Showing posts with label Joseph Stiglitz. Show all posts
Showing posts with label Joseph Stiglitz. Show all posts

Tuesday, January 21, 2014


OXFAM International just released a staggering report on inequality in the world. Here are the highlights.

• Almost half of the world’s wealth is now owned by just one percent of the population.

• The wealth of the one percent richest people in the world amounts to $110 trillion. That’s 65 times the total wealth of the bottom half of the world’s population.

• The bottom half of the world’s population owns the same as the richest 85 people in the world.

• Seven out of ten people live in countries where economic inequality has increased in the last 30 years.

• The richest one percent increased their share of income in 24 out of 26 countries for which we have data between 1980 and 2012.

• In the US, the wealthiest one percent captured 95 percent of post-financial crisis growth since 2009, while the bottom 90 percent became poorer.

The world economy simply cannot be sustained with this level of inequality. Demand is not where it should be and this is exactly why. If this gap continues to widen, demand will fall and more people will have less money as smaller businesses collapse.

Check out this video clip below from "Morning Joe" which illustrates how this is no longer a left-right divide.


Joe sounds quite a bit like Ronald Reagan in that 1986 speech I cite often. Note that they discuss how it isn't simply one issue like the tax code or the minimum wage but many issues that have coalesced into a fundamental systemic failure.

Barack Obama came to Washington to change it and this could be just the issue to do it. My colleagues on the Right and in the Tea Party assure me that they loathe the political and aristocratic class and its rent seeking as much as I do. So, what are we going to do about it?

Monday, December 02, 2013

Another Member of the 1% As Mythbuster

Henry Blodget is co-founder, CEO and Editor-In Chief of Business Insider, one of the fastest-growing business and tech news sites in the world. Business Insider's investors include Institutional Venture Partners, RRE Ventures, and Bezos Expeditions. The site has 25+ million visitors a month. A former top-ranked Wall Street analyst, Henry is also the host of Yahoo Daily Ticker, a digital video show viewed by several million people a month.

His recent piece on his site explains exactly why rich people don't create jobs, echoing Nick Hanauer who is mentioned in the article. Healthy economic systems nurture job growth. This photo shows just how unhealthy our economy is right now.

The bottom 90 percent (the blue color in the graph) are customers and if their wealth is stagnate, our economy doesn't work the way it should.

The company's customers buy the company's products. This, in turn, channels money to the company and allows the the company to hire employees to produce, sell, and service those products. If the company's customers and potential customers go broke, the demand for the company's products will collapse. And the company's jobs will disappear, regardless of what the entrepreneurs or investors do.

Now, again, entrepreneurs are an important part of the company-creation process. And so are investors, who risk capital in the hope of earning returns. But, ultimately, whether a new company continues growing and creates self-sustaining jobs is a function of the company's customers' ability and willingness to pay for the company's products, not the entrepreneur or the investor capital. Suggesting that "rich entrepreneurs and investors" create the jobs, therefore, Hanauer observes, is like suggesting that squirrels create evolution.

Wealthy people like Mr. Blodget are realizing that they need to actively support change otherwise there won't an economy in which they can enjoy their riches.

Monday, November 04, 2013

Friday, November 01, 2013

On Stiglitz: Part Ten

In the final chapter of his magnificent work, The Price of Inequality, Joseph Stiglitz details the steps we must take as a nation if we are to fix our economic problems. Before I get to some of those, though, it's very important to note that he sees two possibilities as potential catalysts for change. He defines these avenues after asking the question, "Is There Hope?"

The first possibility is that most Americans come to realize that they are being duped by the wealthy in this country. The biggest recipients of welfare in this country are the wealthy, not "lazy" poor people. Stiglitz has demonstrated this unequivocally throughout his book. Many wealthy and powerful people in this country have essentially brainwashed Americans into thinking that any sort of talk about inequality leads to communism, internment camps, and loss of freedom. Stiglitz hopes (and so do I) that people are going to wake up to this fact and call them on their bullshit. In many ways, they are the ones that are lazy and have become a drag on our society. Addressing inequality leads to a more efficient system of capitalism and, quite frankly, fairness. Americans are realizing this more and more every day that our system simply isn't fair and it needs to change. Sooner or later, they are going to demand it and we will have a sea change in Washington.

The second catalyst, and the one I see more likely in the near term, is that wealthy people themselves will come to realize that they can't enjoy their lifestyles if there is too great a degree of inequality. They also may act out of simple fear of the natives becoming too restless. Indeed, we see people like Nick Hanauer, Warren Buffet, Bill Gates, and Mark Zuckerberg expressing the need for change because it is in the wealthy's best interest. Stigliz sums up why this is so important.

Alex de Tocqueville once described what he saw as a chief elements of the peculiar genius of American society, something he called "self interest properly understood." The last two words were key. Everyone possesses self interest in a narrow sense: I want what's good for me right now! Self-interest "properly understood" is different. It means appreciating that paying attention to everyone else's self interest-in other, to the common welfare-is in fact a precondition for one's ultimate well being (Adam Smith understood as much. See his The Theory of Moral Sentiments (1759). See also Emma Rothschild and Amartya Sen, "Adam Smith's Economics," The Cambridge Companion to Adam Smith pp. 319-65, in particular p.347). 

Tocqueville was not suggesting that there was anything noble or idealistic about this outlook. Rather, he was suggesting the opposite: it was a mark of American pragmatism. Those canny Americans understood a basic fact: looking out for the other guy isn't just good for the soul; it's good for business.

Again, we are talking about economic efficiency here, not just fairness. Past business leaders in our nation truly understood this. Henry Ford, for example, paid his employees more money so they could afford to buy his cars. Our economy works at top speed when the engine that fuels it (the middle class) has more money. This is exactly why we need government policy that helps them to this end.

So what changes need to be made? Here are few of the many action items Stiglitz lists.

Rent seeking needs to end immediately through curbing the financial sector of our economy. The revenue we gain from this will be able to fund many programs that can help the poor and the middle class. We need to make the banks more transparent and much smaller than they are now. No more "too big or too interconnected to fail." No more predatory lending, excessive bonuses that encourage risk taking, and offshore banking centers that essentially promote tax evasion. Speaking of taxes, the entire code needs to be reformed to a more progressive system with few loopholes for corporations. I have no problem lowering the statutory rate if we lose the loopholes and far too many breaks our nation's corporations get.

In tandem with this, we have to help out the rest, as Stiglitz puts it. We have to improve access to education so we can be more competitive in the age of globalization. We should ordinary Americans save money by creating government incentive and matching programs, for example. Continuing our efforts to have health care for all will go a long way to helping people save money. Changes to government programs like Social Security need to also be made in order to strengthen efforts that have already proven to be successful in reducing poverty.

We need a monetary policy that focuses on employment and growth as well as inflation. Our trade imbalances need to be corrected further than they already are. Our goal should be full employment. Labor needs to be thought of in a completely different way than it is today. With the reality of cheap labor markets around the world, our nation's workers need to be re-educated and put on different career paths. Our growth agenda should be centered on public investment which has shown to yield fantastic returns in our nation's history (the GI Bill, research, public works).

As of right now, we are being held back by myths and ideological intransigence fueled by adolescent hubris. Those who choose to champion these lies (and there really is no other way to put it nicely) are essentially rooting for our country to fail just so they won't be proved wrong. The 1% of this nation, and in particular the financial sector, are using these people to maintain their lifestyles. Reading through my previous entries on Stigilitz, the task is very simple.

It is now time to stop them.

Monday, October 28, 2013

A Change of Heart On Inflation

My latest installment on Stiglitz was heavily centered on the issue of inflation and how the Fed seems completely obsessed with keeping it low. Yet, a recent piece in the New York Times indicates that there might be a sea change with the appointment of Janet Yellin.

The Fed has worked for decades to suppress inflation, but economists, including Janet Yellen, President Obama’s nominee to lead the Fed starting next year, have long argued that a little inflation is particularly valuable when the economy is weak. Rising prices help companies increase profits; rising wages help borrowers repay debts. Inflation also encourages people and businesses to borrow money and spend it more quickly.

I agree. We have to end the inflation hawk hysteria and move towards a more balanced approach towards growth. This is exactly what Stiglitz was hoping would happen when he wrote his tome two years ago and we may finally be heading in that direction.

