A few days ago I linked to this Rebecca Wilder post and called it the “must read post of the day”.
Rebecca gets inducted into the MMR Hall of Fame for this post. In this single post:
- Uses the sector balances with accuracy and flair
- Smacks down the structural unemployment crowd
- Shows “Businesses Hire When They are Swamped With Demand” with astonishing charts
- Points out our major goal should be using government to facilitate private sector saving and investment.
She did us all a huge favor pointing out the extremely strong relationship between corporate saving and recessions. Check out this chart – the red line almost looks like the moving average of the Excess Corprate Savings Rate!
Can I get a “Businesses Hire When They Are Swamped With Demand”?
That chart shows the meme better than I ever dreamed possible. Corporations can have high corporate profits, or low tax rates – but it doesn’t matter at all to the unemployment rate.
What matters is how much demand they see for their product. When they don’t see demand, they save instead of hiring. When they see demand, they hire instead of save.
It’s really that simple.
Check out this quote:
“The positive feedback loop remains broken: higher demand increases sales rates, revenues and production which grows firm profits that are translated into wage and income gains, only to drive demand further upward. It’s broken right between ‘grows firm profits’ and ‘translated into wage and income gains’.
The funny thing is, too, that economists sell this broken feedback loop as rising structural unemployment. Actually, unemployment is not structurally higher, it’s that when firms do not reinvest corporate profits, the lack of income flow manifests itself into the unemployment rate.”
I bolded the entire quote. It’s that good.
She notes this chart is especially damning for people claiming unemployment has a structural problem, because the relationship between corporate savings and the U rate is so strong in every recession, not just this one.
Can I get a “Businesses Hire When They Are Swamped With Demand”?
You’d think she’d lay off at this point. That chart alone is enough to cut off any argument. But she doesn’t lay off at all. Nope.
She pulls out a 2”x4” and lays a smack down on Tyler Cowen the likes of which the world has never seen. (Why Tyler Cowen? He’s always throwing his hands up and saying we’re helpless to do anything in the face of this “structural unemployment” problem we have today.)
The second chart she pulls up shows just how far out of normal the current Corporate Savings Glut (CSG) is compared to prior history. The circle around the off the charts data in the upper right corner is the last few quarters of data.
We could lower our unemployment rate by a huge amount just by pushing the CSG down to the old extremes.
Can I get a “Businesses Hire When They Are Swamped With Demand”?
(P.S. I wonder what a non-linear regression would show? I bet there is a nice curve in that data, which would show the unemployment rate grows quite fast once you get above 2% and flattens out right around -2%…just as you’d expect beca…but I digress.)
If we had a normal CSG, we’d have unemployment down to 4.5% or so. We don’t need a Jobs Guarantee to get the unemployment rate to very low levels. Here’s Rebecca:
“The government doesn’t need to add jobs, per se, the government needs to figure out how to get corporate America to drop the saving glut and re-invest in the economy.”
Thank You, Rebecca Wilder.
That’s actually quite Keynes-way of thinking (not “Keynesian” but rather post-Keynesian) as Keynes entrusted the market and entrepreneurial thinking quite well to maintain the economy in a quasi-boom as long as interest rates were low and kept low and the creation of credit kept at moderate levels. Kent (‘Keynes’s Lectures at the New School for Social Research’, History of Political Economy, 36 (1), p. 205) quotes Keynes (as Tily in ‘Keynes betrayed’ quotes Kent):
“I am in favour of an admixture of public works, but my feeling is that unless you socialise the country to a degree that is unlikely, you will get to the end of the public works program, if not in one year, in two years, and therefore [and here is where my emphasis begins] if you are not prepared to reduce the rate of interest and bring back private enterprise, when you get to the end of the public works program you have shot your bolt, and you are no better off.”
Too bad the liquidity-preference theory of the rate of interest never caught on. Time for it to do so.
“The government doesn’t need to add jobs, per se, the government needs to figure out how to get corporate America to drop the saving glut and re-invest in the economy.”
To me though, it’s an unsatisfying and potentially misleading way of putting it, because it can be interpreted to suggest that government policy should be first aimed directly at corporate America to solve this problem. This to me misses what the lesson is of BHWTASWD in a balance sheet recession, which is that you need to stimulate aggregate demand from the bottom-up. Giving corporations tax cuts, for example, isn’t going to have the same effect as are sales.
In fact, Michael, when I gave you the BHWTASWD yesterday, it was my wake-up call to Wilder, because based on my reading of her piece, she didn’t follow through the whole way, though everything else was great.
Okay, her policy recommendations are more apparent in the comments section, and they make sense. Perhaps she was trying to avoid explicit recommendations in the piece and just make a general statement, not even necessarily specific to the BSR.
It was a good article with some interesting charts, but she writes the entire thing with the tone of “evil corporations are hoarding their cash” instead of explicitly saying that business investment follows demand and we need expansionary fiscal policy.
There is nothing in this post or the data which suggests you don’t need a job guarantee. You say that all we have to do is get the CSG down to normal levels. Well how do you do that? Corporations need an incentive to invest, and that can only come from more NFA’s circulating in the private sector. You can do it as a discretionary stabilizer (fiscal stimulus) or you can do it as an automatic stabilizer (job guarantee). I think automatic is better than discretionary.
I created the TC fiscal policy rule so there could be an automatic fiscal response which does not involve a JG. It also happens to be much larger in impact than the JG.
Instead of taxing corporate income, we should be taxing retained earnings. Capital spending is good, distributing dividends is good, hoarding cash is not good.
Won’t companies just pass the tax along to consumers though kind of defeating the purpose?
Maybe the investor of last resort needs to step in? Mitt Romney running the nation’s private equity arm. Oh my!
If the current corporate income tax is eliminated, there’s no reason it couldn’t be replaced on a revenue-neutral basis by a retained earnings tax, essentially taxing all corps like a REIT (only taxed if it distribute less than 90% of earnings as dividends). Incidentally, REIT investors pay 35% on dividends (instead of 15% rate for ‘double-taxed’ dividends).
A company’s tax burden can fall on its owners, workers or customers, how its divvied up depends on their respective market power.
I think it would just encourage companies to pay the money out in dividends. But I disagree that that would be good. Dividends go directly into the hands of investors, not consumers. Those investors would hoard the money for exactly the same reason as the corporation; lack of profitable investment opportunities. Profitable investment opportunities can only be created by putting money in the hands of consumers.
With the non-paying dividend companies, it would not matter as a matter of simple arithmetic.
With the dividend paying companies, the current monstrosity of the USG would never agree to cut is current source of tax revenues (dividend double taxation).
Since we aren’t afraid to make policy suggestions way outside the mainstream here, why just eliminate the corporate tax and all other taxes completely and replace them with a tax on economic rents (a form of property tax)?
I’m also interested in a thoughtful response to this question/proposal. Why not just eliminate all the “unproductive” taxes and put in place some “productive” taxes that encourage… production! (investment, etc)