Friday, November 17, 2017

Financial Cost (2): Inspection


I want to use GVA (gross value added) as the context for profits and interest expense. Better than GDP in this case, I think, because the GVA I'm using is "Gross value added of corporate business". The Financial Times lexicon says

GDP is commonly estimated using one of three theoretical approaches: production, income or expenditure. When using production or income approaches, the contribution to an economy of a particular industry or sector is measured using GVA.

So the GVA number I'm using measures the part of GDP produced by corporate business. I think that's a good context number for corporate profits and corporate interest expense.

The data I downloaded for mine of the 12th (the data I'm using here) includes GDP and RGDP. (From these I can get price deflator values if needed.) Also: interest paid and compensation of employees for "domestic corporate business"; GVA for "corporate business"; and "corporate" profits. I'm pretty sure these data series (except GDP and RGDP) are all numbers for "domestic corporate business", but I don't know for sure. If you know something I don't, let me know.


First graph shows employee compensation, monetary interest paid, and corporate profit, each as a percent of corporate GVA:

Graph #1:
I should say right away that "monetary interest paid" is not a component of corporate GVA. It is a measure of all the interest expense of corporations, or gross interest. Only "net" interest is included in GVA. The reason for this, no doubt, is to avoid "double counting" of income. But cost is cost, so I'm looking at the bigger number. More on this later.

Employee compensation (blue) as a share of corporate GVA runs pretty stable (more stable than Labor Share, which seems to show decline since 1960), running above 60% until the year 2000, when it starts to drop.

Corporate profits (green) decline from about 25% of corporate GVA to just over 10%. They run low in the Reagan years (interesting!) but pick up a bit in the latter 1990s, then start rising just as labor share starts to drop. Profits are now running above 20% again.

Total corporate Interest paid (red) is shown as a percent of GVA for purposes of comparison. Interest starts out low, less than 2.5% of corporate GVA, but rises to 10% by 1970. It peaks at 27.4% of GVA in 1982, runs high while corporate profits run low (the Reagan years), and peaks at 28.5% in 1989. Thereafter, the trend is slowly downward, but with increasing volatility.

It appears that interest gained at the expense of profits in the 1980s, and that after 2000 profits gained on employee compensation ("labor"). For what that's worth.


To see the relative changes in the three series on the first graph, I divided each series by its 1947 value so all three series start with the value 1.0:

Graph #2:
Indexing the values that way really magnifies the "interest paid" numbers, because that data starts at such a low level. And because employee compensation was so high on the first graph and shows relatively little change, the variation in that series is reduced to almost nothing; here, the blue line is almost straight. The green line, not so high on the first graph and varying more than the blue, still shows some variation on the second graph.

The first graph emphasized the different sizes of the three data series. The second emphasizes the changes in size. The red line really stands out here, but the extreme flatness of the blue is equally noteworthy.


I took profits and employee compensation from Graph #1, and subtracted them from total corporate GVA to see how much of GVA remains for other corporate spending. That's the blue line here:

Graph #3:
I put the red line from Graph #1 on this graph for comparison. It starts significantly lower than the blue line, but catches up by around 1980, and doesn't drop off much after that.

"Interest paid" is a big number. Big, and mostly unnecessary.

Thursday, November 16, 2017

Financial Cost (1): Overview of the data


This graph shows "percent change" rates for the data downloaded for my post of 12 November. Annual data, so the graph shows "percent change from prior year".


The first tall spike we come to, above 40%, between 1948 and 1952, that yucky blue line shows corporate profits. Corporate profits are pretty volatile: The line peaks repeatedly, both upward and downward, and this behavior is consistent for the whole 1948-2016 period shown on the graph.

That volatility is the reason I'm doing this follow-up to mine of the 12th. In that post I looked at corporate data for 1955 through 1958, a brief period during which the growth of profits began by increasing 26% over the previous year, and ended by falling 12% below the previous year.

Those growth rates suggest that corporate profits were well above trend in '55 and well below trend in '58. I wasn't thinking about that when I wrote the post. I was working with those years because those were the years Samuelson and Solow considered in particular in their 1960 paper.

The differences from trend no doubt exaggerated the movements of my "interest cost relative to profits" ratio, giving me the ten-point increase in interest cost (from 15% to 25%) relative to profits. So I'm thinking my numbers exaggerated the situation, perhaps significantly. That's why I'm taking another look.

