1/8/19: Wages vs GDP growth: when economic growth stops benefiting workers

I have posted earlier some data on the gap between real GDP and real disposable income per capita in the U.S. (see here: https://trueeconomics.blogspot.com/2019/08/1819-debasement-of-real-disposable.html) that evidences the longer-term nature of the ongoing debasement of real incomes in the repeated cycles of financialisation of the U.S. economy. Here is another view of the same subject matter:

Per chart above, consistent with my arguments in the case of disposable income, U.S. labor incomes have been sustaining ongoing deterioration relative to overall economic growth since at least the 1970s. In fact, the current expansionary cycle (yellow line) shows relatively benign speed of deterioration in real wages or labor income share of total real GDP, although the length of the cycle means that the total end-of-recession-to-present decline of ca 54 percent is deeper than that in the expansion of the 2000s (decline of 50 percent).

A different view of the same data is presented below, plotting historical gap between wages and GDP over longer horizon and showing expansion-periods' averages, contrasted against Trump Administration tenure average:

Once again, all evidence points to the decreasing, not increasing rate of wages fall relative to GDP over the years.

Of course, the effects are cumulative, which means that our perceptions of labor share collapse and the amplifying pressure on labor income earners in the economy is warranted.

1/8/19: Debasement of Real Disposable Income share of GDP: Historical Trends

I have been crunching some data recently on the historical gap between real GDP growth and wages/income of households. Some of this work will be forthcoming in an article due later this month, so keep an eye out for it. Some of it is post-dating the article submission. Here is an example of the latter. The following chart plots index of real GDP from 1Q 1959 through 1Q 2019 against the index of real disposable income per capita. Both indices are set at 100 at 1959 average.

There are 5 distinct periods over which growth in real GDP moved further and further away from growth in real disposable income. All are associated with monetary accommodation periods post-recessions, and all are associated with increasing post-recession financialization of the U.S. economy and financial or real estate asset booms.

Interestingly, the current rate of acceleration in the gap between economic growth and disposable income growth is... underwhelming. It pales in comparison to what was witnessed in the 1980s, 1990s and 2000s. To see this, consider the chart showing this gap by itself:

Despite our commonly-expressed public, media and analysts' perceptions of the declining share of economic growth going to disposable personal incomes being a new (current) phenomena, the reality of historical data paints a different picture. Most of declines in the share of economic activity accruing to wages, bonuses and investment and retirement incomes have taken place in previous decades, with the ratio of real GDP to real disposable income being relatively stable from the start of 2013 on. Prior to that rate of the decline in the relative share of disposable income has been less sharp from 1999 through 2012, when compared against all other decades.

The debasement of real incomes has been a steady and historical continuous process over the last 60 years.

4/8/18: Collapsed Labor Share of Economy 1947-2016

The frightening fate of the U.S. labor is best highlighted by the share of labor in economic output. Fred database only provides the data through 2014, and then stops. BLS provides data through 3Q 2016, and then stops. No one bothers to measure the contribution of the largest factor of production to the economy any more. Here is the BLS data:

The share of labor contribution in total economic output has, basically, collapsed. The slide started with the technological revolutions of the 1960s and 1970s, followed by computerization and supply chain management revolutions of the 1980s and 1990s. But the real collapse took place starting with 2002 post-dot.Com bust. Despite the tight labor markets and very low unemployment, labor share never really recovered from this decimation.

If this chart offers a stark cross-reference to socio-political environment we are living in today, such cross-referencing is not ad hoc. Labor is what we, people, have to supply in return for the life's necessities and luxuries. For the majority of us, it is ALL that we can supply.  Even our assets, such as homes and pensions savings are, ultimately, tied to labor, not to capital, because their performance is linked to our peers' labor-paid demand. A middle class house is an asset to other middle class households. It is not an asset to the jet-set shopping for homes in the Hamptons. When that demand collapses, as is currently happening in a number of rapidly ageing economies, real assets we hold turn out to be if not completely worthless (https://www.businessinsider.com/italian-town-free-homes-residents-2018-1), at least severely depressed in value (https://www.soa.org/Files/.../lit-review-popl-aging-asset-values-impact-pension.pdf).

