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.

am i missing something?

thanks

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,

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.

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,

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

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

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.