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| 10-01-2012, 01:51 PM | #1 |
| Economic Inequality (yet again)
I know we've hashed and rehashed this aplenty, but this article brings a lot of stuff together very nicely: Inequality and Its Perils - NationalJournal.com  Quote: Once in a while, a new economic narrative gives renewed strength to an old political ideology. Two generations ago, supply-side economics transformed conservatism’s case against big government from a merely ideological claim to an economic one. After decades in which Keynesians had dismissed conservatism as an economic dead end (“Hooverism”), supply-siders turned the tables. The Right could argue that reducing spending and (especially) tax rates was a matter not merely of political preference but of economic urgency. Something potentially analogous is stirring among the Left. An emerging view holds that inequality has reached levels that are damaging not only to liberals’ sense of justice but to the economy’s stability and growth. If this narrative catches on, it could give the egalitarian Left new purchase in the national economic debate. “Widely unequal societies do not function efficiently, and their economies are neither stable nor sustainable in the long term,” Joseph E. Stiglitz, a Nobel Prize-winning economist, writes in his new book, The Price of Inequality. “Taken to its extreme—and this is where we are now—this trend distorts a country and its economy as much as the quick and easy revenues of the extractive industry distort oil- or mineral-rich countries.” Stiglitz’s formulation is a good two-sentence summary of the emerging macroeconomic indictment of inequality, and the two key words in his second sentence, “extreme” and “distort,” make good handles for grasping the arguments. Let’s consider them in turn. INEQUALITY’S BROKEN PROMISE Equality and Efficiency: The Big Trade-off was a 1975 book written by the late Arthur Okun, a Harvard University economist and pillar of the economic establishment. Okun’s title encapsulated an economic consensus: Inequality is the price America pays for a dynamic, efficient economy; we may not like it, but the alternatives are worse. As long as the bottom and the middle are moving up, there is no reason to mind if the top is moving up faster, except perhaps for an ideological grudge against the rich—what conservatives call the politics of envy. For years, the idea that inequality, per se, is economically neutral has been the mainstream view not just among conservatives but among most Americans outside the further reaches of the political Left. There might be ideological or ethical reasons to object to a growing gap between the rich and the rest. But economic reasons? No. “The debate for many years looked settled,” said Robert Shapiro, an economist with Sonecon, a Washington consulting firm. “Changes in the economy and changes in the data have reopened the debate.” Economists know more today than they did in Okun’s day about the distribution of income. “There’s been enormous progress in measuring inequality—Nobel Prize-level progress,” said David Moss, an economist at Harvard Business School. As the data came in and the view got clearer, the picture that emerged was unsettling. “In the 1990s,” Moss said, “it began to appear that income was being concentrated among the very highest earners and that stagnation was occurring not just at the low end but across most income levels.” It wasn’t just that the top was doing better than the rest, but that the very top was absorbing most of the economy’s growth. This was a more extreme and dynamic kind of inequality than the country was accustomed to. Quote: It thus began to seem that the old bargain, in which inequality bought rising incomes for all, had failed—much as the Keynesian bargain (bigger government, faster growth) had failed two generations earlier. “The majority of Americans have simply not been benefiting from the country’s growth,” Stiglitz wrote, overstating things—but not by a lot. PATHWAYS TO PERIL So much for “extreme.” Next came the financial-system meltdown of 2008 and the Great Recession, which bring us to “distort”—how an excess of inequality may have warped the economy. As the data on inequality came in, economists noticed something else: The last time inequality rose to its current heights was in the late 1920s, just before a financial meltdown. Might there be a connection? In 2010, Moss plotted inequality and bank failures since 1864 on the same graph; he found an eerily close fit. That is, in both the 1920s and the first decade of this century, inequality and financial crisis went hand in glove. Others