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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.
this post also has an interesting discussion, see below
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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.
- 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).
- 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?
- 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
Nemo3-DFeudalism was the norm for most of recorded history. We peasants had a decent run for the past few centuries, but that is over now.
MrMSince 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.
Agoraphobic KleptomaniacWhat'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.
JohnI'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.
Dan PalanzaWhen Elites Fail: http://www.youtube.com/watch?v=Z1Jk2kPwUj0&feature=related
RickI 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.
multumnonmultaDeeply flawed – indeed! History is repeating, we're doomed, because we never learn.
Ted KIt'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!
DougPeople 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.
Ted KThrow 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.
Donald A. CoffinPersonally 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.
Ted KI 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…
dwBlagojevich 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.
Can't think of cute nameusually 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
3-DFrom 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?
A. LewisTake 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.
Kay4This 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.
passerbyPlain 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.
albrtThe 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.
oldgalI 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.
DakotabornKansanIn 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.
pebirdOne 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.
Tucker"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.
3-DIn 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.
marc sobelYou'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.
M.G. in Progress - The Unbearable Lightness of Being an economistCan you provide some links or references for your concluding statement:
"Powerful financiers, by and large, did just fine during the Great Depression."
CJPlutonomy 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.
http://mgiannini.blogspot.com/2009/11/plutonomy-and-good-bank-for-citigroup.html
zicMore 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.
PlebeianswillrevoltI 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.
3-DFunny, 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.
Patrice AymeWhat, help the public in a way that won't bring additional profits next quarter and a larger bonus next year? Preposterous! Madness! Unthinkable!
3-DDemo-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.
http://patriceayme.wordpress.com/elTombreAgreed. 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.
RayDisagree, 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.
Andrew the GreatThe 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.
The pragmatistAll 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.
Uncle Billy CunctatorLook 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.
abprosperRespectfully, 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?
zanonHuman 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 ..
via fChwhat circle? do you have a link?
MarkTo 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!
http://imotion.blogspot.com/2009/11/vox-populi-or-what-i-wish-i-wrote.html
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.
robbyWhats 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.
Uncle Billy CunctatorTwo points:
- From the point of view of the 'aristocrats', extreme concentration of wealth doesn't seem to have worked out all that well in history. Look at all the banana republics that have withered from inefficiencies and nepotism. For all its problems, I think globalization will be pretty harsh on any country (us right now) that allows too much concentration of wealth.
- From the point of view of the working classes, I don't think they will stand for it. In a democracy, especially one in which the citizenry is as heavily armed as it is in this country, there are too many ways for the security of the aristocrats to be disturbed. As the wealthy used to say, "Taxes are what we pay so the masses don't come with pitchforks and take everything." Of course that was back in the fifties when the top marginal tax rate was 90%.
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.
Robin ThomasWell someone obviously doesn't want us to remain a wealthy, orderly, lawful country.
tippygoldenFunny 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…
BayardThe 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.
Uncle Billy CunctatorMy 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.
TeotacWe might have had an Ida Tarbell… Mark Pittman, but he just died.
http://forums.wallstreetexaminer.com/index.php?showtopic=848731
(Is Stiglitz trying to be funny here with his "shocking"?
Or not. He could have been just another flack.
Peter TWell, 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.
TonyForesta> 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!
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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.
- there's a severe recession.
- 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.
- 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.
- 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."
- 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).
- derek
- 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:
http://www.becker-posner-blog.com/archives/2005/11/campaign_financ.html
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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 MorrisndkGoldman 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.
attempterI 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.
Trainwreck"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.
Bob the BankerAnalogies:
"Let them eat cake." attributed to Marie Antoinette, perhaps wrongly.
"Greed is Good" Gordon GekkoBTW Wall Street 2 is coming to theaters: http://en.wikipedia.org/wiki/Wall_Street_2
Gordon Gekko is a reformed ex-con Casandra type figure released from prison in 2008 and we all well know the story….
dbtTo 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.
MAsk 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.
;Yves SmithYour 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.ndkCalvinsm 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.
MattCalvinism 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.
SidFinsterThe 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.
DownSouthWhat 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.
DownSouthAs 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."
JoshWe 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:
SkippyActually, 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.
Bob the BankerAnd 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.
Skippy says: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.
http://www.blueletterbible.org/Bible.cfm?b=Mat&c=19&v=24&t=KJV#conc/24
SidFinster says: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.
One Salient Oversight says: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?
