John Q

In a couple of recent posts, I’ve been looking at returns to capital. First, there’s the fact that real returns on long-term (up to 30 year bonds) are now below zero in most countries. I argued that such a situation is inconsistent with the existence of capitalism in the traditional (say, pre-1970s) sense of the term. Then there’s the fact that the biggest contributor to corporate asset values is “intangibles” which is a polite word for monopoly.

An obvious question that arises is: if this is the case, why is the stock market doing so well, holding most of an already high valuation even as the pandemic raises the prospect of a long and deep recession? In one sense, there’s no puzzle at all here. Stocks generally yield higher returns than bonds (this is the “equity premium puzzle” on which I’ve written a lot), but if bonds are paying zero, then investors will be willing to buy stocks with a small (expected) positive return. That implies, for any given expectation of future returns, a higher share price. On this argument, the fact that sharemarket investors have done well in the last ten years or so doesn’t mean that they will do well in the future. Rather, at current stock prices, they will be taking more risk for less return than in the past.

All of this raises more questions about what is going on with corporations. Although corporate profits are increasing at the expense of wages, that masks growing inequality between firms. According to this study from 2017 (abstract over the fold). “Earnings of public firms have become more concentrated – the top 200 firms in profits earn as much as all [other] public firms combined.” Firms are also paying out more in dividends and share buybacks and investing less, implying once again that (at least as regards public markets) the scope for capital investments yielding positive returns has become more limited. I suspect (but haven’t yet got good evidence on this) that a growing share of corporate profits are being captured in privately-held firms (for example, those owned by private equity firms), where there is more scope for various kinds of arbitrage and rent-extraction.

[click to continue…]

In a recent post, I pointed out that long-term (30 year) real interest rates on safe (AAA) bonds had fallen to zero, and suggested that this meant the end of capitalism, at least in the sense that the term was understood in classical economics. On the other hand, stock markets have been doing very well. So what is going on? This is a complicated story and I’m still working it out,
An important starting point is the fact that the most profitable companies, particularly tech companies, don’t have all that much in the way of capital assets compared to their market value. What they have is monopoly power, which has been increasing steadily over time. That benefits those who already own and control these firms, but it does not provide new investment opportunities.

I’ll start by looking at price-to-book ratios. Alphabet, which owns Google has a market value five times the book value of its assets https://www.macrotrends.net/stocks/charts/GOOG/alphabet/price-book The ratio is 15 for Microsoft and 21 for Apple. By contrast, for General Motors, the classic 20th century corporation, it’s just under 1.

For the corporate sector as a whole, the comparable measure is Tobin’s q ratio, which has been trending upwards since the late 1970s and is now near the all-time high reached during the dotcom bubble.

The value of companies like Apple, Google and Microsoft is made up primarily of “intangibles”. That term can cover all sorts of things, and is often taken to refer to some special aspect of the firm in question, such as accumulated R&D, tacit knowledge or ‘goodwill’ associated with brands.
R&D is at most a small part of the story. The leading tech companies spend $10 – 20 billion a year each on R&D https://spendmenot.com/top-rd-spenders/, a tiny fraction of market valuations of $1 trillion or more. And feelings towards most of these companies are the opposite of goodwill – more like resentful dependence in most cases.

A simpler explanation is that the main intangible asset held by these companies is monopoly power, arising from network effects, intellectual property, control over natural resources and good old-fashioned predatory conduct.

In this context, the crucial point about intangibles isn’t that they aren’t physical, it’s that they can’t be reproduced by anyone else. No one can sell a Windows or Apple operating system, even if they were willing to invest the effort required to reverse-engineer it. While there are competitors for the Google’s search engine (I recommend DuckDuckGo), there are huge barriers to entry, notably including the fact that the product is ‘free’ or rather supported by advertising for which all consumers pay whether they use Google or not.

There’s a complicated relationship here between the rise of monopoly and the development of the information economy in which the top tech firms operate. Information is the ultimate ‘non-rival’ good. Once generated by one person it can be shared with anyone else without diminishing in value. As the cost of communication has fallen, it’s become possible for everyone in the world to gain access to new information at essentially zero cost.
What this means is that there is very little relationship between the value of information and the ability of corporations to capture value from it. The protocols and languages that make the Internet possible are a public good, created by collaborative effort and made freely available. The information on the Internet is generated by households, business and governments using these protocols. Without these public goods, Google would be worthless. But because advertising can be attached to search results, ownership of a search engine is immensely profitable.

