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Inequality Bulletin, 2009

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One of the best finds of this year is Feudal Lords Of Finance (The Baseline Scenario)

In some influential circles, these questions are now asked: What’s wrong with high levels of inequality in general, and with having very rich bankers in particular.  After all, human societies have survived the presence of extremely wealthy individuals in the past – in fact, some now argue, the presence of such a “new aristocracy” can finance growth and spur innovation.

This argument is deeply flawed along three dimensions.

  1. Such super-elites care very little for anyone other than themselves.  Certainly, there will be some charity – but remember that John D. Rockefeller’s greatest donations came after he had been dragged through the mud by some very persuasive rakers (Ida Tarbell).
  2. It is a mistake to assume that any country’s institutions (the laws, rules and norms that govern behavior) are fixed for all time.  In reality, institutions change all the time – partly in reaction to who has wealth and power, and what they are trying to do.  What are the odds that our financial super-rich will want to build democracy and strengthen the middle class?
  3. Can the rich and powerful really be counted on to save the system, or just themselves?  Go back carefully through the early history of the Great Depression (see Lords of Finance).  Certainly the big  New York players saved banks and securities firms that were seen to be part of their club (e.g., Kidder Peabody), but they – and the New York Fed – were not so inclined to save financial institutions they regarded as less than central (e.g., Bank of the United States), even if this meant thousands of people lost their life savings.

this post also has an interesting discussion, see below

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[Dec 1, 2009] Feudal Lords Of Finance

The American Dream + Aristocracy = collapse of the system.
The Baseline Scenario

In some influential circles, these questions are now asked: What's wrong with high levels of inequality in general, and with having very rich bankers in particular. After all, human societies have survived the presence of extremely wealthy individuals in the past – in fact, some now argue, the presence of such a "new aristocracy" can finance growth and spur innovation.

This argument is deeply flawed along three dimensions.

  1. Such super-elites care very little for anyone other than themselves. Certainly, there will be some charity – but remember that John D. Rockefeller's greatest donations came after he had been dragged through the mud by some very persuasive rakers (Ida Tarbell).
  2. It is a mistake to assume that any country's institutions (the laws, rules and norms that govern behavior) are fixed for all time. In reality, institutions change all the time – partly in reaction to who has wealth and power, and what they are trying to do. What are the odds that our financial super-rich will want to build democracy and strengthen the middle class?
  3. Can the rich and powerful really be counted on to save the system, or just themselves? Go back carefully through the early history of the Great Depression (see Lords of Finance). Certainly the big New York players saved banks and securities firms that were seen to be part of their club (e.g., Kidder Peabody), but they – and the New York Fed – were not so inclined to save financial institutions they regarded as less than central (e.g., Bank of the United States), even if this meant thousands of people lost their life savings.

When the Bank of England's Andrew Haldane speaks of a "doom loop," he is describing the declining future for our middle class. Powerful financiers, by and large, did just fine during the Great Depression.

By Simon Johnson

Written by Simon Johnson


Feudalism was the norm for most of recorded history. We peasants had a decent run for the past few centuries, but that is over now.


Since it's in writing and I can't hear your tone of voice, have you actually decided the grand experiment of American democracy is over? Or would you continue to try and push it forward?

You're a good thinker, Nemo. It would be discouraging to see you give up on it.


What's wrong with high levels of inequality

Just ask Marie Antoinette or Nicholas II. People tend to have very strong and passionate sense of social justice and fairness, especially if they feel that the tickle-down philosophy makes them trickled-upon by the super rich.

Agoraphobic Kleptomaniac

I'd love to know about what "influential circles" you are talking about here. Is this bankers talking about themselves, or have other people actually asked these questions?

The American Dream + Aristocracy = collapse of the system.

The two are mutually exclusive to a successful society, as we will learn if serious policy makers are asking such questions.


When Elites Fail:

Dan Palanza

I just watched this long presentation. Noam Chomsky has an interesting style, but will little or nothing new to say.

And why is his lecture titled "When Elites Fail?" Using Chomsky's own style of presentation, elites have succeeded big time. Every one of their dreams have come true. Even the next crash is set into place and ready to go off. It seems to me the question to ask is "Why do those with noble hearts always lose?" I suggest that we are a society of cultures that have lost sight of noble goals that we the people hold in common.

The current financial mess is not going to be corrected on Wall Street or in Washington. It will be corrected on the Main Streets of our cities and towns. We will adopt a local way to do business based on physically real investment value and morally worthwhile personal integrity. We must gang up on and support only the banks in our town that will adopt rules that make sense to we their customers.

If your town wants banks that gamble, fine. I want the bank in my town to do business much the way banking was done 40 years ago: with a separation of commercial and investment banking. My bet is that my town will have solid support for that principle. If your town succeeds with gambling banks and mine fails so be it.

As town persons enforce market control over banks, other cities and towns will follow. The majority policy that prevails will be a good and successful policy. The greater society will in time have a way to make rules for the nation based upon real consensus rooted in successful working examples. We have nothing to gain by waiting for the next crash. One need only read the intelligent comments on this blog to feel the impending doom that is on its way.

We are in an age of too much talk and not enough action. Common sense is the tree that grows physically strong because it is deeply rooted into the Earth.


Deeply flawed – indeed! History is repeating, we're doomed, because we never learn.


It's high time an academic wrote about an issue like this. This shows that Mr. Johnson has got not only the prerequisite brain, but also the citizenship necessary to assist at the betterment of our world.

This blog should be circulated among all academic elites who usually say they don't talk politics when confronted by such thoughts!

Ted K

People aren't taking their right to vote seriously anymore. I think "us peasants" need to look in the mirror a little. Even the ones who get worked up enough to protest (teabaggers) don't have the reading comprehension to get through the front section of the New York Times. They'd rather listen to Glen Beck and act on fantasy paranoia than deal with the REAL threats.

That's how guys like Phil Gramm leave office with the rest of their lives assured and pampered and the same dimwits who would have voted for them couldn't tell you in 2009 what state they came from.

When you go out and vote, you don't check the name just because it has Republican by it and he said he wasn't going to raise your taxes. You remember the bustard on the banking committee (Senate and/or House) who played footsie with the bank lobbyists and throw him out of office.

Because if you listen to the fat closet-racist on a.m. radio who doesn't like the President because he has brown-toned skin, and the banker reads 3 high quality newspapers per day, you're probably not going to win the game at the voting booth, or life.


Throw the bastards who play footsie with the bank lobbyists out of office? It's a fine theory, but it's really only applicable if you live in the district that bastard represents.

But more importantly, voters face something akin to a prisoner's dilemma. While your banking committee congressman may be corrupt, he has to pass favors onto your jurisdiction to get elected. For many, it is better to enjoy those favors and let the rest of the country vote out their corrupt representatives. Otherwise, you run the risk of voting out your own powerful yet corrupt representative, and seeing another district's congressman assume the mantle of power and dole out favors to his constituents. Voters only benefit if all of us vote the same way, which seems unlikely.

Ted K

Personally I would rather vote the corrupt politician out of office, even if he is doling out pork projects to my home state. In the long-term we all win that way. But your point is valid. It's kind of the "he may be a bastard but he's OUR bastard" kind of thinking. And that does happen a lot in the voting booths, no doubt about it.

I think writing checks to yourself for doing nothing or writing checks to yourself for activities which don't benefit society eventually catches up to you. We can see that with the state level governments in California and New York now. And really it's just starting to catch up with us at the national level now. People just don't see any connection to the benefits they're getting and who paid for it. People with low-income jobs all their lives are screaming "I don't want the government messing with my Medicare". They don't realize that Medicare IS a government program. All it really is is a welfare check in the form of an expensive pill/pills. They say they paid into the system. Fine, you paid into the system and you should be rewarded for that. But you forgot to realize that one of those pills the government paid for surpasses the hourly wage you made for most of your life.

Donald A. Coffin

I can't help but think about the time I voted to oust a powerful-but-corrupt member of Congress (Dan Rostenkowski). He was ousted.

After 2 years of a Republican non-entity, we elected Rod Blagojevich. Now, THAT was an improvement…

Ted K

Blagojevich was booted out of office, yes??? The system still works if people stay knowledgeable on the issues. Usually there is at least one decent person on the ballot. Ask Al Gore about the other choices on the ballot in Florida in 2000. He could probably tell a story about that.

Voting also doesn't just mean voting for a guy because he will be the best to you as an individual, responsible voting means voting for the guy/girl who will help society progress. I am VERY pro-union. Rostenkowski was pro-union. But if I thought he was "on the take" I would have voted the SOB out of office even before the scandal broke.


usually it seem that most complain about others representatives without knowing of their own aren't doing the same or worse. and most of my local politicians only had one line. 'i am a conservative'.

which means nothing of course

Can't think of cute name

From my lay point of view it seems like an aristocracy would be just as likely to squash as spur innovation. If a technical innovation can be integrated into their current business structure, then they may well provide the initial push to turn it into reality, but if the technology is disruptive to their business model, they can use their wealth to suppress it using the legal system and by influencing legislation and regulatory enforcement. Is there any empirical evidence that speaks to the relative influence of the pro- and anti-innovation forces of wealth concentration?


Take a look at media conglomerates and their technical/legal hamstringing of modern computing technology in order to serve the end of keeping their antiquated business model running. They're desperately fighting against forward progress in media distribution in order to maintain artificial shortages that their business model has depended on for a century now.

Makes it really clear to me that the rich will do nothing for the benefit of anyone other than themselves ultimately. Even if 99% of the ultra rich do good, there are so few of them that the other 1% can really wreck progress and society for the normals like myself.

A. Lewis

This is the last, best (and pitiful) defense of aristocracy. "Oh, maybe they spur innovation!?". At least you said it nicely, asking as a question.

As if innovation, stated simply, is such a greater good it outweighs the clear evils Simon presents.

Our innovations in health care are in some sense obvious "goods", but if only 0.5% of Americans can afford to enjoy them, was it worth it at all?

This is unconscious elitist thinking in action. For society as a whole, results count. The number of poor, the number in jail, the number who don't get an education and realize their full potential, these matter more than the awesome things my iPhone does (though I do love it dearly).

As a flaming liberal, I'm willing to trade my iPhone for my poor neighbors across town to have a good school, clean food and water, and basic healthcare, so they can be productive members of society along with immodest me.

The elitists can't bear to part with anything the aristocracy has acquired for them, so they scrounge for an excuse to continue the system that benefits so few at great cost to so many.

It's sad, the middle ground -where the benefits are spread enough that everyone gets a little improved, even while a few achieve far more on their own merits – is not so far away, but there are no current incentives to get there. Only to be selfish and cheat.

I used to think that education should be the progressive's top priority. It is clear to me that massive campaign finance reform is a necessary pre-cursor. Save that, only bloody revolution will bring change.


Plain and simple, the super wealthy elite are going to do what is best for them, just like everyone else does. They just happen to affect more people in the meantime.


The historical record of our republic can be read to indicate that the government now, as always, is of the people, by and for those people whom the government is meant to serve.


I would love to join a revolution against bankers. But that isn't going to happen. The most we can do is continue to deny, politely or otherwise, that the system is run by and for bankers and related elites.

Minimizing cognitive dissonance has been the best the American middle class can hope for since at least the 1970s.


In the 70's professions became businesses. Now everyone takes pride in the money they make and the power they have rather than taking pride in their professionalism. This is a hard one to undo.


One cannot help but think of the great Roman satirist Juvenal's scornful words,

"Already long ago, from when we sold our vote to no man, the people have abdicated their duties; the people, that once bestowed commands, consulships, legions, and all else, now meddle no more and long eagerly for just two things - bread and circuses."

Just as the Romans lost the capacity to govern themselves by being so distracted by mindless self-gratification, we also have our "bread and circuses"…Michaele and Tareq Salahi, Balloon Boy, Tiger Woods, Jon and Kate, Sarah Palin and Levi Johnston, etc., etc..

According to Juvenal, writing about the Rome of his time, it was hard not to write satire. It is hard not to write satire these days, when we and our government are so consumed with bread and circuses. We constantly satirize ourselves.


"The presence of such a new aristocracy can finance growth and spur innovation."/Dayllll

I guess the concept of using "other people's money" no longer applies to our new aristocracy. When did they get religion?

I can only imagine that they will "finance" growth with their own money when everyone else has none.


In addition to the class issues raised by the creation of a new aristocracy are the nationalist concerns on individuals and firms. A transnational elite, as the neo-dependency theorists would describe it, may be far more willing to take their assets, investments and consumption to the Bahamas, Monaco or Panama now than they were ten years ago because communications and trade make it possible to live and do business there.

They could simply not have an interest in making the US (or their home countries elsewhere) dynamic, democratic, or growing societies because they don't feel a part of them anymore.


You're implying we might very well just get rid of them and get back to having a normal society. Don't tease me with such pie in the sky dreams.

marc sobel

Can you provide some links or references for your concluding statement:

"Powerful financiers, by and large, did just fine during the Great Depression."

M.G. in Progress - The Unbearable Lightness of Being an economist

Plutonomy was described by Michael Moore's "Capitalism: A Love Story" with reference to the in-famous, and leaked, internal Citigroup memo of October 2005 (revisited in March 2006).

The content and language of those memos are upsetting, appalling and dramatic, telling us how wonderful is a world where economic growth is powered by and largely consumed by the wealthy, happy few.


More concentrated wealth at the very top would make us resemble the developing countries Dr. Johnson advised while at the IMF. Look at how well income inequality works in Guatemala or Honduras.


I would think it creates tax-revenue instability.

With wealth under the control of a few people, the flow of money varies from year to year; it's invested for capital gain, which is taxed at a much lower rate and varies based on market trends.

And with wealth concentrations, there's less spread around in income, which is a more stable revenue stream.


Funny, funny stuff! ……………. next, Goldman exec's will be claiming the right of Prima Nocture.

Goldman Sachs Group (GS) is at the focal point of the American public's rage against Wall Street - and probably for good reason. The firm's former chief executives have populated the highest echelons of American government, which has turned around and given Goldman - and its partner in the current financial collapse American International Group (AIG) - billions of dollars in taxpayer money.

Now, as bonus season draws near, Bloomberg News reports that nervous Goldman Sachs partners are arming themselves. According to Bloomberg, some senior Goldman bankers are applying for gun permits ahead of the holidays for fear of the public's reaction once they start receiving their year-end rewards.

It's almost enough to make me feel sorry for these titans of finance. Goldman's bankers have already been denied holiday celebrations and the freedom to gather together in groups of more than 12. And, of course, they are also being denied a chance to flaunt their wealth.

It's not as though Goldman hasn't done anything to try to change the public's mood. Goldman recently announced a $500 million fund intended to help small businesses through a combination of training and lending programs. Yet, the announcement hasn't done much to soothe the public's anger - an anger that I'm sure all of the hedge fund honchos that are set to out-earn Goldman's partners are relieved to see targeted elsewhere.

Once news of the final tally on Goldman's bonuses breaks, the bank is going to face an even tougher public relations campaign. Goldman's partners are expected to receive record bonuses this year. Some bankers fear a repeat of what happened in March to the AIG Financial Products employees who received $165 million in bonuses. Once word got out about the bonuses, demonstrators went to the employees' homes and protested on their front yards.

What Goldman execs need to remember is that the firm wouldn't be doing so well if it weren't for the public's munificence. After all, $12.9 billion of the AIG bailout money went to Goldman. And it is still enjoying $52 billion in low-interest loans from the U.S. government to finance its trading profits.

I am afraid the guns won't protect these Goldman partners. Perhaps a better weapon would be for Goldman to pay reparations for its role in securitizing sub-prime mortgages - as I suggested last month, maybe it could deposit five years of bonuses in a fund to help people who have been displaced due to foreclosure.


What, help the public in a way that won't bring additional profits next quarter and a larger bonus next year? Preposterous! Madness! Unthinkable!

Patrice Ayme

Demo-cracy means People-rule. If the USA stops being a democracy, and all indications are pointing that way, there will be war. World war.

The lesson European democracies have drawn from their confrontation with fascism (1914-1945) is that tolerance is counter-indicated, for the best outcome.

There is no more reason to tolerate lunacy in the USA than there was to tolerate lunacy in Germany.

Now, as far as aristocracy being more innovative, only people who are ignorant of history would say this. All the most democratic regimes (and those were long in western Europe) were most innovative. per the very justifications it uses for its rule, aristocracy is forced to argue for conservatism.

The main force of democracy is that it puts all minds in parallel, and thus has a much greater capacity to generate ideas.


Agreed. Every third world country that clings to dictatorial aristocracies that doesn't cave in to democratic thinking to some degree remains stagnant. Giving in to free thinking democracy almost universally brings progress.


Disagree, somewhat. We are a Republic, not a Democracy, thanks to the wisdom of our Founding Fathers. We elect representatives to vote for us in the legislative bodies; as Ted K notes above, this is also not a perfect system (though I think term limits would address Congress' Too Connected To Fail issue).

If our system breaks down, I think civil war is more likely than world war. And I'd point to relativism and its PC ilk for destroying our civic sense, which in better days taught us who we were as a people.


The problem with huge levels of inequality is that most of the huge fortunes created in earlier times were done so through the ruthless use of power, both physical and economic.

There are always going to be inequalities in wealth, as there should be in a system that rewards those willing to work harder and be smarter than their peers. The problem comes when the very wealthy begin to use their influence to corrupt our government, like what has happened since the Reagan years.

Andrew the Great

All FIAT money systems eventually fail.

Democracy died in 1913.

Americans won nothing in WWII, they simply defeated the Nazi's and Jap's–other dictatorships.

Pauslon, Bush, Greenspan, Geitner, Bernake–all have committed crimes against the Constitution.

Inflation destroys the middle class and they messed up destroying the housing market with their bubble.

Ah, buy your guns, your going to need them.

Fight Club's are forming baby.

The pragmatist

Look at history and at much of the third world. Concentration of wealth in the hands of a few inevitably leads to social unrest, chaos and revolution. And along the way it subjects millions of people to poverty and misery.

The big money on Wall Street may not run this country, but they have altogether to much influence on our government. They are as short sighted and self centered when it comes to politics as they are when running their companies. Long term stability and equity are in their best interests in the long run, but they only look at what is good for them right now.

Uncle Billy Cunctator

Respectfully, humbly - perhaps you could solicit some short essays from Petros G. Peterson, Henry Kissinger, a Rothschild, a Buffet, a Slim, a Rockefeller, a Murdoch, a Soros, and a Caruana or two on this topic?


Human beings are driven by a need for fairness and the current neo-feudal system does not deliver.

The reasons feudalism was able to hold in the past (and it was far from stable if you read history books) the church that taught it was what god wanted, a defense pact from marauders and the stability of the system (Grandpa farmed, Dad farmed, I farm) don't exist today

Eventually, sooner than later it will collapse and be replaced.

And they are not going to be able to divide the population indefinitely nor are they going to be able to count on their security guards or apparatus. The people than make up that lot are loyal to money so far, but once they are co-opted (and its happening fast) by new tribes, gangs and the new movements, the NF's are done.

If they are lucky, they can slink off into a comfy life. If not, well ..


what circle? do you have a link?

via fCh

To my knowledge, professor Johnson, himself a member of a certain elite in the country, is among the too few calling our attention to the need for a change in the way elites conduct themselves in the US. If you like, his is a call for redefining the social contract.

I only wish he'd been more specific/gone deeper, but I trust that he's working on something–take a look at his work in progress.

Thank you, Simon!

P.S. It looks like G.B. is considering some moves to limit the conditions leading to 2008, moves that are still vehemently resisted in the US.


Whats the point? Are you going to urge politicians to take their money from them and give that money to everyone else? Is that what America and democracy is all about?

Our government was designed with checks and balances against corruption and tyranny that is the only thing I care about. Every member of our senate and congress are currently corrupt – they pick a dollar value of pork each year and agree to split it up amongst themselves based on seniority. Nowhere in the constitution is there an allowance for federal money to just be spent like this on anything. This is organized crime. In theory having so many representatives it can't happen since the others would in their self interest refuse to vote on wasting your tax money on someone else's pork.

That is the problem. A billionaire is not the problem and is under no obligation to give away his money or save the system or anything else you are implying. We all should look out for ourselves – and under that philosophy we should be stopping the government from stealing and throwing away our tax money.


Two points:

The combination of globalization, technology and terrorism, domestic terrorism, just makes it unlikely that radical inequalities will exist for very long.

Maintaining an orderly society is very much in the interests of the ruling class. We have both become the richest society on earth and maintained law and order for an enviably long time because the aristocracy shared back a little more of the wealth.

Uncle Billy Cunctator

Well someone obviously doesn't want us to remain a wealthy, orderly, lawful country.

Robin Thomas

Funny post.

Yeah, let them keep on doing what they've been doing and there will be a bloody revolution. I know highly intelligent people who are ready to take to the streets. I'm talking college faculty types and not your garden variety militia dudes. Those Wall St. bastards better straighten the hell up…


The historical difference between our time and the past is the level literacy, education and our access to information and knowledge via the internet :) Perhaps a Black Swan here that bodes well in the evolution of democracy.


My problem is that everything of meaning to us as citizens has been captured and is being manipulated to the benefit of the super rich and super powerful.

There are no Ida Tarbells, or even Walter Cronkites, and power has captured everything that nobility can help. And, it seems that we live in an undereducated, declining society (where the air waves are dominated by a media obsessed by selling commercial time - including the news media - otherwise why would the Salani's and Desparate Housewives capture so much popular attention).

We no longer live in a democracy, but something resembling France pre-revolution, or a third world country. The genocide is only beginning - with the 45,000 Americans who die each year because they can't access adequate health care. No, we are living in a plutocracy, where all political fora are controlled by a captured media, a captured Congress and White House, and oligarchs in Health Care, Energy, Finance, etc.

How will this story end? First, power/money will become even more concentrated, and, when the Afghan war ends, there will be many unemployed and disgruntled military, who are trained and armed to take things back. And, oh, by the way, this will be the result of the control exerted by the Military Industrial Complex, which charges us a million dollars for every deployed soldier to fight to protect our rich and powerful citizens. Note that there's no more draft, after all, why would the rich and powerful want to chance risky war to their draftable heirs.

It is a scary country, if we still believe in freedom and justice for all. They exist here, but certainly not for all.

Uncle Billy Cunctator

We might have had an Ida Tarbell… Mark Pittman, but he just died.

(Is Stiglitz trying to be funny here with his "shocking"?

Or not. He could have been just another flack.


Well, well…. this as dark as I have seen comments go on Baseline… history is indeed repeating itself… as I've said before, we are witnessing The End Of The American Century… our founding fathers established this county under the auspices that they didn't want to leave one aristocracy to establish a new one… and it has worked pretty well for a time… but as Thomas Jefferson wrote "any government that can take care of you is strong enough to take everything from you"… we are heading towards a tipping point… and when it falls, it will fall hard and fast.

Peter T

> Powerful financiers, by and large, did just fine during the Great Depression.

They certainly didn't starve, but was the inequality in society not much reduced after Great Depression (1929-1939) and WWII?


Well spoken Teotac.

The predatorclass is tossing kindling into a fire that though unseen now, is raging beneath the timbers and will soon enfulf everything.

Push enough people to the bitter edge of hopelessness,- flaunt outrageous fortunes robbed and pillaged from, and gleaned of the backs of the poor and middleclass, – imagine there are two sets of laws, one for the few, another for the many, – and wantonly glorify heartlessness, greed, and obdurate disregard for the unwashed masses as a badge of honor, – and there will be blood.

Andrew the Great is correct. The predatorclass is going to need guns, because the poor and middleclass are well armed, locked, cocked, and ready to rock, and growing increasingly pissed. All it will take is one little unforgivable spark, and the unseen raging fire will explode into a conflageration that will burn everything.

In a world where there are no laws, – there are no laws for anyone predators!

[Nov 19, 2009] Risk Pollution, Market Failure & Social Justice by John Holbo

November 19, 2009 | Crooked Timber

I just listened to an EconTalk podcast interview with Richard Posner about his new book, A Failure of Capitalism: The Crisis of '08 and the Descent into Depression [amazon]. The book has gotten a bit of buzz for the way in which Posner semi-recants certain libertarian or Chicago-style economics positions he is known for. But certain other positions he has not recanted, such as his narrow view of economic actors' duties to consider negative externalities of their activities (discussed at CT before here and here).

In the podcast, Posner basically asserts that those actors in the financial sector who almost crashed the world economy were right to do so, in the sense that it was rational for them, individually, to be massive 'risk polluters' (to coin a phrase someone else has probably coined already.)

He would probably go further, although he isn't actually asked to in the podcast: some of these actors were obliged to take the risk. In at least some cases it would have been their strong, positive fiduciary duty, under the circumstances, to do something which – taking a larger view – seriously threatened to run the whole world economy off a cliff. Because that was the apparent route of profit-maximization. It was their job not to take the larger view. Posner blames regulators, not these profit-maximizing actors, for the market failure; for not seeing that the damage to everyone downwind of all that toxic risk was so great that it should not have been permitted.

As a Rawlsian, more or less, I actually sort of like the overall picture here, minus the excessive and rather perverse dogmatic-legalistic strict tidiness of the segregations of duties. It makes sense to have a market in which private actors basically look to their own interests within a system in which regulatory steps have been taken to ensure that they do not, in the aggregate, make a giant, intolerable mess of the whole world. Flawed as any regulatory system is sure to be, it's less reasonable to expect all the individual actors to be sufficiently attentive to, hence to take individual responsibility for, the whole. We don't need to go so far as to treat them as weirdly obliged to be totally blinkered to the whole system. But we shouldn't make each individual responsible for solving what is, in effect, a collective action problem, and a snarly knowledge problem to boot.

But I wonder what Posner would say about the following. Take two cases.

  1. there's a severe recession.
  2. there's serious income inequality.

We've got both; the causes of both are broadly similar. Namely, a lot of actors individually engaged in narrowly self-interested, more or less rational economic activities. The regulations in place, such as they are, have permitted these results. But we take it for granted that trying to do something about the former is presumptively permissible. Why should there even be an issue (beyond a practical issue) about whether it's appropriate to take steps to do something about the latter?

Some people might argue that the second isn't necessarily bad, but I don't think we should take that seriously. What this lot are thinking is just that 2 is a possible outcome of a lot of individually permissible activity. Since we don't want to say those activities were wrong, we shouldn't say the result is wrong. But even if you accept this (for the sake of argument) you should still reply as follows: no one argues that severe recession cannot be a bad thing, so long as it can be shown to be the result of a lot of activity that was permissibly engaged in. Recessions can be bad without needing to be anyone's fault. Likewise, we ought to be willing to say, at the very least, that serious income inequality – some people are rich, others don't have enough to eat – is a bad thing. Because people going hungry is bad thing. Whether any individual actors are to blame for the bad thing is a separate question.

And some folks might persist in quibbling, even past this point, that it's tendentious to characterize a hunger problem – an absolute poverty problem – as though it were a relative income problem. But I don't think so. Why do we regard a recession as a problem? Recession, too, is a relative wealth comparison. We take 'recession' to be the relevant category in part because the fact that we were doing significantly better just a year or so back suggests this is something we should be able to get out of. Likewise, income inequality is provoking to people, not because they are inherently resentful of the rich (not necessarily) but because it suggests to them, prima facie, that poverty in this environment ought to be get-outable-of. At least we ought to try.

Now: I think there is a tendency among liberals – hence by extension, conservatives, when engaging liberal views – to treat the case of a severe recession morally differently from that of income inequality. The latter is, presumptively, a 'social justice' issue. The former an unfortunate event. It isn't unjust for the economy to go into recession. That would sound odd, because everyone takes for granted that no one wanted this result, let alone engineered it expressly. But no one wants income inequality either. Not per se. Yet we may be inclined to say the latter result is not just bad but unjust.

It would make a certain amount of sense to recalibrate our notions so that both problems look morally equivalent. When bad things happen, overall, that it is no individual's job to fix – like recessions, or severe income inequality – then it is the job of the government to do something about it, if possible.

I think Posner would not like this result, as he would think it puts us on a slippery slope to more aggressive interventions against the entity formerly known as 'social injustice' – now excitingly rebranded as: big bad things – than he would think wise. That is, regulators acquire a mindset in which we assume that it is their (the government's) job to fix anything big and bad that it's no one else's job to fix. But really, that is the government's job, on Posner's view. It isn't anyone else's job, by hypothesis, and – if it's bad enough – the bad does need fixing. The only proper restriction on the government's efforts, in this regard, are legal/Constitutional, plus a due sense of humility about the technical possibility of fixing any given 'big bad' thing, without making too many other things worse.

No one thinks trying to get out of a recession is, per se, wrong, just because we should let 'the market decide'. We don't like recessions. But then the same goes for anything else we really don't like: like people going hungry. The effect of thinking this way would be to bleed 'let the market decide' of any vestige of moral, as opposed to prudential, authority. And the prudential point reduces to: don't rock the boat too much. Don't make regulatory interventions in complex situations that might make things worse. (Of course, if you are arguing with someone who doesn't see any value in any market mechanisms whatsoever, then 'let the market decide' can amount to a substantive suggestion that, in general, markets can work pretty well. But, since liberals and progressives are not Maoists, we can ignore this as presently irrelevant – not that Glenn Beck will ignore it, oh no.)

Posner's extreme position seems to me most useful for helping to map out a range of possible positions. We'll start with his.

  1. Individual economic actors are permitted to be (and may be obliged to be) borderline psychopathic in their solipsistic pursuit of narrow self-interest. In this case, you really need a government/regulatory system that is very actively concerned with the entity formerly known as social injustice – a.k.a. really big bad things.
  2. Matthew Yglesias gets what he wants: "What's really wanted here is for the United States to be a different kind of country with a more public-spirited business class wherein the bank executives could be persuaded to "do the right thing" in light of all the crap that taxpayers were doing on their behalf. But we live in the United States of America. Fundamentally, though, as with a lot of this stuff I think what's being implicated is much less America's financial crisis emergency response policies than our background conditions of social justice."
  3. We should 'let the market decide'. That is, there is some reason to suppose the market gets things 'morally right', so if some people have less money, we should presume, prima facie, that this is the 'right' result. But then what is the justification for trying to moderate the business cycle? If we trust the market to decide what everyone deserves to have, then why not conclude that the reason why we all do less well in recessions, on average, is that we all become inherently less deserving people, on average. The business cycle has always been a bit of a mystery: maybe it's fueled by an underlying moral cycle of inherent desert. Some years you get out of bed and you are just plain a worse person, economically, hence more likely to be unemployed for the next 18 months or so. And rightly so. (It's a metaphysical thing. You wouldn't understand.)

I could take 3 a bit more seriously, but I'm not really going to bother. The idea that you can't make at least some judgments about what overall social-economic situations are desirable or undesirable, is pretty silly. Obviously there can be cases in which people really seriously do dispute whether a given arrangement is desirable or undesirable, in some global sense. But there are enough clear cases that we can stick with those, and grant upfront that the government has a lot less business – quite possibly none – intervening when it isn't clear to everyone that we should want to get rid of state of affair x, if just waving a fairy wand were all it would take. (No one likes recessions or hungry poor people. We all agree that waving a fairy wand to eliminate those problems, if we could, would be an appropriate policy.) Once you grant this much, the rest is just arguing practical policy limits, pending the invention of functional fairy wands.

What I think is notable here is that liberals/progressives are more or less ok with 1 or 2, if they are spelled out in some satisfactory way. Whereas conservatives are really only happy with 3, philosophically. Very few of them will regard either 1 or 2 as philosophically tolerable, spell them out how you like. But this doesn't seem to me like a good situation to be in.

I expect that one major line of resistance to all this would be: seriously, dude, you are underestimating the practical limits on government. You change one thing here and 12 things go wrong over there. Part of the problem with this is it assumes liberals and progressives are all Jacobin lunatics. Part of the problem is that it is actually an argument for 2 being a better option than 1. But mostly the problem is that it implicitly concedes that either 1 or 2 could still be philosophically correct.

I hammered all that out pretty quick. I'll bet people won't like it. I could write a post about fonts, if you want.

Martin Bento 11.19.09 at 9:58 am
Donald made a point I was going to. I would go a bit further though. It's not clear to me that economic inequality is not desired for its own sake by the some of the elite. After all, studies suggest that once you get past the level of income needed for a reasonably comfortable life – about 40K for a single person in the US - the quest for money is mostly about status. Meeting your needs is not necessarily zero sum, but status is: my status can only be higher than yours to the extent that yours is lower than mine. The more inequality there is, the more status differentiation there is. Of course, there are other sources of status than money, but I'm talking specifically about people who value money for the status it confers. This is in addition to the "Donner Party Conservatism" calls to make sure the incentives to work are as strong as possible (to be fair, I think tolerating some inequality for the sake of incentives is worthwhile, but we seem to be well beyond that).
Tolerating some wealth inequality for the sake of incentives is like tolerating some inflation for the sake of not having deflation: once you've got inflation at one or two percent, you've achieved that goal. One hundred or two hundred percent inflation is unnecessary and undesirable.

I'm not arguing with the previous commenter, but agreeing and then expanding on why I think the fact that some tiny amount of inequality might be tolerable, does not give libertarians and other inequalitarians carte blanche to argue in favor of unlimited inequality.

bob mcmanus
Adam Smith opposed "self-interest" to "selfishness" precisely in the spirit of giving the individual the benefit of the doubt and presuming a minimal amount of sociality. We should not presume, as the neo-classical economists do, that homo economicus is a sociopath. This is not only uncharitable, but is refuted by the facts as I know them. Just last night, I read a finance worker who probably makes mid-6 figures saying a) those damn CEO's are making too much money, and b) if we have another crash, capitalism has failed and we should move to a command economy. He was very serious, his life-savings would be wiped out, and he would lose his personal "investment" in the free-market ideology. I encounter on the finance boards, at least as many nascent Maoists as Randians.

So if we accept the Smithian assumption that the vast majority are neither Randians or Benthamites, most of the questions become empirical, don't they? How much inequality is tolerable, and what are the efficient ways to adjust incomes and wealth.

bob mcmanus
Empirical: as a Post-Keynesian, I believe that income/wealth inequality or maldistribution is the primary cause of financial instability. Not necessarily economic instability or recessions, we had recessions in the 50s or 60s, but the kind of credit collapse of 1929 and 2008 that is so catastrophic.

This also can be traced back to Smith, who distinguished between investors and speculators (not in those words) and accepted that the rich, without adequate counter-incentives, tended to gamble destructively. This was not a normative judgement, but a recognition that easy money tended to reduce safe investment opportunities and create "imaginary capital". Smith fought with Bentham about usury laws (Smith was for limits on interest rates) because Smith thought high interest rates or excessive rates-of-return encouraged speculation.

To a large degree, the point and purpose of economics is to change normative or social justice questions into empirical questions, on the assumption that human beings are generally social and benevolent critters.

kid bitzer 11.19.09 at 1:47 pm
interesting post.

"I expect that one major line of resistance to all this would be: seriously, dude, you are underestimating the practical limits on government."

i take it that part of your larger point here is that this response is available only to conservatives who also think that govts and central banks ought to take no steps to intervene in recessions, either.

John Holbo 11.19.09 at 2:14 pm
"i take it that part of your larger point here is that this response is available only to conservatives who also think that govts and central banks ought to take no steps to intervene in recessions, either."

I think it's pretty hard to maintain that meliorating income inequality is just too damned technically hard, compared to moderating the business cycle. So, yes, I do think there's going to be an insuperable hurdle here. But also the point is that abominating the very notion of 'social justice' as un-American, then turning and saying that the only reason we shouldn't pursue it is that it's too technically hard, is not a very convincing stance.

Ben Hyde 11.19.09 at 2:50 pm
"Some years you get out of bed and you are just plain a worse person, economically, hence more likely to be unemployed for the next 18 months or so."

Some years you get out of bed with a greater talent as a risk polluter? Some years societies forget the good hygiene required to temper the risk polluters? Some years a new virulent species of risk polluters routes around society's immune system?

Common cause in the face of inequality is harder to spin up, v.s. say the recession, since the problem's costs and benefits are more perfectly aligned with the political fault lines. But both afflictions are pretty well aligned along that dialectic. In both cases the large economic actors are better able on average self insure against the risk, dodging the costs, and garner the benefits.

It is valuable to frame this issue around these as one of learning and forgetting. The recession is a powerful enough experience that even Posner can learn from it. Question: how cyclic is inequality, and what finally drives a society to learn to manage the fever? Where is Dicken's when you need him!

Barry 11.19.09 at 3:51 pm
Donald: "Likewise, one might argue that income inequality might be deliberately engineered (indeed, I think some part of it has been) for the purpose of achieving faster growth and a higher average standard of living in the future. Whether one thinks the outcome (higher average standard of living) is worth the cost (greater inequality) is another question. "

Ath the risk of sidetracking things, I'd argue that those questions are actually third or fourth order questions, because the relationship between growth and inequality is weak, at best. [barring the extreme examples of almost perfect equality/extreme inequality, which I believe have been shown to be bad for growth]

Nicholas Weininger 11.19.09 at 4:41 pm
I think you're arguing against a strawman here. Broadly speaking, the right-wing-ish people who think government ought to intervene against recessions don't think there should be no government action against poverty; they just want there to be less than you do. The people who really think there should be no welfare state at all are also in general likely to reject government anti-recessionary measures. So you're inveighing against an inconsistency of principle actually held by very few.

There are of course both prudential and moral grounds for rejecting antirecessionary government intervention, even if you believe that on its face a recession is a bad thing. On the prudential side, you can believe, for example, that recessions are important truth-signals: they tell you that economic actors have engaged in massive malinvestment and need to seriously reassess their resource allocation. And antirecessionary interventions obstruct that truth-telling, leading to worse problems later. Not to mention that (on this view) government intervention in the economy is a prime cause of most severe recessions, since it so often encourages malinvestment and socializes downside risk.

On the moral side, just because a recession makes people worse off on average doesn't mean it makes everyone worse off. Suppose (purely hypothetically!) that a recession causes a large decline in housing prices. Then people who have patiently saved up and rented, waiting to buy a house they can easily afford, will be better off, whereas those who foolishly took out a subprime mortgage and are now underwater will be worse off. Antirecessionary interventions will tend to help the latter group at the expense of the former, which (again, on a libertarian moral view) is unjust. So it's simply not true that those who think antipoverty intervention is unjust don't also think antirecessionary intervention is unjust.

Donald A. Coffin 11.19.09 at 4:47 pm
Barry (#12)-Let me be clear. I do not agree with the "inequality is essential for growth" argument, just that it is not an argument that can be dismissed out-of-hand. If the question, as implied by your comment is really "What degree of inequality is optimal, given our other economic objectives, such as growth?", then the answer does, in fact, become an empirical issue, not a theoretical issue. Once we've conceded that some inequality might be instrumentally acceptable, then we are asking if the cost of greater inequality is worth the benefit of faster growth/higher average standard of living.
mpowell 11.19.09 at 6:52 pm
Why beat around the bush here? We know what the problem is. It's as plain as day for anyone with a clear head to see. It's not just that economic inequality is morally bad, it's also politically disastrous. We have a situation where a small band of elites, sometimes even constrained by their so-called fiduciary duty, are running the show. It's not the market in action. It's powerful economic players undermining the very rules the game is played by by buying out legislators and regulators. It would be one thing for Posner to argue that these folks have a fiduciary duty to advance the interests of their shareholders in a narrow market sense, but how can you coherently maintain that better regulation is the answer if you are also willing to provide these folks the tools to undermine that regulatory process as part of that same fiduciary duty. It's a view that just completely misunderstands how the modern political/economic game is played.

In another world without market power we could have interesting debates with conservatives about whether economic inequality is 'fair' or not. But in this world, the only task worthwhile is to persuade people that the shape of your regulatory regime can and is being driven by the very actors it is meant to regulate.

Martin Bento 11.19.09 at 7:59 pm
Re: mpowell's point about regulatory capture. It is worth nothing that Posner has explicitly endorsed the notion that if the wealthy have more influence than others, this is not undemocratic. The proper definition of democracy is purely formal. Here is the quote:
"Finally, I disagree with the suggestion, common though it is, that unlimited campaign spending impairs democracy by giving political power to the wealthy, or more precisely to any individuals or groups able and willing to spend disproportionately to support particular candidates or policies.
The suggestion confuses democracy with equality.
Democracy is the political system in which the principal officials are forced to stand for election at short intervals. The identity and policies of the officials may well be influenced by the underlying distribution of income and wealth in society, but that does not make the society less democratic."

And here is the URL:

[Nov 4, 2009] On Invoking God to Defend Mammon

naked capitalism
The efforts to try to burnish the image of bankers have gone from being unconvincing to ridiculous. I am certain we will see Jon Stewart comment on the latest twist, of trying to claim that God wants banks (and therefore bankers) to make a lot of money.

Since Calvinism is the de facto religion of America, equating wealth with virtue would normally make perfect sense. But one of my colleagues, who is thinking about writing a book on Christianity and capitalism, points out that God as depicted in the Bible is not a very good steward of the planet. He regularly uses brimstone, floods, earthquakes, plagues, and whatnot. And there aren't offsetting scenes of acts of nature conservancy. So if man was created in God's image, and God seems to have a bit of an appetite for destruction, perhaps the God-invokers are barking up the wrong tree. They might instead consider passing themselves off as mere vessels of Divine will in helping make bad things happen, that the people are who are suffering, in good Calvinist logic, clearly must be sinners somehow, even if it is not obvious what they did wrong.

But the defenses we get instead are more than a bit twisted, at least as reported in Bloomberg:

Barclays Plc Chief Executive Officer John Varley stood at the wooden lectern in St. Martin-in-the- Fields on London's Trafalgar Square last night and told the packed pews of the church that "profit is not satanic."

The 53-year-old head of Britain's second-biggest bank said banks are the "backbone" of the economy. Rewarding high- performing bankers with more pay doesn't conflict with Christian values, he said. Varley was paid 1.08 million pounds ($1.77 million) and no bonus in 2008….

"Is Christianity and banking compatible? Yes," he said in an interview after the speech in the 283-year-old church. "And is Christianity and fair reward compatible? Yes."

Yves here. Whoa! I will agree that banking is probably not Satanic, but not being on a first name basis with him, I could be wrong here. "Satanic" leads to images of ritual sacrifice of babies, and I don't think the banking industry is into that,. However, many readers were put off by the idea of securitizing life settlements. That occurs when the holder of a life insurance policy is bought out by a third party who continues paying the premiums, speculating that they will die on some sort of actuarially-determined timetable. Of course, if the investor is proven wrong, and the people whose lives he is now insuring live longer than expected, he makes less money and has reason to want them to die, and could resort to trying to speed up the inevitable.

And regardless of your views of Satanic practice, saying something is "not Satanic" is far from saying it is not sinful, or simply morally dubious. I thought that the Seven Deadly Sins were part of the Catholic canon. Seems to me modern bankers practice every one except for sloth.

As I dimly recall (I must confess I received no religious instruction growing up, but you can't avoid picking up snippets here and there), Jesus did say, "It is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God." Bankers don't have to become rich, that it not inherent to banking, but it does seem to be the point of the exercise and is occurring much more frequently than it used to. However, I have also been told that the Eye of the Needle was the smallest gate into Jerusalem, and a camel could go through it, but only if it crawled on its knees, which is difficult for them. Either way, this argument about "compatibility" is awfully strained.

Saying that banks are the "backbone" of the economy is also not persuasive. Banks should be a support function; the backbone metaphor, even if true, says the structure of the economy is not sound. And the statement implies that God wants a strong economy. My impression is that the Bible is pretty silent on that topic.

Of course, you could also turn this argument on its head. If God really did want banks to make money, they have been really really bad at it! How many years of earnings were torched in the crisis? Certainly everything since 2003. And then the banks should properly be charged for all the losses their messes created in the real economy. So the people who ran those banks should not expect to be well treated on Judgement Day, no matter how you look at their divine mission.

Then we have this doozy:

"The injunction of Jesus to love others as ourselves is an endorsement of self-interest," Goldman's [Brian] Griffiths said Oct. 20, his voice echoing around the gold-mosaic walls of St. Paul's Cathedral, whose 365-feet-high dome towers over the City, London's financial district. "We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all."

Yves again. This is the most brazen example of Newspeak I have ever seen. The remark Griffith cited is against self-interest, it's a clear and well known instruction to put other people's interest on the same footing as your own, to be at least fair, if not to go out of your way to be fair. But all Griffiths pays attention to is the self love part, ignores the rest, and acts as if he can brazen his way into getting others to buy his obviously warped reading.

I think they must put something in the water at Goldman these days. The firm seems to be incapable of reasoning any more, and instead reverts increasingly to patent examples of self-serving, intelligence-insulting palaver, which to anyone with an operating brain cell looks narcissistic. Not only is the only thing that matters is what is good for Goldman, but the people at the firm are so deeply inculcated that they assume that the rest of the world recognizes their superiority and privileged claim on everything, so they no longer even bother indulging the idea that other people might have rights too.

