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Friday, January 21, 2011
 Stop Calling it a Moral Issue

Topic: Commentary
Paul Krugman recently "penned" an op-ed called A Tale of Two Moralities in the New York Times that was intended to address the ideological divide between so-called "liberals" and "conservatives" on the issue of economic "fairness". What Mr. Krugman did, however, was he perpetuated the single most harmful meme in American economic thought. He framed the debate, as the majority of liberals wrongly do, as a moral conflict between the notion that "it's not right for rich people to be so rich while poor people are so poor" and the notion that "people deserve to keep the money they have earned, no matter how rich they are."
"One side of American politics considers the modern welfare state — a private-enterprise economy, but one in which society’s winners are taxed to pay for a social safety net — morally superior to the capitalism red in tooth and claw we had before the New Deal. It’s only right, this side believes, for the affluent to help the less fortunate.

The other side believes that people have a right to keep what they earn, and that taxing them to support others, no matter how needy, amounts to theft. That’s what lies behind the modern right’s fondness for violent rhetoric: many activists on the right really do see taxes and regulation as tyrannical impositions on their liberty."

Framing the debate in this way and seeing the issues in this way, again, as American "liberals" commonly do, is completely wrong and fundamentally fails to recognize what is really going on in the American economy. Framing the debate in this way is the single biggest reason why, as Mr. Krugman points out, both sides end up talking past each other and the discussion goes nowhere.

What Mr. Krugman has done here, and what most liberals do when they talking about economic inequality in moralistic terms, is grant a starting assumption that the underlying economic system is fair in the first place, starting from the basis that the incomes of the super-rich are in fact "earned". Instead of challenging the fundamental validity of incomes in America, they grant the presumption that incomes are fundamentally valid, and then go on to claim that people who "earn" huge incomes should "be nice" and "give" some of their "earnings" to "less fortunate" people.

But all of this is complete nonsense.

The fundamental reality is that #1) the incomes of the super-rich are not earned and #2) there is a direct relationship between one's income and the benefits that one receives from society, such that the higher one's income the greater the benefits that one receives from society. Thus, there is an obligation to pay an increasing amount of one's income toward the funding of public goods the higher one's income is, and when one doesn't, they are in fact freeloading.

Let's start by simply addressing the income issue. The way that Mr. Krugman and most other liberals frame the issue is as follows:

Paul goes out into the woods with his ax and he chops down 2 trees a day, and after he chops down 2 trees he calls it a day and goes home to relax and drink beer. Every week Paul brings his 10 trees to market to sell them.

Peter goes out into the woods with his ax and he chops down 10 trees a day, staying out into the evening to finish his work. Every week Peter brings his 50 trees to market to sell them.

Peter has a much higher income than Paul.

But says Mr. Krugman, it's "not fair" for Peter to have so much more than Paul, so Peter should give Paul some of the money he has earned so that Paul won't be so poor, and if Peter won't give it to him, then we should "rob Peter to pay Paul".

Now you see, the problem we have in American economic discussion is that both the conservatives and most liberals are basing their arguments around this exact scenario. When economic conservatives talk about fairness and about redistribution, what they do is they frame the economic discussion around the scenario that I just provided. They frame the issue as two people who have equal types of incomes and equal opportunities, where one is just a harder worker and thus has a higher income purely because of their harder work, and thus it wouldn't be fair to take from Peter to give to Paul.

If you start with those assumptions, then the conservatives are exactly right. In the scenario that I just provided it would be unfair to take from Peter to give to Paul, in fact even Karl Marx would agree that it would be unfair to take from Peter to give to Paul.

In the scenario that I just provided, the income inequality is a product of fairness, and making the incomes more equal would require "redistribution". This is exactly what conservatives go on and on about.

The problem is that the economic framing of the debate by conservatives, which most liberals, including Mr. Krugman, just blindly go along with, is complete nonsense. That's not how our economy works and that's not the root cause of the vast income inequality that we see in America.

In our economy the major causes of economic inequality are not simply the differences in productivity of individuals. It's not that someone with  an income of $40 million a year works 1,000 times harder or is 1,000 times more productive than someone with an income of $40,000 a year.

To claim that is to claim that a single movie star or CEO or hedge fund manager creates as much value as 1,000 school teachers or construction workers or nurses etc. Certainly we can easily agree that there is no person on earth who can work thousands of times harder than an average full-time working person, that simply is impossible, so differences certainly can't be chalked up to a matter of effort.

If we agree that a doctor with an income of $400,000 creates about 10 times more value than a plumber or a school teacher with an income of $40,000, and we agree that doctors are among the hardest working and most highly trained professionals in our society, it is hard to conceive how a doctor, whose income is only 10 times higher than a plumber (which perhaps seems about right), still has an income tens of thousands of times lower than those with the highest incomes in America. There are individuals in America with single yearly incomes in the $4 billion range (hedge fund managers). That would be to say that someone with an income of $4 billion in a single year contributed as much value to our society as 10,000 above average doctors. Is that believable to you? It certainly isn't to me.

What would benefit America more, 1 more super hedge fund manager, or 10,000 more doctors? What do you think?

Once you realize that incomes in America are not fundamentally tied to actual value creation, and that  incomes, especially of the super-rich, are often grossly disproportionate to actual contributions, this means that there is a tremendous amount of "redistribution" taking place within the compensation system in the economy in the first place and the overwhelming majority of that redistribution is a redistribution from the working poor and middle-class to the super-rich.

The question then becomes: how does this happen and what are the mechanisms?

The answer to this question will explored in depth in my upcoming article on American capitalism, but the basic answer is fourfold: through the inherent mechanisms of capital ownership that capitalism is founded on, through market distortions in the economy via mechanisms such as monopolistic power, asymmetric information, etc., through outright manipulation and favoritism via things like government contracts, tax loopholes and tax evasion, government subsidies, collusion, cronyism, etc., and lastly through differences in social starting points of individuals, i.e. through the advantages that some people and groups start out with vs others, such as whites having generations of accumulated wealth and positions of social power over groups like blacks, where most individuals are born into families of lesser means, who have been families of lesser means for generations going back to slavery, etc.

And so the picture of the economy that we arrive at is not one in which those that are exponentially  more wealthy than the majority are people like Peter, who have exponentially more wealth simply because they have worked exponentially harder than the average person, and created exponentially more value than the average person, but rather the super-rich are orders of magnitude richer than the average person due to redistribution in the first place. Value created by the average person is being redistributed to the super-rich to start with, and the super-rich are super-rich not just because they "worked harder", but also, and in some cases only, because we have an economic system that funnels value created by the many to the few, with various levels of distortion and redistribution, such that super-rich individuals have received varying levels of "unearned" wealth through the system.

It is important to note here that we do have a "semi-meritocratic aristocracy", which is to say that the aristocrats are not all completely undeserving of their wealth (some of them are), most of them have made real contributions and have earned a meaningful portion of their wealth, it's just that the rewards are amplified beyond even their actual contributions. In the best of cases in America the incomes of the super-rich are amplified only by the mechanisms of capital ownership and nothing else, but even this alone is very significant. It means that while the difference in contribution between the richest 0.1% and those at the 98th percentile is actually more like 5 times or 10 times, the difference in reward between the richest 0.1% and the 98th percentile is more like 100,000 times.

It's as if someone who comes in first place in a competition for cutting logs cuts 10 logs in an hour, and the one in second place cuts 9 logs in an hour, and the value of each log is $100, but the first place competitor receives a reward not of $1,000, but rather a reward of $100,000, while the second place person gets a reward of $900, and the person in 3rd place gets $500 for their 7 logs, and everyone that came in under 3rd place gets something between $10 and $50, but the value of their logs is what's used to pay the first place winner. Yes, the first place winner did do the best job, but nevertheless his reward is actually grossly disproportionate to the actual difference between his performance and everyone else, and that disproportionate reward is enabled by taking the value created by the majority of the people and redistributing it to the first place winner. And again, this is assuming the best case scenario, where there are no market manipulations, there is no collusion, no tax evasion, no government favoritism, and the winner wasn't born on 3rd base to start with, etc.

So now that we've covered the inherent biases in the American income system in the first place, let's move on to issue #2, which is who benefits the most from society and thus has the greatest the obligation to pay for public goods.

What many conservatives would have us believe is that the poor receive the most benefits from society and from the existence of government and public institutions, and that the wealthy are victims of society, whose individually created wealth, which they would have even independent of society, is taken from them to subsidize the lives of those with lesser means.

This Ayn Randian view is completely upside down, and it is quite easy to demonstrate how this is so, even if we disregard what has just been said about incomes and we assume that all incomes are fully earned. The measure of the benefit that one receives from society is the difference between one's condition within that society and what one's condition would be if they lived alone in isolation, as if on an island.

