Tuesday, May 22, 2012
this is a lord high practicers' attempt to measure
the impact of exports on wage distribution
it has a lapidary finding
inequality rise as exports open up peaks and falls back
as more and more firms join the export game
basically "as is" this appears to be completely useless
after all what about import invasions ?
imports ... more often then not ... rise with exports
open up an economy and much changes
this study really amounts to building a few rooms on one wing
and then trying to play the role of a complete mansion
what seems important here to me is the explicit modeling of heterogenious firms
whats missing besides the other side of the exchange ie import impact
is the role of essentially non patriotic multi national firms
in the development of modern globalization
those different forces ?
effective demand for newly produced output
the wage share in total net income depends on demand for laboring hours
the last time we saw this share improve bill clinton was not having sexual relations
and alan the green was allowing UE to fall below the consensus estimated NAIRU
(the lowest non inflation accelerating rate of unemployment )
ie if the system goes below that taboo line
and the rate of UE gets low enough
job market forces may touch off
a speed up in wage rate gains
------------- yes the wage push spiral gets introduced here but we haven't had one of those since juimy carter's peanut smile turned off a nation
today our system is too open to trigger a spiral with profiteers fleeing rising wages
and squoozen margins by lifting prices on and on up and up
but all this is a diffrent post ...no ? -----
at any rate
yes normal FED practice since the reagan morning in amerika
was and is :
cut back on usury fueled effective demand (aka the punch bowl)
and presto chango
the fed can induce a cooling off in job markets
and a consequent rapid dampening of any building
wage gain wave
unions prolly benefit the class share
mostly by political action to enforce highest possible levels of employment
of course political strikes are often more effective then public demonstrations
okay strenghening the so called safety net or social transfer system helps too
in as much as unemployment or non employment leaves a household with enough "income" to hold out for a decent offer and or simply sit out the slow down instead of clawing at the warehouse gates
" The effect of combination on the part of a group of workers is to protect their relative real wage. The general level of real wages depends on the other forces of the economic system"
now interestingly this same clintonian-greenspan miracle interval
saw the relative wage share in total job compensation decline
here is where unions for our tens of millions of unorganized service and commercial workers comes in !
service and commercial unions could raise the moderate wage earners share of total employment income
Sunday, May 20, 2012
inequality and ...
the middle income class makes it happen
this effort covers lots of ground....read it all ! (~50 pages)
"The American Middle Class, Income Inequality,
and the Strength of Our Economy"
Heather Boushey, Adam Hersh
Tuesday, May 15, 2012
The Economic History of 2008
We have been searching through the economic literature for articles that support our opinion regarding the causative role of income inequality in the crash of 2008, and we have been encouraged by finding views similar to ours in the writings of analysts like Robert Reich. A few days ago we came across a key paper just about the same time as the New York Times apparently discovered it. (The Times commented favorably on the paper in a leading article on May 4, under the heading Inequality, Debt and the Financial Crisis.)
What is curious is that the paper, Inequality, Leverage and Crises, an International Monetary Fund Working Paper, WP/10/268, by Michael Kumhof and Romain Ranciere, was published more than two years ago, in November 2010. In our view, Kumhof and Ranciere have provided the most convincing account of the crash of 2008 that we have read, but their work has not, as far as we are aware, received the publicity it deserves.
The Kumhof and Ranciere paper is not an easy read and for non-economists we would recommend a shorter version titled Leveraging Inequality by the same authors in the IMF publication Finance and Development, December 2010. http://www.imf.org/external/pubs/ft/fandd/2010/12/Kumhof.htm
The chain of causation in the crash of 2008 (and that of 1929) – the "mechanism" by which increasing inequality leads to a financial crash -- will be familiar to readers of this blog, and is contained in our booklet, accessible from the blog's Home Page, How to Unblock the Economy by Reducing Inequality.
The Kumhof and Rancier version of the financial history of the 2008 crash goes something like this:
1. Over several decades, the politics of wage setting and income determination favor a shift in the share of income to the top 5% of income earners and away from the bottom 95%, whose share falls from 78% in 1983 to 66% in 2007.
2. The bottom 95%, trying to maintain a middle class standard of living, borrow money from the top 5%, and become increasingly indebted. The figures they cite are striking: the debt to income ratio of the bottom 95% rises from 60% in 1983 to 140% in 2007.
