Sunday, November 17, 2013
An interesting new analysis of the US national debt. Read carefully.
Treasury ownership marks wealth divide
By Gillian Tett
Who owns America’s ever-swelling pile of government debt? This is a question that has provoked considerable angst among US politicians recently; or at least it has in relation to national identity.
Little wonder. Half a century ago, the share of US public debt held by foreigners was less than 5 per cent; but in 2008 that ratio breached 50 per cent. And while it has since fallen back slightly (because the Federal Reserve has been gobbling up bonds) the shift in ownership is nevertheless stark – along with the new power of creditors such as China.
But there is a second important point about America’s debt that has hitherto received surprisingly little attention: the shifting nature of bond investors who hail from inside the US. In past decades, it has often been assumed that Treasury bonds were widely held by the public. Indeed, since the days of Alexander Hamilton, who founded a strong central US Treasury, many politicians have thought (or hoped) that a broad involvement in the bond market – be that among widows, orphans, middle-class citizens or oligarchs – would be a source of common civic identity and social glue.
However, Sandy Hager, a postdoctoral research fellow at the London School of Economics, has recently crunched through the historical data. This research suggests that if you look at the “publicly held” US government bond markets (ie the parts not held by another US government agency, such as the Fed), foreign ownership of federal bonds has risen from around 5 per cent in 1970 to 55 per cent today, at the expense of US households and business.
More specifically, the ratio of the bond market held by corporations during this period has declined from around 40 per cent to 30 per cent, while for households it has fallen from around 30 per cent to almost 15 per cent.
But what is most interesting is the picture inside the “household” category. Contrary to the usual assumption that government debt is widely held, Mr Hager’s data suggests ownership has become far more concentrated recently, echoing a wider concentration of wealth in the US.
Back in the 1970s, for example, the richest 1 per cent of Americans “only” held 17 per cent of all the federal bonds that were in private sector hands. This was partly because during the second world war and in the immediate aftermath there was a strong attempt to distribute Treasuries widely. But since the 1980s, the proportion of debt owned by the top 1 per cent started to rise sharply, hitting 30 per cent in 2000 and 42 per cent in 2013. The last time it was this high was in 1922, when the ratio was 45 per cent.
Now, this picture may not be entirely complete. Mr Hager himself admits that the historical data are often patchy, and it could be argued that modern citizens are also indirect owners of government debt through public agencies and pension funds, in ways that do not show in the data. But, if nothing else, this pattern gives new significance to the questions that Hamilton and other historical figures first grappled with three centuries ago: namely, is public debt a potential source of civic cohesion? Or merely a subtle way for elites to entrench their power?
Skin in the game
Mr Hager, for his part, takes the latter perspective; after all, he points out, this pattern means the richest are collecting more and more interest income, but not paying a proportionate increase in taxes.
“Over the past three decades, and especially in the context of the current crisis, the ownership of federal bonds and federal interest has become rapidly concentrated in the hands of dominant owners, the top 1 per cent of households and the 2,500 largest corporations [while] the federal income tax system has done little to progressively redistribute the federal interest income received by dominant owners,” he writes.
“Public debt has come to reinforce and augment the power of those at the very top of the social hierarchy,” he adds, concluding that “[Karl] Marx’s notion of a powerful ‘aristocracy of finance’ at the heart of the public debt is . . . a very real feature of the contemporary US political economy.”
No doubt most bond investors would disagree; the name “Marx”, after all, is taboo on dealing floors. But even if you disagree with Mr Hager’s leftwing political bent, the data certainly casts a new light on the political dynamic in the current fiscal rows.
To the wealthy elites in the US who hold government bonds, it seems self-evident that the government needs to preserve the sanctity and value of Treasuries; this group has a strong incentive to ensure this happens via fiscal reform (particularly if this entails budget cuts, rather than higher taxes.) But what is rarely debated is that millions of poor Americans have far less (or no) skin in the Treasuries game. Little wonder, then, that the fiscal debate is so polarised, and unlikely to become any less so any time soon.
Sunday, November 10, 2013
The Fed has set a tentative target of 6.5 % unemployment as a sign of a healthy labour market. Note that Mr. Bernanke, seems to suggest that we are still far away from that goal. Note also that new job creation last month was much better than the previous month but unemployment rate went back up to 7.3% .
Please take some time to reflect on the above chart.
Federal Reserve Chairman Ben Bernanke said on Friday that there was still an "awful lot of slack" in the U.S. labor market, but cautioned that economic data did not do a good job of providing an accurate measure.
"I think the unemployment rate probably understates the degree of slack in the labor market. I think the employment-population ratio overstates it somewhat, because there are important downward trends in participation," he said in response to an audience question during a panel discussion at the IMF.
"But that being said, I think we would agree that there is an awful lot of slack in the labor market - a lot of young people living with their parents and the like - and that is a very important imperative, and why the Federal Reserve in particular is taking strong actions to support job creation."
