aggregate production function and marginal productivity theory

Gross (with depreciation) versus net. Elasticity of substitution.

Piketty’s Fair-Weather Friends by Seth Ackerman

The problem for the book is that its gloomy forecast of a return to “patrimonial capitalism” is based on the prediction that over the next decades, the gap between r and g will widen due to a fall in the growth rate (g). No one has a problem with the prediction of falling growth — all else equal, this will happen simply if population growth slows, as it almost certainly will. The problem is that if growth slows while the rate of saving (i.e. investment) stays constant, capital will start accumulating faster than output is rising, meaning the measured capital-output ratio will increase. 

But marginal productivity theory sees a rise in the capital-output ratio as an increase in the “supply of capital,” which, in classic supply-and-demand logic, ought to bring about a reduction in its “price” — that is, a fall in r. According to the theory, this should neutralize the effect on the r-g gap. 

In his faint-praise review of Piketty’s book, Larry Summers was unyielding on this point: “Economists universally believe in the law of diminishing returns,” he insisted, in a line resounding with the thud of a fist pounding a lectern. Piketty’s forecast of rising r - g must be rejected, Summers concluded, because “as capital accumulates, the incremental return on an additional unit of capital declines.” 

Piketty had of course been aware of this issue when he wrote the book, and he made an attempt to reconcile his argument with conventional theory. He contended that as growth slows and the capital-output ratio rises, r might decline (as theory predicts) but the magnitude of the decline might still be small enough to permit a net widening in the r - g gap. 

The technical term for the quantitative relationship involved (that is, between the size of a change in the capital-output ratio and the size of the change in r that supposedly results, or vice versa) is the elasticity of substitution: the higher the elasticity, the smaller the “response” of r to a given change in the volume of capital. When the elasticity is higher, it’s taken to signify that the force of diminishing returns to capital is weaker, due to richer technological opportunities for labor-saving investment. 

As Summers pointed out in his review, “economists have tried forever to estimate elasticities of substitution with many types of data,” so there’s a large literature on the subject. This is the so-called production function literature, which tries to apply marginal productivity theory empirically by estimating the supposed causal relationships between quantities of labor and capital inputs, on the one hand, and the quantity of output on the other. Piketty’s argument was that the elasticity needed for his forecast to come true isn’t all that much higher than at least a few of the estimates found in the existing production function literature. 

But in saying so, he made a crucial error. He confused two different ways of measuring the elasticity: the usual (gross) measure, which counts depreciation as part of the return to capital, and his own (net) measure, which doesn’t. 

When this discrepancy is accounted for, the elasticity Piketty requires turns out to be far, far higher than any known estimate. This was first pointed out in mid-April by Matt Rognlie, an MIT graduate student and blogger. The problem was ruefully acknowledged by Brad DeLong, the former Clinton administration economist, who is sympathetic to Piketty’s project. 

Summers’s review a month later in the journal Democracy sealed the judgment: Piketty “misreads the literature by conflating gross and net returns to capital,” Summers wrote. “I know of no study suggesting that measuring output in net terms, the elasticity of substitution is greater than 1, and I know of quite a few suggesting the contrary.” 

A reader at this point could be forgiven for feeling confused. Didn’t Piketty gather his own data? He did, of course. That Herculean effort by him and his team of international colleagues, compiling statistics on historical rates of return and capital volumes in many countries going back to the eighteenth century, is the one point on which all reviews are unanimous in their praise. 

As Piketty makes clear, those data — which he’s made freely available on the internet for anyone to check — are indeed “explained” by a net elasticity of 1.3-1.6, which would indicate an extremely weak force of diminishing returns to capital. Yet it’s also true that this figure is far higher than any found in the existing literature — probably more than twice as high as the highest typical estimates. 

What should we make of this?

First, Piketty’s estimate of the elasticity of substitution can’t really be compared with those in the literature. His is based on economy-wide data covering decades and centuries while estimates in the literature typically cover only a few years, and often just a few industries. Moreover, his pertain to all private wealth, while the literature focuses narrowly on production capital. These are very different concepts. 

