naked capitalism

Reader and life-long Chicago resident John Bougearel asked me to reissue a post encouraging readers to participate in peaceful demonstrations during the American Bankers Association annual meeting in Chicago October 25-27. The sessions are organized by a coalition of community, consumer and labor organizations and are called “Showdown in Chicago“. You can find more details via the link.

A number of commentators are planning a series of related posts and hopefully op-ed and news articles around this time. William Black and Dean Baker are among those leading the effort.

John Bougearel reacted to something I wrote two days ago:

But per the social psychology research, this “you are in a minority, you are wrong” message DOES dissuade a lot of people. It is remarkably poisonous. And it discourages people from taking concrete action. I was surprised that some people bothered to comment on a post I put up yesterday, calling on people in the Chicago area to attend some peaceful demonstrations against the banking industry during the American Bankers Association national meeting, October 25 through 27. Some people weighed in, saying (basically) “don’t bother”.

I suppose it makes a difference whether one is old enough to remember the 1960s. Because people in large numbers got out and protested, two sets of changes that seemed impossible came about: civil rights for blacks and an end to the US involvement in Vietnam.

His comment:

I will be more than happy to be in the minority and told I am wrong. The truth of the matter is we who object are neither the minority or wrong. Being told such is intended to be dismissive and minimize our voice.

I have reached the point where it is high time to push-back on the message we are being spoon-fed and to educate and promote the message that it is time to push back on the powers that be. We can start with peaceful demonstrations in the style of MLK. What was startling watching the MLK and Malcom X video clips is how relevant their experience of being black in America relates to being middle class in America today. It is high time middle class America finds its voice and is heard above controlled messages press releases leaked to MSM.

We can not, above all, allow our voice to be drowned out by mainstream media and the powers that be who influence what is peddled through MSM. Our voices are certainly not being represented through our votes, and when that happens, it is no different than the early colonists who fought against taxation without representation. Since our votes find no voice in Congress or Capitol Hill, it is time for grassroots organizations to take over the role that was intended for our elected officials.

And I get the pseudo-protest and protest points cited above in comments, and I get the Malcolm X message, but the MLK message of non-violent protest is authentic and not pseudo as some might imagine. There is power in non-violent protest, resulting in change that can be durable and long-lasting. But an effort must be made at a grass-roots level and it must sweep through the nation.

Here are excerpts from the original post:

Dean Baker, a couple of days ago at Huffington Post, called on readers to go to Chicago to participate in peaceful protests during the annual meetings of the American Bankers Association on October 25 to 27. A coalition of community, labor, and consumer groups are organizing this “Showdown in Chicago.”

If you saw Michael Moore’s Capitalism: A Love Story, a disconcerting bit was his discussion of a series of research reports put out by Citigroup for some of its asset management client in 2005 on “Plutonomy”. It argued that a world ordered to suit the whims of the top 1% was well underway. The only thing that might get in the way was that the other 99% had the force of numbers on its side.

Sometimes it takes a show of numbers to change the dynamic. As Baker pointed out:

The elites hate to acknowledge it, but when large numbers of ordinary people are moved to action, it changes the narrow political world where the elites call the shots. Inside accounts reveal the extent to which Johnson and Nixon’s conduct of the Vietnam War was constrained by the huge anti-war movement. It was the civil rights movement, not compelling arguments, that convinced members of Congress to end legal racial discrimination. More recently, the townhall meetings, dominated by people opposed to health care reform, have been a serious roadblock for those pushing reform….

A big turnout at this event can make a real difference. Just to review the scorecard, most of the country is still suffering the fallout from the bankers’ irrational exuberance of the housing bubble era. The Congressional Budget Office (CBO) and other forecasters expect the suffering to endure for years to come.

As we noted yesterday, ordinary people who still have jobs are often seeing their wages cut, while Wall Street, the beneficiary of rich subsidies, is expecting a banner year.

If you live in or near Chicago, see if you can organize others to join you. And dress nicely! One favorite strategy is to dismiss protestors as ruffians.

The economy must be better, because the rich are spending more. I have to wonder how much of the increase in spending is the result of direct benefit from financial services industry subsidies (ie, people working for large financial firms spending more because they are confident they will have a good to great bonus this year) versus indirect (people feeling better because their stock portfolios have recovered somewhat).