After the yucky blue line, the red line stands out as also highly volatile. That's the interest cost. This one shows more variation than do profits, across the whole 1948-2016 period. The red line is pretty tame before the mid-1960s, staying generally between 10% and 20%. Then from the mid-1960s to the early 1980s the red peaks grow increasingly higher, and the down-pointing peaks increasingly lower. The growing volatility in this period likely reflects the inflation of the time. Finally, since the mid-1980s the red line seems to show some increase over time, but I'd say the main feature is that the movements here are very much bigger than those before the mid-1960s. They are about equal in size to movements during the 1970s and early '80s, but run lower: During the Great Inflation the red line didn't want to go below zero; since the mid-80s it has been centered on the zero level.

The next  line that catches my eye is the gold one, Corporate Gross Value Added (GVA). This line shows little volatility, little vertical motion. It's chief function on this graph seems to be to hide the other lines that display little volatility: nominal GDP (purple) and Employee Compensation (dark blue).

The one line so far omitted from my review of the graph is the greenish line, which shows the growth of GDP with inflation removed from the numbers. This line is mostly hidden by the gold line, except during the years from the mid-1960s to the early 1980s. Again, this is the time of the so-called Great Inflation so we should expect to see the green line run low in these years. And the fact that it does run low supports the view that the growing volatility of the red line in those years "reflects the inflation of the time.

Notice that the gold line and the lines that it hides show a hint of uptrend during the years of inflation. This isn't news. But I want to mention it now so that maybe I won't be fooled by it when I'm lost in the details of my analysis of the numbers.

Sunday, November 12, 2017

Comparative advantage, economies of scale, and the cost of finance


Paul Krugman has an old paper titled How I Work which might be worth your time to read. I want to repeat a fragment of it here, for my own purposes. Krugman writes of his early days as an economist:

What had I found? The point of my trade models was not particularly startling once one thought about it: economies of scale could be an independent cause of international trade, even in the absence of comparative advantage. This was a new insight to me ...

"... within a few days," Krugman says, "I realized that I had hold of something that would form the core of my professional life." It was important to him, this little fragment which said not only comparative advantage, but also economies of scale drive international trade. It was important to him for personal reasons.

It is important to me because I read it this way:

not only comparative advantage, but other things also drive international trade.

It is important to me because it opens a door, the other things also door. And I know what I must bring through that door: the cost of finance.

That shouldn't surprise you. I always look at things in terms of the cost of finance.

Conservatives always gripe about the cost of labor. Liberals always grumble about profits. To my mind you need both wages and profits, if you are to have an economy. And, certainly, you also need finance.

But how much finance do you need? These days, we need a lot. Or, as I see it, we don't really need a lot of finance, but we sure do have a lot. And because we have a lot of finance, the cost of finance is high.

No, not just the rate of interest. Rather, the rate of interest applied to every dollar of debt. If there is not much debt, the cost of finance is low. If there is a lot of debt the cost of finance can be high, even when interest rates are low.

On the consumption side, the cost of finance reduces aggregate demand. On the production side, the cost of finance reduces profits and increases prices. A high cost of finance reduces demand and profits, both, and creates an economy in decline, the kind of decline we have endured now for decades. The cost of finance is a crucial consideration. That's why I talk about it all the time. But set all that aside.

In addition to reducing demand and reducing profits, the cost of finance also adds to the cost of products. It contributes to the increase of prices. (And this does not consider the effect finance has on the quantity of money, and the "inflation is always a monetary phenomenon" thing. But set that phenomenon aside.)

When the cost of finance is rising, it increases costs. It makes output more costly.


In Krugman's "How I Work" paper he says he doesn't worry that his assumptions might be unrealistic. He worries about not knowing what his assumptions are. There are some problems with that approach, but I'll go with it for now. I'll assume that the level of finance was at its best around 1955. You might think 1955 is an unrealistic date. I think it's not far off. But if it makes the reading easier, you can assume I picked a more reasonable date -- still decades ago, but not so many decades ago. That would make the latter 1950s a premonition of what was to come. I can live with that.

By "the level of finance was at its best" I mean that when finance was less, it hindered economic growth more, and that when finance was more it also hindered growth more. I imagine something like a "Laffer curve" for the optimum size of finance. If my Laffer curve comparison doesn't make sense to you, don't worry about it.

