"It is easy to confuse what is with what ought to be, especially when what is has worked out in your favor."
- Tyrion Lannister

"Lannister. Baratheon. Stark. Tyrell. They're all just spokes on a wheel. This one's on top, then that's ones on top and on and on it spins, crushing those on the ground. I'm not going to stop the wheel. I'm going to break the wheel."

- Daenerys Targaryen

"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"

- Tyrion Lannister

"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."

- Jorah Mormont

"These bad people are what I'm good at. Out talking them. Out thinking them."

- Tyrion Lannister

"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."

- Michael Barone

"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy Parker

Saturday, June 07, 2014


Feels Like We Only Going Backwards by Tame Impala


r = the return on wealth
s = savings rate
depreciation of capital?
capital share of economy?

Kuznets, happy trickle-down equalizing capitalism where capital and labor share income? Solow growth model?

Matt Breunig's take? Solow's take? Krugman's take? DeLong's finger exercises? Baker's take? Henwood's take? Boushey's take? Waldman's take? Suresh Naidu?

the mechanism by which the savings rate declines (and r declines) as the capital/income ratio increases and growth slows.

As growth slows, will the "savings rate" decline automatically. Will "r" the return on capital decline. What about rents? How does depreciation fit into the equation. Is this DeLong's Hicks on Piketty's Keynes?

How does the wealth to income ratio increase? What were the growth rates in pre-WWI capitalism?

It was once believed, during the decades immediately following the Great Depression and World War II, that vast disparities in wealth were features of youthful capitalism that had been left behind now that the thing was reaching maturity. This theory was first enunciated formally in a 1955 paper by the economist Simon Kuznets, who plotted a curve representing the historical course of inequality that looked like an upside-down U: Kuznets’s chart showed that disparities in wealth rose dramatically during the early years of growth and then reversed once a mature capitalist economy reached a certain (though none-too-specific) stage of development.
Kuznets’s curve fit nicely with the actual experiences of the rich economies in what the French call the Trente Glorieuses, the “thirty glorious years” between 1945 and 1975, when economic growth was broadly shared and income differentials narrowed. In the United States, according to the Census Bureau’s numbers (which have their problems—more on that in a moment), the share of income claimed by the top 20 percent—and within that group, the top 5 percent—declined during the glorious years. At the same time, the income of the remaining 80 percent gained.
But in the United States, the thirty glorious years were actually twenty-odd years; depending on how you measure it, the equalization process ended sometime between 1968 and 1974, again according to the census figures. Still, quibbles aside, the process of relative equalization went on for long enough that it felt like Kuznets was on to something with his curve. I say “relative” because these are still not small numbers: The richest 5 percent of families had incomes about eleven times those of the poorest 20 percent in 1974, the most equal year by this measure since the census figures started in 1947. But that number looks small now compared with the most recent ratio, almost twenty-three times in 2012.

Just about all economic models tell us that if g falls—which it has since 1970, a decline that is likely to continue due to slower growth in the working-age population and slower technological progress—r will fall too. But Piketty asserts that r will fall less than g. This doesn’t have to be true. However, if it’s sufficiently easy to replace workers with machines—if, to use the technical jargon, the elasticity of substitution between capital and labor is greater than one—slow growth, and the resulting rise in the ratio of capital to income, will indeed widen the gap between r and g. And Piketty argues that this is what the historical record shows will happen. 
If he’s right, one immediate consequence will be a redistribution of income away from labor and toward holders of capital. The conventional wisdom has long been that we needn’t worry about that happening, that the shares of capital and labor respectively in total income are highly stable over time. Over the very long run, however, this hasn’t been true. In Britain, for example, capital’s share of income—whether in the form of corporate profits, dividends, rents, or sales of property, for example—fell from around 40 percent before World War I to barely 20 percent circa 1970, and has since bounced roughly halfway back. The historical arc is less clear-cut in the United States, but here, too, there is a redistribution in favor of capital underway. Notably, corporate profits have soared since the financial crisis began, while wages—including the wages of the highly educated—have stagnated. 
A rising share of capital, in turn, directly increases inequality, because ownership of capital is always much more unequally distributed than labor income. But the effects don’t stop there, because when the rate of return on capital greatly exceeds the rate of economic growth, “the past tends to devour the future”: society inexorably tends toward dominance by inherited wealth.
Naidu: "Every economics student learns the “Kaldor facts” of economic growth. One of these is that the share of national income going to capital has a long-run tendency to stay constant."