noticed the same conjunction. Although Moss recognized that a simple correlation based on only two examples proves nothing, he wasn’t alone in wondering if something might be going on. But what? Different economists suggest different pathways by which inequality at the microeconomic level might cause macroeconomic problems. What follows is a composite story based on common elements. As with supply-side, the case starts with the two extreme ends of a curve. Supply-siders pointed out that two tax rates produce no revenue: zero percent and 100 percent. Inequality traces an analogous curve. At both extremes of inequality—either perfect inequality, where a single person receives all the income, or perfect equality, where rewards and incentives cannot exist—an economy won’t function. So, Moss said, “the question is: Where are the break points in between?” Suppose various changes (globalization, technology, increased demand for skills, deregulation, financial innovation, the rising premium on superstar talent—take your pick) drove most of the economy’s income gains to the few people at the top. The rich save—that is, invest—15 to 25 percent of their income, Stiglitz writes, whereas those on the lower rungs consume most or all of their income and save little or nothing. As the country’s earnings migrate toward the highest reaches of the income distribution, therefore, you would expect to see the economy’s mix of activity tip away from spending (demand) and toward investment. That is fine up to a point, but beyond that, imbalances may arise. As Christopher Brown, an economist at Arkansas State University, put it in a pioneering 2004 paper, “Income inequality can exert a significant drag on effective demand.” Looking back on the two decades before 1986, Brown found that if the gap between rich and poor hadn’t grown wider, consumption spending would have been almost 12 percent higher than it actually was. That was a big enough number to have produced a noticeable macroeconomic impact. Stiglitz, in his book, argues that an inequality-driven shift away from consumption accounts for “the entire shortfall in aggregate demand—and hence in the U.S. economy—today.” True, saving and spending should eventually re-equilibrate. But “eventually” can be a long time. Meanwhile, extreme and growing inequality might depress demand enough to deepen and prolong a downturn, perhaps even turning it into a lost decade—or two. So inequality might suppress growth. It might also cause instability. In a democracy, politicians and the public are unlikely to accept depressed spending power if they can help it. They can try to compensate by easing credit standards, effectively encouraging the non-rich to sustain purchasing power by borrowing. They might, for example, create policies allowing banks to write flimsy home mortgages and encouraging consumers to seek them. Call this the “let them eat credit” strategy. “Cynical as it may seem,” Raghuram Rajan, a finance professor at the University of Chicago’s Booth School of Business, wrote in his 2010 book, Fault Lines: How Hidden Fractures Still Threaten the World Economy, “easy credit has been used as a palliative throughout history by governments that are unable to address the deeper anxieties of the middle class directly.” That certainly seems to have happened in the years leading to the mortgage crisis. Marianne Bertrand and Adair Morse, also of Chicago’s business school, have found that legislators who represent constituencies with higher inequality are more likely to support the easing of credit. Several papers by International Monetary Fund economists comparing countries likewise find support for the “let them eat credit” approach. And credit splurges, they find, bring on instability and current-account deficits. You can see where the logic leads. The economy, propped up on shaky credit, becomes more vulnerable to shocks. When a recession comes, the economy takes a double hit as banks fail and credit-fueled consumer spending collapses. That is not a bad description of what happened in the 1920s and again during these past few years. “When—as appears to have happened in the long run-up to both crises—the rich lend a large part of their added income to the poor and middle class, and when income inequality grows for several decades,” the IMF’s Michael Kumhof and Romain Rancière wrote, “debt-to-income ratios increase sufficiently to raise the risk of a major crisis.” But wait. Which is it? Does inequality depress demand? Or does it inflate credit bubbles that maintain demand? Unfortunately, the answer can be both. If inequality is severe enough, there could be enough of it