From this perspective, clearly the condition of the homeless is hardly different within society than if they lived alone, indeed in some cases the homeless would be better off without society. In other cases they may be dead without society (as would many people), but regardless, the level of their wealth would be little changed in any event. In other words, the homeless have essentially nothing to lose from the dissolution of society and receive very few benefits from its existence.

As we go on up the ladder it is apparent that the more wealth one has, of course the more one has to lose from the  dissolution of society. Those that would be hurt the most from a total collapse of government would be the wealthy, those that would be hurt the least would be the poor. If America defaulted on its debt, if our money became worthless, if the rule of law were to become null and void, it's not the poor who would suffer most, it is the wealthy, whose property rights would then be meaningless and whose property would become prey to the force of the masses.

But even more than that, there is a direct relationship between the benefits that one receives from society and one's income. Generally, the higher one's income the more that income is dependent upon a larger array of economic transactions and public goods.

Let's take Bill gates for example. Bill Gates' income is, and was, hugely reliant on American public education. The products of his company (Microsoft), are only valuable to a literate and educated society. Given that roughly 85% of Americas are educated in public schools, the literary and general education of those Americans is a product of public resources. Given that Bill Gates arguably benefits more from the institution of public education than any single individual in America, since without it the products produced by Microsoft would be largely worthless, Bill Gates has an obligation to pay a larger portion of his income to support public schools than those with lesser incomes. (Even Bill Gates himself acknowledges this)

And this gets to a key point: Many people think, "Well if I don't have kids in public schools then I shouldn't have to pay taxes to support them." Wrong, because everyone benefits from public schools, whether you have children in them or not, and again, those with higher incomes are receiving the highest benefits. This goes for all public goods, not just education. Public infrastructure, law enforcement and emergency services, military power, regulations, etc.

Even when we look at a small business, the dependence on public goods is apparent. Let's take a local clothing sore for example. The existence of public schools means that the business owner is able to hire employees that already have some basic level of skills, such as being able to read and do at least basic math, etc. Public education also raises the productivity of others in society, thus raising their incomes, thus giving them resources to spend on the goods that the store owner sells. The existence of roads and rail lines all around the country are needed in order to ensure that the goods for the store can be shipped there. The existence of local roads allows employees and customers to come to the store. The existence of banking regulations ensure that the financial transactions and holdings of the company are reliable and insured. The existence of other regulations ensures that the store owner can have some confidence that problems with products will be minimal and that certain types of problems can be legally taken up with the suppliers with an expectation of resolution. The legal system again insures that transactions and ownership of goods can be enforced by the state. Police and emergency services provide a secure environment that reduces the risk of theft and assault, etc.

So there are all kinds of benefits from public goods, just for the proprietor of a local clothing store. The variety of public goods and the extent of their benefit generally scales up exponentially with income. The extent to which a corporation like Wal-Mart, and thus Sam Walton and his heirs, and Wal-Mart executives, etc. benefits from public goods is tremendous, far more than say, a local plumber. Wal-Mart is hugely dependent upon the national infrastructure for shipping, the vast majority of their employees have a public school education, regulation of food and product manufacturers reduces the liability for goods that they sell, like all businesses they are huge beneficiaries of a regulated and relatively secure financial system, they are beneficiaries of law enforcement systems, etc.

Yes, virtually all of us benefit from these things, but the degree to which one benefits from them generally increases as one's income increases. There are essentially no examples today where an individual produces increasing amounts of wealth independent of society and independent of interaction with all of the public goods provided by government.

When a higher portion of one's income is not paid toward the funding of public goods as one's income increases, this is in fact freeloading. Since the benefits an individual receives from public goods increases with income, if higher portions of income aren't paid to fund those public goods then individuals are receiving benefits that they aren't paying for. In fact, this is also a significant reason for growing income inequality in America today. Not only are the super-rich receiving undue income via redistribution from the working class, but they also aren't paying enough taxes to pay for the benefits they receive from public goods, so they are getting too much income and paying too little in taxes to support the public institutions that they benefit from. Thus 99% of the population is heavily subsidizing the super-rich on both ends of the ledger.

The income of every single super-rich individual in America today is or was a product of collectively created value. Throughout all of human history, vast wealth has always been the product of collective labor, and those who owned vast wealth were always recipients of the products of collective labor. This was true of the Egyptian pharaohs, the Roman emperors, and the medieval Kings and Barons. No individual can create vast wealth, it requires a society and hundreds, thousands, or millions of people working together to do it. Any time that an individual possesses vast wealth, whether thousands of years ago or today, it is through a system of redistribution, where wealth created by thousands or millions of people is transferred to a few.

What has been true in every human era is that some small number of individuals, by one means or another, has found a way to confiscate value created by the majority and transfer it to a ruling minority, and nothing has changed today.

"Liberals", "progressives", "leftists", whatever, have to stop treating the issue of economic inequality as a "moral issue", and start treating it as an issue of justice. Yes, justice and morality are highly related, but it has to be made clear that the issue is not that it's immoral for some people to be rich while others are poor, the issue is that the wealth of the wealthy is unearned in the first place, and the wealth of the super-rich is a product of redistribution from the working poor and middle-class to begin with.

What we have to be clear on is that we are not saying that we should rob Peter to pay Paul, what we are saying is that Peter is currently stealing from Paul to begin with, that's why Peter is so rich. We demand putting a stop to the robbing of Paul to pay Peter! (Actually in the example scenario with Peter and Paul no one is robbing from anyone, but in this context I'm equating Peter to the American super-wealthy)

The problem we face is that any time this argument in made in America the discussion killing reply is simply that anyone making such an argument, "is a Marxist," end of discussion. When such an argument is made the reply is: CLASS WARFARE! MARXIST! MARXIST!

But the reality is that it doesn't matter. These are the facts and you can't allow the the debate to be framed on a false premise that completely obfuscates the economic realities and the fundamental basis of economic inequality just to avoid being called names, but yet, that is exactly what "mainstream liberals" have done in America over the past  30 years, and it's one of the major reasons why the case against growing economic inequality in America has had such little traction with the American public.

The majority of the America public still sees arguments against the current level of economic inequality in America the way that Mr. Krugman portrayed it: As arguments that it is simply "not fair" for some people to be so rich while others have less, thus we should "rob from the rich to give to the poor."

As long as that is how the case against economic inequality is perceived, there will never be actionable support for addressing the fundamental injustices in the American economic system and for taking action to substantially reduce economic inequality.

Stop calling economic inequality a moral issue. Stop saying we should take from the rich to give to the poor, and make it clear that it is the super-rich who are stealing from 99% of the population right now. What we demand is not to redistribute the wealth from rich value creators to poor leaches, but to stop the on-going redistribution of wealth from the working-class value creators to the wealthy leaches.


Posted by rationalrevolution.net at 2:39 PM EST | Post Comment | View Comments (8) | Permalink
Updated: Friday, January 21, 2011 4:00 PM EST
Monday, January 17, 2011
 Dr. King : Great American Thinker

Topic: Commentary

There are plenty of articles about Dr. Martin Luther King Jr. so I'll keep it short here on this Martin Luther King Day. Dr. King is often accused by his detractors of being an anti-American, a communist, a Marxist, etc.

This isn't true, but what is true is that Dr. King was a "communist sympathizer", which is different from being a communist. Dr. King studied Marxism and he attended meeting of the Communist Party in America. He spoke out in favor of the Communist side in the Vietnam War.

What Dr. King understood, during the height of America's anti-Communist fervor, was that communist revolutions happened because people were disenfranchised and that opponents of communism had nothing to offer if they did not offer alternatives to ending the disenfranchisement of the masses around the world.

Communism, at the time especially, was of course heavily associated with the Soviet system, and King was by no means any supporter of the Soviets or the Chinese Maoists, but he understood that those revolutions happened, and communist revolutions around the world were happening, because majorities of people in populations around the world were disenfranchised and living in poverty. Dr. King understood that the way to "defeat communism" was to end disenfranchisement, to put an end to mass poverty, and to put and end to economic exploitation, not simply to build more atomic weapons and drop bombs on people.

Dr. King was a great American thinker, he studied Marxism and many systems of thought on revolution, justice and economics, from the secular to the theological, and he developed a truly American perspective that took the good from each of these ideas and left aside those things which didn't fit his American sense of how the world should work.

Yes, of course Dr. King's insights on racism and his actions in the Civil Rights movement are of huge importance, but his real genius is in how he understood and was able to communicate the fundamental roots of injustice that went beyond race, creed, or nation.

