Beyond Outrage

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nut-job
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Beyond Outrage

Post by nut-job » Mon May 07, 2012 12:55 pm

Beyond Outrage
Robert Reich

I normally don't read political books, but I saw this one available as a Kindle edition for only $3 and decided to get it.

Despite the title, it is a reasoned argument, which tries to show that our current economic stagnation is a result of more and more wealth being accumulated by a smaller and smaller segment of the population, decimation of support the the middle class (i.e., education and social programs) and control of the political process by the very wealthy.

His basic argument is that between 1950 and 1980, taxes were high compared to now, especially on the wealthy, yet economic growth was robust. After 1980, taxes were repeatedly cut, with this promise that this would unleash even greater economic activity. Instead the economy got weaker, and this weakness was taken as justification to cut taxes even further.

Reich ends with a prescription for the future. He says the US will only prosper if a popular revolt restores taxes and social spending to pre-Reagan levels.

I find his arguments generally persuasive. The main weakness as I see it is that restoring post-war US policy will not restore the world to post-war configuration. The US didn't used to have as much competition from overseas as it does now, and it is not obvious that the race to the bottom that we are now dealing with can be avoided.

lennygoran
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Re: Beyond Outrage

Post by lennygoran » Tue May 08, 2012 11:12 am

nut-job wrote: I find his arguments generally persuasive.
He's been on numerous PBS interview shows and I too am persuaded by what he says--that's why I'll be voting for Obama--I'm just sorry Obama has not been able to put some of the crooked bankers and wall streeters behind bars--Timothy Geithner may be responsible for some of that. Regards, Len :x

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Re: Beyond Outrage

Post by jbuck919 » Tue May 08, 2012 12:01 pm

It impresses me that he is willing to say that we will need a popular revolt to rectify this, which I have long suspected is true. Of course, no one wants to hear that they are going to have to take to the streets to preserve the hopes and the future of themselves and their children against a rapacious oligarchy--civilization is supposed to be past that point. Here is someone who has written a book with the opposite opinion: That everything is just wonderful for everyone because of the circumstances that concentrate super-wealth (warning, this interview is long). Now take your average reasonably educated hanger-on from the former middle class. Which one is he going to want to believe: The guy who says you'll have to revolt, or the one who says everything really is for the best when we are being sucked dry, so you can just relax? And perhaps in the answer to that question lies the reason that Romney is ahead of Obama among independent voters by a cool ten percent (who do not include Lenny, thank goodness).

The New York Times

May 1, 2012
The Purpose of Spectacular Wealth, According to a Spectacularly Wealthy Guy
By ADAM DAVIDSON

Ever since the financial crisis started, we’ve heard plenty from the 1 percent. We’ve heard them giving defensive testimony in Congressional hearings or issuing anodyne statements flanked by lawyers and image consultants. They typically repeat platitudes about investment, risk-taking and job creation with the veiled contempt that the nation doesn’t understand their contribution. You get the sense that they’re afraid to say what they really believe. What do the superrich say when the cameras aren’t there?

With that in mind, I recently met Edward Conard on 57th Street and Madison Avenue, just outside his office at Bain Capital, the private-equity firm he helped build into a multibillion-dollar business by buying, fixing up and selling off companies at a profit. Conard, who retired a few years ago at 51, is not merely a member of the 1 percent. He’s a member of the 0.1 percent. His wealth is most likely in the hundreds of millions; he lives in an Upper East Side town house just off Fifth Avenue; and he is one of the largest donors to his old boss and friend, Mitt Romney.

Unlike his former colleagues, Conard wants to have an open conversation about wealth. He has spent the last four years writing a book that he hopes will forever change the way we view the superrich’s role in our society. “Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong,” to be published in hardcover next month by Portfolio, aggressively argues that the enormous and growing income inequality in the United States is not a sign that the system is rigged. On the contrary, Conard writes, it is a sign that our economy is working. And if we had a little more of it, then everyone, particularly the 99 percent, would be better off. This could be the most hated book of the year.

