Income inequality is a hot topic these days here in the US, and for good reason: over the past generation or so, real gains in income for those at the bottom and middle of the spectrum have been practically nil, while those at the top (especially the very top) have risen rapidly. As a consequence, income inequality by some measures is at its highest levels since the 1920s.

cbo-inequality-after-tax-income

If income inequality has been rising for so long, why is it only recently getting so much attention? I think the main reason for the recent attention was the housing bust and financial crisis in 2008 (duh), which provided a shocking contrast between widespread home foreclosures and mass layoffs on the one hand, and generous bank bailouts on the other. But since then, we’ve had plenty of other things to keep our attention on the subject. I’m thinking the Occupy Wall Street/99% movement; the 2012 Presidential election, which forced a national dialogue on the subject; and the near-celebrity status of economist Emmanuel Saez, whose recent book has attracted huge media attention.

Within that debate, economists continue to fuss over a longstanding question: Sure, inequality is rising, but what does that mean for economic growth? Do societies in which the rich take a bigger and bigger slice find it more difficult to grow the whole pie over time?

The Washington Center for Equitable Growth has a new paper summarizing the research, both old and new, on exactly this topic. It’s a good read even if you’re not into economics, especially the overview section, which gives some nice context for this question. Among the report’s conclusions are:

Most research shows that, in the long term, inequality is negatively related to economic growth and that countries with less disparity and a larger middle class boast stronger and more stable growth. Some studies do suggest that in the short run, inequality may spur growth before hindering it over the longer term, but overall there is growing evidence that, in the long run, more equitable societies are associated with higher rates of growth.

It’s always important to differentiate between positive and normative questions in economics, and this subject is no exception. The former asks something about how the world is; the latter, how the world should be. Economists like to focus most of their time on positive issues: Does inequality constrain growth? That is an important question, and researchers and organizations which focus purely on answering it objectively and honestly are doing very important work. Nonetheless, what seems to be missing from today’s debate about inequality is a second, more normative question: If the economy continues to grow while remaining very unequal (or becoming more unequal), is that ok?

For two reasons, I’d say the answer is No (surprise!). The first reason has to do with economic theory. The second has to do with the very purpose of our lives as human beings. Read the rest of this entry »

Entourage

Am I the only one that misses Entourage? The former HBO series, which closed shop a few years ago after eight seasons, was my escape from the drudgery and boredom of responsible living. Yes, Entourage was over the top, to put it mildly, but so is pretty much everything else on TV. It was at times just plain dumb (the series finale was a hasty tying of years’ worth of plot loose ends), but the show had a lightheartedness and carefree vibe that’s been missing from television ever since.

At the heart of what made Entourage work, of course, was the character of Vincent Chase, loosely based on Mark Wahlberg’s early career (when he was still Markie Mark and doing stuff like this, which some of us refuse to forget). Vince’s is the happy-go-extremely-lucky story we all love to root for: Poor kid from a blue collar town makes it big, achieves fame and fortune, and lives life in the fast lane while never forgetting his true friends or where he came from.

At this point you may be thinking, What does this have to do with finance? I’m glad you asked. (Let’s pretend you asked.) On many occasions in Vince’s fictional life, when he is warned about the imminent possibility of losing it all — by his accountant, his agent, his manager, whoever — he utters some version of the following statement:

What’s the big deal? If I lose all my money I can always go back to Queens. I was happy before when I had nothing. If I have to go back to that, so what?

This is the part in the blog post where I remind myself that Vincent Chase is not a real person (oh yeah). But a part of Vincent Chase lives inside all of us. That’s because we all, in various ways and to varying degrees, practice what I call the “Vincent Chase theory of financial management”. That is, we are all on occasion tempted to “stretch” our money, saving a little less than we probably should towards getting that bigger house, that nicer car, that more glamorous vacation, etc. After all, when times are good and the money’s flowing, why not? We can always go back to the more modest lifestyle we were perfectly happy with before, if the twists and turns of life force us in that direction.

