Clarifying ‘Secular Stagnation’ and the Great Recession

by Andrew Kliman

In 'Clarifying the Crisis,' published earlier this year in Jacobin magazine, the Canadian political economist Sam Gindin reasserted his view that the global economic crisis that erupted in 2008 'needs to be understood primarily as a financial crisis.' To be sure, the U.S. financial crisis was the event that triggered the Great Recession, and Gindin is certainly correct that the recession 'turned into such a generalized and profound economic catastrophe' largely because of the size of the financial sector, global financial integration, and the securitization of mortgage loans. Yet has one really 'clarified the crisis' by saying only this and then quickly moving on, as he does? 

In the U.S., the TARP bailout, 'stress tests' of financial institutions, and other actions succeeded in quelling the financial crisis by mid-2009 at latest. Yet it is now five years later, and the U.S. economy remains mired in a state of near-stagnation with no clear end in sight. Austerity policies are certainly not the culprit; U.S. fiscal and monetary policies have been wildly expansionary. The public debt has risen by 88% since the start of 2008; the extra $8.1 trillion of borrowing, which has been used for increased government spending and lower taxes, amounts to about $4400 per person per year for six straight years. The Federal Reserve has kept the federal funds rate (i.e. the overnight interbank interest rate) near zero for five full years and has bought $3.6 trillion worth of securities since Lehman Brothers collapsed in order to lower long-term rates. Nonetheless, near-stagnation persists–­long after the financial crisis ended.

Can the thesis that the crisis was primarily financial explain this? I don’t think it can, and I’m not alone. Paul Krugman and Robin Wells put the point this way a few years ago: 'If the fundamental problem lay with a crisis of confidence in the banking system, why hasn't a restoration of banking confidence brought a return to strong economic growth? The likely answer is that banks were only part of the problem.' 

More recently, former U.S. Treasury Secretary Lawrence Summers, speaking at an International Monetary Fund (IMF) conference, made the point by comparing the financial crisis to a power failure that causes a country to lose 80% of its electricity. Production would plummet, but once power was restored, production would quickly bounce back. Indeed, since the country would need to replenish the inventories it depleted during the power outage, production would increase at a faster-than-normal rate. 'So you'd actually expect that once things normalized, you'd get more GDP than you otherwise would have had, not that four years later, you'd still be having substantially less than you had before. So, there's something odd… if [financial] panic was our whole problem, to have continued slow growth.' 

Now, if it's odd to say that persistent economic malaise is wholly a financial problem, it's only slightly less odd to say that it’s primarily a financial problem. Gindin fails to grapple with this issue, and he therefore also fails to understand the 'secular stagnation' argument that has been a hot topic among mainstream economists since Summers’s speech. Responding to Michal Rozworski, who linked their worries about the possibility of secular (i.e. long-term) stagnation to his own view that 'structural changes and imbalances in the economy' date back to the 1970s, Gindin writes, 'It is one thing to project a coming long period of stagnation, and another to identify this crisis as a continuation of something that has been going on for more than three decades' (first emphasis added). This suggests that the economists who are discussing secular stagnation are referring only to the post-crisis economy. Actually, they are arguing that the fundamental underlying causes of both the Great Recession and the continuing malaise are non-financial problems that preceded the financial crisis. 

As Martin Wolf of the Financial Times wrote recently, 'Merely restoring a degree of health to the financial system or reducing the overhang of excessive pre-crisis debt is… unlikely to deliver a full recovery. The reason is that the crisis followed financial excesses, which themselves masked or, as I have argued, were even a response to pre-existing structural weaknesses' (emphasis added). In his IMF talk, Summers similarly suggested that 'sometime in the middle of the last decade'––that is, before the financial crisis––it had become impossible to achieve full employment without ridiculously-easy-money policies that push real short-term interest rates down into the –2% to –3% range. Endorsing this suggestion, Krugman opined that, 'in the absence of bubbles[,] the economy has a negative natural rate of interest. And this hasn't just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s.' 

Thus, concerns over the possibility of secular stagnation are based on two factors. One is the failure of the economy to rebound robustly from the Great Recession, even in the U.S., where economic policy has been exceptionally stimulative and the financial crisis is becoming a distant memory. But the other factor is the apparent fact that stagnation had become the new 'default' state of the economy sometime before the financial crisis. Since effects come before causes only in science fiction, this suggests that the financial crisis was not the primary underlying cause of the recession or of our current predicament, but merely a trigger and a 'propagation mechanism.' 

Gindin denies that there were important underlying causes other than financial ones. There were, he says, no 'remarkable problems in what is often called the "real" economy.' Although economic growth since the economic crisis of the mid-1970s was slower than in the 'golden age of capitalism' that preceded it, the 'golden age' was 'was rather short-lived and exceptional…. It hardly qualifies as the standard for assessing economic performance.' 

However, growth-rate figures aren't very good measures of underlying economic conditions when government policymakers again and again prop up growth by papering over problems––artificially stimulating the economy with government borrowing, easy money, and policies that encourage excessive private-sector debt creation. I don't think Krugman was exaggerating when he characterized former Fed chairman Alan Greenspan’s legacy as 'one of replacing each bubble with another bubble.' A better measure of the true state of the economy is the fact that, even with all the bubbles and artificial credit expansion, growth slowed down substantially. What would have happened under a genuinely laissez-faire regime? 

