Category Archives: Banking

Low unemployment isn’t worth much if the jobs barely pay

By Martha Ross and Nicole Bateman – Each month, the Bureau of Labor Statistics releases its Employment Situation report (better known as the “jobs report”) to outline latest state of the nation’s economy. And with it, of late, have been plenty of positive headlines—with unemployment hovering around 3.5%, a decade of job growth, and recent upticks in wages, the report’s numbers have mostly been good news.

But those numbers don’t tell the whole story. Are these jobs any good? How much do they pay? Do workers make enough to live on?

Here, the story is less rosy.

In a recent analysis, we found that 53 million workers ages 18 to 64—or 44% of all workers—earn barely enough to live on. Their median earnings are $10.22 per hour, and about $18,000 per year. These low-wage workers are concentrated in a relatively small number of occupations, including retail sales, cooks, food and beverage servers, janitors and housekeepers, personal care and service workers (such as child care workers and patient care assistants), and various administrative positions. more>

Updates from Chicago Booth

Why central banks need to change their message
The US and European central banks thought they could manage their economies by bringing their secretive plans for interest-rate regulation into the light. But they didn’t account for an unreceptive public.
By Dee Gill – A lot of people don’t have a clue what central banks do, much less how the institutions’ ever-changing interest-rate targets ought to affect their household financial decisions. Recent studies, including several by Chicago Booth researchers, find Americans and Europeans oblivious to or indifferent to the targets’ implications.

This is a serious problem for policy makers. For a decade, monetary policy in many developed economies has relied heavily on forward guidance, a policy of broadcasting interest-rate targets that works only if the public knows and cares what its central bankers say.

“The effects of monetary policy on the economy today depend importantly not only on current policy actions, but also on the public’s expectation of how policy will evolve,” said Ben Bernanke, then chairman of the US Federal Reserve, in a speech to the National Economists Club in 2013. At critical times since 2008, forward guidance has been the Fed’s and the European Central Bank’s go-to tool for revitalizing their ailing economies and holding off widespread depression.

Forward guidance usually involves central banks announcing their plans for interest rates, which traditionally were guarded as state secrets. The openness is intended to spur investors, businesses, and households to make spending and savings decisions that will bolster the economy; typically, to spend more money during economic slowdowns and to save more when the economy is expanding.

Chicago Booth’s Michael Weber and his research colleagues, in several studies, tested the basic assumption that households will respond to forward guidance, and find it flawed. Most people, the researchers conclude, generally do not make spending and savings choices on the basis of inflation expectations. In personal financial decisions—for example, to pay or borrow money for a boat, refrigerator, or renovations, or to sock away funds for rainy days—words from central bankers hardly register. more>

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Capitalism’s Case for Abolishing Billionaires

Adam Smith wanted to keep the power of the rich in check.
By Linsey McGoey – Adam Smith is remembered as the patron saint of unregulated commerce, as the world’s greatest prophet of profit. His idea of the “invisible hand” has been used by countless economists and politicians to argue that capitalism works, despite its excesses and inequalities.

But this fairytale version is wrong. The actual Smith wrote of his dream for a more equal society, and condemned the rich for serving their own narrow interests at the expense of the wider public.

“The establishment of perfect justice, of perfect liberty, and of perfect equality,” he writes in Wealth of Nations, “is the very simple secret which most effectively secures the highest degree of prosperity to all the three classes.”

Today Smith’s call for “perfect equality” is either ignored or deliberately misrepresented.

But with 1% of the world’s population now owning half its wealth, that belief is being forcefully called into question. There are growing calls to abolish billionaires and their privileges, including preferential tax treatment, handouts to corporations, and grossly inflated executive salaries that are often subsidized by taxpayers.

Smith was scathingly critical of the wealthy’s disproportionate power over government policymaking. He complained about the tendency of the rich to shirk tax obligations, unfairly passing tax burdens on to poor workers. He heaped scorn on government bailouts of the East India Company. He thought dirty money in politics was akin to bribery, and that it undermined the duty to govern impartiality. He wasn’t alone.

The reality is that the historical case for abolishing billionaire privileges has a long heritage, stretching to enlightenment thinkers and the revolutionaries they inspired, including countless enslaved and working-class people in forgotten graves. more>

The Greatest Balancing Act

Nature and the global economy
By David Attenborough and Christine Lagarde – In nature, everything is connected. This is equally true of a healthy environment and a healthy economy. We cannot hope to sustain life without taking care of nature. And we need healthy economies to lift people out of poverty and achieve the United Nations Sustainable Development Goals.