Although JP Morgan (so far) has not invoked God to defend its conduct, by any standards it is pretty dubious. It was still trying to extract blood from a turnip in Jefferson County, Alabama, by trying to extract $647 million in termination fees on interest rate swaps. Those swaps were subordinate to $3.2 billion in bonds that the county clearly cannot pay. But did JP Morgan fold up its tent and go home? No, it had been litigating, and it was only an SEC suit that led the bank to relent, and not only drop its claims but pay a total of $75 million in penalities to local government entities. That is cold comfort for Jefferson County, since it is still on the hook for the bonds that were part of the deal that JP Morgan helped structure.

But as reader Marshall Auerback reminds us, Shakespeare was onto the bankers long ago. From the Merchant of Venice:

Mark you this, Bassanio,
The devil can cite Scripture for his purpose.
An evil soul producing holy witness
Is like a villain with a smiling cheek,
A goodly apple rotten at the heart:
O, what a goodly outside falsehood hath!

More on this topic (What's this?)

54 Comments " Links to this post

Bob Morris

November 5, 2009 at 2:36 am

Goldman and the rest of the them have gone from ignoring the peasants with pitchforks to gently mocking them to sharp attacks and now to this derangement.

They quite obviously are scared and feeling the heat, and have gone from being Masters of the Universe to mostly detested in about 24 months.


November 5, 2009 at 3:16 am

I wish you were right, Bob, but I fear you're not. For almost all Americans, banking is now feared and loathed, very true. But the ultra-rich are pretty hygienically insulated from us peons.

They live in gated communities, or buildings with doormen. They have chauffers, and private jets. They dine at restaurants that would consume my monthly food budget in a meal. The hermetic seal is pretty complete.

They're surrounded by other worshippers of Mammon, and there are PLENTY of them out there still. In these communities, they're comforted, pampered, envied, and admired. To be honest, I don't think that much will have changed for these people, day-to-day.

There might be some guilt seeping in that encounters only a thoroughly possessed individual, leading to these bizarre proclamations. Or they might really think it's a good way to regain public support. If you'll forgive me taking the name in vain, God only knows.

But it's a little creepy to read this, in the same way talking with patients who are mentally ill is a little disturbing. There are people out there who operate completely, fundamentally different from me and those I encounter in my own life. But I ride buses with the rest of the prokaryotes(who look very down, these days).

"The injunction of Jesus to love others as ourselves is an endorsement of self-interest…"

Classic. If this wasn't offered in self-parody, they're not half as clever as they think. If there's any justice in this life - and I believe there is - something important out there understands just how funny this statement really is.


November 5, 2009 at 2:43 am

"Is Christianity and banking compatible? Yes," he said in an interview after the speech in the 283-year-old church. "And is Christianity and fair reward compatible? Yes."

Ok, then let's have the fair reward, and get rid of all the obscene reward these bankers keep stealing for themselves.


November 5, 2009 at 2:48 am


"Let them eat cake." attributed to Marie Antoinette, perhaps wrongly.
"Greed is Good" Gordon Gekko

BTW Wall Street 2 is coming to theaters:

Gordon Gekko is a reformed ex-con Casandra type figure released from prison in 2008 and we all well know the story….

Bob the Banker

November 5, 2009 at 4:06 am

To blanket "christians" with that statement is wrong. Most christians I know know that little deal about the gate is a lie. The wealth church, or "God wants to give you whatever you want in this life, just tithe all your money to ME!" church has all kinds of cute little things like that to defend there greed teaching.


November 5, 2009 at 3:05 am

Ask someone in Jerusalem where the eye-of-the-needle gate was and they'll laugh at you. There is no such gate and never was. It's incredibly convenient how american christians insist that parts of the bible be taken literally when it suits them but then equally insist that an exhortation against greed and the needless accumulation of wealth is merely metaphorical.


November 5, 2009 at 3:06 am

Your mixing up Calvinism with other other parts of protestantism. Earning a lot of money is not a Calvinist value. Hard work is, high moral standards is. If you make a lot of money you save and reinvest, that is.
Also on that book about Christianity and capitalism, the writer should not skip over the first five books of the Old Testament, where rules running society are laid down with important remarks on things like tilling the land (but not on the 7th year), working 6 days (but not on the 7th), things about debts being wiped out every so and so years etcetera. Basically not profit maximising but a caring society. Of course theory and practice have not followed each other always closely.

;Yves Smith

November 5, 2009 at 3:22 am

Calvinsm did emphasize working hard, and its doctrine of election had the tendency to equate worldly success (which did not mean flaunting it, as it does in our crass modern era) with being one of God's chosen.


November 5, 2009 at 3:36 am

Calvinism may be a bit ascetic, but at least it beats Judaism, where you just have to be born right. FD, I'm one of those twisted souls born half-right.


November 5, 2009 at 4:19 am

The health-and-wealth gospel isn't a feature, really, of Calvinism. You see it in 19th and 20th century American religious movements that have ties to Arminian thought to the extent they have any sort of deep theology.

I mean, think central Michigan when you think of Calvinism. The banksters ideologically come from different stock, I think.

The gate interpretation is a myth, albeit a widely-circulated one. Jesus elsewhere tells the rich young man that if wants to go to heaven he must give all is possessions away. He can't do it.

The liberation theologians don't have to stretch things very far to get their picture of Jesus. Indeed, a just God would send bankers to South America to live with liberation Christians for a long, long time.


November 5, 2009 at 8:46 am

What on earth did the liberation Christians ever do to deserve THAT?!?

Far as this tabbycat is concerned, yo, if there were any truth to the "Prosperity Gospel," the holiest people on earth must be the various Sheiks and Sharifs of the Gulf States. Not only are they wealthy beyond any sane reckoning, they don't have to lift a finger for their riches. For these people, money literally comes out of the ground.


November 5, 2009 at 7:35 am

As to Calvinism, I highly recommend reading Reinhold Niebuhr, who I consider to be without a doubt America's greatest Christian theologian of the 20th century. In The Irony of America History he has an entire chapter named "Prosperity and virtue." Here's an excerpt:

In Calvinist thought prosperity as a mark of divine favor is closely related to the idea that it must be sought as part of a godly discipline of life. "There is no question," declared Calvin, "that riches should be the portion of the godly rather than the wicked, for godliness hath the promise in this life as well as the life to come." We are long since familiar with Max Weber's thesis in "The Protestant Ethic and the Spirit of Capitalism" that his "intra-mundane asceticism" of Calvinism was responsible creating the standards of diligence, honesty and thrift which lie at the foundation of our capitalistic culture. Actually Weber draws some of his most significant conclusions from American evidence. He finds it particularly interesting that "capitalism remained far less developed in some of the neighbouring colonies, the later Southern States of the U.S.A., in spite of the fact that these latter were founded by large capitalists for business motives, while the New England colonies were founded by preachers…for religious reasons."


November 5, 2009 at 7:45 am

We probably owe our entire liberal-democratic paradigm to the Puritans (not to be confused with Calvanism, which was just a subset of a much greater Puritan movement).

A must-read in this regard is Jacques Barzun's chapter "Puritans as Democrats" in From Dawn to Decadence:


November 5, 2009 at 3:32 am

Actually, the correct translation is "It is easier for a ROPE to go through the eye of a needle than for a rich man to enter the kingdom of God".

The written difference between rope and camel in ancient hebrew is one little dot.

Makes a bit more sense that way. I always have visions of a very annoyed camel with its nose stuck in a needle.


November 5, 2009 at 3:42 am

And a rope carries nothing, but its self before god, where a rich man wishes/needs to bring his possessions as they have supplanted his identity/soul.

Bob the Banker

November 5, 2009 at 4:11 am

The new testament, which is where that statement comes from, was written in greek. Not sure how hewbrew could get thrown in there. Might want to do a little research. Here is a link to the manuscript that is used to translate to english.

Skippy says:

November 5, 2009 at 6:30 am

To Septuagint or not to Septuagint?

The Early Christian Church used the Greek texts since Greek was a lingua franca of the Roman Empire at the time, and the language of the Greco-Roman Church (Aramaic was the language of Syriac Christianity, which used the Targums). In addition the Church Fathers tended to accept Philo's account of the LXX's miraculous and inspired origin. Furthermore, the New Testament writers, when citing the Jewish scriptures or when quoting Jesus doing so, freely used the Greek translation, implying that the Apostles and their followers considered it reliable.[23]

When Jerome undertook the revision of the Old Latin translations of the Septuagint, he checked the Septuagint against the Hebrew texts that were then available. He came to believe that the Hebrew text better testified to Christ than the Septuagint.[24] He broke with church tradition and translated most of the Old Testament of his Vulgate from Hebrew rather than Greek. His choice was severely criticized by Augustine, his contemporary; a flood of still less moderate criticism came from those who regarded Jerome as a forger. But with the passage of time, acceptance of Jerome's version gradually increased until it displaced the Old Latin translations of the Septuagint.[4]

The Hebrew text diverges in some passages that Christians hold to prophesy Christ[25] and the Eastern Orthodox Church still prefers to use the LXX as the basis for translating the Old Testament into other languages. The Eastern Orthodox also use LXX untranslated where Greek is the liturgical language, e.g. in the Orthodox Church of Constantinople, the Church of Greece and the Cypriot Orthodox Church. Many modern critical translations of the Old Testament, while using the Masoretic text as their basis, consult the Septuagint as well as other versions in an attempt to reconstruct the meaning of the Hebrew text whenever the latter is unclear, undeniably corrupt, or ambiguous.

Skippy….don't even get me started on the *First seven Ecumenical Councils* now.

SidFinster says:

November 5, 2009 at 8:52 am

As far as I know, the Gospels were originally written in Greek or Syriac, not Hebrew. So the argument of whether the Hebrew text referred to a camel or a rope is of little relevance.

@Skippy: I thought it was the Septuagint that more clearly pointed to Christ, and not the Masoretic text?

One Salient Oversight says:

November 5, 2009 at 9:46 am

The entire New Testament (including the gospels) was written in Koine Greek

Skippy says:

November 5, 2009 at 9:49 am

In general I agree with the caveat the multiple languages were in usage at the same time in the same location and even to today we witness blurring in definitions between users and their cultural mindset in diverse backgrounds.

Camel or Rope to me, is not important anyway. I belive both deliver a clear message that is one in the same.

Skippy…anyone with the first book has the answer, we are left to question.

Skippy says:

@one salient oversight, in general you are correct, but its really a bit of a mish mash that is yet to be sorted out.

The books of the New Testament were written in Koine Greek, the language of the earliest extant manuscripts, even though some authors often included translations from Hebrew and Aramaic texts. Certainly the Pauline Epistles were written in Greek for Greek-speaking audiences. See Greek primacy. Some scholars believe that some books of the Greek New Testament (in particular, the Gospel of Matthew) are actually translations of a Hebrew or Aramaic original. Of these, a small number accept the Syriac Peshitta as representative of the original.

When ancient scribes copied earlier books, they wrote notes on the margins of the page (marginal glosses) to correct their text-especially if a scribe accidentally omitted a word or line-and to comment about the text. When later scribes were copying the copy, they were sometimes uncertain if a note was intended to be included as part of the text. See textual criticism. Over time, different regions evolved different versions, each with its own assemblage of omissions and additions.

The autographs, the Greek manuscripts written by the original authors, have not survived. Scholars surmise the original Greek text from the versions that do survive. The three main textual traditions of the Greek New Testament are sometimes called the Alexandrian text-type (generally minimalist), the Byzantine text-type (generally maximalist), and the Western text-type (occasionally wild). Together they comprise most of the ancient manuscripts.

Skippy…seems a work in progress eh?

"It's Gonna Be A Good Christmas" " Volatility

November 5, 2009 at 3:35 am

[...] would still be the Too Big To Fail premium. That's our money. All of it. Yet they think God is their copilot. Leave a [...]


November 5, 2009 at 3:54 am

I'm confused – I think the bankers and the media have it all back the front. Jesus quite clearly and unambigously says (Luke 6:34-35) "do good and lend, hoping for nothing in return"

So bad debts make a good christian. I think Jesus might have caused the financial crisis.

One day he will return to judge the solvent from the insolvent…only the bankrupt go to heaven.

Dick Fuld is a true saint


November 5, 2009 at 3:59 am

I saw the headline on Bloomberg, this is just bait for all of the jesus hating lefties….

I'll take it, and further the discussion…

skippy, who has a bigger dick, Jesus or Ayn Rand?


November 5, 2009 at 5:05 am

No one could possibly hate Jesus more than these vermin bankers who would drag him down into their hellish gutter.


November 5, 2009 at 5:23 am

That would be the "J" man, although A. Rand saw *alot* more of it.

Bob the banker I took the time for you see:

•The lending of money or other property for increase.

Leviticus 25:37 Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.

•Those enriched by unlawful, not allowed to enjoy their gain.

Psalms 28:8 The LORD is their strength, and he is the saving strength of his anointed.

•The curse attending the giving or receiving of unlawful, alluded to.

Jeremiah 15:10 Woe is me, my mother, that thou hast borne me a man of strife and a man of contention to the whole earth! I have neither lent on usury, nor men have lent to me on usury; yet every one of them doth curse me.

◦Forbidden to take, from brethren.

Deuteronomy 23:19 Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury:

◦Forbidden to take, from brethren specially when poor.

Exodus 22:25 If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.
Leviticus 25:35-37 And if thy brother be waxen poor, and fallen in decay with thee; then thou shalt relieve him: yea, though he be a stranger, or a sojourner; that he may live with thee. Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.

◦Often guilty of taking.

Nehemiah 5:6-7 And I was very angry when I heard their cry and these words. Then I consulted with myself, and I rebuked the nobles, and the rulers, and said unto them, Ye exact usury, every one of his brother. And I set a great assembly against them.

◦Required to restore.

Nehemiah 5:9-13 Also I said, It is not good that ye do: ought ye not to walk in the fear of our God because of the reproach of the heathen our enemies? I likewise, and my brethren, and my servants, might exact of them money and corn: I pray you, let us leave off this usury. Restore, I pray you, to them, even this day, their lands, their vineyards, their oliveyards, and their houses, also the hundredth part of the money, and of the corn, the wine, and the oil, that ye exact of them. Then said they, We will restore them, and will require nothing of them; so will we do as thou sayest. Then I called the priests, and took an oath of them, that they should do according to this promise. Also I shook my lap, and said, So God shake out every man from his house, and from his labour, that performeth not this promise, even thus be he shaken out, and emptied. And all the congregation said, Amen, and praised the LORD. And the people did according to this promise. …

◦Allowed to take, from strangers lol.

Deuteronomy 23:20 Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.

•True and faithful Israelites never took, from their brethren.

Psalms 15:5 He that putteth not out his money to usury, nor taketh reward against the innocent. He that doeth these things shall never be moved.
Ezekiel 18:8-9 He that hath not given forth upon usury, neither hath taken any increase, that hath withdrawn his hand from iniquity, hath executed true judgment between man and man, Hath walked in my statutes, and hath kept my judgments, to deal truly; he is just, he shall surely live, saith the Lord GOD.

•Judgments denounced against those who exacted unlawful.

Isaiah 24:1-2 Behold, the LORD maketh the earth empty, and maketh it waste, and turneth it upside down, and scattereth abroad the inhabitants thereof. And it shall be, as with the people, so with the priest; as with the servant, so with his master; as with the maid, so with her mistress; as with the buyer, so with the seller; as with the lender, so with the borrower; as with the taker of usury, so with the giver of usury to him.

•Illustrative of the improvement of talents received from God.

Matthew 25:27 Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.
Luke 19:23 Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?

Skippy says:

November 5, 2009 at 5:44 am

Lets talk about riches ok

See link:

Feel free to browse about!


◦Often increase in.

Psalms 73:12 Behold, these are the ungodly, who prosper in the world; they increase in riches.

◦Often spend their days in.

Job 21:13 They spend their days in wealth, and in a moment go down to the grave.

◦Swallow down.

Job 20:15 He hath swallowed down riches, and he shall vomit them up again: God shall cast them out of his belly.

◦Trust in the abundance of.

Psalms 52:7 Lo, this is the man that made not God his strength; but trusted in the abundance of his riches, and strengthened himself in his wickedness.

◦Heap up.

Job 27:16 Though he heap up silver as the dust, and prepare raiment as the clay;
Psalms 39:6 Surely every man walketh in a vain shew: surely they are disquieted in vain: he heapeth up riches, and knoweth not who shall gather them.
Ecclesiastes 2:26 For God giveth to a man that is good in his sight wisdom, and knowledge, and joy: but to the sinner he giveth travail, to gather and to heap up, that he may give to him that is good before God. This also is vanity and vexation of spirit.

◦Keep, to their hurt.

Ecclesiastes 5:13 There is a sore evil which I have seen under the sun, namely, riches kept for the owners thereof to their hurt.

◦Boast themselves in.

Psalms 49:6 They that trust in their wealth, and boast themselves in the multitude of their riches;
Psalms 52:7 Lo, this is the man that made not God his strength; but trusted in the abundance of his riches, and strengthened himself in his wickedness.

◦Profit not by.

Proverbs 11:4 Riches profit not in the day of wrath: but righteousness delivereth from death.
Proverbs 13:7 There is that maketh himself rich, yet hath nothing: there is that maketh himself poor, yet hath great riches.
Ecclesiastes 5:11 When goods increase, they are increased that eat them: and what good is there to the owners thereof, saving the beholding of them with their eyes?

◦Have trouble with.

Proverbs 15:6 In the house of the righteous is much treasure: but in the revenues of the wicked is trouble.
1 Timothy 6:9-10 But they that will be rich fall into temptation and a snare, and into many foolish and hurtful lusts, which drown men in destruction and perdition. For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows.

◦Must leave, to others.

Psalms 49:10 For he seeth that wise men die, likewise the fool and the brutish person perish, and leave their wealth to others.

•Vanity of heaping up.

Psalms 39:6 Surely every man walketh in a vain shew: surely they are disquieted in vain: he heapeth up riches, and knoweth not who shall gather them.
Ecclesiastes 5:10-11 He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity. When goods increase, they are increased that eat them: and what good is there to the owners thereof, saving the beholding of them with their eyes?

•Guilt of trusting in.

Job 31:24 If I have made gold my hope, or have said to the fine gold, Thou art my confidence;
Job 31:28 This also were an iniquity to be punished by the judge: for I should have denied the God that is above.

•Guilt of rejoicing in.

Job 31:25 If I rejoiced because my wealth was great, and because mine hand had gotten much;
Job 31:28 This also were an iniquity to be punished by the judge: for I should have denied the God that is above.

Skippy…Could to this all day standing on my head. First and foremost the 10 commandments must be obeyed as they are from GOD him self and not through an intermediary.


November 5, 2009 at 5:57 am

Try here:

There shall be a cancellation of debt every seven years – a creditor can only hold a debt for 6 years and must release the obligation on the seventh year. Deut 15:1-2.
Debts of foreigners may be continued beyond seven years. Deut. 15:3.
Those who need to borrow from you are not to be turned away. Matt. 5:42.
The borrower is servant to the lender. Prov. 22:7.
You shall not think evil and withhold loaning to your brother in need because the Seventh Year, the year of release, is at hand. You shall surely give to him and the LORD will bless you in all your works. Deut. 15:9-10.
It is wicked to borrow and not repay. Psa. 37:21; Prov. 3:27; Rom. 13:8.
Lend to the poor and needy what is sufficient for his needs. Deut. 15:8.
It is best to owe no man any thing. Rom. 13:8.
Items necessary to sustain a livelihood are not to be given as a pledge (security) for a debt. Deut. 24:6; Job 24:3.
You shall not take a widow's garment as a pledge. Deut 24:17.
Warnings against giving sureties for debts of others. Prov. 6:1-3; Prov. 17:18; Prov. 22:26-27.
He who is surety for a stranger will suffer for it, but one who hates being surety is secure. Prov. 11:15.
Pledges given by the poor for debt are not to be retained overnight. Exod. 22:26; Deut. 24:12-13; Job 24:9-10.
When you lend your brother anything you shall not go into his house to take his pledge, but rather he shall bring the pledge out to you. Deut 24:10-11.
The righteous man restores to the debtor his pledge, but the unrighteous does not restore a pledge. Ezek. 18:5, 7, 12.

November 5, 2009 at 7:28 am

OK, so he's got her on size, but what about swagger? How many central bankers did he have chasing him around?

I thought this was going to be the subject of my upcoming nihilist novella, you answered too quickly, back to the drawing board.

Skippy says:

November 5, 2009 at 9:18 am

Bob said…OK, so he's got her on size, but what about swagger? How many central bankers did he have chasing him around?

Ha ha lol, you forgetith ROME did chase him around a bit and was not that, the central bank of the day ROFL, did they not send their accountants (soldiers) after him, you know lol ow ow.

Any way to answer your question bankers do have a sexual desire for a bit of strangeness, but now I curse you for implanting a picture of A. Rand in black vinyl with toys of trouble and her callers moaning Ive been a bad boy for ripping good people off…mommy can I have another..pleaseee…damn you!…its my bed time and I will weep and sob! Yves is going to ban my IP for sure now. Damn you bob!

PS. If that strap she has counts, it would be the tail that wagged the dog for sure…didn't know prostheses counted.


November 5, 2009 at 3:59 am

"Of course, if the investor is proven wrong, and the people whose lives he is now insuring live longer than expected, he makes less money and has reason to want them to die, and could resort to trying to speed up the inevitable."

Life Settlement securitization have no way to know who is the person that the insurance policy relates to, no more than a life insurance company shareholder has. Privacy regulation in this business are very stringent.

Kevin de Bruxelles

November 5, 2009 at 4:26 am

Many senior bankers are Jewish so it seems slightly strange to try to hold them to Christian values. Up until the 13th/14th centuries it was indeed thought that profit in general and money lending in particular were unChristian activities which is why these jobs were often relegated to Jews. Of course back in those days when too many people got underwater in debt, a pogrom or two could solve the problem; Jews as a community were definitely not considered too big to fail.

This question of whether banking is compatible with Christian values is loaded. The subtext is whether it is wise to have such a small minority of non-Christians being so influential in the banking community of a culturally Christian society. But if the answer to the first question is that banking is incompatible with Christianity then there is no other answer but to continue to relegate this vital task to non-Christians. I would hope however the answer is that conservative community banking is certainly compatible with Christian values while high risk (for the taxpayers) and high profit (for the bankers) banking is not; since this is actually not banking, this is pure theft.

Bob the Banker

November 5, 2009 at 4:33 am


I would just like to say that having walked with the Lord and trying my best to study the WHOLE bible this is classic scripture pulling. The idea that the bible promotes or is "in line with" the level of pay extremes we are seeing today is insane. The verses that I could pull and post are many. Christianity is about heaven and life after this one. Money is simply a tool that the bible warns often about. The bible is a big book with just about every subject in life covered. If you want to, you can pull certain teachings out and create really whatever view point that you want. That is all that is happening. The idea that a man can stand in front of a group of christians and defend this type of pay saddens me as to how blind he has become to the purpose and intention of Christ dying on the cross. It is a shame.

I would echo the comments of M. The original economy that God created the frame work for through the law written by moses was amazing. It is the only time God speaks toward how an economy should run in the entire bible. The other scriptures that deal with money are warnings of its pull and power over an individual.

The work would be intense, but it would be interesting for someone who is not a Christian or spiritually active or practicing Jew to research how that type of economy would work. But truthfully, if your going to talk about where God stands on an economy, that is for sure where you start.


November 5, 2009 at 8:56 am

The biggest mistake the Roman Catholic Church ever made was to insert chapter and verses into the Bible. (Until the 13th Century or so, the smallest sub-divisions in the Bible were of books.)

This makes proof-texting much easier.


November 5, 2009 at 4:51 am

This reminds me of Muller's book "The Mind and the Market". It detailed how the 17th and 18th century philosophers (like Voltaire) redefined the way religion approached markets. Basically he argued that capitalism was able to flourish when Christian thought evolved to a point that it fit with capitalism.


November 5, 2009 at 6:15 am

The Christian-communist connection is well known. Nietzsche lumped the whole lot together as "slave mortality" (along with maths and democracy) – Russell in his "History of Western Philosophy" draws parallels between Augustine's "city of God" and the communist manifesto.

As a committed atheists socialist who grew up in a strongly Christian family I say crucify the bankers with other thieves


November 5, 2009 at 6:56 am

Atheist's only exist with in Christian theology or no Christian no atheist, do you see, just another human.

Skippy…In mono-theocracy's you either with the devil or with them.


November 5, 2009 at 5:20 am

There are two Gods in the Bible. The Old Testament God is usually an angry old man with a vindictive streak. The New Testament God which was called the Father by Jesus is the Living God who brings peace. That the first Christians were essentially Communists is overlooked or dismissed by many. They shared everything amongst themselves. The wealthy Roman matriarchs pressured Paul to "modify" Christianity because they didn't want to share their wealth or free their slaves. One can see the transition from a commune-like Jewish church of Peter and James to the more contemporary pagan churches of Paul in Acts of the Apostles. Using God to justify one's accumulation of monetary wealth is missing most of the spiritual teachings of just about every religion known to Mankind. As Dorothy Parker said, "If you want to know what God thinks of money, just look at the people he gave it to."


November 5, 2009 at 6:30 am

I hath appointed Goldman Sachs as master of my dominion, and ye have been appointed as slaves and servants, to be trodden under the heal and destroyed utterly, unto your last days. Hear, children, the voices of your masters and obey, for my wrath is fierce and my judgment is swift, and there be no mercy for those with hearts hardened against the will of the Lord.

-Bloviations, Book 5, verses 8-9


November 5, 2009 at 10:05 am

Ha! Ha! Sounds a lot like this, no?:

One of these Pontiffs (Popes), who succeeded that St. Peter as Lord of the world, in the dignity and seat which I have before mentioned, made donation of these isles and Tierra-firme to the aforesaid King and Queen and to their successors, our lords, with all that there are in these territories, as is contained in certain writings which passed upon the subject as aforesaid, which you can see if you wish.

So their Highnesses are kings and lords of these islands and land of Tierra-firme by virtue of this donation: and some islands, and indeed almost all those to whom this has been notified, have received and served their Highnesses, as lords and kings, in the way that subjects ought to do, with good will, without any resistance, immediately, without delay, when they were informed of the aforesaid facts….

But, if you do not do this, and maliciously make delay in it, I certify to you that, with the help of God, we shall powerfully enter into your country, and shall make war against you in all ways and manners that we can, and shall subject you to the yoke and obedience of the Church and of their Highnesses; we shall take you and your wives and your children, and shall make slaves of them, and as such shall sell and dispose of them as their Highnesses may command; and we shall take away your goods, and shall do you all the mischief and damage that we can, as to vassals who do not obey, and refuse to receive their lord, and resist and contradict him; and we protest that the deaths and losses which shall accrue from this are your fault, and not that of their Highnesses, or ours, nor of these cavaliers who come with us.

fresn dan

November 5, 2009 at 7:11 am

"Barclays Plc Chief Executive Officer John Varley stood at the wooden lectern in St. Martin-in-the- Fields on London's Trafalgar Square last night and told the packed pews of the church that "profit is not satanic.""

I want the bankers burned at the stake not because of "obscene" or "satanic" or "greedy" profits, but because there are NO PROFITS. I might settle for them spending the rest of their lives in poverty, if it were not for the fact that I am bailing them out.


November 5, 2009 at 7:53 am

Money lenders in the temple you say.


November 5, 2009 at 8:00 am

Sort of doubt that "profits" are satanic but it does seems likely that our economy has gone off the rails on the question of usury. Seems likely that banking reform will involve some acceptance of sharia. Most defenses of money interest assume a limited supply of money. But we know now that modern money is infinite in supply. Of course, the distribution of this infinite supply is carefully policed. It is the core function of the modern state. That which is in infinite supply tends to have zero price. So it does seems unlikely to that those who have privileged and well policed access to this infinite supply of money can properly derive profit from it by lending even from the standpoint of value free economics. Except, of course, by police power.

The Banks vs. Democracy (1 of 2) " Volatility

November 5, 2009 at 8:20 am

[...] what the banks say justifies the wealth monopoly they've wrought. Well, that and God being on their side.) Extreme wealth concentration, just like psychotic government and corporate secrecy, is the [...]

jake chase

November 5, 2009 at 8:26 am

Those who doubt bankers are satanic clearly do not understand how a derivatives desk operates. The coming unwind of the dollar carry trade may change your mind.

Dan Duncan

November 5, 2009 at 8:52 am

Yes, it's absurd for banker to invoke God while reaping obscene profits.

Your reference to your friend's book about Christianity and capitalism, however, gives this post the whiff that it's about something more than just moronic bankers trying to justify this obscene compensation.

Add to the above the "insight" that "Calvinism is the de facto religion of America"…

It appears that Yves equivocates so she can be provocative.

Yves doesn't come right out and say that Christianity and Capitalism are a disastrous combo…but one cannot help but to feel that she really wants to. But if called out, she can just say, "Whoa. I'm simply writing about bankers invoking God."

Hopefully Yves will clear it up. As it is, this post has the feel of a first year college student reveling in the excitement of the audacity of provocation.

Consider the following:

Right after hitting us with "Calvinism is the de facto religion of America" we get this pathetic attempt at profundity:

"God as depicted in the Bible is not a very good steward of the planet. He regularly uses brimstone, floods, earthquakes, plagues, and whatnot. And there aren't offsetting scenes of acts of nature conservancy. So if man was created in God's image, and God seems to have a bit of an appetite for destruction, perhaps the God-invokers are barking up the wrong tree."

Seriously…that passage is the stuff of comedy…where the writer imitates a first year community college student who took a philosophy class from a professor with a pony tail "who actually said 'shit' in class!"…and now she "has it all figured out".

I suspect that later in the day there will be some "controversy" on this blog about one of the earlier comments-where one "wickedly humorous" commenter asks how big Jesus' cock was….

Recriminations and insults will fly….

And Naked Cap, "The Blog That's Too Smart to Sleep", will be little more than an uber-elitist Jerry Springer Show, replete with stage crashing talk show trash, throwing chairs and hopefully breaking some noses.


November 5, 2009 at 9:07 am

My masters go forth unto the people and speak the word of the lord, verily in the lord's house they speak unto ye, and their words roll like thunder and their voices command my will. Thy losses, children, are their profits and thine profits are borne off to Babylon to be laid and stored, as of gifts to the king. This is your portion, unto the last days. Hear ye and understand, for the plagues cometh not to the wise and vainglory be not mercy. Repent and serve, for ye are dust and all your lamentations be nothing but sticks throw, as in to a furnace.

-Bloviations Book 8, verses 12-18

  • i on the ball patriot says:

    November 5, 2009 at 9:36 am

    Provocative post yes, but the provocation is needed.

    For GS god is just another derivative product. Take anything of considered value - in this case man's legitimate search for understanding and meaning - co-opt it, slice it, dice it, pervert it, and resell it it to scam the masses.

    It is not so much an arrogant mocking as it is an integral part of the game plan to create perpetual war in the masses as a means of control. All of this heightened rhetoric is by design. That design is what needs attention.

    God is a product,
    Of one's perception,
    As real as one's breath,
    Or a grand deception …

    Deception is the strongest political force on the planet.

  • DownSouth

    November 5, 2009 at 9:40 am

    "The injunction of Jesus to love others as ourselves is an endorsement of self-interest," Goldman's [Brian] Griffiths said Oct. 20, his voice echoing around the gold-mosaic walls of St. Paul's Cathedral, whose 365-feet-high dome towers over the City, London's financial district. "We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all."

    That seems to be a mixing of the religious with the profane. Sam Harris, one of the four most prominent New Atheists, is quick to point out the difference between the two:

    If, as I believe, morality is a system of thinking about (and maximizing) the well being of conscious creatures like ourselves, many people's moral concerns are frankly immoral.

    Harris is of course a utilitarian consequentialist, and he asserts that public policy should be formulated to minimize harm and promote human welfare-human welfare in this world.

    Harris' hatred of all things religious, however, leads him into propaganda and a bowdlerized reading of history. His study of religion seems to emphasize the Middle Ages, when the demarcation between the religious and the profane was very clear. But in the 16th-century, the Puritans began to blur that line, and in modern-day America it has all but vanished. As Reinhold Niebuhr points out in The Irony of American History:

    All the "this-worldly" emphasis of modern culture, which culminated in the American experiment, were justified protests against the kind of Christian "other-worldliness" which the "Epistle of Clement," written in the Second Century, expressed in the words: "This age and the future are two enemies…we cannot therefore be friends of the two but must bid farewell to the one and hold companionship with the other."

    So for me the blurring of the line between the religious and the profane is not Griffith's greatest sin. Quite the contrary, it is his "this-worldly" philosophy which I find most objectionable. He asserts that "greater prosperity and opportunity for all" is promoted by "self-interest" and "inequality."

    As David Sloan Wilson explains, this is a philosophy that grows out of Bernard Mandeville's Fable of the Bees (1705) and Adam Smith's The Wealth of Nations (1776):

    I hope that our economy recovers, but the time has come to declare its guiding metaphor dead. This is the metaphor of the invisible hand, which makes it seem as if the narrow pursuit of self-interest miraculously results in a well-functioning society.

    The invisible hand metaphor originates with Adam Smith in The Wealth of Nations (1776). Bernard Mandeville made a similar point with his Fable of the Bees (1705), which fancifully describes human society as a wondrously productive bee hive, even though each bee is as selfish as can be.

    Smith was critical of Mandeville and presented a more nuanced view of human nature in his Theory of Moral Sentiments (1759), but modern economic and political discourse is not about nuance. Rational choice theory takes the invisible hand metaphor literally by trying to explain the length and breadth of human behavior on the basis of individual utility maximization, which is fancy talk for the narrow pursuit of self-interest. For the general public, unfettered competition has been turned into a moral virtue and "regulation" has become a sin.

    So religious discourse has nuance and classical economic theory has nuance. But modern neoclassical economic theory has been successful in eliminating all nuance.

    Hannah Arendt also talks of the false premise upon which classical theory is justified, and that is its claim that it protects private property from the government. But as Hannah Arendt points out in The Human Condition, this claim is bogus:

    Since no political theory prior to socialism and communism had proposed to establish an entirely propertyless society, and no government prior to the twentieth century had shown serious inclinations to expropriate its citizens, the content of the new theory could not possibly be intrusion of government administration. The point is that then, unlike now when all property theories are obviously on the defensive, the economists were not on the defensive at all but on the contrary openly hostile to the whole sphere of government, which at best was considered a "necessary evil" and a "reflection on human nature," at worst a parasite on the otherwise healthy life of society. What the modern age so heatedly defended was never property as such but the unhampered pursuit of more property…

    rootless cosmopolitan

    November 5, 2009 at 10:04 am

    What is it with all the excessive moralism about the banks and bankers?

    Capitalism, which never has been a permanently stable system due to its inherent nature – any stability is only tentative -, seems to have reached a period of even higher instability and crisis mode again. And once again, it's really not a novelty, it is widely thought the cause for the crisis are some culprits in the circulation sphere of capitalism, personified now in the evil banker, called now and then also as "bankster", as if the symptoms of capitalism in crisis were caused by some individual character flaws of the ones who are professionally in the banking business and who are misbehaving (and to not forget, their co-conspirators in the government).

    This rhymes to the old ideology that is caught in the dichotomy between the "greedy" (finance) capitalists and the "creating" capital, with the former one allegedly responsible for the things going bad in capitalism, and if one got rid of the former ones capitalism would be such a great place in which to live. This is what I increasingly get when I read this blog or other blogs, and what seems to increasingly be the mood of the public. And in return, some representatives of the banking industry feel compelled to reply to the moral outrage with even such ridiculous defenses as quoted in the blog posting.

    As if the banking industry was based on different principles than any other business in capitalist society, underlying the functional laws of capital accumulation, and if the character masks within the banking industry acted substantially differently compared to the character masks in any other business. The first purpose of banking isn't altruism or serving society or the "common good" (although I never really know what is meant by this and how the "common good" is supposed to be defined), the very first purpose is making money for the owners of the business or the investors in the business. Everything else is just a mean for this end. This end is being pursued in a way the rules made up by society allow, and if the rules are lax, they will be used accordingly to the maximum extend possible. And there is no difference here in the banking business, regarding the purpose and the means that are applied for this purpose, compared to any other business in capitalism whatsoever, whether it is in the sphere of production, service, or finance. This is how capitalism works.

    All this moral outrage is just a distraction from the questions that really need to be asked, which shouldn't be "Who is to blame?". They should be "What is to blame", what are the deeper structural causes of crisis, is it inherent to the nature of capitalism by itself, and can it even be solved within the given fabric of society and its economy?



    November 5, 2009 at 10:45 am

    The who is us, see Pogo. The what is the failure to see that one's self interest is best achieved within the context of supporting the larger community. Profits are neither Satanic nor Godly. The whole of this piece and its thread are a preoccupation with a non event. This is misdirection over that which is not causative of our problem. Drop the concerns over morality, follow the money and see if fair value has been rendered for the coin of the realm. If you haven't received fair value, stop agreeing to the transaction.


    November 5, 2009 at 10:07 am

    I have to go back to work and can't make up any more fake Bible verses to illustrate the enormity of this fool's assholesness.

    But can there be any doubt, any doubt at all, about my earlier observations that these people are possessed by demons. Any doubt?

    Here is a man speaking in the House of Christ Himself, the house of the Master who walked in Galilee as a live Man and brought some semblance of heaven to earth.

    And this Goldman Sachs ape, this miserable, morally decrepit, deluded idiot, speaks what he speaks - in controversion of any fact or any logic - the way he speaks it. This man needs an excorcism. And, afterwards, he would look back on his former self and he would truly, then, try to find a Church of the real Christ, and he would cry like a baby to God for forgiveness.

    Swedish Lex

    November 5, 2009 at 10:13 am

    Separation of the State and Religion, or superstition if you prefer, is a great invention that allows society to advance in ways that are less prone to creating armed conflict, intolerance and oppression.

    I never though we would have to create a wall between Capitalism and Religion, but now I am not so sure any more.

    By the way, was it not Christianity that first installed the prohibition agains taking interest, which is the "soul" of banking, non?

    Countries with the biggest gaps between rich and poor

    Yahoo! Finance

    The U.N. Development Program recently came out with a report looking, among other things, at income inequality worldwide.

    The UNDP ranked countries and regions based on a number of factors, including their Gini coefficient, named for Italian statistician Corrado Gini.

    We have listed the world's most advanced economies based on their Gini score, with zero marking absolute equality and 100 absolute inequality. Scandinavian countries, Japan, and the Czech Republic have the least amount of inequality. The U.S. is among the most unequal, but it's not No. 1. To see which economy is, read on.

    Top 11 Countries With the Biggest Gaps Between Rich and Poor

    No. 1 Hong Kong

    Gini score: 43.4
    GDP 2007 (US$ billions): 207.2
    Share of income or expenditure (%)
    Poorest 10%: 2.0
    Richest 10%: 34.9
    Ratio of income or expenditure, share of top 10% to lowest 10%: 17.8

    Renowned for its high concentration of Rolls-Royces, expensive real estate, and posh shops, the Chinese special administrative region has plenty of rich who enjoy showing off their wealth. However, Hong Kong also has one of the largest public housing sectors in the world, with about half the population living in government-supported or -subsidized housing estates. The city has no minimum wage-except for domestic helpers from the Philippines, Indonesia, and other countries.

    No. 2 Singapore

    Gini score: 42.5
    GDP 2007 (US$ billions): 161.3
    Share of income or expenditure (%)
    Poorest 10%: 1.9
    Richest 10%: 32.8
    Ratio of income or expenditure, share of top 10% to lowest 10%: 17.7

    Singapore is one of the world's most open economies, and it suffered badly following the bankruptcy of Lehman Brothers last year. Recently, though, the city-state's economy has rebounded, with GDP growing an annualized 14.9% rate in the third quarter compared with the previous quarter.

    No. 3 U.S.

    Gini score: 40.8
    GDP 2007 (US$ billions): 13,751.4
    Share of income or expenditure (%)
    Poorest 10%: 1.9
    Richest 10%: 29.9
    Ratio of income or expenditure, share of top 10% to lowest 10%: 15.9

    The share of income for the top percentile of Americans was 23.5% in 2007, the highest since 1928, according to Emmanuel Saez, a Berkeley economist who won the prestigious John Bates Clark Medal in April. Income for the top 0.01% hit a record-high 6.04%. And the recession may be exacerbating income inequality.

    No. 4 Israel

    Gini score: 39.2
    GDP 2007 (US$ billions): 164.0
    Share of income or expenditure (%)
    Poorest 10%: 2.1
    Richest 10%: 28.8
    Ratio of income or expenditure, share of top 10% to lowest 10%: 13.4

    Gone are the days when Israel was one of the world's most egalitarian societies. Early Labor Zionist pioneers built kibbutzim for Jewish immigrants, but those collectives have fallen on hard times. The growing number of haredim, or ultra-Orthodox Jews, with large families and men who study the Torah rather than work has worsened the inequality problem.

    No. 5 Portugal

    Gini score: 38.5
    GDP 2007 (US$ billions): 222.8
    Share of income or expenditure (%)
    Poorest 10%: 2.0
    Richest 10%: 29.8
    Ratio of income or expenditure, share of top 10% to lowest 10%: 15.0

    While Portugal emerged from recession in the second quarter, the unemployment rate tops 9%. The ruling Socialists retained power in elections last month but lost seats to parties on the far left.

    No. 6 New Zealand

    Gini score: 36.2
    GDP 2007 (US$ billions): 135.7
    Share of income or expenditure (%)
    Poorest 10%: 2.2
    Richest 10%: 27.8
    Ratio of income or expenditure, share of top 10% to lowest 10%: 12.5

    According to the OECD, New Zealand had the biggest rise in inequality among member nations in the two decades starting in the mid-1980s. The country's economy emerged from recession in the second quarter, but with growth of just 0.1%, the central bank is likely to keep interest rates low until well into 2010.

    No. 7 (tie) Italy

    Gini score: 36.0
    GDP 2007 (US$ billions): 2,101.6
    Share of income or expenditure (%)
    Poorest 10%: 2.3
    Richest 10%: 26.8
    Ratio of income or expenditure, share of top 10% to lowest 10%: 11.6

    Italians are focused now on the melodrama surrounding embattled Prime Minister Silvio Berlusconi. The political crisis comes at a time when the economy is still mired in recession even as countries like Germany and France are growing again.

    No. 7 (tie) Britain

    Gini score: 36.0
    GDP 2007 (US$ billions): 2,772.0
    Share of income or expenditure (%)
    Poorest 10%: 2.1
    Richest 10%: 28.5
    Ratio of income or expenditure, share of top 10% to lowest 10%: 13.8

    According to Britain's Institute of Fiscal Studies, a government-funded think tank, the average national income, adjusted for inflation, grew 0.5% between 2004 and 2008. In contrast, the same figure for the top 90% income bracket jumped 1.2% over the same period. That was predominantly driven by large salaries and bonuses from the financial services sector in the pre-credit crunch era.

    No. 9 Australia

    Gini score: 35.2
    GDP 2007 (US$ billions): 821.0
    Share of income or expenditure (%)
    Poorest 10%: 2.0
    Richest 10%: 25.4
    Ratio of income or expenditure, share of top 10% to lowest 10%: 12.5

    While developed economies elsewhere fell into recession, the Lucky Country's good fortune held out, with Australia continuing to grow thanks in part to strong demand from China for its resources. This month the central bank raised interest rates, making Australia a leader among countries moving away from monetary easing.

    No. 10 (tie) Ireland

    Gini score: 34.3
    GDP 2007 (US$ billions): 259.0
    Share of income or expenditure (%)
    Poorest 10%: 2.9
    Richest 10%: 27.2
    Ratio of income or expenditure, share of top 10% to lowest 10%: 9.4

    Put aside the old comparisons to Asia's tiger economies. Ireland's workers are suffering badly from the recession; the unemployment rate soared in August to 12.5%. That's the second-worst in the EU, behind only Spain.

    No. 10 (tie) Greece

    Gini score: 34.3
    GDP 2007 (US$ billions): 313.4
    Share of income or expenditure (%)
    Poorest 10%: 2.5
    Richest 10%: 26.0
    Ratio of income or expenditure, share of top 10% to lowest 10%: 10.2

    Newly elected Prime Minister George Papandreou's government faces potential disciplinary action from the European Union, which has reprimanded Greece for a budget deficit of 6% of GDP, twice the EU limit. The IMF projects the economy will shrink 0.8% this year.

