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Buybacks Are Bad. But not for the Reasons You Think.

April 21st, 2020 1 comment

The megabillion-dollar corporate bailouts raining down in the coronavirus response are giving new urgency to voices on the left excoriating corporate stock buybacks. How can we pour money into these firms, even as they pump gushers of money out the other end that could be spent on hiring and investment?

Much of the pushback against that view is unabashed hippie-punching, claiming that lefties don’t understand basic finance and business. “Dividend payments drain money just like buybacks do. Why aren’t you complaining about those? And, the money distributed by either method gets reinvested in other companies. Are you saying we should eradicate shareholder corporations? Sheesh.”

Dividends do “drain” funds from firms — that’s their very purpose — so it seems like a telling question. But the finance guys claiming that buybacks are benign or even salutary (really, they’re almost always guys) merit a serious dose of punchback themselves. Because they’re foolishly (or intentionally) blind to the three big ways that buybacks are bad compared to dividend payments.

The first two are about tax avoidance. Buybacks let the top 10% of households (which own 88% of equity shares) extract cash from the firms they own, and pay vastly less in taxes than they would with dividend distributions.

When a firm distributes dividends, the whole disbursement is taxable for households. But with buybacks, households only pay taxes on their “profits,” or capital gains — the cash received for their shares, minus the shares’ original purchase price, or “cost basis.” If the firm buys shares for $25 and the selling shareholders’ average basis is $20, only $5 is taxed, versus $25 for a dividend distribution. (Dividends and capital gains are currently taxed at the same rates, much lower than taxes on earned income from working.)

But that’s just the tip of the iceberg. Even economists and tax experts, even on the left, seem unaware that most capital gains are never, ever reported as “income.” There are myriad ways that households effectively hide capital gains (mostly, legally) and protect them from taxation — too many and too complex to detail here, but the big-picture result is eye-popping:

Combine the “basis” deduction with all those shelter methods, and those buyback disbursements are barely taxed at all — again, compared to dividends, which all count as taxable income for households.

If you think progressive taxes are beneficial, that they’re necessary for widespread prosperity and well-being, society-wide economic security, and (pas possible) even greater economic growth, this is reason enough to think that buybacks are bad. But there’s another big reason that even economic-efficientists have gotta love.

Corporate insiders know about impending buyback programs before they’re publicly announced. So they know not to sell their shares. Call it insider not-trading, something that it’s essentially impossible for regulators to regulate. Then the announcement drives up share prices, and they sell. Insiders make a nice extra buck on the deal at the expense those who sold before the announcement, and of slower or uninformed shareholders — notably buy-and-hold retirement investors and pension funds.

Here’s the the smoking gun, courtesy of Robert J. Jackson, Jr., a commissioner of the Securities and Exchange Commission.

There’s a fivefold increase in insider selling (average) from the day before the announcement, to the day of.

If the finance guys don’t know the basic economic concept of “information asymmetry,” so well explained a half-century ago by George Akerlof in his seminal “The Market for Lemons,” their fingers-twirling-in-cheeks triumphalism might be the thing that merits punching. If they do know it (uh…they do), even more so.

Remember the LIBOR scandal? Traders manipulated global markets on a massive scale with far less information advantage than this.

You’d think that this would be obvious to the finance guys — I mean, it’s what they’d do given the opportunity, right? And in fact it used to be obvious to everyone. Buybacks were illegal until 1982, treated as a violation of anti-fraud provisions of the Securities Exchange Act of 1934 — because it was assumed they’d be used for market manipulation.

But in 1982 the finance guys convinced their (ideologically?) captured regulators to gut that prohibition, with the enactment of Rule 10b-18, providing legal “safe harbor” for buybacks as long as certain conditions are met. As it turns out, the SEC doesn’t even collect the necessary data to enforce those conditions. But even if they did, the rule doesn’t touch on the crux issue: insiders knowing when to sell — and especially, exclusively, when not to sell.

Whether it’s about rules or enforcement or both, Robert Jackson’s (and others’) research makes clear that the current system is completely inadequate to prevent buybacks being used for insider trading, market manipulation, front-running, skimming, and — let’s just call it what it is — institutionalized fraud.

So sure: dividends are just as bad as buybacks when it comes to “draining” cash from firms, money that in theory could be used for hiring and investment. (Though: maybe those disbursements will be invested in other firms, which will hire and invest?) Economic progressives should stop trying to grind that “drainage” ax, first because it’s so hippie-punchable. But more so, because it misses the two giant things that are so pernicious about buybacks: they’re a decades-long, many-trillion-dollar tax dodge, and they’re a vehicle for corporate insiders to enrich themselves while fleecing everyday equity holders.

Both of those mechanisms overwhelmingly benefit the ten-percenters, one-percenters, and those far beyond. And they leave ordinary working people who are trying to build a nest egg and “safe harbor” of their own in this predatory, precarious world, as usual, with the scraps.

Is U.S. Productivity Actually Skyrocketing?

