October 12, 2012
A guest post from (Roughly) Daily…
click here for larger version
Intrigued by the mechanisms that generate a world like ours, in which over 33% of the wealth in the U.S. is held by 1% of the population, economist Ricardo Fernholz and mathematician/statistician Robert Fernholz developed a model that might explain the high degree of income and wealth inequality we see in advanced economies.
As James Kwak notes in Baseline Scenario,
The model assumes that all households are identical with respect to patience (consumption decisions) and skill (earnings ability). Household outcomes differ solely because they have idiosyncratic investment opportunities—that is, they can’t invest in the market, only in things like privately-held businesses or unique pieces of real estate. Yet when you simulate the model, you see an increasing share of wealth finding its way into fewer and fewer hands [as illustrated in the chart above].
As the authors emphasize, “it is luck alone – in the form of high realised random investment returns – that generates this extreme divergence.” In the absence of redistribution, either explicit or implicit, this is the kind of society you end up with…
Clearly, the world is not quite so simple; there are some redistributive mechanisms (taxes and the like), and (given, e.g., educational differences) not all peoples’ earning abilities are equal. Still, as Kwak observes,
…this is a useful antidote to the widespread belief that outcomes are solely due to skill, hard work, or some other “virtuous” attribute. Even if everyone starts off equal, you’re going to have a few big, big winners and a lot of losers. Because we want to find order and meaning in the universe, we like to think that success is deserved, but it almost always comes with a healthy serving of luck. Bear that in mind the next time you hear some gazillionaire hedge fund manager or corporate CEO insisting that he knows how the country ought to be run.
* “A rich man is nothing but a poor man with money” - W.C. Fields
As we ponder polarization, we might send balanced birthday greetings to Elmer Ambrose Sperry; he was born on this date in 1860. An early exemplar of equipoise, Sperry was the engineer and inventor who devised the gyrocompass (a huge advance on traditional magnetic compasses, first tested on the U.S.S. Delaware in 1911). His compasses and stabilizers have helped navigate and “balance level” first ships, then aircraft ever since.
September 17, 2012
52 Shades of Greed: The oligarchs who’ve benefited from the excesses that led to the crash of 9.15.08– and from the crash itself– memorialized in a deck of cards.
January 28, 2012
The New York Times reports this morning on the latest U.S. GDP figures:
Growth Accelerates, but U.S. Has Lots of Ground to Make Up
The American economy picked up a little steam last quarter, growing at its fastest pace in a year and a half. Whether it can sustain that momentum is critical to millions of Americans out of work — and perhaps President Obama’s re-election chances…
But Nomura Securities analysts looked at the same glass and saw it decidedly half-empty, as Business Insider reports:
Core Economic Growth Slowed Sharply In Q4
In regards to this morning’s mediocre GDP report, Nomura cuts right to the chase in a note titled ‘Core Economic Growth Slowed Sharply’ in Q4.
Here’s their commentary:
Inventory building contributed 1.9 percentage points (pp) to growth in Q4 2011 after subtracting 1.4pp in Q3. The measure of final sales, which is a “core” view of the economy that removes the effect of inventories, grew at an annual rate of just 0.8% in Q4 compared with 3.2% in Q3. Under this perspective, the US economy slowed sharply in the final quarter of the year. The choppiness in quarterly growth in the back half of 2011 is partially due to the rebound following the dampening effect on economic growth stemming from the Japan earthquake and tsunami that hit on 11 March. The second half rebound was front-loaded into Q3. The same pattern can be seen when looking at the industrial production data, which also tracks the broad economy. In Q3, industrial production rebounded to an annual growth rate of 6.3% (following 0.6% in Q2) followed by slower growth of 3.1% in Q4. To smooth the effect of the rebound from temporary factors, economic growth in H2 2011 advanced at an average annual rate of 2.2% compared with 0.8% in H1.
And here’s the chart that demonstrates the point. The gray line is what Nomura calls ‘core’.