Skippy says:The entire New Testament (including the gospels) was written in Koine Greek
Skippy says: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.
"It's Gonna Be A Good Christmas" " Volatility@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?
joseph[...] 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 [...]
bobI'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
attempterI 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?
SkippyNo one could possibly hate Jesus more than these vermin bankers who would drag him down into their hellish gutter.
Skippy says: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?SkippyLets talk about riches ok
See link: http://www.bible-topics.com/Riches.html
Feel free to browse about!
•THE WICKED
◦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.
bobTry here: http://www.giveshare.org/BibleLaw/lawhandbook/16.html
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 amSkippy says: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.
charlesBob 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.
Kevin de Bruxelles"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.
Bob the BankerMany 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.
SidFinsterYves,
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.
JGThe 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.
josephThis 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.
SkippyThe 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
jbmooreAtheist'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.
craazymanThere 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."
DownSouthI 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
fresn danHa! 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.
http://en.wikipedia.org/wiki/Requerimientosangellone"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.
joebekMoney lenders in the temple you say.
The Banks vs. Democracy (1 of 2) " VolatilitySort 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.
jake chase[...] 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 [...]
Dan DuncanThose 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.
craazymanYes, 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.
DownSouthMy 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
Replyi on the ball patriot says: 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.
rootless cosmopolitan► "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.
http://thesciencenetwork.org/programs/beyond-belief-candles-in-the-dark/jonathan-haidt-1Harris 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.
http://www.huffingtonpost.com/david-sloan-wilson/the-invisible-hand-is-dea_b_128030.html&cp
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…
SiggyWhat 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?
rc
craazymanThe 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.
Swedish LexI 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.
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?
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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%: 17.8Renowned 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%: 17.7Singapore 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%: 15.9The 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%: 13.4Gone 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%: 15.0While 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%: 12.5According 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%: 11.6Italians 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%: 13.8According 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%: 12.5While 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%: 9.4Put 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%: 10.2Newly 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.
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September 29, 2009 | economistsview.typepad.com
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)
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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.
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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."
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
Sources:
Bankers Reaped Lavish Bonuses During Bailouts
LOUISE STORY and ERIC DASH
NYT July 30, 2009
http://www.nytimes.com/2009/07/31/business/31pay.htmlBiggest banks in US reward stars with huge bonuses
ADAM GELLER
AP, July 31, 2009
http://www.google.com/hostednews/ap/article/ALeqM5hDoEn8Uu3hgHZTzv2bM03eLCUFCgD99PMIAG1Wall Street Executive Pay Shows 'Huge Disconnect,' Jarrett Says
Nicholas Johnston
Bloomberg, August 1, 2009
http://www.bloomberg.com/apps/news?pid=20601087&sid=aN.QDeYjf4qIHouse Gives Regulators Incentive Pay Role; Senate Prospects Dim
Jesse Westbrook and Ian Katz
Bloomberg, August 1, 2009
http://www.bloomberg.com/apps/news?pid=20601087&sid=aPcjPb7SuWVw
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Jul 21, 2009 | dailykos.com
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.
- The ability of the oligarchs to maintain position relies on a large middle class that is given just enough to give them a stake in supporting the system IMO.
That middle class serves as a buffer between the oligarchs and the torches and pitchfork crowd. Everytime a middle class spot is eliminated so that an oligarch can become even more wealthy the middle class shrinks and there is one more potential torch-bearing candidate.
It's a fine balance that the current pack of oligarchs seems to be having trouble understanding.
"The time for justice is always right now!" - Samantha Booke, Wiley College debate team, 1935
- Excellent point
We've clearly reached the "Let them eat cake" stage in America, with regard to the Goldman Sachs crowd and their friends. Income inequality only feeds on itself and worsens if it is not restrained by deliberate government policy. Middle classes don't happen by themselves; they are deliberately invented and nurtured by specific government policies -- policies that have been reversed over the past 30 years in this country by the servants of economic aristocracy.An economy where too much wealth goes straight to the very wealthiest becomes too top-heavy to sustain itself, and becomes unstable and prone to topple over with any significant imbalance. It was true in late 18th-century France, and it's as true in America today as it was in the late 1920's. The way to fix our economy is to deliberate ensure that economic wealth is spread much more broadly to the bottom 95% of earners, and some of the wealth of the top 1% is taxed away. The solution is simple, even if the mandarins of the media don't want us to hear it.
"I would say to you that extremism in the defense of liberty is no vice!" Bzzzt! Sorry Barry, thanks for playing.