Moreover, Martin Wolf’s point that the 'financial excesses' that preceded the crisis were themselves 'a response to pre-existing structural weaknesses' is especially important as a response to Gindin’s failure to see 'remarkable problems in what is often called the "real" economy.' As I have discussed elsewhere,[1] the U.S. economy failed to rebound strongly after the dot-com bubble burst in 2000. Ben Bernanke, then a member of the Board of Governors of the Federal Reserve, warned at the time that the U.S. might experience deflation and a Japanese-style 'lost decade' of stagnation, and the Federal Reserve responded with an exceptionally expansionary monetary policy. After adjustment for inflation, the federal funds rate was negative from the start of 2002 through mid-2005. This policy, and the loosening of credit standards, served to prolong and further inflate bubbles in the U.S. housing market and other asset markets. In principle, the Fed could have moved to deflate the bubbles several years before the financial crisis erupted but, as Bernanke noted in testimony before the Financial Crisis Inquiry Commission, this 'was not a practical policy option.' The Fed 'likely would have had to increase interest rates quite sharply, at a time when the recovery was viewed as "jobless" and deflation was perceived as a threat.' (Apart from a passing reference to 'the acquiescence of the American state' in the build-up of debt, all this is absent from Gindin’s account of the prelude to the financial crisis.) 

To be sure, one will not find 'remarkable problems' in the 'real' economy during the middle of the last decade if one looks only at conventional economic indicators while ignoring the fact that exceptionally expansionary monetary policy and loose credit standards were artificially stimulating production, employment, demand, and so on. But once one takes this fact into account, the mere lack of remarkable problems is what is so remarkable. We would normally expect the economy to be booming in such a situation. Yet, as Summers pointed out, there was no such boom. 'Capacity utilization wasn't under any great pressure. Unemployment wasn't at any remarkably low level. Inflation was entirely quiescent. So, somehow, even a great bubble wasn't enough to produce any excess in aggregate demand.' Again, this suggests that stagnation had become the new default state of the economy even before the financial crisis erupted. 

In his effort to portray the crisis simply as a financial matter, Gindin comes close to denying that anything at all was amiss in the 'real' economy prior to the crisis, at least from capital’s perspective.

The effective crisis since the early 1980s has not been that of capitalism’s weakness, but of the weakness of labour and the Left. While capital has prospered in terms of profits, accumulation and new opportunities, the devastation in workers’ lives and the explosion in inequality occurred with distressingly little resistance. 

According to Gindin, workers’ incomes stagnated as their wages declined or grew slowly. This not only boosted profits but also contributed substantially to the growth of the financial sector as workers became 'dependent on credit' in order to keep their standard of living from falling. In particular, they 'came to depend heavily on their homes as collateral for borrowings.'   

However, although Gindin cites a lot of data elsewhere in his article, almost no hard evidence accompanies this account of capitalism under 'neoliberalism,' and the hard evidence fails to support much of it. Since something like this account has become conventional wisdom among much of the Left, it is important to review the facts in detail. 

Let me begin with workers’ supposed dependence on credit. Figure 1 depicts trends in household borrowing (there are no data specifically for 'workers'). It shows, first, that the share of personal consumption spending funded by consumer credit––i.e. all household borrowing except for home mortgages––did not rise over time. In other words, consumption did not increasingly come to depend on consumer credit. Second, while there was a huge rise in mortgage borrowing as a percentage of consumption spending, that rise was limited to the period of the housing bubble, which began in the late 1990s.[2] It was not characteristic of the 'neoliberal period' as such. Nor does the rise in mortgage borrowing seem to have been a disproportionately working-class affair. Almost 20% of all new mortgage loans made between 2004 and 2006 were subprime, but almost all the rise in mortgage borrowing occurred before then, when the subprime share of new mortgage loans was 8% or less.[3] Finally, there is the phenomenon that Gindin highlights, that of people borrowing against their equity in their homes in order to sustain their consumption. Information on such borrowing is not regularly collected, but the data plotted in Figure 1, which come from a study of the 1991–2005 period by Alan Greenspan and James Kennedy,[4] indicate that home equity extractions to fund consumption and repay non-mortgage debt were closely tied to the housing bubble as well. They likewise did not begin to rise substantially until 1999.  

Figure 1. Household Borrowing, U.S., 1972–2007 (percentages of personal consumption expenditures)

Yet if workers did not come to depend more and more on debt to sustain their consumption (except, perhaps, during the housing bubble), why didn't consumption spending plummet as their incomes and 'wages' stagnated? The answer is that, while some parts of the working class suffered from 'wage repression,' the myth that this was true of the class as a whole is an artifact of peculiar definitions of 'income' and 'wages.' A remarkable recent study of U.S. household income by Armour, Burkhauser, and Larrimore looked at after-tax income, including transfer payments such as Social Security benefits and noncash income such as medical-insurance benefits, and adjusted for changes in household size. The authors found that the inflation-adjusted income of the middle 20% of households rose by 34% between 1979 and 2007, while incomes of the lowest and next-to-lowest 20% groups rose by 32% and 31%, respectively. And during the 1989–2007 sub-period, income inequality actually declined: these groups’ income growth outpaced that of higher-income households.  

A 2011 Congressional Budget Office (CBO) study found that median (middle) hourly wages of men, adjusted for inflation, rose by only 4% between 1979 and 2007, but those of women, who make up half of the U.S. workforce, rose by 34%.[5] Census Bureau data for men and women combined indicate that median earnings of workers employed full-time, year-round, rose by 22%.[6] These wage and earnings figures exclude pension and medical-insurance benefits that workers receive from their employers, as well as employers’ tax contributions, on their employees’ behalf, for Social Security, Medicare, and similar programs. Such 'nonwage' compensation rose more rapidly than wages during this period, so the CBO and Census figures undoubtedly understate growth of total compensation. (If we assume that median workers’ total compensation rose in relation to their 'wages' at the average rate,[7] median compensation growth was 9% for males, 40% for females, and 27% for full-time, year-round workers.)  