In 1960, looking back at the latter 1950s, Samuelson and Solow wrote:
... just by the time that cost-push was becoming discredited as a theory of inflation, we ran into the rather puzzling phenomenon of the 1955-58 upward creep of prices, which seemed to take place in the last part of the period despite growing overcapacity, slack labor markets, slow real growth, and no apparent great buoyancy in over-all demand.

In the end, Samuelson and Solow could not reject the cost-push explanation:
We have concluded that it is not possible on the basis of a priori reasoning to reject either the demand-pull or cost-push hypothesis ...

Ten years later, Federal Reserve Chairman Arthur Burns was pointing to the increases in employee compensation as the driver of inflation. Robert Hetzel quotes from the Board of Governors Minutes for November 1970, that Burns thought in terms of "cost-push inflation generated by union demands."

Perhaps by 1970 union demands were driving inflation. But in the latter 1950s? In the latter 1950s, the rising cost of finance was squeezing profits.

Growing financial cost got the inflation ball rolling. Union demands took the hit for it later, and perhaps rightly so. But union demands did not create the initial problem. The rising cost of finance got inflation going, and kept it going until a wage-price spiral emerged.

For domestic corporate business, financial cost increased faster than the compensation of employees:

Graph #1: Interest Costs Increased Faster Than Compensation of Employees
Consider the 1955-1958 period, the years that concerned Samuelson and Solow. For every dollar corporations paid out as employee compensation in 1955, they paid out five cents for interest costs. By 1958 that number was seven cents. For every dollar of employee compensation they paid out, corporate business spent two cents more on interest in 1958 than in 1955. Financial costs gained on labor costs.

Financial costs also gained on profits:

Graph #2: Interest Costs Increased Faster Than Corporate Profits
For domestic corporate business, financial costs increased faster than profits. Between 1955 and 1958, corporate interest costs rose from 15 cents to 25 cents per dollar of corporate profits: a ten-cent increase in interest costs, ten cents for every dollar of profit.


If financial costs had grown more slowly, if they had grown at the same rate as profits, say, how would the world have been different?

In 1955, corporate business interest paid totaled $7.3 billion, something less that 15% of profits. In 1958, interest paid came to $11.4 billion, something more than 25% of profits. Other things unchanged, if interest paid in 1958 remained at the 1955 percentage, the cost of interest would have been about $6.4 billion. This is $5 billion less than the actual 1958 cost of interest.

If this $5 billion expenditure had not happened, other things unchanged, corporate profits would have been $5 billion higher.

But I can't add that $5 billion to corporate profit, because it changes my interest-to-profit ratio. It throws the calculation off. In order to work thru the calculation cleanly, we cannot add the $5 billion of interest savings to corporate profits, nor to any corporate spending category. The only way to dispose of the $5 billion is to reduce gross corporate revenue by reducing the price of the corporate product.

In 1958, the gross value added (GVA) to the economy by corporate business amounted to $256.9 billion. If we reduce the price of GVA by $5 billion, the reduced number is $251.9 billion. The reduced GVA number is 98% of the actual number. So, to make the calculation work we have to reduce the price of corporate output by 2%.

If corporate interest costs in 1958 remained in the same proportions as 1955, corporations could have reduced their prices by 2% without reducing their profits and without reducing the wages and benefits paid to their employees. Without reducing any of their spending, other than interest.

This is an exercise in "other things unchanged". Ceteris paribus. The assumption is not realistic. But the numbers tell an honest tale: The cost of interest increased faster than other corporate business costs, fast enough to push prices up 2% between 1955 and 1958.

This suggests a different conclusion for the Samuelson-Solow paper: identification of cost-push as the cause of the 1955-1958 inflation.


How did the rising cost of finance affect the economy?

In 1962, President Kennedy was "jawboning" the steel companies, trying to talk them out of raising prices. They raised prices anyway. In response then,

Kennedy launched investigations by the FTC and Justice Department into collusion and price rigging by the steel companies [and] threatened to break Pentagon contracts with U.S. Steel.

The steel companies acquiesced, rolling back the price hike. But they raised prices anyway the following year. This cannot have been simply

a tiny handful of steel executives whose pursuit of private power and profit exceeds their sense of public responsibility

as Kennedy claimed. The price increase was driven by financial cost pressures that Kennedy could not see. "Operating cost" pressures, according to encyclopedia.com:

Profits were being squeezed between rising operating costs and relatively stable prices, and in April 1962 U.S. Steel unexpectedly announced an across-the-board price increase ...