"But what keeps r high? Piketty never explicitly says. This question is at the heart of the struggle over how to interpret his book."
"Suppose we accept Piketty’s educated guess that the capital-income ratio will increase over the next century before stabilizing at a high value somewhere around 7. Does it follow that the capital share of income will also get bigger? Not necessarily: remember that we have to multiply the capital-income ratio by the rate of return, and that same law of diminishing returns suggests that the rate of return on capital will fall. As production becomes more and more capital-intensive, it gets harder and harder to find profitable uses for additional capital, or easy ways to substitute capital for labor. Whether the capital share falls or rises depends on whether the rate of return has to fall proportionally more or less than the capital-income ratio rises. 
There has been a lot of research around this question within economics, but no definitely conclusive answer has emerged. This suggests that the ultimate effect on the capital share, whichever way it goes, will be small. Piketty opts for an increase in the capital share, and I am inclined to agree with him. Productivity growth has been running ahead of real wage growth in the American economy for the last few decades, with no sign of a reversal, so the capital share has risen and the labor share fallen. Perhaps the capital share will go from about 30 percent to about 35 percent, with whatever challenge to democratic culture and politics that entails."

DeLong's question: ""But if the savings rate necessarily falls as the wealth-to-annual-net-income ratio rises, why was the (gross) savings rate half again as high back before World War I when the economy was wealth-dominated as it is today?""

Going through the reviews.

Juncture interview:
"My bottom line is that the average rate of return for all assets combined is not going to zero. It has been going down a little bit over the past 20 to 30 years because of the rise in the capital-to-income ratio, but it has declined less than the increase in the capital–income ratio, so that the capital share has actually increased."

On Summers' stagnation:

"I think that here there is some confusion in these critiques between the interest rate and the rate of return to capital. The rate of return to capital is a much broader concept than just interest rates. If the rate of return on capital were really going to zero, as Summers seems to argue, then the capital share in GDP and the capital share in the economy would be going to zero. This has not been happening at all. Right now, including five years of total crisis, the capital share is much higher than it was twenty years ago in most developed countries.

So, what’s in the capital share? With the capital share you can have interest payment, dividends, corporate profits (with some of it going into retained earnings which feeds capital gains), and you have rental income. If you make a sum of all these forms of capital payment, then the capital share has not been going to zero at all.

I think that it is just wrong to take the interest rate on public debt as an indicator of the rate of return. Public debt is a very particular kind of asset: it provides liquidity services – that is, you can easily sell your Treasury bonds – and that is partly why people accept having relatively low returns in comparison to other assets. Also, we are not completely out of the financial crisis yet and we have had a lot of creative monetary policies that have kept interest rates low.

I think that where Summers is right, and this is where he wants to get, is that we have been asking too much of creative monetary policies in recent years, pretty much everywhere – in the US, in the UK, and in the Eurozone – because at the end of the day we have this very low interest rate on some assets such as public debt or certain categories of short-term or medium-term loans, but this is creating bubbles in other assets "


Welfare economics: the perils of Potential Pareto (part 2 of a series) by Steve Randy Waldman

What's an economist? A person who knows the price of everything and the value of nothing.

The Pernicious Prison of the Price Theory Paradigm by Steve Roth

Price versus value and what's the slippage. DeLong's deserved profit verus rents.

Piketty's example of German manufacturers. "For instance, I have a long discussion about the value of German manufacturing companies and the fact that their market value may not be as large as British, American or French corporations, but apparently that does not prevent them from producing good cars. The market does a number of things well, but there are also a number of things that the market does not do so well, and putting a price on assets is always a complicated business."

"The book points out that German shares are “underpriced” because shareholders there do not have the same level of political power as shareholders in the US and UK, since they have to share power with workers’ councils and other stakeholders. The same thing is true of unions in the US. David Lee and Alexandre Mas shows that strong union victories in NLRB elections once reduced stock prices, yet it is very unlikely they changed the replacement value of the company’s underlying assets."

Yglesias interview:
"I think the lesson from this graph is that the market value of a corporation and its social value can be two different things. Of course you don't want the market value to be zero, but the example of the German corporation shows that even though their market value is not huge, in the end they produce some of the best cars in the world. They export a lot, and they are very successful. I think getting workers involved on the board of German corporations maybe reduces the market value for shareholders, but in the end, it forces workers and unions to be a lot more responsible for the future of the company."


Internets denizen Edward Lambert writes:
My view is that the answer lies in understanding effective demand... the primary concept of Keynes which has never been given a proper equation. I am researching a new equation that describes Keynes' view of effective demand...

Effective Demand >= Real GDP*effective labor share/(composite utilization of labor and capital)

Thus, effective labor share >= (composite utilization of labor and capital)

Effective labor share is determined by cycle limits of capacity utilization. For the US, effective labor share is 0.762*labor share index (non-farm business sector) since the 60's.
This equation has described the end of all business cycles since the 60's. We are right now again hitting the effective demand limit according to this equation. The limit could rise at this time extending the business cycle, which happened at the end of 90's and a bit before the crisis.

