Baldwin Wallace University Economics Blog ... thinking out loud ...: 2011

Saturday, December 31, 2011

…get off the insanity treadmill

By kay.e.strong

We are on the verge of sleepwalking through yet another year—vaguely cognizant that our mental map of the world is sorely misaligned with reality, yet barely conscious enough to form a coherent question about how.

Albert Einstein offers an insight worth reflecting on. He posited that the thinking we use to solve our problems is in reality the source of our problems. The Greenspan 2008 epiphany is an apt illustration. Appearing before a congressional panel investigating the evolving financial crisis, he admitted "a flaw" in his view of world markets, despite “very considerable evidence that it was working exceptionally well” for forty years or more. To his credit, though, Alan Greenspan is, perhaps, the only leader on record to acknowledge that his mental model of the world had fallen out of sync with reality. Despite this shocking admission by such a highly revered economic-seer, decision-makers and politicians alike have insisted on clinging to out-moded thinking about how the economy operates in reality.

Daily the news pours out evidence indicting the very thinking used to solve our problems.

…deleveraged of assets, homelessness on the rise

…rebound recession worries imported from abroad; yet, $1.6 T. safely tucked away by US banking system

…military spending on autopilot, while investment in people—the true pillars of growth—stagnate

…tax breaks—a runaway train speeding to “Utopia” (Greek for no place), despite proof that higher top income tax rates produce far more jobs

Einstein is also quoted as having defined insanity: doing the same thing over and over again and expecting different results.

2012 is an excellent time to get off the insanity treadmill and reboot our mental models to better align with reality—a reality steeped in uncertainty, complexity and in need of new leadership attuned to this new reality.

Consider Joshua Ramo’s book The Age of the Unthinkable: Why the New World Disorder Constantly Surprises Us and What we Can Do About it (2009). He passionately describes the melt-downs in the global order arising from mismatched mental images and plans for action. When we don’t see the world as a system, we miss the indirect linkages that hold the power to cascade change through a system in response to a direct challenge. He offers his book as a guide to how we can save ourselves—a “decoder ring for the perplexities of our current world, for the dangerous magic that seems to be unspooling everywhere. And it is also, once you’ve understood it clearly, a way for anyone, from eight to eighty, to begin to see what this world means for you — and to see what you can do about it.” (8)

Consider Rebecca Costa’s book The Watchman’s Rattle: Thinking Our Way Out of Extinction (2010). She succinctly identifies the key of our current woes: “The primary cause of all threatening trends is the complexity of civilization itself, which can’t be understood and managed by the cognitive tools we have thus far choose to use. (xi) She argues that our cultural tendency is to focus on the symptoms which we can wrap our head around rather than the underlying problem tangled in a web of complexity. We grab quick-fix solutions for what appear the obvious symptoms but make ourselves more vulnerable to their dangerous consequences. From Costa’s perspective the key to survival is revving up the way a culture ‘thinks’ to match the complexity rate of the external environment—the part of the environment over which we have no direct control, often little knowledge but holds the power to decimate our lives.

Consider Margaret Wheatley’s book Leadership and the New Science: Discovering Order in a Chaotic World (2006). My chance encounter with this one sent my head spinning! Wheatley offers hope when she asserts that "[a] system can descend into chaos and unpredictability, yet within that state of chaos the system is held within boundaries that are well-ordered and predictable." (13) Every living system changes to preserve itself. To do so, however, requires that system maintain a clear sense of identity and freedom of choices, while self-organizing to a higher level of complexity better matched to its environment. Everywhere, life self-organizes as networks of relationships, thereby, making relationships the “basic building blocks” of life.

May tomorrow be the day you step off the insanity treadmill and challenge your own thinking about reality as it is—not as it once was.

Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail: kstrong@bw.edu

Saturday, December 24, 2011

…living on the edge

By kay.e.strong

On the heels of the Census Bureau revelation that nearly half of all Americans are living in poverty or low incomes, comes a new report, America’s Youngest Outcasts 2010. No, it’s not a made for TV reality show—it is reality for 1.6 million American children (1 in 45). In the finger-pointing game of yesteryear, your typical social conservatives would link the plight of a child to the irresponsible behavior of the parent. Yup, you’ve heard ‘em all…the unwed teenage mother syndrome, propagation for [welfare benefits] profit, drug addicted parents, and the like. But the National Center on Family Homelessness sets the record straight on this one.

“Financial speculation sparks collapse of the housing market and financial institutions, a stock market crash, and the Great Recession. The numbers of homeless children increased by more than 448,000 from 2007 to 2010; 1.6 million (one in 45 children) are homeless in 2010—that is a 38% spike from 2007.” < http://www.familyhomelessness.org/ >

To satiate the greed of the few—1.6 million children—more than 30,000 children each week—more than 4,400 each day are being sacrificed. Homeless, hungry and malnourished, declining physical health, emotional trauma, a lost sense of security and unstable educational opportunities follow these children where ever they go. As the National Center on Family Homelessness concludes “[p]lanning and policy activities to support the growth and development of these vulnerable children remain limited. Sixteen states have done no planning related to child homelessness, and only seven states have extensive plans.” Let’s add hopelessness to that list. Living on the edge, the nation’s most vulnerable are cheated of life, liberty and the pursuit of happiness long before reaching voting age!

In 1996 the Personal Responsibility and Work Opportunity Act passed. The Act was hailed as breakthrough legislation on welfare reform. While signing the bill into law, Clinton declared that the act "gives us a chance we haven't had before to break the cycle of dependency … It gives structure, meaning and dignity to most of our lives." It is time to enforce the same reform on the twenty-first century Welfare Queen, the nation’s financial sector. It’s time to demand that the Queen support the nation’s future, its children, in ways that “give structure, meaning and dignity” to their young lives.

Thursday, December 22, 2011

...scanning for tomorrow

By kay.e.strong

I’m an avid scanner, a skill honed while attending the futures program at the U of Houston. Scanning is not a duplication task but rather an exploratory one. One designed to provide clues about the potential shape of the more distant tomorrow. In the spirit of sharing, I offer a glance into how our tomorrow is shaping up.

