A Wee Question

Here is a question for you. Suppose that you lead a comfortable middle-class life. Let's say that you're in your 30s, married, two children, and you make $100,000 per year. I offer you a fair coin flip with the following possible outcomes:

  • Heads: You will be stripped of most of your assets and will earn $30,000 per year for the rest of your life. That's all you get, and neither friends nor family can top it up for you.
  • Tails: You will earn $1 million per year for the rest of your life.

Treat this as a serious question. Would you take me up on my offer to flip the coin?

Matt Yglesias isn't buying my story that skyrocketing Wall Street earnings—and the skyrocketing incomes of the super-rich in general—are basically coming out of the pockets of the working and middle classes:

I think what Kevin’s story keeps missing is a plausible causal account of how a tiny number of financiers have been able to hoover up money from the median wage earner....I can tell you a story about how a tiny number of financiers have been able to hoover up money from the broad class of rich people in the 80th-99th percentile who own the bulk of the financial assets in the country by swindling them. I can tell you a story about how a tiny number of financiers have been able to hoover up money from the broad class of rich people via the income tax and “bailouts.” But the median wage earner seems harder to me.

....Here’s another story. A lot of the median wage earner’s money has been hoovered up by the health care system. If we had single payer health insurance in the United States then increases in per capita health care spending would exhibit themselves as higher taxes....The last part of my story is monetary policy. It used to be the case that monetary policy errors were two-sided. Sometimes wages grew too fast (inflation) and sometimes they grew too slowly (recession), but since 1980 we’ve only ever erred in one direction and experienced three labor market recessions and zero outbursts of inflation.

As it happens, swelling health care benefits aren't enough to account for more than a small amount of middle class income stagnation over the past three decades. The arithmetic just doesn't work out. But Matt is right that the weakest part of my story is coming up with a good causal account of how the top 1% sucked up so much money from the middle classes. But I think it's a mistake to get overly wonky and look for some kind of geometric proof of how this happened. You're just never going to get that. You're never going to be able to point to a specific policy at time X that caused a specific transfer of income share at time Y.

As another blogger put it, "It’s as if the major banks have tapped a hole in the social till and they are drinking from it with a straw." Except it's not just the banks. It's their super-rich clients, too.

Still, I don't think that a plausible story of causation is really all that hard. First, take a look at middle class income stagnation. What caused that? Matt already pointed to one cause: monetary policy since the late 70s that's kept inflation low at the cost of keeping labor markets persistently loose. To that, I'd add several other trends that have marked the past three decades: trade policies that accelerated the decline of U.S. manufacturing; domestic deregulation policies that squeezed workers; stagnation in the minimum wage; immigration policies that reduced wages at the low end; and a 30-year war against labor that devastated unions and reduced the bargaining power of the working class.

On the merits, you can argue for or against any of these individual policies. But there's very little question that collectively they are (a) policies strongly promoted by business interests and the rich, and (b) they suppressed middle class wages. Note that a few of these policies are global in nature, which explains why some other advanced countries also saw a certain amount of middle-class wage stagnation, but that all of them were promoted very aggressively in America, which explains why we saw more of it than most countries.

Now, if these policies hadn't been in place, middle class wages would likely have grown at about the same rate as the overall economy—just as they did in the postwar era. But they didn't, and that meant that every year the money that would have gone to middle class wage increases instead went somewhere else. It was a vast and steadily growing pool of money, and the chart on the right gives you an idea of its size by 2005. It comes from Jacob Hacker and Paul Pierson, and it shows how much income would have gone to different groups if their income had grown at the same rate as the broad economy. The bottom 80% lost $743 billion by growing more slowly. The top 1% gained $673 billion by growing more quickly. That's a pretty close match. And the upper middle class, in the 80th-99th percentile? They didn't score the huge payoffs of the super rich, but they did fine, posting a net gain of $126 billion. In other words, the well off mostly don't seem to have suffered at the hands of the super rich. Instead, the money gained by the top 1% seems to have come largely from the bottom 80%.