In turn, this means that traditional ideas about capital and investment are largely irrelevant in the information economy. More on this soon, I hope.

With everything going on, we at CT haven’t managed any posts for a few days, so I’m opening a thread for comments on any topic. I’ll try to get comments out of moderation reasonably promptly, but bear in mind that I’m in Australia, near the opposite time of day to most readers.

Ever since I wrote Work for All with Australian MP John Langmore back in 1994, I’ve been pushing the idea that a path to full employment requires an expansion of publicly provided services. For about the same length of time, Bill Mitchell (also an Australian economostO has been putting forward similar (but not identical) proposals. At some point in this process, Bill became one of the advocates of what’s called Modern Monetary Theory, which makes the point that taxes don’t (directly) “fund” public expenditure. Rather, they ensure that the total demand for goods and services (for consumption and investment) don’t exceed the productive capacity of the economy, thereby generating inflation.

This reframing raises the question: does a Job Guarantee require higher taxation? The answer, using MMT reasoning, is “Almost certainly, yes”.

Although my book-in-progress is called The Economic Consequences of the Pandemic, a lot of it will deal with changes that were already underway, and have only been accelerated by the pandemic. This was also true of Keynes’ Economic Consequences of the Peace. The economic order destroyed by the Great War was already breaking down, as was discussed for example, in Dangerfield’s Strange Death of Liberal England.

Amid all the strange, alarming and exciting things that have happened lately, the fact that real long-term (30-year) interest rates have fallen below zero has been largely overlooked. Yet this is the end of capitalism, at least as it has traditionally been understood. Interest is the pure form of return to capital, excluding any return to monopoly power, corporate control, managerial skills or compensation for risk.

If there is no real return to capital, then then there is no capitalism. In case it isn’t obvious, I’ll make the point in subsequent posts that there is no reason to expect the system that replaces capitalism (I’ll call it plutocracy for the moment) to be an improvement.

But first let’s look at the real 30-year bond rate. The US Treasury is currently offering an inflation-protected 30 year bond at a rate of -0.3 per cent. That is, if you buy the bond at say, age 35, you can get your money back, less a 10 per cent reduction in real value, when you are 65. This rate has fallen from 2 per cent, when the bond was introduced in 2010, and started declining sharply in late 2018, before the pandemic, and while the Federal funds rate was rising.

In thinking about the future of the economic system, interest rates on 30-year bonds are much more significant than the ‘cash’ rates set by central banks, such as the Federal Funds rate, which have been at or near zero ever since the GFC, or the short-term market rates they influence. These rates aren’t critical in evaluating long-term investments.

The central idea of capitalism is, as the name implies, that of capital. Capital is accumulated through saving, then invested in machines, buildings and other capital assets to be used by workers in producing goods and services. Part of the value of those goods and services is paid out as wages, and the rest is returned to capital, as interest on loans and bonds or as profits for shareholders. Some of the return to capital is saved and reinvested, allowing growth to continue indefinitely. Workers, on this account, can become capitalists too, by saving and investing some of their wages. At a minimum, they should be able to save enough, while working, to finance a decent standard of living in retirement.

But what happens if there is no return to capital? The collapse of interest rates on government means that’s already true for anyone who wants a secure investment. And the situation isn’t any different for the two remaining AAA-rated corporate borrowers, Microsoft and Johnson and Johnson. Microsoft is currently offering a rate of 2.5 per cent on 30-year bonds, and has exchanged lots of outstanding debt for new bonds at that rate (paying a 40 per cent premium for higher-interest bonds). That’s a real return of 0.5 per cent if you assume that the Fed sticks to its current 2 per cent target and hits it on average. (There’s a lot more room for inflation to surprise on the upside, in my view). If you allow a 15 per cent risk that Microsoft will go bankrupt some time before 2050, the expected real return falls to zero.

To complete the picture of returns to capital, we need to look at stock markets and corporate profits. That’ll be the subject of another post.