Launched in 2009 as a nonprofit organization by Shai Reshef, University of the People (UoPeople) is the world’s first tuition-free online academic institution dedicated to the global advancement and democratization of higher education. The high-quality low-cost global educational model embraces the worldwide presence of the Internet and dropping technology costs to bring university-level studies within reach of millions of people across the world. With the support of respected academics, humanitarians and other visionaries, the UoPeople student body represents a new wave in global education. <http://www.uopeople.org/ >

Can you image the impact of engaging the creative potential of 7 billion minds!

***********

Lumus is showing off a pair of light, wearable HD video glasses that will allow you to interact with the world via augmented reality. It is forecast that wearable displays will replace hand-held screens like iPads or laptops. < http://techcrunch.com/2011/12/13/heads-up-lumus-shows-off-720p-see-through-video-glasses/ >

With data chips embedded in products, animals and surfaces, imagine information overload on steroids bombarding your eyeballs!

And if you can't afford the video glasses, no problem! The cell phone hologram is on IBM’s list of the Next Five in Five years. Merging 3D technology into the cell phones will enable projection of life size holograms of friends talking and moving in real time on any surface. < http://www.computerworld.com/s/article/920140/Holograms_on_cell_phones_coming_in_five_years_IBM_predicts >

If I send my hologram, do you think students will know the difference in my 8 AM class?

***********

The U.S. Defense Advanced Projects Research Agency (DARPA) plans to put 1,000 3-D printers (rapid fabrication devices) into high schools across the United States as a way to encourage American young people to go into engineering and particularly manufacturing.
The project is one of many investments that the agency will make over the next five years to help high schoolers build STEM skills. These investments are critical to grow an educated twenty-first century workforce, says DARPA director Regina Dugan. < http://www.wfs.org/content/futurist-update/futurist-update-2011-issues/november-2011-vol-12-no-11 >

The twenty-first century upgrade to shop class! I hope they have a backup plan for containing projects gone wrong!

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Why not take a bad-news break as we wind down the year. Try some exploratory scanning of your own. Follow up with the question “What if?” and consider the rich possibilities that tomorrow could bring. It's great calistetics for the mind and spirit.

Friday, December 16, 2011

…identity crisis in America

By kay.e.strong

One of the great atrocities unleashed on the American mind is the eradication of the lines distinguishing good economics from bad politics.

In introductory courses I distinguish between the end goals of economics and politics. For economics the goal is to maximize the well-being of the majority at the expense of the minority; the opposite is true for politics. Yet the bandwidth for a well-moneyed politician overwhelms that of even the most accomplished economist.

Politicians package the protection of corporate America’s interest as a common good, that is, beneficial to all members of the community. Prostituting themselves to the fortunes of millionaires, politicians propagate Kochism dribble:

1. America must be governed (politics) by the free-market forces (economics).

2. Paying taxes (economics) is tantamount to government extortion (politics).

3. Individuals (politics) have no responsibility to society (economics).

Let's sift out the economic truths.

First, economist Jeffery Sachs in his book The Price of Civilization (2011) clarifies that all great promoters of free-market forces acknowledge a role for government.

“…Adam Smith, John Maynard Keynes, Paul Samuelson, Friedrich Hayek, and Milton Friedman, were fully aware of the reality of public goods, environmental spillovers, and asymmetric information and therefore of the need for government to be deeply engaged in public education, road building, scientific discovery, environmental protection, financial regulation, and many other activities. None ever denied a major role for government in a market system. That’s true not only for Keynes and Samuelson, who are famous for their championship of mixed economy, but also Hayek and Friedman, who are known for their advocacy of unfettered markets.” (34)

Second, free-market forces are stellar at promoting efficient use of resources and growing income.

Financially, the US is the wealthiest nation on the planet earning 14.5 trillion dollars in 2010—a slow year by some standards. Yet, our national debt stands at 15+ trillion dollars. By one estimate, the national debt has increased an average of $3.93 billion per day since September 28, 2007! < http://www.brillig.com/debt_clock/ > Why? We can afford to pay for civilization right now rather than foisting it off onto future generations. According to the American Society of Civil Engineers' 2009 report card, we are in need of a 2.2 trillion dollars investment infusion to replace or repair our aging infrastructure including roads and bridges ($930 b.), public transit ($265 b.), drinking and waste water treatment ($255 b.),and schools ($160 b.). <http://www.infrastructurereportcard.org/> Our disinvestment is showing up in our declining ability to compete in a globalized market.

Third, free-market forces are notoriously unfair. Those holding a minor advantage at the start of the game end with a major wealth and income advantage.

Today’s headline read: Census shows 1 in 2 people are poor or low- income (15 Dec). That works out to 156, 392,664 million Americans—half the U.S. population! Census data, according to the news release, depicts “a middle class that's shrinking as unemployment stays high and the government's safety net frays. The new numbers follow years of stagnating wages for the middle class that have hurt millions of workers and families.”

Blurring economics as politics is the deadly elixir that got us where we are today! Columbia University economist Jeffery Sachs argues “[o]nly markets and government operating as complementary pillars of the economy can produce the prosperity and fairness that we seek.” (179)

And paying for civilization is a choice, a choice of responsible governance, a choice that recognizes the truth of WAIT-T!

Friday, December 9, 2011

Whom Are We Kidding?

By Lewis Sage

Writing in the current issue (v. 90 no. 6) of Foreign Affairs, George Packer indicts the alliance of conservatives and big money that came together, “beginning in 1978 to begin a massive generation-long transfer of wealth to the richest Americans.” The US Senate’s refusal to surtax millionaires to finance the extension of workers’ payroll tax-cut is the latest evidence of the success of that alliance.

The oft-heard Republican claim that a tax on the rich would stall the job-creating engine of small business is disingenuous. Commenting for House Speaker John Boehner, Michael Steele characterized surtax as “a job-killing tax on small businesses” (quoted in The New York Times, 11/29/12). The premise of his argument is that many small business owners choose to report business profits as personal income – a perfectly legal tax strategy – and that a tax on their income, which amounts to a tax on business profits, discourages those folks from hiring. I get it that small business owners, like most people, aren’t in a big hurry to pay more taxes for no reason whatsoever, but there’s are good reasons for this increase: the fairness inherent in an intact social contract and a degree of enlightened self-interest in economic recovery. And surtax is not a job-killer. Here’s why.

