From Trump to Trade, the Financial Crisis Still Resonates 10 Years Later
By Andrew Ross Sorkin
The depth of financial despair during the Great Recession and the invariably slow recovery have unleashed a sense of bitterness that dominates the political landscape, culminating in Mr. Trump’s electoral victory.
“We are almost at each other’s throats when times are good,” said Ray Dalio, the founder of Bridgewater Associates, the largest hedge fund in the world with some $150 billion in assets, and the author of a new book, “A Template for Understanding Big Debt Crises,” an exhaustive study of financial panics and the policies that both created and rescued them.
The deepest crises, he said, always lead to populism. And it should be no surprise that a crisis leads to conflict and, in some extreme cases, war. “I would be worried about the emergence of populism,” he said, “because populists tend to want to fight with the other side rather than try to find ways of getting through it.” Populists on every side of the political spectrum “have in common that they’re confrontational,” he said.
When I wrote “Too Big to Fail” nearly a decade ago, I knew that the crisis would redefine Wall Street and the economy, but I didn’t appreciate how fundamentally it would redefine the political environment.
Amir Sufi, a professor of economics and public policy at University of Chicago’s Booth School of Business and the co-author of “House of Debt,” pointed to the financial crisis as the source of reduced civility a few months after Mr. Trump’s victory. He conducted an analysis of 60 countries with his “House of Debt” co-author, Atif Mian of Princeton University, and Francesco Trebbi of the University of British Columbia. They found that such a response was “common and predictable,” he wrote.
“Our conclusion: Financial crises tend to radicalize electorates,” Mr. Sufi wrote. “After a banking, currency, or debt crisis, our data indicate, the share of centrists or moderates in a country went down, while the share of left- or right-wing radicals went up in most cases.”
In the United States, the crisis exposed an economy that had been a charade — one that most Americans didn’t understand or appreciate. The use of debt had masked the real problems underneath the surface: a significant decrease in worker participation, automation that would take jobs and stagnant wage growth.
These issues long predated the crisis. But as Warren Buffett famously said, “You only find out who is swimming naked when the tide goes out.”
Global Income Inequality Is Declining
By Marian L. Tupy
The most commonly used indicator of income inequality is the Gini coefficient, which measures income inequality on a scale from zero (i.e., all incomes are equal) to 1 (i.e., one person has all the income). One way to measure global income inequality, explains Branko Milanovic from City University of New York, is to calculate a population-adjusted average of Gini values for all individual countries. As can be seen, the decline in global income inequality started in the 1980s and is coterminous with a period of greater economic freedom and interconnectedness known as “globalization.” This measure of income inequality, let’s call it inequality between countries, is somewhat misleading, however, for it assumes that everyone within any given country earns the same income. To get a sense of inequality across the human race, income inequality between countries has to be adjusted by income inequality within countries. On that measure, global income inequality begins to decline somewhat later – after the beginning of the new millennium. Still, both measures of global income inequality show a downward trend. As such, Milanovic concludes, “We are witnessing the first decline in global inequality between world citizens since the Industrial Revolution.”
What is happening with global inequality?
By Branko Milanovic
The share of income received by the global 1% has also, despite the shrinkage of global inequality, remained unchanged. In 1988, its share was 11.3%; it then increased to around 13.5% in 2003 and 2008 before going back to 11% as the crisis struck the rich economies which “supply” most of the people in the global top 1%. Given that we are probably missing an increasing number of the super-rich or that they are hiding their assets more than in the past, it is very likely that the true share of the top 1% has even increased.
We thus have only apparently paradoxical developments over the past 25 years: on the one hand, strongly rising global median income and the shrinkage of global inequality when measured by the synthetic indicators like the Gini or Theil; but, on the other hand, the rising share of the global top 1% and increasing number of people in relative poverty (mostly in Africa). The last point opens up again the vexed question of lack of convergence of Africa and its growing falling behind Asia (and of course the rest of the world).
So, is the world becoming better, as Bill Gates wants us to believe? Yes, in many ways, it is: the mean income in 2013 is almost 40% higher than in 1988, and global inequality is less. But is there a bad news too? Yes: the same share of the world population is being left behind and the top 1% are getting ever further away and richer than everybody else. So, we have, at the same time, the growth of the global “median” class and an increase in world-wide polarization.
Why inequality matters?
By Branko Milanovic
High inequality which effectively debars some people from full participation translates into an issue of fairness or justice. It does so because it affects inter-generational mobility. People who are relatively poor (which is what high inequality means) are not able, even if they are not poor in an absolute sense, to provide for their children a fraction of benefits, from education and inheritance to social capital, that the rich provide to their offspring. This implies that inequality tends to persist across generations which in turns means that opportunities are vastly different for those at the top of the pyramid and those on the bottom. We have the two factors joining forces here: on the one hand, the negative effect of exclusion on growth that carries over generations (which is our instrumental reason for not liking high inequality), and on the other, lack of equality of opportunity (which is an issue of justice).
High inequality has also political effects. The rich have more political power and they use that political power to promote own interests and to entrench their relative position in the society. This means that all the negative effects due to exclusion and lack of equality of opportunity are reinforced and made permanent (at least, until a big social earthquake destroys them). In order to fight off the advent of such an earthquake, the rich must make themselves safe and unassailable from “conquest”. This leads to adversarial politics and destroys social cohesion. Ironically, social instability which then results discourages investments of the rich, that is it undermines the very action that was at the beginning adduced as the key reason why high wealth and inequality may be socially desirable.
We therefore reach the end point where the unfolding of actions that were at the first supposed to produce beneficent outcome destroys by its own logic the original rationale. We have to go back to the beginning and instead of seeing high inequality as promoting investments and growth, we begin to see it, over time, as producing exactly the opposite effects: reducing investments and growth.
The Hard Truths of Trying to ‘Save’ the Rural Economy
By Eduardo Porter
This is the inescapable reality of agglomeration, one of the most powerful forces shaping the American economy over the last three decades. Innovative companies choose to locate where other successful, innovative companies are. That’s where they can find lots of highly skilled workers. The more densely packed these pools of talent are, the more workers can learn from each other and the more productive they become. This dynamic feeds on itself, drawing more high-tech firms and highly skilled workers to where they already are.
“We have a spatial reorganization of the economy,” said Mr. Muro. “We have an archipelago of superstars in an ocean of low-productivity sectors.”
In hindsight, no amount of tax incentives would have convinced Amazon to expand in a medium-sized city such as Columbus, Ohio, rather than Northern Virginia and Queens,which sit in some of the largest pools of talent in the country. If even medium-sized cities find it difficult to compete, what are the odds that, say, a small town like Amory, Miss., where 14 percent of adults have a bachelor’s degree and a quarter of its 2,500 workers work in small-scale manufacturing, have a chance to attract well-paid tech jobs?
U.S. life expectancy declines again, a dismal trend not seen since World War I
By Lenny Bernstein
Drug overdoses set another annual record in 2017, cresting at 70,237 — up from 63,632 the year before, the government said in a companion report. The opioid epidemic continued to take a relentless toll, with 47,600 deaths in 2017 from drugs sold on the street such as fentanyl and heroin, as well as prescription narcotics. That was also a record number, driven largely by an increase in fentanyl deaths.
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The geographic disparity in overdose deaths continued in 2017. West Virginia again led the nation with 57.8 deaths per 100,000 people, followed by Ohio, Pennsylvania and the District of Columbia. Nebraska, by contrast, had just 8.1 drug overdose deaths per 100,000 residents.
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Most notable is the widening gap between urban and rural Americans. Suicide rates in the most rural counties are now nearly double those in the most urban counties.
Overall, suicides increased by a third between 1999 and 2017, the report showed. In urban America, the rate is 11.1 per 100,000 people; in the most rural parts of the country, it is 20 per 100,000.
