Sunday, May 18, 2014

Further Thoughts on Anti-Financialization

I want to amplify the last point from the previous post, about anti-financialization.

If we go back to the beginning of the national accounts in 1929, we find personal consumption accounts for around 75% of GDP. (This is true whether or not we make the C&F adjustments, since in 1929 the imputed and third-party component of consumption were either nonexistent or small.) During the Depression, the consumption share rises to 85% as business investment collapses, during the war it falls to below 50%, and it rises back to around two-thirds after 1945. It's in the second half of the 1940s, with the growth of pension and health benefits and the spread of homeownership, that we start to see a large wedge between headline consumption and actual cash expenditures by households.

We can think of the ratio of adjusted consumption to GDP as a measure of how marketized the economy is: How much of output is purchased by people for their own use, as opposed to allocated in some other way? In this sense, the steady fall in adjusted consumption as a share of GDP represents a steady retreat of capitalist production in the postwar US. It was squeezed from both sides: from "above" by public provision of health care, education and retirement security, and from "below" by the state-fostered growth of self-provision in housing.

Consumption spending by households bottomed out at 47 percent of GDP in 1981. With the neoliberal turn, the process of de-marketization largely halted -- but it did not reverse. Since then, consumption spending by households has hovered around 47-48% of GDP. The phenomena of household financialization, "markets for everything," etc. are real -- but only at the level of ideology.  Private life in the US has not become more commodified, marketized or financialized in recent decades; over a longer horizon the opposite. What has happened is that a thickening veneer of fictional market transactions has been overlaid on a reality of social consumption.

In reality, neither collective provision of health care (or of education, public safety, etc.) nor self-provision of housing has been replaced to any noticeable degree by market purchases. What we've had, instead, is the statistical illusion of rising private consumption spending -- an illusion fostered by the distortion of the national accounts by the dominant economic theory. When health insurance is purchased collectively by government or employers, the national accounts pretend that people were paid in cash and then chose to purchase health coverage individually. When retirement savings are carried out collectively by government or employers, the national accounts pretend that people were paid in cash and then chose to purchase financial assets. When people buy houses for their own use, the national accounts pretend they are profit-maximizing landlords, selling the use of their houses in the rental market. When liquidity constraints force people to hold financial wealth in low-yield forms, the national accounts pretend that financial markets are frictionless and that they are receiving the market yield in some invisible form. Together, these fictional transactions now make up 20 percent of GDP, and fully a third of apparent household consumption.

Of course, that might change. The decline of homeownership and the creation of a rental market for single-family homes may turn the fiction of a housing sector of tenants and profit-seeking landlords into a reality. One result of Obamacare -- intended or otherwise -- will be to replace collective purchases of health insurance by employers with individual purchases by households. Maybe the Kochs and Mark Zuckerberg will join forces and succeed in privatizing the schools. But none of that has happened yet. What's striking to me is how many critics of contemporary capitalism -- including Cynamon and Fazzari themselves -- have accepted the myth of rising household consumption, without realizing there's no such thing. The post 1980s rise in consumption is a statistical artifact of the ideology of capitalism -- a way of pretending that a world of collective production and consumption is a world of private market exchange.


  1. Two ways you can go from here: one, we're moving towards a priceless world; two, we're moving towards a world dominated by rent seeking.

  2. It's 2, and we're well on the way.

  3. Quick question regarding your paper along Jayadev on Fisher Dynamics and household debt. You find quite strong evidence that borrowing played a much smaller role in the post-1980 period in regard to the increase in leverage after taking account of growth rates, inflation, and interest in, say, the post-WWII period up to 1980. I was wondering if two factors may have allowed households to compensate for stagnating real wages (and perhaps higher levels of income/wealth inequality in the post 1980 period: (1) households took on more debt, using assets which have appreciated in value as collateral (stock investments, housing), or they refinanced their existing debt at lower interest rates so as to free up room for additional spending. I was not sure how such factors related to your analysis of Fisher Dynamics.

