Corporate profits helped by weak employment

Weak aggregate demand has two impacts on business, one negative and one positive. The negative impacts is on the top line with weak sales leading to weak revenue growth. The positive impact is on OPEX, with a weak labor market helping to hold costs in line. So, an economy with enough demand to hold up revenue, but still weak enough to keep labor markets in check, might be great for corporate profit. Without end-customer demand to justify hiring ramps or capex outlays though, that profit would just pile up as cash.

The strength (in profits) is directly related to the weakness in hourly wages, which are still growing at just a 2% nominal pace. The weakness of wages and the resulting strength of profits are telling signs that the US labor market is still far from full employment.

The article ends on a somewhat corporate bashing note, I don't think it's reasonable to critisize corporations for trying to maximize profits, but I do agree that aggregate demand is the biggest economic issue in the US today.

Who are the 1%?

Krugman makes an observation that I've made several times on this blog -- there are too many people in the 1%:

White-collar professionals, even if married to each other, are only doing O.K. The big winners are a much smaller group. The Occupy movement popularized the concept of the “1 percent,” which is a good shorthand for the rising elite, but if anything includes too many people: most of the gains of the top 1 percent have in fact gone to an even tinier elite, the top 0.1 percent.

And who are these lucky few? Mainly they’re executives of some kind, especially, although not only, in finance. You can argue about whether these people deserve to be paid so well, but one thing is clear: They didn’t get where they are simply by being prudent, clean and sober.

Krugman is certainly part of the 1%, but maybe not the 0.1%, and he does not see himself as a malefactor of great wealth. A married, mid-career professional couple will find themselves making over $250,000, comfortable by any standard and likely in the 1% or close, but such a "prudent clean and sober" couple is not driving inequality in the US. That's being driven by the Finance industry, which is growing primarily on debt and derivatives. The latter can be outlawed, and the former can be more accurately priced by banning securitization and forcing sound credit management by requiring debt to be held on the issuer's books to maturity. Manage resulting credit contraction through fiscal action.

Recessions and Ethical Norms

Tim Hartford has a nice piece outlining the basic understanding amongst economists for Recessions. He gives it a behavioral spin by including the very human reaction against price gouging. To wit:

There are obvious microeconomic consequences of this pigheaded insistence on the appearance of fairness: ticket touts, empty supermarket shelves in unseasonal weather and restaurants at which one cannot get a seat.

But what is less obvious is that the course of recessions and booms might also be shaped by our desire for prices that move in line with accepted ethical norms rather than the laws of supply and demand.

If prices adjusted swiftly and smoothly, “Say’s Law” would always hold true. The gnomic law, named after a Napoleonic-era French economist, is that “supply creates its own demand”. The implication is that recessions can only be due to supply shocks, not simple lack of demand, as Keynesians claim. Prices and wages should adjust to ensure that supply and demand are always equal. In the world of Say’s Law, monetary policy should have little or no effect. Quantitative easing would be of scarcely more significance than a new set of commemorative postage stamps.

Yet prices and wages sometimes fail to adjust. Occasionally this is for psychological reasons; at other times the hassle of changing the price tags, reprinting the menus and so on can delay price adjustments... Of such inflexibilities are born substantial economic fluctuations – the intellectual descendants of John Maynard Keynes often look to price rigidities to explain why recessions happen at all.

The riddle of a recession is why the market -- usually for labor in the case of unemployment -- fails to clear. If someone cannot get a job for $100/hr, why not accept one for $80/hr instead of being unemployed and collecting $0/hr?

I've promised a longer post on unemployment, which is still to come, and I think that understanding unemployment is important in understanding economic booms and busts. However, I do think that Hartford should look at Keynes' own work on debt driven deflation and perhaps talk to some households and businesses, ideally with nominally fixed mortgages, about why they don't simply work for less. Economic models wash out debt because "for every borrower there must be a lender and so, at the economy level, it balances out". But the fixed, nominal price of outstanding debt is the rigidity which keeps prices and wages failing to adjust.

Taking Hartford's argument at face value though, price gouging is usually triggered by higher prices, not lower. In a recession, the required price adjustments would be downwards. So I don't know if the irrational reaction to gouging is helpful in understanding this observation.

Barbarous Relic 2.0

Fred Wilson lays out the path he sees for Bitcoin:

1) Bitcoin emerges, community develops, mining, wallets 2) Bitcoin vice, silk road, etc
3) Speculation, trading, collecting, price spike
4) Commerce - real people buying real stuff with Bitcoin 5) Bitcoin as infrastructure

I think there will be a step 3.5 where Bitcoin will crash in value as a the speculative phase comes to its predictable end and the Feds start to wrap some regulation around it. This means there will be no step 4.

That does not mean that Bitcoin as infrastructure may not come about though. The irony, if I may use that term, with bitcoin is that it uses a lot of software to re-create the metallic nature of money and create a sort of digital gold standard (or barbarous relic 2.0 if you prefer). But money is not so much a medium of exchange nor a store of value, as economists argue, but a means to tallying and tracking indebtedness or obligations.

As outlined in Graeber's Debt, and is also clear upon a few moments reflection, indebtedness, the asking for and returning of favors, long predated money which merely abstracted and made portable that fundamental owed/owing dynamic. I still owe, but whether I owe my bank or a different bank or a bond holder depends on a secondary market that is independent of me. When a Government declares I owe them taxes, and those taxes must be denominated in a specific currency, it is a fulcrum that the entire economy will then turn on.

By losing focus on the tally, which is the important part, and focusing on the token, Bitcoin has developed an interesting and powerful technology for a use which is besides the point. Like Fred, I am eager to see what use it finds next.