Is Economic Growth Sustainable as Inequality Soars?

 In Martin Ford’s prize-winning book  Rise of the Robots: Technology and the Threat of a Jobless Future we came across this chapter on the role of inequality in determining economic growth. As it is directly relevant to the pursuit of our blog, we reproduce it in its entirety below.

As we’ve seen, overall consumer spending in the United States has so far continued to grow even as it has become more concentrated, with the top 5 percent of households now responsible for nearly 40 percent of total consumption. The real question is whether that trend is likely to be sustainable in the coming years and decades, as information technology continues its relentless acceleration.

While the top 5 percent have relatively high incomes, the vast majority of these people are heavily dependent on jobs. Even within these top-tier households, income is concentrated to a staggering degree; the number of genuinely healthy households—those that can survive and continue spending entirely on the basis of their accumulated wealth—is far smaller. During the first year of recovery from the Great Recession, 95 percent of income growth went to just the top 1 percent.

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The top 5 percent is largely made up of professionals and knowledge workers with at least a college degree. As we saw in Chapter 4, however, many of these skilled occupations are squarely in the crosshairs as technology advances. Software automation may eliminate some jobs entirely. In other cases, the jobs may end being deskilled, so that the wages are driven down. Offshoring and the transition to big data-driven management approaches that often require fewer analysts and middle managers loom as other potential threats for many of these workers. In addition to directly impacting households that are already in the top tier, these same trends will also make it harder for younger workers to eventually move up into positions with comparable income and spending levels.

The bottom line is that the top 5 percent is poised to increasingly look like a microcosm of the entire job market: it is at risk of itself being hollowed out. As technology progresses, the number of American households with sufficiently discretionary income and confidence in the future to engage in robust spending could well continue to contract. The risk is further increased by the fact that many of these top-tier households are probably more financially fragile than their incomes might suggest. These consumers tend to be concentrated in high-cost urban areas and, in many cases, probably do not feel especially wealthy. Large numbers of them have climbed into the top 5 percent through assortative mating: they have partnered with another high-earning college graduate. However, housing and education costs are often so high for these families that the loss of either job puts the household at substantial risk. In other words, in a two-income household the likelihood that sudden unemployment will lead to a substantial cut in spending is effectively doubled.

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As the top tier comes under increasing pressure from technology, there are few reasons to expect that the prospects from the bottom 95 percent of households will improve significantly. Robotics and self-service technology in the service sector will continue to make inroads, holding down wages and leaving relatively unskilled workers with fewer options. Automated vehicles or construction-scale 3D printers may eventually destroy millions of jobs[1] . Many of these workers may experience downward mobility; some will likely choose to leave the work force entirely. There is a risk that, over time, more households will end up living on incomes that are very close to the subsistence level; we could well see more shoppers in midnight lines waiting for their EBT cards to be reloaded so that they can feed their families.

In the absence of increasing incomes, the only mechanism that will allow the bottom 95 percent to spend more would be to take on more debt. As Cynamon and Fazzari found, it was borrowing that allowed American consumers to continue driving economic growth over the course of the two decades leading up to the 2008 financial crisis. In the wake of that crisis, however, household balance sheets are weak and credit standards have tightened substantially, so a great many Americans cannot finance further consuming spending. Even if credit again begins to flow to these households, that is necessarily a temporary solution. Increased debt is unsustainable without increased income, and there would be an obvious danger that loan defaults might eventually precipitate a new crisis. In the one area where lower-income Americans will still have easy access to credit—student loans—the debt burden has already grown to extraordinary proportions and the resulting payments will decimate the disposable income of college graduates (not to mention those that fail to get a degree) for decades to come.

While the argument I’m making here is theoretical, there is statistical evidence to support the contention that

inequality can be harmful to economic growth. In an April 2011 report,  economists Andrew C. Berg and Jonathan D. Ostry of the International Monetary Fund studied a variety of advanced and emerging economies and came to the conclusion that income inequality is a vital factor affecting the sustainability of economic growth. Berg and Ostray point out that economies rarely see steady growth that continues for decades. Instead, “periods of rapid growth are punctuated by collapses and sometimes stagnation—the hills, valleys, and plateaus of growth.” The thing that sets successful economies apart is the duration of the growth spells. The economists found that higher inequality was strongly correlated with shorter periods of economic growth. Indeed, a 10-percentage-point decrease in inequality was associated with growth spells that lasted 50 percent longer. Writing on the IMF’s blog, the economists warned that extreme inequality in the United States has clear implications for the country’s future growth prospects: “Some dismiss inequality and focus instead on overall growth—arguing, in effect, that a rising tide lifts all boats.” However, “when a handful yachts become ocean liners, while the rest remain lowly canoes, something is seriously amiss.” 

—Quoted from Rise of the Robots by Martin Short, Basic Books, New York 2015     

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[1] This is a reference to an earlier chapter where the author told us that giant 3D printers were approaching the point of being able to perform all the tasks in house construction (structure, carpentry, plumbing, wiring, finished surfaces, etc.) that are currently done by hand and would in the future replace all manual labor and skills, making construction workers of any kind no longer necessary.  A truly frightening thought.

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The Repeal of ObamaCare—What Will We Be Left with?

We know the new administration is dedicated to the repeal of the Alternative Care Act. Since we don’t want to be left with no health care whatsoever or a totally destructive substitute for the present one, we are all curious to learn what the other side is proposing to replace it. This suggestion from the other side which we found in the Tuesday Wall Street Journal therefore catches our attention and may interest you. Do you think it might work?

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By JOHN C. GOODMAN, Jan. 23, 2017

The provision was buried deep in a 1,000-page bill that Congress passed in December by large bipartisan majorities. Most lawmakers probably didn’t know it was there. Yet it is the start of an answer to the biggest question on Washington’s mind: What to do about ObamaCare?

