The inequality boom

Henry at Crooked Timber posted about the most recent issue of Politics and Society and its discussion of What Produced the Inequality Boom?. I commented:

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I have to agree with Straightwood on the importance of propaganda and on a pervasive mental model of how the world should work. Ideology, maybe?

What I've noticed, especially in the last couple of decades, is that many Americans and almost all Republicans or libertarians have great difficulty assigning blame to rich people. In discussing any problematic situation or institution -- illegal immigration, for instance -- their first reaction is to see the source of the problem in the least powerful and wealthy people involved. In the example of immigration, if you bring up the complicity of major employers who want to hire illegal immigrants because they're cheap and exploitable, they'll nod and then ... it's as though their brains skid away and they start talking about anchor babies again. The idea that wealthy people have more power and thus may be more culpable doesn't seem to have an traction in their brains, it's a notion that doesn't seem to compute on some basic level. Wealth is the elephant in the room that *people can't actually see*.

From Henry's description of the articles, what stands out to me as an unconsidered aspect is something about the behavior of inherited wealth. It's not just that some people were able to get lots of money, it's that at least some people who started out with money -- Old Money -- didn't lose it in the time-honored fashion, but saw it grow in the way only New Money used to grow. See, for instance, a Wall Street Journal article about Charles Koch, which said he 'applied the "science of liberty" to become one of the world's richest men' -- apparently the "science of liberty" allowed him to make a very wise choice of parents.

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chris:

It can't be just Calvinism, we've had Calvinism all along.

Currently, there's a discussion at Balloon Juice about Megan McArdle's piece in the Atlantic blaming the housing bubble on the 30-year fixed mortgage, because it

gives the consumer the power to shaft banks whenever it is to their advantage.

See Irvine Housing Blog for more evisceration.

McArdle is a useful idiot test case, because she so perfectly exhibits the attitudes I'm talking about. She's not a Calvinist; she calls herself a "libertarian". She's The Atlantic's business and economics editor, though it's thunderously obvious that she knows nothing about what Henry would call "economics".

What she *is*, is an MBA. As I recall, MBA programs became very popular and important in the late 70s, as the inequality boom was taking off. I wonder, now, if what these programs teach -- the mindset, the basic attitudes, what things are important and what aren't -- isn't where the Dives-blindness (or whatever it should be called) comes from. MBA programs, generally speaking, teach the wealthy to regard workers as tools, consumers as lawful prey. This is where our aristocracy is trained, and this is what they learn.

Now that I think about it, what has changed in how inherited wealth functions is that the scions of wealth are often expected to get MBAs. Dr. Hilarius @15 talks about how Old Money is tied up in trusts, etc., so the heirs can't spend it on hookers & blow, in traditional fashion. But since the 60s-70s the MBA has become a way to train heirs to a different kind of aristocratic tradition. You don't have to insulate your heirs from the money if you train them not to blow it, and that's why e.g. Charles Koch (who has an MBA) can be so obscenely wealthy. Gilded Age robber barons started small and made their businesses large; modern ones are Robber Dukes: they start with a large business and make it gigantic.

Blogcomment record: The Wealth of Nations, 1

Steven Brust is reading Adam Smith's The Wealth of Nations. My comments on Chapter 1:

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there is very little division of labor in hunter-gatherer societies

I absolutely disagree. Compared to, say, a baboon troop, there is enormous and striking division of labor in even the most “primitive” human society.

If you look in the Hunter-Gatherer Wiki thinking of chimpanzees or baboons as your baseline for “no division of labor”, what you’ll see is that in most cultures most jobs are the speciality of one sex or the other.

Because humans specialize, they are much better at both gathering and hunting than chimpanzees or baboons would be. Another way of looking at it is that a single human, trying to find food in the wilderness, is not going to be much better at it than a chimpanzee, and will probably die.

H-G groups start teaching girls and boys somewhat different sets of specialized skills at an early age, so by the time they’re adults they are, compared to other apes, specialized, highly-skilled, and co-dependent.