February 14, 2011
a guest post from (Roughly) Daily…
One can use the interactive chart above (which is based on income tax data, and is adjusted for inflation to 2008 dollars) to see how average incomes in the U.S. have grown as between any two years from 1917 to 2008, and how that change was divided as between the richest 10% of the population and the remaining 90%.
The Wall Street Journal reports today that
A newly resilient U.S. economy is poised to expand this year at its fastest pace since 2003, thanks in part to brisk spending by consumers and businesses.
In a new Wall Street Journal survey, many economists ratcheted up their growth forecasts because of recent reports suggesting a greater willingness to spend.
One wonders how… indeed, one wonders how long the dynamic that’s defined the last two decades is sustainable in what is fundamentally a consumer-driven economy.
[TotH to @cshirky for the lead to the tool]
As we ponder the different kinds of heart we might celebrate on Valentine’s Day, we might recall that it was on this date in 1967 that Aretha Franklin recorded “Respect” (with her sisters Carolyn and Erma singing backup). The tune had been written and recorded by Otis Redding two years earlier, and had done well on the R&B charts. But Atlantic Records exec and producer Jerry Wexler thought that the song was especially suited to showcase Aretha’s vocal gifts, and had the potential to be a cross-over hit. He was, of course, right on both counts.
December 21, 2010
We have noted that, historically, small business has played a key role in creating the jobs and growth that have led the U.S. economy out of recession, and that the troubles besetting small business today help explain the depth and duration of our current troubles (e.g., here or here).
Now, from the Cleveland Fed (via the ever-illuminating Calculated Risk), an explanation of the connection between low home prices and stalled small business growth. The report analyzes small business borrowing, and notes that homes equity borrowing is an “important source of capital for small business owners and that the impact of the recent decline in housing prices is significant enough to be a real constraint on small business finances.” It concludes:
Everyone agrees that small business borrowing declined during in the recession and has not yet returned to pre-recession levels. Lesser consensus exists around the cause of the decline. Decreased demand for credit, declining creditworthiness of small business borrowers, an unwillingness of banks to lend money to small businesses, and tightened regulatory standards on bank loans have all been offered as explanations.
While we would agree that these factors have had an effect on the decline in small business borrowing through commercial lending, we believe that other limits on the credit of small business borrowers are also at play and could be harder to offset. Specifically, the decline in home values has constrained the ability of small business owners to obtain the credit they need to finance their businesses.
Of course, not all small businesses have been equally affected by the decline in home prices. While many small business owners use residential real estate to finance businesses, not all do. Those more likely do so to include companies in the real estate and construction industries, those located in the states with the largest increases in home prices during the boom, younger and smaller businesses, companies with lesser financial prospects, and those not planning to borrow from banks. These patterns are also evident in the data sources we examined.
The link between home prices and small business credit poses important challenges for policy makers seeking to improve small business owners’ access to credit. The solution is far more complicated than telling bankers to lend more or reducing the regulatory constraints that may have caused them to cut back on their lending to small companies. Returning small business owners to pre-recession levels of credit access will require an increase in home prices or a weaning of small business owners from the use of home equity as a source of financing. Neither of those alternatives falls into the category of easy and quick solutions.
No “easy and quick solutions”… if we’re to wait for home prices to rise and conventional mortgage lending to recover, the wait could be painfully long.
But perhaps that’s not where we should be looking at all. Perhaps we should be encouraging the emergence of a new suite of financing options for small businesses: from micro-credit (more likely in practice “micro-credit on steriods” to meet the scale of the individual needs, but the principle’s the same) to new credit unions– co-ops that would enable small businesses, in effect, to lend to each other.
In fact, both kinds of institutions (and many variations on these themes) exist already– they simply need to be scaled.
That’s not an “easy and quick solution” either. But it has the extra benefit of building a financing structure that does not depend on the consolidating financial behemoths whose rapaciousness is a(nother) part of our problem… and it beats the hell out of waiting for Godot.