    [Sep 29, 2009] New Income Inequality Data: Surprising and Frightening

    September 29, 2009 |

    Bruce Judson is worried about what the latest reports on economic inequality say about our future:

    New Income Inequality Data: Surprising and Frightening, by Bruce Judson: The newest economic inequality numbers ... are frightening. Yesterday, the Associated Press released an article titled, US income gap widens as poor take hit in recession. The opening paragraph of the article, based on recent census data, reads:
    The recession has hit middle-income and poor families hardest, widening the economic gap between the richest and poorest Americans as rippling job layoffs ravaged household budgets.
    The article ... failed to mention that the Census Bureau considered the differences between 2007 and 2008, with regard to economic inequality, statistically insignificant. But, whether the Census Data shows a meaningful increase, or not is irrelevant. The Census Data reports that, contrary to the almost universal expectations of economists, economic inequality most likely did not decrease in 2008. Experts had anticipated that the declines in income of the rich would lead to a reversal in this groups ever–widening share of our national income. Instead, the Census reported that the 2008 income losses by the top 10% of Americans were offset by larger losses among middle class and poorer Americans. ...
    Early next week, my new book It Could Happen Here will be released... The book is an in-depth look , based on a historical analysis, of the implications of our historically high levels of economic inequality for the nation's ultimate, long-term political stability. As economic inequality grows, nations invariably become increasingly politically unstable: Should we complacently believe that America will be different?
    A central conclusion of the book is that once economic inequality reaches a self-reinforcing cycle it is halted only by inevitably controversial, hard-fought, bitterly opposed government action. ... In 1928, economic inequality was near today's levels. Franklin Roosevelt succeeded in reversing the trend toward the continuing concentration of wealth, but it was a turbulent battle. ...
    In FDR's era and in our own, money brings power: both explicitly and implicitly, in hundreds of different ways, both large and small. Today, the wealthiest Americans, together with a number of financial and corporate interests that act on their behalf, protect their ever-increasing influence through activities that include, among others, lobbying, supplying expertise to the councils of government, casual conversation at dinner parties, the potential for jobs after government service, the power to run media advertisements that influence public opinion. Indeed, MIT economist Simon Johnston, writing in The Atlantic asserted that the U.S. is now run by an oligarchy...
    The new inequality data suggests that the potential problems for the nation associated with the concentration of wealth and power are even more severe than previously recognized. Two weeks ago, I wrote that "Once income concentration becomes a reinforcing cycle of the kind we are witnessing, it is never stopped by pure market forces." This mechanism is now in full swing. ...
    The great strength of American democracy has always been its capacity for self-correction. However, Robert Dahl, the eminent political scientist, recognized that political power fueled by wealth may ultimately neutralize this central aspect of our democracy. In his 2006 book, On Political Equality, Dahl wrote:
    As numerous studies have shown, inequalities in income and wealth are likely to produce other inequalities..
    The unequal accumulation of political resources points to an ominous possibility: political inequalities may be ratcheted up, so to speak, to a level from which they cannot be ratcheted down. The cumulative advantages in power, influence, and authority of the more privileged strata may become so great that even if less privileged Americans compose a majority of citizens they are simply unable, and perhaps even unwilling, to make the effort it would require to overcome the forces of inequality arrayed against them.
    In the chapter following this quote, Dahl notes "that we should not assume this future is inevitable." He's right. But he was clearly concerned. ...
    Many current Executive Branch initiatives deserve our support and praise: However, nothing proposed to date will effectively halt growing economic inequality, and its corrosive impact on our economy and the long-term future of the nation. ...
    My analysis in It Could Happen Here concludes that without a vibrant middle class, the the American democracy as we know it, is not sustainable. Before the Great Recession, the middle class was in far worse shape than was generally acknowledged. In an economy with a record number of job seekers for every available job, the potential for nearly one-half of all home mortgages to be underwater, and increasing foreclosures, the collapse of the middle class will accelerate. With each job loss and each foreclosure, another family becomes a member of the former middle class.
    America has never been a society sharply divided between have's and have not's. Unfortunately, this new data says to me we continue to head in that direction. Economists assumed that the Great Recession would be a circuit breaker that would halt this advance, at least temporarily. It did not. ...
    Could our democracy survive a transformation into a nation composed principally of a privileged upper class and an underclass that struggles from paycheck to paycheck that lacks basic economic security. My analysis of a broad sweep of history, suggests it could not.
    We will only stop the growth of economic inequality if the President and the Congress are ready to fight in the style of Franklin Roosevelt. FDR was a divider not a conciliator. Before World War II, he fought an all-out war at home. Today, "There's class warfare, all right," as Warren Buffett said, "but it's my class, the rich class, that's making war, and we're winning."
    I fervently hoped that we have not passed the point of no return, described by Professor Dahl. The recent news shows we are one step further on this road. If we continue down it, our nation may be on the path to becoming a House divided against itself, which ultimately cannot stand.

    Are you as concerned as he is? I don't know if we are headed down the path of no return or not, but the part that concerns me is that recent changes in inequality do not seem to be driven by market forces that properly evaluate and reward productive activity.

    Republicans worry a lot about the effect that small changes in tax rates would have on economic activity (something there's not a lot of evidence to support) because taxes distort the relationship between effort and reward. But if the rewards have become generally separated from productive effort, particularly the large rewards at the very top of the income distribution where the Republicans argue these incentive effects are the strongest, then there are large distortions in the system that have nothing to do with taxes. That is what Republicans ought to be worried about if they are truly concerned with ensuring that the rewards people receive match their productive effort

    Posted by Mark Thoma on Tuesday, September 29, 2009 at 06:52 PM in Economics, Income Distribution Permalink Comments (25)

    [Aug 3, 2009] Economist's View Paul Krugman Rewarding Bad Actors

    Is what's good for Wall Street also good for America?:

    Rewarding Bad Actors, by Paul Krugman, Commentary, NY Times: Americans are angry at Wall Street, and rightly so. First the financial industry plunged us into economic crisis, then it was bailed out at taxpayer expense. And now, with the economy still deeply depressed, the industry is paying itself gigantic bonuses. If you aren't outraged, you haven't been paying attention. ...

    Consider two recent news stories. One involves ... high-speed trading: some institutions, including Goldman Sachs, have been using superfast computers to get the jump on other investors... Profits from high-frequency trading are one reason Goldman is earning record profits and likely to pay record bonuses.

    On a seemingly different front,... Andrew J. Hall, who leads an arm of Citigroup that speculates on oil and other commodities ... has made a lot of money recently... Mr. Hall is owed $100 million.

    What do these stories have in common?

    The politically salient answer ... is that ... both ... firms ... were major recipients of federal aid. Citi has received around $45 billion...; Goldman has repaid the $10 billion it received..., but it has benefited enormously both from federal guarantees and from bailouts of other financial institutions. What are taxpayers supposed to think when these welfare cases cut nine-figure paychecks?

    But suppose we grant that both Goldman and Mr. Hall are very good at what they do, and might have earned huge profits even without all that aid. Even so, what they do is bad for America.

    Just to be clear: financial speculation can serve a useful purpose. It's good, for example, that futures markets provide an incentive to stockpile heating oil before the weather gets cold...

    But speculation based on information not available to the public at large is a very different matter. As the U.C.L.A. economist Jack Hirshleifer showed back in 1971, such speculation often combines "private profitability" with "social uselessness."

    It's hard to imagine a better illustration than high-frequency trading. The stock market is supposed to allocate capital to its most productive uses... But it's hard to see how traders who place their orders one-thirtieth of a second faster than anyone else ... improve that social function.

    What about Mr. Hall? The Times report suggests that he makes money mainly by outsmarting other investors, rather than by directing resources to where they're needed. Again, it's hard to see the social value...

    And there's a good case that such activities are actually harmful. For example, high-frequency trading [is] ... a kind of tax on investors who lack access to ... superfast computers - which means that the money Goldman spends on those computers has a negative effect on national wealth. As ... Kenneth Arrow put it in 1973, speculation based on private information imposes a "double social loss": it uses up resources and undermines markets. ...

    And soaring incomes in the financial industry have played a large role in sharply rising income inequality.

    What should be done? Last week the House passed a bill setting rules for pay packages at a wide range of financial institutions. That would be a step in the right direction. But it really should be accompanied by much broader regulation of financial practices - and, I would argue, by higher tax rates on supersized incomes.

    Unfortunately, the House measure is opposed by the Obama administration, which still seems to operate on the principle that what's good for Wall Street is good for America.

    Neither the administration, nor our political system in general, is ready to face up to the fact that we've become a society in which the big bucks go to bad actors, a society that lavishly rewards those who make us poorer.

    [See also Back to the Good Times on Wall Street: Looking at "nine large financial institutions that received substantial TARP support from the government," "the firms' post-crisis pay policies appear to be ... even more lucrative to the firms' employees than pre-crisis policies.]

    Selected comments

    Beezer says...

    The concept here in America seems to be that it's OK to gain outsized wealth with other people's money. And lately, this concept has been extended to using taxpayer money as well.

    The concept should be that you can only gain outsized wealth if you own controlling interest of a firm's shares. You can be modestly wealthy if you invest other people's money well, but true wealth must accrue only to those who have controlling interest.

    The Busch family can be tremendously wealthy because they own(ed) a beer business. But the CEO of the beer business should not be allowed that level of monetary success because it's not his (or her) money.

    I remember Michael Eisner one year being paid more than $400 million when head of Disney. It was an amount greater than that distributed to shareholders. This is a perversion of capitalism and free markets.

    The great investment banks became that way on the capital of their partners. They always had their growing fortunes at risk. If they made a mis-step their personal fortunes were first at risk.

    Not today. Great wealth now accrues to the managers of corporations, not majority ownership. Even worse, a growing number of corporations depend upon taxpayer support in order to exist at all. This is a result of ownership being disfranchised.

    Instead of being owners, they have become something called "shareholders." They no longer have a substantive say in how the coroporation is run.

    Sort of like our Democracy. We used to be citizens, and had an important say in how our government is being run. Today we are something called "voters," and we have lost the influence accrued to citizens of years past.

    a says...

    "What should be done?"

    No, the question is, "What should have been done?"

    Last fall, instead of giving bailouts because the World Might End, the government should have taken the opportunity to allow socially useless Investment Banking to end. It would have died, if it had been allowed to. Instead, the powers that be, including nearly all economists, rose in chorus to provide bailouts which continued this socially disasterous activity.

    Krugman is the farmer who left the barndoor open and saw all his horses escape. It's over; he screwed up; the horses are gone; and they're not coming back.

    Looking at Wall Street Pay By Barry Ritholtz

    The real question is: Why generally parasitic institutions were able to pay employers highest bonuses, attract & destroy the best talent of the nation?

    "There's a huge disconnect between what the average American worker receives in terms of compensation and some of what we're hearing about on Wall Street. We do believe that when the taxpayer monies are invested that compensation should be fair."

    -White House senior adviser Valerie Jarrett

    Well, yes and no.

    There is clearly a disconnect between Wall Street and Main Street. The compensation for making bets that payoff is outsized on Wall Street, thanks to the fact that a) Its OPM (other people's money), and 2) it is a difficult job that few people do well; and 3) it is inordinately stressful.

    However, remember there are several different aspects to Wall Street compensation:

    1) Stock Options for C-level execs;

    2) Commission for Sales people;

    3) Bonuses for Traders;

    My biggest issue is with the first item - Stock options. Why? Two major reasons: First, they get issued when stocks are up, and more are given when stocks are down. Eventually, some slug of these options will hit pay dirt. Thus, stock option compensation works out to be a big payoff for Volatility, not Performance.

    This includes the CEOs/CFOs/Senior Execs of companies that have been bankrupted/bailed out, and recieved insane windfalls for helping to destroy these firms. It makes no sense, shows that the Boards of Director and large shareholders are either corrupt, or clueless.

    Second, as we saw in the 1990s, many CEOs and other execs received huge compensation for the simple act of being at the company during a raging bull market. There is no adjusting for how well the company did relative to the market, or to their peers in the same sector. That's not pay for performance, its pay for good timing of when you start your job.


    Here's where you have to be careful not to paint with too broad a brush: The vast majority of people who work on Wall Street are ordinary hard working, albeit well compensated people. And taht vast majortity of these folks did not cause the problems.

    Take for example commission sales: I have zero issue with that, regardless of what these employees are selling - Cars, Frozen Steaks, Institutional Sales, Mutual Funds, whatevers. The guys that can raise the money and close these deals should get whatever their employment contract states.

    As to the P&L Traders whose bonuses are dependent upon profitability, as long as there is some appropriate w/h for future risk - meaning, they can't bankrupt the company - than those contracts should be honored.

    Take AIG for example: There were 400 employees who worked in the Financial Products division (AIG FP) that caused all the problems - out of 116,000 employees. We simply cannot blame everyone who worked there for what those 400 did.

    The Bear Stearns hedge fund that blew up were a handful of people - so too were the Mortgaged backed traders there, as well as at Lehman Brothers. And the nimrods that caused Citi's woes (and Merrill's and Bank of America's and CIT) were a tiny percentage of employees.

    I have a suspicion that some of the anger over compensation is misdirected . . .

    Courtesy NYT

    Bankers Reaped Lavish Bonuses During Bailouts
    NYT July 30, 2009

    Biggest banks in US reward stars with huge bonuses
    AP, July 31, 2009

    Wall Street Executive Pay Shows 'Huge Disconnect,' Jarrett Says
    Nicholas Johnston
    Bloomberg, August 1, 2009

    House Gives Regulators Incentive Pay Role; Senate Prospects Dim
    Jesse Westbrook and Ian Katz
    Bloomberg, August 1, 2009

    [Jul 21, 2009] WSJ says pay inequality is bankrupting the system

    Jul 21, 2009 |

    Pay of Top Earners Erodes Social Security

    Executives and other highly compensated employees now receive more than one-third of all pay in the U.S., according to a Wall Street Journal analysis of Social Security Administration data -- without counting billions of dollars more in pay that remains off federal radar screens that measure wages and salaries.

    The pay of employees who receive more than the Social Security wage base -- now $106,800 -- increased by 78%, or nearly $1 trillion, over the past decade, exceeding the 61% increase for other workers, according to the analysis. In the five years ending in 2007, earnings for American workers rose 24%, half the 48% gain for the top-paid. The result: The top-paid represent 33% of the total, up from 28% in 2002.(...)

    Social Security Administration actuaries estimate removing the earnings ceiling could eliminate the trust fund's deficit altogether for the next 75 years, or nearly eliminate it if credit toward benefits was provided for the additional taxable earnings.

    There is a specific US issue here that Social Security contributions are subject to a cap (a profoundly regressive rule), but you can find similar mechanisms in each country (in France, you have the bouclier fiscal, which caps the marginal tax rate and has the same effect) and the conclusion is that major chunks of public deficits - and of future social benefits "holes" - that we are fearmongered into worrying about could be completely eliminated by taking care of such incredibly unfair loophooles that favor the rich.

    And it needs to be underlined that increasing inequality, and massively boosted incomes at the top mean that an ever larger chunk of incomes and GDP escape taxation (or social contributions), thus worsening the deficits of governments, pensions and healthcare systems.

    Thankfully, that also points to an easy solution to all of these "problems": as they were created by lower taxes on the rich, they can be solved by higher taxes on the rich.

    "Pay Czar" Refusing to Back Down Over Possible $100 Million Citi Bonus

    Ooh, this is getting interesting. Sports fans may recall that as of last week, Citigroup was refusing to back down on the issue of the contract for Andrew Hall, the head of commodities trading unit PhiBro, which could be worth as much as $100 million this year.

    A side comment: Hall seems to be trying to work out a deal to continue with Citi in some fashion, most likely as a spin out with Citi holding a minority stake. But query if this does anything to help the suffering American taxpayer. If Citigroup is still providing all or most of the funding for the business, there is no reduction in risk. Citi could conceivably wind up shouldering a lot of the funding risk and getting considerably less upside.

    The fact that no one else appears to be wooing Hall is also telling. This seems to confirm a suspicion of mine, that Hall has to have cheap funding, meaning a big balance sheet. He probably can't secure enough low cost, funding to make the same money he does at Citi. And raising funds (the equity for the fund) is hard and time consuming. To a person, everyone in the hedge fund and PE businesses says that fundraising is the most difficult and unpleasant aspect of the job.

    So if Hall is such a money spinner, why are no other big bank wooing him? One reason might be that all the logical suspects are on government life support (not quite true but close enough) and they may feel they don't want to press their luck. Or it may be that they know about Hall and don't want to take him on (perhaps they don't want to back big bets right now). A final possibility is they suspect he will earn less if regulators are successful in implementing measures to dampen commodities speculation, particularly in oil.

    Back to the main thread. The last move was that Citi asserted that the pay chieftan, Kenneth Feinberg, had no authority over Hall's contract because it was entered into prior to February 11, 2009, when the law establishing the pay czar authority took effect, at least according to the New York Times. That is certainly the view Citi is taking.

    Yet Feinberg is now claiming broader authority to claw back funds under the TARP. This is certainly not what was provided for in the legislation, at least not as generally reported. The executive comp restrictions were seen as weak, applying only to golden parachutes. Now perhaps there is some ambiguity in the language, but I doubt it. So why would Feinberg assert he has authority he doesn't, unless perhaps they can argue that the contract was somehow invalid?

    Consider this report tonight from Reuters:
    Kenneth Feinberg, the Obama administration's pay czar, said on Sunday he has broad and "binding" authority over executive compensation, including the ability to "claw back" money already paid, and he is weighing how and whether to use that power.

    Feinberg told Reuters that Citigroup Inc included the contract of energy trader Andrew Hall in submissions due Friday by seven major companies still locked in the federal government's TARP Program...

    "Whether I have jurisdiction to decide his compensation or not, we will take a look and decide over the next few weeks," Feinberg said ...

    Feinberg said on Sunday that decisions he makes will be "binding," but that the law limits his power over contracts signed before February 11, 2009.

    He also said he has the authority to use a "clawback" provision to go after compensation for executives from any company that received money from the U.S. Treasury's Troubled Asset Relief Program.

    Asked if he could use that clause to target a firm like Goldman Sachs Group Inc, which paid back $10 billion in bailout money, Feinberg said: "Anything is possible under the law."

    "I can claw back, but we haven't focused on that at all," he said.
    So notice what has happened. Citi decided to file documentation on Hall Friday. That suggests either that they want to look minimally cooperative or that they are not as certain of their position as their bluster of last week suggests.

    Oh, and to you readers who claim I am in favor of breaking contracts, I suggest you familiarize yourself with basic concepts before making charges.

    I said that the normal procedure was to go over the employee's conduct with a fine tooth comb. Why? Even f Hall's contract does not have a clause discussing termination for cause, violating written company policy is considered a contract violation. Many big producers are cavalier about company rules. I would be surprised if Hall did not fall into that camp.

    For instance, Hall probably has signing authority for expenses of his unit up to a certain level, and probably approves routine staff expenses. He'd thus be responsible not just for his own activities but also those of his team.

    So remind me about sanctity of contracts again? It's OK for someone like Hall to break a contract, but it isn't right for Citi to go looking to see if he has and if so, to use that fact to their advantage?

    The other bit is parties require people to sign contracts all the time with absurd provisions that they do not intend to rely on. Most of the time, despite the silly language in most American contracts that the contract is the sum total of the deal, nothing more or less, there often are significant verbal representations made outside the written deal, and they are sometimes enforceable.

    So contracts in theory and contracts in real life are two different matters. For instance, my book contract calls on me to deliver an index along with the rest of the manuscript as my official submission. That is clearly absurd, Palgrave even admits it, because you can't prepare an index until you have page proofs made from the manuscript submission! The contract also calls for the delivery of a typewritten manuscript, which is not in fact what I was told to deliver.

    posted by Yves Smith at 12:03 AM on Aug 17, 2009

    Anonymous said...
    I wonder if they can force the bonus as Citi stock not to be redeemed until 2012.

    August 17, 2009 2:04 AM

    Anonymous said...
    I like how you assume that Hall has broken some provision of his contract without having any proof of this. Making up facts as we go along?

    August 17, 2009 2:14 AM

    Yves Smith said...
    Anon of 2:14 AM,

    I suggest you read what I said, and further Google "psychological projection." Your accusation is "making up facts," No where do I say, or have I ever said, that Hall has broken a provision of his contract. I said under most applicable law, an employment contract, either explicitly or under state law (I have no idea what state was chosen to provide the governing law here) requires the employee to comply with company policy. An employment contract does not have to say, for instance, "We can fire you if you rape your secretary" for that to be grounds for contract termination.

    Given how inattentive most big producers are to formal policies, and give the unusual amount of rope afforded Hall, the odds are high that he in in breech of some policies. Now they might be trivial, but I have been amazed at the violations I have seen investigations turn up of middle and senior level employees.

    I will go further here. Every company I have worked with or had as a client (save one that was fairly small) in both consulting and investment banking showed very high levels of expense account abuse even at junior levels. And this was years ago when firms were privately held and would have more reason to be tough-minded about it. From what I have seen in recent years (less intense involvement but broader sample) nothing has changed. So my suspicion is hardly as radical as you make it out to be. And I did make it clear that this was a personal guess.

    Saying "odds are high" is not at all the same as "he has/must have broken some provision of his contract." And if Citi wanted to see if there were grounds for terminating the agreement, an investigation, which is what I have suggested every time this topic came up, would be the step required to determine where the facts lie.

    August 17, 2009 2:39 AM

    Anonymous said...
    The same people that usually scream about auto workers getting what was in their contract are the first to hoist it up 'the sanctity contracts' when talking about pay of over 200k.

    Which is it? Most of the time there is a lot more case law in favor of the unions. The bankers/ceo's/execs and most other non union workers are "at will" workers, they can be fired at any time for almost any reason, even if they are "under contract". Whatever that means.

    The whole apparatus of a 'human resources' department was usually developed to come up with, and document termination insurance. Aka, make sure you don't fire them for being a Hindu, fire them for being 5 minutes late for work on 3 days out of the last five years.

    August 17, 2009 4:11 AM

    Anonymous said...
    I am familiar with Andy Hall's pay scale. If he is line for a $100 million bonus, then he earned something like $500-550 million for the bank. Citi is netting $400 to $450 million from Andy alone.

    Why is the issue solely with Andy Hall? Why isn't anyone insisting that the taxpayer get a 30-40% cut for financing this whole crap shoot?

    Citi is possibly the worst run financial institution in the world. (Madoff's business was a criminal enterprise but exceedingly well run.)


    August 17, 2009 7:14 AM

    scott m said...
    Agree with anonymous at #4; when one person bargains for a high salary it's great. When two people do it together, it is evil.

    Also, this whole sanctity of contracts is just so much nonsense. Anyone who espouses it hasn't run a business (or dealt with a big one). Contracts get broken all the time. Run a small business for a month and you'll see it in no time.

    August 17, 2009 7:26 AM

    Anonymous said...
    Response from Anon at 2.14am:

    Yves, I think you're over reacting. I don't take issue with the fact that contracts in life and on paper are not necessarily the same.

    What I tried to raise was the assumption that he'd already violated his contract and therefore deserves to have his pay held. If Citi conducted such an investigation and found that he screwed up somewhere, then they can take what action they deem appropriate. If not, then we should not be in a position to judge based on the assumption that, "well if everyone else has done it, then Hall must have too."

    I wish to clarify that I'm hardly a cheerleader for banks paying bonuses after taking government assistance. But that failure lies in the government (via Geithner and Summers) not holding the banks to account.

    Instead guys like Hall become a public effigy that everyone wants to burn to vent their frustration.

    August 17, 2009 8:12 AM

    Anonymous said...
    Is privity of contract an issue in the bonus controversy, as regards companies supported with taxpayer money?

    we the taxpayers did not agree to pay these ridiculous bonuses when we bailed these companies out. Why do we have to honor contracts to which we are not a party?

    August 17, 2009 9:14 AM

    Siggy said...
    I suspect that there is a high probability that Mr Hall's contract could be altered or terminated for some otherwise trivial reason.

    Citi chooses to want to execute the contract. Or, Citi appears to want to execute the contract in the hope that the pay czar will execute a novation and Mr Hall will go walking. But then it seems that no one is courting Mr Hall. Or is he too hot to employ?

    I'm having a very hard time with all of this. Just Who is the Mad Hatter and Who is the Red Queen?

    If Citi doesn't get the bail out, Mr Hall and entourage go somewhere else, why not B of A, they vacumned up a lot of trash and seem to be making it work for them. Another alternative is that Mr Hall and entourage set up their own little niche shop. Who will give them cheap funds?

    Apart from the Fed and Treasury, who has cheap funds for rent?

    This is all grand theater but IMO merely a fly on the elephants ass!

    Yves, your clarification of your position on contracts satisfies me. I see that you are far more reasonable than I had earlier presumed. But then, all reason fails in presumption, does it not?

    August 17, 2009 9:44 AM

    DownSouth said...
    scott m said..."this whole sanctity of contracts is just so much nonsense."

    I couldn't agree more. Heaven knows where the sanctity-of-contract crowd comes up with its smug and highly dogmatic formulations, much less the oppressive idea that the long arm of the law ought to reach out and smack down any and all contract breakers. I suppose it just makes this stuff up out of whole cloth, for none of it has any basis in Western thought, much less American tradition.

    From Western thought comes the idea of the "society of consent":

    The citizen's moral obligation to obey the laws has traditionally been derived from the assumption that he either consented to them or actually was his own legislator; that under the rule of law men are not subject to an alien will but obey only themselves--with the result, of course, that every person is at the same time his own master and his own slave, and that what is seen as the original conflict between the citizen, concerned with the public good, and the self, pursuing his private happiness, is internalized. This is in essence the Rousseauan-Kantian solution to the problem of obligation...

    Hannah Arendt, Crises of the Republic

    Arendt goes on to explain that the theory of "social contract" evolved during the 17th century to mediate between public good vs. private self-interest. Three altogether different kinds of aboriginal agreements were formulated under the rubric of "social contract". Two of these--the Biblical covenant and the Hobbesian variety--were rejected by our founding fathers. Instead the revolutionaries opted for Locke's version, which, according to Arendt, "brought about not government but society--the word being understood in the sense of the Latin societas, an 'alliance' between all individual members." "[T]he American republic," Arendt adds, "rests on the power of the people--the old Roman potestas in populo--and power granted to the authorities is delegated power, which can be revoked."

    August 17, 2009 10:49 AM

    DownSouth said...

    Arendt continues:

    All contracts, covenants, and agreements rest on mutuality, and the great advantage of the horizontal version of the social contract is that this mutuality binds each member to his fellow citizens. This is the only form of government in which people are bound together not through historical memories or ethnic homogeneity, as in the nation-state, and not through Hobbes' Leviathan, which "overawes them all" and thus unites them, but through the strength of mutual promises.

    But Arendt is careful to point out that these promises are not sacrosanct:

    Promises are the uniquely human way of ordering the future, making it predictable and reliable to the extent that this is humanly possible. And since the predictability of the future can never be absolute, promises are qualified by two essential limitations. We are bound to keep our promises provided that no unexpected circumstances arise, and provided that the mutuality inherent in all promises is not broken. There exist a great number of circumstances that may cause a promise to be broken, the most important one in our context being the general circumstance of change. And violation of the inherent mutuality of promises can also be caused by many factors, the ony relevant one in our context being the failure of the established authorities to keep to the original conditions. Example of such failures have become only too numerous; there is the case of an "illegal and immoral war," the case of an increasingly impatient claim to power by the executive branch of government, the case of chronic deception, coupled with deliberate attacks on the freedoms guaranteed under the First Amendment, whose chief political function has always been to make chronic deception impossible...

    Arendt concludes that the Supreme Court is "unable to enforce decisions that would hurt decisively the interests" of the republic and knows that its "authority depends on prudence, that is, on not raising issues or making decisions that cannot be enforced."

    All this of course is lost on the sanctity-of-contracts crowd.

    August 17, 2009 10:50 AM

    Anonymous said...
    In an excellent post related to this one Yves Smith said a few weeks ago: "Sanctity of contract" means there are costs of modifying or exiting the deal ( This is absolutely true, but not likely to be comprehended by those who fundamentally misunderstand the phrase.

    Sanctity of contract is confused with inviolability of contract. It is easy to see where this confusion arises, because 'contract' is very often used as a noun.

    However, the word 'contract' in 'sanctity of contract' is not a noun; it is an intransitive verb meaning "to make a contract." The phrase itself refers to the bilateral right to make any contract the parties wish. The right to enter any (legal) contract may be sacrosanct under our jurisprudence, but no contract is sacrosanct.

    Enforcement is a completely separate matter. Anyone using the phrase with contract as a noun probably wants it to mean 'sanctity of contract enforceability.' But that sanctity is obviously non-existent, which makes plain the grammatical and logical error. Thankfully we do not live in a frozen world of sacrosanct contracts.

    August 17, 2009 11:14 AM

    DownSouth said...
    Anonymous at 9:14 AM said..."we the taxpayers did not agree to pay these ridiculous bonuses when we bailed these companies out. Why do we have to honor contracts to which we are not a party?"

    Excellent point, which goes to highlight how extreme the sanctity-of-contracts crowd has become. Here they're not just advocating that the government enforce a contract between two private parties, one which cannot perform, but that the government step in and perform for the party that cannot perform. All of this is justified in the name of the sanctity of contracts.

    I wonder what socially redeeming function they believe this would accomplish. Pray tell, how would this enhance the public good?

    August 17, 2009 11:26 AM

    Anon1 said...
    Contracts are just pieces of paper. They are NOT sacrosanct, they are NOT holy writ. They are pieces of paper based entirely upon a legal fiction.

    Since the Constitution itself is officially "just a piece of paper" (quote from fmr Prez Bush Jr), then there is NO WAY a mere contract is holier than that.

    Screw contracts. Screw the wealthy robber barons. Claw back every penny and seize the rest of their stolen and unearned wealth. Time to forestall revolution by taking from the rich and leveling the field to something sustainable.

    August 17, 2009 11:38 AM

    Anonymous said...
    Remember the big brouhaha that resulted when Goldman commanded Hartman to command Geithner to command Dodd to insert the bonus payment clause in the bailout legislation?

    I supect that is because it was known that the sovereign could not be made legally responsible to pay these ridiculous bonuses.

    August 17, 2009 12:13 PM

    Nic said...
    I think the czar may have picked the wrong poster boy here. Trading crude oil futures are real profits booked and realised at the time they expire. They are not multi-year mortgage backed securities or deals that can ultimately turn out to be garbage but for which bonuses have already been paid.

    August 17, 2009 12:20 PM

    Anonymous said...
    Do czars get bonuses? What is their base salary? Are they at-will employees? Who said we even need politically appointed czars as another layer of bureaucracy other than payback for large campaign contributions.

    August 17, 2009 1:08 PM

    Anonymous said...
    Say I hire a contractor for a 2 week home repair project. By your logic I can stiff him for the entire bill because he showed up 3 minutes late the 1st day.

    That's not how it works, not should it. Even if the contractor padded the bill by an hour you are still obliged to pay (minus the hour).

    Seems the only difference is the $100M.

    August 17, 2009 2:53 PM

    Anonymous said...
    Only Citi would be so stupid as to assume that Hall's past performance is indicative of his future. They paid Vikram Pandit $600 million to buy his hedge fund, which was worthless just a couple of years later. Hall is no different than all those other guys who were supposedly geniuses until they lost 70 or 80% of their clients' money. He is probably taking lots of risk that won't be apparent until it implodes. So far it has worked for him, but one of these days it will probably blow up spectacularly and everyone will say how stupid it was to have believed he could be a money machine. How many times did this story play out last year with big name hedge fund guys?

    August 17, 2009 5:24 PM

    Independent Accountant said...
    Without knowing what Citigroup's cost of capital charge to Hall was, we have no idea if he made any money at all. I suspect he has never made Citi any money on a risk-adjusted basis.

    August 17, 2009 6:11 PM

    Siggy said...
    Down South,

    I do not know of Arendt. The quotation you provide suggests to me that you may be reading into it that which you wish rather than that which is said.

    I believe that a contract should be honored. I do not believe that they can be broken willy nilly. I also accept that there can be circumstances that demand that a contract be abrogated. In the spirit of Arendt, I believe that the abrogation of the contract at hand should be mutually entered into in the same manner as the contract itself.

    I am curious, in the quote, is the phrase 'social contract' meant to include commercial contracts; or, is the 'social contract' a political one such as the one put forth in the Constitution.

    In the specific, as to Mr Hall/Citi: I believe that a cash bonus $100 million is excessive and quite probably unnecessary. In light of the fact that the US has a substantial equity position in the enterprise, I believe that the US is entitled to demand renegotiation of the contract. I hold that belief less for the fact that the $100 million appears unconscionable than for the fact that I suspect that Citi cannot really afford the payment.

    Now if it is revealed that Mr. Hall, as trader of oil & gas, was/is a causitive force in the recent volatility of energy prices, then; I say lets bring him to dock and find out just what his role was in what appears to have been the mother of all manipulations!

    August 17, 2009 8:45 PM

    Not Too Hard

    In a 2001 study, "What Makes a Revolution," Robert MacCulloch, an economics professor at the Business School of London's Imperial College, employed a data set derived from surveys of revolutionary support across a quarter-million randomly sampled individuals to conclude, as many historians and political scientists have already acknowledged, that more people favor revolt when inequality is high and their net incomes are low."

    Given that, it's not hard to draw some troubling conclusions from the research paper highlighted in the following Huffington Post report, "Income Inequality Is At An All-Time High: Study":

    Income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression, according to a recently updated paper by University of California, Berkeley Professor Emmanuel Saez. The paper, which covers data through 2007, points to a staggering, unprecedented disparity in American incomes. On his blog, Nobel prize-winning economist and New York Times columnist Paul Krugman called the numbers "truly amazing."

    Though income inequality has been growing for some time, the paper paints a stark, disturbing portrait of wealth distribution in America. Saez calculates that in 2007 the top .01 percent of American earners took home 6 percent of total U.S. wages, a figure that has nearly doubled since 2000.

    As of 2007, the top decile of American earners, Saez writes, pulled in 49.7 percent of total wages, a level that's "higher than any other year since 1917 and even surpasses 1928, the peak of stock market bubble in the 'roaring" 1920s.'"

    Beginning in the economic expansion of the early 1990s, Saez argues, the economy began to favor the top tiers American earners, but much of the country missed was left behind. "The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007," Saes writes.

    Despite a rising stock market, largely growing employment and a historic housing boom things were not nearly so rosy for the rest of U.S. workers. This trend, according to Saez, only accelerated during the George W. Bush's tenure as President:

    "...while the bottom 99 percent of incomes grew at a solid pace of 2.7 percent per year from 1993-2000, these incomes grew only 1.3 percent per year from 2002-2007. As a result, in the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth."

    [April 14, 2009] Just How Progressive Is the Tax System?

    April 14, 2009 | Economist's View
    Catherine Rampell at Economix presents and discusses data on the progressivity of taxes (federal, state, and local, calculations from the Citizens for Tax Justice). As she notes, this comes in rebuttal to claims based upon CBO data that taxes are highly progressive, and that the wealthy pay far more than their share:

    Horizontal axis shows the income group. Vertical axis shows the percentage of income that the average member of that group pays in taxes. Taxes include all federal, state and local taxes (personal and corporate income, payroll, property, sales, excise, estate, etc.). Incomes include cash income, employer-paid FICA taxes and corporate profits net of taxable dividends.

    Horizontal axis shows the income group. Taxes include all federal, state and local taxes (personal and corporate income, payroll, property, sales, excise, estate, etc.). Incomes include cash income, employer-paid FICA taxes and corporate profits net of taxable dividends.

    Update: pgl follows up.

    Posted by Mark Thoma on Tuesday, April 14, 2009 at 12:42 AM in Economics, Equity, Taxes

    What's the best thing Bush tried to do, but couldn't?

    April 22, 2008 |

    The Best Thing that Didn't Happen During The Bush Administration, by Robert Reich:

    The best thing to have occurred during the Bush administration is something that did not happen. We did not privatize Social Security.

    Had we done so, boomers facing retirement over the next few years would be even worse off than they are today. Now they're struggling with pension plans worth less than they counted on, and home values that are tanking. At least they can rely on a monthly Social Security check.

    But had we privatized, they'd be totally reliant on the stock market. And look what's happened to the market: Compared to stock values ten years ago, the S&P 500 has risen a little over 1 percent a year, adjusted for inflation. Even Treasury bonds have done better. Go back nine years and there's been no gain at all. Go back eight years and the market has been off an average of 1.4 percent a year.

    Yes, I know, it's been a rough time. First the tech bubble bursting, then 9/11, then Enron, then the housing bubble bursting, then the credit crunch. But that's my point. We can't necessarily rely on the stock market. ...

    Sure, the stock market has done well over the past half century. But there have been decades like the 1970s and this one, so far, where it's been a disaster. That's why we have Social Security – so that if your timing is bad and you get caught in a downdraft, you still have something to fall back on in retirement.

    If we had privatized, you'd have had nothing to fall back on. You'd crash.

    I'm pretty happy the whole permanent Republican majority thing didn't work out so well either.

    Posted by Mark Thoma on Tuesday, April 22, 2008 at 11:10 AM in Economics, Politics, Social Insurance, Social Security

    [Jun 29, 2008] CNBC's-Untold Wealth

    Thursday, CNBC aired a documentary by it business reporter David Faber called "Untold Wealth: The Rise of the Super Rich". It highlights what some are calling the "New Gilded Age". The documentary highlighted some interesting facts:

    Over the last 25 years, the income of the bottom 20% of wage earners has barely kept up with inflation, while the 400 richest Americans-as measured by the Forbes 400-have increased their wealth by 500%. There is no doubt that the gap between the super rich and low income earners has increased while the middle class has thinned. As the country descends into recession, the super wealthy will lose money, but when people in the middle class are losing their jobs and homes, public psychology will have a backlash- maybe by changing tax policy by electing Barack Obama. A well functioning democracy depends on a strong middle class. When inequity rises, at extremes, it causes social unrest. Inequity must be weighted against the unparalleled wealth creation-for all citizen- that capitalism has given this country over the last 100 years.

    [May 19, 2008] More Empty Stomachs in America

    Even now, delusional, usually conservative commentators like to harp on about how wonderful things are in this country -- the greatest story never told! That is despite the fact that everywhere you look, there are numerous signs that things aren't going well for ordinary Americans. Aside from those who can't afford to have health insurance, fill up the tank with gas, or own a home, there seems to be a growing number of individuals who are having a hard time satisfying basic needs. In "New Breed of American Emerges in Need of Food," USA Today's Richard Wolf details a disturbing development.

    Philomena Gist understands why it hurts so much to be on food stamps. After all, she's got a master's degree in psychology.

    "There's pride in being able to take care of yourself," says the Columbus, Ohio, resident, laid off last year from a mortgage company and living on workers' compensation benefits while recovering from surgery. "I'm not supposed to be in this condition."

    Neither are many of the 27.5 million Americans relying on government aid to keep food on their tables amid unemployment and rising prices. Average enrollment in the food stamps program has surpassed the record set in 1994, though the percentage of Americans on food stamps is still lower than records set in 1993-95. The numbers continue to climb.

    Gist, 51, is the new face of hunger in the USA. She says she spent most of her adult life working as a mental health counselor before deciding to try real estate. "I'm a professional person," she says.

    As economists nationally debate whether the country is in recession and policymakers discuss ways to drive down gas prices, a new category of Americans combats hunger.

    Since 2006, soaring food and fuel prices have combined with lost jobs and stagnant wages to boost the number of Americans needing food aid. More than 41% of those on food stamps came from working families in 2006, up from 30% a decade earlier, according to the latest Agriculture Department data.

    They are real estate agents and homebuilders hit by the housing slump, seniors on Social Security, parents of students whose free breakfast and lunch programs don't solve the problem of dinner. Increasingly in recent months, they have signed up for food stamps and shown up at food pantries, trying to make ends meet.

    "This last year's been the worst," says Gladys Pearson, 76, a retired corrections officer, as she leaves a Bread for the City food pantry in Washington, D.C., a three-day supply of staples in the basket of her walker. She likens it to the 1950s, when her husband would come home with a small can of milk for their newborn daughter because a big one was too expensive.

    Officials on the front lines say the need is growing.

    Kindergarteners in Baton Rouge are hoarding part of their lunches to eat later at home, says Mike Manning, president of the Greater Baton Rouge Food Bank.

    In Reading, Pa., Peg Bianca, executive director of the Greater Berks Food Bank, sees demand soaring for "weekenders" - backpacks of food intended to help students stay nourished until Monday.

    Americans 'are really hurting'

    "People are hurting," says Kitty Schaller, executive director of the MANNA FoodBank in Asheville, N.C., where one in six people get emergency food assistance. "They are really hurting in a way that I think may well be unprecedented."

    Hunger in America isn't new. The latest government data for 2006 show that 10.9% of households were "food insecure," a bureaucratic term meaning they did not have enough food for a healthy lifestyle at some point in the year. In 4% of households, no bureaucratic jargon was needed; someone was going hungry.

    Families with enough to eat spent 31% more on food than those who didn't have enough.

    The federal food stamps program has grown, shrunk and grown again since its creation in 1964. It was cut by Republicans when they took control of Congress in 1995. It has expanded during the past eight years, fueled by two economic slumps, relaxed rules regarding assets and an outreach campaign to sign up eligible families.

    The program is restricted to households with incomes below 130% of the federal poverty level, or $27,560 for a family of four. They cannot have more than $2,000 or, in some cases, $3,000 in assets, not including homes and, in most states, cars. The average benefit is about $3 a day per person. Cost to the government: $38 billion, rising to $40 billion in 2009.

    It's the largest weapon in the U.S. government's 15-program food aid arsenal, which now costs about $60 billion, up 76% since 2001. "We do have a strong safety net available to help families in times of economic distress," says Kate Houston, deputy undersecretary for food, nutrition and consumer services at the Department of Agriculture.

    When the Bush administration proposed its 2008 budget in February 2007, it projected that an average of 26.2 million people would get food stamps this year. By the time the fiscal year began in October, however, enrollment already was 27.2 million and growing. For next year, the administration plans for an average of 28 million.

    Even so, only 65% of eligible recipients are enrolled. Among working families, only 57% of those eligible for food stamps have signed up.

    Gist joined the ranks of recipients after losing her job as a loan officer. She says she was fired the day before she was to be paid her $27,000 share of the closing costs for four loans she negotiated. The mortgage company is now out of business and, in an unfortunate twist, her home is in foreclosure.

    She learned she was eligible for food stamps while having her taxes done for free. "It's embarrassing," says Gist, who still hopes to stay in her home despite a scheduled sheriff's sale Friday. "It's humbling."

    'Regular Joes' on food stamps

    Yet it's not unusual. Kevin McGuire, executive director of Maryland's Family Investment Administration, which runs antipoverty programs, says many new food stamp clients are "regular-Joe working Americans." His state saw enrollment rise 13.8% in the past year, fourth-highest in the USA.

    When they get on food stamps, these new recipients find that the program doesn't keep up with prices. The inflation rate for items they're encouraged to buy under the "thrifty food plan" is 5.6% - more than the average 4.7% for food. Prices for basic items such as bread and milk pushed food prices up by almost 1% in April alone; bread costs 14.1% more than it did a year ago, milk 13.5% more.

    Families with less than $10,000 in pre-tax income spend a larger share of their income on food - 17.1% compared with a U.S. average of 12.6%, according to a report last month by the Congressional Research Service. Inflation hits them harder.

    "Many of the people who are turning to food pantries today are reporting that their food stamps aren't even lasting two weeks out of every month," says Lisa Hamler-Fugitt, executive director of the Ohio Association of Second Harvest Foodbanks.

    The farm bill passed overwhelmingly by Congress last week partially addresses those issues. It would invest $10.4 billion over five years in the food stamps program and food banks. President Bush has vowed to veto the bill because of its subsidies to wealthy farmers, but the House and Senate votes indicate Congress is likely to override him for only the second time.

    In the meantime, more Americans will cut corners.

    It doesn't "stretch as far as they say it does," says Brenda Tanner, 45, of Asheville, N.C., who raises two teenage daughters on $623 a month in disability payments and $289 a month in food stamps. She buys in bulk and no longer goes out to eat. "Milk is as high as gas," she says. "That's crazy."

    Near the Capitol, no more cereal

    Even with one in every 11 Americans receiving food stamps, millions who don't qualify also need help. They are joining food stamp recipients at food pantries nationwide, where they receive bags of food intended to last a few days. "Many people are in desperate financial straits who are not eligible for food stamps," says House Speaker Nancy Pelosi, D-Calif., who pushed to pass the farm bill.

    Second Harvest, the nation's largest network of food banks, says demand is up an average of 15% to 20% from a year ago.

    More than 80% of its food banks reported in a survey completed this month that they could not meet demand without trimming operations or reducing the amount of food given out.

    Donations are down, particularly from the federal government as well as private companies. Farmers are selling their crops on the open market at record prices, rather than giving them to the government through price-support programs.

    To compensate, the Agriculture Department has traded raw commodities for finished goods that can be provided to food banks. Earlier this month, it chipped in with $50 million in frozen pork patties.

    Costs are up, particularly for diesel fuel needed to deliver food to pantries by truck. Nearly half of the food banks now buy some of their food or are considering doing so, rather than relying on donations.

    "It's really a perfect storm," says Maura Daly, Second Harvest's vice president of government affairs.

