http://research.stlouisfed.org/fred-addin/

Lots of moving parts and unknowables, of course, but if the decline in oil prices sticks and Europe doesn’t unfold in the worse case scenario, then, sure.  But that’s a lot of ifs.

A barrel of oil is down about $20 bucks since March; gas prices, on average, are down about $0.30/gallon since their April highs.  OPEC’s kicked up production a bit, Libya’s gotten back online more quickly than expected, and Middle East tensions have trailed off a bit.  At the same time, sluggish US demand has helped lower price pressures as well.

The rule of thumb is a $10 decline in a barrel of oil that persists for a year boosts GDP by about 0.2%.  So we’re at about 0.4% if this sticks.

The OECD predicts Eurozone slows from crawling forward to crawling backwards this year–recent events, or non-events, really (more bumbling towards austerity), led them to take down their 2012 forecast from 0.2% growth to 0.1% contraction.  Let’s just call that zero.

Finally, Ezra linked to this in the WSJ:

For every one-percentage-point decline in euro-area growth, history suggests growth in the rest of the world will take a 0.7% hit, “with the U.S. seeing a somewhat smaller decline than other parts of the world,” say J.P. Morgan economists, who forecast a 2% hit to euro-zone GDP if Greece leaves the euro.

So, putting all this stuff together, we could get 0.4% extra growth from oil, which would more than cover the slowdown the OECD predicts in Europe.  But worse case scenario, a 2% percent hit to the euro-zone would perhaps shave a point off of US GDP growth.  Maybe the oil boost reduces that by half, so we’re down about 0.5%.  Not good, but not recessionary.

OK, coffee break over.

Such information is especially compelling right now, because as I discussed on an MSNBC segment with Martin Bashir (and as Paul K amps up today), Wall St and the profiteers in general seem deeply pissed off at everyone, especially the President.  You’d thus maybe think they’ve been doing quite badly and the expense of wage earners.  And you’d thus be quite wrong.

First, here are overall corporate profits and compensation as a share of national income since the recession began in 2007q4.  Now, this isn’t all black and white, because you’ve got rich people earning comp and pension funds whose returns depend partly on corp profits.  But pair this figure up with the fact that the stock market is way up under the President, and based on the numbers, the animosity doesn’t make sense.

Source: NIPA Table 1.12.

In fact, this pattern of decline in labor share and increase in profit shares is particularly notable in the US right now.  The following figures from the IMF show that even as it has declined over the last couple of years, labor share remains quite elevated in Europe relative to pre-recession levels (top figure).  In the US, the decline has accelerated.

Source: IMF

The middle figure from the IMF shows that profit growth has been uniquely strong this time around in the US, accounting for most of the growth in nominal GDP.  That’s quite different from the patterns in both earlier US recoveries and those of European economies.

Looking at the bottom IMF graph, while I bristle when people make the foolish fiscal point that “we’re Greece”—not even close, as a passing glance at borrowing costs of gov’t debt will reveal—when it comes to the loss in labor share…um…we kinda are…Greece, that is.

Finally, if we look at the US data just from the corporate sector, where I can break things down in more interesting ways, we see that the 4.6 percentage point increase in profit share since the recession has come largely from the financial sector—the beneficiaries of the bailouts!—and that the compensation share in that sector has been severely whacked.

Source: NIPA Table 1.14

OK, that’s a lot of numbers and trends but they all say the same thing: even with the black/white caveat above, it is clearly the case that the narrow slice of families whose incomes depend on financial profits are doing a lot better than those who depend on their paychecks.

For the President, it must feel like you’re driving down the road and you see this injured Doberman Pinscher.  You nurse it back to health at which point it attacks you.

(H/t’s to IDG, HS)

However, what with summer vacations starting, and controlling for the fact that Americans are driving less, and given that I’ve somehow managed to never feature one of my favorite jazz singers, today’s musical interlude takes you on an extremely smooth ride down route 66. 

Nat King Cole’s at the wheel, so you know they’ll be lots of stops along the way for swinging piano, jazz guitar, and some of the mellowest vocal chords this side of paradise.  Enjoy, cats and kittens, and whichever direction you’re motoring in, or even if you’re just gettin’ your kicks at home, have a great long weekend.

You’ll see Amarillo…Gallup, New Mexico
Flagstaff, Arizona
Don’t Forget Winona
Kingman, Barstow, San Bernardino!

