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We Are the 99.9%

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Published: November 24, 2011
Fred R. Conrad/The New York Times

Paul Krugman

“We are the 99 percent” is a great slogan. It correctly defines the issue as being the middle class versus the elite (as opposed to the middle class versus the poor). And it also gets past the common but wrong establishment notion that rising inequality is mainly about the well educated doing better than the less educated; the big winners in this new Gilded Age have been a handful of very wealthy people, not college graduates in general.

If anything, however, the 99 percent slogan aims too low. A large fraction of the top 1 percent’s gains have actually gone to an even smaller group, the top 0.1 percent — the richest one-thousandth of the population.

And while Democrats, by and large, want that super-elite to make at least some contribution to long-term deficit reduction, Republicans want to cut the super-elite’s taxes even as they slash Social Security, Medicare and Medicaid in the name of fiscal discipline.

Before I get to those policy disputes, here are a few numbers.

The recent Congressional Budget Office report on inequality didn’t look inside the top 1 percent, but an earlier report, which only went up to 2005, did. According to that report, between 1979 and 2005 the inflation-adjusted, after-tax income of Americans in the middle of the income distribution rose 21 percent. The equivalent number for the richest 0.1 percent rose 400 percent.

For the most part, these huge gains reflected a dramatic rise in the super-elite’s share of pretax income. But there were also large tax cuts favoring the wealthy. In particular, taxes on capital gains are much lower than they were in 1979 — and the richest one-thousandth of Americans account for half of all income from capital gains.

Given this history, why do Republicans advocate further tax cuts for the very rich even as they warn about deficits and demand drastic cuts in social insurance programs?

Well, aside from shouts of “class warfare!” whenever such questions are raised, the usual answer is that the super-elite are “job creators” — that is, that they make a special contribution to the economy. So what you need to know is that this is bad economics. In fact, it would be bad economics even if America had the idealized, perfect market economy of conservative fantasies.

After all, in an idealized market economy each worker would be paid exactly what he or she contributes to the economy by choosing to work, no more and no less. And this would be equally true for workers making $30,000 a year and executives making $30 million a year. There would be no reason to consider the contributions of the $30 million folks as deserving of special treatment.

But, you say, the rich pay taxes! Indeed, they do. And they could — and should, from the point of view of the 99.9 percent — be paying substantially more in taxes, not offered even more tax breaks, despite the alleged budget crisis, because of the wonderful things they supposedly do.

Still, don’t some of the very rich get that way by producing innovations that are worth far more to the world than the income they receive? Sure, but if you look at who really makes up the 0.1 percent, it’s hard to avoid the conclusion that, by and large, the members of the super-elite are overpaid, not underpaid, for what they do.

For who are the 0.1 percent? Very few of them are Steve Jobs-type innovators; most of them are corporate bigwigs and financial wheeler-dealers. One recent analysis found that 43 percent of the super-elite are executives at nonfinancial companies, 18 percent are in finance and another 12 percent are lawyers or in real estate. And these are not, to put it mildly, professions in which there is a clear relationship between someone’s income and his economic contribution.

Executive pay, which has skyrocketed over the past generation, is famously set by boards of directors appointed by the very people whose pay they determine; poorly performing C.E.O.’s still get lavish paychecks, and even failed and fired executives often receive millions as they go out the door.

Meanwhile, the economic crisis showed that much of the apparent value created by modern finance was a mirage. As the Bank of England’s director for financial stability recently put it, seemingly high returns before the crisis simply reflected increased risk-taking — risk that was mostly borne not by the wheeler-dealers themselves but either by naïve investors or by taxpayers, who ended up holding the bag when it all went wrong. And as he waspishly noted, “If risk-making were a value-adding activity, Russian roulette players would contribute disproportionately to global welfare.”

So should the 99.9 percent hate the 0.1 percent? No, not at all. But they should ignore all the propaganda about “job creators” and demand that the super-elite pay substantially more in taxes.

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Here’s the story in the Harvard Crimson:

Students Walk Out of Ec 10 in Solidarity with ‘Occupy’

By JOSE A. DELREAL, CRIMSON STAFF WRITER
Published: Wednesday, November 02, 2011
Economics 10 WalkoutHarvard students and community members gather in front of John Harvard statue in solidarity with the Occupy Movement and Occupy Oakland.