March 11th, 2020 Comments off

 

Our standard measure of production, GDP, doesn’t even come close to explaining the accumulated wealth of nations.

 

How productive are we? How much stuff do we produce for every hour we work? It’s one of the central questions of economics, and per many economists, productivity growth is the ultimate determinant of our world’s centuries-long increase in material well-being. If we increase that ratio we can work less, or have more stuff, or some of each. Here’s what that measure looks like post-war.

By this measure (here in 2012 inflation-adjusted dollars), today we produce $73 worth of stuff for every hour we work, compared to $21 in 1948 — a 3.5x improvement.

Economists have been concerned of late because productivity growth has been moribund in the past decade or so (and sluggish since the 70s compared to previous decades). Here’s annual percent growth in productivity.

But the measure of production here poses a conundrum: production minus consumption — our “saving” — doesn’t explain all the increase in our collective wealth. It’s off by about 30 trillion dollars. See below.

So suppose we instead assume that increasing wealth is itself a (superior?) measure of how much stuff we’ve produced and not consumed. We can easily create a different measure of production: stuff we’ve produced and not consumed, plus stuff we’ve produced and consumed. Equals, stuff we’ve produced. (Not coincidentally, this is also the definition of Haig-Simons income — ∆NW + consumption.*)

Net worth in this figure is annual change. Here’s the cumulative sum of those series.

The difference may not look like much (it’s dominated by production of consumption goods, which have been…consumed), but it represents $30 trillion in additional accumulated wealth, net worth. For reference, households’ total net worth end of Q3 2019 was $114 trillion. (No: adjusting these two series for inflation-adjusted dollars barely changes this comparison — just the numbers and scale on the left axis.)

What we have here are two very different measures of production and accumulation, both based on market prices/purchases — one on prices paid for new goods and services over the years, the other on existing-asset markets’ price-estimates of what all our “saved” stuff is worth. 

Here’s what “real,” inflation-adjusted productivity growth looks like using those two different measures of production. (The consumption + ∆NW measure is subject to big swings and volatility based on wealthholders’ “animal spirits,” so it’s smoothed here to give the long view, with a ten-year rolling average.) Source data here.

Which of these market-price-based measures of production is “correct”?

If you think production minus consumption should equal “saving,” which should equal change in wealth/assets/net worth, you have to reject the GDP-based measure, based on purchase-prices in the markets for new goods. It doesn’t explain wealth changes. But that suggests markets have been underpricing new long-lived goods for years — at least according to later years’ asset markets.

But the net-worth based measure is pretty eye-popping and hard to swallow based on previous understandings. (Perhaps: it could be revealing the unpriced value of free internet services, this article for instance?) It’s tempting to reject it.

To be clear: doing so is to say that the new-goods markets/prices were right about what the purchased stuff was worth (and ditto, national accountants’ tallies of all those market purchases, tallies which include large and necessary but sometimes convoluted estimations like imputed rent and profits for owner-occupied housing). And, it’s saying that the asset markets are wrong, have been since the 90s. It’s saying we’re in the mother of all multi-decadal asset bubbles.

The net-worth approach to measuring production is attractive because production minus consumption equals change in wealth — an intuition that fails with the standard measure. And that net worth approach suggests that current productivity growth is very healthy indeed.

I’ll leave it to my gentle readers to consider the implications.

* For those who are fans of Godley and Lavoie’s work, check out their discussions of Haig-Simons income vis-a-vis net worth in the index for Monetary Economics, notably page 140, and importantly the top of page 490, in their appendix on sectoral balances (though they don’t call them by that name).

The Eighth Way to Think Like a 21st-Century Economist

February 22nd, 2019 Comments off

The teams at Rethinking Economics and Doughnut Economics have launched a contest for entries, asking “What’s the 8th Way to Think Like a 21st Century Economist?” It builds on Kate Raworth’s seven ways, here.

Here’s my entry:

8. Widespread prosperity both causes and is greater prosperity: From false tradeoffs to collective well-being.

“Okun’s Tradeoff” — the idea that inequality is necessary for economic prosperity and growth — is baked into 20th-century economic thinking. It probably carries some significant truth in a generally egalitarian economy. But in the 21st century, with wealth and income concentrations beyond even what we saw in the 1920s, with that era’s disastrous denouement, it just doesn’t hold water.

Today’s extreme concentrations cause us all, collectively — especially our children — to have less. (Excepting those few who are lucky enough to extract, hoard, and benefit from multigenerational dynastic wealth along the way.)

Broadly dispersed wealth and income offer up opportunity, prosperity, economic security, well-being, and a springboard for success to hundreds of millions, billions of people and families. And it uses less of our earth’s limited resources in distorted production markets delivering low-value, absurdly priced luxury goods and services demanded by those with astronomical wealth and income. With the same amount of wealth, broadly dispersed — and the increased spending that broader prosperity delivers (spending on higher-value goods) — we can enjoy a vastly better life for ourselves. And we can deliver likewise to those who come after us.

