Piketty’s Capital

May 25, 2014

No graphs this week!  Awwww!

A few months ago, Thomas Piketty, a French economist, released Capital in the 21st Century, a book that I mentioned to readers back in January before its publication.  Piketty’s book has aroused much interest, praise and denunciation.  What could arouse such fire in the hearts of men, you ask?  Inequality.  We humans are a social bunch and, like our chimpanzee cousins, are especially sensitive to inequality.  “She got more chocolate milk than me!  It’s not fair!” is a familiar lament to many parents.

To understand Piketty’s thesis, let’s review some fundamental concepts of capital and income.
“Income is a flow…the quantity of goods produced and distributed in a given period…Capital is a stock…the total wealth owned at a given point in time.” (p. 50)  Piketty’s thesis is based on a ratio of the capital of a nation to the national income.  His definition of capital is so encompassing that my immediate suspicion was the accuracy of estimates of the total wealth of a nation, a flaw that Piketty acknowledges.

The main thesis of Piketty’s book is: as the capital wealth of a nation accumulates, capital’s share of annual national income increases.  For long periods, the rate of growth of accumulated capital is larger than the growth of the economic output/income of a nation.  The process is self-perpetuating, so that capital takes an ever increasing share of national income.  The higher the capital/ national income ratio the more inequality of wealth and income.  Piketty estimates that, in 2010, the capital/income ratio was 450% for the U.S., a bit above Germany and Canada’s ratios, and far below those of France and Great Britain. Piketty proposes a solution to this inexorable process:  a progressive tax on wealth.  Mount up your steeds, men!  The Marxists are coming!

Wealth = Capital

I’ll begin a review of some criticisms of Piketty’s methodology with a brief primer on some measures of capital.  Economists and accountants often analyze the flow generated by a store of capital, but it is capital that can be more easily counted. In finance, there is a metric called Working Capital Turnover Ratio which calculates the flow of sales from the working capital of a firm, and is used to assess both the value and liquidity of a firm.   Piketty rarely uses the term liquidity in his book, but I think it may be an unstated implication of his work.

ROIC, or Return On Invested Capital, is frequently used to measure how well a firm uses the capital and debt invested in the firm to generate a profit.  These measure net after tax profits as a percentage of the stock of capital and debt in a business.  Piketty also measures flow but it is sales, not profits that is his primary focus.  Profits are of course an intrinsic component of sales since they are that portion of sales income that is left over after all expenses.  The change in real GDP is the percent change in that flow.  Piketty’s concern is the accumulation of the residual of past economic flows, the stock of wealth that he claims earn a greater rate of return than the increase in the annual flow of economic activity.  Capital is a key component of economic growth but Piketty raises concerns that Capital can become too large relative to the flow of economic activity.
Hopefully, this brief background will enable the reader to appreciate the criticisms of Piketty’s thesis.  Charles Gave is a forty year veteran of investment management and cofounder of the international investment firm GaveKal.  Coming from the world of finance, Gave understands capital as meaning invested capital or working capital. Keep that in mind as you read Gave’s denunciation of Piketty’s thesis:

The extraordinary thing is that Piketty’s analysis is based on a massive logical error. His thesis runs as follows: if R is the rate of return on invested capital and if G is the growth rate of the economy, since R is greater than G, profits will grow faster than GDP, and the rich will get richer and the poor poorer. This is GIGO (garbage in, garbage out) at its most egregious. Piketty confuses the return on invested capital, or ROIC, with the growth rate of corporate profits, a mistake so basic it is scarcely believable. [Gave’s emphasis]

On page 46 of his book Piketty writes: “In this book, capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market.”  While this includes invested capital, it is not solely invested capital, for it includes residential real estate, government capital, land and natural resources, some of which are very difficult to value.

In short, Gave read “invested capital” when Piketty wrote just “capital.”  Gave read “corporate profits” when Piketty wrote “return on capital, including profits…” (p. 25).

The economist James Galbraith takes issue with Piketty’s all inclusive  definition of capital: “he conflates physical capital equipment with all forms of money-valued wealth, including land and housing, whether that wealth is in productive use or not.”