A variety of factors determine suicide rates, but one that may help explain its greater prevalence in rural areas is access to guns, said Keith Humphreys, a professor of psychiatry and behavioral sciences at Stanford University.
“Higher suicide rates in rural areas are due to nearly 60 percent of rural homes having a gun versus less than half of homes in urban areas,” Humphreys wrote in an email. “Having easily available lethal means is a big risk factor for suicide.”
Why the global suicide rate is falling
By The Economist
There is no one reason for the global decline, but it is particularly notable among three sets of people. One is young women in China and India. In most of the world, older people kill themselves more often than the young, and men more often than women. But in China and India, young women have been unusually prone to suicide. That is decreasingly the case. The rate among young Chinese women has dropped by 90% since the mid-1990s. Another group is middle-aged men in Russia. After the collapse of the Soviet Union, rates of alcoholism and suicide rocketed among them. Both have now receded. A third category is old people all around the world. The suicide rate among the elderly remains, on average, higher than that among the rest of the population, but it has also fallen faster than among other groups since 2000.
Social change is partly responsible for the falling numbers. Asian women have more freedom and opportunity than before, and thanks to urbanisation fewer have access to the highly toxic pesticides that were once the group’s favoured means of suicide. Social stability has returned to Russia and unemployment is down. Among the old, poverty has declined at a global level faster than among younger people. Social change may also be partly responsible for the rise in America: suicide has risen most among middle-aged, white, poorly educated rural people—the victims of the “deaths of despair” identified by Anne Case and Sir Angus Deaton, Princeton University economists.
Angus Deaton on the Under-Discussed Driver of Inequality in America: “It’s Easier for Rent-Seekers to Affect Policy Here Than In Much of Europe”
By Asher Schechter
Q: In recent years you have devoted more attention to rent-seeking. What is the relationship between inequality and rent-seeking in America?
Monopoly, I think, is a big part of the story. Both monopoly and monopsony contribute to lower real wages (including higher prices, fewer jobs, and slower productivity growth)—just a textbook case! But there are things like contracting out, which are making it much harder at the bottom, or local licensing requirements—mechanisms for making rich people richer at the expense of stopping poor people starting businesses and stifling entrepreneurship. There are also more traditional mechanisms other than rent-seeking, like the tax system. All these affect the distribution of income very directly.
One of the things that seem to be going on more than it used to be is rent-seeking that’s redistributing upwards. Rent-seeking doesn’t have to redistribute upwards—when there were powerful unions, I am sure there was a fair amount of redistributing downward. It used to be that there was a lot of rent-seeking that went to workers. For instance, a lot of rents used to go to the autoworkers in Detroit for instance, [as part of] the Treaty of Detroit—“there’s no real competition, so we make crappy cars, but we’ll share the rents with workers.”
Now they’re not sharing the rents with the workers anymore. I think one of the reasons people are worried about inequality is that rent-seeking has turned almost entirely in favor of the elite.
America’s 1% hasn’t controlled this much wealth since before the Great Depression
By Kari Paul
In 2015, the top 1% of Americans made 26.3 times as much income as the bottom 99 percent — an increase from 2013, when they earned 25.3 times as much, according to a recent study released by the Economic Policy Institute, a left-leaning Washington, D.C. think tank.
A family needed an annual income of $421,926 to be part of the 1% nationally, the study said, but in some states the threshold was higher. The top 1% of Americans took home more than 22% of all income in 2015, the study found. That’s the highest share since a peak of 23.9% just before the Great Depression in 1928.
On Wednesday, Amazon AMZN, +5.01% founder Jeff Bezos became the richest person of the modern era as his wealth surpassed $150 billion.
The fortunes of people like Bezos and those made on Wall Street, in Hollywood and Silicon Valley fuel much of wealth inequality in the U.S., but the issue affects most of the country, the report showed. The incomes of the top 1% grew faster than the bottom 99% in 43 states between 2009 and 2015. In nine states in the U.S., the top 1% represents more than half of all income growth.
Meanwhile, the median net worth of Americans currently hovers at $68,828 per household. One in five Americans say they have more credit-card debt than they do in emergency savings and less than 40% of Americans say they have enough savings to cover a $1,000 emergency room visit or car repair.
Despite strong economy, many Americans struggling to get by
By Sarah Skidmore Sell
Food insecurity was the most common challenge: More than 23 percent of households struggled to feed their family at some point during the year. That was followed by problems paying a family medical bill, reported by about 18 percent. A similar percentage didn’t seek care for a medical need because of the cost.
Additionally, roughly 13 percent of families missed a utility bill payment at some point during the year. And 10 percent of families either didn’t pay the full amount of their rent or mortgage, or they paid it late.
The benefits of this ‘strong economy’ have not reached all Americans
By Heather Long
Four in 10 adults still say they don’t have enough savings to cover a $400 emergency expense, according to the latest Federal Reserve report on the economic well-being of Americans. While that is an improvement over 2013, when half of Americans said they could not cover a $400 expense, it remains elevated at a time when unemployment is so low and wages are rising.
A substantial number of Americans — 45 percent — still rate the current economy as “only fair” or “poor,” according to a Gallup poll in November. Though that is better than in recent years, it is still far higher than November 2000, when only 29 percent of Americans gave the economy a poor grade.
Despite the abundance of “We’re hiring!” signs across the country, an alarming number of men in their prime working years are not employed or looking for work. The labor force participation rate for men ages 25 to 54 is 89 percent, which is below the pre-recession level (90.6 percent in November 2007) and well below what the rate was in 2000, when nearly 92 percent of men of prime age had jobs or were actively searching for work.
In another telling sign, the number of dollar stores has surged from 20,000 to 30,000 locations since 2011, according to a report by Marie Donahue and Stacy Mitchell of the Institute for Local Self-Reliance. These stores are growing rapidly in urban black neighborhoods and rural America, Donahue and Mitchell found, two parts of the country whose residents are starting to look like a “permanent underclass.”
American Capitalism Isn’t Working.
By David Leonhardt
The typical American family today has a lower net worth than the typical family did 20 years ago. Life expectancy, shockingly, has fallen this decade.
The great stagnation of living standards is a defining problem of our time. Most families do not enjoy the “rapidly rising level of living” that Benton called for. Understandably, many Americans are anxious and angry.
The solution will need to involve a return to higher taxes on the rich. But it’s also worth thinking about pre-tax incomes — and specifically what goes on inside corporations. It’s worth asking the question that Benton asked: What kind of corporate America does the rest of America need?
How McKinsey Has Helped Raise the Stature of Authoritarian Governments
By Walt Bogdanich and Michael Forsythe
Robert G. Berschinski, a State Department official in the Obama administration, said business leaders and policymakers often believed that actively engaging with authoritarian governments would lead to economic reform, which in turn would drive political reform.
“But what is becoming increasingly clear, in Russia, China and Saudi Arabia — in all three of those instances — that belief has not proven to be true,” he said.
China is a prime example, argued Mr. Kramer, the former assistant secretary of state. He said the country had lifted hundreds of millions of people out of poverty, yet companies that do business there “have nothing to point to” showing that Chinese people have been granted more civil or political rights.
In some cases, McKinsey’s work may have made things worse.
The firm produced a report tracking how some of Saudi Arabia’s most important policies were viewed by the public, singling out three individuals who drove often negative conversations on Twitter.
One was later arrested, according to a human rights group. Another said that Saudi government officials had imprisoned two of his brothers and hacked his cellphone. The third — an anonymous account — was shut down.
McKinsey said it was “horrified by the possibility, however remote,” that the report could have been misused. But the kingdom is a such a vital client for the firm — the source of nearly 600 projects from 2011 to 2016 alone — that McKinsey chose to participate in a major Saudi investment conference in October even after the killing and dismemberment of a Washington Post columnist by Saudi agents.
