Normative Narratives

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Aftermath of The Baltimore Riots: Justice is Blind, Economics is Not

RIP Freddy Gray. Just 25 years old, a young man’s life was tragically cut short. We cannot let the ensuing chaos detract from this ultimate injustice.

I have seen people on social media try to justify what happened to Mr. Gray by bringing up his criminal history. Not only is his rap-sheet immaterial to his death, but it is despicable that people would drag a dead man’s name through the mud to make their politically / racially charged points. This man is dead, he cannot defend himself.

Furthermore, Mr. Gray’s criminal history of non-violent drug use / distribution is a common product of his environment. Not to make excuses for his past crimes, but his environment does offer some insight and context into his questionable choices.

Another meritless claim is that Mr. Gray’s spinal surgery led to his death. Mr. Gray did not die on the operating table, and without some outside trauma to his spine he would still be alive today.

Equally disgraceful to these meritless justifications of alleged officer misconduct are opportunists using Mr. Gray’s death to loot and riot. Mr. Gray’s family, for their part, has condemned the riots. Nothing fuels a counter-narrative like unlawful behavior; as the saying goes, with friends like these who needs enemies.

A Department of Justice investigation is ongoing, and I fully expect that after a transparent investigation those responsible for Mr. Gray’s death will be held accountable.

Yes America’s criminal justice system is flawed, particularly with respect to African American communities, but to assume that it is never capable of delivering justice belittles its many unsung successes. As of this posting, the 6 officers involved in Mr. Gray’s death have been charged with various crimes, including second degree murder and manslaughter, by Baltimore’s Chief Prosecutor.

I can understand rioting after an unfair ruling, but not before a ruling even takes place. Some will argue that as a white man it is not my place to understand, and while I like to think I am generally pretty good considering things objectively, they may have a point. I do however know this; when comparing the track records of violent and non-violent protests in achieving meaningful reform in America, the more effective approach has unquestionably been non-violent.

Those sympathetic to the rioters may argue that every successful non-violent protest was buoyed by a parallel violent movement. While it is impossible to completely decouple the effects of parallel violent and non-violent movements, I find this argument flawed. What positive role could violent protest possibly play in political decision-making when violent protests detract from public sympathy, and the state always has the overwhelming advantage in shows of force?

To the contrary, in my opinion meaningful change results from strong leaders utilizing their rights to publicly frame issues in ways that even those who may, in their private thoughts, be ideologically opposed cannot as publicly elected officials reasonably challenge.     

Regardless of my understanding, the riots have, in the words of Baltimore’s African-American Police Comissioner Anthony Batts, embarrassed Baltimore as a city. Fortunately the negative actions of a few misguided Baltimoreans should have no impact on either the Baltimore Country or DoJ investigations.

But ultimately it is not the short-term embarrassment or immediate economic consequences that should most worry those who wish to see Baltimore thrive. It is the long-term impact on investment that is most troubling, as the riots will likely exacerbate the very socioeconomic conditions which indirectly led to Mr. Gray’s death and the ensuing riots in the first place.

While properly served justice is “blind”, economic decision making considers every iota of information available:

The looting and burning of a CVS pharmacy and general store, which has been shown on just about every newscast in the past 24 hours, as well as the destruction of other shops, will tend to deter retailers from making new investments, economists warned.

“One of the things that’s been growing in the area has been the tourism aspect and nothing puts off tourists more than riots and curfews,” said Daraius Irani, chief economist at the Regional Economic and Studies Institute of Towson University in Baltimore.

“One of Baltimore’s credit strengths is it has a sizeable and diverse tax base,” said Moody’s analyst Jennifer Diercksen, noting the city’s universities, which provide thousands of very safe jobs – creating a stable base for Baltimore.

Still, the city lags the rest of the nation on a per capita income basis. Its per capita income was $24,155 for 2012, representing only 86.1 percent of the national median, according to Moody’s.

Its unemployment rate is higher than the U.S. average – according to the U.S. Bureau of Labor Statistics, Baltimore city’s unemployment rate in February was 8.4 percent versus the U.S. rate of 5.8 percent in that month.