    Nevertheless, keep up the great work and congrats on the publication.

  4. I think it's pretty clear that neither of those things took place on any significant scale. There was no net flow from the credit markets to households except during the 2000-2005 housing boom period. And the new borrowing that took place in that period all went to housing investment, it did not finance other kinds of spending.

    I don't expect people to change their views overnight, but I think the data is pretty clear that households did *not* compensate for stagnant real wages. Workers' consumption fell right in line with their incomes.

  5. Thank you for the feedback. My views didn't change overnight. But love the data and the findings.

  6. I'm confused. Why would they make the mistake about household consumption when they are the authors of both papers!

    1. I am going to ask them that exact question. But recall, the other paper is from a couple years ago; presumably they didn't realize until writing this new paper that there was no increase in private consumption. After all, no one else realized that either.

  7. the date is february 2013; the new paper is march 2014. Thats not that long. They should have, at least, mentioned in a footnote the difference.

  8. I'm reading Atif Mian and Amir Sufi House of Debt now. It will be interesting to see how their argument fits into all of this. I believe they relied on micro-level data.

  9. I'm not quite getting what is the point of this ironing out of data. Obviously, "household expenditure", even if it somehow would be represented by PCE, isn't unstratified and doesn't correspond to labor vs. capital shares. And does it really matter if it is somehow individually discretionary rather than programmatic, since those would be close substitutes anyway? Nor does it seem likely that rising house and other asset prices didn't result in increased household debt-financed consumption in some proportion, except that that too would have be stratified by the availability of collateral for accessing credit.

    The rising PCE share of GDP might rather simply be reflecting a declining investment share, since the figures will always sum to 100%, and reflect the standard account of an increasingly financialized rent extraction from the overall economy, even as much of it might be mis-attributed to household income and consumption. It reminds me of the factoid that German households had a much lower net worth than Greek households, despite per capita GDP, when, in fact, that was entirely an artifact of accounting attributions, not of real wealth.

    1. "Why does it matter" is always a good question. You are right that the reallocation of expenditure doesn't in itself tell us anything about distribution. Neither does the classification of income from health and pension expenditures if these are close substitutes for private consumption. But it does matter if we are interested in a story about household expenditure decisions, either their causes or consequences. In particular, it is logically impossible for a change in non-cash or third-party expenditure to directly affect households' financial position. And few if any of the sociological factors people invoke to explain "rising household consumption" apply to rising government health care spending, which is what most of that increased consumption actually is.

      Nor does it seem likely that rising house and other asset prices didn't result in increased household debt-financed consumption

      I suppose it's pointless for me to suggest that we can do better than guessing about "what seems likely" -- that this is a question that can actually be answered empirically? I really feel like banging my head against the wall some days, people are so attached to this inequality - debt morality tale. Forget what seems likely, I want to know what is true.

      Which goes back to your larger question of why this matters. The underlying issue from my point of view is that we have an economic discourse that collapses capitalism, finance, markets, and productive activity into a single frame. But these are all different things, with their own distinct logics. We have to recognize that financial relations evolve independently of relations of production and consumption. Changes in assets and debt don't have to reflect anything happening in the "real" economy.

    2. I'm still not getting your point here. Health care expenditures are mostly incurred by the elderly, which is Medicare, hence a government transfer, but would you have it otherwise? And there definitely was a housing bubble during the last cycle in the naughties. ($8 trillion according to Dean Baker). By most accounts, the housing bubble accounted for at least 1/2 the recorded GDP growth during the last cycle, not just because residential construction went from 4-4.5% of GDP to 6.2% at peak, but because of MEW supporting consumption expenditure (which is something Greenspan of all people tracked assiduously, so the figures are available). And, of course, wages have been stagnant in real terms since 1973, while productivity has officially grown by +80%, and the picture doesn't change much if you add in employee benefits. So if consumption has grown from +60% to 70%, what accounts for the increased consumption share? Not to mention that CA deficits have been constant over that period. (As a rule of thumb, if an economy's tradeables sector in "uncompetitive", - and large trade deficits would be prima facie an indication of that,- then investment will flow domestically to the non-tradeables sector. Obviously housing, but also, though I've seen no commentary at all on this, health care, since health care expenditures blew out especially during Dubbya's first term, just as the trade deficit blew out, rising from 12.5% of GDP to +17$ nowadays). Further, the total debt-to-GDP ratio in 1980 was around 150% of GDP, as it had been for 25 years, but began to steeply rise after that, peaking at between 369-386%, depending on your source, If debt played no role, you're suggesting a version of immaculate conception.

