Sunday, October 18, 2015

I like Ed Lambert's conclusion


Jazzbumpa:
Art -

O/T here, but I want to recommend Ed Lambert's latest post at A. B.

Serious food for thought.

http://angrybearblog.com/2015/10/turner-debtdel-fallls.html

Cheers!
JzB

Dunno if there's anything to it, even after I read it once. I'll take another look now, on your time. Here's a summary of the first part of Lambert's Angry Bear post:
Adair Turner lays out an exquisite economic analysis on many layers. Yet I question him… Is it truly deleveraging debt along side fiscal consolidation that is making some economies sluggish?

I look at another cause for economic sluggishness… the fall in labor share. I see the fall in labor share as a fall in effective demand, which has lowered economic potential and the social benefits in the economy.

Every time you copy and paste a line of text from an Angry Bear post you get a line like "See more at: http://angrybearblog.com/2015/10/turner-debtdel-fallls.html#sthash.A73gaDq0.dpuf" appended to the text you copied. It's annoying, and it gets tiresome. Serious food for thought, there.

Anyway, Lambert ends this part of his post with a great conclusion:

We can say that deleveraging debt and the fall in labor share both contribute to the economic sluggishness. - See more at: http://angrybearblog.com/2015/10/turner-debtdel-fallls.html#sthash.A73gaDq0.dpuf

Deleveraging and the fall of labor share both contribute to the problem. Yes! The economy is a complex thing. Causes have consequences, and consequences become causes. It is important to point out, once in a while, that everything depends upon everything. (But what was it Schumpeter said?)

Then Lambert farts in the applesauce. Turns out, he only brought the subject up so he could talk about his pet peeve:

But since Adair Turner did not talk about the fall in labor share, I will.


The second part of Lambert's article is titled The Channels of Money Flow for Business. Lambert provides this interesting image:

Source: Edward Lambert
The picture focuses on "firms" -- the domestic nonfinancial business sector -- and shows four other sectors with which firms engage in trade: foreign, financial, labor, and government. Firms have flows of funds to and from each of these other sectors.

"After the 2001 recession," Lambert says, "labor share of income began falling...":
After the 2001 recession, labor share of income began falling to never before seen lows. Consequently relative sales to labor also decreased because labor had less income relative to production. So overall money flows between labor and firms has been growing slow. Firms have had less ability to profit from labor due to decreased overall money flows with labor. So in response, how did firms compensate for the decreased flows with labor?

Firms began to open up new ways to increase profits through the channels of the Financial sector, government and foreign markets. Interest rates have been falling. Money is cheaper. Effective tax rates have been falling. Outsourcing increased. Sales in foreign countries increased. Firms became less dependent upon domestic labor’s income.

So firms have increased money flows in other channels other than with labor. What has been the result? Firms have been able to increase after tax profits in real terms to new records after the 2001 recession.

I agree with Lambert on the labor share thing. Consumers consume. We spend most of our income. (We did, anyway, before the crisis.) So if firms wanted to boost business sales, they could get their wish by paying higher wages: Consumers would have more money, consumers would spend more, business would bring in more revenue, presto, magic, done. You can't squeeze the life out of one sector of the economy and still expect the economy to be just fine. It doesn't work that way.

I agree with Lambert that the fall of labor share is a problem. But I don't agree with his explanation of events.

He documents the claim that "after tax profits in real terms [hit] new records after the 2001 recession" by showing a graph of profit with price increases stripped away.

Why Lambert shows profit "in real terms" I don't know. Those record highs are even higher if you leave inflation in. And for crying out loud, he used the CPI in his calculation, rather than the Producer Price Index or something like.

But you can take "labor share" and add it to Lambert's profits graph, and get an interesting picture:

Graph #1: Corporate Profits (blue) and Labor Share (red)
After the 2001 recession profits started going up like crazy, and labor share started dropping like crazy. Of course. Money doesn't disappear when you spend it. It just goes into a different pocket.

