Senate Some People Are More Equal Than Others - inequality and the West

I never understood the wail of "but think of the people" when advocating for a systemic crash in 2008. What, like sparing them short term pain for long term agony is compassion?

 

Darth Punk
And letting what is rotten die would have served as a lesson in what not to do in the future. As it is now, everyone avoided the consequences and punted.

 

Trickle down economics will surely benefit the poor. Everybody wins!

 

Yeah there's no point where I saw him and went "disagree." It made me much less lassiez faire than I was before. Hence the regulatory work.

 

Economic inequality has a profound effect on an underclass, which is what America is breeding. That's where I see the brick coming from; that one police shooting of a young, compliant black man too many.

 

Broadly, yes. I watched this when you posted it on facebook (although I skipped most of the interview after his talk purely because I found the interviewer a bit irritating... if I've missed anything worthwhile, let me know and I'll go back to it).

Free markets needed to generate wealth? Absolutely.

Pure, unfettered capitalism leads to problems through the reduction of everything to a profit and loss sheet? Absolutely.

Does this have a dehumanising effect? Absolutely.

Should we consider things like healthcare, education, welfare and environmental protection as things worthwhile in themselves and not through a capitalist lens? Absolutely.

Do I think US democracy is broken because it's effectively been purchased? Absolutely. I think the same is true of most western democracies to some extent.

I disagree that collective bargaining is a key part of the solution. There was a time when unions were relevant but I think that time has passed. Bob Crow and his ilk are every bit the Orwellian pigs and their actions during this information revolution are no more helpful than those of the luddites during the industrial revolution.

That's a key point, too. We're going through a revolution that is reshaping markets, automating jobs and generally causing as much disruption as the industrial revolution (but could have outcomes that are just as beneficial... in 100 years people may well look back at many jobs we do now in the same way that we look back on people working underground hacking at a coalface with a pickaxe). You have the rogue element of a good chunk of the population who are threatened by this and not willing/able to adapt. Instead of looking to shape a fairer future, the goal of unions (and socialists) - almost universally - seems to be to resist all of these changes and try to turn back the tide; seeing technological progress/the information revolution/globalisation as the problem.

I do think there needs to be a healthy political friction and that socialism could deliver this if it could learn to ride the wave of change and look to regulate markets sensibly to curb the dangerous excesses of capitalism, while also bringing an ideology of using a share of the wealth generated by free markets to provide universal healthcare, education and a welfare safety net.

This lack of political friction is clearly a major problem. The fact that the US had the choice between a Thatcherite and a full-blown fascist for their head of state is a good indicator of how bad this problem is.

Will it need to be solved by a brick? If the left continue to have their heads stuck up their luddite ****s, yes. I think we'll see a period of major turmoil that starts within the next decade. If the left gets its head out of its bum and formulates a compassionate ideology that can work in the 21st century, maybe not.

 

This is a slightly better version of the one I linked, and it's what I saw in Sydney on the Saturday. The one in the OP was on the Sunday in Melbourne, a city full of people like Coldplay fan. Hipsters who wouldn't also watch the Rogue One trailer.

I strongly urge watching it.

 

World Economic Forum published a report called "Global Risks 2017". You can find the text here: http://reports.weforum.org/global-risks-2017/part-1-global-risks-2017/

Interestingly enough:

Table 1.1: Top 5 Trends that Determine Global Developments

1 Rising Income and wealth disparity
2 Changing climate
3 Increasing polarization of societies
4 Rising cyber dependency
5 Ageing population

Table 1.2: Most Important Risks’ Interconnections
1 Unemployment and underemployment
Profound social instability
2 Large-scale involuntary migration
State collapse or crisis
3 Failure of climate-change mitigation and adaption
Water crises
4 Failure of national governance
Profound social instability
5 Interstate conflict with regional consequences
Large-scale involuntary migration
"Globally, inequality between countries has been decreasing at an accelerating pace over the past 30 years. 4 Within some countries, however, the data tell a different story. Inequality had been falling consistently in the industrialized world since the beginning of the 20th century, but since the 1980s the share of income going to the top 1% has increased in the United States, United Kingdom, Canada, Ireland and Australia (although not in Germany, Japan, France, Sweden, Denmark or the Netherlands). 5 Reasons include skill-biased technological change6 – which increases the returns to education – combined with scale effects as markets became more interconnected, increasing global competition for talent. Among other things, this has led to an increase in CEO compensation as firms have become larger.7 Global communications have also driven up returns for individuals who can successfully cater to a global audience – what Sherwin Rosen described as “the economics of superstars”."