    At Bread for the City in Washington, less than 2 miles from the White House and the Capitol, food and clothing director Ted Pringle can't buy cereal anymore because of the price of grain, wheat and corn. Fresh fruit jumped by 3.2% nationally in April. "It scares me to buy fruit," Pringle says.

    Food banks across the country are on the front lines as demand increases and supply dwindles:

    • In Oakland, the number of monthly calls into the Alameda County Community Food Bank has risen 28% from last year. Since July, each month has set a new record.
  • • In Tyler, Texas, the East Texas Food Bank has stopped buying rice and pinto beans in bulk quantities because they're too expensive. Some of the pantries it serves no longer can drive up to two hours to the central food bank because of a 64% increase in fuel costs.
  • • In Detroit, executive director Augie Fernandes is seeing more seniors on fixed incomes "who are very proud" come into the Gleaners Community Food Bank of Southeastern Michigan.
  • • In Ponca City, Okla., the local food pantry is serving more than 500 people a month, a 20% increase from last year. As a result, it's had to cut their monthly allotments from three bags of food to two.
  • • In Nashville, program services manager Kelli Garrett sees former volunteers and donors arrive as clients at Second Harvest Food Bank of Middle Tennessee. "They feel a certain level of shame having to ask for help," she says.
  • • In Alaska, 15 remote food pantries have closed because they lacked sufficient government commodities. "At one point, we were down to vegetarian beans," says Susannah Morgan, executive director of the Food Bank of Alaska. Things are better now: They have grape juice, green beans and frozen apricot cups.
  • • In Orlando, Dave Krepcho of the Food Bank of Central Florida has eight trucks and a tractor-trailer on the road full time, picking up food from grocery stores. He worries about low-income children home from school this summer.
  • Krepcho, the food bank's executive director, has been in the business 16 years.

    "This is the worst that I've ever seen it," he says, "by far."

    [May 19, 2008] Voters Around the World Unhappy With Income Disparity

    The Financial Times reports on a FT/Harris survey found a surprising consensus across eight countries in Europe and Asia, as well as in the US, that increasing income disparity was undesirable. Not surprisingly, respondents favored increasing taxes on the rich.

    Of course, this poses an interesting conundrum for politicians, given the sway of multinational corporations and Big Finance. As Jean Colbert observed, "The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing." And those at the top of the food chain know to hiss loudly. So unless the public at large figures out how to get more vocal, any moves to address these sentiments are likely to be symbolic.

    And the survey participants appear to understand that dynamic well. For the most part, they expect inequality to worsen in the next five years.

    From the Financial Times:

    Income inequality has emerged as a highly contentious political issue in many countries as the latest wave of globalisation has created a "superclass" of rich people...

    According to the latest FT/Harris poll, strong majorities in five European countries – ranging from 76 per cent in Spain to 87 per cent in Germany – consider that income inequality is too great.

    But 78 per cent of respondents in the US, traditionally seen as more tolerant of income inequality, also think the gap is too wide....

    For the first time, the FT/Harris poll surveyed opinion in Asia. In China, which has experienced three decades of helter-skelter development, 80 per cent of respondents think income inequality is too great.

    However, Japan recorded the lowest figure of all countries surveyed, with 64 per cent....

    Clear majorities in all countries agree that taxes should be raised on the rich and lowered on the poor. In Britain, 74 per cent of respondents think that those on low incomes should be taxed less, helping to explain the furore that surrounded the Labour government's decision to abolish the 10p income tax rate...

    US respondents were the most resistant to the idea of lowering taxes on the poor, with 27 per cent agreeing with the proposition that taxes should be kept at current levels.

    Note that Japan has one of the most equal distributions of income, if you believe the UN Gini coefficient ranking, although the CIA Factbook Gini points to a very different conclusion. But the Japanese are keen observers of very small status differences (the legacy of having once had extremely strict sumptuary laws), so their sensitivity to income disparity is considerable.

    Budgetary Bait and Switch

    Bruce Bartlett and I disagree about the size of government. He would starve the beast, I would want it healthy and thriving, but I have no disagreement with his view of the general lack of character Republicans have displayed on the budget issue:

    The GOP's bait-and-switch tax strategy, by Bruce Bartlett, Commentary, LA Times: It is an article of faith among Republicans that tax cuts are the cure for every problem the economy faces, and that tax increases are the equivalent of economic poison. Any hint by Democrats that the current administration's tax cuts should be revisited in light of changing economic or fiscal conditions is met with charges that they are proposing the largest tax increase in history.

    The truth is that President Bush's tax cuts didn't do much good for the economy; they were mostly giveaways to GOP political constituencies and were little different conceptually from pork-barrel spending...

    The fact is that the massive tax increase Republicans claim the Democrats are proposing is entirely the result of the GOP's ... policies. Rather than expend the effort to make their tax cuts permanent in the first place, they attached expiration dates to every major provision. ... The alleged tax increase that would result is simply a consequence of the tax system returning to what it was before 2001...

    In other words, no one is proposing new taxes... It is simply a matter of allowing the law that Republicans enacted to follow the course that they chose in the first place.

    Republicans respond that they ... didn't have the votes to enact permanent tax cuts, so it was temporary cuts or nothing. This is not true. They could have made them permanent, but that would have required bipartisanship and more political capital than Republicans were willing to spend. So they took the easy way out, figuring that Democrats wouldn't dare oppose extending the tax cuts when the time came, lest they be accused of favoring a vast tax increase.

    But this isn't even the worst of the Republican dishonesty. That goes to projections from the Congressional Budget Office showing a sharp reduction in budget deficits after 2010. But these lower deficits result largely from the expiration of the tax cuts and the higher revenues that would result. Thus, Republicans are trying to ... blame Democrats for advocating higher taxes while implicitly using those higher taxes to make future deficits smaller.

    This sort of political game may be fun for Republicans who think that they have boxed Democrats into a corner. But this game has had real economic consequences. Because the tax cuts are not permanent, their economic impact has been severely diminished. All economists know that permanent tax changes have far more effect than temporary ones because people won't change their behavior significantly unless they have some assurance that the tax regime will be in effect for the long term. ...

    There is little doubt that the economy would have been stronger with permanent tax cuts. But that would have meant fewer tax cuts and thus fewer opportunities to buy votes. It also would have forced Republicans to deal with the true budgetary consequences of their actions. ...

    Tax policy is an important campaign issue, and it would be good to get agreement on the post-2010 tax code as soon as possible. Current law makes it impossible to plan for the future with regard to taxes. Whatever is done should be done permanently to the greatest extent possible.

    He believes tax cuts promote economic growth to a much larger degree than I do, but there is some common ground. He wants taxes to be efficient, i.e. to promote maximum growth given the size of government that taxes must support, and I do too. Thus, to the extent that we can make the tax code more efficient through budget neutral tax changes without compromising equity, we shouldn't resist doing so. A budget neutral shift in taxes can promote economic growth in the same way that a tax cut does if the shift eliminates or substantially reduces economic distortions, though as I noted above tax changes are not the first place I would look if enhanced growth was the goal.

    What this means is that instead of letting all the Bush tax cuts expire, there is the possibility of retaining some of the existing tax cuts while enacting new ones to replace them so that the revenue implications are the same, but the economic and equity properties are the same or better. However, given that this would be played as Democrats enacting new taxes, the politics that are involved make such a shift in taxes unlikely even though it would bring about the very thing Republicans claim they want, higher economic growth. I think Bruce Bartlett is honest in his belief that permanently lowering taxes has a significant effect on economic growth and that this belief corresponds to his small government philosophy, my difference on this issue is over the magnitude of the growth effect relative to what you must give up in terms of key government programs when taxes are cut. But for many Republicans, it seems as though the growth argument is merely an excuse to attain their real goal, smaller government, and their support of pretty much any tax cut that is proposed is evidence that growth is not the primary concern. Paul Krugman puts it this way:

    Since the 1970's, conservatives have used two theories to justify cutting taxes. One theory, supply-side economics, has always been hokum for the yokels. Conservative insiders adopted the supply-siders as mascots because they were useful to the cause, but never took them seriously. The insiders' theory - what we might call the true tax-cut theory - was memorably described by David Stockman, Ronald Reagan's budget director, as "starving the beast." ... Starve-the-beasters believe that budget deficits will lead to spending cuts that will eventually achieve their true aim: shrinking the government's role back to what it was under Calvin Coolidge.

    And when taxes have been cut recently, who has benefited most from what is "little different conceptually from pork-barrel spending" is worth thinking about as well.

    Posted by Mark Thoma on Tuesday, April 22, 2008 at 02:34 AM in Budget Deficit, Economics, Politics, Taxes

    Tax Progressivity and Inequality by Mark Thoma

    April 22, 2008 |

    Is reduced progressivity of taxes responsible for the rise in inequality in recent decades?

    Tax Progressivity and the Rise in Inequality, by Lane Kenworthy: Income inequality in the United States has increased sharply since the 1970s. How much of this is due to reduced tax progressivity?

    A key element of the rise in inequality has been the dramatic jump in incomes among the top 1% of the population. According to calculations from IRS data by Thomas Piketty and Emmanuel Saez (available here), this group's share of total income more than doubled during the 1980s and 1990s.

    This is due in part to the fact that in recent decades taxes have done less to reduce the top 1%'s income share. The following chart shows the pretax and posttax income share of this group from 1960 to 2001, according to the Piketty-Saez calculations. Between 1960 and 1979, its posttax income share was 70% of its pretax share. In the period from 1980 to 2001 that increased to 84%.

    (Note: The Piketty-Saez data end in 2001, so they don't reflect the Bush tax cuts. Calculations by the Congressional Budget Office suggest that from 2002 to 2005 the top 1%'s posttax income share was 85% of its pretax share, very similar to what the Picketty-Saez data indicate for 1980-2001. I don't use the CBO data here because they go back only to 1979.)

    What effect has this had on inequality?

    The chart makes clear that most of the rise in the top 1%'s posttax income share is due to the increase in its pretax share rather than to changes in tax progressivity. The next chart offers another way to see this. The solid line in the chart shows the top 1%'s share of after-tax income since 1960. The dashed line shows what the top 1%'s share of income would have been had taxes reduced it to the same degree as in the 1960s and 1970s. It's lower, but not massively so. Changes in taxation have mattered, but they have not been the main reason for the rise in the top 1%'s income share.

    If reducing inequality is an aim of the next administration, increasing the progressivity of our tax system would surely help. But this is only one piece of the puzzle.

    Menzie Chinn is puzzled by a certain politician's proposal to stimulate the economy by Mark Thoma

    April 22, 2008 |

    Puzzled, by Menzie Chinn: I have been puzzled by the proposal for a tax holiday for gasoline purchases running from Memorial to Labor day (see [0], [1], [2]), with the objective of spurring the economy. First, the Federal tax is quite low, either in real or in relative terms. Second, the benefits that would accrue to consumers are probably pretty small, under reasonable assumptions.

    Going to the first point... As one can readily verify, in inflation adjusted terms, the tax has been eroded over time to levels not seen since the early 1990's. This is true regardless whether one deflates by the CPI-all or the CPI-ex. energy and food.

    In relative terms, the total Federal tax has been shrinking as a share of gasoline prices, as gasoline prices have headed north (March = $3.293, all grades, inclusive of taxes). As of March 2008, the Federal tax accounted for 0.056% of that price. ...

    So this is the measure to jump start the economy? I think this measure would give relief to somebody. But I also think it's a pretty blunt instrument by which to provide assistance...

    Now, I'm not a microeconomist by training. Nor do I play one on TV. But it seems to me that if the supply of gasoline is price inelastic, and the demand is similarly price inelastic, then the incidence of the current Federal gas tax must be about evenly balanced. A tax holiday is then a holiday to both consumers and producers. ...

    The proposed gas tax holiday was for a short duration of months. In this case, the short run price elasticity of supply is near zero, and the demand elasticity is plausibly near zero as well.

    Assume both supply and demand are equally price inelastic, and this means the incidence of the Federal tax is about 50-50. Eliminating the gasoline tax for a short duration gives a windfall to both consumers and producers, of about equal proportion. (By the way, this conclusion is not true of state gasoline taxes; see Chouinard and Perloff (2004)). Now, giving a windfall to refiners and providers of feedstock for gasoline production might be a worthy goal, but I don't believe that was the stated goal. If those corporations get a windfall then either it gets stored away to be spent on investment in a new refinery or addition to an old refinery sometime in the future, or it leaks out to overseas oil producers.

    Oh, and by the way, to the extent the lower price spurs gasoline consumption, this should increase the petroleum and petroleum products component of U.S. imports, and thence putting further upward pressure on the price of oil...

    The "Merely rich" versus the "Super-rich"

    Mar 2, 2006 | The Big Picture
    Interesting article by David Wessel in the free section of the WSJ today: Rich Get Richer, But Not as Fast As You Think.

    Its a follow up to the Federal Reserve's recent triannual study we discussed last week, Stagnant Net Worth for Typical US Family.

    When looking at who has what share of America's Net Worth, a few data points leap out: The Richest 10% owns 69.5% of the assets, up from 67.4% in 1989.

    Note that the Fed survey explicitly excludes folks on the Forbes 400 list of the very wealthiest Americans. I believe the Fed eventually breaks down the latest numbers on the richest one million families, the top 1%. That group of Super Rich 1% holds about one-third of the total wealth in the nation; The next 9% also holds about a third.

    The group below the top 10% --the 75% - 89.9% slice -- owns 17.6% -- slightly more than their population percentage might suggest numerically. This group contains the heart of the middle class (and upper middle class), and as we have seen, they have been shrinking.

    Last October, citing Internal Revenue Service data, the Wall Street Journal reported that the top 1 percent of Americans earned 21.2 percent of all income in 2005. That's the highest measure of income inequality since, you guessed it, before the Great Depression. The numbers may be off that peak for 2008, given the carnage on Wall Street, and all those investment bankers trying to sell their weekend homes in the Hamptons into a sagging real estate market. But not by much.

    ... ... ...

    Right-wing economists tell us that allowing the rich to grab such a huge percentage of national wealth rewards the most "productive" sector of society and encourages them to create even more wealth, which eventually trickles down to all Americans. So who cares if the income inequality chasm has widened to historically unprecedented heights? Poor Americans now are rich compared with poor Americans in the 1920s. They've got their fancy TVs and access to an extraordinary array of cheaper-than-cheap products at the nearest Wal-Mart. Are they starving? No, the big social problem is rampant obesity! So let the good times roll, and make those tax cuts permanent.

    There are some holes in that logic. The average American family carries upward of $8,000 in credit card debt. The personal savings rate has never been lower. Healthcare costs are inconceivable for anyone who doesn't have insurance. And right now, home prices, which represent the largest chunk of net worth for most Americans, are dropping at a rate of 10 percent a year.

    Anonymous | Mar 2, 2006 8:06:47 AM

    So the top 1% owns one-third of all wealth, the next 9% owns another one-third, and the rest of 90% own the last one-third.

    The exclusion of the Forbes 400 makes the estimates very conservative. Every year, the dollar figure for inclusion on the list grows, and I think about 300 on this are billionaires. That's a lot of wealth to exclude when counting the top 1%.

    The full breakdown of wealth for 2001 is available in the See the "Rolling Tide" article here

    barone has a great post on this. mean and median wealth changes the numbers significantly... if you include Gates, etc.

    Posted by: jp | Mar 2, 2006 11:11:12 AM

    Heavily Progressive Taxation as a Key Clause in the Social Contract

    Matthew Yglesias:

    Matthew Yglesias (March 16, 2008) - Sunday Financial Meltdown Blogging (Domestic Policy): Every now and again, and then increasingly as things start looking worse, I get a comment like "how can you write about [thing that's not earth-shatteringly important] when the economy is [something terrible happening in the economy]."... I try to focus write blog posts that I think are going to be good posts rather than just posts on objectively important topics. I don't, in general, have any opinions about the problems in the financial markets that go beyond the utterly obvious -- bad things seem to be afoot and I'm worried....

    But speaking strictly as an ideologue, I don't necessarily have a problem with the government intervening to bail a bunch of rich guys out when their own bad decisions blow up in their faces if that's what's needed for the health of the overall economy, but this sort of thing is one of several reasons why I think the very rich should pay high tax rates and we shouldn't be happy about the prospect of ever-growing inequality. At a certain level, the game is rigged and you're not really bearing any risk...

    March 16, 2008 at 03:57 PM in Moral Responsibility, Philosophy: Moral, Political Economy, Sorting: Front Page, Sorting: Pieces of the Occasion | Permalink | Comments (0) | TrackBack (0)

    The Bush Tax Cuts Did Not Make Taxes More Progressive

    March 11, 2008 | Economist's View

    In case you hear otherwise (and you will):

    Have the 2001 and 2003 Tax Cuts Made the Tax Code More Progressive?, by Aviva Aron-Dine, CBPP: Summary Supporters of extending the 2001 and 2003 tax cuts claim that these tax cuts' benefits have been broadly and fairly distributed. Some argue that the tax cuts have actually made the tax system more progressive, pointing to Congressional Budget Office (CBO) data showing that the share of total federal income taxes paid by the top 1 percent of households rose modestly after the tax cuts were enacted.

    The claim that the tax cuts are fairly distributed and have made the tax code more progressive does not withstand scrutiny. Whether measured in dollar terms or as a share of household income, the tax cuts going to high-income households are much larger than those going to all other households.

    When fully in effect, the tax cuts will boost after-tax income by more than 7 percent among households with incomes of more than $1 million, but just 2 percent among middle-income families... A progressive tax cut, like a progressive tax system, is one that reduces inequality. But, as these data show, the tax cuts enacted in 2001 and 2003 are widening the gap in after-tax incomes, which was historically large even before the tax cuts were enacted.

    In 2010, when the tax cuts are fully in effect, the average household earning more than $1 million a year will receive $158,000 in tax cuts, according to the Tax Policy Center; the average middle-income household will receive $810.

    The same CBO data cited by the tax cuts' supporters show that the top 1 percent of households pay almost 5 percent less of their income in federal personal income taxes than they did in 2000, before the tax cuts. No other group got a tax cut nearly as large.

    The CBO finding cited by the tax cuts' supporters does not change these facts. High-income households now pay a modestly larger share of federal income taxes not because the tax cuts are somehow tilted against them - to the contrary, the tax cuts are tilted decisively in their favor - but instead because (1) their incomes have risen much faster than other households,' and (2) the tax cuts have significantly shrunk the total revenue "pie."

    The Tax Cuts Widened Income Gaps

    A progressive tax code is one that makes the distribution of after-tax income more equal than the distribution of pre-tax income. (This definition is accepted by analysts across the political spectrum.) Hence, one tax code is "more progressive" than another if it has a larger effect in reducing income inequality. For the 2001 and 2003 tax cuts to have made the tax code more progressive, after-tax incomes would have to be less unequal today than if the tax cuts had not occurred. In fact, the tax cuts have made the distribution of after-tax income more unequal.

    There's been quite a bit of denial about this from the crowd that believes that tax cuts for the wealthy are the answer time, make taxes more progressive. Here's the entire report. [On changes in the distribution of income, see the graphs and discussion in this post from Lane Kenworthy.]

    Stagnant Net Worth for Typical US Family

    February 24, 2006 |

    Every 3 years, the Federal Reserve undertakes a massive survey of nearly 5,000 US families. The interview process is comprehensive, covering all manners of financial information -- and its intensive, taking between 80 minutes and 2 hours.

    Its the Federal Reserve's Report on U.S. Family Finances, and it quantifies what most people already know: The average family is not making much economic progress:

    "After growing rapidly during the boom of the 1990s, the net worth of the typical American family rose only 1.5% after inflation between 2001 and 2004, the Federal Reserve said in an update of a survey it does once every three years.

    The Fed said the net worth of the median American family -- the one smack in the statistical middle -- was $93,100 in 2004. Net worth, the difference between a family's assets and liabilities, rose a robust 10.3% between 1998 and 2001 and 17.4% in the three-year interval before that.

    A booming housing market boosted the typical American family's wealth between 2001 and 2004, but stagnant stock prices and rising debt offset many of those gains."

    The Fed helps explain what many politicans have been unable to grasp: the disconnect between rosy economic headline data and real life experiences for most families.

    The report also gives lie to much of the foolish spin we have heard from some politicians and from the economic charlatans -- those people who know better (or at least should know better), but knowingly deceive the public in pursuit of their own political or economic agenda.

    A few items pop out from the report:

    • Rising debt has offset the boom in housing;
    • Inflation continues to eat into family cash flow;
    • Income remains stagnant;
    • Savings has slipped to zero;

    [Oct 27, 2007] ZNet South Asia Implications of Plutonomy by Girish Mishra

    Almost two years ago, Ajay Kapur, a prominent global strategist of the Citigroup and his two associates, Niall Macleod and Narendra Singh, came out with a paper "Plutonomy: Buying Luxury, Explaining Global Imbalances." If the formulations contained in this paper are correct, they will have far reaching implications, upsetting long-standing understandings of economists all over the world.

    Ajay Kapur and his associates assert that world is getting divided into two blocs, namely, the Plutonomy and the rest. The term 'Plutonomy' is derived from, Plutus, the Greek god of wealth. America, Britain and Canada are the key Plutonomies, powered mainly by the wealthy. In Plutonomies, the rich dominate the economy as they account for most of the consumption expenditures, savings, current account deficits, etc. Obviously, in the Plutonomies, economic growth is powered by the wealthy. The rest of the population does not have much of a role in the economy.

    Kapur and his associates claim: "Plutonomies have occurred before in sixteenth century Spain, in seventeenth century Holland, the Gilded Ages and Roaring Twenties in the U.S." Common drivers of Plutonomy in each case have been "Disruptive technology-driven productivity gains, creative financial innovation, capitalist-friendly cooperative governments, an international dimension of immigrants and overseas conquests invigorating wealth creation, the rule of law, and patenting inventions." These conditions benefit the rich and educated of the time because only they are in a position to exploit them. Income inequality has been a prominent feature of Plutonomy. In the present day world Plutonomies are given birth to and sustained by revolution in information and communications technology, financialization, globalization and friendly governments and their policies.

    In a Plutonomy, consumers do not have their nationality. Thus there is no U.S. consumer or British consumer. Globalization has converted the entire world into a single integrated market. "There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the "non-rich", the multitudinous many, but only accounting for surprisingly small bites of the national pie. Consensus analyses that not tease out the profound plutonomy on spending power, debt loads, savings rates (and hence current account deficits), oil price impacts etc., i.e., focus on the "average" consumer flawed from the start… Since consumption accounts for 65% of the world economy, and consumer staples and discretionary sectors for the MSCIAC World Index, understanding how the plutonomy impacts consumer is key for equity market participants."

    Kapur & Co. assert that Plutonomy is not going to go away but will get stronger and stronger, "its membership swelling from globalized enclaves in the emerging world, we think a "plutonomy basket" of stocks should continue to do well These toys for the wealthy have pricing power, and staying power."

    The share of the wealthy in the national income has been increasing. The top 1% of households in America, i.e., about one million households accounted for around 20% of overall U.S. income in 2000, slightly lower than the share of income of the bottom 60% of households put together. In other words, about one million households on the top and the bottom 60% households had almost equal share in the national pie. The top one per cent of households accounted for 40 per cent of financial net worth, more than the bottom 95 per cent of households put together.

    Kapur & Co. assert: "We posit that the drivers of plutonomy in the U.S. (the UK and Canada) are likely to strengthen, entrenching and buttressing plutonomy where it exists. The six drivers of the current plutonomy: (1) an ongoing technology/biotechnology revolution, (2) capitalist friendly governments and tax regimes, (3) globalization that re-arranges global supply chains with mobile well-capitalized elites and immigrants, (4) greater financial complexity and innovation, (5) the rule of law, and (6) patent protection are well ensconced in the U.S., the UK and Canada. They are also gaining strength in the emerging world." Further, "Eastern Europe is embracing many of these attributes, as are China, India, and Russia."

    When the top, say one per cent of households in a country see their share of income rise sharply, a Plutonomy emerges. This is witnessed often in times of frenetic technology/financial innovation driven wealth waves, accompanied by asset booms, equity and/or property. Feeling wealthier, the rich decide to consume a part of their capital gains right away. In other words, they save less from their income, the well-known wealth effect.

    They claim that the rich have become the dominant drivers of demand in many economies. They have started dominating income, wealth and spending. According to a recent article by George Ip "Income Inequality Gap Widens" (The Wall Street Journal, October 12, 2007): the richest Americans have been cornering greater and greater share of the national income. The wealthiest one per cent of Americans earned 21.2 per cent of national income in 2005 while they earned 19 per cent in 2004 and 20.8 per cent in 2000. On the other hand the bottom 50 per cent earned 12.8 per cent of national income that was less than 13.4 per cent in 2004 and 13 per cent in 2000.

    Since the wealthy appropriate most of the national income, the pattern of production is fashioned to meet their demand. It is estimated that America's richest half-per cent consume, on an average, goods and services worth $650 billion a year. In a Plutonomy like America, "the wealthy account for a greater share of national wealth, spending, profits and economic growth … the top 20 per cent of income earners account for as much as 70 per cent of consumption in the United States. Like it or not… spending by the rich was propping up the economy, even as the middle and lower classes were struggling." Further, "In this new plutonomy, with "rich" consumers and "everyone else," companies that serve the rich are prospering. From department stores to hotels to automakers to homebuilders, businesses in every industry was adapting to an increasingly hour-glass-shaped economy, selling to the status-seeking rich, and the penny-pinching middle and lower middle classes."

    The Plutonomy thesis presented by Ajay Kapur & Co. implies that there will be no "realization crisis" nor will there be any need for the Keynesian prescription of an active role of the state in augmenting the volume of effective demand. In other words, no public works and welfare activities are to be undertaken wherever Plutonomy is in ascendancy. "New Deal" of Roosevelt has become irrelevant. The same is the fate of William H. Beveridge's recommendations for creating a welfare state. Mahatma Gandhi, Nehru, and Indira Gandhi (with her slogan of 'Garibi Hatao') are to become irrelevant. Present day slogans like 'Congress ka Hath Aam Adami ke Sath' and 'the inclusive growth' are nothing but hollow ones.

    Karl Marx was the first to point out that capitalism was bound to face "realization crisis", i.e., capitalists might not realize the value inherent in commodities because they might find the total volume of demand falling short of the volume of supply. Thus capitalists would not be able to sell the entire volume of output. This could be due to anarchy of production and productivity increasing much faster than the wages.

    Karl Marx's claim was outright dismissed by the ruling orthodoxy because till 1929 it continued to stick to the dictum "supply creates its own demand," based on the law of markets put forth by the French economist Jean-Baptiste Say (1767-1832) in a book published in France in 1803 (translated into English as "A Treatise on Political Economy, or the production, distribution and consumption of wealth," and published from Philadelphia in 1855).

    Say held that there could be no demand without supply. The power to purchase could get augmented only by more and more production. Hence there could be no problem of unsold commodities. If everything was normal and there was no interference by the government, trade unions and other quarters in the functioning of market, it would clear. In other words, economy would be self-regulating, provided all prices, including wages were flexible enough. A free market economy was always supposed to maintain full employment. Hence there would be no glut. This approach collapsed in 1929 when the Great Depression set in. This was the most severe and prolonged General Crisis in the history of capitalism.

    Keynes tore this orthodoxy to pieces. Contrary to the assertion of Say's followers there was mass involuntary unemployment because the realization crisis had forced the factories to down their shutters and lay off the workers. This deepened the crisis further. Keynes demonstrated that Say was wrong when he believed that there was only transaction demand for money. In fact, there were precautionary and speculative demands for money. Because of this people might not spend all their earnings on buying goods and services. The greater this leakage, the greater was the impending fear of the phenomenon of unsold commodities. He analyzed the factors behind these two motives.

    Keynes suggested an active role for the state in order to augment and maintain the volume of demand to enable the market to clear and ward off the danger of realization crisis. From this arose the strategy of welfare state. In the course of time, state assumed the responsibility of creating employment opportunities and poverty reduction.

    This thinking remained prominent, in spite of onslaughts by Mises, Hayek and the Chicago school, led by Milton Friedman, but the process of its burial began with the rise of Thatcher-Reagan line of thinking, the collapse of the Soviet Union and the Washington consensus-based globalization, thrust indiscriminately on the entire world. Now, it appears, the danger of realization crisis emanating from a general crisis of capitalism is almost forgotten. Extolling the virtues of consumerism and 'shop till you fall dead' appear to be the instrument for raising the volume of effective demand. There is, however, a catch, more so in developing countries, where the seeds of plutonomy will take a long time to germinate. The overwhelming mass of people lack employment opportunities and income to survive, but they have the power to unseat the government, notwithstanding all the propaganda about glowing future. Didn't Keynes say, in the long run we all will be dead, so what is relevant is the present and immediate future?


    [Oct 11, 2007] Plutonomics 101 - Pittsburgh Tribune-Review By George F. Will

    October 11, 2007 |

    Enough, already, with compassion for society's middle and lower orders. There currently is a sympathy deficit regarding the very rich. Or so the rich might argue because they bear the heavy burden of spending enough to keep today's plutonomy humming.

    Furthermore, they are getting diminishing psychological returns on their spending now that luxury brands are becoming democratized. When there are 379 Louis Vuitton and 227 Gucci stores, who cares?

    Citigroup's Ajay Kapur applies the term "plutonomy" to, primarily, the United States, although Britain, Canada and Australia also qualify. He notes that America's richest 1 percent of households own more than half the nation's stocks and control more wealth ($16 trillion) than the bottom 90 percent. When the richest 20 percent account for almost 60 percent of consumption, you see why rising oil prices have had so little effect on consumption.

    Kapur's theory is that "wealth waves" develop in epochs characterized by, among other things, disruptive technology-driven productivity gains and creative financial innovations that "involve great complexity exploited best by the rich and educated of the time." For the canny, daring and inventive, these are the best of times -- and vast rewards to such people might serve the rapid propulsion of society to greater wealth.

    But it is increasingly expensive to be rich. The Forbes CLEW index (the Cost of Living Extremely Well) -- yes, there is such a thing -- has been rising much faster than the banal CPI (consumer price index). At the end of 2006, there were 9.5 million millionaires worldwide, which helps to explain the boom in the "bling indexes" -- stocks such as Christian Dior and Richemont (Cartier and Chloe, among other brands), which are up 247 percent and 337 percent respectively since 2002, according to Fortune magazine. Citicorp's "plutonomy basket" of stocks (Sotheby's, Bulgari, Hermes, etc.) has generated an annualized return of 17.8 percent since 1985.

    This is the outer symptom of a fascinating psychological phenomenon: Envy increases while -- and perhaps even faster than -- wealth does. When affluence in the material economy guarantees that a large majority can take for granted things that a few generations ago were luxuries for a small minority (a nice home, nice vacations, a second home, college education, comfortable retirement), the "positional economy" becomes more important.

    Positional goods and services are inherently minority enjoyments. These are enjoyments -- "elite" education, "exclusive" vacations or properties -- available only to persons with sufficient wealth to pursue the satisfaction of "positional competition." Time was, certain clothes, luggage, wristwatches, handbags, automobiles, etc., sufficed. But with so much money sloshing around the world, too many people can purchase them. Too many, in the sense that the value of acquiring a "positional good" is linked to the fact that all but a few people cannot acquire it.

    That used to be guaranteed because supplies of many positional goods were inelastic -- they were made by a small class of European craftsmen. But when they are mass-produced in developing nations, they cannot long remain such goods. When 40 percent of all Japanese -- and, Fortune reports, 94.3 percent of Japanese women in their 20s -- own a Louis Vuitton item, its positional value vanishes.

    James Twitchell, University of Florida professor of English and advertising, writing in the Wilson Quarterly, says this "lux populi" is "the Twinkiefication of deluxe." Now that Ralph Lauren is selling house paint, can Polo radial tires be far behind? When a yacht manufacturer advertises a $20 million craft -- in a newspaper, for Pete's sake; the Financial Times, but still -- cachet is a casualty.

    As Adam Smith wrote in "The Wealth of Nations," for most rich people "the chief enjoyment of riches consists in the parade of riches, which in their eye is never so complete as when they appear to possess those decisive marks of opulence which nobody can possess but themselves." Hennessy understands the logic of trophy assets: It is selling a limited batch of 100 bottles of cognac for $200,000 a bottle.

    There is some good news lurking amid the vulgarity. Americans' saving habits are better than they seem because the very rich, consuming more than their current earnings, have a negative savings rate.

    Furthermore, because the merely affluent are diminishing the ability of the very rich to derive pleasure from positional goods, philanthropy might become the final form of positional competition. Perhaps that is why so many colleges and universities (more than 20, according to Twitchell) are currently conducting multi billion-dollar pledge campaigns. When rising consumption of luxuries produces declining enjoyment of vast wealth, giving it away might be the best revenge.

    George F. Will is a columnist for The Washington Post and Newsweek. He can be reached at

    The Wealth Report - Plutonomics

    It's well known that the rich have an outsized influence on the economy.

    The nation's top 1% of households own more than half the nation's stocks, according to the Federal Reserve. They also control more than $16 trillion in wealth - more than the bottom 90%.

    Yet a new body of research from Citigroup suggests that the rich have other, more-surprising impacts on the economy.

    Ajay Kapur, global strategist at Citigroup, and his research team came up with the term "Plutonomy" in 2005 to describe a country that is defined by massive income and wealth inequality. According to their definition, the U.S. is a Plutonomy, along with the U.K., Canada and Australia.

    In a series of research notes over the past year, Kapur and his team explained that Plutonomies have three basic characteristics.

    1. They are all created by "disruptive technology-driven productivity gains, creative financial innovation, capitalist friendly cooperative governments, immigrants…the rule of law and patenting inventions. Often these wealth waves involve great complexity exploited best by the rich and educated of the time."
    2. There is no "average" consumer in Plutonomies. There is only the rich "and everyone else." The rich account for a disproportionate chunk of the economy, while the non-rich account for "surprisingly small bites of the national pie." Kapur estimates that in 2005, the richest 20% may have been responsible for 60% of total spending.
    3. Plutonomies are likely to grow in the future, fed by capitalist-friendly governments, more technology-driven productivity and globalization.

    Kapur says that once we understand the Plutonomy, we can solve some of the recent mysteries of the American economy. For instance, some economists have been puzzled (especially last year) about why wild swings in oil prices have had only muted effects on consumer spending.

    Kapur's explanation: the Plutonomy. Since the rich don't care about higher oil prices, and they dominate spending, higher oil prices don't matter as much to total consumer spending.

    The Plutonomy also could explain larger "imbalances" such as the national debt level. The rich are so comfortably rich, Kapur explains, that they have started spending higher shares of their incomes on luxuries. They borrow much larger amounts than the "average consumer," so they have an exaggerated impact on the nation's debt levels and savings rates. Yet because the rich still have plenty of wealth and healthy balance sheets, their borrowing shouldn't be a cause for concern.

    In other words, much of the nation's lower savings rate is due to borrowing by the rich. So we should worry less about the "over-stretched" average consumer.

    Finally, the Plutonomy helps explain why companies that serve the rich are posting some of the strongest growth and profits these days.

    "The Plutonomy is here, is going to get stronger, its membership swelling" he wrote in one research note. "Toys for the wealthy have pricing power, and staying power."

    To prove his point, he created a "Plutonomy Basket" of stocks, filled with companies that sell to the rich. The auction house Sotheby's is on the list, along with fashion houses Bulgari, Burberry and Hermes, hotelier Four Seasons, private-banker Julius Baer and jeweler Tiffany's. Kapur says the basket has risen an average of 17% a year over the past year, outperforming the MSCI World Index.

    Of course, Kapur says there are risks to the Plutonomy, including war, inflation, financial crises, the end of the technological revolution and populist political pressure. Yet he maintains that the "the rich are likely to keep getting even richer, and enjoy an even greater share of the wealth pie over the coming years."

    All of which means that, like it or not, inequality isn't going away and may become even more pronounced in the coming years. The best way for companies and businesspeople to survive in Plutonomies, Kapur implies, is to disregard the "mass" consumer and focus on the increasingly rich market of the rich.

    A tough message - but one worth considering.

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    For the super-rich it's all give and take - at record levels

    The Guardian
    The wealth of the world's super-rich soared last year at the fastest rate for seven years. The rise in riches was accompanied by a surge in charitable giving to $285bn - believed to be a record.

    The downside for the super-rich was that the cost of their favourite luxury products and activities rose at nearly twice the average rate for goods and services.

    The 11th annual study of 71 countries by investment bank Merrill Lynch and consultancy firm, Capgemini found that buoyant economic growth across the world pushed the riches of "high net worth individuals" (HNWI) up by a hefty 11.4% last year. The dramatic increase took the total prosperity of the world to $37.2 trillion - equivalent to 15 times the annual output of the UK economy.

    High-net worth individuals are those with $1m (£500,000) to invest in financial assets excluding first homes. Ultra high-net worth individuals have $30m at their disposal.

    Britain had the fourth biggest number of the world's wealthiest, with a total of 484,580 high-net worth individuals, up 8.1% from 2005. Only the US, Japan and Germany have more. Britain is home to 16.7% of Europe's super-rich.

    Part of the rise in world wealth last year came from booming stock markets. The Dow Jones world index, for example, increased by a solid 16.4%.

    The boost in cash held by the world's millionaires and billionaires gave way to a surge in philanthropy, the report said. Rich individuals donated 7% of their wealth to charity, while the ultra-rich donated more than 10% to these causes. This charitable giving amounted to more than $285bn globally. Warren Buffett, the world's second-richest man, added to the trend last year when he donated 85% of the $45bn earned from his lifetime of investments to a foundation established by Microsoft's Bill Gates and his wife Melinda.

    "Philanthropy is central to what wealth managers are having to do; it cannot be ignored," said Nick Tucker, a Merrill Lynch executive director and co-author of the report. "New wealth especially are keen on this."

    Environmental and socially responsible investing were no longer niche categories. Nearly half of all British investment firms invest more than 10% of the assets under their management in socially responsible projects, a rise of 20% from 2004.

    The report predicted that global wealth was expected to grow by 6.8% each year until 2011, pushing the total amount to $51.6 trillion, though Mr Tucker warned that a slowing world economy may put a brake on the soaring expansion of wealth over the coming years.

    "With many central banks tightening monetary policy, the period of high liquidity that has stimulated recent growth may soon come to an end. The growth rates of Asia and Latin America are expected to ease back as global demand slows. The dual risks of rising energy prices and geopolitical conflicts are a continued threat, adding a level of uncertainty to our current forecasts."

    Britain in particular was facing slowing growth, and therefore a lower generation of wealth, as a result of higher inflation and low household savings rates this year.

    There were 9.5 million HNWIs last year, according to the report - a rise of 8.3% from 2005. Europe saw its wealth increase at the sharpest rate since 2000, with a rise of 7.8% to $10 trillion. The performance of financial markets in eastern Europe in particular was a key driver in this, Mr Tucker said. Ultra-HNWIs also rapidly increased by 11.3% to 94,970 last year.

    The largest share of the growth in the world's higher net worth population came from Singapore and India, where numbers rose by 21.2% and 20.5% on the year respectively. This continued the rise of a new elite of super-rich individuals in developing nations as their economies expanded, in the case of India and China at rates more than triple that of the UK.

    Many of these emerging economies, which included Russia, were gaining strength from domestic private consumption, competitive services and manufacturing sectors.

    Wealth generated in Latin America, the Middle East and Russia was buoyed up by high commodity and oil prices.

    "The globalisation of wealth creation has accelerated," said Chris Gant, head of wealth management at Capgemini Financial Services. "If 2005 was characterised by a flow of investment to international funds from HNWIs, 2006 ushered in a new era whereby emerging economies leaped ahead with direct foreign investment, strong domestic demand and hefty stock market gains."

    The report found that as the rich got richer, the demand for luxury products increased, making them more expensive. The Cost of Living Extremely Well Index (CLEWI) measured the cost of a basket of 42 luxury goods and services, including designer handbags, tuition at Harvard University and filet mignon.

    Last year, this index rose nearly twice as fast as the cost of everyday consumer products. The CLEWI rose at 7% while the consumer price index increased by 4%.

    The world's millionaires nevertheless devoted about a quarter of their "investments of passion" to yachts and private jets, dubbed "mobile mansions," and a fifth to art.

    [Mar 19, 2007]

    The holiday season was very joyous on Wall Street. CEOs and lots of others took home some of the biggest checks ever.

    I like a $50 million bonus as much as the next guy (although the most I can recall getting was $1,000), but those huge paydays beg a larger social and economic question: Does income inequality matter?

    Mind the Gap

    I'm not asking if we should care about the well-being of our poorest citizens. We should. This is a more subtle question: Should we care about the size of the gap between the rich and poor?

    If we succeed in raising the incomes of the poor, does it matter if incomes at the top are rising even faster, making us a more unequal society overall?

    By coincidence, I was in Brazil in December while those giant Wall Street bonuses were being handed out. Brazil has one of the largest gaps between rich and poor on the planet. Having experienced that gap firsthand -- from the slums run by drug traffickers at one end to the lovely apartments with bulletproof doors at the other -- I'm convinced that income inequality does matter.

    If the gap between rich and poor gets too large, and if those at the bottom feel they have no meaningful route to the riches at the top, then the fabric of society will fray, or even come unraveled entirely.

    Violence Literally Doesn't Pay

    Life gets pretty scary -- no matter how much money you've got -- when a segment of society decides that they're no longer going to play by the rules.

    Shortly before I arrived in Brazil, a British tour bus was hijacked and robbed in broad daylight on the way from Rio's international airport to a ritzy beach area. While I was there, two Supreme Court justices were carjacked on the same road.

    Overall, the murder rate in Brazil is five times that of New York City. As in the United States, much of that violence is poor-on-poor, although the toll redounds everywhere. The New York Times reported recently on a World Bank study concluding that if Brazil had the much lower homicide rate of Costa Rica, Brazil's GDP would have been three to eight percent higher in the 1990s.

    As one economist explained in the article, "You have money spent on guarding stuff rather than making stuff." And when international investors look around the globe, they choose safer places.

    The Gini Out of the Bottle

    Is this violence a direct result of income inequality? Almost certainly not. Brazil has a history of slavery and colonization that was far more brutal than the U.S. It would require a team of sociologists, historians, economists, and criminologists to explain the roots of violence in Brazil. Based on my knowledge of academics, I don't think they would come to a conclusion anyway.

    Still, one can't spend time in Brazil without wondering about income inequality at home. Let's take a look at some numbers.

    The most convenient statistic for measuring income inequality is called a Gini coefficient, which measures a country's distribution of income from 0 (absolute equality, with each person sharing the same amount of wealth) to 1 (absolute inequality, with one person controlling all of the nation's wealth).

    Here's what that statistic looks like for a handful of countries, including contemporary and historic figures for the U.S.:

    A Reason to Get Up in the Morning

    So what? Obviously income inequality is just one statistic; it doesn't reflect the size of the pie, only how it's divided. The Soviet Union was a very equal place -- equally poor.

    In fact, there are some really good things about income inequality, namely that it motivates risk, hard work, and innovation. I'm sure Wall Street bankers are motivated by a love of their work -- but a $50 million bonus can also help you get out of bed in the morning.

    As a matter of fact, high salaries motivate not only the people who get them, but also the people who would like to get them in the future -- a phenomenon that economists refer to as a "tournament effect."
    Thus, a $50 million bonus for a Wall Street CEO also inspires that ambitious guy in the mailroom to get out of bed if he thinks he's got a shot at being CEO someday. Even my undergraduate economics students work harder because they need good grades in order to get coveted investment banking jobs.

    A Bigger Pie, or a Bigger Slice?

    What's the problem, then? I think there are at least two reasons to be cognizant of income inequality in the U.S.:

    1. Is there still really a path from rags to riches? I've spent enough time in inner-city schools to wonder if we're really providing an opportunity for the motivated and gifted to make their way from the projects to Wall Street.

      Yes, it happens -- you can watch Will Smith do it at your local multiplex in The Pursuit of Happyness, which is inspired by a true story. But how often does it not happen?

      I'm convinced that part of what's going on in Brazil is that the socioeconomic ladder is broken. There's no real path from favela to bulletproof apartment, and some people with guns have decided that they don't want to play by the rules made by the people in those apartments.

      Income inequality doesn't motivate anything good when there's no hope of sharing in the pot of gold.

    2. There's a very interesting strain of economic research showing that our sense of well-being is determined more by our relative wealth than by our absolute wealth.
      In other words, we care less about how much money we have than we do about how much money we have relative to everyone else. In a fascinating survey, Cornell economist Robert Frank found that a majority of Americans would prefer to earn $100,000 while everyone else earns $85,000, rather than earning $110,000 while everyone else earns $200,000.

      Think about it: People would prefer to have less stuff, as long as they have more stuff than the neighbors.

      The point -- and this is still a nascent field -- is that a nation may be collectively better off (using some abstract measure of well-being) with a smaller, more evenly divided pie than with a larger pie that's sliced less equitably. Reasonable people can and should argue about that.