I mean, if I showed you a barber shop, a school, a car factory, an accounting firm—you’d quickly get what they were doing here. But PE is different, and absent explanation, it’s easy to get stuck on one end of the “vampire/vulture-to-capitalism’s-savior” continuum.  In that regard, here’s one of the more nuanced, and thus worth reading, pieces about private equity and its role in the larger economy.

Note, for-the-record, that I’m not talking here about this week’s debating point as to whether PE experience is relevant to the job of president—the main point I and others have tried to bring to that debate is: whatever the merits and demerits of private equity, job creation is not part of the mix.  If profitability meant laying off workers, that’s what the PE firm would do, and visa versa.

In this post, I’d like to add two points to the discussion: 1) job growth and profitability, and 2) the tax implications of debt financing. 

As stressed in the NYT piece:

The business of private equity firms is buying and selling companies, all done with the goal of earning big returns for themselves and their investors. Sometimes that means jobs are created; sometimes it means jobs are lost.

This begs the question about the relationship between “big returns” and job growth.  Statistically, they’re both cyclical variables, and both tend to go up in expansions and fall in recessions.  But to what extent is job growth a function of profitability?

Theoretically, it’s not as simple as you’d think.  Profits=revenue-costs, and labor is a cost.  So, depending on underlying demand and the level of productivity, profitability might be enhanced by hiring more people or firing more people (the micro-theory says you hire up to the point where the value added of the last person hired equals the revenue they produce, but that’s too vague a guide in practice).

Like everything else in economics, the relationship between profitability and job growth must be evaluated empirically.  The figures below compare this relationship across three different periods using yearly private sector job growth and corporate profits as a share of national income.  Both variables are indexed to 100 in the base period; the profit share increase represents percentage points over the base year.

In the 1990s, profits relative to income went up a few percentage points—about an average recovery—but job growth was quite strong.  In the 2000s, profit growth accelerated but job growth slowed quite sharply.  And most recently, in the great recession and its aftermath, profits have more than recovered while employment is only slowly climbing back. 

It’s quite remarkable, given how damaged the economy and especially the financial sector were after the crash, how quickly profits reversed course.  Of course, part of this was due to Wall St. bailouts—financial sector profits have led the way.  It’s also the case that globalization enables American multinationals to ratchet up foreign profits even while the US market remains sluggish.  But the larger point is that solid profit growth in the current recovery hasn’t given much of a lift to jobs.

Turning to debt financing, here’s where I think PE as it has evolved in America (and elsewhere, though less so because of less favorable tax treatment) is truly problematic.   As I stressed here, because interest on their borrowing is tax deductable, debt financing and PE are locked in a symbiotic relationship that distorts incentives and leads to levels of indebtedness that can cripple otherwise stable companies. 

And the tax incentive is huge.  According to the Treasury Dept:

..the effective corporate marginal tax rate on new equity-financed investment in equipment is 37 percent in the United States. At the same time, the effective marginal tax rate on the same investment made with debt financing is minus 60 percent—a gap of 97 percentage points. This compares to an average difference of about 51 percentage points for other G-7 countries…

And they use it.  According to this academic study, the median PE deal in the 1990s and 2000s was 70% leveraged (h/t: MG).

At the end of the day, I don’t have a global position as to whether PE deals, on average, add value or not.  Their existence in certain cases looks to me like it imposes a discipline on management that is useful in discovering efficiencies that would otherwise have gone untapped.  In other cases, they seem to extract value for themselves and their shareholders in ways that do more harm than good to the company, its workers, and its community. 

Either way, they’re not net job creators and they sure don’t need that crazily huge, hugely distortionary tax break.  And if a former PE guy or gal were to run for president, I’d like to hear them emphasize those two points.

I Wish, Stevie Wonder

When I Think of You, Janet Jackson

(I Wanna) Be Your Man, Jesse Johnson

In My House, Mary Jane Girls

Rock Steady, Aretha Franklin

What have you got?  Only AAA-list, most funkadelic selections, please.

That was pretty much my reaction to House minority leader Rep Nancy Pelosi’s (D-CA) letter to Rep Boehner yesterday, wherein she mixed a very good idea with a very bad one.  Details here.

The good: Congress should vote now to extend the Bush tax cuts on the middle class but not those on upper income households.  There is no political constituency against this extension—it is not contested ground.  In the interest of fiscal rectitude, there should come a time when we collect more revenue from non-wealthy families, but that should wait until their pretax incomes start doing better than they have over the past decade.

