The Upside-Down Money Universe
Let's start with a cartoon from the International Herald Tribune's Patrick Chappette:
In the Boston Globe, economist Jeffrey Sachs discusses the "Panama papers" and why we are facing "an age of impunity":
The rich and powerful get away with their heists in broad daylight. When a politician like Bernie Sanders calls out the corruption, the New York Times and Wall Street Journal double down with their mockery over such a foolish “dreamer.” The Journal recently opposed the corruption sentence of former Virginia governor Bob McDonnell for taking large gifts and bestowing official favors — because everybody does it. And one of its columnists praised Panama for facilitating the ability of wealthy individuals to hide their income from “predatory governments” trying to collect taxes. No kidding...
The recourse to cheating within the financial industry now seems to be deeply ingrained, part of the corporate culture, and enabled by the prevailing impunity. An ingenious scientific study published in December 2014 showed the rot. Employees of a major international bank were divided into a control group and a treatment group. All subjects were asked to flip a coin 10 times and report truthfully on the number of heads, with more heads resulting in a bigger monetary prize. The treatment group was subtlety reminded they were bankers, while the control group was not. Simply reminding them that they were professional bankers was enough to induce the employees to cheat by exaggerating the number of heads they flipped.
At the Center for American Progress, Molly Elgin-Cossart and Trevor Sutton argues that the most frustrating aspect of the money-hiding scandal is the means by which folks made it happen:
Despite the rise of a global anti-corruption movement and technologically driven advances in transparency that have made privacy all but impossible in other spheres, hiding money for illicit purposes is nearly as easy today as it was 25 years ago. The real scandal of the Panama Papers is not that corruption continues to exist; it is that many of the methods that kleptocrats and criminals use to hide dirty money remain perfectly legal.
Meanwhile in Britain's Telegraph, Matthew Lynn argues bankers pay a lot of taxes and that should be accounted for before we go bashing the banking industry:
It would be hard for bankers – or “banksters” as they have become known in recent years – to have a much worse image. But hold on...the closer you look at what money is raised by the British state and where it is spent, the more it looks like a massive machine for re-distributing cash from the bankers, and the top 1pc of earners, to the other 90pc of the population.
There is nothing intrinsically wrong with that, of course. It is part of what we expect a civilised government to do. But the scale of the redistribution that is going on should be more widely acknowledged.
Speaking of banking, Google will ban ads for payday lenders, reports Andrea Peterson and Jonnelle Marte in the Washington Post:
To enforce the policy, those seeking to market financial products through Google's sprawling advertising network will be required to disclose the length of the loan and the annual interest rate before they will be allowed to place ads. In addition to the broad payday loan ad ban, Google will not display ads from lenders who charge annual interest rates of 36 percent or more in the United States. The same standards will apply to sites that serve as middlemen who connect distressed borrowers to those lenders.
In the other lending news, we have this Wall Street Journal story on the woes of Lending Club and other lending platforms, We also in the Atlantic have this fascinating look at a crowdfunding loan site via Reddit, which is built more on trust than legally binding contracts:
Lenders have little recourse—it’s difficult to break someone’s kneecaps over the Internet, and there is no evidence that any r/borrow lender has used threats to collect an unpaid debt.) And yet, the system mostly works. Of the roughly 60 percent of loan requests that are funded, 70 percent are repaid. By comparison, a 2015 study by the Center for Responsible Lending found that 46 percent of payday-loan borrowers default within two years of their first loan.
Let's have another cartoon:
You may be interested in this story on what happened to some Texas university endowments that lost big because their investment managers were exposed to pharmaceutical company Valeant. The company did not perform well economically following price gouging allegations. And speaking of university endowments, Princeton and Yale are on the ropes as their local officials begin to question and press on the issue of their tax-exempt status reports Nonprofit Quarterly.
In the New York Times, Eduardo Porter argues the government should once again play a significant role in job creation. He argues "America has been here before" and managed to "emerge from the turmoil far more prosperous and powerful":
Epochal transformations like these are complicated. They are difficult to understand, let alone manage, and are driven not only by domestic forces but also by global dynamics over which American politicians have limited control. During much of the 19th and 20th centuries, government at multiple levels played an essential role in shaping the nation’s transition from farms and small towns to cities and factories. It could do so again. What has stopped it is not the lack of practical ideas but the encrusted ideological opposition to government activism of any kind...Though the decline of well-paid working class jobs is often portrayed as the inevitable consequence of globalization and technological change, it is in large part the result of a failure of government.
Job prospects do not look good for young people without a higher education, reports the NYT's Patricia Cohen:
[F]or young high school graduates, the unemployment rate is disturbingly high: 17.8 percent. Add in those who are underemployed, either because they would like a full-time job but can only find part-time work, or they are so discouraged that they’ve given up actively searching, and the share jumps to more than 33 percent.
Younger workers have always had a tougher time finding a job than their older, more experienced counterparts. Even so, the economic recovery has progressed more slowly for young high school graduates than for those coming out of college...