Conard understands that many believe that the U.S. economy currently serves the rich at the expense of everyone else. He contends that this is largely because most Americans don’t know how the economy really works — that the superrich spend only a small portion of their wealth on personal comforts; most of their money is invested in productive businesses that make life better for everyone. “Most citizens are consumers, not investors,” he told me during one of our long, occasionally contentious conversations. “They don’t recognize the benefits to consumers that come from investment.”

This is the usual defense of the 1 percent. Conard, however, has laid out a tightly argued case for just how much consumers actually benefit from the wealthy. Take computers, for example. A small number of innovators and investors may have earned disproportionate billions as the I.T. industry grew, but they got that money by competing to constantly improve their products and simultaneously lower prices. Their work has helped everyone get a lot more value. Cheap, improved computing helps us do our jobs more effectively and, often, earn more money. Countless other industries (travel, telecom, entertainment) use that computing power to lower their prices and enhance their products. This generally makes life more efficient and helps the economy grow.

The idea that society benefits when investors compete successfully is pretty widely accepted. Dean Baker, a prominent progressive economist with the Center for Economic and Policy Research, says that most economists believe society often benefits from investments by the wealthy. Baker estimates the ratio is 5 to 1, meaning that for every dollar an investor earns, the public receives the equivalent of $5 of value. The Google founder Sergey Brin might be very rich, but the world is far richer than he is because of Google. Conard said Baker was undercounting the social benefits of investment. He looks, in particular, at agriculture, where, since the 1940s, the cost of food has steadily fallen because of a constant stream of innovations. While the businesses that profit from that innovation — like seed companies and fast-food restaurants — have made their owners rich, the average U.S. consumer has benefited far more. Conard concludes that for every dollar an investor gets, the public reaps up to $20 in value. This is crucial to his argument: he thinks it proves that we should all appreciate the vast wealth of others more, because we’re benefiting, proportionally, from it.

Google’s contribution is obvious. What about investment banks, with their complicated financial derivatives and overleveraged balance sheets? Conard argues that they make the economy more efficient, too. The financial crisis, he writes, was not the result of corrupt bankers selling dodgy financial products. It was a simple, old-fashioned run on the banks, which, he says, were just doing their job. There are a huge number of people in our economy who want ready access to their savings — pension-fund managers, insurance companies and you and me with our bank accounts. And because economic growth comes from long-term investments in things like housing, factories and research, the central role of banks, Conard says, is to turn the short-term assets of nervous savers into risky long-term loans that help the economy grow.

Every once in a while, this system breaks down. For one reason or another, the savers panic and demand all their money back. This causes a massive problem because the money isn’t sitting at the bank; it’s out in the world in the form of long-term loans. “A lot of people don’t realize that what happened in 2008 was nearly identical to what happened in 1929,” he says. “Depositors ran to the bank to withdraw their money only to discover, like the citizens of Bedford Falls” — referring to the movie “It’s a Wonderful Life” — “that there was no money in the vault. All that money had been lent.”

In 2008 it was large pension funds, insurance companies and other huge institutional investors that withdrew in panic. Conard argues in retrospect that it was these withdrawals that led to the crisis — not, as so many others have argued, an orgy of irresponsible lending. He points to the fact that, according to the Financial Crisis Inquiry Commission, banks lost $320 billion through mortgage-backed securities, but withdrawals disproportionately amounted to five times that. This stance, which largely absolves the banks, is not shared by many analysts. Regardless, Conard told me: “The banks did what we wanted them to do. They put short-term money back into the economy. What they didn’t expect is that depositors would withdraw their money, because they hadn’t withdrawn their money en masse since 1929.”

Conard concedes that the banks made some mistakes, but the important thing now, he says, is to provide them even stronger government support. He advocates creating a new government program that guarantees to bail out the banks if they ever face another run. As for exotic derivatives, Conard doesn’t see a problem. He argues that collateralized-debt obligations, credit-default swaps, mortgage-backed securities and other (now deemed toxic) financial products were fundamentally sound. They were new tools that served a market need for the world’s most sophisticated investors, who bought them in droves. And they didn’t cause the panic anyway, he says; the withdrawals did.