Read the rest of this entry »

dazed_and_confused

I finally got around to listening to This American Life’s radio piece about Carmen Segarra and her secret recordings while working for the Federal Reserve Bank of New York. Even if the subject of financial regulation doesn’t typically blow your socks off, I’d highly recommend listening to the podcast, which features TAL’s typically tremendous mix of information and entertainment. At the very least, read the transcript.

The episode is about something called “regulatory capture”, which is a phenomenon we see in a lot of industries, particularly finance and banking. As the piece puts it, regulatory capture is a lot like when there’s “a watchdog who licks the face of an intruder and plays catch with the intruder instead of barking at him”.

Why does this happen? We often point to the “revolving door” separating industry and regulation, where people bounce back and forth between the private sector and the regulatory agencies, dulling their incentive to be tough on the companies they’re regulating now but might work for in the future. But the piece seems to suggest there’s something more purely psychological than that at play.

Read the rest of this entry »

IMG_0207

A new report by the Global Commission on the Economy and Climate has gotten a lot of attention in the press recently. It finds that:

[T]he choice we face is not between “business and usual” and climate action, but between alternative pathways of growth: one that exacerbates climate risk, and another that reduces it. The evidence presented in this report suggests that the low-carbon growth path can lead to as much prosperity as the high carbon one, especially when account is taken of its multiple other benefits: from greater energy security, to cleaner air and improved health.

This is good news, as it helps bolster the intellectual argument for action and quiet the arguments of the “it’s too expensive” crowd, which claims that the adjustments necessary to avert catastrophic climate change would be too painful for the economy to be feasible. As the report finds, when you add in all the secondary benefits of a less carbon-intensive global economy — lower healthcare costs as a result of cleaner air, for instance — the total cost to the economy of acting is actually quite small, or maybe even zero.

While the report is justifiably making news and being celebrated by environmental advocates for its findings, its important to note that the economic argument for action on climate change is not new. Environmental economists have understood for a long time that while there may be some short-run costs involved in adjusting our global economy to avoid climate change, these short-run costs are small in comparison to the much more severe climate-related costs down the line if we do nothing.

In other words, the choice between good economics and good environmental policy is the ultimate false dichotomy; the two are one and the same. Read the rest of this entry »

chess_pieces

For a while I’ve wanted to write something about why Baha’is choose not to get involved in politics. I’ve kind of dragged my feet on this, mostly because it’s a difficult topic to write about, and is fraught with potential pitfalls. But given the number of international conflicts and other major news stories that have sprouted up  over the past couple of months, and the immense attention that some of these have received in the news and social media, I figured it was as good a time as any.

If you’re wondering why the Baha’is have not stood up and spoken publicly on these various conflicts — Israel vs Hamas, Ukraine vs Russia, the St. Louis protestors vs the police, etc. — then you are probably not alone. That’s because Baha’is actually make it a point not to make their voices heard on specific stories like these. I remember during the buildup to the Iraq War in 2003, for instance, as faith-based groups around the world were holding protests against the possibility of an American invasion, hearing the voices of some well-meaning activists criticizing the relative silence of the Baha’is. How can a religion so committed to peace and justice be so content, as I heard one person put it at the time, to “sit on the sidelines”?

The simple answer is that part of being a Baha’i is to make a commitment to stay out of politics, and to avoid taking sides in terms of one party, group, or nation over another, even as we stand in favor of certain principles.

Read the rest of this entry »

Warning: This one is nerdier than normal*.

This blog’s last post, “The happiness scam”, got an unusual amount of attention. I think the issues of materialism, consumerism, and greed and their toxic effects on our wellbeing must resonate with readers. If so, that’s something that needs to be celebrated. We may have a long way to go, but the spark of discussion seems to have been lit.

One of the most common responses I tend to receive after writing a post like that is: Isn’t our whole economy based on consumerism? Won’t the whole thing collapse like a house of cards if we all stop buying useless junk?

