The budget battles

[mike777]

First of all thanks to Winston for shifting the conversation to this subject.\

 

 

At this point the discussion seems to remind me of my post by Roll. It just seems to be framed a bit different.

 

 

First, human capital values declined precipitously

from mid-2007 through 2008 because anticipated

growth rates in labor income declined. This

value reduction was not observed (and could not

have been). If the anticipated growth rate in labor

income is relatively close to the discount rate, even

a small decrease in anticipated growth can have a

large impact on the present value of human capital

 

 

 

http://www.cfapubs.org/doi/pdf/10.2469/faj.v67.n2.3

 

----

 

 

 

 

1. The valuation of human capital is irrational, as

the stock market is sometimes alleged to be;

there is no underlying real cause but simply a

psychosomatic malady.

2. Human capital values fell because the anticipated

growth rate in labor income declined

(and it should have declined).

There is little proof, but there are plenty of

reasons to suspect that the second possibility is

true. If it is correct, the markets actually got it right

from the very beginning!1

Markets are forward looking, and in 2007,

global market participants began to notice

[Winstonm]

I actually think this subset discussion is on point with the thread: to know what and how to cut and who or what to raise we have no clue as to how to accomplish anything worthwhile going forward.

 

Ken,

 

I think this may appeal to your mathematical tendencies if you care to look: it is the present discussion in charts and graphs.

http://www.bls.gov/opub/mlr/2011/01/art3full.pdf

[phil_20686]

That would be true on a nominal basis, but the figures (both productivity and wages) are inflation adjusted so the only real argument is which deflator to utilize, but even then the differences are not great.

 

This is exactly the point, rising commoditites cause the deflators to diverge. The discussion is complicated by the fact that other things can cause the deflators to diverge. This is essentially what happened in the last decade. Rising commodity prices meant that making things got more expensive. Rising productivity offset this since the productivity gains went to paying more for commoditites, so wages stayed flat. However, the CPI stayed flat as the price of goods was not rising.

 

However you look at it, america as a whole is paying more for the raw materials it consumes. That is coming out of somebodys paycheck somehow. The wage gap just demonstrates that it came out of the wages of people who make stuff, rather than, say, teachers (it also came out of returns of people who provide capital for industry, which also declined). That is not particularly surprising.

[Winstonm]

This is exactly the point, rising commoditites cause the deflators to diverge. The discussion is complicated by the fact that other things can cause the deflators to diverge. This is essentially what happened in the last decade. Rising commodity prices meant that making things got more expensive. Rising productivity offset this since the productivity gains went to paying more for commoditites, so wages stayed flat. However, the CPI stayed flat as the price of goods was not rising.

 

However you look at it, america as a whole is paying more for the raw materials it consumes. That is coming out of somebodys paycheck somehow. The wage gap just demonstrates that it came out of the wages of people who make stuff, rather than, say, teachers (it also came out of returns of people who provide capital for industry, which also declined). That is not particularly surprising.

 

Phil,

 

Let me reproduce a direct quotation from the BLS document to which I referred Ken. (my emphasis)

 

"Before 2009, the difference in growth rates of the CPI and the IPD - that is, the difference in inflation rates - explained most of the gap in each period. For 2000 to 2009, an unprecedented decline in labor share accounted for most of the gap."

[kenberg]

I just want to note that both Mike and Winston referenced the same BLS document. Miracles still happen!

 

Anyway, yes, it does appeal to my mathematical instincts.

[phil_20686]

Phil,

 

Let me reproduce a direct quotation from the BLS document to which I referred Ken. (my emphasis)

 

"Before 2009, the difference in growth rates of the CPI and the IPD - that is, the difference in inflation rates - explained most of the gap in each period. For 2000 to 2009, an unprecedented decline in labor share accounted for most of the gap."

 

Yes, but look at figure 11, and ask "where did it go". It seems to be your unstated implication that the money is going into the hands of the share holders/providers of finance. However, a look at the same graph tells you that it went almost entirely into "materials" - look at figure 11. Materials being the raw materials needed, which is driven by commodity prices.

 

Again, I point you to the wide angle view: America is paying a lot more for the raw materials for its manufacturing sector. This is coming out of someone's pay or profits. What the decline in labour share tells you is that increased productivity are being used to offset higher prices, rather than to raise wages, while the price of capital and services are broadly stable.