Time for a little algebra. Suppose that hiring a new employee would increase your profit by $1000 a year after taxes. Is it worth it to you to hire that employee? No? Then you’re not really all that into squeezing for profit. Your marginal tax rate could increase by two or three percent, and you wouldn't even notice. But if you would hire that new worker to increase profits by $1000, then you're the sort of person who pays attention to detail and you’ll do whatever it takes to increase your disposable income. In particular, if that new worker increased your after-tax profits by $980 (98% of $1000), you would still hire them. Okay. Here’s the algebra. Whatever it takes to increase pre-tax profits by $1000 automatically increases after-tax profits by $980. Whatever increases pre-tax profit by $X automatically increases after-tax profit by 98% of $X. There; that wasn’t so painful.

So here it is in a nutshell. Surtaxing millionaire business owners reduces their disposable incomes. But it does absolutely nothing to their profit-maximizing business decisions… nothing!

Dr. Lewis C. Sage (AB Kenyon, PhD U. Maryland) likes intersections. Since 1991, he has taught Law and Economics, Mathematical Economics, and the Economics of Healthcare. A former Fulbright Fellow (Bulgaria 1995-6), he teaches an interdisciplinary Honors seminar, Enduring Questions, and is studying strategy in the NFL draft with faculty and students in Sport Management and Psychology. E-mail: lsage@bw.edu

Sunday, December 4, 2011

…T.rex and blame

By kay.e.strong

Ask a four-year old what happened to T.rex. Without a moment’s hesitation the word extinction rolls smoothly off his tongue as he stands before you, eyes beaming in delight. Probe a bit about the reason for the extinction, and a likely response will hint at any number of changes in the environment to which T.rex was unable to adapt.

Ask a politician what’s happened to the U.S, and like the four-year old, some accusation of blame rolls smoothly off his/her tongue as (s)he stands before you, eyes beaming in delight. Probe a bit for an explanation and some well-rehearsed, but ludicrous one-liner will pop-out.

Gingrich blames Child Labor Laws for Rising Income Inequality in U.S. (21 Nov 2011)

Romney Blames Obama for Expected Failure of Super Committee (20 Nov 2011)

Cain blames Perry for fueling sexual harassment allegations (3 Nov 2011)

GOP Candidates Blame 30 Years of Rising Income Inequality on Barack Obama and Single Moms (12 Oct 2011)

Bachman blames Obama for Arab Spring (30 Sep 2011)

Seriously, has blame-finding become the national pastime or is it an indicator of something much deeper?

Psychologists suggest that we invoke the tactic of blame to deflect attention from ourselves. Politicians thrive on being in the limelight, so why would a politician ever want to deflect attention away? Blame is a heuristic, a mental shortcut, that “shorten[s] decision-making time and allow people to function without constantly stopping to think …” In essence, blame functions as political-speakese for “I’m clueless. Enough said. Can we move on?”

Blame reveals the obsolete nature of the speaker’s knowledge. It’s a reminder that the speaker belongs to the world of single cause. A world that began unraveling before the signatures dried on the Brent Woods Agreement (1944). A world made even more extinct by the emergence and growth of the World Wide Web (1991).

Authors David Hale and Lyric Hale of What’s Next (2011) remind us that “[a]n event always has more than one cause, all of which are intertwine in a web of complex interrelationships." (287) Multiple causes, interdependent relationships, overabundant information…what’s a politician to do? Blame!

Better yet, educate yourself. Be curious. Explore new ideas through reading. As a primer consider The Age of the Unthinkable by Joshua Ramo (2009). Ramo cracks opens the door on the world in its complex context where stability is only a passing phase, a pause, if you will, in a system of unmapable dynamism. He exposes the harm caused when decision-makers premise policy action on an image of the world that is grossly misaligned with reality.

Blame destroys the fragile threads of social trust which binds us together as a nation. We strengthen those threads every time we reject a blame-claim. We strengthen our nation's ability to survive whenever we humbly acknowledge there is no one-way to solve complex problems, yet demand a serious public conversation in spite of it.

Let mighty T.rex remind us of what happens if we don’t get beyond the futility of the blame game.

Sunday, November 27, 2011

...what, exactly, is the reason for the season?

By kay.e.strong

…hyping holiday bargains the first weekend of October

…fifty-five shopping days front-loaded onto the traditional holiday season

…even before the thanksgiving turkey has digested, millions lept headlong from Red Thursday into the Black Friday frenzy

…pepper-spray becomes the defensive tool of choice for “bargain” hunters

…gun-toters brandish their weapon to motivate those in line ahead of them

…counter stampedes injury fellow shoppers

…police knock a shopper unconscious

…a mugging goes badly; victim left shot and bleeding in the parking lot

Given the evidence, I’d conclude the reason for the season is to celebrate the value Americans are world-renown for: “self-righteous” greed. Self-righteous, in sense that, we truly believe in our entitlement to stake a claim to all that money can buy. Because the American economy--with a bit of help from the might-makes-right department—consistently spins an oversized share—a quarter of the world’s gross domestic product (14.5/ 63 trillion dollars in 2010)—to Americans, we assert a god-given right to shop 'til we drop. Despite overflowing closets, packed garages, and self-storage units and mini-warehouses, Americans seem unable to satiate their lust for stuff.

To regain perspective on the reason for the season, let’s check out our Ecological Footprint < http://www.footprintnetwork.org/ >. An Ecological Footprint is a metric that calculates humanity’s demand on nature. More specifically, “[i]t aims to show the interdependence between a country’s biocapacity, its economy and ultimately, the well-being of its people.”