Filed in Competition and Industry Structure, Driving Forces, Economic, Political, Scenario Planning, Social
Tags: Cleveland Fed, economic growth, economy, employment, home loans, home prices, house prices, real estate prices, Recession, Small business, Unemployment, Waiting for Godot
September 3, 2010
If only it looked like “up” from here…
First, viz. the U.S., the BLS reported this week:
Nonfarm payroll employment changed little (-54,000) in August, and the unemployment rate was about unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported today. Government employment fell, as 114,000 temporary workers hired for the decennial census completed their work. Private-sector payroll employment continued to trend up modestly (+67,000).
The ever-illuminating Calculated Risk puts those numbers (which are being reported as a pleasant surprise to the extent that they weren’t as bad as many feared) into perspective:
… suggesting that any light at the end of this particular tunnel is likely a pretty distant glow at this point… and thus that any real recovery– a restoration of employment, and the consumer purchasing power and confidence that would accompany it– may be a while in coming.
Second, lest we imagine that the disappearance of Europe and the PIIGS from the front page mean that all’s well, a chart from Clusterstock all-too-aptly titled “Europe’s Crisis Coming Back In 3…2…1…“:
While the financial problems of Europe’s periphery ‘PIIGS’ economies (Portugal, Italy, Ireland, Greece, and Spain), has receded substantially from business headlines, this doesn’t mean that their crisis is over, or even getting better.
In fact, the creditworthiness of nations such as Greece, Portugal, and Spain is looking worse than ever, as represented by % spread between the yield demanded by bondholder for ten-year PIIGS government bonds and the ten-year bonds of Germany (Germany is Europe’s version of a ‘risk-free’ yield to compare things against). For all of the PIIGS, it is worse off than before the European Unions’s one-trillion-dollar affirmations of support for the PIIGS, or before the much bally-hooed bank stress tests.
The frenzy surrounding the Eurozone crisis may have ebbed, but it’ll be back…
Japan? Their economy, already in shaky shape, has been rocked by an unexpected rise in the value of the Yen against the dollar (and thus unanticipated– and unwanted– pressure on exports).
The governments of the developed world seem to be behaving as though this is all a kind of “hurricane season” through which they need simply to batten down.
Filed in Competition and Industry Structure, Economic, Political, Scenario Planning, Social
Tags: BLS, Bureau of Labor Statistics, economics, economy, employment, Euro crisis, European economic crisis, European economy, government employment, Greece, Ireland, Italy, Japan, PIIGS, Portugal, private employment, Private-sector payroll, Spain, Unemployment, Yen
June 29, 2010
Crowd at New York’s American Union Bank during a bank run early in the Great Depression.
The Bank opened in 1917 and went out of business on June 30, 1931. (source)
As Lateral Thinking reports, there’s an uncomfortable– if not indeed, an eerie– resemblance between the events of the early 30s and today:
As we have said many times lately, history rhymes… Today’s world looks very much alike the 30s… See what David Rosenberg has to say about it:
“DARING TO COMPARE TODAY TO THE 30′S
Coming off a crash (’29) and rebound (’30); aftermath of an asset deflation and credit collapse banks fail (Bank of New York back then, Lehman this time around); natural disaster (dust bowl then, oil spill now); global policy discord (with the U.K. then, with Germany now); geopolitical threats; interventionist governments; ultra low interest rates (long bond yield finished the 1930s below 2%); chronic unemployment (25% then, 17% now); deflation pressures; competitive devaluations; gold bull market (doubled in Sterling terms in the 30s); debt defaults; sputtering recoveries and rallies; onset of consumer frugality.“
Add to that the growing concern over the sanctity of foreign debt (as remarked by, e.g., The Bank of England)… At the very least there’s reason to dust off those concerns about a double-dip recession– and to be careful to recall that, while inflation is the demon we’ve fought these last several decades, deflation lurks still. (C.F. here and here.)