I’ve kinda broached this topic before, but I think it’s time it deserves it’s own post. Somehow it became a popular meme, especially within my generation, that the American economy (or maybe even the whole modern-day global economy? I dunno) is based on nothing of substance, and that rampant spending is the only thing holding up a giant economic pyramid scheme. But this is (mostly) wrong.
Read the rest of this entry »

Rainn Wilson, the comedic actor best know as “Dwight” from The Office, delivered a brilliant commencement speech to the graduating class at USC a couple of months ago. For those who aren’t aware, Wilson is one of the world’s best-known Baha’is, and has never been shy about broaching the topic of spirituality, especially with young people. Here he was at his best.

The topic of the speech was, more or less, how simply “pursuing happiness” can leave us feeling empty and unsatisfied, and how an attitude of selflessness can bring us a deeper feeling of fulfillment. Here’s an excerpt (a long one, but worth reading in its entirety):

Happiness is so fleeting. It’s like an amusement park ride. It’s like cotton candy. I mean, it looks so amazing: It’s delightful and fluffy and pink and you joyously eat it and then almost immediately regret your decision. Your fingers are sticky the rest of the day, and you’re undergoing an almost immediate insulin crash from the half pound of sugar that you just sucked down. You’re hungry again almost immediately and you begin the chase again for ingestible happiness right away. Happiness in our contemporary culture is something to be chased, something that’s just around the corner, something outside of ourselves. There’s a kind of a “if then” proposition about happiness. For instance: “If I get a job at a top law firm then I will be happy.” “If I get married to the perfect man or woman then I will be happy.” “If I can become more popular then I will he happy…” etc. It’s the whole point of commercialism, too, and materialism. If you buy this car, eat this cheeseburger, wear these jeans, use these headphones, then you will be happy. And you know what? Buy the jeans, eat the cheeseburger, the result is never happiness. Joy or contentment. It’s always the same. We’re never satisfied. It never meets our needs fulfills our standards. We’re left empty, wanting something more. It’s cotton candy. Fleeting, sticky, unsatisfying….

Volunteering, helping, showing kindness, sacrificing your time and energy, giving selflessly, these are the things that will give you the greatest human flourishing. And what a strange dichotomy in this “me me me” culture we live in. Focus on yourself: you’ll find only misery, grasping, depression, emptiness, dissatisfaction. Focus on helping others: joy, contentment, gratitude, happiness… So go forth young men and women spiritual beings all, with your pieces of paper, your souls and your hearts, go forth and undertake our new national motto, “life liberty and the pursuit of service”, and your lives will be the richer for it.

This is potentially tricky territory — I mean, the speaker is basically telling young people at one of the happiest moments of their lives not to strive to be happy — and I truly admire his courage. But the main message here should not be controversial. That’s because, as pointed out in the speech, science actually confirms that acts of selflessness tend to lead to greater happiness. (Nevermind that it represents a core teaching of nearly every religion.) And yet, from my perspective the fact that selflessness, rather than selfishness, is more likely to lead to fulfillment and life satisfaction gets a shamelessly low level of attention in the modern discourse. Instead, we are hit with a steady stream of messages preaching the opposite, including the semi-sarcastic-yet-inescapably-depressing image below, which I captured at our local mall food court:

Spiritual enlightenment was never so easy nor delicious

In the same tradition as the religious faiths founded before it, the Baha’i Faith in countless passages warns us not to rely on the material world for fulfillment. One of my favorite passages written by Baha’u’llah is this one (which I’ve shared before), which compares the world itself to a desert mirage:

The world is but a show, vain and empty, a mere nothing, bearing the semblance of reality… Verily I say, the world is like the vapor in a desert, which the thirsty dreameth to be water and striveth after it with all his might, until when he cometh unto it, he findeth it to be mere illusion.