3. The magnitude of the financial intermediation involved – bringing rich lenders and middle- and lower-income borrowers together – results in a doubling of the share of GDP going to the financial sector – from about 4% to about 8%.
4. Because of the high level of indebtedness the whole economy becomes increasingly vulnerable to financial crises, although the exact nature, timing and playing out of the likely crisis is uncertain. In 2008 it manifested itself in the form of a subprime mortgage crisis that spread across the financial sector and was only stopped by the dramatic intervention of the U.S. Federal Reserve and Treasury.
Some Remarkable Features of this Analysis
The reason why the IMF Staff Working Paper seems to us such a convincing account of the financial crisis of 2008 is, for one thing, that it breaks ranks with the majority of economists who regard class as a taboo topic. The paper breaks this taboo by analyzing consumers or households in two classes, the top 5% and the bottom 95%. In one stroke the authors have opened up a whole different insight into the way the economy has been working. It allows them to recognize that high-income households have a low propensity to consume -- i.e., a high propensity to save -- while the rest of us tend to consume most or all of our income, or even go into debt so that we can consume more than we earn.
Likewise, the authors understand the role of the financial sector more clearly than most economists do. They knock it off its high pedestal as the "maker of perfect markets" and treat it as part of the hurly-burly of unstable macro-economic forces. Forget all the hogwash about "risk management," they see that when the chips are down the financial sector can contribute to instability rather than controlling it.
In this regard, the IMF staff analysis validates the remark of William McChesney Martin, the Federal Reserve chairman during the 1950s and 1960s, that "the job of the Fed is to take away the punch bowl just as the party gets going." His image of the financial sector as a bunch of potentially intoxicated party-goers turns out to be far more realistic that the view espoused by Alan Greenspan, the Fed chairman in the early 2000s, who continued to believe that his wards were sober financiers, even as the level of intoxication of revelers in the mortgage market was becoming increasingly dangerous to the whole economy.
The recent woes of JPMorgan Chase, one of the two most admired companies on Wall Street along with Goldman Sachs, show that sober judgment has not yet returned to Wall Street. A JPMorgan financial subsidiary designed to hedge risks morphed into a profit center that took exposed positions on bond prices. It has lost more than $2 billion since the beginning of April, is expected to lose another $2 billion in the next couple of months, and is apparently likely to have billions of dollars of exposed positions after that.
A Limitation of the IMF Staff Analysis
The Kumhof and Ranciere scenario should be read as a special case rather than a general one. They are trying to describe events that actually occurred -- the two great financial crashes experienced by the United States in the past 100 years. But history is not a matter of predetermined or inevitable events. in a counter-factual or "what-if" historical scenario, events could have taken a different turn in the years leading up to 2008, resulting not in a financial crisis but in a protracted period of economic stagnation. For example, the Federal Reserve could have slowed the growth of mortgage lending in the early 2000s by such measures as tightening monetary policy, enforcing mortgage standards, prohibiting liar loans, limiting the amount of financing to say 80% of the value of a dwelling, and so forth.
With measures such as these, unpopular though they would have been with almost everybody, liberal or conservative, at the time, the mortgage bubble might not have come about, and a financial crisis might have been averted, at least for the time being. But the price of reduced extension of credit would have been slower economic growth during the early 2000s, and possibly a recession. The economic outcome would probably have better than it actually was, but it would not have been great.
The Outlook Today:
Will Indebtedness and Inequality Lead to Another Financial Crisis?
If we expand the analysis of the consequences of extreme inequality, and we acknowledge that it does not necessarily lead to a crisis, it is quite possible that it can lead simply to sluggish consumer demand and resulting economic under-performance. This could be the road we are on today.
The problem is that the financial crisis has not resolved the issues of middle- and low-income indebtedness or the continuing extreme inequality in the distribution of income. The recent statistics suggest that the lion's share of the recovery of incomes since 2008 is going to the rich. The corporate sector (both Wall Street and Main Street) and wealthy individuals are sitting on literally trillions of dollars available for investment (if only there were demand for the products of that investment). ) Once again, as their incomes build up, they will put pressure on the financial sector to find investment outlets for their cash. Tempting outlets will suggest themselves. If the pressure gets too great, bubbles will form.