to cause the country to inflate a dangerous credit bubble and still not offset the reduction in demand. And, no, we’re not finished. Inequality may also be destabilizing in another way. “Of every dollar of real income growth that was generated between 1976 and 2007,” Rajan wrote, “58 cents went to the top 1 percent of households.” In other words, for decades, more than half of the increase in the country’s GDP poured into the bank accounts of the richest Americans, who needed liquid investments in which to put their additional wealth. Their appetite for new investment vehicles fueled a surge in what Arkansas State’s Brown calls “financial engineering”—the concoction of exotic financial instruments, which acted on the financial sector like steroids. Those changes, the French economists Jean-Paul Fitoussi and Francesco Saraceno wrote in a 2010 paper, “help explain why the expansion of the financial sector was so out of touch with the economy. And why, for example, in the U.S., the financial sector represented about 40 percent of the total profit of the economy.” Alas, when the recession struck, the financial sector’s gigantism and complexity helped turn what might have been a brush fire into a meltdown. Some pictures:  | |
| 10-01-2012, 02:09 PM | #2 |
Originally posted by Nesster  I know we've hashed and rehashed this aplenty, but this article brings a lot of stuff together very nicely: Inequality and Its Perils - NationalJournal.com In other words, the old rich-get-richer is OK as long as everyone else does too argument isn't necessarily invalid, but the new data indicates that this is no longer happening. Some pictures:  Quote: Alas, when the recession struck, the financial sector’s gigantism and complexity helped turn what might have been a brush fire into a meltdown. http://www.newyorker.com/reporting/2012/10/08/121008fa_fact_freeland Quote: Kramer, the hedge-fund manager and Obama fund-raiser, was quiet, but others in the room were enthusiastic. Villaraigosa gave Cooperman his direct phone number. Barry Sternlicht, the founder of the W hotel chain, and an Obama donor in 2008, said that he agreed totally with Cooperman. Scaramucci, the organizer of the dinner, told me the next day that the guests had witnessed the “activation” of a “sleeper cell” of hedge-fund managers against Obama. “That’s what you see happening in the hedge-fund community, because they now have the power, because of Citizens United, to aggregate capital into political-action committees and to influence the debate,” he said. “The President has a philosophy of disdain toward wealth creation. That’s just obvious, O.K.? We talked about it all night.” He later said, “If there’s a pope of this movement, it’s Lee Cooperman.” The growing antagonism of the super-wealthy toward Obama can seem mystifying, since Obama has served the rich quite well. His Administration supported the seven-hundred-billion-dollar TARP rescue package for Wall Street, and resisted calls from the Nobel Prize winners Joseph Stiglitz and Paul Krugman, and others on the left, to nationalize the big banks in exchange for that largesse. At the end of September, the S. & P. 500, the benchmark U.S. stock index, had rebounded to just 6.9 per cent below its all-time pre-crisis high, on October 9, 2007. The economists Emmanuel Saez and Thomas Piketty have found that ninety-three per cent of the gains during the 2009-10 recovery went to the top one per cent of earners. Those seated around the table at dinner with Al Gore had done even better: the top 0.01 per cent captured thirty-seven per cent of the total recovery pie, with a rebound in their incomes of more than twenty per cent, which amounted to an additional $4.2 million each. Notwithstanding Occupy Wall Street’s focus on the “one per cent,” or Obama’s choice of two hundred and fifty thousand dollars as the level at which taxes on family income should rise, the salient dividing line between rich and not rich is much higher up the income-distribution scale. Hostility toward the President is particularly strident among the ultra-rich Read more http://www.newyorker.com/reporting/2012/10/08/121008fa_fact_freeland#ixzz285LqeYek  Quote: On the final day, Cooperman delivered a presentation on his top stock picks. A few hours later, the conference concluded in the Bellagio’s grand ballroom, with the most billionaire-friendly speaker of all: Sarah Palin. She strode onto the stage and opened her talk with a rousing greeting, “Hello, one per cent! How y’all doing!” Last edited by jeffkrol; 10-01-2012 at 02:34 PM. | |
| 10-02-2012, 03:45 PM | #3 |
| 10-03-2012, 05:54 AM | #4 |
| 10-03-2012, 06:32 AM | #5 |