From Bloomberg:

Spending in the U.S. on luxury goods and services spurted 29 percent in the third quarter from the previous three months, as consumers with the highest incomes unleashed pent-up demand, according to Unity Marketing.

Spending among 1,067 consumers with average annual income of $228,800 rose to $18,826 each in the three months ended in September from $14,554 a quarter earlier….

The increase was driven by consumers with the highest income levels, starting at $250,000 a year….The wealthy curbed purchasing earlier this year because of Wall Street job cuts, lower home values and volatile financial markets.

“No question that this quarter’s spending increase is good news for luxury marketers,” Danziger said in a telephone interview today. “Many affluent consumers returned after sitting on the sidelines for a year. However, the richest are few in number, 2.5 million households, so competition will be fierce to win their attention.”…

Gains in confidence among luxury consumers, meanwhile, slowed, Unity Marketing said.

The researcher’s luxury confidence index rose 1.6 points to 75.9, after jumping 18.6 points to 74.3 in the previous quarter. That index peaked at 113.2 at the end of March 2006. Its low was 40.3 in September 2008. It started at 100 in January 2004.

Ed Harrison has an excellent post over on his Credit Writedowns blog, following up and elaborating on his “Greed is Not Good” post here yesterday.

To whet your appetite, here it the beginning of “More on greed, regulation, Lehman and the financial industry“:

In one of my latest posts I said “greed is not good.” Quite frankly, I looked at this statement as self-evident in the wake of an economic catastrophe where greed was a defining element. Yet, a remarkable number of people commented in defense of greed; they seem to believe greed is a good thing. So, I would like to clarify a few things about greed in the context of the recent financial crisis and prudent regulation of the financial industry.

Greed is not good

Greed is defined as:

A selfish and excessive desire for more of something (as money) than is needed (Merriam Webster)

An excessive desire to acquire or possess more than what one needs or deserves, especially with respect to material wealth (Free Online Dictionary)

The selfish desire for or pursuit of money, wealth, food, or other possessions, especially when this denies the same goods to others. It is generally considered a vice, and is one of the seven deadly sins in Catholicism. (People who do not view unconstrained acquisitiveness as a vice will generally use a word other than greed, which has strong negative connotations.) (The Free Dictionary)

The obsession with accumulating material goods (Access-Jesus)

Do you notice the commonalities in all these definitions? Excessive, selfish, more than what one needs or deserves, unconstrained, obsessive. You can make the non-judgmental argument as I did that greed is neither good nor bad. But, in what twisted world view is any of this good? Greed is not ambition or hunger or drive. Greed is by definition excessive and unconstrained, and, thus, leads to unstable and suboptimal outcomes. Greed is not good.

Ed discusses how the free market ideology is a religion and serves to maintain the power of kleptocrats and why regulation is the least bad of the options available to deal with the concentrations of power that are inherent features of a stratified society. His post continues here.

The Wall Street Journal story, “The ‘Democratization of Credit’ Is Over — Now It’s Payback Time,” is a solid piece of reporting on how credit that was once offered liberally to lower income consumers has now left a very big hangover. It’s worse than with other income strata for an obvious reason, namely, low income consumers are almost by definition budget stressed, so adding debt to the mix has high odds of leading to a bad outcome (save when used prudently as a short-term bridge, or for a long-term investment, and even then only when conservative cash flow projections confirm the debt service is manageable).

I wish the story had more on how this looked from the lenders’ side, as in what their margins and default assumptions were, but even with the focus on borrowers, the article is revealing. It focuses on Karen King, who admits that, at $36,000 in debt, she had too much of a good time and is now paying for it, literally and figuratively.

But the story glosses over two issues. Of her $36,000 owed, $26,000 is student loans:

Her biggest chunk of debt, $26,000, stems from student loans to pay for her two-year associate’s degree from a community college — loans now in the hands of collectors. The remaining $10,000 or so includes old credit-card balances, debt to a store that rents furniture, utility bills and back taxes. Another obligation is $400 a month she contributes to the rent on her grandfather’s two-bedroom apartment, where her mother, uncle and sister also live.