But what's the mechanism? What are the policies that allowed this pool of money to flow into their hands? Again, you can point to several things. Just to name a few: reduced high-end marginal tax rates on income and capital gains; relentless financial deregulation; weak antitrust enforcement leading to industry consolidation; the emergence of high-speed trading profits available only to well-connected financial firms; crippling of the IRS's ability to audit high earners; a persistent strong dollar policy; and the ability of the rich to make big financial bets backstopped by government bailouts. All of these are policies promoted largely by business interests and the rich.

There's no indisputable smoking gun here. As I said, you're just never going to get that. What we have, however, is still very, very suggestive. The argument goes like this. (1) For three decades we've had wage suppression in the middle classes, largely as a result of policies promoted by the rich. (2) Conversely, the well off in the 80th-99th percentile have mostly kept up. Their incomes haven't skyrocketed, but they've done fine. This is important since political opposition from this class is generally pretty effective and probably would have derailed the entire project. (3) The aggregate pool of money lost by the working and middle classes is suggestively similar to the amount gained by the super-rich. (4) A wide variety of policies have coalesced that have allowed the super-rich to funnel this money in their own direction. As Tyler Cowen put it, "It’s as if the major banks have tapped a hole in the social till and they are drinking from it with a straw." Except it's not just the banks. It's the banks and all their super-rich clients.

I've seen this before, but today Daniel Gros reiterates the point that Japan, far from being an economic basket case, has actually done pretty well given its aging population:

Policymaking is often dominated by simple “lessons learned” from economic history. But the lesson learned from the case of Japan is largely a myth. The basis for the scare story about Japan is that its GDP has grown over the last decade at an average annual rate of only 0.6% compared to 1.7 % for the US.

....But this picture of stagnation in many countries is misleading, because it leaves out an important factor, namely demography.

How should one compare growth records among a group of similar, developed countries? The best measure is not overall GDP growth, but the growth of income per head of the working-age population (not per capita). This last element is important because only the working-age population represents an economy’s productive potential....When one looks at GDP/WAP (defined as population aged 20-60), one gets a surprising result: Japan has actually done better than the US or most European countries over the last decade. The reason is simple: Japan’s overall growth rates have been quite low, but growth was achieved despite a rapidly shrinking working-age population.

I know this interpretation has its critics, but I've always found it pretty persuasive. As any corporate CEO can tell you, growth hides a multitude of sins. And while in theory it should be possible to gracefully transition to slow or flat growth, in reality it's almost always very, very painful. All the little problems that you could ignore and all the encrusted barnacles that you could shake off suddenly become enormous impediments that gum up the works and make it nearly impossible to maintain your existing infrastructure.

In any case, Gros says that Italy and Germany are headed in the same direction as Japan (Russia is already there), while France, the UK, and America are in relatively good shape. And although Gros doesn't mention it, there's another country in the rapidly aging camp too: China. By 2030 they'll have a greater proportion of the elderly than the United States. This is one reason why I'm skeptical of alarmism about China's imminent takeover of the world. I don't doubt that China will continue to grow and flex its muscles, but in the long term they have a demographic time bomb to deal with that's worse than ours, and they'll have to tackle it as a considerably less wealthy country than us. It doesn't mean they're doomed, but it does mean that their path to world domination has a few roadblocks in its way.

The King's Speech

I saw The King's Speech last night. Seemed like a pretty good movie, though the Wikipedia entry on George VI certainly suggests that director Tom Hooper stretched the truth a wee bit. But I'm curious: did anyone else think it a little jarring that he chose a German symphony1 as the background music for the scene where King George reads the speech declaring war on Germany? Or was that a deliberate choice with a significance that escapes me?

1A good German symphony! Beethoven's 7th. But still German.

Two Christmases

Welcome to the recovery:

Retailers did not get all that they wanted for Christmas, with December sales coming in lower than expected. But the holiday season altogether was still the strongest since 2006, and several categories including luxury continued their growth.

....“A lot of companies and sectors out there did well, better than analysts expected,” particularly the more exclusive retailers, said Chris Donnelly, a senior executive in the retail practice at Accenture, the consulting firm.