UPDATE: 4:04 a.m. November 3, 2011

Nearly 70 Harvard student protesters walked out of Economics 10 on Wednesday afternoon, expressing dissatisfaction with what they perceive to be an overly conservative bias in the course.

The walkout was meant to be a show of support for the “Occupy” movement’s principal criticism that conservative economic policies have increased income inequality in the United States.

“Today, we are walking out of your class, Economics 10, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, the University, and our greater society,” read a statement issued by the organizers.

Economics 10—more commonly referred to as “Ec 10”—is taught by professor N. Gregory Mankiw, and has the highest enrollment of any course at the College, boasting over 700 enrollees.

“I was going to announce this at the end, but I have a feeling people might leave a little early,” he said.

At 12:15 p.m. students stood up en masse and walked out of Sanders Theatre, where Ec 10 lectures are held. Some students carried signs, but most left carrying just their backpacks. As the demonstrators marched out of Sanders Theatre, a small crowd booed them in support of Mankiw. Most students remained in their seats

After walking out, the group gathered in the hallway outside of the theater, standing in a circle and speaking out about the event.

“Harvard graduates have been complicit [and] have aided many of the worst injustices of recent years. Today we fight that history,” said Rachel J. Sandalow-Ash ’15, one of the students who organized the walkout. “Harvard students will not do that anymore. We will use our education for good, and not for personal gain at the expense of millions.”

Gabriel H. Bayard ’15, another organizer of the walk out, said that he believes the course is emblematic of the economic policies that have led the financial crisis.

“Ec 10 is a symbol of the larger economic ideology that created the 2008 collapse. Professor Mankiw worked in the Bush administration, and he clearly has a conservative ideology,” Bayard said. “His conservative views are the kind that created the collapse of 2008. This easy money focus on enriching the wealthiest Americans—he really operates with that ideology.”

Mankiw served as the chairman of the Council of Economic Advisers during the second Bush Administration and is currently an adviser to former Mass. Governor Mitt Romney’s presidential campaign. Mankiw declined to comment for this article.

Sandalow-Ash ’15 said that the course too heavily asserts conservative economic claims as fact.

“It’s a class that’s very indoctrinating, and does not encourage diversity of views. Economic questions are not always clear-cut. Multiple views should be presented in this course,” Sandalow-Ash said.

Many undergraduates remained skeptical of the demonstration’s mission.

Mark S. Krass ’14 said he believes the walkout’s intended goals were unclear, which detracted from the walkout’s message and comprises its integrity.

“Those of us who are supportive of Occupy Wall Street are trying very hard to combat the view that there is no set of objectives or ideology motivating that movement,” Krass said. “It was really distressing for people to advertise a walkout of Ec 10 on the basis of high textbook prices and bad teaching.”

Jeremy Patashnik ’12, an economics concentrator who authored a lengthy piece in defense of the course for the Harvard Political Review, rejected the notion that Ec 10 carries a conservative bias.

“I self-identify as a liberal on these issues, and I don’t see the conservative bias. I think this walkout misses the point of what Ec 10 is supposed to be,” Patashnik said. “This class is not attempting to give normative answers about how to address social issues. It’s meant to introduce students to economics as a social science.”

Krass noted that the topic of Wednesday’s lecture—income inequality—might have been particularly interesting to those who participated in the walkout.

“It’s incredible that in the name of advancing a more liberal view of economics they chose to walk out of a class on a social issue they care about,” Krass said.

According to those who walked out, part of the discontent with Economics 10 stems from what they say is the limited number of opportunities to express skepticism toward the material taught in the course.

“I’ve definitely written question marks in my textbook, but we never really get to question [what he says] in section,” said Alexandra E. Foote ’15, who is currently enrolled in the course. “I don’t know very much about economics, and it’s not really fair that I’m getting a skewed perspective.”

—Staff writer Jose A. DelReal can be reached at jdelreal@college.harvard.edu.

