Piketty and DeLong

Link

Over at Equitable Growth: Thomas Piketty: On the Elasticity of Capital-Labor Substitution

Over at Equitable Growth: As I have said before in Very Rough: Exploding Wealth Inequality and Its Rent-Seeking Society Consequences (backed up by the numbers of "Roughing Out a Piketty Model") and elsewhere, in my view Thomas because he really needed a rent seeking society chapter in his Capital in the 21st Century. The underlying logic of his argument seems to be that wealth can take two forms: investments in capital-embodied technological wealth that boost wages in the economy, or investments in rent-seeking wealth that erode wages in the economy. And, I think, his argument is that we are headed for a society with a higher wealth-to-income ratio, and in such a society a greater share of wealth will find its way into the second channel. READ MOAR

Maybe that is not what Pikitty's argument is. But I at least think that it is what Piketty's argument should be--because I think it is highly likely to be true...

Thomas Piketty: On the Elasticity of Capital-Labor Substitution: "I do not believe in the basic neoclassical model...

...But I think it is a language that is important to use in order to respond to those who believe that if the world worked that way everything would be fine. And one of the messages of my book is, first, it does not work that way, and second, even if it did, things would still be almost as bad....

My response to Summers and others is... what we observe... [is] a rise in the capital/income ratio and a rise in the capital share... [in] the standard neoclassical model... the only possible logical... expla[nation]... would be an elasticity of substitution somewhat bigger than 1... that there are more and more different uses for capital over time and maybe in the future robots will make substitution even more.... Now, does this mean that it is the right explanation for what we have seen in recent decades? Certainly not....

All I am saying to neoclassical economists is this: if you really want to stick to your standard model, very small departures from it like an elasticity of substitution slightly above 1 will be enough to generate what we observe in recent decades. But there are many other, and in my view more plausible, ways to explain it.... It is perfectly clear to me that the decline of labor unions, globalization, and the possibility of international investors to put different countries in competition... have contributed to the rise in the capital share...

Cf.: Suresh Naidu: Capital Eats the World, and The Slack Wire: Notes from Capital in the 21st Century Panel; and me: The Hourly Piketty: Paul Krugman, "Gattopardo Economics", and Economic Modelling, and The Honest Broker: Mr. Piketty and the “Neoclassicists”: A Suggested Interpretation: For the Week of May 17, 2014.

Rooseveltian Resolve

Four Questions about Fiscal Policy by JW Mason

The Nearly Forgotten Dearly Beloved 1920-21 Depression Yet Again; Or, Never Reason from a Quantity Change by David Glasner

‘Battle of the beards’: Paul Krugman vs. Ben Bernanke by Robert J. Samuelson (May 6, 2012)

Ben Bernanke (1999): "Rooseveltian Resolve" by DeLong  (March 02, 2013)

Japanese Monetary Policy: A Case of Self-Induced Paralysis? by Ben Bernanke (December 1999)

Earth to Ben Bernanke: Chairman Bernanke Should Listen to Professor Bernanke by Krugman (April 24, 2012)

Baker on DeLong

Question for Brad DeLong and the Debt School of the Downturn: What Would Our Saving Rate Be If We Didn't Have Debt? by Dean Baker

Brad DeLong tells us that he is moving away from the cult of the financial crisis (the weakness of the economy in 2014 is somehow due to Lehman having collapsed in 2008 -- economists can believe lots of mystical claims about the world) and to the debt theory of the downturn. Being a big fan of simplicity and a foe of unnecessary complexity in economics, I have always thought that the story was the lost of housing wealth pure and simple. (And yes folks, this was foreseeable before the collapse. Your favorite economists just didn't want to look.)

Just to be clear on the distinction, the loss of wealth story says it really would not have mattered much if everyone's housing wealth went from $100k to zero, as opposed to going from plus $50k to minus $50k. The really story was that people lost $100k in housing wealth (roughly the average loss per house), not that they ended up in debt. Just to be clear, the wealth effect almost certainly differs across individuals. Bill Gates would never even know if his house rises or falls in value by $100k. On the other hand, for folks whose only asset is their home, a $100k loss of wealth is a really big deal.

