How Much Capital Is Enough?

[Econoline]

A provocative question. Anyone want to venture an answer? For most (all?) other things human, there ARE such things as "too little", "enough", and "too much". Is capital (wealth) different, and if so, why?

How Much Capital Is Enough?
Sunday November 3, 2013 11:37 am

The US calls itself the champion of capitalism. For most of our history, the overarching goal of public policy has been to encourage formation of capital through government interventions*. That effort has been wildly successful. But it has come at great cost to the lives of millions of workers, and structural distortions of the economy and of society, none of which we want to face. In fact we don’t really want to examine directly the idea that government should be central to the project of increasing the amount of capital held by our citizens.

The Great Crash tore away the curtains and brought into plain view the results of this policy. The rich have the power to control the government for their personal benefit, preserving their wealth and power while insisting that the working people pay every last cent of their debt. They have arranged the system so that they not only hang on to their wealth, but increase it dramatically, just as one would expect in an oligarchy. As absurd as it sounds, they have persuaded people that it would be a bad idea to raise their taxes, and a better idea to cut food stamps, unemployment insurance, Social Security, Medicaid and Medicare. We all have to share in the sacrifice, as our President puts it, without bothering to explain why I should sacrifice for the benefit of the filthy rich.

The only solution from liberal economists like Paul Krugman and Jared Bernstein is to increase inflation.
Here’s Krugman:

Interest, classically (and I do mean classically, as in Mr. Keynes …), is the reward for waiting: there’s supposedly a social function to interest because it rewards people for saving rather than spending. But right now we’re awash in excess savings with nowhere to go, and the marginal social value of a dollar of savings is negative. So real interest rates should be negative too, if they’re supposed to reflect social payoffs.

Here’s Bernstein:

On net, faster inflation would help shake the macro-economy out of its slog so I’m for it. But it’s not costless. It hurts those on fixed incomes, hurts creditors (the flipside of helping debtors), and risks unmooring well-anchored inflationary expectations (though these days most of us are more worried about deflation than spiraling inflation).

And, all else equal, it would also reduce real wages. Most recently, the hourly pay of mid-wage workers has been growing at around 2% per year with inflation running at about 1.5%, so slight real wage gains. Take inflation up a point and unless nominal wages accelerate as well, we’re now talking about real wage losses.

Under the policy of Bernstein and Krugman, wages will drop, so business will make more money to make up for inflation. Those who are already rich will not be affected, but there is more misery for retirees, small savers, and workers, who have already been victimized by the demands of the rich. Bernstein and Krugman join the Obama Administration in their willingness to foam the runway with the lives of the poor so that capital can be protected. Their hope is that someday things will change. Why this won’t be a permanent change for the worse is not clear to me.

The first step towards dealing with this problem is to ask just how much capital there is. Here are a couple of numbers.
First, from Forbes,

The 400 wealthiest Americans are worth just over $2 trillion, roughly equivalent to the GDP of Russia. That is a gain of $300 billion from a year ago, and more than double a decade ago.

There are another 61 billionaires who didn’t make the Forbes list. Their net worth is between $1-1.3 billion, so we could estimate that the top 500 richest Americans have a net worth of well over $2.1 trillion. That doesn’t include any outright criminals, who also have huge wealth, given that the drug business runs somewhere around $400 billion annually, and cheats on Wall Street and other financial cheats hide money all over the known world.

Here’s a second figure, from the Financial Accounts of the United States, which is the new name for the Fed Flow of Funds Report. The total of financial assets in this country is $61.9 trillion. See p. 112, line 9. This sector includes domestic hedge funds, private equity funds, and personal trusts. The table on page 119 gives a breakout of major categories of financial assets.

So here’s my question: isn’t that enough? How much more capital do we need when the amount we have is so great that small savers and retirees are sacrificial lambs for the preservation of the assets of the Forbes 461 and a few thousands of centi-millionaires, drug barons and financial cheats?

Why do we think we have to coddle capital, at the expense of our own lives? When did we turn into a nation of masochists? It’s high time we stopped this stupid policy and aimed at taking care of ourselves.
=========================

* We follow the same policy internationally. See The Making of Global Capitalism.

BTW, I think he meant "hecto-millionaires" not "centi-millionaires" but I doubt whether anyone else actually cares...



(Edited to fix the links.)

[rubato]

The response to the 2001 recession, which was created by insufficient demand, was to increase capital formation when we already had a glut of capital. The result was 8 years of stagnation where the median income went down for the first time since records have been kept. Followed by the worst economic collapse in 80 years which was driven by excess capital with no legitimate place to go. The mortgage- backed securities which were the cause of the bubble and the caused the crash were created to find a place to put money when no one was investing in new factories or in hiring new employees.

The reference to Krugman is just wrong, btw.


Yrs,
Rubato

[rubato]

So the period from 2001 to the present is an example of what happens when you have too much investment capital and you change policies to create even more. The middle class are far worse off, the economy is tanked, and the costs of government are shifted onto the poor.

Now it is one thing to commit a total blunder like that but it is another and far worse thing not to have learned from it; and I have not heard even 1 Republican admit to having learned anything from their horrifically failed experiment in mis-government.



yrs,
rubato

[dgs49]

Interestingly, the essay starts with a ridiculous falsehood, to wit, "... For most of our history, the overarching goal of public policy has been to encourage formation of capital through government interventions." It not only reflects ignorance about economics but also the contemporary liberal conceit that "all of history" means, "everything that I personally can remember."

