Category Archives: Inequality

Admati Hammers at Risk-Taking Bankers

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Dean Starkman writes:  Anat R. Admati, a professor of finance and economics at Stanford’s business school, is an unlikely player in Washington’s financial reform scene.

The Israeli-born economist arrived at Stanford in 1983 with an interest in mainstream financial issues and a firm belief that markets—with their unique ability to assign a price to risk and channel capital to its most efficient use—were a powerful force for good.

The 2008 financial crisis upended that faith. She turned her gaze to the industry at the center of the crisis: banking.

Admati made waves on the national financial reform scene in 2013 with the book “The Bankers’ New Clothes: What’s Wrong With Banking and What to Do About It,” co-authored with economist and banking expert Martin Hellwig.

Here’s an excerpt of a discussion with Admati:

Why did you write “The Bankers’ New Clothes,” a book for the general public and not strictly for scholars?

We thought we had to. There was, I thought, a certain lack of engagement on the part of many academics, and it was disturbing to me that there was not enough serious discussion about what was going on.

I was not a banking expert, but after studying it, I found that a lot of policymakers and people commenting on it didn’t actually know what they were saying or were saying wrong things or misleading things.

There seemed to be, to take a charitable interpretation, that there were blind spots or confusion or, the most cynical interpretation, there was sort of willful blindness.

How did you get so involved in Washington financial policy circles?

From the beginning, I tried very hard to engage with anybody in Washington who would engage with me. It started by being appointed by Sheila Bair (then the FDIC chairwoman) to a committee in the spring of 2011, which just allowed me into the room at all.

So, what’s wrong with banking?

What’s wrong with banking is that a lot of people are able to take risks and not be fully responsible and accountable for those actions.

People need to understand that the biggest banks are really, really big, by any measure. Just how much is a trillion? It’s an enormous number. They are larger than just about any corporation, so it’s not just big. It’s really very, very big.

It’s also the complexity and sort of breathless scope of what they do and just how much of it is opaque. It remains incredibly fragile as a system.

Capital requirements, boiled down, amount to a few percentage points of a bank’s total assets. What’s the right ratio?

Current requirements are ridiculous by any normal standards. A supposedly “harsh” regulation would be 5 percent of the total. Corporations just never ever live like that.

I talk about 20 percent-30 percent of assets, but what’s really complicated is how you measure assets. The way assets are measured now pretends to be scientific, but the rules are designed in a flawed way. I want simpler measures and for capital to be 20 percent-30 percent of the total.

Anat Admati

CEO Worker Pay Ratios

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Drew Harwell writes;  Thousands of public U.S. companies are likely to soon be forced to share a number many would rather keep under wraps: how much more their chief executives make than their typical rank-and-file employees.

The Securities and Exchange Commission  is expected to finalize on Wednesday a long-delayed rule forcing businesses to share their “pay ratio,” a simple bit of arithmetic that would cast an unprecedented spotlight on one of corporate America’s thorniest debates.

Once the pay-ratio rule is in place, millions of workers will know exactly how their top boss’s payday compares with their own, revealing a potentially embarrassing disparity in corporate riches that many companies have long fought to keep hidden.

While the average American’s pay and benefits have been growing at the slowest pace in 33 years, executive wages have soared. Fifty years ago, the typical chief executive made $20 for every dollar a worker made; now, that gap is more than $300 to $1, and it’s growing.

The pay ratio, at the center of years of corporate arm-wrestling, could ratchet up the pressure on big companies to bring runaway executive pay under control. Boards and shareholders could use it to judge a firm’s high-priced leadership, and customers could opt to shop at companies where workforce pay seems more fair.

The effects could ripple far beyond the corporate suite.Out-of-balance pay ratios “will be public shaming, just as all adverse financial results are public shaming,” said Bartlett Naylor, a financial policy advocate with the consumer think tank Public Citizen. “If one reports low returns, skyrocketing expenses, that’s shameful, too. Welcome to capitalism.”  CEO Worker Pay Ratios

 CEO Worker Pay Ratios

Risk Necessary for Growth?