....Luxury items continued to rise, even more so than analysts had expected, with the two higher-end stores reporting results — Nordstrom and Saks Fifth Avenue — beating estimates by the biggest amounts. At Saks, sales at stores open at least a year, a measure called same-store sales, rose 11.8 percent, beating estimates of 3.9 percent. And Nordstrom’s rose 8.4 percent, versus estimates of 3.4 percent.

Italics mine. Holiday sales overall weren't bad, which is a promising sign. But maybe not so promising for ordinary working schlubs.

Is Gene Sperling a good candidate to replace Larry Summers as Obama's head of the NEC? David Corn writes a long defense of Sperling today, playing up his progressive credentials. But what about all that Goldman Sachs dough he lined his pockets with after he left the Clinton administration?

According to a source familiar with the episode, Goldman Sachs approached Sperling for advice on globalization. He took this opportunity to pitch the company an idea in sync with his nonprofit work: the firm ought to invest in social capital in poorer nations. He suggested it focus on business education in developing countries. Goldman Sachs asked for a proposal. He worked one up: devoting $100 million for business training for 10,000 women in these nations. Goldman Sachs, via a foundation it operates, went for the idea and eventually asked Sperling to implement it. On the advice of friends, he requested that he be paid what the investment firm might pay a top lawyer or dealmaker: $70,000 a month. And that's what he earned for a year or so. He did no commercial work for the investment bank.

....Dean Baker, of the liberal Center for Economic and Policy Research, chimes in: "I don't think it's a question of outright corruption. It's a question of orientation. Most people hear you got almost a million dollars for a part-time job, and they think there's a problem there. But people on Wall Street say, a million bucks is chicken feed."

The whole piece is worth reading, but the passage above is really the takeaway. In the world of Wall Street banking, getting paid a million dollars in a year simply isn't anything to fuss about. As Baker says, it's chicken feed. And if that kind of money is available, what kind of person would turn it down, especially if it's being offered for doing such obviously worthy work? Would you?

I don't know anything about Sperling myself aside from his basic biography. My guess, though, is that I doubt we're likely to get anyone to replace Summers with less connection to Wall Street than Sperling. The worlds of Wall Street and the West Wing are so intertwined these days that pretty much everyone with any serious experience at all with economic policymaking is hopelessly marinated in high finance. Given the immense pools of money at stake, the finance industry is simply the highest bidder by far for their services. Like it or not, I don't think the revolving door will ever come close to shutting down until Wall Street becomes a lot less profitable than it is now. Which, needless to say, it shows absolutely no signs of doing.

From Robert X. Cringely, on the evolution of the internet:

In terms of latency, the Internet was faster 20 years ago than it is today — in many cases vastly faster. And it is getting slower every day. Unchecked, bufferbloat will eventually make the Internet unusable for some data-intensive activities.

Shazbot! I didn't know that. Or, rather, I kind of suspected it but figured it was just because my cable company sucks or something. But apparently not. Read the whole thing to learn what bufferbloat is and why OS X and Windows 7 are making it worse.

Sarah Ellison has a fascinating piece in Vanity Fair this month about the collaboration between WikiLeaks and the Guardian that resulted in the publication of all those diplomatic cables. After reading it, Henry Farrell draws two conclusions:

First — that Wikileaks-type organizations need strong connections with more traditional media if they are to succeed....Wikileaks is like the blogosphere before it became partially integrated with traditional media. There was a lot of interesting — and newsworthy — material that used to float about on blogs, but unless it was picked up by traditional media, it had little or no political impact.

....Second — that Wikileaks type operations need some kind of organizational infrastructure to work properly. The article discusses at several points Wikileaks’ perpetual need for money, and difficulty in doing what it wanted to do with its material because of lack of money and organizational resources. Taken together, these suggest that Wikileaks-type phenomena are nowhere near as invulnerable to concerted state action as some of the more glib commentators have suggested.

