Economic Inequality??

One can easily misrepresent or exaggerate reality with a few select statistics and come to conveniently chosen conclusions. This doesn’t really help the conversation.

The distribution of wealth and income has become a social, economic, and political problem in recent decades. And not only in the US. But the question is why and what to do about it.

First, we should notice the timeframe of the comparison: 1980 vs. 2014. During these years there has been a massive credit bubble with low to zero interest rates and low inflation, especially over the past 16 years. This has disproportionately rewarded asset holders and debt-driven consumption and the income shares in industries associated with that, like FIRE.

The cheap credit has also led to massive investments in technology and biotech, where income levels have far exceeded those in other industries. This is not necessarily a bad thing, especially for aggregate growth, but it does have distributional consequences for wealth and income. Globalization, through outsourcing, trade and labor migration, has also served to keep labor costs low in developed nations.

So, what to make of this? I would have differences with the suggestions of the author as stated here:

Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation. 

First, the problem with the tax code is that it creates barriers for asset accumulation for those without assets. In other words, it favors the haves over the wannabes, even if the wannabes are more deserving. So we need to reduce those barriers. Not by making it harder to get rich, but by making it harder to stay rich and idle sitting on assets that have ballooned in value through no effort on the owners of those assets. Thus, we should look more toward wealth taxes as opposed to income or capital taxes. We should also make capital taxes more progressive so that the have-nots are not doomed to remain so. Have you seen your interest on savings lately?

Second, a better functioning education system is always a deserved policy priority, but it won’t fix this income distribution problem. The cost of education is becoming prohibitive and elitism is turning top universities, where costs are in the stratosphere, into branding agents rather than educating institutions. In other words, the Ivy League degree is more valuable as a signalling device than anything a student may or may not have learned there. Thus we are biasing favoritism over meritocracy.

Third, the focus on wages and organized labor is completely misguided.  Most workers in growth industries in the 21st century eschew labor unions in favor of equity participation and risk-taking entrepreneurship. Does that mean manufacturing labor has no future? Not at all. But it should be bargaining for equity in addition to a base wage. Competing solely on wages means workers are competing with the global supply of labor, which is a losing proposition for developed countries’ workers.

The inability of policymakers to see clearly how the world has changed and how ownership and control structures must adapt to the information economy leads them towards the rabbit hole of universal basic incomes, which fundamentally is a universal welfare program to support consumption. One thing we’ve learned over the past 60 years is that nobody wants welfare, but many become addicted to it. It’s not a solution or even a short-term fix.

Refer to the NYT website link to view the graphs…

Many Americans can’t remember anything other than an economy with skyrocketing inequality, in which living standards for most Americans are stagnating and the rich are pulling away. It feels inevitable.

But it’s not.

 

A well-known team of inequality researchers — Thomas Piketty, Emmanuel Saez and Gabriel Zucman — has been getting some attention recently for a chart it produced. It shows the change in income between 1980 and 2014 for every point on the distribution, and it neatly summarizes the recent soaring of inequality.

 

The line on the chart (which we have recreated as the red line above) resembles a classic hockey-stick graph. It’s mostly flat and close to zero, before spiking upward at the end. That spike shows that the very affluent, and only the very affluent, have received significant raises in recent decades.

 

This line captures the rise in inequality better than any other chart or simple summary that I’ve seen. So I went to the economists with a request: Could they produce versions of their chart for years before 1980, to capture the income trends following World War II. You are looking at the result here.

The message is straightforward. Only a few decades ago, the middle class and the poor weren’t just receiving healthy raises. Their take-home pay was rising even more rapidly, in percentage terms, than the pay of the rich.

 

The post-inflation, after-tax raises that were typical for the middle class during the pre-1980 period — about 2 percent a year — translate into rapid gains in living standards. At that rate, a household’s income almost doubles every 34 years. (The economists used 34-year windows to stay consistent with their original chart, which covered 1980 through 2014.)

 

In recent decades, by contrast, only very affluent families — those in roughly the top 1/40th of the income distribution — have received such large raises. Yes, the upper-middle class has done better than the middle class or the poor, but the huge gaps are between the super-rich and everyone else.

 

The basic problem is that most families used to receive something approaching their fair share of economic growth, and they don’t anymore.

 

It’s true that the country can’t magically return to the 1950s and 1960s (nor would we want to, all things considered). Economic growth was faster in those decades than we can reasonably expect today. Yet there is nothing natural about the distribution of today’s growth — the fact that our economic bounty flows overwhelmingly to a small share of the population.

 

Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation.