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Robert Litan writes:  We’re going to hear a lot from 2016 presidential candidates about the need for faster economic growth. Jeb Bush says annual growth of 4% would be his goal; that’s almost double the 2.2% U.S. growth rate since June 2009. Hillary Clinton has called for “inclusive” growth, or economic expansion that is distributed more fairly. (I suspect that many Republicans agree with her objective, while differing on what government should do to achieve it.)

Presidential elections are occasions for debating government’s role, so it’s natural to focus on things government can do to affect economic growth, such as simplifying the corporate tax code, removing distortions, and, for some, lowering rates; investing more in infrastructure and early-childhood education; and easing regulatory burdens, especially for new businesses, which have been the source of many major technological advances.

While some or all of these things should help growth, government has limited ability to influence the appetite for taking risks among entrepreneurs, investors, and larger companies. And without risk-taking, we are unlikely to see the kinds of major new innovations that will propel our economy toward a higher growth trajectory.

Two recent essays define this challenge. One is a thoughtful piece by Bloomberg View’s Barry Ritholtz on the decline in publicly traded companies in the U.S., from a peak of more than 7,300 in 1996 to just 3,700 in 2014. After surveying multiple possible causes for the nearly 50% decline–including the much-criticized Sarbanes-Oxley Act, which tightened public company reporting rules–Mr. Ritholtz cites academic research showing that mergers have played an outsize role in reducing the number of public companies.

This is important because when big companies swallow up others, it signals that acquiring companies have essentially outsourced their ideas rather than growing internally. It also suggests that the safer thing to do is to buy someone else rather than develop new products and services yourself. The merger trend is a sign of a collective failure of nerve, the risk-taking that historically contributed to much higher economic growth rates, such as the roughly 4% average from 1948 to 1973.

\Fortune editor Alan Murray reports that revenues of the Fortune 500 companies combined equal 71.9% of U.S. gross domestic product, or more than twice the 35% it totaled in 1955. In other words, despite continuing turnover in the Fortune 500′s composition, big companies are more important than ever as a share of the overall economy.

This wouldn’t be so worrisome for future growth were it not for the decline in the start-up rate, or share of new companies in the number of overall firms, which I have written about before. Despite the continuing emergence of new billion-dollar start-ups (“Unicorns”), the execs of big companies don’t appear to be especially worried. According to the Fortune survey, only 20% think their greatest challenges will come from start-ups.

At the top of their worry list, Fortune found, is the “rapid pace of technological change,” which is ironic since, so far, hype has exceeded reality. As Princeton professor Alan Blinderhas noted, productivity growth since 2010 has clocked in at just 0.4% a year, down from 2.6% over the preceding 15 years.

Unless a big boost in start-ups puts real pressure on large companies, the answer to the growth challenge lies mostly with large companies and those who head them.

startup-cartoon

Risk and Economic Change

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Laura Tyson writes:  Over the past year, the global economic environment changed markedly and in unexpected ways. Energy and commodity prices plunged. Growth in China (which accounts for about 40% of global growth) fell to its lowest rate since 1996, even as its stock market soared to unsustainable heights. The United States and the European Union ratcheted up economic sanctions on Russia in response to its military excursions in Ukraine, highlighting the geopolitical risks associated with cross-border investments. And there have been large swings in exchange rates, fueled by actual or, in the case of the Federal Reserve, anticipated changes in monetary policy.

These rapid changes have rattled global financial markets and spooked investors, reducing their appetite for risk – a cautious attitude that has been reflected in emerging markets. Investors have sat on the sidelines, and the MSCI index that tracks returns on emerging-market equities has stagnated.  Growth and Change

Growth

 

Work Transformed by Technology?

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Jean Pisani-Ferry writes:  In 1983, the American economist and Nobel laureate Wassily Leontief made what was then a startling prediction. Machines, he said, are likely to replace human labor much in the same way that the tractor replaced the horse. Today, with some 200 million people worldwide out of work – 30 million more than in 2008 – Leontief’s words no longer seem as outlandish as they once did. Indeed, there can be little doubt that technology is in the process of completely transforming the global labor market.