      What's clear, however, is that one key difference between poverty in 1900 and poverty in 2007 is that even the poorest households -- in Brazil or the U.S. or anywhere else -- can turn on the television and see how the other half lives. It's one thing to be poor; it's another to be continually reminded exactly how poor you are.

      At a minimum, we should question whether a bigger pie is always better.

    Name Your Poison

    There's no right answer as to how society ought to look. That's a matter of personal philosophy. Indeed, I still find a thought experiment proposed by philosopher John Rawls as relevant as anything that economics can offer.

    Rawls argued that decisions about economic justice should be made behind a "veil of ignorance." How would you want the world to look if you were going to be born tomorrow but didn't know the economic station into which you would be born?

    If you were going to be born somewhere in America tomorrow -- in the projects of Chicago or perhaps into one of those families that brought home $50 million this bonus season -- what would you want the economic landscape to look like today?

    Would you want a distribution of income that looked more like Sweden's, or Brazil's? It's worth thinking about.

    Meet Senator Millionaire Weekend By Jessica Holzer

    Yahoo! Finance

    Despite having a hardscrabble farmer and an avowed socialist in their ranks, the incoming class of senators does little to shake the Senate's image as a millionaires' club.

    Bob Corker, senator-elect from Tennessee, boasts an estimated $64 million to $236 million fortune, according to the financial disclosure he filed to the Senate. Claire McCaskill, the senator-to-be from Missouri, has a portfolio worth roughly $13 million to $29 million.

    And Sheldon Whitehouse, who ousted the fifth-richest member of the Senate, Lincoln Chaffee of Rhode Island, is hardly hurting for cash himself: He has $4 million to $14 million parked in various trusts and funds.

    All told, at least half of the ten men and women joining the Senate next year are millionaires, with Corker and McCaskill shoo-ins to number among the ten richest senators. That rarefied club includes Sen. John Kerry, D-Mass., who Roll Call newspaper ranks as the richest senator, with an estimated net worth of $750 million. Sen. Herb Kohl, D-Wisc., comes in second, with an estimated fortune of $243.15 million.

    The wealth of the incoming class will hardly raise eyebrows in the Senate, where about half of the current 100 members are also millionaires and the average net worth is $8.9 million, according to an analysis by the Center for Responsive Politics in Washington. By contrast, less than 1% of the U.S. population has a net worth of $1 million or more.

    In 2006, senators were paid an annual salary of $165,200.

    Though the affluence of today's Senate might seem staggering, it is hardly out of the ordinary for Congress' elite upper chamber.

    "Overall, senators have historically been wealthier," says Donald Ritchie, a Senate historian.

    The peak of Senate wealth probably came in the late 19th and early 20th centuries, when wealthy businessmen like George Hearst, the father of newspaperman William Randolph Hearst, and Simon Guggenheim were members.

    Though millionaires are far more common today thanks to inflation, lots of members in the 19th century Senate would have been multimillionaires in today's dollars, insists Ritchie. Back in 1900, $100,000 was roughly equivalent to $1 million today.

    So glaring was the affluence of the turn-of-the century Senate that it prompted a series of muckraking articles in 1906 called the "The Treason of the Senate." That led to the 17th Amendment, which instituted the direct election of senators in 1913. Previously, they were chosen by state legislatures.

    It is difficult to pinpoint a senator's precise worth because they are required to disclose only the ranges of dollar values into which their assets fall, rather than an exact figure. Therefore, it's unclear for example whether Amy Klobuchar, Minnesota's senator-elect, is a millionaire: She reported assets of $325,000 and $1.4 million.

    Economist's View

    There seems to be a presumption that more equality equates with lower growth. For example, while discussing policies Democrats might pursue to reduce inequality, David Wessel asks today in the Wall Street Journal:

    What can Democrats do to resist inequality in a way that doesn't choke off economic growth? Can government slice the economic apple more evenly without shrinking it?

    And later adds:

    Republicans as prominent as Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke recently have warned ... of risks posed by widening inequality. But many conservatives fear taxing the rich in response would reduce incentives for innovation, entrepreneurship and education -- and thus reduce economic growth to the detriment of all. Their counsel: Try to lift incomes of the poor and middle class, and don't worry if the rich do even better.

    That is, growth must not be reduced even if it means we must accept widening inequality. However, it hasn't been established that more equality is harmful to economic growth, so I don't accept the presumption that lower economic growth is a necessary consequence of higher equality (and even if it were the case that efficiency and growth are reduced, there may be equity considerations that justify promoting more equality, i.e. the standard efficiency-equity tradeoff and related arguments).

    Richard Freeman and Alexander Gelber recently looked into the question of how effort varies with inequality:

    Optimal Inequality/Optimal Incentives: Evidence from a Tournament, by Richard B. Freeman and Alexander M. Gelber, NBER WP 12588, October 2006 [open link]: Abstract This paper examines performance in a tournament setting with different levels of inequality in rewards... We find that that total tournament output depends on inequality according to an inverse U shaped function: We reward subjects based on the number of mazes they can solve, and the number of solved mazes is lowest when payments are independent of the participants' performance; rises to a maximum at a medium level of inequality; then falls at the highest level of inequality. ...

    Thus, it is not at all clear that moving from high to moderate levels of inequality reduces economic incentives and economic growth.

    There's Nothing Normal About A Middle Class by Thom Hartmann

    Oct 26 2006 | The Smirking Chimp

    by Thom Hartmann | Oct 26 2006 - 1:16pm | permalink
    article tools: email | print | read more Thom Hartmann

    "That liberty [is pure] which is to go to all, and not to the few or the rich alone."
    --Thomas Jefferson to Horatio Gates, 1798.

    There is nothing "normal" about a nation having a middle class, even though it is vital to the survival of democracy.

    As twenty-three years of conservative economic policies have now shown millions of un- and underemployed Americans, what's "normal" in a "free and unfettered" economy is the rapid evolution of a small but fabulously wealthy ownership class, and a large but poor working class. In the entire history of civilization, outside of a small mercantilist class and the very few skilled tradesmen who'd managed to organize in guilds (the earliest unions) like the ancient Masons, the middle class was an aberration.

    A middle class can only come about in one of two ways.

    The first is by a sudden change in the relationship between population and resources. After the Black Death wiped out more than a third of the population in 14th century Europe, the increased demand for labor drove up the price of labor to the point when a middle class emerged in some places. Many historians identify this as one of the factors that brought about the Renaissance.

    Another example came four hundred years later, when a second European middle class (and the first European middle class in North America) emerged because of the "discovery" of "resources" (e.g. "we can steal gold, wood, furs, and land from Native Americans) in The Americas. Some historians suggest that increasing the overall wealth of Europe (and Europeans living in North America) while the overall population was relatively stable produced not just a second middle class, but brought about The Enlightenment and the American Revolution as well.

    But as the population of North America increased in the years leading up to the Civil War, the middle class began to vanish. From the 1830s until the 1930s, outside of family farms, the American middle class was again small and limited to shop owners and specialists.

    Thus, when the Republican Great Depression hit America, Franklin Roosevelt was faced with a dilemma: how to create a middle class without killing off a third of the population or discovering gold in a distant land?

    What he came up with - largely by pragmatic, trial-and-error work - was a synthesis of controls on previously-uncontrolled capitalism which, quite literally, saved American capitalism from itself. The Wagner Act of 1935, mandating unions when 51 percent of workers voted for them. The Social Security Act. Minimum wage and maximum hour laws. Child labor laws. The government as employer of last resort through the WPA, CCC, etc.

    Republicans are fond of arguing that World War II ended the Republican Great Depression, not FDR's policies, but in that argument they ignore a central economic reality: When money is invested in infrastructure like roads, bridges, dams, hospitals, and schools (as FDR did), that infrastructure produces a return on that investment for generations to come. When the same number of dollars are put into bombs and then dropped on Dresden or Tokyo, those dollars vanish along with the bombs, never to be recovered.

    While gearing up for the war did stimulate and alter the American economy, it's much easier to argue that WWII actually slowed our recovery from the Republican Great Depression, because it forced FDR to shift so many resources from infrastructure and into disposable instruments of warfare.

    When Ronald Reagan came into office in 1981, he set about to undo FDR's New Deal. For 26 years now, economic conservatives have run this country, and the result has been the steady deterioration of the middle class, a rise in the wealthy elite, and a massive transfer from infrastructure investment to war expense. The result could easily be another Republican Great Depression (or, more likely, given the massive debts run up by Reagan and both Bush's, a Republican Weimar-style Hyperinflation).

    The idea that turning a nation's economy over to "free market" corporatists is idiotic isn't new. Thomas Jefferson laid it out in an 1816 letter to Samuel Kerchival.

    "Those seeking profits," Jefferson wrote, "were they given total freedom, would not be the ones to trust to keep government pure and our rights secure. Indeed, it has always been those seeking wealth who were the source of corruption in government. No other depositories of power have ever yet been found, which did not end in converting to their own profit the earnings of those committed to their charge."

    He added: "I am not among those who fear the people. They, and not the rich, are our dependence for continued freedom. ... We must make our election between economy and liberty, or profusion and servitude. ... [Otherwise], as the people of England are, our people, like them, must come to labor sixteen hours in the twenty-four, ... and the sixteenth being insufficient to afford us bread, we must live, as they now do, on oatmeal and potatoes; have no time to think, no means of calling the mismanagers to account; but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow sufferers."

    A totally "free" market where corporations reign supreme, just like the oppressive governments of old, Jefferson said could transform America "...until the bulk of the society is reduced to be mere automatons of misery, to have no sensibilities left but for sinning and suffering. Then begins, indeed, the bellum omnium in omnia, which some philosophers observing to be so general in this world, have mistaken it for the natural, instead of the abusive state of man."

    To stimulate our economy after the collapse of the Republican Great Depression, FDR also instituted progressive taxation, which gave workers more to spend, thus stimulating demand for more goods and services.

    Progressive taxation, too, has a long history: As Jefferson said in a 1785 letter to James Madison, "Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise."

    As Jefferson realized, and FDR proved, with no government "interference" by setting the rules of the game of business and fair taxation, there will be no middle class.

    And as history around the world proves, when the middle class vanishes, democracy often goes with it.

    Bushonomics The Awful Truth Laid Bare The Agonist New York Times

    Real Wages Fail to Match a Rise in Productivity

    With the economy beginning to slow, the current expansion has a chance to become the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers.

    That situation is adding to fears among Republicans that the economy will hurt vulnerable incumbents in this year's midterm elections even though overall growth has been healthy for much of the last five years.

    The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation. The drop has been especially notable, economists say, because productivity - the amount that an average worker produces in an hour and the basic wellspring of a nation's living standards - has risen steadily over the same period.

    As a result, wages and salaries now make up the lowest share of the nation's gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960's. UBS, the investment bank, recently described the current period as "the golden era of profitability."

    Until the last year, stagnating wages were somewhat offset by the rising value of benefits, especially health insurance, which caused overall compensation for most Americans to continue increasing. Since last summer, however, the value of workers' benefits has also failed to keep pace with inflation, according to government data.

    At the very top of the income spectrum, many workers have continued to receive raises that outpace inflation, and the gains have been large enough to keep average income and consumer spending rising.

    In a speech on Friday, Ben S. Bernanke, the Federal Reserve chairman, did not specifically discuss wages, but he warned that the unequal distribution of the economy's spoils could derail the trade liberalization of recent decades. Because recent economic changes "threaten the livelihoods of some workers and the profits of some firms," Mr. Bernanke said, policy makers must try "to ensure that the benefits of global economic integration are sufficiently widely shared."

    Political analysts are divided over how much the wage trends will help Democrats this fall in their effort to take control of the House and, in a bigger stretch, the Senate. Some see parallels to watershed political years like 1980, 1992 and 1994, when wage growth fell behind inflation, party alignments shifted and dozens of incumbents were thrown out of office.

    "It's a dangerous time for any party to have control of the federal government - the presidency, the Senate and the House," said Charles Cook, who publishes a nonpartisan political newsletter. "It all feeds into 'it's a time for a change' sentiment. It's a highly combustible mixture."

    But others say that war in Iraq and terrorism, not the economy, will dominate the campaign and that Democrats have yet to offer an economic vision that appeals to voters.

    "National economic policies are more clearly in focus in presidential campaigns," said Richard T. Curtin, director of the University of Michigan's consumer surveys. "When you're electing your local House members, you don't debate that on those issues as much."

    Moreover, polls show that Americans are less dissatisfied with the economy than they were in the early 1980's or early 90's. Rising house and stock values have lifted the net worth of many families over the last few years, and interest rates remain fairly low.

    But polls show that Americans disapprove of President Bush's handling of the economy by wide margins and that anxiety about the future is growing. Earlier this month, the University of Michigan reported that consumer confidence had fallen sharply in recent months, with people's expectations for the future now as downbeat as they were in 1992 and 1993, when the job market had not yet recovered from a recession.

    "Some people who aren't partisans say, 'Yes, the economy's pretty good, so why are people so agitated and anxious?' " said Frank Luntz, a Republican campaign consultant. "The answer is they don't feel it in their weekly paychecks."

    But Mr. Luntz predicted that the economic mood would not do significant damage to Republicans this fall because voters blamed corporate America, not the government, for their problems.

    Economists offer various reasons for the stagnation of wages. Although the economy continues to add jobs, global trade, immigration, layoffs and technology - as well as the insecurity caused by them - appear to have eroded workers' bargaining power.

    Trade unions are much weaker than they once were, while the buying power of the minimum wage is at a 50-year low. And health care is far more expensive than it was a decade ago, causing companies to spend more on benefits at the expense of wages.

    Together, these forces have caused a growing share of the economy to go to companies instead of workers' paychecks. In the first quarter of 2006, wages and salaries represented 45 percent of gross domestic product, down from almost 50 percent in the first quarter of 2001 and a record 53.6 percent in the first quarter of 1970, according to the Commerce Department. Each percentage point now equals about $132 billion.

    Total employee compensation - wages plus benefits - has fared a little better. Its share was briefly lower than its current level of 56.1 percent in the mid-1990's and otherwise has not been so low since 1966.

    Over the last year, the value of employee benefits has risen only 3.4 percent, while inflation has exceeded 4 percent, according to the Labor Department.

    In Europe and Japan, the profit share of economic output is also at or near record levels, noted Larry Hatheway, chief economist for UBS Investment Bank, who said that this highlighted the pressures of globalization on wages.

    In another recent report on the boom in profits, economists at Goldman Sachs wrote, "The most important contributor to higher profit margins over the past five years has been a decline in labor's share of national income." Low interest rates and the moderate cost of capital goods, like computers, have also played a role, though economists note that an economic slowdown could also hurt profits in coming months.

    For most of the last century, wages and productivity - the key measure of the economy's efficiency - have risen together, increasing rapidly through the 1950's and 60's and far more slowly in the 1970's and 80's.

    But in recent years, the productivity gains have continued while the pay increases have not kept up. Worker productivity rose 16.6 percent from 2000 to 2005, while total compensation for the median worker rose 7.2 percent, according to Labor Department statistics analyzed by the Economic Policy Institute, a liberal research group. Benefits accounted for most of the increase.

    "If I had to sum it up," said Jared Bernstein, a senior economist at the institute, "it comes down to bargaining power and the lack of ability of many in the work force to claim their fair share of growth."

    Nominal wages have accelerated in the last year, but the spike in oil costs has eaten up the gains. Now the job market appears to be weakening, after a protracted series of interest-rate increases by the Federal Reserve.

    Unless these trends reverse, the current expansion may lack even an extended period of modest wage growth like one that occurred in the mid-1980's.

    The most recent recession ended in late 2001. Hourly wages continued to rise in 2002 and peaked in early 2003, largely on the lingering strength of the 1990's boom.

    Average family income, adjusted for inflation, has continued to advance at a good clip, a fact Mr. Bush has cited when speaking about the economy. But these gains are a result mainly of increases at the top of the income spectrum that pull up the overall numbers. Even for workers at the 90th percentile of earners - making about $80,000 a year - inflation has outpaced their pay increases over the last three years, according to the Labor Department.

    "There are two economies out there," Mr. Cook, the political analyst, said. "One has been just white hot, going great guns. Those are the people who have benefited from globalization, technology, greater productivity and higher corporate earnings.

    "And then there's the working stiffs,'' he added, "who just don't feel like they're getting ahead despite the fact that they're working very hard. And there are a lot more people in that group than the other group."

    In 2004, the top 1 percent of earners - a group that includes many chief executives - received 11.2 percent of all wage income, up from 8.7 percent a decade earlier and less than 6 percent three decades ago, according to Emmanuel Saez and Thomas Piketty, economists who analyzed the tax data.

    With the midterm campaign expected to heat up after Labor Day, Democrats are saying that they will help workers by making health care more affordable and lifting the minimum wage. Democrats have criticized Republicans for passing tax cuts mainly benefiting high-income families at a time when most families are failing to keep up.

    Republicans counter that the tax cuts passed during Mr. Bush's first term helped lifted the economy out of recession. Unless the cuts are extended, a move many Democrats oppose, the economy will suffer, and so will wages, Republicans say.

    But in a sign that Republicans may be growing concerned about the public's mood, the new Treasury secretary, Henry M. Paulson Jr., adopted a somewhat different tone from Mr. Bush in his first major speech, delivered early this month.

    "Many aren't seeing significant increases in their take-home pay," Mr. Paulson said. "Their increases in wages are being eaten up by high energy prices and rising health care costs, among others."

    At the same time, he said that the Bush administration was not responsible for the situation, pointing out that inequality had been increasing for many years. "It is neither fair nor useful," Mr. Paulson said, "to blame any political party."

    Samuelson Growing Economic Inequality Threatens U.S. Values By Robert J. Samuelson

    Oct. 2, 2006 | Newsweek/
    Trickle-Up Economics?

    No one should be happy with today's growing inequality. It threatens our social compact, which relies on a shared sense of well-being.


    Oct. 2, 2006 issue - If you're in Asheville, N.C., stop by Biltmore, the vast estate that George Vanderbilt III-heir to a railroad fortune-constructed between 1889 and 1895. You can tour most of its 250 rooms, including 43 bathrooms and an indoor swimming pool. When few Americans used electricity, Biltmore had its own generators. To take the tour is to grasp one of the great advances of the 20th century: the gap between the superrich and most Americans has narrowed enormously. In Vanderbilt's time, most Americans lived in filthy slums or on modest farms. Now even the wealthiest among us live more like ordinary people than George Vanderbilt ever did.

    We like it that way. Although Americans are not hugely envious of the rich-especially if their wealth seems honestly earned-we also think that prosperity should be broad-based. Trickle-up economics, with most gains flowing to the top, seems un-American. But is that what we now have? Good question. Just last week Forbes magazine reported that the 400 richest Americans are now all billionaires. And the government's recent release of household income and poverty figures for 2005 has sharpened the debate.

    Let me try to make sense of it. Superficially, the news was not encouraging. Median household income of $46,326, though up slightly from 2004, was still below its record of $47,671 in 1999 (the median household is the one exactly in the middle). The poverty rate was essentially unchanged at 12.6 percent, well above its recent low of 11.3 percent in 2000 (the poverty rate is the share of people below the official "poverty line," about $20,000 in income for a family of four). But the annual numbers are less important in addressing the trickle-up question than long-term trends. Here are three that I think matter.

    Living standards aren't stagnating. Over any realistic period-say a decade-they've risen for almost everyone. From 1992 to 2002, ownership of microwave ovens by the poorest tenth of Americans went from 39 percent to 77 percent, reports one Census Bureau study. VCRs went from 22 percent to 56 percent, computers from 4 percent to 21 percent. Households, when adjusted for their size, uniformly have higher incomes. From 1995 to 2005, the median income of four-person households rose 10.5 percent to $69,605; for three-person households, the increase was 9.6 percent to $58,917. These are real gains, though modest.

    The rich are getting an ever-bigger piece of the economic pie. In 2005, the richest 5 percent of households (average pretax income: $281,155) had 22.2 percent of total income, reports Census. In 1990, the share was 18.5 percent; in 1980, 16.5 percent. These figures exclude capital gains-profits on stocks and other assets-that have most benefited the richest 1 percent. With capital gains, their pretax income averaged about $1 million in 2003. That was about 20 times the average income of households in the middle of the economic distribution. In 1979, the ratio was 10 to 1.

    The inflow of poor Hispanic immigrants and their (often) American-born children have increased poverty. From 1995 to 2005, the rise in the number of Hispanics in poverty-by 794,000-more than accounted for the entire increase in the U.S. poverty population. Poverty among blacks, though still high, declined. Among non-Hispanic whites, it held roughly steady. Health-insurance coverage has also been affected. Since 1995, Hispanics account for about 78 percent of the increase in the uninsured.

    The bottom line: productivity gains (improvements in efficiency) are going disproportionately to those at the top. We do not really understand why. Globalization, weaker unions, increasingly skilled jobs, the frozen minimum wage and the "winner-take-all society" (CEOs, sports stars and movie celebrities getting big payouts) have all been cited as reasons. Costly employer-provided health insurance is also squeezing take-home pay in the middle.

    My sense is that intensified competition has simply made employers stingier. Jared Bernstein of the Economic Policy Institute, a liberal think tank, says that only "in supertight job markets do employers have to bid up wages and compensation to keep workers from leaving." Bernstein isn't sure that the present jobless rate (4.7 percent in August) makes it tight enough.

    What might government do? The Bush administration's enthusiasm for tax cuts for the rich could be tempered; to reduce the budget deficit, their taxes could be raised without dulling economic incentives. (For the record: I supported the first Bush tax cut and opposed his cuts on capital gains and dividends.) Equally, liberals and others who support lax immigration policies on our Southern border should understand that these policies deepen U.S. inequality.

    But many familiar proposals would be mostly symbolic or hurtful. Raising the minimum wage might directly affect only about 5 percent of workers and might destroy some jobs. Protectionism might save a few well-paid jobs but would inflict higher prices on those least able to afford them. Still, no one should be happy with today's growing economic inequality. It threatens America's social compact, which depends on a shared sense of well-being.


    Greedy 1%: How Bush Is Screwing 99% Of Americans (excerpts) by Paul Krugman

    ...Political analysts tried all sorts of explanations for popular discontent with the "Bush boom" - it's the price of gasoline; no, people are in a bad mood because of Iraq - before finally acknowledging that most Americans think it's a bad economy because for them, it is. The lion's share of the benefits from recent economic growth has gone to a small, wealthy minority, while most Americans were worse off in 2005 than they were in 2000. Some conservatives whine that people didn't complain as much about rising inequality when Bill Clinton was president. But most people were happy with the state of the economy in the late 1990's, even though the rich were getting much richer, because the middle class and the poor were also making substantial progress. Now the rich are getting richer, but most working Americans are losing ground.

    Second, notice the amount of time that inequality's apologists spend attacking a claim nobody is making: that there has been a clear long-term decline in middle-class living standards. Yes, real median family income has risen since the late 1970's (with the most convincing gains taking place during the Clinton years). But the rise was very small - small enough that other considerations, like increasing economic insecurity, make it unclear whether families are better or worse off. And that's the point: the United States as a whole has grown a lot richer over the past generation, but the typical American family hasn't. Third, notice the desperate effort to find some number, any number, to support claims that increasing inequality is just a matter of a rising payoff to education and skill. Conservative commentators tell us about wage gains for one-eyed bearded men with 2.5 years of college, or whatever - and conveniently forget to adjust for inflation. In fact, the data refute any suggestion that education is a guarantee of income gains: once you adjust for inflation, you find that the income of a typical household headed by a college graduate was lower in 2005 than in 2000.

    More broadly, right-wing commentators would like you to believe that the economy's winners are a large group, like college graduates or people with agreeable personalities. But the winners' circle is actually very small. Even households at the 95th percentile - that is, households richer than 19 out of 20 Americans - have seen their real income rise less than 1 percent a year since the late 1970's. But the income of the richest 1 percent has roughly doubled, and the income of the top 0.01 percent - people with incomes of more than $5 million in 2004 - has risen by a factor of 5. Finally, while we can have an interesting discussion about questions like the role of unions in wage inequality, or the role of lax regulation in exploding C.E.O. pay, there is no question that the policies of the current majority party - a party that has held a much-needed increase in the minimum wage hostage to large tax cuts for giant estates - have relentlessly favored the interests of a tiny, wealthy minority against everyone else.

    According to new estimates by Thomas Piketty and Emmanuel Saez, the leading experts on long-term trends in inequality, the effective federal tax rate on the richest 0.01 percent has fallen from about 60 percent in 1980 to about 34 percent today. Meanwhile, the U.S. government - unlike any other government in the advanced world - does nothing as more and more working families find themselves unable to obtain health insurance....

    The ghosts of corruption present

    One of the shabbiest shell games under way in Congress is the attempt to convince voters that lawmakers are curbing their corrupt relations with power lobbyists. The cravenness was never clearer as G.O.P. House leaders passed a placebo rules change in place of honest reform - and on the very day when one of their own, Representative Bob Ney of Ohio, was plea bargaining in the corruption investigation of his old friend Jack Abramoff, the disgraced überlobbyist and influence peddler.

    The political ghosts of Mr. Ney and Tom DeLay, the former House majority leader, should haunt this Congress and its Republican bosses for their disgraceful refusal to end the Capitol's embrace of the lobbying industry. In the first burst of the Abramoff scandal last spring, both houses made all manner of reform vows, then cynically hung two hollow bills out to die on the vine.

    Last week House leaders sanctimoniously promised an end to the "fog" and "shadows" with a rules change concocted of smoke and mirrors. The rule pretends to deal with just one part of lobbying corruption, the cramming of millions of dollars in special interest favors into must-pass budget bills.

    Disclosure of these backdoor deals and their sponsors is promised. But lobbyists who have feasted on earmarks are already mapping their way around this fig leaf, just as lawmakers hungry for lobbyists' campaign money know they have once more voted for the shameless status quo.

    Congress is offering this wink and a nod on earmarks only to cover its spinelessness on larger ethical issues. The Republican majority has already junked proposals to restrict the rise of lobbyists as campaign finance brokers for grateful lawmakers.

    A more responsible Congress would ban lobbyists as political money bundlers, as well as the proliferation of lawmakers' relatives as lobbyists and the Capitol junkets catered by lobbyists on corporate tabs.

    The ubiquitous leveraged buyout management buyout or management sellout

    LBO Business Horizons

    My objective in this article is to discuss certain elements of the leveraged buyout (LBO), sometimes referred to as taking a corporation private. In this practice, the company's management and other private investors buy out (hence "buyout") all the other shareholders, almost entirely with borrowed funds (hence "leveraged").

    I am mindful, however, of the sage journalistic advice that suggests that the writer should capture the interest of the readers very early on by establishing the essentiality of the topic, its impact, or, at the very least, sharing provocative examples that highlight its salience. In no particular order, try these:

    Related Results: bribing management in taking private


    A Quibble

    A recent special report by Fortune (1989) educates us with regard to "How Ross Johnson Blew the Buyout." F. Ross Johnson, of course, was the CEO of RJR Nabisco who put his company into play by proposing to take it private via the leveraged buyout. Among other things, it has been suggested that his bid (initially $75 per share, ultimately $109 by Kohlberg, Kravis, and Roberts [KKR]) was preposterously low. The compensation package for Johnson and a few (very few) managerial colleagues was judged by most observers to be outrageously high. Beyond that, certain of Johnson's strategies (for lack of a better word) led to a fair amount of enmity between himself and the special committee of outside directors enchartered to decide the final fate and ultimate ownership of RJR.

    There is apparently some substance to these reports. At a minimum, there is an unusual amount of consistency among many observers that the RJR leveraged buyout did illustrate some excesses that can be associated with such a play. Perhaps, but permit me a quibble.

    If we rely on these reports in their entirety, we might be led to believe that F. Ross Johnson lost. He lost his job, presumably one of great status and reward, as the CEO of a Fortune 500 company. He lost to KKR, for it is KKR who now own and operate RJR. He may have lost some reputation. The word "greed" crops up repeatedly in some descriptions of this LBO. Beyond that, his professional competence has been questioned. It has been alleged, for example, that he was totally outmaneuvered by KKR. Taken in the aggregate, a grim picture and humiliating loss.

    Maybe. Maybe not. We may want to consider one other factor before we decide whether or not Mr. Johnson "lost." It turns out that Mr. Johnson set another record of sorts with his departure from RJR--the largest golden parachute in history. A recent Business Week (1989) reports that F. Ross Johnson, former CEO of RJR, walked away from this embarrassing loss with "separation pay" of more than $53 million.

    I will be among the very first to concede that wealth, as well as winning or losing, is in the proverbial eye of the beholder. I must say, however, that I find it difficult to brand anyone a "loser" who after the fray walks away with $53.8 million. That really does sound like a safe landing. Mr. Johnson deliberately put the company in play; nearly all observers feel that he lost. Even so, it has to be reported that the consolation prize in this tournament is most impressive.

    A Bribe?

    Rand V. Araskog, Chairperson of ITT Corporation, has recently written a book, The ITT Wars: A CEO Speaks Out on Takeovers. Araskog reports that in 1983, Jay Pritzker and Philip Anschutz were interested in gaining control of ITT through a leveraged buyout. The actual financial details are of little consequence here. Suffice it to say that the "deal" would have involved several transactions. Among other things, ITT's senior management would be given a 10 percent stake in the new company. This stake would have garnered Araskog some $30 million or so. Araskog explains in this book that he perceived this $30 million windfall to be little more than a gargantuan bribe.

    Just A Family Affair

    Richard P. Simmons took a specialty steel unit of what is now Allegheny International private in 1980. To his credit, this company has done very well. Two years ago, this same company was once again taken public. Stock was sold and has also done well.

    CEO Simmons requested that the board of directors approve an investment of corporate money into a LBO fund. There is nothing manifestly wrong with that. LBO funds are designed to allow companies (like KKR) to raise money to take companies private. Obviously, one invests in such a fund in the hope that these ventures will be profitable and provide an attractive return on the investment. Mr. Simmons evidently believed that corporate funds invested in such a vehicle was a prudent use of these assets.

    So far, so good. This LBO fund has three general partners. The problem is that one of these three partners is Brian Simmons, the son of Richard P. Simmons, CEO of Allegheny Ludlum.


    That there may be some potential for ethical issues to arise in LBO transactions will come as no surprise to anyone. Certainly, I do not presume to suggest that the prior examples are representative of all LBO transactions. Indeed, I fervently hope that only a modest few would have the character of those cited. Still, since 1981 (the LBO was relatively infrequent prior to that) more than 1,550 public companies have gone private, nearly as many as are listed on the New York Stock Exchange. I will argue that there are a number of factors common to every one of these LBO transactions that are most troubling. In fact, they raise the issue of whether current management of any publicly traded company should be party to an LBO. These issues include, but are not limited to:

    An Obvious Conflict of Interest

    The CEO of a publicly traded corporation has a fiduciary responsibility to shareholders. This responsibility is rather simply described: It requires that the interests of the stockholder be considered prior to, ahead of, and superior to the self-interest of the manager at all times and in all circumstances. Clearly, that sets an omnibus and challenging standard.

    Obviously, it is in the interest of the shareholders to have the value of their common stock at as high a level as possible. This is particularly evident when the stockholder may have some immediate interest in selling the stock. Just as obviously, it is in the interests of the potential buyer of the stock to have the price set somewhat lower. Most of us would be inclined to purchase stock when we believe that the stock is undervalued, when we think we are getting a "good buy." The value of this stock is going to increase. Accordingly, we'll buy some of it at its currently undervalued price.

    More specifically for these purposes, CEOs as managers should seek to place as high a value as possible on the common stock of the corporation. CEOs, as rational individuals, who are acting in their capacity as principals in an LBO, can have no such incentive. On the contrary, it is in their obvious interests to have the common stock valued somewhat lower.

    What Is The Incentive For An LBO?

    Why would any manager be interested in being involved in a LBO? Maybe, in one of the great understatements in recent memory, they believe there may be a few dollars in it. Maybe, more benignly, they believe that the company could be run a bit more efficiently. Suppose that an officer (or group of officers) of the corporation believes that certain assets could be redeployed, divisions divested, products launched, and so forth. Is there not a mature argument that these individuals are legally, as well as ethically, bound to identify and execute these strategies for the benefit of the stockholders?

    It would seem that there are any number of dynamics that underscore such concerns. One, when is the last time that the board of directors accepted the first offer and conditions when a management group proposed a buyout? On the contrary, it is commonplace that the board finds the first offer to be insufficient (the RJR event is a classic case, among hundreds of others). In other words, the management group typically provides a low-ball offer, much the same that you might do when making an offer on a new home. The obvious difference in that you do not have a fiduciary responsibility to the seller of the home.

    It is also considered to be textbook procedure for the board of directors to immediately market the corporation to all suitors when faced with a LBO offer. The object of this is to invite "competition," to be certain that a "fair" price is put on the assets and so forth. What do you suppose this exercise is all about? Is it possible that there are some folks who are not altogether confident that the current management would act in the absolute best interests of their constituency short of these strategies?

    Moreover, it is considered de rigueur to appoint a group of outside directors (because they are purportedly independent, a questionable assumption) to review and make the final recommendation concerning the management proposal. Why do we do this? Do we do it because we can count on the LBO group to provide us with a "fair" price from the onset?

    Also, it is typical to solicit the opinion of investment banks to determine the "fair market" price of such a transaction. Once again, why is this necessary? Do we not trust the very managers who serve as fiduciaries of the shareholders? There must be some doubt in someone's mind.

    We can all agree that some notion of the "fair price" of the company should be set. What is less clear is that the management involved in the bid should set it. Moreover, it is not as though this number can be independently and easily arrived at to the satisfaction of all observers. On the contrary, in one bidding war for Stokely Van Camp, three different investment advisors provided an opinion, sometimes referred to as a fairness letter, to three prospective buyers, all at different values ranging from a low of $50 to a high of $75 per share. If it is true that this "true value" is apparently subject to some debate, many would be quite disturbed if individuals with rather substantial self-interests are serious parties to establishing the price.

    The Ultimate in Inside Information

    The most cursory examination of the leading business and financial periodicals over the past several years would suggest some near crisis regarding inside information. Fundamentally, it is a violation of federal securities law for insiders (for example, company officers, members of the board) to profit from any transaction inspired by certain knowledge not available to stockholders generally. Suppose, for example, that a CEO knew that on Tuesday he would report the lowest dividend in the company's history. When this information is public, it would probably result in at least a short-term reduction in the value of the company's common stock. This CEO could not, then, legally sell shares in his company short on Monday. In short selling, of course, you hope that the price of the stock will fall.

    The CEO has made a good bet, too good. He is almost certain that the price will fall. The problem is he knows that because he is privy to information not generally available to others. Under SEC rule 10b-5, he cannot act in this manner: It is patently illegal. If prosecuted, he would at a minimum forfeit any and all profits derived as a function of this transaction. Beyond that, he would be subject to criminal penalties as well.

    If trading on inside information for a few thousand shares (one share, for that matter) is in violation of federal securities law, then how can the LBO be conducted in anything resembling good faith? Who on the planet has more pertinent information about the strengths, weaknesses, threats, and opportunities facing an organization that its management?

    More directly, if it is illegal to profit on the basis of "inside" information with just a few shares of the company's stock, how can we profit on the basis of the ultimate stock purchase, the company in its entirety? Frankly, I find it incredible that the standing management of a company does not have access to information available neither to its stockholders nor, most certainly, to the public at large.

    The Quality of Privileged


    One of the chief arguments often used in defense of the LBO is that there is no monopoly of the right to offer to buy. It is true that management-led groups, or groups with substantive management interests, can propose an LBO. It is also argued that excesses in this area are unlikely. Suppose, for example, that the management-involved group makes an offer below a reasonable estimate of the market value for a company. It is only reasonable to expect that some other suitor would enter the bidding, provide a more responsible bid and carry the day. In fact, it has been suggested:

    Once anyone initiates an LBO, the directors should put the company up for auction. And they should make sure that all serious bidders have access to all the information needed to make an offer (Business Week December 1988, p. 30).

    It seems that there are two pertinent issues here. One concerns whether it is indeed possible for any other bidder to have the quality of information available to it that is enjoyed by the management-involved team. Once again, who could possibly have the wealth of information available to the current management team? It is hard to contemplate a scenario wherein the management team would not have a substantive edge with regard to the quality of information.

    Beyond that, however, we may face an interesting catch-22. As the prior quote indicates, it is sensible to put the company to auction (presumably to encourage some competition and a check on the reasonableness of the management offer) and provide access to all the information needed to make the offer (possibly to reduce the management information edge.) Surely, much of the information that would be "needed to make an [informed?] offer" would be proprietary. Before suitors could make an informed bid, wouldn't they need information regarding state of development of new products, pending lawsuits and settlements, illness of key executives, and so forth? After all, the current executives are privy to this information.

    It is not immediately clear that the interests of the stockholders are met by divulging this information to "outsiders" irrespective of the LBO. Would such information be considered "inside information" by SEC standards? Would the bidding companies, then, be constrained from relying on this information for purposes of profit? I think that there is an excellent argument that such companies would be so constrained. If, however, it would be illegal for such a company to profit by such information, how could we allow the current officers of the corporation to profit by the same information?

    Full Disclosure

    Management-involved groups cannot take a publicly traded company private at their own initiative. Among other things, they will need the "permission" of the shareholders. Naturally, this is accomplished through the proxy process. Benjamin Stein, a lawyer and economist, has raised a fascinating question regarding this issue. Essentially, the proxy material to a stockholder must include full disclosure of any material fact involving the action. In theory, the stockholder reads the proxy material, becomes acquainted with the major aspects of it, and votes either to approve the LBO or otherwise. The Supreme Court has ruled that there must be such full disclosure of any fact "if there is a substantial likelihood that a reasonable stockholder would consider it important in deciding how to vote."

    This leads Mr. Stein to a persuasive point:

    But insiders never disclose the crucial fact that they plan to make vastly more from the corporate assets than they pay the stockholders for them. I am a stockholder in a few companies in a small way, and I hope I am reasonable. I consider it extremely important if management plans to make $50 from something it paid me $1 for, and it would assuredly make a difference in how I voted (Stein 1985, p. 170).

    Why would CEOs and other highranking officers of prestigious firms risk their security and their reputations if the opportunity for reward was not correspondingly great? Do you think that such information should be disclosed to the stockholders to better inform their vote?

    Let's assume that by whatever means the LBO has been approved. What now? The period after the LBO raises even more troubling issues.

    Life After the LBO

    Not all LBOs are successful, as Revco and Freuhauf could attest. Even so, it has recently been recently reported that the profit margins for LBO companies were 40 percent higher than their industries' median two years after the buyout. It would seem reasonable, then, to conclude that many of these LBOs do very well. As might be expected, there has been some speculation about why this might be the case.

    Consider this. Tadd Seitz ran a profitable division of ITT. This company was divested in an LBO by ITT in 1986. Mr. Seitz continued to run the new company. According to some, when under the control of ITT, is overhead was too high, inventories too large, and management a bit relaxed with respect to wooing new clientele. These, and other "problems" were addressed and the company has prospered. That, however, is not the issue. The better question is why wait until the company was private to make these rather elementary moves. Why were these strategies not employed for the benefit of the initial shareholders?

    This is by no means an uncommon scenario. Time after time LBO companies divest poorly performing subunits, drastically reduce administrative overhead, pare the workforce, renegotiate contracts, and moderate executive perquisites (for example, executive jets, first class accommodations), among a host of other initiatives. E. E. Bergsman of McKinsey & Co. adds some interesting perspective to this: "These LBOs are so immensely successful because they are better managed" (Business Week June 1988).

    Obfuscating Inequality

    The Baseline Scenario

    with 115 comments

    Will Wilkinson has gotten a lot of Internet love for his article "Thinking Clearly About Economic Inequality" (Free Exchange, Real Time Economics, Yglesias, Klein, Cowen, Rortybomb), which argues that increasing inequality is not as bad as people like Paul Krugman make it out to be. I thought it was a rhetorically clever but deeply misleading attempt to blur the obvious issue – economic inequality is increasing – by looking at it through a dizzying array of qualifying lenses.

    Wilkinson marshals an impressive number of arguments to try to make the point that increasing income inequality is not the metric that we should focus on. I'll try to take them one at a time. (Wilkinson's arguments are summarized in the numbered paragraphs; the others are my responses.)

    1. It isn't income that matters, but consumption, since the way that income translates into utility is through consumption. "Why do we want income at all? So we can acquire things that we value."

    OK, I guess, although this ignores the desire of rich people – or even moderately well-off people – to provide for their children. Besides the psychological utility that they gain, this just means that the imbalance in consumption between rich and poor will be spread across future generations. The imbalance doesn't go away. But this argument isn't the big problem.

    2. Actually we need to look at lifetime consumption, because people engage in consumption-smoothing. And "the run-up in consumption inequality has been considerably less dramatic than the run-up in income inequality."

    First, Wilkinson's quotation seems to acknowledge that consumption inequality has been increasing. Second, you would expect increases in consumption inequality to lag increases in income inequality. When rich people get much, much richer very quickly – as happened in the last decade – they are not going to be able to consume that increased income as fast as they earn it. It will get deferred, or inherited, and will show up later. Poor people, by contrast, will attempt to maintain their consumption even as their incomes fall, going into more debt. This is why increases in consumption inequality lag increases in income inequality. It's not a good thing.

    Even more simply, if I make more money than you do over my entire lifetime, then over the course of my lifetime I will consume more than you (or my children will consume more than yours). Unless Wilkinson thinks that today's successful hedge fund managers are actually going to be extremely poor in future years, this effect will not go away.

    3. Furthermore, when we value consumption, we can't look at market prices (nominal consumption); instead, we want to know the value to the consumer of the consumption. So instead we should just look at happiness. And here happiness gaps have been shrinking, not rising.

    Wilkinson is honest enough to acknowledge that even the Stevenson and Wolfers study he cites for narrowing happiness gaps over the past several decades also found that "the trend toward greater equality in happiness stalled and began to reverse course in the 1990s, due in part to widening inequalities in happiness (and wages) between individuals of unequal levels of education." And this is the period Krugman is most concerned with. But he then ignores this point in his analysis.

    I'm as much a fan of positive psychology and happiness research as anyone. I am a believer, based on both personal experience and on reading summaries of the research (I'm not a research psychologist myself, of course) that above a certain level of income and wealth – which I would put somewhere squarely in the middle class – money simply does not make you happier. But this is the first time I've heard an economist try to justify economic inequality on the grounds that it is happiness that matters, not money. This is what you would expect from the medieval Church, not the Cato Institute: although you think you want more material things, actually you don't, because the only thing that matters is salvation in the afterlife.

    4. Wilkinson then tries to explain why increased income inequality does not translate into increased happiness inequality (although Steven and Wolfers actually say that it has translated into increased happiness inequality since the 1990s). There are two parts to this argument, but basically they collapse down to one. First, he says that the quality of budget-level products has increased faster than the quality of luxury-level products (like refrigerators), so that the differential in material comfort is decreasing for a given differential in monetary consumption. Second, he says that rich people are actually taxing themselves by spending huge amounts of money on "real estate with ocean views, or Ivy League diplomas, or goods like yachts" that do not provide value commensurate to their cost. (Along the way, he gets in a dig at the luxury goods industry, which he claims provides shoddy quality at extravagant prices, but that seems to me like an anecdote at best; after all, a Park Avenue duplex is still a lot better than a studio in Yonkers, whether or not Hermes scarves are as good as they once were.)

    First off, remember that we're talking about changes here – changes in income gaps, in consumption gaps, and in happiness gaps. Wilkinson's argument, that increasing income gaps coexist with decreasing happiness gaps, requires more than just the observation that happiness as a function has a decreasing slope (doubling your consumption doesn't double your happiness). It requires some evidence that the marginal happiness benefit of consumption is decreasing over time. If the shape of the happiness curve is the same in time 0 and time 1, then increasing consumption gaps will produce increasing happiness gaps, though perhaps not at a linear rate. Increasing consumption gaps can coexist with decreasing happiness gaps only if the happiness curve is getting flatter fast enough to compensate for those increasing consumption gaps.

    And here Wilkinson undercuts his own argument. He points to the relatively small practical difference between a $300 refrigerator and a $10,000 refrigerator, which is far bigger than the difference between no refrigerator and a refrigerator – which was the relevant difference maybe fifty years ago. Good point. But he also talks about how vanilla and pepper suffered the same fate – only much longer before. The lesson is that different products and services that people want change over time, and at different times, from being rare luxuries to being relative commodities. Just because one former luxury good is now a commodity good doesn't mean there aren't other valuable goods that many people cannot afford.

    Take organic fruits and vegetables, for example, which many parents would like to buy for their children, but are simply too expensive for tens of millions of households. Or private school in places where the public schools are not very good. Or being able to move out of an area that is plagued by air pollution, or by crime. These are not frivolous luxuries like Sub-Zero refrigerators. Or even take air travel, which has gotten much cheaper over the past three decades and that we commonly think of as having been "democratized." Flying a family of four even just from the Northeast to Orlando can easily cost $2,000 in air tickets alone – something that is far beyond the reach of many families who would love to take their children to Disney World just once in their childhoods. In short, for all the product categories where you can say the rich are wasting their money on Sub-Zero refrigerators, there are other product categories where having more money makes a big, big difference in your material quality of life.