No (13+ / 0-)
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Coffee might make you think more clearly. What you need is the opiate for the masses. That's what helps to keep us asleep while we get bashed over the head and our pockets picked.
by DFWmom on Tue Jul 21, 2009 at 07:30:57 AM PDT[ Parent ]
Yes, football, baseball and toys are so (1+ / 0-)
Recommended by:James Kresnik
last century. Will we go back to bread and circuses? Reality shows in live arenas, with fancy food and half dressed Barbies?
Patriotism may be the last refuge of scoundrels, but religion is assuredly the first.by StrayCat on Tue Jul 21, 2009 at 09:30:15 AM PDT
[ Parent ]
We don't have those things already? (1+ / 0-)
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I dreamed up Temptation Island and it wasn't a real show?
"The truth will set you free. But not until it is finished with you." - David Foster Wallaceby John Shade on Tue Jul 21, 2009 at 01:06:48 PM PDT
[ Parent ]
Unfortunately, this is what happens (1+ / 0-)
Recommended by:QuestionAuthority
when an industry goes through major structural changes. The skill sets change, the number of people required changes, and a lot of people get hurt.It used to take considerably longer to happen, and I suspect it didn't hurt people as badly because of that.
I am sorry. But it's the price of progress. Not that that helps you any.
The biggest problem isn't that industry changes - it's that there's nothing else to take up the slack when the jobs disappear. There used to be. And if we had better policies in place, there might have been this time, too.
by mmacdDE on Tue Jul 21, 2009 at 07:41:01 AM PDT[ Parent ]
not skill set (30+ / 0-)
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this is not because of industrial or skill set change. This is about allowing the lords to go and abuse the serfs around the world.Free world trade is a farce. Every country worth a damn on this planet has protectionist policies to protect its workers and its standard of living except us.
You even try to bring up trade, the bullshit protectionism strawman is brought out.
(regarding the bank mess) They want to cure the patient but not deal with the disease.by dark daze on Tue Jul 21, 2009 at 08:08:33 AM PDT
[ Parent ]
Yes, many jobs are still there. (11+ / 0-)
Recommended by:Angie in WA State, zgveritas, reflectionsv37, vigilant meerkat, StrayCat, glaser, James Kresnik, Jacob Bartle, Sparkys Dad, Nada Lemming, Edgewater
They have just been moved to other countries where American workers don't have access to them.
"The difference between the right word and the almost-right word is like the difference between lightning and the lightning bug." -- Mark Twainby Brooke In Seattle on Tue Jul 21, 2009 at 08:25:04 AM PDT
[ Parent ]
And the plutocrats' paid congresspersons (5+ / 0-)
Recommended by:alizard, Brooke In Seattle, reflectionsv37, John Shade, Edgewater
cooperated by arranging nice tax benefits for taking businesses overseas. And, it's not just the jobs, it's the entire money flow that goes with the enterprises, the increased cost of goods to our citizens, and the emptying out of the social fabric.
Patriotism may be the last refuge of scoundrels, but religion is assuredly the first.by StrayCat on Tue Jul 21, 2009 at 09:33:33 AM PDT
[ Parent ]
And the corporate media (3+ / 0-)
Recommended by:alizard, StrayCat, Edgewater
extols the joys of cheap consumer goods and stock market swindling while tongue clicking and head shaking protectionism.I wonder how this is all going to work out when consumers don't have money to spend?
Oh shit, that's happening right now.
I think it's time to buy a reloader.
They tortured people
To get false confessions
To fraudulently justify
Invasion of Iraq!
-Seneca Doaneby James Kresnik on Tue Jul 21, 2009 at 12:25:09 PM PDT
[ Parent ]
Corporate persons find going country to country (1+ / 0-)
Recommended by:Edgewater
far easier than actual people.Out of construction work in the US and want to, say, ply your trade in Australia? Get ready for a lengthy and expensive visa process.
I figure the Masters of the Universe learned from the mistake of letting some of Europe's best go and merely stand in line at Ellis Island for too long (exaggerated historical record for effect.)
"The truth will set you free. But not until it is finished with you." - David Foster Wallaceby John Shade on Tue Jul 21, 2009 at 01:32:26 PM PDT
[ Parent ]
Nope (30+ / 0-)
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We either do manufacturing again or the U.S. dies. We tried a service economy, and that's what got us here. The only way to pay off the debt is to make things and sell them to other nations. Either we figure out how to manufacture again, by hook or by crook, or it's all over.
by TJ on Tue Jul 21, 2009 at 08:28:45 AM PDT[ Parent ]
Yes (12+ / 0-)
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because in the end wealth is not dollars but production of goods.