      So you have a lot of other data to reconcile with your rude empiricks here. "Capitalism, finance, markets, and productive activity" might not be simply reducible to each other, but they do form the constraints of a single system, and "anti-financialization" hardly seems like a claim that could be sustained overall.

  10. First, let's set aside the question of how things should be. I want to understand the actual historical evolution of capitalism and its articulation with external social reality.

    Second, you are right, there definitely was a housing bubble, which involved a big increase in household borrowing to finance new residential investment. I'm not objecting to this side of the conventional story. What I'm objecting to is the idea that the whole rise in household debt-income ratios since 1980 involves the same kind of factors as the bubble period. My argument is that the behavior of household balance sheets in 2000-2005 was very different from the rest of the post-1980 period, and that -- unlike the rise in debt in those years -- the longer-term rise in debt cannot be explained as an increase in household borrowing.

    So everything you say about the housing boom is right. I just don't think the bigger picture looks like that.

    So what has sustained demand, in the face of stagnant wages and current account deficits? My answers are (1) increased government purchases of health care. From my point of view, the assignment of Medicare, medicaid and related public health spending to the personal sector systematically exaggerates C and understates G. (Alternatively, one might want a new category of "collective consumption" in addition to C, I G and NX< but that would be a more radical suggestion than I want to make here.) (2) Increased consumption out of non-wage income. I should write more about this but it is clear -- for the tech bubble period of the 2000s especially -- that luxury consumption by the rich has increased a lot and this has been a major factor in sustaining consumption demand. I beleive Keynes was right to think that consumption propensities of the rich are lower than than of the poor ceteris paribus, but he was also right that cet is never par.

    health care expenditures blew out especially during Dubbya's first term

    Well, let's look at this. Between 2000 and 2005, personal consumption expenditure on health care rose from $920 billion to $1.3 trillion, about $400 billion or close to 50% in 5 years. That is a big increase! But the interesting thing is that it turns out that $160 billion of that increase was employer contributions for health insurance, and $220 billion of the increase was Medicaid and Medicare payments. So the increase in private health expenditures was just $20 billion -- not nothing, of course, but way too small to be macroeconomically important. And again, it's impossible for employer and government health care spending to have increased household debt as a financial counterpart.

    the total debt-to-GDP ratio in 1980 was around 150% of GDP, as it had been for 25 years, but began to steeply rise after that, peaking at between 369-386%, depending on your source, If debt played no role, you're suggesting a version of immaculate conception.

    What I'm suggesting is that BORROWING played no role. The distinction between borrowing and debt is one of the big things I'm trying to get people to understand here.

    Think of 1929-1932: over those three years, the household debt-incom ratio rose from 20 percent to 30 percent. Were people borrowing more in those years? No, of course not -- the whole banking system was in collapse. The rise in the ratio in that period is all about the fall in the denominator. My point is that the same dynamics apply in more recent periods. You don't need outright deflation to raise the debt-income ratio, just slower inflation and/or income growth.

    1. By the way -- thanks for continuing to push back against this. It's very helpful in clarifying the argument.

  11. Note: I usually comment here as Random Lurker but lately it sseems all blogs refuse my comments so I'm changing handler.