In our current model these goals sometimes seem to collide, and our economic pursuits encroach too closely on nature. But nature—a stable climate, reliable freshwater, forests, and other natural resources—is what makes industry possible. It is not one or the other. We cannot have long-term human development without a steady climate and a healthy natural world.

The bottom line is that when we damage the natural world, we damage ourselves. The impact of our growing economic footprint threatens our own future directly. By some estimates, more than 50 percent of the world’s population is now urbanized, increasing the likelihood of people losing touch with nature.

With the projected rise in ocean levels and increase in the average temperature of the planet, large swaths of land, even whole countries, will become uninhabitable, triggering mass climate-induced migration. Never has it been more important to understand how the natural world works and what we must do to preserve it.

A necessary first step is to recognize that waste is the enemy. Wasting food, energy, or materials flies in the face of sustainability. Producing plastics fated to end up as litter is a waste, especially when these plastics pollute our oceans. If we could live by the simple injunction to “do no harm,” both individually and as businesses and economies, we could all make a difference. Overconsumption and unsustainable production have put the planet in peril.

Since the natural and economic worlds are linked, similar principles apply to both.

In the financial world, for example, we would not eat into capital to the point of depletion because that would bring about financial ruin. Yet in the natural world, we have done this repeatedly with fish stocks and forests, among many other resources—in some cases to the point of decimation. We must treat the natural world as we would the economic world—protecting natural capital so that it can continue to provide benefits well into the future. more>

Why Corporations Can No Longer Avoid Politics

By Alana Semuels – For decades, most companies went to great lengths to avoid opining on social issues. No longer.

What’s changed? Frustrated with political gridlock, consumers have turned to business for leadership. “I think business has to pick up the mantle when governments fail you,” Patagonia CEO Rose Marcario told TIME earlier this year. Young consumers are also more likely to patronize brands whose business models claim to include social change.

Nine in 10 members of Generation Z, who account for as much as $150 billion in spending power globally, believe that companies have a responsibility to social and environmental issues, according to McKinsey. In an age when companies have detailed information on customers’ ages, incomes and political persuasions, they’re calculating that these socially aware consumers are more lucrative than those who might be put off by social-justice campaigns.

“In a politically polarized world that is saturated in social media, you’re not going to escape politics,” says Jerry Davis, a professor of management and sociology at the University of Michigan. “This is a sea change–in the past, companies kept their heads down and did their best to never be seen.” more>

Updates from Chicago Booth

How multinational companies help spread recessions
By Bob Simison – The Great Recession a decade ago was one example of how economic cycles across the world can move in parallel, a phenomenon that economists don’t fully understand. It could be that a common event, such as a surge in oil prices, affects many economies at the same time—or perhaps linkages between countries transmit economic shocks from one country to the world economy.

One such linkage is multinational corporations,  according to Marcus Biermann, a postdoctoral scholar at the Catholic University of Louvain, and Chicago Booth’s Kilian Huber, who explore the role of multinationals in spreading the global recession by analyzing the ripple effects of one German bank’s struggles during the 2008–09 financial crisis.

Commerzbank was Germany’s second-biggest commercial lender behind Deutsche Bank. Losses on trading and investments abroad hammered the bank, especially after Lehman Brothers collapsed in September 2008. Commerzbank’s capital fell by 68 percent between December 2007 and December 2009, which forced the bank to reduce its aggregate lending stock by 17 percent. Biermann and Huber find that this pullback in credit available to German parent companies affected subsidiaries in other countries, thus helping to transmit the economic contraction. more>

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What’s Elizabeth Warren’s wealth tax worth?

By Isabel V. Sawhill and Christopher Pulliam – On both sides of the Atlantic, economic inequality has rocketed up the political agenda and inspired a new wave of populism. Wealth inequality is high and rising in the UK and staggeringly so in the US. The top 1% of American households now have more wealth than the bottom 90%. In the UK, the top 10% holds over half the wealth. The richest 400 individuals in the US average a net worth of $7.2 billion.

How did we get to this point? As Thomas Piketty, in his book Capital, famously argued, a capitalist economy left to its own devices will tend to produce not just inequality but ever-rising inequality of wealth – and the income derived from wealth. The main reason is because the returns earned on assets such as stocks and bonds normally exceed the growth of wages.

Imagine an economy with one capitalist and one wage earner. If the annual rate of return to financial assets is, say, 3%, but wages are only growing by 2%, more and more income ends up in the hands of the capitalist. Wealth then begets more wealth as the capitalist, not needing to spend all of his added income, adds to his existing wealth and reaps ever-growing income from that wealth. Unless a war or other shock destroys his wealth (think depression or the devastation in Europe after the Second World War), or government decides to tax it away, we end up with the rise in wealth inequality that we are now seeing in many rich countries – the US in particular.