Piketty anticipated his critics: “some definitions of ‘capital’ hold that the term should apply only to those components of wealth directly employed in the production process…Capital in all its forms has always played a dual role, as both a store of value and a factor of production.  I therefore decided that it was simpler not to impose a rigid distinction between wealth and capital.” (p. 47) 

Let me rephrase the ” R is greater than G” formula that piqued Gave’s derision.  Picketty uses small ‘r’ and small ‘g’ so I will adhere to that: the annual income r derived from capital, as a percentage of that capital stock, will be more than the annual percentage change in real, or inflation adjusted, income/output g.  As Piketty writes: “the inequality implies that wealth accumulated in the past grows more rapidly than output and wages.”

An example:  In the teeny tiny kingdom of Miniscule, the total nonhuman capital stock at the beginning of this year is $100.  It  generated output/income of $10, or 10%. That is r, the return on capital.  This income from capital was part of Miniscule’s total output/income of $30, an increase of $2 over last year’s income/output of $28. To keep the math simple, let’s pretend there was no inflation or depreciation in that year.  The growth in total income/output is about 7%, or $2 / $28.  That is g, the growth rate of output/income.  To recap,  r = 10%, g = 7%.  “r can be significantly higher for long periods of time than the rate of growth of income and output, g.” (p. 571) Is this true?  That’s what Piketty claims to show.

Like Galbraith, I question Piketty’s inclusion of many different forms of wealth which are difficult to measure.  Piketty acknowledges the difficulties in the appendix to a paper he co-authored with Gabriel Zucman in December 2013, “Capital Is Back” and is included as one of the data sources for his book.  Piketty’s thorough explanation of the shortcomings of capital measurements led me to scratch my head and wonder why he decided to include them.

Piketty has no control over accounting conventions adopted by international bodies, yet I’m sure he and his team will be taken to task for the computation of the data that is the responsibility of the various nations included in the study.  A big shout out to Piketty and his collaborators for making the data available.

Back to our tiny kingdom of Miniscule. What if we missed some capital in our tally?  If the capital stock were closer to $120, not $100, then ‘r’, the return on capital would be 8%, not $10% and approximately the same rate of growth as the economy as a whole.

How accurate are the public, or government, capital computations?  In the U.S., the Comptroller General is responsible for auditing the financial statements of the country as part of the Federal Budget.  For ten years, from 1998 – 2008, Comptroller General David Walker refused to certify the financial statements,  listing a number of accounting problems: inadequate  monetary controls, poorly supported adjustments, outdated computer systems, unsupported cash disbursements, an inability to track internal or external fraud and a poorly documented inventory system.  These flawed financial statements are the basis for the capital computations in Piketty’s book.  In the appendix to Capital Is Back, Piketty explains the methodologies used by different nations.   Implicit in these standards is that public capital is understated in the national accounts.  This undervaluation decreases the capital/income ratio while increasing the r, or rate of return, of the capital stock.  Piketty notes the deviations in the various computations of land capital.  In the U.S. only the value of agricultural land is measured (Appendix p. 15).  A vast store of capital in 770 million acres of range land (Source) , more than half of which is private, is thus uncounted, further inflating the r, or return on capital.  70% of the land surface in the U.S. is devoted to livestock grazing (Source). A fundamental weakness in cross country valuations is the assumption that developed countries are more or less similar in most respects.  Key differences in the composition of economies are  factored out of the models.

Human Capital

Piketty separates capital into two categories: human and non-human, including only that non-human capital that can be traded on a market.  This exclusion of human capital may be an appropriate methodology in an analysis of an agrarian economy but is not so when applied to the developed economies of today which rely much more heavily on the human capital amassed through education. This point has been raised by economists Robert Solow and Robert Gordon and Piketty acknowledges this on page 586, note 35.

What are the implications of including educational capital?

Today a person may spend $40,000 to $150,000 to get a college education and expects an inflation adjusted return on that investment  that is greater than the 4% one could get investing in long term Treasury bills.  Developed economies depend greatly on the capital investment that they make in educating most of the young people in a society.  An educated mind is both a capital investment and a leaseable, if not outright tradeable, commodity.  While an employer can not buy an employee’s brain the way one can buy a machine, an employer does lease the knowledge, the output from that brain, by paying a compensation premium to that employee.  Income data from the Census Bureau, the IRS and the Bureau of Labor Statistics enables us to quantify the implied store of value of a college education.  If Piketty’s expansive definition of capital were to include educational capital, what would the resulting capital/income ratio look like?

