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Mexican Remittances Fall
Posted by WARREN MOSLER on December 1st, 2009
Trickle down economics not working so well:
Mexican Remittances Fell Most on Record in October
Dec. 1 (Bloomberg) — Mexican remittances dropped the most on record in October as the impact of the U.S. economic slump continued to spur job losses and sap savings for nationals living north of the border.
Money sent from workers living outside Mexico fell 36percent to $1.7 billion in October from $2.6 billion in the same month a year earlier, the central bank said on its Web site. The largest previous drop was a decline of 20 percent in May.
Remittances data compared with the prior year will remain negative until at least March as immigrants are having trouble replacing diminishing savings with new income because they’re unemployed, said Manuel Orozco, senior associate and director of remittances at the Inter-American Dialogue in Washington.
“If savings drop over time and they don’t find jobs, then the remittance capacity will drop,†Orozco said in a telephone interview.
Falling remittances won’t have a negative impact on Mexican consumer demand because money transfers have increased 8.5 percent so far in 2009 compared with last year due to depreciation of the peso, Gabriel Casillas, chief economist at JPMorgan Chase & Co. in Mexico City, wrote in a report today.
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December 1st, 2009 at 9:16 pm
Yeah well when the jobs begin to evaporate this is going to happen. Maybe we’ll all have an early Christmas present and some of the illegals will decide to go home. Americans need jobs, not the illegal Mexicans.
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December 1st, 2009 at 10:50 pm
The only reason there is a connection and a ‘job shortage’ is a government that doesn’t understand it’s monetary system.
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December 1st, 2009 at 10:50 pm
Hi-
I have a question about “Mosler’s Law” as it relates to debt deflations that wasn’t answered at billy blog (here).
I don’t recall seeing any MMT-related discussion of the non-government sector changing its behavior as a direct RESULT of the government sector’s actions. Perhaps you can point me to something? In particular, if the domestic private sector is trying to pay down debt (by increasing its savings rate), and if the government accommodates this by running a larger deficit, what’s to stop the domestic private sector from upping the ante and trying to save even faster, then rinse and repeat?
For example, let’s say homeowners decide to divert 5% of “non-essential” spending from their wage income to paying off mortgages (and credit cards) faster. Government cuts taxes or increases spending to prevent a fall in GDP. Homeowners direct that added income to accelerated debt repayment while STILL diverting the added 5% of original wage income to debt repayment. Government must run a still larger deficit to sustain GDP. Repeat.
I know the effect isn’t quite this clear cut as those who lose jobs will certainly spend most of any income you give them (via unemployment pay, job guarantee program, etc), which will *partially* sustain GDP (not fully unless you fully replace the lost wage)… So I do agree MMT has a lot to offer in justifying such automatic stabilizers.
However, do you dismiss this dynamic feedback effect as too small in practice to matter when saying “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it”? Or do you just assume that the outcome (partial erasure of private debts by government with the accompanying balance sheet equity / spending power redistribution and moral hazard) is preferable to the alternative of debt deflation, and that this counts as “dealing with it”? The former certainly seems preferable to me (though an dramatically escalating public deficit would likely hit political limits even if everyone understood MMT), but I would love to see any discussion of this dynamic in MMT literature…
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December 1st, 2009 at 11:08 pm
and if the government accommodates this by running a larger deficit, what’s to stop the domestic private sector from upping the ante and trying to save even faster, then rinse and repeat?
YES, JUST KEEP CUTTING TAXES ASSUMING GOVT. IS ALREADY AT THE ‘RIGHT’ SIZE.
WHAT’S THE NEGATIVE TO THAT POLICY?
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RSJ Reply:
December 2nd, 2009 at 12:13 am
The negative is the resulting wealth-shift that you have accomplished, along with the distortions to the private sector.
Scenario 1:
The top 5% accumulate 1 GDP worth of financial claims on the bottom 50%. The bottom 80% cannot pay these claims, as they constitute, say 1 times their annual income. If they government cuts their taxes to zero, it would take, say 10 years to pay that off. In the meantime, government must step in and spend on their behalf. So it must *both* transfer a GDP worth of money to the top 5% *and* step in and buy output for a decade.
At the end of that process, what do you have?
* demand distorted by government spending (e.g. public works built to spend money, as opposed to being necessary)
* the bottom 50% are still at zero (but no longer negative)
* the top 5% are now 1 GDP wealthier
* You were mired in stagnation for a decade
Scenario 2:
The government helps coordinated a orderly default of 1 GDP of debt. The top 5% take the hit, but their marginal spending propensity is not so high anyways. To help with the shock, the government cuts taxes and buys output, but only to absorb the shock of the transition, not to recapitalize the top incomes. Spending will pick up much more quickly, and more importantly, the distribution of financial claims will be in line with the underlying capacity to pay those claims. It will not take a decade of slow repayment, but will be done quickly. The bottom 50% are still at zero, but achieve this position much more quickly.