I think there’s a level of confusion here because agriculture is less skill-and intelligence-dependent than foraging. In modern terms, most agricultural work is unskilled labor; most foraging work is semi-skilled to skilled labor. There is no monotonic “progress” in specialization as you move from foraging societies to farming and then toward civilization (=cities), modern and post-modern.

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Peter:

Yes, there are more specialists in an agricultural society. But *most* of the people are less specialized — less dextrous, in Smith’s terms — than their foraging forbears. That’s IMHO where the proletariat comes from — it’s only with agriculture that you get the possibility of large groups of unskilled and disposable adults.

Economicsts' mistakes

Brad DeLong posted Why I Was Wrong. In the comments, I said:

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I basically agree with Barry. The people who caused this mess appear to have been *flawlessly* rational actors: they have been personally enriched to a truly astounding (one might say "obscene") degree without taking any personal risk or suffering any personal consequences.

When Brad says, for instance, that he didn't expect:

"(3) the discovery that banks and mortgage companies had made no provision for how the loans they made would be renegotiated or serviced in the event of a housing-price downturn."

and

"(8) the failure of highly-leveraged financial institutions to have backup plans for recapitalization in place in the case of a major financial crisis"

I submit that he was wrong because he was expecting those organizations to act like single entities, for the people within them to work (generally speaking) for the good of the institution. Instead, to Barry and me it looks as though the most powerful people in those organizations were acting as libertarian individuals, concerned only with their own ends -- which is exactly the philosophy they claimed to admire. And it certainly seems to have worked for them, so why were you surprised?

When Alan Greenspan said "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms." I didn't believe him. How could The Compleat Randian *not* expect individuals to be looking after their personal interests first?

But the fact that Brad, whom I think is less likely to prevaricate than Greenspan, says the same thing leads me to believe that maybe Greenspan was telling the truth. You-all believed on the one hand that people are and should be rational, self-interested, selfish and greedy actors -- but you also believed the people *you* know personally, the smart and the wealthy and the powerful and the well-connected, aren't "like that".

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mike: The "fat cats" are not losing compared to everybody else. In relative terms, they're still on top. In absolute terms, they're even more secure: they don't face unemployment, homelessness, loss of medical coverage; their children will not be eligible for reduced-price school lunches. They suffer no direct personal suffering.

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"because of the egos and attitudes of the main participants, and as such it was not predictable"

My argument is that the ego and attitudes of the main players were *entirely* predictable, especially given that economics is about predicting human behavior. The collapse of Lehman specifically might be contingent, but that institutions without enough insider support would fail was completely foreseeable.

My Favorite Martian Economist

So my favorite economist won the Nobel-ish Economics Prize. Why is Paul Krugman my favorite economist?

1. As Patrick Nielsen Hayden said, for "his distinguished work in the field of Being Right".

2. He became an economist because he wanted to be Hari Selden.

3. He knows Doctor Who.

4. He quotes Monty Python.

5. He posted a LOLcat at the New York Times.

6. He wrote a paper on The Economic Theory of Interstellar Trade.

7. He writes as though his readers aren't dumb.

Meltdown in Progress: Useful links

I am spending too much time reading about the financial crisis/bailout/meltdown. I hate money.

Good links that may help explain things:

Paul Krugman's blog, always.

Stirling Newberry on "The Crooked Deals that Made This Financial Meltdown Inevitable", Part 1. He promises Part 2 will be RSN.

The underlying problem then, is not the housing bust, since that could be dealt with by a relatively modest FDIC bail out of banks and changes to Freddie and Fannie, nor even the wall of paper that was created, since that could be dealt with by cleaning up a few toxic funds. It is that the very basic bet of the economy was wrong.

The very bet was that war and debt were all that was needed to grow for ever. Because every cent was being poured either into the war, or houses, or into gambling double and triple that these would expand forever, there was no money for anything else.