In light of these data on wage and compensation growth, what would otherwise be an unbelievable fact is much less surprising––the fact that profit did not increase at the expense of employee compensation. As Figure 2 shows, compensation did not fall as a share of net output between 1970 and the Great Recession, either in the U.S. corporate sector or in the business sector as a whole.[8] And this implies that the remaining share––the profit share––did not rise. Beginning in 1980, there was indeed a sharp rise in property owners’ incomes (i.e. interest, dividends, rental income, and proprietors’ income) as a share of net output, as Figure 3 shows. Yet it rose at the expense of the remaining portion of profit, the portion not paid out in dividends and interest but retained by corporations themselves. It did not rise at the expense of working-class income (i.e. compensation of employees plus the government social benefits (minus the social insurance taxes that pay for some of them) that overwhelmingly accrue to poor and low-income people).[9] Working-class income in fact trended upward. This suggests that working people as a whole, including the poor, were able to buy a bigger share of the output than before––using only their income, not additional debt. 

Figure 2. Compensation Share of Net Value Added, Corporate and Total Business Sectors, U.S., 1970–2007


 Figure 3. Percentages of Net Domestic Product, U.S., 1947–2007

In light of the failure of the profit share to rise under 'neoliberalism,' it should not be surprising that U.S. corporations’ rate of profit (i.e. rate of return on investment in fixed assets) also failed to rebound. Figure 4 presents three measures of their rate of profit, based on different definitions of profit. Net operating surplus is the most inclusive; after-tax profit is the least inclusive. All three rates of profit continued to decline.[10] These figures pertain only to domestic profit and investment, but U.S. multinationals’ rate of return on their foreign direct investment also trended downward between 1983 (the first year for which data are available) and the Great Recession. Their profits from abroad increased very rapidly, but their investment abroad increased even more rapidly. 

Figure 4. Rates of Profit and Capital Accumulation, U.S. Corporations, 1980–2007

Corporations’ rate of accumulation––i.e. net investment in fixed assets as a percentage of accumulated investment––fell even more sharply, as Figure 4 also shows.[11] This long-term 'investment dearth,' as Martin Wolf has called it, is the key issue with which the current discussion of secular stagnation is grappling. When economists such as Summers and Krugman hypothesize that the 'natural' real short-term interest rate had become negative well before the financial crisis, what they mean is that the expected profitability of investment in production had fallen to such a low level that something approaching full employment was no longer sustainable given normal interest rates. Businesses would no longer invest at the pace needed to sustain full employment unless the interest they paid to fund investment projects was exceptionally low––low enough to offset the meagre returns they expected from such investments. 

There are no data on expected profitability, but it is clear from Figure 4 that there was a close relationship between movements in the rate of profit and movements in the rate of capital accumulation. This close relationship suggests that declining realized profitability lies behind the investment dearth. We need only assume that businesses’ profit expectations were more or less correct, on average, to conclude that declining expected profitability lies behind it as well. 

I agree with Gindin that '[t]he world of the late 19th century or the 1930s is radically different than the world of today' and that 'each crisis demands not an already-discovered general law but an analysis sensitive to its particularities.' The problem is that his broad-brush, holistic account of the 'neoliberal' period is not sensitive enough to the details of the data. He is certainly right to warn against any effort to 'squeeze… events into the straightjacket of a trans-historical causality (such as the falling rate of profit or production as the sole site of crisis-creation),' but we should also be wary of efforts to dismiss the importance of factors such as the falling rate of profit and capitalist production in advance of careful consideration of the evidence––not to mention efforts to dismiss the evidence itself, which are unfortunately all too common. And we should be sensitive to the fact that the trade union bureaucracy that is the source of much of the Left's economic information is predisposed to claiming that corporations are always awash in profits, and that the real problem is always the unequal distribution of the fruits of capitalism's success—even in the face of the system's descent into a crisis that now seems intractable. 

So, what should be done to confront the prospect of secular stagnation? I wholeheartedly agree with Gindin when he writes that '[if] we don't assert that we refuse to take it anymore, the other side will simply keep demanding more from us,' and when he suggests that working people need to assert their 'independence from capital' and resist 'integration … into the neoliberal project.' Yet I would add that we also need to support and encourage working people's efforts to assert their independence from the trade-union bureaucracy and other pro-capitalist opponents of neoliberalism, whose aims and interests are quite different from theirs. An independent path is also needed because, if there is a pro-capitalist solution to the malaise other than letting it run its course, no one yet knows what it is. The system's leading economists are just now waking up to the possibility that our present predicament is not a mere after-effect of a financial crisis. Austerity policies haven't extricated the economy from the slump but, as the U.S. case shows, neither have wildly expansionary fiscal and monetary policies. 

Class struggles, taking a variety of traditional and new forms, have accelerated throughout the world during the crisis, and a late 2011 Pew Research Center poll of U.S. residents found that a large majority of black people, a majority of people under 30, and almost half of low-income people and Hispanics had a positive perception of socialism. The problem is that these struggles have been derailed and confined by attempts to integrate them into the anti-neoliberal-but-pro-capitalist project, and that most of the Left, including the 'socialist' Left, has been backing these attempts instead of listening to the renewed aspiration for a socialist future. 

