Archive for category Economics
French economist Thomas Piketty has put growing income and wealth inequality center stage, publishing a well researched book full of data that pretty conclusively shows what many of us have been arguing for sometime: there is a growing gap between the rich and poor and this could be dangerous to democracy and modern society.
I plan to read the book and will blog more on the details/arguments. For now, I offer only a general reflection about the subject matter and the importance of taking inequality seriously.
His book isn’t a radical appeal to the masses. It is a lengthy academic tome with a target audience that includes economists, political scientists, and other scholars. Among this audience his argument is neither new nor earth shattering – economists and political scientists have been pointing out how the centralization of wealth has been increasing, creating a real threat to democracy and capitalism itself. However, perhaps because the public is waking up to this fact, his work has suddenly became a best seller and is perhaps one of the most important books of our era.
Pointing out the dangers of out of control capitalism is not an argument for socialism; quite the contrary, thoughtful supporters of market capitalism should take it seriously and ask themselves: is the growing power and influence of the very rich a result of hard work and initiative, or are they able to rig the game in their favor? If the very wealthy are rigging the game, then they are undermining capitalism and democracy.
Libertarian thinkers sometimes have an understanding of economics that is skin deep. They have learned the basics of how the market works, and thus have an understanding that, all things being equal, the market does better than anything else at communicating demand and using price to allocate goods and services. Government policy simply distorts that mechanism and thus creates inefficiencies. So, they conclude, government is the problem, less government is better.
But that’s only if reality operates as pure market theory says it should, and if you take economics beyond the first year you know that is not the case. Markets are distorted by a myriad of factors: imperfect information, misinformation, inside deals, connections, the capacity to use wealth to influence others, and the utter lack of knowledge many have about the way the system operates.
A good example is in Michael Lewis’ new book, Flash Boys. The rigging of the game there is rather minor – big banks can use lags in time to make trades to figure out what trade is coming and make an offer that will earn them a few extra pennies on every trade. No big deal; no 401K investor notices the slight variations. Yet a few pennies off of hundreds of millions of trades and it adds up! That’s just an example of what you can do if you are on the inside. Of course, the way the big banks took investors to the cleaners over derivative bonds during the housing bubble (and in fact caused the housing bubble) is a more dramatic example – described in Lewis’ earlier book The Big Short.
Now one might say that this is nothing new. Throughout history the wealthy, elite class has always assumed they deserved privilege while the poor were looked down upon as being lower in character or worth. In the 19th century the British tried to make any form of social welfare painful and difficult so as to avoid anyone wanting to stay on it. Yet workers have defied that notion of the poor as lazy for centuries. After all, when in Britain millions of factory workers endured horrific conditions during the industrial revolution, they still worked. They put up with sustenance wages, filth, squalor, child labor 80 hour work weeks, and numerous work related deaths and injuries to keep earning.
Compared to then, workers have it pretty good now. So does that mean inequality doesn’t matter?
It does matter. Consider the two charts here. Above, the share of wealth that the top 0.1% have is shown, and it has doubled in the last thirty years to the point that they control a over a fifth of the country’s capital. Below, the graph shows the income of the top 10%. Again, the share going to the very wealthy has increased dramatically over the last 30 years, to levels from the early 20th Century.
This matters for a number of reasons. First, such a distribution of wealth and income makes bubbles more likely. In theory, the very wealthy should be investing their money to create jobs for the poor, allowing that wealth to “trickle down.” In practice, when too much capital is centralized to the very few, bubbles become more likely as they are looking for “easy money” rather than investing in jobs. And when they do invest, overseas investment is common. That money does not go into improving our economy. It would be more efficient to tax it and use it to build infrastructure and support the economy.
The key to long term growth is demand from the middle class. Money earned by the middle class does not usually flow into bubbles; rather, it creates demand for goods and services that require domestic jobs. When a higher proportion of the wealth flows to average folk, the economy grows. Moreover, social mobility in the US as become very low – where you were born has become the best predictor of where you will end up.
That is contrary to the American dream – and the value that individual initiative and effort matter. The best way to assure that people can achieve all they are capable of is to assure access to education, health care, and the things needed to overcome obstacles caused by poverty or lack of status. That means government programs to promote equal opportunity are good for capitalism and freedom; by expanding the capacity of people to achieve all they can we avoid becoming an oligarchy.
If this trend is not reversed, the economy will stagnate and America’s best days will be behind us. The good news is that it appears the anti-tax anti-government sentiment that has been the norm for the last 35 years is starting to fade. Despite the fights over Obamacare, it was passed and implemented; public opinion is shifting. For now it’s important that the conversation about inequality continue – the future of market capitalism depends upon avoiding or reversing today’s inertia to oligarchy.
Jon Stewart has recently taken on Fox New’s shameful and completely irrational effort to claim that the poor in America are moochers and are somehow ripping off the American people. After FOX news responded to the first report, Stewart doubled down and completely demolished Eric Bollingsworth’s effort to “school” Stewart. Why don’t pundits ever get that Stewart lives for such responses and uses them to create some of his best work?
Fox’s argument was straight forward. The poor in America are moochers. First, they aren’t really poor. They have refrigerators, they can use EBT cards at organic markets, purchasing stuff like “wild organic salmon.” To be poor, apparently, means you have to live in third world conditions, barely scrapping by. Government aid should be used to buy the cheapest food possible, preferrably expired, definitely not organic. And you shouldn’t have a television or any modern convenience since those aren’t actually necessary for survival. If you’re not suffering, you’re not really poor.
The second point is that the poor are able to game the system. But they can’t prove how often this happens. Instead they find anecdotal evidence, like “Surfer guy” who did truly abuse the system, and claim that he “literally represents millions of poor.” He doesn’t, they offer no proof that he does, they just try to ignite anger and emotion from their viewers.
Stewart’s ire is correctly tuned on Fox news here because they are engaged in a cheap propaganda ploy designed to support an ideology that argues against community or anything but the so-called “free market.” Never mind that free markets cannot exist without a strong, effective state. Unregulated markets collapse, because there is no check on the abuse of power by those with the most wealth and clout.