Still, economists said one of Baltimore’s problems is the sharp demographic split between the successful elite and an underprivileged population.

“There is the vibrant, beautiful, urban community that is characterized by ongoing renaissance, and the poor, less educated, less visited, which faces more challenges,” said Basu. “Both Baltimores have been making progress in recent years.

“Despite the fact the destruction was in the other Baltimore, not the one visited by tourists, the damage economically in the near and mid term will affect both.”

When private investment lags, jobs and tax revenue for social programs and public goods take a hit. Regardless of your political affiliation or personal beliefs, one or more of these things are needed to promote social mobility and social justice.   

Baltimore’s leaders must now prove their mettle by utilizing the city’s strong fiscal position to attract investors. The city’s leaders must leverage both public money and the public relations boost private companies would realize by helping “rebuilding Baltimore” towards securing public-private partnerships that benefit Baltimore’s poorest areas.

The only silver-lining of these riots is that America is paying attention to Baltimore. While I think peaceful protests would have achieved this same outcome without the negative media coverage and economic backlash, the riots are now (hopefully) a matter of history. Moving forward, the attention Baltimore is currently receiving must be utilized as a positive.  

Another potential avenue for recovery runs through Federal government, which being within a stones-throw of Baltimore may be compelled to invest significantly in revitalizing the city. Of course these two sources of public funding–municipal and federal–should be carefully coordinated to ensure that maximum social benefits are realized.

It is exactly trying times like these when strong leadership is most needed. Let us hope elected officials in Baltimore and Washington D.C. are up to the challenge. Community and religious leaders also have an role to play, both immediately in catalyzing anger into a sustainable political movement, and in the long run by promoting the roles of strong social values, resilience, and personal and social accountability in poverty reduction.

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I am confident that criminal justice will be served in the Freddy Gray case, and that this case will help spur more widespread criminal justice reform across America.

Unfortunately, I fear the riots may have exacerbated the very problems that need to be addressed for more comprehensive progress on the social justice front.

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Transaprency Report: The Real “Bridgegate” Scandal

Original article:

More than 63,000 bridges across the United States are in urgent need of repair, with most of the aging, structurally compromised structures part of the interstate highway system, an analysis of recent federal data has found.

The report, released on Thursday by the American Road and Transportation Builders Association, warned that the dangerous bridges are used some 250 million times a day by trucks, school buses, passenger cars and other vehicles.

Overall, there are more than 607,000 bridges in the United States, according to the DOT’s Federal Highway Administration, and most are more than 40 years old.

The Transportation Department routinely inspects bridges and rates them on a scale of zero to nine. Bridges receiving a grade of four or below are considered structurally deficient, and now account for more than 10 percent of all bridges.

“The bridge problem sits squarely on the backs of our elected officials,” [chief economist at the American Road and Transportation Builders Association Alison Premo] Black said. “The state transportation departments can’t just wave a magic wand and make the problem go away.”

The American Society of Civil Engineers, which separately produces a report card on U.S. infrastructure every four years, gave it an overall “D,” or poor, grade. Bridges received a “C+” grade for mediocre.

The U.S. needs to invest $20.5 billion annually to clear the bridge repair backlog, up from the current $12.8 billion spent annually, the ACSE has said.

The civil engineers’ group estimates that the U.S. will need to invest $3.6 trillion by 2020 to keep its transportation infrastructure in a good state of repair.

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America the short-sighted, America the reactionary.

In Washington’s Snohomish County, local governments OK the building of houses in areas where mudslides are inevitable, resulting in 41 deaths. Why? because bringing in taxpayer dollars and jobs looks good now, forget the potential negative consequences, those will be someone else’s problems.

We squabble over small (if existent) healthcare premium increases associated with Obamacare, unmindful of expanded access to mental healthcare and subsidies to the poor; at the same time we bounce from avoidable tragedy to avoidable tragedy, shaking our heads and asking “what could we have done differently?”

And we let our infrastructure fall into disrepair, setting ourselves up for who knows how many avoidable deaths (not to mention the economic arguments: high unemployment and low borrowing costs beg for stimulus spending, the long term economic costs of failing infrastructure). Nobody wants to be remembered as the person who “wasted” money on a bridge, and there is no accountability for allowing avoidable incidents to occur due to political inaction.

