Monday, September 30, 2019

Maybe corporations don't have enough power.

I think I have expressed skepticism previously that corporate or monopsonist power can explain the apparent growth in income inequality.  First, a careful look at changing income proportions shows that a decent portion of the drag on real incomes is due to housing expenses. Relatively little is due to rising corporate or interest income. Most of the relative difference between high and low incomes is more variance between different laborers or between wage earners and professionals who are frequently proprietors.  In fact, if corporate income or power was rising, monopsony power in labor markets should lead to less variance in wages.  High wages come from skill development and specialization. Frequently these are tied to specific institutional contexts. Specialization would make high earners more vulnerable to being captured by a few or one corporate buyer of their labor.

In a context of monopsony power, wages at the top of the spectrum would be held lower. Corporations wouldn't then voluntarily distribute them to workers with lower wages. But if firms lacked monopoly power, they wouldn't be able to retain the gains from that. The gains would be captured as consumer surplus by the firms' customers. In order to be competitive in the market for their goods and services, firms would have to assert their monopsonist power just to remain competitive by transferring those gains to the consumer.

Here, I am reminded of the conventional wisdom that asserts that mid 20th century corporations were more loyal to their workers and that a corporate job was more of a lifetime gig because corporations took care of their workers.  That doesn't really match very well with income data which doesn't show much variation in corporate operating income as a portion of total domestic income over long periods of time. But it does match with a context where more skilled workers were captured by powerful firms and less skilled workers benefit indirectly as consumers.  Maybe labor incomes had less variance because firms back then were more powerful.

Sometimes an IPO comes up for a company that markets itself as a tech startup, and people joke that it's just a dog food distributor with an app attached to it, or something.  But, maybe we have that backwards.  Maybe every company today is a tech start up.  Maybe, what pushed your wages up in the past was, say, being a machinist in a specific sector, where a few firms were interested in your skills.  But, today, a key path to higher wages is a job with a title like "systems administrator" or "data manager", and your skills are applicable in some way to 80% of the economy.

I suspect that generally there is too much focus on corporate power. Rather than debate whether they have too much or too little, I think attention is better focused on other structural issues. Rising costs of housing, education, health care, and public infrastructure, together with barriers to migration, are more important factors holding down real incomes below their potential. A problem with the corporate power issue may be that the argument about its effect have the sign of the factor wrong.  In the financial crisis, I think the focus on enforcing losses rather than maintaining broader stability presents a similar example where determined policy programs that have the sign wrong (more housing was needed in 2005, not less, for instance) are much, much worse than benevolent indifference.

There is an intersection between these issues. Because of the housing shortage, there is a lack of market access and mobility. Y combinator must be located in Silicon Valley. Being in Silicon Valley is essentially a 40% tax on business development.  The lack of access to that location simultaneously makes certain actors wealthier while reducing overall creative destruction.

The way to progress is to have more y combinators. Adding to the already high costs and barriers with new taxes and mandates hardly seems like a helpful response.

What if the problem is that corporate power is too low? Then lowering their power will worsen inequality even more. Things like codetermination might create even more obstacles to mobility and migration. Maybe the internal politics would serve to further increase the bargaining power of specialized high wage workers.

But, most importantly, over long stretches of time, labor and capital income grow at nearly a 1:1 correlation.  In so many ways our relationships are symbiotic more than they are in conflict. Maybe the focus on relative power is itself a problem. When the economy is growing, the rate of quits increases, and as the Atlanta Fed shows, wages for job switchers increase faster in a growing economy than the wages of other workers. It isn't the relative status of workers compared to employers that is the engine of that shift, it is the relative status of new, more productive firms over old, less productive firms. Surely the way to shared prosperity lies there.  An economy where a restaurant owner is bringing in customers like crazy, but she can't serve them because the potential waiters have found more productive things to do.  That seems like a problem to the restaurant owner.  The response shouldn't be to force them to pay waiters more.  The response should be indifference, which means the restaurant still feels pinched while some other firm somewhere produces high wage opportunities for workers because a growing economy is imbuing those firms with power.

Friday, September 13, 2019

Yield Curve mid-September 2019 update

There has been quite a lot of movement in yields since last month, so I thought it would be useful to look at an update.

During the last half of June and July, the long end of the curve came down while the short end moved up a little bit.  I wish we had an NGDP futures market to check these intuitions against, but I think the best interpretation is that in June the Fed had reversed track a bit and signaled more dovish policy going forward, but then some compromises in that posture began to arise, so while they certainly are more dovish than they were several months ago, some of the optimism that was pressing long end rates higher in June has receded.

The slope of the curve from two years onward has remained relatively stable since then and the movements have mostly been movements in the estimated low point of yields in 2021.