Sadly, while aspects of Dr. King's dream for racial harmony in America have come to pass, economic injustice, both as it relates directly in blacks in America, and for the population as a whole, has only gotten worse since the time of Dr. King's passing. American militarism has, at the very least, not been diminished since the days of Dr. King.

Dr. King in his own words from Beyond Vietnam - 1967:

Beyond Vietnam - Time to Break the Silence - 1967 (with audio)

Commentary from Democracy Now (2005) including excerpts from Beyond Vietnam

"It is with such activity in mind that the words of the late John F. Kennedy come back to haunt us. Five years ago he said, "Those who make peaceful revolution impossible will make violent revolution inevitable." Increasingly, by choice or by accident, this is the role our nation has taken, the role of those who make peaceful revolution impossible by refusing to give up the privileges and the pleasures that come from the immense profits of overseas investments. I am convinced that if we are to get on the right side of the world revolution, we as a nation must undergo a radical revolution of values. We must rapidly begin...we must rapidly begin the shift from a thing-oriented society to a person-oriented society. When machines and computers, profit motives and property rights, are considered more important than people, the giant triplets of racism, extreme materialism, and militarism are incapable of being conquered.

A true revolution of values will soon cause us to question the fairness and justice of many of our past and present policies. On the one hand, we are called to play the Good Samaritan on life's roadside, but that will be only an initial act. One day we must come to see that the whole Jericho Road must be transformed so that men and women will not be constantly beaten and robbed as they make their journey on life's highway. True compassion is more than flinging a coin to a beggar. It comes to see that an edifice which produces beggars needs restructuring.

A true revolution of values will soon look uneasily on the glaring contrast of poverty and wealth. With righteous indignation, it will look across the seas and see individual capitalists of the West investing huge sums of money in Asia, Africa, and South America, only to take the profits out with no concern for the social betterment of the countries, and say, "This is not just." It will look at our alliance with the landed gentry of South America and say, "This is not just." The Western arrogance of feeling that it has everything to teach others and nothing to learn from them is not just.

A true revolution of values will lay hand on the world order and say of war, "This way of settling differences is not just." This business of burning human beings with napalm, of filling our nation's homes with orphans and widows, of injecting poisonous drugs of hate into the veins of peoples normally humane, of sending men home from dark and bloody battlefields physically handicapped and psychologically deranged, cannot be reconciled with wisdom, justice, and love. A nation that continues year after year to spend more money on military defense than on programs of social uplift is approaching spiritual death.

America, the richest and most powerful nation in the world, can well lead the way in this revolution of values. There is nothing except a tragic death wish to prevent us from reordering our priorities so that the pursuit of peace will take precedence over the pursuit of war."


Posted by rationalrevolution.net at 10:48 AM EST | Post Comment | View Comments (4) | Permalink
Updated: Tuesday, January 18, 2011 9:37 PM EST
Wednesday, January 12, 2011
 What the 2nd Amendment really means

Topic: Commentary
Given the the discussion around run rights and gun regulation that has sprung up due to the recent shooting in Arizona, I guess I'll chime in on the issue as well.

My view on guns is basically that the public should generally be allowed to own and use guns, but there does need to be significant regulation of the types of guns that people are allowed to buy, and who can buy them, and how they can buy them.

First lets deal with the 2nd amendment. Here is what the 2nd amendment says:
"A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed."
The Supreme Court recently ruled that the 2nd amendment grants "an individual right to bear arms". I completely disagree with this and consider this ruling to be an "activist" position. In fact, the very people who ruled that the 2nd amendment grants an individual right to bear arms are the same people who call themselves "originalists", in other words the so-called "conservatives".

It is clear from the 2nd amendment that the concern of the amendment is not personal use or protection, but rather the objective of the 2nd amendment is protection of "the State". Let's make this clear, the objective of the 2nd amendment is to ensure protection of the government by the people.

Now, one can argue as to whether this was protection of the local state government from the federal government, or whether this was protection of all forms of government from foreign powers, but what is clear is that the purpose of the 2nd amendment is to ensure security of "the State", because the founders were also opposed to standing armies, and thus if the country didn't have a standing army then in needed a "well regulated militia" for national defense.

So as far as I'm concerned, invoking the 2nd amendment to protect an individual's "right" to "bear arms" for personal protection and enjoyment is a completely fallacy and a complete misinterpretation of the 2nd amendment. It requires, in fact, not looking at the original intent of the drafters and signers of the Bill of Rights. The original intent of the 2nd amendment is protection of the State, given that there would be no standing army. That's it.

That doesn't mean that I'm against gun ownership, I own guns myself and have used guns since childhood, but I do not believe that private gun ownership for personal use is a right enunciated in the American Constitution. It's also clear that the right to an abortion is not enunciated in the Constitution, but I'm pro-choice, and I don't think that "health care" should be considered a right either, but I do think that it is in our best interest as a nation of means to provide universal healthcare and ensure that everyone has access to at least basic health care. Just because something isn't a "right" doesn't mean that we shouldn't have laws that allow people to do it, but I view gun ownership more like driving privileges. It should be considered a privilege, but one that is broadly allowed. In fact we already do treat it more like a privilege than a right anyway, since even the most conservative judges agree that we should be able to restrict the right of certain people from owning guns, like certain types of felons and those with mental health problems, so we already treat it like a privilege anyway.

But lets get back to the 2nd amendment and gun ownership. Many supporters of interpreting the 2nd amendment as a personal right to bear arms argue that the intent of the 2nd amendment is to grant citizens the right to "bear arms" in order for the citizenry to protect itself from the government.

Perhaps, but even if that were true, all it would mean is that the 2nd amendment is now obsolete. Firstly, the 2nd amendment grants the right to "bear arms", not the right to "own guns". "Arms" is anything from clubs and knives to air craft carriers and nuclear weapons. How is it that we've settled on equating "arms" to "guns"?

If the real purpose of the 2nd amendment is to have an armed citizenry that can challenge the power of the American government through use of para-military force, then the citizenry needs a lot more than the types of arms that we are currently legally allowed to own anyway. In order to challenge the power of the government we need fully automatic assault rifles, rocket launchers, mines, various explosives, body armor, etc. as just the starting point, if not also control of fighter jets, tanks, and military sea vessels. Given that all of this is illegal for citizens to own right now, we are already in full violation of the 2nd amendment right now under the the interpretation that the 2nd amendment is about arming the citizenry against the government.

And furthermore, if one supports the "original intent" of the founders, and thus the 2nd amendment, then one has to be against standing armies, in which case all backers of the "original intent" of the 2nd amendment should be calling for a complete disbanding of the US military, which I don't see any folks at the NRA, nor other conservatives save a very few guys like Ron Paul, doing.

The reality is that the local police department is already far more well armed than pretty much any citizen could ever be. The difference between personally own-able arms and arms owned by the state is many times greater today than it was 200+ years ago, back when muskets and cannons represented the pinnacles of advanced weaponry.

I don't believe that guns make the citizenry any more capable of taking on the government in America than not having them. After all, look at Europe, where there are far less gun rights and far fewer people own guns, and yet the citizens challenge the government a lot more than we do here in America. In fact in many ways having so many guns reduces our propensity to engage in protests and mass movements for the same reason that the nuclear arms race deterred war during the Cold War. People don't want to take to the streets in America because there is a greater threat of violence due to all the guns, so instead we protest less (among many other reasons). Having guns just invites more use of force by the government, and a greater threat of force by citizen opponents, so in fact the real effect of all these guns isn't to empower people, its just the opposite.

If we are going to address the gun issue we have to be realistic. Fantasies about armed citizen revolts against the government are just that, fantasies, and in many ways those fantasies only serve to weaken our real resolve to petition the government and bring about change through political power. We need to stop thwarting needed gun regulations out of the fantasy that by allowing people to have a few extra rounds in their clips or that by allowing people to have some assault weapons we are actually protecting democracy, we aren't, we are just pretending.


Posted by rationalrevolution.net at 7:39 AM EST | Post Comment | View Comments (11) | Permalink
Tuesday, January 11, 2011
 Collecting Coconuts

Topic: Semi-random Thoughts

Jane, Jim, Suzy, Bill and Bob live on an island. They need to collect coconuts for food. In order to spur competition they decide that at the end of the day, whoever collects the most coconuts will get half of all the coconuts collected.

Jane collects 4 coconuts
Jim collects 6 coconuts
Suzy collects 8 coconuts
Bill collects 10 coconuts
Bob collects 12 coconuts

At the end of the day, Bob has collected 3 times more coconuts than Jane, and 1.5 times as many as the median (8).

