Tag Archives: economics

Capitalism and Its Discontents

This is a very interesting interview with economist Richard Wolff (h/t to Ed Cone for the link).  A couple of excerpts provided below, but I highly recommend reading the whole thing.

Barsamian: There’s a certain market fundamentalism in the U.S. that equates capitalism with freedom.

Wolff: Yes, employers are free, in this system, to stop raising workers’ wages. But their exercise of that freedom has deprived the mass of Americans of a rising standard of living to accompany their rising productivity. Employers have kept all the benefits of the productivity increase in the form of profits. So one sector of our free economy has deprived another sector of its due. It’s the paradox of a democratic society: the freedoms of one group limit the freedoms of another. To face this fact requires a more critical notion of freedom and democracy than the happy, cheerleader mentality we have today.

How do you talk about freedom to the 20 to 30 million Americans who currently have no job? Are they free? They’ve been denied a living through no fault of their own. When 20 million Americans suddenly can’t find jobs, that isn’t a problem of individuals being lazy. That’s the problem of an economic system that isn’t delivering the goods…

Barsamian: You mentioned earlier that, although wages became stagnant in the 1970s, American workers continued to become more productive. So someone has benefited from the past thirty years.

Wolff: Yes, it’s been the best thirty years that employers in this country have ever had. More product was being produced, but employers didn’t have to pay workers more. This was impossible before the 1970s, because the labor shortage meant employers had to keep paying more, which is why we had that wonderful growth period from 1820 to 1970.

So after the 1970s profits went through the roof. What I find funny — because I don’t want to cry — is the story the business community told about these profits. They probably knew they were getting the benefit of stagnant wages and rising productivity, but they developed a kind of folklore that said the reason profits were so big in the 1980s and 1990s was that executives were geniuses. We made folk heroes of Lee Iacocca at Chrysler and Jack Welch at General Electric. They became icons, as if some mystical ability of theirs accounted for the profits.

Every economist who looks at the numbers knows executives didn’t suddenly become geniuses — as if they’d been dumb before. Shifts in the economy enabled them to stop raising workers’ wages yet keep getting more out of them. No mystery there. Of course, there was a reason for this fairy tale about ceos: if the executives could convince everyone that they were responsible for the profit increase, then they could demand higher salaries. 

 

Ken Snowden, UNCG Econ Professor, On the Mortgage Mess

UNCG Econ Professor Ken Snowden is a co-author of an upcoming book about lessons to be learned from the Great Depression that might be applied to our current mortgage mess.  An excerpt can be found at the Freakonomics blog:

For the past four years, the U.S. has faced a housing crisis that shows no signs of ending.  The situation was similar in June 1933 when the Home Owners’ Loan Corporation was created to address the nation’s last severe mortgage crisis.  Some have suggested that a new HOLC could help resolve the current crisis, but their characterizations of the HOLC have been incomplete.  Our goal here is to summarize recent research that provides a fuller picture of the HOLC and its impact on housing markets in the 1930s.        

Between 1933 and 1936 the HOLC bought and then refinanced one million severely delinquent mortgages, representing roughly one-tenth of the nation’s nonfarm owner-occupied homes.  The total amount refinanced was $3 billion, or about 20 percent of the outstanding mortgage debt on one- to four-family homes in 1933.  A program of similar proportions in 2011 would refinance 7.6 million loans worth $2 trillion. 

The Whining 1%

Paul Krugman's piece, Panic of the Plutocrats, highlights one distinction that I think many people have forgotten – there's a difference between business in the "Main Street" sense and business in the "Wall Street" sense:

What’s going on here? The answer, surely, is that Wall Street’s Masters of the Universe realize, deep down, how morally indefensible their position is. They’re not John Galt; they’re not even Steve Jobs. They’re people who got rich by peddling complex financial schemes that, far from delivering clear benefits to the American people, helped push us into a crisis whose aftereffects continue to blight the lives of tens of millions of their fellow citizens.

Yet they have paid no price. Their institutions were bailed out by taxpayers, with few strings attached. They continue to benefit from explicit and implicit federal guarantees — basically, they’re still in a game of heads they win, tails taxpayers lose. And they benefit from tax loopholes that in many cases have people with multimillion-dollar incomes paying lower rates than middle-class families.

Listen, I get it that we need finance. We need people who can provide capital to the Main Street businesses, and I think there are plenty of fine people working in the financial sector, but just like there are crooks and scam artists working on Main Street there are also crooks and scam artists working on Wall Street. Even if we didn't already have plenty of stories showing that the Wall Street scammers filled their personal vaults while barbequing our Golden Goose, I think the incessant screeching like that currently emanating from halls of power would cause us to say, "The lady (aka the Whining 1%) doth protest too much."