Subsidize for-profit corporations for doing what they would need to do anyways to maximize profits? Sure that brings in jobs. Prevent a bridge from collapsing? Ehhhhh let that be the next guys problem.

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It is telling that investors around the globe seemingly believe in America’s growth and ability to repay our debts more than our own lawmakers do. America’s strength is derived from it’s people, our ingenuity and work ethic. If we continue to under-invest in our people and our infrastructure, we are undermining the very things which made America a global superpower (and “safe haven” for investment) in the first place.

This is not to say that we should not pursue tax reform, and demand oversight / review to ensure programs run efficiently and effectively. But America must more fully embrace the concepts of fiat money and Modern Monetary Theory; past debt cannot be a reason to forgo our current needs, or in the future we will not even have the option of affordable deficit spending. The U.S. Federal government has, in essence, a “blank check”, so long as it is used responsibly; systematic under-investment in the American people and infrastructure is irresponsible and shortsighted.

Issues like this remind me of a favorite Abaraham Lincoln quote: “America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves.” Of course Lincoln was referring to Civil War, a more immediate threat. America seems to be able to deal with immediate/obvious threats. It is responses to impending threats to American prosperity that remain elusive, which is at the same time understandable and infuriating.

We wait for tragedy to strike, lament the dead and point fingers, instead of acting preventatively. Some tragedies are truly unavoidable; this truth should not be used as a free pass for saying all tragedies are unavoidable.

 


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Economic Outlook: High Speed Trading and the Financial Transaction Tax

Micheal Lewis’s new book, “Flash Boys”, (re)focuses the spotlight on the controversial practice of high-frequency trading (HFT) (original article):

Already, officials at the Federal Bureau of Investigation’s New York office are investigating whether such firms traded ahead of other players in the market, in what may amount to insider trading or other fraud, according to an agency spokesman. Regulators in Washington and in New York State have opened their own inquiries.

The worries are hardly new. Over the past five years or so, high-speed computers have increasingly taken over Wall Street, and trading has migrated from raucous trading floors in Lower Manhattan to far-flung electronic platforms.

Critics argue that Mr. Lewis broke no new ground (link inserted, not part of article). And a number of executives at the firms mentioned in the book said that Mr. Lewis did not double-check the facts.

High-frequency trading is almost impossible to avoid today. By some estimates, it accounts for half of all shares traded in the United States. Supporters argue that it has made the markets more efficient by creating a cadre of traders willing to buy or sell at any time.

Others are more skeptical. The New York attorney general, Eric T. Schneiderman, has put high-frequency trading on his list of top priorities. He seized the moment on Monday to discuss his yearlong investigation into the practice.

“Look, the problem here is — and I’m a fan of the markets, but I think Michael is right,” Mr. Schneiderman told Bloomberg Television. “We’ve lost a lot of credibility. A lot of investors do not have confidence in the markets and it’s up to those of us who believe in them, who enforce the law and regulate them, to restore that confidence.”

Mr. Narang, the [IEX] high-frequency trading executive, said he hoped the attention surrounding the book would quickly die down. He said that while he had turned down requests to appear on TV, he couldn’t help speaking out against the book.

“There’s no unfair advantage to using your brain, last time I checked, in a capitalist society,” he said.

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Before I dive into this subject, what exactly is “high frequency trading“?

A program trading platform that uses powerful computers to transact a large number of orders at very fast speeds. High-frequency trading uses complex algorithms to analyze multiple markets and execute orders based on market conditions. Typically, the traders with the fastest execution speeds will be more profitable than traders with slower execution speeds. As of 2009, it is estimated more than 50% of exchange volume comes from high-frequency trading orders.

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I again refer to a favorite source of mine, Keynes General Theory of Employment Interest and Money (Ch 12, Part V, #4):

“But there is one feature in particular which deserves our attention. It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence. Moreover, this behaviour is not the outcome of a wrong-headed propensity. It is an inevitable result of an investment market organised along the lines described. For it is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence.

Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called “liquidity”. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.”

