Tag Archives: Financial crisis

Saving Capitalism from Inequality

Robust middle incomes deliver the demand that businesses need to produce.
By Robert Manduca – After decades of praise heaped on “job creators,” viewers today may find it disorienting to see the consumer—and a middle-income one at that—cast as the hero of the economy, instead of the investor or the entrepreneur.

Yet Fortune, which produced the video in 1956, was hardly an outlier. In the mid-twentieth century, advertising, popular press, and television bombarded Americans with the message that national prosperity depended on their personal spending. As LIFE proclaimed in 1947, “Family Status Must Improve: It Should Buy More For Itself to Better the Living of Others.”

This messaging was not simply an invention of clever marketers; it had behind it the full force of the best-regarded economic theory of the time, the one elaborated in John Maynard Keynes’s The General Theory of Employment, Interest and Money (1936). The key to full employment and economic growth, many at the time believed, was high levels of aggregate demand.

But high demand required mass consumption, which in turn required an equitable distribution of purchasing power. By ensuring sufficient income for less well-off consumers, the government could continually expand the markets for businesses and boost profits as well as wages.

Conversely, Keynes’s theory implied, growing income inequality would lead to lower demand and slower economic growth.

The basic Keynesian logic of demand-driven growth came to be accepted across U.S. society in large part due to significant postwar efforts to explain, communicate, and popularize it. Proponents of Keynesian thinking worked hard to educate the public about the new economic theory and the possibilities of abundance that it foretold. A particularly compelling example is the book Tomorrow Without Fear (1946). 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>


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>

Another year of living dangerously

Twenty twenty will be another year of living dangerously if short-term policies continue to be pursued at the expense of long-term vision.
By Isabel Ortiz – The year 2019 ended with widespread demonstrations, rising inequality and a crisis of representation in many countries. The world is sleepwalking toward recession and a new crisis, while depleting the environment. Governments, and ultimately people, can reverse these alarming trends in 2020.

Sixty-one countries will have presidential or parliamentary elections in 2020. Many citizens are tired of conventional orthodox policies; they want change, and they will choose new parties as a way to achieve this.

This is an important opportunity to redress the current situation, but many of the new emerging leaders are far-right demagogues who blame today’s problems on social-welfare policies, migrants and the poor, while aiming to remove all remaining constraints on capital. As in the United Kingdom, many whom neoliberalism has harmed will vote for these politicians, making the world a more unequal and riskier place.

A lot will be decided in the United States, still the world’s hegemonic power. How US citizens (many without much knowledge of global affairs) vote in the 2020 presidential election will have profound consequences for the rest of the planet’s citizens.

The US president, Donald Trump, has already had a big impact on the world, eroding multilateral institutions, trade agreements and global initiatives as part of his ‘America First’ agenda. Despite the populist rhetoric, Americans in the main have benefited little. more>

Why the idea that the world is in terminal decline is so dangerous

By Jeremy Adelman – From all sides, the message is coming in: the world as we know it is on the verge of something really bad. From the Right, we hear that ‘West’ and ‘Judeo-Christian Civilization’ are in the pincers of foreign infidels and native, hooded extremists. Left-wing declinism buzzes about coups, surveillance regimes, and the inevitable – if elusive – collapse of capitalism.

In fact, the idea of decline is one thing the extremes of Left and Right agree upon. Rome’s decline looms large as the precedent. So, world historians have played their part as doomsayers.

It is almost part of the modern condition to expect the party to be over sooner rather than later. What varies is how the end will come. Will it be a Biblical cataclysm, a great leveler? Or will it be more gradual, like Malthusian hunger or a moralist slump?

Our declinist age is noteworthy in one important way. It’s not just the Westerns who are in trouble; thanks to globalization, it’s the Resterners too. In fact, we are all, as a species, in this mess; our world supply chains and climate change have ensured that we are poised before a sixth mass extinction together. We should worry less about our lifestyle and more about life itself.

One dissenting voice in the 1970s was Albert O Hirschman’s. He worried about the lure of doomsaying. Dire predictions, he warned, can blind big-picture observers to countervailing forces, positive stories and glimmers of solutions. There is a reason why: declinists confuse the growing pains of change with signs of the end of entire systems. Declinism misses the possibility that behind the downsizing old ways there might be new ones poking through. more>

There is No Economics without Politics

Every economic model is built on political assumptions
By Anat Admati – There is absolutely no way to understand events before, during, and since the financial crisis of 2007-2009 while ignoring the powerful political forces that have shaped them. Yet, remarkably, much of the economics and finance literature about financial crises focuses on studying unspecified “shocks” to a system that it largely accepts as inevitable while ignoring critical governance frictions and failures. Removing blind spots would offer economists and other academics rich opportunities to leverage their expertise to benefit society.