For us to look to something bigger than the world around us is not an unnatural act or suppressing our natural selves. The human being’s true nature, Baha’u’llah teaches, is more noble than that. In the same passage as the one above, He compares the childish obsession with our material lives with a fallen bird:

Ye are even as the bird which soareth, with the full force of its mighty wings and with complete and joyous confidence, through the immensity of the heavens, until, impelled to satisfy its hunger, it turneth longingly to the water and clay of the earth below it, and, having been entrapped in the mesh of its desire, findeth itself impotent to resume its flight to the realms whence it came. Powerless to shake off the burden weighing on its sullied wings, that bird, hitherto an inmate of the heavens, is now forced to seek a dwelling-place upon the dust.

Why is this so difficult for us to learn? How come we feel compelled to chase after things that are so ineffective in delivering real happiness? It’s universally acknowledged that true happiness can’t easily be achieved with material things. And yet, we still keep reaching for the cotton candy.

I’m about halfway through through Daniel Kahneman’s Thinking Fast and Slow, which is more or less about how the human brain tends to think sometimes in quick, reactive ways, and other times in deliberate, calculated ways. Kahneman basically summarizes decades of research into how the human mind makes decisions, much of which he himself had a hand in.

One of the more interesting passages from the book is about how the human brain handles fear and risk. The thoughtful, rational aspect of our thinking — what the author abbreviates as “Type II” — can, actuary-style, do all the calculations necessary to estimate the true level of danger that something presents, as well as comparing the probability and severity of different possibilities side-by-side. But when confronted by real-life dangers, we humans don’t commonly tend to think like this. In reality, risks are assessed and our fears governed by our reactive, intuitive “Type I” brain, which tends to overweight the danger from things that are “available”, or in other words visible, easily conceptualized, and at the forefront of our attention.

This makes a lot of sense, given the inordinate amount of attention that we tend to pay on smaller risks that connect more easily to our emotions. I suppose the textbook example would be how we tend to fear plane crashes much more than car crashes, even though the former are much rarer and much less likely to kill us. But we could come up with countless other examples, I’m sure.

The fact that human beings are irrationally fearful of certain relatively benign things over much more dangerous ones is bad enough. Think, for instance, of our society’s obsession with the risk of terrorism, which has killed roughly 3,000 Americans this century, in comparison to our comparatively lukewarm reaction to drunk driving, which kills about 10,000 every year.

But this particular glitch in the way we think becomes much worse when it’s mixed with human selfishness and opportunism. One of the most memorable and funniest recent examples of this was a commercial for a home security system that aired a few years ago. In it, a single woman meets a seemingly nice man at a party, only for that man to break down her door minutes later in an apparent attempt to assault her. Her alarm system blares, and the would be assailant is scared away (phew!). I’m not sure which is funnier: the Saturday Night Live spoof, or the real thing.

Sometimes, the urge to profit from natural human fears is even more nefarious. The existence of fear in whatever form can mean an opportunity for political influence, simply by cultivating and directing these fears towards an intended goal. Again, I could probably list tons of examples here, but I prefer to leave it to the reader’s own imagination (as well as the comments section).

As is the case for so many other things, here I wonder if this problem has always been with us, and I just tend to notice more as I get older. Maybe, but that shouldn’t be cause for us to accept the status quo. Let’s put it this way: When voters feel the urgency to ban shariah law in their state in fear of an Islamic caliphate taking over Oklahoma, something has gone horribly wrong. (And I’m sure both of Oklahoma’s Muslims would agree.)