Now, take the “professional investor and speculator” out of the equation and replace them with a computer algorithm. Remove many of the financial sector regulations put in place after the Great Depression. Change the hypothetical thee month time horizon to fractions of a second.

In Keynes day, at least there was some work going into speculation (besides creating and refining an algorithm). If traditional investment is speculative, as Keynes suggests, we need a new word for high frequency trading. 

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The indisputable role the financial sector played in the financial crisis has shaken confidence in the financial system. Furthermore, the deregulation of commodities markets and subsequent commoditization of traditionally non-financial assets (food, fuel, housing, etc.) has left the “real economy” much more susceptible to fluctuations in financial markets / high frequency trading.

Therefore, it is not surprising that high frequency trading has garnered the attention of regulators. As New York attorney general Eric Schneiderman correctly states, it is the job of these regulators to restore confidence in a system that many see as a potentially destabilizing tool for the rich. There are undeniably positive aspects of financial services, but these positive aspects have been largely overshadowed by speculative and predatory practices.

We cannot wind back the clock on technology to stop high frequency trading. We can, however, curb the arbitrage / rent-seeking potential of high frequency trading with financial transaction taxation (FTT), reducing its prevalence. A FTT would raise tax revenues while also restoring confidence in financial markets (potentially without any negative impact on overall economic growth).

 


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Economic Outlook: The Relationship Between Wages, Productivity, and Economic Inequality In America

Source: The Employment Policy Network (Huffington Post)

Note: Hourly compensation is of production/nonsupervisory workers in the private sector and productivity is for the total economy.

Source: Author’s analysis of unpublished total economy data from Bureau of Labor Statistics, Labor Productivity and Costs program and Bureau of Economic Analysis, National Income and Product Accounts public data series

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THE BOTTOM (high school graduates):

This graph highlights the growing disparity between wages paid and productivity for different educational levels (which we will use as proxies for societal classes). There are a number of explanations for this decoupling. One explanation is the decline of labor union participation due to regulatory changes and pressure from globalization. Another explanation is that as technology has advanced, it has become and increasingly important factor of production; businesses are opting to spend a larger portion of their revenues on machinery as opposed to workers.

This Monday I observed a roundtable at the U.N.– “The Threat of Growing Inequalities”–where one of the speakers raised this point. Taking home a “smaller piece of the pie”, those at the bottom are able to buy less political influence, which leads to weakened labor rights and neglected falling real minimum wages. Economic forces enable those at the top to rig to laws in their favor, further exacerbating inequality–this is the political economy explanation of rising inequality. This explanation hits on another divisive element of contemporary American society, the different legal system experienced based on ones wealth.

Whatever the reason (or as is often the case in real-world economic analysis, combination of reasons), this phenomenon obviously contributes to increasing inequality. How bad is inequality today? The Stanford Center for the Study of Poverty and Inequality has 20 graphs which tell much of the story, while Politifact has compiled a number of inequality related “fact-checks”.

It is heartening to see grassroots minimum-wage movements emerge, spanning many industries (and worldwide, many countries), led by people who are willing to take a stand through collective action. These people are willing to risk the wrath of vengeful corporate executives for economic justice. However, it will take a concerted effort by well intended politicians, independent media outlets (I try to do my part), and progressive judges / competent public defenders to capitalize on this grassroots activism if meaningful progress is to be made on the inequality front.

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THE TOP (“the .1%” is not represented in the graph above):

What is going on at the bottom of the economic pyramid is only part of the inequality story. The meteoric rise of top earners incomes increases inequality; economic growth is important, but how evenly it is distributed also matters. Again here we see a decoupling of wages and productivity in the other direction  (much greater compensation than productivity; in fact, one could argue short-sighted investments result in negative productivity for the economy as a whole, while at the sane time lead to huge rewards for those carrying them out). A micro-example of this adverse relationship, described by former derivatives trader Sam Polk, as “wealth addiction”, is highlighted in a recent NYT opinion piece:

IN my last year on Wall Street my bonus was $3.6 million — and I was angry because it wasn’t big enough. I was 30 years old, had no children to raise, no debts to pay, no philanthropic goal in mind. I wanted more money for exactly the same reason an alcoholic needs another drink: I was addicted.