The Open Letter the students sent to Mankiw:

http://hpronline.org/campus/an-open-letter-to-greg-mankiw/

 

A student defends the course:

http://hpronline.org/campus/in-defense-of-ec-10/

 

The Harvard Crimson has an editorial on the protest:

http://www.thecrimson.com/article/2011/11/3/ec-walkout-occupy/

NPR interviews Mankiw.

http://www.npr.org/v2/?i=141969009&m=141969157&t=audio

The ECB’s Battle against Central Banking

2011-10-31

The ECB’s Battle against Central Banking

BERKELEY – When the European Central Bank announced its program of government-bond purchases, it let financial markets know that it thoroughly disliked the idea, was not fully committed to it, and would reverse the policy as soon as it could. Indeed, the ECB proclaimed its belief that the stabilization of government-bond prices brought about by such purchases would be only temporary.

It is difficult to think of a more self-defeating way to implement a bond-purchase program. By making it clear from the outset that it did not trust its own policy, the ECB practically guaranteed its failure. If it so evidently lacked confidence in the very bonds that it was buying, why should investors feel any differently?

The ECB continues to believe that financial stability is not part of its core business. As its outgoing president, Jean-Claude Trichet, put it, the ECB has “only one needle on [its] compass, and that is inflation.” The ECB’s refusal to be a lender of last resort forced the creation of a surrogate institution, the European Financial Stability Mechanism. But everyone in the financial markets knows that the EFSF has insufficient firepower to undertake that task – and that it has an unworkable governance structure to boot.

Perhaps the most astonishing thing about the ECB’s monochromatic price-stability mission and utter disregard for financial stability – much less for the welfare of the workers and businesses that make up the economy – is its radical departure from the central-banking tradition. Modern central banking got its start in the collapse of the British canal boom of the early 1820’s. During the financial crisis and recession of 1825-1826, a central bank – the Bank of England – intervened in the interest of financial stability as the irrational exuberance of the boom turned into the remorseful pessimism of the bust.

In his book Lombard Street, Walter Bagehot quoted Jeremiah Harman, the governor of the Bank of England in the 1825-1826 crisis:

“We lent…by every possible means and in modes we had never adopted before; we took in stock on security, we purchased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some cases over-nice. Seeing the dreadful state in which the public were, we rendered every assistance in our power…”

The Bank of England’s charter did not give it the legal authority to undertake such lender-of-last-resort financial-stability operations. But the Bank undertook them anyway.

Half a generation later, Britain’s Parliament debated whether the modifications of the Bank’s charter should give it explicit power to conduct lender-of-last-resort operations. The answer was no: granting explicit power would undermine confidence in price stability, for already there was “difficulty restrain[ing] over-issue, depreciation, and fraud.” Indeed, granting explicit lender-of-last-resort powers to the Bank of England would mean that the “millennium of the paper-mongers would be at hand.”

But the leaders of Parliament also believed that the absence of a codified authority to act as lender of last resort would not keep the Bank of England from doing so when necessity commanded. As First Lord of the Treasury Sir Robert Peel wrote: “If it be necessary to assume a grave responsibility, I dare say men will be willing to assume such a responsibility.”

Our current political and economic institutions rest upon the wager that a decentralized market provides a better social-planning, coordination, and capital-allocation mechanism than any other that we have yet been able to devise. But, since the dawn of the Industrial Revolution, part of that system has been a central financial authority that preserves trust that contracts will be fulfilled and promises kept. Time and again, the lender-of-last-resort role has been an indispensable part of that function.

That is what the ECB is now throwing away.

J. Bradford DeLong, a former assistant secretary of the US Treasury, is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau for Economic Research.

Copyright: Project Syndicate, 2011.
http://www.project-syndicate.org

Source: http://www.project-syndicate.org/commentary/delong119/English

1 from The Truth on Vimeo.

Extra credit opportunity!

For extra credit, email me an one-paragraph answer to each of these questions:

1. What was the most relevant factual economic information given in the documentary?

2. Did the presenter offer a model or theory to organize or explain those facts? If the answer is yes, describe it shortly.

3. What were the conclusions drawn by the documentary from the facts presented?

4. State your own opinion and/or comments regarding the content of the documentary?

Please do not create a Word document or attach anything. Just write the answers in a plain email to me.

Nouriel Roubini teaches economics at Stern (NYU). He predicted a serious downturn in the economy since the mid 2000s. This article is about the effects of inequality on the performance of the economy.