 

JoinTheSchwarz this might be of interest to you ^

 

Inequality, gerontocracy and ecological collapse: my bread-and-butter issues!

 

That the academic left and right are both highlighting these as systemic risks gives me comfort; but I attribute this in part to the role of behavioural economics in diluting economic rationalism. That is, we're not longer looking at ideal worlds scenarios with respect of economics (which reduces people to widgets); we're looking at people as people.

 

http://www.economist.com/news/special-report/21721498-brief-history-how-2007-08-crisis-unfolded

A really good report on the GFC and its outcomes.

 

http://www.economist.com/blogs/democracyinamerica/2017/08/rise-rent-seeker

Rise of the rent-seekerUnproductive entrepreneurship is increasingly common in America
The Trump administration is unlikely to reverse the trend

Democracy in America

Aug 3rd 2017
by C.K. | WASHINGTON, D.C

Is America encouraging the wrong type of entrepreneurship? Yes, argue Robert Litan and Ian Hathaway, two economists, in a recent article in the Harvard Business Review. In their view, unproductive “rent-seekers”, who exploit special relationships with the government to secure public spending, or gain regulatory protection from competition at everyone else’s expense, are on the rise. On the other hand, productive entrepreneurship, which generates wealth by creating new and better products and services for everyone, is flagging.
Their charge feels timely: since he was elected president last November, Donald Trump has paid more than 40 visits to Trump corporation properties. His Mar a Lago club in Florida makes twice as much profit as it did two years ago. Family friends fill government offices which oversee parts of the Trump business empire. The administration has hired dozens of former lobbyists, most of them working on issues they previously lobbied on.
But Messrs Litan and Hathaway are not concerned with the current administration’s shenanigans. They take a broader view. Their piece draws on the work of the economist William Baumol, who used his theory of productive and unproductive entrepreneurship in an effort to explain differences in productivity growth across countries and over time. For instance, he studied the decline of royal grants of monopoly in the 18th century, arguing that this helped propel British entrepreneurs away from spending their time currying favour at court towards more productive agricultural and industrial innovation.
Looking at the recent economic history of America, the two economists find that things are moving in the opposite direction. In 2009, the number of businesses that closed down exceeded the number of new ventures for the first time in three decades, a sign that productive entrepreneurial activity is declining.
What explains this shift? One factor appears to be the success of various professional groups in convincing the government to tailor regulation to their needs, for instance by lobbying for occupational licensing. Jason Furman, then the chair of the Council of Economic Advisors, observed in 2015 that the share of the American workforce covered by state licensing laws grew from less than 5% in the 1950s to 25% by 2008, arguing that this deterred new competition.
The proliferation of occupational licensing might be seen as harmful overregulation. Other sectors are plagued by the opposite. Jeffrey Zhang, an economist at the Federal Reserve, argues that banking deregulation in the 1990s led to rapid bank concentration alongside “sub-optimally higher levels of risk-taking”. As a result, the salaries of senior bank employees grew rapidly. Zhang concludes that the rent-seeking enabled by financial deregulation played a sizeable role in the growth of income inequality: bankers were able to skew the system in their favour, to the detriment of everybody else.
The success of such lobbying depends on the government’s susceptibility. This does not appear to be in short supply in America. James E. Bessen, an economist at Boston University, links high profits through regulatory advantages to political factors including lobbying and campaign spending. The work of other economists reinforces his observation. Jeffrey R. Brown and Jiekun Huang, two researchers writing for the National Bureau of Economic Research, use data from White House visitor logs during the Obama administration to show that corporate executives’ meetings with White House staff were associated with a bump in their company stock price, more government contracts and positive regulatory decisions. Firms that had better access to the Obama White House also experienced a large drop in stock prices when the 2016 election result was announced.
It will be difficult to repeat the same analysis for Mr. Trump’s administration, as it has stopped publishing visitor logs. But there is little reason to assume that Mr Trump will limit himself to enriching his own family and business associates. He has already suggested that the changes his administration is planning to make to financial regulation will make bankers “very happy”, rolling back many of the rules put in place after the global financial crisis.
Close links between industry and government do not always end badly: the family-owned chaebol conglomerates of South Korea were the force behind dramatic manufacturing growth in the country, and benefited from government-backed entry barriers and financial support. But their strong links to the government have also spawned investigations into bribery and embezzlement. And in many countries, this type of crony capitalism has fostered stagnation rather than propelled growth. Russia, where many people have seen disappointingly little improvement in their living standards since the Soviet Union collapsed in 1991, is a prime example. Perhaps Mr. Trump could ask Mr. Putin for advice on how to avoid a similar fate.