On the other hand, it is time to let the highend Bush tax cuts sunset—i.e., for households with incomes above $250K.  There’s a trillion in revenue up there, including interest savings on the debt.  The growth impacts of such a tax hike are minimal, as I stress here, and I seriously worry (seriously, Dad??) about these cuts becoming permanent if they’re once again extended.

The bad: But that’s not what leader Pelosi  suggested to Rep Boehner.  She moved the $250K threshold up to $1 million.  That is, she wrote:  “Democrats believe that tax cuts for those earning over a million dollars a year should expire…”

That is a very big, very bad deal.  It’s also a weird bargaining strategy, but I’ll leave that to the game theorists.  Fiscally, it loses something like 40% of the revenue according to the (indispensable) Citizens for Tax Justice—CTJ also points out that about half the benefits of this higher threshold accrue to—wait for it—millionaires, who would, under this plan, pay the lower Bush rates on their earnings from $250K-1mil.

But it also redefines “middle class” in this debate as going up to $1 million.  There is less than one-half of one-percent of American households with incomes above that threshold.  True, there’s only a few percent—2-3%–above $250K, so that was already arbitrary and not so representative of the middle class, I suppose.  But again, really…seriously??

The White House, to their credit, came out swinging hard against the idea (link to come).   And Politico has the following, suggesting this is some kind of tactical move.

A Democratic source explained Pelosi’s move: if Republicans didn’t agree to her proposal, it would make it “clear they are standing with millionaires and endangering the economic security of the middle class.”

Too clever by half, IMHO.  This is a bad genie to let out of the bottle.

For the record, Leader Pelosi has been a wonderful force in the Congress and a stalwart fighter for progressive change.  But really, Nancy??  Seriously???

I am the Grammarian about whom your mother warned you.

Second, is it rude to look at your smart phone during meetings?  I guess so, but a) everybody does it, b) even well-run meetings are, at some point, inefficient, and c) it is a bit rude, I’m sure, but it’s hard not to and can be done without losing the thread of the conversation.  I think it’s quite rude to do anything more than check it–i.e., to respond to an email is impolite.

I will say this: if you’re having a meeting about the economy and the budget deficit, and someone goes into a rap about how the markets and going to punish us for our fiscal policy, the bond vigilantes are coming, the end is near, yada-yada…at that point, it is legitimate to check your phone.

The language in one prospectus seeking Bain Capital investors was clear: “The objective of the Fund is to achieve an annual rate of return on invested capital in excess of the returns generated” by other investments. Any job creation was accidental.

This is not an indictment of Bain in particular or PE in general.  But when they invested in companies, if profit maximization for Bain’s investors implied layoffs or shut downs, then that’s what they’d do.  And visa versa—if they saw a chance to build up a company and gain market share, they’d go after it.  But even then, labor is always a cost in PE calculations, one to be avoided unless profits would otherwise be left on the table.    

In that regard, a key linkage here, one not stressed in the oped, is the non-correlation between profitability and job growth.  It falls right out of the above discussion, but there are people listening to this debate who may reasonably think, “OK, PE firms maximize profits, not jobs…but don’t jobs follow profits?”

Alas, all too rarely in recent years has higher profitability linked to job growth.  Obviously, both are cyclical so they loosely correlate, but the fact is that profit growth was strong in the 2000s when job growth was anemic and in this current expansion, corporate profitability has more than recovered from its swoon in the Great Recession while jobs are only slowly climbing back.

Interestingly, a number of the delivery system reforms that are central to the Affordable Care Act’s cost saving strategies are showing up already.  These include things like accountable care organizations (where providers form groups to lower costs through coordinating care, reducing duplication, avoiding errors), bundling payments (one payment for a full medical “episode” as opposed to separate ones for each provider), “medical homes” (assigning a primary doctor to coordinate a patient’s services), and financial incentives to reduce hospital recidivism. 

Note that much of what we’re seeing here is the private sector trying out these measures even before the law has fully taken hold (and before the Supreme Court has announced its verdict on the ACA).  So it’s a unique and positive interaction between pubilc policy and private practices in an area where we very much need these types of innovations.  As I see it, the way forward for America involves fewer synthetic credit default swaps and more accountable care organizations!

Anyway, I hope such experimentation is why spending has slowed, but other evidence points to cost shifting onto to folks who can’t afford the services they need.  That’s another way to bend the cost curve—a truly lousy way.