We understand that, as a rule, total spending must equal total income (this was explained in part 4 of the series). But this raises a question. Is it spending that determines income or, instead, income that determines spending?heteconomist
John Atkinson Hobson was an English economist in the second-half of the C19th and worked well into the C20th, dying at the age of 81 in 1940. I have been reflecting on his work in the context of wage and other labour market developments in recent years. Hobson, individually and with co-authors, provided some excellent insights into how rising income inequality, mass unemployment and increased poverty destabilises the economic system through its impacts on consumption spending. He argued that government should engender what he called a ‘high-wage economy’ which would provide the best basis for prosperity. He was writing as an antagonist to the trends of the day, which considered wage suppression to be good for business and society. In this blog, we consider some of those issues. This is a further instalment to the manuscript I am currently finalising with co-author, Italian journalist Thomas Fazi. The book, which will hopefully be out soon, traces the way the Left fell prey to what we call the globalisation myth and formed the view that the state has become powerless (or severely constrained) in the face of the transnational movements of goods and services and capital flows. This segment fits into Part 3 which focuses on ‘what is to be done’.Bill Mitchell – billy blog
Earlier IMF work has shown that income inequality is bad for growth and its sustainability. Our new research shows that income distribution itself—not just the level of income inequality—matters for growth.
Specifically, we find that making the rich richer by one percentage point lowers GDP growth in a country over the next five years by 0.08 percentage points—whereas making the poor and the middle class one percentage point richer can raise GDP growth by as much as 0.38 percentage points (Chart 2). Put simply, boosting the incomes of the poor and the middle class can help raise growth prospects for all.
One possible explanation is that the poor and the middle class tend to consume a higher fraction of their income than the rich. If more money flows to these segments of society, they will consume rather than save, raising demand and spurring aggregate growth in the short run. What this means is that the poor and the middle class are key engines of growth. But with inequality on the rise, those engines are stalling.
Over the longer run, persistent inequality means that the the poor and the middle class have fewer opportunities to get educated, enhance their skills, and pursue their entrepreneurial dreams. As a result, labor productivity and growth suffer.Ya think?
Please America, listen up.
pp: 504-557 in
"Night after night I would return home exhausted by the pretensions of knowledge I was forced to wear in a daytime masquerade."That's where references to Cotton Mather and his commentaries about farming & industry, credit & currency, production & consumption crop up (pun intended).
actual savings = actual investment, when optimized, and thatactual production = actual consumption when optimized.
"The very essence of capitalism implies a debtor-creditor relationship ... to save successfully, someone has to borrow what is saved ... bankers, the arch symbols of capitalism, are the greatest borrowers ..."And that little trivia about optimal production = optimal consumption? For Pete's sake, one look at an ant colony or beehive reveals the power of teamwork among social species.
'When inventories rose there appeared to have been too much production, but that was "in reality, underconsumption when judged in terms of the real world instead of the money world." 'So even by 1930 some still realized that the "money world" was just a method for tracking and denominating parts, but by no means all, of the real world?
"What passed as a 'lack of confidence' was really nothing more than an investors recognition of the fact that new plant facilities ... [were] over built when judged in terms of the effective demand consumers could make on the output of that plant."
'Moreover, the only way economic growth could could continue was if the changing balance of consumption and savings .. could "provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery." With this Eccles not only had grasped the bookkeeping essential of elementary macro economics, but he realized the dynamic properties as well. '
'The wrong ratios of consumption to savings could cause the growing system to plow itself into the ground. It was Roy Harrod's 1948 book on economic dynamics that first explained in formal terms the paradox of self-destructive macroeconomic growth.'
'Eccles also figured out the "fallacy of composition." What was good for the bankers in a depression was bad for everyone else: "By forcing the liquidation of loans and securities to meet the demands of depositors, were we not helping to drive prices down and thereby making it increasingly difficult for our debtors to pay back what they had borrowed from us?" 'Gosh! When will US citizens be educated enough to realize that they are "prosumers?"
