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First, writes Galbraith, it is important to understand that most of the current statistics on inequality are flawed. For while economists typically focus on income data – or measures such as the “gini coefficient” – these are extremely crude and tend to focus on outdated ideas about how economies work. Second, he adds, if you crunch the numbers in a more granular and up-to-date way, this challenges some orthodoxies. In particular, most economists (and politicians) have assumed in recent years that the US was becoming more unequal because of industrial change, such as a loss of manufacturing jobs to China.
But Galbraith sees little evidence of this. “At the global level, the data give no support to the vast outpouring in the professional literature arguing that changes in inequality are based on so-called ‘real factors’ such as a race between technology and education,” he writes. “On the contrary, financial factors explain a very large share (practically everything) that can be explained.”
The US financial markets have suffered over 18,000 extreme price changes caused by ultrafast trading, according to a new study of market data between 2006 and 2011
"The once-stable incomes of America's biggest earners now fluctuate dramatically from year to year. And as go the rich, so goes much of the economy. "
"I will divide my remarks into 8 parts; (1) I will argue that the Mortgage Interest Deduction is a residual of the 1913 tax code, and was not created to encourage homeownership; (2) that those on the margin of homeowning get little-to-no benefit from the Mortgage Interest Deduction, and that the policy therefore does little to encourage homeownership; (3) that the Mortgage Interest Deduction does encourage those who would be homeowners anyway to purchase larger houses than they otherwise would; (4) that even in the absence of the Mortgage Interest Deduction, owner-occupants receive a large tax benefit; (5) that phasing out the Mortgage Interest Deduction would encourage households to pay down their mortgages more quickly, and would therefore encourage households to rely less on leverage; (6) household deleveraging would lead to greater market stability, but would also mean that the revenues generated by the elimination of the deduction would be smaller than static estimates suggest; (7) at a time when the housing market remains quite weak, it is important that the Mortgage Interest Deduction be phased out carefully; (8) that if we do wish to encourage homeownership via tax policy, a targeted, refundable credit would be more effective than the current Mortgage Interest Deduction. "
"The Obama administration’s response to the crisis was visibly poor in real time. Klein shrugs off the error as though it were inevitable, predestined. It was not. The administration screwed up, and they screwed up in a deeply toxic way. They defined “politically possible” to mean acceptable to powerful incumbents, and then restricted their policy advocacy to the realm of that possible. The administration could have chosen to fight for policies that would have been effective and fair rather than placate groups whose interests were opposed to good policy. They might not have succeeded, but even so, as Mike Koncazal puts it, they would have lost well. We would be better off with good policy options untried but still on the table than where we are now, with policy itself — monetary, fiscal, whatever — discredited as both ineffective and faintly corrupt."
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Once you understand that the problem is a fairness issue rather than a dollars-and-cents issue, the policy space grows wider. Holding constant the level of expenditure, one can make bail-outs more or less fair by the degree to which you demand sacrifice from the people you are bailing out. TARP was deeply stupid not because it meant socializing risks and costs created by bankers. TARP was terrible public policy because it socialized risks and costs while demanding almost no sacrifice at all from the people most responsible for those risks. The alternative to TARP was never “let the banks fail, and see how the bankruptcy system deals with it.” The alternative would have been to inject public capital (socialize risks and costs!) while also haircutting creditors, writing-off equityholders, firing management, and aggressively investigating past behavior. It was not the money that made TARP unpopular. It was the unfairness. And the unfairness was not at all necessary to resolve the financial problem.
"Successful animal systems often manage risk through synchronous behavior that spontaneously arises without leadership. In critical human systems facing risk, such as financial markets or military operations, our understanding of the benefits associated to synchronicity is nascent but promising. "
in list: Economic Crisis
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PP: It’s really interesting that you mention the lack of scientific funding after the Cold War. The eminent economic historian Philip Mirowski has noted this time and again. In his books he writes about how scientists found themselves increasingly in oversupply as the Cold War ran down and spending on military research dwindled. He contends that much of the ‘mathematicisation’ of modern economics – that is, the move away from realistic theories that help the public purpose and into ‘pure’ models that don’t really do or say anything – was due to this emigration from the hard sciences. Clearly without the threat of the ‘Evil Empire’ Western governments no longer see as much need to spend on expensive research. I mean, while I’m not hugely keen on the military-industrial complex, at least a lot of this research ended up serving the public purpose when it was released by the military.
"Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations. "
"Our results show that the marginal effect of financial development on output growth becomes negative when credit to the private sector surpasses 110% of GDP. This result is surprisingly consistent across different types of estimators (simple regressions and semi-parametric estimations) and data (country-level and industry-level). The threshold at which we find that financial development starts having a negative effect on growth is similar to the threshold at which Easterly et al. 2000 find that financial development starts increasing volatility."
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Our results show that the marginal effect of financial development on output growth becomes negative when credit to the private sector surpasses 110% of GDP. This result is surprisingly consistent across different types of estimators (simple regressions and semi-parametric estimations) and data (country-level and industry-level). The threshold at which we find that financial development starts having a negative effect on growth is similar to the threshold at which Easterly et al. 2000 find that financial development starts increasing volatility. This finding is consistent with the literature on the relationship between volatility and growth (Ramey and Ramey 1995) and that on the persistence of negative output shocks (Cerra and Saxena 2008).
"The world is experiencing three simultaneous crises in finance, development, and the environment. A number of economists are questioning the mainstream narratives and analyses of these crises. Some of us have joined to create the Triple Crisis Blog to contribute to a more open and global dialogue around these three crises."
Colorado hit-and-run case with financial adviser.
"Symposium: Macroeconomics after the Financial Crisis" from the Journal of Economic Perspectives, v. 24 no. 4, Fall 2010
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