At least today, the equality-vs-growth tradeoff is wrong by 180 degrees. The choice is not a difficult one. In fact it’s not even a choice we have to make. Widespread prosperity both causes and is greater prosperity.

Safe Assets, Collateral, and Portfolio Preferences

January 29th, 2019 1 comment

Matthew Klein and Mayank Seksaria had an interesting Twitter conversation yesterday in response to a Stephanie Kelton tweet. Read it here.

Here’s my understanding of the financial mechanisms they’re talking about.

Government deficit spending deposits fixed-price securities (“money,” checking and money-market holdings) ab nihilo onto private sector balance sheets. These are perfectly “safe assets” in the sense that you always know what they’re worth relative to the unit of account (The Dollar). A $1 checking-account balance is always worth one dollar — if the holding account contains less than the FDIC-insured maximum. But for big finance players with big cash balances, they’re not as safe as…

Treasury bills/bonds. And since Treasury is required to “sop up,” re-absorb, burn those newly-created cash balances by swapping them for bonds (“borrowing”): deficit spending + bond issuance, consolidated, effectively deposits new Treasuries, ab nihilo, onto private-sector balance sheets.

Now to the portfolio effects, which are driven by the market’s portfolio preferences (a broader and IMO more aptly descriptive term than “liquidity preferences”).

If deficit spending delivers cash onto private-sector balance sheets, the market is overweight cash. (Assuming portfolio preferences are unchanged.) It can’t get rid of cash because cash is (by its very definition) fixed-price. There’s a fixed stock, unaffected by capital gains and losses. (Yes, net bank lending changes this stock, but very slowly.)

So to adjust their portfolios, market players bid up variable-priced assets: mainly bonds, equities, and titles to real estate. Voila, cap gains: there are more total assets, and portfolio preferences are achieved.

But wait: deficit spending + bond issuance, consolidated, doesn’t make the market overweight cash. It’s overweight bonds. Portfolio balancing is more complicated here, because bonds have variable prices (though they’re less variable than equities).

The market could just sell bonds, driving down their prices and reducing total assets, to achieve its portfolio preference — less bonds, same amount of cash and equities. Or it could sell less bonds but also bid up equities to hit its portfolio prefs; the first reduces total assets, while the second increases that measure. (As they say, further research is needed.)

But none of this, in my opinion, has a whole lot to do with the value of “safe assets” as “collateral” (except when asset prices are diving and all correlations go to one). That seems peripheral and secondary to me, a hamster-wheel of financial shenanigans, sound and fury signifying…

Another takeaway from this: Government deficit spending & bond issuance delivers new assets (Treasuries) onto private-sector balance sheets. But no new liabilities. So it creates more net worth.

But the portfolio balancing that ensues generally also drives up equity (and real-estate) prices, yielding a deficit-spending multiplier effect on wealth by driving cap gains that wouldn’t happen otherwise. One dollar of deficit spending/bond issuance results in more than one dollar in new private-sector wealth, assets, net worth.

That’s how I see it…

Why the “Money Supply” Is Conceptually Incoherent

December 28th, 2018 Comments off

Economists’/monetarists’ use of the term Money “Supply” reveals multiple levels of deep confusion.

1. Supply implies a flow. But they’re clearly referring to a “stock” of money: what’s tallied in monetary aggregates.

2. Even if you’re think of a stock of money: Supply is not a quantity, an amount, a numeric measure. It’s a psychological/behavioral concept — willingness to produce and sell — commonly depicted in a curve representing that willingness at different price points. (All economics is behavioral economics.)

But “supply” is necessary to validate the incoherent ideas of the “price of” and “demand for” money — a set of financial instruments like checking deposits whose price never changes (relative to the Unit of Account). That price can’t change — by definition, by construction, and by institutional fiat.

Likewise, the aggregate stock or so-called “supply” of fixed-price instruments, money, changes only very slowly via bank net new lending. (That change in lending is determined by myriad economic behaviors and effects.)

If so-called demand for money can’t change the (P)rice of money (it can’t), or the collective (Q)uantity of money outstanding (it can but not much and very slowly), what exactly are we talking about here in our imagined supply-and-demand diagram toy thought-experiment?

Actually, Only Banks Print Money

December 12th, 2018 2 comments

I’m thinking this headline will raise some eyebrows in the MMT community. But it’s not really so radical. It’s just using the word money very carefully, as defined here.

Starting with the big picture: 

You can compare the magnitude of these asset-creation mechanisms here. (Hint: cap gains rule.)

The key concept: “money” here just means a particular type of financial instrument, balance-sheet asset: one whose price is institutionally pegged to the unit of account (The Dollar, eg). The price of a dollar bill or a checking/money-market one-dollar balance is always…one dollar. This class of instruments is what’s tallied up in monetary aggregates.

A key tenet of MMT, loosely stated, is that government deficit spending creates money. And that’s true; it delivers assets ab nihilo onto private-sector balance sheets, and those new assets are checking deposits — “money” as defined here.