Eccles to the Utah Bankers Association: "... hard work means more production, but thrift and economy mean less consumption. Now reconcile those two forces, will you?"
Even by 30 pages in, there's much more, on the topic of nationalizing the Federal Reserve to balancing dynamic national budgets. There's too much to quote here, so I'll give a flavor of the insights in a summary quote.
'In 1937 [Treasury Secretary Morgenthau] gave a budget-balancing speech before the Academy of Political Science, which Roosevelt had actually helped draft. Eccles was outraged, beside himself at the duplicity and stupidity of it. The economy was diving and Eccles thought he had been bringing FDR around to some compensating deficit spending. ... On Nov 10, 1937, in the afternoon, FDR had seemingly approved of a shift in fiscal policy toward the deficit. That night Morgenthau dropped his bomb (to the accompaniment of some drunken laughter in the audience).
Eccles [later] wrote: "The contradictions between the afternoon and evening ... made me wonder at this time whether the New Deal was merely a political slogan or if Roosevelt really knew what the New Deal was. This is an ungenerous comment, yet it faithfully reports what I felt at the time."
Shortly thereafter ... FDR turned and supported an increased deficit. ... [FDR] didn't care, because he didn't have to.'
“Isn’t it about time that we learned this simple truth? Is it so hard to understand that when an individual owes money, he generally owes it to another individual, but when a nation owes [its own currency] it owes it to itself?* When an individual pays a debt, he pays it to someone else. When a nation pays a [T-Bond] debt, it pays it to its own people.” Marriner Eccles, 1938 **
Sustained recovery requires direct investment, not just a rise in consumption income that hopefully might convince capitalists to again reinvest in the US (or not convince). So the problem is not merely a lack of income growth to stimulate investment. US capitalists are investing–just not in real asset investment and not in the US. They are investing in emerging markets, and even more so in financial asset markets globally (which are now more numerous, liquid, and available than ever before due to the creation of an unregulated global shadow banking system).…
The more fundamental problem is that finance capital has changed. Raising incomes of workers and middle class Americans will help somewhat, but not all that much. It will not result in sustained economic recovery any longer. It is therefore not the main solution to the long term economic stagnation that the US has been experiencing since 2009. Capitalist profit opportunities are simply greater offshore in EMs, and in financial asset markets, than they are from making goods and services in the US, even if US workers were able to buy those real goods and services if they had more income.…
To argue simply for wage and income growth as the solution to a chronic stagnant US economic recovery—as Krugman and colleagues do for example—is to assume that capitalist enterprise will redirect itself from more lucrative profit opportunities from financial speculation and in offshore markets, back to less profitable real production of goods and services in the US. They won’t to any significant extent, since rates of return in the latter are significantly less than in the former.
The only real solution to a sustained US recovery is for massive public government investment, that then subsequently creates income. Investment precedes income creation, it does not necessarily follow it any longer in a world of 21sts century global finance capital. Just calling for income growth (via minimum wage hikes, more contingent job creation, tax cuts, or whatever) will not necessarily result in US-based investment if Capitalists continue to shift to more profitable financial speculation offshore; public investment must therefore occur prior to income growth in order to generate a sustained recovery.…
In today’s world of 21st Century Global Finance Capital, don’t expect capitalists to invest in real production and thus jobs and income in the US economy as they did decades ago. They are too busy making greater profits offshore and in financial asset speculation, leveraging the trillions of dollars of free money and credit created for them by the Federal Reserve. If real investment in the US economy is ever to return, it will have to come via major public investment initiatives. And if not, expect chronic economic stagnation to continue, as has been the case since 2010.Counterpunch
This is simply a microcosm of China’s greater overall dilemma created by its growth disequilibrium; either it must relax restraints and allow continued rapid debt growth and thereby maintain its high level of investment [with increasingly low returns owing to saturation], or it must reduce debt growth and suffer the consequences of an investment downturn with its threat of an accelerator multiplier contraction.Macrobits by Marshall Auerback
Capitalism does a reasonably good job of efficiently organizing the production process and using limited resources efficiently and effectively to produce the goods and services. With some glaring monopolistic pricing exceptions, deriving from various sources, it does a pretty good job with such organization and efficiency. (Before the demise of the antitrust laws, the monopolistic pricing exceptions were much rarer.) However, capitalism has a serious problem everywhere it is practiced in the world these days.