Even though these big conclusions are at odds with most other accounts, several economists said that they see Conard’s description of the crisis as more than just an apologia for the banking class (though it certainly is that, too). Andrei Shleifer, an influential Harvard economist, told me that he thought Conard was “genuinely fantastic on finance.”

“Unintended Consequences” only mentions Romney by name once (and in the acknowledgments, at that), but Conard hopes that the arguments detailed in his book will help readers understand why it’s so crucial that his former boss — who believes the government should help the investor class — win this November. As I read “Unintended Consequences,” though, I wondered if the book would have the opposite effect. Even staunch Republicans and many members of the Tea Party might bristle at a worldview that celebrates the coastal elite and says many talented people in the middle class aren’t pulling their weight. Was Conard saddling his old boss with another example of how out of touch those with car elevators and multiple Cadillacs can be? In this time of overheated arguments between opponents who rarely listen to one another, here was a rare member of the 1 percent openly trying to make his case. How convincing is it?

Conard and I eventually sat down at a cafe off Madison. His book is filled with a lot of abstraction, so I asked him to show me how his ideas play out in the real world.

Conard picked up a soda can and pointed to the way the can’s side bent inward at the top. “I worked with the company that makes the machine that tapers that can,” he told me. That little taper allows manufacturers to make the same size can with a tiny bit less aluminum. “It saves a fraction of a penny on every can,” he said. “There are a lot of soda cans in the world. That means the economy can produce more cans with the same amount of resources. It makes every American who buys a soda can a little bit richer because their paycheck buys more.”

It might be hard to get excited about milligrams of aluminum, but Conard says that we live longer, healthier and richer lives because of countless microimprovements like that one. The people looking for them, Conard likes to point out, are not only computer programmers, engineers and scientists. They are also wealthy investors like him, who are willing to risk their own money to finance improvements that may or may not work. There is a huge mechanism constantly trying to seek out and support these new ideas — entrepreneurs, multinationals and, crucially for Conard, investment firms and hedge funds and everyone down to individual bond traders. As Conard told me, one of the crucial lessons he learned at Bain is that it makes no sense to look for easy solutions. In a competitive market, all that’s left are the truly hard puzzles. And they require extraordinary resources. While we often hear about the greatest successes — penicillin, the iPhone — we rarely hear about the countless failures and the people and companies who financed them.

A central problem with the U.S. economy, he told me, is finding a way to get more people to look for solutions despite these terrible odds of success. Conard’s solution is simple. Society benefits if the successful risk takers get a lot of money. For proof, he looks to the market. At a nearby table we saw three young people with plaid shirts and floppy hair. For all we know, they may have been plotting the next generation’s Twitter, but Conard felt sure they were merely lounging on the sidelines. “What are they doing, sitting here, having a coffee at 2:30?” he asked. “I’m sure those guys are college-educated.” Conard, who occasionally flashed a mean streak during our talks, started calling the group “art-history majors,” his derisive term for pretty much anyone who was lucky enough to be born with the talent and opportunity to join the risk-taking, innovation-hunting mechanism but who chose instead a less competitive life. In Conard’s mind, this includes, surprisingly, people like lawyers, who opt for stable professions that don’t maximize their wealth-creating potential. He said the only way to persuade these “art-history majors” to join the fiercely competitive economic mechanism is to tempt them with extraordinary payoffs.

“It’s not like the current payoff is motivating everybody to take risks,” he said. “We need twice as many people. When I look around, I see a world of unrealized opportunities for improvements, an abundance of talented people able to take the risks necessary to make improvements but a shortage of people and investors willing to take those risks. That doesn’t indicate to me that risk takers, as a whole, are overpaid. Quite the opposite.” The wealth concentrated at the top should be twice as large, he said. That way, the art-history majors would feel compelled to try to join them.

I first met Conard last fall, around the same period in which I was spending a lot of time in Zuccotti Park, interviewing anti-Wall Street protesters who argued that people like him were destroying our democracy. Most Wall Street leaders ignored the Occupy movement or evaded it, and I was sure Conard would be among the most silent. He had recently been stung by a 1 percent scandal of his own: setting up a company whose sole purpose was to donate $1 million to a political-action committee that supported Romney. He was being cast as the embodiment of the secretive and growing influence that the hyperrich have in our political system. If anybody was going to be shy with a reporter, I figured, it was him.

