[PassedOut]

Winstonm, on 2011-August-26, 08:30, said:

Without increasing demand through wages, we are bound to stagnate.

For sure. I don't see how anyone could reasonably dispute this (unless one redefines "stagnate").

[Winstonm]

I found it interesting that just today there was a piece in The Big Picture, the blog of Barry Ritholtz, about this very subject:

Quote

Let’s begin by referencing a recent piece by Stephen Roach that accurately assesses what’s really wrong with our current economy, summed up in one number:

"The number is 0.2%. It is the average annualized growth of US consumer spending over the past 14 quarters – calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011. Never before in the post-World War II era have American consumers been so weak for so long. This one number encapsulates much of what is wrong today in the US – and in the global economy."

We’ve gone, 14 quarters from the start of the recession, from an index value of 100 to a current index value of 100.7, which is an average annualized growth rate of 0.2 percent. Anemic. Given that consumer spending represents some 70 percent of GDP, a wobbly consumer — note the flatline over the past two quarters — is problematic. And at the risk of turning blue in the face, I’d point out yet again that we know small businesses cite “Poor Sales” as their number one single biggest problem. So, to the extent very little (anything?) has been done to help the consumer, the mess in which we find ourselves should come as absolutely no surprise. Corporations, which are flush with cash, are spending that cash on such things as mergers, acquisitions, share buybacks, and dividend hikes. While that’s all well and good for the investor class, it does virtually nothing for Joe Six Pack on Main St.

My position on this is simple and I think the data supports it: Regressive taxes being used to pay for the tax benefits of corporations and reduced upper end progressive taxes is wrongheaded. There is a benefit to society as a whole (through growth in GDP) in taking a small amount of the excesses of the most wealthy and redistributing that money to the consumption class who will spend 100% of it - or deleverage until their own consumption can be restored. Either way, it is an increase in the available funds to the production/consumption classes that leads to sustainable growth.

Trickle-down and supply side place the horse and cart in unflattering positions relative to their productivity.

[luke warm]

Winstonm, on 2011-August-26, 10:10, said:

Trickle-down and supply side place the horse and cart in unflattering positions relative to their productivity.

some nobel prize winners disagree

[Winstonm]

luke warm, on 2011-August-26, 15:32, said:

some nobel prize winners disagree

Other nobel prize winning economists agree: http://www.alterpoli...eates-deficits/

[Winstonm]

Here is some chart porn that seems to validate the correlation between income and GDP:






Of course, income is not just wages, but at the same time it is not debt, either, so one cannot argue that the removal of the home-equity ATM is the cause of the decrease in income. These charts indicate a close correlation of income with demand.

[phil_20686]

Your charts represent a tautology. Income per person is simply GDP/population. Those charts are actually the same information in two formats, all htey tell you is that following a recession many people are unemployed.

[luke warm]

Winstonm, on 2011-August-26, 17:21, said:

Other nobel prize winning economists agree: http://www.alterpoli...eates-deficits/

so we have battling nobel prize winners... just proves what i've always said, people tend to appeal to whichever authority matches their preconceptions, their worldviews

phil_20686, on 2011-August-30, 12:54, said:

Your charts represent a tautology. Income per person is simply GDP/population. Those charts are actually the same information in two formats, all they tell you is that following a recession many people are unemployed.

but they do so very colorfully

[Winstonm]

phil_20686, on 2011-August-30, 12:54, said:

Your charts represent a tautology. Income per person is simply GDP/population. Those charts are actually the same information in two formats, all htey tell you is that following a recession many people are unemployed.

Which then tells you there is a strong correlation between between GDP and employment, that the problem with stagnation of GDP is a job-side problem.