And, of course, poor people really live rough lives sometimes. I know poor students who work 40 hours a week, study, and have to live off the cheapest food possible. Yes, they do have refrigerators – and stoves, heat in winter, and cupboards. Compared to the third world, or American life in the early 1800s, they have conveniences beyond belief. They even have electric lights! Often they have computers (necessary to study) and even a TV. But that does not make for an easy go at things.
Single parents find the situation even more difficult. To work they need child care, child care is expensive. They want to feed their kids healthy food, but that’s more expensive. To get good food for their kids, they often sacrifice their own diet. They might have nice clothes for their kids and themselves – but usually that’s been purchased at a second hand or thrift store. Or perhaps they find cheap made in china toys and clothes at Walmart.
So when the poor are demonized as moochers, it’s really a “big lie.” The poor are worse off. This affects nutrition, makes it less likely they will get adequate health care, dental care, and educational opportunities. Yes, they will have a TV and a refrigerator, but won’t have access to what most of the country takes for granted.
I took my kids to swim at the fitness center today. I skied all winter with them, amazed at how they mastered the mountain (and scary jumps) at such young ages. I purchase shoes that help me avoid a recurrence of planter fasciitis. My wife and I eat out when we decide we want to, and sometimes take all four kids (each of us has two from a previous marriage). We’re hoping for a vacation this summer – nothing fancy, but getting away and doing something fun. We’ll go to water parks, buy camping equipment, even if we use it in the backyard. And while it was a stretch, we splurged on a hot tub.
Every well off family has these opportunities. The very wealthy have no boundaries, they can’t spend all their money on stuff, so they look to invest it to create more money. In theory that should be good for the economy, but in practice so much money seeking only to make more money inflated bubbles.
The poor struggle. Drive through rural Maine, or the rural south. Go into the inner city and look at living conditions. Talk to people who are struggling. It is perverse that a working class man not on welfare sees the single mother with an EBT card as the enemy, while the upper crust chuckle about how they rigged the game and make it seem like those with the least wealth and power are the problem! Fox news is their propaganda wing.
So if you look at the real picture, the very wealthy have been using deregulation and a warped ideology to try to convince those losing out that somehow less taxes and less regulation is good for them. More “freedom.” That, again, is the big lie. The most perverse aspect of all of this is how it’s built on massive debt. That has created an economy that while still huge, no longer is sustainable. Unless things change, Americans will soon look back at the 20th Century as the good old days now gone, nostalgic for the time America’s middle class was envied. Those days are already gone, America is no longer the best place to live in the industrialized world, especially for the poor and the middle class.
The reality of these statistics will ultimately shape the politics of this country. People are not going to take this, and they’re not going to take how wobbly our economy has become. A few can still believe that somehow America’s the envy of the world and has the best standard of living, but that’s simply not true any more – and things are likely to get worse.
It’s important to break the misguided ideology of free markets, ultra low taxes and deregulation. That does not increase freedom, it destroys the fabric of our society – and ultimately will send the US on a downward spiral.
While some on the right claim that President Obama’s health care law amounts to war on Roman Catholicism due to its birth control provisions, others on the right are attacking the head of the Catholic church, Pope Francis I, for being “Marxist.”
The charge is absurd.
Marxism is a particular theory about how history unfolds, an enlightenment style reason-based theory which seeks to objectively show that there is a correct interpretation of history based on the nature of the mode of production – or how value is produced. Any economic system (slavery, feudalism, capitalism) that generates value through exploitation (a small group benefiting from the work of others) inherently contains contradictions. Those contradictions inevitably cause the system to collapse, until finally a system with no exploitation (communism – the anti-statist utopian Marxian version) comes without internal contradictions. History is a human construct, Marxism has no place for a deity. I very much doubt that the Pontiff believes any of that to be true.
Pope Francis I instead provides a conservative critique of capitalism, one that echoes some of the anti-Communist John Paul II’s ideas. The Pontiff released a 50,000 treatise, Evangelii Gaudium” (The Joy of the Gospel), which calls for a series of reforms and admonishes “unfettered” capitalism. He criticizes trickle down economics, and decries “the idolatry of money” which will lead to a “new tyranny.” He bemoans the “culture of prosperity” where materialism defines human value, but leaves the majority on the outside, often suffering. Even those well off feel like their life is lacking because the culture defines so much by material success. People turn artificial wants into perceived needs.
The Pope was not attacking market economics but naive capitalism – those who believe that markets always turn self-interest into the best result possible. Naive capitalists believe that the “winners” deserve to take as much as they can get away with because they are smarter or work harder. Moreover, they believe that the game is always open for others to win – that the playing field is level and the market will somehow prevent winners from building structural advantage and using their position in society to benefit themselves and guarantee that they and their children will have a much better shot at continuing to “win.” Naive capitalists believe the “losers” are inferior – they deserve to be poor.
The conservative critique of capitalism is not that somehow everyone should be equal. Traditional conservatism accepts the idea that inequality is inevitable in society, but that it cannot be so pervasive as to be culturally destabilizing. They distrust capitalism because it debases the culture. It appeals to the masses, and replaces community with consumption. It rationalizes wealth inequality without creating a sense of social responsibility. Conservatives also distrust human nature; they believe that utopian visions of capitalism underestimate human greed, ruthlessness and willingness to cheat/abuse others out of self interest.
Traditional conservatism has an organic view of society – that the culture is an entity that is greater than the sum of the individuals. It distrusts the radical individualism of naive capitalism, noting that the individual is embedded in a culture and society from which identity, interests, morals and desires all spring. The culture maintains social stability and order. Reason alone cannot replace it, since reason is a tool that can rationalize just about anything. Reason can justify a whole host of contradictory principles and ideals — whatever the individual wants to believe. That was Edmund Burke’s critique of the French revolution; you take away the cultural glue that holds society together and everything falls apart.
For conservative critics of capitalism, the market doesn’t magically follow the values society holds, nor do peoples’ decisions on what to buy and sell necessarily support their core values. That’s why people have constructed governments to, among other things, tame the excesses of capitalism.
