Thursday Highlights

Well, we made it to Thursday without too too much of the embarrassing theatrics, eh?

  1. Now that is quite striking.
  2. Ooooh, let’s try to open old wounds.
  3. Theology, anthropology and political science all rolled in together. Whaddya get out? The Constitution.
  4. Obamacare estimates.
  5. If that is not satire, then there’s another reason to call it the dismal science.
  6. Never happen. As soon as the Democrats cotton that legalizing polygamy will end the inheritance tax … they’ll be dead set against it.
  7. Not an AR. This.
  8. Inconsistency.
  9. Remembering Plato apparently fondly.
  10. Gosh, remember just earlier this week … I linked charts indicating corporate “sitting on cash” is a myth, makes the title tag-line ironic, eh?

27 Responses to Thursday Highlights

  1. Never happen. As soon as the Democrats cotton that legalizing polygamy will end the inheritance tax … they’ll be dead set against it.

    I agree states should stop being in the business of prosecuting people for polygamy. If some man in Utah wants to live with 5 women and everyone is an adult and no one is being forced or abused then the state should leave them alone. In that sense polygamy should be legalized.

    In the sense that polygamy should be legalized meaning marriage licenses should be issued, problem is there’s nothing to legalize. Unlike SSM the law has no structure for marriages of 3 or more people AND more importantly no clear path to derive a single structure. In short, how does legal SSM work? Same as different sex marriage. How does polygamy work? No one can say as there are many possible legal systems of polygamy, many mutually exclusive. If a polygamy advocate wants to propose a system, then the merits of that proposal can be debated and evaluated but in the absense of that this is time wasted on speculation. And why are you wasting time talking about polygamy instead of proposing ways to stop sex trafficking?

  2. Gosh, remember just earlier this week … I linked charts indicating corporate “sitting on cash” is a myth, makes the title tag-line ironic, eh?

    Actually could you double check that link. I tried to hit it and just got Forbes’s home page.

  3. Boonton,

    I agree states should stop being in the business of prosecuting people for polygamy. If some man in Utah wants to live with 5 women and everyone is an adult and no one is being forced or abused then the state should leave them alone. In that sense polygamy should be legalized.

    You think you’ve cleverly dodged the inheritance tax issue by pretending licensing will do it. Yet, oddly enough common law marriages exist and are not licensed … and the putative common law spouse does the (inheritance, insurance &c) benefits of a licensed spouse. If you legalize or formalize your acceptance of polygamy … you haven’t dodged it by requiring licenses.

    Actually could you double check that link. I tried to hit it and just got Forbes’s home page.

    Do you really want to defend Krugman?

  4. You think you’ve cleverly dodged the inheritance tax issue by pretending licensing will do it. Yet, oddly enough common law marriages exist and are not licensed … and the putative common law spouse does the (inheritance, insurance &c) benefits of a licensed spouse

    There is no inheritance tax issue. Only legal spouses are exempt from inheritance tax on the tiny fraction of estates subject to the inheritance tax. What I was speaking too was the fact that in some states polygamy itself is a crime, meaning men and women who are not legally married (like in the series Big Love) can nonetheless be charged with a crime simply for living together ‘as if’ they were married. IMO Mormon dominated states are using such laws as a tool to punish sects that have broken with the mainline Mormon Church. Not the gov’t’s job IMO to help a church punish its heretics. I simply think there’s no reason the state should be bothering such people provided they don’t bother anyone else.

    Now again if you want to talk about legalizing polygamy in the sense that the state will issue marriage licenses, have a system of divorce and family dispute resolution etc. for polygamous couples, etc, you’re just talking about something entirely speculative. No such system can be enacted by just declaring the current system will remain as is but ‘allow polygamy’ the way it can with SSM. Since that’s the case there’s not much that can be said unless someone is actually proposing a legal polygamy system that we can evaluate. Let me know if that happens.

    Do you really want to defend Krugman?

    Don’t really need too, but it might be interesting to see what the ‘corps don’t have cash’ argument looked like.