I think a socialist way out of the crisis is a real historical possibility now, but only if the ferment from below is met halfway with a sober, rationalist politics that says, 'the solutions that have been tried to fix capitalism aren't working. We have to find a way out of this system, but we don't really know yet what must be changed in order to transcend it. So the only solution is you. It's up to you to take control of the process of figuring this out. Once you know what you’re doing, you’ll be able to do more than express your anger and appeal to leaders to help you. You can take charge.'

Andrew Kliman is the author of The Failure of Capitalist Production: Underlying Causes of the Great Recession (Pluto Press, 2011) and Reclaiming Marx’s 'Capital': A Refutation of the Myth of Inconsistency (Lexington Books, 2007). A professor of economics at Pace University (New York), he works politically with the Marxist-Humanist Initiative.

[1] Andrew Kliman, The Failure of Capitalist Production: Underlying Causes of the Great Recession (London: Pluto Press, 2011), pp. 38–47.

[2] The consumer-credit and home-mortgage borrowing figures are reported in lines 44 and 43, respectively, of Table F.100 of the Federal Reserve’s Financial Accounts of the United States. Personal consumption expenditures are reported in line 2 of National Income and Product Accounts (NIPA) Table 1.1.5.

[3] See Table 1 of the Federal Reserve Bank of San Francisco’s 2007 annual report, The Subprime Mortgage Market: National and Twelfth District Developments.

[4] The equity-extraction estimates are reported in line 109 of Table 2 of their paper.

[5] See figures for the 50th percentile in Table A-1.

[6] The earnings data are reported in the Census Bureau’s Historical Income Tables P-45 and P-45A. To make them as comparable as possible to the figures reported in the CBO study, which used the personal consumption expenditures price index (reported in NIPA Table 1.1.4, line 2) to adjust for inflation, I used it as well. 

[7] Total compensation and wage data are reported in NIPA Table 2.1, lines 2 and 3, respectively.

[8] Corporations’ net value added and compensation data are reported in NIPA Table 1.14, lines 3 and 4, respectively. Business-sector net value added is reported in NIPA Table 1.9.5, line 2, while total business-sector compensation is the sum of lines 3 and 11 of NIPA Table 1.13. I have used net value added and net domestic product figures here and below, rather than the corresponding gross figures, because the latter include depreciation, which is a cost, not a component of profit or compensation income.

[9] Interest, dividend, rental, and proprietors’ income are reported in NIPA Table 2.1, lines 14, 15, 12, and 9, respectively. Compensation of employees is reported in line 2, government social benefits in line 17, and social insurance taxes in line 25 of the same table. Net Domestic Product is reported in line 29 of NIPA Table 1.7.5.

[10] My measure of net operating surplus is gross value added minus historical cost-depreciation of fixed assets, compensation of employees, and 'taxes on production and imports[,] less subsidies.' Before-tax profit is net operating surplus minus net interest (and miscellaneous) payments and transfer payments. After-tax profit is before-tax profit minus corporate income taxes. Gross value added, compensation, 'taxes on production [etc.],' interest payments, transfer payments, and income taxes are reported in NIPA Table 1.14, lines 1, 4, 7, 9, 10, and 12, respectively. The depreciation data are reported in the Bureau of Economic Analysis’ Fixed Assets Accounts Table 6.6, line 2. The rates of profit express the profit measures as percentages of corporations’ accumulated investment in fixed assets, net of depreciation––their 'historical-cost net stock'—reported in Fixed Assets Accounts Table 6.3, line 2.

[11] Net investment is (gross) investment minus historical-cost deprecation, reported in Fixed Assets Accounts Tables 6.7, line 2, and 6.6, line 2, respectively.

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First published: 03 March, 2014

Category: Economy, Labour movement, Vision/Strategy

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21 Comments on "Clarifying ‘Secular Stagnation’ and the Great Recession"

By bevin, on 03 March 2014 - 13:56 |

“I think a socialist way out of the crisis is a real historical possibility now, but only if the ferment from below is met halfway with a sober, rationalist politics that says, ‘the solutions that have been tried to fix capitalism aren’t working. We have to find a way out of this system, but we don’t really know yet what must be changed in order to transcend it. So the only solution is you. It’s up to you to take control of the process of figuring this out. Once you know what you’re doing, you’ll be able to do more than express your anger and appeal to leaders to help you. You can take charge.’”


By Peggy Dobbins, on 03 March 2014 - 15:21 |

Non profits, maybe churches especially—because they are social organizations of humans more or less committed to collectively believe they all together believe in morality, peace, justice, social responsibility, and should act together thusly—could begin experimenting with guaranteeing a reduced  N (>fewer and fewer than 40) of hours of labor the employee is able to do at a wage pegged to sustain the prevailing  standard of living .    If the terms “guarantee,” “reduced”  and “able” were accepted, we could concentrate on finding agreement  on the identity of the use values of the commodities of the prevailing standard of living, ie what to include in the basket of necessary commodities (purchased by individuals in the market) 

By Christen Thomsen, on 03 March 2014 - 19:02 |

Fine. But shouldn’t we mention Paul Mattick’s book, ‘Business as Usual’. That book doesn’t, however, lend itself to the optimism put forward in Kliman’s last paragraph.

By JamieSW, on 03 March 2014 - 23:10 |

Christen: care to elaborate? Does Mattick put forward the same factual argument as Kliman but draw different political conclusions from it? Or is the factual argument itself different?

By JDC, on 12 March 2014 - 23:06 |

Very interesting article, Andrew.

Reading the links you posted to Krugman, Summers and Wolf’s articles, it is amazing how closely they converge around the thesis that financial bubbles have functioned as temporary, imperfect resolutions to the poor performance of productive capital in the last 40 years. Of course, their explanations for this (especially Krugman’s demographic ) are incredibly weak, as they refuse identify capitalist accumulation as inherently contradictory. 

