”

I’ve probably googled this question half a dozen times over the last years, and have never come up with any answer beyond “Harry Reid’s a wimp.”

Since he isn’t–like really at all–that explanation has always seemed…less than satisfying.

My latest google foray finally turned up the following February 23 post by Ryan Grim at the Huffington Post, drawing on and reprinting a memo on the subject from Harry Reid’s office.

Short story, they don’t have to talk. That’s only in the movies (and on The West Wing). The ‘pubs can absent themselves, while one of their senators sits on the Senate floor saying “there’s no quorum” every so often.

Now you can ask: would the C-Span visuals of a single ‘pub senator obstructing Senate business play well with the public? I just don’t know, but I gotta believe that Harry Reid asked himself that question a long time ago…

Here’s Grim’s piece, with an extract from the Reid office memo:

The Myth Of The Filibuster: Dems Can’t Make Republicans Talk All Night.

The byproduct of the cloture rule changes in 1917 and 1974 is you need to invoke cloture to proceed to a bill. Senators don’t have to speak to vote against cloture. If you can’t get 60, you can’t move it to the floor. On the motion to proceed, if a Republican chose to get up they can speak about any topic they want, or they can sit down and begin an endless series of quorum calls.

Home-Work: Increase GDP by a Third?

March 5th, 2009 1 comment

I wrote recently about the fact that non-remunerated work — anything that doesn’t involve a money transfer — isn’t included in GDP. So painting your mother’s house, fixing your car, or cooking dinner isn’t reflected in that key measure of our prosperity and well-being — even though that work quite clearly contributes greatly to our prosperity and well-being.

Which got me wondering: how much of that type of work do we do? And what’s it worth?

The American Time Use Survey (ATUS), conducted by the U.S. Bureau of Labor Statistics, measures the amount of time people spend doing various activities such as paid work, childcare, volunteering, commuting, and socializing (PDF). I extracted activities that most of us would call “productive.”

2007 average hours per person (over age 15) per day
Housework    0.64
Food preparation and cleanup    0.52
Lawn and garden care    0.21
Household management    0.14
Purchasing goods and services    0.78
Caring for and helping household members    0.53
Caring for and helping nonhousehold members    0.2
Volunteering (organizational and civic activities)    0.16

Total hours per day    3.18
Total hours per year    1160.7

There are approximately 200 million Americans over age 15, meaning that we put in something like 232 billion home-work hours per year.

Value at different wage rates
At $5 an hour    $1.2 trillion
At $10 an hour    $2.3 trillion
At $15 an hour    $3.5 trillion
At $20 an hour    $4.6 trillion

This last — $20 an hour — was the median hourly wage in America for 2007 (not including benefits). Half the people make more, half the people make less.

Okay, the official GDP for 2007 was $13.8 trillion. Add $4.6 trillion and you get a total GDP of $18.5 trillion.

Home-work makes up 25% of that total GDP, or in other words increases reported GDP by 33%.

Now you have to figure that Europeans — with their shorter work weeks and long vacations — have a lot more time for home-work than we do. That may go a long way to explaining why the quality of life feels so gosh-darned good over there, even while their official GDP per capita hovers at 75-80% of the U.S.

If you truly believe in family values, those are some numbers worth pondering.