I don't know if this is already common knowledge and I just haven't been following the story closely enough, but it turns out that Julian Assange kept very tight control over what could be released and what couldn't. But shortly before publication started, the Guardian got hold of a second copy of the database of diplomatic cables ("package three") from, ironically, a leaker within WikiLeaks:

In October, while The Guardian was preparing to publish the Iraq War Logs and working on package three, Heather Brooke, a British freelance journalist who had written a book on freedom of information, had a copy of the package-three database leaked to her by a former WikiLeaks volunteer. [Guardian investigations editor David] Leigh shrewdly invited Brooke to join the Guardian team. He did not want her taking the story to another paper. Furthermore, by securing the same database from a source other than Assange, The Guardian might then be free of its promise to wait for Assange’s green light to publish. Leigh got the documents from Brooke, and the paper distributed them to Der Spiegel and The New York Times. The three news organizations were poised to publish the material on November 8.

Assange didn't take this well and threatened to sue. Eventually, an agreement was reached to begin releasing the material on November 29.

In any case, the entire piece is worth a read, as are Henry's observations. My own guess is that he's overestimating the difficulty of running a WikiLeaks-style organization: after the success of the current document release, I suspect that other organizations with access to big databases of leaked material will have little trouble finding media partners to help them publicize it. In time, it might even become a pretty standard way of doing business. And while funding will remain an issue, I imagine that organizations dedicated to leaking will, over time, develop both an infrastructure and a way of doing business that works pretty well. WikiLeaks may be in trouble right now, but others will learn from their mistakes.

The Census Bureau reports on state finances:

The recession blew a huge hole in the already shaky finances of state governments, causing them to lose nearly one-third of their revenue in 2009, according to a Census Bureau report released Wednesday....Overall, total state government revenue dropped 30.8 percent, to $1.1 trillion, between fiscal 2008 and 2009, according to the report.

Is it any wonder that pension funds look bad when revenue drops 30% in a single year? States have a problem, but contra conservative rhetoric, it's a tax problem, not a spending problem.

The belief that vaccines cause autism got its start in 1998 with a paper in the Lancet authored by Andrew Wakefield. We've known for a long time that it was a piece of crap: it used a nonrandom sample of 12 children, it depended largely on observations by parents, it was marred by egregious conflicts of interest, and in 2004 it was renounced by 10 of its co-authors and later retracted by the magazine. That's all bad enough. But it turns out that it was even worse: the paper was an outright fraud from start to finish. Aaron Carroll summarizes:

How bad was the deception?

First of all, in order for this all to make sense, the children had to have what is known as “regressive autism”. In other words, they had to have been fine — normal, in fact — and then get much worse after the MMR shot, developing autism. Children who obviously weren’t right from the start would have had something wrong already, and not have autism caused by the MMR vaccine. In Wakefield’s paper, he described 9 of the 12 children as having regressive autism. Mr. Deer’s investigation found that three of the 9 children he reported as regressive autism were not. Moreover, an additional 5 of the remaining 6 could not be proven to have regressive autism. So — at best — only 6 of the 12 children in the study had regressive autism; more likely, only one did.

Next, Wakefield’s paper alleged that a colitis brought on by the vaccine is what led the shot to become so damaging. In his paper, he reported that 11 of 12 of the children had a nonspecific colitis. What did the records show? That only 3 of the 12 had nonspecific colitis. The other 6 cases were falsified.

And, of course, the final piece of the puzzle was that symptoms needed to start not long after the vaccine was given. In Wakefield’s paper, 8 of the 12 patients reported symptoms days after the MMR. Mr. Deer’s investigation confirmed that for 10 of the 12 children, this was false. For the other two it was unknown. So — at best — 2 of the 12 children showed symptoms near the vaccine. At worst, none did.

And Lancet's editors added this: "Is it possible that he was wrong, but not dishonest: that he was so incompetent that he was unable to fairly describe the project, or to report even one of the 12 children’s cases accurately? No. A great deal of thought and effort must have gone into drafting the paper to achieve the results he wanted." The punchline, of course, is that parents panicked over Wakefield's results and lots of them decided not to get their kids vaccinated. As a result:

Measles has surged since Wakefield's paper was published and there are sporadic outbreaks in Europe and the U.S. In 2008, measles was deemed endemic in England and Wales.

The vaccine-autism quackery that Jenny McCarthy and her ilk continue to promote isn't just harmless fun and games. It's damaged untold children and might well have killed a few. It's long past time for it to stop.