Over lunch with editors from The Times Magazine, Conard proved the exact opposite. He looks like a benign middle-aged guy until he starts making an argument. At which point, Conard stares into your eyes and talks with intense force, punctuated by the occasional profanity, in full paragraphs. He delighted in arguing over corporate-bond rates and Chinese central-bank policy, among other arcane minutiae. It also became clear that he had exhaustively thought through the role of the superrich in our economy, and he wasn’t afraid to share those opinions.

Conard’s life serves as the perfect model for his economic philosophy. Born in 1956, he grew up in a middle-class suburb of Detroit, the son of a kindergarten teacher and a Ford engineer. His childhood ambition was to be able to afford his own house in a Detroit suburb, but, he likes to say, he took a series of risks (like forgoing the more secure path of law school) that eventually led him to Harvard Business School. When Conard graduated, in 1982, he entered the burgeoning field of management consulting. He joined the prestigious Boston-based firm Bain & Company, which nine years earlier was founded with a radically different approach from the more traditional New York-based consulting firms. Those firms positioned themselves as grand thinkers, far above the fray of daily business struggles. Bain’s approach was to join its clients in the trenches, providing analysis and working with senior management to beat the competition.

In 1990, Conard decided to pursue even greater wealth by quitting Bain to become a manager at the investment bank Wasserstein Perella, in New York. He disliked the job, though, and when his old colleague Mitt Romney took him to lunch in 1992, Conard offered his services to Bain Capital, a division that Romney helped start in order to acquire companies with the goal of improving them itself. When Romney said he couldn’t afford to match his Wall Street pay, Conard offered to work for less until Romney decided he had added enough value to deserve a bonus and stock options. His first year did not go terribly well, though Conard eventually identified an ideal takeover target, a company that made pharmaceutical-test instruments. Bain paid less than a half billion for the company. Its value has since risen to more than $7 billion. In 2000, he became the head of the New York office.

Which leads us to what Conard said was his next big risk — leaving the business world to make his case for a new, decidedly pro-investor way to think about the economy. He seems genuinely certain that his arguments in “Unintended Consequences” will persuade a fair number of economists, politicians and thought leaders. I suggested during many of our conversations that being a public intellectual might be tricky when you freely say the sorts of things that Conard often does. During one conversation, he expressed anger over the praise that Warren Buffett has received for pledging billions of his fortune to charity. It was no sacrifice, Conard argued; Buffett still has plenty left over to lead his normal quality of life. By taking billions out of productive investment, he was depriving the middle class of the potential of its 20-to-1 benefits. If anyone was sacrificing, it was those people. “Quit taking a victory lap,” he said, referring to Buffett. “That money was for the middle class.”

There’s also the fact that Conard applies a relentless, mathematical logic to nearly everything, even finding a good spouse. He advocates, in utter seriousness, using demographic data to calculate the number of potential mates in your geographic area. Then, he says, you should set aside a bit of time for “calibration” — dating as many people as you can so that you have a sense of what the marriage marketplace is like. Then you enter the selection phase, this time with the goal of picking a permanent mate. The first woman you date who is a better match than the best woman you met during the calibration phase is, therefore, the person you should marry. By statistical probability, she is as good a match as you’re going to get. (Conard used this system himself.)

This constant calculation — even of the incalculable — can be both fascinating and absurd. The world Conard describes too often feels grim and soulless, one in which art and romance and the nonremunerative satisfactions of a simpler life are invisible. And that, I realized, really is Conard’s world. “God didn’t create the universe so that talented people would be happy,” he said. “It’s not beautiful. It’s hard work. It’s responsibility and deadlines, working till 11 o’clock at night when you want to watch your baby and be with your wife. It’s not serenity and beauty.”

