Re: [Pen-l] An Economy You Can Bank On

["Jim Devine" <jdevine03@xxxxxxxxx>]

wow! A Chicago-schooler pushing a Marxist emphasis on the rate of
profit (what he calls the "marginal product of capital")! What he
misses is that financial crises can hurt the rate of profit by causing
a realization (deficient aggregate demand) crisis.

He also misses that one reason for the high rate of profit is the the
radical rightward move of the distribution of income. This is
associated with the under-consumption undertow, which implies that
booms can only persist with the help of bubbles (or government help or
rising exports). As I've noted, this kind of profit-led boom becomes
increasingly unstable over time.

> An Economy You Can Bank On
> By CASEY B. MULLIGAN
>
> <Casey B. Mulligan is a professor of economics at the University of
> Chicago.>
>
> "The non-financial sectors will not suffer much from the banking
> crisis, because the general economic importance of banks has been
> highly exaggerated."
>
> "It turns out that John McCain, who was widely mocked for saying that
> "the fundamentals of our economy are strong," was actually right.
> We're in a financial crisis, not an economic crisis. We're not
> entering a second Great Depression.
>
> How do we know? Well, the economy outside the financial sector is
> healthier than it seems.
>
> One important indicator is the profitability of non-financial capital,
> what economists call the marginal product of capital. It's a measure
> of how much profit that each dollar of capital invested in the economy
> is producing during, say, a year. Some investments earn more than
> others, of course, but the marginal product of capital is a composite
> of all of them - a macroeconomic version of the price-to-earnings
> ratio followed in the financial markets.
>
> When the profit per dollar of capital invested in the economy is
> higher than average, future rates of economic growth also tend to be
> above average. The same cannot be said about rates of return on the
> S.& P. 500, or any another measurement that commands attention on Wall
> Street.
>
> Since World War II, the marginal product of capital, after taxes, has
> averaged 7 percent to 8 percent per year. (In other words, each dollar
> of capital invested in the economy earns, on average, 7 cents to 8
> cents annually.) And what happened during 2007 and the first half of
> 2008, when the financial markets were already spooked by oil price
> spikes and housing price crashes? The marginal product was more than
> 10 percent per year, far above the historical average. The
> third-quarter earnings reports from some companies already suggest
> that America's non-financial companies are still making plenty of
> money.[...]"
>
> Full:
> <<http://www.nytimes.com/2008/10/10/opinion/10mulligan.html?_r=1&ref=opinion&oref=slogin>
>
>
>
>
>
>
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-- 
Jim Devine /  "Nobody told me there'd be days like these / Strange
days indeed -- most peculiar, mama." -- JL.
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