Everyone puts half of their coconuts into the pool and keeps the other half. This puts 20 coconuts into the pool and leaves Jane with 2 coconuts, Jim with 3, etc. Since Bob gets the half that went into the pool, Bob ends up with 26 coconuts to Bill's 5. Bob now has 6.4 times the median (4).

Jane has 2 coconuts
Jim has 3 coconuts
Suzy has 4 coconuts
Bill has 5 coconuts
Bob has 26 coconuts

The competition did encourage people to try harder, thus resulting in more net coconut collection than if there had been no competition, however, it's likely that everyone except Bob ended up with fewer total coconuts at the end of the day.

Bob likes the competition and chides the others for being such inferior coconut collectors. Bob touts his superiority by noting that he has "earned" more coconuts than all of the rest of them combined. Bill notes that if everyone would try harder, they could all be like Bob.


Posted by rationalrevolution.net at 10:51 AM EST | Post Comment | View Comments (6) | Permalink
Updated: Wednesday, October 26, 2011 7:29 AM EDT
Monday, January 10, 2011
 Why there won't be an economic recovery

Topic: Commentary

There are plenty of people predicting an upturn for the US economy in 2011, and the basis for most of these predictions has largely been growing retail sales and modest increases in hiring. I've learned my lesson on trying to be too precise with timing, I thought that we were going to have a major economic recession around 2006-2007, but that didn't happen, despite the fundamentals showing that it should have happened, because of a massive credit bubble which I had underestimated.

However what I do know is this, whether there is some modest "improvement" in 2011 or not (what exactly defines improvement?), nothing in current economic policy or conditions is paving the way for long-term economic recovery, in fact just the opposite.

People keep talking about how it could take a decade to "recover" the jobs lost during the 2008-2009 recession, but to be honest that assumes that there is any recovery at all, and I see no reason at this point to believe that there will be any such recovery at all. At the rate we are going I would predict higher unemployment rates 5 years from now than we have today and major economic collapse. That may not happen, but it won't be because of anything that's happening right now. If that doesn't happen it will be because of a change of course in American economic policy. Without a major change of course there isn't going to be any recovery. The whole reason that many people saw the election of Barack Obama as a major relief and believed for about 6 months that his election would improve the state of the American economy was the belief held by many people that Obama was going to bring about the needed change in course in American economic policy, but it now becomes more evident every day that Barack Obama is not going to bring about such a change in course, and that in fact he is doubling-down on all of the failed economic policies of the past.

What makes Barack Obama even more dangerous to America than a president like George W. Bush is that Obama is able to push through much more devastating policies with less opposition, or at least with less properly directed opposition. The loudest opposition to Obama's policies is largely misdirected opposition from the so-called "right" which is easily debunked, even if it is politically powerful, but meaningful opposition from Democratic voters is muted at best.

Had George W. Bush pushed the same exact health care "reforms" that Obama signed into law Democratic voters would have been outraged, and would have been outraged with coherent arguments against the "reforms", namely that the healthcare changes do little to actually reduce costs but largely shift the burden of costs from the government to individuals (that's how it reduces the deficit) and that it further intrenches the role of private-for-profit insurance in the system instead of reducing it, etc., etc. But Barack Obama was able to get away with this, and this anti-progressive "reform package" is largely defended by Democratic voters and talking-heads.

As Obama continues to put the heads of Wall Street in charge of American agencies and pushes through tax cuts that that heavily benefit the wealthy, as his "stimulus" efforts continue to rely on tax cuts and "trickle-down" economics, as unions and public employees come under increasing attacks, there is very little resistance from Democratic voters, far less resistance than if these exact same policies were being enacted by a Republican president. Obama not only enables greater attacks on the working class than what a Republican would be able to mount without resistance, but he's also setting up a situation where in the future where Republicans will be able to make the same types of attacks and more since the precedents will have already been set, both in the legal sense and in the voting public's mind.

And so the country is now being set on the path of major economic downfall. It is very difficult to understand how and why this is being allowed to happen, but the best I can figure is that it's a mix of pursuit of the short-term economic interests of the politically and socially powerful super-wealthy, especially those in the financial sector , in addition to a mix of truly misguided beliefs in how to improve the economy.

But the plain facts are these: The American economy has been in decline for 30 years, having largely been masked over that period by public and private debt. The Clinton years, which so many Democrats like to tout, were themselves largely driven by debt, speculation, and off-shoring (loss of American capital). Housing prices are still way over inflated. They have been over inflated for 15 years, it was only from 2003-2008 that the most dramatic bubble occurred, but the whole last 15 years has been a housing bubble, and prices will continue to fall in many areas for years to come. It is reasonable to expect that commodity prices will continue to rise for the indefinite future based on global demand and growing scarcity of some commodities, leading to real inflation (not inflation caused by monetary policy). And most important, average wages are continuing to decline.

There can be no economic recovery in America until real incomes for average workers in America rise, and rise significantly faster than inflation. This will not happen until the forces driving income inequality are reversed, and there is nothing in any foreseeable economic policies over at least the next 2 years, and possibly not even over the next 8 years, that will bring about that change.

The most likely scenario at this point, based on what's coming out of Washington and the corporate media, is that there will be a loss of living standards for 90% of the American population for the next 10 years at least, while income inequality increases and the incomes of America's super-rich become increasingly less dependent on America as they become increasingly tied to the global economy.

The retirement of the baby boom generation is actually one of the few possible things that could bring about some economic improvements on its own, if enough of them leave the workforce to help drive down unemployment rates, but there is essentially nothing in any of the economic polices in place at the moment to actually drive down unemployment, and the message from Washington is essentially that "it's not the governments job to fix unemployment". Every time I hear anyone from the Obama administration talk about unemployment, there message is that "it will take a very long time for this to work itself out". Well, that would be true if the same approach had been taken 15 or 20 years ago, but today it's simply never going to work itself out, it's not going to happen, and it doesn't have to take a long time anyway. We could cut unemployment down to 6% or 7% if we wanted to with the proper policies, but they aren't going to do it, and it becomes more and more clear every day that there is no force in the American public sector that can stand up to the interests of the super-rich and that no policies will be pursued to improve the American economy if those policies require any sacrifice on the part of the super-rich, who have not only stolen trillions of dollars from the working class over the past 30 years, but who are still stealing from the working class today. We haven't turned any corners over the past 2 years, in fact all we have done is strengthen the hand of the very forces that are destroying the American economy and further entrenched the country on the path that has brought about our current conditions.

It appears thus far that the voting public is sufficiently confused, misled, and demoralized to prevent any major change of course in economic policy being pushed forward by a popular majority. Since it's clear that economic policy in America is dictated by the interests of the super-rich, what I think will most likely happen is that over the next several years conflicts of interests among the super-rich will lead to a push for nominally beneficial changes for the working poor and middle-class. The super-rich are not a monolithic group by any means, either in terms of pure economic interest or in terms of ideology. Right now there are already rifts, with some of the super-wealthy calling for increasing progressive taxation while others lobby against it. Some of the super-wealthy are more dependent upon the American economy for their wealth than others, and some of the super-wealthy, regardless of economic interest, genuinely support a more fair economic system and understand that the burden of paying for public goods should fall more heavily on the wealthy, who benefit the most from those public goods.

But economically progressive changes brought about through the leadership of the wealthy will likely be incremental at best, and will mostly just soften the blow dealt to the working-class, the changes won't upset the order of things. It's quite possible that there will be no efforts for serious economic reform until America's economic decline hits the super-wealthy, and there is a chance that, with sufficient globalization, a significant portion of the super-wealthy could avoid economic decline indefinitely. By the time the will to take action to truly improve the US economy exists, it may be too late to do so.

While I certainly think we should be working for major changes to America's economic system, and support efforts for a progressive/populist mass movement, I am not optimistic about the prospects of such a movement forming and being successful over the next decade, and think that it's far more likely that the next decade will be a very painful one for the American working-class, with little or no improvements in economic conditions for the vast majority of the American population.

Until capital ownership becomes less concentrated and the share of national income going to bottom 80% of the population increases, there will be no meaningful economic recovery. I don't foresee these things happening for a long time, if ever...


Posted by rationalrevolution.net at 11:27 AM EST | Post Comment | View Comments (2) | Permalink
Updated: Monday, January 10, 2011 11:38 AM EST
Wednesday, December 22, 2010
 Obama the bipartisan negotiator...

Topic: Semi-random Thoughts

Republicans: "We want to launch all nuclear weapons and blow up the world! We demand that our goals be met!"

Obama: "In the interest of bipartisanship, I have agreed to reach across the isle to put together a centrist bill with our Republican friends and colleagues. In order to sustain school funding at 2008 levels through the end of 2014, I have agreed to a compromise with the Republicans in which we will blow up the world. The bill isn't perfect, and we didn't get everything we wanted, but in the real world you have to engage in a give and take, so I feel that this is the best bill we could get at this time.