This is a timely piece because it's highlighting one of the major concerns affecting a post-GFC, "recovery" (literally a "thanks Obama" moment; when the collapse does happen, you will need to direct you anger and anguish at the 44th, not 45th President, since the 44th had the power to prevent it. The 45th had neither the power nor the inclination nor the know-how to prevent anything) is this slowed growth in innovation and new industries. We see for example a significant concern with underemployment, but the US' crony capitalism has directly discouraged competitition so how are new jobs going to be created at a rate sufficient for the demand for them?

It can't. It won't.

 

To paraphrase a former Canadian Prime Minister;

"I keep my wallet on the right and my heart on the left"

 

Sorry for delayed response; 3 day weekend and I took forums downtime.

There's a lot to it. Glass-Steagall for example being repealed only meant that you could merge commerical and investment banking. But a lot of the predatory behaviours that are problematic were culturally ingrained further back than that. Where the US govt bailout came into effect was that there had been no real requirement, nor in fact no need, to do capital adequacy testing or liquidity stress testing in the past because the banking sector was so strong.

Since the GFC though, the third Basel accord established a basic standard for prudential capital management globally that manages the risk of banks owing more than they hold on balance sheet. We have a length and terribly boring process around it, for example: http://www.apra.gov.au/CrossIndustry/Pages/CPG-110-Internal-Capital-Adequacy-Assessment.aspx

But I'm not sure you can exclusively blame banking for the US situation. They're part of the problem, but the general anti-competitiveness isn't just in banking. We're... wise enough, anakinfansince1983, to remember the woeful Justice Dept. efforts to break up Microsoft's monopoly. But look at any number of big US companies and they're heavily involved in anti-competitive behaviour - Microsoft bought out its rivals. Apple tried to sue Samsung out of the tablet space. Disney has essentially single-handedly destroyed the concept of copyright, which is to respect intellectual property during an author's lifetime, to a near perpetual claim over something so long as it remains profitable. The idea is meant to be that the public domain is enhanced by things entering it, like I don't know, the entire catalogue of classical music! That in performing these works from Beethoven, Mozart, Debussy etc an artist is free to bring others joy from doing it, without first paying a fee to do so.

Banking in the modern context, the fused commerical/retail/investment bank, is a useful way of providing a number of services that would otherwise not be able to achieve the same results if they were standalone - economies of scale and all that. But it does race questions about effectiveness, and vertical integration - if the people who make a product, sell a product and advise clients to buy that product, there are obvious conflicts of interest between the employee of the company the fiduciary duty to the client. Regulation can help manage or segregate those conflicts.

But, really, accountability - legally - will do as much to regulate those conflicts as anything else. Banks don't necessarily contribute to income inequality at a basic level. They can, in misconduct, amplify it - but there is no real accountability for them doing that. Makers of subprime mortgage bonds did not face jail time or 5 years disqualification from the industry. Brokers who sold those products to the most vulnerable in turn lost their jobs, but that is not a natural justice (think of the broker-bros in the film The Big Short). And that the systemic issues and rot in the system will perpetuate, as the film suggests, is more a fault of the main culprits here - government.

dp4m and I have both said, variously, that we consider the bailouts in 2008 a mistake. As much human misery as a collapse of the system would have caused, the point to make here is that a collapse is a case of when, not if. Misery is inevitable; do you get it over and done with, or do you prolong it through misguided "too big to fail" initiatives? In the case of the latter it's likely that the deferred collapse will be served with compounding interest - if your objective is to avoid or manage out inequality, then this is a misguided way of achieving it.

But I digress.

