The beautiful and the damned

[nooby_mcnoob]

Quote from darkhorse:

Read Gladwell's "Outliers" and the specific chapter on New York's garment district for an example of this.

Really interesting discussion about. Totally changed the way I think about certain things.

 

[TGregg]

Quote from denner:

Exactly. The timeline spans decades I'm certain, but by the mid-1990s the real evidence of embedded moral hazard became apparent.

http://en.wikipedia.org/wiki/Savings_and_loan_crisis

 

[tomdavis]

The prosperous middle class of the 1950s-60s was a direct result of WWII.

After WWII, the United States had 4% of the world's population and 70% of the intact manufacturing and transportation infrastructure because all the other major industrialized countries (Germany, Japan, Russia, Poland, etc.) had been decimated in the war. For about 20 years, while everybody else caught up, the United States was the major producer of products in a world with rapidly expanding demand. Worldwide demand for US products drove up prices and workers' wages. By the mid-1960's the rest of the world had caught up. And by the 1980s-1990s China and India came into the picture. The decline of the middle class is largely a result of the rest of the world catching up with us and eliminating the advantage we gained in the aftermath of WWII.

Quote from hippie:

THERE was not a single year between 1952 and 1986 in which the richest 1% of American households earned more than a tenth of national income. Yet after rising steadily since the mid-1980s, reckon Thomas Piketty and Emmanuel Saez, two economists, in 2007 the income share of the richest percentile reached a staggering 18.3%. The last time America was such an unequal place was in 1929, when the equivalent figure was 18.4%. The similarities in the evolution of income inequality in the years leading up to the Depression and the global economic crisis make for one of the most striking parallels between the two episodes. Some talk of a repeat of the Roaring Twenties, when Jay Gatsby threw lavish parties at his Long Island mansion—although this time round, the dubious profits have been made from real-life finance, not fictitious bootlegging.

Economists have been thinking hard about the causes, extent and consequences of the recent rise in inequality. At the annual meeting of the American Economic Association (AEA) in Denver this month, there was a spirited debate about one of the most controversial hypotheses so far. That has been advanced by Raghuram Rajan, of the University of Chicago Booth School of Business, in a recent book, “Fault Lines”. He argues that increased inequality—more precisely, the political response to it—helped to cause the financial crisis.

Mr Rajan reckons that technological progress increased the relative demand for skilled workers. This led to a widening gap in wages between them and the rest of the workforce, because the supply of the skilled did not keep pace with demand. This reasoning is widely accepted. But Mr Rajan goes further than most when he argues that this growing gap lay behind the credit boom whose souring precipitated the financial crisis.

Governments, he argues, could not simply stand by as the poor and unskilled fell farther behind. Ideally, more should have been spent on education and training. But in the short run, credit was an easy way to prop up the living standards of those at the bottom of the economic pile. This was especially true in America, with its relatively puny welfare state.

Mr Rajan thinks, therefore, that it is no coincidence that America in the early 2000s saw a boom in lending to the poor, including those folks that banks used to sniff at. He points to the pressure the government put on the two state-backed housing giants, Fannie Mae and Freddie Mac, to lend more to poorer people. Affordable-housing targets, slacker underwriting guidelines and the creation of new “low down-payment” mortgages were all used as instruments of public policy.

The push for affordable credit worked. Subprime mortgages, whose share of all mortgages serviced rose from less than 4% at the turn of the century to a peak of around 15% before the crisis, were the most visible examples of this. They helped push American home-ownership rates to record highs. But the credit boom also inflated an enormous housing bubble, whose collapse precipitated a financial crisis brought on by defaults on those very subprime mortgages. According to Mr Rajan, therefore, well-intentioned political responses to the rise in inequality that many found disturbing ended up having devastating side effects.

This is a provocative idea. But do the facts support it? Two prominent economists—Daron Acemoglu of the Massachusetts Institute of Technology and Edward Glaeser of Harvard University—argued at the AEA meetings that Mr Rajan’s hypothesis, for all its plausibility, is flawed. Neither critic doubts that inequality rose and that poorer people gained access to more credit. But they disagree with Mr Rajan on the link between the two.

Mr Acemoglu argues that the expansion in credit came far too late for Mr Rajan’s hypothesis. The subprime boom began around 2000. Yet those at the bottom of the income distribution were getting hammered by technological change in the 1980s. Since then, the least-skilled workers in America have not become still worse-off, largely because they work in service industries which are hard to automate. Inequality has continued to rise because the rich have done even better; it is those in the middle who have fared relatively poorly. Why would the state try to help the poorest at a time when they were doing better than before?

Mr Glaeser has a different criticism. He thinks that the role of easy credit in the housing bubble was not as large as Mr Rajan believes. He refers to research by Atif Mian, of the University at California, Berkeley, and Amir Sufi, of the Booth School, which shows that increased mortgage availability pushed up American home prices by only around 4.3%. This was a small fraction of the rise in prices during the boom. Irrational exuberance and a willingness to bet on prices rising for ever were probably much bigger contributors to the bubble than credit expansion.

Let’s all agree to blame the speculators and lobbyists

Mr Acemoglu does believe that there is a link—albeit not a causal one—between increased inequality and the crisis. He thinks both were the consequence of politicians’ willingness to deregulate the financial sector, which partly reflected the industry’s lobbying prowess. A consequence, documented by two more economists, Ariell Reshef and Thomas Philippon, was that salaries in finance soared, causing a substantial part of the explosion in top incomes noted by Messrs Piketty and Saez. Runaway lending and lax standards, which fuelled the boom and contributed to the crisis, were others. So he thinks Mr Rajan is right to focus on politics but that they did not play out in quite the way he believes.

