Where I expose my ignorance of elemental economics

[lpetrich]

Peter Turchin's Cycles of History

Peter Turchin and Sergei Nefedov have published a book, "Secular Cycles", in which they propose that large-scale human societies have cycles of growth and decay. PT also has a popularized version: "War and Peace and War: The Rise and Fall of Empires". For preindustrial societies, PT proposes this cycle:

• Integrative - centralized, unified elites, strong state, order, stability -- wars of conquest against neighbors
  • Expansion (Growth) - population increases
  • Stagflation (Compression) - population levels off, elites increase
• Disintegrative - decentralized, divided elites, weak state, disorder, instability -- civil wars
  • Crisis (State Breakdown) - population declines, elites continue, lots of strife
  • Depression - population stays low, civil wars, elites get pruned
• Intercycle - if it takes time to form a strong state

The best times are when society is relatively egalitarian, contrary to a certain economic dogma popular among certain people. The dogma that states that the people on top are never paid enough, while the non-top people are always overpaid.

Peter Turchin: US-History Cycles

From sources like Dynamics of political instability in the United States, 1780–2010 and Peter Turchin – The history of inequality, we find a long-term cycle, though it has gone through only 1.5 periods. But it is overall similar to the preindustrial-society cycles.

He collected several sorts of statistics, detrended them, and then normalized them to look for cycles. Normalized: mean = 0, stdev = 1.
[table="class:grid"]
[tr][td]What[/td][td]Proxy[/td][td]Direction[/td][/tr]
[tr][td]Labor oversupply[/td][td]Proportion of population born outside the USA[/td][td]-[/td][/tr]
[tr][td]Price of labor[/td][td]Wage in relation to GDP per capita[/td][td]+[/td][/tr]
[tr][td]Biological well-being/Health[/td][td]Average stature and life expectancy[/td][td]+[/td][/tr]
[tr][td]Social optimism[/td][td]Age at first marriage (both sexes)[/td][td]-[/td][/tr]
[tr][td]Wealth inequality[/td][td]Largest fortune in relation to the median wage[/td][td]-[/td][/tr]
[tr][td]Intra-elite competition/conflict[/td][td]Political polarization in the Congress[/td][td]-[/td][/tr]
[tr][td]Sociopolitical instability[/td][td]Fatalities per 5 years per 1 million population[/td][td]-[/td][/tr]
[/table]

1800: 0.4
1824: 0.8 - Era of Good Feelings
1904: -1.4 - Gilded Age bottoming out
1960: 1.3 - Eisenhower/Kennedy era
2000: -0.3

We are currently in a downward part of the cycle.

What's interesting here is that the two "good" eras coincide with relative economic egalitarianism, the second one having the  Great Compression, while the "bad" one coincides with relative economic inegalitarianism. As I've noted, this is contrary to a certain popular economic dogma.

 

[ksen]

And what you are missing is that the portion of the economy that people depend on for survival is not the only thing that matters.

lol

 

[lpetrich]

I don't think that one can reasonably think of economics outside our broader society. Doing so may be a convenient division of labor, but that's about it.

Some of the economic dogmas mentioned in the OP may be summarized as economic Panglossianism.

Candide 2.0 Chapter 1 – How Candide Was Brought Up in a Magnificent Castle, and How He Was Expelled Thence «

Pangloss was professor of metaphysico-theologico-cosmolo-nigology. He proved admirably that there is no effect without a cause, and that, in this best of all possible worlds, the Baron’s castle was the most magnificent of castles, and his lady the best of all possible Baronesses.

“It is demonstrable,” said he, “that things cannot be otherwise than as they are; for all being created for an end, all is necessarily for the best end. Observe, that the nose has been formed to bear spectacles—thus we have spectacles. Legs are visibly designed for stockings—and we have stockings. Stones were made to be hewn, and to construct castles—therefore my lord has a magnificent castle; for the greatest baron in the province ought to be the best lodged. Pigs were made to be eaten—therefore we eat pork all the year round. Consequently they who assert that all is well have said a foolish thing, they should have said all is for the best.”

More on cycles of history:
US History Cycles - Liberal vs. Conservative
US History Cycles - Extroverted vs. Introverted foreign policy

 

[Cheerful Charlie]

It means nothing when numerous eminent, not run of the mill, but very well qualified economists bother to sign a statement supporting a position? Does this mean mediocre economists' opinions matter despite their ignoring studies demonstrating they are wrong?

You can't make this argument without knowing how many are on the other side.

I'll go with the eminent experts and their facts instead of the many run-of-the mill economists who ignore these latest studies and have often been wrong in the past. Wrong-header right winger "think tanks" are full of these type who haven't got much right over the years.

 

[SimpleDon]

I am arguing that all of the investment that has been raised by eating the wage gains of the poor and the middle class have gone into non-productive investments like the stock market or T-Bills.

The stock market provides liquidity and thus drives new investment--it's not non-productive.

You have chanted this slogan before. I wonder if it is suppose to counter my rather detailed explanation of why the stock market is not especially important to the economy that most people depend on for their very survival.Or whether it is just one of your slogans that you use as a shield against against ideas and conclusions that go against your scared beliefs.

And what you are missing is that the portion of the economy that people depend on for survival is not the only thing that matters.

Of course it isn't the only thing, the economy has to be self-supporting, it has to be renewing itself and providing enough extra for growth and innovation.

But the most important thing is the real economy that supports the vast majority of the population. This is why the economy exists, not to make a few people very rich.

In a world where you are eating the capital to make people happy now the stock market doesn't matter. We have a good example of how that turns out, though--Venezuela. Eat the capital, the economy runs down.

I thought that we cleared this up. The stock market doesn't provide the capital for growth, for keeping the economy running. The stock market is an entity separate from the real economy. It is in every meaning of the word gambling on which companies will do well and which ones won't.

It is like betting on a horse race but with two differences, in the stock market the horses never finish, the betting is just on form and in a real horse race some of the money that is bet goes to pay for the care and feeding of the horses, the companies have to pay the betters in the stock market horse race.

You have to address this weakness of the current economy and its relationship to the stock market with some better arguments than simply repeating over and over again that what I am proposing is to "eat the capital." You have now said it four times.

The only nuance that you have added in this post is the implication that I want to turn the US into the disaster that is Venezuela. I don't, of course, I don't like socialism, it is a terrible Utopian economic theory that turns out to be even worse in practice. Just as I oppose the Utopian economic theory of the self-regulating free market which would, in my opinion, be even a greater disaster.

If you believe that the stock market is still an important way of raising investment capital for companies then please tell us that and explain how I am wrong in my belief that the stock market is no longer the way that the vast majority of investment in the real economy of building production of products for consumption, if that is what you believe. All that we know from your posts here is that, presumably, you don't believe in eating the capital.

I apparently alone among the posters here don't want to change the economic system that we have, the one that has evolved over time and has been constantly improving and strengthening. I believe that the current mixed mode economy that we have with the government supporting the economy and doing the things that the capitalist system either can't do or can't do well, things like the defense of the country, education, infrastructure, policing, jurisprudence, health care, regulation of the economy, etc., while the economy does what it does best, innovation, allocation of resources, distribution of the rewards, etc.

I understand that there has to be a balance between supply and demand, between capital and wages. This is what you are denying by supporting continuation of our current government policies. Policies that assume that the economy is supply side lead, that demand is a weak sister that simply follows where supply leads.

I want to slowly reverse the federal government's role in the intentional transfer of income and wealth to the rich from the 90% and to increase the wages paid to the 90%.

Apparently you are in favor of continuing this government sponsored transfer of income to the already rich. Can you form any more of a reason why you believe in this beyond pejorative sloganeering or is this all that you have?

The thing is I don't see this government sponsored transfer you refer to. Rather, I see a lack of the previous government sponsored transfer from rich to poor. Also, I see our supply chain becoming deeper and deeper as our products are more complex. The more effort needed to turn raw materials into consumer goods the greater a percentage of the economy goes to companies.

In one statement you say that you don't see where government policies affect the split between capital and labor, the split between profits and wages. Then in the very next line you say that the previous government policies transferred income from the rich to the poor, the same as favoring wages over profits.

I don't understand, do you believe that government policies don't affect the split of income between rewarding capital and rewarding labor?

Then if you agree that government policies do affect the split the question becomes,

Do you believe that the current government policies now are biased toward rewarding capital, that is profits?

I may be able to clear this up. I think that you are still misunderstanding me.