The history of financial economics is revealing in this regard. By the second half of the 20th century, when modern finance emerged as part of economics, the holistic approach of early thinkers such as Adam Smith—which combined economics, moral philosophy, and politics—was long gone. Narrow social-science disciplines replaced the holistic approach by the end of the 19th century. In the 20th century, economists sought to make economics formal, precise, and elegant, similar to Newton’s 17th-century physics.

The focus in much of economics, particularly in finance, is on markets. Even when economists postulate a “social planner” and discuss policy, they rarely consider how this social planner gets to know what is needed or the process by which policy decisions are made and implemented. Collective action and politics are messy. Neat and elegant models are more fun and easier to market to editors and colleagues.

Lobbyists, who engage in “marketing” ideas to policymakers and to the public, are actually influential. They know how to work the system and can dismiss, take out of context, misquote, misuse, or promote research as needed. If policymakers or the public are unable or unwilling to evaluate the claims people make, lobbyists and others can create confusion and promote misleading narratives if it benefits them. In the real political economy, good ideas and worthy research can fail to gain traction while bad ideas and flawed research can succeed and have an impact.

Having observed governance and policy failures in banking, I realized that the focus on shareholder-manager conflicts is far too narrow and often misses the most important problems. We must also worry about the governance of the institutions that create and enforce the rules for all. How power structures and information asymmetries play out within and between institutions in the private and public sectors is critical. more>

Updates from McKinsey

How smart choices on taxation can help close the growing fiscal gap
The growing fiscal gap has policy makers in a difficult position. Swift action in a few areas can help them improve the operational efficiency of fiscal systems.
By Aurélie Barnay, Jonathan Davis, Jonathan Dimson, and Marco Dondi – Governments around the world have implemented a range of fiscal and debt measures to fund policy initiatives over recent decades. As a result, tax revenues as a proportion of GDP have risen four percentage points across Organization for Economic Cooperation and Development (OECD) countries since 1980. However, many governments remain inadequately funded. Despite higher tax revenues, spending is rising faster than income, leading to widening budget deficits and higher levels of debt.

Four distinct trends are playing out: increasing automation in the workplace, leading to pressure on employment; the evolution of global trade through the proliferation of e-commerce and digital business, raising questions over cross-border taxation; rising self-employment; and an aging population. Each of these could further widen the fiscal deficit in the years ahead. Moreover, we see all four accelerating, placing policy makers in an ever-tightening fiscal bind.

Basic economics provides two options for balancing the books: either increase revenues or decrease spending.

The bottom line for governments is that there are no easy answers. Whether they seek to increase taxation or boost efficiency, they are likely to face headwinds. Still, decisive and rapid action is essential to optimize tax collections and keep pace with an inevitable rise in demand for services.

Tax revenues in OECD countries have risen slightly over the past 35 years. However, spending has risen more, leading to widening deficits that governments have bridged with debt. OECD tax revenues were 34 percent of GDP in 2017. Because of tax deficits and the effects of the 2008 financial crisis, the average ratio of gross debt to GDP rose from 66 percent of GDP in 1995 to 88 percent in 2017.

Sources of tax revenue have remained stable over time. Over three decades, personal income and consumption together accounted for 82 to 89 percent of revenues. The biggest single contributor was payroll and income tax, accounting for 50 to 55 percent of revenues (even though the contribution of personal income tax declined by nearly 7 percentage points). Consumption and excise duties remain little changed at 32 to 34 percent of revenues.

More people are working for themselves, either as a contractor to several companies or a single company. This emerging gig economy accounts for an estimated 28 percent of EU and US employment. The proportion would rise to 46 percent if everyone had their preferred working arrangement, according to MGI research.

However, the gig economy creates challenges for tax authorities. First, independent workers are generally less compliant than their employed peers, and in some countries are required to pay less taxes. Evidence from the US suggests that workers subject to limited information reporting, such as the self-employed, have an around 50 percentage point lower rate of tax compliance than traditional workers. There are also ongoing legal debates in some jurisdictions over whether gig economy workers are employees for the purposes of worker classification and social security contributions.

Governments can close the widening gap between revenues and expenditures in a variety of ways through tax revenues, nontax revenues, and spending optimization. In addition, some governments are either implementing or considering approaches based on monetary finance.