The 21st Century Cures Act, which President Obama signed Dec. 13, focuses mainly on helping patients obtain breakthrough drugs and medical devices. But it also includes provisions that will give small employers—those with fewer than 50 workers—more flexibility in the insurance marketplace. As Republicans debate how to replace ObamaCare, giving that same flexibility to all employers would be a perfect place to start.

One reason that most Americans get health insurance through work is that there are tax advantages for doing so: Employers can pay for the insurance with pretax dollars. If companies wanted to simply give their workers cash, and let the employees choose their own insurance, that money would be taxed by Uncle Sam.

The problem is that this system ties the worker’s insurance to his job. If he quits, he loses coverage. Polls have consistently shown that what employees most want in health insurance is portability. They want to own their policy and take it from job to job.

Many companies would like to accommodate this by giving employees a “defined contribution”—a fixed amount of money—and letting them choose their own health insurance. Thanks to the 21st Century Cures Act, small employers now can do this. They can put pretax dollars into accounts called Health Reimbursement Arrangements, or HRAs. Workers can then use that money to buy their own health coverage.

This represents an abrupt reversal of policy. Since 2015 the Obama administration has been threatening to punish any employer who used HRA accounts in this way with a fine as high as $100 per employee per day.

Small companies were already exempt from ObamaCare’s employer mandate, but this has taken on increased importance. They are now the only employers that can choose how health insurance will be subsidized by the federal government. They can (1) use pretax dollars to provide health insurance directly; (2) pay higher taxable wages and allow the employees to buy their own insurance, benefiting from the ObamaCare tax credits if they quality; or (3) put pretax dollars into an HRA. Extending this freedom to all employers would be a remarkably effective solution to ObamaCare’s many problems.

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One reason so little progress has been made in increasing employer-based coverage is that larger companies are meeting the law’s minimum requirements by offering low-wage workers bronze ObamaCare plans. But these plans might have deductibles of $6,000 or more and premiums equal to 9.5% of the employee’s wage. Workers routinely reject this kind of coverage.

What if these firms were given the same choice that small businesses have? What if they could put money into an HRA for each employee, which the worker could then use to purchase coverage on his own, with the help of tax credits?

Economists like tax credits because of their incentive effects. They subsidize the first dollars of coverage (basic insurance we want everyone to have) instead of the last dollars (extensive policies with bells and whistles). Such credits also allow employees to forgo unneeded coverage and increase their take-home pay, without tax penalty.

The tax credits offered in the ObamaCare exchanges favor low-wage workers, since the subsidies start high and phase out as income rises. On the other hand, the ability to buy insurance with pretax dollars favors high-wage workers, since the value of that option depends on the employee’s tax bracket. But a universal tax credit, which is what some Republicans are proposing, would offer the same amount for everyone, regardless of income.

These changes wouldn’t solve every problem with ObamaCare. Lawmakers would still need to stop the race to the bottom in which insurers try to attract healthy people and scare off sick ones with narrow networks and sky-high deductibles. One method: Impose financial penalties on insurers who drive enrollees to other plans. Another issue is how to prevent people from gaming the system by remaining uninsured until they get sick. Medicare has managed to do that by charging seniors higher premiums if they don’t sign up when they are eligible.

Fortunately, there is legislation to accomplish all this and more. Rep. Pete Sessions (R., Texas) and Sen. Bill Cassidy (R., La.) have offered a bill to create a universal tax credit worth $2,500 for an adult and $8,000 for a family of four. That’s generous enough to allow everyone access to Medicaid-like coverage. The bill would remove federal impediments to portable insurance, offer large employers a choice of tax regimes (tax credits or the current system), and give every American access to a Health Savings Account.

We have already done much of this for small businesses without any partisan bickering at all. It should be a no-brainer to give big companies the same flexibility.

 

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Goodbye, Health Care?

Mr. Goodman is president of the Goodman Institute for Public Policy Research and the author of “Priceless: Solving America’s Healthcare Crisis” (Independent Institute, 2012).

Davos, Switzerland—The World Economic Forum Meets to Discuss Globalization

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We have been looking for an opportunity to report on this most important gathering under the utmost security of some of the richest and most powerful people on earth  in this picturesque village in the Swiss Alps. This article in today’s New York Times provides us with that opportunity.

As the “haves,” those gathered here are also among the most hated people in the world so that it is natural that their talk this year should circle around how best to deflect from themselves this hatred of the “have-nots.” While to us the answer seems self-evident, let’s see what they have in mind. Do they really grasp the seriousness of their situation or are they only interested in hanging on to their money?

By PETER S. GOODMAN,  Jan. 19, 2017

The people gathered here this week in the Swiss Alps for the annual World Economic Forum have noticed this, too. They are the elite — heads of state, billionaire hedge fund managers, technology executives.

They are eager to talk about how to set things right, soothing the populist fury by making globalization a more lucrative proposition for the masses. Myriad panel discussions are focused on finding the best way to “reform capitalism,” make globalization work and revive the middle class.

What is striking is what generally is not discussed: bolstering the power of workers to bargain for better wages and redistributing wealth from the top to the bottom.

“That agenda is anathema to a lot of Davos men and women,” said Joseph E. Stiglitz, a Nobel laureate economist and author of numerous books on globalization and economic inequality. “More rights to bargain for workers, that’s the part where Davos man is going to get stuck. The stark reality is that globalization has reduced the bargaining power of workers, and corporations have taken advantage of it.”. . .

It is a conversation fueled in part by fear: If the world is indeed in the throes of a populist insurrection, the pitchforks could do worse than to point here. The Davos elites have enjoyed outsize influence over economic policies in recent decades as a growing share of wealth has, perhaps not coincidentally, landed in the coffers of people with a need for bank accounts in the British Virgin Islands, while poor and middle-class households have seen their earnings stagnate and decline.