Yes, the pre-1980 government policies transferred income from capital to labor, from profits to wages, from the rich to the middle class and the poor, the non-rich. Maybe even too much was transferred to the non-rich because we had some wage price inflation, although that wasn't what caused most of the inflation. That honor is split between the Fed's boneheaded, Milton Friedman inspired monetary policies that turned fairly moderate inflation into a full blown disaster and by third party caused inflation, i.e. the oil cartels.

The pre-1980's government policies like now also transferred a lot of money from the rich to support their own profits. It would be helpful if you could try to think why? I will explain why below. But try to think why that is on your own first.

Capitalism has a tendency to over reward capital. This shouldn't come as any surprise to anyone. In spite of the basic, elemental economic principle that says that capitalism is the prefect economic system it isn't, this one of capitalism's flaws.

In fact, it is what Marx labeled as capitalism's fatal flaw, that income and wealth in capitalism are concentrated in progressively fewer and fewer hands over time. Like much of Marx's theories he correctly identified the phenomenon but was horribly wrong when he proposed solutions.

Because we found a solution to the problem, the government has to step in and to transfer income from the rich to the non-rich. To tax the rich and to use the money to support the incomes of the non-rich.

Just as the government has to tax the rich to provide the functions for society that the market doesn't provide or that it is horrible at doing, things like listed above in this post, the government has to tax the rich to prevent this ever increasing concentration of wealth.

But the government also has to tax the rich to support companies and their profits, the so-called corporate welfare. Profits that ironically go largely to the rich. Why? Because the rich are terrible investors. They put most of their money into either T-Bills, corporate bonds or stocks. None of these really help to provide the kind of investments that the economy needs.

Hopefully you now understand why this is true of stocks and the stock market and in almost all of the paper products that Wall Street and the financial sector sells.

Show

Insurance is of course useful. It does mitigate some of the risks of building and owning brick and mortar investments, but it doesn't provide much real investment. The days of the insurance companies primarily investing in commercial real estate are pretty much behind us, they pretty much buy the Wall Street paper products now.

I wonder if the financial industry consolidation that followed deregulation so that the insurance companies are now largely owned by Wall Street and its six mega banks could have anything to do with it?

Corporate bonds are issued to finance corporate investments, of course, but they only save the corporations a couple of percentage points over borrowing from a bank. The failure of a corporate bond offering to be fully subscribed doesn't stop many corporate investments these days.

And most of the Treasury bills owned by the rich were issued to finance the debt that the government went into to provide the tax cuts to provide the rich with the money that they largely use to buy the Treasury bills. We cut taxes on the rich to increase the amount of financial capital available for investment and we financed the debt created by the tax cuts by reducing the amount of money available for investment.

What we did starting in the early 1980's is to change these policies from shifting income from the rich to non-rich to more of shifting the income the other way. These changes are loosely referred to as Reaganomics because they constitute almost the entire economic policies of movement conservatism and the Republican party.

Those government policies that you claim that you didn't realize are involved in changing the distribution of income in the economy from the poor and the middle class to the rich are actually pretty easy to see. They are changes to the tax code intended to facilitate the natural tendency of income and wealth consolidation rather than to reduce it as before 1980's.

But there are many more policy changes involved, all of which were intended to suppress the wages of the poor and the middle class. And I have repeatedly listed them in these posts and threads for years without you or anyone else offering any reason why these policies, the very tenets of movement conservatism and the Republican party do anything but to reduce the wages of at least the 90% of the income distribution in the US.

Here is a condensed example in this thread that you must have missed,

Yes, it is also about increasing regressive taxes on everyone else, increasing sales taxes, payroll taxes, etc. The holy grails of movement conservatism are either the regressive flat tax or eliminating the progressive income tax completely and going to some form of national sales tax, like the so-called fair tax.

Supply side economics is also about intentionally suppressing the wages of the non-rich by suppressing the unions, by letting the real value of the minimum wage decrease, by exposing American workers to wage competition from illegal immigration and from low wage countries, by undercutting defined benefit pensions, by undercutting overtime pay, by preserving the forty hour work week, by increasing the retirement age, and a hundred smaller other ways.

It is also about mindless, knee jerk deregulation, like that caused the savings and loan fiasco and the similar but much more damaging Great Financial Crisis which lead us into the massive recession of 2008.

Also, financial industry deregulation increased dramatically the interest rates on consumers' credit, another transfer of income from the non-rich to the rich.

There are the amnesty for felons who illegally parked income in off shore tax havens, apparently the reason that Mitt Romney was reluctant to release more than one year of his tax records. What that one year did show was that Mitt did have was 100 million dollars in his 401k, thanks to an extremely lucrative investment fund that required that he also invest and lose 100 million dollars in a holding fund of the 401k fund. Funds that are not available to the non-rich.

But I think that you do realize all of this, but don't want to admit it. That this why you couched the phrase as a "lack of the previous government sponsored transfer from rich to poor" because you are loath to admit that the conservative policies of the federal government are now and have for more than thirty years moved the money the other way compared to what it was.

You want to continue to pretend that the free market is somehow in control, that supply and demand set prices and wages. That this income distribution that we have now is the result of a somehow more natural, organic economy when it is pretty obvious that for the last thirty years or so that the income distribution that you so clearly favor is being determined by exactly the same forces that shaped it in the pre-1980 economy, the economic policies of the federal government.

Yes, the deepening of the supply chain has increased profits and serves to also suppress wages. But why don't you refer to it as globalization? or free trade, more recognizable names for the same thing. And, yes, when you deepen the supply chain by shifting more of your production overseas to much lower wage countries you have more total profits because you are spending less for labor.

This is because of two things that you have consistently denied are true.

Lower wages means higher profits. Likewise, higher profit means lower wages. An increase in wages first and foremost means that profits will go down.

And why is this? Because supply and demand doesn't set prices. Supply and demand doesn't set wages.

--------------------------​

What has happened over the last thirty five years or so is obvious to any interested party who lived through it and is only a mystery to you and any modern Rip Van Winkles who slept through the time. The economic policies of the federal government have been changed from ones that balanced profits and wages to movement conservatism's policies that are biased to favor profits over wages.

With full employment, and the support of unions, and with trade restrictions the negotiating power of workers is much higher and their wages and benefits are higher. A higher minimum wage increases the incomes of about 35 million minimum wage workers and those who earn near minimum wage. With higher marginal rates the take home pay of the rich is lower. Higher inheritance taxes reduce the inter generational accumulation of wealth. Higher tax rates of regressive taxes like sales taxes, payroll taxes and earnings taxes hit the non-rich proportionally more than the rich. Tax deductions benefit the rich more and flatten the progressive income tax. When wages go up profits go down.

These are indisputable facts. These were the targets and continue to be the targets of movement conservatism and of the Republican party and they are what have produced the vast amount of income inequality, more than was considered unacceptable in Mexico 10 years ago by the IMF.

And no, the failure of supply side economics or Reaganomics to increase investment and economic growth isn't due to unknown economic factors or to flawed CPI, unemployment or GDP measurements or to technical factors. It is due to the relative decrease in the economy's demand because demand comes from wages. And Reaganomics intentionally suppresses wages.

You can continue to plead ignorance of these facts describing the policies that you enthusiastically support but these are the inevitable outcomes of these policies and you must also acknowledge them too.

 

[SimpleDon]

You can't make this argument without knowing how many are on the other side.

I'll go with the eminent experts and their facts instead of the many run-of-the mill economists who ignore these latest studies and have often been wrong in the past. Wrong-header right winger "think tanks" are full of these type who haven't got much right over the years.

Loren dismisses the economists and the studies that find no evidence of widespread and consistent unemployment resulting from an increase in the minimum wage to the fact that they are leftists, implying that they are biased and intentionally skew their results to show no statistical evidence of unemployment.

But the CBO found that the studies that supported Loren's position that unemployment results from an increase in the minimum wage and no other wage increase, are tainted by publication selection bias. That incredibly virtually all of the studies that found unemployment resulting from minimum wage increases found that the amount of unemployment that resulted was equal to the minimum amount that is considered to be statistically relevant. That is above the statistical noise that Loren is so convinced hides the unemployment from any minimum wage increase, and will hide the unemployment from an increase as small as 10 cents an hour.

Here is the abstract from the paper that found the bias Publication Selection Bias in Minimum-Wage Research? A Meta-Regression Analysis, Authors, Hristos Doucouliagos, T. D. Stanley, 2009.

Card and Krueger's meta-analysis of the employment effects of minimum wages challenged existing theory. Unfortunately, their meta-analysis confused publication selection with the absence of a genuine empirical effect. We apply recently developed meta-analysis methods to 64 US minimum-wage studies and corroborate that Card and Krueger's findings were nevertheless correct. The minimum-wage effects literature is contaminated by publication selection bias, which we estimate to be slightly larger than the average reported minimum-wage effect. Once this publication selection is corrected, little or no evidence of a negative association between minimum wages and employment remains.