It fails badly on the distribution side. The income derived from the production process is not well distributed to the population for the purchase of the goods and services produced. It becomes concentrated in the hands of too few and excessive income inequality arises, aggregate demand is compromised, the economy is compromised and together with such inequality, monopolistic pricing becomes more widespread and prevalent. Just what we observe in the United States today.Wandering the Oceans: SailBlogs
This line of reasoning is of course influenced by the ideas of people like Milton Friedman who mixed up non-monetary consumption (i.e. the use of consumer goods) and ‘utility’ with monetary consumption (i.e. the purchase of consumer goods) and production, to argue that consumption was non-cyclical, signifying that all kinds of counter-cyclical government policies were not necessary. But monetary consumption is cyclical and contrary to the statements of Gerlach-Kirsten, Merola and O’Toole it has been quite cyclical all along, especially expenditure on consumer durables. In the real world, the smoothing of the use of these durables leads to more cyclical purchases!
Dear friends, if post war consumption did not show the large cyclical developments of the past this was because incomes were smoothed by automatic stabilizers, minimum, wages, whatever, and not because households smoothed expenditures. However – governments have given up on this, at least in the EU, and ultra-unemployment (oops, ultra-unemployment is not even mentioned in their article…) and volatile expenditure are back, together with highly volatile consumer expenditures.
In the May 10 issue of my blog I referred to a very interesting IMF paper written by Il Houng Lee, Murtaza Syed, and Liu Xueyan. The study, “China’s Path to Consumer-Based Growth: Reorienting Investment and Enhancing Efficiency”, attempts among other things to evaluate the efficiency of investment in various provinces within China. I argued in the newsletter that the paper supported my contention that China has overinvested beyond its capacity to absorb capital.
This argument is in opposition to claims made by many analysts that China has not overinvested systematically, and that in fact, with much less capital stock per worker than advanced countries like the US or Japan, China has a long ways to go before it begins to bump up against the productive limits of investment.China Financial Markets
Green’s points are that there is a large difference between the richer and poorer provinces, and that the same set of policies that drove up income levels in the richer provinces can, presumably, be applied to the poorer provinces in the same way and for the same effect as their income levels converge with those of the richer provinces. This convergence alone will guarantee that China will grow by 7-8% for many more years.
Green may be right, but I think it is worth pointing out under what conditions he would be right and under what conditions he would be wrong. If the difference in wealth between the richer and poorer provinces is indeed caused mainly by the difference in capital stock per worker, and if otherwise there are no significant institutional differences between the two that prevent the poorer regions from catching up, then it is probably true that the policies that worked in the coastal regions can be successfully applied to the inland regions with much the same economic impact. Beijing can turn all of China into Guangdong and Zhejiang.
But if the poorer regions are poorer not because they lack investment but rather because they are institutionally more “backward” and so lack the ability to absorb investment efficiently, then it is not so clear that their income levels can converge with those of the richer regions within China except under conditions of significant social and political change.
As an aside I am struck by the fact that the disparity between richer and poorer regions in China has existed in very much the same way for many centuries, and wonder if this isn’t due at least in part to dramatic differences in what I am calling social capital.Exactly, and that we the choice of the extractive elites. The present regime knows that it has to be perceived as correctly that imbalance if it is to maintain credibility as a socialist government representing labor and not capital as the chief factor. For the leadership this is an existential choice. The Party is walking a fine line and they know it. They also realize that a widespread perception of crony capitalism and corruption will do them in.
