Tag Archives: economics

Why It’s Not Altruistic to Help the Poor

In an earlier post we reviewed research by epidemiologists Richard Wilkinson and Kate Pickett showing that income inequality contributes to a whole host of negative outcomes, including higher rates of mental illness, drug use, obesity, infant death, imprisonment, and interpersonal trust.

She summarizes these findings in this quick nine-minute talk at a Green Party conference:

See Dr. Pickett making similar arguments as to why raising the average national income in developed countries doesn’t make people happier or enable them to live longer, why unequal societies are more violent, and how status inequality increases stress.

And see more about income inequality and national well-being at Equality Trust.

Lisa Wade is a professor of sociology at Occidental College and the author of Gender: Ideas, Interactions, Institutions, with Myra Marx Ferree. You can follow her on Twitter and Facebook.

Markets and Emotion Work in the Modeling Industry

Today kicks off New York Fashion Week, an important time of year for models.

In these interviews, sociologist Ashley Mears talks about her research on modeling. Modeling, she explains, is a “winner take all” market; most live in very precarious economic circumstances. The value of her product — her body and her ability to use it — is something over which she has almost no control.

Accordingly, modeling requires an incredible amount of “emotion work,” the control of one’s feelings and presentation of emotions for the sake of an employer or customer.

For more from Dr. Mears, see our posts on the invisibility of labor in modeling, the ugly secret behind the model search, thinness in modeling (trigger warning), and contrasting aesthetics for high end and commercial models.

Lisa Wade is a professor of sociology at Occidental College and the author of Gender: Ideas, Interactions, Institutions, with Myra Marx Ferree. You can follow her on Twitter and Facebook.

Racial Disparities in Bankruptcy Filings

The New York Times recently reported the results of a study of racial disparities in bankruptcy filings. When filing personal bankruptcy, most people have two options: Chapter 7 and Chapter 13. With Chapter 7, you have to turn over all non-exempt assets, which will be used to pay off as much of your debts as possible; you’re then free from any further obligation regarding the debts included in the case. Under Chapter 13, on the other hand, you have to continue to try to pay your debts for 3-5 years. There are reasons a person might sometimes prefer Chapter 13 (especially if they have particularly valuable assets they do not want to turn over), but generally it’s more expensive to file for and, obviously, provides less financial relief from debts. According to Braucher et al. (2012), the authors of the study, overall about 30% of personal bankruptcies are filed under Chapter 13.

But in their study, Braucher et al. found that African Americans were significantly more likely to file for Chapter 13, and more likely than they would expect when controlling for things that might make Chapter 13 more attractive. As this NYT chart shows, over half of African Americans file under Chapter 13, compared to just over a quarter for Whites and even less for other groups:

Rates of Chapter 13 filings vary quite a bit across different judicial districts, but African Americans consistently filed Chapter 13 at a higher rate than other groups, regardless of what the overall rate was:

Braucher et al. suggest that attorneys play a key role here. They sent surveys to 596 randomly-selected attorneys who represent individuals filing for bankruptcy, providing information about a married couple considering bankruptcy; 262 of the attorneys responded. When the potential filers gave the names Reggie and Latisha, attorneys were more likely to recommend Chapter 13 than when they gave the names Todd and Allison, suggesting that attorneys may play a role in tracking clients toward different bankruptcy options based on race.

The result is that African Americans are, overall, more likely to use the version of personal bankruptcy that costs them more and requires them to continue struggling to pay their debts for several more years, reducing the immediate relief most people assume bankruptcy provides.

Source: Braucher, Jean, Dov Cohen, and Robert Lawless. 2012. Race, Attorney Influence, and Bankruptcy Chapter Choice. Forthcoming in the Journal of Empirical Legal Studies. Available free online here.

Gwen Sharp is an associate professor of sociology at Nevada State College. You can follow her on Twitter at @gwensharpnv.

Shareholders vs. Stakeholders

Cross-posted at Montclair SocioBlog.

Mitt Romney’s capitalism has come under attack – from fellow Republicans, of all people.  They’re pummeling him for his work at Bain Capital, his private equity firm.  “Private equity” became the term of choice when “leveraged buyout” acquired a connotation of nastiness, probably because many LBOs were in fact nasty affairs (“hostile” takeovers).