Yet the solutions that have currency seem calculated to spare corporations and the wealthiest people from having to make any sacrifices at all, as if there is a way to be found to tilt the balance of inequality while those at the top hang on to everything they have.

More entrepreneurialism, mindfulness training, education focused on the modern ways of technology: These are the sorts of items that tend to get discussed here as the response to the plight of those left behind by globalization. That perhaps private equity overseers should not be paid 1,000 times as much as teachers while availing themselves of tax breaks is thinking that gets little airing here.

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At a dinner on Monday evening as the forum got underway, Ian Goldin, a professor of globalization and development at Oxford University, celebrated the connectedness of the global economy and the technological advancements that have liberated humans from disease, poverty and the drudgery of manual labor.

“There’s never been a better time to be alive, and yet we feel so glum,” Mr. Goldin said. “So many people feel anxious. So many people feel that this is one of the most dangerous times.”  . . .

“We need to learn these historical lessons and realize that this is the most precious moment in human history,” Mr. Goldin said. “We need to make the choices to ensure that globalization is sustainable, that connectivity is sustainable, that we deal with the intractable problems that are worrying people.”

But Mr. Goldin’s comments were merely the prelude to a conversation that was supposed to be about how to pull that off. The answers from the corporate executives who comprised a panel could be crudely boiled down to this: The people who have not benefited from globalization need to try harder to emulate those who have succeeded.

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Abidali Neemuchwala, the chief executive officer of Wipro, the global information technology and consulting company that hosted the event along with The Financial Times — and who last year earned some $1.8 million plus stock grants worth an additional $2 million or so — said working people would have to pursue training for the jobs of the future.

“People have to take more ownership of upgrading themselves on a continuous basis,” he said. . . .

But nowhere in the discussion was there a mention of tax policy, or addressing the soaring costs of gaining higher education, or access to health care.

At a panel on Wednesday morning, Christine Lagarde, managing director of the International Monetary Fund, injected a rarely heard word into a conversation about the crisis for middle-class households: redistribution.

“There are things that can be done,” she said. “It probably means more redistribution than we have at the moment.”

But then the conversation moved on to other subjects. Ray Dalio, founder of the American investment firm Bridgewater Associates — who took home $1.4 billion in compensation in 2015 — suggested the key to reinvigorating the middle class was to “create a favorable environment for making money.” He touted in particular the “animal spirits” unleashed by stripping away regulations. . . .

“People talk about inequality, how it’s a major problem, the greatest threat to globalization and the global economy,” Mr. Stiglitz said. “You have to recognize that the way we have managed globalization has contributed significantly to inequality. But I have not yet heard a good conversation about what changes in globalization would address inequality.”

That is not an accident, he surmised. Any sincere list would have to include items that involve transferring wealth and power from the sorts of people who come to Davos to ordinary workers via more progressive taxation, increased bargaining rights for labor unions, and greater protections for labor in general. . . .

Which means that the global populism insurrection is unlikely to lose momentum anytime soon.

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Infrastructure Dollars Might Divert to the Very Rich

Then

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 09   wpa_2

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Franklin Roosevelt’s New Deal, whether it was the WPA, the PWA, the CCC, the TVA or the NRA, was all directed at putting unemployed men back to work. And it succeeded in this gloriously. Men of all kinds, day laborers, artists, shopkeepers, who had been formerly in dole lines, regained their self respect and were able once again to put food on their family table. 

And now

Bernie Sanders first came up with the idea of a giant works program similar to those of the New Deal for repairing all our decaying infrastructure in order to provide work for the millions of still unemployed men and women resulting from the Great Recession. It was one of the most appealing aspects of his program. When Sanders dropped out, Hillary Clinton picked up the idea and adopted it as one of the planks of her platform. We were once again enheartened.

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When Donald Trump gave it high priority on his platform, some of us began to see some hope in his new administration. “Our new president really seems to care for the down-and-outers.”

But then this Sunday the following article appeared in the New York Times business section, making it abundantly clear that all this talk about infrastructure repair is simply another way for those who already have money (i.e., the mutual funds) to become even richer by milking the federal government and—effectively—us, the tax payers. What a cheat!

We reprint the article, somewhat  abbreviated, below:

By NORM ALSTER, January 15, 2017

President-elect Donald J. Trump has spoken of spending a trillion dollars over the next decade to rebuild and repair the nation’s sagging infrastructure. Apart from offering big tax breaks to participating developers, few details of the Trump plan have emerged.

But a trillion dollars is hard to ignore, and investors looking to profit have numerous infrastructure mutual funds and exchange traded funds to choose from, though all of them have certain drawbacks.[Hey, wait a second, investor! This isn’t about you. Or wasn’t supposed to be.]

For one thing, most infrastructure funds own assets of limited scope, such as utilities, pipelines and railroads. “That doesn’t capture the full scope of infrastructure investment,” said Peter Santoro, lead portfolio manager for the Columbia Global Infrastructure fund.

Mutual funds and exchange-traded funds (E.T.F.s) are unlikely to own United States roads, bridges and airports, which are typically owned by states and municipalities. “None of these assets are publicly traded [thank God! Imagine if they were],” said Randle Smith, co-manager of the Virtus Global Infrastructure fund. . . .

Still, several fund managers insist their holdings are likely to benefit from an eventual Trump infrastructure program.[We didn’t think that benefitting mutual fund holdings was the point of the infrastructure program. Were we wrong?] Mr. Santoro, manager of the Columbia fund, says investors don’t need to own roads and bridges. They can own the concrete manufacturers who will supply developers. He cites two of his fund’s holdings, Eagle Materials and Cemex.

Lead contamination in the water system of Flint, Mich., has sharpened focus on the need for upgrading water systems. Most drinking-water and sewer systems are government-owned but “in contrast to roads and airports, water public entities are privatizing,” said Mr. Smith of Virtus. [They can’t even leave our drinking water alone.]