Even the capitalist hero, Adam Smith, knew markets were not magic. While naive capitalists use his metaphor of the “hidden hand,” it’s a metaphor he only used once, and in a limited context. If you actually read Smith’s Wealth of Nations it’s clear that he is critical of the capitalists of his era. Karl Marx even considered Smith his favorite economist, saying that only in communism would Smith’s ideas work properly. Those nuances don’t fit into the good vs. evil simplistic dichotomy of the Limbaughesque world.
To be sure, the conservative critique of capitalism is distrustful of big government and efforts to promote equal outcomes. Conservatives embrace tradition, family, community and custom. Capitalism does damage to all of those – thanks to capitalism Christmas now is more about shopping than worship. Thanks to capitalism extended families in close contact have become rare. A sense of community has been replaced by people who hardly know their neighbors, especially in urban areas. Custom has been replaced by fad. Perhaps that is why Limbaugh and others want to try to hide all this using a claim that any critique of capitalism is “Marxist.”
Agree or disagree, the Pope is decrying the materialism, self-centered individualism, and lack of concern for the community that raw capitalism often fosters. That is a value-based critique, not at all Marxist. The Limbaughs of the world want to put their hands over their ears and mutter “Marxist, Marxist, Marxist…” because they don’t want to delve into the details of how the world really works — So much easier to have a “left vs. right” caricature than to actually consider the gritty complexity of reality.
Das Wirtschaftswunder, or economic miracle, is what Germans called the quick recovery of their economy after WWII. After a horrible winter in 1946, Germans went to work to rebuild their country, getting off rationing even before the victorious French and British. In the 1950’s Erhardt as Economics Minister presided over the regeneration of the German economy as he pushed for rapid free market reforms, even surpassing the pace suggested by the allies. Erhardt was Chancellor from 1963 to 1966 (replacing Adenauer, the first West German Chancellor who came to office in 1949), promoting both market economics and European economic unity.
Central was the concept of the Soziale Marktwirtschaft or social market economy. In terms of economic theory this relates to the Freiburg school or Ordoliberalism. Essentially the role of the state is to try to assure that the free market economy produces as close to possible the maximum amount it is capable of producing. Ordoliberalism rejects the idea that markets can function ‘magically’ or efficiently without the state – the state has a key role to play. This includes social welfare protections, collective bargaining, and state support of some industries. However, it is a liberal theory, rejecting socialist planning and socialist goals. The desired end result is not based on a theory of social justice or exploitation, but on having the market economy work as well as it possibly can.
(To American readers who haven’t studied political philosophy: liberalism here means a belief in limited government and a capitalist market economy — Ronald Reagan and George W. Bush were ideological liberals. The jargony use of liberal to mean leftist in the US is idiosyncratic to US politics!)
Even when the Social Democrats were in power from 1969 – 1983 and 1998 – 2005 they did not veer from the main components of Erhardt’s vision. The Christian Democrats never embraced a more radical form of liberalism like what Thatcher brought Great Britain or Reagan brought the US, also remaining true to the social market economy.
Right now Germany is out performing almost every major industrialized economy, except perhaps some of the Scandinavian states.
Think about what that means. Here in the US pundits want to tell us that higher taxes, social welfare spending, and more regulation are all “job killers” that would destroy our economic recovery. Yet the best performing states during this recession (and Germany’s record is solid for the entire post-war history) have far higher tax rates, more social welfare spending and more regulation than ours. Indeed, thanks to the power of Germany’s Green party the environmental regulations in Germany are among the most extensive in the world. Germany has met and gone beyond the Kyoto protocol goals. The first lesson from Germany is not to believe the ideological punditry!
That doesn’t mean we should emulate Germany; US culture is different, as are our strengths and weaknesses. Germany has also done some things Republicans would admire. The two major parties – Christian Democrats and Social Democrats – agreed on a balanced budget amendment designed to assure that German debt doesn’t increase. That sent a clear signal to bond markets and currency traders that the Euro’s anchor is secure. Regardless of what happens on the periphery, the underlying value of the Euro will remain strong because the German economy is stable.
A second thing we should learn from Germany is the strength of pragmatism. Pragmatism means avoiding ideological thinking in order to figure out the best way to solve a problem. Moreover, pragmatism for Germans is rooted in principle – the idea that the social market economy reflects support for a free market economy that operates as best as possible, with the public interest protected. That means all citizens should have a chance to succeed, and basics such as health care, education, pensions, job training and a decent standard of living are guaranteed. It’s not an effort to equalize out comes — there are many extremely wealthy Germans — but to assure equal opportunity and a minimum standard of living.
This pragmatism means that the two parties share a deep set of principles that unite them. As much as they disagree on various policies and programs, they know that its most important that Germany deal with problems through compromise and avoiding either an ideological lurch to the left (massive debt, redistribution and spending) or to the liberal right (deregulation, massive tax cuts, leaving the poor to their own devices). Moreover, the social market economy is based in part on understanding the power of incentives — all policies from the tax code to social welfare programs should be structured in a way that does not create incentives to cheat the system or avoid work. Germany’s balanced all this better than most advanced industrialized states.
It works. It’s not perfect. The budget contains inefficiencies, there have been recessions and economic problems, but looking at Germany’s economy today one can’t help but be impressed. If it weren’t for Germany, the situation in Europe would be far bleaker.
Those reading this blog over the past couple years recall that I’ve started rather bold research programs involving the media, consumerism, and the construction of values. These questions have intrigued me and helped guide my teaching. But ultimately I found myself unable to push the research along, it was too daunting to really shift my focus.
So I’m back to what I’ve published on, wrote my dissertation about, and remain keenly interested in: German politics, and by extension, the European Union. My focus is going to be to write a book that gives an accessible history of German economic policy and the keys to on going success, and then investigate what we can learn from Germany’s experience. Does Germany’s success mean we have to rethink the theoretical and ideological arguments so common from both the right and the left in the US? Does Germany have the capacity to help guide the EU into a much brighter future? Moreover, might this be a complete metamorphosis of Germany from a state that wanted to dominate Europe to one that embodies the best European values, building a European Union based on cooperation, markets, and values? I’ll keep you informed of my progress!