I’d always looked enviously at the people who earned more than I did; now, for the first time, I was embarrassed for them, and for me. I made in a single year more than my mom made her whole life. I knew that wasn’t fair; that wasn’t right. Yes, I was sharp, good with numbers. I had marketable talents. But in the end I didn’t really do anything. I was a derivatives trader, and it occurred to me the world would hardly change at all if credit derivatives ceased to exist. Not so nurse practitioners. What had seemed normal now seemed deeply distorted.

DESPITE my realizations, it was incredibly difficult to leave. I was terrified of running out of money and of forgoing future bonuses. More than anything, I was afraid that five or 10 years down the road, I’d feel like an idiot for walking away from my one chance to be really important. What made it harder was that people thought I was crazy for thinking about leaving. In 2010, in a final paroxysm of my withering addiction, I demanded $8 million instead of $3.6 million. My bosses said they’d raise my bonus if I agreed to stay several more years. Instead, I walked away.

The first year was really hard. I went through what I can only describe as withdrawal — waking up at nights panicked about running out of money, scouring the headlines to see which of my old co-workers had gotten promoted. Over time it got easier — I started to realize that I had enough money, and if I needed to make more, I could. But my wealth addiction still hasn’t gone completely away. Sometimes I still buy lottery tickets.

Wealth addiction was described by the late sociologist and playwright Philip Slater in a 1980 book, but addiction researchers have paid the concept little attention. Like alcoholics driving drunk, wealth addiction imperils everyone. Wealth addicts are, more than anybody, specifically responsible for the ever widening rift that is tearing apart our once great country. Wealth addicts are responsible for the vast and toxic disparity between the rich and the poor and the annihilation of the middle class. Only a wealth addict would feel justified in receiving $14 million in compensation — including an $8.5 million bonus — as the McDonald’s C.E.O., Don Thompson, did in 2012, while his company then published a brochure for its work force on how to survive on their low wages. Only a wealth addict would earn hundreds of millions as a hedge-fund manager, and then lobby to maintain a tax loophole that gave him a lower tax rate than his secretary.

I see Wall Street’s mantra — “We’re smarter and work harder than everyone else, so we deserve all this money” — for what it is: the rationalization of addicts. From a distance I can see what I couldn’t see then — that Wall Street is a toxic culture that encourages the grandiosity of people who are desperately trying to feel powerful.

I was lucky. My experience with drugs and alcohol allowed me to recognize my pursuit of wealth as an addiction. The years of work I did with my counselor helped me heal the parts of myself that felt damaged and inadequate, so that I had enough of a core sense of self to walk away.

Dozens of different types of 12-step support groups — including Clutterers Anonymous and On-Line Gamers Anonymous — exist to help addicts of various types, yet there is no Wealth Addicts Anonymous. Why not? Because our culture supports and even lauds the addiction. Look at the magazine covers in any newsstand, plastered with the faces of celebrities and C.E.O.’s; the super-rich are our cultural gods. I hope we all confront our part in enabling wealth addicts to exert so much influence over our country.

This is a powerful piece, an inside voice admitting that derivatives traders “don’t really do anything”, and that an insatiable “wealth addiction” (and the political clout it buys) drives a widening income gap in this country. The idea that much investment “doesn’t really do anything”, that it is speculative rather than true investment, is not a new concept. In fact, the concept was laid out eloquently by John Maynard Keynes in “The General Theory of Employment, Interest, and Money“:

It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence.

Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.” 

This was written in 1936 in the context of post-Great Depression financial regulation, long before technological changes such as the internet and mass-deregulation created a risk-seeking “too-big-to-fail” financial sector which nearly destroyed the global economy in 2008. One can imagine what Keynes would have to say about the financial sector–and the inadequate regulatory response to the Great Recession–we experience today!

The top his risen due with the help of financial deregulation, enabling a “wealth addiction” by canonizing those selfish (or at best ignorant) enough to pursue such ends. This, coupled with the bottoming out of the lower end of the economic pyramid, leads to gross inequality. Inequality distorts our legal and political system, which leads to self-perpetuating social immobility; those at the top stay at the top (and continue rising), while those at the bottom stay at the bottom (an inter-generational poverty trap).