Central to this investor’s work ethic is another pillar of his worldview. Unlike Romney, Conard rejects the notion that America has “some monopoly on hard work or entrepreneurship.” “I think it’s simple economics,” he said. “If the payoff for risk-taking is better, people will take more risks.” Conard sees the success of the U.S. economy as, in part, the result of a series of historic accidents. Most recently, the coincidence of Roe v. Wade and the late 1970s economic malaise allowed Ronald Reagan to unify social conservatives and free-market advocates and set the country on a pro-investment path for decades. Europeans, he says, made all the wrong decisions. Concern about promoting equality and protecting favored industries have led to onerous work rules, higher taxes and all sorts of social programs that keep them poorer than Americans.

Now we’re at a particularly crucial moment, he writes. Technology and global competition have made it more important than ever that the United States remain the world’s most productive, risk-taking, success-rewarding society. Obama, Conard says, is “going to dampen the incentives.” Even worse, Conard says, “he’s slowing the accumulation of equity” by fighting income inequality. Only with a pro-investment president, he says, can the American economy reach its full potential.

At its core, Conard’s book addresses what is perhaps the most important question in economics, the one Adam Smith set out to answer in “The Wealth of Nations”: Why do some countries grow so rich and others stay poor? Where you come down on the answer has as much to do with your politics as your economic worldview (two things that can often be the same). Glenn Hubbard, a prominent economist and one of Romney’s chief economic advisers, takes his ideas seriously. “He doesn’t have the blinders of a model-based view of the world, which is an advantage and a disadvantage,” Hubbard told me. Others, like the progressive economist Dean Baker, were less kind. “I can’t say there was much I found compelling,” he told me. The celebrated New York University economist Nouriel Roubini went out of his way to say that he had “great intellectual respect for his sharp mind,” even if he didn’t agree on numerous points, especially the benefits of inequality.

Nearly every economist I spoke with said that Conard has too much faith in the market’s ability to reward only those who create real value. Conard, for instance, insists that even the dodgiest financial products must have been beneficial or else nobody would have bought them in the first place. If a Wall Street trader or a corporate chief executive is filthy rich, Conard says that the merciless process of economic selection has assured that they have somehow benefited society. Even pro-market Romney supporters take issue with this. “Ed ought to be more concerned about crony capitalism,” Hubbard told me.

“Unintended Consequences” ignores some of the most important economic work of the past few decades, about how power and politics influence economic growth. In technical language, this field is the study of “rent seeking,” in which people or companies get rich because of their power, not because of their ideas. This is one of the few fields in economics in which left and right share many influences and ideas — namely that wealthy individuals and corporations are able to influence politicians and regulators to make seemingly insignificant changes to regulations that benefit themselves. In other words, to rig the game. One classic example is banking. Banks have enormous resources to constantly put explicit or subtle pressure on lawmakers and regulators so that regulation can eventually serve their interests.

Conard’s version of the financial crisis ignores much reporting and analysis — including work I’ve done with NPR’s “Planet Money” team — that shows that some of the nation’s largest banks actively manipulated customers and regulators and, sometimes, their own stockholders to profit from dangerous risk. And for many economists, rising inequality can create exactly the wrong outcomes for society over all. Rather than simply serving as an invitation for everybody to engage in potentially beneficial risk-taking, inequality can allow those with wealth to crush new ideas.

I kept raising these questions with Conard, but he repeatedly waved them off. “I don’t want to talk about rent-seeking,” he told me. “When you go off to a third-world country, there’s a dictator who says, ‘I’m giving the telephone franchise to my brother-in-law.’ It’s pretty hard to do that here.” I countered that many economists see rent-seeking in the United States as a much more subtle but still destructive process. If some rich people are able to get and stay rich by messing around with the rules, then those art-history majors will feel as if they have no chance to break into a well-connected, well-protected elite.

Perhaps concentrated wealth will inspire a nation of innovative problem-solvers. But if the view of many economists is right — that it sometimes discourages innovation — then we should worry. While Conard offers deep and well-argued analyses on almost every issue, on this one he resorted to anecdotes and gut feelings. During his work at Bain, he said, he saw that successful companies had to battle against one another. Nobody was just given a free ride because of their power. “Was a person, like me, excluded from opportunity?” he asked rhetorically. “If so, I wasn’t aware!”