Before the 2001 recession, profits increased gradually while labor share fell gradually. So money moved slowly from workers' pockets to owners' pockets before 2001, and fast after 2001.

This is interesting. But it doesn't support the view that boosting labor share will boost profits.

//

Lambert's graphic of money flow for "firms" considers both "Foreign Markets" and the "Financial Sector" to be external to firms. So I have to assume his data for firms is domestic and nonfinancial. That's fine; I just want to be clear.

If he is looking at what FRED calls domestic nonfinancial business ...

I can't find profits at FRED for business. I can only find profits for corporate business. So I want to assume that Lambert's "firms" means domestic nonfinancial corporate business. This is reasonable, because his profits graph shows corporate profits.

(I'm trying to use the right data here, to make a valid evaluation of Lambert's post.)

If he is looking at what FRED calls domestic nonfinancial corporate business, he shouldn't be showing a graph of corporate profits. He should be showing nonfinancial corporate business profits. There is a difference:

Graph #2: Corporate (blue) and Nonfinancial Corporate (red) Profits
(Lambert used the blue one.)

Funny thing, though. The assets of nonfinancial corporations are increasingly financial assets:

Graph #3: Financial Assets as a Percent of All Assets of Nonfinancial Corporations

Nonfinancial corporations have been increasing their holdings of financial assets. This means the profits of nonfinancial corporations are increasingly financial profits. You have to wonder what nonfinancial corporate profits would look like if we exclude their financial profits. This graph assumes the profit rate is the same for financial and nonfinancial assets:

Graph #4: Nonfinancial Profits of Nonfinancial Corporations (red) and Total Corporate Profits (blue)
The blue line shows total profits of corporations. The red line shows the nonfinancial profits. The space between the red and blue lines represents financial profits.

The blue line is unchanged from Graph #2. The red line is much lower now.

//

Next, take labor share and add it to the previous graph:

Graph #5: Total Profits (blue), Nonfinancial Profits (red), and Labor Share (green)
Before the 2001 recession, profits increased gradually while labor share fell gradually. After the 2001 recession profits started going up like crazy, and labor share started dropping like crazy. Money moved slowly from workers' pockets to owners' pockets before 2001, and fast after.

It is pretty easy to see the sudden increase in profits after 2001, and a matching decrease in labor share. It is also easy to see that the sudden increase in profits was mostly financial profits. Profits made at the expense of those who are in debt.

So, when Ed Lambert says

After the 2001 recession, ... relative sales to labor also decreased because labor had less income relative to production.

we know he is not quite correct. Labor had less income relative to finance, certainly. Relative to production, not so much.

But when Ed Lambert says

For me, the solution lies in making firms more dependent upon the money flows with labor. That means reversing the policies that increased profits through money channels other than with labor.

I think he is exactly right. Lambert's focus is the fall of labor share. Mine is the rise of finance. Yours may be the decline of tax rates on the wealthy and on big business. And maybe all of us want to see our trade deficit reduced. If so, all of us are calling for "making firms more dependent upon the money flows with labor."

// related post: "One for You, Three for Me"

2 comments:

Anonymous said...

You say...

"Deleveraging and the fall of labor share both contribute to the problem. Yes! The economy is a complex thing. Causes have consequences, and consequences become causes. It is important to point out, once in a while, that everything depends upon everything. (But what was it Schumpeter said?)"

Marcus Aurelius said in book VI.38...

"38. Frequently consider the connection of all things in the universe and their relation to one another. For in a manner all things are implicated with one another, and all in this way are friendly to one another; for one thing comes in order after another, and this is by virtue of the active movement and mutual conspiration and the unity of the substance (ix. 1)."

Saludos

Iñigo

The Arthurian said...

Bonito.

By the way... Schumpeter, out of context: "The distinction is, in a sense, quite unrealistic. But if we do not make it, we shall never be able to say any more than that everything depends upon everything."