    A somewhat contingent point:

    Generally "capitalism" is considered the same thing as "free markets", and free markets are supposed to be better than the other option (generally soviet-style "central planning" is the other option considered) because in a free market every actor chooses for him/herself and is better at choosing than some remote central burocrat planner.
    In this view, the fact that 1/3 of the supposed personal consumption is not really chosen by free actors but by the government, or simply imputed, really goes against this rethoric of growing free choice.
    Also in this view the market is a sort of giant soup of all economic choices and is not structured.

    However "capitalism" is not exactly the same thing as "free market", because term capitalism implies the existence of capital: a situation where some sort of "mean of production" permits profits. Generally this happens because of scale efficiencies: A factory that produces shoes that employs 100 workers can produce more shoes than 100 shoe-making artisans; thus the factory owner lowers the price of shoes below what would be possible to said artisans, but still higer than his/her production costs (that include workers' wages), so that s/he still can have a profit.

    I think that there is a relationship between scale efficiencies and free markets: without scale effciencies, free markets wouldn't be that relevant or useful.

    If we assume that scale efficiencies/capital are a fundamental feature of capitalism, we can't see the market as an undifferentiated soup of similar actors, but instead we have to see it as a "sandwitch" of at least 3, possibly 4, different layers; each layer can be seen as a soup of homogeneous actors, but the layers don't mix usually and the actors of each layer beahve differently.
    [a sandwitch of soups: a delicious mixed metaphor!]

    1) the first layer is the labor market, where workers are "free to choose" their jobs (tendentially this should lead to similar wages in each sector). What does it mean that the labor market is more or less capitalistic? At an extreme a labor market were workers are restricted on their career choices is more "feudal" than free market/capitalist. Also business owners should be free to hire/fire freely. So things like sexual or racial discriminations or guilds/unions are less capitalist, and also restriction on migration is against capitalist utopia. However poverty traps, low social mobility and situations where workers cannot really freely risk to change jobs because they have a very low financial security is against capitalist utopia. In this sense, "capitalism" undermines itself.

    2) the second layer is the consumption good market, where more appreciated stuff can command higer prices or larger shares of the market. In this layer your observation that the amount of consumption that is directly chosen by consumers didn't increase really goes against the idea of a "more capitalist" society.

  12. 3) the third layer is the capital good market. Different profits in the consumption good layer cause different rates of profits, and possibly different prices, for different capital goods, and actors in this layer chase the higest rate of profit (usually, though maybe in speculative periods they chase capital appreciation). This lead to the actual distribuition of productive resources in the system, and this is supposed to be the best way to allocate resources. Here on one hand (at least here in Italy) the allocation of resources through the chase to profits increased, in particular because of privatisation of previously public sectors, so we have "more capitalism". On the other hand, right-leaning critics of this system (like Grillo) point out that much of the profitscome from milking the government in various ways. This goes against the utopian view of capitalism (though I believe that it is the normal way of really existing capitalism). More importantly, increasing scale advantages in many sectors mean that those sectors become worldwide oligopolies, so this also is capitalism undermining itself (or more accurately really existing capitalism undermining utopian capitalism).

    4) maybe financial markets could be seen as another layer above the capital good market, but I'm not sure of it.

    All this is to say that, while the rethoric of "free markets" is rampant and apparently dominant, in pratice the real world working of capitalist economies goes very much against this.

    I think that this is the reason there are many right leaning true believers that are continuously tarring moderatly leftish politicians as stalinists: they see that their "utopian capitalism" is very much on retreat, but they don't understand that it is the real world capitalism that is chasing it away, and blame the lefties.

  13. You're on to something, but I think you're a little too eager to kick things off by making a grand statement. One thing I think you're missing in all this is the way in which the systems that you define as social provision have themselves been 'marketized'. Is the shift from defined benefit to defined contribution pension plans really not a 'marketization' of retirement savings, because it's funneled through the employer? Is the shift from state tuition subsidies to student loans not a marketization because those loans are provided by the government? What about the shift from non-profit to for-profit health care provision? The changes in banking law since 1980 also significantly 'marketized' housing finance, culminating in the explosion of private label MBS over the first part of the 2000s (which has now of course been reversed due to the collapse of that market). Also, on housing in general, buying a private home is not collective provision -- it's a market transaction. Not sure it's unreasonable to try to price it somehow as private consumption.

