Saturday, March 17, 2012

Neofeudalism watch

Via:  www.nytimes.com

March 12, 2012, 12:31 AM

The Reproduction of Privilege

By THOMAS B. EDSALL

Instead of serving as a springboard to social mobility as it did for the first decades after World War II, college education today is reinforcing class stratification, with a huge majority of the 24 percent of Americans aged 25 to 29 currently holding a bachelor’s degree coming from families with earnings above the median income.

Seventy-four percent of those now attending colleges that are classified as “most competitive,” a group that includes schools like Harvard, Emory, Stanford and Notre Dame, come from families with earnings in the top income quartile, while only three percent come from families in the bottom quartile.

Anthony Carnevale, director of the Georgetown University Center on Education and the Workforce and co-author of “How Increasing College Access Is Increasing Inequality, and What to Do about It,” puts it succinctly: “The education system is an increasingly powerful mechanism for the intergenerational reproduction of privilege.”

Continues here.  Read. 

See also:  College, Farther and Farther Out of Reach

When do nations fail?

Trying to collect a few salient readings from the past week or so on what causes fatal collapse of a complex developed society.

Via:  http://globalguerrillas.typepad.com/globalguerrillas/

When elites depart

One of the benefits of having a son that is a scholar of ancient warfare, from Alexander the Great to the Byzantine Empire to the Mongols, is that we can have wide ranging discussions on very deep topics.  Of perennial interest to us:  why do complex societies/civilizations collapse? 

One of interesting working theories we have is that while complex societies can be in decay for a long period of time, they only collapse when its favored elites abandon it/betray it.  

Here's an example from Roman history written by Joseph Tainter:

The Collapse of The [Western] Roman Empire

One outcome of diminishing returns to complexity is illustrated by the collapse of the Western Roman Empire. As a solar-energy based society which taxed heavily, the empire had little fiscal reserve. When confronted with military crises, Roman Emperors often had to respond by debasing the silver currency (Figure 4.2) and trying to raise new funds. In the third century A.D. constant crises forced the emperors to double the size of the army and increase both the size and complexity of the government. To pay for this, masses of worthless coins were produced, supplies were commandeered from peasants, and the level of taxation was made even more oppressive (up to two-thirds of the net yield after payment of rent). Inflation devastated the economy. Lands and population were surveyed across the empire and assessed for taxes. Communities were held corporately liable for any unpaid amounts. While peasants went hungry or sold their children into slavery, massive fortifications were built, the size of the bureaucracy doubled, provincial administration was made more complex, large subsidies in gold were paid to Germanic tribes, and new imperial cities and courts were established. With rising taxes, marginal lands were abandoned and population declined. Peasants could no longer support large families. To avoid oppressive civic obligations, the wealthy fled from cities to establish self-sufficient rural estates. Ultimately, to escape taxation, peasants voluntarily entered into feudal relationships with these land holders. A few wealthy families came to own much of the land in the western empire, and were able to defy the imperial government. The empire came to sustain itself by consuming its capital resources; producing lands and peasant population (Jones 1964, 1974; Wickham 1984; Tainter 1988, 1994b). The Roman Empire provides history's best-documented example of how increasing complexity to resolve problems leads to higher costs, diminishing returns, alienation of a support population, economic weakness, and collapse. In the end it could no longer afford to solve the problems of its own existence.

A more recent example of this is how the bureaucratic elites of the former Soviet Union, turned on the system and quickly gutted it through privatization, when their privileges were reduced.   An accelerant of the process was the availability of an external financial system to deposit the newly looted wealth.

The big question for those of us in the US/EU is whether we are seeing this process at work in our system.  Are the government/business elites turning against the system? 

Update: Wall Street Journal Wealth Report, Are Taxes Causing the Rich to Renounce Their Citizenship?:

Why is this happening? The IRS doesn’t tell us why people expatriate, or who they are or where they go. Lawyers say most are wealthy Americans who have expatriated to all manner of countries.

One argument is that they are leaving because of President Obama and the nation’s leaders.

“There is growing concern, particularly among the wealthy, about the future financial direction of the country,” said Paul L. Caron, Charles Hartsock Professor of Law at the University of Cincinnati College of Law. “This President constantly demonizes the wealthy, who undoubtedly are concerned about the tax policy that would emerge in 2012 if a re-elected Barack Obama, unconstrained by re-election concerns, finally confronts the budgetary train wreck that he has done so much to exacerbate.”

Other attorneys who specialize in helping the Americans expatriate say the reason is that the IRS is cracking down on overseas bank accounts and offshore income.

Via:  http://www.nytimes.com/2012/03/18/magazine/why-countries-go-bust.html?pagewanted=all

By his own admission, Daron Acemoglu is a slightly pudgy and fairly nerdy guy with an unpronounceable last name. But when I mentioned that I was interviewing him to two econ buffs, they each gasped and said, “I love Daron Acemoglu,” as if I were talking about Keith Richards. The Turkish M.I.T. professor — who, right now, is about as hot as economists get — acquired his renown for serious advances in answering the single most important question in his profession, the same one that compelled Adam Smith to write “The Wealth of Nations”: why are some countries rich while others are poor?