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Matt Franko Reply:
December 2nd, 2009 at 6:18 pm
RSJ,
What are those percentages in your model representative of: taxable income or net wealth or something else? Resp,
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RSJ Reply:
December 3rd, 2009 at 7:01 pm
Hi Matt,
I am looking at balance sheets (net financial wealth), and grouping these by market income, as measured by either the census or the survey on consumer finances.
The simple model states the majority of the public is willing to dissave if they believe they are purchasing assets (primarily housing, but to a lesser degree also education) that will substantially appreciate in value. Once they realize that this is not the case, they will need to make two adjustments: save enough to rebuild their net-worth, *and* spend less going forward since they will no longer be dissaving.
If government boosts their incomes long enough to rebuild their net-worth, then still the society as a whole will be at a lower spending level, and government will still need to purchase output to make up the difference, or the economy as a whole adjusts downward to a lower level of output.
Matt Franko Reply:
December 3rd, 2009 at 8:25 pm
RSJ, Thanks Im going to think about that series of events….
for now as far as Warrens FICA tax holiday; Ive found the following:
“During FY 2008, the federal government collected approximately $2.52 trillion in tax revenue. Primary receipt categories included individual income taxes (45%), Social Security/Social Insurance taxes (36%), and corporate taxes (12%). Other types included….”
So FICA taxes are about $900B split between workers and employers. So how would the $450B that workers would have gotten to keep over the last year end up with the top 5%? being loaned back to workers? Thru spending? Im not following….as far as spending less I dont believe in $3.00 gas/$4.00 coffee/$9.50 cocktails/$6.00 beers anyway! ;) Resp
RSJ Reply:
December 3rd, 2009 at 9:09 pm
Hi Matt,
Generally speaking, if people are paying down debt as a result of government income boosts that they would otherwise default upon, then this is a transfer from debtors to creditors. All debt that is not payable given long term income trends *should* be defaulted upon. Just as we did in the S&L crisis, the banks should only be recapitalized after risk capital has taken the hit and loans have been written off.
There is a nice article comparing the current response with the S&L response on the in the Kansas City blog:
http://neweconomicperspectives.blogspot.com/2009/12/geithner-as-martyr-to-ungrateful-nation.html
In the same way, if people are not spending money on output, it is because output is too expensive in proportion to their wages. We have seen houses, autos, college tuition, and health-care — all increase disproportionately to wages, and yet these are things that everyone needs to pay for. In the meantime, households have gone into debt to maintain their current level of spending.
I am a general believer that when things get too expensive relative to wages, you need to lower the price, rather than supporting the price by temporarily boosting non-wage incomes until the borrowing game is restarted. The relative stickiness of wages versus prices ensures that prices will fall in proportion to wages in a demand contraction. I understand that this is disruptive and causes social harm. So do falling wage shares during expansions. They are both disruptive and distortive, and the economy lurches between the two.
So if you are going to short-circuit this adjustment with demand-maintenance policies, you also need wage-maintenance policies.In the form of high top marginal rates, high minimum wage laws, high surplus profit taxes, and other mechanisms that take windfall-seeking off the table and discourage profit growth during expansions beyond a certain point, just as we prevent demand from collapsing beyond a certain point.
This is also punitive in many respects, but must be done if you are going to prevent the depressions from occurring. You need to do both, and if you only do one, then the result is a shrinking middle class and growing indebtedness. I’ve posted this chart before, but you may not have seen it — the source data is from measuringworth.com
http://1.bp.blogspot.com/_fevQMK7kLEI/SwKQna4z9cI/AAAAAAAAAHI/p2Y35enKAC0/s1600/recession_and_wage_per_output.png
hbl Reply:
December 2nd, 2009 at 3:17 pm
Thanks for the reply.
I still suspect there are more negatives than the high level theory suggests, but that the positives do outweigh the negatives. I’m not clear how lag effects would play into the whole process of reactive tax cuts, and whether political limits would be inevitable even in a world that understood MMT if there was a very large escalation dynamic, and what would happen to currencies, etc. Also there would be a government-induced relative shift in balance sheet equity to give debtors (or ex-debtors) a higher percentage of total wealth relative to creditors than they previously had… which while it is almost certainly for the greater good (therefore this likely isn’t a negative) could create a lot of outrage about fairness, moral hazard, etc. (It would impact prudent savers and retirees as much as the rich). But I’m having fewer reservations about these ideas as I see more discussion… thanks.