Nouriel Roubini on "The shadow banking system is unravelling".

Last week saw the demise of the shadow banking system that has been created over the past 20 years. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders.

Like banks, most members of this system borrow very short-term and in liquid ways, are more highly leveraged than banks (the exception being money market funds) and lend and invest into more illiquid and long-term instruments. Like banks, they carry the risk that an otherwise solvent but liquid institution may be subject to a self-­fulfilling and destructive run on its ­liquid liabilities.

But unlike banks, which are sheltered from the risk of a run – via deposit insurance and central banks’ lender-of-last-resort liquidity – most members of the shadow system did not have access to these firewalls that ­prevent runs.

Roubini emphasizes that the crisis will necessarily involve European financial institutions, as well.

Jerome a Paris is one of the people best placed to say "I told you so." Over the past couple of years, he has been talking about The Anglo Disease:

The Anglo Disease is the label I have been using to describe the current situation, whereby too much debt has made the financial sector dominant, and starved the rest of the economy of oxygen - and not-so-coincidentally transfering massive wealth from the working classes to the very rich: debt, managed by the financial sector, and working under assumptions of ever increasing returns, is both the core tool of very obvious policies and the very instrument to hide these from view; feeding the ideology of selfishness, and hiding (temporarily, but for much longer than even its creators dared hope, I think) the empoverishment of the many, it is both self-sustaining and popular for the masses, is it has become a full scale addiction.

Heads They Win; Farming

I left a comment at echidne of the snakes:

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from What’s $34 Billion on Wall Street? [NYT, Jan 27 '08]

In any other industry, Mr. Kim and Mr. Maheras would be pariahs. But in the looking-glass world of Wall Street, they — and others like them — are hot properties. The two executives are well on their way to reviving their careers, even as global markets shudder at the prospect that Merrill and Citigroup may report further subprime losses in the coming months.

... The quick comebacks of these executives stand in stark contrast to the plight of the hundreds of investment bankers who have received pink slips in the last two weeks. They also illuminate a peculiar aspect of Wall Street’s own version of a class divide.

... To some extent, it is personal: Mr. Kim and Mr. Maheras have a web of relationships with Wall Street’s top executives.

I don't see anything "peculiar" about this class divide at all. This is what a ruling class looks like: if you're on the inside, your friends help each other loot & pillage when times are good -- and cut back to just looting when times are bad.

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also posted at Making Light, Heads they win, tails we lose. With much other discussion:

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It looks like one of the oldest games of all: It's Not What You Know, It's Who You Know. The complete decoupling of risk and reward is not a bug in this game, it's a *feature*. For the winners, at least.

I'm not sure what kind of -cracy this is. Plutocracy? Aristocracy? BigGuycracy? In any event, it's not "a peculiar version of a class divide", it's the same old class divide made especially stark.

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albatross @ 215:
I think you'd find it hard to make an argument for subsidizing small farmers (being pushed out of the market by economic forces) that didn't also apply to all kinds of other businesses

The traditional argument is that food is special because everyone needs food to *live*, so (a) monopolies are especially dangerous, and (b) letting the supply be controlled by other countries is especially dangerous.

In the case of France, at least, one can see an additional consequence of small-farm supports: French food. Most food ingredients just aren't as tasty when they've been mass-produced and travelled hundreds or thousands of miles. To get French food, you need local ingredients, and that's part of what French agricultural policy has gotten them.

Of course, this is doubly untrue in the US, where (a) people historically don't care how the food tastes, and (b) ag policy supports the food that travels best (grains, sugar, butter). But the local harvest idea really does mean something.

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PJ Evans @219:

One of the great benefits of Community Supported Agriculture is that the farmer gets the money in the spring, when ze needs it, and then the risk that a particular crop will fail gets spread across all the members, not just dumped on the farmer. I've been a CSA member for about 15 years, and you really get an old-fashioned attitude toward the weather -- it's *personal* when an early frost means no more basil, or too much rain at the wrong time means no carrots this year.