One such privatizer is American Water, which the Virtus fund holds. Two other holdings are makers of water pipes: Forterra, which manufactures concrete pipes, and Advanced Drainage Systems, which produces resin-based pipes.

Many infrastructure portfolios have also loaded up on energy pipelines, which seem likely to benefit from Trump policies. Scott Hammond of the Guggenheim World Equity Income fund expects the resumption of some projects that have been long and bitterly opposed by environmentalists, such as the Keystone XL and Dakota Access pipelines. And as pipeline capacity is increased to bring domestic shale oil to ports for export, companies like Kinder Morgan should profit, he added.

Mr. Santoro said the Columbia fund owned the oil service giants Schlumberger and Halliburton “because they have the engineering and construction expertise that’s needed.”

Railroads will also almost surely benefit from any uptick in economic activity set off by infrastructure spending. CSX, Norfolk Southern and Union Pacific are three of the largest holdings in the Lazard fund.

But the reality is that private equity funds for wealthy investors may be best positioned to take advantage of future tax breaks. For one thing, they have the capital. And where roads are now in private hands, private equity funds are typically the owners, so they can make the tax-advantaged repairs and recover their investment with tolls.

How good all of this will be for the general public remains to be seen. Some critics have questioned whether private developers would undertake needed public-interest projects that do not offer the prospect of profit. And on projects that do offer profit, ordinary people may end up footing the bill.

“Trump might dispute that his plan would require raising more in taxes,” said Hunter Blair, federal budget analyst with the liberal Economic Policy Institute, “but it will certainly cost money through tolls and other user fees.”

Trump’s Not-So-Invisible Hand

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Would Adam Smith have approved of our President-Elect’s meddling with cross-the-border trade? This is the question posed in an article in today’s Wall Street Journal. (The original article has been abridged for convenience.)

By GERALD F. SEIB, Jan. 16, 2017

[Trump] was asked in an interview whether he was getting down in the weeds of other people’s companies by, for example, negotiating directly with defense contractors or publicly warning other firms not to move plants overseas.

“I’m not in the weeds,” he replied. “I’m setting a tone for hundreds of companies.”

He cited in particular his jawboning of Ford Motor Co. not to move a production line to Mexico.

“When I tell Ford that if you build that plant, you’re going to leave Michigan, you’re going to go to Mexico, you’re going to build a plant,” he said. “You’re going to fire all your workers in the United States. You’re going to hire new workers. And if you think you’re going to sell your cars across the border and you’re not going to pay a tax, you’re wrong.”

“The truth is there’s no tax because they’re not going to leave. There’s only a tax if they leave.”

Instead, he noted, Ford has scrapped plans to build a $1.6 billion assembly plant in Mexico and is going to invest $700 million in a Michigan facility that would build electric cars.

And, he noted, Fiat Chrysler Automobiles NV will invest $1 billion in two existing plants in the U. S., creating 2,000 jobs in the Midwest. . . .

The GOP is the party that is supposed to eschew the kind of government intervention in business decisions that Mr. Trump’s actions represent.

Ideological conservatives, in fact, look on with a mixture of shock and horror. A true conservative believes in economist Adam Smith’s concept that the strongest economy emerges not when a government has a hand in it, but rather when the invisible hand of a free market brings supply and demand into a natural balance that maximizes output and efficiency.

Republicans have traditionally deployed disparaging terms to describe government actions that interfere with freely made business decisions. “Industrial policy” is one; “picking winners and losers” is another.

Beyond ideological beefs, there are two practical risks in what Mr. Trump is doing. The first is that companies begin making questionable decisions about how to invest their money simply to avoid being the target of presidential ire, and in the process sap their long-term viability.

The second is that a company comes to the government seeking favors in order to comply with the presidential insistence that it not move, or shut down, an operation that doesn’t otherwise make economic sense. That dynamic was in play, at least in part, with Carrier, a unit of United Technologies Corp. It received state tax incentives to keep jobs in Indiana.

But the Trump view is that today’s globalized economy simply isn’t open or fair—and that other governments, specifically China and Mexico, already are messing with that invisible-hand idea.

Descriptions of the Categories

I The Very Rich

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By 2007 the top 0.1% was 220 times larger than the average of the bottom 90%.

In 2010 CEOs’ compensation was 295 times that of typical workers after taxes.

Of all individuals with assets over $50 million, 42% (35,400) live in the U.S. followed by Europe with 28% (23,700).

44% of all UHNWIs (ultra-high net worth individuals with assets over $50 million) live in the U.S.; 28% (23,700) live in Europe; 15% (13,000) live in Asia/Pacific

Today’s super rich in America did not inherit wealth. They are working rich, a true meritocracy — Bill Gates, not the Duke of Bedford.

To break into the one percent you have to be earning $100,000 by the time you are 35. A strong early education is pretty much a precondition. In what field? Statistics: the ability to understand data is the most powerful skill of the 21st Century. College degree adds $1 million to a lifetime’s earnings.

“It’s a brutal world. You have to be really on the ball and fast to survive,” says the richest man in Brazil. To quote a young opponent of Occupy Wall Street, “We are Wall Street … We get up at 5 am and work until 10 pm or later … We eat what we kill.”

The average tenure of a Fortune 500 CEO has fallen from 9 1/2 years to 6 1/2 years in the last decade.

Steve Jobs may have been an egotistical jerk but we need men like him to succeed in business because of their sheer superiority to everyone else.

Today’s super-elite live longer even though they lead anxious, overworked and uncertain lives, due to our adoption of the winner-take-all philosophy.

II The Poor

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Poor Americans are people who lack education and skills, who have bad health, poor housing, low levels of aspiration and high levels of mental distress. Each disability becomes more intense because it exists within a web of disabilities. If one problem is solved and others remain unchanged, there can be little gain.