But. Government, the US Treasury, is constrained by an archaic rule: it has to “borrow” to cover any spending deficits. So Treasury issues bonds and swaps them for that newly-created checking-account money, reabsorbing and disappearing that money from private sector balance sheets.

If you consolidate Treasury’s deficit spending and bond issuance into one accounting event, Treasury is issuing new bonds onto private-sector balance sheets. It’s not printing “money,” not increasing the aggregate “money stock” of fixed-price instruments.

This was something of an Aha for me: If you look at the three mechanisms of asset-creation in the table above, only one increases the monetary aggregates that include demand deposits (M1, M2, M3, and MZM): bank (net new) lending.

Arguably there might be one more row added to the bottom of this table: so-called “money printing” by the Fed. But as with Treasury bond issuance, that doesn’t actually create new assets. The Fed just issues new “reserves” — bank money that banks exchange among themselves — and swaps them for bonds, just changing TheBanks’ portfolio mix. That leaves private-sector assets and net worth unchanged, and only increases one monetary aggregate measure: the “monetary base” (MB). 

I’ll leave it to my gentle readers to consider what economic effects that reserves-for-bonds swap might have. 

Fake News from the CBO? Some Very Dicey Numbers in the New Income Inequality Report

November 21st, 2018 Comments off

It didn’t take long to realize that something was very wrong.

The Congressional Budget Office just released its new report on The Distribution of Household Income, updated to cover 1979–2015. One thing in particular looked very dicey right off (source xlsx):

Household Capital Gains (per household, average)
2007: $8,800
2008: $4,400
2009: $2,200

Wait a minute. Households didn’t incur capital losses in any of those years? Like…trillions of dollars in losses, as real-estate and equity prices dove for the zero lower bound? Red flag, something’s wrong here. (And yes: the CBO does include cap gains in this household “income” measure. Below.)

The report gives zero explanation anywhere I can find of how cap gains are measured/estimated/calculated. But for certain, the CBO’s measure is wildly lower, and wildly less volatile, than other (well-documented) measures:

These other two measures move much more closely together. The CBO measure is the huge outlier. And besides being unexplained, it’s just obviously wrong on its face. It’s missing 60–75% of recent decades’ household capital gains.

Since the top 20% of households own 85% of U.S. wealth, cap gains go overwhelmingly to them. So this cap-gains under-estimate makes invisible a huge part of their income (increases) over decades — whether you’re talking before taxes and transfers, or after. #GotInequality?

State and Local Taxes

Next up: smaller but still pretty huge: when calculating its “after-tax/after-transfer” household income numbers, the CBO ignores state and local taxes $1.8T last year. If that measure incorporated those taxes, income would be about 15% lower over recent decades.

State and local taxes are regressive: lower-income households pay a higher tax rate (in some states, wildly higher). So with a complete measure you’d see lower after-tax incomes especially among those with…lower incomes.

The CBO measure does of course include federal taxes (which are progressive, especially in lower tiers), and it does include transfers from the states. It seems very odd to exclude taxes paid to the states.

 

 

Wealth and the National Accounts: Response to Matthew Klein

March 8th, 2018 Comments off

I’m both abashed and delighted that the truly stand-out econ writer Matthew Klein has offered wonderfully fulsome praise of one of my pieces, Why Economists Don’t Know How to Think about Wealth, and some very interesting discussion as well. Some responses here. Please excuse me if I repeat some of the points from the first article.

>His key point is that changes in net worth caused by asset prices fluctuations are just as important as standard measures of income and saving.

That’s important, but there are really three key points I’d really like to come through:

1. Wealth matters. Net worth and total assets. Those are absent from the Flow of Funds matrix, because it ignores: A. Nonfinancial assets — the (L)evels tables aren’t balance sheets — and B. Holding gains. Yes: changes in wealth measures also matter a lot (see below), and they’re of course also invisible and largely unexplained in the FFA matrix.

2. Accounting statements are economic models, based on deeply-embedded assumptions that are largely invisible except to accounting-theory adepts. The FFAs’ closed-loop construct depicts, promulgates, and validates the whole factors-of-production worldview (each according to its contribution…) which underpins travesties like Greg Mankiw’s “just deserts” claptrap. See in particular national-accounting-sage Robert Hall’s discussion of the accounts’ implicit “zero-rent economy.”

3. The dumpster fire (@noahpinion) of terminology that economists rely on to communicate — and really to think (together) — is (or should be) rigorously defined based on accounting identities. But that requires deeply understanding #2 above: what those measures and identities mean. To repeat: accounting classes don’t even count as electives for econ degrees at Harvard and U Chicago. (Really, the situation is more like the sub-basement of Fukushima Three. One word: “saving.” Many economists vaguely think that more individual saving results in some larger stock of monetary “savings.” Sheesh.)

