Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Wednesday, February 23, 2011

Still More Major Shifts, Circa 1980

Over at Illusion of Prosperity, Stagflationary Mark posted a couple of really interesting graphs, bringing up two points.

1) It's great to have people digging into things that never even occurred to me - not only a learning experience, but unexpected help. 

2) Here is more evidence of deliberate behavior that has contributed to the major economic shifts that happened within a few years of 1980.

Here's a look at the ratio of dividends paid to stockholders by corporations to wages paid to the workforce.

The list of uses for corporate capital is pretty short: investment (in a very broad sense) or distribution. Voluntary distribution avenues include wages and dividends.   Since a stark inflection point in 1976, the dividend to wage ratio has tripled.  If you'd rather consider a long average as your launch pad, that value would be under 5%, so the ratio on that basis has more than doubled.    At a detail level, the decline from 1966 to 1976 (coincidentally, most of the peak inflation period) looks significant.  The ratio has faltered a bit recently, during the economic downturn.  Whether this constitutes a turning point or just a rest stop on the way up is yet to be determined.  (For a no-prize contest, see if you can Elliott-wave label the advance.)

For now, I'll leave it to the reader's imagination to decide what this might mean in terms of wealth disparity and the potential for resource misallocation.

Here's a look at the balance imbalance of trade.

I agree that trade is a good thing.  But good things should be done properly, and in the right proportion.  That was the case with the trade balance for many years - up to an inflection point that is a bit later on this graph - 1984 - but no more difficult to discern.  Before then, the trade balance was so close to parity, you'd almost think it might have been planned that way.  Since then, it's been up-up-and-away, with only a pause in the 90's.  This probably resulted from the '91 recession, but the trajectory was slowed - despite NAFTA - for most of the Clinton admistration.  Again, we see a hint of a possible direction change at the end.   We sure do live in interesting times.

While it's possible that the two graphed items are unconnected phenomena, I have tendency to find interconnectedness in everything (when I can get away with it.)  Not necessarily a straight line, but Mark connects the dots like this:

Higher Trade Deficit -> Higher Unemployment -> Downward Wage Pressure

It's at least plausible.  He also found an article relating trade balance to unemployment, with this statement.

We find a 60 to 72% correlation between the balance of a country’s trade and its overall Unemployment Rate. That is, countries with Trade surplus have lower Unemployment Rates while countries with Trade deficits tend to have higher unemployment.

That's pretty impressive correlation, and lends a lot of credence to the idea that we have been exporting jobs - to our detriment.  And it looks like a policy-driven result.


Stagflationary Mark said...

"And it looks like a policy-driven result."

I believe that the higher natural unemployment rate we should be seeing (due to our trade deficit) has been artificially masked for more than a decade by two unsustainable bubbles (dotcom and housing).

If the 1970s are any indicator, a commodity bubble won't produce the same effect.

St. Louis Fed: Historical Unemployment Rate

Jazzbumpa said...

Mark -

You raise some good points.

It would be great if there were an analytical way to drill down to a definitive answer.


Jerry Critter said...

So it looks like, beginning around 1990, corporations began investing more in their stockholders than in their employees.

Jazzbumpa said...

Jerry -

That's exactly the point, but I trace it back to the 1976 reversal.


Steve Roth said...

This last correlation is damned interesting. I'm going to be researching/thinking about that a lot.