Tuesday, October 22, 2013

On Stiglitz: Part Nine

The penultimate chapter in Joseph Stiglitz's The Price of Inequality illustrates how macroeconomic policy in this country is essentially made for the 1 percent because macroecomic policy, in a broad sense, affects distribution of income. Stiglitz notes that policymakers are not often aware of this and that's why we have the problems we have. People worked hard, studied hard and played by the rules but the best most can hope for in the last decade+ is just to get by. Worse, many were not even doing that as we have seen in earlier chapters in the book. 

A basic rule of economics is that life involves tradeoffs. One alleged tradeoff is the balance between inflation and unemployment. If there is low unemployment, generally speaking, there is inflation because there are more people buying things. If there is high unemployment, inflation is low as there are less people fueling the economy. In some ways, this is exactly what the 1 percent (see: financial sector) want. They make more money if inflation is low so the bondholders interest is for the focus is on inflation, not unemployment. This is where the structural problems with our economy begin. According to Stiglitz, and I agree with him wholeheartedly, there is no such tradeoff.

Imagine, Stiglitz notes, if the focus were on unemployment instead. Finding that right number on the lower end (4%?, 5%?) of unemployment that still keeps inflation low is tricky but if you start from the other side (inflation), the policy that is made tends to benefit the least amount of people...those in the financial sector. If you start from the side of unemployment, or at the very least, look for a balance, you benefit more people and the macroeconomic policy of the country as a whole. This is why the Fed fell asleep in the collapse of 2008. They had no balance, Further, they thought the banks could take care of themselves and needed no oversight. When solutions to the crisis were presented, they focused on inflation (the interests of the bankers and the financial sector) not everyone else.

But the problem, as I have always said, was really with the regulations themselves. The obsessive focus on interest rates erroneously led to the Fed believing that they had some sort of magic "lever," as Stiglitz puts it, that can manipulate the economy.

Lower the interest rate and the economy expand; raise the interest rate and it slows down. And though there are times and circumstances in which the interest rate may have those effects, at other times the links are at beast weak and other instruments might have been more effective. For instance, in response to the real estate bubble , it would have made more sense to raise the down payment requirements for mortgages than to raise the interest rates; one didn't want to slow down productive investments, just to dampen the bubble. Such regulations were anathema to the Fed, with its religious devotion to the price system and the wonders of the market.

Exactly. We're talking about a massively rigid ideology here that sadly, to this day, has not been broken.

Getting back to unemployment, such a high level of joblessness doesn't simply hurt those who are unemployed. It also hurts the rest of us because a natural effect of this is lower wages. People entering the work force for the first time are forced to take a salary that they simply can't live on. Less money goes into the economy as consumer confidence and spending shrinks due to a lack of aggregate demand. The financial sector may enjoy this "labor market flexibility" but the rest of us do not. And it's clear that the economy has suffered due to these magnanimous gifts bestowed to bankers from our monetary policy. This policy, supported by both Republicans and Democrats, has been a disaster.

The Fed's low interest rate policy hadn't led to the resurgence of investment as it had hoped. It did encourage those who were planning investments to substitute cheap capital labor. Capital was, in effect, at a temporary artificially low price , and one might as well take advantage of an unusual situation. This reinforced distorted patterns of innovation that focused on saving labor at a time when it was increasingly in abundance. It is curious that at a time when unemployment among the unskilled is so high, grocery and drug stores are replacing checkout clerks with automatic machines. The Fed was making it more and more likely that, when recovery set in, it would be a jobless one.

My only gripe about this line of thought is that it really isn't a good thing to fight progress. This is the same complaint I have about the Right on issues such as energy, climate change, and education. Our nation has one direction: forward. If low skilled workers are losing their jobs to innovation, then it's time that we retrain them and give them the skills they need to compete in the age of globalization. Other than that, though, Stiglitz is spot on.

How did we get such a crappy monetary policy? Deregulation. I've talked about this extensively so there's no need to repeat myself. Instead, let's take a look at the consequences, via Stiglitz.

This deregulation had two related consequences. First, it led to the increasing financialization of the economy-with all its distortions and inequities. Second, it allowed the banks to exploit the rest of society-through predatory lending, abusive credit card fees, and other practices. The banks shifted risk toward the poor and toward the taxpayer: when things didn't go as lenders had predicted, others had to bear the consequences. The Fed not only didn't discourage this; it encouraged it. It is clear that, from a social perspective, the banks did not help people manage their risk; they created it. But when it came to managing their own risk, the bankers were more successful. They didn't bear the consequences of their actions. 

Stiglitz identifies a common ground here where liberals and conservatives could work together. At the time of the crisis, there wasn't really a choice in terms of letting the banks fail. It would have collapsed the economy. Now, however, we can regulate the industry so that none of these institutions are "too big to fail" or, better yet, too interconnected to fail. In short, Glass-Steagall for the 21st Century. Dodd-Frank is a start but it still gives the Fed responsibility for implementing the new regulations. Its track record thus far has shown that it is less than average in doing this.

At this point in the chapter I realized that Mr. Stiglitz should be the new Fed Chair! Obviously, it's never going to happen especially now that we have Janet Yellin but we do need someone who will kick the inflation obsession.

It should be apparent at this point that the banks should be focusing on banking and not macroecomic policy. How did we get to this point? More importantly, can we ever break free of this framework and have government leaders who are not influenced by the financial sector of this country? Even the evidence that the Fed was forced to reveal, which showed that the large banks were both borrowing substantial amounts of money from them while also claiming publicly that they were in great shape, was not enough to change the system. Indeed, our problem, as Stiglitz notes, is "more ideological conviction than economic analysis." This, of course, comes directly from the NUMERO UNO free market fundamentalist himself, Milton Friedman, a colleague of Stiglitz.

I remember long discussions with him on the consequences of imperfect information or incomplete risk markets; my own work and that of numerous colleagues had shown that in these conditions, markets typically didn't work well. Friedman simply couldn't or wouldn't grasp the results. He couldn't refute them. He simply knew they had to be wrong. He, and other free market economists, had two other replies: even if the theoretical results were true, they were "curiosities," exceptions that proved the rule; and even if the problems were pervasive, one couldn't rely on government to fix them.

Sounds familiar, eh?:) Many of the problems we have with our modern economic policy can be attributed directly to Mr. Friedman. His cult-like worship of the free market has led to far too many people turning brain dead in terms of economic analysis.

Recall that the Fed's main purpose should be focused on inflation, employment and growth. The second of these three has fallen by the wayside as the bankers have more or less taken over the show. So, the government is the problem but not in the way conservatives would have you believe. It's not that it's too big. It's that it simply doesn't function in the way it is supposed to function due to monetarists' obsession with inflation and their complete ignorance of unemployment. This obsession is based on three very questionable hypotheses. First, inflation is the supreme evil. Second, maintaining low and stable inflation is necessary and almost sufficient for maintaining a high and stable real growth rate. Third, everyone benefits from low inflation. Stiglitz wraps up the chapter explaining that none of these beliefs are true and that inflation hawks have been basically telling tales out of school.

For inflation hawks economy is always at the edge of a precipice: once inflation starts, it will be difficult to control. And since the cost of reversing inflation-disinflation, as it's called-is so large, it is best to address it immediately. But these views are not based on a careful assessment of the evidence. There is no precipice, and mild upticks in inflation, if they look as if they might become persistent, can easily be reversed by tightening credit availability. In short, it was simply wrong that the best way to maintain high employment and strong growth as to focus on inflation. The focus on inflation distracted attention from things that were far more important: the losses from even moderate inflation were negligible in comparison to the losses from financial collapse.

So, we need to remove ourselves from the shackles of obsession over inflation. Our monetary policy should strive for the best possible balance between inflation, employment, and growth. We can't continue to make trickle down policy that is made specifically for the benefits of the banks. In a preview of the last chapter, Stiglitz argues that there is no single best policy. Certainly the obsession with inflation has proved that. Further, there is nothing natural about our currently very high state of unemployment or the low level of aggregate demand. It is the result of policy that caters to serve the small number of people in the financial sector in this country and they have scammed us into thinking that any changes will result in another economic collapse.

Therefore, the first step in changing the system is to not believe them anymore.