The Ecological and Biocapacity Report for 2007 shows America--an ecological debtor nation. Americans consume 8.0 hectares (of global resources) per capita and our nation’s biocapacity is 3.9 hectares per capita, thus, our ecological deficit—yup, chalk up another one for us—is 4.1 hectares per capita—translated: a 4.1 hectares deficit per every man, woman and child in the country. According to the Global Footprint Network (GFN), a non-profit organization, if everyone in the world lived the lifestyle of the average America, we would need five planets. But we have only one planet, one future—from which all peoples have an entitlement to live satisfying lives.

As the economic winds of world fortune shift ever more easterly, the excesses of Americans will be put in check. GFN reminds us that “[a]s resource pressures escalate, ecological wealth will play an increasing role in determining countries’ competitiveness and its citizens’ ability to lead secure, rewarding lives.” Today’s fight over global oil supplies will pale in significance to the pending wars over water and food.

Please, before the next mall surge, take time with your family to view The Story of Stuff < http://www.storyofstuff.com/ >. Make it a holiday classic--along with a heart-felt conversation about giving back to the planet we share with 7 billion other inhabitants of our future. Let’s put sensibility and compassion back into the reason for the season.

Sunday, November 20, 2011

...the proof's in the pizza!

By kay.e.strong

Legislating pizza a vegetable is blatant evidence of a puppet Congress wholly owned by Corporate America! It’s time to cut the strings. And I have a cost savings tip for the Deficit Reduction Commission.

Dissolve Congress!

We get an immediate 5 billion dollars and change in savings from the Legislative Branch budget (2012). http://deathandtaxesposter.com/

Dissolving Congress serves two useful purposes.

First, it eliminates the political façade that governance in the US is even remotely representative--that the voice of the people is alive in Washington. Corporate America owns the country. Its will has been the will of the people—whether the people knew it or not! No one needs a “pass-through” agency. It’s time to open our eyes to the truth. Swallow hard and let go of that trite nonsense taught in high school government class and call reality--reality.

Second, the cost savings from dissolving Congress helps the Deficit Reduction Committee move closer to their 1.2 trillion dollar goal. No need to drag us through another political temper-tantrum, aka gridlock, sabatoge maneuvers and stock market upheavel because Corporate America isn't getting its way. Automatic cuts across the board can be handle with a nice clean algorithm. No partisan politics needed. We get the same end results either way.

In effect, dissolving Congress become a win-win for everyone.

Corporate America’s profits will rise since members of Congress will no longer be on the payroll and channeling funds through PACs will no longer be necessary.

As usual, the American people will continue to get the short end of the stick—no real change here. But, at least, we won’t be confused by the political slight of hand tricks.

The 535 members of Congress and their staff and their staff’s staff will have the dubious honor of getting real jobs. Yes, it's possible that their income sans corporate kick-backs may suffer. But no harm…just let’em eat pizza—the nation’s newest veggie!

Sunday, November 13, 2011

...an invitation to stand with the 70%

By kay.e.strong

American shoppers are the most powerful economic group on the face of the earth! In America alone we are in control of 70% of GDP spending. That’s three times more than the federal government spends. It’s twelve times more than the war department!

Individually, we think of ourselves as weak…but every powerful force on earth is a composite of individual elements acting in unison. Drops of rain collected together have the power to become game-changing raging tornadoes, surging tsunamis, and even magnificent waterfalls.

We hold in our wallets the power to transform the world.

Wanta’ put an end to corporate greed? Stop it at its source…your pocketbook! Don’t buy their stuff. Want to encourage corporate social responsibility? Buy only from businesses exercising social responsibility. Shun businesses that hold the local community hostage to tax write-offs in exchange for jobs. Hold profiteering corporate farms responsible for wreaking havoc on the soil, polluting our waterways, belching particulates into the air and denigrating the diversity of the biosphere.

Wanta’ stop the epidemic of obesity and chronic disease? Pay attention to what you drop into your shopping cart. Don’t put fat-drenched, high-fructose corn syrup and sugar-laden foods into your mouth or your child’s. Don’t create demand for these foods. Send the government a message that Americans want agricultural subsidies (some $100 billions) re-routed to support “healthy” eating choices of farm fresh fruits and vegetables. Become a patron of the local farmers’ market.

Wanta’ send commericalizers of Christmas a message? Don’t participate in the buying frenzy being foisted on us. Stay away from the malls, the big box stores, and the online shiny gizmos and gadgets. Send commercial propagandizers the message that we are no longer listening--that we can indeed live a life void of “more stuff” to jam behind an already overflowing closet door.

Refocus on what really matters in life. Strengthen your local community by giving back. Bring the gifts of trust, compassion and cooperation. These are the gifts that keep on giving!

You have cash in your wallet! Seize your right to turn the tables on an insensitive government, big-moneyed politicians, and responsibility-challenged corporations. Don’t play on their terms.

Wait patiently on the data crunchers to affirm the power of the American Consumer.

We are the 70%! We alone can bring the change needed to America. Mindfully cast every dollar vote you pull from your wallet.

Sunday, November 6, 2011

Frankly, I'm Confused (What's New?)

By Lewis Sage

Frankly, I'm confused. Robert H. Frank, the excellent Cornell economist, writes about taxes and income distribution, recently published a new book, The Darwin Economy, and has a regular blog in the New York Times (http://www.robert-h-frank.com/timescolumn.html). Frank Rich, who until his recent retirement was a fine columnist for the Times, may have started as a theater critic, but ended his stint on the Op-Ed page with essays on finance and the public interest like “The Tea Party Wags the Dog” and “At Last, Bernie Madoff Gives Back” (http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/frankrich/index.html). To top it off, Robert Frank, who writes about wealth for the Wall Street Journal (http://blogs.wsj.com/wealth/), has authored two recent books, Richistan (2007) and The High-Beta Rich (2011), about the meteoric trajectories of the spectacularly well off in 21^st century America. And, as if willfully to confound the issue, Robert goes so far as to cite an earlier book, “The Winner-Take-All Society, by Robert H., no relation” (p. 18), in High-Beta. Clear? No wonder I’m confused.

In an effort at least to distinguish Robert Frank from Robert H. Frank, I’ve just finished High-Beta and have ordered a copy of Darwin Economy.

