States Where the Middle Class Is Dying in the US There are many possible definitions of the middle class.  One very logical definition involves dividing incomes into five quintiles.  Then the income classes can be labelled as follows:

• Lowest quintile:  Low Income
• Second quintile:  Low Middle Income
• Third quintile:  Middle Income
• Fourth quintile:  Upper Middle Income
• Highest quintile:  High Income

Based on income earned before taxes by the third quintile, middle class incomes in Rhode Island declined the most in the country. Incomes among middle class Rhode Island households fell by 3.1% from 2010 to 2014, while income among the state’s fifth quintile, the top 20% of state households, grew by 4.5%.  This is representative, but to a greater extent, of what has happened to the distribution of income across the U.S.  See next article.

Observations in this article about characteristics of the states with the greatest middle income losses (not all found in every bottom 10 states):

• More regressive taxation.
• Low or declining union membership
• High property taxes
• More than average employment decline

Econintersect:  However, ranking of growth in high incomes shows little correlation with the decline in middle incomes.  The ten states have an average rank of of 21 (rank 1 being the greatest high income gain).  None of the ten states ranked by greatest middle income loss ranked in the top ten for high income gain (Maine had the highest rank – 11th).  But neither did any of the top  ten states for middle income loss rank in the bottom two quintiles for high income gain (South Carolina had the lowest rank – 29th).  These observations appear to indicate that state by state the loss of middle income is not strongly associated with either (1) large high income increases or (2) general economic decline for a state.

Here are the ten states that have had the greatest middle income losses between 2010:

10.  Arkansas  9.  New York 8.  Montana 7.  California 6.  South Carolina 5.  Tennessee 4.  North Carolina 3.  Maine 2.  Georgia 1.  Rhode Island

Elizabeth Drew writes: It would be helpful if there were another word for “infrastructure”: it’s such an earnest and passive word for the blood vessels of this country, the crucial conveyors and connections that get us from here to there (or not) and the ports that facilitate our trade (or don’t), as well as the carriers of information, in particular broadband (if one is connected to it), and other unreliable structures. The word “crisis” is also overused, applied to the unimportant as well as the crucial. But this country has an infrastructure crisis.

The near-total failure of our political institutions to invest for the future, eschewing what doesn’t yield the quick payoff, political and physical, has left us with hopelessly clogged traffic, at risk of being on a bridge that collapses, or on a train that flies off defective rails, or with rusted pipes carrying our drinking water. Broadband is our new interstate highway system, but not everyone has access to it—a division largely based on class. Depending on the measurement used, the United States ranks from fourteenth to thirtieth among all nations in its investments in infrastructure. The wealthiest nation on earth is nowhere near the top.

Congress’s approval last December of a five-year bill to spend $305 billion to improve the nation’s highway system occasioned much self-congratulation that the lawmakers actually got something done. But with an increase in the gasoline tax politically off-limits, the means for paying for it are dubious and uncertain. This was the longest-term highway bill passed since 1998 and the thirty-fifth extension of an authorization of highway construction since 2005. Some of the extensions of the highway program approved by Congress lasted for only three months. The previous extension was for just over three weeks. Such practices don’t allow for much planning of the construction or repair of highways and bridges and mass transit systems.  Infrastrcture Repair in US

The problem is not that banks are too big too fail.  They are too important not to have democratic control.  This is the only business whose product is other people’s money.  Currently in the US, taxpayers’ money insures taxpayers’ accounts up to $250,000 so that banks can gamble with impunity.  Bank Regulation

 The International Monetary Fund is concerned about the decision of Aivaras Abromavicius to resign from the post of Minister of Economic Development and Trade, IMF Managing Director Christine Lagarde said.

“His recently announced resignation is of concern. If the allegations that he makes in his resignation are correct, then it is obviously an indication that anticorruption measures that were committed to by the government are not yet working. And there is more progress to be had in that area. We’ve known that all along,” she said.

Andrew Sheng and Xiao Geng write: The Chinese economy has caught a surprisingly severe cold this winter – a cold so bad that almost all global markets are sneezing. During the first two weeks of 2016, the Shanghai Composite Index fell 18%. On January 15, the index closed at 2,901 – very close to the trough of last summer’s stock-market crash. Foreign analysts almost uniformly predict another market crash or even a hard landing. With oil prices dipping below $28 per barrel, the specter of a global economic pandemic has appeared.