Regarding the second half of your article, in which you present your own empirical argument, I have a few questions.
1) What do you think of the Fed’s household debt ratio figures which suggest pretty big increases in household indebtedness since the 1970s? Does that not support Crouch’s ‘Privatised Keynesianism’ thesis that consumption has been - at least to an extent - maintained by extending credit to workers? (
2) With regards to income levels, doesn’t it make sense to exclude transfer payments because they are not paid directly out of capital’s profit? So stagnating wages with rising government assistance could still mean that profit *did* ‘increase at the expense of employee compensation’? 
3) Doesn’t the increasing expansion of US capital into cheap foreign labour markets mean that US workers’ rising compensation (assuming this actually happened) wouldn’t necessarily contradict the idea that capital increased its profitability through increasing the rate of exploitation? 

Thanks for the thought provoking article. Keep it up!

By Andrew Kliman, on 15 March 2014 - 07:09 |


Thanks for your generous comments.

Here are my responses to your questions:

1. The household debt ratio uses the same consumer credit and mortgage credit numbers that I used in Figure 1, but combines them. The main reason the household debt ratio rose is that the mortgage debt burden rose. Also, the household debt ratio expresses the debt as a percentage of after-tax (“disposable”) income, while I expressed it as a percentage of consumption spending. I expressed it this way because of the question I was addressing—was Gindin right that workers came to depend more and more on debt to sustain their *consumption*?

2. Transfer payments definitely have to be excluded from compensation of employees. I didn’t include them. My Figure 2 shows that compensation, not compensation + transfer income, was stable as a share of net output, and this means that profit didn’t increase at the expense of compensation.

I did include transfer payments in Figure 3, but Figure 3 isn’t about the distribution of output between employee compensation and profit. I should have been clearer about that. It addresses a different question: was there a fall in the share of output that working people could buy with their *income*, i.e., without going deeper into debt? (There wasn’t.) Because the question in this case is about the growth of their total income, not just the growth of their compensation, I counted transfer income along with compensation as “working-class income.”

3. As I mentioned, it wasn’t only the domestic rate of profit that fell. “U.S. multinationals’ rate of return on their foreign direct investment also trended downward.” So if “capital increased its profitability through increasing the rate of exploitation” means that U.S. capital’s overall rate of profit rose, that didn’t happen. If it means that increased use of cheap labor abroad kept the overall rate of profit from falling by as much as it otherwise would have fallen, that’s quite plausible. But the data on that don’t go back far enough to allow me to give a firm answer.

By Michael N Moore, on 15 March 2014 - 19:26 |

Yes. By including US employer-paid health benefits, many people’s incomes have risen. It is no surprise that the US medical industrial complex (health care facilities, health insurance, and pharmaceutical) are looting the country. The high cost of poor health care is a national scandal that we are all aware of. The result is much less disposable income for other goods and services.

By Anand, on 19 March 2014 - 07:24 |

I have a couple of comments on this article. Many points have been addressed by Sam Gindin in his response, but I want to add a couple

a) You can look at labour’s share of income as part of total here:

To quote from there: “These three data sources measure slightly different labor share concepts, which is why their estimated levels are different. But they agree in indicating a significant drop of 3 to 8 percentage points in labor’s share of income since the early 1980s, with the trend accelerating during the 2000s.”

b) Andrew Kliman also says that “austerity policies have not been the culprit”, pointing to increased debt. But that is not the correct way to look at austerity. There was an 8 trillion dollar housing bubble, and when it burst, it left a big hole in demand. Even with the big increase in deficits, it is not sufficient to fill the hole. As you can see here: Real GDP took a huge hit in 2008 and is still way below potential GDP.;=#e1e9f0&graph;_bgcolor=#ffffff&fo=verdana&ts=12&tts=13&txtcolor;=#444444&drp=0&cosd=1985-03-19,1985-03-19&coed=2014-03-20,2014-03-20&width=670&height=445&stacking;=&range=Custom&mode=fred&id=GDPPOT,GDPPOT&transformation=lin&nd=2007-12-01&ost=-99999&oet=99999&scale=left&line;_color=#4572a7&line_style=solid&lw=2&mark;_type=&mw=3&mma=0&fml=a&fgst=lin&fq=Quarterly&fam=avg&vintage;_date=&revision;_date=&chart_cosd=1985-03-19&chart_coed=2014-03-20

And there has been a lot of austerity after the stimulus, which was very small and it’s affects wore out very quickly. This is mentioned in one of the footnotes to the Sam Gindin response.

As to the monetary policy, actually even near zero interest rates are not enough to qualify as easy money in this environment. If you apply the Taylor rule as a rule of thumb, the optimal interest rate would be negative. The Fed has taken some extraordinary measures trying to get some inflation in the economy, but it’s still quite far.

By Anand, on 19 March 2014 - 07:30 |

I also want to add one more comment. Considering compensation rather than wages is a bit misleading. Since much of the increased compensation is due to higher health care costs. These are, to a certain extent transfers from the employer to insurance companies and less so a measure of increased standard of living.

The fact that there was not an increase in personal debt before the 2000s, was interesting for me. However, one can also point to the entry of women into the workforce in maintaining the living standards of the household to a certain extent.

By Andrew Kliman, on 20 March 2014 - 03:32 |

Anand, I intend to respond to Gindin. As for your other points:

(a) Dividing compensation by GDP, as the Cleveland Fed paper does, leads to skewed results. First, depreciation has risen as a share of GDP, and this artificially pulls down the labor share. Recipients of profits don’t eat depreciation any more than workers do. Second, the household sector should be excluded. The falling total compensation of domestic servants, due to the fact that there are fewer of them now, together with the rise in the GDP produced by people living in their homes(!), skews the results. The compensation share of net output in the corporate and business sectors is what’s relevant, and that’s what’s in my Figure 2.