The power of the media to skew our sense of risk — whether motivated simply by the profit motive or by some deeper political goal — is described by Kahneman in the framework of the “availability cascade”. He writes:

An availability cascade is a self-sustaining chain of events, which may start from media reports of a relatively minor event and lead up to public panic and large-scale government action. On some occasions, a media story about a risk catches the attention of a segment of the public, which becomes aroused and worried. This emotional reaction becomes a story in itself, prompting additional coverage in the media, which in turn produces greater concern and involvement. The cycle is sometimes sped along deliberately by “availability entrepreneurs,”, individuals or organizations who work to ensure a continuous flow of worrying news. The danger is increasingly exaggerated as the media compete for attention-grabbing headlines. Scientists and others who try to dampen the increasing fears and revulsion attract little attention, most of it hostile: anyone who claims that the danger is overstated is suspected of association with a “heinous cover-up”. The issue becomes politically important because it is on everyone’s mind, and the response of the political system is guided by the intensity of public sentiment. The availability cascade has now reset priorities. Other risks, and other ways that resources could be applied for the public good, all have faded into the background.

How far the current state of affairs seems to be from Shoghi Effendi’s vision of a free but morally responsible press that will “cease to be mischievously manipulated by vested interests, whether private or public, and will be liberated from the influence of contending governments and peoples.” It’s not just human irrationality that is at issue here. The problem is also, in Kahneman’s words, the “availability entrepreneurs”, those who’ve discovered all the right buttons to push to translate fear into power, and seem to have no qualms about pushing them.

 

There hasn’t been much blogging these days, for which I felt it necessary to issue an apology. The excuse I’ll use (for everything, really) is that my wife and I had our second child recently, and life has predictably been turned upside down. Things will normalize as far as this blog goes in due time, I promise.

Having baby #2 has brought the expected burst of joy, with an entirely new set of challenges. The biggest is the predictable jealousy of our two-and-a-half year-old son for his new baby sister. We’re not too concerned, as everyone tells us this is normal. We actually see it as an opportunity for him to experience some healthy heartbreak and learn that he’s not the center of the universe. Nonetheless, for the time being he’s been an absolute menace, with lots of tantrums (the sight of mom nursing another baby is a usual source of emotional devastation).

A lifesaver for our older one has been books, especially at night time. My wife is constantly on the prowl for good children’s books, and it’s a credit to her that our son is so fond of reading at such a young age. Consequently, I’ve become something of an expert on children’s literature, like most parents I suppose. Honestly, most of the genre is just crap, in my experience, though I understand that I’m not exactly the target audience. (After re-reading those “Mister” books for the first time in nearly three decades, for instance, I now fully believe them to have been written and illustrated by a 3rd grader during recess.) However, there are a couple of books in particular that are just superb at explaining complex social concepts to kids, including some economic themes that we adults routinely gloss over or fail to address entirely. It might seem corny to look to children’s books for economic wisdom, but “corny” has never stopped me on this blog before, so bear with me.

The first I’ll mention is Little Blue Truck Leads the Way by Alice Schertle. It tells the story of a little blue truck who ventures into the tall, fast city, only to find that all the other vehicles are in a terrible, aggressive rush. Everyone is so stressed and hurried that the city streets eventually grind to a halt, and no one can get anywhere. Finally, all the vehicles recognize the wisdom of the Little Blue Truck, who teaches everyone to wait patiently and form an orderly line, allowing others to go first.

little_blue_truck

The beauty of this book is not just that it teaches kids to respect order and not barge ahead of others. It’s that it acknowledges the limits to the importance of economic efficiency. The problem with the big city, it seems, is not just that it’s chaotic, but that it’s miserable. All of the vehicles, in their scramble to get ahead, are stressed, angry, and frustrated. (Sounds like my morning commute into Manhattan.) When everyone slows down a bit, the city is able to relax and breathe, adding value to its residents’ lives in ways that can’t easily be measured. This is an important point that is lost on a lot of us adults; in our quest for efficiency and productivity, we sometimes unwittingly sacrifice subtle things that are vital for our own welfare. This is a point I’ve been thinking of writing about on this blog for a while now, but like a lot of things, it’s probably best left to art.