To be sure, predictions like Leontief’s leave many economists skeptical, and for good reason. Historically, increases in productivity have rarely destroyed jobs. Each time that machines yielded gains in efficiency (including when tractors took over from horses), old jobs disappeared, but new jobs were created. Furthermore, economists are number crunchers, and recent data show a slowdown – rather than an acceleration – in productivity gains. When it comes to the actual number of jobs available, there are reasons to question the doomsayers’ dire predictions. Yet there are also reasons to think that the nature of work is changing.

Rather than try to stop the unstoppable, we should think about how to put this new reality at the service of our values and welfare. In addition to rethinking institutions and practices predicated on traditional employment contracts – such as social security contributions – we will need to begin to invent new institutions that harness this technology-driven transformation for our collective benefit. The backbone of tomorrow’s societies, after all, will be built not by robots or digital platforms, but by their citizens. Laborers’ Future

The Nature of Work

Lagarde Opposed Greek Loans; Now Stuck with Default

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As French Finance Minister in 2010, Christine Lagarde opposed the involvement of the International Monetary Fund in Greece.

Now Lagarde’s tenure at the head of the IMF since 2011 will be shaped by Greece, which holds a referendum on Sunday that could pave the way to its exit from the euro.

By its own admission the Washington-based institution broke many of its rules in lending to Greece. It ended up endorsing austerity measures proposed by the European Commission and European Central Bank, its partners in the troika of Greece’s lenders.

That the IMF lent to Greece at the behest of Europe, which has nominated every IMF Managing Director since the inception of the Fund in 1946, may expose the institution to greater scrutiny, especially as it has $24 billion in loans outstanding to Greece in its largest-ever program.

The involvement of the Fund in Greece and its continued support for decisions driven by eurozone governments caused a deep split in the institution.

Some IMF economists had misgivings about lending to Greece in 2010 within the constraints of the so-called “troika” of lenders, where the Fund would be the junior partner to the European Central Bank and the European Commission.

IMF board members also protested the “exceptional” size of the program, as Athens did not meet the Fund’s criteria for debt sustainability, meaning it would have trouble repaying.

Yet swayed by the fear that contagion in Athens could spread to French and German banks, the IMF agreed to participate in a joint 110-billion-euro bailout of Greece with the Europeans.

Later, the Fund admitted that its projections for the Greek economy had been overly optimistic. Instead of growing after a year of austerity, Greece’s economy plunged into one of the worst recessions to ever hit a country in peacetime, with output falling 22 percent from 2008 to 2012.

While the eurozone’s insistence on drawing a direct link between euro membership and Greece’s debt sustainability and the negotiating tactics of the Greek government have exposed both to questions of credibility, the Fund stands charged as well.

Greek default on all $24 billion it owes to the IMF dwarfs previous delinquincies from countries like Sudan, Zimbabwe and Somalia.

While the IMF was worried about contagion when it made the loans, it also had institutional incentives for wanting to bail out troubled countries.

The IMF’s heavy involvement in large bailouts for euro zone countries, which included Ireland and Portugal, have enabled it to build up its reserve buffers in recent years. It is now aiming to store away some $28 billion by 2018.

From interest and charges on the Greek program alone, the IMF has earned some $3.9 billion since 2010.

Greek Default

Entrepreneur Alert: Lingerie Etc. in Saudi Arabia

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A growing number of women in Saudi Arabia are joining the workforce and chipping away at discriminations enshrined in its laws. But they face conservative opposition and — even now — a ban on driving.

Juliane von Mittelstaedt and Samiha Shafy write:   Every time Hanin Alamri sells a pair of shoes, it amounts to a revolution. Stilettos, platform heels, gold peep-toes — all lined up on white shelves on the second floor of the Red Sea Mall, one of the biggest shopping centers in Jeddah. 27-year-old Alamri wears trainers with her floor-length black and white abaya. Her hair, hidden underneath a headscarf, is dyed red. She recently got divorced. “Every day I say thanks, thanks, thanks that I am free,” says Hanin Alamri. If it weren’t for her job, she’d still be married.

