Henry Blodget Breaks Down the Economy (and How to Fix It)

[Beet]

http://www.businessinsider.com/how-to-fix-the-economy-in-one-simple-chart-2012-8

A great piece that goes to the heart of the problem.

[後援会]

And the rebuttal.

http://www.marketwatch.com/story/why-henry-blodget-is-dead-wrong-2012-08-24

[Beet]

And the rebuttal.

http://www.marketwatch.com/story/why-henry-blodget-is-dead-wrong-2012-08-24

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LOL, there's nothing self hating about this Republican woman.

Seriously, I hope you guys keep making the argument that
1. If women just get back in the kitchen inequality would be fixed
2. Americans deserve what they get because they're morally bad in their personal lives
3. The real statistics say workers are actually really well off! Health care compensation has skyrocketed! (never mind costs)
4. The middle class isn't paying enough in taxes.

Yes, yes, keeping going down that road

[後援会]

It's quite self-evident that she uses that line of reasoning to point out how ludicrous the argument would be. Unlike some, the rest of us do not view inequality as a problem to be tackled by making some people poorer, so we naturally understood how ridiculous it was.

The gap between lower-middle class and upper-middle class is often simply the gap between a one-income household and a two-income household. The problem isn't that some women are entering in the workforce, but rather that many households do not have two people heading them, which is quite unfortunate.

This is a good NYT article that illustrates this. www.nytimes.com/2012/07/15/us/two-classes-in-america-divided-by-i-do.html

[Beet]

It's quite self-evident that she uses that line of reasoning to point out how ludicrous the argument would be. Unlike some, the rest of us do not view inequality as a problem to be tackled by making some people poorer, so we naturally understood how ridiculous it was.

It's not self-evident to me. There was no need to suggest that only one member of the household need be allowed to work, to make an argument that inequality was (in her opinion) an artifact of more two-income ones. Nor to use words such as 'culprit.'

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Yes except this actually makes Blodget's point because there was a time when you could have a decent middle class life on just one income. Now it takes two incomes. As Elizabeth Warren pointed out nearly a decade ago, in her book The Two Income Trap: Why Middle Class Mothers and Fathers are Going Broke, the rise of two incomes can be explained by the increasing necessity of having two incomes just to pay for basic requirements of middle class life. She points out that two incomes are a necessity because of increased housing, education and health care costs. Thus it isn't something that can be used to justify inequality, but a way that families have responded to desperately try and mitigate it. But many do not succeed (as your NY Times article points out).

I'm glad that you linked to the 'rebuttal' because of how awful it is. Many of the arguments in there are actually validations of Blodget's point. Even the one she starts with, about how the upper fifth spend no more than 2.4 times the amount of the lowest fifth, the same as the 1980s... shows that humans have a limit to how much wealth they can enjoy. You can only consume so many mansions, caviars, BMWs, private schools, etc. before there is a diminishing marginal utility of wealth. That is why taxing the wealthier at a higher rate causes less suffering, on average, than taxing the not so well off the same amount (in aggregate).

[後援会]

The Warren argument is misleading for several reasons, but that's not particularly relevant because whether we accept her insinuations or not, the solution to increased housing, education, and healthcare costs are changes in our housing, education, and healthcare systems, not a simple generic cry to eat the 1%.

Also, someone at the 80th percentile does not enjoy "mansions and caviars". In fact, you would probably have to make more than twenty or thirty the times of the income of an 80th percentile household to do so it's not a reasonable caricature.

The problem of the constant cries to vastly increase the redistribution of wealth and focus it from the extremely rich to the middle-class is that there are a lot more middle-class than extremely rich. It's not a serious solution. Blodget is technically correct when he is saying if the purchasing power of the middle-class was drastically expanded that the economy would also expand, but it's not possible to do so via wealth redistribution. Now, if we were planning a stimulus, the obvious idea would be to shower the middle-class in money, but as we know, a stimulus is a temporary counter-cyclical solution, not a tool to restructure society.

[Beet]

The Warren argument is misleading for several reasons, but that's not particularly relevant because whether we accept her insinuations or not, the solution to increased housing, education, and healthcare costs are changes in our housing, education, and healthcare systems, not a simple generic cry to eat the 1%.

It's not about "eat[ing] the 1%". Historical statistics show that even the 1% do better when the rest of us do better. Even if they're taking home a smaller share of income, their absolute income is still growing because overall income streams in the economy are growing. That means more revenue for companies, etc.

Yes, we should fix the housing, education and healthcare systems, and if those costs do come down, then we can say that the middle class is better off even if their nominal wage growth remains relatively low. But that hasn't happened, and it's not clear when or if it will happen. So for now we have to accept Blodget's point that the middle class is indeed struggling.
 

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Of course. I used extreme examples to illustrate the point, but the point is still valid for the difference between the 20th and 80th percentiles. Consumption has a diminishing marginal utility as you go up.