Governments Don’t Rule the World, Goldman Sachs Rules the World

I have no idea if the guy in the video below is legit or if he's just a blowhard who happened to score a BBC interview, but his comments raise some interesting questions.  Comments like "The governments don't rule the world, Goldman Sachs rules the world" and "For most traders we don't really care that much how they're going to fix the whole situation. Our job is to make money from it" beg the questions, "How do the Goldman Sachs rule the world without a stable society provided by governments" and "At what point do traders and the rest of the players in the financial market put aside their short term (profit) interests and do what's best for society at large?"  For that last question I'll ask those who are more educated in the ways of the economy – is it possible, or even advisable, to ask financiers to forego short term gains for the greater good or is it always in our best interest for them to always pursue what's in their best interest?

People are People

Never, ever underestimate the effect of basic human emotions. Want to understand why people continually make decisions that, if looked at objectively, are pretty stupid?  Simply remember that people are always capable of doing things that are illogical because they are possessed of emotions and those emotions are far more powerful than any logic.

Keep that in mind as you read this piece in the Economist that explores why poor people are less likely than you'd expect to be in favor of increasing taxes on the wealthy.  Several socioeconomic factors are explored, but the one I found most interesting is the propensity of people to care more about not being lowest on the totem pole than about the actual amount of money they have.  From the article:

Instead of opposing redistribution because people expect to make it to the top of the economic ladder, the authors of the new paper argue that people don’t like to be at the bottom. One paradoxical consequence of this “last-place aversion” is that some poor people may be vociferously opposed to the kinds of policies that would actually raise their own income a bit but that might also push those who are poorer than them into comparable or higher positions. The authors ran a series of experiments where students were randomly allotted sums of money, separated by $1, and informed about the “income distribution” that resulted. They were then given another $2, which they could give either to the person directly above or below them in the distribution.

In keeping with the notion of “last-place aversion”, the people who were a spot away from the bottom were the most likely to give the money to the person above them: rewarding the “rich” but ensuring that someone remained poorer than themselves. Those not at risk of becoming the poorest did not seem to mind falling a notch in the distribution of income nearly as much. This idea is backed up by survey data from America collected by Pew, a polling company: those who earned just a bit more than the minimum wage were the most resistant to increasing it.

Poverty may be miserable. But being able to feel a bit better-off than someone else makes it a bit more bearable.

To put it simply Joe the Plumber is much more likely to fight higher taxes on Larry the Lawyer if he thinks the result will be Ernie the Electrician moving from the bottom rung to the same or higher rung on society's ladder.  Of course there are many more reasons why someone would be opposed to higher taxes on the wealthy, but I don't think you can discount the import of peoples' fear, greed or jealousy.

US Debt is Falling

Here's an interesting blog post at Time.com that points out how overall US debt is falling:

The U.S.'s overall debt – which is government debt plus individual household debt plus corporate debt and bank debt – when compared to our GDP, which is how most economists look at these things, is actually much lower than many other developed nations. Overall, the U.S. and its citizens owe a little over $41 trillion. That, of course, is a lot of money. But when compared to the U.S. GDP, it's not a shockingly bad number. In fact, it's pretty good, when compared to other nations. The U.S.'s debt is equal to 275% of our GDP. That percentage for the United Kingdom is over 450%. Japan's overall debt-to-GDP is about the same as the U.K. Spain comes in at nearly 350%, and France's debt is above 300%. Our debt level is about the same as Germany, which everyone think is pulling off economic miracles these days. But more importantly than that, the U.S. appears to be the only developed country where the overall debt level is falling…

Of course, the reason our overall level of debt has been falling is because of individuals and not government. Government debt is continuing to rise. Private household debt has been falling, in large part because people have been losing those households, and the debt that goes with them. Consumers have also reigned in spending and are now saving at the highest level in years. And that is one of the reasons that the economic recovery has been slower than expected.

But Charles Roxburgh, who did the study for McKinsey, says his point, at a time when there has been a lot of focus on government debt, is that overall debt matters. Private debt – what individuals, banks and companies owe – can become public debt, as we have seen from the bailouts. So the fact that our private debt is falling is a positive in the government debt debate.

Read more: http://curiouscapitalist.blogs.time.com/2011/07/18/surprise-u-s-debt-is-falling/#ixzz1SZlZPQmN