So a decline in economic value added share accruing to labor is a transfer of income (and therefore wealth) from those who work for living to those who invest for living (invest in technology and/or financial assets). This game is a zero sum game even after we account for pensions funds and household investments: someone loses (labor), someone gains (investors). It is made even worse by higher taxes on labor and by transfers via monetary policy (Quantitative Easing).

The only way to offset such transfers is to vest labor with claims to financial returns. In other words, by providing workers with shares in the financial markets. Simply taxing and shifting income from higher earners to lower earners won't do the trick, because some higher earners are generating their income through labor (and human capital), while others are doing so through inherited and acquired financial assets. Taxing income of the latter implies taxing incomes of the former, which, in turn, depresses returns to investment in human capital (or, ultimately, returns to investment in labor).

Basic income structure of the future will have to achieve exactly that: create broad share ownership of financial instruments linked to financial and technological capital amongst those supplying labor.

20/3/18: Market Power and 5 Macroeconomic Puzzles: Rotten State of the ‘Competitive Markets’

Washington Centre for Equitable Growth has recently published a new modified version of the neoclassical model attempting to explain a number of empirical facts. A paper by Gauti Eggertsson, Jacob A. Robbins, Ella Getz Wold, titled “Kaldor and Piketty’s Facts: The Rise of Monopoly Power in the United States” (February 2018: http://equitablegrowth.org/working-papers/kaldor-piketty-monopoly-power/) departs from the empirical observation that the empirical facts of the real economy can be reconciled with in contrast to the traditional neoclassical models. Specifically, per authors:

• “(P1) An increase in the financial wealth-to-income ratio despite low savings rates, with a stagnating capital-to-income ratio.”
• “(P2) An increase in Tobin’s Q to a level permanently above 1.” So that stock market value of assets exceeds productive value of assets.
• “(P3) A decrease in the real rate of interest, while the measured average return on capital is relatively constant.” So profit margins on investment rise.
• “(P4) An increase in the pure profit share, with a decrease in the capital and labor share.” So shareholders get to carry away more in returns, while capital suppliers and workers get less.
• “(P5) A decrease in investment-to-output, even given historically low borrowing costs and a high value of empirical Tobin’s Q.” In  other words, low investment, even as the interest rates (cost of investment) fall.

Table 1: Factor shares. 5-year moving averages

The paper then modifies the standard neoclassical model. The authors introduce a market concentration distortion: “an increase in monopoly profits, [coupled] with a decrease in the natural rate of interest”.

To justify this, they, first, “depart from perfect competition, and posit that market power allows firms to make pure profits”. Second, authors assert that “there are barriers to entry, which prevent competition from driving these profits to zero.” This is consistent with the proposition that we are witnessing increased pressure of monopolistic and oligopolistic competition in the U.S. economy, as covered by me in a range of previous posts and articles.

“Third, claims to the (nonzero) pure profits of firms are traded and priced, and the ratio of the market
value of firms (which includes the rights to pure profits) to the replacement value of the productive capital stock is permanently above one; this ratio is commonly known as “empirical Tobin’s Q”.” Note that the tradability of pure profits of the firm (as opposed to rents on capital) is a distinct part of the model. Traditionally, we think of stock markets valuations as reflective of economic rents, not pure profits. That is so, because we assume that over the longer run, pure profits are driven down to zero. However, if/when pure profits are non-zero, stock market valuations are reflective of both: capital rents (low, due to extremely low cost of credit), plus pure profit (high, due to the transfers from interest rate subsidy from labor and technology logical capital to financial capital via pure profit monetisation, plus, dare I say it, the monetary policies excesses of the recent past).