Wednesday, September 18, 2013

On Stiglitz: Part Eight

The next chapter in Stiglitz's book, The Price of Inequality, is called "The Battle of the Budget." Written around the time of the 2011 budge battle (see also: When the Right Lost the 2012 Election Due to Moonbattery), it's frustrating that in 2013 we are still having the same fight and have not progressed.

This budget brinksmanship obscured the real economic challenges facing the country: the immediate problem posed by the high level of unemployment and the gap between the economy's potential output and its actual output, and the long term problem of growing inequality. The brinksmanship shifted attention away from these fierce problems to the issues of deficit and debt reduction.

Stiglitz describes this shift as being caused by what he terms " debt and deficit feitishists." Ironic that these people ignored the actual causes of our debt and deficit and, instead, ascribed the cause to their emotional feelings (see: psychosis) about government spending. I'll get to spending later but as he notes correctly, the four main causes of our debt and deficit are: the Bush Tax Cuts, the wars in Iraq and Afghanistan, the Medicare D (a huge rent for the drug companies) and the underperformance of the economy itself due to contraction. The figures for each of these causes are: $3.3 trillion dollars, $2.5 trillion dollars, $500 billion dollars, $900 billion dollars. Given that we have made some small improvements in the tax structure earlier this year, these numbers aren't quite as bad anymore but they still illustrate the need for improvement.

But we still have a fundamental and systemic problem with our tax structure. The people that contribute the least to our economy (the financial sector) are taxed at a ridiculously low rate for the amount of money they make. As Stiglitz notes, the lower tax rates on capital gains did not lead to higher, sustainable growth but rather, two speculative booms (1997, early 2000s) in the technology sector and the housing sector.

Bush argued successfully in 2003 for a (temporary) cut on the tax on dividends, to a maximum of 15 percent, less than half the rate paid by someone who receives a comparable income in the form of wages and salaries. The claim was that it would lead to more investment by firms in plant and equipment, but it didn't. Arguably, it may have had the opposite effect. Firms were, in effect, encouraged to pay out dividends while the tax rates were low, leaving fewer funds inside the corporation for a good investment project, should have turned up.

Stiglitz goes on to argue the need for stiffer taxes on rents and how we need to put more taxes on the toxic things in our economy. He makes a very interesting point that considering the fact that the financial sector nearly brought down the world economy, they are "polluters" and need to be taxed accordingly. For those of you unfamiliar with basic economic theory, taxing good things distorts markets and can do harm. Taxing bad things corrects the erosion of consumer surplus and inefficiency of markets due to the public expense of something like pollution. The public has born a great deal of expense as a result of the financial collapse and the people in those markets should be taxed at a higher rate.

In addition, the financial sector (along with many other sectors of our economy ), no longer need subsidies. It continually amazes me that the Right argues vociferously for less social welfare but wants corporate welfare to continue in earnest. The tax breaks we give to the multi-billion dollar oil industry are ridiculous.

So, Stiglitz has six action items in regards to our tax system'

1. Raise taxes on the people at the top
2. Eliminate loopholes and special treatment for upper incomes
3. Eliminate subsidies
4. Tax rents at higher rate
5. Tax pollution
6. Tax the financial sector similar to the ways we tax pollution given the costs they impose on the rest of society.

As I stated above, the deal on the budget reached earlier this year is a beginning down this path but it's not enough.

Now, seeing the word "tax" is sure to cause the mouth foamers' blood to rise. They will caterwaul and bloviate about how it hurts businesses and they won't hire people but they are pushing a myth, which is a polite way of saying they are lying, as Stiglitz notes on page 225. Suppose you own a business and calculate that hiring a worker will yield you a return of $100,000. $50,000 of that will go to costs the firm has to pay (including taxes, salary, other costs etc). This leaves a profit of $50,000. Now, you had to pay an extra tax of $2500 (5 percent) on that employee, would you still hire? Of course you would. Taxes don't prevent people from hiring if there is profit involved. What prevents people from hiring is a lack of demand (discussed many times on this site) which would push that $100,000 figure downwards. If they don't have the business coming through the door, they won't hire.

Moving past the issue of revenue, let's turn our attention to spending. Stiglitz argues for more spending to really get the economy going again. He dismisses the deficit/debt fetishes and notes...

The United States is an especially good position to pursue this strategy, both because returns to public investments are so high, as a result of underinvestment for a quarter of a century, and because it borrow so cheaply long term. Unfortuneately, especially among the Right (but, even, alas, among many in the center) deficit fetishism has gained ground. The ratings agencies-still trusted despite their incredibly bad performance in recent decades-have joined in the fray, downgrading US debt. But the test of the quality of debt is the risk premium that investors demand. As the book goes to press, there is a demand for US T-bills at interest rates near zero (and, in real terms, negative)

Exactly right. The fetishists don't get to determine the quality of our debt. The free market does. It simply isn't justified on the basis of economic principles. Stiglitz goes on to note that economic stimulus can be achieved through a long standing principle called the balanced budget multiplier (increasing taxes and expenditures simultaneously while taking care to not add any more to the current deficit). He argues that if this happens, GDP would increase two to three times the rate of spending. This growth would decrease the national debt over the intermediate term (pages 217-218).

But won't all this spending make us "like Greece?" No, says Stiglitz...and everyone else who doesn't let their emotions about spending dictate policy (side note: why is it that the Right cite power hungry human nature as the reason why people in the government should not be allowed to spend money yet believe, in the same head, that people are little angels when they make financial decisions privately?). Greece owes money in euros of which they have no direct control. US debt is in dollars and we control the printing presses. The idea that we would default is pure moonbattery. Sure, you'll hear bloviating about inflation but, again, the free market does not see that happening.

One can infer that both from the very low interest rate that the government has to pay on its long-term debt and even more from what it has to pay for inflation-protected bonds (or more accurately, the difference between the returns on ordinary bonds and inflation protected bonds). Now, the market could be wrong, but then the rating agencies giving a downgrade to the United States should have explained why the market was wrong, and why they believed that there is a much higher risk of inflation than the market believed. The answers have not been forthcoming.

Likely because it was politically motivated. The United States knows that the Fed will buy government bonds. Greece has no idea if the ECB will buy their bonds at all. Essentially what's going on here is that the adolescents are playing make believe and saying that there is less faith in the US government than there actually is. Considering they are big believers in the free market, this makes no sense to me.

Some other bits from the chapter...

Reagan supply side economics, which held that lowering tax rates would increase economic activity, so much so that tax revenues would actually increase, has (as we noted in chapter 3) been disproved by what happened after both the Bush and the Reagan era tax cuts.

Ah, but we should never let reality get in the way of a good fantasy, right?

No deficit reduction group suggested a frontal attack on corporate welfare and the hidden subsidies (including the financial sector) that we've stressed in this book, partly because the Right has succeeded in convincing many Americans that an attack on corporate welfare is "class warfare." 

Of course, when Reagan said it, it was okey-dokey.

Regarding Social Security and Medicare...

In the most hopeful scenarios, the Right would privatize both services. Privatization, of course, is based on yet another myth: that government run programs must be inefficient, and privatization accordingly must be better. In fact, the transaction costs of Social Security and Medicare are much, much lower than those of private sector providing comparable services. This should not come as a surprise. The objective of the private sector is to make profits-for private companies, transaction costs are a good thing; the difference between what they take in and what they pay out is what they want to maximize. 

Social Security and Medicare can be fixed quite easily with very simple adjustments phased in over time (increasing retirement age, means testing etc). Unfortunately, no one in Congress seem willing to move towards that end. Privatization is absolutely the wrong answer and we all know the real reason why the Right wants to get their hands on that money. As Stiglitz notes..

The agenda for privatization of Social Security was not about providing more money to America's retirees or more security or about increasing efficiency. It was about one thing only: providing more money to the 1 percent at the expense of the 99 percent-more money to Wall Street. The magnitudes involved are potentially enormous. Think of the $2.6 trillion in the Social Security Trust fund. If Wall Street could get just 1 percent per year for managing that money, that would be an extra bonanza for the managers of $26 billion dollars a year.

It's about as obvious as the smell of pig shit.