The story dwells on the lifestyle she had (dining out 2-3 times a week, going to movies) that presumably was a big contributor to the $10,000 she now owes, but skips past the $26,000. Ms. King worked in a shoe store and now drives a tour bus for $13 an hour plus tips. Did that associate degree do her any good in the job market? And I have to wonder if the student debt, which she was not doubt told was sensible (”an investment in your future”) desensitized her to taking on more debt. I admittedly came of age in the era before education inflation kicked in, but my mother recently found one of the old bills from college. I made some crude assumptions and compounded forward the Harvard tuition, room and board forward, and it came a bit over $20,000 a year in current dollars. Ms. King no doubt overspent, but a more important contributor to her current mess is that she threw away a lot of money on a useless degree.

The second interesting bit is she has decided not to declare bankruptcy, the reason apparently being that her impaired credit record has led her to be turned down for jobs. Her debt management decisions are driven by the impact on that scorecard:

When a utility to which she owed $300 offered to settle for less, Ms. King says, she declined, because she was told an overdue bill takes longer to come off a person’s credit report when it is settled for a partial payment.

She rejected any idea of a bankruptcy filing for the same reason. “It takes forever to come off” the credit report, she says.

Before the way to punish debtors was to send them to debtors prison. Now it appears to be to restrict their access to work. Perverse, but effective.

As much as commentators are trying to put a happy face on recent data releases showing that job losses are slowing, it still means that fewer people are working. Moreover, one element of the poor jobs environment that it not getting enough play is the way wages are deteriorating. Some who have full-time work have been asked to take pay cuts to preserve jobs; those who work part time are seeing their hours cut.

A sign of how difficult things are for some: food stamps users are increasingly employed. From the Financial Times:

The number of working Americans turning to free government food stamps has surged as their hours and wages erode…

While the increase in take-up is often attributed to the sharp rise in unemployment – which on Friday hit 9.7 per cent – the Financial Times has learnt that some 40 per cent of the families now on food stamps have “earned income”, up from 25 per cent two years ago.

The agriculture department, which runs the programme, attributes this rise to workers having their hours cut back.

“I’m sort of stunned, it seems like a dire warning . . . that even the jobs people are retaining in this recession aren’t at the wage level and hours level that they need to provide for their families,” said Heidi Shierholz, economist at the Economic Policy Institute….

Less attention has been paid to those still in the workforce, whose incomes are also being squeezed. The average working week is now about 33 hours, the lowest on record, while the number forced to work part-time because they cannot find full-time work has risen more than 50 per cent in the past year to a record 8.8m. Wages and benefits have decelerated.

The food stamp data suggest that “the labour market problems are more significant than you would expect, given just the unemployment rate”, said John Silvia, chief economist at Wells Fargo. “For me it suggests the consumer is not going to rebound or contribute to economic growth for the next year, as the consumer would in a traditional economic recovery.”

Another implication is that when the economy recovers, employers will first return staff whose hours have ben cut back to full time before hiring new staff, so improvements in unemployment will be slow in coming.

By Andrew Kaplan, a hedge fund manager:

It has become fashionable among equities managers of the bullish persuasion to argue that a strong recovery in GDP will occur in 2010 because the “structural adjustment period” of moving back to a more normal savings rate has been completed. We’ve gone from a savings rate of barely 1% in 2008 up to 4.2% in July (ok, so the argument sounded better when the number was 6.2% in May, but still…).

The story goes something like, “consumers took a little time to recognize that their home equity had disappeared, but now they’ve adjusted their savings rates toward the desired level to reflect the fact that they need to save a larger proportion of income for retirement…so this effect will no longer be a drag on growth in coming quarters.”

This is the kind of conventional wisdom which could only emerge among folks in the 99^th income percentile who spend their time primarily with other folks in the 99^th income percentile. You don’t have to look at the data (mortgage delinquencies, foreclosures, credit card defaults, bankruptcies) all that hard to see a very different picture. In fact, it is almost certainly true that the savings rate for 99% of the US population is negative. These people (a/k/a “all of us”) are drowning. And to the extent that our savings rate is less negative than it was one or two years ago, that simply reflects the reality of reduced home equity and unsecured credit lines rather than any conscious effort to reach a “desired level” of savings.

A little data might help here. Unfortunately, there really IS no good data on PCE (personal consumption expenditure) and savings stratified by income percentile. There are a couple of surveys, the triennial “Survey of Consumer Finances” by the Federal Reserve and the “Consumer Expenditure Survey” by the Bureau of Labor Statistics, but the self-reported data is laughable. For 2007, the Consumer Expenditure Survey showed a personal savings rate of 18.4%. In the same year, the Bureau of Economic Analysis, which calculates the savings rate as a residual from actual income and expenditure data, showed a savings rate of 1.7%. Either the Consumer Expenditure Survey does a poor job of sampling, or people who fill out surveys are really big liars.

