Central Perk: 25 aug. 2013

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Mish's Global Economic Trend Analysis

Income Inequality Explained: Why Wages Don't, Won't, and Can't Keep Up With Productivity
Hurry! Only 121 Shopping Days Left Before Christmas; What to Expect This Holiday Season; Perpetual Christmas
Brazil Plans $60 Billion Currency Intervention Scheme; Indonesia Abandons Intervention, Adopts Other Measures

Income Inequality Explained: Why Wages Don't, Won't, and Can't Keep Up With Productivity

Posted: 25 Aug 2013 10:36 PM PDT

By now, everyone is well aware that real wages have not kept up worker productivity. But why is that?

The Fed, government bureaucrats, and economists are puzzled by the phenomenon as well as what to do about it.

I can explain easily, but first let's zero in on what is happening.

Workers Don't Share in Companies' Productivity Gains

In stark contrast to the great American dream, CNN notes Workers don't share in companies' productivity gains.

Companies are on a tear in terms of productivity and profits, but they aren't sharing much of the gains with their workers.

The gap between hourly compensation and productivity is the highest it's been since just after World War II. This divergence is one of the major drivers of the nation's growing income inequality.

"A bigger share of what businesses in the U.S. are producing is going to the owners of the firms and the people who lent money to the firm, and a smaller share is going to workers," said Gary Burtless, senior fellow in economic studies at The Brookings Institution.

Productivity, which measures the goods and services generated per hour worked, rose by 80.4% between 1973 and 2011, compared to a 10.7% growth in median hourly compensation, according to the left-leaning Economic Policy Institute, which crunched the numbers last year.

Real Wages vs. Productivity

CNN states "Global competition and national deregulation have kept compensation down, while the decline of union power weakened workers' ability to bargain for higher pay."

Where Did the Productivity Go?

Is the demise of unions and deregulation really the story? The answer is "no", but first consider superficial analysis by Paul Krugman in Where The Productivity Went.

Where did the productivity go?

The answer is, it's two-thirds the inequality, stupid. One third of the difference is due to a technical issue involving price indexes. The rest, however, reflects a shift of income from labor to capital and, within that, a shift of labor income to the top and away from the middle.

Krugman offered no insight as to why this was happening, but he did accurately state "Income stagnation does not reflect overall economic stagnation; the incomes of typical workers would be 30 or 40 percent higher than they are if inequality hadn't soared."

The Wedge Between Productivity and Wages

Mark Thoma commented on Krugman's post in his Economist's View take on The Wedge Between Productivity and Wages

Inequality has reverted to levels unseen since the Gilded Age, financial regulation has waned, monopoly power has increased, union power has been lost, and much of the disgust with the political process revolves around the feeling that politicians are out of touch with the interests of the working class.

We need a serious discussion of this issue, followed by changes that shift political power toward the working class. But who will start the conversation?

Who Will Start The Conversation?

Thoma asks "Who will start the conversation?"

I am more than happy to start the conversation (and indeed already have on numerous occasions). Nonetheless, let's try once again, starting with a link a close friend sent just today: "A Peek Inside Tesla's Robotic Factory"

I invite you to read the article, but please watch the video.

Technology Overtakes Demographics

Watching that video should explain many things. The key point that should be easy to spot is technology has surpassed demographics.

Krugman's Mea Culpa

Paul Krugman was let to the recognition party as evidenced by his article Is Growth Over?

"Smart machines may make higher GDP possible, but also reduce the demand for people — including smart people. So we could be looking at a society that grows ever richer, but in which all the gains in wealth accrue to whoever owns the robots."

Robots, Demographics, the Fed

Amusingly, Krugman admitted in December of 2012 that he did not understand what was happening (let alone what to do about it).

In Human Versus Physical Capital Krugman stated ...

So the story has totally shifted; if you want to understand what's happening to income distribution in the 21st century economy, you need to stop talking so much about skills, and start talking much more about profits and who owns the capital. Mea culpa: I myself didn't grasp this until recently. But it's really crucial.

Robots, Demographics, the Fed

Not only was Krugman was late to the problem, he also missed the central cause of the problem, who is to blame, and what to do about it.

As noted above, technology has overtaken demographics. Before that happened, the Fed (central banks in general) could inflate at will, waiting for wages to rise with inflation.

However, the natural state of affairs as a result of productivity increases is falling prices (not rising nominal wages). One look at computer prices (where there is no government or union interference) should suffice to prove the point.

Yet the Fed is hell bent on preventing price deflation. The Fed succeeded but it has been a Pyrrhic victory.

Prices are going up, but wages have not kept up. It is as simple as that.

In the absence of Fed policies, wages would be stable to declining, but prices would fall more, and thus real wages would rise.

Instead, and as a direct result of Fed inflationary policies, profits have gone to those with first access to money, notably banks and the already wealthy.

The solution is to get rid of the Fed and fractional reserve lending, not tax robots or increase inflation as Krugman and others hypothesize.

Unfortunately, we see all sorts of preposterous proposals by various inflation proponents stating that more inflation is the key to success.

For example, Noah Smith, economist author of the "Not Quite Noahpinion" blog, recently proposed 5% inflation stating "Inflation makes you richer ... to the benefit of the young and the poor ... which is why conservatives don't like inflation"!

For details of Noah's Alice in Wonderland economic thesis, please see Ivory Tower Academics, Inflation, and Kindness.