[phil_20686]

I just want to note that both Mike and Winston referenced the same BLS document. Miracles still happen!

 

Actually, I was the first person to link to that report, bottom of page 34. :)

[kenberg]

Actually, I was the first person to link to that report, bottom of page 34. :)

mea culpa

 

At any rate, I like the report.

[Winstonm]

Now that is not to say that every commodity has increased. Some have bucked the trend, its easy to get data just google commodities prices. Overall the index for industrial commodities has risen by a factor of 4 in ten years. To put this in perspective, 30 years ago at was at pretty much exactly the same value as ten years ago. No matter how you look at it, if the economy is paying more for goods, then people are worse off. This is the story of the wage/productivity gap for the last decade.

 

Phil,

 

I looked at the inflation data since 1980 and I cannot get those results to match your claims, especially when compared to the following from the BLS: (repeated for convenience - emphasis added)

 

"Before 2009, the difference in growth rates of the CPI and the IPD - that is, the difference in inflation rates - explained most of the gap in each period. For 2000 to 2009, an unprecedented decline in labor share accounted for most of the gap."

 

I looked at the average annual inflation rates for the past 3 decades and here is what I found:

 

1980-1989: 4.55

1990-1999: 3.01

2000-2009: 2.56

 

It would seem that if your claim that inflation is the cause of the increase in the wage-productivity gap then inflation should be rising over time rather than falling. Your idea also does not include the change in the U.S. from a manufacturing economy (where commodity prices matter more) to a service-based economy (where commodity pricing isn't as important). GDP - the basis of productivity - includes the value of all goods and services. At the same time, manufacturing, where commodity price increases would be felt most, has dropped as a share of the USA economy from 21% in 1980 to 18% in 1990, 16% in 2000 and 13% in 2008.

 

It is difficult to see how your claim holds, especially for 2000-2009 period, when inflation was lower than the two previous decades, the U.S. economy had become primarily service-based, but wages stagnated while the wage-productivity gap increased.

 

Add to that the record-setting profits of U.S. corporations during the bulk of the 2000s, and it is hard to see how your explanation is viable.

[mike777]

again Winston If I understand your main point...it seems basically the same as the theory put forth in the Roll article.

 

 

The article points out it does not have proof of the theory.

 

 

First, human capital values declined precipitously

from mid-2007 through 2008 because anticipated

growth rates in labor income declined. This

value reduction was not observed (and could not

have been). If the anticipated growth rate in labor

income is relatively close to the discount rate, even

a small decrease in anticipated growth can have a

large impact on the present value of human capital.

Second, real estate values declined either concurrently

or with a short lag.

Third, as soon as these poorly observable

assets became clearly less valuable, equities fell

because anticipated consumption and future corporate

earnings declined.

Validity?

If the preceding chronology has any validity, we

may have misdiagnosed the debt markets as the

underlying cause of the crisis rather than simply

the sneeze caused by the virus. But if the chronology

is valid, why did human capital fall in value and

thereby precipitate the cascade of declines in other

real assets? There are two possibilities that are

[mike777]

sidenote

 

 

really are rep cand saying they dont belive in evolution or "general" global warming?

 

 

asfar as glbl warming lets debate what we should do about it....not that it exists

 

 

as far as evolution...ok.....in general yes......very extreme....very....God....

 

 

-------------------

 

 

 

I worry about most of the rep cand.

[phil_20686]

Phil,

 

I looked at the inflation data since 1980 and I cannot get those results to match your claims, especially when compared to the following from the BLS: (repeated for convenience - emphasis added)

 

"Before 2009, the difference in growth rates of the CPI and the IPD - that is, the difference in inflation rates - explained most of the gap in each period. For 2000 to 2009, an unprecedented decline in labor share accounted for most of the gap."

 

You seem to be missing the point. Which is, that a decline in labour share cannot happen in a vacuum. Either some other costs are higher, or profits are higher. That productivity increase went somewhere. You are arguing the second case, that corporations are screwing fewer works for more work. I am arguing the first cast, that productivity increases went into higher costs.