Fortunately, there IS some pretty good data on income stratification in the United States, and a few assumptions can help shed some light. Economists Thomas Piketty and Emmanuel Saez have made careers of studying US income inequality using IRS data, which goes back to 1913. The most recent data available (for 2007) showed that the top 14,988 households (0.01% of the population) received 6.04% of income, the highest figure for any year since the data became available. The top 1% of households received 23.5% of income (the second highest on record, after 1928), while the top 10% received 49.7% of income (the highest on record).

The fortunate 14,988 had an average income in 2007 of $35,042,705. They had an average federal tax burden, according to Piketty and Saez, of 34.7%, leaving them after tax income of $22.9 million. If you assume a 50% savings rate among this group, you get total savings of $171.5 billion. This is nearly ONE HALF of the total savings for the entire country implied by a savings rate of 4.2% ($365 bn) reported in this month’s Bureau of Economic Analysis data.

I’ve never actually had an after tax income of $22.9 million, so I couldn’t say for sure whether a 50% savings rate is a reasonable assumption, but I’m going to go out on a limb and say that it is, just based on the pure physics of spending money. Buying cars, clothes, and fancy dinners, even at Masa, won’t get you there…the math doesn’t work. Buying a private jet could get you there, but most people, even rich people, don’t buy one of those every year. The only EASY way to spend more than 50% of $22.9 million on an annual basis is to buy lots of houses…but the definition of “personal consumption expenditure” used by the BEA specifically excludes purchases of real estate. They use an imputed rent calculation instead. So I’m going to stick with my 50% number.

If we expand our survey to the top 1% of all households, we find an average income of $1.36 million for 2007. These folks had an average federal tax burden of just under 33%, so their after tax income averaged $916 thousand. If you assume this group had a savings rate of 33%, you get total savings of $452 billion (remember, $171.5 bn of this comes from the top 0.01%, we’re assuming a savings rate of around 25% of after tax income for the “poorer” 99% of the top 1%) This is more than 100% of the personal savings of the entire population, according to the BEA data. It implies that 99% of the US population still has, on average, a negative savings rate of around 1.3%. If you subtract the next nine percent, which likely still has a positive savings rate, the data for the bottom 90% becomes even more depressing, implying a negative savings rate of close to 5%.

Submitted by Thomas Forest

Outliers: The Story of Success
Malcolm Gladwell, Little Brown and Company, (2008)

Have you read Fooled by Randomness by Nassim Taleb? Malcolm Gladwell has, “(Fooled by Randomness) is to conventional Wall Street wisdom approximately what Martin Luther’s ninety-five theses were to the Catholic Church.” And Taleb has been reading Gladwell. For example in the notes on Chapter 10 Taleb makes reference to The Tipping Point and to Gladwell’s 1996 essay discussing the non-linear physical properties of ketchup, “Tomato ketchup in a bottle- None will come and then the lot’ll.” (Incidentally, Malcolm Gladwell is something of an authority on packaged tomato products. His description of the evolution of grocery store spaghetti sauce on YouTube is not to be missed.) Strangely the connections between the authors’ work extends even to their dust jackets. At least from my uninformed perspective Christopher Sergio seems to have completely ripped off Allison Warner’s jacket design, or maybe it’s the other way around.

In Chapter 10 of Fooled by Randomness, Loser Takes All- On the Nonlinearities of Life, Taleb asks the question, “While it is hard to deny that (Microsoft’s Bill) Gates is a man of high personal standards, work ethics, and above average intelligence, is he the best? Does he deserve it? Clearly not… Most of Gate’s rivals have an obsessive jealousy of his success. They are maddened by the fact that he managed to win so big while many of them are struggling to make their companies survive.” Right. Haven’t you asked yourself this question? Come on, what gives with Bill Gates? Why is he such an outlier? Is it just Talebian randomness? In Outliers: The Story of Success Malcolm Gladwell takes up this specific question, as well as the general version. Why are some people such enormous winners? Is it something intrinsic to them or is there something more? Gladwell asks (he really does ask) why have you never heard of Chris Langan? What, apart from fabulous wealth, did Rockefeller, Carnegie, Weyerhaeuser, Gould, Field, Morgan, Pullman, and Armour share? What is the most important non-athletic characteristic of professional Canadian hockey players? Why were 19th century Appalachians so fantastically quarrelsome? Why are these people outliers? What is going on?