The Bureau of Labor Statistics estimates an annual return of approximately $24,000 in 2013 for a bachelor’s degree. In 2011, the Census Bureau estimated the number of people in the U.S. with college degrees at 63 million, or 40% of the workforce.  If we guesstimate an average cost of $50K per degree, that is over $3 trillion of capital investment not counted, almost 20% of the $17 trillion in GDP (BEA News Release)  If we were to use the international standard (System of National Accounts) method of computing the present value of a college degree using an average 4.5% return (p. 572), then the capital value of a college degree over a working period of 35 years is over $400,000 per degree and the total is $26 trillion in uncounted capital, 150% of the nation’s GDP.   That inclusion would add $26 trillion to the $65 trillion capital base of the U.S. (p. 151)

If educational capital were included,  the capital/income ratio in the U.S. in 2010 would rise to 620%, far above the 450% calculated by Piketty’s team.  The higher this ratio, the greater the inequality in income and wealth.  By excluding educational capital, Piketty has understated his thesis.  Like Galbraith, I would exclude land and natural resources that are impossible to value.  Unlike Piketty and Galbraith, I would include educational capital, since it is a productive capital.

If we use the BLS figures and guesstimate that 63 million people with college degrees earn an additional $24K per year, then the share of income attributable to capital would increase by $1.5 trillion, from $4 trillion to $5.5 trillion.  As a share of national income, the income from capital would increase to 38% from 28% (p. 222)  The return on capital, r, would stay about the same at a bit over 6%, and more than twice the growth rate of national income in the U.S.


Piketty does not mention the liquidity of a national economy but implies it.  As the capital of a nation becomes more concentrated in a rather small group of families, individuals, and endowments, the trading of capital takes place within a small pool.  The onset of the 2008 financial crisis revealed that a small coterie of investment firms, sovereign funds and mega-banks traded financial instruments among each other.  Contagion in one class of asset – mortgage backed securities – poisoned the financial pool.  Like a gene pool, diversity is the key to survival.

As capital’s share of national income becomes greater, the buyers of capital as a percent of the population shrinks.  Fewer buyers = lack of liquidity.  A nation does have an abiding interest to reduce threats to the stability of its financial system.  The mobility of capital in the global world of finance may be hiding an underlying lack of liquidity.


To offset the increasing accumulation and concentration of wealth, Piketty recommends (p. 517) a progressive wealth tax, ranging from .1% to .5% for most Americans, those with assets of less than 1 million euros, $1.36 million dollars at today’s exchange rate.  Piketty is not done yet.  He notes that the progressive income tax taxes only the income from inherited wealth.  In some countries in Europe, that capital income is exempt from the income tax (p. 496).  Piketty advocates a return to the confiscatory income tax rates of the early half of the 20th century (p. 512 – 513), citing an optimal top tax rate at above 80%.  Bill Gates and Warren Buffett have both pledged to give away most of the billions they have amassed.  Why bother, guys?  If Piketty’s solutions were implemented, the politicians bickering on C-Span every night will take care of that for you guys.  In the U.S. the Constitution would have to be amended if the Federal Government were to enact a wealth tax because the 16th Amendment allows only a tax on incomes.  However, that does not prevent the States from enacting such a tax.

Will a wealth tax solve the problem of growing inequality?  In principle, in a mathematical utopia – the kind of world that economists assume in their models – governments would take corrective action by taxing wealth, thereby offsetting the growing accumulation  and concentration of capital and its increasing share of national income.  Unfortunately, we don’t live in that world.  In the real world, politicians – real people that you and I know – would say “Hey, this is a great excuse to grab more money from the private sector to solve problems!  Solving problems wins votes!  Votes get me re-elected!”  Politicians love problems, and solving them.  That’s why they create so many of them with their policies.

If people think income tax reporting and accounting is a nightmare, wait until they see the wealth tax forms.  Since the rich would pay a progressively higher tax, they would be highly motivated to develop ways of sheltering assets.  The hiding of wealth will become a national pastime.  Gold miners and dealers are shouting “Huzzah!”  Accountants and lawyers will cook up complicated investment vehicles that offer rapid depreciation of assets to reduce the amount of notional wealth one has to report.  Insurance companies will lobby for the purchase of annuities that are then excluded from one’s wealth.  The lobbyists are singing in the streets.  Strike up the band and join the tax parade!