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LOL... weeelll yes... perfect in every way. Re interest rates & banks: No Joy on Wall Street as Biggest Banks Earn $63 Billion - Bloomberg Quote: Four years ago today, President George W. Bush signed into law the biggest corporate rescue in American history. Even as U.S. unemployment has remained above 8 percent for 43 months, the country’s biggest banks are making almost as much as they ever have. The combined $63 billion in profit reported by the six largest U.S. lenders over the four quarters through June is more than they earned in any calendar year since the peak in 2006. Bank of America Corp. made more in the 12-month period than Walt Disney Co. and McDonald’s Corp. combined. Citigroup Inc. (C), which like Bank of America took $45 billion in taxpayer funds from the Troubled Asset Relief Program, earned more than Caterpillar Inc. (CAT) and Boeing Co. JPMorgan Chase & Co. (JPM), the largest U.S. bank by assets, had profits of more than $17 billion even after reporting a $5.8 billion trading loss. Still, Wall Street isn’t enjoying its good fortune. Those billions of dollars in profits aren’t enough, according to interviews with more than a dozen bank executives and analysts. The lowest leverage in a decade, return on equity at a third of 2006 levels, higher capital requirements, shares trading below book value, declining bonuses, job cuts, the European sovereign-debt crisis and a backlash against bankers have damped the joys of profit, they said. ---- Talk of unfairness to banks so soon after the financial crisis confounds Michael Greenberger, a former director of markets at the Commodity Futures Trading Commission. “When the banks say, ‘We’re doing very well but not getting a return on our capital,’ it’s completely incomprehensible, and it’s angering to the average American,” said Greenberger, who teaches derivatives at the University of Maryland’s law school. “They’re making billions of dollars in profits. That’s the bottom line.” --- 'Not Sustainable’ JPMorgan’s consumer and community-banking unit, the one that sent out the cookies, includes a retail division that cut $555 million in the second quarter from an allowance covering future loan losses. That translates into a gain in pretax earnings. In the same period the previous year, the bank added about $1 billion to that sum, an addition treated as an expense. The $1.55 billion swing was more than one-fifth of the company’s pretax income for the three months. While Smith, the unit’s co-CEO, said the decline in the allowance is “a very good thing” because it shows the health of the firm’s portfolio, some analysts question the quality of earnings from reduced losses. “It’s their money, but it’s not coming from operations,” said Shannon Stemm, an analyst at Edward Jones & Co. in St. Louis. The gains are “definitely not sustainable,” she said, because there’s a limit to how far the reserves can decline. Accounting Gains JPMorgan wasn’t alone in profiting from loan-loss accounting. A $1.48 billion decline from a year earlier in Bank of America’s provision amounted to more than 40 percent of the firm’s $3.4 billion second-quarter pretax income. Other accounting measures helped produce Bank of America’s profit in last year’s third quarter, one of its best ever for the Charlotte, North Carolina-based company. Results were skewed by one-time pretax gains, including $4.5 billion in adjustments of structured liabilities, $3.6 billion from selling a stake in China Construction Bank Corp. (939) and $1.7 billion tied to changes in the value of the firm’s debt. Banks have been forced to cut compensation to sustain earnings. Those costs fell at Morgan Stanley in the second quarter by about $1 billion from a year earlier to $3.63 billion. That reduction was bigger than the New York-based company’s $940 million pretax profit in the period. Goldman Sachs said it will cut $500 million of expenses this year, mostly from compensation. Job Cuts The six lenders announced at least 40,000 job cuts in the year through June, according to data compiled by Bloomberg. Bonuses fell by more than 20 percent last year from 2010 at the major commercial and investment banks, compensation-consulting firm Johnson Associates Inc. said in a report. Concerns that earnings at the biggest banks are under pressure continue to weigh on the companies’ stock prices. While Bank of America’s shares have climbed 61 percent this year, the most of any of the six firms, and Citigroup’s are up 26 percent, all six banks are trading at a lower price than five years ago. Citigroup shares have fallen more than 90 percent since Oct. 1, 