China’s New Year financial-market shock has been attributed to several causes, primarily related to policy transparency and clarity. One was the reversal of China’s attempt to install a stock-market “circuit breaker,” which, far from tempering volatility, spurred a new wave of selloffs. The other – arguably more serious – problem was market confusion about the direction of the renminbi exchange rate, following a gradual but constant ten-day depreciation against the US dollar that fueled capital outflows, until the People’s Bank of China (PBOC) intervened.

According to the PBOC, the confusion arose from a technical change in the process of setting the renminbi exchange rate, with the common reference rate against the US dollar replaced by a rate established on the basis of an undisclosed basket of key international currencies. This reform may be intended to boost the renminbi’s stability; but it is not good for markets, which prefer stability against the dollar to the uncertainty of a managed float.

This is not the first time markets have felt blindsided by well-meaning reforms. Unclear policy communication was compounded by global developments. The US Federal Reserve’s decision in December to raise the federal funds rate, together with the uncertainty generated by collapsing oil prices, has also spurred investors to reduce their China exposure and switch to dollars.

China’s government has reiterated its commitment to implementing tough market-oriented reforms, including measures to address environmental pollution, overcapacity, excessive debt, high taxes, bureaucratic red tape, and monopoly privileges for state-owned enterprises (SOEs).

All modern economies struggle with the inconsistency between sharp and volatile short-term price movements in financial markets and more gradual long-term structural adjustments in the real economy. Unlike in the past, when Chinese policymakers were able to concentrate on the real economy without worrying about excessive financial-market instability, they now must manage short-term volatility caused by liberalized interest and exchange rates, together with larger and faster capital flows both within and across borders.

Only with market-savvy central- and local-government officials and SOE managers can China implement short-term stabilization measures or long-term structural reforms. The problem  is that such talent is not widely available in the country.

The key to attracting market-oriented talent to China’s large bureaucracy is to make it clear that risk-taking – and even failure – will be tolerated. Only if skilled officials feel comfortable making real-time decisions under uncertain conditions can the state keep pace with markets, responding effectively to new developments and thus maintaining high levels of confidence.

China is in a strong position to handle the challenges that it faces. Growth, while slower than in the last three decades, remains relatively strong, as does China’s foreign-asset position and its central-government and household-sector balance sheets. Stable markets need stable policy transitions. By installing officials with strong policy credibility and the ability to handle market volatility deftly, China can complete its transition to a more market-oriented, innovation-driven economy – one that also supports stronger global growth.

Antonio Foglia writes:  Everyone seems to be talking about – and condemning – today’s rising level of economic inequality. Fueled by jarring statistics like Oxfam’s recent revelation that the world’s richest 62 people own as much wealth as the poorest 3.6 billion, popular support for left-wing figures like America’s Bernie Sanders and Britain’s Jeremy Corbyn is rising.

Many of those engaged in the debate on inequality nowadays cite the French economist Thomas Piketty’s 2014 book Capital in the Twenty-First Century, which makes three key points. First, over the last 30 years, the ratio of wealth to income has steadily increased. Second, if the total return on wealth is higher than the growth in incomes, wealth is necessarily becoming increasingly concentrated. Third, this rising inequality must be reversed through confiscatory taxation before it destroys society.

The points might seem convincing at first glance.

From 1980 on, nominal interest rates fell dramatically. Not surprisingly, the value of wealth rose much faster than that of income during this period, because the value of the assets that comprise wealth amounts essentially to the net present value of their expected future cash flows, discounted at the current interest rate.

The most straightforward example is a government bond. But the value of a house is determined in a similar manner: according to the rent it is expected to generate, capitalized at the current nominal interest rate. Equities, too, are valued at a higher multiple of earnings when interest rates fall.

In determining the value of total wealth, Piketty included both the income generated by assets and their appreciation. Meanwhile, incomes were capitalized at declining interest rates for more than a generation.

What impact do lower interest rates have on measured inequality? If I own one house and my neighbor owns two, and falling interest rates cause the value of those houses to double, the monetary inequality between us also doubles, affecting a variety of statistical indicators and triggering much well-intended concern. But the reality is that I still own one house and my neighbor still owns two. Even the relative affordability of houses doesn’t change much, because lower interest rates make larger mortgages possible.

The real-world impact of this dynamic on inequality is precisely the opposite of what Piketty would expect. Indeed, not only are Italians, on average, much richer than Germans; Italy’s overall wealth distribution is much more balanced.