In short, I heartily endorse this proposal just as soon as I sell my house, convert any assets to gold and find a private island in the Caribbean where I can bury my assets in the sand. I do heartily recommend this book, though. The book contains far more that caught my interest than I can touch on – public and private debt and capital, a survey of income taxes in developed countries, to name a few. The author has taken great pains to lay out historical trends in the data, acknowledging and anticipating many objections.  But, like the old country doctor, Dr. Piketty has but one solution. Got a problem?  Add another tax and call me in the morning. I also salute the translator, Arthur Goldhammer, for the flow and grammatical construction of his  English translation.

Next week I’ll look at another disturbing and related topic – education.  A recent analysis suggests that the financial advantage of a college education may be eroding.

Retail Sales, Autos, Sell in May

May 18, 2014

This week I’ll look at sentiment among small business owners, retail and auto sales, and revisit the “Sell in May” idea.

Small Business

Cue the trumpets, clouds part, sun rays stream down upon the green fields.  After almost seven years, sentiment among small business owners broke through the 95 level according to the monthly survey conducted by the National Federation of Independent Businesses (NFIB).  Despite the many positives in this latest survey, hiring plans remain muted.  This unfortunately confirms several other reports – the monthly employment report, JOLTS, disposable income, to mention a few – that indicate a befuddling lack of robust employment gains during this recovery.


Retail Sales

The monthly reports on employment and retail sales probably have the most impact on short term investor sentiment.  Retail sales were flat in April but have rebounded well after the particularly harsh winter.  With a longer term perspective, year over year retail gains are not robust but are still in the healthy zone of 2-1/2%.

Per capita inflation adjusted retail and food service sales are strong.  Rising home prices in the early 2000s drove an upsurge in retail sales, followed by an offsetting plunge as home prices dropped and the financial crisis of 2008 hit consumers hard.  The landslide of employment losses undercut retail sales.

Motor Vehicles sales are particularly strong and are now back to the pre-recession trend line.

However, that recession dip represents millions of vehicles not sold and contributes mightily to the record average age of more than 11 years for vehicles in the U.S. (AutoNews)  As the article noted, better engineering has lengthened the serviceable life of many autos.  There are 247 million registered passenger vehicles and light trucks, more than one for each of the 240 million people in this country over the age of 18 (Census Bureau) According to the industry research firm Motor Intelligence (spreadsheet), April’s year to date passenger car sales have declined 1.8% while sales of light pickups have surged 8.3%.  The particularly harsh winter months probably reduced traffic at car dealerships around the country, but the year-over-year comparison in April was only a 3.6% gain.  The lack of a spring bounce indicates that household income gains are meager.  The rise in sales of light pickups is largely due to a 10% increase in construction spending in the past year.

On an annualized basis, auto sales are approaching 16 million, a level last seen in November 2007 and far above the 10 million vehicle sales in 2009.

The numbers look rather strong but annual sales per capita are at the recession levels of the early 1990s.   Clearly, something has changed.

Better engineering has increased serviceable vehicle life.  Demographic changes may be having an effect. The population is aging and older people who drive less may decide to hang on to their vehicles longer.  A population shift toward urban centers reduces demand for autos.  There is a greater availability of public transportation.  In some areas of the country, an electric scooter or bicycle meets many transportation needs.
Long term shifts in an industry prompt employers to look for opportunities to adjust some part of their strategy or cost structure to meet those changes.  Three weeks ago, Toyota announced that they will move their headquarters from Torrance, CA, in the South Bay area of metro L.A., to Plano, TX.  As the largest employer in Torrance, the city’s economy will surely take a hit. (Daily Breeze)  Toyota joins a list of large employers leaving or reducing their presence in California (article)


Sell in May

The market has flatlined since early March.  Most of the companies in the S&P500 have reported earnings for the first quarter.  68% beat expectations but this has become a highly sophisticated game of managing expectations.  What is notable is that sales growth has slowed.  As I noted a few weeks earlier, labor productivity is poor.  Companies have done a remarkable job of cutting costs to boost profits but it is unclear how much more they can cut.  Last year’s 30% rise in the market has spurred the rise of mergers, or growing profits through economies of scale.

If the market were to decline 10 – 20% from here, some would point to the chart of the S&P500 and say they saw it all along.  “Classic case of a market top,” they would intone.  “Several failed attempts to break through resistance at the 1900 level indicated a major market correction.”  Oh, and they have a newsletter that you can subscribe to.

If the market goes up 10%, a different set of people will proclaim that they saw it all along.  “The market was forming a baseline of support,” they will sagely pronounce.  Each of these people also have a newsletter.