    And let's not mention health care, which is literally a matter of life and death.

    Finally, there's something strangely patronizing about this argument. Wilkinson cites research showing that the rate of inflation for the basic necessities that poor people buy – food, shelter, clothing – has been lower than the rate of inflation for other goods, like "home cleaning, lawn care, psychotherapy, and yoga classes." That is an important finding. The implication is that, relatively speaking, the buying power of the poor (and hence their consumption) has grown faster than their income, while the buying power of the rich has grown slower than their income.

    If the falling relative price of basic necessities (other than health care, of course) has reduced the proportion of people who go without basic necessities, then that is a great thing. But that is not the same thing as a decrease in inequality. Whether or not the poor have what social scientists think they need – food, shelter, and clothing (but not health care!) – they may still want home cleaning, lawn care, psychotherapy, and yoga classes. In this model, more leisure time, better psychological balance, and less back pain are all valuable things that rich people have much more of than poor people. And no matter what you do with the numbers, if nominal consumption inequality (inequality in the amount spent on consumption) is going up, you cannot make inequality in consumption of these goods go down. In a simple model, rich people benefit the same amount in nominal terms as poor people from a fall in the price of necessities, and therefore if the nominal consumption gap is increasing, the gap in the amount of money left for yoga classes is necessarily also increasing; the rate of inflation of yoga classes cannot change that. Given an increasing nominal consumption gap, rich people may have a lower percentage rate of growth of abstract consumption units than poor people, but their level of consumption will always grow faster than that of poor people.

    Ultimately, the "rich people are fooling themselves" argument relies on a theory of false consciousness: rich people don't know what is good for them and are wasting their money; poor people are better off not taking yoga classes. But this, I fear, moves us out of the realm of economics altogether. I know that behavioral economists for decades have been showing that people make irrational choices. Fine; let's try to help people make more rational choices. But remember, it's still their money. And they want more of it. How people spend their money reveals how they value things, and if they pay $50 per hour for yoga classes, then maybe yoga classes are worth $50 per hour to them, at least in their conscious brains.

    From a moral standpoint, if there is a problem in one person having ten times as much money as someone else, that problem does not go away because he blows it on cocaine. From a policy standpoint, whether or not people use their money in ways that increase their happiness, money is the thing that they care about, and trying to base policy decisions on happiness is both paternalistic and impractical. If it turns out that rich people are no happier than poor people, should we simply stop worrying about poverty?

    Wilkinson brings up a lot of interesting ideas and cites some interesting research, but does little to challenge Krugman's core point: people like money, people use money to buy stuff, the money gap between rich and poor is increasing, and the stuff gap is increasing as well. I'll accept that nominal consumption inequality may be growing slower than income inequality (although I suspect the difference is just being deferred into later decades), and inequality in stuff actually consumed may be growing slower than nominal consumption inequality (due to different inflation rates), but I don't see a solid argument for why they aren't growing. And that's still a problem.

    That was just the first nine pages – hopefully I'll be back to talk about the rest.

    By James Kwak

    Written by James Kwak

    July 25, 2009 at 2:45 pm

    115 Responses

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    "1. It isn't income that matters, but consumption, since the way that income translates into utility is through consumption. "Why do we want income at all? So we can acquire things that we value.""

    It isn't income that matters, but wealth. In some societies wealth cannot be spent at all. In some, wealth is periodically destroyed. (That is consumption in a way, but you have to be wealthy to be able to destroy it effectively.) In developed societies, wealth confers power. Sometimes it does so via consumption, but sometimes the threat of consumption is enough to confer power.

    "3. Furthermore, when we value consumption, we can't look at market prices (nominal consumption); instead, we want to know the value to the consumer of the consumption."

    Well, if the value of money is proportional to wealth, or something similar is the case, then the wealthy person has to gain a lot more money - or equivalent goods - than a poor person to obtain the equivalent value. That's why Wall Street executives need humungous bonuses. Pobrecitos!

    James Kwak: "When rich people get much, much richer very quickly – as happened in the last decade – they are not going to be able to consume that increased income as fast as they earn it. It will get deferred, or inherited, and will show up later. Poor people, by contrast, will attempt to maintain their consumption even as their incomes fall, going into more debt. This is why increases in consumption inequality lag increases in income inequality. It's not a good thing."

    Some months ago Bill Maher read something by an economist written in the 1930s (IIRC) to explain why the income inequality of the Roaring 20s led to the Great Depression.


    July 25, 2009 at 3:26 pm


    Edit: Instead of "something" I meant to say "something to that effect".


    July 25, 2009 at 3:29 pm

    I think most wealthy people are miserable. If they did something extraordinary to amass that wealth, it was probably to the detriment of their personal relationships. And I think most actually resent their children.

    But that is a superficial, "it's lonely at the top" kind of misery; it doesn't exactly compare to a poor person trying to figure out what they can pawn so they can visit a doctor for some antibiotics.

    Bond Girl

    July 25, 2009 at 3:56 pm

    I would like to add to your point about happiness not increasing above a certain level of monetary compensation. I think there is no doubt that is true. Once certain needs are met the rest increases happiness very little. The counter to that is that once you have a lot of extra there is greater angst with loss of money. Taking money from the rich will always result in more gnashing of teeth than taking from those who already have learned to live without. The thought of moving down a tax bracket or two is surely to result in great wailing.


    July 25, 2009 at 4:08 pm

    Since income inequality does not matter, why don't we just tax away everyone's income beyond a certain point that we will call the happiness threshold. This is would be the point where more money will not make them more happy. I wonder what arguments they will come up with to defend income inequality…


    July 25, 2009 at 4:17 pm

    Well, since you made it so easy…

    Income inequality exists. Income equality doesn't. It never has on any relevantly broad scale. All efforts to achieve it have failed. Humans are too diverse in their capabilities, their preferences, their behavior for equality of results across a broad population. A significant sample of the world population was enrolled, mostly on an involuntary basis, in an experiment from 1945 thru 1989 where a number of states purported to establish income equality, but they abandoned the experiment, recognizing that the general welfare had suffered to too great an extent to warrant continuation of the experiment. As well, the non-elite recognized that equality had not actually been established, rather the elite had captured significantly greater assets for themselves, betraying the ideal and the legitimacy of the experiment. All empirical data tell us that income inequality is inevitable.

    In addition, your premise that "income inequality does not matter" is false. To many people, it is important to do better than the average in order to advance one's ranking within the group. Whether you like that or not, it happens, ergo, your premise is inaccurate.

    Those are two defenses of the existence of income inequality.


    July 25, 2009 at 9:09 pm

    Um. You have just proven the point of the post to which you replied.


    July 27, 2009 at 1:49 pm

    There is social and financial stability where there is a broad-based middle class. It comes from closing the gap between the very rich and very poor.

    Tippy Golden

    July 25, 2009 at 4:24 pm


    I just read that one of the reasons Constantinople was so vulnerable to civil war in the 14th century was due to the fact that other than the western states it had developed no middle class which, according to John Julius Norwich served as a puffer between the poor, i.e. peasantry and dispossessed (fugitives).

    … made me think that once the Detroit auto worker will have stopped to be middle class he will have stopped providing a stepping stone for his children or grand-children up into their dream professions (remember: it takes three generations to make a lady …)
    also he will have stopped being the possible next step up the ladder for the ones below him – if you take out the puffers/stepping stones only the dream of from rags to riches which resembles the dream of the lottery ticket will remain but no way of working your way up without the big luck hitting you


    July 26, 2009 at 4:35 am

    "From a m oral standpoint, if there is a problem in one person having ten times as much as someone else…"

    Well, that doesn't seem to be a moral problem to me. Are you saying 9 times is moral but 10 is not? If so, please explain how you derived that analysis. If it's not what you mean, why build on an assumption you don't believe? There are many, many explanations why that ratio would exist between two people and be considered perfectly justified. One may work harder – 60 hours vs 40 does not necessarily translate into 1.5 times income, there are increasing returns in many endeavors. One may have invested more time and effort in her training – a good student vs. a lazy one. One may have more skill than another – a neurosurgeon vs. a a garbage collector. One may have made better decisions at critical junctures – I had a college tour recently given by someone from a rural midwest town where he came from a class of 11 people and he was the only one to strive for college, the rest were content to marry at 18, and so on. For another example, some lenders may have krupt and the former earning 100 times more than the latter. Immoral?

    The actions of people can be characterized as moral. Although there will be debate over the meaning of that word. But a ratio of numbers is not moral-izable. It;s just an arithmetic statement, morally neutral through and through.

    I also note that an American who is on the short end of the 10:1 ratio you lay out, is also on the long end of that same ratio as measured against most of the planet. Are you immoral merely by virtue of your salary?


    July 25, 2009 at 4:27 pm


    This is going to get a bit technical.

    Krugman says that rising inequality is a problem. Wilkinson, in the part of his article that I review, doesn't actually say that rising inequality wouldn't be a problem; he just says that inequality isn't rising. So for purposes of argument, I wanted to leave aside whether inequality (one person making 10x another) is a problem; more narrowly, I just wanted to argue that IF it is a problem, then the fact that the rich person may squander his money doesn't make the problem go away. That's why I phrased it that way. I very explicitly did not state that a 10x multiple in income or wealth is or is not moral.

    Whether one person making 10x another is a problem obviously depends on the circumstances.

    James Kwak

    July 25, 2009 at 4:58 pm


    Actually, James, he notes that income inequality is rising, but that is irrelevant because we can, all of us, buy refrigerators of our own….

    Thus, the happiness of the American dream is not threatened by the dramatic transfer of wealth to the already wealthy, according to Wilkinson.


    July 26, 2009 at 9:32 am


    That's precisely the side of Krugman's argument that is the strongest: it's pretty absurd to suggest that inequality has not risen, when its evidence is all around us. Private jets, recombined properties, domestic servants – it's all there.

    What seems unproven by Krugman is precisely whether this is a bad thing. He simply assumes it is, without giving any reason.

    Surely if word had leaked out in the 1950s of Krugman's idyllic youth that there was some faraway sheikdom of unimaginable wealth, it would not have mattered to Paul. So why does it matter if that sheikdom is located not in the sands along the Persian Gulf but hard by Long Island Sound?


    July 26, 2009 at 3:27 pm


    We will always have inequality – not everyone can be Michael Jordan. But Michael Jordan was paid the big bucks because of his outsize talent and his incredible work ethic.

    In that the class profiting so greatly these days seems to have the business sense of a gambler, that's when inequality becomes a bad thing. It is no longer an inequality derived from a difference in work or talent, but an inequality created when the wealthy have bought off the political leaders.

    Honestly, I never cared at all about the bonuses Wall Street paid themselves until last fall – but I do today because their bonuses have been paid for and supported by taxpayers – not their own talent….


    July 26, 2009 at 4:21 pm


    Why is one source of inequality "better" than another? Consider accidents of birth: your physical abilities (Jordan, Carl Lewis, Wayne Gretzky, etc.), your "IQ" intelligence, your physical attractiveness, congenital heart disease and other congenital disorders(schizophrenia, for example), your birth family and your extended family, your location, and others. All of these factors contribute to your life outcomes, yet, you are not responsible for any of them.

    Also, why is "hard" work any "better" than "clever" work? Of course, we'll have inequality and unhappiness and we already know why. Life isn't fair; it can't be.

    I think the real issue is how much inequality a society can tolerate and what are the boundaries of tolerance?


    July 26, 2009 at 5:38 pm


    James didn't say that there was a moral problem with one person having ten times as much as someone else. To the extent that he hypothesized about that level of income inequality defining a moral problem, it was completely ancillary to the point of that sentence, which was that if income inequality is a moral problem, it remains a moral problem regardless of how the wealthier person spends his income.

    Read the whole sentence.

    "From a moral standpoint, if there is a problem in one person having ten times as much money as someone else, that problem does not go away because he blows it on cocaine."

    Scot Griffin

    July 25, 2009 at 5:09 pm

    Thank you, and thanks to Professor Kwak for his explanation (although I am puzzled how, in an "if then" proposition, the only "if" is "completely ancillary" to the "then").


    July 25, 2009 at 6:59 pm


    Since you are puzzled, I will help you out.

    The "if then" proposition was, in fact, "if income inequality is a moral problem, then, how the wealthy guy spends his higher income is irrelevant."

    The statement about the 10:1 ratio that you focused on in your response was unnecessary to make the "if then" statement (i.e., completely ancillary), and probably should not have been uttered, if only to avoid the ensuing confusion.

    Does that clear things up?

    Scot Griffin

    July 25, 2009 at 11:06 pm

    A 1:10 difference in income IMHO is still within a definition of broadly based middle class, eg, $100,000 to $1 million income difference. With $100,000 at the lower end say :)

    The problem arises when you have income differences of say 1:1000, eg. $10,000 to $10,000,000, which may be an indication of where the US economy is already at.

    Tippy Golden

    July 25, 2009 at 4:44 pm

    10:1 differences are a problem only when the one making 10x produces less or the same wealth (not money mind you) as the person making x. The problem is non existent if the person actually works and produces close to 10x more. There are certainly people who are more productive than others, however I'm not sure anyone is 1000 times more productive than me and I know there are those who make 1000x what I make.

    Just sayin'


    July 25, 2009 at 9:41 pm


    I think poor & middle class people have been sheltered from the full extent of income inequality by the credit bubble. The decline in consumption is actually in part an expression of inequality that was delayed by easy credit. This undercuts Wilkinson's argument that copious consumption by the poor and middle class alleviates income inequality.

    I also wonder whether 'happiness' measurements include stress. I think that health care insecurity causes a great deal of stress. So does housing insecurity. These stresses have soared in the last year.

    Someone is 'well off', I would argue, if they do not have housing or health care insecurity. Note that anyone with job insecurity in our system has health care insecurity as well.


    July 25, 2009 at 5:22 pm


    There has got to be a better example than organic fruits. Most people don't care enough to buy cheap non-organic fruits which provide essentially the same benefit as organic fruit.

    Disney World is a good example. I grew up in central Florida and its a magic place. It would be nice if they built more and more lower-middle class people could go. (If more people just went it'd probably explode–the crowds are bad enoug as-is!) Still, I doubt there are many goods as good as value as Disney World that are so expensive.

    Most of the other things you mention (good schools/education, health care) only apply to poor/very low middle class people basically who are exempt from the whole happiness discussion because everyone agrees they would be happier with more money. Some middle class people choose not to buy helath insurance because they're idiots but that isn't anyone else's fault if it makes them unhappy.


    July 25, 2009 at 5:23 pm


    There are three possible responses to this type of casuistry. One is to ignore it since even critical commentary adds to its currency. The second is laboriously to deconstruct every contrived argument and distorted 'fact.' This presumes that there is really an intellectual debate going on, which is not the case. The third is to see this as the sophisticated propogandizing of a dogma whose proponents are attached to as a matter of faith. Think the Society for the Propogation of the Faith in Rome. We have seen much of this dogmatic resistance to even the most dramatic contradictory evidence over the past year – including persons and circles at the highest policy-making levels. The Bernankes, Geithners, Rubins and Summers of the financial world clutch onto their dogma the way a drunk clutches a lamp-post in a wind storm. The response should be unparing denunciation of ideological fanaticism spiked with a large dollop of material interest.

    Therefore, I advocate a combination of '1′ and '3.'

    Michael Brenner

    Michael Brenner

    July 25, 2009 at 5:42 pm


    The whole argument is founded on the two (unspoken, class war eliding) libertine, er, "libertarian" lies, that:

    1. Wealth just magically appears in a harmless way.

    2. The wealthy use wealth in a hermetically sealed, harmless way.

    Both of these are of course grotesque lies. To correct them:

    1. The way the superrich achieved such wealth imbalances in the first place was through a relentless assault on wages, work conditions, standards of living for the non-rich, public services, and environmental services. They polluted, gutted the safety net, ruthlessly privatized profits and socialized costs, stripped consumer protections, commodified health care, privatized the law itself, constructed the military-industrial complex (among other corporate welfare complexes) and expanded the empire, waged wars.

    All of this was horrendously expensive, and all of it was done on the backs of the non-rich.

    That's how they acquired this wealth in the first place.

    2. They have been similarly ruthless, aggressive, destructive in the way they use this wealth.

    Where this wealth became too prodigious, and there was nothing else left to do with it, they used it to blow up bubbles, to turn human society – home, street, park, school, playground – into a rancid casino. And when this bubble blows, and this casino burns down, it everyone other than the rich who pay the price with their suffering and anguish.

    Most of all, in their filthy hedonism they drove up the prices of every necessity and right, like health care and housing, and beyond that everything subject to the travail of inflation, condemning everyone else to the slave treadmill, a lifelong rat race until you collapse, all to just try to keep up in a world where the pace is set by soul-dead monied vermin.

    This wealth abyss is the most intense, horrific zero-sum game, where every cent redistributed upward is lashed out of the skin of those below, and where the spending of that cent rains as acid fallout on those below.

    But to these vile cadres it's all a pleasant ivory tower exercise. Just like every other aspect of their ideology, it has to be distilled through as many layers of fantasy filtering as possible to cleanse it enough to make it presentable in their prostituted journals, from which the traitor MSM can then take its marching orders.


    July 25, 2009 at 5:48 pm


    "The way the superrich achieved such wealth imbalances in the first place was through a relentless assault on wages, work conditions, standards of living for the non-rich, public services, and environmental services. They polluted, gutted the safety net, ruthlessly privatized profits and socialized costs, stripped consumer protections, commodified health care, privatized the law itself, constructed the military-industrial complex (among other corporate welfare complexes) and expanded the empire, waged wars."

    You know, I never thought of the guys who founded Google in that way before. They've sure been busy, heavn't they? You've really opened my eyes with your absurd overgeneralizations, thanks.


    July 25, 2009 at 6:56 pm


    Thanks for making my point for me.

    1. So far as I can see, neither Google nor any other big internet company "innovated" much more than being first to fill a vacuum. While they may deserve some return for that, I certainly don't see any justification for the return they and others get.

    I'm aware that the propaganda nowadays is how the internet had some Wild West phase where anything could have happened, that there were numerous potential strange attractors, and that it was the heroic innovation of a few online entrepreneurs which caused things to fall out the way they did.

    Well, I find that doubtful. I think the way things have turned out was, given the premises of an increasingly corporatist system, the most likely way.

    2. So how convenient that "the way things turned out" was a way which made a handful very rich, and teased many others with a bubble and crash, while for the masses it simply generated (1) more costs: now it's an economic necessity to have a PC and an online connection (but as library hours and services are being cut back as part of the standard capitalist battle plan during a self-generated crisis, public online access is now beleaguered, and I don't see Google leading the way in setting up public internet centers); (2) lifestyle degradation: now it's perceived as a necessity to be online and "connected" in general. Cf. Bruce Sterling's profound analysis of the class war aspect of all these gadgets. "Connectivity is poverty."

    3. The taxpayers paid for the internet in the first place. Where's our cut of the proceeds from these windfall recipients?

    4. As per the usual practice, the second it got big enough Google switched to feudal entrenchment, anti-entrepreneurial, rent-seeking mode. Everywhere you look it's accused of anti-competitive practices.

    5. While its record is perhaps not as bad as some others, it has still acted typically in cooperating with repressive governments like China. So we know all the rhetoric and alleged idealism is nothing in the face of profits uber alles.

    6. Then there's ominous power-creep like the book-scanning project. This was clearly intended to be a massive theft and power grab in the first place, and was only scaled back in the face of resistance.

    Again, whatever the merits of book scanning in itself, why should it be undertaken for profit, by such a powerful, concentrated entity?

    While Google has not been so overtly rapacious and fascistic as e.g. Monsanto, in the end I don't trust it as custodian of the world's books any more than I'd trust Monsanto with seeds.

    Nothing of any importance can be left in the hands of corporations. We know that's suicide.

    7. That leads to the broader trend, pushed by all the online feudalists, and cheerled by the likes of Wired, of the pauperization of intellectual and creative workers, who are now supposed to become a new kind of serf on a new kind of plantation, ruled and mined by a new kind of landed master.

    And all this for what – so that a handful of guys, who never "innovated" anything special, but rather were lucky enough to be in the right place at the right time to take advantage of the system's logical development (after the taxpayers had already done all the real work of building the thing), can now embody a new megarich, megapowerful center of entrenched feudal wealth and privilege?

    That's your pro-corporatist argument? Pathetic and vile.

    And since you picked the example, I'll assume that's the best you can do.


    July 26, 2009 at 3:18 am


    Great rebuttal! But, it's also worth noting that Mark's arguments are very typical of a majority of people who still believe that 'free-market capitalism' would be fine if it wasn't for the crooks currently running things.

    Unfortunately, our current problems stem from the fact that this economic system is running according to plan, and was never either 'free-market' or 'capitalist' by choice. It is pure corporatism that aims to return society to neo-feudalism.

    When one cuts through all of the PR, the corporate agenda is all about creating monopolies, toll-gates and extending hereditary rights (i.e. patents forever) to assure that those in power stay in power.
    Controlling all of the levers of power, who is to say that the current financial crisis wasn't modeled on Sun King's brilliant plan to take absolute control of France by forcing the nobility to spend and borrow themselves into his favor? Does easy access to money in a culture that demands it be spent on conspicuous consumption of luxury goods, (Mc)mansions and 'keeping up with the de la Jones' sound familiar to anyone?

    Louis, like today's neo-monarchists, inflated a massive credit bubble with the express aim of bursting it for his advantage and profit. He consolidated his control on the nobility by forcing them in his debt, just as surely as our contemporary 'Rulers of the Universe' forced today's masses into debt-slavery.

    The problem is, what to do about it? Signing online petitions, protesting or trying to reform the system all seem useless to me. I am starting to believe that we must start to set up an alternative system from the ground up. One that promotes different ideals, but also practical alternatives to our current choice between wage-slavery or homelessness. But where and how to start?


    July 26, 2009 at 11:08 am


    Martin, I only learned about Michael Sandel recently. But I love what he has to say. Try here: BBC Reith Lectures.

    Tippy Golden

    July 26, 2009 at 3:12 pm

    and here on

    Tippy Golden

    July 26, 2009 at 5:45 pm

    One important consequence of income inequality that you don't discuss is the resulting inequality in political power that always increases as income inequality increases. The political power is used to influence many things including whether income inequality will continue and the possibility of development of ruling class whose position amd power in society is inherited and continues to be passed down through many generations. Think ot the Rockefellers or Kennedys. Their political power comes from the marked income inequality of an earlier era.

    David Walzer

    July 25, 2009 at 6:18 pm



    1. I should have specified that the dogma in question is market fundamentalism/Social Darwinism.

    2. There is a powerful affinity of interest and ideas. I have yet to see one of these pieces from a college lecturer with a spouse and child who earns $32,00 per annum after spending 8 years in grad school.

    3. Americans are peculiarly ahistorical. We, and the rest of the industrialized world, went through all of this for 150 years before achieving the enlightened social contract implicit in the post-war consensus on the social welfare state and an active role for government in regulating the market and capping great accumulations of wealth. That so many in this country yearn for the 1920s if not 1890s testifies to profound ignorance, extreme parochialism, reckless ideologizing and political obtuseness of the first order.

    Michael Brenner

    Michael Brenner

    July 25, 2009 at 6:32 pm


    Who actually produces, with their hands, all our food, clothing, shelter, transportation & energy? Is it rich people or poor people? And who says the rich are more important than the poor? The rich say so. Because they are in control of our government.

    Is this good for the long term viability of our country? Not looking that way right now.


    July 25, 2009 at 7:21 pm


    Many of these rich are nothing more than embezzlers who gain control of these companies & take advantage of the less greedy workers to enrich themselves. Jack Welch is a prime example. Anyone remember all the financial stuff that came out about his pension during his divorce? The only number I remember is $15,000 per month for flowers.

    And what's the ratio of CEO to average worker pay now? Like 400 to 1? Like quadruple the ratio in Japan & other highly productive countries.


    July 25, 2009 at 7:46 pm


    According to Lucien Bebchuk and Jesse Fried's book, Pay without Performance, here's how the income disparity has grown in recent years:

    "Between 1992 and 2000, the average real (inflation-adjusted) pay of chief executive officers (CEOs) of S&P firms more than quadrupled, climbing from $3.5 million to $14.7 million. Increases in option-based compensation accounted for the lion's share of the gains, with the value of stock options granted to CEOs jumping ninefold during this period. The growth of executive compensation far outstripped that of compensation for other employees. In 1991, the average large-company CEO received approximately 140 times the pay of the average worker; in 2003, the ratio was about 500:1."


    July 25, 2009 at 10:48 pm


    Yup! 1:1000 might be under estimating when we consider say $10,000 for a low income single parent family and those at the top 1%.


    July 25, 2009 at 11:14 pm


    Our ideas about great income and wealth come mostly from things like the Forbes lists. How accurate are they? Do we have any trillionaires yet? At the time of Rockefeller's death, his personal net worth was estimated at $1.4B, if GDP was $92B at the time, he was worth, then, 1.5% of GDP. Did the stewards help that fortune grow consummate with GDP, one wonders, or more? Are the various entities connected with the family worth in the ballpark of… $210B? Small potatoes, but still enough to influence a politician or 10,000, right?

    Uncle Billy vs. Mont Pelerin

    July 25, 2009 at 7:51 pm


    Hang on - lot's of tenuous connections here. Will Willkinson, was (is?) associated with the Koch Family's Mercatus Center, the goofy Tyler-Cowen-led free-market think tank that apparently has cooperated on some projects with the Templeton Foundation. Templeton - king of the vultures - who loved to profit from distress, and reportedly was not adverse to creating that distress himself (great business plan!). There's a company called "Brand Mercatus" who works with very large entities. They brand. They repeat messages over and over and over again and build trust in brands. A bit like what these think tanks do, right? Any relation? Their Malaysia-based CEO and celebrity, Peter Pek, has worked on a few Murdoch Family papers and projects. According to their website, they started in London, and it looks like things still might be run out of London, but who is in charge over there? Any direct relation between Mercatus Institute and Brand Mercatus? Between the Koch Family / Templeton fortune, and Murdoch?

    Uncle Billy vs. Mont Pelerin

    July 25, 2009 at 8:35 pm


    You just stole the plot of William Gibson's next book.


    July 25, 2009 at 9:11 pm


    Maybe not so far-fetched. Here's the plot of a new Victor Ostrovsky book (broken into blog-friendly snippets):

    Looks like Brand Mercatus has a well developed Investor Relations business segment:

    If you try to find out a little more about the company, by clicking on the "international partners" link, you get nothing. Click on people, and you get a generic description of people.

    Here is a law firm with offices both in the UK and US that recently represented "Mercatus Partners LLC" "in its acquisition of Boston based Financial Research Corporation (FRC), from parent company Citigroup Inc."

    Uncle Billy vs. Mont Pelerin

    July 26, 2009 at 1:16 am


    Uncle Billy vs. Mont Pelerin

    July 26, 2009 at 1:31 am


    You make a good point, although ad hominem. The Cato Institute is funded by the usual movement conservative families – Koch, Scaife, Olin, etc. Krugman makes this point in his book, "The Conscience of a Liberal." The Wilkinson piece is self-serving, indeed.


    July 26, 2009 at 5:43 pm


    I wonder if income/wealth inequality are at the root of the structural problems in our tax system; making us unable to fund health care reform, etc. because the taxable income of the very wealthy fluctuates so much from year to year.

    How does one look at our current tax policy and determine the difference in revenues if, say, half of the income of the top 1% were distributed evenly through the bottom 50%? Would the system be more stable?

    And just to point out, one problem with income disparity in the US is access to the legal system.


    July 25, 2009 at 8:48 pm


    Income inequality is not just an economic issue! It has pervasively corrosive social costs. See "The Impact of Inequality: How to Make Sick Societies Healthier" by Richard G Wilkinson. It would be worth paying an economic cost, if indeed there were one, to reduce inequality.

    Scott Free

    July 25, 2009 at 10:02 pm


    That paper is literally one of the most irritating things I've ever read in my life.

    Leave it to a conservative to say that the dramatic income disparity between those at the very top and everyone else is irrelevant – because we've been consumption equals all this time.

    First, where are those stats? What does that mean? My five yr old van gives me equality to someone with a fully loaded Porsche Cayenne that cost six figures? Because driving is much better than walking – so it doesn't matter at all what you drive?

    And are we not in a crisis right now because today's consumption was done with tomorrow's dollar? Debt-ridden consumption from people who make no money does not equality make…

    The little people – the ones with the average salary of $50K – an annual income level that has gained no ground at all in the last decade – if they even have a salary these days – have lost serious ground since Reagan.

    Leave it to the Cato Institute to spin such real disparity into a non-issue because the little people are just has happy with their cheap knock-offs – purchased through fabulous new credit options that provide even bigger profit margins to the already wealthy.

    And if you believe this – did you hear – Goldman Sachs turned an enormous profit this year based solely on the collective wisdom of their crack staff…..


    July 25, 2009 at 10:43 pm


    When reading this all that came to mind was the "Pioneers" who got gwb selected. Who gives a flying RF if they are happy with their personal consumption? They got to purchase what really counts: Political Power.

    dilbert dogbert

    July 26, 2009 at 12:03 am


    Good income & wealth data websites -


    July 26, 2009 at 12:25 am


    Makes you want to bite a mule in the a$$.


    July 26, 2009 at 12:30 am


    Economic Civil Disobedience

    Martha and the Stone Poneys

    July 26, 2009 at 1:41 am


    If Wilkinson fails to appreciate the reason why rich people are stupid enough to buy luxury goods, I suggest he read Theory of the Leisure Class. His main source for the notion that the goods rich people buy have declined in value seems to be Dana Thomas' Deluxe: How Luxury Lost Its Luster. Apparently he glanced at the cover because the contents say nothing about a decline in the quality of Hermès' products. In any case, the function of a fancy handbag is not to hold your glasses, but to signal social status.

    One problem with rising income inequality is exactly the sort of social barriers these luxury items signal. Social marginalization can carry real costs.


    July 26, 2009 at 3:18 am


    "How Luxury Lost Its Luster"

    the rich ones of today must be a bunch of misers because if they buy couture by Armani they buy stuff that is only affordable to them because it has been ambroidered in India
    … would it be embroidered in Milan or Paris it would exceed their means ;-)

    Though I am happy for the Indian embroiderer for getting a chance to make a hopefully decent living
    I worry that we have discarded all that handicraft knowledge accumulated over centuries i.e. instead of ideas flowing back and forth over the continents from craftsman to craftsman, now Milan or Paris are only creating the ideas and the needle workers are only in India
    I feel there is something very unhealthy brewing in such a very large division of labour


    July 26, 2009 at 4:59 am


    This is getting a bit off topic, but Armani is made in Italy. There's a little bit of controversy that some clothing lines were being made in Eastern Europe and then having some finishing touches added in Italy so that they could claim the "made in Italy" label. Thomas talks about how during the 80's Louis Vuitton brought all its manufacturing back under its own control changing a trend towards outsourcing that was lowering the quality of the goods. They had great success and other companies followed suit. Thomas also talks about more recent and limited outsourcing to China by some companies; she mentions Coach if I recall correctly. "Luxury goods" is a broad topic and generalizations are dangerous.

    I don't really agree with many of Thomas' opinions, but this isn't the place for that. One fact Wilkinson needs to prove his point is that there is a convergence of quality of the high end and low end goods. His main source for proof of the declining quality of high end goods is book that talks mainly about the vulgarization of the marketing of those goods.

    Sorry, I have a strong interest in the subject from a business standpoint. I don't care much for the goods themselves. I also don't care much about loosing handicraft knowledge. If some poor souls don't have to labor at repetitive tasks for poor wages to create beautiful things for wealthy people who see the workers as only half human because we now have machines, well then, good. I've labored as a handicraft worker, so I don't romanticize it.


    July 26, 2009 at 11:14 pm


    of course handicraft is unromantic, but for example in the chemical industry a product goes from the lab through ever increasing quantities before it may reach production level. In the "good ol' times" there was a glass blower who would on an equal basis together with the chemist design the upgrading equipment. In advanced times the glass blower works for a smallish outfit that sends its conference table suitable representative to talk to the chemist to get the order for equipment. Chemists bitterly complained about the new way but how to make credible that an uneducated handicraftler helped with development. The Zeitgeist would have none of it.
    Armani may make his clothes in Italy the embroidering is done, last time I read, in India. I wonder how often the designer and the actual embroiderer will thus get together and brood over a design
    no matter how internetted we are local closeness makes a difference


    July 27, 2009 at 5:11 am


    Really enjoyed this post. I would be interested to see what the data has to say about income gap vs. comsumption gap lags (thought that was a great point).

    One main comment:
    "And here Wilkinson undercuts his own argument. [...] he also talks about how vanilla and pepper suffered the same fate – only much longer before."

    I think what he's getting at here is that for a concave utility function, if two people's consumption levels increase by the same fixed amount, the difference in utility will decrease. And then if these levels increase by the same amount again, the difference will decrease again.
    We might think of the first time to be a time when rich people have spices like vanilla and pepper while poor people don't. After the first increase, rich people might have refrigerators while the poor only have spices. And after the second increase, rich people might have expensive refrigerators while poor people have normal refrigerators.
    However, *if* the utility value of spices > value of refrigerators > value of the fancy features of an expensive refrigerator, then inequality steadily decreased.
    Of course we have to examine the relevant inequality signs, but although "different products and services that people want change over time, and at different times, from being rare luxuries to being relative commodities", I think Wilkinson would argue that each of those events decreased inequality.

    "If it turns out that rich people are no happier than poor people, should we simply stop worrying about poverty?"
    Do you think it's possible a significant amount of your disagreement with Wilkinson is due to him being more utilitarian?

    Or maybe a better description of your objection is that you think nominal spending is a better proxy for welfare/utility than any speculation based on the relative value of spices and fancy refrigerators?


    July 26, 2009 at 5:17 am


    so what is the modern class structure supposed to work like… if the system supports a viewpoint that accelerates and obfuscates the reward / responsibility system so that the working classes are responsible and the wealthy are just rewarded regardless of contribution and downright results… it would seem that giving rewards for giving rewards is the primary concern, the politics of taxes 'thats like paying bills in poor mans terms' has been increasingly shifted to the poor by mutilating the tax base into a subsidized wealthy funk
    I dont think the realization that at some point being rich is not good, its leadership thats immensely valuable and that takes accountability… we only have so many mansions and 3rd homes to go around so a class of wealthy 'deciders' is absolutely neccesary… but who these people are and should be, what culture they adhere to, and the waste of perverted economics and debt should be factors to BANKRUPT failures and RISE UP a new 'super class' of dignified wealthy cohorts to a great society
    if we just reward rewarders you get back into boom bust speculation cuz there just only so much awsome property and way to many sick and empty people… we need real leaders, and we just dont have them


    July 26, 2009 at 5:34 am


    Excellent post, James. A further problem that is missed by analysis of consumption inequality alone is the disparity in assets arising from unspent income of the rich. Asset accumulation gives the rich a valuable sense of economic security (compared to the often-paralyzing insecurity on the part of the poor and uninsured that has been shown to perpetuate poverty traps.) Assets also enable the rich to take (good) risks that multiply in further upward mobility, as well as to simply enjoy leisure and join in society and social networks, rather than taking a second job at night. The result is even more profound: those with economic security enjoy important advantages in political power issuing from the ability to devote time (not to mention money) to political action; they can take time away from work to advance a cause and organize friends to do the same. The insecure, by contrast, cannot so easily do so.


    July 26, 2009 at 7:31 am


    Wilkinson grew up in a very blue-collar Midwestern town, Marshalltown, Iowa. The two big employers in Marshalltown for many years were Swift meatpacking plants and Lennox furnace. Wilkinson should know better than to write that crap.

    Ted K

    July 26, 2009 at 7:49 am


    there is nobody like an ex-smoker to "prosecute" smokers
    or in German "Die schärfsten Kritiker der Elche waren früher selber welche. (F.W. Bernstein)" (the hardest critics of elks formerly were elks themselves)


    July 26, 2009 at 8:33 am


    I will go a step further than James, who is ever so polite. Wilkinson's article is a feint. There are three classes of arguments for wealth inequality:

    - Economic (inequality maintains strong incentives to produce). Of course, this assumes that most incomes do not derive from rent-seeking activities and/or socially destructive behavior (and this is arguable, particularly given the financial fiasco).

    - Moral (People with money deserve it, because they contributed significantly to society… This too has been undermined by the financial crisis, which has clearly rewarded people who didn't produce anything and harmed people who did.)

    - Political (People with money have power, and they use the money to preserve that power.) Unlike the other two arguments, this is de-legitimizing.

    Wilkinson's argument is a feint, because it argues not that the wealth differential is legitimate, but that it really doesn't matter that much… (Unless, of course, you want to buy off a Congressman or endow a think tank like the CATO institute.)

    Ultimately, however, almost the entire article breaks down to a simple fact.

    The price of manufactured goods (including basic commodity food) has been declining due to automation, while the (relative) price of services has been increasing because these are less subject to automation. Automation has also decreased the quality differential between certain types of goods (e.g. value clothing, vs. luxury clothing).

    So, for the cost of a music lesson for your kids these days you can buy a huge bag of dried beans and rice. Music isn't a necessity, but beans and rice will keep you alive for a week.

    The primary exception – health care – is a service industry.

    The other classes of semi-necessary items that have increased in value are scarce items, notably things like real estate (in areas with high demand). Unfortunately, this is not a "minor" issue in which wealthy people squander money (the jokes on them! hah hah).

    The fact is that choice of residential location determines school quality, maternal and childhood exposure to toxins, access to public services, and crime safety.

    So in terms of "basic needs", the relative cost of keeping a human being alive has decreased (assuming we do not take into account the environmental/health costs associated with our agro-industry). In other words, poor people receive ample resources to survive – assuming they cheaply provide their labor.

    However, they less healthy (large correlation in many studies). Less able to weather a disability, and more likely to suffer serious unhappiness after a disability: Less able to provide for their children. Have less economic security. Are more susceptible to shocks in basic-needs goods (e.g. the price of gasoline).

    Much of Wilkinson's argument is that the wealthy can hurt themselves with wealth in a semi-objective sense (which is not really objective) – and certainly, one can think of things like unnecessary plastic surgery, cosmetic aids, expensive an dangerous health/weight loss supplements, travel to exotic destinations with exotic diseases, etc…

    But many of the things Wilkinson dismisses are in fact highly beneficial toward quality of life in a semi-objective sense:

    1) Living in a safe neighborhood with well-funded schools
    2) He cites yoga as one of those luxuries rich people can do with out. I am not a practitioner, but an increasing volume of research has linked yoga (among other forms of exercise) to reduced hypertension risk, better cardiovascular outcomes, improved strength/flexibility as we age, reduction in insomnia, and other beneficial outcomes.
    3) Ditto for joining an expensive health club
    4) Regarding psychotherapy, he cites this as something one can do without. But what about things like psychological treatment for children with disabilities (e.g. autism). There can be a HUGE quality of life difference for wealth vs. nonwealthy families that have an autistic child.


    July 26, 2009 at 9:02 am


    I also thought the inclusion of psychotherapy among luxuries was short sighted. People suffering from acute mental illness probably don't think so.


    July 26, 2009 at 11:39 pm


    A quick qualifier, the Political argument _for_ wealth inequality is the Burkean one: at least society is stable; instability is worse than inequality, and any attempt to make the system more equal will destabilize it.


    July 26, 2009 at 9:05 am


    Ha ha, yes! You're right, it is delegitimizing, since it's so obviously self-serving – of course the guy with the wealth is going to say that.

    Meanwhile it offers nothing to the person who has nothing to "stabilize", so for him it's invalid on its face.

    Of course, we have no Burkean conservatives left in the world.

    We have only gutter Hobbesian louts.


    July 26, 2009 at 10:11 am


    A society that has seen a dramatic loss in jobs in the last year (millions now unemployed – even more underemployed) is not stable.

    To concurrently reward the financial sector, whose bad bets resulted in the collapse of the global economy, with astronomical bonuses as unemployment rises to rates not seen in a quarter of a century, is also not a stabilizing influence.

    IMHO, our attempts to make the system less equal have been exceptionally destabilizing.


    July 26, 2009 at 10:17 am


    If I might add- bad bets with other people's money.


    July 26, 2009 at 1:30 pm


    Your interpretation seems to have slipped at one point. You say the lower rate of inflation for necessities than for luxuries implies "the buying power of the poor (and hence their consumption) has grown faster than their income, while the buying power of the rich has grown slower than their income."

    The buying power of the poor is not determined by the cost of necessities relative to luxuries but by the cost of necessities relative to income. You do not cite evidence that the rate of inflation for necessities has been lower than the rate of increase of poor people's income. I doubt you can; my hazy recollection of various reading suggests the reverse is true.


    July 26, 2009 at 9:57 am


    Libertarianism objectively equates to corporatism. This blog shouldn't get drawn into the weeds with the likes of Wilkinson. He is obviously an odious shill, and he speaks to no one who could play any sort of role in rescuing this country.


    July 26, 2009 at 10:46 am


    During WW2 and following up until the 70s the top marginal tax rates were ca 90%.

    Thatcher and Reagan changed all that. It didn't work out quite as promised.

    William Pfaff had a recent column related to this topic here:

    and otherwise Wilkinson's effort only reminds me of Galbraith's observation:
    "The modern conservative is engaged in one of man's oldest excuses in moral philosophy; that is, the search for a superior moral justification for selfishness."


    July 26, 2009 at 11:19 am


    If greater income equality is a good thing we should be able to look back at times of greater equality and recognize them as "better". I don't see it. A rising tide may not be good for everyone, but a sinking ship is certainly bad for virtually everybody.

    The role of government should be to create the environment within which people can maximize "good" while managing to incentivize appropriate behavior, and avoid and punish those who take matters to extremes.

    Income inequality too often becomes largely an argument about the extremes. Modern history demonstrates the private sector does a better job of wealth creation in almost all fields than government. Government frequently characterizes its position as "how much should someone be allowed to make" vs "how much should government be allowed to take". The unintended consequences of high marginal tax rates are more devastating to the middle class in the long run than more modest marginal tax rates.

    Over time the truly wealthy will get richer. But the truly poor will always be at or near zero. Taking care of the truly needy is a societal obligation. Taking care of the lazy is not. Creating a prosperous and rising middle class with increasing wealth is the key. In most ways, focusing on income inequality is the wrong metric. Focus on increasing middle class wealth; and income inequality will take care of itself.

    Kevin Casey

    July 26, 2009 at 12:17 pm


    "Modern history demonstrates the private sector does a better job of wealth creation in almost all fields than government."
    Straw dog argument. I have never heard anyone argue that the purpose of government is wealth creation.


    July 26, 2009 at 3:08 pm


    Kevin Casey: "If greater income equality is a good thing we should be able to look back at times of greater equality and recognize them as "better". I don't see it."

    The '50s and '60s had greater income equality than the '90s and '00s, and the economy was better. :) And more stable.


    July 26, 2009 at 8:18 pm


    On income inequality he draws bogus analysis from UN Human Development Index to refute this statement - Paul Krugman has stated that "the United States doesn't have Third World levels of economic inequality-yet." on pg 32 and turn it on its head.

    I looked at the footnote for this reference
    32. United Nations Development Programme,
    Human Development Report 2006 (New York: Palgrave
    Macmillan, 2006), p. 335.

    This is really a bogus argument and he is using it to obfuscate the real problem here. Inheritance + Wages = Housing + Health + Education + the "Good Life". When you get into wage inequality my feeling is Krugman is talking about ability to have a living wage and how corporation have to fund the salaries of the top %5 wage earners. Whether or not the argument is that they deserve it has any merit. It seems to ring hollow with the current economic downturn on how much real value they are providing?

    Wilkinson is a apologist attempting to say there is nothing wrong with the current status quo. All the while the whole economic system is unraveling before our eyes.


    July 26, 2009 at 12:55 pm


    I've taken a quick look at the Cato "policy analysis". Some quotes indicating ideological baseline:

    "The evidence that the rich, as a class, are about to
    gang up and rig the political system in their favor is thin.

    "It is not very easy to convert economic resources into
    political resources.


    July 26, 2009 at 12:57 pm


    Cato is here mixing up something ridiculous with something of-course, i.e.

    "gang up and rig the political system in their favor"

    "they" do not have to do any ganging up, if there are rules and regulations that are favourable to their prosperity they will push all in the same direction without any prior ganging up – they are not like workers who need a union to make their impact felt. And if one of them hits on a useful wedge the others will help pushing. They may synchronize their world views while chatting in their clubs but I doubt that they work on any cabals because that would mean they would have to agree on a leader and that is not compatible with guys (and girls?) who all see themselves as leaders.