I’ve been reading the latest (excellent as usual) book from Jacob Hacker and Paul Pierson, Let Them Eat Tweets: How the Right Rules in an Age of Extreme Inequality . The opening paras read

This is not a book about Donald Trump. Instead it is about an immense shift that preceded Trump’s rise, has profoundly shaped his political party and its priorities, and poses a threat to our democracy that is certain to outlast his presidency. That shift is the rise of plutocracy – government of, by, and for the rich

This passage reflects the conflict between two propositions that I (and lots of others, I think) have been grappling with
(1) The rise of Donald Trump represents a radical transformation of the Republican party and American conservatism
(2) Everything Trump has done is a continuation of long-established Republican policy and practices.

Here at CT, Corey has argued for a long time that (2) is correct, and that conservatives or, more properly, reactionaries have always been about preserving hierarchy and power. I find Corey’s argument convincing, but not enough to persuade me that (1) is wrong. Hacker and Pierson also broadly endorse (2). But much of their book is a comparison of the trajectory of the Republican Party with that of the German nationalists in the dying days of the Weimar Republic. The fact that such a comparison, until recently regarded as an automatic disqualification from serious argument (Godwin’s law) now seems entirely plausible, suggests that something really has changed.

In trying to find a way to understand this, I was struck by the idea that the concept of a phase transition (such as from liquid to gas, or dissolved solid to crystal) in physics and chemistry might be a useful metaphor. I didn’t get past high-school in science, so I may well use the metaphor inaccurately – I’m sure commenters will feel free to set me straight.

To develop the metaphor, think of the Eisenhower-era Republican party as a complicated mixture of many dissolved ingredients, in which the dominant element was the business establishment, and the Trump era party, as described by Hacker and Pierson as a crystallised mass of plutocratic economics, racism and all-round craziness. The development over the 60 years between the two has consisted of keeping the mixture simmering, while adding more and more appeals to racial animus and magical thinking (supply-side economics, climate denial, the Iraq war and so on). In this process various elements of the original mix have boiled off or precipitated out and discarded as dregs. Stretching the metaphor a bit, I’m thinking of boiling off as the process by which various groups (Blacks and Northeastern liberal Republicans in C20, liberaltarians more recently) have left the Republican coalition in response to its racism and know-nothingism. The dregs that have precipitated out are ideas that were supposed to be important to Republicans (free trade, scientific truth, classical liberalism, moral character and so on) that turned out not to matter at all.

Trump’s arrival is the catalyst seed crystal that produces the phase change. The final product of the reaction emerges in its crystallised form, and the remaining elements of the mixture are discarded.

As with most really neat sayings, the original (with billions, instead of trillions) is misattributed, in this case to the late Senator Everett Dirksen, a conservative Republican who nonetheless helped to write the 1964 Civil Rights Act. The saying can be traced back to an unsigned New York Times article in 1938, which said ““Well, now, about this new budget. It’s a billion here and a billion there, and by and by it begins to mount up into money”. This in turn improved on earlier versions going back at least to 1917
US GDP today (Over $20 trillion) is around 250 times as high, in dollar terms, as it was in 1938, so replacing billions with trillions isn’t much of a stretch.

With that in mind, what should we think about the $2.4 trillion pandemic relief package, and the likelihood of huge demands for public expenditure stretching well into the future? And how much of this analysis is applicable to the world as a whole, where large scale government responses have been the norm rather than the exception.
[click to continue…]

The title of my book-in-progress, The Economic Consequences of the Pandemic is obviously meant as an allusion to Keynes’ The Economic Consequences of the Peace, and one of the central messages will be the need to resist austerity policies of the kind Keynes criticised in his major work, The General Theory of Employment Interest and Money. That title, in turn was an allusion to Einstein*, and the Special and General theories of Relativity.
[click to continue…]

That’s the title of a book I’ve agreed to write for Yale University Press (their editorial director) Seth Ditchik commissioned my previous two books, Zombie Economics and Economics in Two Lessons when he was at Princeton UP.

When we first discussed the book, I took the view that most of the writing would have to be done after November, since the outcome of the US presidential election would be crucial to developments in the US and globally. I’m now working on the assumptions that
(a) Biden will be the next president
(b) he will have a workable majority in Congress.
(c) mainstream Democrats recognise the need for radical change, and Biden will align with the mainstream position as he always has done

The first of these assumptions was problematic until recently, but seems safe enough to work on now. The third, I’ll leave for comments.
That leaves the question of a workable majority. Roughly speaking, I mean that the Dems have enough votes in the Senate to abolish or restrict the filibuster and pass the kind of program I’ll be advocating (allowing for a couple of defections, that would be 52 or more). Winning that many seats is still a stretch on current polling, but not out of reach.