“Sell in May and go away” is an old quip of short term trading.  In 2011, I explored (here and here) the truths and myths behind this old saw. On a long term basis, one earns better returns by disciplined monthly, or quarterly, investing. Still, in a slight majority of the almost 20 years I reviewed, the Sell in May approach had some validity. Let’s look back at the last five years.  Typically an investor would sell the S&P500 and go into long Term Treasuries (TLT).  A more cautious investor might pick a less volatile intermediate bond fund.

In 2013, the SP500 went nowhere from May 1st to September 1st.  Great call by our intrepid investor who took some of her money out of the market and invested in Long Term Treasuries (TLT) in early May.  By early September, however, her investment would have depreciated 13%. Ooops!  Better to have stayed in stocks.

Likewise, in 2012, stocks went nowhere from early May to early September.  Unlike 2013, an investor buying long term Treasuries during that period had a 7% gain BUT if she had waited a week to sell in September, there was no gain.  The gains were a matter of luck.

2011 was the bing-bang year for the Sell in May crowd.  The stock market lost about 12% during the summer while long Treasuries gained 20%.

In 2010, stocks fell 7% during the summer while long Treasuries gained 10%.  During the summer of stocks gained almost 12% while Treasuries changed little.  In short, the strategy worked three summers out of the past five.

Now for a more fundamental approach – investing in companies that are more stable.  Horan Capital Advisors referred to a report from S&P Capital IQ that found that companies in the S&P500 with a low beta offset or reduced any summer market volatility.  Beta is a measure of a stock’s price volatility.  A value of 1 is the volatility of the entire index.  Betas less than 1 mean that a company’s stock price is less volatile than the index.  As volatility of the total market increases, investors tend to seek companies with a more reliable outlook and performance.  The screening criteria produced a mix of companies dominated by those in the consumer discretionary and health care sectors.  Worth a look for investors who buy individual stocks.

Net Worth, Labor Productivity And Political Pay

May 10th, 2014

This week I’ll look at some short term mixed signals in economic activity, and long term trends in labor productivity and household net worth.  In advance of the mid term election season in the U.S., I’ll look at several aspects of the money machine that drives elections.


For almost a year, I’ve been tracking a composite index, a Constant Weighted Purchasing Index, based on the Purchasing Manager’s Index produced by the Institute for Supply Management (ISM).  Based on key elements of ISM’s manufacturing and non-manufacturing monthly indexes, it is less erratic than the ISM indexes and gives fewer false signals of recession and recovery.  After reaching a low of 53.5 last month, the CWPI of manufacturing and service industries is on the rise again.  During this recovery this index of economic activity has shown a regular wave pattern.  If that continues, we should expect to see four to five months of rising activity before the next lull in late summer or early fall.  Any deviation from that pattern would be cause for concern if falling and optimism if rising.

The winter probably prolonged the recent downturn in the index.  In the manufacturing sector, new orders and employment are strong.  In the services sector, which comprises most of the economy, new orders are strong but employment growth has slowed to a tepid pace.

This week the Bureau of Labor Statistics released their estimate of Productivity growth for the first quarter.  One of the metrics is the per hour growth in productivity, which is key to the overall growth of the economy.  As seen in the chart below, the last time annual productivity growth was above 2% was in the 3rd quarter of 2010.  To show the historical trend, I took the 3 quarter moving average of the year over year growth rate.  We can see a remarkable shift downward in productivity.

Recovery after recessions are marked by a spike in growth above 3% simply because the comparison base during the recession is so weak. What the chart shows is the shift from steady growth of 3% to a much weaker growth pattern since the 2008 recession.  In testimony before the Senate Finance Committee, Fed chairwoman Janet Yellen stated that we may have to adjust our expectations to continuing slow growth.  The erosion of productivity growth has probably prompted concerns in the Fed Open Market Committee.


JOLTS – Job openings

Continuing on from labor productivity, let’s look at a trend in job openings.  With a month lag, the Bureau of Labor Statistics (BLS) reports on the number of job openings around the country. Preceding a recession, the number of job openings begins to decline.  Recovery is marked by an increase in openings. March’s report showed a slight increase in job openings, near the high of the recovery and closer to late 2005 levels.

