Category Archives: economy

Growing inequality in the news; point of no return?

The Congressional Budget Office (CBO) issued a report early this week that outlines factoids known to scholars of inequality for some time — that over the last 30 years the share of income captured by the top has grown at the expense of those in the middle or low-end of the income hierarchy.

After-tax incomes for the top 1% grew 265% over the roughly three decades from 1979-2007 while those with incomes in the bottom 20% of the distribution saw after-tax income rise a paltry 18% over roughly 30 years (or about half of 1% per year).

The top 1% now capture 17% of the nation’s income, more than double the 8% they captured back in 1979.  The bottom 80% of households (most of us) saw their share of income decline 2-3 percentage points over this period.  [CBO points out that part of this trend toward increasing inequality was the result of higher-income households capturing a higher share of wages in the market and part was government doing less than 3 decades ago to redistribute and even out this market-based inequality.]

While these factoids are known by some, what may be new is: 1) that general unrest and anger/frustration at this inequality is growing, as evidenced by the Occupy Wall Street protests; and 2) even mainstream believers of capitalism, like PIMCO bond-fund investment chief Mohamed El-Erian (also former manager of the Harvard endowment) or Harvard pre-eminent labor economist Larry Katz (former chief economist for the department of labor under Clinton) believe that we have drifted into economically deleterious levels.

Mohamed El-Erian, another pillar of the financial world … is sympathetic to aspects of the Occupy movement. He told me that the economic system needs to move toward “inclusive capitalism” and embrace broad-based job creation while curbing excessive inequality.

“You cannot be a good house in a rapidly deteriorating neighborhood,” he told me. “The credibility and the fair functioning of the neighborhood matter a great deal. Without that, the integrity of the capitalist system will weaken further.”

Lawrence Katz, a Harvard economist, adds that some inequality is necessary to create incentives in a capitalist economy but that “too much inequality can harm the efficient operation of the economy.” In particular, he says, excessive inequality can have two perverse consequences: first, the very wealthy lobby for favors, contracts and bailouts that distort markets; and, second, growing inequality undermines the ability of the poorest to invest in their own education.

“These factors mean that high inequality can generate further high inequality and eventually poor economic growth,” Professor Katz said. [quoted from “Crony Capitalism Comes Home” by Nick Kristof, NYT Op-Ed 10/27/11]

Interesting links: Obama 2.0, craigslist for service, trust and voter turnout

(photo by remolacha)

(photo by remolacha)

I previously posted on how the economy depends so heavily on our trust.  Slate’s Anne Applebaum has a recent post on how the fraud of Bernard Madoff threatens to return us more to the creaky workings of the Polish economy c. 1990.

It is amazing the range of sophisticated and prominent investors brought down by Madoff’s $50 billion Ponzi scheme, including Stephen Spielberg, Dreamwork’s Jeffrey Katzenberg, ex-Sen. Frank Lautenberg, Elie Wiesel, Mort Zuckerman, and $3 billion invested by the Spanish bank Santander.

Obama 2.0: I was at an interesting roundtable yesterday on the Internet and Democracy where many in the group felt that as dramatic a role that the Internet played in the election of Obama, the potential for the Obama administration to take us to an entirely new level of citizen participation in governance, transparency and accountability is much higher.  One of the participants was Beth Noveck, pioneer of the innovative Peer-to-Patent system, who is on the Technology, Innovation and Government Reform policy working group helping to advise Obama on transparency and accountability.

– TechPresident also had this interesting post on the reports from the PA Field Director for Obama (Paulette Aniskoff) on feedback that the Obama campaign was hearing from their volunteer troops.

Craigslist for Service:  The Obama campaign has been advocating during the campaign that we need a craigslist for service and it is even in the Obama platform.  Craig Newmark, self-described customer service representative, and founder of craigslist partly says we have it already and it’s called VolunteerMatch, but he also talks about his vision of other ways people can serve.

Voter Turnout:  I previously posted updated turnout figures here, but Michael McDonald of GMU has slightly revised upward his turnout estimate to 61.6% to 131 million.  This still makes it the highest for 40 years, since 1968.   McDonald notes that these “preliminary” numbers could creep slightly higher but are essentially settled.  [See McDonald’s blog post here.]  Curtis Gans, the other major scholar in this field, has not revised his earlier estimates, and McDonald continues to believe that 2008 represented more of an increase in voter turnout than Gans.  By Spring we’ll get Americans’ self-reports of voting on the CPS November supplement.  The Associated Press reports that early voting hit a new high, with about 41 million people, or over 31%, voting before Election Day (vs. 22% in 2004). Voter turnout increased substantially in newly competitive states like Virginia, Indiana and North Carolina, which all went for Obama for the first time in decades and turnout also rose in Republican states with large black populations, such as Mississippi, South Carolina and Georgia.  North Carolina saw the biggest increase in turnout, rising from 57.8% in 2004 to 65.8% in 2008, driven by a large African American population, and competitive elections at the gubernatorial, Senatorial and presidential levels.

The economy, the holidays, giving and social capital

Give reconciliation a chance  (photo by araleya)

Give reconciliation a chance (photo by araleya)

I heard recently of one school teacher reminding children that many parents are currently out of work.  The teacher asked her pupils to think of one gift that they got that they never used and one gift that they could give or ask for that doesn’t require any money. Then she asked the students to think about the economy and the fact that it is often hard to know whether parents are in good or bad financial shape in forming their holiday “wish lists.”  I learned of a mother that sometimes gives her children a birthday or Christmas “get out of jail card”.  It’s a card that has no expiration date and can be used once by her children to escape punishment/consequences on “non-federal offenses.”