(b) Surely you’re familiar with “automatic stabilizers”? They are fiscal policy instruments, and they’ve had an extremely stimulative effect. After all, the U.S. government could kept its deficits from increasing during the recession—as it did during the early part of the Great Depression—by raising taxes and/or slashing spending. That it did not do so is expansionary fiscal policy. Plus there are other things also ignored when only “the stimulus” money is counted, like the extended unemployment insurance benefits and the cut in Social Security taxes. So The government has been artificially propping up the economy big time by borrowing more and more and more, and it’s naive to think that an extra half-trillion or extra trillion dollars would turn the situation around., as Gindin seems to think.

(c) The Fed can’t make the federal funds rate negative. So it’s engaged in trillions of dollars worth of quantitative easing. The reduction of the feds funds rate to near-zero COMBINED with all the QE is what makes its policy exceptionally expansionary. 

(d) Higher heath care costs borne by employers are not transfers from employers to insurance companies, not to any extent. I don’t think so, the Bureau of Economic Analysis doesn’t think so, and the people who constructed the international System of National Accounts don’t think so. If medical insurance benefits were “really” income of the insurance companies rather than legitimate employee compensation, then cash wages spent on bread would “really” be income of Wonder Bread and such. The point is that workers’ receipt of income is one thing; their exchange of that income for goods and services is another. The former reduces capitalists’ profits; the latter is an exchange of equal sums of value––for instance, the exchange of $10 for $10 worth of bread or $10 worth of a medical benefits.

(e) I’ll address the entry of women into the workforce thing when I reply to Gindin.

By Michael N Moore, on 20 March 2014 - 14:57 |

Regarding the US healthcare costs issue, the question is raised: How is that some sectors of capitalism are able to “game” the system and escape the much-touted “discipline of the market”.

Steven Brill’s report in Time Magazine of March 4, 2014, lays out breath-taking profiteering by the “healthcare” industry that makes it look like the Naples Mafia. And some kind of rational health insurance for all, such as we see in Canada and France, would save the capitalist class a fortune that they are losing to private health insurance companies.

The template for this appears to have been established by the US military-industrial complex, which, while hiding behind the noble cause of God and Country, has bought off nearly every politician worth buying off and imbedded themselves in the US political economy. The healthcare mafia lives off the good will built by the old charity-medical values, which they have pitched out the window as they bought off the political establishment.

Another up-and-comer in buying off our “parliament of whores” is cable television companies. With the rise of online delivery, their core service has become outmoded, but they maintain control over the internet connection and enforce consumption by making the WWW connection their actual market product. This whole irrational extortion ploy could be overthrown with some kind of public Wi Fi. This doesn’t happen.

By Andrew Kliman, on 20 March 2014 - 15:42 |

If gaming the system is the issue, why is there so little concern about higher education in the US, where inflation has been higher even than in medical care? Humongous government support and growing gaps in pay between college grads and others are behind that.

By Michael N Moore, on 20 March 2014 - 17:46 |

Sorry, Andrew. I forgot to mention the education-industrial complex who, similarly, hides behind a mask of public service, while empire building at a huge cost to society.

See the following on US university non-academic payroll padding if you need a fix of outrage:

By Michael N Moore, on 20 March 2014 - 19:48 |

In an article that could have some bearing on the rise of US government subsidized executives, Stephen M. Teles argues that the US government, far from being a vehicle that redistributes income downwards, is a vehicle for redistributing income upwards.

By Marko, on 23 March 2014 - 20:13 |

The major inconsistentcy in Gindin’s account is the one that nobody noticed. He starts out by dismissing the postwar “Golden Age” as a legitimate basis for comparison :

“...Referring to the period since the 1970s as a continuing crisis trivializes the notion of crisis. Growth over these three decades was indeed slower than in the golden age of 1950-68. But that period was rather short-lived and exceptional, lasting less than two decades and benefitting from the postponed production and consumption through the Depression and War. It hardly qualifies as the standard for assessing economic performance.”

He readily accepts the notion that that period was enhanced due to the deferred consumption from previous years , but then goes on to presume that finance can offer us advanced consumption from future years , indefinitely. This is simply ludicrous. In addition , the evidence shows that households only “caught up” their consumption by taking on debt up to about 1965 :

hh debt to gdp ( debt to disposable income is similar ) :

For a decade after 1965 , household leverage actually declined. This was , not coincidentally , the last gasp of the Golden Age era , when incomes across the distribution rose in line with productivity. Debt became a necessary supplement to wages for increasing numbers of households from then on. The surge in the mid-1980’s was real and meaningful in a macro sense , and was in many ways a precursor to the 2000s boom , characterized by the same sort of dodgy lending and appraisal practices.

The idea that households were able to maintain spending via income gains is not supported by the data , if you just look closely. I’d suggest a study of the data by Fazzari et al , summarized here :

Broken down by top 5% vs bottom 95% households , it’s clear that the income and wealth gains have concentrated at the top , while the debt has been accumulated by the 95%. The 2000s blowoff was simply the culmination of Minsky’s progression , as , collectively , households suffered the fate of all Ponzi schemes.

You can also see in Fazzari’s graphs that consumption has declined as a result of the bottom 95% no longer having access to the debt booster. The top 5% pick up some slack with their juicy “wealth effect” , but not enough. The top 5% ARE capital , with a capital K. Their bag is accumulation , not consumption.