Romney is tall and good-looking with a full head of hair.  He speaks with no noticeable regional accent.  Danny DeVito is a photo negative of all that.  But as Lawrence Garfield,* a.k.a. Larry the Liquidator in “Other People’s Money” DeVito does a much better job in making the case for what Mitt did at Bain Capital.**  (The original title for this post was “Defending Private Equity – the Short Version.”)

Bain sometimes made money by bankrupting the companies it took over.  That’s creative destruction for you – first the destruction, then creation.    As Larry the Liquidator puts it***:

 You invested in a business and this business is dead. Let’s have the intelligence, let’s have the decency to sign the death certificate, collect the insurance, and invest in something with a future. . .
Take the money. Invest it somewhere else. Maybe, maybe you’ll get lucky and it’ll be used productively. And if it is, you’ll create new jobs and provide a service for the economy and, God forbid, even make a few bucks for yourselves.

Romney’s critics talk about the people put out of work, the towns and communities eviscerated.  That’s where Garfield/Romney are on shakier ground.

“Ah, but we can’t,” goes the prayer. “We can’t because we have responsibility, a responsibility to our employees, to our community. What will happen to them?” I got two words for that – “Who cares?”

Larry the Liquidator is raising the issue of shareholders vs. stakeholders.  Stakeholders are all those people who are affected by a corporation.  To attract corporations, local governments sometimes offer goodies like tax breaks, regulation breaks, and even bagfuls of cash.  The localities defend these deals by saying that they will be good for the whole town, particularly for those who become employees or who sell goods and services to the corporation.  These people and the town generally will be stakeholders.  They all have a stake in the success of the corporation.

Corporations too often talk the stakeholder talk.  But when times get tough, they talk the shareholder talk – the talk that Larry does so well. And they walk the shareholder walk.  They walk out of town with the money from the sale of the company’s assets.

All this has implications for issues of trust, implications much too broad and deep for a simple blog post.  See this 1988 article by Andrei Schleifer and Larry Summers, “Breach of Trust in Hostile Takeovers.”

————————

* Romney is a Mormon.  Larry Garfield is of no specified religion, though we can assume he is not a Mormon.  In the original play, he was Larry Garfinkle. For Hollywood purposes he became Garfield, just as did actor John Garfinkle.

** Conservapedia, as I’m sure Drek knows, rated “Other People’s Money” as one of the twenty greatest conservative movies.

*** For a transcript of Larry’s speech go here.  The original stage play is by Jerry Sterner, the screenplay by Alvin (Three Spidermans) Sargent.  I don’t know how much credit each gets for this speech.

 Big hat tip to Ezra Klein for the material here.

Income Inequality is Bad for Society. Really Bad.

The mysterious SocProf, who writes The Global Sociology Blog, offered a nice review of Richard Wilkinson and Kate Pickett‘s book, The Spirit Level: Why More Equal Societies Almost Always Do Better.  Wilkinson and Pickett offer transnational research showing how, exactly, income inequality is related to bad outcomes on average.  In other words, as SocProf puts it, ”…egalitarianism is not a bleeding heart’s wet dream but rather the only rational course of action in terms of public policy.”  The 11 graphs, available at the Equality Trust website, speak for themselves.

Societies with more income inequality have higher infant death rates than other societies:

Societies with more income inequality have higher rates of mental illness than other societies:

Societies with more income inequality have a higher incidence of drug use than other societies:

Societies with more income inequality have a higher high school drop out rate than other societies:

Societies with more income inequality imprison a larger proportion of their population than other societies:

Societies with more income inequality have a higher rate of obesity than other societies:

Individuals in societies with more income inequality are less likely to be in a different class than their parents compared to other societies:

Individuals in societies trust others less than people in other societies:

Societies with more income inequality have higher rates of homicide than other societies:

Societies with more income inequality give less in foreign aid than other societies:

Children in societies with more income inequality do less well than children in other societies:

The authors sum it up pretty simply: : “Th[e] dissatisfaction [measured in this data is] a cost which the rich impose on the rest of society.”