Card and Krueger's study is the first so-called natural study of the cross border effects of a minimum wage increase in one jurisdiction compared to another nearby one where the minimum wage wasn't raised. It was the study that sent conservative mad because it found no unemployment resulting from the minimum wage increase in, I believe, New Jersey, I am relying on my memory here.

 

[Loren Pechtel]

I am arguing that all of the investment that has been raised by eating the wage gains of the poor and the middle class have gone into non-productive investments like the stock market or T-Bills.

The stock market provides liquidity and thus drives new investment--it's not non-productive.

You have chanted this slogan before. I wonder if it is suppose to counter my rather detailed explanation of why the stock market is not especially important to the economy that most people depend on for their very survival.Or whether it is just one of your slogans that you use as a shield against against ideas and conclusions that go against your scared beliefs.

And what you are missing is that the portion of the economy that people depend on for survival is not the only thing that matters.

Of course it isn't the only thing, the economy has to be self-supporting, it has to be renewing itself and providing enough extra for growth and innovation.

But the most important thing is the real economy that supports the vast majority of the population. This is why the economy exists, not to make a few people very rich.

The stock market doesn't exist to support the current standard of living. It exists to support the future standard of living.

In a world where you are eating the capital to make people happy now the stock market doesn't matter. We have a good example of how that turns out, though--Venezuela. Eat the capital, the economy runs down.

I thought that we cleared this up. The stock market doesn't provide the capital for growth, for keeping the economy running. The stock market is an entity separate from the real economy. It is in every meaning of the word gambling on which companies will do well and which ones won't.

The stock market provides the secondary market for the successful startups. Without this secondary market the venture capitalists wouldn't be able to cash in their successes and thus wouldn't have the money to invest in more startups. Innovative new business creation would plummet.

It is like betting on a horse race but with two differences, in the stock market the horses never finish, the betting is just on form and in a real horse race some of the money that is bet goes to pay for the care and feeding of the horses, the companies have to pay the betters in the stock market horse race.

You're missing the effect of dividends. The stock market is not zero sum!

The only nuance that you have added in this post is the implication that I want to turn the US into the disaster that is Venezuela. I don't, of course, I don't like socialism, it is a terrible Utopian economic theory that turns out to be even worse in practice. Just as I oppose the Utopian economic theory of the self-regulating free market which would, in my opinion, be even a greater disaster.

You're not looking for the personal redistribution, but the same overall pattern--convert capital to consumer spending.

In one statement you say that you don't see where government policies affect the split between capital and labor, the split between profits and wages. Then in the very next line you say that the previous government policies transferred income from the rich to the poor, the same as favoring wages over profits.

You're calling a lack of transfer from rich to poor as a transfer from poor to rich.

Just as the government has to tax the rich to provide the functions for society that the market doesn't provide or that it is horrible at doing, things like listed above in this post, the government has to tax the rich to prevent this ever increasing concentration of wealth.

In other words, eat the rich.

Yes, the deepening of the supply chain has increased profits and serves to also suppress wages. But why don't you refer to it as globalization? or free trade, more recognizable names for the same thing. And, yes, when you deepen the supply chain by shifting more of your production overseas to much lower wage countries you have more total profits because you are spending less for labor.

It's not just about global trade. I'm talking about the number of transformations between what starts in nature to what we actually take home.

With full employment, and the support of unions, and with trade restrictions the negotiating power of workers is much higher and their wages and benefits are higher. A higher minimum wage increases the incomes of about 35 million minimum wage workers and those who earn near minimum wage. With higher marginal rates the take home pay of the rich is lower. Higher inheritance taxes reduce the inter generational accumulation of wealth. Higher tax rates of regressive taxes like sales taxes, payroll taxes and earnings taxes hit the non-rich proportionally more than the rich. Tax deductions benefit the rich more and flatten the progressive income tax. When wages go up profits go down.

You're describing a formula for inflation here.

 

[Cheerful Charlie]

Card and Krueger's study is the first so-called natural study of the cross border effects of a minimum wage increase in one jurisdiction compared to another nearby one where the minimum wage wasn't raised. It was the study that sent conservative mad because it found no unemployment resulting from the minimum wage increase in, I believe, New Jersey, I am relying on my memory here.

Yes. New Jersy became something of a useful example when it came to natural experiments of economic policies.

Back years ago when the internet was thrown open and usenet was a big thing, I used to see dictionary duels. People arguing, and choosing the dictionaries that supported their wished for definitions to win arguments. I see the same sort of thing with economics to a degree. Throwing stuff from various think tanks around with abandon.

This is one reason I am very interested in these natural experiments. New Jersy took some of the wind out of the sails of the right. Brownback's Kansas is another prime example. Bush's big tax cuts is another. Jindal's Louisiana.

Some big obvious examples of such natural experiments are worth a library worth of theorizing and rationalization. I have always like Paul Krugman because he tends to look at such facts, and natural experiments that blow away the dust of obfusication.

 

[Cheerful Charlie]

http://www.nytimes.com/2015/07/17/opinion/paul-krugman-liberals-and-wages.html


[h=1]Liberals and Wages[/h]More than two decades ago the economists David Card and Alan Krueger realized that when an individual state raises its minimum wage rate, it in effect performs an experiment on the labor market. Better still, it’s an experiment that offers a natural control group: neighboring states that don’t raise their minimum wages. Mr. Card and Mr. Krueger applied their insight by looking at what happened to the fast-food sector — which is where the effects of the minimum wage should be most pronounced — after New Jersey hiked its minimum wage but Pennsylvania did not.

Until the Card-Krueger study, most economists, myself included, assumed that raising the minimum wage would have a clear negative effect on employment. But they found, if anything, a positive effect. Their result has since been confirmed using data from many episodes. There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.
....
And for those trying to play gotcha by pointing out that some of what she said differed from ideas that prevailed when her husband was president, well, many liberals have changed their views in response to new evidence. It’s an interesting experience; conservatives should try it some time.

 

[Canard DuJour]

Jersy became something of a useful example when it came to natural experiments of economic policies.

Another is Britain, where a national MW was introduced in 1999. Wages as low as £2/hr were common in the agricultural and hospitality sectors. The relatively new phenomenon of welfare dependency among the working poor had become a national scandal. A MW was introduced at £3.60/hr - a substantial increase. Both the Conservative party and CBI opposed it, predicting substantial inflation and unemployment. There was no discernible inflation and, if anything, a small positive employment effect. Both the Conservative Party and the CBI now support the MW.

 

[SimpleDon]

I am arguing that all of the investment that has been raised by eating the wage gains of the poor and the middle class have gone into non-productive investments like the stock market or T-Bills.

The stock market provides liquidity and thus drives new investment--it's not non-productive.

You have chanted this slogan before. I wonder if it is suppose to counter my rather detailed explanation of why the stock market is not especially important to the economy that most people depend on for their very survival.Or whether it is just one of your slogans that you use as a shield against against ideas and conclusions that go against your scared beliefs.

And what you are missing is that the portion of the economy that people depend on for survival is not the only thing that matters.

Of course it isn't the only thing, the economy has to be self-supporting, it has to be renewing itself and providing enough extra for growth and innovation.

But the most important thing is the real economy that supports the vast majority of the population. This is why the economy exists, not to make a few people very rich.

The stock market doesn't exist to support the current standard of living. It exists to support the future standard of living.

It can only support the future standard of living if some of the money in the stock market is actually recycled back into the real economy. I have repeatedly detailed that little or no money in the stock market returns to the real economy. Initial offerings every year are only a small fraction of a percentage point of the stock market, and these are only to buyout private owners in enterprises that already exist, they don't provide new capital, they only replace existing, privately owned capital with stockholder owned property.

Secondary equity offerings are much rarer than initial offerings and we know how much venture capital is provided every year and it's provided to less than one percent of the total start up businesses every year.

The vast majority of business investment every year comes from corporate retained earnings or from corporate borrowing, not from the stock market.

You have repeatedly told me that I am wrong. In three different formulations of what finally is the same slogan. The stock market improves liquidity, but so does sewing your money into your mattress. You say that capital does move into investing in the economy but what you haven't yet done is to explain why I am wrong and how capital moves from the stock market back into the economy. And how much moves into real investment? Is it more than moves from the economy to the stock market in the form of dividends?

In a world where you are eating the capital to make people happy now the stock market doesn't matter. We have a good example of how that turns out, though--Venezuela. Eat the capital, the economy runs down.