Finally , with regard to the “extreme” levels of stimulus. Wrong again. It was not nearly extreme enough. Look at the total nonfinancial ( public and privatde )debt/gdp level. It’s flat since the start of the crisis , whereas it had been steeply climbing throughot the 2000s :

Or , look at the yoy % change in the same metric :

We’ve replaced a ~17% yoy change in debt stimulus with a 10% yoy change. We’re short by roughly , yes , a $trillion.

Now , I don’t agree with the Krugman’s of the world that a bigger stimulus would have solved the problem , because you would have to continue it indefinitely. We have an underlying problem with income distribution. What you see now is what you’ve got , and we can’t even delever from our too-high leverage levels without adverse consequences. Stagnation are us.

If you want to take a productive stab at the declining-rate-of-profit thesis , I’d suggest following the Fazzari model. Look at top 5% businesses vs bottom 95% , and you’ll probably gain some traction. The top corporations are profit-rich and have  been investing heavily all along , it’s just that a big chunk of their investments have been in assets with names prefixed by the  likes of Senator , Delegate , Councilman , and Judge.





By Michael N Moore, on 24 March 2014 - 14:28 |

Marko said:

“The top corporations are profit-rich and have been investing heavily all along , it’s just that a big chunk of their investments have been in assets with names prefixed by the likes of Senator , Delegate , Councilman , and Judge.”

This is a witty phrase, but it does present a serious way of measuring the fat of influence that marbles the meat of current US business wealth. Some metrics could be contributions to PACs, 501C3 groups, candidates, political parties; “institutional advertising” which promotes a worldview rather than a product; and superfluous hiring for political reasons as we usually see only in the governmental sector.

By Andrew Kliman, on 24 March 2014 - 15:08 |

Hi Marko,

I don’t think I understand the point about household debt during the Golden Age.

As for working-class income being able to purchase a constant share of output between 1970 and 2007, I don’t think the Cynamon and Fazzari study really challenges that. Their data are Piketty-Saez tax-return data that don’t conform at all closely to national account data. Income is defined extremely narrowly in the tax-return data (only “market income” that’s currently received is counted) and the figures are skewed because they’re for “tax units” of variable size. I think the Burkhauser et al. studies I mentioned have seriously called into question the utility of inferences from this kind of thiing. For more on this issue, please see“the-99”-and-“the-1”-…-of-what.html .

No doubt, there was an increase in income inequality in the 1980s, but the newest Burkhauser et al. paper indicates a reversal during the 1989-2007 period (even without inclusion of accrued capital gains). In any case, I think the jury is still out on whether the “propensity to consume” is inversely related to income, so it’s not clear that rising inequality would affect the share of income spent on personal consumption.

One of Cynamon and Fazzari ‘s graphs shows a decline in consumption as a share of income during the recession and since. This is obviously mostly a result of the fall in income due to rising unemployment and lack of wage growth during the recession and since. It’s not evidence that, PRIOR to the recession, rising household debt was needed as a supplement to income in order to keep consumption from falling.

You simply misread It sh.ows a sharp rise total nonfinancial debt as a share of GDP during the recession. The fall comes since it ended. (The recession is indicated by a shaded bar.)  In any case, the Federal government has no direct control over this. It only directly controls (or fails to control) its own debt, which has risen by 88% in 6 years. $8.1 trillion additional debt hasn’t produced a new boom, and I don’t think it’s reasonable to assume that an extra trillion or two specifically earmarked as “stimulus” (rather than “automatic stabilizer”) debt would turn things around, even temporarily. And if we’re talking about more than a temporary band-aid, Keynesian economics itself tells us that the effects of a stimulus are only temporary; when the stimulus ends, the economy goes back to where it was.

By Marko, on 24 March 2014 - 20:59 |

“You simply misread It sh.ows a sharp rise total nonfinancial debt as a share of GDP during the recession. The fall comes since it ended. (The recession is indicated by a shaded bar.)”

No.  The apparent rise is due to a falling denominator , gdp. The absolute fall in the annual change in added nonfinancial debt was in excess of $1 trillion , in spite of the “massive” federal stimulus. See :

As I said earlier , since the recession ended , new debt as a share of gdp has been essentially flat , as compared to the steeply rising trend during the 2000s. This is what you expect when you’re adding 9-10% new debt as a share of gdp at a ~4-4.5% ngdp growth rate , and a 240-250% debt/gdp ratio. It’s just math.

If any study has a problem with data , it’s Burkhauser’s. He relies heavily on CPS data , which is notoriously unreliable for top-end income earners , the very reason Piketty uses the IRS database. Not to mention his cherry-picking of the 1989-2007 window , corresponding to the period most favorable to his dubious method of capital gains accrual. In short , he used the methods typical of rightwing economists who want to sidetrack the inequality discussion. He was predictably praised in National Review and other such rags , though I wouldn’t have expected the same on a site called “New Left Project”. Nevertheless , I’m sure the Koch Bros are tickled “pink”.

By Anand, on 25 March 2014 - 03:57 |

Hi Andrew,
  Sorry I forgot about this comment earlier.

a) That is an interesting point about depreciation. Is that sufficient to explain the gap which the Cleveland Fed paper gives?

b) I have indeed heard about automatic stabilizers. And indeed, they have helped, since the US does not have 20% unemployment. The question is whether they are big *enough*. Recall that there was a 8 trillion dollar housing bubble which burst, which left a big hole in the economy.