Former Fed Chairman Blasts McKinsey and Hedge Fund Billionaires
By Mary Childs
The book talks about financialization for finance’s sake.
I’m surprised more people haven’t picked up the story in the book: I was at a conference in Italy, and there was William Sharpe.
[I asked] “What difference does [the use of derivatives] make to GDP?”
“None!”
I talked to him to make sure he wouldn’t get disturbed if I put it in the book, and he just chuckled and said go ahead. You’d think that would make people raise a question mark: How is this guy, that was one of the fathers [of financial engineering], saying it doesn’t do anything for GDP?
What has driven this whole process, more than anything else, is the whole idea of incentive compensation. I blame McKinsey for that. When you dangle big bonus awards for meeting certain objectives, people may be less impressed by their company’s statement of ethical practices than the fact that they can make $1 million by engaging in a little questionable behavior, conflicts of interest, overselling products. It became the mantra for businesses consultants. It’s even more powerful than the emphasis on making profits at a company. Look at Wells Fargo: Right down to the tellers, you get a little bonus if you get another account. So maybe we’ll make up a few accounts and get our bonus! It’s inevitable. The lost sense of fiduciary responsibility is a malign influence on financial markets.
You combine that incentive compensation with the inherent complexity of instruments and their interactions, and you’ve got something that’s very hard to manage. The point I would make is the importance of supervision and regulation. I know it can be overdone and can be a pain. But if anything has been demonstrated, it is the need for close scrutiny of what’s going on, and trying to deal with problem areas you should recognize, that sometimes are difficult to recognize, as with subprime mortgages 10 years ago. How was it ever permitted to rise in the space of just three or four years, from nothing to bringing down the economy!
Right-Sizing American Capitalism
By Matt Stoller
… Amazon might be paying its warehouse workers $15/hour, but it also has the scale and capital to invest in technologies like tracking the movements of its employees and firing them via algorithm if they don’t move quickly or often enough. Large companies can systemically engage in wage theft, and use complex legal contracts like mandatory arbitration and non-compete agreements to discipline or threaten wayward workers. Smaller companies may or may not want to do this, but they have to focus on keeping their business going, not investing in deep control of their workers.
This is not just innate to size. There is policy behind the rise of giants. The thinking from the current policymaker establishment encourages bigness. The Department of Justice and the Federal Trade Commission, which are charged with reducing corporate concentration, instead attack cartels of smaller companies or even workers when those institutions attempt to stand up to monopoly. For example, in 2013, the Obama Department of Justice sued book publishers attempting to create a competitor to Amazon’s Kindle book reader. DOJ saw a monopolist, Amazon, and used the sword of antitrust to go after the companies Amazon was bullying. The FTC went after 1-800-CONTACTS for trying to organize against Google’s market power in the search advertising market. Corporate cartels aren’t necessarily good, but they are often a response to a monopoly elsewhere in a supply chain.
Be Afraid of Economic ‘Bigness.’ Be Very Afraid.
By Tim Wu
After the fall of the Third Reich, the Allies broke up the major Nazi monopolies specifically so that they could not be “used by Germany as instruments of political or economic aggression,” in the words of the law used to do so. The United States took its medicine, too: In 1950, Congress passed the Anti-Merger Act of 1950 to curb politically and economically dangerous concentrations. It empowered the Justice Department and Federal Trade Commission to block or undo mergers when the effect was “substantially to lessen competition or to tend to create a monopoly.”
It would be understandable if you assumed that the Anti-Merger Act of 1950 had been repealed. But in fact it remains on the books. It has merely been evaded, eroded and enfeebled by the corroding effect of decades of industry pressure and ideological drift, yielding hesitant enforcers and a hostile judiciary. Consequently, over the last two decades we have allowed successive waves of mergers that make a mockery of the 1950 law, and have concentrated economic power in ways that are dangerous to the polity.
Democratic National Committee Backtracks On Its Ban Of Fossil Fuel Donations
By Alexander C. Kaufman
Obama halted contributions from PACs and lobbyists in 2008 after winning the party’s presidential nomination. But then-DNC Chair Debbie Wasserman Schultz loosened the restrictions in July 2015 before completely rolling back the ban in February 2016, nine months before that year’s presidential election.
The energy and natural resource sectors, including fossil fuel producers and mining companies, gave $2.6 million to the DNC in 2016, according to data collected by the nonpartisan Center for Responsive Politics. That’s less than 5 percent of the $56.1 million that the finance and real estate sectors ― the DNC’s largest corporate donors ― contributed that year.
Oil and gas companies spent a record $7.6 million on Democratic races in 2016. That’s a pittance compared to the $53.7 million in direct donations to Republicans, who received 88 percent of the industry’s contributions during that election cycle. Republicans have taken in 89 percent of the industry’s donations so far in 2018. That figure rises to 95 percent of the coal sector’s largesse this year.
But even as fossil fuel companies entrench with Republicans and the Trump administration continues deregulating drilling, mining and emissions, Democrats remain slow to mount a serious challenge to the industry most responsible for anthropogenic global warming.
Trump’s giveaway to Big Oil will accelerate climate change
By Leah C. Stokes
We shouldn’t be surprised to see oil companies getting their way on energy policy. This administration is stacked with former fossil fuel lobbyists. According to Bloomberg, some of the largest oil companies, including Marathon and Koch, have been quietly lobbying the administration to roll back Obama-era standards. Like a favorite child, the industry has gotten its way for a century. The history of climate inaction is the history of oil companies stalling.
Over the past 30 years, fossil fuel companies have waged a war on addressing climate change. They began with an organized effort to deny climate science. Historians, sociologists, foundations and investigative journalists have written detailed accounts that show the playbook these companies used.
To sway politicians and the public to their view, fossil fuel companies had a variety of tools in their quiver: money, ideas and relationships. From the late 1990s until at least 2014, they funded deniers who spun false tales of shoddy science. And their reports did not end up on the shelf collecting dust. These climate deniers were effective, getting their ideas into the media and even presidents’ speeches.
Fossil fuel companies, by sowing doubt and driving division, helped bring partisanship into the climate change conversation.
Meanwhile, these same companies were internally relying on climate science to plan their operations and investments. Exxon, for example, worked diligently to understand the problem while publicly claiming in 1999 that climate models were “completely unproven.” In 1998, Shell ran a simulation exercise featuring a giant climate-caused hurricane on the East Coast. In Shell’s imagined scenario, after all the destruction, the government came calling to demand they pick up the tab.
These fossil fuel companies knew they were being irresponsible. They knew they were walking out without paying the bill.
After Citizens United, a Vicious Cycle of Corruption
By Thomas B. Edsall
… Martin Gilens, a political scientist at Princeton, who wrote in “Affluence and Influence: Economic Inequality and Political Power in America”:
As resources flow toward the already most advantaged Americans, their ability to use those resources to shape policy increases. Of course rich Americans hold diverse preferences, just as the poor and the middle class. But despite some prominent liberal counterexamples, rich Americans tend to support the economic policies from which they have so greatly benefited. This raises the disturbing prospect of a vicious cycle in which growing economic and political inequality are mutually reinforcing.
We are seeing that vicious cycle in operation today, with a Supreme Court incapable of applying either reason or common sense to stop the madness.