Kennedy was looking for a wage-price spiral. The steel price hike was not part of a wage-price spiral. In March of 1962 the Steelworkers accepted a contract that gave them no wage increase. In April, the price of steel increased 3.5%. The source of the cost pressure was not labor, but finance.


In 1965, on the last day of the year, in its renowned We Are All Keynesians Now article, Time magazine wrote:

First the U.S. economists embraced Keynesianism, then the public accepted its tenets. Now even businessmen, traditionally hostile to Government's role in the economy, have been won over—not only because Keynesianism works but because Lyndon Johnson knows how to make it palatable. They have begun to take for granted that the Government will intervene to head off recession or choke off inflation, no longer think that deficit spending is immoral. Nor, in perhaps the greatest change of all, do they believe that Government will ever fully pay off its debt, any more than General Motors or IBM find it advisable to pay off their long-term obligations; instead of demanding payment, creditors would rather continue collecting interest.

The "greatest change of all" was acceptance of the view that government would act more like business, rolling debt over rather than paying it off.

That change didn't last. Already in 1964, Ronald Reagan had spoken on behalf of Presidential candidate Barry Goldwater. Reagan:

Today, 37 cents of every dollar earned in this country is the tax collector's share, and yet our government continues to spend $17 million a day more than the government takes in. We haven't balanced our budget 28 out of the last 34 years. We have raised our debt limit three times in the last twelve months ...

In 1980, Reagan himself was elected President in a landslide. "We don’t have a trillion-dollar debt because we haven’t taxed enough," he said; "we have a trillion-dollar debt because we spend too much." By 1980, the greatest change of all was that people had come to believe the Federal debt must be reduced. So much for being all Keynesian.

But notice what was not a change in 1965: businesses did not "find it advisable to pay off their long-term obligations". Accumulating debt was standard practice. For the longest time, people thought it was okay if private debt increased. I guess that did finally change, about ten years back. But here's the thing: Corporate interest costs ran neck-and-neck with profits in 2003-2005. Other than that, interest costs were higher than corporate profits from 1980 to the crisis.

Corporate business interest costs were only 15% as much as profits in 1955. By 1980, interest costs were more than profits. The growth of financial cost, a trend visible in the late 1950s, continued to 1980 and continued on to the crisis.


By 1970 one could easily see that wage hikes were driving inflation, because employee compensation is a far larger number than the cost of interest. And by 1970, everyone was trying to catch up with everyone else. Inflation had become self-sustaining. But how, in the latter 1950s, with "no apparent great buoyancy in over-all demand", how is "the 1955-58 upward creep of prices" to be explained? And then in the early 1960s, the price of steel? These were not stories of demand-pull inflation. They were cost-push stories. But the driving force was not compensation of employees or union demands or wages. The driving force was rising financial cost.

"Comparative advantage" makes some domestic products an international bargain, and this, as Paul Krugman writes, is a "cause of international trade". But the point of Krugman's trade models was to show that economies of scale can also make some products a bargain in foreign markets. The lesson we learn from Paul Krugman is that costs affect trade: Low costs increase trade. High costs reduce it.

In the US we rely on credit. Credit has a cost. The use of credit in the productive sector raises the prices of US products. If we rely more on credit than other nations, our financial costs will be higher than theirs. Those costs are reflected in the higher prices of our products. High prices make our products less competitive in international markets.

Increasing financial costs, by raising prices, may be to blame for a significant share of US trade deficits going all the way back to the 1970s.

The point of this essay is not particularly startling once one thinks about it: Despite the best comparative advantage and the greatest economies of scale, high financial costs can be an impediment to the export trade.

// The Excel file

Saturday, November 11, 2017

What was it that got the wage-price spiral started?


It had to be something other than the wage-price spiral.

What was the initial shock that started the Great Inflation? In Ronald Reagan and the Politics of Freedom, Andrew E. Busch says what everybody thinks -- it started with a wage-price spiral:


I disagree. There had to be some other "push" that got things started.


Wikipedia:

In macroeconomics, the price/wage spiral (also called the wage/price spiral or wage-price spiral) represents a vicious circle process in which wage increases cause price increases which in turn cause wage increases, possibly with no answer to which came first.

This is totally unsatisfactory!