The essay also illustrates the bizarre Progressive concept of "paying for" something. Consider, "The rich have the power to control the government for their personal benefit, preserving their wealth and power while insisting that the working people pay every last cent of their debt." Consider that sentence in light of the fact that about half of the U.S. adult population PAYS NO FEDERAL INCOME TAXES. (They do pay "payroll" taxes, but those taxes - at least in theory - go to funding SS and Medicare, which have nothing to do with debt service on the national debt). It would be an interesting but pointless exercise in sophistry to ascertain how someone who pays no taxes is "paying every last cent of [someone else's] debt."

Liberals cannot seem to get their warped little minds around the fact that the "working class" has been harmed, not by the greed of capitalists, but by global competition. That is to say, when it comes to the manufacturing economy that has historically provided the best jobs for people with few marketable skills, "we" have a difficult time competing with similarly skilled workers in the developing world. Hence, millions of manufacturing jobs have been "exported" to Mexico, Korea, China, India, and so on.

And this creates an unfortunate conundrum: The natural, impulsive response to this development would be to erect trade barriers or tarriffs that would make goods made in the USA more economically "competitive" at home. But our trading partners would retaliate (history records that this is inevitable and immediate), thus making our goods uncompetitive overseas, and increasing the price of imported goods that we cannot produce. The overall effect being the loss of millions of American jobs and a deep recession or depression. (Smoot-Hawley?)

So we can't significantly fuck with the balance of import-export, and we have to live with the international competition in manufacturing, and make jobs elsewhere in our economy. We were partly successful in this before the Great Recession by building houses with reckless abandon, but that petered out eventually.

But what drives Liberals crazy is that "capitalists" are able to profit even when the middle class is suffering, because corporations can be quite profitable even when they are forced to close their domestic manufacturing plants and make things overseas. Indeed, they can be more profitable outsourcing than they can be when they make things themselves. And to the untrained eye, they are "profiting from the misery of the (so-called) working man."

In the liberal fantasy world, it is possible to take the "excess profits" of the capitalists, and somehow funnel it to the non and semi-skilled American population, and raise their standard of living. Maybe by enacting "living wage" laws. Maybe by embarking on a massive campaign of public works projects. Maybe by hiring yet another army of government employees to administer one thing or another. I don't know the solution (the problem of falling standard of living for the unskilled working class is undeniable), and I don't think anybody else does either. But I'm pretty sure that siezing more and more money from the successful to pay for an ever-expanding cornucopia of government hand-outs is probably not a viable solution.

[Econoline]

Which completely ignores the question: when it comes to capital, is there such a thing as "enough"? (The question that comes after that--which you seem to have put first--is, "If enough is enough, who decides, and how?") You do seem to believe, Dave, that when it comes to taxes, there is such a thing as "enough"--as do I, BTW; what the two of us disagree on is who decides, and (especially) how.

Want to give the question at the top of the thread a try?

[rubato]

Too much of anything, or having anything too cheap, is often harmful.

In the early 1990s we had excess demand (driven to a great degree by the computer hardware business) so that cutting Federal spending (which Clinton did) freed up capital in the private sector and was partially responsible for the boom. People wanted goods but the factories couldn't produce enough of them so that building factories ("Fabs", in the computer chip world), buying tools to fill them with from Applied Materials, Novellus &c. and hiring and training very highly paid people to operate and maintain them needed capital. And to borrow the capital had to be avail. at reasonable interest. So the Federal Govt. used less of the pile which left more for private investment which caused a boom (with every 1/5th of the economy making more money).

What happened between year 2000 and year 2001 is that we had the largest annual increase in computer chip sales ever followed by ... market saturation. Demand had been met and exceeded with a bang. (People who say "dot-com" boom have no idea what really happened. The "dot-com" companies, purely online businesses, were a TINY fraction of the whole at the time.) When the market is saturated no one wants to pay $ 2Billion to build a factory that can't run at more than a fraction of capacity and so no one needs capital.

What also happened was that nearly all of the contestants in the race to be the best CPU manufacturer in the world realized what the stakes had become (one new Fab cost ca 2B US dollahs ) and dropped out; HP, National (remember Cyrix?), TI, IBM*,&c all ran up the white flag and killed their CPU development programs. Intel and AMD (struggling) were left with, possibly, NEC. And the foundries took over; TSMC, UMC, Global Foundries. Samsung is still somewhere in there. The foundries were better positioned to cope with fluctuations in demand and could better manage risk and became the dominant players, along with Intel.

So cutting taxes on the rich, who invest our excess income rather than spend it, just adds to a glut of money with no worthwhile purpose to put it to. Stupid. A recession brought on by insufficient demand is better addressed by giving money to those in the bottom 80% of incomes who will SPEND their additional income on goods and services and not borrowing to give to the rich.

yrs,
rubato

* An existing factory which is paid off and makes useful chips can still be run at a profit so that many are running old processes for lower-level chips and still making something. But the race for the newest and best CPU has passed them by. IBM develops processes which it sells to others. To make 1 chip at teh cutting edge requires a large number of steps each of which can be very technically challenging to master when making a profit requires as close to perfection in yield as you can get so it is often advantageous to buy a process which is already proven from IBM rather than do it on your own. We're currently sampling materials to IBM for the 10nm and beyond generations.