What billionaires want: the secret influence of America’s 100 richest
By Benjamin I Page, Jason Seawright and Matthew J Lacombe
Most of the wealthiest US billionaires have made substantial financial contributions – amounting to hundreds of thousands of reported dollars annually, in addition to any undisclosed “dark money” contributions – to conservative Republican candidates and officials who favor the very unpopular step of cutting rather than expanding social security benefits. Yet, over the 10-year period we have studied, 97% of the wealthiest billionaires have said nothing at all about social security policy. Nothing about benefit levels, cost-of-living adjustments, or privatization. (Also nothing about the popular idea of shoring up social security finances by removing the low “cap” on income subject to payroll taxes and making the wealthy pay more.) How can voters know that most billionaires are working to cut their social security benefits?
In fact, people who pay the closest attention to the media may actually be the most misled, because most of the very few billionaires who have spoken out about social security – like Buffett and Soros – have supported a generous social security system in television interviews and newspaper op-eds.
Or consider the estate tax. Our study ferreted out quiet activity by 12 of the wealthiest billionaires – including the Kochs and (perhaps unsurprisingly) several wealthy inheritors of the Walton and Mars fortunes – aimed specifically at cutting or abolishing the estate tax. They gave money to policy-oriented organizations seeking to abolish the tax, or founded such organizations, and served on their boards. Not a single billionaire took such activity to support the estate tax.
How the IRS Was Gutted
By Paul Kiel and Jesse Eisinger
Corporations and the wealthy are the biggest beneficiaries of the IRS’ decay. Most Americans’ interaction with the IRS is largely automated. But it takes specialized, well-trained personnel to audit a business or a billionaire or to unravel a tax scheme — and those employees are leaving in droves and taking their expertise with them. For the country’s largest corporations, the danger of being hit with a billion-dollar tax bill has greatly diminished. For the rich, who research shows evade taxes the most, the IRS has become less and less of a force to be feared.
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One factor that has helped obscure this deterioration is the growth of the U.S. economy, which has pushed up tax receipts since the Great Recession. The IRS took in $3 trillion in 2017, up from $2 trillion in 2011. Republicans have pointed to this as proof that nothing is amiss: “You could argue,” Representative Crenshaw said to Koskinen in a 2016 hearing, “if you collect more revenue with less money, then maybe if you had even less money you would collect even more revenue.”
But the increase in receipts is misleading. During that period, for example, the top marginal tax rate went up, so the richest taxpayers were paying more. More important, in 2011, Americans had deep losses from the 2008 financial crisis that were still depressing tax obligations. In the following years, receipts outpaced economic growth, a typical phenomenon during recoveries. Still, that increase was weaker than government analysts expected. Even before last year’s tax cuts, tax receipts as a percentage of GDP never reached the levels of the late 1990s or mid-2000s.
It will be years before we know whether tax cheating has in fact increased. The last IRS report to assess what it calls the “tax gap,” issued in 2016, analyzed the period from 2008 to 2010. It found that taxpayers had paid about 82 percent of the taxes they truly owed. If the rate of compliance in 2017 was the same, that would translate to $667 billion in missing taxes.
Even the tiniest drop in compliance would cost billions more. But no one we spoke with who has worked at the IRS thinks the drop is likely to have been small. “One day it will be clear,” Koskinen said, “but by that time, you’re in deep yogurt.”
In Our ‘Winner-Take-Most’ Economy, the Wealth Is Not Spreading
By Thomas B. Edsall
Looking at inequality from a different angle, Annette Alstadsæter, Niels Johannesen and Gabriel Zucman, professors of economics at the Norwegian University of Life Sciences, the University of Copenhagen and Berkeley, found in their paper “Who Owns The Wealth In Tax Havens?” that wealth inequality worldwide has been substantially underestimated because so much of it is put into overseas tax havens.
How much money are we talking about?
The equivalent of 10 percent of world GDP is held in tax havens globally, but this average masks a great deal of heterogeneity — from a few percent of GDP in Scandinavia, to about 15 percent in Continental Europe, and 60 percent in Gulf countries and some Latin American economies.
In the United States, the top 0.01 percent holds 9.9 percent of the nation’s total wealth excluding deposits in tax havens. When wealth in tax havens is included, the share held by the top 0.01 percent rises to 11.2 percent.
While an increase from 9.9 to 11.2 percent amounts to a 1.3 percentage point increase, in real dollars that translates to $1.06 trillion, or roughly $40 million for every adult in the top 0.01 percent.
U.S. Cash Repatriation Plunges 50%, Defying Trump’s Tax Forecast
By Laura Davison and Sho Chandra
Trump has said, without specifying his source, that he expects more than $4 trillion to return to the U.S., which will help to create jobs and more investment.
The repatriation figures were part of a quarterly report on the current-account deficit, which widened to $124.8 billion in the July-September period from $101.2 billion. The gap is considered the broadest measure of international trade because it includes income payments and government transfers.
The amount of cash accumulated offshore is probably closer to $2.5 trillion than $4 trillion, according to Gordon Gray, the director of fiscal policy at American Action Forum. Gray said he thought the high repatriation amounts in the first two quarters aren’t likely to be repeated — but the levels going forward will ultimately still be greater than before the tax law.
Even though companies are less restricted in moving their offshore profits under the U.S. tax overhaul, corporations, in aggregate, are choosing to keep earnings in their foreign subsidiaries, a team of Morgan Stanley analysts led by Todd Castagno said in a note earlier this month.
« Yellow vests » and tax justice
By Thomas Piketty
Since the crisis in 2008, and even more so since Trump, Brexit and the explosion of the xenophobe vote all over Europe, there is a better appreciation of the dangers posed by the rise in inequality and the sense of abandonment in the working classes, so that many now understand the need for a new social regulation of capitalism. In these conditions, adding a further measure in favour of the richest in 2018 was not really very clever. If Macron wants to be the president of the 2020s and not the 1990s, he is going to have to adapt quickly.
The saddest thing is the appalling wastage and mess concerning global warming. If a carbon tax is to succeed, it is imperative that the totality of the net proceeds be allocated to the social measures associated with the ecological transition. The government has done just the opposite: only 10% of the 4 billion Euros rise in fuel duty in 2018, and the extra 4 billion expected in 2019, were earmarked for social measures, while the remainder financed, de facto, the abolition of the wealth tax (ISF) and the flat tax on income from capital.
The Robots Have Descended on Trump Country
By Thomas B. Edsall
Donald Trump’s $1.5 trillion tax cut has increased incentives to replace workers with robots, contradicting his campaign promise to restore well-paying manufacturing jobs in the nation’s heartland.
The Trump tax bill permits “U.S. corporations to expense their capital investment, through 2022. So, if a U.S. corporation buys a robot for $100 thousand, it can deduct the $100 thousand immediately to calculate its U.S. taxable income, rather than recover the $100 thousand over the life of the robot, as under prior law,” Steven M. Rosenthal, a senior fellow at the Urban Institute and a specialist in tax policy, wrote me by email.
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The 2017 Trump tax cut not only boosted incentives for corporations to replace workers with robots, it has also created incentives for American companies to move production overseas, even as it directed resources toward “opportunity zones” in what the Trump administration defines as “neglected and underserved communities” — incidentally providing a bounty of lucrative grants, guarantees and breaks for real estate developers.
While Trump is clearly attuned to the political power of white working class anger — in 2016 he ignited a blue-collar insurgency and mobilized white men in particular — his campaign rhetoric is also expedient. He is also highly attuned to the agenda of the Republican Party he leads, not to mention the corporate establishment and its antipathy to corporate taxation. And it goes without saying that the tax cut was enormously beneficial to Trump and to his family — by conservative estimates he will personally save from $11 to $15 million annually and his estate will reap millions.
The robots are coming. Let’s help the middle class get ready.
By Harry J. Holzer
While new digital technologies and other forces have caused rising inequality in late 20th and early 21st century, many Americans now fear a new and potentially more threatening form of automation, where even those with BAs or professional degrees could become displaced and dislodged from the middle class. Thus, it is possible that the employment consequences of this new automation will be more negative for the middle class than they were during any episode in the past.