Should we allow a private option?by Toon on Tue Jul 21, 2009 at 09:02:44 AM PDT
[ Parent ]
Exactly (11+ / 0-)
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the last big change was from agriculture to manufacturing - and there were plenty of manufacturing jobs to absorb most of those who wanted/needed to make the switch.Now, when a job goes away, it either goes overseas or is otherwise gone forever.
Of course, if the govt was smart, they'd realize that if wages were increased enough that it only took one halfway decent salary to support a household, that in many families one parent would stay home, therefore dropping the number of people wanting to work and making the employment numbers look much, much better.
It would also make for more stable families, and better care for children.
But the GOP, who supposedly are all for families, would never go along with incentives to raise average pay.
by mmacdDE on Tue Jul 21, 2009 at 10:43:22 AM PDT[ Parent ]
just before the financial meltdown started (3+ / 0-)
Recommended by:lotlizard, Sparkys Dad, Edgewater
I heard that US low-end retailers were looking for US sources for products and that Chinese manufacturers (like the company that made my personal computer case) were buying US factory sites.Same reason in both cases, the price of shipping had gone up to the point where offshore-driven low prices were unsustainable, the price of moving containers had gone up severalfold and showed no prospect of stopping.
I think manufacturing is going to go regional... a major corporation might have one factory in the Americas, one in Asia, one in EU.
Note that a factory in the Americas need not be sited in the USA.
What makes sense depends on what one does.
If a company needs professionals and the stability of a relatively well-run government and a health care system that works, Canada makes more sense at the moment. If a company needs warm bodies and the ability to buy immunity from labor and environmental law, it's a tossup between a Red State and Mexico.
As for overall infrastructure, I'm not sure whether Canada or the US is better off, with respect to communications infrastructure, Canada is only slightly ahead of the US in broadband rankings. (which suggests their politicians screwed the pooch, too)
If one's top priority is communication infrastructure, cultivate a preference for kim-chee... because one is going to South Korea. Which is extending its lead over the US further, they are spending a chunk of their economic stimulus program on bringing 1 gigabit broadband to every home and business.
Instead of pumping money into the non-productive FIRE sector as Bush did and Obama is doing.
Looking for intelligent energy policy alternatives? Try here.by alizard on Tue Jul 21, 2009 at 01:15:22 PM PDT
[ Parent ]
Progress my hind parts (4+ / 0-)
Recommended by:alizard, NBBooks, Sparkys Dad, Edgewater
What real "progress" has the ever-increasing financialization of the US economy wrought, other than massively fatter wallets for 1% of us? Sure, for a brief time the FIRE industries could claim more people "owned" a home, but that was smoke and mirrors.
"The truth will set you free. But not until it is finished with you." - David Foster Wallaceby John Shade on Tue Jul 21, 2009 at 01:09:01 PM PDT
[ Parent ]
I have to question a vision of progress (0+ / 0-)
that equates throwing people away with improvement.I don't think true progress can be achieved by mechanizing everything so that it relies on fossil fuels to run while at the same time throwing labor out of work.
It's time to throw out the model that says whatever increases short term profits for a few is progress and turn to a model that says a sustainable system that has room for everyone is progress IMO.
It isn't that I'm against technological advancement. But creating technology that gobbles resources while making human beings an anachronism to be disposed of isn't going to fix any of the problems we currently face in the world.
Progress should serve people - not vice versa.
"The time for justice is always right now!" - Samantha Booke, Wiley College debate team, 1935by Edgewater on Tue Jul 21, 2009 at 04:16:20 PM PDT
[ Parent ]
Instead of coffee, perhaps a mild (2+ / 0-)
Recommended by:fearisthemindkiller, QuestionAuthority
sedative would be better. Too much caffeine is just going to give you the jitters and will shorten your life.
Oh Barry, they are turning Health Care into an Actuary's wet dream.by fredlonsdale on Tue Jul 21, 2009 at 07:50:12 AM PDT
[ Parent ]
on the other hand, they are finding that a fairly (3+ / 0-)
Recommended by:Marie, StrayCat, el vasco
large amount of coffee each day seems to reduce alzheimer's.
by polar bear on Tue Jul 21, 2009 at 09:14:23 AM PDT[ Parent ]
If these goons succeed in their efforts, (0+ / 0-)
Alzheimer's may turn out to be a blessing. (Not really of course, but selective memory loss can allow functioning in terrible circumstances).