The debt story never made much sense to me for two reasons. First, the housing wealth effect story fit the basic picture very well. Are we supposed to believe that the housing wealth effect that we all grew up to love stopped working in the bubble years? The data showed the predicted consumption boom during the bubble years, followed by a fallback to more normal levels when the bubble burst. 

The other reason is that the debt story would imply truly heroic levels of consumption by the indebted homeowners in the counter-factual. Currently just over 9 million families are seriously underwater (more than 25 percent negative equity), down from a peak of just under 13 million in 2012. Let's assume that if we include the marginally underwater homeowners we double these numbers to 18 million and 26 million.

How much more money do we think these people would be spending each year, if we just snapped our fingers and made their debt zero? (Each is emphasized, because the issue is not if some people buy a car in a given year, the point is they would have buy a car every year.) An increase of $5,000 a year would be quite large, given that the median income of homeowners is around $70,000. In this case, we would see an additional $90 billion in consumption this year and would have seen an additional $130 billion in consumption in 2012.

Would this have gotten us out of the downturn? It wouldn't where I do my arithmetic. For example, compare it to a $500 billion trade deficit than no one talks about. Furthermore, the finger snapping also would have a wealth effect. In 2012 we would have added roughly $1 trillion in wealth to these homeowners by eliminating their negative equity. Assuming a housing wealth effect of 5 to 7 cents on the dollar, that would imply additional consumption of between $50 billion to $70 billion a year, eliminating close to half of the debt story. So how is the downturn a debt story? (You're welcome to put in a higher average boost to consumption for formerly negative equity households, but you have to do it with a straight face.)

Finally, getting to the question in my headline, the current saving rate out of disposable income is 5 percent. This is lower than we ever saw until the stock wealth effect in the late 1990s pushed it down to 4.4 percent in 1999, it hit 4.2 percent in 2000. The saving rate rose again following the collapse of the stock bubble, but then fell to 3.0 percent in 2007. The question then for our debt fans is what they think the saving rate would be absent another bubble, if we eliminated all the negative equity.

DeLong on Wolf

Over at Equitable Growth: Night Thoughts on Martin Wolf's Shocking Shifts: Daily Focus by DeLong

DeLong: productive vs. extractive

Very Rough: Exploding Wealth Inequality and Its Rent-Seeking Society Consequences: (Early) Monday Focus for October 27, 2014 by DeLong

What I would like to see Emmanuel and Gabriel guess it is the share of wealth that is productive–that boosts the productivity of the working class and that shares those productivity benefits with workers–and the share of wealth that is extractive–that are pure claims on income rather than useful instruments of production, and thus that erode rather than boost the incomes of others. Wealth plays two roles, you see: as useful factors of production that boost productivity, and as extractive social power that is the result, the cause, and the maintainer of the rent-seeking society.

Housing and Fed Fail

Baker would agree investment is as expected - pace Yglesias, but would disagree about housing.

Over at Equitable Growth: Is There Really a Profits-Investment Disconnect?: (Late) Friday Focus for October 24, 2014 by DeLong

As a result of the housing bubble, the mortgage frauds, the attempts at regulatory arbitrage on their balance sheets by the money-center universal banks, the financial crisis, et sequelae, U.S. real GDP today is now 12% below what we back in 2007 expected it to be now. Since the post financial-crisis trough U.S. real economic growth has proceeded at 2.24%/year, compared to the 3.00%/year growth rate we saw between 1990 and 2007.

So far there are no signs anywhere that the gap between today and the pre-2007 trend in levels will be made up. So far there are no signs anywhere that the gap between today and the pre-2007 trend in growth rates will be made up. 

That means that, come 2024 a decade hence, we can now expect a U.S. economy to be 19.5% smaller than the economy we confidently projected as of 2007 we would have. 