The greater potential for future employment loss exists because of the much greater potential reach of artificial intelligence (AI) into what have until now been exclusively human functions. AI’s ability to read patterns in the physical environment and in human interactions, as well as its ability to learn over time and adjust itself accordingly, will likely enable robots and other forms of automation to perform tasks that historically have been undertaken by humans.
Some such tasks, like driving a motor vehicle in traffic or responding to customer questions and complaints in retail and service establishments, are now becoming automated and will soon eliminate several million jobs that have paid middle-class wages to workers that fill them. And, as the dexterity of robots grows, they will not only be able to perform a range of physical tasks in jobs from manufacturing to handling inventories and delivering products; they will increasingly be able to perform a range of analytical tasks in health care, legal services, accounting and finance that have required professional degrees will increasingly be within their reach. Therefore, both the lower and upper middle classes will be at risk of robot replacement, and could face lower earnings opportunities as a result.
China’s AI push raises fears over widespread job cuts
By Yuan Yang
Automation has replaced the jobs of up to 40 per cent of workers in some Chinese industrial companies over the past three years, highlighting the effects of Beijing’s push to upgrade its technological base and become a world superpower in artificial intelligence.
Several companies in China’s export-manufacturing provinces of Zhejiang, Jiangsu and Guangdong have cut 30-40 per cent of their workforce as a result of automation in that three-year period, according to a report by the China Development Research Foundation, a government think-tank, and venture capital fund Sequoia China.
Beijing is pursuing an ambitious policy to upgrade manufacturing technologies. State media coverage of the government’s development goals, including in the field of artificial intelligence, have concentrated on the positives. However, authorities have quietly raised concerns about the lay-offs caused by such policies.
“In response to the challenges brought by AI, we need to place greater importance on stable employment,” said Zhang Yizhen, China’s vice-minister of human resources, at the launch of the CDRF report.
Lu Mai, CDRF secretary-general, said: “If workers’ skills cannot be upgraded . . . we will not only not benefit from technological progress, but also suffer from inadequate employment and the deterioration of the distributional structure.”
How artificial intelligence is shaking up the job market
By Igor Perisic
The future of work is usually discussed in theoretical terms. Reports and opinion pieces cover the full spectrum of opinion, from the dystopian landscape that leaves millions unemployed, to new opportunities for social and economic mobility that could transform society for the better.
The World Economic Forum’s The Future of Jobs 2018 aims to base this debate on facts rather than speculation. By tracking the acceleration of technological change as it gives rise to new job roles, occupations and industries, the report evaluates the changing contours of work in the Fourth Industrial Revolution.
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As the recent report makes clear, the anticipated impact of AI on the labour market fits neither of the polarized narratives that tend to hog headlines. It’s estimated that by 2025, the amount of work done by machines will jump from 29% to more than 50% – but that this rapid shift will be accompanied by new labour-market demands that may result in more, rather than fewer, jobs. As the report notes, these predictions “[provide] grounds for both optimism and caution”.
While AI is unlikely to replace human workers, uncertainty remains regarding what types of jobs will be created, how permanent they will be, and what kind of training they may require. Preparing the workforce for these changes will depend on a data-driven approach to understanding the trends that are shaping the future of the labour market, and a commitment to investing in lifelong learning opportunities that can help workers adapt to rapid economic shifts.
The Student Debt Problem Is Worse Than We Imagined
By Ben Miller
The federal government cannot keep turning a blind eye while almost one-third of student loan borrowers struggle. Fortunately, efforts to rewrite federal higher-education laws present an opportunity to address these shortcomings. This should include losing federal aid if borrowers are not repaying their loans — even if they do not default. Loan performance should also be tracked for at least five years instead of three.
The federal government, states and institutions also need to make significant investments in college affordability to reduce the number of students who need a loan in the first place. Too many borrowers and defaulters are low-income students, the very people who would receive only grant aid under a rational system for college financing. Forcing these students to borrow has turned one of America’s best investments in socioeconomic mobility — college — into a debt trap for far too many.
The Next Financial Calamity Is Coming. Here’s What to Watch.
By Matt Phillips and Karl Russell
The amount of American student debt — roughly $1.5 trillion — has more than doubled since the financial crisis. It is now the second-largest category of consumer debt outstanding, after mortgages.
Public colleges and universities, hurt by state budget cuts, increased tuition. The drop in house values also made it harder for families to tap into their home equity to pay for tuition. As a result, the financial burden shifted to students, who took on heavier debt loads to pay for school.
Many borrowers are already falling behind. During the second quarter of 2018, more than 10 percent of student loans were at least 90 days past due. That was down slightly from a couple of years ago, but higher than the peak for mortgage delinquencies during the last crisis.
Could this spark a new crisis, with student loans playing the role that mortgages played a decade ago? Probably not.
The student loan market is much smaller than the mortgage market. And the main lender is the federal government, so even a surge of defaults would barely touch the banking system, unlike the mortgage meltdown.
The bigger issue is whether growing amounts of student debt may be a drag on consumers. Some think it could be playing a role in the decline of homeownership over the last decade, an important driver of spending in the consumption-led American economy.
The Recovery Threw the Middle-Class Dream Under a Benz
By Nelson D. Schwartz
Younger Americans, in particular, will be marked by the experience of 2008 much as the Crash of 1929 and the Great Depression haunted the generations who lived through it in the last century. Not only were they unable to accumulate assets in the lean years of the early recovery, but they also missed out on the recent stock market rally that benefited their older and richer peers.
A recent study by the Federal Reserve Bank of St. Louis found that while all birth cohorts lost wealth during the Great Recession, Americans born in the 1980s were at the “greatest risk for becoming a lost generation for wealth accumulation.”
Millennials are killing countless industries — but the Fed says it’s mostly just because they’re poor
By Kate Taylor
Differences in spending between millennials and past generations, the Federal Reserve report argues, are not primarily due to “unique tastes and preferences.” Instead, authors Christopher Kurz, Geng Li, and Daniel J. Vine point to general technological changes, ongoing demographic evolution, and economic cycles as explanations.
Most significantly, most millennials came of age during the Great Recession, kneecapping their financial well-being in early years of adulthood.
“Millennials are less well off than members of earlier generations when they were young, with lower earnings, fewer assets, and less wealth. … Conditional on their age and other factors, millennials do not appear to have preferences for consumption that differ significantly from those of earlier generations,” the report reads.
Average real labor earnings for male household heads working full time were 18% and 27% higher for Generation X and Baby Boomers when they were young compared to millennials. For young female heads of household, the difference is smaller — 12% for Gen X and 24% for Boomers — but earlier generations were still making more money when they were younger among similar demographics.
The rise of the low-pay workforce – when seven jobs just isn’t enough
By Andrew Smith and Jo McBride
We believe the rise of multiple jobs is due to the creation of a deregulated “flexible” labour market. Recent research by the Joseph Rowntree Foundation highlighted the expansion of insecure work. The TUC, which comprises the majority of the UK’s major trade unions, has also reported that only one in 40 jobs created since the recession is full-time.
The workers we interviewed had to acquire additional jobs as a result of low wages, limited working hours, under-employment and job insecurity. Additional factors include the proliferation of part-time, zero hours contracts and temporary and casual contracts. Many of the people we spoke to were experiencing job insecurity and instability, and having to work for employment agencies.