The answer from Fooled by Randomness is grim, except perhaps for those readers who were clinically depressed before they picked it up. We are Chance the Gardener careening through life around open manholes with speeding taxis missing our knees by inches… until we are crushed in our living rooms while cautiously assembling a flat-packed bookcase from IKEA according to the manufacturer’s detailed instructions. Our lives ebb and flow according to some hideous Pareto distribution, and it is just as well only a few depressed people understand the mathematics. We should all hunker down with a copy of Seneca’s Letters from a Stoic.

In contrast, Outliers succeeds, in Gladwell’s typical narrative salad style, as a balm on the psyche of the constitutional optimist. Have you seen that black and white image of the two faces in profile that suddenly turns into a cup, and then back into two faces, and then you realize you can make your brain look at it either way? Gladwell does something similar, but different. When I was young and unencumbered by material things I lived by the tracks. One morning a train was parked on them loaded with large brightly colored metallic objects. I stood staring at the train trying to make sense of the apparently random pattern of lines formed by the intersection of the silhouettes of the train cars and their cargo. I stood there longer than I like to admit. And then all the lines miraculously resolved themselves into a train loaded with automobiles. The point here being that unlike the faces and the cup image, once I saw that the train was loaded with automobiles the random pattern of silhouettes was irrevocably ordered, crystalized. In similar fashion, in Outliers Gladwell displays his talent for putting together crystalizing explanations. He looks at life from a weird perspective and then points out the order in the randomness, thereby irrevocably reordering our understanding of reality.

Gladwell’s explanation of the quarrelsome nature of Appalachians is a good example of his ability to crystalize the logic behind a puzzle. My mother’s people are multigenerational Appalachians, and the family history was always been inexplicable to me. When I was eight years old, I asked my grandfather why he decided to enlist to fight in World War II. He told me that he had gotten into a scrape with a man (a “feller” as my grandfather told it) and that man’s brothers were out hunting around the neighborhood to kill him. However, my grandfather was able to sneak past the brothers and got home, where his mother hid him in the barn under some burlap sacks. Rising early the next morning, his mother had him lie down on the floor of the back seat of the car and then drove him to Bristol to the Army recruiter’s office. “Ah,” you are thinking, “one of Grandpa’s tedious stories.” But not in this instance, rather this story is a typical fragment of a family history composed of dozens of similar episodes. From my youth I have been puzzled by why these people were so touchy and violent, but as Gladwell shows, the explanation for their chaotic history is not something in the water or a genetic defect. In Outliers he irrevocably reordered my understanding of their behavior.

Must our hands shake as we tear open the box from IKEA? Are we really stuck with a Pareto distribution? Taleb tells us they should and we are, but Gladwell replies by reaching out to offer hope. He does not dispute Taleb’s point that we are ruled by non-linear distributions, but shows us that we need not always be fooled by them. What, after all, gives with Bill Gates? Gladwell shows that he exists at the intersection of the extreme ends of two non-linear distributions. As Taleb notes, you are more likely to win the PowerBall Lottery three times than you are to find yourself in similar circumstances, but if you read Outliers you’ll at least understand the Story of Bill Gates’ Success, and maybe if you are as lucky as me, you may even understand why your relatives are so crazy.

Submitted by Edward Harrison of the site Credit Writedowns.

As with my most recent post here on Naked Capitalism about Larry Summers, I want to write a thought piece here, as much for discussion’s sake as for its analysis. Now, the core of what you are about to read is something I put together and posted on Credit Writedowns in March of ‘08. At the time, I was struggling with the dichotomy between the perceived increase in wealth in the United States and the obviously poor macro statistics on debt, leverage and earnings for the middle class. This piece was the product of that struggle.

I should warn you that it is at odds with some of what you will see me write here since I am basically a libertarian and the piece is very populist. When I wrote the piece, I can’t say I was 100% behind this interpretation of events. Nevertheless, as time has passed during this financial crisis, many events have validated this view in my eyes (the dichotomy between the bank/insurance company bailouts and the auto bailouts being a prime example). Therefore, I would be curious to read your responses.