Patriotism may be the last refuge of scoundrels, but religion is assuredly the first.by StrayCat on Tue Jul 21, 2009 at 09:36:16 AM PDT
[ Parent ]
and if it shortens life, so much the better. (1+ / 0-)
Recommended by:CharlieHipHop
Longevity is a false god.
Manhattan straight up pleaseby el vasco on Tue Jul 21, 2009 at 09:44:41 AM PDT
[ Parent ]
Doing my part for the overpopulation problem n/t (1+ / 0-)
Recommended by:James Kresnik
Funny dumbassby CharlieHipHop on Tue Jul 21, 2009 at 11:09:26 AM PDT
[ Parent ]
Wow, Shocko. You are channeling me. (25+ / 0-)
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I didn't have to write anything at all here -- should have just scrolled down to your comment.Remember when people could work jobs in publishing all their lives and retire at 65 with a gold watch and a pension?
Well, I do. You may not be as old as I am.
My daughter has two friends in college who are English majors, and they want to be editors. I keep telling them that it makes me feel terrible to say this, but they need a different career choice.
The publishing industry as I knew it is dead and gone, and few people seem to care.
And everyone with a computer thinks he's a writer or editor these days, no matter how much experience or training one might have, so they don't need the old support people like us. Well, they think they don't.
I know the world still needs editors. I see the evidence every single day. Sadly, no one wants to pay us to do the only thing at which I'm any good.
And all the dithering in DC isn't going to make a difference in my life either.
If I were still in Seattle, I'd try to scrape together a few quarters and go have coffee with you. Alas, I am in Central Texas now, and I miss Seattle every single day.
"The difference between the right word and the almost-right word is like the difference between lightning and the lightning bug." -- Mark Twainby Brooke In Seattle on Tue Jul 21, 2009 at 08:23:00 AM PDT
[ Parent ]
My sons wantto be engineers. (12+ / 0-)
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I told then they'd be better off learning a trade, like car repair, something that can't be outsourced.We live in a f'd up world right now.
"Policies that were wrong under George W. Bush are no less wrong because Barack Obama is in the White House." -Bob Herbertby Nada Lemming on Tue Jul 21, 2009 at 09:34:08 AM PDT
[ Parent ]
There's a point to this. (4+ / 0-)
Recommended by:Dallasdoc, lotlizard, ShadowSD, Nada Lemming
Maybe instead of trying to find a scarce private school teaching job, I should go learn how to do decorative painting and hanging wallpaper, and do it at a reasonable rate part-time. That, or tile-setting. The sunroom floor turned out really nice. I've seen people's eyes bug out when I tell them that I did it.
"Fighting Fascism is Always Cool." -- Amsterdam Weekly, volume three, issue 18 (-8.50, -7.23)by Noor B on Tue Jul 21, 2009 at 01:15:37 PM PDT
[ Parent ]
I've been thinking about this (2+ / 0-)
Recommended by:ShadowSD, wvmom
My brother gave up in his profession (teaching karate to kids) and now installs satellite dishes. He's a lot less stressed these days.My ex-wife gave up being an engineer at Honeywell and now sells Mary Kay in a small town.
My friend got laid off as a chemical engineer at 3M and now washes windows at malls. He's an entrepreneur!
We're down to blue collar trades and selling each other pizzas and beauty products.
"Policies that were wrong under George W. Bush are no less wrong because Barack Obama is in the White House." -Bob Herbertby Nada Lemming on Tue Jul 21, 2009 at 02:36:20 PM PDT
[ Parent ]
sure, work with your hands (0+ / 0-)
I think that tile-setting might do well as an income stream.
And you might indeed figure out how to work with young people doing tilework.(I'm a great fan of Julia Morgan
http://www.neovenator.com/...
"You don't have to burn books to destroy a culture. Just get people to stop reading them." [Ray Bradbury]by RosyFinch on Sat Jul 25, 2009 at 12:15:40 PM PDT
[ Parent ]
science and engineering careers (2+ / 0-)
Recommended by:wsexson, Nada Lemming
might work for people who figure they're going to practice their professions overseas. I would suggest that any young person thinking of these career choices start country-shopping in high school, learn whatever foreign languages are required, and see if it's possible to go to college/university in the country of one's choice.