For centuries, economists and intellectuals have been compelled to explain why some nations fail. Here are their theories and the holes in the arguments.

Over the centuries, proposed answers have varied greatly. Smith declared that the difference between wealth and poverty resulted from the relative freedom of the markets; Thomas Malthus said poverty comes from overpopulation; and John Maynard Keynes claimed it was a byproduct of a lack of technocrats. (Of course, everyone knows that politicians love listening to wonky bureaucrats!) Jeffrey Sachs, one of the world’s most famous economists, asserts that poor soil, lack of navigable rivers and tropical diseases are, in part, to blame. Others point to culture, geography, climate, colonization and military might. The list goes on.

But through a series of legendary — and somewhat controversial — academic papers published over the past decade, Acemoglu has persuasively challenged many of the previous theories. (If poverty were primarily the result of geography, say, or an unfortunate history, how can we account for the successes of Botswana, Costa Rica or Thailand?) Now, in their new book, “Why Nations Fail,” Acemoglu and his collaborator, James Robinson, argue that the wealth of a country is most closely correlated with the degree to which the average person shares in the overall growth of its economy. It’s an idea that was first raised by Smith but was then largely ignored for centuries as economics became focused on theoretical models of ideal economies rather than the not-at-all-ideal problems of real nations. […]

Worth reading the whole article.  I read the reviews of the book at Amazon which indicated that his method is largely inductive (by example) which will never convince mainstream economists; and any mathematization he provides will be attacked on its assumptions.  Mainstream economists are paid by the institutions of the status quo, and face severe consequences for speaking out (much like bankers critical of their industry or of current economic policy).

I find Acemoglu and Robinson’s conclusions to be virtually self-evident to anyone whose heart has not hardened with the sclerosis of Econ.  See also their blog http://whynationsfail.com/.

Via:  http://www.angrybearblog.com/2012/03/when-do-humans-want-to-share-wealth.html

When do humans want to share the wealth?

Jonathan Haidt reports an interesting experimental result:
Two three-year-olds walk up to a marble-delivery machine that has two bins. Each stands in front of one bin. Three scenarios:

1. One bin has three marbles in it, the other has one: the winner is unlikely to share to equalize the takings.

2. There are two ropes to pull; one delivers one marble, the other three: the winner is unlikely to share to equalize the takings.

3. Two ropes, but both must be pulled together to deliver the one/three marbles: the winner is likely (75%!) to share to equalize the takings. (Either spontaneously, or on request from the loser.)

If people feel that they must work together to get the goods, they also feel that they should (or even want to) share the goods.
Haidt’s take (my emphasis):

If there’s a problem with the ultra-rich, it’s not that they have too much wealth, it’s that they bought laws that made it easy for them to gain and keep so much more wealth in recent decades.
Sarah Palin gave a speech last September lambasting “crony capitalism,” which she defined as “the collusion of big government and big business and big finance to the detriment of all the rest – to the little guys.” I think that she was on to something and that she was right to include big government along with big business and big finance. The problem isn’t that some kids have many more marbles than others. The problem is that some kids are in cahoots with the experimenters. They get to rig the marble machine before the rest of us have a chance to play with it.

Now add this:
The losers know the game is rigged, so their innate intution tells them that the winners should share.

Let me reiterate that I believe there is an optimal level of inequality that is optimal, possibly output-maximizing, and most definitely social-welfare-maximizing.  And I believe that level is far less than exists in the US or many other developed countries.  The notable reference here is the survey result of Ariely and Norton, “Building a Better America—One Wealth Quintile at a Time”:

Disagreements about the optimal level of wealth inequality underlie policy debates ranging from taxation to welfare. We attempt to insert the desires of “regular” Americans into these debates by asking a nationally representative online panel to estimate the current distribution of wealth in the United States and to “build a better America” by constructing distributions with their ideal level of inequality. First, respondents dramatically underestimated the current level of wealth inequality. Second, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution. Most important from a policy perspective, we observed a surprising level of consensus: all demographic groups—even those not usually associated with wealth redistribution such as Republicans and the wealthy—desired a more equal distribution of wealth than the status quo. [Emphasis mine]

Finally, it’s been a hypothesis of mine (partly resulting from observation of the few 1% friends I have) that the 1% like to get the hell out of the country for vacations, with the preferred destinations (I googled “vactions destinations wealthy” and got a series of articles on where the Forbes 400 go to play) being in Europe.  Absent the UK, one feature of the European nations is that they have much flatter income and wealth distributions than the US, and hence are arguably lacking the schizoid social tensions of America, where a generation of 76 millions Baby Boomers largely without adequate retirement assets and facing the possible gutting of Social Security by whomever is elected shuffle zombie-like through their days wondering if they’ll be living in their cars if they lose their jobs, because their children will be debt slaves….  You know, the unspoken fears of the average American.

Collapse is a distinct possibility.  There is already evidence of hysteresis, the damaging follow-on damage to the potential output of the economy from the last credit crisis (see Economist article on this).  Dmitri Orlov has drawn attention to many similarities of current America to pre-collapse Soviet Union:  declining life expectancy in major segments of the population; extreme inequality; looting of national resources by elites.