From InvestingAnswers:

The general idea behind a wage-price spiral is a simple one of supply and demand. People can do only two things with money: save it or spend it. If they have more money on hand, they likely will spend at least some of that money. Accordingly, putting more money in people's hands creates more demand for goods and services. Thus, something like a wage increase across the board (think, for example, of a rise in the minimum wage) creates more demand for goods and services and drives up the prices of those goods and services.

So the Minimum Wage caused the Great Inflation? No.


From Chron:

When an economy is operating at near full employment and people have money to spend, demand for goods and services increases. To meet the demand, companies expand their businesses and hire more workers. However, at near full employment, most workers already have jobs. So companies have to lure workers with higher wages, which, of course, increases the companies' costs, explains the website Biz/ed. The workers then push for higher wages to meet the higher prices and expected price hikes, which increases company costs again. Theoretically, this continues in an inflationary spiral until a loaf of bread costs the proverbial wheelbarrow full of cash.

Full employment creates a wage-price spiral? That sounds reasonable...


So they're saying the 1965-1971 spike in employee compensation (relative to GDP) is what got the wage-price spiral going. But most of that spike occurred after the Great Inflation was already under way! And the other spikes, did they also cause wage-price spirals that led to Great Inflations?

And what about the 1960-65 decline in employee compensation? Prices were going up then, too. "Full employment" may be a plausible story of the Great Inflation, but it doesn't seem to explain how the wage-price spiral got started.

Thursday, November 9, 2017

David "Dirtbag" Ricardo


Wikipedia on David Ricardo:

He made the bulk of his fortune as a result of speculation on the outcome of the Battle of Waterloo. Prior to the battle, Ricardo posted an observer to convey early results of the outcome. He then deliberately created the mistaken impression the French had won by initially openly selling British securities. A market panic ensued. Following this panic he moved to buy British securities at a steep discount. The Sunday Times reported in Ricardo’s obituary, published on 14 September 1823, that during the Battle of Waterloo Ricardo "netted upwards of a million sterling", a huge sum at the time. He immediately retired, his position on the floor no longer tenable ...

In August 1818 he bought Lord Portarlington’s seat in Parliament for £4,000 ...

Wednesday, November 8, 2017

Slowly, people are recognizing that the economy is improving


30 Aug 2017: Trump's hope for 3% growth no longer looks so far-fetched at CNBC:

When President Donald Trump predicted that his policies would spur growth of 3 percent or more, a lot of economists didn't take him seriously. They may now.
...
"It's not just the GDP report. We've had a really steady stream lately, whether it's GDP or ADP or [jobless] claims or retail sales or confidence measures," said Jim Paulsen, chief investment strategist at the Leuthold Group.


8 Sept 2017: Two signs the US economy really is getting better, from World Economic Forum:

Forget the soaring stock market. Here's the real evidence the U.S. economy is getting better: Food stamp usage is down, and spending on entertainment — everything from Netflix to Disney World trips — is up.


27 October 2017: US economy on solid growth path from dw.com:

The world's largest economy has seen its total output expand by a rate that the US President had expected to see because of his tax and investment policy. But for all of 2017, the rate will be hard to maintain.
...
For all of 2017, forecasters believe the economy will grow at an annual rate of around 2.2 percent, rising to 2.4 percent next year.

Tuesday, November 7, 2017

The world is not digital


In a digital world, economic growth would look something like this:


But our world is not digital. Economic growth looks like this:


In our world it is difficult to tell what will happen next. In a digital world, it is true, the bottom could drop out at any time. But until it did, at least you would know whether your economy was "good" or not. Those would be the only choices in a digital world: It's good, or it's not good.

A digital world might offer a high level of confidence about the future. Our world offers only a low level of confidence about the future. Nevertheless, I confidently predict a good decade for the US economy. Where does my confidence come from, and why isn't everyone making similar predictions?


There are a couple different ways of looking at the economy. One way is to grab the most current data announcements you can find, because the most current announcements are nearest to what we want to know about: the future.

It's not a perfect method, because it doesn't really give you the future. But it does give you the closest thing.

The trouble with this method is that the world is not digital. The most current data announcements are up today and down tomorrow. Current data is all over the place. So you have to filter the facts, or prioritize the information, or assign weights to the data to determine what you think the future will look like.

The other way to look at the economy is to focus on everything but the most current data. Don't worry about the last ten minutes or (in this case) the last ten years. Focus instead on a lifetime of years before that. Look for patterns in that data. Give some weight to existing knowledge, and give almost as much weight to "heterodox" views, but always put the most emphasis on what you can see for yourself.