  5. Boonton,
    I linked a few days ago (the corps/cash issue). I think it was Marginal Revolution … they showed a graph which showed that the ratio of corporate profits to cash has not changed in the last 30 or so years.

    Only legal spouses are exempt from inheritance tax …

    A common law spouse will not pay inheritance tax (and can sue for alimony on separation).

  6. Ratio of profits to cash? Clearly then if corporate profits go up quite a bit so can corporate cash holding even if the ratio of profits to cash remains constant. Funny isn’t it how sometimes the simple things in math can still trip one up?

    Common law spouse still = legal spouse for states that accept common law marriage.

  7. Boonton,

    Common law spouse still = legal spouse for states that accept common law marriage.

    So, then licenses aren’t required as you claim.

    Ratio of profits to cash? Clearly then if corporate profits go up quite a bit so can corporate cash holding even if the ratio of profits to cash remains constant. Funny isn’t it how sometimes the simple things in math can still trip one up?

    I’m confused. Krugman claims that corporations are sitting on unwarranted/unusual amounts of cash. The Marginal post shows that corporate profits to cash hasn’t changed, and that corporate profits have risen, i.e., the amount of cash held by corps isn’t unusual that is Krugman’s claim is just plain wrong. What math is tripping me up?

  8. So, then licenses aren’t required as you claim.

    Not for common law marriages. But the problem for using this as an estate tax dodge is that if you’re not going to get a formal license, you have to basically be able to demonstrate you were married by ‘acting like’ you are married. Doing polygamy things like splitting your time between different houses and women would most likely end up getting you ruled as not married to anyone thereby voiding yourself exemption for even a single spouse. More interestingly, many polygamists have a role of ‘first wife’ who is the one who holds the actual civil marriage license. Just as common law is automatically trumped by legislated law, such an arrangement would void any ‘common marriage’ claims.

    I’m confused. Krugman claims that corporations are sitting on unwarranted/unusual amounts of cash. The Marginal post shows that corporate profits to cash hasn’t changed, and that corporate profits have risen, i.e., the amount of cash held by corps isn’t unusual

    As usual with shrill anti-Krugman fanatics you mix up different concepts in an attempt to declare Krumgan wrong. In fact you are saying exactly what Krugman says, just using different terms. Sorta like someone saying “the answer isn’t zero, it’s Log 1!”

    What happens if corporate profits go up exceptionally but corporate spending does not rise exceptionally? Cash balances increase. If cash balances increase then that’s potential spending that isn’t happening. Your attempted counter seems to be that if profits go up exceptionally, spending should only rise in proportion to profits. But does that make sense? If you ran a dinner and suddenly saw ten times as much profit each week wouldn’t you consider making the dinner larger or buy spin off properties? Likewise if you saw profits crashing would you simply lower spending accordingly or would you consider cutting off the enterprise entirely? Rapidly increasing profits without even faster increasing spending is a sign that businesses do not see the demand out there hence aren’t going to expand even if they are profitable.

  9. Boonton,

    But the problem for using this as an estate tax dodge is that if you’re not going to get a formal license, you have to basically be able to demonstrate you were married by ‘acting like’ you are married.

    You mean things like living under the same roof? Gosh that will never happen with older parents and children.

    What happens if corporate profits go up exceptionally but corporate spending does not rise exceptionally?

    Then cash balances will rise exceptionally. Except cash balances aren’t exceptional. Which means corporate spending has gone up. Swing. Miss. Try again.

  10. You mean things like living under the same roof? Gosh that will never happen with older parents and children.

    Not really following, most married couples live under the same roof….even if inlaws and adult children are living with them too.

    Then cash balances will rise exceptionally. Except cash balances aren’t exceptional. Which means corporate spending has gone up.

    YOu didn’t cite any evidence of this, you cited a ratio of profits to cash balances. Actually you never cited evidence of that either….you first put up a Forbes link that didn’t work then said you saw it on marginal revolution.