But wealthy investors and the financial sector are well aware that bubbles can burst, sooner or later. In the years leading up to 2008, it seems the memory of the dot-com bust of 2000 was in the process of being forgotten by investors and the Fed. Or put it this way: in bullish times such as those, investors are willing to believe rosy investment stories if they could semi-plausibly be true, and regulators are reluctant to intervene. The burden is on the skeptics to prove that the rosy scenarios are not true.
However, when the crisis of 2008 developed into such a shocking financial calamity, maybe the burden of proof shifted (except, apparently, at JPMorgan Chase's "hedging" unit). If the investment stories being touted by the financial sector seem unrealistically optimistic, investors may find the proof lacking and just turn them down. Result: less investment and slower economic growth rather than a bubble.
Meanwhile, the high level of household debt also continues to slow down the economic recovery. We could continue to get growth, but growth of say 2% a year, too slow to re-absorb the unemployed into the work force. This might be tolerable from the point of view of business (and the wealthy) if steady growth leads to increased profits without increasing inflation and interest rates. But things would not be as good as they could be, because this scenario would fall far short of a boom in investment projects, profits and stock prices. And things would be bad for labor, given that the rate of unemployment would stay high, and labor's bargaining power would be weak.
Temporary increases of consumer borrowing and spending could mask the underlying weakness of the economy, as they did in the years before 2008, but they will not put the economy on a sustainable growth path, they will merely create the preconditions of another financial crisis.
In Kumhof and Ranciere's view, the excessive amount of debt of the bottom 95% of households remains the principal impediment to economic recovery. There are two ways to reduce the ratio of household debt to income, the one being to write down the debt. If large-scale debt defaults have become inevitable in the ongoing sluggish economy, what they call "orderly debt reduction" becomes a desirable option.
The other policy option is "a restoration of workers' earnings," i.e., a reversal of the shift of income from workers to employers and other high-income earners. We note that this is clearly the best long-term policy strategy. In any event, a rebalancing of the economy would reduce vulnerability to financial crisis.
In our paper, we dealt with a range of policy options. Without going into them here, we note that they try to address the difficulty of increasing take-home wages in an era of strong international competition, and shifting taxes off of the backs of labor.
On this last point – shifting taxes from labor – Kumhof and Ranciere include a thoughtful proposal regarding which taxes could be increased ,without being self-defeating or causing adverse side-effects. They propose "a switch…to taxes on economic rents, including on land, natural resources, and financial sector rents." This suggestion warrants extensive research.
Thanks to Kumhof and Ranciere, the analysis of extreme inequality in the U.S. and the macroeconomic harm it causes has taken several steps forward.
Wednesday, May 9, 2012
Sorry to say, James K. Galbraith's book "Inequality and Instability" (New York: Oxford University Press, 2012) does not advance our understanding of the 2008 financial crisis and subsequent Great Recession. This is, firstly, because it is mostly a review and update of economic analyses by the economist Simon Kuznets and many others, aimed at explaining why inequality increases or decreases in various countries over different periods of time. Note that inequality is the "dependent variable" in this analysis. It is the passive and inevitable result of active historical forces such as industrialization.
Our approach is the opposite: we regard extreme inequality in the U.S. today as largely a political and social artifact, an "independent variable" that has itself caused the financial crisis and the continuing sluggish state of the economy. Taking this active approach, we believe that extreme inequality can be reduced by policy measures, and that this will make the economy stronger and steadier.
Perhaps Galbraith's book lacks relevance because of its timing. While its publication date is given as 2012, it clearly represents much older research, and when it finally comes to Chapter 13: Economic Inequality and the World Crisis, it is apparent that fatigue has set in. Galbraith starts the chapter with a quote in French to the effect that "this letter is long and it's time to end it."
And passivity is still emphasized in Chapter 13: "(T)he dominant forces affecting the distribution of pay (and therefore incomes) worldwide are systematic and macroeconomic…forces impinging on individual countries and perhaps modified by the institutions those countries have and the policies they apply—but nevertheless forces that originate beyond their control." We prefer to accentuate the positive: without a "perhaps," we'd say that wages are all about institutions and policies.
Of course, we do not deny that it will be no mean feat to, for example, put in place institutions and policies to increase wages in this country, but we believe it can be done. And, equally importantly, higher wages will be economically feasible, and not self-defeating, despite competition by low-wage foreign workers, and so on. Simply stated, if worker productivity and per-capita GDP have been rising for decades (which they have), wages should be able to rise too (which they haven't).