I believe that in the past two to three years there has been a significant and welcome shift in Beijing’s attitude towards maintaining growth, and that this shift implicitly represents a shift from the capital frontier model of optimal investment levels to the social capital model. Keynes famously reminded us that “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist,” and I would argue that in this sense models do matter. The economic model that we implicitly use to justify policy can result in hugely different policies with hugely different outcomes.China needs to increase social spending to increase "social capital," especially in regions where social capital is lacking. But one area that immediately suggests itself is creating a social safety net that would encourage less domestic saving and more domestic consumption, which would drive investment in domestic enterprise. The other low hanging fruit lies in improving the legal system, reducing the corruption that has traditionally been endemic in China, and improving public education.
If the above analysis is correct then the US economy is even more reliant on the gains made in the stock market than people think. The wealth effect relies on the perception of rising wealth which then leads well-off people with positions in the stock market to spend more money.So maybe the Fed was right about QE and the wealth effect, i.e., driving risky assets higher than they would be otherwise by reducing the volume of safe assets — Treasuries and agencies — by paying more than they are perceived to be worth. It seems that some of the gains in equities may have spilled into increased consumption by the wealthy.
The spin-doctors are hard at work talking up America’s subpar economic recovery. All eyes are on households. Thanks to falling unemployment, rising home values, and record stock prices, an emerging consensus of forecasters, market participants, and policymakers has now concluded that the American consumer is finally back.
Don’t believe it. First, consider the facts: Over the 21 quarters since the beginning of 2008, real (inflation-adjusted) personal consumption has risen at an average annual rate of just 0.9%. That is by far the most protracted period of weakness in real US consumer demand since the end of World War II – and a massive slowdown from the pre-crisis pace of 3.6% annual real consumption growth from 1996 to 2007.
With household consumption accounting for about 70% of the US economy, that 2.7-percentage-point gap between pre-crisis and post-crisis trends has been enough to knock 1.9 percentage points off the post-crisis trend in real GDP growth. Look no further for the cause of unacceptably high US unemployment....Project Syndicate
According to the World Bank and numerous other analysts, wealth in developing countries is today largely locked up among the elite....
Of potentially considerable concern in the bank’s projections is where this new wealth will end up being concentrated.
“It’s one thing for the pie to be increasing, but how equitably is it being distributed?” Kar asks.
“Equity is a huge problem, as the rich seem to be getting richer and the poor getting poorer. Further, it seems the nouveau riche in the developing countries are a bit more callous than the established rich in developed countries.”Inter Press Service
Before I go, one more thought: After coming up with this “accumulation” notion/usage, Very Little Googling revealed that (no surprise) it’s hardly original. It’s right there in Volume I of Das Kapital. (I just discovered this? Hey, I’m self-taught, with the resulting predictably spotty/spotlight reading background. I’m working on it!)
And let’s not forget: It was the 1930s. Kuznets and co. were developing the national accounts, and they were devoted capitalists. They’re gonna use Marxist language, much less concepts and theory? In the National Accounts? Of The United States of America? Not gonna happen.Asymptosis
One solution to this problem [of cutting government investment in deficit reduction] would be to have a capital budget that segregates government investment spending from consumption spending. Virtually all the states do this already. Conservatives who routinely defend a balanced-budget amendment to the Constitution, on the grounds that the states must balance their budgets annually, appear to be unaware that such requirements apply only to operating budgets, excluding capital outlays.
If households were required to balance their budgets the way balanced-budget amendment supporters want the federal government to operate, they would almost never be able to buy homes or cars. Such outlays almost always exceed their annual incomes over and above consumption and would thus constitute deficit spending.
Of course, families could draw down savings to buy homes and cars. But that’s an option not available to the government because it has no savings, only a large debt. Treating it and private individuals the same way, as balanced-budget supporters propose, would require the entire national debt to be paid off and a surplus accumulated before it would be permitted to make new investments in roads, bridges, buildings and other long-lived assets.The New York Times — Economix
Any economic theory that ignores this type of spending and its sector of the economy (i.e., the secondary financial asset markets) is deeply flawed and liable to be missing something fundamental about modern market economies....
This type of spending is also a fundamental reason why Say’s law is one of the most ridiculous ideas ever formulated by economists.Social Democracy for the 21st Century