Very few are expecting the end of the business cycle now. The Fed and ECB are trying to keep the BC alive with long run low nominal rates. Will it work? Will the instability be too great? We will see.

In effect, there is an experiment going on right now with this equation of effective demand. If it turns out to identify the end of this business cycle, when few expect it, we will have made progress in understanding recessions. The equation can predict the potential end of a business cycle years in advance.

The equation is doing a great job so far in determining that potential GDP is much lower than the CBO originally thought.
Here is a synopsis.


He links aprovingly to John Taylor who wanted to raise rates in 2011. LOLWUT?

Thursday, June 05, 2014


If I had the time and energy I'd learn more about the zero lower bound and Scott Sumner's problem with it.

Zero lower bound
The Zero Lower Bound (ZLB) or Zero Nominal Lower Bound (ZNLB) is a macroeconomic problem that occurs when the short-term nominal interest rate is at or near zero, causing a liquidity trap and limiting the capacity that the central bank has to stimulate economic growth. This problem returned to prominence with the Japan's experience during the 90's, and more recently with the subprime crisis. The belief that monetary policy under the ZLB was effective in promoting economy growth has been critiqued by Paul KrugmanGauti Eggertsson, and Michael Woodford among others. Milton Friedman, on the other hand, argued that a zero nominal interest rate presents no problem for monetary policy. According to Friedman, a central bank can increase the monetary base even if the interest rate vanishes; it only needs to continue buying bonds.[1] Other economists point out that there are more efficient ways to adjust the money supply.[2][3]
EDIT: Simon Wren-Lewis on the ZLB.

I'd also look into the debate over Piketty's "r" or return on wealth. Critics say it will automatically go down as r slows. Apparently Piketty and others have the data which says it hasn't gone down as growth slows.

How does Piketty calculate "wealth" in the wealth to income ratio. Does he include liquid assets?

Also, since 1980 or so, growth has been 2-3 percent.* Piketty guesses it will slow in the future. Return on wealth has been 4-5 percent. Inequality has risen because wealth is concentrated.

1) are the critics saying that the return on wealth will come down as growth slows? What is their reasoning? 2) what were the growth rates and return on wealth during the Thirty Glorious Years of post-WWII social-democracy?

comment at DeLong's blog:
"Not according to Piketty. See table 2.5. From 1980 to 2012, annual growth in real GDP per head has been 1.7% globally, 1.8% in Europe, 1.3% in "America". There's a considerable element of embedded wishful thinking in the common assumption of much higher rates. In the US, this may be driven by the failure to allow for population growth."



Isabella Kaminska on the economic mechanics which bring r back down as g slows.

See this: http://qz.com/215281/dont-believe-brokers-the-government-or-thomas-piketty-your-property-values-wont-grow-faster-than-your-paycheck/

And also my German sunseeker posts. Savers will put up a fuss about yield compression, but eventually if there isn’t $ denominated growth either the cashflows associated with their wealth will dwindle and the mark to market value of their assets will begin to fall with it, or the government or some other agent will have to step in to debase the relative value of those returns in $ terms. It is the process of bringing r down to g which creates capital crises. When g outperforms r, on the other hand, you have the opposite problem, one in which capital is under priced in relative terms.


Welfare economics: the perils of Potential Pareto (part 2 of a series) by Steve Randy Waldman

What's an economist? A person who knows the price of everything and the value of nothing.

The Pernicious Prison of the Price Theory Paradigm by Steve Roth

negative interest rates and the Euro

The ECB is about to introduce negative rates. Can it save the euro? by Matt O'Brien

Why Negative Rates Won't Work In The Eurozone by Frances Coppola

Tuesday, June 03, 2014

You're Gonna Go Far, Kid


Plutonomy revisited by Doug Henwood
Business Insider has a write-up of a BoA Merrill Lynch report that declares that, the FT’s quibbles aside, Thomas Piketty is essentially right, and the super-rich is where the action is, so invest accordingly. (Never mind that Piketty utterly destroyed, in the most gracious manner imaginable, the newspaper’s economics editor Chris Giles’ half-assed critique.) The BoA Merrill report was written by Ajay Kapur, who is quoted by BI as saying: 
When wealth and income are as concentrated as they are, and expected (a la Piketty) to get even more so, examining the ‘average’ consumer or ‘average’ investor makes little sense. Examining the fat tail – the behavior of the plutonomists, rather than that of the multitudinous many – is more advantageous to investors. Plutonomists determine and dominate spending and investment decisions and their magnitudes. Any analysis that does not tease out the skewed global income and wealth distribution, but focuses on the average is flawed from the start and is incomplete, as we step into its deeper extremes. 
The word “plutonomy” rang a bell, and sure enough we’ve been here before. Back in 2005 and 2006, in the bubbly days before the financial crisis and Great Recession, Kapur wrote a series of reports for Citigroup, his then-employer, on the topic. Citi did its best to stem the circulation of the reports, demanding that websites that posted them take them down. 
As a public service, lbo-news is reposting them. Evidently, the worst crisis in 80 years is not enough to keep the plutocrats down. 
Here are the links (all PDFs—and I changed them since my first posting to confuse Citi’s plutonomy sniffer): 
Plutonomy 1 (October 16, 2005)
Plutonomy 2 (March 5, 2006)
Plutonomy 3 (September 29, 2006)