Her marriage was arranged, and she only met her husband-to-be after they got engaged. He promised her he would be tolerant and open-minded, but once they were married, he forced her to wear a niqab, which left only her eyes uncovered. He was unemployed and unhappy. “He didn’t want me to be happy either,” she says. She was stuck at home, with no money of her own and nothing to do. She had a daughter, but became depressed. Her husband controlled her every move and forbade her from working. Alamri begged him to change his mind. After two years, he gave in.

Her first job was selling cosmetics. Then she began working in a shoe store. Four years ago, female shop assistants were few and far between. Most people working in stores were men from overseas — from the Philippines, Bangladesh and Malaysia. Foreigners account for one third of the population in Saudi Arabia, working primarily as drivers, waiters, housekeepers or salespeople for clothes and cosmetics — and even lingerie. In a country that insists on segregation of the sexes, women had to buy lingerie from men.

“Once I had to give a shop assistant my bra size,” says Alamri. “He told me I had it wrong. I was deeply embarrassed.” Trying anything on was out of the question. There are no changing rooms in stores in Saudi Arabia. So Alamri did what all women there have to do – she picked up a random bra, paid and left. And got used to badly-fitting underwear.  Women at Work in Saudi Arabia

 Lingerie in Saudi Arabia

Lagarde Argues for the Positive Economic Impact of Equitable Growth

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Obinna Chima writes:   By lifting the “small boats” of the poor and middle class,  a fairer society and stronger economy can be built, the Managing Director of the International Monetary Fund (IMF), Christine Lagarde has said.

Lagarde in a report from the fund at the weekend, pointed out that growing and excessive inequality had become a problem for economic growth and development.
“You do not have to be an altruist to support policies that lift the incomes of the poor and the middle class. Everybody will benefit from these policies, because they are essential to generate higher, more inclusive, and more sustainable growth,” Lagarde declared.

“In other words, if you want to see more durable growth, you need to generate more equitable growth.”

A new IMF research showed that if  the income share of the poor and middle class is lifted by one percentage point, then GDP growth would increase by as much as 0.38 percentage points in a country over five years.

By contrast, if the income share of rich is lifted by 1 percentage point, then GDP growth decreases by 0.08 percentage points.

“Our findings suggest that—contrary to conventional wisdom—the benefits of higher income are trickling up, not down,” Lagarde said.

Lagarde highlighted the divergence between a steady, decades-long fall in inequality between countries—driven by rapidly rising average incomes in emerging market economies—and growing income inequality within countries.

The two main factors driving the widening earnings gap between higher- and lower-skilled individuals, especially in advanced economies, are technological progress and financial globalization, Lagarde noted.

There are recipes for stronger, more inclusive, and more sustainable growth in all countries. These include macroeconomic stability—“Sound macroeconomic policies are the poor’s best friend”—supported by good governance, since corruption can be a strong indicator of profound social and economic inequality. Others are the adoption of prudent policies that strike a balance between promoting greater equality and preserving strong incentives to compete, innovate, and invest, adjusting fiscal policy by clamping down on tax evasion, removing unfair tax relief, reducing high labor taxes, relying more on conditional cash transfers, and freeing up resources by reducing energy subsidies; and enacting smart reforms in education, health care, labor markets, infrastructure, and financial inclusion, to lift potential economic growth and boost income and living standards over the medium term.

The IMF’s key mandate is to promote global economic and financial stability, and the institution has been deeply involved in development by helping its 188 member countries to design and implement policies and by lending to countries in times of distress, so they can get back on their feet.

“In sub-Saharan Africa, for example, many countries have applied sound macroeconomic policies over the past decade, and they are now reaping the benefits in the form of stronger growth and higher living standards. The IMF has supported these efforts through new instruments such as zero-interest loans, as well as increased financing and capacity building,” she added.

Income Equality?

Poverty and the Developing Brain

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Madeline Ostrander writes: The brain’s foundation, frame, and walls are built in the womb. As an embryo grows into a fetus, some of its dividing cells turn into neurons, arranging themselves into layers and forming the first synapses, the organ’s electrical wiring. Four or five months into gestation, the brain’s outermost layer, the cerebral cortex, begins to develop its characteristic wrinkles, which deepen further after birth. It isn’t until a child’s infant and toddler years that the structures underlying higher-level cognition—will power, emotional self-control, decision-making—begin to flourish; some of them continue to be fine-tuned throughout adolescence and into the first decade of adulthood.