Stiglitz round out the chapter with a discussion of how the Right likes to blame the victim (in this case, the middle class) for our economic woes. Cuts in wages reduce economic demand so, again, it makes no sense to blame your average worker, especially considering how well the wealthy have done despite the contraction. On the last few pages of the chapter he offers a scathing indictment of austerity (pages 230-231) as well as an evisceration of the myth of the failed stimulus (page 232)., explaining in detail just how awful it would have been had we not had it and how the Obama administration failed to note just how deep the hole was that we dug ourselves.

He challenges anyone to find historical examples of austerity actually working in more than just rare cases in countries that are small and had trading partners experiencing a boom. He blows apart the myth of how a government budget should be like a household budget. Considering that the former can change the macro-economy and the latter counter, one would think the differences are obvious.

So, as this latest round of budget battles gets underway, Stiglitz is correct when he says government spending can be very effective. Funds directly spend on high productivity, structural reform, and basic infrastructure will increase productivity which will include an increase in demand. One need only look at examples from the past like Grand Coulee Dam or the current return on government investment in research to see that this is true.

(Note: the link to The Price of Inequality in the first line of this post takes you to where you can look inside and read the entire book and source material)

Saturday, September 14, 2013

Still Stagnate

Emmanuel Saez from UC Berkeley has released his latest report on inequality and it reminds me that I need to finish off my last three installments of Joseph Stiglitz. I'll have Part Eight up sometime next week, perfectly timed as well as the title of that chapter is "The Battle of the Budget."

Saez's latest report has quite a bit of useful information, including...

Top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012. Hence, the top 1% captured 95% of the income gains in the first three years of the recovery. From 2009 to 2010, top 1% grew fast and then stagnated from 2010 to 2011. Bottom 99% stagnated both from 2009 to 2010 and from 2010 to 2011. In 2012, top 1% incomes increased sharply by 19.6% while bottom 99% incomes grew only by 1.0%. 

So, what does all this mean?

Top 1% incomes are close to full recovery while bottom 99% incomes have hardly started to recover. 

Shocking, I know:)

Saez notes that after the Great Depression, there were policy changes that reduced this income concentration. Today, however, there have been none. Again, I'm shocked.

On page seven, the data shows that during the Clinton administration, the wealthy did quite well, increasing their income by 98 percent! Yet, so did the 99 percent, who saw their income increase by 20 percent. Now, take a look at the Bush Years. It's apparent that the policy changes under his administration favored the wealthy and even then, underperfomed compared to Bill Clinton. The collapse of 2008 seems to have permanently stagnated the income of 99 percent of Americans.

We simply can't have an economy like this. Two thirds of our economy is consumer spending and there just aren't enough people spending. They don't have any extra money.

So, what do we do now? Well, any policy changes are going to be nearly impossible to pass with the Republicans hell bent on the president failing. They certainly don't want any successes on his watch as that would really drive home the contrast between the utter failure of George W. Bush and any potential gains under Barack Obama. In fact, our economy is doing mildly better and that's just about all they can tolerate as they still have to have something negative to caterwaul about.

In some ways, I hope that we elect a moderate Republican so he or she can do all the things that Barack Obama was not allowed to do because of adolescent temper tantrums.

Tuesday, August 13, 2013

Monday, June 24, 2013

On Stiglitz: Part Seven

The next chapter in Joseph Stiglitz's The Price of Inequality is titled "Justice For All? How Inequality Is Eroding The Rule Of Law?" Even though it is the shortest chapter of the ten in the text, it takes sharp aim at how our justice system has helped to further inequality in this country. The rule of law is supposed to protect the weak against the powerful yet in today's society, if someone is suing a corporation, we have all been conditioned to view that person as "gold digger" and the corporation as a "victim" (This simple fact is covered extensively in the stunning film Hot Coffee).

As Stiglitz notes,

As the old poem goes, "No man is an island." In any society what one person does may hurt, or benefit, others. Economists refer to these effects as externalities. When those who injure others don't have to bear the full consequences of their actions, they will have inadequate incentives not to injure them, and to take precautions to avoid risks of injury. 

The Right has a real cognitive dissonance problem with the sentiment above. They want to live in a society where everyone is a "rugged individualist" yet still want all the trappings of a modernism. They can't accept the fact that in any sort of society one person's actions has a direct effect on another's life. and that's with or without government interference.

Stiglitz writes that one of the big reasons why American corporations have been so successful in the last 30 years is they have been able to avoid the consequences of their actions by rigging the game in their favor. This has never been more true than in the financial sector, specifically the banks. There were no real consequences for the predatory lending and fraud committed by the banks in the run up the financial crisis of 2008. Stiglitz notes that some states like Georgia tried to enact laws that would have stopped this sort of behavior in the first place.They were repaid by Standard and Poor's threatening them to not rate any of their mortgages. This would be the same Standard and Poor's who downgraded the US credit rating. This would also be the same S & P labelled "A" what turned out to be "F" rated mortgages. So, any attempt to stop predatory lending by government entities was met with (ahem) corporate force.

Stiglitz goes on to discuss how bankruptcy law has also become massively corrupted in a similar way. He touches on the student loan problem and how banks seem intent trapping young people into impossible situations with insurmountable, lifelong debt. This helps to cement the inequality in this country.

Stigliiz then turns to the mortgage crisis that was the driving force behind the 2008 economic crisis. In a nutshell, he asserts that "rule of law" was tested in this country and the results clearly showed that there was no justice for all. In fact, there was justice for very few people in the financial sector.

The banks wanted a speedier and less costly way of transferring, so they created their own system called MERS but like so much of what the banks had done in the gold rush days, it proved to be a deficient system, without safeguards, and amounted to an end run around a legal system designed to protect debtors. 

So, the banks unilaterally decided to rewrite property law. When the crisis hit, they were supposed to be able to prove how much they actually owed. They couldn't and it was largely because there was no oversight to make sure they did. It didn't really matter to them anyway. There was so much money flying all over the place that they knew the government would have no choice but to bail them out. What were they going to do? Let the economy collapse?

Worse, Stiglitz points out that if corporations were indeed people, they should have been prosecuted for fraud as they were unable to prove that there financial records were valid. There still has not been any significant pursuit, by the government, towards foreclosure fraud. This is a complete and total failure by the US government, specifically Eric Holder. It's amusing how much people on the right bitch about him for the phantom things he's done but not the main thing that he has neglected to do. Recall that the DOJ prosecuted over one thousand cases in the S & L scandal in the early 1990s.

Stigliz notes a Wall Street Journal piece which also uncovered discrimination on the basis of income regarding the foreclosure process. On average, it took banks two years and two months to foreclose on mortgages over one million dollars, six months longer than on those under one hundred thousand dollars. Banks were bending over backwards to accommodate bigger debtors and their team of lawyers that were the best money could buy. The little guy had none of this, of course, and worse, considering just how much the law had been eroded.

We've come to a point in our society where the government does more to protect the interests of corporations and less to protect the rights of individuals. People in Congress are being paid large quantities of money to look the other way and allow the private sector, especially the financial sector, massive leeway in their business. We don't need a "bigger" government. What we need are elected officials who can quickly recognize factors such as externalities and market power in the private sector and intervene quickly to prevent another crisis such as the one we had in 2008. A good place to start is the financial sector and we have, at least, taken steps down that path with the Dodd-Frank bill.

The people who are elected to Congress have to understand that they are performing a public service. They aren't the extended legal staff of the various corporations in the United States.

Friday, March 08, 2013

Monday, March 04, 2013

On Siglitz: Part Six

The sixth chapter of Joseph Stiglitz's The Price of Inequality is called, "1984 is Upon Us." In this section, Stiglitz details how many of the wealthy in this country try to frame the discussion in a way that benefits their interests, realizing that, in democracy, they cannot simply impose their rules on others. He posits that, in one way or another, they have to "co-opt" the rest of society to advance their agenda. They do this using their own, more subtle version of "newspeak."

An example of this can be seen in how our society responds to the word "socialism."

In American parlance, "socialism" is akin to communism , and communism is the ideology we battled for sixty years, triumphing only in 1989 with the fall of the Berlin Wall. Hence labeling anything as socialism is the kiss of death. Medicare is a single payer system-the government pays the bill, but the individual gets to choose the provider. Most of the elderly love Medicare. But many are convinced that government can't provide services efficiently that they believe that Medicare must be private.