The second book is Just So Thankful, by Mercer Mayer (from that “Critter” series that a lot of us became acquainted with as kids). It follows a kid who’s bummed out that his parents won’t buy him a particular toy, and who grows jealous of the new kid in school, “H.H.”, who’s super rich and seems to have every toy (as well as servants, a mansion, and a swimming pool). When H.H. comes over to Critter’s modest house to play one day, the rich kid ends up having a blast enjoying the little things — helping out with dinner, playing with he family puppy, getting his shoes eaten up by the dog — and shows Critter how good he truly has it, despite the fact that his family isn’t rich.

just_so_thankful

There is no shortage of art seeking to explain that material possessions aren’t what make us happy, that “the best things in life are free”. But this book does more than that, which is to emphasize that people of all economic backgrounds — rich, poor, whatever — derive happiness from the same things in life. H.H. arrives at Critter’s house with excitement about seemingly mundane but valuable things, like having a family cookout. Far from snobby about his wealth, we find when H.H. is stripped of his butler and cell phone and Super Streak Scooter, he’s just another normal kid who enjoys the same thing as everyone else.

Anyway, those are my children’s book recommendations. If you’re a parent, you should get them for your kids. If not, you might still get them and read them on your own. Just think twice before doing so in public, because that might seem creepy. About as creepy as a grown man writing emotionally about children’s literature on an economics blog.

 

Godzilla vs Mr. Bill

I recently finished reading Chrystia Freeland’s Plutocrats, which is about the world’s rising elite class and the enormous buildup of wealth at the top of the spectrum. Easily the most satisfying part of the book is towards the end, when she discusses the potential impact of this phenomenon for our economy and our democracy. Here she shares a brilliant quote from Luigi Zingales, an economics professor at UChicago’s Booth School of Business, which I felt compelled to share:

True capitalism lacks a strong lobby. That assertion might appear strange in light of the billions of dollars firms spend lobbying Congress in America, but that is exactly the point. Most lobbying seeks to tilt the playing field in one direction or another, not to level it. Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition. Open competition forces established firms to prove their competence again and again; strong successful market players therefore often use their muscle to restrict such competition, and to strengthen their positions. As a result, serious tensions emerge between a pro-market agenda and a pro-business one.

Industry has been throwing its weight around to the detriment or the larger marketplace — and to society in general — for decades, if not longer. As Zingales describes, this includes purposefully stifling open competition, and in doing so hurting other companies operating in the marketplace, as well as the consumers who would otherwise benefit from the better quality and prices that a competitive market would bring. To take one recent example we’ve already covered here on this blog, the lines separating media companies, political lobbyists/fundraisers, and government policymaking have been blurred, possibly paving the way for regulators to sign off on ever-growing oligopolies, and thus crowding out efficient competition from smaller firms. In other words… cable is too frigging expensive!

But beyond just stifling competition, there are innumerable ways that businesses and industry groups distort the free market with their political power. More than fifty years ago, Eisenhower prophetically warned of the “military industrial complex”, where an industry that stood to profit from war would skew the nation towards unnecessary debts and perpetual conflict. There are countless corollaries today in other industries. Big banks lobby against financial regulation, strengthening their bottom lines while potentially increasing the likelihood of another devastating financial crisis. Producers of fossil fuels quietly spend huge sums trying to confuse the scientific debate on climate change, holding the price of carbon emissions inefficiently low while the earth gradually warms. The farm lobby assiduously maintains the political backing for agricultural subsidies year after year, paid out of the pocket of the US Treasury.  Each case is an example of “extracting rents”, in economics speak. That is, a small and powerful minority with political power extracting value from the broader society and keeping it for itself, all the while compromising the efficiency of the free market.

This is not capitalism, or certainly not “true capitalism”, as Zingales puts it. True capitalism can be, and should be, ethical and egalitarian in its principles. And with the right rules and regulations, it can lead to generally fair and stable outcomes for society (see America for about thirty years following WWII). But not many people can spot the difference between “true capitalism” and what I’d call “rigged capitalism”, and most people nowadays appear hopelessly resigned to the latter.

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