In Current GDP Growth Isn't Anything Special, Justin Fox is trying to see the future. He relies on the most current data announcements:

Real gross domestic product has now grown at an estimated annual rate of 3 percent or more in the U.S. for two quarters in a row (3 percent in the third quarter, 3.1 percent in the second).

"... but two quarters don't tell us much," he says. Fox reminds us that quarterly data is volatile and noisy. He considers looking at the 12-month change rather than one or two 3-month changes. That smooths things out a bit. And the longer wait provides more solid evidence. But when things finally do start getting better, you have to wait a year to get your evidence! And as Justin Fox says, "looking back four quarters is, well, backward-looking." It tells you about the past, not the future.

Fox has another thought: Look at different data, something less volatile than GDP. He references a 2015 study that uses "real final sales to private domestic purchasers". He looks at the most recent data for this series, and he writes:

By that metric, economic growth in the third quarter was just OK, at 2.2 percent... But there's really no sign from the GDP data yet that the slow-growth era is ending.

There might be a sign that the slow-growth era is ending. Those two most recent quarters of GDP growth might be a sign. We won't know for sure until the evidence is solid. But by the time the evidence is solid the improvement won't be news anymore. People want to know now. And if you have reasons for thinking that the economy is improving now, you want to talk about it now, not a year from now.

This goes back to the question that got me writing today: How can we know before it happens that the economy is improving?

Not by tracking the most recent data. You know it by studying the past until you think you understand how the economy behaves. After that, you start watching the recent data, looking for patterns that mimic patterns you've seen in the past. When you find those patterns, you make your prediction about the economy. Then you wait and see.

Recently I've been pointing out the most recent data myself: better productivity here, improved growth here and here. Upbeat data like that is not evidence; not yet. It will be, when there is enough of it. I point out such data to remind you of my prediction that our economy will soon be "good" for about a decade. Because in the context of my prediction, that data is evidence.

Hey, I could be wrong about the economy improving. But here's the thing. If I'm not wrong, then maybe the patterns I've found in the old data are significant. Maybe those patterns describe an area of study that economists ought to include in their work: Accumulated debt relative to the quantity of circulating money. Private debt relative to public debt. Debt service relative to income. Things like that. Today, economists nibble around the edges of such concepts, or miss them entirely.

That's why I so often bring up my prediction of a decade of vigor.


How do you predict the future? You want to look at what is sometimes called "fundamentals". Nobody ever defines fundamentals, of course. They only say the fundamentals are sound when they're telling us not to worry about some worrisome thing. But I'll tell you what "fundamentals" is, what my idea of it is: it is the cost of finance in comparison to the cost of labor and profit. And I'll tell you how it works: If the cost of finance is low, the economy can grow, and if the cost of finance is rising, the economy is growing. But if the cost of finance is high, there can be no vigor.

Monday, November 6, 2017

A psalm of balance


The use of credit gives the economy a boost, but also creates debt which eventually undermines the "boost" effect.

Policymakers are well aware that the use of credit boosts the economy. They create all sorts of policies to encourage the use of credit: deductible interest expense, financial deregulation, low interest rates and quantitative easing, for example.

Except in times of crisis, these policies cause the use of credit to grow at an accelerated rate. Therefore, debt ordinarily grows at an accelerated rate.

We have no policy designed to accelerate the repayment of debt. Therefore, debt grows at an accelerated rate until it accumulates enough to create a crisis.

If we insist on having policies that encourage the use of credit, then we must also have policies that accelerate the repayment of private debt.

Sunday, November 5, 2017

Shitting on the Cato guy


From Cato: Labor’s Share of GDP: Wrong Answers to a Wrong Question by Alan Reynolds.

The opening paragraph:
A recent paper by David Autor of MIT, Lawrence Katz of Harvard and others, “The Fall of the Labor Share and the Rise of Superstar Firms,” begins by posing a mystery: “The fall of labor’s share of GDP in the United States and many other countries in recent decades is well documented but its causes remain uncertain.”  They construct a model to blame it on U.S. businesses that are too successful with consumers.

"They construct a model to blame it on U.S. businesses that are too successful with consumers." The writing reeks of attitude. Attitude often makes for a good read, but it seldom makes for a good argument.