What you're describing there, afs1983, is a culture that profits from inequality. It doesn't cause it; it reacts to it. There is a simple solution to it - responsible lending laws. I know you have a "Truth in Lending Act", but it's not the same thing. We have an act, the National Consumer Credit Protection Act or NCCP, that puts the onus on the lender to establish that the borrower has what we call servicability. That is, against all extant debt, your current income will be enough to sustain minimum payments over the 30 years of a standard mortgage contract. If you're 55, for example, then there's only really a 10-13 year window left in your working years so that will factor into the assessment.

We never had subprime loans, but we did have what we called "low doc" and "no doc" loans, designed to help the self-employed, whose income is not fixed, get mortgages. Brokers were using the system to help anyone get these, despite the fact people could never afford the loans int he first place. These loans still exist, but with much tighter parameters. The rest of it now? Well, you can't borrow 100% LVR. In most cases, if you borrow any more than 80% LVR, you're paying LMI (lender's mortgage insurance) on top, against risk of default.

Now, we also don't have the insane law that says you can just ditch the keys and walk away. But this system has, since the law came in, worked massively to reduce the number of default or mortager-in-possession properties on the market.

Ideologically, can you honestly see that level of accountability in the modern USA, either under the imbecile president you have now, or under Hillary Rodham Thatcher?

 

https://www.economist.com/news/econ...central-focus-economics-second-our-series-big

Six big ideasGary Becker’s concept of human capital
Becker made people the central focus of economics. The second in our series on big economic ideas

print-edition icon Print edition | Economics brief


WHY do families in rich countries have fewer children? Why do companies in poor countries often provide meals for their workers? Why has each new generation spent more time in school than the one that came before? Why have earnings of highly skilled workers risen even as their numbers have also increased? Why should universities charge tuition fees?
This is an incredibly diverse array of questions. The answers to some might seem intuitive; others are more perplexing. For Gary Becker, an American economist who died in 2014, a common thread ran through them all: human capital.
Simply put, human capital refers to the abilities and qualities of people that make them productive. Knowledge is the most important of these, but other factors, from a sense of punctuality to the state of someone’s health, also matter. Investment in human capital thus mainly refers to education but it also includes other things—the inculcation of values by parents, say, or a healthy diet. Just as investing in physical capital—whether building a new factory or upgrading computers—can pay off for a company, so investments in human capital also pay off for people. The earnings of well-educated individuals are generally higher than those of the wider population.
All this might sound obvious. As far back as Adam Smith in the 18th century, economists had noted that production depended not just on equipment or land but also on peoples’ abilities. But before the 1950s, when Becker first examined links between education and incomes, little thought was given to how such abilities fit with economic theory or public policy.
Instead, economists’ general practice was to treat labour as an undifferentiated mass of workers, lumping the skilled and unskilled together. To the extent that topics such as training were thought about, the view was pessimistic. Arthur Pigou, a British economist who is credited with coining the term “human capital”, believed there would be an under-supply of trained workers because companies would not want to teach skills to employees only to see them poached by rivals.
After the second world war, when America’s GI bill helped millions complete high school and university, education started to receive more attention from economists, Becker among them. The son of parents who had never got beyond the eighth grade but who filled his childhood home with discussions about politics, he wanted to investigate the structure of society. Lectures by Milton Friedman at the University of Chicago, where Becker completed his graduate studies in 1955, showed him the analytical power of economic theory. Doctoral degree in hand, Becker, then in his mid-20s, was hired by the National Bureau of Economic Research to work on a project calculating returns on schooling. What seemed a simple question led him to realise that no one had yet fleshed out the concept of human capital. In subsequent years he developed it into a full-fledged theory that could be applied to any number of questions and, soon enough, to issues previously seen as outside the realm of economics, from marriage to fertility.
One of Becker’s earliest contributions was to distinguish between specific and general human capital. Specific capital arises when workers acquire knowledge directly tied to their firms, such as how to use proprietary software. Companies are happy to pay for this kind of training because it is not transferable. By contrast, as Pigou suggested, firms are often reluctant to stump up for general human capital: teach employees to be good software programmers and they may well jump ship to whichever company pays them the most.
But this was just the beginning of his analysis. Becker observed that people do acquire general human capital, but they often do so at their own expense, rather than that of employers. This is true of university, when students take on debts to pay for education before entering the workforce. It is also true of workers in almost all industries: interns, trainees and junior employees share in the cost of getting them up to speed by being paid less.
Becker made the assumption that people would be hard-headed in calculating how much to invest in their own human capital. They would compare expected future earnings from different career choices and consider the cost of acquiring the education to pursue these careers, including time spent in the classroom. He knew that reality was far messier, with decisions plagued by uncertainty and complicated motivations, but he described his model as an “economic way of looking at life”. His simplified assumptions about people being purposeful and rational in their decisions laid the groundwork for an elegant theory of human capital, which he expounded in several seminal articles and a book in the early 1960s.
His theory helped explain why younger generations spent more time in schooling than older ones: longer life expectancies raised the profitability of acquiring knowledge. It also helped explain the spread of education: advances in technology made it more profitable to have skills, which in turn raised the demand for education. It showed that under-investment in human capital was a constant risk: young people can be short-sighted given the long payback period for education; and lenders are wary of supporting them because of their lack of collateral (attributes such as knowledge always stay with the borrower, whereas a borrower’s physical assets can be seized). It suggested that there was no fixed number of good jobs but that highly paid work would increase as economies produced more skilled graduates who generated more innovation.
The becklash
Human capital could also be applied to topics beyond returns to individuals from education. The idea was a powerful variable in explaining why some countries fared far better than others: to promote income growth over many years, heavy investment in schooling was necessary. It shed light on why firms in poor countries tended to be more paternalistic, providing dormitories and canteens: they reaped immediate productivity gains from rested, well-fed workers. It informed big increases in the numbers of women studying law, finance and science since the 1950s: the automation of much household work meant that women could invest more in building their careers. And it helped explain the shrinkage of families in wealthy countries: if increasing value is placed on human capital, parents must invest more in each child, making large families costly.