2007, Bank of America is down more than 80 percent and Morgan Stanley more than 70 percent. ‘Banking Crisis’ Those three banks, along with Goldman Sachs, are trading at a discount to tangible book value, which means investors value the company less than what shareholders would receive if it were liquidated. Citigroup’s price-to-tangible-book ratio is 0.64, the lowest of the six. Five years ago, all traded at a multiple of tangible book. “We may be on the verge of a new kind of banking crisis, and that’s a banking crisis where no one wants to own any banks as an investor,” said John Garvey, head of the financial- advisory practice at PricewaterhouseCoopers LLP in New York. “The future looks very dim.” Greenberger, the University of Maryland law professor, said investors have little confidence in banks because they’ve grown since the financial crisis and have managed to delay or water down regulation. “The reason their current and prospective investors are concerned is that there’s every likelihood that what happened in 2008 will repeat itself,” he said, calling the rigging of global interest rates and JPMorgan’s trading loss evidence of systemic instability. | |
| 10-03-2012, 06:41 AM | #6 |
| Business: Washington Post Business Page, Business News Quote: The divergent fortunes of Reyes and Hemsley show that the U.S. has gone through two recoveries. The 1.2 million households whose incomes put them in the top 1 percent of the U.S. saw their earnings increase 5.5 percent last year, according to estimates released last month by the U.S. Census Bureau. Earnings fell 1.7 percent for the 96 million households in the bottom 80 percent -- those that made less than $101,583. The recovery that officially began in mid-2009 hasn’t arrived in most Americans’ paychecks. In 2010, the top 1 percent of U.S. families captured as much as 93 percent of the nation’s income growth, according to a March paper by Emmanuel Saez, a University of California at Berkeley economist who studied Internal Revenue Service data. The earnings gap between rich and poor Americans was the widest in more than four decades in 2011, Census data show, surpassing income inequality previously reported in Uganda and Kazakhstan. The notion that each generation does better than the last -- one aspect of the American Dream -- has been challenged by evidence that average family incomes fell last decade for the first time since World War II. --- Even as a mending economy generated 4.6 million private- sector jobs since February 2010, almost 40 percent of them were in fields such as hospitality and temporary staffing where the average wage is $15 an hour, according to a report last month by Wells Fargo Securities LLC senior economist Mark Vitner. A broken middle class isn’t just an economic challenge -- it also erodes political stability, said Diane Swonk, chief economist at Mesirow Financial Holdings Inc. in Chicago. --- At the same time, at least 176 companies lit a “sleeping time bomb” of stock-market wealth in 2009 by awarding “mega” grants of stock options to executives, said Paul Hodgson, chief research analyst at GMI Ratings, a New York corporate governance firm. A mega-grant confers 500,000 shares or more, according to GMI’s reports. Seagate Technology Plc gave CEO Stephen Luczo options to buy 3.5 million shares of the computer disk drive maker in January 2009, when the price had plummeted to less than $4 from $20 about six months earlier. That same month, the company, which is run from Scotts Valley, California, and formally based in Dublin, said it would eliminate 2,950 jobs -- or 6 percent of its workforce -- and reduce salaries by as much as 25 percent. Share Sales The CEO’s salary was cut 25 percent -- yet Luczo’s options could be exercised starting at $4.05, a price they exceeded within a week of the grant. The options began vesting in 2010 once “specified performance criteria” were met, according to corporate filings. This year, Seagate shares have had an average price of $27.13, and Luczo has sold more than $110 million worth, including some from the 2009 options grant, the disclosures say. “Awarding stock option grants at record lows allows executives to profit handsomely from a market recovery with which they have nothing to do,” Hodgson said. “It divorces pay from performance even more spectacularly.” Brian Ziel, a spokesman for Seagate, declined to comment. --- | |
| 10-03-2012, 07:05 AM | #7 |
| Originally posted by Nesster LOL... weeelll yes... perfect in every way. Re interest rates & banks: No Joy on Wall Street as Biggest Banks Earn $63 Billion - Bloomberg | |
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