Via Yglesias, Josh Barro is against unions.


Piketty on Colbert

net neutrality

John Oliver delivers the clearest, most hilarious, explanation of net neutrality you’ll see by Ezra Klein

Does Vox comment on Obama's apparent sellout?

How is it exactly that cable companies in the US don’t compete? by Joshua Gans (via Thoma)

And Oliver is delivered to us by the cable companies.

John Oliver may have crashed the FCC’s comments system

Monday, June 02, 2014

low interest rates

For Bonds, This Time is Different by Krugman
Bloomberg has an interesting piece on how high bond prices and low yields have been shocking investors who relied on old models. Some of this, I suspect, is because many people still — after all these years — haven’t wrapped their minds around the implications of a zero-lower=bound economy and the risks of a low-inflation trap. 
But it’s also true that structural change is happening fast — just not the kind of structural change people like to talk about. Never mind the stuff about skill mismatches and all that. What’s really happening fast is the demographic transition, with Europe very quickly turning Japanese:

And the US, although growing faster, also turning down sharply. 
Add to this the fact that what we thought was normal actually depended on ever-growing household debt, and it becomes clear that historical expectations about normal interest rates are likely to be way off. You don’t have to believe in secular stagnation (although you should take it very seriously) to accept that low rates are very likely the new normal.
Tim Duy on how Fed Policy keeps rates low by Scott Sumner
Garrett pointed me to a very good Tim Duy post on Fed policy:
The Federal Reserve has set reasonably clear expectations that rates will remain low for a long time. That path, however, seems to be a consequence of doing too little now to ensure a stronger recovery. In other words, the Fed seems to be taking a lower-rate future as a given rather than as a result of insufficient policy. Instead of acting to ensure a stronger forecast, they seem more interesting in acting to lock-in the lower path of activity. And that in turn will tend to lock in a low level of long-term rates. This, I think, is the best explanation for the inability of markets to sustain higher rates. It is simply reasonable to expect that the conditions which justify higher long rates will be met with tighter policy sufficient to contain growth to something closer to the current path of output than to current estimates of potential output. 
This is actually pretty close to Milton Friedman’s 1998 claim that rates in Japan were low because money had been tight. Or Nick Rowe’s upward sloping IS curve. Duy doesn’t use the term “tight money”, but the phrase “doing too little now to ensure a stronger recovery” implies money is tighter than Duy and I might consider optimal, and that easier money would eventually lead to higher rates. If you put aside my idiosyncratic definition of “easy” and “tight” money (I use NGDP growth, not interest rates and money growth as policy indicators), my views are actually similar close to those of a mainstream macroeconomist like Tim Duy. The substance of what we are saying on monetary policy and interest rates (and also monetary offset) is very close, once you get beyond framing effects. 
Have our views always been close on these issues? I’m not sure.

Game of Thrones and TV shows

AV Club reviews Game Of Thrones (experts): “The Mountain And The Viper”

AV Club reviews Halt And Catch Fire: “I/O”

AV Club reviews Silicon Valley: “Optimal Tip-To-Tip Efficiency”

AV Club revies Veep: “Debate”

From Orphan Black's human clones to Halt and Catch Fire's PC clones.

Some great music, too. Halt and Catch Fire had the Magnificent Seven:

Silicon Valley had Green Day's Minority again over the credits:


r>g meets c>l by Jared Bernstein

Sunday, June 01, 2014

political economy

"As another Thomas—Pynchon—said: “If they can get you asking the wrong questions, they don’t have to worry about answers.”  Progressives have all kinds of ideas to shape a more equitable primary distribution.  But those ideas will never get much oxygen if we remain voluntary trapped in the cramped debate of a short-sighted economics."

Why is Capital So Much Stronger than Labor? by Jared Bernstein

Orphan Black

AV Club reviews Orphan Black: “Knowledge Of Causes, And Secret Motion Of Things”