But most importantly, given the flawed marginalist theory behind it, and its even more flawed basis of measurement — a subject there’s no space to go into here, but which marks a fundamental critique of the production function literature advanced in an important book published just two months before Piketty’s — the elasticity of substitution simply cannot be regarded as a meaningful measure of an economy’s technology (or anything else), or as providing any clue to its future. 

What’s essential, rather, is Piketty’s empirical demonstration that the rate of return on wealth has been remarkably stable over centuries — and, contraSummers, with no visible tendency to vary in any consistent way against the “supply of capital.” 

Therefore, if we expect growth to slow, the most reasonable expectation is that the r - g gap will in fact increase, and inherited wealth will expand.

Three Ways of Looking at alpha = r k

Three Ways of Looking at alpha = r k by JW Mason

Piketty's "first law of capitalism" is the accounting identity

α = r k

where α is the share of capital income in total output, r is the average return on capital, and k is the aggregate capital-output ratio.

As accounting, this is true by definition. As economics, what kind of economic behavior does it describe? There are three ways of looking at it. 

In the standard version, the profit share is determined by a production function, which is given by technology. The profit rate r* required by capital owners is fixed by technology in combination with time preferences. In this closure, k is the endogenous, or adjusting, variable.  Investment rises or falls whenever the realized profit rate differs from the required rate, thus keeping k at the level that satisfies the equation for r  = r*. 

In Piketty’s version, r is fixed (somehow; the mechanism is not clear) and k is determined by savings behavior and (exogenous) growth according to his "second law of capitalism": 

k = s/g

That leaves α to passively accommodate r and k. Capitalists get whatever the current capital stock and fixed profit rate entitle them to, and workers get whatever is left over; in effect, workers are the residual claimants in Piketty's system. (This is the opposite of the classical view, in which wages are fixed and capitalists get the residual.)

In a third interpretation, we could say that α and r are set institutionally -- α through some kind of bargaining process, or by the degree of monopoly, r perhaps by the interest rate set in the financial system. The value of the capital stock is then given by capitalizing the flow of profits α Y at the discount rate r. (Y is total output.) This interpretation is the natural one if we think of “capital” as a claim to a share of the surplus as opposed to physical means of production. 

This interpretation clearly applies to pure land, or to the market value of a particular firm. What if it applied to capital in general? Since claims on the surplus -- including claims exercised through nonproduced assets like land -- are not created by reserving output from consumption, aggregate savings would be a meaningless accounting construct in this case. (Or we could adopt a Hicksian view of saving in which it equals the change in net wealth by definition.) Looking at things this way also puts r > g in a different light. Suppose we think of the capital stock as a whole as something like the stock of a firm, which entitles the owners to the flow of profits from that firm. If the profits today are α Y and output is expected to grow at a rate g, what is the value of the stock today? If we discount future profits at r, then it is the sum from t=0 to t=infinity of α Y (1 + g)^t / (1 + r)^t, which works out to α Y / (r - g). So if we can take the rate of return on capital as the discount rate on future profits, then r > g is implied by a finite value of the capital stock.

We shouldn't ask what capital "really" is. It really is a quantity of money in a process of self-expansion, and it really is a mass of means of production, and it really is authority over the production process. But the particular historical questions Piketty is interested in may be better suited to thinking of capital as a claim on the social surplus than as a physical quantity of means of production. Seth Ackerman has some very interesting thoughts along these lines in his contribution to the Jacobin symposium on the book. 

Game of Thrones

Game Of Thrones (experts): “The Watchers On The Wall” (for experts)

Game Of Thrones (experts): “The Watchers On The Wall” (for newbies)

Halt And Catch Fire: “FUD”

Abenomics

Japan growth up

Orphan Black

AV Club reviews Orphan Black: “Variable And Full Of Perturbation”

Avant Gardener

Courtney Barnett's Avant Gardener

Pitchfork

One of the tags on Melbourne-based songwriter Courtney Barnett's Bandcamp page is "slacker," a term with roots in the 1890s but stronger ties to a decade about a hundred years later. Barnett's music-- like the term-- feels older, too. Building on the wordy irreverence of mid-'60s Bob Dylan and a Byrds-ian blend of psychedelia, folk and country, "Avant Gardener" tells the story of a girl dragging her underemployed ass out of bed late on a Monday morning to try her hand at gardening-- at which point she suffers a panic attack. 