But how could we let this happen to America, once a “beacon of hope”? Wouldn’t our democratic system have stopped this from happening?

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THE MIDDLE (bachelors and graduate degree earners):

It is indeed perplexing how we got into this mess, given America’s democratic system. Part of the explanation is that we canonize the rich–we want to be them, we don’t want to regulate them. We also vilify the poor–they are lazy, undeserving, and are responsible for the majority of anti-social behavior (crime, drug use, etc.). “We” here is the middle class, the last faction of American society where social mobility and meritocracy exists (to a certain extent).

Middle class families can afford the necessities needed for “equality of opportunity”, even if they cannot afford great luxuries. They earn college degrees and go on to make living wages. These workers still see a connection between productivity and compensation. An income of $50,000/yr is probably related to the amount you produce. Perform well and there is a promotion in it for you; you may even “make it to the top”!

To paraphrase John Steinbeck: “Socialism never took root in America because the poor see themselves not as an exploited proletariat, but as temporarily embarrassed millionaires”

Those at the top receive more than they produce, so why complain (however they do get defensive anytime someone proposes a common sense regulation)? Those in the middle earn roughly what they produce, and have a reasonable belief they will make it to the top; you don’t want to regulate what you one day aspire to be! Those at the bottom–well fuck em’ they’re lazy drug users!

How have those at the top succeeded at winning the PR war on income inequality? The best explanation I have heard comes from Matt Taibbi’s book “Griftopia”. In this book, he tells a story of local level governance which is overrun by regulations (he uses an example of a bureaucracy ramming affordable housing down a communities throat). Knowing that middle-class people experience over-regulation at the local level, those at the top seize on this “big-government” narrative to drum up support for financial deregulation; they create a narrative of “the poor banker trying to earn a buck”.

This narrative resonates with the middle-class worker who experiences the aforementioned local government over-regulation. It is reinforced by media commentary, which is often a pawn of those at the top (another tool, like political clout, enabled by surplus wealth).  Furthermore, this narrative also vilifies financial regulation as a something which stifles economic growth / cost jobs / lead to higher consumer finance costs (and in this economy, we simply cant afford it!), even though economic theory and common sense suggest that inequality stifles consumption, job creation, and economic growth.

Of course this is a false equality; federal (and international) financial sector regulation and local / state government regulation are unrelated (local governance may well be over-regulated in some instances, but the financial sector is undeniably under-regulated). But unless you have studied the way the government works (which most people haven’t), you have no idea you are being fed horseshit; you hear the word “regulation” and cry bloody murder. Because local governance is often intervening on behalf of lower class citizens, this creates a rift between the middle and lower class, while the real culprits are laughing all the way to the bank (quite literally–they tend to work at banks).

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If this sounds like class warfare, that’s because America is experiencing class warfare.

This post relied heavily on generalizations, there are undoubtedly people in each class of society who do not fit into these generalizations. But in general these descriptions hold (that’s why they’re called generalizations).

This post focused on America; globally the inequality problem is much worse. According to a just-released Oxfam report, the richest 85 people in the world control the same amount of wealth as the bottom 3.5 billion (that’s nearly half the global population!). Recently, UNDP chief Helen Clark spoke about the link between inequality, poverty, and standard of living. Least developed countries experience different problems (extreme poverty, authoritarian / incompetent governance, lack of access to credit, armed conflict, etc.), but these problems manifest themselves in similar ways (poverty, inequality, power imbalances).

The whole world must confront and stop enabling “wealth addiction”, if we hope to realize sustainable human development in the 21st century. We must try, through regulation, taxation, and incentives, to restore the productivity-to-earnings relationship. As inequality becomes more of a “mainstream” issue (it has recently been emphasized by, among others, Barack Obama and Pope John Francis), we can expect to see a larger portion of society begin to champion pro-poor causes.


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Economic Outlook: Europe Addresses “Too Big To Fail” and Speculation v. Investment

Original article

“Finance ministers in Luxembourg will try to resolve one of the most difficult questions posed by Europe’s banking crisis – how to shut failed banks without sowing panic or burdening taxpayers.”