And, with a capital-output ratio of roughly 3, that means that between 2007 and 2024 cumulative net investment will be lower than projected back in 2007 by 58.5%-point years of GDP--and cumulative gross investment considerably lower.

monetary policy and financial instability

Over at Equitable Growth: Financial Stability and Instability, Ultra-Low Interest Rates, Quantitative Easing, and the Mammon of Unrighteousness: (Late) Tuesday Focus for October 7, 2014 by DeLong

Bill Gross

Over at Equitable Growth: Why Was Bill Gross so Certain Interest Rates Were on the Rise Back in February 2011?: Tuesday Focus for September 30, 2014 by DeLong

The Pimco Perplex by Krugman

It’s fairly clear that the events of 2011 are a large part of the story of Bill Gross’s abrupt departure from Pimco; as Neil Irwin says,

A disastrous bet he made against United States Treasury bonds in 2011 led to three years of underperformance and billions in withdrawals.
And Joshua Brown has some choice quotes:

Gross compounded the move by being extremely vocal about his rationale – he went so far as to call Treasury bonds a “robbery” of investors given their ultra-low interest rates and the potential for inflation. He talked about the need for investors to “exorcise” US bonds from their portfolios, as though the asset class itself was demonic. He called investors in Treasury bonds “frogs being cooked alive in a pot.” 

But why was Gross betting so heavily against Treasuries? Brad DeLong tries to rationalize Gross’s behavior in terms of a coherent story about an impending U.S. recovery, which would lift us out of the liquidity trap. But Gross wasn’t saying anything like that. Instead, he was claiming that the Fed’s asset purchases — QE2 — were holding rates down, and warned that the impending spike in rates when QE2 ended would derail recovery. 

So why did he believe all that? It all comes down, I’d argue, to liquidity trap denial. 

Since 2008 the basic logic of the economic situation has been that the private sector is trying to run a huge surplus, and the public sector isn’t willing to run a corresponding deficit. The result is an economy awash in desired savings with nowhere to go. This in turn means that budget deficits aren’t competing with private borrowing, and therefore need not drive up interest rates. This isn’t hindsight; it’s what I and others have been saying since the very beginning. 

But a lot of people — politicians, of course, but also a lot of people in finance — have just refused to accept this account. They have clung to the view that budget deficits must lead to higher interest rates. You might think the failure of higher rates to materialize, year after year, would cause them to reassess — indeed, would have caused them to reassess years ago. 

Instead, however, many of them made excuses. Above all, the big excuse was that rates would have gone higher if only the Fed weren’t buying up the stuff. So QE2 acquired a much bigger role in their thinking than it deserved, leading to confident predictions of soaring rates as soon as it ended. And Gross put his money — and more importantly, his investors’ money — where his mouth was. 

And he was wrong. QE2 ended, and nothing happened to rates. 

You can see why I found Gillian Tett’s apologia for Gross — that he was blindsided by central bank intervention — frustrating. For one thing, that’s accepting a model that has failed with flying colors; but beyond that, Gross’s really bad call was almost exactly the opposite, his claim that rates would soar when the Fed’s intervention ended. 

As I’ve said, Gross of all people shouldn’t have fallen into this trap, since his own chief economist understood liquidity trap logic better than almost anyone. But finance people seem weirdly determined to believe in a macro canon whose hold on their perceptions appears to be completely unbreakable, no matter how much money it causes them to lose.

macro, Keynes and monetarism

Their Own Imaginary Keynes (Wonkish) by Krugman

IS-LM as “Obfuscation”? No: Thursday Focus for September 11, 2014 by DeLong

Nick Rowe on Money and Coordination Failures by David Glasner

What Is Special About Recessions in a “Monetary Economy”: Trollng Nick Rowe: Wednesday Focus for September 10, 2014 by DeLong

DeLong on Rowe and QE, monetary policy

THE TAPER, NICK ROWE, QUANTITATIVE EASING, AND INTELLECTUAL COORDINATION FAILURES: OVER AT EQUITABLE GROWTH: WEDNESDAY FOCUS FOR AUGUST 27, 2014/THE (NOT SO) HONEST BROKER FOR THE WEEK OF AUGUST 30, 2014 by DeLong

welfare reform

DeLong quotes Kevin Drum against his own instance that blue states did well with welfare reform while only red states didn't.