The irrelevance of Galbraith's book as a guide to current U.S. economic policy is in marked contrast to the timeliness of work done by the staff of the International Monetary Fund, in particular "Inequality, Leverage and Crises" by Michael Kumhof and Romain Ranciere, IMF Working Paper, November 2010, which will be the subject of a future post.
Monday, May 7, 2012
Here is Paine from Market Earth, dissecting some recent research from EPI President Lawrence Mishel:
We need a nice break out of the drivers behind the growing compensation/productivity wedge
ya wage earners took a serious rip these past 40 years
but the black hats have brandished their off sets
let us look closer
cold war competition 48-68 may well have chastened corporate maximos
so labor's productivity and compensation traveled together
up and up with no lasting change in the size of the C/P wedge
Apparently the defeat of the soviet competition was so obvious to most
leading guardian class elements by '72.....the 25 year social contract
between capital and labor was balled up and tossed in the trash can
Anyway, ever since McGovern took the gas pipe in november '72
its been a bad scene for wage spirits
Some clips from Mishel and comments:
"During the 1973 to 2011 period, labor productivity rose 80.4 percent but ....81 to 11 !!!!!!...fun fact :
real median hourly compensation (including all wages and benefits) increased just 10.7 percent"
"...If the real median hourly compensation had grown at the same rate as labor productivity over the period"average "compensation" would now be .......
"$32.61" instead of the actual " $20.01."
"... the relative importance of three wedges
driving the median compensation-productivity gap "
"1) rising compensation inequality"Recall those sky rocketing CEO incomes were compensation too.
The distribution of total compensation has shifted heroically upward
in particular toward the top 1% of earners :
"2) the shift from labor to capital income"Yup. From wages to profits, excuse me...from employee earnings to corporate earnings.
"3) divergence of consumer and output prices."*(This requires a note, see * below, where the issue of depreciation is also marked off. **)
Now the estimated real live numbers are worth a careful munch over.
"The most important factor in the 2000-11 era" :
"the decline in labor’s share of income "
"In contrast, the period of sharply rising productivity and falling unemployment in the late 1990s saw a rise in labor’s share of income."
the late 90's saw a dramatic shift between
the top earners compensation and "the rest of us".
only during this period....
( if we recall the rate of unemployment was allowed to fall thru the taboo line
during this period...obviously we can "conjecture" a tight labor market
is good for wage share )
* "The third factor, the fact that output prices (covering investment, exports, imports, government as well as consumption) grew more slowly than the prices of consumer purchases — sometimes labeled a deterioration in “labor’s terms of trade” — was evident throughout most of the last three decades ..."
of existing production facilities
( depreciation of plant soft ware and equipment) grew also during this period. often attributed to changes in composition of the durable elements of the production system ie bigger share of fast depreciation soft ware )
(n.b. depreciation is often augmented by stupid accounting tricks.
There is an incentive to reduce apparent earnings exposed to taxation.)
Saturday, May 5, 2012
It is one of the great "mysteries" most trained economists struggle to answer. Essentially, the issue is contained in this chart, which summarizes a tendency well known to economists:
Despite the fact that this divergence is well-known to establishment economists, it is usually explained only vaguely. In fact, many (if not most) economists assume - despite all empirical evidence to date - that it is a process which will reverse itself over time.
This difference is not trivial. Establishment economists continually warn of the futility of certain types of political intervention (and their "unintended consequences"), and maintain that until dis-equilibriums are allowed to "work themselves out" no intentional intervention is useful. Prominent among these "immutable realities" of the market are the wage share and the capital share.
Of course, the great irony is that where there can be shown to be large changes in these "immutable" proportions over time - and these changes can be linked to legal and structural changes - the changes themselves are usually defended as a "necessary adjustment period". See, for instance, the persistently high unemployment rate since the economic crisis of 2008...
It is past time to dig beneath these foolish shibboleths of professional economics. Beginning to understand the dynamics of such a large aggregate change as the one described in the chart above requires first of all, understanding its component parts. Do they move in harmony, or a contradictory fashion?
To begin this needed process, we will be inviting a guest blogger from the inestimable Market Earth to examine some recent research which sheds some needed light on this little-understood dynamic. Look for his post soon.