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Well sure, did you read the article? Blodget says:

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He's not calling for wealth redistribution. He wants a private sector solution of corporations voluntarily paying higher wages. Now, I agree with him that it's not just about wealth redistribution, but I think he's naive if he thinks that corporations will just voluntarily pay higher wages. That's one area where the article is lacking. It used to be that with 30% of the private sector workforce unionized, corporations 'voluntarily' paid higher wages because they felt pressure to do so. To give labor some power in the private sector there must be at least some allowance for private unionization.

[後援会]

It's basically following the same train of logic. Where would a corporation get that money? If we distributed 90% of a CEOs pay to every worker, we'd see only a very slight increase in income combined with crushing most of the incentives to become a CEO. I just don't see productivity and wages going up long-term with that. Companies arbitrarily increasing wages is not going to be any kind of panacea.

And I don't disagree that wealth redistribution has a utilitarian positive effect in that money is worth more to you the less it has. However, it also has a negative utilitarian effect in that it distorts market transactions and price signals. Obviously, our goal should be to find a balance that maximizes the former and minimizes the latter. And a system of massive transfers from a tiny wealthy to a very large middle-class probably minimizes the former and maximizes the latter.

[Beet]

It's basically following the same train of logic. Where would a corporation get that money? If we distributed 90% of a CEOs pay to every worker, we'd see only a very slight increase in income combined with crushing most of the incentives to become a CEO. I just don't see productivity and wages going up long-term with that. Companies arbitrarily increasing wages is not going to be any kind of panacea.

CEO pay is absurdly high, but it's not just about that. According to the Federal Reserve, corporations have some $5 trillion in spare cash, once you include offshore accounts. It's a bit of a prisoner's dilemma. Every corporation individually has incentive to pay the lowest it can, cut costs and squeeze more out of existing or fewer workers, even though collectively they would all be better off if they increased employment and pay. It's stupid to think that broadly rising wages across the economy for people who would actually spend that money (the middle class & below) wouldn't generate a lot of prosperity.

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Again, Blodget's point is that it's not just a matter of redistribution, it's a matter of economics. Market transactions and price signals don't have any inherent utilitarian value by themselves. They exist only to send information about how to distribute resources. Sometimes the information they send can be faulty, such as during he Internet bubble of he 1990s, or the housing bubble. There's no evidence that increasing employment and wages for the large middle class would distort price signals in any significant negative way.

[後援会]

The quality of price signals absolutely have a utilitarian benefit because the better they are, the better our economic outcomes are going to be.

Also, $5 trillion in potential credit and investments is very very different from "WE'RE SWIMMING IN A POOL OF MONEY BECAUSE WE HAVE NOTHING TO DO WITH IT." And there are very good reasons why a company would not want to leverage their assets too heavily. Such as regulatory and economic uncertainty.

[Beet]

The quality of price signals absolutely have a utilitarian benefit because the better they are, the better our economic outcomes are going to be.

It has a derivative benefit, but it doesn't have an inherent benefit. I'm talking about inherent benefits- as in, the inherent benefit to getting enough to eat this month, is greater than the inherent benefit of upgrading from a Mercedes C class to an E class, even though the latter might involve a greater nominal amount of dollars.

The problem with derivative benefits is that they're conditional on the mechanism that supposedly provides the benefit. You can't argue against an inherent benefit using a derivative one.

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But we are swimming in a pool of undeployed money. Companies have good reasons to hoard money because they're looking after their own self-interest. The job of the management is to pad "shareholder value", and undistributed profits certainly contributes to market capitalization.

[後援会]

If we refuse to recognize derivative benefits, than that's how we get down the road towards the utility monster. Which I'm not going to endorse.

The best way to increase shareholder value is to properly deploy capital. And if companies don't want to leverage their assets, then we're talking about an entirely different economic problem.

[Gustaf]

A good discussion on here? My goodness.

You guys covered a lot of ground already, but I'd just like to point out that there seems to me to be a prisoners' dilemma going on with Blodget's idea.

If all other corporations raise wages and get the economy going (assuming for the moment that he's correct about this mechanism) I can keep the wages of my company down and still enjoy the benefits. And I can't make the economy stimulated just by raising the wages of my company's employees.

It would take some form of collective bargaining for this to work, making it sort of the reverse of what in Sweden is called the Calmfors Curve theory of how high levels of unionization can lead to lower wages.

[opebo]

If all other corporations raise wages and get the economy going (assuming for the moment that he's correct about this mechanism) I can keep the wages of my company down and still enjoy the benefits. And I can't make the economy stimulated just by raising the wages of my company's employees.

It would take some form of collective bargaining for this to work

Yes precisely - this would have to be mandated by the State, and you point out very well why 'private' industry is so disastrous for the economy as a whole (unless it is only 'private' in a legalistic pretense but in practice closely managed by the State).

[Gustaf]

If all other corporations raise wages and get the economy going (assuming for the moment that he's correct about this mechanism) I can keep the wages of my company down and still enjoy the benefits. And I can't make the economy stimulated just by raising the wages of my company's employees.

It would take some form of collective bargaining for this to work

Yes precisely - this would have to be mandated by the State, and you point out very well why 'private' industry is so disastrous for the economy as a whole (unless it is only 'private' in a legalistic pretense but in practice closely managed by the State).