Ultimately it may be hard to prove a causal connection between inequality, subprime lending and the Wall Street boom. Even so, most economists at the AEA gathering agreed that the three forces combined in the American economy in an unsustainable and unhealthy way. To misquote “The Great Gatsby”, the rock of the world was founded securely on a fairy’s wing.

from PRINT EDITION | Finance and Economics

http://www.economist.com/node/17957107?fsrc=scn/fb/wl/ar/econfocus

 

[Scataphagos]

Quote from tomdavis:

"... The decline of the middle class is largely a result of the rest of the world catching up with us and eliminating the advantage we gained in the aftermath of WWII.

Correctamundo!

We've hastened our economic demise by (1) outsourcing jobs to boost the bottom line, and (2) trying to "hang onto" our former economic glory in the face of very stiff competition form Chindia, Latin countries.

The economic "shift towards the West" to Asia was inevitable... but we hurt ourselves by speeding up the shift, not acknowledging it as a permanent, structural change... and overspending.... when we should have been scaling back and husbanding our resources.

 

[darkhorse]

Quote from tomdavis:

The decline of the middle class is largely a result of the rest of the world catching up with us and eliminating the advantage we gained in the aftermath of WWII.

The decline of the unions you mean. America is still surprisingly good at manufacturing -- just tilted towards higher end stuff. And in the 80s the transition began to a service oriented economy. The real trouble is 1) the leverage piled on over the past 25 years, and 2) the parasitic expansion of a self-serving financial sector. Grantham has good stuff on this.

 

[Scataphagos]

Quote from darkhorse:

The decline of the unions you mean.

Unions SHOULD decline... SHOULD BE ABOLISHED! They are little more than legalized extortion.... parasitic blood suckers... even more so for Public Employee Unions.

Reagan's firing of all PATCO members was a great thing.... too bad it didn't catch on throughout the USA.

 

[darkhorse]

Quote from Scataphagos:

Unions SHOULD decline... SHOULD BE ABOLISHED! They are little more than legalized extortion.... parasitic blood suckers... even more so for Public Employee Unions.

Reagan's firing of all PATCO members was a great thing.... too bad it didn't catch on throughout the USA.

They served a purpose in their original incarnation and then grew bloated and corrupt over time, just as any self-interested power structure will without vigilance built into the culture.

 

[Nebuchadnezzar]

Quote from MarkJC:

The notion that the rich continue to get richer and the poor continue to stay poor is a myth and a lie that is perpetrated by those with socialist intents. The truth is completely opposite as the graph below demonstrates:

From 1995 to 2006, the poorest who were in the lowest quintile (lowest %20 of incomes) had their incomes grow 90.5% over that time span. Those in the 20%-40% quintile had their incomes grow 35%. The richest, however, in the top 20% of incomes, only had their income grow 10% over this time period. The richest 5% actually had their incomes decline -7% over this period, and the big kicker - the richest 1% had their incomes fall a whopping -26%.

Below is another way of showing income mobility. This chart demonstrates it not by raw percent incomes but by the percent of people moving from one income group to another over time. Again, the result is the same and the conclusion is inescapable. Those advocating for wealth redistribution are wrong. These graphs suggest that if anything, our hugely progressive tax system is unfairly punishing those in the top income brackets, making wealth accumulation more and more difficult the wealthier the person becomes.

http://www.treasury.gov/resource-center/tax-policy/Documents/incomemobilitystudy03-08revise.pdf

For the purposes of that study (Page 19), the income cutoff for Top 1% in 1996 was $284,603. Do you really think that this type of income is considered to be rich by those who subscribe to the notion that the rich continue to get richer?

Secondly, the page 8 of that same study clearly states, that the top income groups often include a large share of individuals whose income is only temporarily high. Put differently, more than half of the households in the top 1% in 2005 were not there nine years earlier.

The only thing that study illustrates is the hierarchical nature of the wage distribution (there are less jobs that come with higher wages) and the natural increase in wages associated with career growth due to passage of time. In other words, some people's careers grow and they make more money, some don't. Given the finite number of positions that pay wages as broken down by quintiles, some of them would be occupied by some people who made less money before the promotion.

If one considers the meaning of being rich as based on the assets as opposed to the taxable income - the rich are getting richer.

 

[Scataphagos]

Quote from Nebuchadnezzar:

"... If one considers the meaning of being rich as based on the assets as opposed to the taxable income - the rich are getting richer.

And the sun rises in the East... the natural order of things.

So... you think "that's not fair"? You're jealous of the success of others? Why don't you do what's required to become one of the rich? If you did, you'd have a different view of things.

ANYBODY IN AMERICA CAN BECOME RICH... IF THEY ARE WILLING AND ABLE TO DO WHAT'S REQUIRED!!

 

[MarkJC]

Quote from Nebuchadnezzar:
For the purposes of that study (Page 19), the income cutoff for Top 1% in 1996 was $284,603. Do you really think that this type of income is considered to be rich by those who subscribe to the notion that the rich continue to get richer?

$284k in 1996 is equivalent to around $400k today from inflation. A person with that income falls squarely in the highest income tax bracket in the country. Uncle Sam clearly considers these people to be rich. Liberals are constantly calling for higher taxes on the rich "because they can afford them." And by the rich, they are referring to the people in the top income brackets. So the answer to your question is yes.

Secondly, the page 8 of that same study clearly states, that the top income groups often include a large share of individuals whose income is only temporarily high. Put differently, more than half of the households in the top 1% in 2005 were not there nine years earlier.

So? You're ignoring the top 5%. How about the top 10%? Top 20%? The same trend exists in every case. And these aren't all due to "temporarily high incomes." As for the rich becoming wealthier in assets, I would be interested in seeing your evidence of that. Regardless though, it's not as relevant, since the issue here is progressive income taxes and their effects on wealth accumulation.