Hence the famous "Keep your government hands off my Medicare" line. The irony here, aside from the obvious, is just how much socialism there is in this country that hasn't delivered the promised tyranny we now daily from the Right and, in fact, has been enormously beneficial to our country. Even famed "unbridled capitalist" Adam Smith wrote, in The Wealth of Nations, that the sovereign has

The duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a greater society.

Here, Smith champions elements of socialism and states that they are essential to any successful society. They have certainly worked out very well for us as we are the greatest nation this world has ever seen.

So, the dichotomy here is very frustrating given how the framing of American parlance operates. When we start discussing economics and the high level of inequality we have in this country, we see it again. As Stiglitz notes

Mainstream economics assumes that individuals have well defined preferences and fully rational expectations and perceptions. Individuals know what they want. But in this respect, traditional economics is wrong. If it were true, there would be little need for advertising. Corporations use recent advances in psychology and economics that extend our understanding and preferences and beliefs can be shaped to induce people to buy their products. 

Exactly right. One of the major problems I have with the whole "people act in their own enlightened self interest" meme is that..well...people don't. They are often foolish, emotionally unintelligent, and behave poorly, even engaging in criminal activity. That's why "leaving it all up to the free market to sort out" doesn't work given that the powerful people who run many of these markets can be characterized as all the above.

More importantly, people who don't really know what they want and aren't rational can be easily manipulated. Because of this simple fact, Stiglitz notes that most Americans have no earthly idea how much inequality there is in this country. They believe there is less economic inequality than there is, they underestimate its adverse economic effects, and they overestimate the costs of taking action.

In a recent study respondents on average thought that the top fifth of the population had just short of 60 percent of the wealth, when in truth that group holds approximately 85 percent of the wealth. Interestingly, respondents described an ideal wealth distribution as one in which the top 20 percent hold just over 30 percent of the wealth. Americans recognize that some inequality is inevitable, and perhaps even desirable if one is to provide incentives; but the level of inequality in American society is well beyond that level.

I've brought up this study before but I think it should be revisited given the context of Stiglitz's argument. People don't have any idea just how much the wealthy have in this country. Of course, any discussion about it results in Orwellian screeches and howls from the Right about "Marxism" and "class warfare." Yet this sort of wealth concentration at the top is exactly where liberal economic theory was born. Men like Adam Smith and Samuel Stiles bemoaned the hoarding of wealth by the aristocracy through mercantilism and other protectionist practices. In many ways, Stiglitz has argued the same thing in previous chapters by pointing out the endless cycle of rent seeking, incompetent government action and government inaction. Regardless of the times or the mechanism, the wealthy are continuing to do what they always do: consolidate power.

Now, this is usually the point when people ask, "how much inequality is bad and how much is good?" Well, before we do that, we have to get back to the perception problem.

Not only do Americans misperceive the level of inequality; they underestimate the changes that have been going on. Only 42 percent of Americans believe that inequality has increased in the past ten years, when in fact the increase has been tectonic. Misperceptions are evident, too, in views about social mobility. Several studies (here, here, and here) confirmed that perceptions of social mobility are overly optimistic.

So, we need to solve the problem of awareness first before we can detail any sort of serious metric regarding acceptable or unacceptable levels of inequality. That means we have to combat the 1984ish messaging we see every day from the 1 percent.

After we've done that, the best place to start is the most commonly used measure of inequality: the Gini-coefficient. There is also the Theil index, which has more sub group and sub region development, the Decile dispersion ratio, and the Share of income/consumption of the poorest x%. All of these metrics should be used in tandem for a more accurate analysis.

In taking a look at where we are today, it's obvious that we really do have some very serious perception problems.

Bear in mind, these figures are only through 2010, the last time the Census Bureau did their estimate. Two years ago we were at 46.9 which means we are very close to that .5 tipping point where we quite literally have a country of haves and have-nots. The study from above shows that Americans want our country to be more like Sweden. That's not surprising, given that there Gini coefficient is .23, nearly half of what our's is today.

Stiglitz has much more to say in this chapter regarding perceptions in terms of market behavior, fairness, and a whole host of other issues like the public view on estate taxes and bank recapitalization. It's quite a bit of information to absorb so I chose to focus on the more general theme of the chapter-the perception of inequality. For the finer points, as always, I recommend reading the book and the sources contained at the end of each section, some of which I have listed here.

So, the facts show that it's a more subtle version of newspeak, isn't it? It's not quite war is peace (although the Right's view on guns is certainly close to that) but it's still just as contradictory. The people of this country need to know just how much inequality there is and, as Stiglitz noted in previous chapters, the detrimental effects it is inflicting on our country.

Friday, December 14, 2012

On Stiglitz Part Five

I ran across this piece last week and thought it would make an excellent summation before a return to Stiglitz.

One conservative message on inequality is to say that it doesn't matter, and we should accept rises in both pre-tax and post-tax inequality. This is the implication of studies periodically put out by the Heritage Foundation, arguing that poor people aren't really poor if they have microwave ovens. This isn't an appealing argument. 

The problem with rising inequality is not that lower-income families can't afford ever-cheaper electronics; it's that they can't keep pace with the rising costs of health care, education and (in certain parts of the country) housing. There's also no reason to think that, whatever standard of living we start from, an economy where nearly all the improvements accrue to a small fraction of families is either politically sustainable or morally acceptable.

Excatly. In a nutshell, that is the foundation that is laid in the four chapters of his book. The cost of inequality is no health care, no education (past high school), and inadequate housing. Millions are affected by one, two or all three of these issues in an adverse way. So what's the result?

A Democracy in Peril-the title of Chapter 5 in "The Price of Inequality."

Stiglitz starts off in this chapter talking about the disillusionment, lower trust, and general loss of perceived fairness that has mounted due to inequality.  This leads to an erosion of civic virtue.

Such civic virtue should not be taken for granted. If the belief takes hold that the political system is stacked, that it's unfair, individuals will feel released from the obligations of civic virtue. When the social contract is abrogated, when trust between government and its citizens fails, disillusionment, disengagement, or worse follows. In the United States today and in many other democracies around the world mistrust is ascendent.

No doubt, this is a chief reason why we see less than 60 percent voter turnout. It gets worse.

Social capital is the glue that holds societies together. If individuals believe the economic and political system is unfair, the glue doesn't work and societies don't function well. As I've traveled around the world, particularly in my job as chief economist of the World Bank, I've seen instances where social capital has been strong and societies have worked together. I've also seen instances where social cohesion has been destroyed and societies have become dysfunctional.

Well, that's where we are headed and what makes matters worse are the policies aimed to further this disenfranchisement, most of which are aimed at the poor. Photo ID laws and resistance against extended voting hours and times add to this feeling of disillusionment (which works in the favor of those who support these endeavors) resulting in continued low turnout at the polls.

Stiglitz goes on to talk about how Citizen's United makes matters worse and it is there that he and I part ways in agreement (in fact, this is my least favorite chapter in the book). His book was written before the election this year so he couldn't know that his predictions in this chapter regarding this case were going to be wrong.

Hundreds of millions of dollars were poured at President Obama in the hopes of defeating him and all of it failed. Certainly, the president had a lot of money behind him. Yet he also had a massive network of people that not only contributed small amounts of money but also formed a very solid foundation of motivated people that got out the vote. So, Stiglitz was wrong. In this case, people triumphed over money.

His analysis of Citizen's United wasn't the only point he made with which I disagreed. The rest of the chapter has to do with globalization and he's far too vague in his criticism of it. He somewhat wrongly assumes that the lack of voter enthusiasm can be entirely attributed to civic disillusionment
and not mere laziness (see: The Michael Jordan Generation). He also leaves out the raised prosperity around the world as a result of the spread of free markets and capitalism. He seems to call of return to protectionism which, in my view, would be a giant mistake. And this chapter is generally far too repetitive regarding disillusionment with our democracy.

He does have two good points that round out the chapter in regards to financial markets and American's place in the global economy. If America is going to lecture countries around the world about economic stability, then it should practice what it preaches. We have indeed lost credibility around the world because of our financial markets.

Proponents of the financial markets like to claim that one of the virtues of open capital market is that they provide "discipline." But the markets are a fickle disciplinarian, giving an A rating one moment and turning around with an F rating the next. Even worse, financial markets' interests frequently do not coincide with those of the country. The markets are shortsighted and have a political and economic agenda that seeks the advancement of the well being of financiers rather than that of the country as a whole. 