    July 26, 2009 at 1:40 pm


    Wonder how many papers have been written or will be written on the economic value that credit default swaps add to the system. I guess since Larry Summers and Tim Geithner have done ABSOLUTELY NOTHING to prohibit or even inhibit CDS creation and trading we SHOULD have lots of papers on this in the future. Apparently 1 disaster hasn't provided enough data. We need at least 2 more systemic nose dives into main street hell and mass housing foreclosures before Summers, Bernanke, and Geithner do anything about it.

    Ted K

    July 26, 2009 at 1:26 pm


    Social engineering from the right and left:

    Here is the Cato Institute's position on health care reform: Free market solutions needed.

    From the Bill Moyer Show on Diagnosing Proposals for Health Reform.

    "Our problem is that we spend two and a half times as much per person on health care as the average of other advanced countries … I think we have to go for a single payer system. - Dr Marcia Angell

    "The single payer system would be the best of all… Unfortunately, we can't get there from here because the political forces are just too strong against single payer." - Robert Reich


    July 26, 2009 at 2:32 pm


    single payer – of course I do not really know what they mean by it – but just the words make me wonder why German authorities have been trying for decades and are still trying to get some competition into the system –
    if it works and how much it works is hard to judge but they still have to cap costs and increase premiums in any way they can think of –
    of course we patients are part of the problem by trying to get as much of our money back from the system as possible – it is not as easy and as generous as it used to be but still a little massage here a little yoga there …


    July 26, 2009 at 3:30 pm


    Since when is inequality – as opposed to absolute poverty – an issue for the state. Unless, of course, it is unjust state policies that generate it. Obama's daughters for example will get an education superior to mine or that which I was able to provide my children for the simple reason that I have no control over how my tax money is spent to educate my children. On top of that his children will benefit from racial preferences at the expense of my children. I have no beef with how rich Bill Gates is or with how he spends his money. The parasitical class that profits from big government is the issue. The Obamas are both examplars of these people and advocates of their interests.

    Charles R. Williams

    July 26, 2009 at 2:41 pm


    "Since when is inequality – as opposed to absolute poverty – an issue for the state."
    In part because we purportedly live in a democracy, yet clearly unequal wealth equals unequal power.
    Furthermore, Americans historically have taken great pride in living in a country based on moral values.


    July 26, 2009 at 3:15 pm


    Of course his focus on "consumption" misses the important point that our current level of consumption is unsustainable. Also, consumption doesn't feed children or pay medical bills.

    Matt Fahrner

    July 26, 2009 at 2:41 pm


    Social engineering from the left and right:

    Here is the Cato Institute's position on health care reform: Free markets are the solution.

    From the Bill Moyer Show on Diagnosing Proposals for Health Reform.

    "Our problem is that we spend two and a half times as much per person on health care as the average of other advanced countries … [Throwing more money into our current system is not the solution] … I think we have to go for a single payer system." - Dr Marcia Angell

    "The single payer system would be the best of all… Unfortunately, we can't get there from here because the political forces are just too strong against single payer." - Robert Reich

    Tippy Golden

    July 26, 2009 at 2:44 pm


    Sorry to post twice. Here is the video link to the Bill Moyer program referred to above.

    Tippy Golden

    July 26, 2009 at 3:03 pm


    As Holly Golightly would say, "Quel merde!"


    July 26, 2009 at 3:49 pm


    Is wide income inequality a bad thing?
    Take a look at the fate of civilizations that tolerated or encouraged it.

    Not exactly a pretty sight.

    However, if income inequality was taking place in a society where the electoral process was entirely financed by the community at large, my bet is the situation would be far less problematic than it is now. Let's be clear: in our society, money buy you access to the politicians and lawmakers, while those without money are neglected because they're never heard unless they protest loudly and in big numbers.

    The refusal to tackle this problem has obvious implications, none of them helpful for the common good. Just read "Free Lunch" and Perfectly Legal" to be convinced of it.

    Dr. Frankie

    July 26, 2009 at 4:11 pm


    If I might add- bad bets with other people's money.


    July 26, 2009 at 4:16 pm


    Can these pathological liar measure the hopegap, because it is here that thehaves and thehavenots are dividing wildly and exponentially. Look at swindlers and thieves and Wall Street giddy and deliriously drunk on their illgotten gains raked off the back of taxpayers, and captured cronies in the socalled government – billions of dollars in false profits by simply refusing to account for those PONZI scheme enterprizes, or toxic assets, and feeding at the trough of the Fed and treasury to the tune of 13 TRILLION taxpayer dollars. It's business as usual for these swindlers and thieves and back to the halcyon days of bubble/bust economy madness and thievery of September of 2008, knowing alltowell that when they screwup again on a catastrophic level – the Fed and the Treasury, and their bought and paid for CAPTURED cronies in the government will bail them out yet again and heap all the costs, debts, burdens and suffering on the backs of America's poor and middle class children. Hope is alive and thriving for the predatorclass, for the superrich who can ghoulishly swoop in now and devour all those defaulted properties, and glean outrageous fortunes off the backs of America's poor and middleclass and the unlimited largess of a government owned and controlled by the predatorclass. But hope is dead or dying for America's poor and middle class. No hope for upward mobility. No hope for retirement. No hope for a debtfree existance. No hope for legal justice! No hope for real freedom. No hope for real democracy. No hope in hell for real honesty from our leadership (as Palins twisted and pathetic speech today proves). No hope for representatives in our socalled government truly giving voice to the voiceless. No hope for a college education for our children. No hope for adequate healthcare. No hope for bargaining power for our labor forces. No hope for decent wages, or job protection, or benefits from our ruthless corporatist employers. No hope for a green future. No hope for less guns or fewer weapons, or less warmaking. NO goddamn HOPE!!!! There is no hope for America's poor and middleclass.

    But out of this horrorshow reality can be found the one opportunity for righting these terrible wrongs, and leveling the playing field and forcing real change. America's poor and middleclass are like abused children, and when we stand up and strike out at our abusers and refuse to allow the abuse, – then there will be real hope again. In a world where there are no laws, – there are no laws for anyone predatorclass biiaaatches.


    July 26, 2009 at 7:37 pm


    as much as I like your rant and as much as it spoke to my heart and gut etc. and made me nod yes, yes, yes
    I think it is a dream that the middle class ever will "march" for a common cause with the poor. "We" will not do that even after having been reduced to poverty ourselves. Class barriers exist, they are barriers of manners/habits just as much as of income and therefore they are human nature they may be softened but only in a society where there is a certain level of comfort for all. Once the substance is endangered or partly destroyed it is each group/class on it's own unless of course a new kind of human being has evolved without my taking notice ;-)
    and once leaders of groups will emerge out of the upheaval/chaos they will always tend to be lenient to other leaders because that is the only way they can get any kind of results/agreements/common grounds.


    July 27, 2009 at 7:23 am


    A critical aspect of income and wealth level comparisons has been omitted from James's rebuttal of Wilkinson as well as from Wilkinson's own piece – the marginal utility of income and wealth. I recall research cited earlier this year in The Economist (Economics View) in which two U. of Chicago researchers make exactly the argument that James tries to refute (and Wilkinson probably cites) – since the price inflation of services exceeds that of goods and the rich spend disproportionately on services, the rich suffer disproportionally from inflation and the buying power of the poor has increased at a faster rate (or decreased at a slower). Therefore, the poor, despite lower relative incomes and wealth (even in real terms), are really better off than they were 20 years ago.

    I think the strongest rebuttal this argument results from applying the concept of marginal utility of income (and wealth) to this finding. The dollars that the poor spend on goods are more valuable to them than the dollars that the rich spend on services. The real utility of those "poor-man's-dollars" is so much greater to them than is the utility of those "rich-man's dollars" to the rich that this differential exceeds the amount required to compensate for this supposed greater inflation in the price of services than in the price of goods.

    So what if the prices of yoga, massage, gardening services, psychotherapy, season tickets to the Met, etc. (and you can add ocean front real estate, Ferrari's, etc., if you fine-tune the research) are rising faster than the prices of cars, gasoline, food and refrigerators? The dollars used to buy services are worth significantly less to the people who spend them on those services, and the items, therefore, are worth less to the rich than the goods the poor buy are worth to the poor.

    I can't believe that the Cato Institute's research is taken seriously by serious economists. Two years ago, Alan Reynolds disputed in the WSJ the growing income gap that the research of Piketty and Saenz demonstrated quite clearly, by questioning the appropriateness of their data sources. (Reynolds was writing in response to an op-ed piece by a U. S. Senator (whose name I can't recall as I write this) who cited Piketty and Saenz in his call for some reform (which I also can't recall…:(). Saenz then rebutted Reynolds who backed off and promised a conclusive argument in his forthcoming book. The disagreement ended there, as far as I know, except for these continuing attempts to reduce the population's willingness to accept the reality of this gap and its implications.

    What none of these apologists for the naive free market view seem to be willing to note is that the income and wealth profile of the U. S. has changed since 1980 from one which matched that of the European nations and Japan to that of the emerging market economies such as Brazil, Russia, Argentina and Mexico. Is this change progress? Is that where we want to go?


    July 26, 2009 at 7:38 pm


    Certainly not.

    But, our problem is that Geithner, Bernanke, Sommers, Obama, et al are too stupid to see that that's where they're sending us. They seem to think that they will continue to have a lot of money & power even when there's no one left to produce anything for them to buy with all their money. Except Chinese pheasants. They could care less about American working people, the real producers in this economy. They only want to protect themselves & all the other parasites like them.


    July 26, 2009 at 8:16 pm


    Charles: "I recall research cited earlier this year in The Economist (Economics View) in which two U. of Chicago researchers make exactly the argument that James tries to refute (and Wilkinson probably cites) – since the price inflation of services exceeds that of goods and the rich spend disproportionately on services, the rich suffer disproportionally from inflation and the buying power of the poor has increased at a faster rate (or decreased at a slower). Therefore, the poor, despite lower relative incomes and wealth (even in real terms), are really better off than they were 20 years ago."

    On that argument, the poor might be better off in those terms if their relative wealth had remained the same. Unfortunately, the wealth gap has widened over that time.


    July 26, 2009 at 9:54 pm


    Precisely my point, but for different reasons.

    I was responding to the idea that the wealth and income gaps hadn't really grown because price increases on the stuff rich people buy increased quickly enough to offset this difference, the implication being that because the poor can buy better Honda Civics for the same money (in real terms) or equal Civics for less and the rich pay more (in real terms) for a Mercedes CL 550 or for the daily massage that the poor can't buy at all, the poor are relatively better off despite their relatively greater income and wealth. I just wanted to point out that the dollar spent on the massage to a person who earns $250k/year is worth less to him than is the dollar spent on a massage to the person who earns $60,000/year. More important is that the poor can't even buy the services that the rich can buy, so the relative greater cost of those services isn't a basis for comparison at all. It's a difference of kind rather than degree: "The rich are different from you and me."


    July 27, 2009 at 12:04 pm


    I have a problem with this statement:
    "But this is the first time I've heard an economist try to justify economic inequality on the grounds that it is happiness that matters, not money."
    Wilkinson does not hold a doctorate and his publication record seems to have an allergy to peer review. His background seems to be in philosophy and he is an economist in only the etymological sense. Wilkinson has a precocious intellect and is an impressive autodidact, but he is not a real scholar and no amount of footnotes can hide the lack of economic rigor in his work.

    Ian M.

    July 26, 2009 at 8:43 pm


    We've built up a whole host of near oligopolies which have, as would be natural, built up a whole host of government supports for maintaining their oligopolies.

    At some point, if we want to maintain a Democracy, we'll have to push back. Obama is making an effort, but breaking down all these barriers and allowing any real competition back in is going to take time and a huge amount of coordination.

    Someone earlier said that government can't create wealth. I think that kind of absolute statement is probably, at best, seriously misleading.

    Much of America's great wealth was created as a result of the public's investment in some area or other, whether it be the origination of rail lines, the exploitation of mineral resources, or the internet–which was a government invention.

    The public has just made a couple trillion dollar investment in the financial industry in order to avoid Depression. Somewhere right about here is when the discussion of oligopolies gained a lot of traction. The Wall Street bailout and all its components certainly appear to be a clear sign that we've got an oligopoly problem where a few citizens, aided and protected by government plutocrats, are wielding very undemocratic power.

    This is being done right in the face of a progressive President. It is an alarming display of power.


    July 26, 2009 at 9:50 pm


    "Someone earlier said that government can't create wealth."


    1) The National Institute of Health does a LOT of basic research into drug candidates. If I recall correctly, 25% of all the drugs that land on the US market were originally discovered at the NIH labs. If this is not wealth, I don't know what qualifies.

    2) When the Apollo missions were started, engineers had a particularly vexing problem: space navigation is very calculus intensive, hence, not really suited for abacus processing. They needed powerful machines to automate calculations in a very reduced space and very energy efficient. Let's remember that at the time, the private sector was enjoying big profits for selling big mainframes. Where were the incentives to shrink those? Nowhere.

    What did the solutions to these problems brought us? The personal computer industry. Remind me again how much wealth was created?

    3) Nuclear explosions create a very powerful magnetic field that can fry any electronics. That's a real bummer when the communication technology is point-to-point, You're the military and you NEED to ensure basic communications in such a scenario. What to do? You talk about your problem with DARPA, and there you go: the Internet is born. Any wealth here?

    I rest my case.

    Dr. Frankie

    July 26, 2009 at 11:15 pm


    And an alarming display of greed & stupidity.


    July 27, 2009 at 12:37 am


    Shovelling $22 trillion to the banksters NOW NOW NOW is an "effort"? TARP was dead in the water until Obama whipped for it.

    lambert strether

    July 27, 2009 at 10:21 pm


    some more fodder for the Michael Sandel fans from his talks with this site


    July 27, 2009 at 6:17 am


    one more useful link for the philosophically minded

    Nigel Warburton from the Open University publishes probably everything that is available for free on the net and American Philosophers seem to show up in Britain a lot and Warburton also informs of US-University podcasts if available (I remember one Berkeley-professor on Heidegger) – to date I know of no US-site matching this site's info-value


    July 27, 2009 at 6:56 am


    Thanks Silke for your interest in Michael Sandel. His words are music to my ears. He articulates a philosophy which provides an explanation for the current "mess" our world is in. But better still he is offering a way forward.

    Sandel says the age of "market triumphalism" (which began with Reagan / Margaret and reached a culmination with Clinton / Blair) has failed. The way forward includes a genuine civic and political debate on where to set the - the limits - on the market place.

    The challenge Sandel articulates is how does society create a new (economic?) paradigm where morality and spiritual values will help set limits on the market. And Sandel is nearly apologetic when he brings the subject of spiritual values into the discourse.

    Tippy Golden

    July 27, 2009 at 10:57 am


    Margaret here of course referring to Thatcher.

    Tippy Golden

    July 27, 2009 at 11:00 am


    sorry I am only a partial Michael Sandel fan – I liked him on the two philosophybites pieces but only listened to small parts of the Reith lecture, even got kind of angry at him, too much walking on the clouds as a Greek saying goes – as just everybody else he is strong on the analysis but when it comes to the solutions I still have to read somebody who is proposing more than a tweak here and a tweak there i.e. a grander picture it does seem unmanageable to me – maybe because it has been my job for so long to make legal prescriptions work in everyday life but I just tend to see the flaws


    July 27, 2009 at 11:14 am


    Well Silke, you are German I take it and I am Canadian. The Americans will need to find their solutions. And the EU. Here in Canada I am very grateful all this "cowboy" free-market financial innovation collapsed as it was only getting a foothold in Canada.

    Tippy Golden

    July 27, 2009 at 11:35 am


    I am happy for every country who hasn't participated in the general madness and comes out of it mostly undamaged
    Germany I get told has been running an austerity program with normal people not going into debt (which obviously didn't keep some banks and cities going on the rampage) but as the economy is based heavily on exports it has suffered probably more than they are willing to publicly admit shortly before general election. For the time being people are kept on short working hours benefits (a part of the unemplayment insurance system) and everything seems to be on hold whether it will blow over or we will crash belatedly and how badly.


    July 27, 2009 at 11:51 am


    Sorry to hear about this in Germany. Normal people running an austerity program and not going getting into debt while the banks went on a rampage.

    In the late 1990s there was a huge push by business to allow Canadian banks to merge with the large American banks. The free market mantra was Canadian banks were too small, less competitive, less profitable. But our finance minister Paul Martin and our prime minister Jean Chretien heard the public opposition and had the foresight to rule against foreign takeover.

    All I can say is what a mess the Canadian banking system would be in if our banks had been taken over by American banking giants like Citi, Bear Sterns, or Merrill.

    There are systemic problems in our economy. Here in British Columbia the forest sector is always having some kind of problem. Our fisheries are in trouble because of over fishing and global warming. The salmon returns are 50% below forecast this year. When the river temperatures rise the salmon don't like to enter the rivers to return to their spawning grounds. Industrial fishing and forestry gone mad.

    But still no Canadian banks went on a rampage. So we were lucky on this one.

    Tippy Golden

    July 27, 2009 at 11:13 pm

    Jackybird and Silke,

    Silke has identified a very serious problem that "advanced" nations are dealing with. Manufacturing has been outsourced to Asia (China, India, Pakistan) and the trend is increasingly so. This means the traditional middle class (those who worked with their hands in manufacturing and in the trades) has lost ground with the majority of new jobs in the service sector.

    It seems to me many new "middle-class" jobs are in the: video game industry, film industry, animation, web design and all the amazing widgets and software to service the internet. Anyone want to talk about this one?

    Tippy Golden

    July 27, 2009 at 11:14 am



    I too was confused by the term - single payer - when I first came across it. It means a single payer for health care. In other words, a national health care program. We call it universal health care in Canada.

    Tippy Golden

    July 27, 2009 at 11:19 am

    we have in GErmany a system of universal health care the origin of which goes back to Bismarck and has been patched up, amended, ameliorated etc etc ever since. The membership is compulsory for "wage slaves" up to a certain salary. Those earning more and the self-employed MAY chose private insurers but a lot of them choose to stay in the public system for probably good reasons (for example a single person pays the same as the father/mother in the next cubicle with any number of kids and a non-working spouse – the solidarity principle)
    The actual providers of universal health care insurance (a lot of them) in the "public" system operate like private insurers but with some democratic elements added to it. It is very complicated and entangled but from the insured patient's point of view quite comfortable.
    But ever since costs and the premiums (paid half and half by employer and employee) started to explode while the labour market started to weaken "they" have fiddled with the system. One trend was to somehow introduce competition between the "public" insurers – since then there is a constant back and forth. Recently they have changed the age old even split of premiums between employer and employee so that further raises of premiums are supposed to be borne exclusively by the employee.
    A lot of people have tried to organize the system anew in a sensible and understandable manner – nobody has succeeded and the costs keep coming and even though the official insurance premium is kept from rising alarmingly the costs to the patients get fiddled with in all kinds of clever and possibly reasonable ways but which come with the benefit of veiling the fact that they are an actual increase of health care cost.

    So coming back to the Unequality topic I think this constant fiddling convinces "people" more and more that they are getting screwed while being told that they will be much happier with the new rules.


    July 27, 2009 at 11:44 am


    Silke, we have the same problem in Canada. Rising costs because of medical technology, procedures, diagnostics and drugs of unproven usefulness.

    The for-profit medical lobby has a relentless campaign to convince Canadians our health care system is failing. While the side which wants to preserve national health care says our health system does not need a huge infusion of private or public capital. Rather we can restructure and allocate resources better. I'm inclined to side with the latter.

    Tippy Golden

    July 27, 2009 at 11:29 pm


    Of course I go with the latter also but in my experience it is the time that a system has existed and consequently the number of adjustments and deviations from its original intentions that determine how much it is in danger of crashing

    … and of course with how much disregard for small print the necessary patching up has been done (my lawyer bosses have always pointed out to me how long it took Germans around 1900 to word our Bürgerliches Gesetzbuch – Book of Laws for Citizens – and how well it has weathered the changing times and how fast they are through with wording amendments nowadays – because they are so much smarter than the old ones?;-) – it just is hubris wherever you look)

    the pity is that those wanting to look really close at the dangers get maligned just as much as those advocating for throwing it all away and starting anew, so in the end no real discussion is taking place
    - my only hope is that I am wrong about that and that there are some quiet rooms (Hinterzimmer-back rooms of pubs for clubby drinkers and gamblers) where people really are thinking and discussing with the sole ambition of coming up with workable solutions for our times.


    July 28, 2009 at 8:10 am


    Don't fall for the idea that anything costs less, least of all basics. This is a big lie: the cost to replicate the quality of food the average family enjoyed fifty or seventy years ago is vastly higher today as a percentage of average incomes, especially for the poor, who generally have even less access to quality grocers and live in neighborhoods where fresh produce and non-Mad Cow meat is incredibly expensive.

    The same goes for shelter: the real estate market has not yet bottomed out – price:income ratios for housing stock is much higher, even for rentals, than several decades ago, and in urban areas, where large concentrations of the poor live, it is vastly more expensive than ever.

    Clothing? Granted, a pair of generic rip-off 501s is cheaper than the genuine article was 30 years ago. But 30 years ago 501s were much higher quality than generic rip-offs; you once could tell the difference in the quality of textile and workmanship, probably because 30 years ago the textiles were made in North Carolina and the garment was manufactured in Tennessee. Expatriating that production to China and lowering quality standards has broadened the market, and led to an increasingly disposable product.

    The same could be said for just about any consumer electronics. These are the big-ticket items of consumer spending today, and they really skew the data. Cheap handsets and crappy LCD TVs and monitors that have to be replaced every couple years (or less, even) drastically inflate the consumer spending numbers, and explain why cutbacks in these sectors by households that never should have been buying them in the first place is causing such heavy ripples in the downturn.

    Durable, quality basics, such as brick walk-ups, 5-year old work pants, and non-GMO apples from your own hemisphere are very expensive habits today, and taking up a much larger portion of the budgets of the ever-growing lower classes. On top of this, the use of auto fuel by the poor has increased by several orders of magnitude in the past few decades, as the lower-middle-class are pushed out to the suburbs by the creative class's Return to the City and by swindler developers offering cheap junk suburban homes for a few cents less than a smaller quality home closer in. Gas prices suck up a much larger share of the working poor's income.

    So the lot of the poor has not improved. They are poorer, and they feel poorer, and our ability to extend social programs to adjust this is coming to an end as we will soon be spending most of our national income servicing our military and corporate-bailout debts. So don't be too pleased next time you hear some economics pundit pushing the case for more tax cuts for the rich: they are the benefiaries of our largesse, they ran up the debt, and they invented the disposable economy that is deteriorating our standards of living.


    July 27, 2009 at 1:16 pm


    The big problem I have with the article is the way it completely ignores the issue of debt and/or savings.

    Yes, consumption for the poor and or middle class may have held up much better than income in recent years, but how much of that is explained by the increase in debt and/or drop in savings. It is hard to take his article on consumption that avoids the issue of debt seriously.


    July 27, 2009 at 2:45 pm


    I found Wilkinson's paper quite persuasive, but Kwak's rebuttal is good. I have only one correction. When Kwak writes that "this is the first time [he's] heard an economist try to justify economic inequality on the grounds that it is happiness that matters, not money," he spoke too soon. As fas as I know, Wilkinson is not an economist, or at the very least, he has no degree in economics.


    July 27, 2009 at 3:24 pm


    They say that money can't buy happiness - but it can sure take the sting out of being unhappy.

    lambert strether

    July 27, 2009 at 10:18 pm


    now while everybody is busy regulating the loopholes of the last crisis out of existence it seems bankers have found a new one
    Being not of the business I do not know how relevant it is but listening just to the podcast which explains it very well did nothing to make me dismiss it as just a media hype.
    "It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors' orders and, critics say, even subtly manipulate share prices."


    July 28, 2009 at 7:09 am


    As long as there are resources allocated initially by markets, entities will control the production/distribution where scalable, and so the freedom of that particular market will die. So we end up with a system of oligarchies, corporatism. This also leads to the inevitable purchase of the political system.

    As long as this system is allowed, there will be inequality. There are and have been alternatives. A decent example (excellent given the sea it sails in) is the Mondragon coops in Spain.

    As far as the economics of it goes, one has to keep in mind mainstream economics is more religion than science; Steve Keen has a good analysis of this.

    The fact markets are so often defended and lauded makes me think they know they are on thin ice. When's the last time someone defended gravity?


    July 28, 2009 at 11:01 am


    Having come via CR, I've been a long-time lurker here, too.
    Definitely one of the better blogs, and less comments that make you want to rip your hair out than usual for many blogs about the economy…

    A really nice rebuttal of a transparent attempt to justify the pernicious changes in wealth distribution that started with Reagan and Thatcher and fanned out to many other countries including my own, Germany.
    Now I'm waiting for your thoughts about the remaining 15 pages.

    We're talking about an ideology that is prepared to sacrifice society (and economy in the longer term) in exchange for short-term profits.
    One more symptom: Many people can't get into regular employment like their parents, having to earn their livelihood on a series of time-limited contracts. Because of lack of reliable income/planning security, they often delay the decision to have children until it's very late. Another well-known fact is that the number of children in a family has become a good predictor for poverty risk. Societal/health/economic effects left as an exercise to the reader.

    BTW, like Silke, I fear that most Germans will only feel the unbuffered effects of the crisis after the general election. I hear a lot from self-employed people (like myself) and people in SMEs, their reality sure differs from what we hear through our media.

    Finally, one question, please disregard it if you think it's stupid or indiscreet. I happen to know two people with the family name "곽", which is often romanized as "Kwak". Wrong guess?


    July 28, 2009 at 11:32 am

    Income inequality bandwagon

    The Washington Times

    In a previous column, I noted the sudden new interest in income inequality on the part of the New York Times and Wall Street Journal. The Christian Science Monitor and Business Week since have jumped on the bandwagon. The latest entry in the Times series predictably noted the Bush tax cuts are exacerbating the maldistribution of income.
    As I said earlier, I don't believe this heavy coverage of a not remotely time-sensitive issue is coincidental. One clue comes from the University of Texas Inequality Project, which recently produced a paper showing Democratic presidential candidates did better in states with high income inequality.
    It isn't much of a surprise that inequality is an issue that plays for Democrats. Bashing the rich is in their blood, and no Democrat is happier than when engaging in class warfare. Consequently, it is in the Democrats' interest to play up inequality and any sign of the rich getting richer, especially if they can show it is at the expense of the poor and middle class.
    There is an unlimited supply of liberal economists at the University of Texas, the Center on Budget and Policy Priorities and elsewhere who are eager to manipulate the data to 'prove' inequality is worsening. But average people don't believe it. What really matters, both economically and politically, is what they see with their own eyes in their own lives. On this basis, the evidence of rising inequality is very weak indeed.
    The American Enterprise Institute compiled a useful compendium of data on this subject a few years ago. According to this study, people were first asked in 1964 in what economic class they had grown up and to what class they belonged at the time of the study. Pollsters asked again in 1978, 1984 and 1996. In every case, there was solid evidence people were in a higher economic class than the one in which they were raised.
    Interestingly, the strongest evidence is found in the most recent poll, taken in March by, ironically, the New York Times. According to this study, 18 percent of people reported living in the lower class as children. But today, only 7 percent say they belong to that class. Another 44 percent say they had a working-class childhood. However, only 35 percent say they are part of the working class today. In short, the percentage of the population living in the bottom two income classes fell from 62 percent to 42 percent -- an impressive improvement, greater than in any other survey.
    Concomitantly, the ranks of the middle and upper middle classes have increased. Only 28 percent of people reported growing up middle class and just 8 percent said they had lived in an upper-middle-class home. Today, 42 percent say they belong to the middle class and 15 percent are part of the upper middle class. Only 1 percent of say they were in the upper class as children, the same percentage that say they belong to this class today.
    In other words, there is no evidence whatsoever of economic class stagnation or deterioration in the data. Fewer people live poorly and more people live well. The data are unambiguous because people report their relative position in society as they see it. And in this case, perception is reality.
    People were asked if they thought it was still possible to start out poor in this country, work hard and become rich. The first time this question was asked in 1983, only 57 percent of people thought it possible.
    In 1998, in the midst of exceptionally strong economic growth, 70 percent of people thought it was possible to get rich. Today, 80 percent say it is possible to become rich in America and a mere 19 percent say it is not.
    People were also asked how they saw their own personal prospects for becoming rich. Amazingly, 11 percent said they thought it very likely. Another 34 percent thought it was somewhat likely. Only 22 percent thought they had no chance.
    This may explain why so many people in the Times poll said they favor abolishing the estate tax. Only 17 percent of people favor this tax and an overwhelming 76 percent oppose it. Obviously, many people who know they themselves will never, ever pay this tax nevertheless favor its abolition.
    I believe the recent media interest in inequality is part of a last-ditch effort to save the estate tax from repeal this year. The Times poll suggests it will be an uphill effort.

    Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist.

    Income and Wealth Inequality

    According to the Federal Reserve, in 1990 the richest 1 percent of America owned 40 percent of its wealth -- the greatest level of inequality among all rich nations, and the worst in U.S. history since the Roaring Twenties. Furthermore, the richest 20 percent owned 80 percent of America -- meaning, of course, that the bottom four-fifths of all Americans owned only one fifth of its wealth.

    Another revealing way of expressing this statistic is that the top 1 percent owned more than the bottom 90 percent combined.

    What caused this growing inequality? The most underlying reason may be that it takes money to make money. This is why many call for a progressive tax system: to redistribute at least a percentage of the wealth back to the middle class, thereby avoiding modern serfdom. We will explore the tax cuts for the rich in detail in the next section. But tax cuts are not the only way to polarize wealth. There are several others, and they can all be lobbied through Congress. A complete list follows in More.

    Tax progressivity was highest in the decades after World War II, when the rich were taxed a stratospheric 88 percent for nearly two decades. This was also an era in which the U.S. economy was a juggernaut, and the American Dream was indisputably alive and well. Because of this, most economists do not believe that high tax rates on the rich are bad for the economy.

    Personal income tax rate for top bracket1
    Years      Percent
    1945       91%
    1946-63    88
    1964-81    70
    1981-86    50
    1988       28
    1991       31

    The following chart shows the effectiveness of a progressive tax system. When the top rates were truly high from 1950 to 1978, American income at all levels grew at about the same pace. But when progressivity was lost in the 80s, the income of the poor began falling, while that of the rich continued growing.

    Income Growth by Quintile2

    Quintile       1950-1978     1979-1993
    Lowest 20%     138%          -15%
    2nd 20%         98            -7
    3rd 20%        106            -3  
    4th 20%        111             5
    Highest 20%     99            18

    Economists have a standard measure of income inequality, called the Gini Index. In this index, the higher the number, the greater the income disparity between the rich and the poor. (0 = perfect equality, 1 = only one person in the economy has all the income.)

    Gini Index of Income Inequality3

    Before   After 
            Taxes    Taxes
    1979    0.403    0.352
    1980    0.401    0.347
    1981    0.404    0.350
    1982    0.409    0.359
    1983    0.412    0.368
    1984    0.413    0.372
    1985    0.418    0.381
    1986    0.423    0.404 
    1987    0.424    0.380 
    1988    0.425    0.384
    1989    0.429    0.387 
    1990    0.426    0.381 
    1991    0.425    0.379
    1992    0.430    0.381

    As mentioned earlier, the U.S. economy slowed in 1973 for reasons still not completely understood. The average weekly earnings of nonsupervisory workers -- about four-fifths of the civilian workforce -- peaked in 1973, and have been falling ever since:

    Average weekly earnings of nonsupervisory workers, total private industry, 1982 dollars4

    1965  $290   
    1970   297 
    1973   315  (Peak)  
    1975   292  
    1976   297
    1977   299
    1978   301
    1979   291
    1980   274
    1981   271
    1982   267
    1983   272
    1984   274
    1985   271
    1986   271
    1987   269
    1988   266
    1989   263
    1990   259
    1991   255 
    1992   255  (Nadir) 

    The above chart is especially useful in rebutting supply-siders who use other measures to argue that everyone's incomes rose during the 80s. For detailed refutations of these other measures, see More.

    Average hourly earnings also fell over the 80s:

    Average hourly earnings, total private industry (1982 dollars)4
    1973  $8.55
    1980   7.78
    1985   7.77
    1990   7.52
    1993   7.39 

    Presidents Reagan and Bush froze the minimum wage for 9 years, essentially giving those workers a pay cut each year as inflation bit into their paychecks. In 1992 dollars, the 1963 minimum was $5.74 -- or 35 percent more than it is today.

    Raises in the Federal Minimum Wage5

    Percent of average
    Year   New rate   production earnings
    1950*  $0.75      54%
    1981    3.35      43
    1990    3.80      35
    1991    4.25      38
    1994      --      35 

    *For brevity's sake, this chart omits the 15 minimum wage increases between 1950 and 1981. No newly introduced minimum wage has ever been lower than 35 percent of the average wage, although old minimum wages have certainly gone below this. For a fuller chart, see More.

    Economists previously believed that raising the minimum wage would cost jobs, especially among teenagers. However, recent research suggests that the truth might be a bit more complicated than this, and that when the minimum wage falls too low (due to inflation), it can be raised safely. For more on the controversy stemming from the Card/Krueger study, see More.

    On the other hand, the salaries of executives skyrocketed during the 80s:

    Salaries and benefits of corporate CEOs as a multiple of the average factory worker's6

    1980   30 times
    1991   130-140 times

    And these super-salaries did not come primarily from greater profits, but from a larger slice of the profits: (More)

    Executive Compensation as a Share of Corporate Profits7

    1953   22%
    1987   61

    The following chart shows the growth in the number of millionaires and billionaires during the 80s. Notice that their numbers skyrocketed in the years 1985-87.

    Approximate number of millionaires and billionaires in the U.S., 1978-19888

    Year  Millionaires  Decamillionaires  Centamillionaires  Billionaires 
    1978    450,000                                            1 
    1979    519,000 
    1980    574,000                                            ? 
    1981    638,000                                            ? 
    1982                  38,885              400              13 
    1983                                      500              15 
    1984                                      600              12 
    1985    832,000                           700              13 
    1986                                      900              26 
    1987   1,239,000      81,816            1,200              49 
    1988   1,500,000     100,000            1,200              51 

    Percent Increase of Combined Salaries by Income Bracket, unadjusted for inflation (1980s)9

    Income Bracket       Percent Increase
    $20,000 - 50,000          44%
    200,000 - 1 million      697
    Over $1 million        2,184 

    Viewing the above chart more broadly, the total wages of all people who earned less than $50,000 a year -- about 85 percent of all Americans -- increased an average of 2 percent a year from 1980 to 1989, which did not even keep pace with inflation. By contrast, the total wages of all millionaires shot up 243 percent a year.

    Defenders of the Reagan era claim that income mobility in the U.S. is great enough to overcome income inequality. That is, if people move up and down the income scale to a significant degree, then, over a lifetime, your average income is going to match my average income. However, there are a few flaws with this argument. First, income mobility in the U.S. is not even close to making this a reality. ( More.) Second, one could hardly justify slavery on the basis that, for 1 percent of your life, you, too, will be the master.

    So who gets ahead, and who gets left behind? The single most decisive factor is education:

    Education, Experience and Wages10

    Percent change in earnings
    New Workers (1-5 years experience)      from 1979 to 1987
    Less than 12 years of school             -15.8%
    High school degree                       -19.8
    16 or more years of school               +10.8
    Old Workers (26-35 years of experience)
    Less than 12 years of school             -1.9
    High school degree                       -2.8
    16 or more years of school               +1.8 

    Some people claim that if the poor want to get ahead, they should just return to college. However, the job market can bear only a limited percentage of educated professionals, and there is already a glut of college grads in most fields. This makes competition the hallmark of today's meritocracy, which critics call destructive in its extreme form. (More)

    Although the following chart is one of the largest, it is also one of the most important. This chart shows how the incomes of most American families stagnated or fell during the 80s, with gains posted only by the top 20 percent. It also reveals how supply-siders lie with statistics, but more on this in a moment. For those unfamiliar with the term "decile," the 1st decile is the poorest 10 percent of the population, the 2nd decile the 2nd poorest, and so on.

    Average Income Level and Effective Federal Tax Rates in Each Family Decile by Year, in 1988 dollars (Corporate income tax allocated to capital income)11

                                                      Percent change:
                                                     1977-   1980-   1985-
    Decile    1977      1980      1985      1990       90      90      90
    1st      $4,277     3,852     3,568     3,805    -11.0%  -1.2    6.7
    2nd       8,663     7,982     7,717     8,251     -4.8    3.4    6.9
    3rd      13,510    12,530    12,230    13,110     -3.7    4.6    7.2
    4th      18,980    17,240    17,010    18,200     -4.1    5.6    7.0
    5th      24,520    22,380    22,070    23,580     -3.8    5.4    6.9
    6th      30,430    28,100    27,620    29,490     -3.1    5.0    6.8
    7th      36,880    34,370    34,620    36,890      0.0    7.3    6.5
    8th      44,820    42,050    43,370    46,280      3.3   10.1    6.7
    9th      56,360    53,660    56,190    59,860      6.2   11.6    6.5
    10th    111,100   107,900   123,200   133,200     19.9   23.4    8.2
    top 5%  149,500   146,000   172,100   187,400     25.4   28.3    8.9
    top 1%  319,100   321,400   415,700   463,800     45.4   44.3   11.6
    All      34,830    32,850    34,480    37,050      6.4   12.8    7.4

    As you can see, the majority of American families were worse off in 1990 than they were in 1977, at the beginning of Carter's presidency!

    When supply-siders talk about family income in the 80s, they are always careful to use 1980 as a benchmark for their comparisons, and never 1977. This is because the recession of 1980-82 was the worst since World War II -- perfect for comparing the later Reagan years in their best light. But comparing the Reagan recovery to the non-recession year of 1977 puts everything in perspective: most Americans lost ground, even at the end of the recovery.

    Which leads to the question: are presidents responsible for creating recessions and recoveries? If yes, then Reagan deserves credit for rescuing the economy from Carter's mismanagement. But if not -- which is what almost all mainstream economists believe -- then the supply-sider's praise of the 80s rings hollow. In that case, it is natural for recessions to be followed by recoveries, and supply-siders might as well take credit for the incoming of the tide. In reality, the Chairman of the Federal Reserve Board is far more responsible for influencing recessions and recoveries. (More)

    Supply-siders have a partial rebuttal to the above chart. They point out that family size decreased during the 70s and 80s, which means that less family income would cover fewer people, and therefore not lower their standard of living. The following chart shows the long-term decline in average family size:

    Average Family Size12

    1970   3.58 persons
    1975   3.42 
    1980   3.29
    1985   3.23
    1990   3.17

    But this counter-argument runs into a few others. First, falling individual income is responsible for declining family size, so to say that families are maintaining their standard of living despite everything is missing the point. (More) Second, the rather small decline in family size does not explain or justify the massive income gains seen by the top 1 percent, while 80 percent of all families are treading water.

    The following chart shows how large a slice of the economic pie everyone is getting. More specifically, it shows how much of the total national income that each 20 percent of American families are making. As you can see, everyone's slice of the pie grew smaller in the 80s except the top 20 percent, which grew. And the top 1 percent was responsible for most of that quintile's growth, as the last chart reveals.

    Percent of National Aggregate Income Received by Each Quintile (by Family, in 1992 dollars)13

    Quintile       1980   1992
    Lowest 20%      5.2%   4.4
    2nd 20%        11.5   10.5
    3rd 20%        17.5   16.5
    4th 20%        24.3   24.0
    Top 20%        41.5   44.6
    Top 5%         15.3   17.6

    Shares of Pretax Adjusted Family Income14

    Quintile        1977     1980    1985    1988    1989
    Lowest 20%      4.7%     4.3     3.7     3.5     3.5
    2nd 20%         10.8     10.5    9.5     9.1     9.2
    3rd 20%         16.3     16.0    15.1    14.6    14.7
    4th 20%         22.9     22.9    22.2    21.7    21.7
    Top 20%         45.6     46.7    50.1    51.4    51.4*
    Top 1%           8.3      9.2    11.6    13.4    13.0

    *Table reads that 51.4 percent of all adjusted pretax family income in 1989 belonged to families in fifth or highest quintile. Quintiles are weighted by persons.

    A common defense of these charts runs something like this: "How equally the pie is sliced is not as important as the fact that the pie itself is growing. Our GDP grows almost every year, so everyone benefits." But this argument becomes incoherent when paired with the claim that America should be an unrestricted meritocracy. If competition is the primary basis of American society, then how equally the pie is sliced becomes significantly more important than the size of the pie itself. (More)

    An even stronger refutation is that, over the 80s, as the pie has grown, 70 percent of the extra growth has gone to the top one percent, with the rest going to the next 5 percent or so. The middle class share has simply stayed the same size.15 This means that the average American worker is working harder, producing more, and creating overall growth, but is not seeing any of the rewards. And this largely explains why middle class anxiety, voter anger and economic uncertainty are gripping the nation today. ( More)

    Next Section: Taxes
    Return to The Reagan Years Home Page
    1 Internal Revenue Service.
    2 U.S. Bureau of the Census, Current Population Survey.
    3 U.S. Bureau of Labor Statistics. The "before tax" column is Measure 1 of the Gini Index. The "after tax" column is Measure 15, which measures inequality after all taxes and government transfers.
    4 U.S. Bureau of Labor Statistics, Bulletin 2445, and Employment and Earnings, monthly, June and March issues.
    5 U.S. Department of Labor, Employment Standards Administration, Minimum Wage and Maximum Hour Standards Under Fair Labor Standards Act, 1981, annual and unpublished data.
    6 Kevin Phillips, Boiling Point (New York: HarperPerennial, 1993), p. 251.
    7 Internal Revenue Service.
    8 The statistics and estimates for millionaires are drawn from multiple sources, according to Kevin Phillips in The Politics of Rich and Poor (New York: Random House, 1990), Appendix A, p. 239. The decamillionaire data for 1982-88 comes from Thomas J. Stealey, Marketing to the Affluent (Homewood, Ill.: Dow Jones-Irwin, 1988). The remaining data comes from Forbes and Fortune surveys of the richest Americans during the 1980s.
    9 Internal Revenue Service.
    10 Calculations based on L.F. Katz and K.M. Murphy, Changes in Relative Wages, 1963-1987: Supply and Demand Factors (Cambridge, Massachusetts: National Bureau of Economic Research, 1990).
    11 Congressional Budget Office, House Ways and Means Committee, 1992 Green Book.
    12 U.S. Bureau of the Census, Current Population Reports, P20-477.
    13 U.S. Bureau of the Census, Current Population Reports, P60-184; and unpublished reports.
    14 Congressional Budget Office tax simulation model, cited in U.S. House Ways and Means Committee, 1992 Green Book, p. 1521.
    15 This is the so-called "Krugman calculation," which has successfully resisted various statistical challenges by supply-siders. See Paul Krugman, Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations (W.W. Norton & Company, 1994), p. 138.



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    [Oct 19 2006] - World - View from the Top Felix Rohatyn

    October 19 2006 |

    Business leaders review the news on video for

    This week, Ambassador Felix Rohatyn of Lehman Brothers

    Financial Times: One of the signal events this week is the Dow breaking 12,000. What do you think that means?

    Felix Rohatyn: I don't know if it has one particular meaning, but I think it's maybe more a result than a meaning. I think that globalisation has created new wealth by providing much lower costs to manufacturing, by providing much lower cost labour; and a lot of the savings created by this are savings that show up in corporate P&Ls, and if you then apply some type of multiple to that, those are very, very big numbers.

    And I think, without necessarily going into the argument of rich versus poor.... that clearly this is something that helps the one half of 1 per cent of 1 per cent who own most of America's is creating wealth differentials that probably are not tolerable in the long run and require some - I won't use the word redistribution because that's not a nice word - but some changes, probably through the tax system at some point.

    [Feb 24, 2006] The Big Picture Fed Stagnant Net Worth for Typical US Family

    Every 3 years, the Federal Reserve undertakes a massive survey of nearly 5,000 US families. The interview process is comprehensive, covering all manners of financial information -- and its intensive, taking between 80 minutes and 2 hours.

    Its the Federal Reserve's Report on U.S. Family Finances, and it quantifies what most people already know: The average family is not making much economic progress:

    "After growing rapidly during the boom of the 1990s, the net worth of the typical American family rose only 1.5% after inflation between 2001 and 2004, the Federal Reserve said in an update of a survey it does once every three years.

    The Fed said the net worth of the median American family -- the one smack in the statistical middle -- was $93,100 in 2004. Net worth, the difference between a family's assets and liabilities, rose a robust 10.3% between 1998 and 2001 and 17.4% in the three-year interval before that.

    A booming housing market boosted the typical American family's wealth between 2001 and 2004, but stagnant stock prices and rising debt offset many of those gains."

    The Fed helps explain what many politicans have been unable to grasp: the disconnect between rosy economic headline data and real life experiences for most families.

    The report also gives lie to much of the foolish spin we have heard from some politicians and from the economic charlatans -- those people who know better (or at least should know better), but knowingly deceive the public in pursuit of their own political or economic agenda.