>Roth’s presentation…is not new. Alan Greenspan wrote about these ideas back in the 1950s

Johnny-come-lately. Haig-Simons, who I refer to repeatedly, bruited their comprehensive accounting definition of income in the 20s and 30s. (Dead-cat bounce. I’m thinking the rich hate this idea. The political implications of fully revealing wealth and wealth accumulation could be…revolutionary?)

Wikipedia informs me that a German legal scholar named Georg von Schanz was on it somewhat earlier. (Modern Money Network, are you listening?)

>Roth ends up downplaying the importance of the liability side of the balance sheet.

Perhaps. At least three reasons:

1.The FFA matrix does an excellent job of accounting for (inevitably “financial”) liabilities. Nothing to complain about there. That’s where the IMAs get most or all of their liability accounting from. And economists have made very good use of that data.

2. Looking at households as the “buck stops here” balance sheet, liabilities are surprisingly (to me) small percentage of assets. Yes, a long secular trend with one big spike (not much for sample size…). Click for Fred.

3. For the economic import of (change in) assets versus liabilites, I’ll just point to one economic factoid which I find darned significant:

Post-1960s (post Bretton-Woods?), every time you see year-over-year decline in real household net worth or assets, you’re just into or about to be in a recession. (There are two bare false positives, just after the ’99 and ’08-’09 market dives; they look to me like blowback, residual turbulence, if that suffices as cogent economic terminology…)

Notice: The two measures are equally predictive; including liabilities (in net worth) adds no predictive power. These two measures move closely together. This especially makes sense for declines; asset markets dive, while liabilities are much more sticky downward. (They tend to climb together over time.)

So yeah, I’m with Roger Farmer about stock-market declines “Granger-causing” recessions, though 1. I cringe at that faux-statistical usage, and 2. at least for the GFC, I’d say the real-estate crash caused the stock-market crash. In any case, overall, it sure looks to me like wealth (asset) declines (proximate?) cause recessions. I’d say high debt levels amplify the effects when that does happen.

So yeah of course, net worth is not some kind of tell-all economic measure. You gotta deconstruct it. But it’s a bloody-well-necessary measure that economists (and national accountants) have largely ignored, like forever.

>defining “saving” as the “change in net worth”, as Roth does, is that this obscures as much as it clarifies

Note that I use a particular term for that, Comprehensive Saving, while leaving what I call Primary Saving (largely) intact. (The IMAs’ measure of primary income hence saving is after “Uses of property income (interest paid)” are deducted, which seems crazy (and politically pernicious) to me. I’ve moved it from it’s sort-of-hidden position in Sources, to appear explicitly in Uses, so my Primary Income and Primary Saving measures are a bit higher than the IMAs’.)

hh-sources-uses

Now it’s true that I relegate Primary Saving to an addendum, favoring Comprehensive Saving as the more important measure. This imparts how deeply rhetorical all accounting presentations are. But I think this privileging makes sense give the relative magnitudes we see. (Net Lending + Capital Formation here is traditional primary “saving”).

This is J.W. Mason’s recent graph, which I was delighted to see, showing the same measures (the IMAs’ ∆NW decomposition) that I’ve also graphed in the past.

>asset price appreciation generally leads to proportionally tiny increases in spending.

The linked study, like others of its kind, in my opinion gives too much weight to marginal propensities, based on one-time changes. So I question how good a guide they are to determining economic reaction functions. This is too much of a subject to address here, so I’ll only suggest that more straightforward, long-term propensity-to-consume measures by wealth/income classes might be more illuminating. Also velocity of wealth. (I’m a monetarist! As long as “money” means “wealth”…)

Whether or not you consider these figures illuminating, they are the kind of figures you can derive from a complete accounting construct that tallies total assets and net worth. Note that both are also dependent on data from Zucman/Saez/Pikkety’s magisterial Distributional National Accounts (DINAs). What I’d really like to see is Distributional IMAs (DIMAs). I corresponded with Gabriel Zucman on this a bit; he’s given me permission to quote him:

You are correct that there can be pure asset valuation effects in the long run (i.e., capital gains in excess of those mechanically caused by retained earnings). These pure valuation effects are not part of national income, hence not included in our measure of income and our distributional series. However, they could be included down the road by computing income as delta wealth + consumption (i.e., Haig-Simon income). We have wealth in our database so we’re not far from being able to do this.

To conclude on a decidedly accounting-dweeby note, here’s the key accounting identity for Haig-Simons (which I call Comprehensive) Income:

∆ Net Worth + Consumption = Primary (traditional) Income + Holding Gains (+ Other Changes in Volume)

Subtract taxes, and you’ve got Comprehensive Disposable Income. Subtract Consumption, and you’ve got Comprehensive Saving. Equals…change in Net Worth.

Accounting identi-tists, have fun!

(For those who prefer this kind of thing in slide-deck form, here’s a PDF of my presentation from the recent Modern Monetary Theory conference.)

The Mysterious Stock of “Loanable Funds”

October 26th, 2017 5 comments

This Twitter thread between Ryan Cooper and Joe Wiesenthal prompts me to do full-spectrum explanation of some thinking that I’ve been meaning to get to for a while. (Thanks for the inspiration.)