Though our schools will be woefully underfunded and will be atomized by nuclear bombs, we are happy to announce that schools will remain funded due to these negotiations and my willingness to reach across the isle and compromise with our Republican friends."

CNN: "Looks like another big win for Barack Obama. Despite grumbling from radicals on the left within his own party, Obama shows a real determination to get things done."

@SarahPalinUSA: "Obamas failure 2 privatize schools shows once again hes a extreme Marxismist"

FOX News: "Once again Barack Obama is showing his extreme Marxist bent, and shows that the Democrats are willing to stop at nothing and won't compromise with the Republicans. He has now forced the Republicans' hand in taking America down the path of Socialism by continuing funding for the public school system.

In other news, the world will be destroyed in 3 days, thanks to Mitch McConnell's successful efforts to bring Jesus back to earth on his birthday!"

"Liberal" Blogger: "Barack Obama's deal with the Republicans to blow up the world in exchange for reducing public school funding is insane! Obviously we should not agree to this absurd demand by the Republicans, can't you see that blowing up the world will kill everyone? The Republican position is extremist and crazy. The president should be speaking out forcefully against the Republican agenda and demanding increased funding for public schools; after all, most Americans don't want us to blow up the world and they do want increased funding for public schools!" 

Robert Gibbs: "President Obama has to do this. If he doesn't nuke the world the schools will not be funded, and the poor and middle class WILL benefit from nuclear exposure.  The radical leftist naysayers will never be satisfied, they are living in a fantasy world."

Random Democrat: "Barack Obama is doing his best. We all need to rally behind keeping public school funding at 2008 levels indefinitely, this is much better than the alternatives. Do you want to let the Republicans win?"

ABC News/USA Today Poll Results: "The bipartisan agreement between Obama and the Republicans is a popular one. 78% of respondents had a favorable view of the agreement, across all party lines*.

*Poll questions:

1) Q: Do you support president Obama's centrist bipartisan agreement with the Republicans to continue funding for all American public schools? Results: 78% Yes; 15% No; 7% Unsure

2) Q: Do you you think we should launch all nuclear weapons to destroy the world? Results: 93% No; 3% Yes; 4% Unsure

3) Q: Do you think that American public schools should receive A) More funding B) Less funding C) Funding should remain at 2008 levels? Results: 86% A; 8% B; 6% C"


Posted by rationalrevolution.net at 7:00 AM EST | Post Comment | View Comments (8) | Permalink
Updated: Wednesday, December 22, 2010 2:12 PM EST
Friday, December 17, 2010
 How the Financial Industry Get's So Much Money

Topic: Commentary

There has been some buzz around a recent article by Tyler Cowen, The Inequality that Matters.  It is a decent article and makes some good points, but ultimately it misses the mark in my opinion.

The most obvious error made is a semantic one, one of my pet peeves, in which Cowen continues to use the term "top earners" and to talk about the super-rich "making" their money, even though the point of the article is that the super-rich aren't actually earning their incomes, or at least this is one "possibility" that Cowen "considers".

Cowen rightly points out that the highest income receivers in America disproportionately come from the financial sector.

"In that same year, the top 25 hedge fund managers combined appear to have earned more than all of the CEOs from the entire S&P 500. The number of Wall Street investors earning more than $100 million a year was nine times higher than the public company executives earning that amount."

But when he tries to provide explanations for their over sized  incomes he comes up extremely short. Firstly, Cowen focuses on the financial sector in relation to other high income receivers implying that the incomes of other high receivers are themselves justified, which they are not. The incomes of corporate executives and celebrities are not justifiable either, as I discussed in the article How Reagan Sowed the Seeds of America's Demise.

But when Cowen tries to explain how those in the financial industry get such huge incomes he falls flat. Cowen's big answers are that investors "go short on volatility" and they use other people's money to gamble. These things are true, but hardly revelations and they don't get to the heart of the issue.

First, when it comes to "going short on volatility", Cowen compares betting against the housing market (which is what many of the biggest hedge fund managers did in 2007 and 2008) to betting that a bad sports team would win a championship, it's not the conventional wisdom so it pays off big etc.

But this really isn't a good analogy. Cowen implies that betting against the housing market was some kind of huge risk or that it took genius to do it or that or that the big payoffs outweigh the losses, etc. This is all nonsense. First of all, it didn't take a genius to figure out that the housing market was going to crash, this was obvious, the only challenge there was having a sense of the timing. But having a sense of the timing isn't so difficult if you are a financial insider who sees the books of banks and knows what deals are being made and is managing the money of the biggest financial institutions. After all lets not forget that John Paulson, one of the biggest profiteers of the housing market crash, is acknowledged to have been involved in picking the the assets going into investment pools setup by other firms, which he was then betting against.

Even though neither Paulson nor the firms that created the toxic Abacus CDO were ever charged with anything, it points to the level of involvement and knowledge that these financial insiders have. They can much more easily time the market than your average guy because they have a far different level of information and are much more closely monitoring the situation, and that's being generous and assuming no funny businesses.

But even that isn't the point and totally fails to get to the root of the matter. The real question is this, why is it that firms like Goldman Sachs are able to reap such huge profits and to pay their employees so highly? In a competitive market profits should be driven down, yet profits for "Wall Street" have been going up dramatically over the past 30 years, most dramatically over the past 10 years. Well, what that tells us right off the top is that we aren't dealing with a competitive market.

What does Goldman Sachs do? Goldman Sachs is an investment bank; their primary function is ostensibly to help clients bring companies public, i.e. to manage IPOs, and to manage mergers and acquisitions, etc. Now, they also do a lot of stuff on the side, like trading and investment banking, etc. The function of the stock markets is supposed to be to help companies raise money via IPOs. That, really, is the sole "economic good" provided by stock markets, the "sharing of capital". However, that isn't where most of the money is made in the stock market, most of the money is made simply trading stocks around, which doesn't generate any real revenue and provides no direct benefit to the corporations whose stocks are being traded.

Now, when it comes to a company like Goldman Sachs, their revenue comes from two main sources: fees paid by clients and profits from trading. The first issue to address is the "fees paid by clients". Based on the level of the profits, the question is, why do clients agree to pay these fees, since clearly Goldman Sachs is skimming a lot off the top? In a competitive market we would predict that competition would come in a drive down prices, but this doesn't happen on Wall Street, the big players are the big players, they have been the big players for a long time and they remain the big players today, and there is very little real competition. Why? I suppose that there are multiple reasons, some of which are based on economic principles and some of which I suspect have to do with the laws on the books, collusion, backroom dealing and personal relationships, etc. I can't speculate on the latter issues, so I'll just stick to the issue of economic principles.

What exactly are stock exchanges? Well actually stock exchanges are the original "social networks". The stock exchanges are essentially the first major predecessors to the internet, and specifically they are the predecessors to social networking sites like Facebook. The value of all social networks and social networking platforms is predominately a product of membership in the network. The networks become more valuable and more attractive the more people join them.

In fact, social networks tend to create natural monopolies, however, our legal system doesn't recognize dominant social networks as monopolies. As discussed in this article Zuckerberg: Non-Evil Non-Genius, sites like Facebook benefit hugely from being the first in the market and then once a slight dominance is established in terms of membership, the membership itself become the most valuable aspect of the platform. People don't join Facebook because Facebook has better features than other alternatives, in fact Facebook sucks in terms of its implementation and user interface and user friendliness. As an application Facebook is horrible, it's horribly designed and it's record on user privacy is deplorable, but people use it and flock to it because that's where everyone else is. The membership is the primary draw, and thus Facebook is a type of natural monopoly, just like Microsoft Windows was a type of natural monopoly by attracting enough users to become a standard. Many people adopted Microsoft not because they loved Windows, but because they wanted to share documents with other people who only had Microsoft compatable documents and they wanted to use programs that only ran on Windows, because that's what was being used at work, etc.

But Microsoft won the court case that attempted to define Windows as a natural monopoly, preventing the operating system from being labeled as such, and thus avoiding the regulation that comes along with the designation. The reality, however, is that virtually all of the super-rich are types of natural monopolists. Celebrities are a type of monopolist. Everyone can't be a celebrity for the same reason that when you go to watch a play you have hundreds of people watching a dozen people perform on a stage. Even if everyone in the audience was as good a performer as those on stage, it wouldn't work if everyone started performing in order to compete for attention, it only works when a few people have the attention and the majority observe.

If incomes and profits get very high for auto-mechanics then more people will become mechanics, increasing competition and driving down profits and incomes. Celebrities have huge incomes, so why don't market forces result in more people becoming celebrities, thus driving down the profits of celebrity? Because celebrity is a form of natural monopoly, and so is social networking, and and stock exchanges are a type of social network and so are investment banks.