As to the data that reinforces this view, you can find more at the following posts:

• Chart of the day: real hourly earnings (Jun 2008)
• Charts of the day: US macro disequilibria (Oct 2008)

I intend to follow this post with one titled “De-regulation as crony capitalism” or something to that effect, because the theme underneath this post is that Special Interests which favor elites are always present in any society, at any time regardless of the form of government. This was true in Egypt, Rome and Greece. It was true in the Soviet Union and it is certainly true in the United States. Therefore, it is axiomatic that de-regulation favors elites through crony capitalism, which is basically what we have seen over the past few decades. This is not the invisible hand of Adam Smith on display and makes the case for some minimal level of regulatory oversight.

One last comment: this post also is in line with my view that the United States has been in relative decline for some time, probably since World War II. The U.S. reached its apex as an economic and military power when large parts of Europe and Asia lay in ashes in 1945. In the intervening time, the U.S. has not recognized its relative decline. This has led to imperial over-stretch and a redistribution from the middle class to elites (This view is in line with Kennedy’s “The Rise and Fall of the Great Powers’ and deserves another separate post as well).

Below is the post. Feel free to comment whether you agree or disagree. Enjoy.

In an earlier post, I said that populism was the problem, not the solution. I reject populist methods of tariffs and protectionism because they are self-defeating economic poison. However, in this brief post, I do want to give voice to a populist interpretation of the last 35 years of U.S. economic history. This is a story of unequal re-distribution of wealth from the less fortunate to the more fortunate. This is a story of the United States in which the rich get richer at the expense of everybody else. At the conclusion, ask yourself: is this true and, if so, what should we do about it?

The Theory of Kleptocracy
First, let’s use a theory from Guns, Germs, and Steel by Jared Diamond as the center-piece for this little theory. In Chapter 14, entitled “From Egalitarianism to Kleptocracy,” Diamond postulates that more stratified societies are by definition less egalitarian, but more efficient and are, thus, able to eradicate or conquer more egalitarian, less stratified societies. Thus, all ‘advanced’ societies with high levels of GDP are complex and hierarchical.

The problem is: these more stratified, more complex societies are in essence Kleptocracies, where those in power re-distribute societal wealth to themselves. Those at the bottom of the society’s pyramid accept this unequal, non-egalitarian state of affairs because they too benefit from their society’s relative advancement. It’s a case of a rising tide lifting all boats.

Diamond says the Kleptocrats maintain power using 4 different methods:

“1. Disarm the populace, and arm the elite.”
“2. Make the masses happy by redistributing much of the tribute received, in popular ways.”
“3. Use the monopoly of force to promote happiness, by maintaining public order and curbing violence. This is potentially a big and underappreciated advantage of centralized societies over noncentralized ones.”
“4. The remaining way for kleptocrats to gain public support is to construct an ideology or religion justifying kleptocracy.”

Kleptocracy in America?
The obvious corollary of this theory is that most successful modern societies are, in fact, kleptocracies. The key is to use the four methods to gain popular support in order to re-distribute as much wealth to the ruling class as the populace will support. If the ruling class takes too much, it will be overthrown and replaced by a new ruling class (which in turn will re-distribute wealth to itself using the same four methods).

While this angle seems cynical, it is a a line of argument that has great internal consistency.

So, is the United States a kleptocracy? Of course it is! Is that bad? Well, it obviously depends on who you are in society. But, it also depends on whether the kleptocracy is efficient and fair over the long term. Let me explain this last statement a bit more.

Efficiency and Fairness
Because any heavily stratified society is by its very nature non-egalitarian, there always exists the potential for disenchantment amongst the masses. The U.S. is no exception. In order to prevent this disenchantment from leading to revolt, the ruling class must appear to strive for efficiency and fairness.

According to dictionary.com, efficiency means “accomplishment of or ability to accomplish a job with a minimum expenditure of time and effort.” So, for the US, it means the ability to increase productivity at a rate which makes the U.S. wealthier on a per capita basis now and in the future. And remember, it is the perception of efficiency, not actual efficiency which is important.

To be fair is to be “free from bias, dishonesty, or injustice.” For the United States, this means maintaining the perception that most every person has the opportunity to succeed while few, if any, have unobstructed paths to guaranteed success.

Is the U.S. efficient and fair?
That’s the $64,000 question, isn’t it. My populist take: no, the United States is neither efficient nor fair.