Pat Levitt, a developmental neuroscientist at Children’s Hospital Los Angeles, has spent much of his career studying the setbacks and accidents that can make this construction process go awry. In the nineteen-nineties, during the media panic over “crack babies,” he was among a number of scientists who questioned whether the danger of cocaine exposure in utero was being overstated. (Levitt spent two decades examining the brains of rabbit mothers and their offspring that were dosed with the drug, and says that the alarm was “an exaggeration.”) More recently, as the science director of the National Scientific Council on the Developing Child, he has become interested in another sort of neurotoxin: poverty.

As it turns out, the conditions that attend poverty—what a National Scientific Council report summarized as “overcrowding, noise, substandard housing, separation from parent(s), exposure to violence, family turmoil,” and other forms of extreme stress—can be toxic to the developing brain, just like drug or alcohol abuse.  Poverty and the Developing Brain

Poverty and the Developing Brain

US Pres Race, Jobs, and Record of US Govs.

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1. Ohio Gov. John Kasich

In Office: Jan. 2011 – present

Kasich will have quite a story to tell if he enters the race for the White House.

When the former congressman entered the governor’s mansion in 2011, his state’s unemployment rate was 9.2 percent. In the most recent confirmed figures, for March 2015, it is 5.1 percent. The improvement is not just dramatic in itself, it also outpaces the nation as a whole. Importantly, Kasich’s record comes in an industrial — and electorally crucial — state in the Midwest which detractors had argued was in a near-inexorable decline.

Kasich supporters point to a number of moves that they believed helped the economy along, including his replacement of a state board aimed at economic development with a private non-profit organization, JobsOhio. He has often noted that he erased a projected $8 billion budget shortfall without raising taxes.

Skeptics, however, assert that President Obama’s bailout of the auto-industry had as significant an effect in reviving Ohio’s fortunes as anything Kasich has done.

2. Former Texas Gov. Rick Perry

In Office: Dec. 2000 – Jan. 2015

Note: Texas is a state committed to support business, and its jobs’ record is associated with this commitment.

Perry put his economic record in the Lone Star State front-and-center when he officially launched his campaign last week, claiming to have created 1.5 million new jobs in the last seven years of his tenure and to have “led the most successful state in America.”

When Perry took office a decade and a half ago, unemployment levels in the state were more than half a percentage point higher than the nation’s. By the time he left, joblessness in Texas was 4.4 percent, versus a nationwide 5.7 percent.

Perry backers note that Texas still has no state income tax and is light on regulation. Perry generally made sure that whatever tax hikes he did agree to were politically sellable to conservatives: a new tax on strip clubs was a notable example.

One contentious issue is the economic impact of Texas’ rapid population growth.

Perry boosters argue that his record on jobs is even more impressive given that the state’s population grew by around 26 percent during his time in office, versus a national population growth of around 11 percent.

Others, including left-leaning economist Paul Krugman, have suggested the influx actually helped speed economic growth by keeping labor costs low.

3. Former Florida Gov. Jeb Bush

In Office: Jan. 1999 – January 2007

Unlike Kasich and Perry, Bush was out of office before the Great Recession scythed down jobs everywhere.

His state’s performance on jobs was better than that of the nation during his tenure.

In the month he left office, joblessness in Florida was at 3.5 percent compared to a national rate of 4.6 percent. When he took office, eight years before, the Florida unemployment rate had also been below that of the U.S., but by a more modest amount.

Bush, who has difficulties with his party’s conservative base on some non-economic issues such as immigration, is on more solid ground when it comes to the economy. A Wall Street Journal assessment last year noted noted that he had vetoed $2 billion in government spending during his time in office.

Still, not everything he touched turned to gold. Reuters earlier this year noted how he spearheaded one of the biggest development projects in the state’s history — an effort to create a biomedical hub in a Palm Beach County town — but the outcome fell short of expectations.

GOP and Jobs