OK. So what Frank is on about is that the increasing concentration of income at the top end of the income distribution (see my last couple of posts, “Trick or Treat” and “PS…”) and the increasing volatility of the incomes and spending patterns of the top few percentiles mean that our economy is itself more and more a volatile reflection of their experience. He draws heavily on the work of Parker and Vissing-Jorgensen to document the increasing magnitude since WW II of income swings in the top 1% as compared to the rest of us. In the days of my youth, the income streams of the wealthy were much less volatile than the average (beta < 1), but over time that has changed as income increases have become more concentrated and the income of the richest have come to depend less and less on manufacturing and more and more on financial instruments. In the 1%, beta is about 2; in the rarified top 0.01%, it’s over 3.

And that’s enough to scare anyone, particularly anyone whose job it is to forecast state tax revenues. Toward the end of High-Beta, Frank cites Hill and Williams, “By 2007, the top 1% of California’s taxpayers were … earning 25 percent of all income and paying 48 percent of the state’s income taxes.” (p. 180) Clearly a recipe for disaster when you have to balance the budget, whatever the revenue shortfall. Increasing concentrations of increasingly volatile incomes are bad enough. What makes it worse is that the spending patterns of the rich and famous have apparently become as wild and crazy as their incomes. High-beta consumption has been paired with high-beta incomes. The spending fraction for the high-beta wealthy is above that of average households! is Gone are the days of conservative buy-and-hold finance. It’s been replaced with innovate, develop, liquidate and spend. Diversification has been replaced with leverage, and Frank’s narrative is replete with stories of spectacular financial catastrophe (bankrupt former billionaires, repossessed Gulfstream 550’s, the collapse of Yellowstone Club World) that serve as a titillating counterpoise to Richistan, his catalogue of wretched excess. But without a hint of schadenfreude. In fact, he ends with the tale of yet another Frank (Kavanaugh), a low-beta millionaire and a model of rectitude and self-restraint, whose goal is to create value and jobs. “Look at the banking industry,” he is quoted as saying (p. 204) “… they don’t have real expertise in a real business, and I’m not sure they’re creating lasting value.” Frankly, words to live by.

Hill, Elizabeth and Bradley Williams. “California’s Changing Income Distribution” Legislative Analyst’s Office (8/2000)

Kapur, Ajay. “The Global Investigator; Michael Moore, Misrepresentation and Migrating Plutonomies” (2009)

Parker, Jonathan and Annette Vissing-Jorgensen. “An Increase in Income Cyclicality of High-Income Households and Its Relation in the Rise in Top Income Shares,” Brookings Papers and Proceedings (2010)

_______________. “Who Bears Aggregate Fluctuations and How?” AER (2009)

...a new best friend?

Bykay.e.strong

Will China ride to the rescue of the Europeans? President Sarkozy lent his support to a proposal encouraging Klaus Regling, the current CEO of the European Financial Stability Facility (EFSF) to make contact with Beijing. Zhu Guangyao, finance minister, and Klaus Regling met. Adopting a wait-n-see posture, China made no commitment to the 1.4 trillion dollar bailout fund.

Financially, the Chinese do have the resources to act. Currently, China is the top creditor to the US, underwriting the federal debt ($14.9 trillion). The Federal Reserve reported China’s holding at $1,137.0 billion, about 25% of total foreign holdings of US Treasury securities at the end of August 2011.

According to Chinese government figures, its foreign exchange (FX) reserves rose from $216 billion in 2001 to $3.2 trillion as of June 2011, and its reserves as a percent of nominal GDP grew from 15.3% in 2001 to 48.4% in 2010. The main contributors to this accumulation are China’s large trade surpluses ($185 billion in 2010), inflows of foreign direct investment into China ($106 billion in 2010) and inflows of “hot money.”

The CRS report China’s Holdings of US Securities (26 September 2011) argues that “China’s central bank is a major purchaser of U.S. financial assets, largely because of its exchange rate policy. In order to limit the appreciation of China’s currency, the renminbi (RMB), against

the dollar, China must purchase U.S. dollars.” This has led China to amass a huge level of foreign exchange (FX) reserves of which analysts estimate the dollar composition to be around 70%.

The report suggests that rather than hold dollars (and other foreign currencies), which earn no interest, the Chinese central government has converted some level of its foreign exchange reserve holdings into U.S. financial securities, including U.S. Treasury securities, U.S. agency debt, U.S. corporate debt, and U.S. equities.

China certainly appears to have the ability to provide a line of credit to Europe but does it have the willingness?

Perhaps, not. The world has historically been less than kind to China, treating China as a second-class citizen. China may choose to hold out for an improvement in the terms of the trade--not economic but rather political. What change(s) might the assumption by China of the role of lender-of-last-resort set in motion?

First and foremost, the chief lender to the world would seek a more level playing field. With the exception of its UN Security Council seat which it had to wrestle from Taiwan, China’s status in most organizations is at odds with its true economic stature.

It has no representation among the Group of Eight (G8), the economic forum of the major world economies. The G8 is currently populated by Canada, France, Germany, Italy, Japan, the United Kingdom and the US with Russia added in 1997. Ironically, in 2010 China surpassed Japan to become the world’s second largest economy and the International Monetary Fund (IMF) projects that the Chinese economy will surpass that of the US in real terms in 2016.

At the International Monetary Fund (IMF), the organization responsible for ensuring exchange rate stability, China holds a 3.55% voting share and the US, a 16.17% voting share.

In the International Development Association (IDA), the organ of the World Bank responsible for providing loans to the poorest countries, China holds 4.4% voting power and the US 15.85%.

China finally gained a seat at the World Trade Organization (WTO) table in December 2001. Since then, China has been a complainant in eight cases involving either the US or the European Union and a respondent in twenty-three cases—seventeen of which were brought by either the US or the European Communities.

China is destine to gain full admission to the Club of the World. China is vast territorially, some 9.5 million square kilometers. China is the most populous nation accounting for nearly 20% of world’s population. China has the second largest world economy. It has a labor force of over 800 million. A study conducted by the Royal Society, the UK’s national science academy predicts that China will overtake the US as the world’s leading producer of research as soon as 2013, returning China to its historic role as a global leader in technology.