 

The IPD is not a very good indicator of the cost of doing buisness in the short to medium term, as it includes lots of items that a business might only need to buy once a decade, as well as lots of items that are needed daily. Further, it doesn't really account for the fact that as prices change the balance of inputs by value changes, so you need to change the weighting in the basket according to the current prices. But generally statisticians keep them the same, or change them only rarely, to make the indexes from different years more directly comparable. Let me once again point you to the wide angle view: America is paying more for the raw materials for its manufacturing industry, a lot more, my contention is that this is principally coming out of the wages of workers in the manufacturing sector. I would expect a bigger productivity gap in the manufacturing sector than over the whole economy if this is true: what do you know that is exactly what the report shows: Compare figures one and six.

 

Your contention seems to be that the productivity increases has gone into increases corporate profits. However, a brief analysis shows that the increase in corporate profits is driven almost entirely by overseas earnings. That is mostly a function of the exchange rate, but at any rate, overseas earnings cannot be driven by the productivity of american workers.

 

Corporate profits over the business cycle are pretty stable in any competitive industry, generally being a low single digit % of revenue. A nice comfortable energy company like eon is making profits at about 8% of revenue, despite benefiting from ever rising gas prices in the UK.

[hrothgar]

 

Let me once again point you to the wide angle view: America is paying more for the raw materials for its manufacturing industry, a lot more, my contention is that this is principally coming out of the wages of workers in the manufacturing sector. I would expect a bigger productivity gap in the manufacturing sector than over the whole economy if this is true: what do you know that is exactly what the report shows: Compare figures one and six.

 

 

Quick thought about all this:

 

Economists would model the increase in the cost of raw materials as a supply shock.

 

There are well known procedures for measuring the impact of a supply shock on the economy.

Many of these analyzes deal with measuring the "incidence" of the supply shock.

(What portion of the supply shock gets absorbed by producers as opposed to consumers)

There is a good treatment of this available at http://en.wikipedia.org/wiki/Tax_incidence

(This assumes that the supply shock is a tax, however, an increase in to cost of raw materials is completely analogous)

 

Conceptually, once can extend the analysis to consider how the cost of the supply shock that is absorbed by the firm is divided between capital and labor. At this point in time, labor is very plentiful and capital is scarce; accordingly the effect of the supply shock will largely fall on the backs of laborers.

[phil_20686]

Quick thought about all this:

 

Economists would model the increase in the cost of raw materials as a supply shock.

 

There are well known procedures for measuring the impact of a supply shock on the economy.

Many of these analyzes deal with measuring the "incidence" of the supply shock.

(What portion of the supply shock gets absorbed by producers as opposed to consumers)

There is a good treatment of this available at http://en.wikipedia.org/wiki/Tax_incidence

(This assumes that the supply shock is a tax, however, an increase in to cost of raw materials is completely analogous)

 

Conceptually, once can extend the analysis to consider how the cost of the supply shock that is absorbed by the firm is divided between capital and labor. At this point in time, labor is very plentiful and capital is scarce; accordingly the effect of the supply shock will largely fall on the backs of laborers.

 

One of the references I pointed Kenberg to on productivity pointed out that the wages/productivity link has a full employment assumption lurking in it. If unemployment is high one can basically always find someone willing to do the same job for less.

 

I once had an interesting discussion on this point, along the lines of the fact that the highly educated are virtually always at full employment. Even in a job market as tough as this one, a good degree in physics or maths from a top university will get you a good job. However, if you are lacking skills then there is a glut of labour among the poorly educated. I argued (though I don't know how much I believe it), that expanding this link to groups with similar education backgrounds could be useful in understanding the difference in growth of wages among different groups. My friend argued that since productivity growth and wages are only tied at a national level, rather than an industry level, comparing groups below national level is pointless.

 

It feels like there is something to the argument that far too small a proportion of our workforce has "good skills", and that this means that those who do are commanding a larger premium than might be expected.

[Winstonm]

Your contention seems to be that the productivity increases has gone into increases corporate profits.

 

The argument is that there is a real wage-productivity gap, caused by many variables, including reductions in corporate taxes that were subsidized by regressive taxes like FICA, and because 50% of GDP is consumption by production workers, any long term change in GDP needs to alter the flow of funds.

 

In other words, the best way to help everyone is to relieve the pressure on the lower classes. Cutting taxes on those making <$100,000 a year while compensating with higher corporate taxes and income taxes on the higher brackets would have a more positive effect on the economy than the current trend.