But any theory that attempts to explain so much is bound to encounter pushback. Many critics bristled at Becker’s market-driven logic, which seemed to reduce people to cold, calculating machines. Although “human capital” is an unsightly term—in 2004 a panel of German linguists deemed Humankapital the most offensive word of the year—it is the task of social science to identify and refine concepts that would otherwise be fuzzy. It took Becker’s framework to make the importance of education explicit, and to put people at the heart of economics.
Within the discipline, some objected that Becker had overstated the importance of learning. Education matters not because it imparts knowledge, critics said, but because of what it signals about the people who complete university, namely that they are disciplined and more likely to be productive workers. In any case, people of greater abilities are the ones who are most likely to get higher degrees in the first place.
Yet increasingly sophisticated empirical analyses has revealed that the acquisition of knowledge is in fact a big part of what it means to be a student. Becker himself highlighted research findings that one quarter of the rise in per-person incomes from 1929 to 1982 in America was because of increases in schooling. Much of the rest, he insisted, was a result of harder-to-measure gains in human capital such as on-the-job training and better health.
He was also fond of pointing to the success of Asian economies such as South Korea and Taiwan, endowed with few natural resources other than their populations, as proof of the value of investing in human capital—and in particular of building up education systems. Becker’s original analysis focused on the private benefits to students, but economists who followed in his footsteps expanded their field of study to include the broader social gains from having well-educated populations.
The importance of human capital is now taken for granted. What is more controversial is the question of how to cultivate it. For those inclined to support a bigger state, one interpretation of Becker’s analysis is that the government ought to pour money into education and make it widely available at a low cost. For a conservative, the conclusion might be that the private gains from education are so big that students should bear the costs of tuition.
Although Becker’s academic writings rarely strayed into policy prescriptions, his popular writings—a monthly Businessweek column that began in the 1980s and blog posts in later years—offer a measure of his views. For starters, he talked of “bad inequality” but also “good inequality”, an unfashionable idea today. Higher earnings for scientists, doctors and computer programmers help motivate students to tackle these difficult subjects, in the process pushing knowledge forward; from this perspective, inequality contributes to human capital. But when inequality gets too extreme, the schooling and even the health of children from poor families suffer, with their parents unable adequately to provide for them. Inequality of this sort depresses human capital, leaving society worse off.
As for the debate about whether government-funded universities should raise tuition fees, Becker thought that only fair, given that their graduates could expect higher lifetime earnings. Rather than subsidising students who go on to become bankers or lawyers, he argued that it would be more productive for the government to fund research and development. Yet, concerned by mounting inequality in America, he thought that more should be done to invest in early childhood education and improve the state of schools.
The knowledge economy
Becker applied his own prodigious reserves of human capital well beyond education. He used his “economic approach” to look at everything from the motives of criminals and drug addicts to the evolution of family structures and discrimination against minorities. In 1992 he was awarded the Nobel prize for extending economic analysis to new spheres of human behaviour. He remains one of the most cited economists of the past half-century.
Mr Becker’s way of doing economics, initially a radical challenge to convention, came under attack as it went mainstream. The rise of behavioural economics, with its emphasis on limits to rationality, undercut his depiction of people as rational agents seeking to maximise welfare. Improvements in data collection and analysis also gave rise to more detailed empirical research, instead of the wide-ranging concepts that he favoured.
Yet precisely because Mr Becker’s analysis touched on so much, it still has a lot to offer. Consider the debate on how governments ought to respond to disruptive technological change. From the standpoint of human capital, one answer is obvious. Technological advances mean that the knowledge that people acquire in school is becoming obsolete more quickly than before. At the same time, longer life expectancies mean that the returns on mid-career training are higher than in the past. It is therefore both necessary and possible to replenish human capital by designing better systems for lifelong learning.
This is just one element of the response to technological disruption but it is a vital one. Becker never intended that his theory of human capital explain everything in economics, only that it explain a little about a lot. On this count his work remains indispensable.