Only time will tell whether China will assist the Europeans. But one thing is certain, the time has come for some honest soul-searching about inclusion and cooperation in the decisions affecting the world.

Monday, October 31, 2011

Trick or Treat

By Lewis Sage

I couldn’t decide on a costume for tonight, so I went to a scary place, the Congressional Budget Office for inspiration.

The CBO’s report, Trends in the Distribution of Household Income Between 1979 and 2007, came out a little early for Halloween, but it is just as full of tricks – for most of us – and treats – for a select few - as earlier reports (see especially Piketty and Saez, Income Inequality in the United States, 1913-1998, Quarterly Journal of Economics, 2003). The news, in case you’ve been off the planet for the last generation, is that between the pre-recession peaks of 1979 and 2007, the inflation-adjusted after-tax-after-transfer income of the average American household rose an average of 1.8% per year, a total of 62% since the waning days of the Carter administration. Pretty good, if you live in the average household, but there’s no such thing as an average household.

If we sort households by income from highest to lowest, the rising economic tide turns out to have been a flood for the top 1%, but no more than a heavy dew for those in the bottom 20%. After-tax income for the top 1% has risen at an average rate of 5% per year, a pace at which it doubles twice a generation; for the bottom 20%, the rate is 0.6%, doubling their standard of living every four generations. In between, income growth has been, well, in between. But the facts are clear: only those households in the top 20% have seen above-average increases, and those have been heavily concentrated in the top 1%, so that by 2007, the aggregate income of the top 1% equaled that of the bottom 40%.

There are three main reasons for this skewed growth pattern: disproportionate growth at the top of the wage distribution; a shift toward highly concentrated income sources; reduction in the progressivity of the federal tax structure. Concentrated growth was not limited to wages, however:
“In 1979, the bottom 80 percent of the population in the income spectrum received nearly 60 percent of total labor income, about 33 percent of income from capital and business, and about 8 percent from capital gains In 1979, the bottom 80 percent of the population in the income spectrum received nearly 60 percent of total labor income, about 33 percent of income from capital and business, and about 8 percent from capital gains… By 2007, the share of labor income going to the bottom 80 percent had dropped to less than 50 percent, their percentage of business income and income from capital had decreased to 20 percent, and their share of capital gains was about 5 percent.” (p. 10) Increasing demand for highly skilled labor, exploding compensation for upper management, the growth of the superstar model, all have been proposed to explain the concentration of labor income.

Inequality has also increased because the top 1% shifted sources from capital income to business income (perhaps in response to changing tax rules) and business income was at the same time the fastest growing income source. And finally, the tax and transfer structure of the federal government has contributed to the concentration of income at the top, becoming less progressive, with tax rate reductions at the upper end, and increased reliance on payroll taxes.

One percent wins; 19% break even; 80% slip backward. Maybe I’ll go as an occupier.

Saturday, October 29, 2011

…tagged an Internet hoax but promising

By kay.e.strong

The other day I received in my email box an Internet chain letter described as the "Congressional Reform Act of 2011." Billionaire Warren Buffett is quoted early in such a way as to suggest his support.

Initially, I read it and dismissed it. But upon further reflection, I find some provisions promising, perhaps, even complementing ideas emerging from the 99% movement. I have modified the text slightly in some places, added Fact Checks and commentary.

1. TERM limit of twelve years congressional service in total

The practice of “homesteading” and “perpetuity in office” in Congress creates an environment which American Statesman Richard Henry Lee described as "most highly and dangerously oligarchic."

George Mason, the Father of the Bill of Rights, argued that "nothing is so essential to the preservation of a Republican government as a periodic rotation."

Known as the Conscience of the American Revolution, Mercy Otis Warren chided the founding fathers for the lack of term limits stating that "there is no provision for a rotation, nor anything to prevent the perpetuity of office in the same hands for life; which by a little well timed bribery, will probably be done...."

Fact Check: As they pertain to Congress, these laws are no longer enforceable, however, as in 1995, the U.S. Supreme Court overturned congressional term limits, ruling that state governments cannot limit the terms of members of the national government.

A provision for term limits exists in 15 states. Some states have bans on consecutive limits, others on lifetime bans. <Source: http://www.ncsl.org/default.aspx?tabid=14844>

Churning the membership rolls of Congress is an obvious way to assure that the cupboard gets restocked with a mixture more diverse and authentically representative of the American demographic landscape than its current stock of white, aged cans. Churning holds open the possibility of a deeper, more inclusive examination of complex issues which typically involve niche communities. Churning is probably the only way to breathe new life into the marketplace of ideas and stamp-out self-interested cronyism.

2. A congressman/ woman collects a salary while in office and receives no pay when they're out of office.

Fact Check: The current salary (2011) for rank-and-file members of the
         House and Senate is $174,000 per year which clearly, is more than
         sufficient to meet basic needs. Current compensation:
         <http://www.thecapitol.net/FAQ/payandperqs.htm>

Serving in Congress is an honor, not a career. As such Congressional pay should be set at the national average of salaries in other honorable career services such as public school teaching ($47,100 to $51,180), police ($51,410) and fire ($44,260) protection. (Occupational Outlook Handbook-BLS)

The Founding Fathers envisioned citizen legislators, so ours should serve their terms, then go home and back to work.

3. CONGRESS (past, present & future) participates in Social Security.

        Fact Check: Members elected since 1984 are covered by the
        Federal Employees' Retirement System (FERS). Those elected prior
        to 1984 were covered by the Civil Service Retirement System
        (CSRS). In 1984 all members were given the option of remaining
        with CSRS or switching to FERS.

As it is for all other federal employees, congressional retirement is funded through taxes and the participants' contributions. Members of Congress under FERS contribute 1.3 percent of their salary into the FERS retirement plan and pay 6.2 percent of their salary in Social Security taxes.

The average annual pension of retired members of Congress ranged between $35,952 and $60,972 as of 2006, according to the CRS. Members of Congress are eligible for full retirement after twenty years of service, a provision marked similar to that of military.