AFTER THE STORM

The Instability of Inequality

2011-10-13

The Instability of Inequality

NEW YORK – This year has witnessed a global wave of social and political turmoil and instability, with masses of people pouring into the real and virtual streets: the Arab Spring; riots in London; Israel’s middle-class protests against high housing prices and an inflationary squeeze on living standards; protesting Chilean students; the destruction in Germany of the expensive cars of “fat cats”; India’s movement against corruption; mounting unhappiness with corruption and inequality in China; and now the “Occupy Wall Street” movement in New York and across the United States.

While these protests have no unified theme, they express in different ways the serious concerns of the world’s working and middle classes about their prospects in the face of the growing concentration of power among economic, financial, and political elites. The causes of their concern are clear enough: high unemployment and underemployment in advanced and emerging economies; inadequate skills and education for young people and workers to compete in a globalized world; resentment against corruption, including legalized forms like lobbying; and a sharp rise in income and wealth inequality in advanced and fast-growing emerging-market economies.

Of course, the malaise that so many people feel cannot be reduced to one factor. For example, the rise in inequality has many causes: the addition of 2.3 billion Chinese and Indians to the global labor force, which is reducing the jobs and wages of unskilled blue-collar and off-shorable white-collar workers in advanced economies; skill-biased technological change; winner-take-all effects; early emergence of income and wealth disparities in rapidly growing, previously low-income economies; and less progressive taxation.

The increase in private- and public-sector leverage and the related asset and credit bubbles are partly the result of inequality. Mediocre income growth for everyone but the rich in the last few decades opened a gap between incomes and spending aspirations. In Anglo-Saxon countries, the response was to democratize credit – via financial liberalization – thereby fueling a rise in private debt as households borrowed to make up the difference. In Europe, the gap was filled by public services – free education, health care, etc. – that were not fully financed by taxes, fueling public deficits and debt. In both cases, debt levels eventually became unsustainable.

Firms in advanced economies are now cutting jobs, owing to inadequate final demand, which has led to excess capacity, and to uncertainty about future demand. But cutting jobs weakens final demand further, because it reduces labor income and increases inequality. Because a firm’s labor costs are someone else’s labor income and demand, what is individually rational for one firm is destructive in the aggregate.

The result is that free markets don’t generate enough final demand. In the US, for example, slashing labor costs has sharply reduced the share of labor income in GDP. With credit exhausted, the effects on aggregate demand of decades of redistribution of income and wealth – from labor to capital, from wages to profits, from poor to rich, and from households to corporate firms – have become severe, owing to the lower marginal propensity of firms/capital owners/rich households to spend.

The problem is not new. Karl Marx oversold socialism, but he was right in claiming that globalization, unfettered financial capitalism, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct. As he argued, unregulated capitalism can lead to regular bouts of over-capacity, under-consumption, and the recurrence of destructive financial crises, fueled by credit bubbles and asset-price booms and busts.

Even before the Great Depression, Europe’s enlightened “bourgeois” classes recognized that, to avoid revolution, workers’ rights needed to be protected, wage and labor conditions improved, and a welfare state created to redistribute wealth and finance public goods – education, health care, and a social safety net. The push towards a modern welfare state accelerated after the Great Depression, when the state took on the responsibility for macroeconomic stabilization – a role that required the maintenance of a large middle class by widening the provision of public goods through progressive taxation of incomes and wealth and fostering economic opportunity for all.

Thus, the rise of the social-welfare state was a response (often of market-oriented liberal democracies) to the threat of popular revolutions, socialism, and communism as the frequency and severity of economic and financial crises increased. Three decades of relative social and economic stability then ensued, from the late 1940’s until the mid-1970’s, a period when inequality fell sharply and median incomes grew rapidly.

Some of the lessons about the need for prudential regulation of the financial system were lost in the Reagan-Thatcher era, when the appetite for massive deregulation was created in part by the flaws in Europe’s social-welfare model. Those flaws were reflected in yawning fiscal deficits, regulatory overkill, and a lack of economic dynamism that led to sclerotic growth then and the eurozone’s sovereign-debt crisis now.

But the laissez-faire Anglo-Saxon model has also now failed miserably. To stabilize market-oriented economies requires a return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of unregulated markets and the continental European model of deficit-driven welfare states. Even an alternative “Asian” growth model – if there really is one – has not prevented a rise in inequality in China, India, and elsewhere.