The scene unfolds like a dream: "Halfway down High Street, Andy looks ambivalent/ He's probably wondering what I'm doing getting in an ambulance," Barnett sings, her voice drifting through the lines in sweet speak-sing. "The paramedic thinks I'm clever 'cause I play guitar/ I think she's clever 'cause she stops people dying." They're both right. Later, the song's poor narrator struggles to get a good pull on her asthma inhaler. "I was never good at smoking bongs," she confesses. Some slacker.

AVANT GARDENER

I sleep in late
Another day
Oh what a wonder
Oh what a waste.
It’s a monday
It’s so mundane
What exciting things
Will happen today?
The yard is full of hard rubbish it’s a mess and
I guess the neighbours must think we run a meth lab
We should ammend that
I pull the sheets back
It’s 40 degrees
And i feel like i’m dying.
Life’s getting hard in here
So i do some gardening
Anything to take my mind away from where it’s sposed to be.
The nice lady next door talks of green beds
And all the nice things that she wants to plant in them
I wanna grow tomatoes on the front steps.
Sunflowers, bean sprouts, sweet corn and radishes.
I feel pro-active
I pull out weeds
All of a sudden
I’m having trouble breathing in.

My hands are shaky
My knees are weak
I can’t seem to stand
On my own two feet
I’m breathing but i’m wheezing
Feel like i’m emphysem-in’
My throat feels like a funnel
Filled with weet bix and kerosene and
Oh no, next thing i know
They call up triple o
I’d rather die than owe the hospital
Till I get old
I get adrenalin
Straight to the heart
I feel like Uma Thurman
Post-overdosing kick start
Reminds me of the time
When i was really sick and i
Had too much psuedoefedryn and i
Couldn’t sleep at night
Halfway down high street, andy looks ambivalent
He’s probably wondering what i’m doing getting in an ambulance
The paramedic thinks i’m clever cos i play guitar
I think she’s clever cos she stops people dying
Anaphylactic and super hypocondriactic
Should’ve stayed in bed today
I much prefer the mundane.
I take a hit from
An asthma puffer
I do it wrong
I was never good at smoking bongs.
I’m not that good at breathing in.

oedipal

This Be The Verse

BY PHILIP LARKIN

They fuck you up, your mum and dad.   

    They may not mean to, but they do.   

They fill you with the faults they had

    And add some extra, just for you.

But they were fucked up in their turn

    By fools in old-style hats and coats,   

Who half the time were soppy-stern

    And half at one another’s throats.

Man hands on misery to man.

    It deepens like a coastal shelf.

Get out as early as you can,

    And don’t have any kids yourself.

from the controversial Jacobin piece on bro-bashing. "While intergenerational critique is both healthy and necessary, I’d hope we could transcend the Oedipal alienation of “This Be the Verse…”" I don't think it's Oedipal, just realistic. Parents can be assholes because they're miserable. There's little accountability. And possibly parents are easily tempted to fuck up their kids. Power corrupts. So don't have kids.

This started with a feminist lefty tweeting about a "bro-battle" between Henwood and Piketty. If I remember correctly Henwood used to write about Harold Bloom who wrote about the fimsily related Anxiety of Influence in literature.

Henwood's criticism of Piketty was that he was too moderate. Henwood is also a critic of DeBlasio and Obama, so perhaps Aaron Bady is a supporter of them and considers Henwood's criticisms as "prolier-than-thou" and leftier than thou and conceives of it as tough "bro" behavior. But then again he mentions "data."

Lonerism

Feels Like We Only Going Backwards by Tame Impala

K21

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?

Henwood:

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.

Krugman:

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."
Solow:

"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 "

Interfluidity

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."

Naidu: 
"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."