4. CONGRESSIONAL pay rises in tandem with Social Security cost of living adjustments.

         Fact Check: In December 2010, 43.8 million people received Old Age
         Survivors Insurance benefits. A 3.6% increase becomes effective
         January 2012.

5. CONGRESS participates in the same health care system as the American people.

          Fact Check: Members of Congress are allowed to purchase private
          health insurance offered through the Federal Employees Health
          Benefits Program, which covers more than 8 million other federal
          employees, retires and their families.

6. CONGRESS must equally abide by all laws they impose on the American people.

7. ALL contracts with past and present Congressmen/women are void effective 1/1/12. The American people did not make this contract with Congressmen/women. Congressmen made all these contracts for themselves.

The first provision concerning term limits holds promise as an effective tool at unleveraging the positive feedback loop between power and money influence.

The original email encouraged each recipient to pass the letter along to at least twenty other recipients as a means to “fix Congress.”

So, what do you think?

[In case you are interested in an unadulterated version, viewed it at http://urbanlegends.about.com/od/government/a/Congressional-Reform-Act-Of-2011.htm]

Sunday, October 23, 2011

PS to the Message (see below)

By Lewis Sage

Alexander Stille’s op-ed piece, “The Paradox of the New Elite,” in the Sunday Review section of the NYT (10.23.11), points – once again – to two salient points that explain exactly how frustratingly stacked the deck is. In our increasingly stratified and calcified society, income and status buy access to income and status for a demographically diverse, but highly exclusive meritocracy. We have heard, both here and elsewhere that the growth of American productivity has been captured by the top few percentiles of the income distribution and that the position of the median household has been eroding over the last couple of decades, so that the portion of gross income going to top 1% now approaches the 23% they controlled in 1929. But Professor Stille’s second point is that upward socio-economic mobility – the carrot that used to make a winner-take-all society palatable to the not-yet-haves – has also been eroded.

For extensive background reading on the distribution of income and wealth in the US, Dr. G. William Domhoff’s page, Who Rules America? (http://sociology.ucsc.edu/whorulesamerica/about.html) is an interesting starting place. For those who may find UC Santa Cruz a little to the left of their own political persuasion, I’d suggest a quick stop at Kiplinger’s website to read Kevin McCormally’s “Where Do You Rank As a Taxpayer?” (October 13, 2011) (http://www.kiplinger.com/features/archives/how-your-income-stacks-up.html), where you can check out what it takes to make the top 1% according to the IRS. At Kiplinger’s invitation, I entered a variety of hypothetical adjusted gross income (AGI) figures (none of them my own) and learned that an AGI of $66,200 puts one in the top 25%; $112,200 gets you to the top 10%; $154,650 is the cut-off for the top 5%; $343,930 is the threshold for the top 1%, with nearly 17% of the nation’s reported AGI.

Left or right, both sites end at the same place – and I quote Kiplinger – “For historical perspective, back in 1986, the top 1% of earners reported [only] 11% of all income and paid 26% of the income taxes; the lower-earning 50% made 17% of the income and paid 6% of the nation’s individual income tax bill.” Today, the bottom 50% has 13% of the income and pays 2.25% of the income tax bill. Makes you think.

…folks, the medium is the message

By kay.e.strong

In the silence of the Occupy Wall Street movement is a poignant message about the status of 99% of Americans. But how many get it?

The movement is an emergent property arising endogenously out of the frustrations and anxieties and general dissatisfaction of the 99% in a system flagrantly stacked against them—a system that has silence them.

OWS is not politics-as-usual! All attempts to benchmark it against the status quo framework owned by the 1% are ill-contrived.

The 99% movement is a first draft in the evolutionary process of differentiation-selection-amplification. This process, if nurtured, will provide us with novelty, a pool of alternative design options from which to draw a more sustainable system. Any reasonable person would concur that the status quo of politics or economics can not continue as is.

The 99% movement operates as a consensus-building mechanism, the expressway to rebuilding trust. For those not in the know, high economic performance demands both high-levels of cooperation and high-levels of trust. Both of which have been wrung from a system so fragmented by self-interested, big-monied politics that gridlock is the tactic-de-jour! We willingly pay 1.1 billion dollars to secure a head on a plate, but feign no funds available for food in the bellies of our children. We bail out Big Men institutions, but ignore the cries of main street homeowners in distress. Cuts to the social safety net take precedent over cuts to defensive spending.

Despite being characterized as leaderless and lacking an agenda, the protest that began at the heart of the American financial district has grown to become an undisputed national movement with sympathetic rallies in 60 cities world-wide. Intuitively, people get it. Even members of the 1% have been seen among the ranks of the 99%.

Last week City Council Speaker Christine Quinn, a potential 2013 New York City mayoral candidate, stated that “…by focusing on the protests’ anti-Wall Street theme and not the larger issue of people feeling hopeless about the economy, ‘you lose the bigger point.’” (NYT, 18 Oct 2011)

Cornel West, an activist of the sixties, defended the lack of agenda asserting that "[i]t’s impossible to translate the issue of the greed of Wall Street into one demand, or two demands. We’re talking about a democratic awakening." (29 Sep 11 in Democracy Now!)

Chiding the Occupy Wall Street protesters for failing to look like your grandmother’s politics is to truly miss the message. Here’s a hint from Marshall McLuhan, “The medium is the message.”

Wednesday, October 19, 2011

Imported from Detroit

By Lewis Sage

A couple of weeks ago, one of our regular readers sent us an email that would have blown out the limits of any known comment box. It ran about three pages and raised eight or ten excellent comment-questions about the current economic scene – enough fodder for a whole series of blogs – and when I asked permission to use them that way, he was kind enough to agree. The entries ranged from suggestions as to the foundations of recovery, to musings on the nature of modern political reality. So here goes.

Our correspondent’s first suggested foundation for economic growth calls for the expansion of foreign markets for US goods and services, what trade economists refer to as export-led growth. Simply, the idea is that US output and employment must increase when foreigners start buying more of our stuff.