I'm interested because I have trouble understanding what "labor share" represents. I mean, at FRED, Labor Share for the business sector, and also for the nonfarm business sector, are shown as indexes, not as percent of GDP. I can guess that the indexes show changes in labor share as a percent of GDP over time, yes, but I can't tell what the percent values actually are.

There is a "Share of Labour Compensation in GDP" series with "ratio" units. It's a simple thing to get "percent" values from that one. And the overall trend of this series is like the others: downhill. But at a slightly closer glance it doesn't really match either of the "labor share" series. So I'm left hanging. I thought maybe the Cato article would help.

Heh.

Second paragraph:
Five broad industries, they found, became more dominated by fewer firms between 1982 and 2012: retailing, finance, wholesaling, manufacturing and services. But those aren’t industries at all, much less relevant markets: they’re gigantic, diverse sectors. Is all manufacturing becoming monopolized? Really? Census data ignores imports, but why ruin this bad story with good facts.

So the guy is complaining that Autor and Katz left out the word sectors? Because they said "industries" instead of "industrial sectors"? Really?

And again, attitude: Five gigantic, diverse sectors became more dominated by fewer firms, "but why ruin this bad story with good facts."

At last, in the third paragraph, a possibly useful observation:
Jason Furman and Peter Orszag found “the decline in the labor share of income is not due to an increase in the share of income going to productive capital—which has largely been stable—but instead is due to the increased share of income going to housing capital.”

The useful observation is Orszag and Furman's, not Cato's, but at least the Cato guy provides a link.

In paragraph four, Cato guy is complaining about "industries" versus "industrial sectors" again:
President Obama’s Council of Economic Advisers, under Jason Furman, nonetheless worried that the 50 [!] largest firms in just 10 “industries” (if you can imagine retailing and real estate to be industries) had a larger share of sales in 2012 than in 1997 ...

But yeah, I can imagine retailing and real estate as industries. Cato guy is being ridiculous. Finally, in the rest of paragraph four, he moves on to a different complaint:

They concluded that, “many industries may be becoming more concentrated.” Noah Smith, Paul Krugman and many others have suggested that this nebulous “concentration” allowed monopoly profits to rise at the expense of the working class, supposedly explaining labor’s falling share of GDP during the high-tech boom. A quixotic search for even one actual example of monopoly soon morphed into advice about using unconstrained antitrust to constrain Amazon, which is apparently feared to have monopoly profits invisible to the rest of us.

Now he cannot see the boom in corporate consolidation, and cannot figure out why monopoly might be a problem. And look what he does there at the end: "Invisible to the rest of us," he says. Cato guy takes us, his readers, and imagines we stand with him, blind to the monopoly profits that may or may not exist in the one particular place where my wife does all her shopping: Prime.

But forget that Cato crap about "invisible" profits which are "apparently feared" by some unidentified but obviously stupid bunch of people. Forget that. I'll tell you what really bothers me about Amazon. And it's not the so-called "free" shipping. What bothers me is that Amazon is doing to the rest of the economy what supermarkets and big-box did to Mom and Pop. Nobody even knows anymore what a mom-and-pop is. Amazon is doing the same to everyone else: Putting them out of business.

Paragraph five:
Research that starts with such a meaningless question as “labor’s share of GDP” was never likely to lead us to any profound answers. Workers do not receive shares of GDP – they receive shares of personal or household income.

I thought Cato guy might be on to something with that. Hey, you know? I always figure after a guy has two or three stupid ideas in a row he's bound to come up with a good one, just by dumb luck.

Nah. "Workers do not receive shares of GDP" he says, emphatically. But GDP is a measure of income. And workers do receive income. So it is okay to talk about “labor’s share of GDP”. Sure, to appease Cato guy, you could use GDI instead of GDP. But those two are really supposed to be equal, so Cato guy is complaining about nothing. Again.

That's enough. This Cato guy is not worth reading.


No, I can't let it go. I have to point out one more thing. Cato guy says

Workers do not receive shares of GDP – they receive shares of personal or household income.

Cato guy takes "labor share" and turns it into "worker's share". He takes the relevant macroeconomic concept (the split between labor and capital) and tosses it aside. In its place he puts you and your weekly paycheck. He brings it down to a personal level, and (bad as the argument is) we like him for it. Then he says that our weekly paychecks don't get counted in GDP. That part is just not true.

Cato guy turns "labor share" into a story of "the individual and his paycheck". And he tells us our weekly paychecks don't count in GDP. He mixes up ideas, and he lies.