A 2013 study of household finances in the eurozone, conducted by the European Central Bank, showed that in 2010 – the last year in Piketty’s research – the average Italian household was 41% richer than the average German household. Moreover, whereas the difference between mean and median household wealth is 59% in Italy, it is a whopping 282% in Germany.

This difference can be explained largely by the fact that 59% of households in Italy own homes, compared to only 26% in Germany. A larger share of Italians has thus benefited more from a larger drop in interest rates.

Then there are the numerous factors affecting incomes, such as demand for particular skills. For those whose skills are not in demand, the availability of skills upgrading or training opportunities will have a significant impact on income prospects.

Clearly, economic inequality is a highly complex phenomenon, affected by a wide variety of factors – many of which we do not fully understand, much less control.

Perhaps a new approach is not necessary at all. After all, globally, standards of living are continuously improving and converging. That is something that everyone, from the emerging populists to the hardened capitalists, should be able to agree on.

Kenneth Rogoff writes:  Since 2016 began, the prospect of a major devaluation of China’s renminbi has been hanging over global markets like the Sword of Damocles. No other source of policy uncertainty has been as destabilizing. Few observers doubt that China will have to let the renminbi exchange rate float freely sometime over the next decade. The question is how much drama will take place in the interim, as political and economic imperatives collide.

It might seem odd that a country running a $600 billion trade surplus in 2015 should be worried about currency weakness. But a combination of factors, including slowing economic growth and a gradual relaxation of restrictions on investing abroad, has unleashed a torrent of capital outflows.

Private citizens are now allowed to take up to $50,000 per year out of the country. If just one of every 20 Chinese citizens exercised this option, China’s foreign-exchange reserves would be wiped out. At the same time, China’s cash-rich companies have been employing all sorts of devices to get money out. A perfectly legal approach is to lend in renminbi and be repaid in foreign currency.

A not-so-legal approach is to issue false or inflated trade invoices – essentially a form of money laundering. For example, a Chinese exporter might report a lower sale price to an American importer than it actually receives, with the difference secretly deposited in dollars into a US bank account (which might in turn be used to purchase a Picasso).

Now that Chinese firms have bought up so many US and European companies, money laundering can even be done in-house. The Chinese hardly invented this idea. After World War II, when a ruined Europe was smothered in foreign-exchange controls, illegal capital flows out of the continent often averaged 10% of the value of trade or more. As one of the world’s largest trading countries, it is virtually impossible for China to keep a tight lid on capital outflows when the incentives to leave become large enough.

Indeed, despite the giant trade surplus, the People’s Bank of China has been forced to intervene heavily to prop up the exchange rate – so much so that foreign-currency reserves actually fell by $500 billion in 2015. With such leaky capital controls, China’s war chest of $3 trillion won’t be enough to hold down the fort indefinitely. In fact, the more people worry that the exchange rate is going down, the more they want to get their money out of the country immediately. That fear, in turn, has been an important factor driving down the Chinese stock market.

There is a lot of market speculation that the Chinese will undertake a sizable one-time devaluation, say 10%, to weaken the renminbi enough to ease downward pressure on the exchange rate. But, aside from providing fodder for the likes of Donald Trump, who believes that China is an unfair trader, this would be a very dangerous choice of strategy for a government that financial markets do not really trust. The main risk is that a big devaluation would be interpreted as indicating that China’s economic slowdown is far more severe than people think, in which case money would continue to flee.

There is no easy way to improve communication with markets until China learns how to produce credible economic data. It was a huge news story when China’s 2015 GDP growth was reported at 6.9%, just short of the official target of 7%. This difference ought to be irrelevant, but markets have treated it with the utmost importance, because investors believe that things must be really bad if the government can’t rig the numbers enough to hit its target.

A good place for the authorities to start would be to establish a commission of economists to produce a more realistic and believable set of historical GNP figures, paving the way for more believable GNP figures going forward. Instead, the government’s immediate idea for relieving exchange-rate pressure is to peg the renminbi to a basket of 13 currencies, instead of just to the US dollar. This is a good idea in theory; in practice, however, basket pegs tend to have chronic transparency problems.

Moreover, a basket peg shares most of the problems of a simple dollar peg. True, the euro and yen have fallen against the dollar over the past couple of years. If the dollar retreats in 2016, however, the basket peg implies a stronger renminbi-dollar rate, which might be unhelpful. The government has also indicated that it intends to clamp down more heavily on illegal capital flows; but it will not be easy to put that genie back in the bottle.

