Photo of Ta-Nehisi Coates by Gerald R. Ford School of Public Policy, University of Michigan, flickr, cc
Must-Watch: 2015 National Book Award Non-Fiction Winner:
: :Must-Watch: 2015 National Book Award Non-Fiction Winner:
: :Must-Note: Macro Advisers says: the economy is growing at less than any reasonable estimate of potential output this quarter…
In fact, let’s look at the past eight quarters:
2015Q4: 1.9%
2015Q3: 1.5%
2015Q2: 3.9%
2015Q1: 0.6%
That is a 2.0% growth rate for 2015, after a 2.5% growth rate in 2014, after a 2.4% growth rate for 2013. No signs of growth faster than potential output. No signs of inflation.
While business investment in the United States is growing at a historically weak rate, corporate profits continue to make up a remarkably large share of the economy. The result: Net savings by the U.S. corporate sector has increased significantly since the turn of the century, going from negative to close to 2 percent of our gross domestic product.
This trend isn’t restricted to the United States, however—it’s also happening in the other large developed economies such as Japan, the United Kingdom, and Germany, as Martin Wolf aptly describes in a column for the Financial Times. For those concerned about the pace of future economic growth and perhaps economic stability, the rise of corporate savings has important implications.
As Wolf points out in his column, the increase in corporate savings has significant ramifications for economic growth in two ways. The first effect is that declining corporate investment will reduce the potential growth rate of the economy, as investment is thought to have a strong relationship with productivity growth. The rise of corporate savings surpluses, however, has an effect on “the shape of aggregate demand.”
With all its excess savings, the corporate sector has turned into a net financer of the economy in recent years. These savings have to go somewhere, but government borrowing seems to be an unlikely destination with many governments shooting for balanced budgets. The remaining targets are then the household sector and the rest of the global economy.
It might be a positive development for the United States if the savings are reinvested in the global economy. The United States has long run a trade deficit with the rest of the world, so an increase in savings going abroad would help balance the trade deficit. In a traditional neoclassical model, we might expect this capital to flow from high-income countries to low-income countries where the return on capital is higher. In fact, we’ve seen the opposite of this happen in recent years. The strong U.S. dollar seems to have been an impediment to this process in the past.
When it comes to the household sector, we have to ask which households would end up borrowing these loaned funds. As research from University of California, Berkeley economists Emmanuel Saez and Gabriel Zucman shows, the savings rate is much higher for higher-income Americans than for those further down the income ladder. With savings rates hovering around 0 percent for the bottom 90 percent, do we really want to have them save even less? Experience shows that funneling debt toward those particular households poses a big risk.
To return to the question of business investment, Wolf suggests that the government should consider taxing corporations’ retained earnings at a higher rate while allowing for the deductibility of investment and dividends. Given the research on how cutting dividend taxes would affect corporate decision making, it seems likely that deductibility would not boost business investment as intended. Instead, it would increase payouts to high-income shareholders.
This leaves us with two broad options. Either we figure out a way to induce more investment from the corporate sector, or we consider the best use of these savings for the broader economy. In an era of potential secular stagnation, it’s a knotty topic we have to unravel.
Must-View: Prime-age female employment in the U.S. and Canada:
Must-Read: The economics of the regulation of natural monopolies tells us that such entities reduce utility by artificially restricting what they produce in order to improve their terms-of-trade and profits–and that one tool to deal with this is rate regulation. The Card-Krueger and other evidence on low-wage employment suggests the same rationale for the minimum wage:
Models of the Minimum Wage: “We can introduce some ideas… that comport a bit more with reality…
:…In the low-wage labor market… workers/employers are not that responsive in terms of employment to changes in wages (dlog(emp)/dlog(wage)=small number like -0.1 to -0.3, or something…). When you draw inelastic supply and demand curves, you end up predicting a lot less unemployment…. If this model is more accurate, significant estimates of job loss effects are hard to pull out of the data. Which they are…. [The world is] trying to tell us something about low-wage workers and their employers’ tempered responsiveness to increases in the wage floor…. There’s [also] a model… [of a] a monopsony labor market…. The monopsony model may sound arcane—the classic example is the one-company coal town–but it may not be too much of a reach to conclude that the low-wage labor market in a given town or city works kind of like this…. The competitive model as conventionally drawn is misleading. Economic models vastly simplify… can yield some insights…. But at the end of the day… when the theory doesn’t match the evidence, trust the evidence.
Must-Read: That Miles Corak describes the three aspects of rising-inequality denial as “a common storyline” is a measure of how completely divorced from reality even so-called policy professionals in the right-of-center echo chamber have become. Sensible technocratic dialogue is thus going to remain very, very difficult for quite a while to come…
Inequality: A Fact, an Interpretation, and a Policy Recommendation: “A common storyline…. Inequality has not increased…
:…even if it has… little… can be done… and even if… policy has punch, the effort… diverts attention from more pressing problems, like poverty…. [But we can] address both inequality and poverty in a smart way…. A more nuanced interpretation… give[s]… another storyline…. Inequality has increased; there is something that can be done about it; and if public policy has punch, the effort directed to fighting inequality contributes to solving other pressing problems, like poverty.
Must-Read: I really want to see what happens to these numbers in a high-pressure low-slack economy…
Where Have All the Workers Gone?: “Among male heads of household between the ages of 25-54…
:…[not at work,] 27 percent say it is because they are ill or disabled…. [But] we excluded from the sample anyone on disability…. Another 22 percent said they couldn’t find work–not too surprising in a year when the unemployment rate was still over 7 percent. The remaining half… going to school, taking care of home or family… retired (despite being under 55), or… some other reason for why they weren’t working…. These are all men in their prime working years and that their lack of work leaves them and anyone else in their household at or near the poverty line…. Women heading households are somewhat similar… with far fewer reporting that they are ill or disabled and more of them reporting that they are taking care of home or family…
Must-Read: Gabriel Zucman is talking at Berkeley on November 30 on the sharpness of the peak in wealth accumulation. It’s not any sort of broad-based phenomenon, it’s all at the peak–the surge in incomes at the very top, coupled with their inability or unwillingness to increase their spending to match…
GSPP Policy Research Seminar: Wealth Inequality in the United States Since 1913: Evidence from Capitalized Income Tax Data: “We estimate wealth by capitalizing the incomes reported by individual taxpayers…
:…accounting for assets that do not generate taxable income…. Wealth concentration has followed a U-shaped evolution over the last 100 years: It was high in the beginning of the twentieth century, fell from 1929 to 1978, and has continuously increased since then. The rise of wealth inequality is almost entirely due to the rise of the top 0.1% wealth share, from 7% in 1979 to 22% in 2012–a level almost as high as in 1929…. The increase in wealth concentration is due to the surge of top incomes combined with an increase in saving rate inequality…. Monday, November 30, 12:10–1:00 Room 105, GSPP (Corner of Hearst and LeRoy, across from Cory Hall.)
Must-Read: Human smiles and human truly creative thought look to remain economically valuable. So learn how to smile!
Are the Robots Taking Enough Jobs?: “Andy Haldane has warned that new technologies could replace up to 15 million British jobs…
:…Ignazio Visco, trod much the same ground. Both policymakers are taking the threat of computerisation… seriously…. Historically… waves of new technology have created as many jobs as they have destroyed…. This time might be different, the next wave of labour-saving technology looks to be replacing human brains, rather than human brawn, and the impact could be far more wide-reaching. And, even if this time isn’t different… adjustments… in the past led to a generation or more of economic pain…