Goldman Sachs reaps huge profits, so why don't market forces result in there being more investment banks who compete against Goldman Sachs and drive down prices, thus reducing profits, which, as Adam Smith outlined so long ago, is the whole point of markets in the first place, to drive down profits and thus increase the social good?

Because a part of investment banking is social networking and once dominant social networks are established their momentum can be  nearly unstoppable and the barriers to entry for competition are nearly insurmountable. The problem is that these types of businesses aren't widely acknowledged as natural monopolies, but they are. Most acknowledged natural monopolies today are things like utility companies and toll roads.

But that isn't the whole story. In terms of revenue from clients companies like Goldman Sachs have an advantage because they are natural monopolies, or natural oligopolies, and are thus able to extract rents for their services due to the power of the social network that they are able to tie clients into. However they also receive a large portion of their revenue from trading. People greatly misunderstand the revenue generated from trading by large institutional traders and investment banks.

The biggest misconception is the fact that most people don't understand just how unlevel the playing field is between professional traders and the average guy. This isn't like the difference between professional athletes and the average guy, the biggest advantages of the professional trader, especially today, have nothing to do with the natural abilities of traders and have everything to do with the information and tools at their disposal.

First lets take the example of the old school floor trader for the New York Stock Exchange. Floor traders are able to trade on their own accounts, and before various rule changes, including the adoption of decimal pricing instead of fractional pricing, floor traders were able to essentially make no lose deals. Floor traders were, and are in the NYSE, responsible for making the transactions when someone wants to buy or sell a stock (or whatever instrument these days). Let's say that you put in an order to sell your stock at $23.25, and the floor trader got this order, and they saw someone who wanted to buy that stock for $23.75. The floor trader could use his own account to buy your stock from you at $23.25, and then turn around and sell it to the other guy for $23.75, pocketing 50 cents a share on top of his commissions in the process.

Doing this wasn't a matter of being any kind of market genius, it was simply a matter of being able to see all the cards on the table, and it was an easy way to make money. Technically they aren't supposed to do that type of stuff anymore, but we are in a new era of sophistication now. Even without engaging in those types of obvious abuses, traders have a level of understanding of the market activity that the average person doesn't.

But, that was the New York Stock Exchange, which famously had/has all of those traders down there on the floor yelling and making deals. Then came the NASDAQ, and what sets the NASDAQ apart from other exchanges is that the NASDAQ is an all electronic exchange. There are no floor traders, all of the trades are executed electronically, which eliminates middle-men and thereby reduces the overhead cost of executing trades, and it also was supposed to address issues like traders gaming the system.

Ahh, but it hasn't. Now we have something called high-frequency trading, which effectively does the same thing as what the guys on the NYSE used to do, but now it is in fact much much worse, for now it's automated and essentially constant and automatic and all of the investment banks do it.

When you submit an order to buy or sell a stock on the NASDAQ your buy or sell price is supposed to be hidden information that the other party cannot know. If you submit an order to buy 100 shares at $23.75 for example, and there is also an order out there to sell 500 at $23.25, then the way it is supposed to work is that you buy 100 of those shares at $23.25, you get the best price available. The "person" selling at $23.25 doesn't know your price and thus doesn't know that they could have changed you more, etc.

This is where high-frequency trading comes in. Investment banks have computers that do nothing but sit there all day submitting bogus transaction requests. They submit orders to buy and sell stock every fraction of a second basically probing the asking prices in the market, which they aren't supposed to be able to know, but what they do is they submit fractionally higher and lower bids very quickly and then when one is accepted they cancel the transaction, this lets them know the asking prices of the bids in the market. Then once they have determined the spread on selling and buying prices of different bids, they step in and buy a block of shares at one price then sell it immediately to the other person at the other price. So, in the case of someone wanting to sell for $23.25 and someone wanting to buy for $23.75, computers would submit transactions to find those limits, then buy at $23.25 exactly and sell at $23.75 exactly, keeping the 50 cent spread themselves. It's a no lose transaction, there is no speculation taking place, there is no risk, and there is no real allocation of resources. The investment bank just steps in and extracts a fee for doing nothing and its stepping in benefited neither side of the deal, it's purely parasitic. And these large institutions have these programs running all the time, they are unmanned, there is no real strategy or anything it's just a pure profit machine that provides no benefit to anyone other than those running the programs and it serves as an added tax on the investors making the trade.

And this is just one aspect of how these banks are now using computers to engage in trading systems that are effectively just gaming the whole system. And make no mistake, the recently passed financial reform legislation that was passed by the Democrats does nothing to address these issues and doesn't tackle high-frequency trading at all.

But what really makes all of this work and makes the profits for those in finance so high, is the giant pool of money that they operate on. That giant pool of money is what has been created by the rest of society, including Americans and foreigners. Those in the financial institutions are getting hugely wealthy because the giant pool of money produced by the rest of society has grown rapidly and those in the financial institutions are getting a cut out of it, largely by using "heads we win, tails you lose" techniques both in terms of high-tech trading systems and of course in terms of government backed subsidies, in addition to the natural monopolies enjoyed among the various components of the financial system, from the stock exchanges to the highly connected investment banks. It is the collective production of society that has produced the wealth, not these bankers, hedge fund managers and traders, and yet they are the ones reaping the rewards by extracting massive rents on the system.

There are theoretical ways that the entire financial system could be radically changed however, in ways that would effectively eliminate the rent seekers. First is the stock exchanges themselves. As I said, stock exchanges were really the first major social networks, the first major predecessor to the internet, but guess what, now we have the internet, we don't actually need stock exchanges anymore. The whole point of a stock exchange is to serve basically as a giant chat room that allows all of the buyers and sellers of stocks to transact in a single market. Technically when you buy stock you have a certificate. You could go out on the street and sell that certificate if you wanted to, but we don't do that because out on the street you have no idea what other people would be willing to pay for it and you may not find anyone that wants to buy it, so we have exchanges, where everyone who wants to buy or sell "chats" in the same room. The exchange model is over a hundred years old, it made sense when we didn't have the ability to individually connect the way we do now. Now it is a fact that stock exchanges are functionality obsolete, they are totally unnecessary, but they still exist out of moment and regulation. Also note that stocks and other assets only trade on specific exchanges. Companies pay to get listed on a given exchange, and their stock only trades on that exchange. That could all be eliminated with open standards and the development of full market internet based direct trading where buyers and sellers interact directly with each other without middle-men. It's technically possible now, but clearly there are powerful interests, indeed some of the most powerful and wealthy people in the world, who would not let that actually happen. In this case, protecting the interest of the financial industry and the stock exchanges requires preventing the rise of a freer market system. A freer market without exchanges would benefit stock owners at the expense of the middle-men currently in place who graft off the top of every transaction.

As noted by Lord Adair Turner in What Good is Wall Street, investment bankers and traders are really just glorified utility operators. The objective of financial institutions is to channel capital from individuals and institutions to the places where it can, theoretically, do the most good. You put money into the pot and in theory the activity of those on Wall Street is to allocate your money to the businesses that can make the most use of it, allowing them to produce a return on that capital. That's the theory, and that's describing the activities of Wall Street in the best possible light. In reality most of the activity on Wall Street is just outright gambling with no real economic benefit.

But granting the utility of Wall Street activity, it is effectively equivalent to an operator at an energy company who has to rout electricity and turn on and turn off various power plants in order to optimize electricity usage throughout the day, to rout the electricity to where it is most needed. But do we pay such operators by the amount of electricity that flows through the system each day, are they paid by the kilowatt? No, they aren't, they are paid a wage like any normal worker. Do we pay operators at facilities for large cities exponentially more than operators for smaller areas that use less electricity? No, we don't. Operators for larger regions may get slightly higher pay, but its double or triple the pay of smaller operators at most, we don't pay operators 10,000 times more who work for New York city power companies than ones who work in Arkansas, but when it comes to finances it's a different story.

The scale of the income in the financial industry is directly related to the scale of the economic activity, even though we don't pay power grid operators or water management operators in direct proportion to the scale of the flow through the networks they manage. Given that the financial industry is really a glorified utility, and that they benefit from monopolistic characteristics, the industry should bemuch more heavily regulated, including the use of price controls and major compensation restrictions.

There really is no question that the financial industry is extracting massive rents for, at best, providing no real value, and at worst the financial industry is in fact profiting from causing real economic damage. To argue that the events of the last 5 years, with the near collapse of the financial system and the housing bubble isn't an example of profiting from real and massive damage is to just plain ignore reality.