  11. Boonton,

    .you first put up a Forbes link that didn’t work then said you saw it on marginal revolution.

    No. I what was the “forbes” link was the Krugman piece. I said I saw the graph showing that profits and cash-on-hand have tracked each other, and the claim that there is excess cash on hand right now is mistaken. I thought I’d linked it before.

    Let’s see what google shows, this?

    You have made the clam the profits and cash have not tracked, that right now cash is abnormally high. Do you have evidence?

  12. BTW, other posts that address your corporate cash issue
    http://krugman.blogs.nytimes.com/2013/02/09/profits-and-business-investment/

    and
    http://krugman.blogs.nytimes.com/2013/02/10/still-says-law-after-all-these-years/

    Not sure if this is the MR post you were talking about but http://marginalrevolution.com/marginalrevolution/2013/02/are-corporate-profits-a-sinkhole-for-purchasing-power.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+marginalrevolution%2Ffeed+%28Marginal+Revolution%29

    Go to the bottom and look at the graph he links too of ‘business investment minus corporate profits’. That figure has indeed sunk dramatically in the last few years which would be not be consistent with your story that business spending grows linearly with business profits.

    MR also seems to accept the ‘cash hoard’ story by arguing that accumulated profits held ‘in the bank’ turn into spending via loans to businesses and consumers. But if that’s his story then he is accepting that businesses are seeing cash balances pile up.

    Finally the graph of net investment also seems pretty consistent with a Keynesian model (http://marginalrevolution.com/marginalrevolution/2012/02/the-balance-sheet-recession-and-the-great-stagnation.html).

    Net investment is investment minus depreciation. It’s roughly the investment you do above and beyond simply replacing the capital that wears out due to time and use. Notice all the spending sectors, incl. gov’t, saw net investment decline at the beginning of the Great Recession. Notice the housing boom is the red line which rose over the blue from about 1999 until 2008 or so.

    UPDATE:

    See you found the MR post I did.

    Let’s see what google shows, this?

    But the graph is just retail sales and Cowen does seem to be saying that corps have excess cash on hand….just that excess cash on hand can result in demand via the financial system. That is only a ‘can be true’ statement. Apple can indeed put billions of cash into buying corporate bonds which funds spending by smaller companies. But the financial system can also create paper assets to suck up real purchasing power.

  13. Boonton,

    Here’s the actual link I was looking for.

  14. Maybe I missed it because I clicked the link too fast instead of letting the article run its course.

    What I think you missed from the article:

    1. Actual corporate cash balances have dramatically increased.

    2. This might be due to a ‘rule of thumb’ of corp’s trying to always keep 2 years worth of profits onhand as cash. If profits rise then so would cash.

    3. The ‘rule of thumb’ hypothesis only makes sense if corps were afraid of hitting a ‘credit crunch’ when they absolutely needed access to cash to expand operations. This makes the case for looser monetary policy. It also says corps are indeed suffering a demand shortage. Otherwise they would be expanding right now (either by using their cash reserves or borrowing cash from the market).

    The increase in profits is also suspect when you think in terms of models. Rising profits should correlate with new firms entering the market to reap some of those profits thereby reducing them. Even if the big old firms are keeping hoards of cash in the bank, the banks (or financial markets) should be channelling that cash to fund start ups. A plausible reason they aren’t is because there’s a shortage of demand. The market gets owned by the large firm who is at the bottom of the economy of scale curve leaving little room for a new comer to capture the stagnant market by competiting on price and no new customers to offer sales to upstarts.

  15. Boonton,

    Actual corporate cash balances have dramatically increased.

    No. I saw that. What I also saw was the counter claim that corporate profits have increased and that cash balances have tracked with profits. I haven’t seen you actually disagree with this claim.

    If profits rise then so would cash.

    Which is what was graphed.

    The ‘rule of thumb’ hypothesis only makes sense if corps were afraid of hitting a ‘credit crunch’ when they absolutely needed access to cash to expand operations

    No logic connects 2 to 3. Work on that.