Life would be a lot easier today if China had moved to a much greater degree of exchange-rate flexibility back when the going was good, as some of us had advised for more than a decade. Maybe the authorities will be able to hold on in 2016; but it is more likely that the renminbi will continue its rocky ride – taking global markets along with it.

Anatole Kaletsky writes:  January is usually expected to be a good month for stock markets, with new money gushing into investment funds, while tax-related selling abates at the end of the year. Although the data on investment returns in the United States actually show that January profits have historically been on only slightly better than the monthly norm, the widespread belief in a bullish “January effect” has made the weakness of stock markets around the world this year all the more shocking.

But the pessimists have a point, even if they sometimes overstate the January magic. According to statisticians at Reuters, this year started with Wall Street’s biggest first-week fall in over a century, and the 8% monthly decline in the MSCI world index made January’s performance worse than 96% of the months on record. So, just how worried about the world economy should we be?

Three fears now seem to be influencing market psychology: China, oil and the fear of a US or global recession.

China is surely a big enough problem to throw the world economy and equity markets off the rails for the rest of this decade. We saw this in the first four days of the year, when the sudden fall in the Chinese stock market triggered January’s global financial mayhem. But the Chinese stock market is of little consequence for the rest of the world. The real fear is that the Chinese authorities will either act aggressively to devalue the renminbi or, more likely, lose control of it through accidental mismanagement, resulting in devastating capital flight.

Such a scenario seemed quite plausible for a few weeks last summer, and it reemerged as a threat in the first two weeks of this year. By the end of January, however, market sentiment had moved back in favor of stability in China. This calm could be disrupted again if China’s foreign-exchange reserves show another huge monthly loss, and the authorities’ efforts to manage an orderly economic slowdown will remain the biggest source of legitimate concern for financial markets for many years ahead. But, judging by market behavior in the second half of January, the fear about China has subsided, at least for now.

That cannot be said about the market’s second great worry: collapsing oil prices. From the moment investors stopped panicking about China, in the second week of January, stock markets around the world started falling (and occasionally rebounding) in lockstep with the price of oil. Unlike the reasonable concern about China, market sentiment seems simply to have gotten the relationship between oil and the world economy wrong. In anything but the very short term, the correlation between oil prices and stock markets should be negative, not positive – and will almost certainly turn out that way in the years ahead.

When oil prices plunge by 10% daily, this is obviously disruptive in the short term: credit spreads in resources and related sectors explode, and leveraged investors are forced into asset fire sales to meet margin calls. Fortunately, market panic now seems to be subsiding, as oil prices reach the lower part of the $25-50 trading range that always seemed appropriate in today’s political and economic conditions. Now that oil prices are stabilizing at a reasonable long-term level, the world economy and non-commodity businesses should benefit. Low oil prices increase real incomes, stimulate spending on non-resource goods and services, and boost profits for energy-using businesses.

Yet, despite these obvious benefits, most investors now seem to believe that falling oil prices point to a collapse in economic activity, which brings us to the third fear haunting financial markets this winter: a recession in the global economy or the US.

Past experience suggests that oil prices are not a useful leading indicator of economic activity. In fact, if oil-price movements have any relevance at all in economic forecasting, it is as a contrary indicator. Every global recession since 1970 has been preceded by a big increase in oil prices, while almost every decline greater than 30% has been followed by accelerating growth and higher equity prices. The widespread view that plunging oil prices augur recession is a clear case of the belief that this time is different – a belief that typically takes hold in financial markets at the peaks and troughs of boom-bust cycles.

Finally, what about the falling stock market itself as an indicator of recession risks? One could quote the great economist Paul Samuelson, who famously quipped in the 1960s that the stock market had “predicted nine of the last five recessions.” There is, however, a less reassuring answer. While markets are often wrong in predicting economic events, financial expectations can sometimes influence those events. As a result, reality can sometimes be forced to converge towards market expectations, not vice versa.

This process, known as “reflexivity,” is a powerful force in financial markets, especially during periods of instability or crisis. To the extent that reflexivity works through consumer and business confidence, it should not be a problem now, because the oil-price collapse is a powerful antidote to the stock-market decline. Consumers are gaining more from cheap oil than they are losing from falling stock prices, so the net effect of recent financial turmoil on consumption should be positive – and stronger consumption should feed through to business revenues.