At first glance, rising rates since the end of August are bullish.  But, that is entirely due to rising short term rates.  The long end has actually flattened slightly compared to the beginning of August (the blue line compared to the pink line).  There are obviously a mixture of factors here, and continued strength in the labor market is probably one reason for optimism.  But, it seems to me that the net movement of the past two weeks is probably bearish.  Less faith that a dovish commitment by the Fed will prevent a bit of a downturn.  That would lead me to suspect that the coming decline in the target short term rate will be somewhat tepid and will be associated with a sympathetic decline in the long end of the curve at first, back toward or below the levels of late August.

Thursday, September 12, 2019

August 2019 CPI Inflation

Here are the monthly inflation updates.  It will be interesting to see if the Fed treats 2% as a symmetrical target or a ceiling.  There might be an argument for treating it as a ceiling at this point in the business cycle, because employment is so strong.  But employment is a lagging indicator.  At this point, I think the Fed has reduced the potential of worst case scenarios, but I don't think they will loosen up monetary policy aggressively enough to avoid a bit of a contraction.  And the depth of the contraction mostly depends on future decisions.

In addition to the problem that these measures are backward looking, of course, there is the issue, which is always the focus of these posts, that the shelter component is not particularly related to monetary policy, since it mostly measures the estimated rental value of owned homes, and even in the case of rented homes, frequently is measuring the growth in economic rents from the ownership of a politically protected asset, which is really more of a political transfer of wealth than an effect of monetary policy.

All of these questions about monetary policy discretion would be unnecessary under an NGDP futures targeting regime.  Hopefully, we can continue moving in that direction.

The last couple of months have seen an upward movement in non-shelter core inflation.  This puts core CPI at 2.36% and non-shelter core CPI at 1.68%.

Monday, September 9, 2019

Part 16: The conclusion to my series on housing affordability

A conceptual starting point for housing affordability and public policy

Here is an excerpt, but the post is short, so please click the link if you're interested.

Understanding this value and the systematic returns that homes provide leads to a somewhat paradoxical conclusion that (1) homeownership is usually a good investment, and (2) the smaller the investment, the better. In other words, an owner-occupied home with a low rental value can be a great investment, but the downside is that it requires living in a home with a low rental value.

The various posts in this series have considered housing affordability with a focus on rent. This focus has led me to the following policy suggestions: we should (1) maintain relatively high property taxes, (2) reduce or eliminate income tax benefits of homeownership, including the non-taxability of the rental value of owned units, (3) eliminate urban supply constraints, (4) reduce regulatory barriers to mortgage lending, especially in low tier markets, and (5) encourage innovation in real estate markets that reduces transaction costs.

I hope you have found some interesting ideas in the series.  I found it useful and enjoyable to systematically lay out a conceptual review of these ideas.

Here is a link to the whole series.

Wednesday, September 4, 2019

August 2019 Yield Curve Update

I had a brief flirtation with optimism, but the last couple of months have seen a bearish turn. 

This first graph is a graph comparing the Fed Funds Rate and the 10 year Treasury yield.  The orange line is the effective inversion line.  The zero lower bound means that long term yields have a kind of option value, biasing the yield curve upward.  This is my attempt at adjusting for that effect.  The yield curve is highly inverted.

In the meantime, the Fed seems to be tepid about their recent dovish turn.  It would take quite an aggressive posture for them to get ahead of this.  For this to become less bearish, the 10 year yield would need to rise substantially.  It's unlikely to do that without an aggressively dovish move, which the Fed would signal with a sharp decline in the Fed Funds Rate.

I expect the long term rate to bounce around a bit, but it seems unlikely that it will push back away from inversion.

The second graph shows the yield curve at various dates over the past few months.  It has flattened even as short term rates have declined.

Tuesday, September 3, 2019

Part 15 of my Housing Affordability at Mercatus

As the series nears a conclusion, I question the notion that homeowners are more leveraged than renters, or that, all things considered, the housing boom was associated with a rise in household liabilities.
The idea that paying $700 in rent is preferable to a $300 mortgage payment comes from the idea that a potential home buyer would be adding a new liability to their household balance sheet. It would involve leverage, and leverage is dangerous.
But this idea is, itself, a product of mental framing. There are assets and liabilities that we explicitly include on balance sheets, like the value of a home and a mortgage, or the market value of a corporation’s future profits. And there are assets and liabilities that we don’t explicitly include, like future rental expenses or the market value of a laborer’s future wages.
The explicit financial engineering that spread before the financial crisis has taken on a lot of criticism over the past decade.  That financial engineering, ironically, created risks and costs that were more transparent and visible than the implicit financial engineering that has been an unwitting side effect of deleveraging Americans’ explicit balance sheets.
A significant part of corporate financial analysts’ academic training is to properly account for the liability of the rents corporations have committed to paying.  Wouldn’t it be prudent for mortgage regulators to account for this liability also when evaluating the benefits and costs of the lending standards applied to households?