 

Remarkably, President Trump and the Republican leaders in Congress are trying to go in the other direction. They spent months trying to take away health insurance from millions of middle-class and poor families. Their initial tax-reform planswould reduce taxes for the rich much more than for everyone else. And they want to cut spending on schools, even though education is the single best way to improve middle-class living standards over the long term.

 

Most Americans would look at these charts and conclude that inequality is out of control. The president, on the other hand, seems to think that inequality isn’t big enough.

Gambling on the Welfare State

State-sponsored gambling is the one acceptable way of raising taxes on lower-income folks to help fund the welfare state. …Dancing in [politicians’] heads are visions of new state-sponsored gambling empires built on online poker, online slot machines and online lottery-ticket sales, with politicians collecting most of the vig.  …With or without federal regulation, legalized online poker is likely coming your way in 2013.

LOL. These are some great quotes from the article cited below. I’ve been waiting for someone to expose this dark secret about one way our politicians seek to fulfill their promises to take care of the poor. A remarkable trend that is probably inevitable, like sin taxes.

In my 2002 article titled CasinoWorld (downloadable pdf), I identified four behavioral types in terms of gaming strategies that explain risk behavior under uncertainty. These four types are explained in the following excerpt from the study:

The two dimensions of risk-taking (odds and stakes) yield four separate categories of agents (see Table 4.1):

  1. High odds/variance + high stakes = gambler
  2. Low odds/variance + high stakes = investor
  3. High odds/variance + low stakes = lottery player
  4. Low odds/variance + low stakes = subsistence/saver

————————

If we run a game of chance with these four strategies employed, eventually we end up with only two types: investors who own all the wealth and lottery players who live a subsistence life. Is this the world our leaders have planned for us? The 1% and 99%? Think about it, carefully. Happy Holidays!

From the WSJ:

D.C. Plays Fizzbin With Online Poker

How to make the poor pay for the welfare state: online gambling.

By HOLMAN W. JENKINS, JR.

Sometimes only a Star Trek metaphor will do. Remember the episode about a primitive people who developed a planet-girdling civilization based on the principles of the Chicago gangs? Many modern economic anthropologists would tell you that the state begins as organized crime, dividing up rackets and controlling turf.

Case in point: anything having to do with Internet poker.

It starts with the enterprising activities of the Justice Department. Seizing on a 2006 law making it illegal to process U.S. payments for online gambling, federal prosecutors last year brought charges against three offshore poker websites. While admitting no wrongdoing, the sites quickly settled and agreed to hand over substantial sums of money to the department.

Some of these funds were supposed to reimburse the “victims,” U.S. poker players who had money in their accounts when the sites were shut down. But so cumbersome and legalistic is the process created by Justice that many lawyers say they don’t expect their clients to find it worth the trouble or legal fees. Justice may end up keeping much of the loot itself under asset-forfeiture rules.

Don’t expect a hue and cry from gambling interests, however. Bigger stakes are up for grabs, not unlike the turf war Captain Kirk found when he beamed down to the gangster planet Sigma Iotia II.

Having cleared the online poker marketplace of its incumbents, Justice decided that under the 1961 Wire Act most Internet gambling isn’t illegal after all. This new “interpretation,” which came at the behest of Illinois and New York, has inspired a new light in the eyes of state officials looking for ways to fund the welfare state. Dancing in their heads are visions of new state-sponsored gambling empires built on online poker, online slot machines and online lottery-ticket sales, with politicians collecting most of the vig.

Not everyone is pleased by the prospect. Sen. Jon Kyl, an Arizona Republican who is retiring this year, doesn’t like gambling; Sen. Harry Reid, a Nevada Democrat, doesn’t like gambling when it’s not controlled by Nevada casinos.

During the lame-duck session, these improbable bedfellows promoted a bill to halt the online gambling stampede, except for online poker. Why the exception? Poker is a great American tradition, say supporters, including former Sen. Al D’Amato, representing something called the Poker Players Alliance.

More to the point, stopping Americans from playing Internet poker is probably impossible. Under the Kyl-Reid proposal, at least players would be pitted against each other, not the house, which is deemed less iniquitous and corrupting.

The bill satisfies Mr. Reid, meanwhile, because Nevada is already pushing ahead with in-state online poker. Nevada’s casinos and Nevada’s gaming regulators see a federal law as a way to give themselves a headstart in marketing a government-endorsed version of the game to the masses nationally and internationally.

The Kyl-Reid bill, as Captain Kirk would quickly suss out (aided by the deductive powers of Mr. Spock), was destined instantly to become a bone of contention among the various gangs jostling for a piece of the online poker action.

The state lottery commissioners and governors opposed the bill because it would prevent them offering an array of tantalizing new online games to suckers, er, citizens of their states.