What follows is very unorthodox thinking even among the heterodox. It’s well beyond and different from MMT’s utterly convincing takedowns of “loanable funds” notions, for instance.

So take it as the ravings of an internet econocrank, if you will. But here it is FWIW.

First off, nobody can ever point to these so-called “loanable funds,” or mostly even say if they’re talking about a stock measure or a flow measure. It’s one of those unmeasurable, actually dimensionless, concepts that econs are so fond of, like demand and supply (desire and willingness).

It’s often used synonymously with “savings” with an “s”, at least implying some stock. (The national accounts use the term “saving”; there is no stock measure labeled “savings” therein.)

The only measurable stock of “loanable savings” I can think of is wealth: balance-sheet assets, or net worth. (The national accounts, by the way, only started tallying those comprehensively a decade ago.) Household-sector assets or net worth are probably the best measures of this, because they incorporate the value, telescoped in, of the household sector’s wholly-owned subsidiary, firms.

On the idea that household saving “funds” lending and investment by providing more loanable funds: individual saving increases your assets/net worth. It doesn’t increase our assets/net worth. Your savings are just held in your account instead of — if you spend — someone else’s account. They can be intermediated into investment from either account.

Likewise “saving” by firms — retaining earnings instead of distributing them to shareholders as dividends. In either case those funds are in accounts that are intermediated (and re-re-re-“hypothecated”…) by the financial system. If a firm uses those funds for actual, real investment, that’s…spending! (“Investment spending” as opposed to “consumption spending” — the two sum to GDP.)

Individual saving doesn’t create any extra “loanable funds” — stock or flow. When you eat less corn (save), we have more corn. When you spend less money, we have no more money. Spending — even “consumption spending” — is not consumption. Transferring an asset (spending) doesn’t “consume” that asset, make it disappear. This error of composition pervades economic thinking. Think: Krugman/Eggertsson’s whole “patient savers”/”impatient borrowers” construct. Individual saving doesn’t create collective savings.

Individual saving is actually a non-flow, an accounting residual of two actual transaction flows — income minus expenditures. (Though it is a flow measure as opposed to a stock measure — it’s measured over a period, not at an instant.)

Sectoral saving actually consists of two (or three) things, as revealed by the accounting derivation in the Integrated Macroeconomic Accounts (IMAs): capital formation + net lending/borrowing + capital transfers. For households, capital transfers is mostly estate taxes; it’s a small number. Capital formation is the creation of actual new (long-lived) stuff within a sector, whose value is posted to the asset side of balance sheets. Net lending/borrowing is the accumulation of claims against other sectors’ balance-sheet assets.

These two are utterly distinct and different economic mechanisms, crammed together into a single accounting measure labeled “saving.” It’s no surprise that nobody understands saving. In the grand scheme of wealth accumulation, these two saving mechanisms are pretty small change. Here, the derivation of change in private-sector net worth, again from the IMAs.

Real investment in the creation of newly produced, long-lived (productive) stuff — capital formation, investment spending — is overwhelmingly “funded” by churn within wealthholders’ $100-trillionish portfolio. Sell treasuries, buy into an IPO or a real-estate development deal. A zillion et ceteras. The “flow” of saving is small by comparison.

At the macro-est level, that “investment impulse” is driven by collective portfolio preferences, the markets’ risk/reward/yield calculations. (“Jesse Livermore” delivered the Aha for me on this; his measure of equities as a share of outstanding financial assets on Fred here. Pace market monetarists, it sure doesn’t look the market is crowding into “safe assets.”)

Swapping checking-account deposits for Apple shares is not investment in the economic sense of paying people (spending) to create new long-lived (productive) stuff. Collectively, it’s just portfolio allocation. If people are (confidently) optimistic, they bid up risk assets, expanding the total portfolio (wealth) pie.

Monetarists’ obsession with financial instruments like checking and money-market deposits whose prices are institutionally pegged to the unit of account (“cash” — only about 5% of household assets) blinds them to that collective portfolio adjustment mechanism. If government deficit-spends $100 billion in cash onto household balance sheets, the market is overweight cash (if portfolio preferences are unchanged). It re-allocates by competitively buying variable-priced instruments (bonds, stocks, land titles), driving up their prices. There’s more cash and more other assets.

Market asset pricing doesn’t — can’t — influence the total stock of fixed-price, UofA-pegged instruments. Their prices are fixed! (That’s the thing that makes cash, cash.) They can only be created by bank lending and government deficit spending (see next para). Those instruments are largely just a pool of intermediates in portfolio churn, in any case: sell treasuries, get cash; swap cash for IPO shares. As long as there are enough “cash” instruments for transactions to clear (and the peg holds), you’re cool. The transaction system doesn’t bind up. Collective portfolio reallocation is almost all via price changes in, duh, variable-priced instruments.