The gap between government revenues and spending has widened and is likely to continue to do so. The onus, then, is on tax authorities to act now. more>

New Microeconomics: How Evolution Explains Resource Distribution

By Blair Fix – Through years of schooling, mainstream economists are trained to ignore the obvious facts about human nature. The theories that economists learn make it impossible for them to understand human sociality.

Economists are trained that humans are asocial ‘globules of desire’. This is Thorstein Veblen’s satirical term for ‘homo economicus’, the economic model of man.

As Veblen makes clear, economists’ model of human behavior is bizarre. Indeed, the assumptions are so far-fetched that one wonders how this ‘theory’ ever gained acceptance. I’ve spent years trying to make sense of homo economicus as a scientific theory. I’ve concluded that this is a waste of time. Economists’ selfish model of humanity is best treated not as science, but as ideology.

Unlike scientific theories, ideologies are not about the search for ‘truth’. Instead, they are about rationalizing a certain worldview — usually the worldview of the powerful. Economists’ selfish model of humanity is a textbook example.

The discipline of economics emerged during the transition from feudalism to capitalism. During this period of social upheaval, business owners battled to wrench power from the landed aristocracy. To supplant the aristocracy, business owners needed to frame their power as legitimate (and the power of aristocrats as illegitimate). Their solution was devilishly clever. The new business class appealed to autonomy — the mirror opposite of the ideals of feudalism.

Feudalism was based on ideals of servitude and obligation. Serfs were obligated to perform free work for feudal lords. And these lords, in return, were obligated to protect serfs from outside attackers. This web of obligation was rationalized by religion — it was a natural order ordained by God.

To upend this order, business owners championed the ideals of autonomy and freedom. Business owners claimed to want nothing but to be left alone — to pursue profit unfettered by government or aristocratic power. From this world view, the autonomous model of man was born. It had nothing to do with how humans actually behaved. It was about rationalizing the goals of business owners. They wanted power, but they framed it as the pursuit of freedom and autonomy. “Power in the name of freedom” is how Jonathan Nitzan puts it. more>

How to save capitalism from itself

Meet the CEOs, workers, activists, thinkers, policy wonks, and class traitors leading the way toward a more equitable, humane, and democratic economic system that works for the many and not the few.
By Darren Walker – Capitalism is in crisis.

The United States—and our democratic values, discourse, and institutions—is suffering from unprecedented levels of inequality. Today, the three richest Americans collectively own about as much wealth as the bottom half of the population combined. Worse, extreme levels of economic inequity are only one of the many forms of inequality that plague our nation: We also face rampant discrimination based on race, gender, sexual orientation, ethnicity, religion, and ability. Looming over all of this is the threat of a global environmental catastrophe, which will make every one of these disparities more extreme through droughts, food shortages, and refugee crises.

Today, a growing number of leaders in the business and social sectors are finding ways to make our capitalist system fairer. They recognize that if we create the context and conditions for an inclusive and just economy, the more we can use capitalism’s undeniable productive power to unlock better ideas and outcomes for humankind.

The idea is simple: Everyone affected by the policies and practices of a firm should have a voice in shaping them.

Moving to stakeholder capitalism is not only a matter of doing the right thing, economists such as Harvard University’s Oliver Hart and the University of Chicago’s Luigi Zingales argue. In many cases, it’s also economically more efficient—which will in turn help everyone’s bottom line.

It’s less expensive to not pollute the environment than it is to clean up pollution. It’s less costly to not sell addictive opioids than it is to provide mental and physical care for those who become addicted.

By considering the perspectives of all the stakeholders involved, we can avoid cases like these where everyone involved ends up suffering. more>

How to Survive a Recession: 12 Steps You Should Take Now to Protect Your Money

By Diane Harris – “The global economy is facing increasingly serious headwinds,” said OECD chief economist Laurence Boone. “An urgent response is required.”

It shouldn’t exactly come as a surprise then that the latest Gallup poll found about half of Americans now believe that a recession in the next year is likely—a more pessimistic reading than the survey found 12 years ago, just two months prior to the start of the Great Recession.

Even more affluent households are often cash-strapped. Among those making $85,000 or more—the top 25 percent of the income range—the typical family only has enough in liquid savings to replace 40 days of income.

If a recession hits, what would your biggest financial problem be? Taking steps to address that pain point now will make your life a lot easier if trouble comes.

“Your emotions are your best clue,” says Stephanie McCullough. “What stresses you out the most—credit card debt, the feeling that you’re spending beyond your means? Whatever the little nagging voice in your head is telling you is what you should tackle first.”

These moves address the most common contenders for many families.

  1. Pay down the plastic
  2. Earmark spending cuts
  3. Get a check-up