For high school students, a four-year college education is frequently held out as the only viable option, precisely because job opportunities and wages are so much better upon graduation. But many who sign up never finish. “The most common reason they fail to complete is that they need to start earning a living to support their families,” Mr. Lennon said.
Vocational, career and technical high schools have often been stigmatized as a last resort for underachievers. At the same time, educators and administrators in some places have been criticized for steering minority students toward them in lieu of academic programs.
In the New York Post, John Crudele looks at government employment data and questions what defines having an actual job. Meanwhile, over at Quartz, Allison Schrager is back to tell us why she thinks universal income is a dumb idea "whose time will never come":
We can argue about what ails developed economies the most. The rise of ugly economic populism suggests to me that it is not a lack of creative work—it is more likely down to growing polarization, weak community bonds, and disenfranchised, underemployed men. In an increasingly isolated world, where our darkest impulses are easily validated on the internet, work is an important place where we interact and connect with others around a shared sense of purpose. Sometimes, we even encounter people with different politics and views of the world.
I can’t understand why we’d consider creating and then calcifying a perpetually under-employed underclass by promoting the stagnation of their skills and severing their links to broader communities. But maybe it’s not just me—polls suggest a majority of Americans aren’t keen on the idea, either. And Switzerland will hold a referendum on a proposal for a universal basic income next month—it looks doomed to fail.
In Bloomberg View, Noah Smith looks at the microeconomic theory and why we may be headed for a world of high-frequency lawyers:
Instead of high-frequency traders, imagine high-frequency lawyers, adjusting contracts to reward contractors appropriately for tiny improvements in efficiency, using sophisticated statistical analysis to figure out whether performance is being driven by outside conditions or by the contractor’s skill and effort. Of course, in this sci-fi vision, the contractor will also be a robot, using equally sophisticated procedures to optimize its payment relative to its cost.
This may be our future: a whole economy of ultra-fast robots, negotiating, making agreements and adjusting incentives. Sometimes, just like their financial counterparts, the high-frequency lawyers will try to fake each other out. They will try to shirk, to disguise their lack of effort and corner-cutting, to save money at the purchasers’ expense, just like human contractors do now. The government will even have its own high-frequency lawyers, monitoring private-sector robots for regulatory violations. The economy will become a beautiful ballet of data and math, dancing to the beat of equations like Sannikov’s.
(Your editor finds this terrifying.)
Pew looks at nearly 229 metro areas and shows middle incomes are shrinking:
The widespread erosion of the middle class took place against the backdrop of a decrease in household incomes in most U.S. metropolitan areas. Nationwide, the median income of U.S. households in 2014 stood at 8% less than in 1999, a reminder that the economy has yet to fully recover from the effects of the Great Recession of 2007-09. The decline was pervasive, with median incomes falling in 190 of 229 metropolitan areas examined. Goldsboro ranked near the bottom with a loss of 26% in median income. Midland bucked the prevailing trend with the median income there rising 37% from 1999 to 2014, the greatest increase among the areas examined.
The decline of the middle class is a reflection of rising income inequality in the U.S. Generally speaking, middle-class households are more prevalent in metropolitan areas where there is less of a gap between the incomes of households near the top and the bottom ends of the income distribution. Moreover, from 2000 to 2014, the middle-class share decreased more in areas with a greater increase in income inequality.
In Harvard Business Review, we have a look at what globalization has achieved and why the biggest winners currently are the so-called one percent and the middle classes in Asia:
The expansion of incomes around the median of the global income distribution was so overwhelming that it ensured global inequality’s decline — despite the real income growth of the top 1% and rising national inequalities in many countries. Real incomes more than doubled between 1988 and 2011 (though the extension to 2011 is not shown in this chart), a shift that involved large swaths of people (almost a third of the world population, most of them from Asia)...
In most countries, and especially in the big ones like China, India, the United States, and Russia, national inequalities have risen. So if people are more focused on national inequality, their concerns about what is happening at home will dominate the “objective” reduction of inequality across the globe.
This may be politically a more meaningful way to look at global inequality, and it leads to a somber conclusion. Even if globalization were to be associated with an absolute real income improvement for all, or almost all, and reduced global inequality, if it is also associated with rising national inequalities, the unhappiness stemming from the latter may dominate. Globalization may be “felt” to produce a more unequal world, even if it objectively does not.
Your editor has pointed out the numerous ways the poor often pay more for the same services and goods ranging from housing to debt. To add to the list, the Atlantic reports on how few poor people can take advantage of discounts using toilet paper as an example:
They found that high-income households (those making $100,000 or more a year) bought their toilet paper on sale 39 percent of the time, whereas low-income households (those making $20,000 or less a year) only did so 28 percent of the time. High-income households were also more likely to buy more rolls of toilet paper at a time, which meant not only that they were saving money on each roll, but that they didn’t have to make as many trips to the store. “Low income households,” Orhun and Palazzolo write, “are less likely to utilize these strategies even though they have greater incentives to do so.”