asset shortages and the great recession: a kaldorian perspective
TRANSCRIPT
Asset shortages and the Great Recession: A Kaldorian Perspective
Nicholas SnowdenLancaster University Management School,
LANCASTER,LA1 4YX,
United [email protected]
Introduction
• Monetary and financial variables were relatively neglected by the ‘modern consensus’ macroeconomics before 2008
• Heavy focus on financial sector developments has arisen since with Minsky’s views widely endorsed
• But was financial instability ultimately connected with ‘real’ sector (structural) developments?
• This was a theme in the 1930s (re the Wall Street Crash) and there has been some recent revival:
Sector shifts and investment
• For example, the ‘technological disemployment’ thesis of the 1930s’ has some echoes in Gatti et.al. (2012)
• They draw an analogy between the employment shift from agriculture to manufacturing in the 1920s and the modern shift from manufacturing to services
• Workers in agriculture/manufacturing are trapped between sluggish demand and rising productivity
• Fiscal expansion, or an adequate rate of investment spending could, in principle, aid the transition
• But, if inadequate, might debt-fuelled consumption spending have (temporarily) had a similar role?
A ‘necessary’ bubble?
• This is the theme of the present study – initially prompted by recent writing on asset shortages and ‘necessary’ bubbles
• Kaldor (1966) proposed a (non-speculative) capital gains mechanism to adjust saving (consumption) to investment at full employment
• A minor extension to this model highlights the probable connection between the sub-prime boom and earlier trends in US corporate investment (and saving) behaviour
Purchasing power transfers
• In OLG terms, a bubble asset transfers consumer purchasing power from the high-saving ‘young’ to the low-saving ‘old’
• In Kaldor’s model, higher share prices boost shareholder consumption while releasing equities for workers’ retirement portfolios
• The modification here introduces a given (asset shortage-linked) US current account deficit 𝐹 = 𝑀 − 𝑋 with the associated credit allocated
to corporate needs and, residually, to housing
‘Neo-Pasinetti’ profits?
• Kaldor’s model derives expressions for the long-run profit rate (ρ) and for the equity valuation ratio (v) with a given issue ratio
• In the shorter term, the issue ratio could be derived from a given profit rate (reflecting a predetermined mark-up at full employment):
• Simple rearrangement of Kaldor’s expression for 𝜌 would then imply: 𝑖 =
𝑔𝐾−𝑠𝐶𝜌𝐾
𝑔𝐾
• With this determination of 𝑖 the modified valuation ratio is:
Full-employment asset values
• 𝑣 =1
𝑐𝐵
𝐹
𝑔𝐾1 −
𝑐𝐻
θ+
𝑠𝑊𝑊
𝑔𝐾−
𝑔𝐾−𝑠𝐶𝜌𝐾
𝑔𝐾1 − 𝑐𝐵 − 𝑐𝐻
𝜋
θ
• As national accounting would imply, if 𝐹↑, or if 𝑖 ↓, v↑, (cet.par) to generate extra shareholder consumption
• But the influence of 𝐹↑ on v is lessened if associated housing gains raise consumption through ‘equity withdrawal’ (𝑐𝐻)
• In particular, if investment spending slackens (𝑔𝐾↓) and if the profit rate rises (𝜌↑) then 𝑣↑ (cet.par)
• But, the implied fall in issues diverts credit to the housing sector (reflected in 𝑐𝐻
𝜋
𝜃) limiting the necessary rise in 𝑣
• How did these variables behave before 2008?:
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Corporate 'financing gap' and asset price changes:1950-2013
Real house price deviation from CPI (Ln) 'Q' diff from mean
Finance gap to capex (RH axis) Finance gap to capex HP trend
Corporate funding and asset values
• The dashed series (and H-P trend) show the financing gap as a % of GCF (≈issue ratio)
• This ratio was high in the 1970s while ‘Q’ deviations suggest weak equity valuations (≈v)
• The gap recedes through the 1980s with +veequity gains (‘Q’ deviations) after 1991
• After the exceptional NASDAQ boom the financing gap falls dramatically and housing equity withdrawal greatly increases
Other influences?
• The NASDAQ boom coincided with substantial external financing needs – contrary to the model
• This takes expectations to be constant with capital gains reflecting only the value of installed capital relative to its purchase cost
• If extended it would also suggest that a lower budget deficit would raise share prices, and the budget deficit declined remarkably in the 1990s
• But, was the weakness of ‘Q’ in the first greyed period only due to OPEC and recession? →
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Capital formation and profitability: 1950-2013
GCF to corp VA Gross pt profit to VA
Real interest rate GCF to gross pt profit (RH axis)
GCF to profit HP trend
Over-to-under-investment?
• GCF tended to rise re corporate value added (and profits) during the 1970s up to the Volcker squeeze
• GCF and gross profits both then fell but GCF more so. Earlier in the NASDAQ period, profits amply matched growing GCF
• After 2001 the contrast between rising profits and falling GCF against CVA is striking -
• Despite falling real interest rates - this is the housing equity withdrawal period
• But why did the corporate GCF changes occur? →
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Distributions and the financing gap: 1950-2013
Financing gap to capex Financing gap HP trend
Equity issue to capex Dividends paid to gross pt profit (RH axis)
Changing distribution policies
• Weak equity prices in the first greyed period were linked to low payout ratios and new equity fund-raising
• Beginning in the mid-1980s, the recovery in ‘q’ was linked to the emergence of negative equity issues (share repurchases) and, later, to greatly increased payout ratios
• The timing of share repurchases suggests an interpretation:
Management and shareholders
• The first key buy-back period (1983-92) was linked to the emergence hostile takeovers and leveraged buyouts - prompted by low profits and empire-building in the 1970s (Murphy, 2012)
• Share repurchases during 1992-2001 (shaded) were linked to reorientation of managerial incentives through stock option schemes (ibid)
• Generally, a tighter screening of new capital projects from the 1980s was reasserted after NASDAQ and dominated the cyclical recovery of 2001-07
Investment dearth – housing boom
• In investment/saving (aggregate demand) terms, the corporate sector became increasingly a ‘sink’, rather than a ‘spout’ after 2001
• Combined with hefty capital inflows, and as Kaldor’sframework suggests, monetary policy needed to stimulate consumption
• Contrary to recent trends, and pending a revival in private investment appetites, substantial public capital formation would help to prevent further financial disruption
• Moreover, debt financing for these purposes would also help to address the international asset shortage problem