...

There's a lot to process here, but I guess do people disagree with Becker's view?

 

https://www.economist.com/blogs/buttonwood/2017/08/wall-street-s-high-wire-act

Wall Street’s high-wire act
Capitalism and the absence of creative disruption
The market is relying on profits to stay high

Buttonwood’s notebook

Aug 8th 2017
by Buttonwood

NINE straight highs for the Dow Jones Industrial Average might suggest that all is well with capitalism. But on the contrary, they could be a sign that things have been going profoundly wrong with the way the system is working. The main driver for the surge in share prices this year has been the strength of profits; second quarter profits for S&P 500 companies are around 12.6% higher than a year ago, according to Andrew Lapthorne at Société Générale, a French bank. As the chart shows, relative to GDP, profits seem to be regaining their levels of recent years. And those levels are much higher than they have been in much of the post-war era (see chart).

Jim McCaughan of Principal Global Investors says he is not too concerned about this since the nature of capital has changed; no longer is the economy dominated by manufacturing where businesses have to invest in heavy equipment, blast furnaces and the like. But that argument, which has been knocking around since the dotcom boom, strikes me as unsatisfactory. In essence, the argument boils down to the return on capital having risen. But if that is the case then entrepreneurs round the world should be piling in, creating new businesses and expanding existing firms—especially in the light of low interest rates. The resulting competition should drive profits back down.
That clearly isn’t happening, suggesting something about capitalism has changed. One reason could be that certain sectors are now in the hands of effective monopolies, particularly in technology where network effects favour incumbents (see our coverage of this issue). Creative destruction may not be happening any more. And that may explain why economic growth and productivity improvements have been sluggish in recent years.


It is possible, of course, although three big caveats are needed. There have been several cases in the last 20 years when companies have thought they had an enduring advantage (AOL, Nokia and Blackberry, for example), only for events to overtake them. Secondly, big business was dominated by monopolies in the early 20th century, only for populism to strike back in the form of trust-busting measures. The same could happen today; barely a day goes by without a tech company facing public controversy. Third, the marginal cost of many tech products tends towards zero which suggests that price competition eventually ought to bite hard. The tech giants may yet be cut down to size.
When it comes to the stockmarket, Jeremy Grantham of GMO has a new note pointing out that investors tend to award high valuations to shares when, like now, profit margins are high and inflation is low and stable. But if one believes that margins are mean-reverting, this shouldn’t happen. When profits are high, investors should fear that they will fall and pay a low multiple of current profits; instead valuations have only been higher in 1929 and the late 1990s.
Mr Grantham thinks that any shift to lower valuations would have to be accompanied by a sustained fall in margins or a rise in inflation (or both). And neither is going to happen soon. He may be right on both counts. But that should worry those who are hoping for a return to healthy economic growth. And all “this time is different” arguments should remind us of when Irving Fisher said, in 1929, that stocks had reached a “permanently high plateau”.