[Winstonm]

luke warm, on 2011-August-30, 15:29, said:

so we have battling nobel prize winners... just proves what i've always said, people tend to appeal to whichever authority matches their preconceptions, their worldview

This is the only economist who I think has it down pat:

Quote

In economics, the majority is always wrong. — John Kenneth Galbraith

[helene_t]

Winstonm, on 2011-August-30, 17:26, said:

Which then tells you there is a strong correlation between between GDP and employment, that the problem with stagnation of GDP is a job-side problem.

or that the problem with employment is a gdb-side problem.

Seriously, Winston, Phil is right.

[Winstonm]

helene_t, on 2011-August-31, 04:29, said:

or that the problem with employment is a gdb-side problem.

Seriously, Winston, Phil is right.

Helene,

I understand that these measures correlate. Where I disagree is causation. Increasing production doesn't lead to increased income without consumption of those new products and services - the consumption can only come from increased incomes or new debt - if income does not rise and debt is unavailable or refused, increased production only ends with oversupply and a reduction in production.

But a permanent increase in income does stimulate increased spending, resulting in increased GDP.

That is my position. If I am wrong, I have would be glad for you to explain the errors in my thinking. I am not married to this position, but it makes the most sense to me.

[awm]

From Wikipedia:

Quote

Another way of measuring GDP is to measure total income. If GDP is calculated this way it is sometimes called Gross Domestic Income (GDI), or GDP(I). GDI should provide the same amount as the expenditure method described above. (By definition, GDI = GDP. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies.)

So basically GDP and total income are the same. The gap between them (other than measurement error) should be US corporate profits not returned to US shareholders/ownership. There is some percentage of this (companies building up cash reserves, or returning income to foreign shareholders) but it's unlikely to be a really significant percent of GDP. So it's unsurprising that the graphs are very nearly the same.

[Winstonm]

I'd like to thank everyone for their input into this side discussion as I have found it quite entertaining and helpful to hear some other viewpoints. I would like to return for a minute to Phil's discussion of inflation and its affect on wage-productivity ratios.

Here is a simplified example of what I understood him to mean. If a manufacturer has costs of commodity $1 and labor $1 and sells his product for $3 then productivity-wage ratio is 3:1 and profit is $1. If the commodity price rises to $3, though, then the product price must rise to $5 to keep profits equal and this then means productivity ratio changes to 5:1.

What this example fails to account for is an explanation of why prices didn't rise to reflect both the increased costs of the commodity and increased pay for labor. The price could have risen to $6 and included a $1 increase to labor, keeping the productivity ratio 3:1 while retaining profits of $1.

Say's Law requires flexibility of prices and wages. In the above example, while real production has not increased the real ability to consume that production has decreased.

[Winstonm]

Just to be clear, I am unprepared to claim any one overriding factor as a cause, but am attempting to distinguish unproductive policy from productive policy.

Changes in demographics play a large part in temporary supply-demand imbalances, but can have long-lasting affects if technology advances can produce more than can be consumed by the changed demand.

Some things that were outside the scope of the thinking of Keynes, Say, or any earlier economist are now changing the world as we know it: limited investment with near unlimited returns, such as software giants Google, Facebook, et al - when you compare the investment amounts and time needed to recoup investment of these types of businesses against things like building steel mills and railroads, it is apparent that the rules for investment and return are quickly changing.

[luke warm]

Winstonm, on 2011-September-01, 11:30, said:

Some things that were outside the scope of the thinking of Keynes, Say, or any earlier economist are now changing the world as we know it: limited investment with near unlimited returns, such as software giants Google, Facebook, et al - when you compare the investment amounts and time needed to recoup investment of these types of businesses against things like building steel mills and railroads, it is apparent that the rules for investment and return are quickly changing.

not trying to be difficult, but i don't see it... expectatins may have changed, but not the rules... it's true that as an economy or society shifts from one base to another, things change... but that's always been the case... technology is simply of a different type and scope today than in the past, but economic changes due to technology has always been the case

[hrothgar]

Winstonm, on 2011-September-01, 11:30, said:

Some things that were outside the scope of the thinking of Keynes, Say, or any earlier economist are now changing the world as we know it: limited investment with near unlimited returns, such as software giants Google, Facebook, et al - when you compare the investment amounts and time needed to recoup investment of these types of businesses against things like building steel mills and railroads, it is apparent that the rules for investment and return are quickly changing.