    It also says corps are indeed suffering a demand shortage

    Which also doesn’t follow.

    The increase in profits is also suspect when you think in terms of models

    Huh?

    Rising profits should correlate with new firms entering the market to reap some of those profits thereby reducing them.

    Yes. Excess profits invite entry. If profits rise in general … where do you enter? Who enters? If … credit is problematic, how do they enter?

    A plausible reason they aren’t is because there’s a shortage of demand.

    How do you get rising profits with dropping demand?

  16. No. I saw that. What I also saw was the counter claim that corporate profits have increased and that cash balances have tracked with profits.

    Which isn’t challenging anything Krugman wrote.

    No logic connects 2 to 3. Work on that.

    Question, why keep 2 yrs worth of profits as cash? In terms of yourself the instinct is to see ‘cash in the bank’ as a good thing so why not keep as much as you can? But in terms of a business it’s actually a cost. A business marshals capital and labor to produce products to sell for profit. Keeping cash in the bank is like a football coach keeping players on the bench when he’s allowed to put more on the field.

    One reason is keeping cash in the bank is for safety, if you suffer a slack year that cash can cushion you until the market turns around. But what’s curious about that hypothesis is that need will *fall* as profits rise. If your business is feast or famine, it makes sense to keep a cash hoarde. If your business becomes feast or super-feast, the need for an emergancy balance declines. Another reason is shortage, if soon there won’t be any cash to grab (say via loans), best stockpile it today esp. if you can’t find any use for it.

    Yes. Excess profits invite entry. If profits rise in general … where do you enter? Who enters? If … credit is problematic, how do they enter?

    Who enters? Big companies can expand, small companies can enter, start ups can be formed. If rising profits are due to rising demand then the question of ‘who enters’ is determined by the mkt. But be assured someone is going to enter. But profits can also rise without rising demand. For example, demand can remain constant but costs could drop. Here imagine a company that has a large portion of the market and is operating at the bottom of the economies of scale curve. As demand slackens, smaller firms leave the market or go out of business. The remaining large firm sees sales expand as it mops up those customers. Since its costs are lower profits likewise expand but the firm sees no need to invest since it already has enough capacity to meet demand (which is flat or falling). Result: Cash balances build up. Why? Slack demand leaves the firm with no incentive to do anything ‘real’ with those assets.

  17. Boonton,

    Which isn’t challenging anything Krugman wrote.

    Except that he claims that corporate cash balances are abnormally high. Which alas, isn’t true, seeing as the graphs show that they are in the same/ordinary (non-exceptional) proportion to profits.

    Question, why keep 2 yrs worth of profits as cash?

    Cite? Did corporations keep that much as cash before now (if they are doing it now). How did they get these high balances and keep their profits, expenses, and cash at the same proportions?

    But be assured someone is going to enter.

    If, in a boom, all businesses flourish … exactly which sector becomes the one to invite entry?

    Result: Cash balances build up

    Except they haven’t (out of proportion to profits … and therefore expenditures as well).

    Keep trying.

  18. Boonton,

    Question, why keep 2 yrs worth of profits as cash?

    This is a lot less money than you’d imagine, ’cause you’re being sneaky I suspect. “Profits” can be very low in a expanding, well run, stable company. Profits are what you make after salary, bonuses, expansion, property, materials, taxes. Two years of profits for many companies is less than a months receivables. It’s a lot less cushion than you pretend.

    One market indicator … our company is in automation. Our big show for the year was held just recently … we got 5 times the number of good leads from the show than we normally receive at that show. Credible buyers are came out in droves. It looks possibly that capital investment in automation is on the rise right now.

  19. Except that he claims that corporate cash balances are abnormally high. Which alas, isn’t true, seeing as the graphs show that they are in the same/ordinary (non-exceptional) proportion to profits.

    You keep dodging this, if the ratio of cash to profits remains constant but profits become abnormally high then cash balances will become abnormally high. You can’t be claiming Krugman is wrong unless you have Krugman claiming the ratio changed.