The United States has been living beyond its means for some time. Since the 1960s, we have run up a massive federal debt and current account deficit, while debt levels have doubled on a percentage of GDP basis. Our present levels of consumption are simply not justified by our current levels of productivity, if we want to maintain our present standard of living in the future.

Were we not the world’s major military superpower with the world’s reserve currency and the world’s largest economy, we would have succumbed to our profligacy years ago. Paul Kennedy has a great book on “The Rise and Fall of the Great Powers.” By contrast, many developing countries have gone bankrupt in the last 30 years from Argentina to Zimbabwe. Yet, we are in worse shape than were they, if one looks at the signposts which represent our macroeconomic health: debt-to-GDP levels, current account deficit as a percent of GDP, Government budget deficit, savings rate, etc.

The fact is our day of reckoning is upon us. We will soon realize that our massive debt and an outsized credit bubble have not only saddled us with debt, but it has also misallocated capital so that we are less productive than we believed. We have built miles and miles of telecom dark fibre when we could have invested in schools. We have built massive numbers of new homes, when we could have repaired our bridges and roads. The last 35 years have been an illusion of extreme productivity and wealth because we have artificially pulled forward demand by misallocating resources in order to consume today, what could have been consumed tomorrow. In essence, we are consuming today, while unwittingly making it more difficult to consume tomorrow because we believe we are wealthier than we truly are.

And as for fairness, Real Weekly Earnings peaked over 35 years ago in September 1972! Using the CPI to adjust wages to today’s dollars, the average worker made $738.48 per week in September 1972. In January 2008, that figure was $598.18.

(Note: these figures are expressed in Jan 2008 dollars. I use the CPI Index to calculate real dollars, which is based on 1982-1984 dollars. But, I then multiply this figure by 2.1108, which represents the BLS’s index factor for Jan 2008).

So, we are getting poorer. And we have been for over 35 years. Only during the end of the Clinton Administration was there an appreciable upswing in real weekly wages over this time period. Don’t believe me? See the raw data yourself, here and run the numbers.

In the meantime, CEOs are earning hundreds of millions of dollars, even when they are forced to leave because of poor management which cost their firms billions. In 2005, the average CEO earned 262 times what an average worker gets. In 1965, that figure was 24 times (see story).

Conclusions
There it is: the U.S. ruling class is not living up to its role in either efficiency or fairness. We are getting poorer.

That is why people are so angry. That is why the poll numbers for the President and Congress are so low [remember, I wrote this in March 2008]. And that is why so many people are suffering from the housing bubble.

The question you should ask yourself is this: Why has it taken the citizens of the U.S. so long to figure all this out? Answer: Even though the gulf between rich and poor was widening and the rich were getting richer, we thought we too were getting richer as well. We thought that we too were profiting from all of this “productivity.” In the 1980s, we came out of a steep double dip recession and stagflation and we won the cold war. This inflated our sense of well-being. In the 1990s, there was the tech bubble to inflate our assets. In this decade, there was the housing bubble. So, we thought we were getting rich too. We didn’t mind that the ruling class was benefiting disproportionately as long as we too appeared to be benefiting.

But, what was really happening is we were loading up on debt. We were not benefiting at all

And now that there are no more cold wars we can win quickly, no more tech stocks, no more double digit house price increases, and no more asset bubbles to hide the naked truth — now we realize that we were getting poorer all the time — just as it felt to us. The ruling class have used the four methods to maintain popular support that I enumerated before in order to give the appearance of equity and efficiency. All the while, the rich were milking the system for all they could.

I advise anyone who finds this populist line of argument compelling to read Jared Diamond’s Pulitzer Prize-winning book. Chapter 14 is especially rich. Once you realize that we the American people have been duped for the last generation, you will be angry. And this is why we need a major change in Washington. The politics and policies of the past just will not do.

In case you managed to miss it, Japan has taken a huge fall in its relative economic standing by more or less standing still for almost a generation. The comparative fall is 30%. And even though visitors to Japan do not see the superficial signs of distress (infrastructure is well maintained, people are neatly dressed, restaurants, bars, and tea houses look busy), the consumer has retrenched to a degree that (now) seems unimaginable to the US.

The big reason Japan has had a high savings rate is the lack of Social Security or tax-advantaged retirement plans, plus families are more nuclear than in other societies (i.e., less reliance on extended families). But a second reason is the extreme instability of employment among the young. Many are so-called “freeters”, or basically long-term temps, doing low level work for employers, the first to be fired, and little hope of advancement even if they do wind up staying with the same company a long time. This is not only materially difficult, but psychologically hard, since Japan places great standing on group membership.