I suggested that both could be true. The rich could earn a great deal of wealth through their own hard work, skill and luck. They could also use their subsequent influence to make themselves even richer. One of the great political and economic challenges of our time is figuring out the balance between wealth that benefits society and wealth that distorts. Of course we want to encourage people to take risks and find areas of productive innovation. It’s just not in the interest of the United States to allow wealth to skew the political process so that good new ideas are barred.

Are Conard’s views the uncensored, impolitic version of the man he hopes will be president? The Romney campaign said they wouldn’t comment in any way on “Unintended Consequences,” and Conard wouldn’t share with me anything about his private conversations with his old friend. Glenn Hubbard said only that at a broad level, Romney and Conard share “beliefs about innovation and growth and responsible risk-taking.”

Conard and Romney certainly share views on numerous policy matters. Like many Republicans, they promote lower taxes and less regulation for those who achieve financial success. Romney has also said that rising inequality is not a problem and that the attention paid to the issue is “about envy. I think it’s about class warfare.” The differences between these two men are also striking. Romney’s economic platform and his record as the governor of Massachusetts suggest that he is more of a centrist than Conard. Romney wants to eliminate capital-gains taxes for people earning less than $200,000 a year but keep them in place for the 1 percent, which Conard says is a good start but doesn’t go far enough.

The biggest difference is that Romney is running for president and needs more people to like him. Conard doesn’t have to worry about that. “People get very angry before they change their mind,” he said. “Economics is counterintuitive. It just is.” I told him that surely is true, but his ideas are counterintuitive even to people well versed in economics. After we spoke for one of the last times, he sent me an e-mail summing up his argument: At base, having a small elite with vast wealth is good for the poor and middle class. “From my perspective,” he wrote, “it’s not a close call.”

Adam Davidson writes the "It’s the Economy" column for the magazine. He is a founder of NPR’s Planet Money, a podcast and blog.

There's nothing remarkable about it. All one has to do is hit the right keys at the right time and the instrument plays itself.
-- Johann Sebastian Bach

nut-job
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Re: Beyond Outrage

Post by nut-job » Tue May 08, 2012 2:45 pm

jbuck919 wrote:It impresses me that he is willing to say that we will need a popular revolt to rectify this, which I have long suspected is true. Of course, no one wants to hear that they are going to have to take to the streets to preserve the hopes and the future of themselves and their children against a rapacious oligarchy--civilization is supposed to be past that point. Here is someone who has written a book with the opposite opinion: That everything is just wonderful for everyone because of the circumstances that concentrate super-wealth (warning, this interview is long). Now take your average reasonably educated hanger-on from the former middle class. Which one is he going to want to believe: The guy who says you'll have to revolt, or the one who says everything really is for the best when we are being sucked dry, so you can just relax? And perhaps in the answer to that question lies the reason that Romney is ahead of Obama among independent voters by a cool ten percent (who do not include Lenny, thank goodness).
I'm not sure the popular revolt requires literally taking to the streets. I just might require openly voting for (gasp) liberals. What shocks me is that 'liberals' have given so much ground, and embraced centrist/right positions. When will unabashed liberals emerge?

The book ends with a series of challenges to Obama. Things like letting the Bush tax cuts expire, forcing banks to reduce the principal in underwater mortgages, imposing strong regulation of banks, including limiting the size of banks and making it illegal for banks to speculate with the assets of their depositers, increasing spending on education and infastructure. Why is it unthinkable to do the things we did when the country was so successful economically?

BWV 1080
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Re: Beyond Outrage

Post by BWV 1080 » Tue May 08, 2012 9:18 pm

nut-job wrote:Beyond Outrage
Robert Reich

I normally don't read political books, but I saw this one available as a Kindle edition for only $3 and decided to get it.

Despite the title, it is a reasoned argument, which tries to show that our current economic stagnation is a result of more and more wealth being accumulated by a smaller and smaller segment of the population, decimation of support the the middle class (i.e., education and social programs) and control of the political process by the very wealthy.

His basic argument is that between 1950 and 1980, taxes were high compared to now, especially on the wealthy, yet economic growth was robust. After 1980, taxes were repeatedly cut, with this promise that this would unleash even greater economic activity. Instead the economy got weaker, and this weakness was taken as justification to cut taxes even further.