When we look at the ratio of job openings to the unemployed, the picture is less encouraging.  The unemployed do not include discouraged job seekers.  If we included those, we the readers might get discouraged.  Almost five years after the official end of the recession, we are barely above the low point of the recession of the early 2000s.

When Fed chairwoman Janet Yellen speaks of weaknesses in the labor market that will require continued central bank support, this is one of the metrics that the Fed is no doubt keeping an eye on.


Household Net Worth

For many of us, our net worth includes family, friends, pets, interests and passions but the Federal Reserve doesn’t count these in its quarterly Flow of Funds report.  In early March, the Fed released its annual Flow of Funds report, which includes estimated net worth and debt levels of households, business and governments in the U.S.  Below is a chart of household, business and government debt levels from that report.

Rising stock prices and recovering home values have boosted the net worth of households.

As you can see in the chart below, the percent change in net worth has only significantly dipped below zero in the last two recessions.

The severity of this last dip was due to the falls in both the housing and stock markets.  The curious thing is why earlier stock market drops in the 1970s and early 1980s did not produce a significant percentage drop in household net worth. In those earlier periods, increases in home prices were about 4%, similar to the level of economic growth, and not enough to offset significant drops in the stock market.

So what has changed in the past two recessions?  The introduction of IRA accounts in the 1980s prompted individuals to put more of their savings in the stock market instead of bonds, CDs and savings accounts. Downturns in the stock market in the past two recessions affected household balance sheets to a greater degree.  Inflation was greater during the 1970s, 80s and 90s, raising the value of all assets.  China’s growing dominance in the international market was not a factor in the stock market drop in 2000 – 2003.  It was only admitted to the World Trade Organization in 2001.  In an odd coincidence, the past twenty years and particularly the past 15 years are marked by a growing and pervasive inflence of the internet in all aspects of our lives.

If we chart the change in a broad stock market index like the SP500 along with the percent change in net worth over the past seven years, we see a loose correlation using 40% of the change in the stock market.  Rises and falls in the stock market produce a material change in the paper net worth of households and can significantly lead to a change in “mood” among consumers, something the economist John Maynard Keynes called “animal spirits.”

Because the swelling demographic tide of the Boomer generation has a significant part of their retirement nest egg in the stock market, price movements in the markets have probably had a greater effect on total net worth in the past decade.


Party Favors

Now for everyone’s favorite dinner topic – political contributions.  Who contributed the most to the 2012 Presidential campaign?
a) the evil Koch Bros
b) gambling king Sheldon Adelson who almost single-handedly bankrolled the Newt Gingrich campaign
c) hedge fund billionaire George Soros, the  “Octopus” of liberal causes
d) the socialist commie labor unions.

Answer:  Whatever answer suits your political message or opinion.

On the one hand, campaign contributions can be what economists call a “rich” data set so that an analyst can tease out several conclusions or summaries, sometimes contradictory, from the data set.  On the other hand, some “social welfare” organizations do not have to reveal donor lists.  An investigator wishing to discover the myriad channels of political contributions must don their spelunking equipment before descending into the caverns of political finance.   In some cases private IRS data is released by accident, revealing dense networks linking moneyed individuals.

The Federal Election Commission (FEC) maintains a compilation of individual and group contributions to political campaigns.  OpenSecrets.org , a project of the Center for Responsive Politics, summarizes the data.  There we find that Sheldon and Miriam Adelson contributed $30 million through the Republican Restore Our Future PAC  and $20 million to the Republic PAC American Crossroads.

The Democratic PAC Priorities USA did not have a single donor as generous as the Adelsons.  George Soros ponied up $1 million along with many others, including Hollywood movie mogul Steven Spielberg, but the most generous donor contributed only $5 million, punk change when compared to the Adelson’s commitment to Republican causes and candidates.

In the 2012 Presidential race, the Obama campaign drew in so many more individual contributions than the Romney team that outside spending by political action groups was the only way to close the money gap.  Pony up they did, outspending the Obama campaign $419 million to $131 million. The NY Times summarized the outside spending with links to the various groups.

Despite their relatively low percentage of the work force, labor unions are major contributors to the Democratic effort.  A WSJ article in July 2012 revealed the extent of their political activity.  The bulk of union campaign spending is not reported to the FEC but is  reported to the Labor Dept. In total, unions disclosed that they spent over $200 million per year from 2005 – 2011.  54% of the spending reported to the Labor Dept was on state and local campaigns.