    Cite? Did corporations keep that much as cash before now (if they are doing it now). How did they get these high balances and keep their profits, expenses, and cash at the same proportions?

    The cite is the very post you cited.

    If, in a boom, all businesses flourish … exactly which sector becomes the one to invite entry?

    ?

    Two years of profits for many companies is less than a months receivables. It’s a lot less cushion than you pretend.

    Doesn’t matter, if profits are going up the need for a cushion goes down. If you’re making a loss in one year, profit in the next your need for a cushion is higher than someone who makes a modest profit one year and huge profit the next. A ‘rule of thumb’ to just keep two years worth of profits, strictly speaking, sounds sensible but it isn’t.

    It looks possibly that capital investment in automation is on the rise right now.

    Possibly, it’s hard to tell since by definition almost all direct observations are ancedotes when talking about the entire economy.

  20. Boonton,

    You keep dodging this, if the ratio of cash to profits remains constant but profits become abnormally high then cash balances will become abnormally high.

    No. If profits become high then the cash balances will be normally (not abnormally) high (and investments will be high as well). To claim that the cash balances are abnormal you have to claim the ratio changed. The ratio didn’t change. This is not what Krugman claims. He claims that cash is abnormally high. It is normally high.

    The cite is the very post you cited.

    The company at which I worked by design divvy’s up profits at the end of the year as salary/bonus. We have $0 annual corporate profits as a result. We keep considerably more than 2 years cash on hand.

    Doesn’t matter, if profits are going up the need for a cushion goes down.

    Actually “cash on hand” is not dependent on profits or expected loss but more likely depends more on fluctuations in operating in/out of receivables and disbursements. This fluctation in some business is going to vary greatly depending on what you do. The point is, the necessity of cash-on-hand really doesn’t depend very strongly on profit.

  21. To claim that the cash balances are abnormal you have to claim the ratio changed. The ratio didn’t change

    I don’t have to claim anything about the ratio unless I’m talking about the ratio.

    We have $0 annual corporate profits as a result. We keep considerably more than 2 years cash on hand.

    Accounting wise you guys may have profits. Money paid to owners would not count as an expense. Smaller companies do zero out their profit by paying their owners a wage that has a year end bonus high enough to zero out profits before Dec 31st. To do this the owner has to actually work at the company besides simply owning it and total pay has to be reasonably within market rates.

  22. Boonton,

    To do this the owner has to actually work at the company besides simply owning it and total pay has to be reasonably within market rates.

    OK. So? Our owners all work. I’m unclear on why this means profit is not iffy thing that I suggested it was.

  23. I didn’t say your profit wasn’t an iffy thing, that doesn’t tell me why it’s sensible to consider the ratio of cash to profit to ‘normally’ be roughly constant? Why wouldn’t a business whose profits were more ‘iffy’ seek to have more cash on hand at any given time while one with larger, more dependable profits would seek to have less cash?

    Ratios are often interesting to look at but they aren’t automatically relevant. You’ve gone off hysterical accusing Krugman of lying about corpoate cash balances by pretending cash levels is the same thing as a ratio of cash to something else. There’s an almost infinite number of possible ratios you can look at. Perhaps your ratio of thousands of dollars of cash in your home to kilos of cocaine is 1 to 1. If on Monday you have $1,000 and 1 kilo and on Friday you have $1M and 1,000 kilos, you’re ratio has remained perfectly constant….nothing to see here all is normal. But clearly you would have an abnormally high amount of cash at home on Friday!

  24. Boonton,
    I didn’t make the ratio connection. You and the other economists did. They (you?) have cited that the “cash on hand is equal to 2 years profits”. So apparently profits and cash as a relation is not one made by up by me. Apparently someone thinks they are relevant. But … it was noted (not by me) that the cash on hand to profits is not unusual as a ratio. I didn’t make it up.

    Why wouldn’t a business whose profits were more ‘iffy’ seek to have more cash on hand at any given time while one with larger, more dependable profits would seek to have less cash?