I thought that we cleared this up. The stock market doesn't provide the capital for growth, for keeping the economy running. The stock market is an entity separate from the real economy. It is in every meaning of the word gambling on which companies will do well and which ones won't.

The stock market provides the secondary market for the successful startups. Without this secondary market the venture capitalists wouldn't be able to cash in their successes and thus wouldn't have the money to invest in more startups. Innovative new business creation would plummet.

Don't get me wrong, the stock market has some value. It is a replica market that pretty accurately judges the relative value of companies. But its value is seriously overrated and based largely on a history and a reputation that it no longer deserves. It is no longer an even minor source for capital for business investment. By far the greatest sources of this money now is corporate retained earnings and corporate borrowing, either bond issues or banks.

And as far as start ups, businessmen will resist going to venture capitalists for as long as possible. And as for "cashing out" whether by entrepreneurs or by venture capitalists the amount of money that they cash out for in the stock market is dwarfed by the same sources that provide most of the business investment funds, that is corporate buy outs.

The venture capital market was about 50 billion dollars in 2014, about 15% of the total business investment of the country. This is a lot of money and is as you said, extremely valuable for our economy and our capitalism. But it was up from 19 billion dollars just a few years ago. So this might be an odd, peak year.

But only a tiny number of start ups use venture capital firms, less than 1%. Certainly the most common way is Mommy, Daddy and other relatives followed closely by maxing out the credit cards.

The Venture Capital firms don't go to the stock market to raise funds. They raise them like any other any other Wall Street firm does, they sell shares to investors. Investors who agree to have their money tied up for a minimum term, usually ten years and agree to an annual maintenance fee usually about 2%.

I said that the stock market is an accurate judge of relative value between companies. The absolute value that the stock market arrived at is more dependent on the Ponzi scheme, aspect of the stock market. The market doesn't share its money with the companies and the companies pay the stockholders as little in dividends as they can get away with. For there to be growth in the market valuation, your prized capital gains, there has to be new money coming into the market.

It is like betting on a horse race but with two differences, in the stock market the horses never finish, the betting is just on form and in a real horse race some of the money that is bet goes to pay for the care and feeding of the horses, the companies have to pay the betters in the stock market horse race.

You're missing the effect of dividends. The stock market is not zero sum!

No, I accounted for dividends, when I that "some of the money that is bet goes to pay for the care and feeding of the horses, the companies have to pay the betters in the stock market horse race." was referring to the dividends.

The only nuance that you have added in this post is the implication that I want to turn the US into the disaster that is Venezuela. I don't, of course, I don't like socialism, it is a terrible Utopian economic theory that turns out to be even worse in practice. Just as I oppose the Utopian economic theory of the self-regulating free market which would, in my opinion, be even a greater disaster.

You're not looking for the personal redistribution, but the same overall pattern--convert capital to consumer spending.

Yes, after many, many posts of me saying exactly that you finally understand. And it does include personal redistribution, I think, but I am not sure what you mean by that. I don't advocate thievery, for example, people taking redistribution into their own hands.

Once again, I will ask the questions that I have asked you many times before.

Considering the following, that ...

1. ... corporate profits are now four times the annual amount of the investment in new and existing businesses.
2. ... corporate profits were only twice as much as the total investments in the economy that the supply siders said that they could improve on.
3. ... business investment as a percentage of GDP over the last thirty five years has decreased along with the growth rate ...
4. ... you say that we have no choice but to continue to suppress wages and to see an ever increasing amount of income and the resulting wealth is transferred to the already rich instead of being more evenly distributed to the other 99% of the population but you can't explain why.

Considering this, how much more capital do you think that is needed to be concentrated into the hands of the as a multiple of the business investment in the economy?

It is now four times as much. Is it enough when it is six times? Eight times?

Is there any point at which the huge amount capital being generated from what use to be paid as wages, far more annually than can be used as real investment, becomes a problem?

Say that too much goes into the paper investment of the stock market? What would happen then? Would the market become overvalued and crash?

Or say that we had to run huge federal government deficits to make up for the tax cuts that we used to put more money in the hands of the rich. Those deficits wouldn't cause any problems, right?

Or say that too much of this money goes into buying a commodity like gold or into oil futures it would be barely noticed, right?

Or say that someone invents a kind of security to soak up all of this excess capital that they call a mortgage backed security where they package a whole lot of home mortgages together and slice across all of the mortgages so that one slice, let's call it a trance, contains many small pieces of individual mortgages and say we believe deep in our hearts that this reduced the risks of the security because we all know that home prices never go down and we package the mortgage so that the riskiest mortgages have the highest returns but the carry same risk as any other because we all know that home values never go down and the incorruptible security rating businesses say so and these trances are the most popular but we don't have enough of the riskiest mortgages to satisfy the demand so we hire people who are used to selling predatory payday loans to the poor and the highest risk individuals and pay them not by how many mortgages they sign up but by the dollar amount of mortgages that they sign and push adjustable rate loans with a low teaser rate that jumps significantly after three years and miracles of miracles all of the new money in the housing market balloons the prices of homes faster and higher than any time in history, that nothing can go wrong, right? Because home prices never go down.

If you believe that this massive amount of money can't do us any harm then perhaps it is because you don't know enough.

In one statement you say that you don't see where government policies affect the split between capital and labor, the split between profits and wages. Then in the very next line you say that the previous government policies transferred income from the rich to the poor, the same as favoring wages over profits.

You're calling a lack of transfer from rich to poor as a transfer from poor to rich.

Because it is. Concentrate. We were running a set of many different policies that economy wide transferred income and wealth from the rich to the poor. As you accept and acknowledge.

We didn't get rid of these policies, rather we modified them so that they no favored the poor and the middle class but so that they now favor the rich. And the previous transfer of money was reversed. There is no lack of the policies, they are still there, their impact has been reversed to now favor the rich.

All better?

Just as the government has to tax the rich to provide the functions for society that the market doesn't provide or that it is horrible at doing, things like listed above in this post, the government has to tax the rich to prevent this ever increasing concentration of wealth.

In other words, eat the rich.

Why do you think that we don't have to avoid the concentration of wealth in ever fewer hands?

That it isn't a problem of the rich eating everyone else? Including themselves eventually?

You have had many faulty ideas about how the economy works. Isn't this just another one of those?

That for some reason that you can't explain we have to accept an economy that makes just a few people very wealthy?

Even though we know that it hurts the economy?

And that we know why it happens because of the many government policies that we changed, that we could easily change back?

Yes, the deepening of the supply chain has increased profits and serves to also suppress wages. But why don't you refer to it as globalization? or free trade, more recognizable names for the same thing. And, yes, when you deepen the supply chain by shifting more of your production overseas to much lower wage countries you have more total profits because you are spending less for labor.

It's not just about global trade. I'm talking about the number of transformations between what starts in nature to what we actually take home.

So it is about global trade, but more.

But you said that you didn't know what the federal government had done to intentionally suppress wages. One of the things that the government did was to remove trade barriers to expose American workers to competition from low wage countries. Free trade agreements like NAFTA, etc.

The question that you need to answer is if this does suppress US wages?

I don't see that we make products that have many more production steps than we did thirty five years ago. A large part of increasing productivity is simplifying production. A lot of the innovation that has gone on has been to produce substitutes for components that cost too much or that complicate assembly.

With full employment, and the support of unions, and with trade restrictions the negotiating power of workers is much higher and their wages and benefits are higher. A higher minimum wage increases the incomes of about 35 million minimum wage workers and those who earn near minimum wage. With higher marginal rates the take home pay of the rich is lower. Higher inheritance taxes reduce the inter generational accumulation of wealth. Higher tax rates of regressive taxes like sales taxes, payroll taxes and earnings taxes hit the non-rich proportionally more than the rich. Tax deductions benefit the rich more and flatten the progressive income tax. When wages go up profits go down.

You're describing a formula for inflation here.

So you do agree that doing the opposite, what we are doing now, suppresses wages. That is something.

Let's be clear. What has happened over the last thirty five years of neoliberal economics is that supply, capital, now collects all of the economic gains from increased productivity and innovation. Previously half of the economic gains from productivity was split between profits and wages, between capital and labor. It this had been true for the past thirty five years like it was for the thirty five years before 1980 then the average annual income today would be about 90,000 dollars a year instead of 55,000 dollars a year. The accumulated total that was switched from wages to profits over that time is now close to 20 trillion dollars.

Yes, if we put this money into wages it creates more demand, more growth, and the potential for more inflation. We also will improve the lives of 99% of Americans and will strengthen the economy, providing more money for investment in the economy and for innovation.