“What Have We Done?”: Silicon Valley Engineers Fear They’ve Created a Monster
By Susan Fowler
Gig-economy “platforms,” as they’re called, take their inspiration from software engineering, where the goal is to create modular, scalable software applications. To do this, engineers build small pieces of code that run concurrently, dividing a task into ever smaller pieces to conquer it more efficiently. Start-ups function in a similar way; tasks that used to make up a single job are broken down into the smallest possible code pieces, then partitioned so those pieces can be accomplished in parallel. It’s been a successful approach for start-ups for the same reason it’s a successful approach to writing code: it is perfectly, beautifully efficient. Across so-called platforms, there are no individuals—no bosses delegating tasks. Instead, various algorithms run on the platform, matching consumers with workers, riders with the nearest driver, and hungry customers with delivery people, telling them where to go, what to do, and how to do it. Constant needs and their quick solutions all hummingly, perpetually aligned.
By now it’s clear that these companies represent more than a trend. Though it’s difficult to accurately determine the size of the gig economy—estimates range from 0.7 to 34 percent of the national workforce—the number grows with each new start-up that figures out how to break down another basic task. There’s a relatively low risk associated with launching gig-economy companies, start-ups that can engage in “a kind of contract arbitrage” because they “aren’t bearing the corporate or societal cost, even as they reap fractional or full-time value from workers,” explains Seattle-based tech journalist Glenn Fleishman. Thanks to this buffer, they’re almost guaranteed to multiply. As the gig economy grows, so too does the danger that engineers, in attempting to build the most efficient systems, will chop and dice jobs into pieces so dehumanized that our legal system will no longer recognize them. And along with this comes an even more sinister possibility: jobs that would and should be recognizable—especially supervisory and management positions—will disappear altogether. If a software engineer can write a set of programs that breaks a job into smaller increments, and can follow it up with an algorithm that fills in as the supervisor, then the position itself can be programmed to redundancy.
Robots Aren’t Yet Killing Off All Our Jobs, World Bank Says
By Natalia Drozdiak
In the future, workers are more likely to have many jobs over the course of their careers, largely due to the rise of the gig economy, instead of holding down a position with the same employer for decades, according to the World Bank.
And different skills will be increasingly important, the report says. Instead of less advanced skills that can be replaced by technology, employers will increasingly be looking to hire people with advanced cognitive skills, like complex problem-solving, teamwork, reasoning and communication talents.
To ease that transition, governments should guarantee a universal minimum level of social protection, the World Bank said. One option could involve offering insurance independent of employment since future workers will likely flit from one job to the next.
Restoring respect is the first step towards a better society
By Richard V Reeves
When economic inequality evolves into class separation – by neighbourhood, school, workplace, lifestyle, culture – the seeds of destruction for relational inequality are planted. Rather than looking the less fortunate ‘squarely in the eye’, the elite might instead come to look at them down their nose: ‘deplorables’ (Hillary Clinton), ‘they cling to guns or religion’ (Barack Obama, 2008), an ‘underclass’ (Bill Clinton, 1996) characterised by fecklessness, irresponsibility and idleness – not worthy, in fact, of our respect.
Using word-association tests, researchers from Kansas State and Rice universities have attempted to gauge how Americans view the poor. Their average respondent described poor people as 39 per cent more ‘unpleasant’, 95 per cent more ‘unmotivated’, and twice as ‘dirty’ as middle-class Americans. As John A Powell, the director of the Haas Institute for a Fair and Inclusive Society, and Arthur Brooks, president of the American Enterprise Institute, wrote in 2017: ‘[I]t is reasonable to conclude that middle-class and wealthy Americans’ social distance from people in poverty exists in a mutually reinforcing cycle with the contempt they feel towards them.’
According to a poll by the Los Angeles Times in 2016, most of those who are not poor themselves think that welfare benefits ‘make poor people dependent and encourage them to stay poor’ (61 per cent) rather than giving ‘poor people a chance to stand on their own two feet and get started again’ (31 per cent). Meanwhile, those in poverty themselves were divided equally on the question (41 per cent). Most poor Americans (71 per cent) think it is ‘very hard for poor people to find work’, compared with just 25 per cent who think ‘there are plenty of jobs available for poor people/anyone who is willing to work’.
The less successful are now returning the favour. Respect for ‘the elite’ among ordinary Americans has declined sharply in recent decades, as work by scholars such as Joan Williams and Arlie Russell Hochschild demonstrates. This has potentially profound political consequences, including the outcome of the 2016 US presidential election. One of the reasons that Trump won is that working-class and middle-class white Americans felt that he was on their side, and was not condescending to them. In short, that he showed them a little respect.
The death of our Siemens factory is the result of another Trump lie
By Robert Morrison
Back when he was running for president, Trump told us exactly what we wanted to hear. In fact, Trump’s promises are a major reason why Des Moines county swung from Barack Obama to Trump in 2016 – making it one of 31 Iowa counties that pivoted to Trump. Most of these counties are located along the Mississippi river valley, which was once a thriving industrial corridor but has since fallen on hard times.
It is too late for our jobs here in Burlington. However, I still believe we can save jobs in other communities threatened by offshoring – but only if our president takes executive action.
My job at Siemens allowed me to buy a house and a car, put food on the table and pay my medical bills. It’s one of the few decent-paying jobs left in our community.
When Siemens shuts its doors on Friday, what kind of economic opportunities will my son – or his son – have?
Our community is angry. I’m angry.
What Populists Do to Democracies
By Yascha Mounk and Jordan Kyle
Populists often get elected on a promise to root out corruption. In Brazil, Bolsonaro soared in popularity by riding public anger against the “Carwash” scandal, a giant scheme of kickbacks from construction contracts that implicated much of the country’s political class, including the ex-president Luiz Inácio da Silva. In Italy, the populist Northern League has long railed against corrupt politicians in “thieving Rome.” In the United States, President Trump famously vowed to “drain the swamp.”
But far from draining the swamp, most populists have, as the economist Barry Eichengreen put it, simply replaced the mainstream’s alligators with even more deadly ones of their own. In fact, we found that 40 percent of populist heads of government are ultimately indicted for corruption. Since many populists amass sufficient power to hamper independent investigations into their conduct, it is likely that this figure actually underestimates the full extent of their malfeasance.
This suspicion is corroborated by a second piece of information: Our data show that populist governments have led their countries to drop by an average of five places on Transparency International’s Corruption Perceptions Index. Some cases are far more extreme than that: Venezuela, for example, dropped by an astounding 83 places under the leadership of Hugo Chávez.
Corruption is costing the global economy $3.6 billion dollars every year
By Stephen Johnson
The annual costs of international corruption amount to a staggering $3.6 trillion in the form of bribes and stolen money, United Nations Secretary-General António Guterres said on International Anti-Corruption Day, December 9.
Corruption can take many forms: bribery, embezzlement, money laundering, tax evasion and cronyism, to name a few. Whatever its shape, corruption always comes at someone’s expense, and it often leads to weaker institutions, less prosperity, denial of basic services, less employment and more environmental disasters.
“Fighting corruption is a global concern because corruption is found in both rich and poor countries, and evidence shows that it hurts poor people disproportionately,” the U.N. wrote on its website. “It contributes to instability, poverty and is a dominant factor driving fragile countries towards state failure.”
Having wrecked the economy, Venezuela’s rulers see no reason to change
By The Economist
Venezuela’s collapse is not the result of low oil prices, still less of sanctions imposed by the United States. Other oil producers have coped with low prices, and the sanctions mainly affect individual leaders of the regime. Venezuela has been mismanaged and looted by its rulers. Chávez squandered an oil boom, borrowed recklessly and shackled the private sector. Venezuela is now the world’s most indebted country. Its foreign obligations equal five times its exports, according to Ricardo Hausmann, a Venezuelan economist at Harvard University. Even China and Russia seem reluctant to lend more to it.