A lot of Americans believe that the US offers unique opportunities for people to rise to the top if they work hard and show innovation. It’s the American dream – the idea anyone can grow up to be rich, anyone can be President. After all, look where success stories like Barack Obama and Bill Clinton came from; neither were from the ranks of the rich and famous.
Yet as the New York Times reports, that dream is quickly becoming a myth. If you’re poor in America, you’re likely stay poor. It’s no longer the land of opportunity. Canada and most of Europe offer a better chance for the poor to succeed. The findings are sometimes stark. In Demark about 25% of men in born in the bottom fifth end up there, in the US it’s well over 40%. Even Great Britain’s level is 30%, much lower than that of the US. Two thirds of those born in the bottom 20% stay in the bottom 40%.
The top fifth is also “sticky” as the article notes. If you’re born in the top 20% of the population in terms of wealth, you’re very likely to stay there. It’s hard for those on lower levels to move into the top fifth.
The good news is that in the middle things are more fluid. About 36% born in the middle fifth move up, while 41% move down. It’s the very rich and the very poor who appear stuck.
What do we make of this? First, you can’t deny the role of economic and social structure in creating opportunities and constraints. Being born into wealth assures you opportunities that others do not get — that’s why so many people stay there. Being born into poverty means a lack of opportunity and a series of constraints: poor health care, poor schooling, bad neighborhoods, etc.
This is not something that Republicans deny. The article points out that Rick Santorum and other conservative voices are pointing out the lack of mobility from the bottom.
Second, the US does not fare any better than other advanced industrialized states in any measure of mobility. The inability for the poorest to rise is stark, but at other levels countries fare similarly. The American dream and the ability to achieve it for those outside the bottom 20% is about the same as the Canadian dream, Danish dream, etc.
Why, though, do our poor have more difficulty than those in other states? The answer is obvious: social welfare programs. For all their faults, social welfare programs assuring health care, basic housing and nutrition to all citizens make a difference. That’s why a Dane born at the bottom finds more opportunity to rise up than an American born in similar circumstances. It simply is not true that social welfare programs only create a sense of entitlement and dependency; they actually get people motivated to pursue opportunities and move forward.
This also suggests that it does the top fifth little or no harm to increase taxes to create social welfare programs to help the bottom fifth. This isn’t unfair since the top fifth already has so many more opportunities and chances for success. They don’t earn these opportunities through their own choices and work, they achieve it by dint of where they are in the social structure. A major causal aspect of their success is from outside their individual efforts.
That doesn’t mean that individual choices don’t matter — people have to take the opportunity that they receive and not waste it. Still, somewhat higher taxes won’t change that fundamental social structure. Moreover, one could make a strong argument that it is a denial of liberty to those down the ladder by allowing so many individuals to be given such greater opportunity and fewer constraints because of position of birth. It’s not much different than the old aristocracy.
However, how such money is spent still is debatable. I don’t think a Danish social welfare system would necessarily work the same in the US because the social divisions, size of the country, and the impact of years of neglect will make it more difficult to get real opportunity to the poor. Also, while it’s clear that social welfare programs can work – they help people move up the ladder, they don’t necessarily create dependency – not every program is equal. Some programs do create dependencies, especially if like in the US the programs are meager transfers that don’t really create opportunity. If you’re not going to be able to move up, why bother? Just take what you can!
For the US to create opportunity we need to focus on helping people help themselves, providing education, health care, and the basics that children need to be in a position to let their effort and innovation actually determine what they achieve in life, not their position of birth. Perhaps the kind of welfare programs we have is part of the problem
To be sure, 8% of Americans (still the lowest compared to other countries) born in the bottom fifth make it to the top fifth. It’s not that there is no opportunity or that the constraints are insurmountable. But Americans tend to over estimate how likely it is for one to be able to do that, and under estimate the impact of social structure on opportunity.
This also vindicates at least one message from Occupy Wall Street. The 1% are almost certain to stay at the top, the game is structured in their favor. The poorest have real constraints, and even the middle class have limited means. That doesn’t mean that the radical solutions the protesters sometimes suggest are right — there is huge room for debate amongst conservatives, liberals, free marketeers and social democrats about the best ways to move forward. What we have to do, though, is accept the fact the class mobility in the US is low, especially for the top and bottom 20%.
Finally, the article points out that some skeptics note that 81% of Americans earn more in absolute terms than their parents. While that is a sign that as a society we’ve become more prosperous, the American dream is not simply about making more money, but real opportunity. A trash collector today earns more than a trash collector did 20 years ago. But the children of trash collectors should have the same opportunity to become doctors as the children of doctors.
Alarming words from the head of the IMF: a global economic collapse could occur within weeks if something isn’t done head off the ongoing crisis in Europe. The warning may seem overblown, but the danger is real.
Here’s the problem: unless investors are convinced that bonds issued by Greece, Spain, Portugal, Italy and Ireland are safe, they’ll start selling them off in the bond market. That will drive down the price (supply increases, demand will be low). When the price of a bond falls, that increases its interest rate. An Italian bond set to pay off 1000 Euros in three years might normally cost 940 Euro, meaning you’d earn 60 Euro (about 2% per year) on your investment. But if people start thinking the Italian economy is going to tank then the price may drop dramatically — the 1000 Euro bond might cost only 850 Euro, meaning a 5% yield, or go even lower. Right now the Italian 10 year bond has a 5.5% yield rate.
By comparison, US Treasuries have about 2% yield on the ten year bond, as does Germany’s. This means that if the US and Germany sell bonds to finance government debt, the cost is relatively low — 2% a year. If Italy wants to run deficits, they pay a much higher interest rates. Now, guess what Greece’s 10 year bond yield rate is. 23%. That is simply unsustainable even in the short term. It shows that people are expecting a Greek default and thus dumping bonds to those who want to take a big risk to potentially pocket a 23% investment gain.
Spain is also at about 5%, but Portugal’s bond yield is 11%, and Ireland’s at near 8%. Those are getting into very high risk territory. Now, at this point all these yields are kept somewhat low (relative to what they could be) by the hope/expectation of an EU bailout. The EU has intervened in Greece, Greece has undertaken a very unpopular austerity program (after all you can’t keep running up debt borrowing at 23%!), and the panic has been minimal.