There are three economic mechanisms that create new private-sector balance-sheet assets ab nihilo: government deficit spending, bank lending, and asset-market price runups/capital gains. (Bank lending creates simultaneous private-sector liabilities, so it doesn’t create new private-sector net worth; the other two do.) These mechanisms create new “loanable funds” a.k.a. wealth. (Fed asset purchases with newly-“printed” “money” — reserves — create no new private sector assets or net worth — they just swap reserves for bonds, changing the private-sector portfolio mix; the market then adjusts its portfolio allocation in response, as described above.)

Of these three ab novo asset-creation mechanisms, capital gains utterly dominates:

Especially since the 80s/90s, as revealed here in corporate equity performance (this in inflation-adjusted dollars):

Think Amazon: essentially zero profits, saving, change in book value over two decades, while delivering half a trillion dollars onto household balance sheets.

This (plus similar or larger cap gains effects in real-estate valuation) gives rise to some very perplexing trends — perplexing for me at least:

This depicts what Sri Thiruvadanthai calls a “structural break,” some kind of seeming phase shift in how markets are working, or how we perceive and report on those markets, in accounting terms. Or both. Earnings and P/E, for instance, are becoming increasingly problematic as predictors of total return. What’s the capitalized present value of future cash flows from a firm that…will never deliver any cash flows/”profits”?

The asset markets seem to think that all our stuff is worth a lot more than it sold for in the new-goods markets.* One of those markets is getting prices “wrong.” Either this is the mother of all multi-decadal asset bubbles, or we’ve been vastly understating GDP for decades. (Or something else, maybe accounting, measurement-related.)

The creation of real, long-lived goods (“capital”) is the ultimate driver of wealth accumulation. But the economic mechanisms of wealth creation and accumulation — creating new claims on all our goods and future production (claims whose market-priced value is tallied up as balance-sheet assets) — are something else entirely.

In any case I agree with Joe: within what I think is a great article, Ryan’s rather rote recitation of standard-issue “loanable funds” truisms merits some careful rethinking.

===============

* The national accounts don’t even come close to tallying all that “capital,” by the way, or the investment in creating it. Consider the massive, lasting productive value, for instance, of widespread knowledge, skills, and abilities imparted through education and training and deployed over lifetimes, or broadly experienced health and well-being delivered through health-care spending. Those expenditures aren’t tallied as “investment” (spending on long-lived goods), nor are the resulting “assets” depreciated as humans age, sicken, and die.

When Did Hillary Lose the Election? In 1964.

January 13th, 2017 Comments off

The half-century story of Democrats’ abdication and decline

By Steve Roth. Publisher, Evonomics

On January 1, 1964, John F. Kennedy posthumously initiated the half-century decline of the Democratic Party, beginning its descent into this moment’s dark and backward abysm of slime. His massive tax cuts for the rich, implemented in ’64 and ’65, were the turning point and beginning of Democrats’ five-decade abandonment of its longtime winning formula: full-throated, unabashed, progressive economic populism. It was the signal moment when Democrats began to abandon the working and middle class. The working and middle class, betrayed and feeling betrayed, have now returned the favor.

Unapologetic progressive economic populism — starting really with Teddy Roosevelt’s slash-and-burn trustbusting, and turned up full-throttle in his namesake’s New Deal — had given Democrats three decades of electoral success. FDR lost two states and eight electoral votes in 1936. He got 523 out of 531. Over four campaigns, he never got less that 432. Eisenhower got a couple of terms as a very moderate Republican, really a progressive, but Democrats’ dominance of Congress and state governments seemed eternal.

Because: that economic populism also delivered success for America. The New Deal, combined with the government deficit spending of World War II, resulted in the greatest burst of widespread growth, progress, prosperity, and individual economic freedom in American history — before or since.

James Carville was certainly right: “It’s the economy, stupid.”

Democrats’ remaining progressivism under Johnson — civil-rights legislation, Medicare and Medicaid, and the wholesale movement of liberated women into the workforce — eventually pushed a hot middle-out economy into the demand-driven inflation of the 70s. That torrid growth brought government debt down from 120% of GDP in 1947, to 35% in 1980. (You know what happened after that.)

But even amidst that burst of growth and sustainable government finance, Democrats were abandoning the very source of their economic and electoral success. Kennedy’s top-tier tax cuts were a preemptive, voluntary abdication to trickle-down theory, before “trickle-down” even existed. When Reagan turned that dial to eleven, he was only occupying ideological ground that Democrats had ceded and abandoned to the enemy, long before. It was an epochal own-goal of historic proportions.

Democrats have been kicking the economic ball into their own net ever since. The obvious solution to the 70s inflation was to raise taxes, reducing government deficit spending, to drain off excess demand from a too-hot economy. Instead they acceded to the banker-industrial complex and the diktats of childish monetarism, again conceding the win to an economic belief system that is egregiously self-serving for the rich, and anathema to Democratic progressive economic populism.