I strongly recommend this directory to find a CSA near you -- though shares are mostly gone for the 2008 season as the popularity of "eating locally" increases.

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Greg @ 234:

It really, really depends on what they're farming and where. I'm not far from Princeton, NJ, and I know a number of people who have successfully gone into "boutique" farming from a non-farm background. The CSA has interns and apprentices every year. A bunch of my middle-schoolers friends are in 4H, just like the farm kids were when I was growing up -- but these aren't farm kids, they're not born into farming -- they're learning it just as the kids on the robotics team are learning engineering, or the kids in woodworking classes are learning that trade.

It's definitely the organic farmers who are the real cutting edge, here: they're developing a model of farming as a *career*, not a birth right (or curse).

As PJ says, it works for unprocessed fruits & veg, and for high-value items like organic dairy products and wine. And it also works here because the land is so valuable that farming *has* to concentrate on high-value items -- though there's some talk about people experimenting with field corn this year.

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Koske @ 261:

My thinking is that many of these O/N/L businesses and products come closer to reflecting the actual costs of the food

That is certainly my observation. The organic vegetables I get from my CSA actually cost no more in $$ than buying the same thing in "non-organic" form at the grocery store, and are *much* cheaper than buying the organic equivalent at the natural food store.

Basically, I do not spend more money by getting food from the CSA, but the quality is enormously higher. They're not just tomatoes, they're a religious experience.

albatross @260:
As I said above, farming is not-just-a-business because we need food to *live*, in way that we don't need hardware stores.

I live literally next door to the CSA where I get my food. It is enormously easier for me to put up with the local externalities -- tractor noise at odd hours, some pretty organic smells from time to time -- because I know that I'm not living next to a mere business of which I happen to be a customer, but a source of my physical existence. Even so, I wouldn't be nearly as tolerant of a non-organic farm, because the externality of breathing pesticides & herbicides would be too high.

Greg @236:

One thing about "boutique" farms is that, to be viable, they need to grow an enormously greater range of crops than the farms you grew up with probably did. The CSA farm (less than 100 acres) where I get my veg grows 40 different crops, each in multiple varieties (there must be 30+ different kinds each of tomatoes and peppers). The orchard (200 acres) where I get most of my fruit grows 30 varieties each of apples and peaches, along with 20 other crops.

This is clearly enormously inefficient by agribusiness standards -- but it buffers the farmers against the random factors that always make agriculture precarious. That buffering is what agricultural subsidies are supposed to be *for*, so in many ways I'm paying the subsidies for my food upfront -- by getting only what they are able to grow despite their inefficiency.

The way I get my food has an "anti-capitalist" feel, because it involves actual human relationships, not just the exchange of money. But this discussion has made me see that a lot of what we see as part of capitalism is passing the buck on externalities. What I'm experiencing is not really romanticism, it's "not escaping the externalities".

Are high-income voters Democrats or Republicans?

Paul Krugman now has a blog, in which he makes brief but frequent posts. Many, of course, are related to his new book, The Conscience of a Liberal.

Recently he's made several posts about income and voting, and how the media's Conventional Wisdom is that "rich people vote democratic". He's also talked about What's the Matter With Kansas, the thesis of which is that low-income voters (e.g. Kansas) have been voting Republican, against their economic best interests, for the sake of social issues. Krugman presents evidence from Larry Bartels that lower-class voters continue to vote Democratic, the real shift is that upper-class voters are more consistently Republican. The other big shift is that white males in the South have moved to the Republicans, in backlash against the Civil Rights Act.

In comments, I've noted that the CW is not without foundation: high-income *states* definitely do vote Democratic in presidential elections. This seems to directly contradict the data Krugman presents showing that high-income *voters* vote Republican.

Is it something to do with income inequality? Or maybe regional differences in turnout?

You can tell I'm not an economist because thinking about this makes my brain hurt. Any economists/poli sci peeps out there who can lead me through the maze?