ONE EQUATION TO RULE THEM ALL

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.

http://effectivedemand.typepad.com/ed/synopsis-of-the-effective-demand-research.html

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

Game of Thrones

Game Of Thrones overtakes The Sopranosas HBO’s biggest series ever

thoughts

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 Krugman, Gauti 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."

K21

OVER AT EQUITABLE GROWTH: TRYING, YET AGAIN, TO COMMUNICATE THE ARITHMETIC SCAFFOLDING OF PIKETTY'S "CAPITAL IN THE TWENTY-FIRST CENTURY": THURSDAY FOCUS: JUNE 5, 2014 by DeLong

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.

interfluidity

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

So much for the zero bound by Scott Sumner

You're Gonna Go Far, Kid

plutonomy

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)

unions

Via Yglesias, Josh Barro is against unions.

Piketty

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

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 Game Of Thrones (newbie): “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:

K21

r>g meets c>l by Jared Bernstein

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”

K21

Capital Eats the World by Suresh Naidu

Chastity Bites

Waldman

Welfare economics: an introduction (part 1 of a series) by Steve Randy Waldman

Bend It Like Beckham

Just saw the movie again. Parminder Nagra's character Jess is destined by tradition to marry and become a mother and housewife. But she loves soccer (football) and is good it at. She gets to do what she wants with the help of her coach Joe, her father and her friends Jules and Tony. She didn't build that.

Elizabeth Bishop was allergic to peanuts.

She was in Brazil during the 1964 coup d'état.

Reaching for the Moon

Amy Poehler memoir

I was a fan of Upright Citizens Brigade way back when:

Just as I was a fan of Colbert on Exit 57.

The Normal Heart

The Media Forgets That AIDS Is Still an Epidemic, But Hollywood Doesn't. 'The Normal Heart' is a damning indictment of our government's negligence by Eric Sasson

Wow all of the actors were really, really good. Mark Ruffalo, Julia Roberts, Matt Bomer, Jim Parsons, Taylor Kitsch, Alfred Molina, etc. Brad Pitt was one of the executive producers.

Baker on Geithner

Stress Test: The Indictment of Timothy Geithner by Dean Baker

Geithner

Tim Geithner is wrong about FDR by Matt O'Brien

I saw Geithner on the Daily Show and he said the turn to austerity was too abrupt, but in reality he led the charge towards deficit reduction and famously said fiscal stimulus is like "sugar."

Geithner

HOW TIMOTHY GEITHNER FAILED HIS STRESS TEST by Mike Konczal

The Americans

AV Club reviews The Americans: “Echo”

The Americans’ showrunners walk through a terrific season character by character. Also: Discussion of the finale’s most devastating twists by Todd VanDerWerff

Great Clusterfuck

It Wasn't Household Debt That Caused the Great Recession by Heather Boushey

It’s not just that 7.4 million workers lost their job during the years of the Great Recession of 2007-2009 but also that the employment crisis continues to this day. While jobs are no longer being shed at the rate of 20,000 a day, the share of the U.S. population with a job fell to a low of 58.2 percent in November 2010 from a high of 63.4 percent in December 2006, but has only increased by a fraction of a percentage since then, hitting just 58.9 percent in April 2014.

...

Their story starts with an accumulation of debt—lots of it. After the Asian financial crisis in 1997, investors were looking for safe havens to park their money. What they wanted were AAA-rated bonds. What they got were mortgage-backed securities that were rated AAA but turned out to be junk. As we all now know—but most of us didn’t know at the time—Wall Street firms in the early 2000s began slicing and dicing and then reassembling mortgage debt into more and more exotic and risky mortgage-backed securities in ways that made them look risk-free. 

But, it wasn’t just that there was more securitization. It was that loans made to riskier borrowers were more likely to be securitized. This both drove the housing bubble and made the consequences of it popping all the worse. Mian and Sufi point out that between 2002 and 2005, the growth in mortgage credit and household incomes became negatively correlated, that is, credit expanded in areas where incomes were declining. This makes no sense: How can you pay back a loan if your income is falling? They point to academic research by Yuliya Demyanyk and Otto Van Hemert showing the profound consequences: By 2006, loans had become so disconnected from prudent business practices that “an unusually large fraction of subprime mortgages originated in 2006 and 2007 [became] delinquent or in foreclosure only months later.” 

