Monday, June 16, 2014

We are the 100%

This chart is kind of messy, but it basically outlines a problem with a lot of commentary I see on the economy.

This compares growth in commercial loans, the unemployment rate (inverted), inflation adjusted wage growth, and inflation adjusted short term interest rates.  This is a mixture of quantities and prices and it's also a mixture of labor and capital.  And, they all basically move together....

The economy is overwhelmingly more complementary than competitive.  When more labor is utilized, more capital is utilized.  When the price of labor rises, the price of capital rises.

So, analysis that says that rising wages will lead to inflation or that rising wages means labor has more bargaining power is flat out wrong.  Unemployment is falling because frictions in the marketplace are being worked out.  Wages are rising because those reduced frictions mean the pie is getting bigger.  More workers, more loans, higher wages, higher returns - these are all products of an economy functioning well.  This is a tidal chart, and all the boats are being lifted together.

Analysis that says rising interest rates is usually the result of a tightening Fed, tamping demand for credit, is flat out wrong.  Rates rise because the economy is functioning better.  The Fed is usually only able to raise the Fed Funds target because the improved economic context is expanding investment and returns.

Policy and punditry that focuses on good guys and bad guys, pitting labor against capital, takings and givings, can be satisfying, and it seems so right.  But, it only seems right because our brains evolved in a Malthusian context.  I know so many people who recognize the value of the human ability for acceptance and empathy toward diverse and wide-ranging cultures and lifestyles, but when it comes to economics they turn into a bunch of feces throwers.  Sometimes these monkey-minds we all are saddled with will just see what they are going to see.  I don't know if we can ever get safely beyond these predilections.  Whether it's with military adventures or social and economic planning, we are suckers for leaders who want to "get tough" with somebody, to our own detriment.

I dream of a world where we all imagine those we want to get tough with, and we vote instead for generosity and trust, where capitalists and central bankers see rising wages and feel hopeful, where workers see high corporate profits and feel a swell of good cheer.

Here's an even messier version of the graph, with the YOY change in public equities added (the orange line).  The main difference is that equities, being a flexible and residual measure of ownership, are a leading indicator...a sort of canary in the coal mine.  If you're ever in a coal mine, and the foreman says it's time to "get tough" on the canary, you probably don't want to stick around to see how it turns out.


  1. Thanks for this chart, do you have the source URL? The scales are a little difficult to interpret.

    1. Sorry, I don't. I have just been doing screen grabs so they appear in the posts the way I intended. But, the legend describes the measures (for instance, the green line in the bottom graph is FedFundsRate minus PCEPILFE). All measures are Year over Year % changes, except the rate measures, which are simply the YOY change in the rate. The Wilshire and C&I Loan series are on the right scale. The others are on the left.
      I hope that helps.
      Let me know if you still have questions.

  2. As I said, you're missing the point. Obviously capital and labor should benefit together... but the problem is that a bunch of capitalists *do not think that way*. I don't know how to fix the thinking of these guys, but they are bad people who are causing bad problems. Think Pete Peterson as an example of the problem.