The massive profits in the financial industry are certainly only made possible by the large amount of real value created by the rest of society, which creates the massive pool of money that the financial industry extracts profits from, but the real question of why it is that competition doesn't drive profits down is the more complicated one. The only answers appear to be that players in the financial industry benefit from forms of natural monopoly, while not being regulated as monopolists, that there is indeed nefarious activity taking place both technically illegal insider trading as well as technically legal forms of insider trading, and the rise of computer driven trading schemes has created true virtual money machines that produce essentially risk free profits throughout computerized trading, which is a complete corruption of the markets. All of this in association with the virtual guarantee from governments that major losses will be propped up by tax payers has resulted in a no lose environment where the big players are able to extract massive rents unchallenged by either competition or the law.

See also: Wall Street by Doug Henwood


Posted by rationalrevolution.net at 7:43 AM EST | Post Comment | View Comments (2) | Permalink
Updated: Friday, December 17, 2010 10:21 AM EST
Tuesday, December 14, 2010
 The Myth of Center-Right America

Topic: Commentary

We have heard for years that America is a so-called "center-right" nation, meaning that the majority of the people favor "moderately conservative" policies. This has been said for decades, and is obviously repeated mostly by conservatives, but even so-called "unbiased" pundits and observers often make the same claim.

See:
Tracking the center-right nation meme
Media conservatives claim America is "center-right," but political scientists challenge reliance on voter self-identification
REPORT: America: A Center-Left Nation
Newsweek: America is a center-right country

There is a fragment of support for this claim, and that fragment of support is that when people are asked to identify their political persuasion as either "liberal", "moderate", or "conservative" more people identify themselves as moderate or conservative than liberal. For example in the 2008 election exit polls, in which there were broad Democratic wins, 22% of those polled identified themselves as "liberal", 44% as "moderate" and 34% as "conservative".

This has been true in America for decades, and though the polling data doesn't go back far enough I suspect that the results of a poll like this would have been similar throughout all American history. Even during the height of FDR's presidency or the JFK years I suspect that more people would have identified themselves as conservative than liberal.

However, these labels don't capture the reality of American's positions on real issues. At the same time that more Americans have identified themselves as "conservative" than liberal, more Americans have also actually favored so-called "liberal" economic positions than conservative ones. Again, poll after poll, going back decades, shows that when questioned on specific issues Americans overwhelmingly favor so-called "liberal" positions, especially on the economy, and yet the even bigger irony here is that many so-called "moderates" call themselves "fiscally conservative and socially liberal".

So what is really going on here? Well, the reality is that America is not a "center-right" nation, America is an economically populist and moderately socially conservative nation. If you ignore people's self-identification and look at where people stand on specific issues what you find is that there is generally strong support for economic populism and there are slight majorities in favor of a modestly socially conservative agenda. The reality is that people don't consider populism to be "liberal", and in truth, it isn't, though so-called "liberals" in America are generally the ones who favor and support economically populist positions.

Most Americans are actually Jacksonian Democrats. Andrew Jackson was born into poverty, was self educated, and rose to become the most powerful man in America through his military conquests, eventually becoming one of America's most popular presidents.

Jackson supported slavery, he waged war against the Native Americans and was engaged in one of the worst Indian Removal campaigns in American history, and he was a macho patriarchal figure, certainly no friend of women in the political sense. But, Jackson was a strong supporter of the little guy economically, as long as the little guy was a white male. Jackson railed against the bankers, he put checks on the power of the northern merchants and financial interests, he was a protectionist when it came to trade, he paid off the national debt, he opposed the electoral college and wanted more direct democracy, and he advocated strongly for the interests of small farmers.

When we look at the issues today what we find is that populist economic positions are overwhelmingly favored across the board in poll after poll. For example:

What is even more remarkable about these positions is that there is virtually no advocacy of any of these positions in the corporate media. There is either no discussion of many of these positions, or the predominate view expressed in the corporate media is opposition to these positions, yet they remain popular. If there was actually visible advocacy for these positions in mainstream media it's likely that support for them would be even stronger.

And yet, when you listen to pundits in the corporate media these positions are labeled "far left" and "radical". It is implied that these are fringe positions, which can't possibly even be considered. This is where we also get into "false centrism". A recent story on NPR provides the perfect example. The false centrists setup a false dichotomy where they declare that "positions on the left and right are extremist", and thus the sensible positions are somewhere in between. They imply that the act of compromise in and of itself produces more popular positions, but that is not true. The most popular position on securing Social Security is to eliminate the taxation cap. Compromise positions that cut benefits and either don't raise the cap at all or only raise it slightly are less popular. The most popular position is to eliminate the cap and make no cuts at all. In fact what bipartisan compromises often produce is not more popular policy, but policies that no one likes, which often end up being subverted to special interests in the process.

Again, a perfect example of this is the recent health care reform legislation passed by president Obama. The majority of people still want to see a "public option" as part of health care reform. Compromise didn't produce more popular or more mainstream legislation, it produced less popular legislation that eliminated a provision that was not only popular, but which was functionally superior as a cost control measure to bring down the cost of health insurance and to provide health insurance for high risk individuals. The "compromise" didn't produce something better, it produced something less popular and quantifiably less effective, serving really only to protect the interests of insurance industry profits.

America is not a "center-right" country, and it has never been. America is and has always been a populist country, for better or worse. What has happened over the past 30 years is a well known tale, the populist vote has been split on social issues thereby dividing the economic interests of the majority.


Posted by rationalrevolution.net at 6:23 AM EST | Post Comment | View Comments (5) | Permalink
Updated: Tuesday, December 14, 2010 7:22 AM EST
Saturday, December 11, 2010
 The Myth of Bipartisanship

Topic: Commentary

We often hear pundits and the president, talking about bipartisanship as though bipartisanship is an inherently good thing and as though the recent decline in bipartisanship is an indicator of some kind of breakdown of the political system.

There has in-fact been a quantifiable decline in bipartisanship over the past 20 years when compared to the prior 50 years, but the reality is that the bipartisanship of the period from the 1930s through the 1980s was an anomaly caused by the process of ideological re-alignment of the two parties.

The image below shows the degree of difference between the two parties based on votes over time.


source: http://www.brendan-nyhan.com/blog/2007/08/the-high-cost-o.html

This next image shows senate voting patterns historically going back to 1857. Follow the link below for more a more detailed look:


source: http://www.duke.edu/~dbs9/senatehistory.html
(Note: I don't agree with the definitions of "left" and "right" in the linked material, its far too simplistic)

People often confuse partisanship with ideology, but these two things are not the same. Partisanship refers specifically to party affiliation, whereas ideology refers to one's political beliefs and motivations. It makes sense for party affiliation to be aligned with ideology, and historically it has been. However, there was a period from the 1930s through the 1980s when there was a high degree of ideological diversity within the political parties, not for any noble reasons and not because there was some kind of growing political consensus taking shape, but because of ideological re-alignments taking place within the parties, largely based on regional shifts in the North and South.

This began, essentially with the rise of wage laborers as a political force and came to prominence with the presidency of Teddy Roosevelt in the early 1900s. Historically American politics has been ideologically divided into two main groups, largely because of the de-facto two party system. That breakdown from the time of the founding up to the beginning of the 20th century was effectively socially conservative economic populism (dominated by farming interests) vs socially progressive economic elitism (dominated by northern merchants and industrialists).

With the rise of industrialization an new class of propertyless worker became significant in numbers, largely in the cities, which were dominated by the Republicans. While the Republicans had traditionally dominated the metropolitan vote, the rise of "wage-laborering" city dwellers gave rise to the need to adopt some level of populist positions to go after that vote. The vote was then split between the interests of farmers, wage laborers, and non-farm business owners. Prior to the last 19th century there were essentially only farmers and non-farm businesses owners, there was no significant population of "wage-laborers", and the rise of wage-laborers in the cities, along with the decline of the number of farmers, setup a battle for this new vote. This created ideological conflict within the Republican party, because now the metropolitan vote wasn't just dominated by the business owner's vote, now the business owners had competition from the wage laborers.

This is what gave rise to the so-called "progressive" movement, the rise of socially progressive economic populism.

Teddy Roosevelt was the first major Republican political figure to come to the side of the wage-laborers and to be a socially progressive economic populist. This began fracturing the Republican party ideologically.

The same thing was happening on the other side as well. The Democrats had traditionally been the economically populist "farmer's party", but with the rise of wage-laborers in the cities, the traditional economic populism of the Democrats found support among the wage-laborers. In addition, many wage-laborers in the cities had recently moved to the cities from farms and came from traditionally Democratic families.

This is what gave rise to the socially progressive metropolitan Northern Democrats, from which FDR sprang. These figures were also socially progressive and economically populist, likewise going after that urban wage-labor vote.