As these foreclosures began to pile up, affected households cut back sharply on spending. Thus, the catalyst for Great Recession had begun two years before the dramatic demise of Lehman Brothers. In the second quarter of 2006, the collapse in consumption started with residential investment, which fell by a 17 percent annual rate. Non-residential investment didn’t begin to fall until late in 2008, but by then households had already pared back spending sharply. 

This fallout from the collapse of the housing bubble was amplified by the unequal distribution of net wealth. What Mian and Sufi find is that counties with the largest decline in total net worth—were the ones that cut back most on spending when house prices declined. As housing prices began falling in 2006, in counties where net worth had declined most, consumption fell by almost 20 percent, compared to only five percent for the entire U.S. economy. In contrast, even through 2008, counties that avoided the collapse in net worth saw almost no decline in spending. If debt had been more equally distributed then the decline in consumption would have been less dramatic and the recession would have been less devastating.

late capitalism and identity

Buzzfeed's founder used to write Marxist theory and it explains Buzzfeed perfectly by Dylan Matthews

I'm probably totally off but makes me think of Mike Judge's Office Space and Silicon Valley that combine relatively recent phenomena and identities like not very masculine technonerds and rap music.

dirigism and "free market" reforms

Modi's Role Model: Margaret Thatcher or Lee Kuan Yew? by John Cassidy

trade deficit

The Trade Deficit: The Biggest Obstacle to Full Employment by Dean Baker

K21

Piketty crossing the Delaware by John Quiggin

Game of Thrones

Game of Thrones (experts): “Mockingbird”

Game of Thrones (newbie): “Mockingbird”

debt loads

The Nonexistent Rise in Household Consumption by JW Mason

In our "Fisher dynamics" paper, Arjun Jayadev and I showed that the rise in debt-income ratios for the household sector is not due to any increase in household borrowing, but can be entirely explained by higher interest rates relative to income growth and inflation.

Pace Dean Baker and House of Debt. Or maybe not.

Diagnoses and Prescriptions: The Great Recession by Jared Bernstein

trade and currency policy

DeLong:

Ryan Avent: Secular Stagnation: Glut Busters: “A particular view about the macroeconomics of the pre-crisis period seems to be coalescing…. Since we haven’t solved the underlying savings glut, the American economy now has three options, according to this view: 1. Suffer through the same low growth (“secular stagnation”) that was characteristic of the early 2000s. 2. Use monetary policy to raise demand through higher asset prices and credit growth, restoring decent growth but creating a risk of new bubbles. 3. Use deficit-financed fiscal policy to absorb excess savings and boost demand, without relying on rapid growth in private credit. Certainly, parts of this story are correct. But is this really the best way to describe what was taking place?… One might… argue that the problem in the 2000s was not that the Fed haplessly created a bubble in order get the economy going again…. The problem was that it… ought to have done… was intervene aggressively in foreign-exchange markets to dampen the dollar’s rapid appreciation…. Doug Campbell… [and] Ju Hyun Pyun…. Now obviously, direct intervention in foreign-exchange markets is not the sort of thing America is supposed to do…. But this is a taboo that needs rethinking. Depreciations have historically been the most effective way to lift expectations for growth and inflation…. The Fed will not do any of the above autonomously. The decision to change the global monetary system will be political, just as it was in 1933 and in 1971, when American presidents made the necessary policy shift. Such decisions only tend to be made when the status quo is clearly untenable or when large political majorities demand a different course. Unfortunately, America’s secular stagnation mess does not seem likely to test either limit for some time to come.”

Great Clusterfuck

Reviewing Ryan Avent’s Review of Amir Sufi and Atif Mian’s House of Debt: Friday Focus: May 16, 2014 by DeLong

neoliberalism

The Italian Disaster by Perry Anderson

K21 and capital rate of return, i.e "r"

Piketty:

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 – in real estate and in some segments of the stock market – and so you have huge return on some other assets at the same time as you have zero interest rates on the public debt. So in fact, this is probably amplifying the inequality in rates of return, in this huge heterogeneity of rates of return. 