Normally all this would mean the government’s downfall. Voters do not like being robbed or impoverished, and outsiders are unlikely to bail out Venezuela while the same incompetent thugs remain in charge. However, Mr Maduro has taken precautions to avoid being ejected. The main opposition parties are banned, their leaders in jail, in exile or intimidated. Torture of prisoners is common. The National Assembly has been reduced to an impotent NGO. In municipal elections on December 9th, only 27% of voters were officially said to have turned out. The Cuban spies who protect the regime have disrupted several coup plots this year. Dozens of military officers are in jail.
How much longer can Orbán’s apologists ignore what he’s doing to Hungary?
By Nick Cohen
If you exploit fears of immigrants to win wealth and power, you must keep immigrants out. The closing of borders leads to labour shortages, as we may find out after Brexit. Meanwhile young Hungarians, like East Europeans from well governed countries, have taken advantage of freedom of movement to find work in Germany, Britain and France. But in Hungary’s case there is a political as well as an economic motivation. When I was last in Budapest, opposition activists lamented how their comrades were leaving because they did not want to waste their lives living under a corrupt government that thrived on the promotion of hatred and ignorance. Their departure appeared to suit the regime, which had every interest in seeing bright and committed people, who might lead a revolution, head for the exit. It did not notice that their departure only exacerbated the problem of who was going to do the work to keep the Hungarian economy functioning.
I don’t want to get carried away. For all the gerrymandering, Orbán continues to enjoy popular support. I should add too that the protestors have been on the streets in their thousands rather than hundreds of thousands. But the demonstrations show no sign of abating – last night they targeted the president’s office. And their very existence reveals a truth about the new politics Brexit Britain may soon be learning.
The characteristic vice of left-wing populism is hyper-inflation. To pay for its social programmes, to finance the corruption of the elite, and to compensate for the destruction of efficient businesses, Chavez and Maduro printed money to such an extent Venezuelan inflation has topped one million per cent (I know, I can’t comprehend that figure either or imagine how Venezuelans live from one day to the next).
Hungary suggests that the characteristic vices of right-wing populism will be stagnation, labour shortages and the exploitation of workers.
When left-leaning parties support austerity, their voters start to embrace the far right
By Maria Snegovaya
In some Central European countries, leftist parties preserved protectionist economic policies and kept their blue-collar voters, leaving fewer political openings for the populist right to exploit. For example, in Slovakia, one left-leaning party, SDL, supported its government’s austerity program. In response, another Slovak left-wing party, Smer, campaigned on a traditional left platform, criticizing the Slovak center-right governments for ignoring Slovakia’s growing disparities and catering to multinational corporations and financial interests. As a solution, Smer emphasized a return to the basic principles of solidarity and state involvement in the economy, offering changes in the labor code, pensions and education. Smer further pledged to increase public spending on health care, pensions and education and to introduce a second sales tax on basic goods. The SDL lost its supporters and disappeared. Smer-SD (since Smer absorbed the SDL in 2005) has won each parliamentary election since 2006.
Overall, the experiences of Central European countries suggest that when left-leaning parties turn their backs on working people, other parties will willingly step up to channel their frustration.
The People, No
By Thomas Frank
In 1999, we thought right-wing populism was a historical mystery that needed to be unraveled and understood; in the minds of its legions of analysts today it’s no mystery at all. For them, the common people’s incomprehension of liberal values is as unremarkable and self-evident as is the superiority of Yale over Southeast Missouri State. Populism, much of our ruling punditburo now believes, is a creature of the ill-informed right by its very nature. Bring aggrieved plebes together in movements and mass rallies and of course they will start chanting the name of Trump. That’s just who ordinary Americans are. In this democracy, it’s the people themselves who are the problem.
This is the reason that so many of the prized manifestos of the left these days resemble nothing so much as ritualized scolding—or, rather, concerned letters from mom gently reminding the lowly of their precarious place in the New Economy hierarchy. Before long, chide the solons of liberalism, they’ll have to retrain and repatriate to one of the coastal warrens of tech monopoly and lifestyle liberalism—places where they don’t look too fondly on MAGA hats.
At the other end of the ideological spectrum, meanwhile, the Tea Party movement of 2009 is now in the midst of a full-on populist makeover. Never has there been a phonier, more transparent bid to mislead an angry public. Supposedly a protest against bank bailouts, it was actually launched from among the futures traders on the floor of the Chicago Mercantile Exchange—and then backed to the hilt by Beltway libertarians looking for a way to distance themselves from the badly damaged Republican brand. The movement’s Number One heroine, Ayn Rand, spent decades dreaming up ways to express her contempt for democracy and its beloved average citizen. The Tea Party movement’s great demand for solving the problem of out-of-control bankers—more bank deregulation—seems to have been developed as a kind of thought experiment to gauge the outer limits of human gullibility.
Why Killing Dodd-Frank Could Lead to the Next Crash
By Matt Taibbi
… eliminating Dodd-Frank was such an urgent need for His Orangeness that an executive order mandating the act’s deconstruction was one of his first policy moves. Like his White House hirings of so many Goldman Sachs vets after loudly campaigning against the bank, Trump showed his true colors when he made killing Wall Street’s most hated law a high priority.
Then again, the Democrats showed their colors when they gave him the win. Nobody will say so, but everyone on the Hill knows why this bill passed. According to the Center for Responsive Politics, three of the bill’s Democratic co-sponsors, North Dakota’s Heidi Heitkamp, Indiana’s Joe Donnelly and Montana’s Jon Tester, are three of the Senate’s biggest recipients of financial-services donations. Quelle surprise!
This would be merely politically disgusting, were it not for the consequences in an overheated economy. Remember how tossing the Glass-Steagall Act during the Internet boom worked out? We should be increasing safety standards, not eliminating them. “With debt levels higher than before the last crash, a stock market bubble and wage stagnation,” says Dennis Kelleher, head of the watchdog group Better Markets, “now is the worst time to deregulate the financial industry.”
The Malaysia Scandal Is Starting to Look Dire for Goldman Sachs
By Matt Taibbi
… 1MDB is both a financial and existential threat to the bank. In its most recent quarterly filing, Goldman said it expected to face “significant fines, penalties, and other sanctions,” as individuals and nations alike will be scrambling to recover pilfered funds.
The larger damage may be to the bank’s name. The apparent inability of Goldman’s internal control mechanisms to question the source of a mysteriously lucrative $600 million bond deal sent a powerful signal to investors.
“Were those fees worth the reputational damage?” asked Bloomberg.
“People are cynical, of course, and think they’ll still get away with a fine,” says Pang. “But this is as serious a situation as they’ve faced.”
What’s kept the financial system together since 2008 is a widespread belief that even if bankers at places like Goldman are greedy or amoral, they’re at least sharp in a self-interested way, “the smartest guys in the room.” We’re now finding out that even that last part might not be so true. Greedy, amoral and not too bright: Welcome to the modern financial system.
Paul Volcker’s Wisdom for America’s Rigged Economy
By John Cassidy
During the nineteen-eighties and nineties, Volcker, who identifies himself as an Independent, fought a losing battle to maintain the Depression-era regulations that separated commercial banks from investment banks. After the great financial crisis of 2008–09, he led an effort to restore some narrower restraints on Wall Street’s risk taking. He duly covers this history, but doesn’t stop there. Writing of the obscenely large pay packages that the heads of big financial institutions routinely receive, he notes that “a kind of contagion seems to be at work. Stepping back, do the CEOs of today’s top banks (or other financial institutions) really contribute five to ten times as much (in price-adjusted terms) to the success of their institution, or the economy, as their predecessors did forty or so years ago? I have my doubts. At least, it doesn’t show up in the economic growth rate, certainly not in the pay of the average worker, or, more specifically, in an absence of financial crises.”