Right. Until we chuck the "Wall Street Government," we aren't going to have as much respect around the world and voter disillusionment is going to continue at home. This point also serves to put an end, once and for all, to the notion that a successful business leader would make a successful civic leader (and that a rating from S&P means nothing).

The title of Stiglitz's next chapter is "1984 is Upon Us" and it details how perception is manipulated to continue inequality. 

Thursday, December 13, 2012

Wednesday, November 21, 2012

The Productivity Dividend

Getting back to Stiglitz.

Many years ago Keynes posed a question. For thousands of years, most people had to spend most of their time working just to survived-for food, clothing, and shelter. Then, beginning with the Industrial Revolution, unprecedented increases in productivity meant that more and more individuals could be freed from the chains of subsistence living. For increasingly large portions of the population, only a small fraction of their time was required to provide for the necessities of life. The question was, How would people spend the productivity dividend?

This is that quote from Chapter 4 that I wanted to pull out and examine on its own. The reason for this is that it ties directly into our economy. In the United States, people spend that productivity dividend on consumption and, as Stiglitz notes, their consumption relative to others. This is where that whole "Keeping up with the Jones'" comes into play. In particular, he notes that Europe opted for more goods AND more leisure while America opted for less leisure and more goods.

So, are we really working harder and harder "for the family?" Or are we simply playing a continual game of catch up with no end regarding consumption? No doubt that our economy is heavily based on consumption but is that a good thing? Should we consider more leisure time and less of keeping up with the Jones'? As we  consider how to mend our economy, we should examine the basic question of the productivity dividend.

Another idea that came out of this quote was the issue of fear and anxiety about the future. There are many on the Right that believe America is going to end soon because of the president and the Democrats. Would they be worried about this if they had to provide the basics (food, clothing, shelter)? Further, would anyone worry as much about all the silly stuff we fret over if this were the case?

I doubt it.

Tuesday, October 30, 2012

On Stiglitz, Part Four

Spend just a few minutes on the internet and you can see Joseph Stiglitz everywhere.

A recent article on how public sector belt tightening has made inequality worse.

These reductions, economists say, act as a drag on the economy. Former park employees, clerks, and firefighters such as Lykins are buying only the necessities. Cities are deferring road work, which means contractors aren't hiring people to pour concrete. By far, the largest impact is on school systems, which are laying off teachers, counselors, and janitors.

The latest BLS data on the working poor.

In 2010, there were 10.5 million individuals classified as "working poor" (persons who spent at least 27 weeks in the labor force—that is, working or looking for work—but whose incomes still fell below the official poverty level); the number of working poor was little changed from 2009.

Yet another report on the widening income disparity.

The divergent fortunes of Reyes and Hemsley show that the U.S. has gone through two recoveries. The 1.2 million households whose incomes put them in the top 1 percent of the U.S. saw their earnings increase 5.5 percent last year, according to estimates released last month by the U.S. Census Bureau. Earnings fell 1.7 percent for the 96 million households in the bottom 80 percent -- those that made less than $101,583.

So, Chapter 4 of The Price of Inequality by Joseph Stiglitz, aptly titled "Why It Matters" could never be more relevant.

Stiglitz begins by illustrating a very simple fact.

When the wealthiest use their political power to benefit excessively the corporations they control, much needed revenues are diverted into the pockets of a few instead of benefiting society at large. But the rich do not exist in a vacuum. They need a functioning society around them to sustain their position and to produce income from their assets. The rich resist taxes, but taxes allow society to make investments that sustain the country's growth.

This echoes Nick Hanuer and his pointing out of the obvious: he (and other wealthy people) don't buy 5,000 pairs of pants. They buy 5 pairs. If people are buying less pairs of pants, the economy doesn't grow and that's why it matters. But it gets worse.

As Stiglitz notes, moving money from the bottom to the top lower consumption because the wealthy save more of their money rather than spend it. In fact, they save 15 to 25 percent of their income whereas those at the bottom spend all of theirs. Why does this matter?

The result: until and unless something else happens, such as increase in investment or exports, total demand in the economy will be less than what the economy is capable of supplying-and that means there will be unemployment. 

So, what can be done? Well, the wealthy are going to have to give up some of the money they are saving if they want to continue to have a society in which to enjoy their wealth. Stiglitz thinks that this should be done through taxes and government spending. Certainly, that's going to happen in some form or another but I question to what degree and, I have to admit, I question the mechanism. Relying completely on government is not the answer. As Stiglitz himself admits, they are running the government with their money and it's going to be enormously difficult to break out of that cycle, if not impossible. I think the president is trying to do this and having a tough time of it. Mitt Romney will make it worse.

That doesn't change the fact that the wealthy of this country are going to have to ALL do what Bill Gates does in Africa but do it here. It can't just be a few of them and the sooner they realize the necessity of this to their own livelihoods, the better. Stiglitz has a simple way to solve it.

The top 1 percent of this country earns 20 percent of the income. If they shifted just 5 percent of that income to the poor or middle class who do not save (through a combination of taxes, private charities, grants, and higher wages a la Henry Ford), this would increase aggregate demand by 1 percentage point and still leave them obviously quite wealthy with 15 percent of the nation's income. This is what we saw from post WWII to about 1980 and it wasn't socialism, folks, there was still inequality...just not enough to inhibit growth in our economy like there is right now.

This increase of one point would have a cascading effect. As the money recirculates, output would actually increase by 1.5 to 2 percentage points. Unemployment would go down considerably, likely around 6 percent. Stiglitz notes that a broader redistribution (from the top 20 percent, as opposed to the top 1 percent) would lower this unemployment even further.

Right around now is when the mouth foamers blow a bowel and starting screaming about socialism and/or communism. Paying higher taxes, as Stiglitz is suggesting, isn't socialism. Morever, I'd be more than happy if the wealthy of this country saw the need to do this voluntarily and simply did it for their own sake's. If we continue down this path of increased inequality and stagnation (likely worse, eventually), they will not have a choice. I think things are moving in the right direction, though, and we are already seeing some signs of this possibly happening and I am certainly optimistic.

Stiglitz goes on to discuss how the government's response to weak demand from inequality led to a bubble and even more inequality. He cites inadequate regulation and dishonest/incompetent banking as large contributors to this problem but this has been gone over many times.

He then lays out exactly how inequality makes for a less efficient and productive economy by looking at lowering public investment (as we see in the CSM link above), underinvestiment in the common good like education that directly leads to economic mobility, rent seeking and the financialization of our economy (the oil market is a great example of this...filled with people that don't actually buy oil but speculate on it), and the issue of consumerism.I'm going to turn this final point of consumerism into a stand alone post at some point as it is worthy of special attention. 

The rest of Chapter 4 is devoted to the alleged inequality efficiency trade off which, again, deserves its own post and honestly is separate from the issue of why inequality matters.  Suffice to say, Stiglitz has shown thus far that not only are we failing in equality of outcome but we are failing in equality of opportunity. People simply don't have the income mobility that leads to greater opportunity and our society is sorely lacking in closing this gap and increasing these types of opportunities.

Worse, as Stiglitz previews for the next chapter, this inequality is imperiling our democracy.

Wednesday, September 19, 2012

On Stiglitz Part Three

Given Mitt Romney's recent comments, I think it's time to get back to Stiglitz. The next section in his book, The Price of Inequality, is called Markets and Inequality. His basic premise here is that even though market forces are real, every law, every regulation and every institutional arrangement has been made to benefit those at the top and to the disadvantage of the rest. Simply put, it is the government's fault! They create the problem by making rules that benefit the wealthy and then they do little to change the fall out.

He faults the government's reaction to the technology boom, for example, as being quite poor when one considers that education at that time should have been shored up in a sort of GI bill type of way. The steel industry, for example, now operates with a quarter of the workforce because of technological advances. What are the remaining three quarters supposed to do now that their services are no longer required? Train for a new profession. Of course, this isn't usually easy and it can be expensive.