But what if the EU can’t save Greece? Then the Greeks will likely default, they simply can’t make payments on their bonds. The bond holders — banks throughout Europe (including Germany) will then be under stress, as some of their assetts become worthless. Still, if it stopped there, that wouldn’t be that big of a crisis. The danger is Contagion. Holders of Portugese, Italian, Spanish and Irish bonds would realize that the world has changed: default is possible. Yields on all those bonds would likely rise dramatically creating default threats across southern Europe. At that point bank assets would be so stressed that credit markets would dry up and the European economy would be hit by a crisis larger than what hit the US in 2008.
US and British banks are relatively unexposed, but the economic impact would be to sink the world deeper in recession. But it doesn’t end there.
Banks, including those in the US and UK, have been issuing credit default swaps on these bonds. These swaps can be seen as akin to a life insurance policy. Let’s say your neighbor confides with you that he has cancer, even though he’s young and fit. You then go to an insurance agent and buy a life insurance policy on him for $1 million. You pay a policy of $300 a year, but if the cancer kills him you could get $ 1 million.
Insurance companies sell these policies because statistically they don’t expect to make large payments. Most of us go through life paying for insurance “just in case.” But in the world of finance it’s more like a casino. The credit default swaps are cheap, but have a potentially very large payoff. It’s like placing a bet on a long shot horse — you’ll probably lose, but if you win the earnings are big. So if you decide to bet against the EU and Italy, you can buy credit default swaps on Italian bonds. If the bonds mature and Italy pays their value, you get nothing and lose the “premium” you paid to buy the swap. But if Italy defaults, you get the value of the bond — potentially a huge pay off. That happened back in the US when owners of credit default swaps on mortgage backed bonds made a killing when the real estate bubble burst.
The thing is, we don’t know how exposed banks are in terms of credit default swaps. If they’ve felt confident that the crisis would be contained, they may be very exposed. So even banks that don’t directly hold bonds might be on the hook if defaults spread. That would add to the depth of the crisis and could spark a breakdown in the entire financial system of the kind that the bail outs of 2008 managed to avoid. In such a case credit would be very difficult to come by, even for “safe” auto loans, perhaps even credit cards would be hit.
If the EU doesn’t manage to convince investors that Greece will not default the whole thing could spread quickly — within weeks. If the EU came up with a very comprehensive package they could allay fears and Greek yields would come back down to earth and overcome the crisis. It would be a couple years before deleveraging would get them out of the woods, but investor confidence would return and the system would survive.
However, although this may look like a no brainer in those terms, in political terms it’s a tough sell. Any kind of package that saves the system would appear to be a bail out of countries who had been irresponsible in their borrowing and spending, and protection of banks who made irresponsible loans. That would be very unpopular in countries like Germany, which would pay a lion’s share of the cost. But it would also be unpopular in Greece, whose people protest cuts in spending and increases in taxes. In their eyes they’re being made to suffer for mistakes of bureaucrats and banks, and a mix of spending cuts and tax increases assures a deeper recession and more pain. They’d rather default than suffer austerity. So the moves needed to save the global political economy are by nature very unpopular and arose anger.
Most people don’t know how bonds work, wouldn’t know a credit default swap from collaterized debt obligation, and have no sense of just how interconnected the financial industry is world wide. The argument supporting such “bailouts” is only persuasive if you really work through the intricacies of how the financial system functions. Most voters don’t do that, so any politician who tries to save the system will probably lose their job.
With so much on the line I think they’ll find a way to avert catastrophe. The stakes are just too high, and the insiders know what the stakes are, and how inaction could mean utter catastrophe. Still, the danger is real. That’s why stories about European bond yields and bailout plans may be the most important news to follow in coming weeks. Global economic collapse is still unlikely, but quite possible.
Fundamental disagreements about taxation and government spending rest on different assumptions about the nature of wealth and of society. Where one stands on these issues determines ones’ perspective, and while some people may believe they have the most moral or rational point of view, such claims defy objective proof. People can only look at the arguments and go with what they believe correct.
Arguments that say taxation should be minimal, even on the wealthy, have an assumption that market outcomes are proper, and that markets work in practice as they are supposed to in theory. I believe these two assumptions to be flawed.
Unpacking the first assumption, one has to ask what determines a “proper” outcome? To say that any market outcome is proper one requires a materialist and economistic view of reality. Everything else — concern about human suffering, poverty, exploitation and equal opportunity — gets dismissed as secondary, or at best left up to the individual. Society in such a view is not a unit connected by shared cultural values, norms, and interdependent relationships, rather it is simply the outcome of a bunch of purely individual choices. Individuals are seen as rational and self-interested, simply interacting with others.
While all of those assumptions are possible to hold, they are by no means self-evidently true or even persuasive. Human history has primarily been that of people connected by tradition and custom in social organizations that value spiritual and community bonds higher than material goods or individual self-interest. Individual identity, purpose and interests came from tradition, culture and social norms. Moreover, no individual chooses his or her interests, goals and ideals purely on their own. Humans are in part cultural products; if the same person were born in Cairo instead of Boston he or she would be a different person, with different beliefs, tastes, values and interests. Finally, no individual is fully responsible for his or her outcomes, including wealth. Depending on how society is structured, wealth accrues to people in different ways, based on different actions. Simply, wealth is a by product of social structures as much as it is of individual choices.
Since Freud we’ve known that humans are not guided primarily by reason and rational thought, but other impulses and drives below the surface in our subconscious. Personality goes a long way to explain different political opinions and points of view, just as it explains ones’ philosophical perspective. Personality is both innate (we’re born a certain way) and shaped by personal experience in both families and the larger culture.
Thus I reject the first assumption. I do not think market outcomes are driven by purely individual choices and interactions, but have a cultural component that plays a huge role in whether or not one becomes wealthy. Moreover, the import of culture also trumps a focus merely on the material and economic. Values matter, as does social stability. Therefore, market outcomes are not inherently just or proper, nor do they accurately reflect the quality of an individual’s choices. There is nothing inherently moral about a market outcome.
