On 2/6/2011 10:41 PM, Doug Henwood wrote:
> The higher consumption/GDP has had to be financed, since wages haven't done the trick. A lot of that came from the upper orders (that which didn't come from China). But I'm not sure how the macro/micro can be easily separated. Since 1982, nonfinancial corps have transferred (through dividends and negative net equity offerings, which means buybacks& takeovers) almost $8 trillion to their shareholders, or 44% of their available internal funds. (Over the same period, internal funds have covered 90% of capital expenditures.) Where do you think that $8 trillion went? My guess is that a lot of it went into asset purchases and luxury consumption. Clearly a decline of just 1-2% of GDP in real investment is much smaller than this flow, so the lack of outlet explanation will only take you so far. But $8 trillion is a lot of money.
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> Over the same 1982-2010 period, credit market debt rose by $46 trillion, or over 800%. The value of stocks rose by $19 billion, or 1,243%. The transfer from corporations can't explain all this - there's also the accumulation of assets among the top 1% of households - but it has to have something to do with it.
Keynes would say that if corporations decide autonomously to invest less, the result will be a recession - unless there happens to be an autonomous increase in consumption at the same time. Obviously, the latter is what actually happened. Now, you're right, wages didn't cover the increase in consumption - a lot of it came from borrowing. But that's where the causal slippage happens: just because investors receiving payouts now have more cash to put "into" the financial system doesn't mean the cash will then automatically be forthcoming "out" of the financial system to finance the mass consumption needed to make up for the decline in investment. Consumers have to be (a) able and willing to borrow from (b) a financial system that's able and willing to lend. I think the revolution in borrowing happened more because of institutional changes like deregulation, the mortgage-interest tax exemption, coupled with changing norms and "Veblen effects." And I think it would be a functionalist fallacy to assume that the revolution in consumer borrowing happened "because" the economy now "needed" greater consumer borrowing (to compensate for lower investment). And it would be a macroeconomic fallacy (of an oddly orthodox, loanable-funds kind) to assume that the borrowing happened automatically "because" there was greater saving by the payout-receiving rich. Why didn't the greater saving by investors ("asset purchases") just lead to an economic contraction? Why an increase in consumption?
By the way, one question/point about the explosion in financial assets/GDP. Depending on how you use the statistics, there can be a lot of double counting. When asset ownership is intermediated through investment funds (mutual, pension, etc.), it's possible to count the asset twice or more - once on the fund's balance sheet, and again on the individual owner's balance sheet. If there's a shift over time away from individual asset ownership, toward fund ownership, then that will show up as an increase in the volume of financial assets/GDP. Also, surely some of the underlying increase can be explained simply by: (1) higher P/E ratios on stocks in the long bull market; and (2) higher valuations of credit assets in the era of low interest rates. Once you strip out those factors, I wonder how much is left of the explosion. There's still the explosion of derivatives to account for, but surely that's about institutional evolution rather than a macroeconomic phenomenon.
SA