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Ralph Musgrave Reply:
December 3rd, 2009 at 2:32 pm
Hbl: Your questions about “dynamic feedback†and “lags†(both here and on Billy Blog) are perfectly fair questions, but we are so to speak in the position of trying to explain to Neanderthals (deficit terrorists) how to use a fire hose to stop a house burning down. You’re worrying (to continue the analogy) about whether the Neanderthals know what the optimum amount of water to squirt on the house is. My answer is: just get the Neanderthal fireman to squirt water. If it’s not the optimum amount, at least it will be better than nothing. We can worry about the refinements later.
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Matt Franko Reply:
December 4th, 2009 at 10:05 am
RSJ,
Appreciate (& share) your concern for “the little guy” in all of this. But my interpretation is that Warren’s payroll tax holiday is just what working folks need right now, and is targeted right at them….
Ppg 1 & 2: Warren doesnt agree at all with how policy makers reponded to this banking “crisis” including TARP, PPIP, LMNOP, etc…generally agrees with Prof Black on law enforcement and has repeatedly offered alternatives here all thru this. I dont see the direct connection between a payroll tax holiday and bank regulation, just because a household is not punitively over taxed and allowed to keep earnings to be able to continue to make a mortgage payment or other obligation? You are twisting a tax reduction into an “income boost”. Similar to a Congressman positing: “how are we going to ‘pay’ for that tax cut?”
PPG 3: Consumer credit was increasing at about $100B per year in the 2004-2007 “boom times” thats about $900 per household per year: BIG DEAL!. Someone maybe bought a new car to drive to work in, went to grad school, got some new kitchen appliances to cook their food in, etc…and financed it, are we not allowed to do these things (especially when we think times are good)? People were not over-leveraging to “keep spending”. IMO normal people were victims of speculators, in housing, food, energy and other things. Be careful, there is a lot of propaganda out there that US consumers are spendthrifts, etc…and somehow to blame in this curent mess when we both know it was the Wall Street crowd’s leveraging and re-leveraging of financial assets that was the imprudent use of credit that got us into this. Any objective review of the data will show this is a slander on the American people.
PPG 4: If policy makers had done a payroll tax holiday in 2001, do you think that DrKoop.com would still sport a $1+ Billion market capitalization today? And consumers would be lamenting how much it still costs to get Dr Koop’s unique insights on medical issues off the web? Grossly mispriced financial assets will adjust on their own, no need to keep punishing j6p with the FICA taxes that are in terminal surplus.
PPG 5 & 6: If you are a bank in violation of a regulatory ratio, then instead of “regulatory forbearance” via the sham TARP, or FDIC backed bonds, etc., give them 24 months to turn it around, in the mean time no dividends, no bonuses, no option grants, no deferrred comp, no one (full boat) in fact can make more than the President as your bank is effectively a ward of the state (you blew it!). At the end of 24 mos. re-evaluate. Oh, first pass the payroll tax holiday to support AD.
Anyway RSJ I appreciate your concerns again and wish you would reconsider how the payroll tax cut would be a “bottom-up” remedy in this instance. Resp,
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December 5th, 2009 at 12:52 am
Hi Matt,
I also favor a payroll tax holiday. I am merely pointing out that you need to accompany it by other things, such as prompt corrective action aimed at wiping out risk capital. My impression of Warren’s proposals was that he favors guaranteeing assets with government funds (see the Mosler TALF alternative) as opposed to forcing prompt write-offs.
re: consumer credit.
The relevant metric is household net borrowing growth (e.g. borrowing net of repayment), which was growing at about 1 Trillion per year during the boom periods or about $10,000 per household per year:
z.1 table F.1/divided by 100 million (the number of households) — SAAR
2004: $10.5K
2005: $11.7K
2006: $11.8K
2007: $8.6K
2008 Q1: $4.0K
2008 Q2: $4.2K
2008 Q3: $-730
2008 Q4: $-2.3K
2009 Q1: $-1.6K
2010 Q2: $-2.3K
So the peak swing is about $14,000/household, which is about 30% of median household income. This is consistent with the revenue hit that many businesses are now feeling, although obviously the hit to the economy as a whole is smaller.
Note that a 7.5% FICA tax cut (to households) would only grant the median income household about 4K. You would need the remaining 7.5% paid by employers to be passed onto households in the form of higher wages, too, and still you would not be overcoming the de-levering trends (e.g. the negative numbers).
