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Incentives matter

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Romeo Ranoco/Reuters/File

(Read caption) A worker counts US dollar bills at a money changer in Manila. Dividend income jumped an annualized $268 billion in December compared to November, Karlsson writes, and by $302 billion compared to October

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According to the first preliminary U.S. GDP report, nominal GDP increased at an annualized rate of just 0.5%-yet nominal disposable personal income rose at an annualized rate of 8.1%.
How is that possible? Well, in part it probably reflects so-called statistical discrepancy. Production- and income numbers are based on different data sources and this quarter, unlike previous quarters, the production numbers are probably weaker than the income numbers.
The second, and likely far more important, explanation is that companies made large advance payments of salaries and dividends because they expected a big increase in tax rates. The fact that dividend income jumped an annualized $268 billion in December compared to November, and by $302 billion compared to October illustrates the importance of this factor.

 

 

This will with near certainty be more or less entirely reversed during this quarter.

One of the lessons of this is that people do respond to incentives. If they hadn't, we wouldn't have seen these large advance payments of salaries to high income earners, and above all, dividends.

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