Reich ends with a prescription for the future. He says the US will only prosper if a popular revolt restores taxes and social spending to pre-Reagan levels.

I find his arguments generally persuasive. The main weakness as I see it is that restoring post-war US policy will not restore the world to post-war configuration. The US didn't used to have as much competition from overseas as it does now, and it is not obvious that the race to the bottom that we are now dealing with can be avoided.

by what basis can someone with an ounce of intellectual honesty make (or believe) such a specious argument? like tax policies in the 1950s were responsible for the growth or the fact that the US was the only major developed economy that wasn't destroyed by the war? its the worst sort of demagoguery to claim that economics can validate these idiotic blue / red arguments. I remember Reich arguing 20 years ago that we should all adopt the Japanese model as they clearly had figured out how to have the government cooperate with business. The truth is that our economic problems - the stagnation of middle class wages, increases in inequality etc. are mirrored across the developed world and are a direct consequence of the rise in competitiveness of Asia which put a couple of billion of hardworking people into the modern economy.

nut-job
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Re: Beyond Outrage

Post by nut-job » Wed May 09, 2012 12:17 am

BWV 1080 wrote:by what basis can someone with an ounce of intellectual honesty make (or believe) such a specious argument? like tax policies in the 1950s were responsible for the growth or the fact that the US was the only major developed economy that wasn't destroyed by the war? its the worst sort of demagoguery to claim that economics can validate these idiotic blue / red arguments. I remember Reich arguing 20 years ago that we should all adopt the Japanese model as they clearly had figured out how to have the government cooperate with business. The truth is that our economic problems - the stagnation of middle class wages, increases in inequality etc. are mirrored across the developed world and are a direct consequence of the rise in competitiveness of Asia which put a couple of billion of hardworking people into the modern economy.
Well, since I'm an 'idiot' and don't have 'an ounce of intellectual honesty,' it's clear that you're not interested in my response to your statement. Where did I get the notion that you can have a reasoned discussion on the internet anyway?

jbuck919
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Re: Beyond Outrage

Post by jbuck919 » Wed May 09, 2012 4:37 pm

We've treaded into Pub territory, which may have been inevitable given the topic of the book in question. I did at least make an effort to cite another book in my first response.

Reich's point, which Steve finds questionable, is nothing new. Steve's explanation may also not be new, but it is the first time I've heard it. Socioeconomic phenomena often have multiple or complex explanations, though I am afraid that the first thing Steve's notion reminds me of is the claim, which was common in an armchair way at the time but has largely been buried in the popular recollection, that women entering the workforce depressed the labor market for men. There may also have been some slight truth in that, but it was not adequate as an explanation of the dynamic in a labor market that continued to be generally favorable to men (and women) as long as the economy was doing well.

Here is another piece, not entirely wonderful I admit, which anyway does not contradict Reich, and which might help get us back on track and off the one of annoyed responses perceived as personal attacks. Oh, and I've reserved Reich's book at the library.

The Washington Post

Back to previous page
IMF: Income inequality is bad for economic growth
By Brad Plumer, Published: October 6, 2011

As the Occupy Wall Street protests swell in size and people pay closer attention to the gap between the wealthiest Americans and everyone else, one question is why this divide even matters. One way to look at income inequality, after all, is that it’s no big deal. If a country is growing at a healthy clip and everyone is steadily getting richer, then it’s hardly an outrage that a few titans at the very top are doing freakishly well, right?

But a recent study from the International Monetary Fund suggests that this conventional view is misguided. Excessive income inequality, the authors find, can actually inflict a lot of harm on a country’s long-term economic prospects.

In the IMF’s Finance & Development magazine, the authors, Andrew Berg and Jonathan Ostry, summarize their recent research (see also Josh Harkinson’s piece for Mother Jones). It’s relatively common, the authors note, for countries to experience small growth spurts here and there. But sustained, long-term economic growth, of the sort that the United States and Britain enjoyed after World War II, is rare. Plenty of poorer countries — say, Brazil or Jordan or Cameroon — don’t ever seem to be able to maintain that momentum.