Most sensible people (or just anyone who's taken a sufficient amount of economics) know that private actors can't optimize everything. A lot of things are better left to private actors though, for various reasons that I suspect you would recognize if you wanted to.

[opebo]

Most sensible people (or just anyone who's taken a sufficient amount of economics) know that private actors can't optimize everything. A lot of things are better left to private actors though, for various reasons that I suspect you would recognize if you wanted to.

Most people don't really have a very good understanding of the meaning of the public/'private' dichotomy.  You're quite correct I have no objection to - for example - privately owned restaurants (so long as they aren't chains), but the process erroneously labeled 'leaving remuneration of employees up to the market' will always doom the economy.

[anvi]

I take Blodget's point to be one about persistently depressed demand when high unemployment levels persist.  So, it follows that the more people are working, the more they will consume, and therefore economic growth and long-term corporate profitability continue apace.  I'm thinking though that there are two or three hitches in the argument he makes.  First, this persuasion of corporations to hire more workers would probably have to include an effort to tell them to ignore all those labor productivity equations they learned in college, and that might be a hard sell.  The other thing of course is over 50% of American workers are still employed by small enterprises and not large corporations, and getting the small enterprises to hire more people, especially in strapped circumstances to begin with, won't be easy.  Plus, economic inequality is at least partly addressed by increasing the skill levels of the workforce to meet the needs of changing markets, so government still needs to to a lot.  Don't get me wrong, I like Blodget's sentiment, but the solution, it seems to me, isn't that simple.

[opebo]

...Plus, economic inequality is at least partly addressed by increasing the skill levels of the workforce to meet the needs of changing markets, so government still needs to to a lot. 

Government needs to do it all, and unfortunately 'increasing skill levels' will not be enough (that is mostly a red herring).  It needs to forcibly redistribute - this is the only way.  And the key is not so much unemployment as inadequate remuneration of those who are working.

[Link]

A good discussion on here? My goodness.

Only problem is no one pointed out the author of the article quoted in the OP is a crook who along with a handful of other criminals caused the second biggest financial calamity in my life time.  And every indication is if he hadn't been barred from the securities industry prior to the largest calamity in my lifetime he would have been front and center stoking the flames of that disaster.

[So rightwing that I broke the Political Compass!]

I'm a little skeptical of this assumption that increased consumption is the path to economic recovery. That may be true if you're talking about services. But I don't think theirs much if any slack in demand for good- if that was true the price for various resources would be stagnant or declining, but instead resource prices are continuing to surge.

[Beet]

I'm a little skeptical of this assumption that increased consumption is the path to economic recovery. That may be true if you're talking about services. But I don't think theirs much if any slack in demand for good- if that was true the price for various resources would be stagnant or declining, but instead resource prices are continuing to surge.

You're referring to slack in demand for natural resources, not finished goods. The capacity utilitization in the United States of industrial production is currently a shade under 80 percent, which is much better than it was in 2009 but still below the historical average. More significantly, there are 23 million unemployed, most of which signals slack in utilization of labor resources.

Natural resources are entirely different altogether. For one thing, the natural resource market is global, and the world economy, led by developing countries, is growing much faster than the US economy. So looking at natural resource prices can tell you about the global economy as a whole but not necessarily the US economy.

I do agree with you though that environmental and sustainability questions are one area of economics where increased consumption is not the answer. This is the big blind spot of Keynes, IMO, and most all economists.

[opebo]

This is the big blind spot of Keynes, IMO, and most all economists.

They all assume that technological advance - spurred by price level - will find a way out of shortage, no?

[Beet]

This is the big blind spot of Keynes, IMO, and most all economists.

They all assume that technological advance - spurred by price level - will find a way out of shortage, no?

Ya, that's the best counter-argument.

Of course, it's kind of hard to "model" technology, the way economists have a "model" for everything else. Technological advance is supposed to just "happen." As far as I know, none of the public intellectuals have bothered to advance or take up any systemic theory of technological advance; what drives it, what we can expect from it, and so on. Probably because such would be impossible. But it leaves a dilemma because you can't just argue "increase the rate of technological advance!" or "we need more technological advance!" as it is both a trivial proposition and one that is perceived as us not being able to do much about. The closest thing would be to increase federal funding for science and research.

[opebo]

...Technological advance is supposed to just "happen." As far as I know, none of the public intellectuals have bothered to advance or take up any systemic theory of technological advance; what drives it, what we can expect from it, and so on.

It isn't a systemic theory, but most of them seem to embrace the belief that technological advance comes from capitalist profit - 'incentives'.

Of course as you say this doesn't predict anything at all in detail (rate of 'advance', etc.) - and after all it may be completely erroneous.

[Politico]

Fixing the economy starts on Tuesday, November 6. Fixing the economy certainly has nothing to do with listening to the folks who were wrong in 2009, or else the economy would already be fixed. Clearly the last thing we need to do is give more power to people in Washington, who cannot even ensure the safety of our embassies and ambassadors anymore. There's more to getting the job done than fancy rhetoric and a cool smile.