It isn’t just bank C.E.O.s who incur Volcker’s wrath. He is equally critical of corporate directors who fail to ask tough questions of the executives they are supposed to supervise; of corrupt officials at international organizations like the United Nations and the World Bank; and of economists and other academics who prioritize their own arcane research over practical matters. Even the folks who run Princeton, his alma mater, aren’t spared criticism. Commenting on their management of the Woodrow Wilson School of Public and International Affairs, where he has taught on occasion, Volcker writes, “A great university simply has not risen to the challenge of effective education for public service.”
In a world of self-dealers, knaves, and charlatans, effective public service is essential. This is Volcker’s central message, and he has embodied the role of the competent, non-conflicted public servant. On top of his service in the United States, he has headed up various international committees, including ones that looked into corruption at the U.N.’s oil-for-food program in Iraq, and the dormant Swiss bank accounts of Holocaust victims. In 2013, he founded the Volcker Alliance, whose goals are to make government work better and raise the level of public trust in it. (He cites polls showing that fewer than twenty per cent of Americans trust the government to do the right thing most of the time.)
What’s Really Behind France’s Yellow Vest Protest?
By Cole Stangler
… a poll conducted just after last Saturday’s riots in Paris showed that, while most disagreed with the use of violence, seven in 10 still backed the gilets jaunes movement as a whole. Support closely tracks class lines. According to a separate study released November 28, about four-fifths of working-class respondents—those defined as blue-collar and service-sector workers in France’s detailed socio-professional classification system—expressed sympathy or support for the movement. Just 56 percent of managers and white-collar professionals felt the same.
If the movement has managed to win such broad support thus far, it’s because it has clearly tapped into a deeper sense of social injustice. While that sentiment is shared nationwide to varying degrees, the protests themselves sprung up largely in rural areas and in what’s known as le périurbain: the sparsely populated outer bands of suburbs and metropolitan areas. These are parts of the country that suffer from high joblessness and rely heavily on state investment to keep their communities afloat, from unemployment benefits to the public rail network that connects them to larger cities.
High expectations of the state also come with close scrutiny over its actions. This attitude can be misinterpreted as hostility toward the very idea of public intervention in the economy—and, unsurprisingly, right-wingers from abroad have projected their own libertarian fantasies onto the wave of protest. But the fact remains that most gilets jaunes sympathizers in France are not opposed to the state’s role in the economy—they simply want it to act more fairly. Over the past decade, they’ve witnessed hospital closures, postal-service cuts, and rail reforms laying the groundwork for privatization and higher ticket prices, as in the United Kingdom. Much like spiraling fuel costs, these are not the sorts of things that keep wealthy people up at night.
Meanwhile, since taking office a year and a half ago, Emmanuel Macron has mandated further belt-tightening for the working class. In the name of fighting the budget deficit, local governments have seen subsidies for part-time jobs slashed, low-income people have suffered cuts in their housing aid, and retirees have been dealt reductions in their pension checks. The rich receive a very different sort of treatment: Overseeing his very first budget as president, Macron rushed to repeal France’s wealth tax, which had applied only to those with over €1.3 million in assets. This is why the notion of justice fiscale, or “tax justice,” figures so prominently among Yellow Vest sympathizers: Why should ordinary people, they ask, be forced to fork over another couple hundred euros each month while the super-rich are rewarded simply for being super-rich? Likewise, as outlandish as it may sound, many protesters are calling on the president to resign. Through both his policies that disproportionately benefit the rich and his tendency to ignore his critics, Macron exemplifies the state’s abdication of responsibility toward the least well-off.
Since the 1980s the rate of both overall GDP per capita growth and productivity growth in France has slowed. It seems to have shifted down again in the wake of the financial crisis a decade ago.
What’s ominous for Macron is that this seems to be part of a global trend of slowing economic growth, suggesting it will not easily be turned around by policies in one country.
Defeatism is usually poor counsel and so it remains today. There surely remains potential not just for France, but for all nations, to increase national productivity growth through investments in infrastructure, research and skills. Living standards can be improved not just through redistribution but through a new generation of low-carbon technologies, through institutions that foster a greater sense of economic security, and through governance innovations that enable people and communities to take more control of their lives.
Yet the transition out of malaise is unlikely to be smooth. And if the economic pie is not growing as fast as it was, arguments and tensions about its division are likely to become more intense. Perhaps in this respect, as it was in 1789, France is in the revolutionary vanguard of nations once again.
Brazil: the latest domino to fall
By Nathan Gardels
The pattern is clear: when an unresponsive elite forsakes average citizens in a system legitimated by popular sovereignty, demagogues who fashion themselves as tribunes of the people ride the rage to power. To add danger to decay, the fevered insurgency throws the baby out with the bathwater, assaulting the very integrity of institutional checks and balances that guarantee the enduring survival of republics. When magical thinking, incompetence and xenophobic passions take hold, all that was painstakingly built is destroyed. The revolt against a moribund political class transmutes into a revolt against democratic governance itself.
One thing is clear by now. We are beyond the point of going back to the old ways through the normal rotation of election cycles. All hope now rests on the capacity to renovate democracy when the next turn of the zeitgeist arrives.
Democratic Capitalism’s Future
By Didi Kuo
As the United States industrialized in the nineteenth century, many corporations engaged in corrupt politics, excessive rent-seeking, and labor repression, and parties built on patronage did little to stop them. But changes to capitalism produced changes in politics, or at least in business’ role in politics. Managerial capitalism produced a class of business leaders who demanded better governance, and parties responded by dismantling patronage and building new administrative institutions. The United States became a global economic and political leader in the stakeholder era with the aid of its business elite, many of whom pushed for social protections, education, infrastructure, and regulation. Democratic capitalism succeeded because capitalists were on board with—and at times, worked to improve—our democracy. This stands in stark contrast to capitalists today, who seem at best agnostic, and at worst, outright cynical, about our system of government. Perhaps the people will do the hard work needed to reconfigure this relationship, through mass protest or through the election of new leaders. But the scarier outcome is that our democracy capitulates, while capitalism perseveres.
The End of the Democratic Century
By Yascha Mounk and Roberto Stefan Foa
Ever since the last decade of the nineteenth century, the democracies that formed the West’s Cold War alliance against the Soviet Union—in North America, western Europe, Australasia, and postwar Japan—have commanded a majority of the world’s income. In the late nineteenth century, established democracies such as the United Kingdom and the United States made up the bulk of global GDP. In the second half of the twentieth century, as the geographic span of both democratic rule and the alliance structure headed by the United States expanded to include Japan and Germany, the power of this liberal democratic alliance became even more crushing. But now, for the first time in over a hundred years, its share of global GDP has fallen below half. According to forecasts by the International Monetary Fund, it will slump to a third within the next decade.
At the same time that the dominance of democracies has faded, the share of economic output coming from authoritarian states has grown rapidly. In 1990, countries rated “not free” by Freedom House (the lowest category, which excludes “partially free” countries such as Singapore) accounted for just 12 percent of global income. Now, they are responsible for 33 percent, matching the level they achieved in the early 1930s, during the rise of fascism in Europe, and surpassing the heights they reached in the Cold War when Soviet power was at its apex.
As a result, the world is now approaching a striking milestone: within the next five years, the share of global income held by countries considered “not free”—such as China, Russia, and Saudi Arabia—will surpass the share held by Western liberal democracies. In the span of a quarter century, liberal democracies have gone from a position of unprecedented economic strength to a position of unprecedented economic weakness.
It is looking less and less likely that the countries in North America and western Europe that made up the traditional heartland of liberal democracy can regain their erstwhile supremacy, with their democratic systems embattled at home and their share of the world economy continuing to shrink. So the future promises two realistic scenarios: either some of the most powerful autocratic countries in the world will transition to liberal democracy, or the period of democratic dominance that was expected to last forever will prove no more than an interlude before a new era of struggle between mutually hostile political systems.