 

Without increasing demand through wages, we are bound to stagnate.

[PassedOut]

Without increasing demand through wages, we are bound to stagnate.

For sure. I don't see how anyone could reasonably dispute this (unless one redefines "stagnate").

[Winstonm]

I found it interesting that just today there was a piece in The Big Picture, the blog of Barry Ritholtz, about this very subject:

 

Lets begin by referencing a recent piece by Stephen Roach that accurately assesses whats really wrong with our current economy, summed up in one number:

 

"The number is 0.2%. It is the average annualized growth of US consumer spending over the past 14 quarters calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011. Never before in the post-World War II era have American consumers been so weak for so long. This one number encapsulates much of what is wrong today in the US and in the global economy."

 

Weve gone, 14 quarters from the start of the recession, from an index value of 100 to a current index value of 100.7, which is an average annualized growth rate of 0.2 percent. Anemic. Given that consumer spending represents some 70 percent of GDP, a wobbly consumer note the flatline over the past two quarters is problematic. And at the risk of turning blue in the face, Id point out yet again that we know small businesses cite Poor Sales as their number one single biggest problem. So, to the extent very little (anything?) has been done to help the consumer, the mess in which we find ourselves should come as absolutely no surprise. Corporations, which are flush with cash, are spending that cash on such things as mergers, acquisitions, share buybacks, and dividend hikes. While thats all well and good for the investor class, it does virtually nothing for Joe Six Pack on Main St.

 

My position on this is simple and I think the data supports it: Regressive taxes being used to pay for the tax benefits of corporations and reduced upper end progressive taxes is wrongheaded. There is a benefit to society as a whole (through growth in GDP) in taking a small amount of the excesses of the most wealthy and redistributing that money to the consumption class who will spend 100% of it - or deleverage until their own consumption can be restored. Either way, it is an increase in the available funds to the production/consumption classes that leads to sustainable growth.

 

Trickle-down and supply side place the horse and cart in unflattering positions relative to their productivity.

[luke warm]

Trickle-down and supply side place the horse and cart in unflattering positions relative to their productivity.

some nobel prize winners disagree

[Winstonm]

some nobel prize winners disagree

 

Other nobel prize winning economists agree: http://www.alterpolitics.com/politics/ny-times-paul-krugman-supply-side-economics-creates-deficits/

[Winstonm]

Here is some chart porn that seems to validate the correlation between income and GDP:

 

http://www.ritholtz.com/blog/wp-content/uploads/2011/08/22.gif

 

http://www.ritholtz.com/blog/wp-content/uploads/2011/08/32.gif

 

 

Of course, income is not just wages, but at the same time it is not debt, either, so one cannot argue that the removal of the home-equity ATM is the cause of the decrease in income. These charts indicate a close correlation of income with demand.

[phil_20686]

Your charts represent a tautology. Income per person is simply GDP/population. Those charts are actually the same information in two formats, all htey tell you is that following a recession many people are unemployed.

[luke warm]

Other nobel prize winning economists agree: http://www.alterpolitics.com/politics/ny-times-paul-krugman-supply-side-economics-creates-deficits/

so we have battling nobel prize winners... just proves what i've always said, people tend to appeal to whichever authority matches their preconceptions, their worldviews

 

Your charts represent a tautology. Income per person is simply GDP/population. Those charts are actually the same information in two formats, all they tell you is that following a recession many people are unemployed.

but they do so very colorfully

[Winstonm]

Your charts represent a tautology. Income per person is simply GDP/population. Those charts are actually the same information in two formats, all htey tell you is that following a recession many people are unemployed.

 

Which then tells you there is a strong correlation between between GDP and employment, that the problem with stagnation of GDP is a job-side problem.

[Winstonm]

so we have battling nobel prize winners... just proves what i've always said, people tend to appeal to whichever authority matches their preconceptions, their worldview

 

This is the only economist who I think has it down pat:

In economics, the majority is always wrong. — John Kenneth Galbraith

[helene_t]

Which then tells you there is a strong correlation between between GDP and employment, that the problem with stagnation of GDP is a job-side problem.

or that the problem with employment is a gdb-side problem.

 

Seriously, Winston, Phil is right.