Kevin Drum: Welfare Reform and the Great Recession “CBPP…. Welfare reform… in its first few years… 

…seemed like a great success… but it was a bubbly economy that made the biggest difference. So how would welfare reform fare when it got hit with a real test? Answer: not so well. In late 2007 the Great Recession started, creating an extra 1.5 million families with children in poverty. TANF, however, barely responded at all. There was no room in strapped state budgets for more TANF funds…. This is why conservatives are so enamored of block grants. It’s not because they truly believe that states are better able to manage programs for the poor than the federal government. That’s frankly laughable. The reason they like block grants is because they know perfectly well that they’ll erode over time. That’s how you eventually drown the federal government in a bathtub. If Paul Ryan ever seriously proposes—and wins Republican support for—a welfare reform plan that includes block grants which (a) grow with inflation and (b) adjust automatically when recessions hit, I’ll pay attention. Until then, they’re just a Trojan Horse…. After all, those tax cuts for the rich won’t fund themselves, will they?

the rich and exclusiveness

#FF: THE BEST OF DANIEL DAVIES: OVER AT EQUITABLE GROWTH: FRIDAY FOCUS FOR AUGUST 22, 2014 by Delong

Daniel Davies: No Riff-Raff: "Entering into the Brad DeLong Eat The Rich Controversy...
...I offer this observation: 

If it is not the case "that the rich are spiteful--that they enjoy the envy of the poor", then why is the word "exclusive" so popular in the marketing material for hotels, nightclubs, holiday resorts and residential property developments. "Exclusive" is probably these days an advertising man's synonym for "nice", but it also has a clear and specific literal meaning. It means that the hotel, nightclub, resort etc is providing a bundled service; partly, the provision of a normal hotel or nightclub, and partly the service of excluding a segment of the population from that service. One pays extra to go to a health club whose swimming pool is not polluted by the greasy, hairy polloi. 

The reason that this service is valuable is that those who consume it get utility from a) dividing society into two groups, rich and poor, b) creating institutions which physically and socially segregate these two groups and c) them being in the "rich" group. Nobody would apply for membership of Bouji's or the Bucks if it was just a matter of waiting your turn and paying your fee. This would completely defeat the point of the exercise and destroy the value proposition. The point is that in order to attract a better class of customer, you have to keep the riff-raff out. Basil Fawlty understood this; why doesn't the blogosphere?

(See the Dorothy Parker quote at the top of the blog.)

Plosser and the rentiers

A Note on Understanding the Debate Inside the Federal Reserve: Afternoon Comment by DeLong

Dan Davies

Evening Must-Read: Daniel Davies: D-squared Digest–FOR Bigger Pies and Shorter Hours and AGAINST More-or-Less Everything Else by DeLong

Daniel Davies has unlocked his weblog. Plus: Daniel–Crooked Timber: “I’ve had a life event recently. As of today (I’m posting this from the WiFi at Geneva airport) and for the next year, I am doing less of the stockbroking, and more of the travelling round the world with my family…” | And: “The single most sensible thing said in political philosophy in the twentieth century was JK Galbraith’s aphorism…

…that the quest of conservative thought throughout the ages has been ‘the search for a higher moral justification for selfishness’. Some rightwingers are not hypocrites because they admit that their basic moral principle is ‘what I have, I keep’. Some rightwingers are hypocrites because they pretend that ‘what I have, I keep’ is always and everywhere the best way to express a general unparticularised love for all sentient things. Then there are the tricky cases where the rightwingers happen to be on the right side because we haven’t yet discovered a better form of social organisation than private property for solving several important classes of optimisation problem…. 