    Seriously? Let’s see. I’ll bet you’d be able to answer that question on an econ exam, your just pretending this is something you can’t answer. Well, cash-on-hand desires don’t track with profits but track with the need to respond to variability in cash flow, payment for materiels and labor comes often months, if not years, before the payoff for an particular product or contract. Cash-on-hand and the other the side of that being letters of credit at banks allows one to smooth out those bumps and make your obligations. If business is growing and profits are coming in, it stands to reason that one’s “bumps” are larger, hence a call for larger cash-on-hand supplies. (I’ll ignore the silly ratios you prefer).

    That being said, as I noted, I think cash-on-hand shouldn’t be compared to profits (which is an iffy thing, as an aside, do dividends count as profit? That basically is what the end-of-year payments to owners amounts to) but to variability in daily cash flow. However there is a a relationship, you have to build your CoH (cash-on-hand) from your profits. So there is a dependency there, your targetted CoH depends on your estimates of variability but how high you can get CoH depends on profit.

    Seems to me a argument “CoH” is unusually high after finding that it has tracked with profits is probably erroneous. It just means given recent volatility in demand, which might relate directly to greater volatility in cash requirements, that there is a desire by CFOs to have higher CoH than they have now … and they’ve consciously or unconsciously tied that to profits … not some magical constant that you’d suggest they should use.

    So. Again. Why do you think CoH is “unusually” high in the light of the fact that you’ve correlated them with profits?

  25. So apparently profits and cash as a relation is not one made by up by me. Apparently someone thinks they are relevant.

    The assertion that you are championing is that there’s nothing unusual about corporate cash balances because the ratio has remained unchanged. It does appear true that the ratio is unchanged. After all when someone says something like “it seems like corps are keeping 2 yrs of profits as cash balances” that is essentially saying the same thing as “the ratio is unchanged”.

    But the deeper question is should this ratio be fixed? Consider my example of the ratio of kilos of coke in your house to $1K’s you have. Let’s just say at any given time you keep 1 kilo in your house. If you go from having $1,000 to $1M then the ratio will fall dramatically. If, however, the ratio remained constant then one would suspect there was some relationship. But maybe not, perhaps winning the lottery has caused your drug habit to spin out of control.

    Likewise there’s good reasons to think that corporations should NOT normally operate on a ‘2 yrs of profit as cash’ rule of thumb. One would think they would be thinking about the things you cited like ‘variability in cash flow’. Well it seems to me a corporation whose profits tend to be low are ones who would worry the most about cash flow variability. It’s also not clear to me that rising profits is always linked to variable cash flow. Apple, for example, has seen exploding profits but I doubt they have experienced any cash flow variability. They are able to demand excellent cash terms from suppliers and demand cash up front from customers.

    So on the small scale, the ratio normally should NOT be constant. As Apple sees better and better profits they should not simply ‘keep 2 years profit as cash’ or keep their ratio constant. Better profits for Apple should be coupled with less cash flow angst which means the ratio of cash to profits should decline rather than normally remaining constant.

  26. Boonton,
    OK. Econ question #1 … give 3 reasons why you would want to keep the CoH constant (or high). Or put it another way, what are the reasons for large CoH and the reasons for a low one.

    Here’s my answer. I await yours. A CFO has conflicting impulses regarding CoH. He wants this to be as high as he can get it, to keep himself sleeping easy without worries at night. He is safer with a high CoH. On the other hands, at year end, there are other things wanting his cash/profit pile. Paying out as dividends (which includes himself), as capital improvement projects, and so on. So … a rational CFO might decide at year end to apportion a percentage to each of these things … which would give you the result you see, i.e., no particular movement of the CoH to profit ratio as profits have fluctuated up and down over the last 30 years.

    The problem for your “this is unusual” position is that … for the last 30 years CoH has tracked profits by ratio. Claiming we have “unusual” CoH right now is either a lie, a misunderstanding, or something you haven’t explained yet.

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