As a block then, are unions the largest contributors to Democratic campaigns?  Some “napkin math” would get us to a guesstimate of  $90 to $100 million a year on national campaigns, so surely they are at the top, aren’t they?  Not so fast, you conclusion jumper, you.

As transparent as the unions are, contributors to Republican causes are not.  Corporate political spending like that of the private U.S. Chamber of Commerce are not disclosed, as are many other corporate political and lobbying efforts.  These are some of the largest corporations in the world with vast resources and a strongly vested interest in policy decisions that will affect their bottom line.  Most of those contributions are hidden.

As this midterm election approaches rest assured, gentle reader, that you can confidently say – no matter what your political persuasion – that you have data to back up your opinion that the other side is buying the election.  You can hold your head high, confident in the soundness of your opinions.  And don’t we all sleep better at night, knowing that we are right?

Employment, Income and GDP

May 4th, 2014


Private payroll processor ADP estimated job gains of 220K in April and revised March’s estimate 10% higher, indicating an economy that is picking up some steam.  Of course, we have seen this, done that, as the saying goes.  Good job gains in the early months of 2012 and 2013 sparked hopes of a strong resurgence of economic growth followed by OK growth.

New unemployment claims this week were pushing 350K, a bit surprising.  The weekly numbers are a bit volatile and the 4 week average is still rather low at 320K.  In a period of resurgent growth, that four week average should continue to drift downward, not reverse direction. Given the strong corporate profit growth expectations in the second half of the year, there is a curious wariness in the market.  Conflicting data like this keeps buyers on the sidelines, waiting for some confirmation.  CALPERS, the California Employees Pension Fund with almost $200 billion in assets, expressed some difficulty finding value in U.S. equities and is looking abroad to invest new dollars.

On Friday, the Bureau of Labor Statistics reported job gains of 288K in April, including 15K government jobs.  Most sectors of the economy reported gains but there are several surprises in this report.  The unemployment rate dropped to 6.3% from 6.7% the previous month, but the decline owes much to a huge drop in labor force participation.  After poking through the 156 million mark recently, the labor force shrank more than 800,000 in April, more than wiping out the 500,000 increase in March.

To give recent history some context notice the steady rise in the labor force since the end of World War 2, followed by a flattening of growth in the past six years.

The core work force, those aged 25 – 54 years, finally broke through the 95 million level in January and rose incrementally in February and March.  It was a bit disappointing that employment in this age group dropped slightly this month.

To give this some perspective, look at the employment rate for this age group. Was the strong growth of employment in the core work force largely a Boomer phenomenon unlikely to repeat?  Perhaps this is why the Fed indicated this week that we may have to lower our expectations of growth in the future.

Discouraged job seekers and involuntary part timers saw little change in this latest report.  On the positive side, there was no increase.  On the negative side, these should decline in a growing economy.  There simply isn’t enough growth.  Was the strong pickup in jobs this past month a sign of a resurgent economy?  Was it simply a make up for growth hampered by the exceptional winter?  The answers to these and other questions will become clearer in the future.  My time machine is in the shop.



Go back with me now to those days of yesteryear – actually, it was last year.  Real GDP growth crossed the 4% line in mid year.  The crowd cheered.  Then the economic engine began to slow down. The initial estimate of fourth quarter growth a few months ago was 3.2%.  The second estimate for that period was revised down to 2.4%, far below a half century’s average of 3%.  This week the final estimate was nudged up a bit to 2.6%, but still below the long term average.

Earlier in the week, the Federal Reserve announced that it will continue its steady tapering of bond buying and that it may have to adjust long term policy to a slower growth model.  The harsh winter makes any analysis rather tentative so we can guess the Fed doesn’t want to get it wrong?


Manufacturing – ISM

ISM reported an upswing in manufacturing activity in April, approaching the level of strong growth.  The focus will be on the service sector which has been expanding at a modest clip.  I’ll update the CWPI when the ISM Service sector report comes out next week.


Income – Spending

Consumer income and spending showed respectable annual gains of 3.4% and 4.0%.  The BLS reported that earnings have increased 1.9% in the past twelve months. CPI annual growth is a bit over 1% so workers are keeping ahead of inflation, but not by much.   Auto sales remain very strong and the percentage of truck sales is rising toward 60%, a sign of growing confidence by those in the construction and service trades.  Construction spending rose in March .2% and is up over 8% year over year but the leveling off of the residential housing market has clearly had an effect on this sector in the past six months.