That’s when the enthusiastic, progressive Democratic base stopped turning out in force. (Exception: Obama. For other reasons.) Progressive baby boomers have spent their whole lives voting against Republicans and their swingeing, destructive economic policies, not for inspiring Democrats. Think about the Democratic presidential candidates since 1964. McGovern was a true social progressive, but really a one-issue anti-war candidate. Bill Clinton did okay, within the confines of the post-Reagan economic belief system, which he never seriously challenged as FDR did. Obama didn’t either, in rhetoric or practice. His administration’s failure to prosecute a single prominent bankster is arguably the best single explanation for Hillary’s electoral meltdown.

Can you name one full-throated economic progressive Democratic candidate in the past half century? I’m not even asking for fire-eating. Here’s some help: Humphrey. Carter. Mondale. Dukakis. Gore. Kerry. (Are you still awake?) Aside from Obama, no Democratic candidates had the Democratic base flocking to the polls. (Compare: Republicans and their rabid Tea-Party base.) Add Hillary to that rather stultifying list.

Starting in the 60s, Democratic candidates stopped delivering an inspiring economic message. But the real failure was substantive. In their sellout to the enrich-the-rich supply-siders, Democrats abandoned the working and middle class, and the party’s winning legacy of widespread prosperity. The Democratic party elite bought into and helped promulgate an economic belief system (the “Washington Consensus”) in which distribution and concentration of wealth and income not only don’t matter, they can’t matter. The quite predicable results are upon us — decades of working-class wage stagnation, and wealth concentrations that are as high or higher than any period in modern world history.

It’s no wonder the Democratic base feels betrayed. They were betrayed.

Still: despite those decades of weak-kneed collaborationism, Democrats have obviously remained more economically progressive than Republicans. Clinton and Obama managed to raise taxes some, and Obama gave us Obamacare. And the economy has shown the results. Democratic presidents have delivered growth, progress, widespread prosperity, individual economic security, and true personal economic “freedom” that Republicans — the self-proclaimed “party of growth” — can only imagine in their fever dreams.

By almost any economic measure — GDP or income growth, job creation, stock-market runups, deficit reduction, people in poverty…choose your measure — Democrats’ economic performance has unfailingly beggared what Republicans have offered up. That is true for any multi-decade period you choose to look at since World War II, or over the last century for that matter. It’s true at the national, state, and local levels. Republicans constantly promise prosperity and growth. Democrats consistently deliver it (at least compared to Republicans). They’ve kicked Republicans’ economic asses, decade after decade.

Bigger pie? Raise all boats? Talk to the Democrats.

But nobody seems to know that. Did you? And Democrats never even say it — much less repeat it endlessly over decades, shouting it from the rooftops to stir up the base as Republicans would. The old saw is apparently right: “A liberal is someone who won’t take their own side in an argument.”

Perhaps that failure is a result of progressives’ fussy squeamishness about people getting rich. They don’t really like that word. But voters do. A third of Americans’ think they’ll be rich someday. Fifty percent of 18–29-year-olds do. (About 5% of Americans actually are rich, with more than couple of million dollars in net worth.) That squeamishness explains the persistent “anti-capitalist” strain of American liberalism, which is such an electoral disaster at the voting booth.

Democrats have much to atone for in their failure to hold the line on progressive economic principles, their failure to wholeheartedly champion and defend the working and middle classes, their sellout and abdication to the bankster class. But they also have much to crow about. Instead, though, they’ve stood by for decades while Republicans have falsely claimed the “party of growth” moniker, contrary to all historical evidence.

It is the economy, stupid. Voters, Democratic and Republican alike, will tell you in surveys about all the things they care about. But when they walk into the voting booth, they’re going to choose the person who they think will make them, their families, and those around them more prosperous, comfortable, and economically secure. They vote for candidates who they think will deliver better lives — starting with people having enough money to pay the bills. The Republicans realized that forty-plus years ago, and they’ve been winning based on that ever since. “I’ll cut your taxes and deliver economic growth.” Full stop, drop the mic.

Trump showed us that fire-breathing populism wins elections. While his brimstone reeked of many things, economic populism was at the core of his rhetorical fur ball. Even as he prepared to betray the working class at unheard-of levels, he channeled that betrayal straight onto his vote tally. “Audacity”? Obama should grab a stool and go to school.

And Bernie showed us the same thing. His campaign was unprecedented in American political history, funding a full-boat national campaign and outspending Hillary by 25 million dollars, almost completely with small donations. His message of economic populism brought in more than 200 million dollars in donations from 2.5 million people. And he turned out the enthusiastic base, in droves. Presumably he would have done so on election day, as well. Are Democratic political operatives finally beginning to take note?

There is a path out of the wilderness for Democrats. It’s the path they’ve trod before, with huge success. It involves (for once) coalescing around a core message that resonates with all Americans, repeated endlessly over years and decades. “Equality” and “opportunity,” important as they are, are weak beer on the campaign trail. Most Americans change the channel.  Tell them what they want to hear:

“We make America rich.”

The double meaning is fully intended.