Hypocrisy doesn’t really enter into the equation with rightwing politics; you don’t (or shouldn’t) get any extra points for being sincere about being selfish. So where does that leave our students? Well, they’re young. They’re most likely insecure. They don’t actually have a lot, and it’s hardly surprising that they’re a bit precious about what they have…. People in general seem to be horribly uncomfortable with the idea that, by the standards they use to judge political situations, they themselves don’t come out as moral heroes. At base, this is a fairly childish and decidedly illiberal attitude; childish because it demands a sort of moral perfection which everyone intellectually knows can’t exist outside fairy stories (unless you count the way that parents appear to their children) and illiberal because it suggests that you’re only prepared to have normal social interactions with people who pass your own personal moral examination…

Philosophies of economic policymaking - a comment which growed by Daniel Davies

...And (I think I'm making my own position clear here) I think this is why Friedmanism fails.  Because actually, the buck does have to stop somewhere, and pretending that you can manage a complex system via a simple rule is basically impossible (it falls foul of Stafford Beer's Principle Of Sufficient Variability).  In practice, in a system based on a Taylor Rule, an Evans Rule or even an NGDP target, the buck stops with whoever it is that is responsible for maintaining the model which generates the forecasts of the control parameter.  And this person is always going to deny that he's making activist policy and claim that he's a technocrat who simply goes where the data takes him.  Friedmanism in economic policy, in the general sense I'm talking about here, is nothing more nor less than a distributed responsibility avoidance system.

market monetarists and gold bugs

MONDAY DELONG SMACKDOWN: THE WELLSPRINGS OF BAD MONETARY ECONOMICS IN GOLDBUGISM

bubbly stock market? and Fed Fail

UNDER WHAT CIRCUMSTANCES SHOULD YOU WORRY THAT THE STOCK MARKET IS "TOO HIGH"?: THE HONEST BROKER FOR THE WEEK OF AUGUST 16, 2014 by DeLong

The 10.8 trillion failures of the Federal Reserve by Rex Nutting

WASHINGTON (MarketWatch) — The conventional wisdom says the Federal Reserve is keeping interest rates so low that it doesn’t pay to play it safe, and that it’s encouraging investors to do all sorts of crazy things to earn a higher yield. 

Supposedly, the central bank is forcing investors pump up stocks, junk bonds, farm land and all the other bubbles you’ve been reading about. 

It’s a nice story, but the data show that U.S. investors are still conservative about where they put their money. 

Just how conservative are they? 

Data from the little-noticed financial accounts report show the American people have $10.8 trillion parked in cash, bank accounts and money-market funds that pay little or no interest. 

At the end of the first quarter, low-yielding assets totaled 84.5% of annual disposable personal income, the highest share in 23 years. Sure, people need to keep some money handy to pay their bills and some folks might have a few hundred or a few thousand in a rainy-day fund, but no one needs immediate access to the equivalent of 11 months of income. 

In essence, there’s $10.8 trillion stuffed into mattresses. 

That $10.8 trillion hoard represents a failure of Fed policy. 

Since the Fed began quantitative easing in September 2012, U.S. households have socked away $1.17 trillion in their low-yield accounts. That means that 95% of the Fed’s $1.24 trillion QE3 ended up not in bubbly markets but in a safe and boring bank account. 

Since the recession began more than six years ago, the Fed has been trying to encourage people to put their money to work in the economy. That’s why the Fed has kept interest rates low and has been buying up trillions of dollars worth of relatively safe securities, hoping to push us to take on a little more risk. 

After all, an economy can’t really grow if no one’s willing to gamble on the future. 

But many of us don’t want to. We are still afraid, so we prefer to put a large part of our savings in assets that are guaranteed, like FDIC-insured bank accounts, or into money-market funds whose sponsor guarantees the return of the principle.