There is something deeply disturbing about Piketty’s work. If one takes his thesis seriously, it means that the inequality of wealth and its corollary, income inequality, along with their continued growth, is the new normal. They are baked into a capitalist economy.

Of course, some financial capital gets invested in productive assets that help the economy grow. But productive investment and growth have slowed in recent decades, making it hard to argue that the rise in wealth at the top has benefited everyone. In the meantime, the accumulation of wealth in high-income households is one reason that income inequality is rising so sharply at the very top. While the richest 20% of US households, which benefit from a lot of human capital but not a lot of wealth, saw their market incomes rise by 96% between 1979 and 2016, the top 1% – which receives far more of their income from wealth – saw their incomes rise by a staggering 219%.

In short, growing wealth inequality spawns growing income inequality, so if we care about the latter, we cannot focus only on redistributing income. We need to tackle the accumulation of wealth as well.

What to do? Senator Elizabeth Warren, a serious contender for the US presidency, has proposed a wealth tax. more>

Updates from Chicago Booth

How machine learning can improve money management<
By Michael Maiello – Two disciplines familiar to econometricians, factor analysis of equities returns and machine learning, have grown up alongside each other. Used in tandem, these fields of study can build effective investment-management tools, according to City University of Hong Kong’s Guanho Feng (a graduate of Chicago Booth’s PhD Program), Booth’s Nicholas Polson, and Booth PhD candidate Jianeng Xu.

The researchers set out to determine whether they could create a deep-learning model to automate the management of a portfolio built on buying stocks that are expected to rise and short selling those that are expected to fall, known as a long-short strategy. They created a machine-learning algorithm that built a long-short equity portfolio from the top and bottom 20 percent of a 3,000-stock universe.

They ranked the equities using the five-factor model of Chicago Booth’s Eugene F. Fama and Dartmouth’s Kenneth R. French. Fama and French break down the components of stock returns over time into five factors: market risk, in which stocks with less risk relative to their benchmark outperform those with more risk; size, in which companies with small market capitalizations outperform larger companies; value, where a low price-to-book ratio outperforms high; profitability, where higher operating profits outperform; and reinvestment, in which companies that reinvest outperform those that don’t. more>

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Consumerism isn’t a sellout – if capitalism works for all

By Richard V. Reeves – The essential thinginess of capitalism has been one of its most-criticized features. Materialism, and specifically consumerism, are almost always used as pejorative terms. Nostalgic conservatives, egalitarian progressives and environmentalists loudly agree on at least one thing: we are just buying too much stuff.

They’re not wrong. The U.S. self-storage market is already worth $38 billion, and growing fast. Almost one in ten households are now renting extra space. One feature of late capitalism is that many of us have more things than we have space for things.

At its best, however, consumerism is a powerful, positive force. It allows for the expression of identity, it can hold sellers to public account, and it drives new thinking and development. But this is only the case when consumers are being served fairly in the market. Today, there is a pressing concern about whether the forces of “bigness” – a trend toward fewer larger companies – combined with a reluctance on the part of governments to intervene in consumer markets, is dampening innovation and narrowing choice.

Before worrying about whether the market is serving consumers, we need to agree that it should. Critiques of consumerism have to be taken seriously before examining whether contemporary capitalism is friendly to consumers. These critiques usually come in four types: moral, aesthetic, financial, or environmental.

The moral critique of consumerism is that the acquisition of things displaces more worthwhile activities or priorities. Instead of shopping, we should be spending time with friends and family, in places of worship, or in nature. more>

Updates from Chicago Booth

Free markets for free men
By Milton Friedman – Do free markets make free men, or do free men make the free markets?

That might seem like a play on words or a purely semantic question, but it is not. It is a very real and very important question, and I think it contributes a great deal to understanding the kind of world we live in, and might live in.

One’s offhand impression is to say, “Well it must be free men who make free markets.” There’s an element of truth in that, but I think to a far greater extent, free markets make free men and not the other way around.

It’s true that there have been free men who have made free markets. The founders of the United States were free men who believed in individual and personal freedom, and they set up a constitution that was designed to preserve free markets.

But many people who regarded themselves as free men have produced totalitarian societies. The intellectual creators of the Soviet Union would have called themselves free men and would have said that they believed in individual and personal freedom. Yet they created not free markets but controlled markets. more>

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