If we continue to put money into profits it certainly reduces the potential for inflation in the economy. This is the secret of the so-called "Great Moderation," when the neoclassical economists couldn't understand why inflationary pressure had been reduced in the ten years leading up to the Great Recession. It was because we were intentionally boosting the incomes of the rich, the rich have a greater propensity to invest, and their investments don't impact the economy. Their investments don't put money into the economy.

Their investments go into the paper economy of Wall Street, and they cause inflation in this paper economy. Some of it we call capital gains when it occurs in the stock market. In other areas it creates asset bubbles, another kind of inflation. Only occasionally does this money find its way into the real economy. For example, the recent housing bubble and the endless bubbles in oil futures.

But this excess capital is guaranteed to cause instability in the financial markets, especially if it is accompanied by the deregulation of the financial markets.

In essence what we have now is two parallel economies. One is the economy of producing products for consumption. The economy that all of us depend for life itself. The other economy is the paper economy of Wall Street. The economy that only benefits the rich and has little impact on the real economy.

 

[SimpleDon]

Peter Turchin's Cycles of History

Peter Turchin and Sergei Nefedov have published a book, "Secular Cycles", in which they propose that large-scale human societies have cycles of growth and decay. PT also has a popularized version: "War and Peace and War: The Rise and Fall of Empires". For preindustrial societies, PT proposes this cycle:

• Integrative - centralized, unified elites, strong state, order, stability -- wars of conquest against neighbors
  • Expansion (Growth) - population increases
  • Stagflation (Compression) - population levels off, elites increase
• Disintegrative - decentralized, divided elites, weak state, disorder, instability -- civil wars
  • Crisis (State Breakdown) - population declines, elites continue, lots of strife
  • Depression - population stays low, civil wars, elites get pruned
• Intercycle - if it takes time to form a strong state

The best times are when society is relatively egalitarian, contrary to a certain economic dogma popular among certain people. The dogma that states that the people on top are never paid enough, while the non-top people are always overpaid.

Peter Turchin: US-History Cycles

From sources like Dynamics of political instability in the United States, 1780–2010 and Peter Turchin – The history of inequality, we find a long-term cycle, though it has gone through only 1.5 periods. But it is overall similar to the preindustrial-society cycles.

He collected several sorts of statistics, detrended them, and then normalized them to look for cycles. Normalized: mean = 0, stdev = 1.
[table="class:grid"]
[tr][td]What[/td][td]Proxy[/td][td]Direction[/td][/tr]
[tr][td]Labor oversupply[/td][td]Proportion of population born outside the USA[/td][td]-[/td][/tr]
[tr][td]Price of labor[/td][td]Wage in relation to GDP per capita[/td][td]+[/td][/tr]
[tr][td]Biological well-being/Health[/td][td]Average stature and life expectancy[/td][td]+[/td][/tr]
[tr][td]Social optimism[/td][td]Age at first marriage (both sexes)[/td][td]-[/td][/tr]
[tr][td]Wealth inequality[/td][td]Largest fortune in relation to the median wage[/td][td]-[/td][/tr]
[tr][td]Intra-elite competition/conflict[/td][td]Political polarization in the Congress[/td][td]-[/td][/tr]
[tr][td]Sociopolitical instability[/td][td]Fatalities per 5 years per 1 million population[/td][td]-[/td][/tr]
[/table]

1800: 0.4
1824: 0.8 - Era of Good Feelings
1904: -1.4 - Gilded Age bottoming out
1960: 1.3 - Eisenhower/Kennedy era
2000: -0.3

We are currently in a downward part of the cycle.

What's interesting here is that the two "good" eras coincide with relative economic egalitarianism, the second one having the  Great Compression, while the "bad" one coincides with relative economic inegalitarianism. As I've noted, this is contrary to a certain popular economic dogma.

I missed this post, the "View first unread" button took me passed it.

Finally it is all about power. We know that the economy can be manipulated to produce different income distributions over time. This is pretty much accepted by all economists except for Austrian/Libertarians. There isn't really anyone else that really believes that there is a free market or that it is even possible.

The economic elite, the rich, promote the idea of a free market to justify the natural tendency of capitalism to over reward them and to undercut the ability of the government to enforce external costs on them like pollution controls and workers' safety. They certainly don't believe in the free market and supply and demand setting prices. They don't even believe in getting the government out of the economy, they want to control the government and to use its control over the economy to their benefit.

The economic egalitarians have certainly lost out over the last thirty five years to the economic elites as the elites have introduced movement conservatism and solidified their control over the Republican party. The economic egalitarians have been unable to mount any serious challenge to the rather simplistic conservative orthodoxy that has kept the Republican party marching to the elites' tune all of these many years. It doesn't bother conservatives that their orthodoxy is largely a pack of lies. For example, the discussions that I have with conservatives about the economy. Conservatives want the world to stop spinning, they want to stop change. They don't really care if they have to believe in lies to do it.

So no, it is not my economic theories that are canceled by dose of reality. Post Keynesian economics tries to understand the economy the way that it is, not to figure out ways to change it. The entire purpose of elemental economics, that is, neoclassical economics is to justify a larger role for supply, capital, than it really has in the economy. The elites don't want to hear that capital, and by extension themselves, are no longer the most important thing in the economy. They don't want to hear that their stock market is no longer relevant to the economy.

Good post.

 

[Loren Pechtel]

http://www.nytimes.com/2015/07/17/opinion/paul-krugman-liberals-and-wages.html


[h=1]Liberals and Wages[/h]More than two decades ago the economists David Card and Alan Krueger realized that when an individual state raises its minimum wage rate, it in effect performs an experiment on the labor market. Better still, it’s an experiment that offers a natural control group: neighboring states that don’t raise their minimum wages. Mr. Card and Mr. Krueger applied their insight by looking at what happened to the fast-food sector — which is where the effects of the minimum wage should be most pronounced — after New Jersey hiked its minimum wage but Pennsylvania did not.

Until the Card-Krueger study, most economists, myself included, assumed that raising the minimum wage would have a clear negative effect on employment. But they found, if anything, a positive effect. Their result has since been confirmed using data from many episodes. There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.
....
And for those trying to play gotcha by pointing out that some of what she said differed from ideas that prevailed when her husband was president, well, many liberals have changed their views in response to new evidence. It’s an interesting experience; conservatives should try it some time.

This would only be meaningful if minimum wage increases weren't related to the economy. The reality is that the minimum wage is usually raised during good times--of course you see good results for now. You have to look down the road to the next recession to see what really happens.

 

[Loren Pechtel]

It can only support the future standard of living if some of the money in the stock market is actually recycled back into the real economy. I have repeatedly detailed that little or no money in the stock market returns to the real economy. Initial offerings every year are only a small fraction of a percentage point of the stock market, and these are only to buyout private owners in enterprises that already exist, they don't provide new capital, they only replace existing, privately owned capital with stockholder owned property.

It doesn't show up in the economy? Trillions in pension funds, 401ks and IRAs don't end up as consumer spending???

The vast majority of business investment every year comes from corporate retained earnings or from corporate borrowing, not from the stock market.

Growth of existing businesses. New businesses don't come from retained earnings or borrowing.

Why do you think that we don't have to avoid the concentration of wealth in ever fewer hands?

That it isn't a problem of the rich eating everyone else? Including themselves eventually?

Because it doesn't actually happen. That wealth gets dispersed in a few generations at most.

But you said that you didn't know what the federal government had done to intentionally suppress wages. One of the things that the government did was to remove trade barriers to expose American workers to competition from low wage countries. Free trade agreements like NAFTA, etc.

Which should cause zero harm--it should balance out by the exchange rate shifting over time.

I don't see that we make products that have many more production steps than we did thirty five years ago. A large part of increasing productivity is simplifying production. A lot of the innovation that has gone on has been to produce substitutes for components that cost too much or that complicate assembly.

The assembly at any one step is often simpler or else robotic these days. What I'm saying is there are more steps. There are a lot of steps needed to produce any product with a computer in it--and that's an awful lot of products on the market these days.

With full employment, and the support of unions, and with trade restrictions the negotiating power of workers is much higher and their wages and benefits are higher. A higher minimum wage increases the incomes of about 35 million minimum wage workers and those who earn near minimum wage. With higher marginal rates the take home pay of the rich is lower. Higher inheritance taxes reduce the inter generational accumulation of wealth. Higher tax rates of regressive taxes like sales taxes, payroll taxes and earnings taxes hit the non-rich proportionally more than the rich. Tax deductions benefit the rich more and flatten the progressive income tax. When wages go up profits go down.

You're describing a formula for inflation here.

So you do agree that doing the opposite, what we are doing now, suppresses wages. That is something.