In 2011 46 million Americans, nearly one in six, were living below the poverty line as defined by an annual income of $22,314 for a family of four.
The U.S. poverty gap, those living below the official poverty line, is 37%, one of the lowest rankings in the club of developed nations.

Almost a quarter of all children in the U.S. live in poverty.

Equal opportunity no longer exists in this country. The poor rarely have access to the best education. When they do, they emerge encumbered by an unsupportable debt.

Employers take advantage of the poor by requiring them to compete against each other for slimmer and slimmer wages. On top of which many employers steal from their employees’ wages by requiring additional hours without additional pay.

The poor are victimized in every possible way. Theirs is an indecent way of life:
•Lack of medical insurance forces them to resort to emergency room use. Consequently they remain in a state of poor health.
•Lending institutions charge high interest rates for short-term loans, then pile on late fees this until debt is unsupportable.
•Similarly home ownership is favorably tilted towards the banks, forcing so-called owners into foreclosure and homelessness.
•Parking fines are skewed against the poor car owner to support municipalities.
•Poor people’s right to vote is stripped from them by senseless restrictions.
•Our all-volunteer army is constituted of those who have little other recourse.

III What can be done about it?

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First, has it always been this way? No, hardly. Take a careful look at this chart of the top 1% share of wealth since the 1950s:

IMG_0516.jpgSource: Thomas Piketty : Capital in the Twenty-First Century

For comparison, take a look at this table from the same book. Piketty’s deduction for the future on the right hand column is truly frightening:

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It was not always like this. A reduction in inequality took place after 1910 in the Progressive Era which followed the excesses of the Gilded Age. And again in 1940 after the Roaring Twenties, both as a consequence of war and policies adopted to cope with the shock of war.

In the immediate post-war decades, the welfare state kept up with the widening inequality of market incomes. It is since 1980, as a result of explicit policy decisions to cut back that it has failed to do so.

We are talking about the New Deal, the World War II policies of F.D.R., the strengthening of the labor unions. An important factor was collective bargaining by trade unions. Rising wages in the post war decade reduced inequality, as did the GI bill and a highly progressive tax system erected during World War II. Progressive taxation was at high level from 1959 to 1979. The top rate was 75%. Over the next thirty years it dropped to 39%.

The top 1% share in total personal wealth fell between 1950 and 1980. And rose again from 1980 to the 2000s. By 2007 the top 0.1% income was 220 times larger than the average of the bottom 90%. CEO’s compensation rose to 243 times that of the typical worker.

What is needed?

  •  A fairer distribution of the cost of the operation of the government and the raising of revenues to finance redistribution.
  •  A maximum fair marginal rate (what people keep as a result of their extra effort) should be the same for everybody. The marginal rate at the top of income distribution should be the same as at the bottom.

Policies are available that would simultaneously increase growth and equality, creating a shared prosperity. The question is more one of politics than of economics. Japan has, since 1989, managed to avoid high levels of unemployment and limit increases in inequality that have marked others. Brazil, one of the up-and coming world economies, has seen a reduction of inequality as a result of investments in education and programs to protect poor children.

When did we go astray?

Beginning with the election of President Reagan:

  • The deregulation of the financial sector.
  • The reduction of the progressive tax system. The top rate of 70% was lowered to 28%, then raised by Clinton to 39.6% (1993), then lowered by Bush to 35%.
  • Deregulation led to excessive financialization of the economy. 40% of all profits went to the financial sector. The top 1% earned more than half of the capital gains taxes, lowered by Clinton to 20% (1997) and by Bush to 15%.

The far greater inequality in this country in comparison to all others comes out of distinctively American policies:

  • A less progressive tax system.
  • Weaker safety nets and social protection systems.
  • Educational, economic and social attainments are more closely linked to those of parents. A stronger link existed between parental and children’s socio-emotional outcomes in the U.S. than in any other country investigated including old Europe.
  • A larger role for banks due to deregulation.

Prior to Reagan, matters in this country were improving. Our economy, our democracy, our society would all benefit from reducing inequality of opportunity. House divided cannot stand.

Instead of tempering the excesses of the market in America today, the two (government and Wall Street) have been working together to increase income and wealth disparities.

If a country doesn’t give its population the education they need to earn a decent living, if employers don’t pay workers a decent wage , if society provides so little opportunity many people become alienated, that society and its economy won’t work well.

Our system can’t work if there isn’t a deeper sense of community. A dual economy, two societies living side by side, hardly imagining what life is like for the other, is what we have today. “That the poor are invisible is one of the most egregious things about them. They are not simply neglected and forgotten as in the old rhetoric of reform, but what is much worse, they are not seen.” (Michael Harrington in The Other America.)

IV Why we Quakers are the best suited to take on the challenge of poverty in
the U.S.

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The real solution to the inequality crisis lies in focusing on community rather than simply on self-interest.

The Quakers are a small sect who have produced a disproportionate number of business men. Quakers were traditionally barred from public and civic offices along with other non-conformists. Neither medicine nor law was open to them as you had to be a practicing Anglican to take a degree at the university. So they gravitated to business and commerce.

Many went into the cocoa business, which they saw as a desirable alternative to alcohol, and became part of the temperance movement.

They were among the first to set a firm price on goods which gave them a competitive advantage as customers didn’t feel they would get ripped off.

Quaker confectioners were seen as trustworthy with good and safe factory conditions.

Quakers religious ethos and self reliance make them natural capitalists. Non-conformism puts the burden of responsibility for salvation on the individual.

The testimony of truth and integrity gave rise to a refusal to swear oaths which eventually gave Quakers a reputation for being honest business men and led them to establish some of the most successful enterprises of the 18th and 19th centuries.

Simplicity lede them to live and dress plainly without ostentation and to reject excessive consumerism and the unsustainable use of natural resources.