I also reject the other assumption, namely that markets work well on their own. Left to their own devices markets break down, and are replaced by pseudo-markets which appear to be capitalist, but instead reflect the interests of the powerful and wealthy — those able to stack the deck in their favor. The stacking is not a malevolent effort by the moneyed elite to control the country, but rather the result of numerous small rational choices that protect profits.
These small choices can hinder the market because of power differentials. People who benefit from one market outcome are in a position to have greater opportunities the next time the game is played. Over time this creates structural benefits to many, and constructs structural barriers to others. Markets thus do not lead to the optimal outcomes implied in theory, but class divisions where a small group is able to get rich and stay rich across generations. This inherently limits the opportunities of those who are not well off. Some can overcome those constraints, most cannot.
Because those core assumptions are flawed, so is the argument that progressive taxation is wrong, or that taxing the wealthy harms the economy. In reality taxing the wealthy: a) recognizes the role of society in creating that wealth — it is not merely the result of individual choices; b) allows resources to be used to help remove constraints by others to succeed, enhancing true opportunity and fixing market anomalies; and c) allows people to focus on other values a society has, rather than seeing materialist processes as the ethical core of a society.
Moreover, the flaws of those core assumptions also explain why regulation is needed. Power differentials create incentives for “winners” to avoid the limits a true market would create. Regulation is needed for the market to operate effectively, create transparency to limit the benefits insiders get thanks to the information and resources at their disposal, and protect market mechanisms.
Note that this argument is supportive of market capitalism. It is not an argument for socialism or against markets, it is merely a claim that markets are not magic. The goal of government is in part to compensate for ways in which the nature of society and the distribution of power disrupts how a market would operate “in theory.” Yes, there are also other values a society might have that trump market processes. These can be conservative (e.g., protect religious institutions, support cultural values such as marriage, etc.) or liberal (assure everyone has quality education and health care). But since there is no “answer key” telling the right values to use to govern, such questions of value are inherently political and contestable — and so far democratic institutions are the best way to deal with such issues.
This still doesn’t answer what the proper tax level should be, what kind of government programs are best, or anything like that. Those questions cannot be answered in the abstract as they are questions reflecting different opinions — there is no right or wrong answer. That’s why democracy is best when it functions correctly — we can debate, persuade, learn from different perspectives, and over time test policies and change what doesn’t work and embrace what does.
Sometimes I run across an article that causes my jaw to drop in amazement that anybody would write such a thing. A recent article at the website “American Thinker” is one of them. In that article they say registering the poor to vote is un-American because the poor don’t pay taxes. The article itself, apparently trying to rationalize voter suppression and create resentment of the poor, is a mess. Most of the time it focuses on hard core Marxists of over forty years ago and even Trotskyists. Apparently the author wants to somehow link these to Barack Obama and current democrats.
There are three especially perverse aspects of that argument.
1. The article suggests that the Democrats want the poor to be poor in order to get votes through bribery. In other words, all the rhetoric about wanting equal opportunity, helping those who have difficulty, insuring people get access to quality education and health care — as well as food for children — is a lie: to them, the Democrats don’t care about the poor except to get votes.
That would be despicable if it were true. But Democrats from hardcore activists to people whose political action doesn’t go beyond voting are motivated by a desire for justice and to help people improve their lives. Now, it may be that the Democratic approach is wrong — there are many good arguments one can make against a myriad of social welfare programs. But the argument made in the article in American Thinker does go that route. They say that the poor are just being bribed, that the Democrats are shaking down the rich to buy off the poor.
That is a fascistic argument. I’m not saying that to call names, but fascism essentially operates by trying to deny the existence of politics. Fascism sees politics as mob rule, destined to fail as politicians play populist games to get votes. Therefore fascists try to deny the legitimacy of political differences and instead paint their opponents are morally depraved or fundamentally dishonest. In the article the real issues of how to deal with social problems are defined away; rather you just have bad Democrats trying to bribe greedy poor people.
It’s also an insane argument. The poor rarely vote. You’re not going to win elections by trying to simply give to the poor. The reason Democrats want to register the poor is to get them involved in the process. The more involved you are in the process the more likely you are going to take your community seriously and improve your life. The poor voter is more likely to work his or her way off welfare than one who is alienated. The writers’ argument is not only wrong, if followed (dissuading the poor from voting) it would make the poor more likely to stay dependent on the state.
2. It is clear class warfare, an effort to breed resentment of the poor and cause middle class folk, especially whites, to think that the Democrats simply represent lazy freeloaders. Some poor folk may be lazy, but most working class poor have recently lost a job, have had unexpected health care costs, or really want to find a way to make it on their own. If their kids don’t get a solid education, health care, and basic nutrition, they won’t have a real opportunity to succeed — meaning a perpetual cycle of poverty and an increased chance of crime.
For the rich to resent the poor is perversion. It’s the “haves” looking down their nose and scoffing at those who do not do as well, and then telling them “you should have no voice in the political system because you’re a loser.” When President Obama wants to close a few loopholes people scream that he’s demonizing the rich — which he’s not. The rich do very well in the US, we have the wealthiest top ten percent of income earners in the world by far. Our bottom 10% are closer to third world states, and even our bottom sixty percent aren’t that well off relative to other countries. If there’s class warfare, it’s coming from the right.
3. The argument ignores reality. Another blogger linked an article the other day from the CATO institute. Like the American Thinker article, it plays rhetorical games but ignores reality. Their claim:
Did you know that in Denmark, the poorest 30 percent pay 14.1 percent of all taxes and the richest pay 48.7 percent, while in the United States, the poorest 30 percent pay just 6.1 percent of all taxes and the richest 30 percent pay a whopping 65.3 percent?
From there the author asserts that our poorest pay less and get more, while our wealthy are bled. Of course, the reality is quite different. First, Scandinavian countries have poor pay in and then get more reimbursement — it’s only the reforms of Ronald Reagan that actually ended the poor paying in first. Reagan was proud to get the poor off the tax roles.
However, to measure progressivity the only way is to look at the GINI index and see the before tax and transfer and after tax and transfer rate. The GINI index measures income distribution. 0 would be everyone earning the same, 1.00 would be one person with everything and another with nothing.