Convenience-store owners opposed the bill, fearing it would clear the way for online lottery ticket sales, which would cut into their lucrative piece of the over-the-counter lottery racket.

The Nevada casinos naturally favored any law that would give them a leg up in the emerging marketplace for legal online poker.

In hearings before Congress last year, a Native American spokesman argued that tribes must be allowed to offer online poker on grounds that his 101-year-old grandmother had been a reservation schoolteacher fighting to preserve native culture. Therefore, “if anybody deserves to be at the front line in this industry it’s Native American people.”

Captain Kirk, it will be remembered, invented the deliberately convoluted card game “Fizzbin” as a ruse to distract the gambling-mad, gangster inhabitants of Sigma Iotia II. The Reid-Kyl gambit may have run out of time, but the feds aren’t likely to desist from trying to control so profitable a new racket. State-sponsored gambling is the one acceptable way of raising taxes on lower-income folks to help fund the welfare state. With or without federal regulation, legalized online poker is likely coming your way in 2013. Don’t be surprised if one of the games is called Fizzbin.

The Vatican’s Calls for Global Financial Reform

The bishops are right on the money (!) with their diagnosis of the problem, but seem a bit off in advocating for centralized authority over globalization. Seems to go in exactly the wrong direction. We need more democratic and market transparency and accountability. (Admittedly, not the Church’s strong point.)

From Foreign Affairs:

The Future of the Church in the Financial Order
Samuel Gregg
February 7, 2012

Last October, a bold proposal to reform the global financial system came from an unexpected source: the Catholic Church. As the eurozone teetered on the brink of economic chaos, the Pontifical Council for Justice and Peace — a body of the Roman Curia that advises the pope on economic justice, peace, and human rights — issued “Towards Reforming the International Financial and Monetary Systems in the Context of Global Public Authority” (more simply called the “Note”). The Council’s goal in publishing it was explicit: the Church wanted to attract the attention of world leaders as they assembled to discuss ongoing turmoil in financial markets at the G-20 Summit in Cannes and to add its voice to those arguing for capital controls (such as the “Tobin tax”) to discourage international financial speculation. Then, early last month, during his keynote speech for the New Year to diplomats accredited to the Holy See, Pope Benedict XVI reinforced the call for ethics in the global economy. The Pope’s words echoed the Note’s urgent call for new, even radical thinking about the rules and institutions governing the global economy.

The Note argued that the root cause of today’s economic woes is the growth of excessive credit and monetary liquidity in the past few decades, which, in turn, inflated asset bubbles and set off a succession of debt and confidence crises. It also held that the lack of regulatory controls on international finance exacerbated the problem — in other words, that the pace of economic globalization has been out of control. The resulting instability and economic inequality means that the world now requires “a system of government for the economy and international finance.” Once world leaders recognize, the Council argued, that increasing global interdependence is forcing countries to move beyond a Westphalian, or state-based, international order, they will be more prepared to cede their own sovereignty in the interests of global humanity’s common good.

On the one hand, the Church advocates a world authority that manages globalization in the interests of economic justice. Yet it is equally committed to open markets, also as a matter of economic justice. Reconciling these two commitments will be a major test for Catholic social doctrine.

Considering the Church’s history and its social doctrine, its call for a supranational authority is hardly a surprise. The Church has long viewed nation-state sovereignty as a challenge to its autonomy. Historically, it was far more comfortable operating in more fluid internationalized settings, such as during the Holy Roman Empire or Medieval Christendom. The devastation of World War II convinced senior European Catholics that the power of nation-states had to be tamed. This helps to explain why the Church was such an advocate of European unification. Indeed, prominent Catholics such as the former French Prime Minister Robert Schuman were central players in the processes set in motion by the 1957 Treaty of Rome. Six years later, Pope John XXIII endorsed the idea of a world authority, a call reiterated in all subsequent popes’ social teachings. The Church has avoided identifying such a body specifically with the United Nations. And it has tended to describe such an authority’s functions in very general terms such as “coordination.” But the logic is that if the conditions that facilitate human flourishing increasingly transcend national boundaries, the modern state’s claim to be the highest political authority capable of coordinating such conditions is unwarranted. In practical terms, some Church officials calculate that a world authority would be easier for the Church to navigate than a global order of sovereign nation-states.

Yet a world authority could pit the economic interests of Catholics in developed countries against those in developing nations, creating challenges for how the Church presents its teachings about economic issues to Catholics throughout the world. Many countries throughout Latin America, Africa, and Asia are in a fundamentally different economic and geopolitical place from those of the ailing EU. The Church must thus deepen its appreciation of how the global operation of economic factors such as comparative advantage, incentives, and tradeoffs has different impacts upon Catholics living in very dissimilar economic circumstances. But this also has implications for the Church’s position concerning the economic functions to be assumed by a world authority. Such responsibilities, for example, could primarily concern promoting greater economic integration through removing obstacles to trade. This, however, would be incompatible with the Note’s theme that a world authority’s economic functions should be focused upon securing greater control over the pace of change through international regulations that, if implemented, would significantly impede the free movement of people, goods, and capital.