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. My second point is that you have a huge heterogeneity in rates of return between assets, and that having very low interest rates on certain assets, such as public debt in particular, is not necessarily a good thing because it stimulates very high bubbles in capital gains and rates of return on other assets at the same time.

IMF

Stop blaming the IMF for everything by Matt O'Brien

K21

Good piece by Porter.

The Politics of Income Inequality by Eduardo Porter

The Great Recession helped make a case for redistribution. Jason Furman, President Obama’s chief economic adviser, says that the administration’s initiatives — like higher income tax rates, subsidies to buy health insurance under the Affordable Care Act and expanded tax breaks for poor families with children — have produced “the most significant policy-induced reduction in inequality in at least 40 years.” Just the tax measures, Mr. Furman estimated, take off about half a decade’s worth of increasing inequality, as measured by the so-called Gini coefficient. 

Is this as good as it gets? For all the struggle on the part of the White House, the income gap keeps growing. Maybe this means that, in the absence of war, democracy can’t do much more.

Piketty:

I am not as pessimistic as a number of observers and reviewers seem to be after reading my book, and so I am sorry if my book made them pessimistic. The development of information technology and the internet also opens up new ways of spreading information, and new ways of mobilisation. I also believe in the power of ideas and books – and this can also contribute to the diffusion of information, and can try to contribute to a wider political mobilization.

a problem

Sorkin:

At another point, he cheerfully relayed a story that also appears in his book about the time he sought advice from Bill Clinton on how to pursue a more populist strategy: “You could take Lloyd Blankfein into a dark alley,” Clinton said, “and slit his throat, and it would satisfy them for about two days. Then the blood lust would rise again.”

Kaminska quotes Summers review of K21:

Even where capital accumulation is concerned, I am not sure that Piketty’s theory emphasizes the right aspects. Looking to the future, my guess is that the main story connecting capital accumulation and inequality will not be Piketty’s tale of amassing fortunes. It will be the devastating consequences of robots, 3-D printing, artificial intelligence, and the like for those who perform routine tasks. Already there are more American men on disability insurance than doing production work in manufacturing. And the trends are all in the wrong direction, particularly for the less skilled, as the capacity of capital embodying artificial intelligence to replace white-collar as well as blue-collar work will increase rapidly in the years ahead.

Larry Summers gets it wrong on Piketty and Robots by Colin Lewis (via DeLong)

The Americans

AV Club reviews The Americans: “Operation Chronicle”

Person of Interest

AV Club reviews Person Of Interest: “Deus Ex Machina”

How ‘Person’ Retains Interest at Episode 23 by Mike Hale

macro, pollution, inequality and capitalism

"Like pollution, inequality may be necessary correlate of important and valuable processes, and so should be tolerated to a degree. But like pollution, inequality without bound is inconsistent with the efficient functioning of free markets. If you are a lover of markets, you ought wish to limit inequality in order to preserve markets."

Should markets clear? by Steve Randy Waldman

REBELLIOUS ECONOMICS STUDENTS HAVE A POINT by John Cassidy

The Great Clusterfuck

What Caused Great Recession? Household Deleveraging or ZLB? by David Beckworth

Geithner

AND DAN DAVIES DELIVERS TIM GEITHNER'S SOLILOQUY AS THE EARL OF KENT IN "KING BARACK": MONDAY REAL-TIME SMACKDOWN WATCH by DeLong

Why Tim Geithner is wrong on homeowner debt relief by Atif Mian and Amir Sufi

Tim Geithner: More Banker Than the Bankers by Noam Scheiber

Game of Thrones

AV club reviews Game Of Thrones (newbies): “The Laws Of Gods And Men”

AV club reviews Game Of Thrones (experts): “The Laws Of Gods And Men”

Mad Men

AV Club reviews Mad Men "The Runaways." 

I weirdly prefigured(?) the HAL scene in this post from last Wednesday.

Orphan Black

AV Club reviews Orphan Black: "Governed As It Were Chance"