“But France and Germany are divided over how strict the new rules should be, with Paris worried that imposing losses on depositors could prompt a bank run.”

“A draft EU law that will form the basis f discussions recommends a pecking order in which first bank shareholders would take losses, then bondholders and finally depositors with more than 100,000 euros ($132,000) in their account.”

“A central element to ensure the euro zone’s long-term survival is a system to supervise, control and support its banks, known as banking union.

Common rules in the wider European Union are considered a stepping stone towards the euro zone’s banking union.

Agreeing EU-wide norms would address Germany’s demand that European rules on closing banks be in place before the 17-nation euro zone’s bailout fund can help banks in trouble.”

“If agreed, the new EU rules would take effect at the start of 2015 with the provisions to impose losses coming as late as 2018.”

“Britain and France say countries should have the final word in deciding how to close banks and not be tightly bound by any new EU rules.

But Germany, the Netherlands and Austria want regulations that will be applied in the same way across all 27 countries in the European Union. They fear that granting too much national leeway would undermine the new law.

“Some flexibility might be necessary, but it shouldn’t be too much,” Joerg Asmussen, the German member of the European Central Bank executive board, told reporters, arguing that investors need to know the rules of the game. ($1 = 0.7590 euros)”

By systematically imposing losses on investors, the EU is attempting to address the “too big to fail” issue from the demand side.

Combined with preferential rates for long run investments vs. short run investments, and a FTT (which is implicitly higher for short-run investments, as a potential investor is likely to reinvest multiple times, he/she will pay more for many short-sighted investments since he/she is paying for each investment individually), policy changes can funnel money towards “investment” and away from “speculation”.

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Investment v. Speculation

 Keynes: The General Theory of Employment, Interest and Money

“But there is one feature in particular which deserves our attention. It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence. Moreover, this behaviour is not the outcome of a wrong-headed propensity. It is an inevitable result of an investment market organised along the lines described. For it is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence.

Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called “liquidity”. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.”

Keynes’s words still ring true today (even truer really). At the core of the issue is that the term “investment” in a financial sense has evolved in a way that economic policy makers have yet to adjust too. Most “investment” today is little more than rent-seeking speculation.

Consider the following definition from Investopia.com:

“Investment: An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

The building of a factory used to produce goods and the investment one makes by going to college or university are both examples of investments in the economic sense.

In the financial sense investments include the purchase of bonds, stocks or real estate property.

Be sure not to get ‘making an investment’ and ‘speculating’ confused. Investing usually involves the creation of wealth whereas speculating is often a zero-sum game; wealth is not created. Although speculators are often making informed decisions, speculation cannot usually be categorized as traditional investing.”

Don’t want to take my (or Keynes or Investopia’s) word for it? It is not only “outsiders” who believe the financial sector has evolved in a way that is detrimental to society as a whole. Consider the summary of a book recently written by financial guru and pioneer by John C. Bogle:

“Over the course of his sixty-year career in the mutual fund industry, Vanguard Group founder John C. Bogle has witnessed a massive shift in the culture of the financial sector. The prudent, value-adding culture of long-term investment has been crowded out by an aggressive, value-destroying culture of short-term speculation. Mr. Bogle has not been merely an eye-witness to these changes, but one of the financial sector’s most active participants. In The Clash of the Cultures, he urges a return to the common sense principles of long-term investing.”

As I have often advocated, the financial sector needs policy reforms to make it more sustainable–for both society as a whole and for the future of the sector itself in a post-too-big-to-fail world. Policies need to be reshaped to reward the positive externalities of investment,  while holding speculators accountable for the negative externalities of their “investments”.

This will require great political will to overcome the vested interests that the financial sector has secured. It will also require the chasm between investment and speculation to be accepted as common knowledge.

Europe has made strong efforts to “push the needle” on these reforms, with its innovative approach to address too big to fail financial institutions and it’s repeated calls for a FTT. The financial sector cannot continue to thrive to the detriment of society as a whole. The burden of change ultimately falls on the people of the world (surprise surprise), we must elect leaders who possess the political will to make these necessary changes.