Conservative and Liberals

While this blog focuses mainly on investing and economics, public policy is becoming an ever increasing part of each family’s economic heatlh, both now and particularly in the future.
Some conservatives say that they endorse policies which strengthen the family yet are against rent control, minimum wage and family leave laws, all of which do support families.  How to explain this apparent contradiction?  A feature of philosophies, be they political, social or economic, is that they have a set of rules.  Some rules may be common to competing philosophies but what distinguishes a conceptual framework or viewpoint is the difference in the ordering of those rules.  The prolific author Isaac Asimov, biologist and science fiction writer, proposed a set of three rules programmed into each robot to safeguard humans.  A robot could not obey the second law if it conflicted with the first.  Robots are rigid; humans are not.  Yet we do construct some ordering of our rules.

A conservative, then, might have a rule that policies that protect the family are good.  But conservatives also have two higher priority rules which honor the sanctity of contract and private property: 1) that government should not interfere in voluntary private contracts, and 2) that private property is not to be taken from private individuals or companies without some compensation, either money or an exchange of a good or service. Through rent control policies, governments interfere in a private contract between landlord and tenant and essentially take money from a landlord and give it to a tenant, a violation of both rules 1 and 2.  Minimum wage and mandatory family leave laws enable a government to interfere in a private contract between employer and employee and essentially transfer money from one to the other, another violation of both rules.

In my state, Colorado, there is no rent control.  Instead, landlords receive a prevailing market price and low income tenants receive housing subsidies and energy assistance.  Under rent control, money is taken from a specific subset of the population, landlords, and given to tenants.  Under housing subsidies, money is taken from general tax revenues of one sort or another and given to tenants.  Of the two systems, housing subsidies seems the fairer but many conservatives object to either policy because the government takes from individuals or companies without any exchange, a violation of rule #2.  All policies like housing subsidies which involve transfers of income from one person to another, are mandatory charity, and violate rule #2.

Liberals want to support families as well but they have a different set of rules that prioritizes the sanctity of the social contract: 1) individuals living in a society have an obligation to the well being of other members of that society, and 2) those with greater means have a greater obligation to the well being of the society.  A government which is representative of the individuals of that society has the responsibility to facilitate the movement of wealth and income among those individuals in order to achieve a more equitable balance of happiness within the society.  Flat tax policies espoused by more conservative individuals violate rule #2.  Libertarian proposals for a much smaller regulatory role for government violate rule #1.

For liberals, both of the above rules are subservient to the prime rule: humans have a greater priority than things.  When the preservation of property rights violates the prime rule, property rights are diminished in preference to the preservation of human well-being.  On the other hand, conservatives view property rights as an integral aspect of being human; to diminish property rights is to diminish an individual’s humanity.

In the centuries old dynamic tension between the individual and the group, the liberal view is more tribal, focusing on the well being of the group.  Liberals sometimes ridicule some tax policies espoused by conservatives as “trickle down economics.”  In a touch of irony, it is liberals who truly believe in a trickle down approach in social and economic policies.  The liberal philosophy seeks to protect society from the natural and sometimes reckless self-interest of the individuals within that society. The conservative viewpoint is concerned more with the protection of the individual from the group, believing that the group will achieve a greater degree of well-being if the individuals are secure in their contracts and property. Conservatives then favor what could be called a bottom up approach to organizing society.

Conservatives honor the social contract but give it a lower priority than private contracts.  Liberals honor private contracts but not if they conflict with the social contract. Most people probably fall somewhere on the scale between the two ends of these philosophies and arguments about which approach is “right” will never resolve the fundamental discord between these two philosophies.

In the coming years, we are going to have to learn to negotiate between these two philosophies or public policy will have little direction or effectiveness.  Negotiating between the two will require an understanding of the ordering of priorities of each ideological camp.

Before the 1970s political candidates were picked by the party bosses in each state, who picked those candidates they thought would appeal to the most party voters in the district.   The present system of promoting political candidates by a primary system within each state has favored candidates who are fervent advocates of a strictly conservative or liberal philosophy, chosen by a small group of equally fervent voters in each state.  The middle has mostly deserted each party, leading to a growing polarization.  Survey after survey reveals that the views of most voters are not as polarized as the candidates who are elected to represent them. A graph from the Brookings Institution shows the increasing polarity of the Congress, while repeated surveys indicate that voters are rather evenly divided.