A greater worry is the workings of reflexivity within the financial system itself. Bankruptcies among small energy-sector companies, which are of limited economic importance themselves, are creating pressures in global banking and reducing the availability of credit to healthy businesses and households that would otherwise be beneficiaries of cheaper oil. Fears of a Chinese devaluation that has not happened (and probably never will) are having the same chilling effect on credit in emerging markets. Meanwhile, banking regulators are continuing to tighten lending standards, even though economic conditions suggest they should be easing up.

In short, nothing about the condition of the world economy suggests that a major slowdown or recession is inevitable or even likely. But a lethal combination of self-fulfilling expectations and policy errors could cause economic reality to bend to the dismal mood prevailing in financial markets.

Lucy P. Marcus writes:  Business and government leaders worry about a multitude of issues these days. Climate change, weapons of mass destruction, water scarcity, migration, and energy are the greatest threats we face, according to the 750 experts surveyed for the World Economic Forum’s Global Risk Report 2016. And at the WEF’s annual meeting in Davos this year, the sheer number of unsettled issues – the Middle East meltdown, the European Union’s future (particularly given the possibility of a British exit), America’s presidential election, the refugee crisis, China’s economic slowdown, oil prices, and more – was itself unsettling.

But consider this: None of the risks highlighted in the WEF report caused the recent spike in debt crises or the wave of scandals that engulfed – just in the last year – Volkswagen, Toshiba, Valeant, and FIFA. These developments (and many more) are rooted in a more pedestrian – and perennial – problem: the inability or refusal to recognize the need for course correction (including new management).

As anti-establishment parties and candidates gain ground with voters throughout Europe and in the United States, political leaders who continue to pursue a business-as-usual approach could find themselves looking for new jobs. And the same is true of business leaders: Activist investors are fed up and determined to force change, either with a hands-on approach or by voting with their feet and divesting from companies that don’t meet their criteria.

As Barbara Novick, a vice chair of BlackRock, noted on a panel on corporate governance and ethics at this year’s Davos gathering, her firm looks carefully at whether the boards of companies in which BlackRock invests include people who are engaged and asking hard questions consistently throughout the year.

And yet the heads of some of the world’s largest companies still seem to be in denial. I spent several hours last year with the chief executive and chair of a bank who thought it unfair that investors were planning to vote against him holding both posts. Though he agreed that having one person in both roles is, in principle, a bad idea, he insisted that he was the exception.

I had a similar conversation this year with someone who noted that most of his company’s board had served for upwards of 20 years, and that his company had just established an age limit of 80 for board members. More rapid turnover might work for other companies, he conceded; but, again, his company was somehow exceptional.

On the other hand, Hiroaki Nakanishi, CEO and Chairman of Hitachi, spoke eloquently to me about the importance of corporate governance and the changing demands that global companies faced. He noted the importance of having non-Japanese board members as Hitachi seeks to expand further internationally.

The problem is that those now speaking up for long-term investing, commitment to the community, and building companies that last are doing so over dinner, behind closed doors, or under the protection of the Chatham House Rule (which requires that reported statements remain unattributed to those who made them). Indeed, in the program for this year’s Davos meeting, the phrase “corporate governance” appeared just once (for the panel with Novick that I was on). The same was true for “board” and “boardroom,” while a search for “ethics” turned up sessions on medicine and biotech. “Governance” was primarily about political governance, and “stewardship” referred to the planet.

Many people are cynical about Davos – and they aren’t completely wrong. Years ago, it was because the meetings were so openly secretive (much like the way people perceive board meetings). Nowadays, the WEF webcasts many of its sessions, and the cynicism comes from the sense that what is being discussed is not what business and government leaders need to think about.

That’s not the WEF’s fault. Davos has extraordinary convening power and the ability to bring important issues to the fore, including LGBT issues this year. There is no reason it cannot also include issues like the pay gap between executives and labor, the impact of corporate decisions on communities and the environment, and the growing loss of trust toward business and government. What it can’t do is force CEOs, board directors, investors, and policymakers to speak about such issues openly and on the record.

It is easy for companies to see far-off risks that they cannot control. It is a lot harder, but a lot more important, for them to acknowledge the risks stemming from how they operate. And it is harder still to persuade those business leaders who do comprehend such risks to talk about them on a public stage. That reluctance to speak openly about how to restructure corporate governance in a way that improves stewardship places all of us at risk.