Back in the weird old days, there were plenty of opportunities for high risk, high return investments.

I'd argue that railroads are a classic example (you seem to assume that the share prices in railroads reflected physical issues like the time required to lay track, build up rolling stock, etc.) In actuality, share prices were enormously dependent on various sorts of political and financial shenaniggins and could fluctuate dramatically in short periods of time.

If you want to go back earlier, consider the profits and risks associated with long distance trade (there are good reason's why the history of insurance and limited liability corporations good hand in hand with shipping)

From my perspective, the big changes in finance over the last 50 odd years are:

1. The end of traditional defined benefit systems and the rise of 401Ks and the like
2. The emergence of mutual funds and exchange traded funds
3. Algorithmic trading
4. Exotic instruments

[mike777]

Winstonm, on 2011-September-01, 11:30, said:

Just to be clear, I am unprepared to claim any one overriding factor as a cause, but am attempting to distinguish unproductive policy from productive policy.

Changes in demographics play a large part in temporary supply-demand imbalances, but can have long-lasting affects if technology advances can produce more than can be consumed by the changed demand.

Some things that were outside the scope of the thinking of Keynes, Say, or any earlier economist are now changing the world as we know it: limited investment with near unlimited returns, such as software giants Google, Facebook, et al - when you compare the investment amounts and time needed to recoup investment of these types of businesses against things like building steel mills and railroads, it is apparent that the rules for investment and return are quickly changing.

If the old rule is an investment is worth the NPV of all future cash flows then I dont think the rule has changed.

I doubt there are unlimited returns. FWIW I think facebook is a challenge to future cashflows of Google and no doubt our kids will invent something that is a threat to the cashflows of facebook.

HP the largest maker of PC is getting out of business. Nokia used be number one in mobile phones

---


As far as your main point of what is productive central govt policy vs unproductive central govt policy, well that is the debate dems and rep are having right now. It is a worldwide debate we have had around the globe for decades.

[mike777]

"Just to be clear, I am unprepared to claim any one overriding factor as a cause, but am attempting to distinguish unproductive policy from productive policy"


Winston I just wanted to add that one huge issue is just defining what Productive means. For example one gets into a dsicussion of such issues as fairness, social justice, safety nets, etc.

Policy makers cannot even agree if a private company should maximize long term profits as its number one goal or social justice.

[Winstonm]

Quote

I'd argue that railroads are a classic example (you seem to assume that the share prices in railroads reflected physical issues like the time required to lay track, build up rolling stock, etc.) In actuality, share prices were enormously dependent on various sorts of political and financial shenaniggins and could fluctuate dramatically in short periods of time.

Maybe I didn't make myself clear enough. I am not thinking of share prices but the utility of investment capital. Comparitively, it takes dramatically less start-up capital for a software company as compared to building a nationwide railway system, and the recovery of the initial investment cost is much quicker, allowing further investment. Basically, in software you build it once and then resell copies over and over, whereas railroads require physical expansion to expand market share.

[mike777]

Winstonm, on 2011-September-01, 14:39, said:

Maybe I didn't make myself clear enough. I am not thinking of share prices but the utility of investment capital. Comparitively, it takes dramatically less start-up capital for a software company as compared to building a nationwide railway system, and the recovery of the initial investment cost is much quicker, allowing further investment. Basically, in software you build it once and then resell copies over and over, whereas railroads require physical expansion to expand market share.

?So in your example there are a great many barriers to entry to competition for my railroad company than your software company.

btw railroads were one of the first truly great technology industries. Today the train crash in China proves that in many ways railroads are software companies.