Ernest Bader, a Quaker and head of a chemical company, Scott Bader Commonwealth, gave his very successful business to his employees in the early 1950s.

The Quakers are ideally suited to make the case against inequality. Of all the religious denominations they are in the strongest position. There is a solid tradition of successful and trustworthy middle-class business men and women among us. We are an integral part of the capitalist system, neither too rich nor too poor, ideally located to point out its faults and the necessary corrections. The Episcopal Church within which I was raised is too closely associated with the moneyed class to be useful. The Catholic Church is too embedded among the poor and the dispossessed to be a credible and objective voice.

A short list of some of the best known Quaker businesses:

Cadbury’s

Fry’s

Carr’s Biscuits

Huntley and Palmer’s

Barclay’s Bank

Rowntree

Bethlehem Steel

LLoyd’s Bank

Imperial Oil (now Exxon)

Bryant & May Matches

Strawbridge & Clothier’s (now Macy’s)

Sony

Waterford Crystal

Cornell University

John Hopkins University

The Myth and the Reality – Trump vis-à-vis Reagan

Thomas Piketty, in his book Capital in the Twenty-First Century, stated categorically that the United States will not within the foreseeable future achieve the 3.5 percent growth rate of the thirty-year period that followed World War II; nor will any of the economically advanced countries—Britain, France, Germany et al. The ideal conditions existing then, which made such growth possible, no longer exist. We have to be satisfied with a 1.5 percent growth rate from now on and should, in fact, consider it appropriate  for this stage of our economic development.

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Today’s Sunday New York Times contains an article by Ruchir Sharma of Morgan Stanley, presented below in an abridged form, in which he arrives at the same rational conclusion. Both men are equally credible. How much longer must we  endure the posturing of analysts and politicians who cannot recognize that the past is past? 

By RUCHIR SHARMA Jan. 14, 2017

Mr. Trump’s advisers say that over the next decade, their plans for tax cuts and deregulation could push the average annual growth rate back up to 3.5 percent — the same as during the Reagan presidency. . . .  His backers, dismissing skeptics as defeatists, have insisted there is “no law of nature or economics” that would prevent the United States from reviving the boom of the 1980s.

Only there is such a law. The forces that underlie economic growth have weakened significantly since the Reagan years, worldwide. No nation, no matter how exceptional, can try to grow faster than economic forces allow without the risk of provoking a volatile boom-bust cycle.

The potential growth rate of an economy is roughly determined — and limited — by the sum of two factors: population and productivity.  An economy can grow steadily only by adding more workers or by increasing output per worker. During the Reagan years, both population and productivity were growing at around 1.7 percent a year, so the potential United States growth rate was close to 3.5 percent.

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Luxury cars of the Fifties

 In recent years, America’s population and productivity growth have fallen to around .75 percent each, generously measured, so potential economic growth is roughly 1.5 percent, less than half the rate of the Reagan era. Any policy package that aims to push an economy beyond its potential could easily backfire — in the form of higher deficits and inflation.

The population and productivity formula is well known and undisputed — yet widely ignored amid the current euphoria.

In the last 1,000 years, no economy has ever broken free of the limits imposed by population growth. Before the late 19th century, global population growth did not exceed half a percent, and global economic growth did not exceed 1 percent for any sustained period. Before World War II, population growth increased to 1 percent, and economic growth accelerated to about 2 percent. After the war, the baby boom pushed population growth toward 2 percent, and economic growth rose to nearly 4 percent for the first and only time in world history.

54ca9e2a27086_-_family-sedans-02-0410-synd   images-3                                                          Luxury cars today

Now, as families around the world have fewer children, global population growth has fallen to about 1 percent. . . . With the United States population growth rate falling — last year to the slowest rate recorded since the 1930s — it is extremely unlikely that any president could juice the economy to grow at a steady 3.5 percent or more over the next decade.

Slow population growth undermines the economy by delivering fewer young people into the work force. Nations can partly compensate by raising the retirement age or admitting more immigrant workers. Mr. Trump, however, has no such plans. His advisers focus instead on bringing back the many American workers who have given up on finding jobs and dropped out of the labor force. But this strategy can have only limited effect. The main reason fewer workers participate in the nation’s labor force is not that they are discouraged, but that they are over 55, the age when many people stop working or work less.

In general, commentators who believe the United States can go back to the 1980s focus not on population but on productivity. They argue that Reagan-style tax cuts and deregulation can increase investment in new plants and equipment, and substantially raise output per worker. . . .

Let’s assume Mr. Trump’s team can more than double United States productivity growth to the rate achieved in the Reagan era, 1.7 percent. Given the irreversible fact of slowing population growth, that productivity miracle would still raise the potential growth rate of the domestic economy to only around 2.5 percent. If that doesn’t sound so different from 3.5 percent, consider that every percentage point of growth in the domestic economy is worth more than $100 billion — the difference between feeling pretty good and Great Again.

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The nub of the problem here is nostalgia for a bygone era. . . .  [F]or most countries, the era of population growth is now over.

The pressure of falling population growth means that every class of countries needs to adopt a new math of economic success and bring its definition of strong growth down by a full point or more. For developed nations like the United States, with average incomes over $25,000, any rate above 1.5 percent should be seen as relatively good. . . .

The risks of excessive ambition are real. In recent years the actual growth rate of the United States economy has been about 2 percent, which is disappointing in comparison with the 1980s, but far from horrible, given its diminished potential. Often, if a country pushes the economy to grow much faster than its potential, it will start to suffer from rising debts and deficits. Inflation will rise, forcing the central bank to raise interest rates aggressively, which can prompt a recession. This risk is particularly high at a time, like the present, when the United States is already running the largest deficit ever recorded at this stage of an economic expansion.