While the Church’s senior leadership is disproportionately European in composition, the Catholic Church’s epicenter in raw numbers has shifted to the developing world. According to statistics contained in the Vatican’s 2011 Annuario Pontificio, European Catholics now account for just 24 percent of the world’s 1.18 billion Catholics. In 1948, the equivalent was about 49 percent. Today, almost 50 percent of all Catholics live in the Americas, and most of them south of the Rio Grande. Demographically, the European Church has stagnated for three decades. But its expansion in Africa, Asia, and Latin America in the same time period has been staggering. Between 2005 and 2009 alone, the number of African Catholics grew from 135 million to approximately 158 million.

These realignments parallel changes in the economic path pursued by many of the developing nations in which most of the world’s Catholics live. In recent years, economic growth has taken off in many developing countries at a pace that dwarfs European growth rates. Over the last three decades, many such countries (Chile and Brazil being prominent Catholic examples) have gradually moved away from top-down economic planning toward greater openness to global markets as a primary way to diminish poverty and spur economic growth. Within Catholic social teaching, there is considerable support for such market-oriented paths. Since 1991, Catholic social doctrine has re-emphasized that developing nations have a right to freely access networks of global exchange. The free trade and anti-protectionist implications of this principle were spelled out in John Paul II’s encyclical Centesimus Annus and reiterated in Benedict XVI’s 2009 Caritas in Veritate. How this fits, however, with the Church’s ongoing emphasis on the need for a world authority — and, more immediately, with the Note’s call for capital controls — needs to be clarified.

Moreover, the Church’s teaching on these matters is grappling to accommodate the growing divergence between the immediate economic expectations of Catholics in developed European nations and those living in emerging economies. For Catholics in developing countries, economic globalization is a way out of poverty. This helps explain why some traditionally Catholic countries such as Colombia, Guatemala, Mexico, and Panama have pushed for free trade agreements with the United States, while others, such as Brazil, have pursued trade agreements within Latin America. Likewise, African countries with large Catholic populations, such as Kenya, Rwanda, Tanzania, and Uganda, have pursued regional trade agreements as steppingstones to wider entry into global markets.

By contrast, many Catholics in Western Europe see the same forces released by economic globalization as creating pressures to lower their countries’ regulatory barriers, reduce their wages, phase out subsidies, and rethink the high tax levels needed to pay for strong welfare states. Not surprisingly, many Europeans are reluctant to go down paths that represent a departure from postwar policies.

The tension between these two groups presents the Catholic Church with three significant and interrelated challenges. First, it must ensure that its emphasis on supranational institutions as a way of managing globalization is not interpreted as reflective of a desire to protect EU states from increasing competition from developing nations. Any appearance of protecting wealthy Europeans at developing countries’ expense would be considered inconsistent with the Church’s stated commitment to social justice and would risk alienating many Catholics in developing nations.

Second, the Holy See will increasingly find itself lobbied by European leaders as well as those of developing nations to lend its influence to the realization of incompatible economic objectives. What stance, for example, should the Church adopt toward agricultural subsidies? Many Europeans see subsidies as ways to protect European farmers from economic extinction. Africans and Latin Americans, however, are inclined to view the same EU subsidies as measures designed to blunt developing countries’ increasingly competitive edge in agriculture. In such debates, who will the Church end up supporting?

Third, the Church’s leadership faces an intellectual challenge. On the one hand, the Church advocates a world authority that manages globalization in the interests of economic justice. Yet it is equally committed to open markets, also as a matter of economic justice. Reconciling these two commitments will be a major test for Catholic social doctrine. Open global markets certainly need rules. But how would a world authority engage in top-down global economic management without significantly compromising the competition that flows from open economic and financial markets?

The Catholic Church is not in the business of exercising “hard power.” But it certainly shapes people’s minds, whether through the daily preaching of thousands of Catholic clergy, the formation imparted by its countless educational institutions, or the unique bully pulpit it possesses with the papacy. This is no guarantee that predominately Catholic countries will simply fall into line with the Church’s teaching on global economic governance issues. The Church is, however, in a position to shape millions of people’s attitudes. In an increasingly global public square, the influence exercised by a Church whose name means “universal” and which, as a religious organization, possesses an unrivaled worldwide presence means that when it makes pronouncements about global economic reforms, it should consider making requests that are consistent with its own future.