Bottom Line

The Fed and its inflationary policies are directly responsible for the massive rise in income inequality, yet numerous economists promote more inflation and taxation of robots as the solution.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Hurry! Only 121 Shopping Days Left Before Christmas; What to Expect This Holiday Season; Perpetual Christmas

Posted: 25 Aug 2013 01:53 PM PDT

Better hurry. There's "only" 121 shopping days left before Christmas.

If you think that sounds ridiculous so do I. But all it takes is for one major retailer to start Christmas promotions a few days earlier than last year, and all the lemming fall in line.

Thus, retailers en masses started bombarding customers with Christmas promotions three days sooner this year than last.

What to Expect This Holiday Season

MarketWatch says Wal-Mart's free layaway launch foreshadows a competitive holiday to come.

Many top retailers have cut their full-year earnings outlooks, a clear indication they see a rough holiday season ahead.

Wal-Mart Stores Inc. WMT , cognizant of the climate, is wasting no time getting a jump on the competition.

Merchandising and marketing chief Duncan Mac Naughton, speaking Wednesday before 6,000 employees at Wal-Mart's annual holiday meeting, said the company for the first time will introduce free layaway with no opening fee and no gift-card reimbursements. Last year, Wal-Mart layaways carried a $5 fee. It's also adding infant toys, car stereos and other automotive electronics to the list of categories available for layaway. The program starts Sept. 13, three days earlier this year, and lasts through Dec. 13.

Citigroup analyst Deborah Weinswig said Wal-Mart's layaway-tied sales last holiday season rose about 10%. "We have a cautious view on the consumer," she said, adding Wal-Mart's no-fee program will resonate with shoppers given the challenging economic environment.

Christmas in August

As goes Wal-Mart, so goes the rest of retail. On Thursday CNBC stated Retailers start Xmas deals.

Even before the school bells are ringing for many families, retailers are sounding sleigh bells.

Yes, that's right. With 120-plus shopping days left, stores are already talking up their holiday offers.

Toys R Us announced Wednesday that it would expand its price-match guarantee to include online retailers including Amazon.com, Walmart.com, Target.com and BestBuy.com, among others. The aim, according to the release, "Removing any doubt before holiday shopping begins in earnest that customers are receiving the best available prices."

"Retailers are determined not to be left on the sidelines," said Dave Cheatham, managing principal of Velocity Retail Group. "They're reinventing the rules on how to do holiday shopping."

And there is some basis for the Christmas-in-August approach. "We do know that 40 percent of holiday shoppers say they begin shopping before Halloween," said Kathy Grannis, spokeswoman for the National Retail Federation. If it draws in even a few extra customers, early action can be a big advantage in a competitive season, she said.

"Perpetual Christmas"

So when does Christmas in July start? Heck, why not perpetual Christmas?

And I have just the slogan: "It's always Christmas at Wal-Mart". And if it's "Always Christmas", there's never any shopping days left - so you really better hurry with that shopping!

Wal-Mart better grab this slogan before Amazon does.

Retailers seem to be worried. But if consumers behave rationally for a change, it will be a good thing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Brazil Plans $60 Billion Currency Intervention Scheme; Indonesia Abandons Intervention, Adopts Other Measures

Posted: 25 Aug 2013 10:59 AM PDT

The Financial Times reports Brazil, Indonesia launch measures to shore up their currencies.

Brazil and Indonesia have moved to stem the declines in their currencies and shore up confidence at the end of a torrid week for emerging markets where local borrowing costs hit a two-year high.

The central bank of Latin America's largest economy said late on Thursday that it would launch a currency intervention programme worth about $60bn to ensure liquidity and reduce volatility in the nation's foreign exchange market.

On Friday, Indonesia's chief economic minister Hatta Rajasa told reporters that the government would increase import taxes on luxury cars, introduce tax incentives for companies investing in agriculture and metals industries and aim to reduce oil imports.

Brazil's huge programme, which will be conducted through currency swap and repurchase agreements, follows a more than 15 per cent depreciation in the real against the dollar this year to its weakest levels in more than four years.

Brazil's central bank said in its statement that it would on Monday to Thursday offer $500m a day in currency swaps to support the real, while on Fridays it would sell $1bn on the spot market through repurchase agreements.

"If judged appropriate, the central bank will take additional measures," the bank said in the statement. The programme, which will last until December, follows intervention this year by the bank through derivative markets and other means worth about $45bn.

Brazil's Currency War

These moves by Brazil are rather amusing since Brazil launched a "currency war" while complaining bitterly over the past two years that its currency was too strong.

Flashback March 3, 2012: Brazil Declares New Currency War on US and Europe; Japan Losing Balance of Trade Battle

Brazil has declared a fresh "currency war" on the US and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country's struggling manufacturers.

Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not "sit by passively" as developed nations continue to pursue expansionary monetary policies at the expense of Brazil.

"When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil," he said on Thursday after announcing changes to the so-called IOF tax.

Be Careful of What You Ask

Countries need to be careful of what they ask as they just might get it. Brazil got what it asked and now does not want it.

OK Guido, what happened to the increased competitiveness you thought you were going to get?

Brazil's currency madness should provide a lesson for Japan, but it won't.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Seth's Blog : "When I grow up..."

"When I grow up..."

No kid sets out to make Doritos commercials. No one grows up saying, "I want to go into marketing."

More than ever, though, folks grow up saying, "I want to change the world." More than ever, that means telling stories, changing minds and building a tribe.

You know, marketing.

At least if you want it to be.