It will be difficult to persuade people to accept the reality of slower growth. Voters in many countries are already turning to populists who are promising miracles and attempting nationalist economic experiments. The coming era is likely to bring more such experimentation and diversion,but the new math of slower growth will remain.

About the author: Ruchir Sharma, author of “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World,” is chief global strategist at Morgan Stanley Investment Management.

Technology Boom’s Impact on Productivity

We think that this news piece on the second page of yesterday’s Wall Street Journal is of enormous importance and would therefore like to highlight it. Basically, it explains why labor (wages), except at the highest levels, has never recovered from the Great Recession (in fact, never will), why all the recovery profit since then (and there has been a lot) has gone to the people at the top, and why we will never see economic growth of 3% and 4% as we did in the years after the Second World War again.                                                                                            

5-yr-tips-vs-2-yr-gdpGraph showing how growth measured by GDP has declined steadily since the 1970’s

By SHAYNDI RAICE, for The Wall Street Journal, Jan. 5, 2017

In the mid-1990s, when John Fernald had to write a memo for his bosses at the Federal Reserve on the merits of internet access at work, he was stumped.

“I couldn’t quite get what the benefit was,” he recalled in a recent interview.

Today, the Fed economist has a clear and very influential view. His research found that the information technology boom of the 1990s helped businesses become more efficient until about 2003. But that boost began fading by 2004, and now the benefits of tech innovation flow more to leisure activities, such as social media and smartphone apps.

More fun, perhaps, but not much increase in economic output per labor hour, or productivity—the key to rising living standards.

His work on the technology boom’s impact on productivity has reshaped the way central-bank officials see economic growth, interest rates and inflation.

For several years after the Great Recession, Fed officials were puzzled by persistently disappointing U.S. economic growth, particularly given their efforts to juice it with superlow interest rates. They now believe one major cause was a slowdown in productivity gains, but they have differed over whether this was a long-term or temporary postcrisis problem.

Mr. Fernald, a senior research adviser at the Federal Reserve Bank of San Francisco, has played a key role in convincing many top Fed officials that the productivity slowdown began well before the 2008 financial crisis.

This means productivity growth is unlikely to bounce back after the effects of the crisis dissipate, and it implies U.S. economic growth is unlikely to pick up much either. That suggests the Fed won’t have to raise interest rates a lot to keep inflation under control.

Central-bank officials, including Fed Chairwoman Janet Yellen, regularly cite Mr. Fernald. His “research has shaped my understanding of critical issues related to the sources, measurement and behavior of productivity growth,” said San Francisco Fed President John Williams.

Stanford University economist Robert Hall said Mr. Fernald “has been a voice of sanity in discussions of the causes of the recent productivity slowdown and the outlook for future productivity growth. He properly emphasizes the uncertainty about growth.”

Long-term economic expansion is the result of a growing workforce, investment in capital such as technology and buildings, and then combining them in new ways to boost efficiency—an element called total factor productivity[see below], a key measure of the economic contribution of innovation. Total factor productivity grew an average 1.8% a year from the end of 1995 through 2004, but growth has slowed since then to an average 0.5% annually.

The problem, in Mr. Fernald’s mind, is that today’s innovations are focused on improving leisure time, not business efficiency.

“Tremendous things are happening in Silicon Valley and elsewhere in terms of information technology, the internet, software and the like,” said Mr. Fernald. “But to really change the productivity numbers, those things have to translate into how businesses throughout the economy operate.”

Weak output gains also reflect a slowdown in the growth of the labor force and a plateauing of educational attainment, Mr. Fernald says. He puts the new normal for U.S. economic growth at 1.5% to 1.75% a year—roughly half the typical range of 3% to 4% from the end of World War II to 2005. [Interestingly, Piketty also set the new normal at 1.5%, though no one seems to have paid much attention to him, although they should. WSJ this morning is still citing 3% to 4% economic growth as what we should expect, in spite of having run this article that denies it the day before. Don’t they read their own newspaper?]  

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Mr. Fernald, 52 years old, joined the Fed in 1993, after finishing his Ph.D. in economics at Harvard University. He began his career at the Fed Board of Governors, focusing on China, Hong Kong and Taiwan. While he still dabbles in those areas, he has focused for the past 15 years on productivity.

Mr. Fernald joins a bevy of economists aiming to understand slowing growth. A different school of thought believes much of the productivity slowdown can be traced to the severity of the Great Recession. [Time will soon show who is right. We’re placing our money on Piketty and Mr. Fernald, Trump with his 4% economic growth be damned!]

Mr. Fernald says he is less dogmatic in his vision than some of his peers. For example, the New Jersey native says he is more “agnostic” on the future of productivity growth than Northwestern University’s Robert Gordon. Mr. Gordon has argued that the rapid U.S. economic growth experienced from 1870 to 1970 is a bygone era, when groundbreaking innovations such as electricity, the interstate highway system or indoor plumbing dramatically boosted efficiencies.

Mr. Gordon says he has “good reasons for my position that productivity growth will remain relatively slow,” in the range of 1% a year compared with 3% a year in previous eras. He believes technological innovation will have a more evolutionary, rather than revolutionary, impact on growth over the next two decades.

Just as he didn’t foresee the value of the internet in the workplace immediately in the mid-1990s, Mr. Fernald says it is still possible businesses will find ways to use innovations to their benefit.

While insisting that “no one in the Federal Reserve system just accepts anyone else’s ideas,” Mr. Fernald says his theories seem to have caught on quickly.

When he first started the research that would ultimately become a frequently cited 2014 paper, he recalls people responding to his ideas with surprise, such as “Oh, that’s interesting.”

“I think by the time it was published, I would hear people say, ‘Oh, isn’t that the conventional wisdom?’” he said.


Total Factor Productivity (TFP) is the portion of output not explained by the amount of inputs used in production. … As such, its level is determined by how efficiently and intensely the inputs are utilized in production.

