What’s missing from the conversation on income inequality?

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.

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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. Continue reading

The Entourage theory of financial management

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.

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On the futility of politics

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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.

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The happiness scam

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.

What can youth athletics teach us about free markets?

How about a little sportsmanship when it comes to markets?

How about a little sportsmanship when it comes to economic competition?

Sometimes small gestures can prove profoundly spiritually powerful. Spirituality, after all, isn’t just meditating on the top of a mountain or praying by a candlelit bedside. It’s found in real, human gestures that happen around us everyday.

One remarkable illustration of this — and which recently gained national recognition here in the US — happened at a high school wrestling match in St. Paul, Minnesota last month between St. Michael Albertville High School sophomore Mitchell McKee and Blaine High School sophomore Malik Stewart. Other than the stakes, namely the state championship for the 120 lb weight class, this wasn’t an extraordinary match. Except that the following happened: After Stewart was beaten, he immediately walked over and embraced the father of the opposing wrestler, who is terminally ill with cancer. You can read the whole story here (and I strongly recommend you do.)

What was it about this story that made it so emotionally powerful, and vaulted it into the national spotlight a few days later? I think it’s because sports — and particularly youth sports — can occasionally remind us that even in an ultra-competitive atmosphere, the most beautiful human virtues can rise to the surface. Anyone who’s watched high school wrestling in particular recognizes that the sport uniquely balances strategy and discipline with primal aggression and raw effort. That a spontaneous act of humanity can emerge from such gritty violence is testament to the delicate balance between competition and cooperation. At one moment, two athletes struggle to physically dominate each other as if their lives depended on it. At the very next, those two athletes, as well as a tiny community of spectators, are somehow tearfully united by a simple but powerful gesture.

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Greed as epidemic, from Wall Street to Main Street

batch of dollarsLast month the New York Times published a fascinating and much talked about op-ed by Sam Polk, a former derivatives trader turned socially-conscious entrepreneur. If there’s such a thing as a must read, this would be it.

In Polk’s piece, he talks about his time on Wall Street and what he believes was his out of control addiction to money. There are countless passages that are worthy of pasting here, but here’s just a sample:

At 25, I could go to any restaurant in Manhattan — Per Se, Le Bernardin — just by picking up the phone and calling one of my brokers, who ingratiate themselves to traders by entertaining with unlimited expense accounts. I could be second row at the Knicks-Lakers game just by hinting to a broker I might be interested in going. The satisfaction wasn’t just about the money. It was about the power. Because of how smart and successful I was, it was someone else’s job to make me happy.

Still, I was nagged by envy… I wanted a billion dollars. It’s staggering to think that in the course of five years, I’d gone from being thrilled at my first bonus — $40,000 — to being disappointed when, my second year at the hedge fund, I was paid “only” $1.5 million…

Like alcoholics driving drunk, wealth addiction imperils everyone. Wealth addicts are, more than anybody, specifically responsible for the ever widening rift that is tearing apart our once great country. Wealth addicts are responsible for the vast and toxic disparity between the rich and the poor and the annihilation of the middle class.

Polk’s depiction of Wall Street’s culture of voracious greed sounds like a Scorcese-like fantasy. But it’s hardly an exaggeration.

Like I’ve mentioned on this blog before, I work in the investment banking industry, but in research. All that means is that I’m a kind of glorified front-office nerd who works in tandem with bankers, traders, and salespeople, and who’s often called upon to discuss the markets with hotshot portfolio managers. Research isn’t compensated like those other job functions (I’ll get to that in a minute), but we’re close enough to the action to understand the cultural current that runs through a trading floor or a dazzlingly decorated hedge fund meeting room.

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On The Wolf of Wall Street and the subtle glorification of greed

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Martin Scorcese’s new film, The Wolf of Wall Street, about the famously decadent financial scam artist Jordan Belfort, is getting plenty of attention these days. But so is an op-ed by Christina McDowell, the daughter of one of Belfort’s former colleagues, who recently came out against what she sees as the film’s glorification of greed and recklessness. She writes:

You people are dangerous. Your film is a reckless attempt at continuing to pretend that these sorts of schemes are entertaining, even as the country is reeling from yet another round of Wall Street scandals. We want to get lost in what? These phony financiers’ fun sexcapades and coke binges? Come on, we know the truth. This kind of behavior brought America to its knees.

And yet you’re glorifying it… Did you think about the cultural message you’d be sending when you decided to make this film? You have successfully aligned yourself with an accomplished criminal, a guy who still hasn’t made full restitution to his victims, exacerbating our national obsession with wealth and status and glorifying greed and psychopathic behavior.

I went to see The Wolf of Wall Street on New Year’s Day. As for whether or not the film glamorizes the famous greed and excess of Belfort and Stratton Oakmont… well, there is a lot of grey area here, much of it by design.

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The world’s poor: Stressed, jaded, and incessantly patronized

1375849_18372716I write a lot on this blog about economists’ assumptions about human behavior, and when these assumptions are useful to understand reality and when they are not. For instance, a while back I touched on the assumption of “rationality”, which for economists has a strict mathematical definition and is needed to make certain clean, elegant microeconomic models work. Unfortunately, some people take this and other theoretical assumptions beyond their original purpose, asserting, for instance that every human action in real life must be motivated by a rational thought process all the time.

Most of us are observant enough to know that at least sometimes, human beings do not, in fact, behave rationally. Addiction is an often used as example. I’m sure you can construct a model showing how a person could behave rationally and still drink himself into oblivion. But it’s much easier simply to admit to oneself that irrational behavior exists in the world, and basic models based based on an assumption of rationality are limited.

The question is, Just how widespread is our irrationality? That’s the question asked by many behavioral economists and psychologists who’ve attempted to document and codify all sorts of irrational things that human beings tend to do. (Dan Ariely’s best seller Predictably Irrational, though a few years old now, is a great book for a summary of this line of research.) I tend to believe irrational behavior can be found almost everywhere, and understanding this can help us improve ourselves and our society. A few months back, for instance, I made the argument that certain types or consumer loans preyed on individuals’ irrationality, specifically their impulsiveness and lack of understanding of finance. The poor are prime targets, in that they may be less likely to have had some basic financial education, and are naturally more susceptible to the “Interest Free Loans!” thing and other scams, perpetuating the imaginary dream of unlimited access to money without consequences.

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