Believe it or not, it is not that I am a bleeding heart that is looking out for the little guy, but am merely observing that if wages do not rise with output, then debt must make up the difference. If we run out of debt rope, then output stops growing and we turn Japanese.
After 30 years of stagnant incomes and household debt growth making up the difference, it is high time to start fueling consumption with wages again. A payroll tax holiday, while nice, is a one-time boost.
Go ahead and do it, but it will not solve the issue of wages not growing with output going forward. You need to add 2.7% to median wages every year in real terms, since that is the gap between the current wage growth rates and national output growth.
re: your banking proposal,
I would say enforce prompt corrective action without waiting 24 months. This is like a margin call — demand that the bank raise their level of capital, and if they cannot do this, then convert some risk capital (e.g. bonds) to equity so that banks have an adequate cushion for write-offs. No one is saying that prompt corrective action means raising the buildings and firing the tellers — we are talking about a shift in the bank’s capital structure, and there is no reason to delay this shift. Transparency and quick resolution is key.
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Matt Franko Reply:
December 5th, 2009 at 9:50 pm
RSJ, I get where you are coming from on this and basically agree. WRT TARP, Warren often comments on the specifics of these govt “fixes” and suggests specific alternative approaches but you have to realize his suggestions are in the context of the specific govt actions. If he could have a “clean slate”, Im sure Warren would paint a VERY different picture overall.
Consumer: I was looking at consumer (no mortgages) at the 100B level which your z.1 confirms (Which I still say is not a lot). It’s interesting that from the z.1 table you reference, it looks like the 1T was all mortgages no? Starts were at 2M in say 2004/2005, if you assume 300k new construction price, that would be 600B right there. At a 2% new household formation rate, that would account for the 2M new housing starts. that still leaves 400B of mortgage backed debt issued per year unaccounted. Now simultaneously, they were pumping up ownership rates. Moving that needle 5% would probably result in say: 5M x 200K = $1T of additional mortgage debt issued, over some time frame that would have added in. You know none of these #s look outrageous to me (other than perhaps housing prices were bid up due to speculation and the war) I think we need to return to these same kinds of numbers on units just so people have housing, hopefully people will get better prices.
On your FICA consider this : I posted above that I found 900B of FICA receipts per year, so workers share is 450B, if you assume 135M workers, that is 3300 per worker. If you have a 2 worker household,thats 6600 per household (average) in retained earnings that would certainly help. Remember seniors dont count here as they are beneficiaries of SS/Medicare, not contributors any more.
Household Debt Growth: RSJ check this out: If you look at the graph in your link you see a reversion to the zero line starting to form in the early 80’s (red line). Then something happens around 1983/84 and you get this exponential curve start to form that starts the non-linear increase in both of your plots for the next 25-30 years. Now check out this graph. You see the extreme top at the same 83/84 inflection point? I submit that the rentier class has used this 25/30 year interest rate ride tailwind to leverage and re-leverage and re-re-leverage their way to ever increasing commercial and residential real estate values that have sapped the purchasing power away from the workers/consumers over this same time period (it has to have as you have shown in the z.1 that all of the new debt has been mortages!). they even figured out a way to effectively push their rates BELOW ZERO with the negative am. loans they rolled out here at “the end of the ride”. That graph Ive linked to above has been the creator of many “financial geniuses” in the past generation IMO. If you double down on your insurance scheme at that top you become Warren Buffett today, if you start your bond business in earnest at that top you become “the bond king Bill Gross”.
The ride is over…..Im hoping that value now comes back to working households.
Banking Proposal: I agree that these banks should be resolved promptly….But Ill raise you: Ill quote Prof. Wray recently: “Euthanize the Rentier!” ;)
Anyway good exchange RSJ, my hope is if we achieve what we both want ie higher effective incomes for households, the country (and REAL businesses for that matter) will be better off for it…Resp,
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Warren Molser Reply:
December 6th, 2009 at 2:55 pm
having the fed lend unsecured to banks isn’t guaranteeing assets.
the fed requiring collateral is simply redundant as the fdic already regulates all bank collateral and capital ratios.
am i missing something?
thanks
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December 6th, 2009 at 3:02 pm
also, I continue to support a payroll tax holiday that would allow perhaps millions of lower income families to stay in their homes rather then lose them to a foreclosure sale simply by not taking so much away from them out of each paycheck.
The idea of removing wealth from the ‘rich’ by allowing demand to collapse so their financial assets are reduced by defaults makes no sense to me as a policy tool.
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