Prior to the Great Depression, however, the parties remained relatively ideologically pure, the Democrats dominating the South and the Republicans dominating the North. But with the Great Depression the solid economic populism of the Democratic party trumped everything, and so blacks from the South who had traditionally voted Republican now voted Democrat out of economic interests, and likewise wage-laborers and small businessmen from the North who had traditionally voted Republican also now voted Democrat out of economic interests. Essentially, everyone who wasn't wealthy, regardless of whether they were socially conservative or socially progressive, voted Democrat.

This mixed the social conservatives and social progressives up into the same party. Now the Democratic Party was a "big tent" on social issues with progressive Northern Democrats voting along with conservative Southern Democrats. However, because FDR was himself a progressive Northern Democrat and because he was in office for 12 years he had a huge impact on the national direction of the party, and it was FDR who sowed the seeds of the Democratic party's transformation from a Southern conservative party to a national progressive party.

From the 1930s through 1970s that transformation was taking place, and as that transformation took place a counter transformation took place on the Republican side, with the Republican party transforming from a Northern progressive party to a Southern conservative party. But both parties retained their ideological roots on economic issues, the Democrats being populists and the Republcians being the party of "big business".

The bipartisanship of the 1930s-1980s was really just a byproduct of this realignment. Due to the fact that it took a few generations for traditionally conservative Democrats to die out or leave the party, what we had from the 1930s to the 1980s were vestiges of the Democrat's conservative past lingering in the party. The same goes on the Republican side, with vestiges of the Republican's progressive past lingering on.

These people still voted along ideological lines. The ideological lines remained just as heavily drawn the whole time, the only difference was that the composition of the parties was changing ideologically.

This is where the difference between cross-party agreement and cross ideological agreement becomes important. We talk about bipartisanship because there is an implication that if legislation can get bipartisan support it must mean that it's not controversial, because "everyone" can agree that it's good. But we can't really compare the bipartisanship of the 1930s-1980s with today, because the parties back then were much more ideologically diverse. What really tells you if legislation is "controversial" or not isn't whether it gets bipartisan support, but whether it has support across the ideological  spectrum, and the truth is that there was just as much division ideologically from the 1930s through to the 1980s as there is now, it's just that the parties weren't as ideologically distinct, because of the period of ideological realignment.

So what does all this mean? It means that going on and on about the bipartisanship of the past is at best largely meaningless, and is generally mis-representative Talking about the bipartisanship of the past implies that there weren't ideological conflicts in the past, which is patently false, there were, and progressive policies had to be fought for along ideological lines. It just so happens that those ideological lines weren't the same as the party lines. There was less conflict between the parties, but there was more conflict within them.

On an additional note, while partisanship is arguably increasing today compared to the past 50 years, both parties could actually be considered more ideologically similar today than they were in the past as well, due largely to the changing balance of power in the American political system. As wealth has become more concentrated among the super-rich, the political power has become more concentrated as well. As a result, both parties are chasing after the same base of power, the interests of the super-rich and the corporations. A major distinction has to be noted. Prior to "The Great Realignment" from the 1930s-1970s American economic populism was rooted in the political power of the farmers. Now, however, having come out of the realignment, that power is gone, there is no longer any base of independent farmers which is politically powerful, since today only 2% of the population are farmers, and most farms are now run by large corporations, making them more like normal corporations than traditional farms in terms of their interests. In addition, the rise of retired seniors has changed the political landscape. The interests of working-class populism now resides among wage-laborers, but wage-laborers are weaker politically than the farmers were, and retired seniors have conflicting interests with working wage-laborers. So unfortunately the forces of economic populism, while still dominate in terms of numbers in America, are politically much weaker. So, despite the return of partisanship, the reality is that the differences between the two parties are smaller today than in the pre-realignment past, with greater fighting over less significant differences and with the differences being more pronounced on less economically impactful social issues.


Posted by rationalrevolution.net at 7:23 AM EST | Post Comment | View Comments (23) | Permalink
Updated: Saturday, December 11, 2010 7:28 AM EST
Friday, December 3, 2010
 Unemployment and Education

Unemployment numbers are out again today and many people are discussing the total unemployment rate of 9.8%, an increase of .2% over the previous month, but the bigger story is in the details. Not only has the total unemployment rate gone up, but it went up even for people with college degrees. The unemployment rate for people with college degrees has historically been lower than for those without, and has remained relatively low throughout the recession, but the numbers for November show the unemployment rate for people with college degrees hitting its highest point in decades, 5.1%.

But the issue is not just that the unemployment rate for people with college degrees has gone up, that is really a symptom of a larger problem. The larger problem is that the difference in the unemployment rate between people with college degrees and those without them has gone up. Back in 2000 the difference in the unemployment rate between those with only a high school education and those with college degrees was 2 percentage points (3.5% to 1.5%). Today the difference is 4.9 percentage points (10% to 5.1%). The unemployment gap between the college educated and those without college degrees has gone up significantly just over the past 2 years.

But its not just the past 2 years. Over the past 30 years there is a bigger trend, with the unemployment rate gap between those with college degrees and not trending up over that time.

The problem here is partly self-induced structural unemployment. Structural unemployment is when there are job vacancies but there aren't enough workers to fill them, and there are workers looking for work but there aren't enough jobs that fit their skill-set.

Now certainly the unemployment problem isn't completely structural in America right now, but it is partly and the structural component of unemployment is essentially completely self-induced, caused in large part by the outsourcing of manufacturing jobs to foreign countries.

Those who defend the outsourcing practices that have taken place in America over the past 30 years have noted that a job that is outsourced doesn't necessarily equal a job lost, because outsourcing itself enables new types of job creation. This is partly true, but it isn't the whole story. When new jobs are created as a result of outsourcing, they obviously aren't the same types of jobs, and typically what happens is that (and I don't have the exact numbers here, no one does) for something like every 5 manufacturing jobs outsourced, one new administrative or sales job is created in America. Those new jobs created as a result of outsourcing typically require higher levels of education.

Many advocates of the "structural unemployment" explanation for the current unemployment crisis argue that this structural unemployment is simply a reflection of the new reality that we "live in a high tech world now" and it requires more education to be able to contribute.

This is completely false. It's not that our economy no longer relies on the contributions of people without college degrees, it's that we have shipped those jobs over seas. Our economy still relies heavily on the labor of people with little or no education. We still consume trillions of dollars worth of goods produced by people with nothing more than the equivalent of a high school education or less, it's just that these people live in India, China, South America, Mexico, Guam, etc.

And the problem now is that as this self-inflicted structural unemployment goes on unabated, it exacerbates economic problems for everyone and contributes to overall unemployment caused by lack of demand for goods and services. But the self-inflicted structural unemployment isn't the only problem, its just one of the components of the larger problem of the declining share of national income going to workers over the past 30 years. There really is no question that the current economic crisis and the current unemployment conditions are caused both directly and indirectly by the wealthy, and that the currently wealthy have benefited and gained a large portion of their wealth via the mechanisms and decisions that have caused the current economic crisis.

How have the wealthy caused the current crisis and benefited from its creation?

1) Over the past 30 years employee compensation as a percentage of corporate revenue has steadily declined, leaving non-executives with an ever smaller share of the value that they create, while funneling an ever growing share of the value created by employees to executives and share holders, whose incomes have exploded over the past 30 years.

2) By choosing to outsource manufacturing and call-center jobs to foreign countries where wages are lower and there are fewer environmental and safety regulations, etc., executives and investors have reaped larger incomes by eliminating American workers and replacing them with lower paid foreign workers while pocketing the difference themselves.

3) The entire mortgage-backed security issue and the sub-prime loans that drove the housing bubble and bust were all engineered by America's wealthiest bankers and financiers, and despite the massive problems caused by these shenanigans, they still profited hugely, in large part due to government bailouts.

Those who believe that a "planned economy" is a bad thing need to understand that the United States has a planned economy right now, but the planners aren't government officials, they are Wall Street investors, who have planned and dictated the form of our economy over the past 30 years, of which  the case of A123 Systems is a perfect illustration. A123 Systems is a company trying to manufacture new high-tech batteries in America, but which was unable to get private investors if they insisted on manufacturing in the United States. They would only provide funding if they agreed to move manufacturing to Asia. Ultimately they received some starting capital from the government to allow them to get started in America, via Obama's stimulus package.

Yes there is structural unemployment in America today, and it is by design, it is a product of conscious decisions made by the wealthiest Americans.


Posted by rationalrevolution.net at 11:37 AM EST | Post Comment | View Comments (1) | Permalink
Updated: Friday, December 3, 2010 11:45 AM EST

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