That does not follow. You're trying to cause a labor shortage--and labor shortages lead to inflationary spirals.

 

[Cheerful Charlie]

http://www.nytimes.com/2015/07/17/opinion/paul-krugman-liberals-and-wages.html


Liberals and Wages

More than two decades ago the economists David Card and Alan Krueger realized that when an individual state raises its minimum wage rate, it in effect performs an experiment on the labor market. Better still, it’s an experiment that offers a natural control group: neighboring states that don’t raise their minimum wages. Mr. Card and Mr. Krueger applied their insight by looking at what happened to the fast-food sector — which is where the effects of the minimum wage should be most pronounced — after New Jersey hiked its minimum wage but Pennsylvania did not.

Until the Card-Krueger study, most economists, myself included, assumed that raising the minimum wage would have a clear negative effect on employment. But they found, if anything, a positive effect. Their result has since been confirmed using data from many episodes. There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.
....
And for those trying to play gotcha by pointing out that some of what she said differed from ideas that prevailed when her husband was president, well, many liberals have changed their views in response to new evidence. It’s an interesting experience; conservatives should try it some time.

This would only be meaningful if minimum wage increases weren't related to the economy. The reality is that the minimum wage is usually raised during good times--of course you see good results for now. You have to look down the road to the next recession to see what really happens.

Are you seriously telling us that the "many episodes" of MW raises coincidentally happened only in good economic cycles? Can you demonstrate that we should take that idea seriously? The claim was, raising minimum wages depresses employment. It has proven to be not so. Since the Card and Krueger study two decades ago, evidence has been accumulating that raises to MW do not have the baleful effects all too many unobservant politicians still claim that it does, to the detriment of many of their constituents.

Offering up a rationalization to avoid admitting that fact simply does not change the fact, 20 years of studies of such natural experiments in economics has debunked that outdated claim.

Its now time for politicians of all persuasions to admit that fact and shift to a policy of seeing that anybody who works at a job does not live in poverty because of a living wage that is insufficient to meet basic needs. A political system that allows that because of an economic myth is a bad system.

 

[lpetrich]

The economic egalitarians have certainly lost out over the last thirty five years to the economic elites as the elites have introduced movement conservatism and solidified their control over the Republican party.

In US History Cycles - Liberal vs. Conservative I mentioned Arthur Schlesinger's history cycles. The US cycles between liberal and conservative, over varying amounts of time, typically a generation or two.

• Liberal: public purpose, expanding democracy
• Conservative: private interest, containing democracy

Arthur Schlesingers I and II had proposed that each phase of the cycle is self-limiting.

Liberal phases typically end because it is difficult to sustain the effort needed for major reforms. That is especially true if the reforms have some big successes. Liberal phases may also be perceived by many people as going too far. Also, a society may need some time to assimilate major changes, especially if those changes have been very disruptive.

Conservative phases typically end because of the accumulation of unsolved problems -- problems that society's elites are unwilling to solve, and are often unwilling to acknowledge.

The phases (dates approximate): L: creation of Constitution 1776-1788, C: Hamiltonian federalism 1788-1800, L: Jeffersonianism 1800-1812, C: aftermath of the War of 1812 1812-1829, L: Jacksonian democracy 1829-1841, C: dominance of slaveowners 1841-1861, L: Abolition of slavery, Reconstruction 1861-1869, C: Gilded Age I 1869-1901, L: Progressive Era 1901-1919, C: Republican Restoration 1919-1931, L: The New Deal 1931-1947, C: Eisenhower Era 1947-1962, L: Sixties Radicalism 1962-1978, C: Gilded Age II 1978-

We are now in Gilded Age II, and its problems have very evidently been accumulating. It has several parallels to the original Gilded Age a little over a century ago. Being unusually long, being in a Peter-Turchin-cycle downturn, following a traumatic period of reform that involved race relations, having great income and wealth inequality, etc. I remember thinking that the Clinton years would be the end of this period of conservatism, but those years weren't, despite the right wing vilifying him as a left-wing ogre.

They don't want to hear that their stock market is no longer relevant to the economy.

Corporate stock does have a purpose: raising money for big capital investments. However, in practice, it doesn't necessarily work out that way, and corporate stock often ends up being adult trading cards. An adult version of baseball cards and Pokemon cards. It does have the difference of offering income in the form of dividends, but when stock has a very high P/E value, that is not very significant.

The P/E value of stock is price / earnings. It's essentially how long it takes for a share of stock to give out in dividends the amount of money needed to buy it. A reasonable value would be the time that it takes to build the company using the stock price, typically around 5 to 20 years (very rough guess). So one has to suspect a bubble market for stock with P/E ratios above 100 or so.

Economic bubbles are a kind of market failure: some asset getting valued absurdly high, then declining.

Except that some capitalist apologists seems to want to define market failures out of existence.

 

[Loren Pechtel]

This would only be meaningful if minimum wage increases weren't related to the economy. The reality is that the minimum wage is usually raised during good times--of course you see good results for now. You have to look down the road to the next recession to see what really happens.

Are you seriously telling us that the "many episodes" of MW raises coincidentally happened only in good economic cycles? Can you demonstrate that we should take that idea seriously? The claim was, raising minimum wages depresses employment. It has proven to be not so. Since the Card and Krueger study two decades ago, evidence has been accumulating that raises to MW do not have the baleful effects all too many unobservant politicians still claim that it does, to the detriment of many of their constituents.

Offering up a rationalization to avoid admitting that fact simply does not change the fact, 20 years of studies of such natural experiments in economics has debunked that outdated claim.

Its now time for politicians of all persuasions to admit that fact and shift to a policy of seeing that anybody who works at a job does not live in poverty because of a living wage that is insufficient to meet basic needs. A political system that allows that because of an economic myth is a bad system.

What's so remarkable about this? When times are bad politicians won't vote for a MW increase.

 

[Cheerful Charlie]

Times have not been exactly economically good in recent years, but we see a number of state and local raises in MW across America in the past few years. And indeed MW was not notably raised during the Bush years that saw the disaster that befell our economy. We cannot therefore say that that policy helped much as unemployment peaked under Bush at over 10%. Inflation increased slowly over the Bush years but MW did not. So real earnings for MW earners dropped. No way to run an economy. Obviously the GOP policy of opposing MW raises with the ferocity they have indeed opposed raising MW isn't working.

The claim raising MW depresses employment deeply has been demonstrated to be false. And watching people sink into poverty due to bad economic policy based on bad economic assumptions is more and more political suicide.
The GOP Congress ratings are 15% approval, 79% disapproval.

We tried this the GOP way for years now and its a proven failure.

 

[SimpleDon]

I am trying to understand exactly how you approach this discussion that we are having. I am sorry, but it seems to me that you read through my rather lengthy and detailed responses until you find a point that you feel is weak on my part and post an one line bullet point that you feel demolishes my point.

In the process you ignore the other 98% of my post. You are very selective about what you respond to.

You completely ignore my questions, I have repeatedly asked for example, how much more money do you think that we have to transfer to the already wealthy before it is too much.

To me, this is a rhetorical question. It is obvious that we have transferred a huge amount of money to the rich over the last thirty five years without any of the impacts that the supply side proponents promised, no increase in business investments or in growth. Something approaching twenty trillion dollars went to the rich that under the previous split between profits and wages would have gone to wages, demand, consumption, debt reduction and the net worth of the poor and the middle class.

What we have gained for transferring this money to the rich are repeated asset bubbles, financial market instability, the incursions of capitalized for profit businesses into areas where it has no business being, including health care, prisons, education, fighting wars, funding mortgages, etc.

But it isn't a rhetorical question for you because you believe that we have to continue to transfer this more than one trillion dollars a year and growing to the rich, for reasons that totally escape me, but which might be ...

1. Because while it hasn't happened in thirty five years you are convinced that Say's law will kick in any day now?
   
2. Or perhaps you believe the same things that colorado and dismal believe, that the measurements used for growth and inflation have become unusable in the last thirty five years?
   
3. Or their completely different explanation that some unknown and unknowable economic factors have prevented the growth that was promised?
   
4. Or some other transparently wrong reason?

I try to answer all of your questions. I do this on the assumption that you are asking the question either to gain more information or to gain some more understanding of exactly what I am saying. But somehow my answers are never acknowledged so I don't know if you understand my answers. I do try to answer not only your questions but also the implicit challenges in your belief statements.

Here we have been discussing if the stock market provides investment funds for businesses, the money that they need to expand their production. I have explained over and over again how I know that the stock market doesn't provide this money. And how the corporations do finance their capital projects. If I am wrong, which apparently you believe, then this is a good place to prove it.