I welcome thoughts from readers of “social-capital friendly” ideas for these financially stressed holidays.  Here are some starter ideas:

– Making gifts with others to share

Giving Circles: where each person contributes a small amount of money and the group decides how to collectively use the money for good.

– Group volunteering projects for others inside or outside your community.

– Potluck holiday parties

– Finding an opportunity to do something nice to former friends with whom you have had a falling out or people with whom you are not now on speaking terms.  Give reconciliation a chance.

– And it’s not about finding financial alternatives to giving, but Changing the Present has a nice list of gifts one can give to help others.

Note: Caribbean Girl has a nice simpatico post talking about how “the long walk” is a more important part of holiday gift-giving than money.  Excerpts of her post (of relevance regardless of one’s religious beliefs):

An African boy listened carefully as his teacher explained why Christians give presents to each other on Christmas day. “The gift is an expression of our joy over the birth of Jesus and our friendship for each other,” she said.

When Christmas day came, the boy brought to the teacher a seashell of lustrous beauty. “Where did you ever find such a beautiful shell?” the teacher asked as she gently fingered the gift.

The youth told her there was only one spot where such extraordinary shells could be found…a certain bay several miles away. [T]he teacher was left speechless.

“Why…why, it’s gorgeous…wonderful, but you shouldn’t have gone all that way to get a gift for me.”

His eyes brightening, the boy answered, “Long walk part of gift.”…

While they [the magic] gave gold, frankincense, and myrrh…, they also gave another gift…a long walk. We don’t know how far the magi traveled, but we do know it took months, perhaps years, for them to reach their destination. Their long walk was part of the gift.

We ought to think about what we can give these holidays where “the long walk” (our efforts and care for another) shows our love more than what we spend.

Economy dangling by the thin thread of trust

from leonardosam, Flickr

from leonardosam, Flickr

These are unprecedented times for our economy (at least since the Great Depression). No one would have predicted several years ago that we’d see the federal government forced to take over the two largest mortgage holders (Freddie Mac and Fannie Mae), the largest worldwide insurer (AIG), and 3 of the 5 largest investment banks forced either to sell at bargain-basement prices, declare bankruptcy or get government assistance (Merrill Lynch; Lehman Brothers; Bear Stearns, respectively).

Underlying the well-working of the whole economic system both at the micro and macro level is trust. Other scholars have written about this before, most notably James Coleman in his 1988 discussion of Jewish diamond merchants in New York (“Social Capital in the Creation of Human Capital“); the merchants’ interconnecting networks and interpersonal trust allowed them to freely lend diamonds to each other for examination and ensure that the bags were honestly returned.  The social networks helped ensure that any short-term gains to be made through dishonesty would be swamped by being shunned in the future when one’s poor reputation spread through these networks.

But at the macro level, our economy also depends on trust:  Trust that the banking systems will continue to work. Trust that the U.S. government will be in a position to pay back all the money it borrows for Treasuries. Trust that stocks will go up or are a good place to park retirement assets. Trust that one’s money market fund that has nominally had an unguaranteed $1 per share price will continue to be so valuedTrust that funding will be available in the future at reasonable rates.

When trust starts to dry up, these well-oiled financial systems can become remarkably rusty and liquidity and access to capital can dry up amazingly fast.  At the same time on Tuesday that AIG was trying to get billions pumped into their operations, they had a remarkably hard tapping credit;  the benchmark inter-bank LIBOR rate (used to peg many variable rate mortgages) literally nearly doubled in one day.

One of the spectacular ways in which one sees trust underlying our economy is in bank failures. While some bank runs are driven by fraudulent activity by the bank that suddenly cause everyone to question whether their assets’ security, normally we live with the fiction that our assets are there for us.  In reality of course, our bank deposits aren’t sitting in the bank, but the bank has lent out our money to make more money and to be able to pay us interest, meet their expenses and make a profit. The banks keep some small reserves to cover the expected levels of daily withdrawals, but these are desperately inadequate when we all decide to do this at the same time and the banks can’t get our cash back fast enough from borrowers. As “It’s A Wonderful Life” styled it, ‘Don’t Look Now, but there’s Something Funny Going on at the Bank, George.’

There was an interesting commentary on bank panics by Jane Kamensky (Brandeis) and this one (LA Times Op-Ed) and a talk show where she discusses the importance of trust to banks.

The FDIC tried to help create trust after the Great Depression by insuring our deposits up to $100,000, hoping that this would avoid runs on banks, although we are learning that this too depends on trust. There is some mounting evidence that the amounts FDIC maintains are not really adequate for a big financial meltdown. The FDIC used up one sixth of their total reserves just paying out to IndyMac depositors when that bank went under this summer. While the FDIC can raise premiums that banks pay for this insurance, at some point they run the risk that these higher payments will in turn make more banks unprofitable and force them to liquidate as well.

The economy is becoming like the veritable sausage axiom, don’t pay too much attention examining how it’s produced.

[For good background on what is going on with the economic woes, see “Diamond and Kashyap on the Recent Financial Upheavals”, these NY Times posts, or “Worst Crisis Since ’30s with No End Yet In Sight” (WSJ), likening crisis to doctors treating a patient in intensive care.]

Note: HybridVigor has an interesting post that concludes from the financial meltdown in 2008 that “Markets depend on trust, but self-interested egoists don’t engender trust.”  More specifically, “When it comes to social trust, free markets are freeloaders. Free markets are most efficient when a high degree of social capital exists, but the “flaw” Greenspan alludes to is simply the friction between egotism and trust. It turns out that trust, not egotism, is what keeps a market in check. But markets today encourage risky, self-centric, and flamboyant behavior. The Laws of Relation predict that relationships set up in this way result in everyone being worse off.”

Note also that David Brooks has a related article 4-5 months after this post called “An Economy of Faith and Trust” (1/16/09)