UPDATE, JUNE 30: David Leonhardt of the New York Times in a similar vein…
From the Center on Budget and Policy Priorities:
Some critics continue to assert that President George W. Bush’s policies bear little responsibility for the deficits the nation faces over the coming decade — that, instead, the new policies of President Barack Obama and the 111th Congress are to blame. Most recently, a Heritage Foundation paper downplayed the role of Bush-era policies… Nevertheless, the fact remains: Together with the economic downturn, the Bush tax cuts and the wars in Afghanistan and Iraq explain virtually the entire deficit over the next ten years (see Figure 1).
The full report (here, or pdf here) is well worth a read… if only as a powerful reminder that Santayana was surely right: if we don’t heed the lessons of the past, we are bound to make the same mistakes again.
Filed in Economic, Political, Scenario Planning, Social
Tags: Barack Obama, budget deficit, Bush tax cuts, Center on Budget and Policy Priorities, deficit, economic downturn, economic policy, economy, fiscal policy, George W. Bush, President Bush, President Obama, tax cuts, tax policy
November 27, 2009
As we metabolize our way through the annual tryptophan haze, two contributions on a theme that’s been raised here before (c.f., for example, here, here, and most fundamentally, here), two video commentaries on the current state of economic play…
And (on a very different note, but to the same end), via MonkeyBusinessBlog, a “soliloquy” from Wallstreetpro2 (alert: after you get past the first few seconds– which are devoted to a pitch for precious metals– this video is, by reason of sustained use of profanity, not even nearly “suitable for work”… but then, it’s a holiday; we’re not at work):
While it’s easy to quibble with a detail here or there, and to fault the not-so-veiled xenophobia in the latter, it’s hard to dismiss the through-line. But that it’s a problem of a scale befitting both the cynical nostalgia and the epic anger? Quod erat demonstrandum.
So, what to do?
Increasingly, wise and experienced observers are arguing that financial institutions central to the economic infrastructure– banks, some insurance companies, a few huge employers (like GM and Chrysler)… any institution that government(s) can’t permit to crash– must not be allowed to become (or, in our current situation, to remain) “too big to fail.” Former IMF Chief Economist and MIT Professor Simon Johnson, Nobel Laureate Joesph Stiglitz (see also Bloomberg video here), former Federal Reserve Chairman Paul Volcker– all warn against letting institutions grow so large that they cannot be allowed to die.
Why? Far from reducing the appetite for the kind of risky behavior that drove us into our current trough, the effective guarantee of a government bailout removes all moral hazard; if the truly-huge get to keep their winnings, but have their losses covered, why not take more and more risk? And since the bankers and the markets all know that the guarantee is in place, the gargantuan incumbents enjoy a cost advantage– they can (as the first video reminds us) raise money more cheaply than their competitors (after all, there’s no risk)– money that they have used not to restore the flow of credit, but to acquire even more scale through acquisitions, to fund extraordinarily profitable proprietary trading… and of course, to pay those infamous bonuses (and here). All, while these behemoths raise their fees to their customers (see here, here, and here, for instance).
For my part, I agree– I hope that efforts like those of Vermont Senator Bernie Sanders bear some fruit.
But I fear that they neither go far enough to address inherent risk and the attendant issues of fairness, nor get at what is, at the core of our troubles, an extraordinary opportunity for growth… and after all, a crisis is a terrible thing to waste. More on that shortly…
March 19, 2009
A guest post from (Roughly) Daily…
“27 Visualizations and Infographics to Understand the Financial Crisis” (including a few that will be recognizable to readers of these missives or of Scenarios and Strategy)…
(See also this Ad Age piece on how “Data Visualization is Reinventing Storytelling Online,” referred by Tim O’Reilly)
As we begin to get it, we might spare a consoling thought for that pioneer of guerilla marketing Honore de Balzac, who, on this date in 1842, opened his play Les Ressources de Quinola to an empty house… Hoping to create “buzz” for the play, Balzac (the poster boy of over-achievers, who worked 14-16 hour shifts, propelled by a reported 50 cups of coffee a day) had started, then encouraged, the rumor that tickets were sold out. Unfortunately for him, his fans took the news at face value and stayed home.