The US pre-tax and transfer GINI index is at .46, while Sweden is at .43, and Denmark and Norway are at .42. That means pre-tax they are slightly more even in income distribution, but not much. Germany has a bigger pre-tax gap between the rich and the poor than the US at .51.
After tax the US GINI index moves to .38 — a modest improvement. After taxes and transfers Denmark is at .23. That’s right, taxes and transfers equalize wealth dramatically, the gap between the rich and the poor is least in all the industrialized world. This means the poor are much more even with the rich in Denmark. Sweden is also at .23, Norway is at .28, while Germany’s disparity narrows from .51 to .30. All of those systems are much more progressive than the US. Most wealth stays with the rich here, the gap between the rich and the poor is higher in the US than ALL other OECD states except Portugal, with which we’re tied. Poland is slightly better at .37 after taxes and transfers.
These arguments are signs that far right are relying on false arguments, based on distortion. They do not have facts on their side. It isn’t bad for the poor to vote, we do have the largest gap between the rich and poor, and our wealthy are doing very well.
This doesn’t mean Democratic programs work. This doesn’t even mean that the Republicans don’t have better ideas. It’s only that people making these kinds of arguments (glibly, talk radio style arguments) don’t even try to engage Democratic ideas or support Republican ones. They evade the real issues and appeal to emotion, often with very misleading information. The left spins as well, neither side is immune from the temptation to twist things their way. But these examples are a bit over the top, especially the desire to demonize the poor in the American Thinker article. It’s another example of how the far right is ‘jumping the shark’ and may be past its peak.
My facebook status update today: “Idea for a remake of ‘You’ve Got Mail.’ Tom Hanks is going out of business from his big box book store, while Meg Ryan is running a successful web based downloading service. (Goodbye, Borders!)”
Border’s books, one of the premier original “big box” book stores, is going out of business nation wide. On the one hand, this isn’t exceptional. Large even legendary stores like Montgomery Wards and Circuit City have closed, and throughout the Midwest once prosperous steel and factory towns have lost out as the US manufacturing sector steadily declined to below 10% in the last 35 years. Success today does not insure success tomorrow.
Yet what I find interesting in this is what it says about our reading habits. Last night I was in Barnes and Nobles, in Augusta, Maine. I like going to book stores, especially the ‘big box’ stores that have a wide variety of titles. Often there is a pleasant surprise — this time I found They Fight Like Soldiers, they Die like Children, by Romeo Dallaire. Besides the fact I admire Dallaire for his work in documenting the Rwanda genocide, I co-teach a course on “Children and War,” and this may end up a perfect text for it.
In fact, some of the most powerful books I’ve read — War is a Force that Gives Us Meaning by Chris Hedges, Before the Deluge by Otto Friedrich and The Fabric of the Cosmos by Brian Greene were found exploring that store. I try to buy books locally — we have a great small bookstore downtown, and I ran across the Fall of an Empire book about Attila the Hun by Christopher Kelly there. But the laws of probability state that you’re more likely to run across a book you want when the supply is large, so I still enjoy trips to Barnes and Nobles. The coffee isn’t bad either.
Yet more and more people are not only ordering books from on line websites like Amazon, but they’re downloading material for their Kindle or Nook. In a small device you can store hundreds (thousands?) of books to have with you at all times. Screens are getting easier to read too, especially for devices made solely for electronic reading.
Some people decry the loss of the book — the nice leather (or paper) bound set of pages you can skim through, hold in your hand, mark up, and keep on the bedstand. The book seems under violent attack from electronic media which seek to replace our romantic attachment to the printed word with cold bits and bytes, pages on a screen that are transient and sterile.
The book, of course, got to its position through violence — it has not always been the innocent victim it now appears to be. It came on the scene and challenged the tradition of oral histories and stories. Once we had vast memories and communities learned their past and their traditions in a way that could only be passed down by word of mouth. The printed page — cold and inhuman, just words on paper put there by a movable type press — banished our human memories and the social nature of reciting and singing our histories and traditions to the past. Who needs a memory if you can look it up? Who needs community if your knowledge is personal?
And while I enjoy strolling through bookstores (and stores in general), I’ve slowly become convinced that online shopping can be good, for books and other merchandise. I resisted it for a long time. I like to go to the store, compare items and mull it over. I sometimes leave the store, drive around, think about my potential purchase, maybe stop somewhere else, and then finally buy it (or not). I like to see, feel and hold what I’m going to buy, to know the item I am giving up my money to purchase. To click an image on the computer, give my credit card number and then have it sent seems a gamble. Am I sure I want it? Is it what it appears to be?
Yet living in rural Maine offers limited shopping possibilities. Walmart is fine for supplies like every day items, and basic electronics (Target is better, though that’s in Augusta), but good, enjoyable shopping requires at least a trip to Augusta, and probably to Portland. With kids along its not easy to ponder potential purchases. Living in rural Maine used to really limit shopping options; with the internet, as long as you can accept not being in the store, you’ve got the same kind of choice as someone in New York or Boston.
Beyond that, teaching at a university in rural Maine at one point meant very limited research options for students. The library is small and under funded, and to get journal articles one has to travel to one of the private schools or the campus in Orono (the system’s research university). Inter-library loan improved things, but now you can go on line and with data bases and other resources, have access to more than all but the top research universities used to have available. In fact, many professors are assigning web sights or articles from data bases rather than buying text books. This is hitting text book publishers and university book stores, while also lowering costs for students. I still order books, as for my classes as I haven’t found suitable replacement material on the web…yet.
The hard part about electronic books and buying via Amazon is that you have to know what you’re looking for. It’s not as easy to “browse” Amazon, or to page through a book, jumping from one section to another. And that’s the trouble with the information revolution. Unless you know what you’re looking for, you’re limited. One can’t aimlessly browse, at least not as easily. I like going to a store and just browsing, finding items I might never have known existed, or books I hadn’t heard of before.