CHART 1

Now, the authors confine their explanation for market power perpetuation to the following: “Because of the barriers to entry, the assets which hold the rights to the pure profits are non-reproducible: unlike productive capital, individuals cannot recreate these assets through investment, they must instead purchase them from others.” Personally, I would agree that barriers to entry - formal ones, e.g. via licensing and regulation - are one part of the problem. But there is a more direct problem arising in the American economy as well: concentration driven by pure monopolistic differentiation (see buy post on this here: http://trueeconomics.blogspot.com/2018/03/28218-san-francisco-fed-research.html, and here: http://trueeconomics.blogspot.com/2018/02/7218-american-wages-corporotocracy-why.html, and here: http://trueeconomics.blogspot.com/2018/02/9218-angus-deaton-on-monopolization-and.html.

The authors simply ignore this consideration as if it represents an uncomfortable truth about the state of the modern American society and economy. Instead, they create a marginal wrap-around argument to explain these dynamics: “This produces an interesting result: returns to assets that receive the rights to pure profits are significantly riskier than the returns to productive capital.” Why would returns to pure profit assets be riskier? Because the authors want to explain the differential between the returns to pure profit (higher) and the returns to productive capital (lower) by something ‘organic’, related to traditional financial theory. In other words, they need to show that pure profits returns bear additional risk and are paid additional risk premium over and above the returns to productive capital.

Here’s the authors’ argument: “The reason for this result is closely connected to the non-reproducibility of the assets which hold the rights to pure profits. When the economy is shocked, the price of these assets show large fluctuations, because their supply is fixed. In comparison, there is less fluctuation in the price of productive capital, since the supply is not fixed and it can be produced through new investment; the variance of the price of productive capital is determined in our model by the level of capital adjustment costs. As the economy transforms from one in which the majority of assets by market value are productive capital into one dominated by pure economic rents, this generates an endogenous increase in risk premium.”

CHART 2: Average return on capital

I do not buy this argument AT ALL. Let me explain. Non-reproducibility of these assets is a pure, unadulterated nonsense. We used to have Microsoft (a monopoly) and then we got Google (another monopoly), then we got FAANGS (more monopolies), and so on. If anything, rising concentration of the S&P 500 at the hands of larger, monopolistic issuers strongly suggests not only that the monopolistic assets ARE reproducible, but the our financial markets are solely preoccupied with reproducing them. Behold the ‘unicorns’.

The real driver for the abnormal (pure profit-linked) returns is the very existence of that pure profit, driven by: (a) regulatory barriers to entry (think banks), (b) state subsidies (think Tesla), (c) market macrostructure (think Google and Facebook), (d) rampant rent-seeking (think all), (e) outdated anti-trust regulations (think the U.S. system dominated by only one consideration, that of the material harm to consumers, that ignores the fact that modern ICT services are NOT your typical transactions, and involve a barter-type set of transactions between consumers and, say, Google). Majority of these drivers are reinforced by the selectively ultra-low cost of funding for the monopolistic competitors, available courtesy of the rounds and rounds of global risk-mispricing, aka, QE.

Despite the above shortcomings, the paper is an important one. Its conclusions are succinct and far-reaching. “There are a number of reasons why we argue for this hypothesis (i) there is a wide variety of confirmatory evidence that concentration, profits, and markups have increased over the time period, while the natural rate of interest has decreased (ii) it is parsimonious, in the sense that we use two data series (markups and interest rates) to explain the movements of 5 separate trends (iii) our model does not generate counterfactual implications.”

“In this paper, we argue that these trends can be explained by an increase in market power and pure profits in the US economy, i.e., the emergence of a non-zero-rent economy, along with forces that have led to a persistent long term decline in real interest rates.” Whatever your views on the causal factors might be, the dangers inherent in this systemic dismantling of the competitive, open, entrepreneurial model of the American economy of the past is a major source of future risks, uncertainties and social risks.