Quite honestly, I shared your beliefs, until very recently, a year ago tops,that the stock market is a good institution and important, even integral, to the economy. That it provided money for investments.

But then I looked into the numbers of just how money is involved in the various equity offerings that would provide this money for investment. It is pitifully small, hundreds of millions a year in markets that trade billions in a day, that are worth 50 trillion dollars.

And I recalled discussions with the CEO and the CFO of my company. They told me that the shareholders are far down the list of whom is important to the management of a corporation, all things being equal. And long before this I understood how our customers financed their expansion projects because more often than not we were involved in the financing of the projects.

Below I answer your questions, a courtesy that so far you haven't afforded to me. But ever hopeful I submit them.
​

It doesn't show up in the economy? Trillions in pension funds, 401ks and IRAs don't end up as consumer spending???

The stock market does provide a way to save money, in 401k's, etc. And yes, the money saved in this fashion does return to the economy, but as consumer spending, not as money used to increase business investment.

Savings of any kind is deferred consumer spending. It isn't deferred investment.

We were discussing investments up until now. Is there some reason for you to change the subject now? Can't you explain how I am wrong about the stock market providing any appreciable amount of the money used for business investment?

The vast majority of business investment every year comes from corporate retained earnings or from corporate borrowing, not from the stock market.

Growth of existing businesses. New businesses don't come from retained earnings or borrowing.

Of course, you are again wrong. Venture capitalists are the closest that the stock market comes to funding new businesses. But they only fund about 1% of all new businesses. And IPOs are much less than 0.01% of the stock markets' valuation every year and they aren't even for start ups. They are for existing businesses to go public, and the money raised from going public goes to the private owners of the business and the newly issued stock is a liability for the new corporation, not a asset that could be used for further investment. And even then most successful new start ups don't reward their founders by going public on the stock markets, but rather they are sold to established corporations that use retained earnings.

And of course, you are wrong that most start ups don't borrow money to go into business. It is by far the way that most of the start ups raise capital to go into business. Granted that more often than not its maxing out credit cards or second mortgages or borrowing from relatives and friends or crowd funding. But it is borrowing. And more to the point it has nothing to do with the stock market.

Why do you think that we don't have to avoid the concentration of wealth in ever fewer hands?

That it isn't a problem of the rich eating everyone else? Including themselves eventually?

Because it doesn't actually happen. That wealth gets dispersed in a few generations at most.

Because the heirs become progressively less competent generations after generation.

How can you possibly say that this enhances the case for no or low inheritance taxes? "Don't worry, inheritances dissipate fortunes because it places the money and the power that comes with the money in progressively less competent hands."

But studies say that you are wrong, most recently Thomas Piketty's Capital in the Twenty First Century.

Subsequently, we find a spectacular decrease in the flow of inheritances between 1910 and 1950 followed by a steady rebound thereafter, with an acceleration in the 1980s. There were very large upward and downward variations during the twentieth century. The annual flow of inheritances and gifts was (to a first approximation, and compared with subsequent shocks) relatively stable until World War I but fell by a factor of 5 or 6 between 1910 and 1950 (when the inheritance flow was barely 4 or 5 percent of national income), after which it increased by a factor of 3 or 4 between 1950 and 2010 (at which time the flow accounted for 15 percent of national income). The evolution visible in Figure 11.1 reflects deep changes in the perception as well as the reality of inheritance, and to a large extent it also reflects changes in the structure of inequality. As we will soon see, the compression of the inheritance flow owing to the shocks of 1914–1945 was nearly twice as great as the decrease in private wealth. The inheritance collapse was therefore not simply the result of a wealth collapse (even if the two developments are obviously closely related). In the public mind, the idea that the age of inheritance was over was certainly even more influential than the idea of an end of capitalism. In 1950–1960, bequests and gifts accounted for just a few points of national income, so it was reasonable to think that inheritances had virtually disappeared and that capital, though less important overall than in the past, was now wealth that an individual accumulated by effort and saving during his or her lifetime. Several generations grew up under these conditions (even if perceptions somewhat exceeded reality), in particular the baby boom generation, born in the late 1940s and early 1950s, many of whom are still alive today, and it was natural for them to assume that this was the “new normal.” Conversely, younger people, in particular those born in the 1970s and 1980s, have already experienced (to a certain extent) the important role that inheritance will once again play in their lives and the lives of their relatives and friends. For this group, for example, whether or not a child receives gifts from parents can have a major impact in deciding who will own property and who will not, at what age, and how extensive that property will be—in any case, to a much greater extent than in the previous generation. Inheritance is playing a larger part in their lives, careers, and individual and family choices than it did with the baby boomers.

Piketty, Thomas (2014-03-10). Capital in the Twenty-First Century (Kindle Locations 6524-6542). Harvard University Press. Kindle Edition.

But you said that you didn't know what the federal government had done to intentionally suppress wages. One of the things that the government did was to remove trade barriers to expose American workers to competition from low wage countries. Free trade agreements like NAFTA, etc.

Which should cause zero harm--it should balance out by the exchange rate shifting over time.

So you don't believe that globalization had the effect of lowering the wages in the US because of the serious devaluation of the dollar that occurred compensated for the nearly twenty to one higher wages in the US? What planet are you living on or more likely what drugs have you been doing?

I don't see that we make products that have many more production steps than we did thirty five years ago. A large part of increasing productivity is simplifying production. A lot of the innovation that has gone on has been to produce substitutes for components that cost too much or that complicate assembly.

The assembly at any one step is often simpler or else robotic these days. What I'm saying is there are more steps. There are a lot of steps needed to produce any product with a computer in it--and that's an awful lot of products on the market these days.

And because there are more steps in the production of modern products there has to be more profit as a cost in the final product and this why wages are now lower and corporate profits have more than doubled as a portion of GDP? And not because the proponents of neoliberal economics said that the economy was short of investment and that if we changed many of our economic policies that supported a balance between profits and wages to where they favored profits and we reduced the tax burden on the rich and increased it on everyone else, the non-rich, then there would be more money for investments and more growth in the economy than there had been and we changed these economic policies, that none of this is why we have more profits now and stagnating wages, it is because we have more steps in the production of modern products?

And I have never heard of this theory of complex modern products causing the massive income and wealth inequality that we have today because I don't understand elemental economics like you do? It must be because I am not seeing it. Can you provide me with some further explanation, maybe something with numbers in it? I will ask my resources and see if they have heard of this and if they had seen any papers on it.

With full employment, and the support of unions, and with trade restrictions the negotiating power of workers is much higher and their wages and benefits are higher. A higher minimum wage increases the incomes of about 35 million minimum wage workers and those who earn near minimum wage. With higher marginal rates the take home pay of the rich is lower. Higher inheritance taxes reduce the inter generational accumulation of wealth. Higher tax rates of regressive taxes like sales taxes, payroll taxes and earnings taxes hit the non-rich proportionally more than the rich. Tax deductions benefit the rich more and flatten the progressive income tax. When wages go up profits go down.

You're describing a formula for inflation here.

So you do agree that doing the opposite, what we are doing now, suppresses wages. That is something.

That does not follow. You're trying to cause a labor shortage--and labor shortages lead to inflationary spirals.

It is like you have only two large stop signs to wave, one says UNEMPLOYMENT and the other says INFLATION. And if you can't make any headway with one you wave the other one.

You convey to me the sense that if policy changes like increasing the minimum wage results in even one person becoming unemployed, even one marginal business going out of business, or even the smallest up tick in inflation that it is sufficient to void any of the good that the policies otherwise produce. Is this correct?

Here is another question that you can't answer, another one that you have no choice but to ignore.

Since you are one of the die hard, "inflation is caused by the Fed printing too much money," Irwin Fischer's quantity of money champion, why do you think that a labor shortage will create inflation? Why would the Fed print too much money?

Back in the real world of the real economy, yes, we are trying to increase wages to increase demand and to lower profits. Yes, this runs the risk of increasing inflation.

But since inflation is a real result of conditions in the economy we can easily see that the economy can stand a substantial increase in wages and in demand. And what tells us this? It is not that we know that the Fed won't insanely print too much money. It is because the capacity utilization in the economy is at an all time low for a recovering economy. Because the economy has unused capacity to meet the demand, quickly, easily, without much investment.

And because we would raise the wages very slowly. Just like we raised profits very slowly over the last thirty five years. So slowly that no one really notices. So slowly that the economy has time to adapt, to increase real investment to meet the increased demand and to avoid inflation. Because we wouldn't be cutting existing profits. We will be reducing the amount of the growth of the economy, the gains from innovation and the gains from the improvements in productivity.