That's where the issue of stagnant wages comes in. Stigiliz accurately points out that from 1949 to 1980, productivity and real hourly compensation rose together. After 1980, they began to drift apart. Why? Because the government began to make policies that benefited rent seekers at the top of our society. This is where these two premises
  • Taxing the top at higher rates reduces incentive
  • Helping the poor means more poverty because they then don't want to work
are inaccurate and no longer apply. Because of the large amount of inequality, people have less of incentive to work. They are essentially hopeless so why bother? Stiglitz asks, "How seriously would incentive be weakened if we had a little bit less inequality?" The problem here is that the Straw Man Machine gets to work and labels folks like me and Stiglitz as wanting no inequality. That's simply not true and no one is trying to do that.

Further, incentive pay for wealth execs isn't really that.

Under incentive compensation schemes, pay is supposed to increase with performance. What the bankers did was common practice: when there was a decline in measured performance according to the yardsticks that were supposed to be used to determine compensation, the compensation system changed. The effect was that, in practice, pay was high when performance was good, and pay was high when performance was bad. (Bebhuck and Fried, Pay Without Performance

In fact, they were so embarrassed by this that "performance bonuses" was changed to "retention bonuses." Executives were (and still are) allowed to set their own compensation schedules which has effectively separated pay from performance and misalign incentives, as Stigliz correctly notes.

Countries that have large financial sectors typically have greater inequality. Deregulation along with hidden and open government subsidies distort the economy and make it easier to move money from the bottom to the top. As Stiglitz notes, "We don't have to know precisely the fraction of inequality that should be attributed to the increased financialization of the economy to understand that a change in policy is needed." Indeed. The banks are simply too big right now and need to be broken up. I'm happy to see that many on both the right and the left are calling for this to happen.

recent report by the Congressional Research Service confirms much of the information above.

The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. 

However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.

I highly recommend reading the entire report. It is loaded down with data that supports Stiglitz's assertions.

The other big part of this chapter is a discussion on the free mobility of capital and the free mobility of labor. It is here where he and I part ways. He rightly criticizes the MNC's and financial institutions for some of the problems they have caused the Global South. However, he completely ignores the fact that the average age of mortality in Africa, for example, has doubled in the last fifty years and it's largely due to Global North investment and direct aid.

He seems to be calling for a return to trade restrictions and tariffs placed on imports that would, in turn, benefit labor in this country. I think that's a giant mistake. We have progressed for the last 70 years towards liberal and free markets. This was done to prevent world wars which were very costly in many ways (the biggest of which is human life). To go back after all the progress we have made in the Global South is very short sighted.

What we can do in the age of free mobility of capital is use that money to further educate our workforce and make the more competitive in the world. Labor around the world is very cheap right now and those without college degrees simply can't compete which is the main reason why we have a large number of people unemployed or underemployed. These people need to get college degrees and that's going to mean sacrifice by everyone...colleges, universities, professors, bankers, and many more of the very wealthy.

All of these people are going to have to step up to the plate, whether it is in the form of lower tuition, lower salaries for professors, higher taxes for the wealthy, or more private grants...A LOT MORE PRIVATE grants. Remember, the 1 percent can't enjoy their money without the support of a strong middle class.

With education, comes strength.

Monday, September 03, 2012

Back To Stiglitz

Being that it is Labor Day, I thought we'd jump back to my analysis of Joseph Stiglitz's book, The Price of Inequality. And, before I get to the next section (Chapter 3), I want to detail the four myths (per Stiglitz) that are perpetuated by the Right regarding inequality. These are pretty important to look at before we continue.

First, the Right argues that when inequality is examined, it is done so in a snapshot sort of way. If one looks at lifetime inequality, then it's not so bad. People start off poor and then they get rich. In fact, the opposite is becoming increasingly true. Chances are if you are born poor, you are going to stay that way the rest of your life. Lifetime inequality is, in fact, very large and it's almost as large as it is in each moment of time.

Second, the Right says that our poor must not have it that bad because they have Flat Screen TVs and X Box. That may have been a measure of wealth in 1980 when those items weren't made cheaply in China and sold at Costco but it's certainly not a measure by today's standards. As at National Academy of Sciences panel pointed out, one can't ignore relative deprivation. Rural India, for example, has enormous poverty but they have access to television and cel phones. How would selling a TV or cel phone provide for long term needs like food, access to decent health care and education? The value of these things aren't really that great in today's world.

Third, the Right likes to pick nits about statistics. They say that inflation may be overestimated and growth in income underestimated. Yet Americans are working longer hours and sometimes two or three jobs just to make ends meet. These jobs aren't very secure either. Details like this aren't really measured in quantitative analyses and that's why those studies must be juxtaposed with qualitative work. Clearly, the problem is growing worse as we saw in the latest Census report in 2010: poverty went up from 15.2 percent to 16 percent.

Finally, (and this is what is going to tie into my post about Chapter 3), the Right insist that it is moral for society to be unequal, even at ever increasing levels. Doing anything would "kill the golden goose," as Stiglitz puts it. This argument has two sides and both are wrong. The first is that if we tax the higher rate folks they will lose their incentive to work and tax revenue will drop. As Greg Mankiw (one of Mitt Rommney's main economic advisers), the Laffer Curve proved to be inaccurate. The second part of this argument states that helping the poor will only lead to more and increasing poverty. They too will not be properly incentivized. The poor have only themselves to blame, right? Why should they take away the "hard earned money" of the wealthy?

We aren't going to get anywhere with addressing these issue of inequality until we dispense with these four myths. They are not rooted in fact nor are they rooted in evidence. Moreover, they are detrimental to solving the problem of lessening inequality, the result of which (as Stiglitz notes) will create a more dynamic economy.

Monday, August 06, 2012

On Stiglitz (Part Two)

In the second chapter of The Price of Inequality, Joseph Stiglitz discusses how an unequal society is created. From the outset, he discusses how this is allowed to happen.

Much of the inequality that exists today is a result of government policy, both of what the government does and does not do. Government has the power to move money from the top to the bottom and the middle, or vice versa.

Wow. What a commie.

He then goes on to discuss the concept of rent seeking and how people in power use it to manipulate the government into doing their bidding, hence the increased inequality. But aren't these people in power faced with a choice?

To put it baldly, there are two ways to become wealthy: to create wealth or to take wealth away from others. The former adds to society. The latter typically subtracts from it, for in the process of taking it away, wealth gets destroyed. A monopolist who overcharges for his product takes money from those whom he is overcharging and at the time destroys value. 

Right. That's the erosion of consumer surplus of which I often speak. So how does the latter (taking away wealth) actually happen? Well, it starts with many wealth creators not being satisfied with their wealth. So they seek to monopolize or rent seek even further. We saw this with the railroad barons of the nineteenth century and I think we are seeing it again today. So does Stiglitz.

Why does this happen? Stiglitz submits that Smith's invisible hand doesn't apply to our financial sector because their interest are not aligned with societal returns. They are, instead, aligned with their own interests and that of other people in the one percent. It's not a zero sum game but a negative sum game, where the gains to the winners are less than losses to the losers. As Smith himself said

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

We saw this go on with the stock pools in the 1920s and the credit default swaps and CDOs in 2008. In fact, Stiglitz argues that private financial firms act to ensure that markets don't work well. Why? Because they can make more money. If markets are competitive, after all, profits above the normal return to capital cannot be sustained.

That is so because if a firm makes greater profits than that on a sale, rivals will attempt to steal the customers by lowering prices. As firms compete vigorously, prices fall to the point that profits (above the normal return to capital) are driven down to zero, a disaster to for those seeking big profits. 

He goes on to discuss how they teach students in business school to create barriers to competition and entry to a market as well as circumvent government regulation. Essentially, how to erode consumers surplus, make markets less efficient, and continue to widen the gap between the interests of the financial sector and the interest of society. In short, increase inequality.

Indeed, the financial sector has become quite adept at doing this. On pages 36-38, there is a section called  "Moving money from the bottom of the pyramid to the top" in which Stiglitz offers examples of how exactly this is accomplished.

-Taking advantage of asymmetries of information (selling securities that they had designed to fail, but knowing that buyers didn't know that)

-Taking excessive risk-with the government holding a lifeline, bailing them out, and assuming the losses, the knowledge of which, incidentally, allows them to borrow at a lower interest rate than they otherwise could

-Getting money from the Federal Reserve at low interest rates, now almost zero

And the worst, according to Stiglitz?