If the automatic stabilizers are enough to reduce unemployment, why would spending more not reduce unemployment even more? I dont’ see why it is naive at all. At this point in time, there are many idle resources and low borrowing rates. Why not borrow more and put the people to work?

c) As to the size of the stimulus and its effects, one can look at the experience of China. There is a recent paper which looks at how big China’s stimulus was to counteract a huge drop (45%) in its exports after 2008. It contrasts how the huge fiscal measures were more helpful than the monetary measures largely taken by the West:

d) As to the Fed policy, for sure, QE and so on were inflationary. However, again the critical question is were they inflationary ENOUGH? Bernanke, in a speech a couple days ago thought that while it was indeed quite aggressive, they could have been even more aggressive:

One can look at the Eurozone monetary policy, which has been relatively tighter, and they have a much sharper recession.

e) I have perhaps muddled this “compensation” issue a bit. The point I was making was simply that increasing healthcare costs are not directly leading to a higher standard of living. I just think it is a bit misleading to include that directly in the wages. One should certainly look at the total compensation, but also look at other indicators, as you have done in your article.

By Andrew Kliman, on 25 March 2014 - 04:25 |

Marko, your original point was about the RATIO of debt to GDP. “Look at the total nonfinancial ( public and privatde )debt/gdp level. It’s flat since the start of the crisis , whereas it had been steeply climbing throughot the 2000s.” MY response likewise pertained to this ratio: “You simply misread It sh.ows a sharp rise total nonfinancial debt as a share of GDP during the recession. The fall comes since it ended.”

Okay, maybe you didn’t misread, but misstated your point.  But the absolute level of total nonfinancial-sector debt wasn’t flat either, though it grew more slowly. In any case, these data are misleading, since some (or all?, who knows?) of the decline in the growth of debt was due to write-offs of bad loans rather than to a reduction in the growth of new lending.

A 2012 paper by Burkhauser et al. basically replicates Piketty-Saez’s results—using Census (CPS) data—WHEN P-S’s definition of income and units (“tax uinits”) are used. It thereby dispels the common misconception that you repeat: “He relies heavily on CPS data , which is notoriously unreliable for top-end income earners , the very reason Piketty uses the IRS database.” See my article (“the-99”-and-“the-1”-…-of-what.html ) for a citation to their article and a bit more discussion of its implications.

I don’t think the cherry-picking charge is accurate. First, Burkhauser et al. are concerned, very concerned, to measure income changes between *comparable* points of the business cycle. That’s why they focus on 1979, 1989, and 2007. That’s the precise opposite of cherry picking.  Second, the Survey of Consumer Finance data used to estimate capital gains were only available for every third year from 1989 onward. (There are earlier data, but they report that they aren’t comparable.) Nor do I think counting capital gains at accrual is “dubious.” I think counting them at realization and, especially, excluding cap gains that aren’t taxable (as P-S, the CBO, etc. do) are what is dubious. In any case, when I said that Burkhauser et al. found a reversal of inequality after 1989, I was referring to their findings EXCLUDING cap gains: “No doubt, there was an increase in income inequality in the 1980s, but the newest Burkhauser et al. paper indicates a reversal during the 1989-2007 period (even without inclusion of accrued capital gains).”

The rest of your stuff is ad hominem ( and doesn’t merit a response.

By Andrew Kliman, on 25 March 2014 - 15:39 |

Anand, there are five differences between the Cleveland Fed NIPA numbers and my business-sector compensation share in Fig. 2, which also uses NIPA data. (1) They don’t remove depreciation; (2) they include the household sector, which means that they count the value of the “housing services” that owner-occupied homes provide, as non-labor income. So when housing costs rise, this artificially depresses their labor share. These first two things both have a big effect. (3) They include also the general government and nonprofit sectors (these things have little effect). (4) I use revised data—this makes a non-trivial difference. (5) They look at shares of income, not shares of output. Over the long haul, this doesn’t make a difference, but it does in the short-run. An output measure is preferable if the issue is the share of the distribution of what’s produced.

What I wrote was “The government has been artificially propping up the economy big time by borrowing more and more and more, and it’s naive to think that an extra half-trillion or extra trillion dollars would turn the situation around., as Gindin seems to think.” The issue is how much additional stimulus would be needed to turn the economy around TEMPORARILY.  If one wrongly views the stimulus-to-date as 1/3 of $750 billion, or something like that, as Gindin does, then one imagines than an extra $1 trillion would pack a big punch. But that’s just wrong, because the total stimulus has been $8 trillion, and all of it has been needed to produce the effects it’s had. Another $1 trillion wouldn’t do much even temporarily. It’s a simple matter of multiplier math.

I don’t see the relevance of China here. The US government has borrowed $8 trillion. All of the extra money has been used to lower taxes and increase spending.  It’s had only meager results. There’s no reason to think that another trillion dollars will have more than 1/8 the effect that $8 trillion has had. The same thing goes for monetary policy.

And I need to emphasize again something I wrote in reply to Marko: “if we’re talking about more than a temporary band-aid, Keynesian economics itself tells us that the effects of a stimulus are only temporary; when the stimulus ends, the economy goes back to where it was.”

On the healthcare thing, one has to keep in mind, first, that I’m talking about distribution, not utility. A dollar paid in medical benefits by a company is a dollar less profit, whatever implications that may or may not have for utility. Second, if we’re talking about *real* (inflation-adjusted) compensation growth, as I was, the growth is the growth in compensation after the effect of rising healthcare prices has been removed. (Heathcare prices are a component of the price index that’s used to adjust for inflation.) In other words, after controlling for inflation, including higher medical prices, compensation per hour rose by an amount that wasn’t small, even for the median worker.

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