The test of whether America can still function as a nation lies ahead, for the first time since the Civil War.

Monday, March 12, 2012

Reinhart on financial repression

Via:  www.bloomberg.com    This is a follow-up to my post on “how long can interest stay low” (or “how long are we ZIRP’ed?”).

As they have before in the aftermath of financial crises or wars, governments and central banks are increasingly resorting to a form of “taxation” that helps liquidate the huge overhang of public and private debt and eases the burden of servicing that debt.

Such policies, known as financial repression, usually involve a strong connection between the government, the central bank and the financial sector. In the U.S., as in Europe, at present, this means consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers.

Continues here.  It’s a must read. The extraction of wealth from the lower socioeconomic classes continues.  It was interesting to read Niall Ferguson in one of John Mauldin’s recent blasts saying he feared for America unless a total “reset” of the system takes place.  That I can agree with.

The problem is the distribution, not aggregate demand.  But you can’t expect a mainstream economist to agree to that.

Friday, March 9, 2012

‘Animal spirits’ update

I continue to forecast the unemployment rate judgmentally, and by eye, to be consistent with the 1973-1974 pattern relating the “animal spirits” metric and the Michigan sentiment series.  Unemployment can be expected to jolt upward in 2013 as the European recession drags the US down with it, with the US Congress adding its own drag by reducing net fiscal flows into aggregate demand.

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By my estimation the economy will enter recession in the first half of 2013.  From a chaos theory point of view, it looks as if the US entered a period doubling regime in the 1980s, 1990s, and 2000s, as the length of the cycle between recession rose to almost a decade.  Period doubling precedes the transition to chaos in many dynamic systems.  If that is what has occurred, then we can expect a choppy short business “cycle” for some time to come, with perhaps another recession in 2018 or 2019.

We are in an “animal spirits” bubble now, hard as that is to believe.  The next bout of depressed spirits will probably be accompanied by another staggering downward of living standards, health and welfare of the 99%, which may or may not finally motivate the population to force democratic changes that will benefit them. 

Thursday, March 8, 2012

The end times are here? Hell freezes over?

Via:  www.rawstory.com

Conservative televangelist Pat Robertson says he has become a “hero of the hippie culture” by calling for marijuana to be legalized.

“I really believe we should treat marijuana the way we treat beverage alcohol,” Robertson toldThe New York Times on Wednesday. “I’ve never used marijuana and I don’t intend to, but it’s just one of those things that I think: this war on drugs just hasn’t succeeded.”

Late last year, the televangelist seemed to endorse deregulation, but a spokesman for the Christian Broadcast Network (CBN) told Raw Story that he “did not call for the decriminalization of marijuana.”

“He was advocating that our government revisit the severity of the existing laws because mandatory drug sentences do harm to many young people who go to prison and come out as hardened criminals,” CBN spokesman Chris Roslan wrote.

This time, Robertson was clear that he “absolutely” supports ballot measures in Colorado and Washington that would legalize the drug for recreational use.

Save the rich

Hat tip:  www.patrick.net

Tuesday, March 6, 2012

Picture of a broken country

The problem with America is that the owners of corporations don’t control them, looting corporate managements belonging to a cozy ruling class do; “corporations are people” and can buy elections outright (so can anyone in the world, since the money can be contributed anonymously); income and wealth are being split up largely along class membership lines (with the rare entrepreneurial exception who didn’t start off in or near the upper class—look at who gets funded by VC); and the only thing that will prevent America from descending further into banana republic neofeudalism will be renewed democratic commitment to collective welfare:  health, education, and work for those who need it.  Our emerging competitors may easily leapfrog past America as they see that countries that strive for “government that works” outperform countries where the prevailing attitude is “government is evil.”

I continue to hope.  Many have given up, and have become survivalists waiting for collapse.  To lose hope in the possibility of reform is to become a serf.

Hat tip to www.businessinsider.com:

Striking it Richer: The Evolution of Top Incomes in the United States (Updated with 2009 and 2010 estimates).

The basic gist: After losing big during the Great Recession, the top 1% have dominated income gains in the Great Recovery.

From the report:

During the Great Recession, from 2007 to 2009, average real income per family declined dramatically by 17.4% (Table 1),1 the largest two year drop since the Great Depression. Average real income for the top percentile fell even faster (36.3 percent decline, Table 1), which lead to a decrease in the top percentile income share from 23.5 to 18.1 percent (Figure 2). Average real income for the bottom 99% also fell sharply by 11.6%, also by far the largest two year decline since the Great Depression. This drop of 11.6% more than erases the 6.8% income gain from 2002 to 2007 for the bottom 99%.


The sharp fall in top incomes is explained primarily by the collapse of realized capital gains due to the stock-market crash. Aggregate realized capital gains fell from $895 billion in 2007 to $236 billion in 2009. Indeed, including realized capital gains, the top decile income share dropped from 49.7% in 2007 to 46.5% in 2009 while excluding realized capital gains, the top decile income share remained virtually constant from 45.7% in 2007 to 45.5% in 2009.

..