    I haven't looked into the numbers, but I also think it would be good if you reverse engineered some of this stuff by looking into areas where we know that the market has made inroads on private life. For example, the entry of women into the workforce has clearly put all kinds of stress on family child care resources -- how is that showing up? Is it just too small a dollar amount to make a big difference, or did a lot of it flow to informal grey market care that doesn't show up? And where is the increase in household indebtedness going to -- just maintaining consumption in the face of rising wages?

    Anyway, it probably shows that I haven't had the chance to dive into the numbers...just some thoughts.

  14. You're on to something, but I think you're a little too eager to kick things off by making a grand statement.

    I'm sure you're right about that. The temptation of grand statements is hard to resist!

    Is the shift from defined benefit to defined contribution pension plans really not a 'marketization' of retirement savings, because it's funneled through the employer?

    Well, first of all, pension contributions aren't counted as consumption either way. So the numbers in the figure would be the same whether we count employer contributions to pensions as household income, as the BEA does, or whether we count payouts from pensions as household income, as Cynamon and Fazzari do. And in a mature pension system with a constant population, those numbers will be the same anyway.

    On the larger conceptual question, it's not either-or. From my point of view, an employer-sponsored defined contribution pension is less financialized than individual saving, but more financialized that a defined-benefit system, which in turn is more financialized than a public pay-as-you-go system. So where to draw the line between market income and non-market income is always going to be somewhat arbitrary. However, if what we want to do is tell a story about household behavior, I think it is logical to group all third-party pensions together. I think few if any people consider employer contributions to their DC pension as part of their income, which is why C&F don't count it.

    Is the shift from state tuition subsidies to student loans not a marketization because those loans are provided by the government?

    There are no adjustments here for education. All spending on education is counted as consumption, regardless of how it is financed. This includes cases where public financial aid involves the government making tuition payments directly, without the household ever receiving or writing a check. Personally, I think some of that spending should be subtracted from household consumption as well, but C&F don't make that adjustment.

    Again, a system where the government provides subsidies (including subsidized loans) to students to pay for higher ed is clearly more financialized than a system where government pays for higher education directly, but it is less marketized than one where households pay full costs out of pocket or with private loans. We have not reached that point, obviously, but the national accounts currently are written as if we had.

  15. What about the shift from non-profit to for-profit health care provision?

    This is sort of captured by Cynamon & Fazzari's adjustment, in the sense that a shrinking nonprofit sector shows up as a fall in household consumption in the BEA series but not in the adjusted series. But I will need to think about this one more.

    on housing in general, buying a private home is not collective provision -- it's a market transaction. Not sure it's unreasonable to try to price it somehow as private consumption.

    I guess I wasn't clear here. The issue isn't the purchase of new housing -- C&F do group that with consumption. The issue is the flow of housing services from homes that people already own. When you continue to occupy the house you already own for another month, *that* is not a market transaction. But the BEA treats it as if it were, by imputing a rent you-as-tenant pay to you-as-landlord.

    the entry of women into the workforce has clearly put all kinds of stress on family child care resources -- how is that showing up?

    This actually is a perfect example of why Cynamon and Fazzari's approach is a good index of marketization. if the BEA treated childcare the way it treats this other stuff, they would impute a purchase of childcare services from families to themselves. If they did that, a shift from self-provision to market provision of childcare would not affect reported consumption. Of course the BEA doesn't do this -- they don't make an imputation for care of own children as they do for owners' equivalent rent -- so the purchase of childcare (and prepared food, cleaning services, etc.) does show up as an increase in C.

    where is the increase in household indebtedness going to

    Interest payments.

    1. Just to be clear, I agree that owner occupied housing is not collective provision. But it's not market provision either. It is self provision.