Bernanke was not specifically referring to the latest employment report, released earlier on Friday, which showed the unemployment rate rose to 7.3 percent in October.
Bernanke was taking part in a panel discussion that included IMF Chief Economist Olivier Blanchard, former IMF Chief Economist Kenneth Rogoff, former U.S. Treasury Secretary Lawrence Summers, and Stanley Fischer, whom the conference honored. All had been taught by Fischer.
At one point, Bernanke and Summers, who had been a top contender to replace him at the helm of the U.S. central bank until political opposition killed his chances, debated theories of negative interest rates.
That discussion was spurred after Summers delivered a very gloomy diagnosis of why U.S. growth has been so soft since the 2008 financial crisis.
The Fed chief was also asked about the mounting burden of student debt, whose outstanding balances rose by $8 billion in the second quarter, to $994 billion, according to data from the Federal Reserve Bank of New York.
"To the extent that there is a lot of student debt held by people not working, it is obviously another drag on the recovery. I don't see it as a source of financial crisis per se, simply because it is primarily the asset of the federal government," he said. "What it could be, ultimately, is another fiscal cost."
Saturday, November 02, 2013
Workers’ share of national income
All around the world, labour is losing out to capital
The “labour share” of national income has been falling across much of the world since the 1980s (see chart). The Organisation for Economic Co-operation and Development (OECD), a club of mostly rich countries, reckons that labour captured just 62% of all income in the 2000s, down from over 66% in the early 1990s. That sort of decline is not supposed to happen. For decades economists treated the shares of income flowing to labour and capital as fixed (apart from short-run wiggles due to business cycles). When Nicholas Kaldor set out six “stylised facts” about economic growth in 1957, the roughly constant share of income flowing to labour made the list. Many in the profession now wonder whether it still belongs there.
Workers in America tend to blame cheap labour in poorer places for this trend. They are broadly right to do so, according to new research by Michael Elsby of the University of Edinburgh, Bart Hobijn of the Federal Reserve Bank of San Francisco and Aysegul Sahin of the Federal Reserve Bank of New York. They calculated how much different industries in America are exposed to competition from imports, and compared the results with the decline in the labour share in each industry. A greater reliance on imports, they found, is associated with a bigger decline in labour’s take. Of the 3.9 percentage-point fall in the labour share in America over the past 25 years, 3.3 percentage points can be pinned on the likes of Foxconn.
Yet trade cannot account for all labour’s woes in America or elsewhere. Workers in many developing countries, from China to Mexico, have also struggled to seize the benefits of growth over the past two decades. The likeliest culprit is technology, which, the OECD estimates, accounts for roughly 80% of the drop in the labour share among its members. Foxconn, for example, is looking for something different in its new employees: circuitry. The firm says it will add 1m robots to its factories next year.
Cheaper and more powerful equipment, in robotics and computing, has allowed firms to automate an ever larger array of tasks. New research by Loukas Karabarbounis and Brent Neiman of the University of Chicago illustrates the point. They reckon that the cost of investment goods, relative to consumption goods, has dropped 25% over the past 35 years. That made it attractive for firms to swap labour for software whenever possible, which has contributed to a decline in the labour share of five percentage points. In places and industries where the cost of investment goods fell by more, the drop in the labour share was correspondingly larger.
Other work reinforces their conclusion. Despite their emphasis on trade, Messrs Elsby and Hobijn and Ms Sahin note that American labour productivity grew faster than worker compensation in the 1980s and 1990s, before the period of the most rapid growth in imports. Studies looking at the increasing inequality among workers tell a similar story. In recent decades jobs requiring middling skills have declined sharply as a share of total employment, while employment in high- and low-skill occupations has increased. Work by David Autor of MIT, David Dorn of the Centre for Monetary and Financial Studies and Gordon Hanson of the University of California, San Diego, shows that computerisation and automation laid waste mid-level jobs in the 1990s. Trade, by contrast, only became an important cause of the growing disparity in wages in the 2000s.
Trade and technology’s toll on wages has in some cases been abetted by changes in employment laws. In the late 1970s European workers enjoyed high labour shares thanks to stiff labour-market regulation. The labour share topped 75% in Spain and 80% in France. When labour- and product-market liberalisation swept Europe in the early 1980s—motivated in part by stubbornly high unemployment—labour shares tumbled. Privatisation has further weakened labour’s hold.
Such trends may tempt governments to adopt new protections for workers as a means to support the labour share. Yet regulation might instead lead to more unemployment, or to an even faster shift to automation. Trade’s impact could become more benign in future as emerging-market wages rise, but that too could simply hasten automation, as at Foxconn.
Accelerating technological change and rising productivity create the potential for rapid improvements in living standards. Yet if the resulting income gains prove elusive to wage and salary workers, that promise may not be realised.