So there’s more information out there, but we have to know what we’re looking for. Back 40 years ago there was a lot less news, but it was packaged so that the most important stories were put forth, and people could browse through the newspapers for what interested them. Now we choose our websites, perhaps slanted to the left or right (or to sports and entertainment) and might miss the big stories, or the interesting tidbits we’d run across browsing. That’s a small price to pay for the increased knowledge at our finger tips. Missing out on Borders is a small price for the ease of Amazon and access to just about every book one could buy. I can’t browse Blockbusters anymore, but I can search netflix. It is overall better. Still, there’ something lost when something’s gained.
On December 29, 2000 I headed to Italy with a class of 20 students. We started in Venice and headed to Florence and Rome, spending two weeks in Italy (and celebrating 2001’s New Years Day in Venice). Earlier that month the Supreme Court stopped a Florida recount and ultimately ruled in favor of George W. Bush in a hotly contested Presidential election. The Twin Towers of the World Trade Center still stood as New York’s primary landmark. And although lira was still used as currency, the Euro had become the official standard for determining value, and a Euro cost 77 cents. A gallon of gas was about a buck. The students found Italy cheap. The travel fee was $1200 for hotel, airfare, a rail pass and transportation to and from the airports. With a good exchange rates people bought leather jackets in Florence and enjoyed fine restaurants.
On Monday I leave for my sixth travel course to Italy (I’ve also done two to Germany/Austria). I led that first one in 2000 alone, but since then have co-taught the course with Steve Pane (Music History), Sarah Maline (Art History) and Luann Yetter (Literature). We usually have 36 to 40 students, this year we have 42. We’ve got the mechanics of the trip honed like a well oiled machine. We know the hotels, we’ve come to know the cities (still Venice, Florence and Rome) well, have our favorite places to eat and know how much to plan for the students. We have crafted and refined our seminars (some joint, but students can also choose between different offerings depending on their interests) and know how to help students create their own experiences.
We’ve learned lessons along the way. We tell students now to NEVER bring dollars, dollar denominated travelers checks, or ever go to an money exchange shop. Ever since the Euro came into being those places have jacked up fees and made the rate of exchange worse in order to make up for not earning money from European travelers. Instead, use your ATM card or credit card, or perhaps order Euros from a bank here. The only travelers check to use is a Euro denominated American Express check — and those can only be cashed at American Express offices (anywhere else you’ll get less than 90 Euro for a 100 Euro check).
We’ve also watched the dollar weaken and travel fares increase. This year the travel fee is $2120, and it covers far less than was covered the first trip. No rail pass for day trips; students will have to finance day trips on their own. Air fare is significantly more expensive thanks to both oil and security costs which are tacked on as fees. Students find their funds disappearing quickly as the exchange rate ends up being about $1.50 for a Euro. And, while comparing the experiences of traveling with the dollar worth about half as much as it was ten years ago is a good story to help get students to understand the impact of exchange rates on economic transactions, no student has bought a leather jacket in Florence in recent years.
I usually handle the financial side of things and the logistics. This year has been especially tough. The Euro was at $1.33 when I started planning, and our initial quote for air fare was $870 on British Air (flying into Venice and back from Rome). The first shock was after the unrest broke out in Egypt oil prices rose, and British Air tacked on an extra $100 fuel oil surcharge. They said that more could be added, so we switched to Iberian Air, who would guarantee the price. The student fees had already been set, so we couldn’t pass on the increase. Then the dollar started to deteriorate as the European economies started to look stronger than the US.
I was smart enough to suspect the likelihood that the dollar would lose value, so I budgeted at a rate of $1.50 per Euro. Yet losing $100 to a fuel surcharge meant that money for things like day trips, museum admissions, public transportation in Rome or perhaps a concert was contingent on exchange rates not reaching my budgeted “worst case scenario.” Unfortunately, they did — and in an especially frustrating manner. Most hotels and the trains had to be paid in advance, in April. That means that even though the dollar has rebounded slightly in the last two weeks, its too late to help us on those costs. Now it’s down to $1.42 — at least that would make life a bit easier on the students!
Taking a step back, thinking about how proud we are of this travel course we’ve put together and perfected over the years, I sometimes wonder how long we can offer it. Visions of the dollar sinking below $2.00 a Euro, or oil jumping over $200 a barrel cause me to wonder if such a course won’t soon be out of reach for student budgets — especially students at a working class state school.
I sometimes wonder if Europe isn’t regaining a leadership role in the western world. Despite crises in Greece and Ireland, most European states are handling the recession reasonably well, still produce as much as they consume, and have made strides in cutting debt. True, Italy’s been hit hard by the recession — it’s debt is 115% of GDP, compared to the US debt to GDP ratio of about 75%. Italy’s demographics show an aging society where a smaller work force has to pay pensions on a longer living and larger retired population. Yet they and other European states have been more able to make reforms (raise the retirement age, cut pensions, etc.) than the US has, and there’s a sense that the future will see improvements.
The EU has met the Kyoto accord green house gas emission targets, and as such has become the world leader in green technology, which has also helped them weather the oil price increases. New partnerships with China and Russia signal a break from the close US-European relationship in the past. Similarly, the Obama Administration has shifted focus to Asia and the Mideast.
In Rome one seminar we’ll hold will be on Vico’s theory of history, and will broach the question of whether or not the US is like Rome. Are we an empire in decline? Or are we like Rome around 50 BC, a decadent Republic about to lose liberties and morph into an Empire? Is the EU a future model of political organization, or will the demographic and economic problems within Europe create long term crisis there as well? Or, perhaps, will the information revolution and technological boom — as well as the potential promise of the “Arab Spring” and globalization lead to surprise developments that will benefit us all?
For now, I’m just getting ready to walk 12 miles a day and enjoy wonderful meals — and cherish the experience of helping students learn about and discover the richness of Italy’s past and present. Of all my life accomplishments, this course, mixing teaching, friendship with colleagues, helping students expand their horizons, and giving me the personal pleasure of frequently experiencing Italy (it’s cool to think I really do know my way around Venice, Florence and Rome) is one of the most meaningful. So fmy blog will now switch into Italy mode — I’m not sure how much I’ll be able to blog during the trip (check February 2009’s blog for entries from that trip), but my mind is already starting its journey to Italia!