To expand markets, it seems that American firms need to close our trade deficit, selling more both here and abroad. But wait a minute. All that says is that American firms need to sell more stuff, which is exactly the problem we’re trying to address. So let’s back up. The trade deficit isn’t the cause of the problem for US firms – it’s the effect of deficient demand for US goods in foreign markets. We need to focus on foreign market demand.

The good news for this strategy is that approximately 6.6 billion people don’t live here – all of them potential importers of our exports, if only they wanted and could afford the things we have to sell. And, based on recent data (Economic Report of the President, 2011), we already export more than $1 trillion worth of such stuff in a typical year. Trouble is, there’s a lot more stuff that we prefer to buy from overseas, about 1.8 times as much, as of 2007, which suggests that, on balance, their goods are more attractive to us than ours are to them. But our trading partners aren’t monolithic: maybe we can learn something by looking at bilateral trade flows.

The question then becomes, “With whom we are running trade deficits?” Broadly speaking, the answer is, “Everybody.” (Except Brazil and Singapore.) Surely some of the imbalance is attributable to trade barriers of one kind and another and certainly a big chunk is the consequence of the over-valued yuan, but even if we could perfectly balance our trade with China, we would still have been about $550 billion short of current accounts parity in the last year before the recession. Which is not to say that increasing exports by $250 billion would be useless: holding everything else constant, it would lop about one percentage point off our unemployment rate.

So, maybe if we look at what it is that we export, we can get a handle on which American goods are relatively attractive. If we have enough unused capacity, opening new markets to a potentially attractive export would make a lot of sense. Examining the 2007 data by broad categories of imports / exports, however, we find that

· We exported about as much food and as much non-automotive capital as we imported.

· We imported about twice as much in the way of industrial supplies and material as we exported ($320+ billion deficit).

· We ran a $120+ billion deficit in automobiles and engines.

· We ran a $320+ billion deficit in other consumer goods.

· We ran a $120+ billion deficit in petroleum products.

Put another way, we could double our automotive exports without coming close to closing the balance of payments gap. Goodness knows, we have the plant capacity to expand auto production dramatically and cut manufacturing unemployment in the process, but the real question (emblematic of the problem underlying the strategy of export-led growth) is, “We Americans may love them, but who else wants to buy a Chrysler ‘imported from Detroit’?”

Sunday, October 16, 2011

…talking hunger in America’s living room

By kay.e.strong

While the public outcry about exaggerated inequities of a system long skewed in favor of “the moneyed” play out in public squares around the globe, preschoolers across the nation talk food insecurity on the living room floor. Lily, the newest resident of 123 Sesame Street, reaches out to raise awareness about the realities of growing hunger in America. An injustice visited upon the most helpless of all humanity---our progeny.

And in the halls of Congress recommendations to cut the funding to the Supplemental Nutrition Assistance Program (SNAP) and National School Lunch Program are being readied for the Committee on Deficit Reduction.

More that 44.5 million Americans receive SNAP benefits, nearly a 61% increase over four years. In fiscal year 2009, 48 percent of all SNAP participants were children. This recommendation would cut one million recipients and leave some 200,000 children without school lunches.

Proponents of balancing the budget on the backs of the nation’s children claim that “increasingly lax requirements” explain the growth in the number of American households now relying on federal government’s food assistance. A claim at odds with the realities of life on 123 Main Street America.

In September the U.S. Bureau of Census released its annual publication Income, Poverty and Health Insurance Coverage. A decline in real median household income, an increased poverty rate and an increase in the number of individuals without insurance between 2009 and 2010 were the major findings. Not surprisingly, changes in the shares of aggregate household income indicated an increase in income inequality between 2009 and 2010 favoring the higher income household.

Last week Gallup released its monthly U.S. Well-Being Index. According to Gallup, “Americans' access to healthcare, food, and shelter worsened the most in September compared with when the Basic Access Index was at its high point in September 2008. Fewer Americans now have a personal doctor and health insurance. And more Americans are having trouble paying for food and shelter.”

<http://www.gallup.com/poll/150122/Americans-Access-Basic-Necessities-Recession Level.aspx?utm_source=tagrss&utm_medium=rss utm_campaign =syndication>

Perhaps, no organization knows the stark realities of Hunger in America more fully than Feeding America, the nation’s leading domestic hunger-relief charity.

Feeding America reports:

In 2010, 16.4 million or approximately 22 percent of children in the U.S. lived in poverty.
Nearly 14 million children are estimated to be served by Feeding America, over 3 million of which are ages 5 and under.
According to the USDA, over 16 million children lived in food insecure (low food security and very low food security) households in 2010.

The implications of childhood hunger are dire with their consequences accumulating over the lifetime of the individual. Poor pre-natal nutrition causes mothers to bear low birth weight babies---infants likely to experience hearing, vision and learning problems, often, requiring more expensive special education services. A hungry child is more likely to experiences chronic illnesses requiring more frequent medical care—care that is often subsidized by those with health insurance. Children who are malnourished perform poorly academically, become ill more often, potentially infecting classmates, miss school and fall further behind. Emotional and behavior problems surface in the classroom disrupting the learning process for classmates. As young adults the academically unsuccessful drop out of school. Gainful employment becomes problematic. The incident of unemployment among those without a high school diploma is often double the national average. Without access to education beyond high school or a good paying job, a stable productive life becomes all the more elusive. As aging adults, the accumulated effects of poor nutrition and health show up as a financial stressor on the nation’s health care system in the form of chronic diseases. It is estimated that over 75% of our national expenditures result from treatment of chronic diseases.

Hunger for our children is tied inexplicable to unemployment of parents in a vicious feedback loop represented by the system archetype known as “success to the successful.”

Any politician sanctimoniously justifying cuts in food assistance programs to hungry American families should be sent to reeducation camp at 123 Sesame Street!

“The true measure of a nation’s standing is how well it attends to its children – their health and safety, their material security, their education and socialization, and their sense of being loved, valued, and included in the families and societies into which they are born.”—UNICEF Child poverty in perspective: An overview of child well-being in rich countries, Innocenti Report Card 7, 2007