Yes, continuing with your preferred policies to stagnate wages and to keep increasing profits doesn't risk inflation in the real economy.

The money from the increased profits doesn't cause inflation in the real economy because this money is largely removed from the real economy. Because this money isn't invested in the real economy. It doesn't create any demand in the real economy.

The money from the increased profits is moved into the paper economy of Wall Street and the paper economy of the government debt incurred to making the tax cuts for the rich. But it does increase the inflation in the paper economy. But inflation in the paper economy has been defined as an economic good and given a different name, capital gains. It also creates asset bubbles. And it creates financial market instability.

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A careful reader would have noticed that I said that the money from the profits that we intentionally increased over the last thirty five year is "largely removed from the real economy." I don't mean that some finds its way into the promised boom of investment. I mean that on occasion our deregulated financial sector finds ways to introduce some of this money into the real economy. But almost without exception these incursions into the real economy have been disastrous.

These include the boosting of oil prices by repeatedly buying and selling oil futures, by building the housing bubble which created the Great Financial Crisis and Recession when burst, the incursion of for profit business into areas that it doesn't belong in, health care, education, prisons, etc., by pumping up the stock market which creates expectations and pressure for even higher profits, among others.

 

[Loren Pechtel]

And I recalled discussions with the CEO and the CFO of my company. They told me that the shareholders are far down the list of whom is important to the management of a corporation, all things being equal. And long before this I understood how our customers financed their expansion projects because more often than not we were involved in the financing of the projects.

Of course shareholders are far down the list. I don't see the relevance, though. If shareholders didn't benefit adequately they wouldn't be buying the stock in the first place and the price would fall until the benefits were reasonable.

The stock market does provide a way to save money, in 401k's, etc. And yes, the money saved in this fashion does return to the economy, but as consumer spending, not as money used to increase business investment.

Savings of any kind is deferred consumer spending. It isn't deferred investment.

You've got it backwards--nobody said anything about deferred investment. It's current investment and deferred consumer spending.

We were discussing investments up until now. Is there some reason for you to change the subject now? Can't you explain how I am wrong about the stock market providing any appreciable amount of the money used for business investment?

I didn't change the topic--you keep trying to pretend there's no value in the stock market, I was showing one of the values.

As for providing money for investment--it does, but not directly. As you observe, mostly the stock market is simply traded around. What matters is it's effect on the venture capital market--which most certainly does create new investment. Without the stock market to provide a secondary market to liquidate the winners there would be far less venture capital investing.

Of course, you are again wrong. Venture capitalists are the closest that the stock market comes to funding new businesses. But they only fund about 1% of all new businesses. And IPOs are much less than 0.01% of the stock markets' valuation every year and they aren't even for start ups. They are for existing businesses to go public, and the money raised from going public goes to the private owners of the business and the newly issued stock is a liability for the new corporation, not a asset that could be used for further investment. And even then most successful new start ups don't reward their founders by going public on the stock markets, but rather they are sold to established corporations that use retained earnings.

IPOs are the venture capitalists liquidating their winning positions to free up capital to invest in other businesses. You're also distorting the picture by ignoring the ones that failed--that's still investment.

As for being sold to existing businesses--so what? The existing business has to compete against what they could get from an IPO and this drives up the price--and thus drives up the incentive to invest.

Furthermore, it doesn't matter whether venture capital funding gets involved--the stock market is a major driver of investment that gets sold. (As opposed to the business started simply for the income it produces with no intent of selling out. The stock market has no effect on the latter.)

Because the heirs become progressively less competent generations after generation.

While that can be an issue the biggest factor is simple dispersion. The total fertility rate for the US is 1.8 and in my experience the well to do tend to have larger families (for them family size isn't subject to meaningful financial limits) so lets say 2.5 kids per rich couple. Lets say you leave $100 million to your heirs. $45 million after the estate tax, spread between 2.5 kids = $18 million for the next generation. Note that it's reduced 5x. The next generation is only going to inherit $3.2 million. Now you're down to the point that you can't just live on the earnings and leave the inflation-adjusted capital for the next generation. With no inheritance tax at all this would take about twice as long but it would still happen.

So you don't believe that globalization had the effect of lowering the wages in the US because of the serious devaluation of the dollar that occurred compensated for the nearly twenty to one higher wages in the US? What planet are you living on or more likely what drugs have you been doing?

Globalization is routinely blamed for things which it didn't cause. Most of the effects were actually due to automation. The jobs didn't go overseas, they went to robots and other efficiency improvements.

While it hasn't yet reached the point that bringing jobs home from China is worth it, it's also rarely worth it to send jobs to China these days. You get a lot more from a US worker and you don't have to deal with a factory that's always trying to gyp you.

And because there are more steps in the production of modern products there has to be more profit as a cost in the final product and this why wages are now lower and corporate profits have more than doubled as a portion of GDP? And not because the proponents of neoliberal economics said that the economy was short of investment and that if we changed many of our economic policies that supported a balance between profits and wages to where they favored profits and we reduced the tax burden on the rich and increased it on everyone else, the non-rich, then there would be more money for investments and more growth in the economy than there had been and we changed these economic policies, that none of this is why we have more profits now and stagnating wages, it is because we have more steps in the production of modern products?

What you continue to miss is that a greater portion of the economy is going into producing the means of producing the goods. This of course increases the share of the economy that's corporate but at the same time it increases the standard of living of society.

Furthermore, the "lower" wages you keep referring to are bad data--because they're only looking at wages. Most good jobs these days are salaried.

It is like you have only two large stop signs to wave, one says UNEMPLOYMENT and the other says INFLATION. And if you can't make any headway with one you wave the other one.

Because they're true. You keep advocating for things which will drive up wages--and continue to ignore the fact that if you increase wages without increasing productivity you get inflation rather than any lasting benefit to the workers.

You convey to me the sense that if policy changes like increasing the minimum wage results in even one person becoming unemployed, even one marginal business going out of business, or even the smallest up tick in inflation that it is sufficient to void any of the good that the policies otherwise produce. Is this correct?

No. I think we should look at the balance of good and bad. However, I do not think the total payroll is a good measure of the balance--even if total payroll rises that doesn't mean there's a net benefit. The thing is I score the guy laid off much more highly than the guy who got a bit more.

Also, there's the issue of whether the guys who get more actually benefit or simply see it eroded by inflation. Basic economics says it should be eroded by inflation eventually--and thus have zero lasting benefit.

If we want to help low-wage workers I think a much better approach is through expanding the EITC. That's basically a non-starter in today's political climate, though--the right simply wants to screw the poor people while the left wants off-the-books answers that they can pretend are paid for only by the rich.

Since you are one of the die hard, "inflation is caused by the Fed printing too much money," Irwin Fischer's quantity of money champion, why do you think that a labor shortage will create inflation? Why would the Fed print too much money?

Printing too much money causes inflation but it's not the only cause of inflation.

Back in the real world of the real economy, yes, we are trying to increase wages to increase demand and to lower profits. Yes, this runs the risk of increasing inflation.

And what you don't understand is that average corporate profits aren't that high in the first place. There are some high flyers but not the marketplace as a whole.

But since inflation is a real result of conditions in the economy we can easily see that the economy can stand a substantial increase in wages and in demand. And what tells us this? It is not that we know that the Fed won't insanely print too much money. It is because the capacity utilization in the economy is at an all time low for a recovering economy. Because the economy has unused capacity to meet the demand, quickly, easily, without much investment.

But you're applying a permanent fix to a temporary problem. (And I'm not sure there's that much unused capacity in the first place because of population growth.)

And because we would raise the wages very slowly. Just like we raised profits very slowly over the last thirty five years. So slowly that no one really notices. So slowly that the economy has time to adapt, to increase real investment to meet the increased demand and to avoid inflation. Because we wouldn't be cutting existing profits. We will be reducing the amount of the growth of the economy, the gains from innovation and the gains from the improvements in productivity.

So we boil the frog. The frog still gets cooked.

Yes, continuing with your preferred policies to stagnate wages and to keep increasing profits doesn't risk inflation in the real economy.

The money from the increased profits doesn't cause inflation in the real economy because this money is largely removed from the real economy. Because this money isn't invested in the real economy. It doesn't create any demand in the real economy.

The money from the increased profits is moved into the paper economy of Wall Street and the paper economy of the government debt incurred to making the tax cuts for the rich. But it does increase the inflation in the paper economy. But inflation in the paper economy has been defined as an economic good and given a different name, capital gains. It also creates asset bubbles. And it creates financial market instability.

Assuming you are right note that your approach causes massive inflation. You'll destroy those profits but with little long-term benefit to the workers.