Any economic model that does not properly address inequality will eventually face a crisis of legitimacy. Unless the relative economic roles of the market and the state are rebalanced, the protests of 2011 will become more severe, with social and political instability eventually harming long-term economic growth and welfare.

Nouriel Roubini is Chairman of Roubini Global Economics, Professor of Economics at the Stern School of Business, New York University, and co-author of the book Crisis Economics.

http://www.project-syndicate.org/commentary/roubini43/English

RATIONAL IRRATIONALITY

John Cassidy on economics, money, and more.

OCTOBER 3, 2011

WHAT WOULD KEYNES SAY NOW?

Posted by 
111010_r21364_p233.jpgIn the latest edition of the magazine, I have a longish essay on John Maynard Keynes, whose magnum opus, “The General Theory of Employment, Interest, and Money,” turns seventy-five this year, and who is the subject of several new books. (For the moment, the piece is behind a firewall.) Obviously, it’s not exactly an unexplored subject, but Keynes is one of those pesky fellows who simply won’t go away, despite the best efforts of Rick Perry and many other conservatives to consign him to history.

As somebody who was first taught economics in England, and who has written a lot about market failures, I have always thought of myself as a “Keynesian.” But the task of rereading much of Keynes’s writings and distilling them into five thousand words accessible to the general reader forced me to think hard about what the phrase really means, both in terms of economic theory and current policy applications. Keynes wrote a lot, and over the years his views changed quite substantially. If you search his writings, you can find a quote here or there to back up all sorts of things, including even supply-side economics. (Thanks to Dr. Arthur Laffer for pointing out that one.) But the real essence of Keynes, I eventually decided, can be expressed in these terms:

1. In the short-run, demand is what drives economies, not prices.

2. In a demand-driven economy, many types of unfavorable and self-sustaining outcomes are possible, including lengthy slumps.

3. The role of the government is to sustain demand and help the economy avoid such disastrous outcomes.

I regard these statements as truisms, even though others would dispute them, to varying degrees. Once you get beyond them, things get murky. For example, like most economists of a certain age, I was brought up on the “I.S.L.M.” model, a toy version of Keynesianism due to Sir John Hicks, which allows you to depict the entire economy in the form of two simple curves: one representing investment and saving, the other the supply and demand for money. In policy terms, the I.S.L.M. setup remains immensely useful. Whenever I hear somebody saying, “We should cut taxes on X,” or, “The Fed should do Y,” I automatically think to myself: “What would that do to the I.S. and L.M. curves?” I’d be willing to bet that many of the economists who work at the White House and the Fed go through a similar exercise.

But I.S.L.M. is a crude form of Keynesianism. It depends on the assumption that prices are fixed, which is obviously not true. Conservative economists have always posed this question: In a depressed economy, why won’t prices and wages adjust to restore a full-employment “equilibrium”? Keynes’s answer, which it must be said he never fully integrated into what modern economists would recognize as a “model,” had to do with uncertainty and crowd psychology. When “animal spirits” are depressed, he pointed out, the mere availability of cheap money and cheap labor won’t be sufficient to make businesses invest and expand. Rather, the economy will get stuck in rut.

There’s much more about this is in the piece, together with some speculations about what Keynes would be recommending now. Obviously (at least I think it’s obvious) he would be defending the Obama stimulus and arguing for more of the same. But I think he would also be consumed by the international situation, particularly the European debt crisis. After his experience at the Paris peace talks after the First World War, where he saw the victors impose onerous debts on the Germans and Austrians with disastrous consequences, he would surely be pushing for a restructuring of Greek debt, and probably something similar for Ireland and Portugal, too.

Finally, and I didn’t put this in the piece, I think Keynes would be sympathetic towards the anti-Wall Street protestors who are camping out in downtown Manhattan. Somewhat like George Soros, Keynes was an ardent and skilled speculator in the markets who, nonetheless, had few illusions about the social utility of various fashionable forms of finance. “Speculators may do no harms as bubbles on a steady stream of enterprise,” he wrote. “But the position is serious when enterprise becomes a bubble on the whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, it is likely to be ill-done.”

Maybe the protestors should reprint that quote in the next edition of their new newspaper, The Occupied Wall Street Journal.

Read more http://www.newyorker.com/online/blogs/johncassidy/2011/10/what-would-keynes-say-now.html#ixzz1aPKpyBcx