Economists have long recognized that total factor productivity is an important factor in the process of economic growth. However, just how important it is has been a matter of ongoing controversy. Part of this controversy is about methods and assumptions. Total factor productivity growth is estimated as a residual, using index number techniques. It is thus a measure of our ignorance, with ample scope for measurement error.

Deutsche Bank: The Aftermath III

By JENNY STRASBURG for The Wall Street Journal,  Jan. 2, 2017

Anshu Jain has landed a top job at New York-based Cantor Fitzgerald LP a year and a half after being replaced as co-chief executive officer of Deutsche Bank AG.

In his newly created position as group-level president, Mr. Jain will help oversee Cantor’s companywide strategy and expansion efforts in areas including fixed-income and equities trading and prime brokerage, Howard Lutnick, the New York-based firm’s CEO and chairman, said in an interview Monday.

Mr. Jain will be based in London, and will spend a lot of time in the U.S. and Asia.

“He has vast knowledge and experience across the entire global financial footprint,” Mr. Lutnick said. “He’s my partner at the parent company, so his roles are very much vision, direction and then helping build the teams to execute. It’s not an operating role.”

Mr. Jain said in a press release from Cantor that he has admired Mr. Lutnick’s leadership and Cantor’s growth since 2001, and was attracted by the firm’s position as a leading nonbank financial company with “cutting-edge technology and a global reach. . . .”

Cantor sells trading and investment-banking services and operates insurance brokerage and investment-management businesses. Mr. Lutnick said he sees opportunities to lure more trading and investment-banking business from big banks in part because of capital constraints that have forced banks to rein in risk-taking since the financial crisis.

Many big European banks have shrunk their businesses, cutting jobs and clients.

“When they cut those clients back, where are those clients going to go?” Mr. Lutnick said, adding that Cantor has a different “risk profile” from banks. The company’s growth plans are focused on the U.S. and Asia, he said.

Mr. Jain, a 53-year-old native of India and British citizen, joined Deutsche Bank in 1995 and helped build its London-based investment bank into a global trading powerhouse. He became co-CEO in 2012, and left Deutsche Bank in 2015 when he and co-CEO Jürgen Fitschen were replaced by John Cryan .

As Deutsche Bank’s most visible executive during his co-CEO tenure, Mr. Jain came under fire for missing cost-cutting targets and big regulatory and legal woes, some of which have continued to haunt the bank. The pressure intensified in the weeks before Mr. Jain resigned in June 2015. (Mr. Fitschen remains at Deutsche Bank working with key clients and executives.) . . .

Mr. Lutnick said he has known Mr. Jain for many years, and they have become friends over the past several. Their discussions about a role at Cantor intensified gradually during the past year.

“I have really longed for a partner,” Mr. Lutnick said, noting the company’s growth since it was devastated by the Sept. 11, 2001, terror attacks on the World Trade Center in New York. Cantor lost 658 employees in the attacks. . . .

The company has more than 10,000 employees and operations in about 25 countries.

Has it occurred to you that there might exist in the financial world a breed of men with such extraordinary powers  to survive that, just when one is convinced that they have finally gone down for the count (“stake through the heart” and all that), they will reappear, full of life, more Jason than Oedipus, all ready for Act VI of their five-act tragedy? 

Could Anju Jain be one of these?

Deutsche Bank: The Aftermath II

Deutsche Bank Co-CEOs Jain and Fitschen Resign

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The embattled co-chief executives of Deutsche Bank AG announced their resignations on Sunday, an abrupt move that throws into question the future direction of one of the world’s largest banks.

The joint resignations follow a series of financial missteps and regulatory penalties at the giant Frankfurt-headquartered bank. In recent weeks, the pressure has intensified, with an increasing number of shareholders and employees losing confidence in the bank’s performance and the management team’s turnaround plans. . . .

Mr. Jain’s decision was driven largely by criticism from labor unions and media in Germany over the bank’s decision to cut thousands of jobs and close many branches, one person said. Mr. Jain felt his inability to speak fluent German, a barrier to engaging shareholders at the bank’s annual meeting, was a major obstacle. He viewed himself as a lightning rod to critics and, increasingly, a distraction that interfered with the bank’s ability to thrive.

Adding to the pressure on the co-CEOs, Mr. Fitschen, 66 years old, is on trial in Germany in connection with the collapse of the Kirch media empire in 2002. He is accused of giving false testimony in a long-running legal battle with heirs of the late media mogul Leo Kirch. Mr. Fitschen has denied the charges. . . .

The bank repeatedly fell short of its own and Wall Street’s profit forecasts. The executives said the bank had plenty of capital, only to do an about-face and go to shareholders for more funds, first in 2013 and then again last year. In April, the bank was forced to pay about $2.5 billion and to plead guilty to resolve accusations that its traders tried to rig benchmark interest rates, including the London interbank offered rate, or Libor; regulators blasted the bank for misplacing or destroying evidence and not cooperating sufficiently with investigators.

In late May, the U.S. Securities and Exchange Commission fined Deutsche Bank $55 million for essentially hiding losses during the financial crisis. And the bank in recent weeks has said it was investigating allegations that its Russian unit was involved in money laundering, a revelation that knocked the bank’s stock price last week.  Mr.  Jain was also rocked by the suicide in January 2014 of one of his long-serving deputies. . . .

Among the warning signs for Mr. Jain was an open letter sent to Deutsche Bank employees last month. Titled “Wind of Change? Wind of Jain,” the letter from labor-union representatives demanded Mr. Jain’s ouster. In an indication of eroding support for management, the letter resonated not just with rank-and-file employees who opposed the planned layoffs and branch closures, but also with some senior executives, said people familiar with the matter. . . .

Now that Mr. Jain has been thoroughly discredited by Deutsche Bank, let’s see what finally happens to him. Go on to The Aftermath III.