-Taking advantage of the poor and uninformed., as they made enormous amounts of money by preying upon these groups with predatory lending and abusive credit card practices. This took many forms...changing high interest rates, sometimes obfuscated by fees...the abolition of usury laws...circumventing regulations. Rent-a-Center, for example, claimed to be renting furniture but was really selling it and lending money at high interest rates. 

One poor person by themselves couldn't have done this. As there were so many, the amount of debt was astronomical. If the government had intervened in the best interests of social justice or concern of market efficiency, none of this would have happened.

Now there are many who think that it was the government, not the private sector, that drove this rush to lend to poor people through the Community Reinvestment Act of 1977. To put it bluntly, this is a giant load of shit. Here is one example of why that is.  And here is another.  And another. And another.  As we saw in House of Cards and Inside Job, this debacle originated in the private sector (specifically California) and happened simply because people in the financial sector (and then everyone else) wanted to make more money.

So, the financial sector was (and still is) more focused on circumventing regulations and exploitative activities than economic growth. As I have shown repeatedly, they don't contribute to our society in any meaningful way from an economic standpoint. Indeed, from Adam Smith's standpoint.

What other ways shift money from the bottom to the top?

-Those at the top have managed to design a tax system in which they pay less than their fair share-they pay a lower fraction of their income than do those who are much poorer. We call such tax systems regressive.

-The hollowing out of the middle class and the increase in poverty due to laws that govern how corporations interact with the norms of behavior that guide the leaders of these corporations and determine how returns are shared among top management and other stakeholders. If monetary authorities act to keep unemployment high (even because of fear of inflation), then wages will be restrained. 

And who is it that heavily influences those authorities?

Moreover, the very sharp attacks on unions have weakened have weakened the individual's power over the corporation. We currently have about 7 percent of our population that are in private sector unions.

Stiglitz concludes this section by stating that market forces combined with politics (both of which should work in a balance to lessen inequality) have actually joined forces to increase income and wealth disparity.

All in all, it's not a pretty picture and it continues to get worse. There are no words that I can use to express my frustration at the right who view this information as being "commie talk." I urge all of you to read the rest of Chapter 2 of Stiglitz's book as it details more ways (too lengthy to mention here) that the wealthy are rent seekers.

Wednesday, August 01, 2012

On Stiglitz (Part One)

I first heard of Joseph Stiglitz's new book, "The Price of Inequality," from a very conservative friend of mine on Facebook. His comment was...

How about stop focusing on making things "fair" and let the chips fall where they may? Kind of like....oh...I don;t know...OLD SCHOOL AMERICA? No, no, better to listen to the liberal commie fuck professor who never worked in the private sector and wants MORE taxes, rules and regulations to make things "fair." Fucking idiot.

Anytime I see this sort of mouth foaming, I know it must be something worth reading!

Over the next few weeks, I'm going to be discussing Stiglitz's book and highlighting the parts of it that I think are important. Each post I put up will more than likely be on one specific point although not always as is the case with this first one.With over 100 pages in sourced information, there is going to be a lot to choose from and I want to make it clear from the outset that there is no way I can get to it all. This would be why I would recommend reading the book for yourself so you can study the full argument from the one who put in all the research that led him to a central and inevitable conclusion: the inequality in this country endangers our future.

Now, before we get started, I want to clear up an issue that came up in comments the last time we talked about inequality. I was tasked to come up with a number of what is too much inequality. As Stiglitz points out in the first chapter in the book, relying solely on a quantitative analysis isn't an accurate way of examining inequality.

On page 23, he discusses the Gini Coefficient and how it is used as a standard measure of inequality. A GC of 0 (in which the bottom 10 percent get 10 percent of the income, the bottom 20 get 20 etc) is the most equal. A GC of one (in which all the income goes to 1 person) would be the most unequal. In between 0 and 1 are where countries are measured. More equal societies have around 0.3 (Sweden, Norway, Germany) and less equal countries have 0.5 or above (African nations and South America). The US stands at .47, up from .4 in 1980. We are more unequal than Iran or Turkey and very much more equal than any country in the EU.

Yet, as Stiglitz notes,

Measures of income inequality don't fully capture critical aspects of inequality. America's inequality may, in fact, be far worse than those number suggest. In other advanced industrial countries, families don't have to worry about how they will pay the doctor's bill, or whether they can afford to pay for their parent's health care. Access to health care is taken as a basic human right. In other countries, the loss of a job is serious, but at least there is a better safety net. In no other country are so many persons worried about the loss of their home. For Americans at the bottom and in the middle, economic insecurity has become a fact of life. It is real, it is important, but it's not captured in these metrics. If it were, the international comparisons would cast what's been happening in America in an even worse light.

So, choosing a number shouldn't be the exclusive focus when you consider the multiple factors (some of which he mentions above) that make each country's economic concerns unique. Obviously, it's a starting point but it needs to be put into context with other, qualitative factors. An example of this would be the current economic situation in the EU. They may have 0 3 on the GC but isn't that equality an illusion considering what they are facing right now?

Further, is the GC even accurate? What are the factors that they use? Why? And why don't they leave out some factors, if any? The answers to these questions illustrate the flaws in focusing on one measure of inequality.

Now that we have gotten that out of the way, let's take a look at the first point Stiglitz makes in Chapter 1: the disparity in income. Stiglitz is quick to point out that he is looking at median, not average income, as that is more of an indicator of how the various income groups are doing. If you look at average income, it might seem like the lower groups are doing well since the upper groups are seeing their wages and wealth rise.

But if you look at median income, you see the following:

Median household income was actually lower in 2010 ($49, 445) than it was in 1997 (adjusted for inflation, $50, 123). Over the longer period (1980-2010), median family income essentially stagnated, growing at an annual rate of only .36 percent. Adjusted for inflation, male median income in 2010 was $32, 137. In 1968, it was $32, 844. (source and source.)

Add in the fact that the top one percent now earns 20 percent of the nation's income with the top 0.1 percent  earning 220 times larger than the average of the bottom 90 percent and the picture of gross inequality is stark and evident.

So, why does this matter? Page 85.

Moving money from the bottom to the top lowers consumption because higher income individuals consume a smaller proportion of their income than do lower income individuals (those at the top save 15 to 25 percent of their income, those at the bottom spend all of their income). The result: until and unless something else happens, such as an increase in investment or exports, total demand in the economy will be less than what the economy is capable of supplying-and that means that there will be unemployment.

Unemployment can be be blamed on a deficiency in aggregate demand; in some sense, the entire shortfall in aggregate demand-and hence the US economy-today can be blamed on the extremes in inequality. 

As we have seen, the top 1 percent earns 20 percent of the national income. If that top 1 percent saves some 20 percent of its income, a shift of just 5 percentage points to the poor or middle who do not save-so the top 1 percent would still get 15 percent of the nation's income-would increase aggregate demand directly by 1 percentage point. But as that money recirculates, output would actually increase by some 1.5 to 2 percentage points.

This kind of shift in income would decrease the unemployment rate from 8.3 percent to 6.3 percent. A broader redistribution, from the top 20 percent to the rest, would have brought down the unemployment further to a more normal 5 or 6 percent. 

This is at the heart of what the president and the Democrats are trying to do because they know it's what must be done in order to get the economy on track. Businesses aren't going to hire more people unless more people start coming through the door and buying their goods and services. We've seen that tax cuts don't spur hiring.

Eventually, the 0.1 percent, the 1 percent, and the top 20 percent are going to realize that if they want to continue to enjoy their wealth in a healthy society, this redistribution is going to have to happen. People like Warren Buffet and Nick Hanauer have already accepted this fact. Whether or not the government "forces" them to do so is irrelevant.

It's no longer a question of "if" but of "when."

Personally, I'd like the wealthy of this country to do it on their own. That way we can leave the sensitivity about the federal government (see: paranoia, hysterical old ladies) behind in the trash heap where it belongs. Obviously, this isn't likely but we have to do it. As Stiglitz puts it,

Countries around the world provide frightening examples of what happens to societies when they reach the level of inequality toward which we are moving. It is not a pretty picture: countries where the rich live in gated communities, waited upon by hordes of low income workers; unstable political systems where populists promise the masses a better life, only to disappoint. Perhaps most importantly, there is an absence of hope. In these countries, the poor know that their prospects of emerging from poverty, let alone making it to the top, are minuscule. This is not something we should be striving for.