The point of Fed policy has been to get people either to consume more or to lend their money to others who would invest it productively. Either way, aggregate demand would rise, boosting the economy and creating more jobs. 

The Fed can point to some successes: Consumer spending and business investment have bounced back, but both are somewhat weaker than they usually are coming out of recessions. 

The majority of Americans are doing their patriotic bit, spending nearly everything they earn. A recent report from the Fed showed that little more than a third of families are able to save any money at all after they pay their bills each month. More than 60% say they couldn’t come up with $400 in an emergency without borrowing or pawning something. 

Most people are saving next to nothing, while just a few are saving a significant amount. Those who do save are saving a ton — more than $1.2 trillion a year. 

According to the Fed’s financial accounts data and definitions, the personal savings rate has averaged about 10% of disposable income since the recession ended, up from around 7% before the recession. That means upper-middle class and wealthy Americans are saving nearly $400 billion more a year than they used to. 

That extra $400 billion would be a boon to the economy if it were being consumed or invested.
But high-income Americans don’t want to consume any more than they already do. The upper-middle class is desperately saving for their kids’ college and for their own retirement. And the truly wealthy have everything they desire, so they are saving a lot, buying equities, bonds and real estate, and adding to their bank balance. 

In theory, the money they deposit in the bank should flow into the economy when the bank makes a loan. But bank lending to businesses has been very soft, up just $160 billion in the past year. 

Businesses haven’t been relying on bank loans anyway, because their internal cash flow has been more than adequate to finance their investments in new structures, equipment and intellectual property. Since the recession ended, internal funds have exceeded capital spending in every quarter. 

When companies do borrow, they use the proceeds to buy back shares or to acquire whole companies, neither of which adds to the stock of our national wealth. Since the recession ended, corporations have spent about twice as much money on buying their own stock and the shares of acquired companies as they have borrowed from banks. 

Corporations have been buying so many shares that they haven’t raised any money on net in the stock market from households in years. In fact, households have been raising money from corporations, to the tune of about $450 billion a year. 

So, even though U.S. households are saving lots of money, very little of it is flowing through to the economy. There are 10.8 trillion reasons to think the Fed has failed to get the American people to take on more risk.

the economy

OVER AT EQUITABLE GROWTH: WHY IS EMPLOYMENT TODAY SO MUCH LOWER THAN WE EXPECTED SEVEN YEARS AGO?: (LATE) MONDAY FOCUS FOR AUGUST 5, 2014 by DeLong

What's Holding the Economy Back: Revised Version by Dean Baker

Another Reminder About the Stupidity of Austerity by Josh Bivens

Simon Wren-Lewis and Nick Rowe Annoy Each Other…: Friday Focus for August 1, 2014 by DeLong

...In the case of (2), the key shortage is not of the stock of the liquid medium exchange per se or an elevation of the entire risk spectrum of real interest rates above the Wicksellian natural rate because of the zero lower bound, but rather the inability of financial intermediaries to raise enough capital and trust to do the risk transformation. The consequence is safe interest rates at or below their first-best Wicksellian natural values and risky interest rates well above their first-best Wicksellian natural values. In this case a resort to monetary expansion–even if the economy is away from its zero interest-rate lower bound–provides incentives to invest too much of society’s wealth in long-duration assets, with the added complication that the financial sector has a difficult time distinguishing A valid long-duration asset from a Ponzi scheme because neither requires the investors be shown the money in any serious way.

inflation (or a lack thereof) and the rightwing fever swamp

IS U.S. AT IMMEDIATE RISK OF BECOMING "ARGENTINA"?: MONDAY SMACKDOWN/THE HONEST BROKER FOR THE WEEK OF JULY 12, 2014 by DeLong

helicopter drops and the floor system

A quick note on “helicopter drops” by Steve Randy Waldman

(via Steve Roth)

A new link meme? The great synthesis.

DeLong objects.

And here.

This relates to the Floor system.