The immediate question is that of how to get rid of the filibuster. Doing so pre-emptively would be problematic in all sorts of ways. Biden needs to start with the 2008 Obama playbook of reaching out across the aisle in the spirit of bipartisanship. But unlike in Obama’s case, once the proffered hand (or perhaps elbow bump) of friendship is slapped down, as it surely will be, Biden needs to point to his electoral mandate and whip up the necessary votes. Obama realised this, to some extent, in his second term, but by then he had a hostile Congress.

[click to continue…]

• As Princeton has just repudiated Woodrow Wilson, I thought I’d repost this from 2011, which seems relevant to a lot of current discussion*

As an Australian, I’m not much accustomed to think of political leaders in heroic terms[1], something that reflects the fact that nothing our political leaders do matters that much to anybody except us, and even then most of the decisions that really mattered have always been made elsewhere. So, I’m fascinated by the US activity of ranking presidents and other political leaders, and eager to try my hand.

What has brought this to mind is running across George Will’s campaign against Woodrow Wilson, who always seemed to be presented in hagiographic terms until relatively recently. Much as it goes against the grain to agree with Will on anything, he surely has the goods on Wilson: a consistent racist, who lied America into the Great War, and used Sedition acts and similar devices to suppress opposition. His positive record appears to consist of a variety of “Progressive” measures (in the early C20 sense of the term) many of which were inherited from Teddy Roosevelt, and few of which were particularly progressive from a left viewpoint[2], and his proposal for the League of Nations, where he comprehensively screwed up the domestic politics, leading the US to stay out of the League.

[click to continue…]

Predicting election outcomes is always risky (for example, the People’s Action Party could lose the current election in Singapore), but life involves taking some risks. So I’m going to predict that Trump is going to lose in November, and lose badly*. He is far behind in the polls, substantially further than in 2016. More relevantly perhaps, the resurgence of the pandemic in Arizona, Florida and Texas has ended any chance that the economy will be successfully reopened and the pandemic clearly under control by November, not to mention giving the citizens of those states very personal reasons to vote against him.

What will happen to Trumpism after Trump’s defeat, in the US and globally? Here are some very disorganised thoughts.

A big part of Trump’s appeal is that he is a winner, and a big part of Trumpist mythology comes from wins against the odds, as with Brexit and Johnson and, more periphally, with the re-election of the Morrison government in Australia (which had the good sense to dump most of its ideology for the duration of the crisis, but is now returning to its roots). With that gone, Trump’s support will be much weakened So, the stage will be set for a fight in which the hard neoliberals who controlled the party before Trump attempt to reassert themselves, breaking with Trump’s explicit racism while still trying to keep the Repubs white voting base behind them.

On the other hand, Trump has lots of supporters who will refuse to accept the reality of a defeat (not enough, I think, and particularly not enough in positions of power, for him to stop the election or overturn its result). And there are more competent Trumpists, in the mould of Viktor Orban, keen to push an ethnonationlist, racist and authoritarian policy program without Trump’s clownish demagoguery.

Internationally, a defeat for Trump probably won’t make much difference to the ethnonationalist voting base of the Trumpist right. That base has always been there, ready to turn out whenever some other group can be identified as the enemy. But it will, I think, have a significant effect on the right wing of the political class. Some of them will find themselves outside the bounds of legitimate discussion (this is already happening in a small way in Australia), while others will engage in some quick reinvention.

The big question is whether hard neoliberalism can recover. On the one hand, the financial sector still has huge economic power, which usually translates into political power. And the common-sense economics of the Swabian housewife still retains its grip on many. On the other hand, just about everything that is identified with hard neoliberalism (globalisation of trade and financial flows, the hypertrophic growth of the financial sector, trickle-down economics and more) is massively unpopular. That’s particularly true of those under 40, who never experienced the illusory prosperity of the 1990s, or the crises of the 1970s (minor by comparison with the last decade, but a massive shock to expectations conditioned by the postwar boom).

The best hope for the US right is that Biden and the Democrats are unable to fix the catastrophic mess they will inherit. More on this soon, perhaps.

• I meant to have a footnote about the possibility of Trump rejecting the election outcome, but covered it with a parenthetical statement.