And they have a clear policy proposal relevant to the current economic crisis.

[This is] a clear warning for those who might want to place low public expenditure and taxation at the top of their priorities. If you fail to avoid high inequality, you will need more prison and more police. You will have to deal with higher rates of mental illness, drug abuse and every other kind of problems. If keeping taxes and benefits down leads to wider income differences, the need to deal with ensuing social ills may  force you to raise public expenditure to cope.

Readers Ana and Dmitriy T.M. sent in a TED talk of Richard Wilkinson discussing the relationship between income inequality and social problems:

Lisa Wade is a professor of sociology at Occidental College and the author of Gender: Ideas, Interactions, Institutions, with Myra Marx Ferree. You can follow her on Twitter and Facebook.

Another Failure for the Best and the Brightest

The Federal Reserve Bank recently released 1,197 pages of transcripts of its 2006 closed door meetings.  As the Wall Street Journal comments: “The transcripts paint the most detailed picture yet of how top officials at the central bank didn’t anticipate the storm about to hit the U.S. economy and the global financial system.”  

Federal Reserve officials suspected that housing prices were peaking (see chart below).  But since they didn’t believe that prices had been driven up by a well entrenched bubble, they were not very concerned that they were coming down. 

p1-be338_fed_ns_20120112181819.jpg 

The Financial Times described the general Federal Reserve stance as follows:

Almost every Fed policymaker concluded that weaker housing would cause a slowdown in consumption and investment but expected that to offset strength elsewhere in the economy, leading to continued growth overall.

“Housing is the crucial issue. To get a soft landing, we need some cooling in housing,” said Ben Bernanke, Fed chairman, in his summing up of the economic situation in March 2006. “I think we are unlikely to see growth being derailed by the housing market.”

Indeed, a number of Fed officials saw the housing slowdown as welcome news that would help resolve a potential threat to the economy. “As to housing, we are in fact, as all have noted, squeezing out of that sector the speculative excesses that developed with the low interest rates of recent years — and doing so is unavoidable if we want to correct the sector,” said Thomas Hoenig, then president of the Kansas City Fed, at the September 2006 meeting of the FOMC. 

The transcripts show that the Federal Reserve was so confident that the economy was on solid footing that many officials were, according to the Wall Street Journal:   

…offering praise for outgoing Fed Chairman Alan Greenspan, who attended his final Fed meeting in January 2006. Timothy Geithner, then president of the Federal Reserve Bank of New York and now Treasury Secretary, playfully offered this forecast about Mr. Greenspan’s legacy: “I think the risk that we decide in the future that you’re even better than we think is higher than the alternative.”

The transcripts also suggest that Fed officials misgauged the potential for housing problems to spill over into the broader economy.

“Our recent financial-market data don’t, in my view, provide a convincing case for a substantial increase in the probability of a much weaker path for growth going forward,” Mr. Geithner said at a meeting in December 2006.  

So how did the best and the brightest get it so wrong?

Perhaps the major reason is because it served their interests to pretend there was no housing bubble.  The recovery from our 2001 recession was driven by consumption and that consumption was supported directly and indirectly by the housing bubble.  In other words stopping the bubble would have revealed the weakness in our economy and the need for serious structural change.  It was far easier and more lucrative for those at the top to just let the bubble go on expanding and pretend that it didn’t exist.

The following chart from the New York Times puts the movement in housing prices highlighted above into a longer term perspective, revealing just how strong speculative pressures were in the housing market.

shiller-housing-bubble-graph.jpg

As Dean Baker, one of the very few economists to warn about the dangers of the bubble, explains 

First, what happened is very straightforward: we had a huge run-up in house prices that had no basis in the fundamentals of the housing market. After 100 years in which nationwide house prices just kept even with the overall rate of inflation, house prices began to sharply outpace inflation, beginning in the late 1990s.

By 2002, when some of us first noticed the bubble, house prices had already risen by more than 30 per cent in excess of inflation. By the peak of the bubble in 2006, the increase in house prices was more than 70 per cent above the rate of inflation.

This was a huge problem because this bubble was driving the economy. It drove the economy directly by creating a boom in residential housing construction. We were building housing at a near record pace in the years 2002-2006. This was in spite of the fact that we had an ageing population and record levels of vacancies at the start of that period.

