No Takers? No Support For Paul Krugman?

I have a long post describing three bets I am prepared to entertain with Krugman's supporters.  Despite his popularity in the blogosphere, I have yet to find a taker.

Fortunately, we have time.  And let's just recap the propositions - Krugman says that only higher growth can improve the return on capital of American business, thereby helping the stock market.  However, he goes on, since higher growth also improves the financial outlook for Social Security, personal accounts only make sense when we don't really need them.

Nonsense, say I - basic finance says that if you want to increase the return on capital, you need to either increase the income being earned by the capital, or decrease the amount of capital employed.  Growth is a secondary consideration - in fact, growing the profits of a low return-on-capital enterprise simply results in a larger enterprise with a low return on capital.

My answer - increase the income share going to capital in the Social Security forecasts.  With a starting cost of capital in the forecasts of 5%, a 30% increase in the income share will increase the return on capital by 30% to 6.5%, which is the target offered by Krugman.

Does that seem like a lot?  If the income share rise from 8% to 10.4% of GDP, that is a 30% increase.  And how might this happen?  Well, productivity growth is forecast at about 1.7% per year.  If we have two years of stagnant real wages, with workers unable to benefit from higher productivity, then "capital" captures two years of productivity related growth.  This will raise the income share going to capital by (roughly) 3.4% (e.g., from 8% to 11.4%), which is well above the 2.4% increase we are looking for.

Now, in his column Krugman implicitly says that such a result is "mathematically impossible" without much higher long term growth.  But surely the spectre of workers threatened by outsourcing and rendered helpless as the Bush Administration guts labor protections is a staple of Democratic politics. In fact, let's see what Krugman wrote just a bit more than a year ago:

Commerce Department figures reveal a startling disconnect between overall economic growth, which has been impressive since last spring, and the incomes of a great majority of Americans. In the third quarter of 2003, as everyone knows, real G.D.P. rose at an annual rate of 8.2 percent. But wage and salary income, adjusted for inflation, rose at an annual rate of only 0.8 percent. More recent data don't change the picture: in the six months that ended in November, income from wages rose only 0.65 percent after inflation.

Why aren't workers sharing in the so-called boom? Start with jobs.

...But if the number of jobs isn't rising much, aren't workers at least earning more? You may have thought so. After all, companies have been able to increase output without hiring more workers, thanks to the rapidly rising output per worker. (Yes, that's a tautology.) Historically, higher productivity has translated into rising wages. But not this time: thanks to a weak labor market, employers have felt no pressure to share productivity gains. Calculations by the Economic Policy Institute show real wages for most workers flat or falling even as the economy expands.

So if jobs are scarce and wages are flat, who's benefiting from the economy's expansion? The direct gains are going largely to corporate profits, which rose at an annual rate of more than 40 percent in the third quarter. Indirectly, that means that gains are going to stockholders, who are the ultimate owners of corporate profits. (That is, if the gains don't go to self-dealing executives, but let's save that topic for another day.)

My impression of this debate is that sometime soon, Krugman's supporters (if they can be coaxed forward - they stood up and cheered when he wrote this) will explain to me that "mathematically impossible" means "Not, in Krugman's opinion, very likely".  C'mon - even on sports talk radio, no one says that it is mathematically impossible for the Orioles to win the pennant.

MORE:  Well, well.  Here is a CBO forecast covering 2003 (Historical) to 2014.  Although it may not be directly comparable to the Soc Sec forecast, the CBO has corporate profits moving from 7.9% of GDP in 2003 up to 11.7% in 2005, and then settling down at 9.1%.  Yet I am being implicitly informed that an increase from 8% to 10.4% is "mathematically impossible".  In fact, it would simply require the profit share to *fall* by a bit less than the CBO expects.

Fine, it may not be directly comparable, and we have different starting points, yada, yada.  But the profit share I need to make my forecast work is not science fiction, even by CBO standards.

UPDATE:  Incredibly, folks are not rushing up from the left to bash Krugman, although I have even helped them with the spin - since my revised low growth/high return forecast relies on higher corporate profitability, the new sound bite will be (once they have digested this) that "OF COURSE raising profitabilty raises the retrun on capital, anyone knows that, it was too obvious for Krugman even to risk insulting his readers by mentioning it.

And the reality is (they will go on), privatizers did not lie about the economy's growth prospects; they lied about just how greedy and rapacious corporations would have to be to make this work.

It still spins, just a bit differently.

Why Krugman missed a chance to bash greedy corporations and the Republicans who enable them will remain as one unanswered question; another will be, how does raising the growth of a low return on capital scenario improve the return on capital?  (There is a productivity angle that makes this possible but implausible; see the tedious math at the end of this post).

We hope to have a list of Frequently Unanswered Question for Paul Krugman soon enough.

Comments

[Birkel]

Maybe not mathematically impossible for the Orioles but on sports talk radio they're approaching that POV asymptotically. (Hat Tip: Kausfiles- not for the idea, just that use of the word)

And as for the KC Royals... I'll go ahead and say it. Mathematically impossible. Ditto the Devil Rays.

[Mike J]

Response to the Krugman Challenge from the lefty blogspehre:

Unlike Krugman, you have an obscene amount of reason and fact to back up your rantings. So much, that my eyes glazeth over. But that doesn't diminish the impact! If I listened to the posts instead of read them, I would be bludgeoned into a stupor by trying to grasp the concepts. Perhaps, since Krugman's supporters are, shall we say, deficient in cognitive faculties they have trouble even understanding your challenge?

When issuing such a call for feats of strength, perhaps you should lower your language to a more Kugman-ish level?

Love the site!

[Fred Boness]

Have you tried the anonymous economist at Angry Bear?

[TM]

Helpful Link on Econ data

Thanks, I e-mailed him, yes. Incredibly, folks are not rushing up from the left to bash Krugman, although I have even helped them with the spin - since my revised low growth/high return forecast relies on higher corporate profitability, the new sound bite will be (once they have digested this) that "OF COURSE raising profitabilty raises the retrun on capital, anyone knows that, it was too obvious for Krugman even to mention.

And the reality is(they will go on), privatizers did not lie about the economy's growth prospects; they lied about justhow greedy and rapacious corporations would have to be to make this work.

It still spins, just a bit differently.

Well, they will get there. I don't know if I will win the Baker Cup (alluded to in Krugman's column).

[Patrick R. Sullivan]

Hmm. Max Sawicky links to Bruce Bartlett's lastest, where we can read:

"...the Social Security tax begins falling as a net contributor to federal revenues in 2008, when the surplus of Social Security taxes over benefits will peak at 0.8 percent of the gross domestic product. After that, this figure gradually falls to zero in 2018 and becomes negative thereafter."

I made it to be 2009, otherwise Bartlett's and my point, are identical. Funny that Max links to one, and ostracizes the other.

We'll see how long that point remains in his comments section. Maybe TM will want to place another bet?

[TM]

So much, that my eyes glazeth over.

I'm getting numb myself, but I think we are down to the last day. Time permitting, I hope to claim the Dean Baker "No Economist's Left Behind" Cup (such cheek!) today, at which point, they will see the end of me.

[Noah]

OK, Correct me if I'm wrong, but doesn't your projected scenario for high profits in a low economic growth environment require price inflation to exceed wage inflation? Maybe I slept through too many economics classes, but I thought market pressures were supposed to prevent this from happening.

You are counting on companies to pass on profits from their reduced costs to investors rather than reducing prices to try to increase market share.