The market turn/Neoliberalism. From stylised charts to stylised facts.

Some charts. some papers and some rough thoughts rather than a blog.

Ryan Avent in an excellent piece on the dollar has a strong (and early) contender for chart of the year.

As Mike Bird noted on Twitter, “ Inverting the % of countries with foreign exchange controls is a pretty good proxy for neoliberalism”.

His rough sketch is below.

(Although ideally, you’d want to weight it by GDP on a PPP basis…)

I don’t especially like the term “neoliberalism” — it’s too often used as a synonym for “stuff I don’t like”.

I’m more comfortable with Offer’s term — “market liberalism”.

I was very struck by Offer’s (very stylised) chart (from the paper linked to above).

As the abstract below explains, Offer explains the pattern of rising public expenditure followed by rising debt as part of a shift from using social democratic means to private financial market means to deal with life-cycle dependency.

The chart is for the UK, but Offer argues it holds for most Western advanced economies. Here’s a quick (and less stylised) US version:

Anyway… I’m left wondering if there’s link between Avent’s and Offer’s charts?

The Offer story is straight forward: social democracy means rising state spending until a perceived limit is hit, followed by rising household indebtedness after the market turn of circa 1980.

What his stylised chart misses is the ramping up of credit growth from the late 1990s onwards until 2008.

I’m wondering if, what Offer calls, “the market turn” was prolonged by the reserve accumulation shown in Avent’s chart?

Think in terms of Obstfeld and Rogoff here:

And then take the global imbalances/saving story a step further. In terms of this recent paper:

The sectoral composition of global saving changed dramatically during the last three decades. Whereas in the early 1980s most of global investment was funded by household saving, nowadays nearly two-thirds of global investment is funded by corporate saving. This shift in the sectoral composition of saving was not accompanied by changes in the sectoral composition of investment, implying an improvement in the corporate net lending position. We characterize the behavior of corporate saving using both national income accounts and firm-level data and clarify its relationship with the global decline in labor share, the accumulation of corporate cash stocks, and the greater propensity for equity buybacks. We develop a general equilibrium model with product and capital market imperfections to explore quantitatively the determination of the flow of funds across sectors. Changes including declines in the real interest rate, the price of investment, and corporate income taxes generate increases in corporate profits and shifts in the supply of sectoral saving that are of similar magnitude to those observed in the data

Then look back to a 2012 paper from the same authors:

The stability of the labor share is a key foundation in macroeconomic models. We document, however, that the global labor share has significantly declined over the last 30 years. This decline was associated with a significant increase in corporate saving, generally the largest component of national saving. We relate the labor share to corporate saving empirically and theoretically using a model featuring CES production and imperfections in the flow of funds between households and corporations. These two departures from the standard neoclassical model imply that the labor share fluctuates and that corporate saving affects macroeconomic allocations. We argue that it is important to study the labor share and corporate saving jointly, and offer a unified explanation for their trends. A global decline in the cost of capital beginning around 1980 induced firms to shift away from labor and toward capital, financed in part with an increase in corporate saving.

So… what I’m left wondering is this: if you put it all together: Offer’s market turn, Avent’s story of reserve accumulation as fixed exchange rate regimes ended, the changing balance of coporate savings and investment and the fluctuation of the (global) labour share…

Do you get to what I called (in December 2013, just as the latest bout of the secular stagnation debate was kicking off) the new stylised facts of (UK) growth:

  1. Rising GDP growth does not necessarily feed through to rising standards of living for households in the middle and below.
  2. Periods of growth are associated with a falling household savings ratio.
  3. Periods of growth are associated with a widening trade deficit.
  4. Household borrowing is more responsive to low interest rates than corporate borrowing.
  5. The marginal propensity to invest is falling. There is, in times of growth, a large surplus of profits over investment.
  6. There is a long term tendency for the share of consumption in GDP to rise.

Perhaps. Perhaps. Something to ponder further.

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