    A few items pop out from the report:

    • Rising debt has offset the boom in housing;
    • Inflation continues to eat into family cash flow;
    • Income remains stagnant;
    • Savings has slipped to zero;

    click for larger graphic

    Share of the Wealth

    Percentile Wealth in Millions of Dollars Share of Wealth in Percentage Terms
    Bottom 25% n/a 0
    24 to 49.9% 1,319,977.5 2.6
    50 to 74.9% 5,195,835 10.3
    75 to 89.9% 8,856,460.5 17.6
    90 to 100% 34,910,182 69.5
    Bottom 25% n/a 0
    25-49.9% 1,251,375 2.8
    50-74.9% 4,701,975 10.5
    75-89.9% 7,645,635 17
    90-100% 31,269,465 69.7
    Bottom 25% n/a 0
    25-49.9% 1,067,040 3.2
    50-74.9% 3,824,415 11.4
    75-89.9% 5,734,314 17.1
    90-100% 23,025,492 68.5
    Bottom 25% n/a 0
    25-49.9% 930,600 3.6
    50-74.9% 3,034,350 11.8
    75-89.9% 4,359,960 16.9
    90-100% 17,490,330 67.8

    Courtesty of WSJ, Federal Reserve's Survey of Consumer Finances

    The Confiscation of American Prosperity From Right-Wing Extremism and Economic Ideology to the Next Great Depression by Michael Perelman

    "Can a recent history of the U.S. economy read a bit like a crime story? Yes, in the hands of Michael Perelman" - Seth Sandronsky, Sacramento News & Review

    "The Confiscation of American Prosperity is a highly readable work that offers equal servings of serious economics and controlled anger. Michael Perelman is outraged by 30 years of deepening disparities in the U.S. economy, and by the fact most economists either ignore the reality before them or worse, provide academic firepower on behalf of a more unequal and unstable society. Read Perelman, and prepare to be challenged, both intellectually and morally."

    --Robert Pollin, Professor of Economics and Co-Director of the Political Economy Research Institute (PERI), University of Massachusetts-Amherst

    "This book gives an original perspective on the changes in the country over the last three decades. It documents how the wealthy have managed to structure the economy so that they could monopolize the gains from growth over this period. It shows how the resulting growth in inequality is undermining economic stability and productivity growth, creating an economy and society that will not be sustainable in the long-run."

    --Dean Baker, Co-Director, Center for Economic and Policy Research

    "Michael Perelman is author of a long series of important works on the history and theory of capitalism. In his latest book The Confiscation of American Prosperity, he offers an integrated account of economic and political developments in the postwar period that could not be more timely. Going beyond moral denunciation of the ever-worsening distribution of income and wealth, he shows the way in which an ascendant far right used the levers of power to counter declining profitability, but, in the process of assaulting American living standards and further enriching the wealthy, ended up weakening the mainsprings of the economy and preparing the ground for devastating crisis. This is a story that economic orthodoxy cannot tell but one that everyone needs to hear."
    --Robert Brenner, Director, Center for Social Theory and Comparative History, UCLA

    "In this age of ever-increasing concentrations of power and wealth, economists have been quick to attribute changes in inequality to factors such as globalization and technological change, while paying much less attention to the social and political forces that have shaped the outcome. With its analysis of the political, economic, and social forces behind recent changes in the distribution of power, wealth, and income, this book takes important steps to fill this void. Beginning with its analysis of the right wing's exploitation of the discontent from the unraveling of the Golden Age as a means to promote free-market ideology, continuing with its analysis of later efforts to further free-market ideology in the political and public arenas, and ending with its characterization of where we are now, this book helps us understand how we attained the level of inequality we have today, and where we might be headed next."
    --Mark Thoma, Associate Professor of Economics, University of Oregon

    Book Description
    This book argues that the right-wing revolution in the United States has created deepening inequality and will lead to economic catastrophe. The author makes the case that over the past three decades the rich have confiscated wealth and income from the poor and middle class to a far greater extent than many realize, and he explores in detail important but commonly unmeasured dimensions of inequality. He also takes aim at the economics profession, criticising the analytical blinders that leave economists incapable of seeing the coming crisis.

    Bank results may drag stocks even lower Markets Hot Stocks By Michael Brush

    $21,000 an hour, at your expense

    New rules have lifted the veil on how big companies reward their part-time board members. The average pay is nearly $200,000 a year, and an elite group earns $1 million or more.

    How would you like to earn $21,000 an hour for a part-time job?

    In 2006, the latest year for which numbers are available, 85 corporate directors took home more than $1 million, according to analysis by The Corporate Library, a corporate-governance research firm. They typically get this juicy pay for attending about 10 meetings a year, joining in on some conference calls and sometimes consulting on projects.

    Many members of this elite group are founders or former executives, or serve as chairmen of the board, and some argue they deserve those checks.

    Board members are supposed to represent shareholders' interests in guiding a company. Instead, as the numbers show, they're often enriching themselves at shareholders' expense.

    'A dream job for any American'

    Take real-estate magnate Sam Zell, who ranks 158th on Forbes' list of the world's billionaires. He's worth an estimated $5 billion.

    Thanks to his part-time position as chairman of the board at Equity Residential (EQR, news, msgs), an apartment-building developer that he helped found, Zell continues to accumulate wealth. In 2006, Equity Residential rewarded Zell with $3.2 million worth of options and restricted stock.

    The Equity Residential board held nine meetings that year. Assuming they were full-day meetings and throwing in a few weeks for prep time, Zell earned about $21,000 per hour for this position. That's a well-paid gig even as chairmanships go. Directors at Fortune 500 firms who were also chairmen got a median of $288,000 in 2006, according to Equilar, an executive-compensation research firm. That was more than five times the median income that U.S. households brought home that year.

    Mozilo could reap $115 million By Kathy M. Kristof

    January 11, 2008 | Los Angeles Times
    The Countrywide CEO's potential pay if his company is acquired rankles critics.

    By Kathy M. Kristof, Los Angeles Times Staff Writer
    January 11, 2008

    Countrywide Financial Corp. founder Angelo Mozilo, one of the nation's highest-paid chief executives, stands to reap $115 million in severance-related pay if his troubled company is acquired by Bank of America Corp., regulatory filings show.

    Free rides on the company jet are also included in Mozilo's departure deal, and the company will pick up his country club bills until 2011.

    Other executives, including Home Depot Inc.'s jettisoned CEO, Robert Nardelli, have garnered bigger going-away packages. But critics say Mozilo's arrangement is especially nettlesome given the losses that Countrywide investors have suffered in the last year. Company shares rallied Thursday to $7.75, up $2.63, but that's still down 82% from their high last year.

    "This is a failed chief executive -- a failed and overpaid chief executive -- who has driven his company to the brink of bankruptcy," said Daniel Pedrotty, director of the office of investment at the AFL-CIO. "I think shareholders are going to be especially outraged if he walks away with another pay-for-failure package."

    Neither Mozilo nor Countrywide officials returned calls for comment.

    Bank of America is in talks to acquire Countrywide and a deal could be announced as early as today, according to people with knowledge of the talks.

    If Countrywide is acquired, Mozilo could potentially stay on with the company. But he could probably make more money by leaving, compensation experts say.

    For one thing, Bank of America is unlikely to pay Mozilo more than its own chief executive, Kenneth Lewis.

    Lewis, whose company has a market capitalization of $174 billion, earned $27.9 million in 2007, according to regulatory filings. Mozilo earned $48.1 million last year, and Countrywide's market capitalization is $4.5 billion.

    If Mozilo is fired or resigns voluntarily, his employment contract guarantees him three times his base salary, plus a cash payment equal to three times the amount of whichever is greater: his average bonus over the last two years or his bonus from the previous year.

    That combined total would be $87.9 million, according to Countrywide's most recent proxy statement.

    In addition, Mozilo has two pensions that his severance pact gives him the right to receive as a lump sum upon his departure. Those pensions were worth $24 million as of December 2006, the last time the company was required to report their value.

    Finally, Mozilo would be eligible for accelerated payment of stock options and stock grants if the buyout goes through. Those are worth at least $3 million at current market prices, estimated Richard Ferlauto, director of pension and benefits policy at the American Federation of State, County and Municipal Employees.

    Add it all up, and the severance package is potentially worth $115 million.

    "He has driven the stock price into the ground and the company has been destroyed," Ferlauto said. "Their customers have lost their homes and he is potentially walking away with more than $100 million. For us, that's unconscionable enrichment."

    In the past, Countrywide has defended Mozilo's pay, saying that shareholders had reaped vast riches thanks to the leadership of the company's founder, who has served as its chief executive since 1998. Until it was struck by rising loan defaults last year, the company had been profitable and its stock price had handily beaten market averages.

    Mozilo has also defended his sale of company stock options, which are now the subject of an inquiry by the Securities and Exchange Commission.

    The Times reported last year that Mozilo made changes to his stock-trading arrangements that allowed him to ramp up his sales of company stock before Countrywide shares went into a tailspin.

    In October 2006, shortly before the severity of the mortgage crisis became understood to investors, Mozilo adopted a stock-trading plan allowing him to sell 350,000 shares of Countrywide stock each month.

    He launched a second trading plan in December 2006 and then revised it in February, when the stock was at a 52-week high, to vastly increase his stock sales. Those changes helped enable Mozilo to sell $145 million in Countrywide stock between Nov. 1, 2006, and Oct. 12, 2007. Although executives are allowed to trade shares in their companies under so-called 10b(5) agreements, industry experts said it was highly unusual to revise and add plans in short succession.

    SEC officials will not discuss continuing investigations, but people within the agency have confirmed that Mozilo's stock sales are being scrutinized.

    Combining those sales with pay and previous gains on the sale of stock, Mozilo has taken more than $650 million out of Countrywide over the course of the last 10 years, Ferlauto said. Add in potential severance payments and the Calabasas-based company would have enriched Mozilo to the tune of three-quarters of a billion dollars.

    "Compensation abuse has been a recurring travesty with this company," said William Patterson, director of CtW Investment Group in Washington. "The company has been run into the mud. Should Mozilo be able to walk away with this additional cash? Clearly not. I think it becomes the latest in a series of outrages."

    Stagflation: The Epic Battle Between Labor and Capital by charles hugh smith

    January 10, 2008 | charles hugh smith

    Now that 25 years of high growth and benign inflation appears to be ending, the term stagflation--stagnant economic growth coupled with stubborn inflation--is once again in the news.

    For a novel and perceptive interpretation of stagflation, we turn to frequent contributor Albert T.:

    What is stagflation really? High inflation and low growth is what we hear but why? The truth is stagflation is the battle between labor and capital for the share of the economic pie--wage share of income as we call it in one of my classes. (emphasis added--CHS) This story is the trend in my view:

    Italians Dressed in Sunday Best Forced to Dine in Soup Kitchens

    Dressed in his best Sunday suit, Fausto Cepponi took his wife and seven-year-old son out for dinner -- at a soup kitchen.

    ``I never thought I would be in this position,'' said Cepponi, 45, a security guard, dining in an 800-seat charity cafeteria near Rome's main train station. ``I have a job, I had a car, but everything has become so expensive and what I earn just isn't enough. I panic every third week of the month.''

    With salaries on hold, prices for staples such as pasta and bread rising and mortgages soaring, efforts to keep up appearances -- ``fare la bella figura'' in Italian -- can no longer disguise that thousands of job-holding Italians are failing to make ends meet. They've been labeled ``The New Poor,'' the title of a book published this year.

    The problem with inflation is that repricing of contracts (labor contract being one of them) is problematic unless you have leverage. Hence the writers strike and stagehands strikes (both have tremendous leverage).

    Inflation is in essense a gambit of attacking your costs by raising prices, assuming your own costs will rise but fall short of the net benefit between the two increases. Unfortunately for capital in this battle my guess is the writers will win out in the end. However that doesn't mean that labor won't lose out to capital in other areas.

    I personally think the coming bankruptcy of small cities and towns will make them merge and eliminate work force, ergo "civil servants" and those people will rejoin the world of the living.

    You think large corporations got great tax breaks before for shifting new businesses to one state or another, just wait. We will see deals of the century; I am sure offers of 99 years without taxation perhaps even decades of subsidy and tax free bonds financing. Ergo capital for capital that is intensive will become very very low cost but labor will be driven into a state of frenzy so high that it will force politicians to compete to placate it's plight.

    Imagine having a tough time buying food like the people in the story above and I am sure any wage where you can buy food will look good. That is what we call subsistance wage in one of my classes. Subsistance wage is where you cover your necessities but have no money at all for savings--just like the U.S. wage earner on average--many Americans now live paycheck to paycheck.

    Although some of us are thriftier and do choose to save, that choice will soon be gone for the majority. The wonderful point about subsistance wage is that is where the capital return is highest for capital.

    It might seem odd that everything is falling around us but if we think about it the world is making perfect sense. Assets are repricing because they are being sold off by those whom aren't capital holders. People who are laid off by the job cuts in banks etc will probably sell off any 401k they managed to bulk up to pay for the mortgage or daily expenses until they get a job. I would be very reluctant to go to a lower paying job until all my savings were gone too, or if I didn't live with my parents. Prices take a long time to adjust.

    Italy truck strike ends -- for now

    The short end of the story is basically truckers in Italy stoped all traffic for about 3 days + with food shortages and store shelves going empty along with gas pumps, etc... To get higher wages ofcourse because their income hasn't kept pace with inflation.

    Germany: Train Drivers Strike Again

    German train drivers brought local rail services across the country to a standstill to press their demand for higher wages. The railway has refused to meet the union▓s demands for a wage increase of as much as 31 percent.
    Train strike brings Germany to standstill

    French rail authority says labor unions announce plan for 36-hour strike next week

    (French and German unions have struck before and continued to strike until their wages were bumped up or some other economic benefit is provided to keep pace with inflation.)

    Thank you, Albert, for a very insightful and deeply provocative interpretation. Now I get to add my three cents. (It used to be two cents but costs have risen.)

    Albert makes some key macro points. The first is what he calls labor leverage. Albert's example is the current Hollywood writers strike. The writers have leverage because the production companies are bound by contract to hire union writers. Legally, they cannot just go hire new screenwriters from Bollywood for a hundred bucks a movie/TV show. There is also a fraternal system in Hollywood which does not lend itself to outsourcing of creative material.

    In other words, the writers have leverage. Eventually the media companies run out of new content and their advertisers go away. Corporate income drops, the stockholders scream, the head honchos' heads roll, and new management cuts a deal to restore profitability. If labor has a stranglehold on corporate revenue/profits, they can actually win. That's leverage. If not, they lose.

    (NOTE: I think you can guess where my sympathies lie in this dispute. Recording artists receive income for decades from their original material, yet writers are supposed to give up their electronic (future) rights for nothing? Gee, I wonder why the media corporations are fighting so desperately for 100% of future electronic profits.)

    The opposite of leverage is wage arbitrage. This is the term for moving factories and call centers to places with lower labor costs. Thus the factory moves from the U.S. to China, from Dusseldorf to Bulgaria, from Italy to Sri Lanka, and so on--in an endless chain which eventually leads--and has already led in some cases--to factories in "high cost" China being moved to "low cost" Vietnam.

    How many jobs in the U.S. are vulnerable to wage arbitrage? A lot. Manufacturing jobs in the U.S. total about 14 million now, while China has about 110 million factory jobs. In one sense, this makes China far more vulnerable to wage arbitrage than the U.S. All the U.S. manufacturing jobs which could be shifted to cut costs have already been moved; those 14 million manufacturing jobs still here are here for a reason.

    Like what? Like the materials are too heavy and the labor costs too small a percentage of the final cost to make offshoring the plant worthwhile. Examples include glass (heavy and brittle, often requires high-tech coatings better done here by robots), lumber products and various pharmaceuticals. (Pirating in China has destroyed many brands and pharmaceutical products' markets, so why bother even making stuff there?)

    Meanwhile, we have friends whose family business manufactures specialty steel products. They have already moved their factory from China to Vietnam, and they are not alone. There are plenty of stories about wages rising in China to the point that wage abritrage is now a factor in China's growth as well.

    Albert makes repeated mention of labor union strikes in Europe--especially those in transport. Municipal labor unions have plenty of leverage over public transport and services, as we all know. Subway/train and garbage strikes are usually quickly resolved in the unions' favor.

    But as Albert points out, what happens on a macro level when cities and public agencies go bankrupt? As readers know, I have been forecasting just such a tidal wave of public bankruptcies for several years.

    The problem for public unions is they don't control or even influence the revenue side of public agencies' ledgers. The basic model for the past 25 years of union contracts has been this: when unions strike, the easiest way to lower the pain (public outcry at the disruptions, etc.) for agency managers has been to cave in and agree to higher wages/benefits. Then the agency raises ticket prices or taxes. The public has grumbled but never revolted.

    That will change once people find they can't afford food by the third week of the month. Their sympathy for well-paid transit and public union workers will vanish, and they may, for the first time, refuse to pay the higher ticket prices or higher property taxes.

    If politicians start losing elections for trying to raise taxes, then agency heads will also roll. Bottom line: it's the politicians who control the revenue stream, and the public has the ultimate leverage on them.

    If we wander back down memory lane, we can recall that President Reagan was faced by what appeared to be a union with tremendous leverage: the air traffic controllers. Now the air traffic control system is in dire need of a complete (and costly) overhaul, and I am not knowledgeable enough to say whether the union being busted was a good thing for the nation or not.

    My point is simply this: public officials can stand up to public unions when pushed beyond a certain point--and when the public supports the officials. Europe and the U.S. have a different mix of public and private labor. About 40% of the French workforce is public or semi-public employees. That's a high enough percentage that they can practically control elections and vote in tax increases as a policy of self-interest.

    But at some point, the private corporations and businesses who are paying the high taxes may rebel, and either close down (in the case of cafes and small businesses) or leave for more hospitable climes--wage and tax arbitrage, another issue Albert raised so preciently.

    If public revenue (taxes) cannot keep pace with public union demands, then something will have to give. I would anticipate a situation in which transit/rail workers go on strike, demanding higher wages. This is a strategy which has worked exceedingly well for 60 years (since 1945). But alas, they will be told by bankrupt public authorities there simply is no more money. The unions will have a difficult time grasping this strangulation of the public revenue stream. But can't you raise taxes on someone, somewhere? No; all the productive businesses have left, exploiting global wage and tax arbitrage.

    Many observers in California have noted the flow of jobs from California to other states--that is, wage and tax arbitrage within the U.S. Businesses and jobs leave California for lower-cost states. At an even finer-grained level, businesses leave high-cost San Francisco for lower cost suburbs. Like water flowing to the lowest level, businesses flow to the areas with the lowest wages and taxes. In many cases, they really have no choice; their competitors are already reaping the benefits of lower wages and taxes, and they can cut prices and increase profits as a result.

    So the question for each of us becomes: how much leverage do we really have?

    Readers Journal has been updated! An important new essay and many excellent comments on Can a Fragmented Culture Find Common Ground? and inflation/deflation.

    Readers commentaries

    Thoughts on a Common Culture (Chuck D.)

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    Free Lunch How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill) by David Cay Johnston

    The bestselling author of Perfectly Legal returns with a powerful new exposé

    How does a strong and growing economy lend itself to job uncertainty, debt, bankruptcy, and economic fear for a vast number of Americans? Free Lunch provides answers to this great economic mystery of our time, revealing how today's government policies and spending reach deep into the wallets of the many for the benefit of the wealthy few.

    Johnston cuts through the official version of events and shows how, under the guise of deregulation, a whole new set of regulations quietly went into effect-regulations that thwart competition, depress wages, and reward misconduct. From how George W. Bush got rich off a tax increase to a $100 million taxpayer gift to Warren Buffett, Johnston puts a face on all of the dirty little tricks that business and government pull. A lot of people appear to be getting free lunches-but of course there's no such thing as a free lunch, and someone (you, the taxpayer) is picking up the bill.

    Johnston's many revelations include:
    • How we ended up with the most expensive yet inefficient health-care system in the world
    • How homeowners' title insurance became a costly, deceitful, yet almost invisible oligopoly
    • How our government gives hidden subsidies for posh golf courses
    • How Paris Hilton's grandfather schemed to retake the family fortune from a charity for poor children
    • How the Yankees and Mets owners will collect more than $1.3 billion in public funds

    In these instances and many more, Free Lunch shows how the lobbyists and lawyers representing the most powerful 0.1 percent of Americans manipulated our government at the expense of the other 99.9 percent.

    With his extraordinary reporting, vivid stories, and sharp analysis, Johnston reveals the forces that shape our everyday economic lives-and shows us how we can finally make things better.

    The Thinkers Playing fair, even when it hurts in the pocketbook

    Dr. Christina Fong, research scientist at Carnegie Mellon University, does research on people's charitable impulses.

    Christina Fong grew up near Purdue University, where she met many poor Indiana residents who believed strongly in the free enterprise system, even if it wasn't benefiting them very much.

    Then, every other summer, she would spend six weeks in her mother's native Sweden, meeting wealthy Swedes who happily supported the heavy taxes on the rich that financed that nation's expansive social welfare system.

    It gave the Carnegie Mellon University researcher a lifelong question to pursue: Why do people support economic systems that seem to be against their self-interest?

    In Sweden, many affluent residents endorse the country's lofty taxes, even though it takes citizens until the first week in August to pay their collective annual tax burden, compared with the end of April in the United States.

    On the other hand, many low-income Americans oppose stiff taxes on the wealthy, even if it would mean greater benefits for them.

    That enigma has been a driving force for Dr. Fong, a professor in the Department of Social and Decision Sciences at Carnegie Mellon.

    "Why do we see these poor people in Indiana who don't buy into an egalitarian system and these rich people in Sweden who support it?" she asked. "That's a big puzzle in economics."

    She and her colleagues have found that the split between rich and poor people on these issues is less lopsided than many might imagine.

    As expected, a 1998 Gallup poll found that a majority of people making less than $30,000 a year felt the rich should be heavily taxed, while a majority of those making more than $50,000 a year felt they should not.

    Christina Fong

    But surprisingly, nearly 35 percent of the poorer residents opposed heavy taxes for the wealthy, while a quarter of the affluent supported such taxes.

    In a similar vein, a 1995 study by the research organization Public Agenda showed that welfare recipients shared almost the same negative attitudes toward welfare as other people did.

    For instance, 57 percent of non-welfare respondents and 62 percent of welfare recipients said welfare "encourages people to be lazy," while 60 percent of non-welfare people and 64 percent of welfare clients said it "encourages people to have kids out of wedlock."

    In several studies in recent years, Dr. Fong has found that for many people, achieving fairness in an economic system is almost as important as how much money they make.

    The experiments she and others have done show that "income doesn't matter as much as we think it should."

    "If only income mattered and beliefs about fairness didn't matter at all, then you should expect to see the world that traditional economists expect you to see, which is that poor people demand redistribution [of tax revenue] and rich people oppose it.

    "The fact that we don't see that requires some explanation, and a big part of the explanation is that these beliefs about fairness matter a lot. So if you're poor but you think that the rich people really deserve to be rich, then you'll accept having less."

    Much of Americans' beliefs revolve around whether they think the free-market economy is fair -- "in other words, people who work hard get more and people who don't get less" -- or whether they think it is basically unfair, so that "people are working really hard and not getting enough compensation."

    In one recent study, Dr. Fong and Giacomo Corneo at the Free University of Berlin used economic equations to calculate that both those groups would give up about 20 percent of their annual income to achieve a world that they thought was fair.

    In other words, people who think the free market is unjust would give up a fifth of their income to switch from a laissez-faire economy to one where the government reduces the gap between the rich and poor. But those who feel that private enterprise is fair would give up an equal amount of their income to switch from an economy where the government redistributes money to the poor, to one where the free market rules.

    Other studies show that people will spend real money to ensure fairness.

    In one unpublished experiment she has just finished with Felix Oberholzer at Harvard Business School, Dr. Fong gave people $10 each and said they could split it any way they wanted between themselves and public housing residents they were paired with.

    But then she added a twist. All the public housing residents in the study had indicated they were held back in life either by drug abuse or by a disability, and the experimental subjects were offered the chance to spend $1 to find out which reason had been cited by the residents they were matched with.

    About a third of the subjects spent the dollar, Dr. Fong said. And while you might think such curiosity would make them the less generous group, the opposite was true.

    On average, she said, people who didn't seek information about their public housing residents gave them about $2 and kept about $8. Those who paid to find out about their residents gave them about $2.60 and kept the remaining $6.40.

    The averages obscured a more intriguing finding, though. Those who discovered they had "worthy" residents, who said a disability had held them back, gave the residents about $4.55, and kept just $4.45 for themselves. Those who found that their residents cited drug abuse as an impediment kept $8.38 and gave the residents only 62 cents.

    It turned out, then, that the people who were more generous on average also were extremely interested in finding out whether their charity recipients deserved to be helped, while those who were more selfish on average didn't care as much about how worthy the recipients were.

    "Selfish people don't need the information" about recipients, she said, "because they're just not going to give [as much], but the people who want to give are only going to give if the person is deemed worthy."

    While feelings about fairness influence charitable giving, another study Dr. Fong published earlier this year with Erzo Luttmer of Harvard University shows that racial and ethnic identity also plays a role in the United States.

    In that study, people were shown a video about victims of Hurricane Katrina and then could decide how to split $100 between themselves and Habitat for Humanity chapters in the communities they had learned about.

    Some of the videos people watched showed mostly white residents and some showed mostly black residents. In addition, the people in the experiment had previously filled out surveys showing how closely they identified with their own racial or ethnic group.

    The bottom line: Whites who said they felt "close" or "very close" to their ethnic or racial group on average gave $17 less to blacks than whites, but whites who said they were "not very close" or "not close at all" to their group gave $13 more to blacks than to whites.

    The lessons from this experiment are not just about race, Dr. Fong said, but about the importance of our opinions about the people receiving any kind of assistance.

    While many people still have negative attitudes toward welfare, despite the reforms made over the past decade, they generally have positive feelings toward Social Security.

    Both those programs have white and black recipients, Dr. Fong said, but with welfare, many people feel the recipients aren't deserving, but have opposite opinions about Social Security because most recipients paid into the system when they worked.

    In America, she said, one way to tap into this basic sense of fairness is to bring up the subject of the working poor.

    "If they're perceived as being really hard-working and having reached that state despite their hard work, that's the point at which people are willing to step in and say either I as an individual or we as a society have to do something for this person.

    "People don't necessarily think a low-income worker should be as rich as [Microsoft billionaire] Bill Gates, even though he might be working as hard as Bill Gates, but they do have some sense of when things have gone too far."

    Scrutiny of Pay Gap Between CEO and Direct Reports

    naked capitalism

    The Financial Times reports today that institutional investors and the SEC are taking interest in the difficult-to-justify pay disparities between the CEO and his immediate subordinates at some public companies. And isolated data points, like Sallie Mae, suggest that the ones with the biggest gulf (in its case, ten times) aren't delivering commensurate performance.

    A few corporate leaders recognize that a large gap is demotivating. GE's Jeff Immelt remarked:

    The key relationship is the one between the CEO and the top 25 managers in the company, because that is the key team. Should the CEO make five times, three times or twice what this group makes? That is debatable, but 20 times is lunacy,
    However, the facts on the ground indicate that Immelt's views aren't widely shared. A lot of CEOs appear to be suffering from what might politely be called acquired situational narcissism, or less politely, a belief in near-royal entitlement. From the Financial Times:
    US companies are facing fresh pressure from regulators and shareholders to rein in excessive executive pay as research shows chief executives have been paid up to 10 times more than their top lieutenants.

    The average total compensation for a S&P 500 chief executive was about twice as much as the second most highly paid executive last year, according to a study conducted for the Financial Times by the research group,

    However, at SLM, the student loan group known as Sallie Mae, the pay of Thomas Fitzpatrick, chief executive, who resigned in May, was more than 10 times that of June McCormack, his executive vice-president.

    At more than 30 other companies, the gap ranged from four times to seven times.

    The Securities and Exchange Commission is believed to have asked a number of companies to explain the reason for large pay gaps between top executives, as part of a review of corporate pay.

    In August, the regulator sent letters to more than 300 companies urging them to be more transparent in their disclosure of executive compensation practices. Several companies received specific questions about the executive pay gap, according to people who have seen the letters.

    The Council of Institutional Investors, whose members have more than $3,000bn under management, has also voiced concern at large disparities in pay between executives.

    Investors argue a huge pay differential may be a waste of shareholder funds; indicates the board is not an adequate counterbalance to the chief executive's powers, and could drive away talented young executives.

    "[The gap] is a red flag for investors. It is a classic sign that the board may be beholden to the chief executive," said Christopher Ailman, chief investment officer of the California State Teachers' Retirement System (Calstrs), the US pension fund.

    Genzyme, where Henri Termeer, chief executive, earned more than seven times more than Peter Wirth, chief legal officer, said: "Our compensation structure for executive management is set so that there is a flat tier below Henri. Because there's not a hierarchical approach here, [there is] a bigger gap between number one and number two."

    Other high-profile companies with above-average executive pay differential include the utility TXU, and the food group Heinz.

    A related FT story sees the pay gap as a sign of corporate malaise:
    After years spent focusing on the value of the princely pay packages commanded by corporate leaders, shareholders, and to a certain extent regulators, have begun looking at boardroom inequality.

    Their argument is that a large differential between those at the top of the ladder and those just below – chief financial officers, division heads, or even superstar sales executives – is a symptom of deeper malaise.

    Christopher Ailman, who manages more than $170bn for the California State Teachers' Retirement System, believes that a yawning gap points to weak corporate controls. "Paying chief executives an excessive amount relative to their number twos is a warning signal that the chief executive may have the compensation committee sewn up and that the board is not doing a good job of the succession plan," he says.

    Others warn that funnelling a large part of the executive compensation pool to the boss can damage shareholders by demoralising senior management and future chief executive candidates.

    "A large differential can actually harm performance because it is demotivating for the senior managers," argues Ann Yerger, executive director of the Council of Institutional Investors,.

    Two weeks ago, the Council wrote to the Securities and Exchange Commission, urging the regulator to ensure that "companies... adequately disclose each [executive's] compensation and explain the reasons for the differences in the amounts awarded to each".

    Mark Van Clieaf, managing director of compensation consultancy MVC Associates International, says directors should police pay equity more strictly: "Large shareholders are asking about it, regulators are asking about it, so directors should take a look at the issue."

    Yet few dare quantify what an "excessive" differential actually is.

    It will be revealing to see how much coverage this story gets in the US.

    What a new 'gilded age' may bring

    The richest 1 percent of Americans now get about 15 percent of total US income, close to the 18 percent the same small group had in 1913. In a way, the days of the robber barons, the tycoons, and the Gilded Age are back - after the Great Depression, World Wars I and II, and progressive taxation had trimmed their share to 8 percent in 1963.

    In contrast, the vast majority of American incomes have not kept up with inflation for the past six years. "It's very troubling," says Benjamin Friedman, a Harvard University economist. "Inequality by some measures is very high by historical standards."

    Undoubtedly the rich, with their fat investment portfolios, were hit by the bursting of the stock-market bubble at the start of this century. The Bush tax cuts alleviated some of that pain.

    Nonetheless, the market collapse did not stop the trend of the past 25 years toward greater income inequality. A recent Congressional Budget Office report shows that, between 1979 and 2003, the top 1 percent of households enjoyed a 129 percent gain in after-tax income after inflation. That compares with 15 percent for the middle one-fifth of all households and 4 percent for the bottom fifth.

    So much of the fruits of economic productivity growth from 1966 to 2001 went to the top 10 percent that little was left for the other 90 percent, notes a new paper by Northwestern University economist Robert Gordon and student Ian Dew-Becker. Productivity is the source of growth in real per-capita income.

    This research also shows that the richest of the rich, the top 1/1,000th, enjoyed a 497 percent gain in wage and salary income between 1972 and 2001. Those at the 99th percentile, who made an average $1.7 million per year in 2001, enjoyed a mere 181 percent gain.

    A recent visitor to Antigua saw one consequence of this income shift: a row of 80-foot American-owned yachts lined up at a wharf. One of a dozen crew members on one ship said the owner only came aboard for about two weeks in the winter and again in summer - when the yacht is docked in southern France.

    The New York Times recently reported a boom in building mega-yachts, some as long as a football field. Big yachts have multiplied from 4,000 a decade ago to 7,000 now. Only a few slips can accommodate the biggest boats, each of which can cost $200 million. (Many boat owners use tax breaks, some provided in a 2003 tax bill, to slash costs.)

    Most Americans still believe in their own potential to climb the income ladder. But growing income inequality still worries Edward Wolff, an expert at New York University: "It makes our democracy very fragile.... Eventually the American people are going to catch on. Politically it is going to create a major backlash." He's not predicting revolution, rather "reactionary tendencies." Dr. Friedman, author of an excellent new book, "The Moral Consequences of Economic Growth," agrees.

    Here are some consequences the two economists and others foresee:

    It could make the political system more unfair, says Professor Wolff.

    Some economists blame the concentration of wealth and income on extremely high pay for some CEOs, entertainment celebrities, sports stars, and Wall Street financiers - the "working rich," as they are dubbed. At the bottom, deunionization and globalization have depressed wages. Progressive taxation no longer restrains wealth much.

    University of Texas economist James Galbraith attributes most of the rising income inequality, at least through 2000, to soaring stock prices. Some new wealth, he suspects, may not be as willing as old wealth to leave money to charitable foundations. So ending federal estate taxes, if it happens, may also wither the philanthropic culture that has done so much for the nation.

    Note: Income is defined as market income; government transfers and realized capital gains are excluded.

    It's (really) good to be a US boss By Daniel Luban

    Asia Times

    WASHINGTON - The pay gap between workers and employers in the United States remains enormous, with the typical chief executive officer of a top firm earning more in a single workday than the average US worker takes home in an entire year, according to a new study on executive compensation released on Wednesday.

    Not only do top CEOs receive a total income that is about 364 times that of the average worker, their earnings also far outstrip
    those of government leaders, non-profit executives, and even their European counterparts, the study found.

    These findings come as politicians in the US and Europe increasingly debate CEO pay, an issue that for many has come to exemplify the pitfalls of an economy that has produced impressive growth while seemingly failing to improve the fortunes of the bulk of the population.

    The study, which was released by the Institute for Policy Studies (IPS) and United for a Fair Economy (UFE) to coincide with the Labor Day holiday in the US this coming Monday, found that CEOs of the 500 largest US companies earned an average of US$10.8 million in total compensation in 2006, and the CEOs of the 20 largest companies earned an average of $36.4 million.

    By comparison, the average worker in the US earned $29,544 in the same time period.

    The $36.4 million earned by the top 20 US CEOS also far exceeded the average earnings of the 20 highest-paid European CEOs ($12.5 million), US non-profit leaders ($965,698), members of the executive branch of the US government ($198,369), and generals in the US military ($178,542).

    Sarah Anderson of the Institute for Policy Studies, the lead author of the study, said the vast pay gap between the top private-sector and public-sector jobs creates serious problems for the country.

    "First of all, [the lower compensation] is a serious disincentive to take government and not-for-profit jobs, and thus drains leadership talent out of the not-for-profit world," she said. "Second, it contributes to a 'revolving door' between government and the private sector" as policymakers often opt for more lucrative business and lobbying jobs.

    But being the CEO of a large company is not the most lucrative job in United States, the study found. That honor went to the managers of the country's top hedge funds, which are exclusive investment groups that operate in a largely unregulated environment.

    The average income of the 20 top-earning hedge-fund and private-equity managers was $655.5 million in 2006, the study found. Four such managers earned more than $1 billion in the past year alone.

    Although recent changes to the rules for reporting income make it difficult to compare precisely this year's CEO-worker wage gap with previous years, Anderson said the trends have not changed significantly.

    "We certainly haven't seen any real retreat on CEO pay," she said. "Even companies that are heading towards crisis are continuing to pay huge sums."

    Last year's 364:1 CEO-to-worker pay gap is a massive increase from previous decades: in 1990, the ratio was 107:1, and in 1980, it was only 40:1, according to the study.

    The findings about CEO pay come in the context of a larger debate over growing income inequality in the US.

    Defenders of the George W Bush administration's economic policies point to robust levels of growth in recent years, while critics contend that most if not all of the gains have gone to the richest citizens.

    Research published by economists Emmanuel Saez and Thomas Piketty this year showed that the wealthiest US citizens have increased their share of national income to levels unseen since the 1920s. The top 10% now account for 48.5% of income, and the top 1% for 21.8% of income.

    And although the total reported income in the US increased by almost 9% in 2005, Saez and Piketty found that the incomes of those in the bottom 90% of earners actually decreased slightly that year.

    The CEO-worker wage gap has become a potent representation of this increased income inequality, and US politicians have seized on the issue as the 2008 presidential-election campaign gets under way.

    Senators Hillary Clinton and Barack Obama and former senator John Edwards, the three leading candidates for the Democratic Party presidential nomination, have all called for increased scrutiny on CEO pay.

    Obama is sponsoring so-called "say on pay" legislation in the Senate, which would let corporate shareholders hold non-binding advisory votes about executive-compensation plans. The legislation has already passed in the House of Representatives, although President Bush has expressed his disapproval of the bill and may veto it if it passes in the Senate.

    Other Democrats have also proposed legislation on the issue. A bill introduced by Democratic Congresswoman Barbara Lee would limit how much executive pay companies can claim as tax-deductible, and a bill introduced by Sander Levin, another Democrat, would tax the earnings of hedge-fund managers at the rate for income (currently 35%) rather than the rate for capital gains (currently 15%).

    The increased scrutiny of CEO pay has not been limited to the US, as European leaders have also focused on the issue - although, as the IPS/UFE study documents, the earnings of European CEOs are relatively small compared with their US counterparts.

    Even French President Nicolas Sarkozy, who is known as a relative fiscal conservative, has pledged to pass a law limiting the severance packages of top executives.

    "It is fascinating that we suddenly have this unprecedented debate about CEO pay in both the US and Europe," said Anderson, the author of the study. "It may be a sign that our political leaders are finally catching up to where the public has been for quite a while on these issues."

    (Inter Press Service)

    All About Wealth Disparity

    April 21st, 2007 |

    One of the topics that has kept coming up over the 2 years of this blog's existence is wealth and income disparity. It's pretty obvious from a number of different sources and metrics that –after heading down for several generations– it's been going up over the past 35 years or so in the U.S. In fact the U.S. is now closer to China or Iran in terms of wealth distribution (as measured by the Gini Coefficient) than Canada or Western Europe.

    Some of the regulars here (myself included) view this as an alarming trend, with some disturbing implications, such as:

    Some of our regulars appear to think this may be a symptom of an inevitable mega-trend that no amount of social engineering or tax redistribution can stop. Some even consider the emergence of a large, prosperous middle class as a historical aberration, that we are now in the process of "correcting". Peter P has often commented that, "no matter how you redistribute wealth, it always ends up in the same hands". And there may be validity to this view: consider the spectacular rise and fall of Communism in the Twentieth Century. There is also the notion that our economy has progressed to the point where wealth disparity is unlikely to lead to the kinds of social/political unrest it has in the past (French, Russian Revolutions, etc.), because for the most part, citizens' basic physical needs are still being met. A.k.a., the "bread and circuses" argument (see Maslow's hierarchy of needs).

    The big questions for me are:

    1. Is the decline of the middle class and bifurcation of the U.S. economy an inevitable result of macro-economic and historical forces beyond our ability to influence (such as global wage arbitrage and the transition from being an industrial power to a primarily service-based economy)?
    2. Is it theoretically possible to reverse this trend through social/economic policies, and if so, how? Is Different Sean-style socialism the only way? (see "How does one regulate 'well'?")
    3. If such reforms are theoretically possible, are they practically feasible? (i.e., is it realistic to assume political opposition from entrenched special interests can ever be overcome?)

    Discuss, enjoy…

    Posted in Uncategorized | 263 Comments "

    PIMCO Bonds - Investment Outlook- August 2007 Enough is Enough

    "The rich are different from you and me," wrote Fitzgerald and I suppose they are, but the differences – they wax and wane with the economic tides. Gilded ages come, go, and are reborn on the monsoon cloudbursts of seemingly intangible forces such as globalization, innovation, and favorable tax policy. For the rich to be truly rich and multiply their numbers, they need help. Adept surfers they may be, but like all riders, the wealthy need a seventh wave that allows them to preen their skills and declare themselves masters of their own universe, if only for a moment in time. That the golden glazed surfboards of the 21st century seem unique with their decals of "private equity" and "hedge finance" is mostly a mirage. Wealth has always gravitated towards those that take risk with other people's money but especially so when taxes are low. The rich are different – but they are not necessarily society's paragons. It is in fact society's wind and its current willingness to nurture the rich that fills their sails.

    What farce, then, to give credence to current debate as to whether private equity and hedge fund managers will be properly incented if Congress moves to raise their taxes up to levels paid by the majority of America's middle class. What pretense to assert, as did Kenneth Griffin, recipient last year of more than $1 billion in compensation as manager of the Citadel Investment Group, that "the (current) income distribution has to stand. If the tax became too high, as a matter of principle I would not be working this hard." Right. In the same breath he tells, Louis Uchitelle of The New York Times that the get-rich crowd "soon discover that wealth is not a particularly satisfying outcome." The team at Citadel, he claims, "loves the problems they work on and the challenges inherent to their business." Oh what a delicate/tangled web we weave sir. Far better to admit, as has Warren Buffett, that the tax rates of the wealthiest Americans average nearly 15% while those of their salaried and therefore less incented assistants just outside their offices are nearly twice that. Far better to recognize, as does Chart 1, that only twice before during the last century has such a high percentage of national income (5%) gone to the top .01% of American families. Far better to understand, to quote Buffett, that "society should place an initial emphasis on abundance but then should continuously strive to redistribute the abundance more equitably."

    Buffett's comments basically frame the debate: when is enough, enough? Granted, American style capitalism has fostered and encouraged innovation and globalization which are the fundamental building blocks of wealth. That is the abundance that Buffett speaks to – the creation of enough. But when the fruits of society's labor become maldistributed, when the rich get richer and the middle and lower classes struggle to keep their heads above water as is clearly the case today, then the system ultimately breaks down; boats do not rise equally with the tide; the center cannot hold.

    Of course the wealthy fire back in cloying self-justification, stressing their charitable and philanthropic pursuits, suggesting that they can more efficiently redistribute wealth than can the society that provided the basis for their riches in the first place. Perhaps. But with exceptions (and plaudits) for the Gates and Buffetts of the mega-rich, the inefficiencies of wealth redistribution by the Forbes 400 mega-rich and their wannabes are perhaps as egregious and wasteful as any government agency, if not more. Trust funds for the kids, inheritances for the grandkids, multiple vacation homes, private planes, multi-million dollar birthday bashes and ego-rich donations to local art museums and concert halls are but a few of the ways that rich people waste money – and I must admit, I am guilty of at least one of these on this admittedly short list of sins. I have, however, avoided the last one. When millions of people are dying from AIDS and malaria in Africa, it is hard to justify the umpteenth society gala held for the benefit of a performing arts center or an art museum. A thirty million dollar gift for a concert hall is not philanthropy, it is a Napoleonic coronation.

    So when is enough, enough? Now is the time, long overdue in fact, to admit that for the rich, for the mega-rich of this country, that enough is never enough, and it is therefore incumbent upon government to rectify today's imbalances. "The way our society equalizes incomes" argues ex-American Airlines CEO Bob Crandall, "is through much higher taxes than we have today. There is no other way." Well said, Bob. Enough said, Bob. Because enough, when it comes to the gilded 21st century rich, has clearly become too much.

    If gluttony describes the acquisitive reach of the mega-rich, then the same gastronomical metaphor applies to today's state of the credit markets. Stuffed! Both borrowers and lenders may have bitten off more than they can chew, and even those that swallow their hot dogs whole – Nathan's Famous Coney Island style – are having a serious bout of indigestion. Several hundred billion dollars of bank loans and high yield debt wait in the wings to take out the private equity and leveraged buyout deals that have helped propel stocks to Dow 14,000. And lenders…mmmmm, how do we say this…don't seem to have much of an appetite anymore. Six weeks ago the high yield debt market was humming the Campbell's soup theme and now, it's begging for a truckload of Rolaids. Yields have risen by 100 to 150 basis points in response as shown in Chart 2.

    Some wonder what squelched the hunger of potential lenders so abruptly, while in the same breath suggesting that the subprime crisis is "isolated" and not contagious to other markets or even the overall economy. Not so, and the sudden liquidity crisis in the high yield debt market is just the latest sign that there is a connection, a chain that links all markets and ultimately their prices and yields to the fate of the U.S. economy. The fact is that several weeks ago, Moody's and Standard & Poor's finally got it into gear, downgrading hundreds of subprime issues and threatening more to come. "Isolationists" would wonder what that has to do with the corporate debt market. Housing is faring badly but corporate profits are in their prime and at record levels as a percentage of GDP. Lenders to corporations should not be affected by defaults in subprime housing space, they claim. Unfortunately that does not appear to be the case.