For sustained growth to occur, Berg and Ostry found, the most important factors are a relatively equal income distribution and trade openness. (See the chart on the right.) Having healthy, democratic political institutions matters quite a bit, too. Conversely, having a lot of foreign investment or keeping debt under control, among other factors, aren’t nearly as crucial. In the end, the most important factor is inequality: “a 10 percentile decrease in inequality... increases the expected length of a growth spell by 50 percent.”

Why would inequality be so crushing for a country’s economy? For one, the authors note that inequality tends to be associated with financial crises. When inequality runs rampant, people on the lower end tend to borrow more to keep up, which increases the risk of a major crisis. (Earlier IMF research suggested that this may have contributed to the 1929 and 2008 financial crashes in the United States.)

What’s more, inequality can foster political instability, which discourages investment. Berg and Ostry also argue that inequality makes it harder for governments to deal with external shocks — it’s politically dicey to, say, cut public spending to avoid a debt crisis when the middle class already feels like it’s falling behind.

Do these lessons apply to the United States? They might. In 2005, Ohio State University’s Mark Patridge conducted a study of economic growth in the 50 states and found that “a more vibrant middle class… increased long-run economic growth.” In Democracy earlier this year, David Madland tried to tease out the causality, arguing that societies with less inequality and a stronger middle class tend to have more trust, less corrupt governance and stronger “capitalist values” that encourage entrepreneurship.

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BWV 1080
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Re: Beyond Outrage

Post by BWV 1080 » Thu May 10, 2012 9:34 am

your piece only supports Reich if you believe that tax policy is either the cause or solution to income inequality. Its pure partisan BS - i cannot believe that Reich really believes that the tax policy of the 1950s was the cause of the decade's prosperity - you might as well blame the decline in the use of hair grease & three martini lunches for our economic woes

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Inequality Rising Across the Developed World
By CATHERINE RAMPELL
America isn’t the only rich country dealing with a rise in inequality. Most of the developed world is, too.

A new report from the Organization for Economic Cooperation and Development finds that most of its member countries have seen their richest citizens get much, much richer in the last few decades, leading to a widening income gap.


Source: OECD Income Distribution and Poverty Database. Note: Data for mid-1980s refer to early 1990s for Czech Republic and Hungary.
Today, across developed countries, the average income of the richest 10 percent of the population is about nine times that of the poorest 10 percent, with much bigger multiples in Israel, Turkey, the United States, Chile and Mexico. In these last two countries, the income ratio is 27 to 1.

So what accounts for the growing gulf?

Changes in capital income — which primarily affects wealthier people — have contributed to rising inequality, although the impact has been relatively modest when compared to changes in labor income, the report says. As lower-paid workers have seen their incomes stagnate or even fall, the highest-paid workers have gotten steep raises.

Many factors have contributed to the rising labor income inequality. Globalization has had an impact, as rich countries have been sending more of their commodifiable, generally less-skilled jobs offshore, which has displaced many lower-paid workers in rich countries.

Besides outright layoffs, there have also been cuts in work hours (sometimes voluntary, sometimes not), disproportionately affecting lower-paid employees:


Source: Organization for Economic Cooperation and Development. Note: Paid workers of working-age. Mid-2000s refer to 2000 for Belgium and France. Mid-1980s refer to early 1990s for Austria, Czech Republic, France, Greece, Hungary and Ireland.
Technological improvements have also disproportionately benefited the pay of high-skilled workers. Regulatory changes, like loosening protections for temporary (and less-skilled) workers and lower unemployment benefits, may have also had an effect.

The report notes that changing courtship patterns may also be contributing to the widening income gap.

Over the years people have become more and more likely to marry mates who have similar incomes. “Today, 40 percent of couples in which both partners work belong to the same or neighboring earnings deciles, compared with 33 percent some 20 years ago,” the report says.

Surely to some extent this has to do with more women having earnings, period, and therefore having more women’s earning matching what their husbands make. But in any case if poor marry poor and rich marry rich, that magnifies the income gap effect. After all, if poor married rich, the result would be more evenly distributed wealth.

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