Looking for intelligent energy policy alternatives? Try here.by alizard on Tue Jul 21, 2009 at 01:27:19 PM PDT
[ Parent ]
There's plenty of work (1+ / 0-)
Recommended by:alizard
in the UAE and Saudi Arabia. A few jobs in the UK.
"Policies that were wrong under George W. Bush are no less wrong because Barack Obama is in the White House." -Bob Herbertby Nada Lemming on Tue Jul 21, 2009 at 02:31:33 PM PDT
[ Parent ]
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nakedcapitalism.comOoh, 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.)
-Expat
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...
- (continued)
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 (www.nakedcapitalism.com/2009/07/on-sanctity-of-wall-street-pay.html). 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...
- YS:
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
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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."
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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
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April 22, 2008 | economistsview.typepad.com
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
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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:
- In 1985 there were 13 US billionaires- today there are more than a 1,000.
- The richest 1% of Americans control more wealth than 90% of the U.S. population-combined.
- 80 percent of the people with a net worth exceeding $30 million say they plan to spend more in 2008 than they did in 2007. (Prince Associates)
- 2007 was the first year that making Forbes magazine's list of 400 richest Americans required more than $1 billion. (The cutoff was $1.3 billion.)
- There are roughly 150,000 households in the United States with a net worth of at least $20 million.
- In 2004, the last time the Fed provided data, there were 649,000 American households worth $10 million or more, a nearly 300 percent jump since 1992.
- About 51 percent of the individual giving and philanthropy is from the 10 percent of households in the highest income groups.
- The earners in the top 1 percent in income distribution bracket make 20% of the money.
- Private jet travel is the fastest growing luxury market segment. Over 15% of all flights in the U.S. are by private jet. There are more than 1,000 daily private jet flights in key markets such as South Florida, New York and Los Angeles.- (Elite Traveler Magazine).
- More than 49,000 Americans are said to have more than $50 million.
- 125,000 more households in the $25 million to $50 million range.
- In 2005, the top 400 earners in America collectively piled up $214 billion, more than the GDP of 149 nations.
- The average American salary is $26,352.
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.
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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.
• 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.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.
- At food stamp offices, employees are "seeing people from various occupations that they have never seen before," says Vic Todd, administrator of Oregon's Office of Self-Sufficiency Programs.
- At food banks, demand is up 15% to 20% over last year. Pantries are serving "folks who get up and go to work every day," says Bill Bolling, founder of the Atlanta Community Food Bank. "That's remarkably different than the profile of who we've served through the years."
- In schools, the school breakfast and lunch programs are serving more than 31 million students, which soon will give way to summer programs that serve just 3 million.
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 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."
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www.nakedcapitalism.comThe 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.
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economistsview.typepad.com
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
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April 22, 2008 | economistsview.typepad.com
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.
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April 22, 2008 | economistsview.typepad.com
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...
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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.
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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.
http://www.federalreserve.gov/pubs/oss/oss2/method.htmlhttp://www.usnews.com/usnews/opinion/baroneblog/archives/060301/the_wealth_of_t_1.htm
Posted by: jp | Mar 2, 2006 11:11:12 AM
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delong.typepad.com
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)
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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.]
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February 24, 2006 | ritholtz.com
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;
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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?
E-mail: [email protected]
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October 11, 2007 | pittsburghlive.com
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 [email protected].
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WSJ.com
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.
- 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."
- 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.
- 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.
Permalink | Trackback URL: http://blogs.wsj.com/wealth/2007/01/08/plutonomics/trackback/
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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.
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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
- Japan: .25
- Sweden: .25
- India: .33
- The United States 1970: .39
- The United States 2005: .47 (Note that a small fraction of the increase over time is due to a change in the methodology for calculating the Gini coefficient; still, income inequality has climbed steadily by this measure over the past four decades.)
- Brazil: .58
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.:
Name Your Poison
- 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.
- 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.
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.
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Yahoo! Finance
Forbes.comDespite 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.
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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.
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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.
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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."
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Oct. 2, 2006 | Newsweek/MSNBC.com
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.
Newsweek
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.
URL: http://www.msnbc.msn.com/id/14966272/site/newsweek/from/RS.1/
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...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....
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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.
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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
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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.
THE LBO AND ETHICS
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
- What is the Incentive for an LBO?
- The Ultimate in Inside Information
- The Quality of Privileged Information
- Full Disclosure
- Life After the LBO
- The Final Irony: Going Public Again
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
Information
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).
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