As Eszter said in her post on health living,, everyone has their own story and their own health. That’s true, but we are all subject to the same physical laws. So, here’s my story and some thoughts on the physics.

I managed to lose about 12 Kg over a couple of years, almost entirely through exercise.

The basic physics is simple
(1) weight loss = (kilojoules burnt – kilojoules consumed)*k,
(2) kilojoules burnt = base metabolism + work done

where k ≃ 0.025 is a constant reflecting the rate at which your body converts kilojoules of food energy into kilograms of fat. If you can alter the right hand side of (1) through any combination of diet and exercise then you will lose weight.

The problem is that altering either of these, or even altering while holding the other constant is really hard. Dieting makes you tired and slows your metabolism. Exercise increases your appetite, and also encourages you to flop once you stop exercising. All that’s because your body isn’t evolved to lose weight easily. Hunger and fatigue are both adaptations to stop you doing that. And, even if you can shift (1) enough to lose some weight, (2) puts a limit on how much you can lose. Balance is restored by the fact that your lighter body takes less energy to maintain and move around.

The crucial thing is to find some change for which you have both the willpower to adopt it initially and the willingness to maintain it indefinitely. For me, as I said, that’s been exercise. I aim to burn 4000 kj (about 1000 calories) a day in addition to base metabolism, which implies about 100 minutes of vigorous aerobic exercise. That’s logistically feasible for someone with flexible working hours and no kids at home, but very difficult otherwise. And it takes a long while to get to the point where you really enjoy it. That’s why the experts mostly recommend working on diet. But, if you can manage it, I think exercise is the better way to go.

The decision of the US Supreme Court, that the Civil Rights Act prohibits discrimination based on sexual orientation and gender identity was entirely predictable, based on the century old observation of the fictional Irish-American bartender Mr Dooley observed “The Soopreme Court follows the illiction returns.” As I said in 2018

At most, the court constitutes a veto point, able to block legislation that can be represented as violating constitutional protections. But most of the progressive agenda is clearly within the power of the legislature and executive. If the Democrats win the next few elections, the Roberts Court will be as much of a disappointment to its creators as the Warren Court in the 1960s

A decision restricting the interpretation of the Civil Rights Act would have had huge political costs for the Republican majority, without achieving any long term results. In the quite likely event that the Democrats gained control of both the Presidency and Congress sometime in the next few years, the decision would probably have prompted a new and even broader Civil Rights Act, as well as a potential trigger for expanding the court to create a Democratic majority. Even if this didn’t happen, the remaining state-level restrictions would have been chipped away in a series of losing campaigns for the right. From Roberts’ viewpoint the key goal has to be to keep bringing down decisions like Citizens United, which entrench Republican advantages. As for Gorsuch, the advantages are even clearer. His appointment is widely regarded as illegitimate, and a decision showing that “textualism” means “rightwing interpretations of the text” would have entrenched that. As it is, he can present himself as someone who, while conservative, is not a partisan hack.

It will be interesting to see how this plays out on the right. Roughly speaking, I’d expect the hard neoliberals to welcome the fact that this unwinnable fight is over. By contrast, the culture warriors who back Trump will be furious. Apparently, many are expecting a sweeping win in November, in which case they could amend the law.

As statues of slavers are pulled down around the world*, we are getting the usual stuff from the political right about rewriting history and so on. This is obviously silly. Less than twenty years ago, the same people were thrilled by (misleadingly edited) images of US forces pulling down a statue of Saddam Hussein. A bit before that, Lenin and Stalin had their turn.

Wondering about other cases, I looked at Wikipedia to find out about memorials to the personification of treachery against the United States, Benedict Arnold, who won a number of military victories for the American side in the Revolutionary War, before changing sides. It turns out that there are a couple, but he is never mentioned by name and, in one case, is represented by an empty niche. As Wikipedia observes, this is a striking instance of the practice of damnatio memoriae.

On one view, the idea here is to erase all memory of those whose memorials are destroyed. But this doesn’t happen, at least not reliably. With the exception of Washington, Arnold is probably the only Revolutionary War general most Americans could name. And the effect of the latest protests has to bring attention to the evil acts of men who had long been forgotten.

Thinking more about the example of Arnold, one way to deal with monuments of this kind is to remove the status, but leave the plinth and the original inscription, along with an updated version explaining the history.

• Australia has plenty of candidates