The other way in which the bubble was driving the economy was through its effect on consumption. The bubble created more than US $8tn [trillion] in ephemeral wealth in housing. Homeowners thought this wealth was real and spent accordingly. The result was a massive consumption boom that sent the saving rate down to zero in the years from 2004-2006.

In reality, a lot of the consumer spending driving growth was financed by home refinancing, which helped many housholds compensate for stagnant wages and weak job creation at the cost of a sharp rise in debt.  As a Wall Street Journal blog post pointed out, “From 2000 to 2007, household debt doubled from $7 trillion to $14 trillion, with debt related to housing responsible for 80% of the increase. By 2007, the household debt to GDP ratio reached its highest level since 1929.”

As we now know only too well, the collapse of the housing bubble reverberated through the economy, including the financial sector, triggering the Great Recession.  Tragically, many of the “best and brightest” remain in leadership positions today, still arguing for the soundness of economic fundamentals. 

Cities, Soap Operas, and the Declining Birth Rate in Latin America

The declining birth rate in Latin America, depicted in this graph, is a nice example of the way that both cultural and social change affects individual choices.  Brazil is highlighted as an extreme case. It’s birthrate has fallen from over six children/woman in 1960 to under 1.9 today.

The accompanying Washington Post article, sent in by Mae C., explains that the decrease in the birthrate since the 1960s is related to migration to cities.  In rural areas children are useful. They can help with crops and animals.  In crowded and expensive cities, however, they cost money and take up space.  Economic change, then, changed the context of individual choices.

This transition — from a largely rural country with high birthrates to an industrialized one with lower birthrates — has been observed across countries again and again.  It’s no surprise to demographers (social scientists who study changes in human population).  But Brazil did surprise demographers in one way:

…Brazil’s fertility rate fell almost uniformly from cosmopolitan Sao Paulo, with its tiny apartments and go-go economy, to Amazonian villages and the vast central farming belt.

The decline in birthrate, in other words, has occurred across the urban/rural divide. Demographers attribute this to cultural factors.  The idea of “an appealing, affluent, highflying world, whose distinguishing features include the small family” has been widely portrayed on popular soap operas, while Brazilian women in the real world have made strong strides into high-status, well-paid, but time-intensive occupations.  They mention, in particular, Brazil’s widely-admired first female president, Dilma Rousseff, who has one child.

Ultimately, then, the dramatic drop in the birthrate is due to a combination of both economic and cultural change.

Lisa Wade is a professor of sociology at Occidental College and the author of Gender: Ideas, Interactions, Institutions, with Myra Marx Ferree. You can follow her on Twitter and Facebook.

Slumlords Conspire to Avoid Building Maintenance

A new study shows that owners of run-down apartment buildings are selling them to each other  ”in a criminal conspiracy to avoid having to do the legally required maintenance necessary to keeping their buildings habitable and safe” (BoingBoing).

A tenant advocate was working with the city to document unsafe living conditions in apartments — things like leaking sewage and lead levels that were causing mental retardation — and get the owners of the buildings to make repairs  ”But every time documented problems were delivered to the current LLC [Limited Liability Company] owners by city officials,” the report says, “nothing would happen.”

When the city’s deadline approached to fix the violations, the old LLC owner would explain that the property had changed hands and they were no longer involved. The buildings continued to deteriorate as owner after owner avoided addressing the violations.

In fact, the buildings were shifting hands within an extended family.  Confirming the connections between the various landlords proved that “…properties exchanged hands not as independent and valid real estate investments but as a conspiracy to avoid fixing the building violations.”

So, it went something like this. The building was passing from one LLC to another:

But all the LLCs were controlled by people connected to one other:

So the family had found a way around the law, “allowing the owners to ‘strip mine’ the equity from the buildings,” while leaving tenants in dangerous conditions.

The authors of the report call this a “common slumlord modus operandi.”  You should read the whole thing; it’s pretty stunning.

Lisa Wade is a professor of sociology at Occidental College and the author of Gender: Ideas, Interactions, Institutions, with Myra Marx Ferree. You can follow her on Twitter and Facebook.