The examples from this New York Times story are revealing:

The economic malaise that plagued Japan from the 1990s until the early 2000s brought stunted wages and depressed stock prices, turning free-spending consumers into misers and making them dead weight on Japan’s economy.

Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming ’80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.

The Takigasaki family in the Tokyo suburb of Nakano goes further to save a yen or two. Although the family has a comfortable nest egg, Hiroko Takigasaki carefully rations her vegetables. When she goes through too many in a given week, she reverts to her cost-saving standby: cabbage stew.

“You can make almost anything with some cabbage, and perhaps some potato,” says Mrs. Takigasaki, 49, who works part time at a home for people with disabilities.

Her husband has a well-paying job with the electronics giant Fujitsu, but “I don’t know when the ax will drop,” she says. “Really, we need to save much, much more.”…

To better compete, companies slashed jobs and wages, replacing much of their work force with temporary workers who had no job security and fewer benefits. Nontraditional workers now make up more than a third of Japan’s labor force.

Younger people are feeling the brunt of that shift. Some 48 percent of workers age 24 or younger are temps. These workers, who came of age during a tough job market, tend to shun conspicuous consumption.

They tend to be uninterested in cars; a survey last year by the business daily Nikkei found that only 25 percent of Japanese men in their 20s wanted a car, down from 48 percent in 2000, contributing to the slump in sales.

Young Japanese women even seem to be losing their once- insatiable thirst for foreign fashion. Louis Vuitton, for example, reported a 10 percent drop in its sales in Japan in 2008.

“I’m not interested in big spending,” says Risa Masaki, 20, a college student in Tokyo and a neighbor of the Takigasakis. “I just want a humble life.”…

“My husband is retiring in five years, and I’m very concerned,” says Ms. Masaki’s mother, Naoko, 52. She says it is no relief that her husband, a public servant, can expect a hefty retirement package; pension payments could fall, and she has two unmarried children to worry about.

“I want him to find another job, and work as long as he’s able,” Mrs. Masaki says. “We must be ready to fend for ourselves.”

Perhaps I am wrong, but my impression is Americans understand frugality borne of real or near poverty but are less able to identify with middle class desperation. But studies have also found that happiness is correlated strongly with relative rather than absolute economic standing, that is, someone would be happier earning $100,000 in a community where the average income is $75,000 than they would earning $150,000 in a community where the average income is $200,000. Since Japan has very little income disparity, the fact that the belt-tightening is widespread no doubt makes it somewhat easier to bear. I do not know how well America would bear up if we had a long period of Japanese style austerity with the big differences we have between the bottom, middle, and top echelons.

The Wall Street Journal Economics Blog today featured an update of a chart prepared by Alexis de Tocqueville, author of Democracy in America, comparing the compensation of French and American civil servants, with an update (click to enlarge):

The problem is that this comparison is misleading. The intent is to illustrate pay disparities over time.

However, while the President and the King were indeed the highest paid “civil servants”, the President than as now was almost certainly not the highest paid individual, while the King most certainly was. And that’s before we get into the royal perks: the castles, staff, stables, artwork, the list goes on). Plus the idea of a king as civil servant is a bit strained too. However, this was the Bourbon Restoration, so kings were a bit more mindful of the citizens than in pre-Revolutionary times.

But the King was almost certainly the richest and best paid individual in France. He made 8,000 times the most menial civil worker. Our disparity (minimum wage versus Lloyd Blankfein) at a mere 5,000+ isn’t quite as bad, right?

But Blankfein was far from the best paid American. Forbes told us that the 400 highest earning taxpayers reported $105 billion in adjusted gross income. That averages $262.5 million. $262 million versus the minimum wage level of $13,100 gives a ratio of over 20,000 to one.

Now some will protest that the $105 billion probably includes one time windfalls, like the sale of major businesses. Doesn’t wash. We are looking for the disparity top to bottom. I haven’t seen any estimates for 2008 yet, and hedge funds had a rougher year, but the Institutional Investor ranking of top hedge fund managers for 2007 showed John Paulson at $3.7 billion, George Soros at $2.9 billion, and James Simons at $2.8 billion.

So the popular perception is right. The super wealthy today are better off than royalty of old. And it’s not due to indoor plumbing, either.