Sociological Images

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.”

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* 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.

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. 

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.

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. 

The NYT posted an interesting interactive graphic showing the occupations of the wealthiest 1% of U.S. households, broken down further by industry. You can hover over a rectangle to see how many people in a particular type of job in each industry are in the top 1%, as well as what percent of people in that job/industry are in the top 1%. For instance, 27.2% of physicians in offices or clinics (not hospitals) are in the top 1%:

The relative size of the rectangle tells you how many people in that category are in the top 1% (so overall, the single largest occupational group of the top 1% is management), while the color indicates the % of people in each occupation/industry who are in the top 1% (lightest = less than 1%, darkest = over 20%). Definitely worth going over to the NYT post and playing around for a little while.

Cross-posted at Reports from the Economic Front.

At one time, the conventional wisdom was that capitalism was a means to an end, the end being a better standard of living.  Now it appears that capitalism has become the end itself, and to sustain a healthy capitalism workers will have to make sacrifices.    Case in point: the minimum wage. 

On January 1st, the minimum wage increased in Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington. These eight states all have laws which require them to automatically increase their respective minimum wages by the rate of inflation (called “indexing”). Nevada also indexes its minimum wage but its increase takes place in July.

The state of Washington has the highest state minimum hourly wage at $9.04.  Oregon has the second highest at $8.80.

Eighteen states plus the District of Columbia have minimum wages above the federal minimum wage which remains at $7.25 per hour.  A full-time worker making the federal minimum wage earns just $15,000 a year.

There are those who argue against state laws requiring an inflation adjustment to the minimum wage.  Their most common argument is that such government mandated increases are a threat to business profitability and the health of our capitalist, free-market economy. Putting capitalism first, as I suggest in my opening line, actually means that those arguing against increasing the minimum wage are really arguing for the necessity of a declining real wage.  The minimum wage has not kept up with inflation and increases are needed just to keep workers from falling further behind.  For example, Oregon’s January 2012 increase to $8.80 from $8.50 still leaves the real inflation-adjusted Oregon minimum wage below what it was in 1976.  In 2011 dollars, Oregon’s 1976 minimum wage was $9.09.

The chart below highlights the real decline in the federal minimum wage. The blue line shows the actual or nominal dollar value of the federal minimum wage; increases are the result of a vote by Congress.  The red line shows the real value of the minimum wage in 2010 dollars.  In real terms the federal minimum wage remains considerably below its value in the 1970s.

A second common argument against inflation adjusted increases in the minimum wage is that it is just a training wage for young teens and therefore not important to family survival.  This argument misses the mark for several reasons, the most important being that, as the chart below shows, 80% of minimum wage workers in the eight states with mandated increases are over the age of 20, and more than 75% work more than 20 hours per week (just over half work full-time). In fact, according to an Economic Policy Institute study of national data, families with a minimum-wage worker rely on their earnings for nearly half the family income.

Cross-posted from Reports from the Economic Front.

The extent of our labor market problems has been highlighted many times and in many ways.  Yet, with little being done to correct them, it is worth keeping the issue in the public eye.

What follows are three charts from the Economic Policy Institute.  This one highlights the ratio of unemployed persons to job openings.  Although the ratio has fallen since the “end” of the recession, it remains considerably higher than a decade ago.  It currently stands at four unemployed per job opening.

This one breaks down the data by industry.  It reveals that there are problems across the board.

This final one shows that the job crisis is hitting everyone.  As the Economic Policy Institute explains: “Those with higher levels of education are leaving (or never entering) the workforce at the same rate as those with just a high school degree.” Only those with less than a high school diploma seem to be experiencing improved employment opportunities.

And the response of many political and business leaders to this dismal situation?  Primarily calls for austerity — or, better said, cuts in social spending.  Some economists have even developed a theory of austerity-led growth, arguing that slashing government spending will unleash private investment and job creation.

We have been witnessing a test of this theory in Europe and not surprisingly it hasn’t produced positive results.  As the economist Kevin O’Rourke explains:

One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary.

I am willing to bet that this outcome wasn’t a surprise to most workers.

Cross-posted at Reports from the Economic Front.

Here is a short (less than 4 minute) video that illustrates the fact that 53% of our tax dollars, conservatively estimated, go to finance our military.

And here is a link to a recent study by Robert Pollin and Heidi Garrett-Peltier on the employment effects of military spending versus alternative domestic spending priorities, in particular investments in clean energy, health care, and education.

The authors first examine the employment effects of spending $1 billion on the military versus spending the same amount on clean energy, health care, education or tax cuts.  The chart below shows their results.

Moreover, even though jobs in the military provide the highest levels of compensation, the authors still find that “investments in clean energy, health care and education create a much larger number of jobs across all pay ranges, including mid-range jobs (paying between $32,000 and $64,000) and high paying jobs (paying over $64,000).”

Let’s see if these facts come up in the next Congressional budget debate.

For the last week of December, we’re re-posting some of our favorite posts from 2011.

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Enjoying a show last year at The Magic Castle, I was struck by the magician/assistant distinction.  The magician would make a dove disappear, and his assistant would suddenly reveal it in her possession.  ”Who was doing magic,” I wondered? It looked like a team effort to me.

I was reminded of this distinction while watching an NPR short on artist Liu Bolin.  Bolin, we are told, “has a habit of painting himself” so as to disappear into his surroundings.  The idea is to illustrate the way in which humans are increasingly “merged” with their environment.

So how does he do it?  Well, it turns out that he doesn’t.  Instead, “assistants” spend hours painting him.  And someone else photographs him.  He just stands there.  Watch how the process is described in this one minute clip:

So what makes an artist?

One might argue that it was Bolin who had the idea to illustrate the contemporary human condition in this way. That the “art” in this work is really in his inspiration, while the “work” in this art is what is being done by the assistants. Yet clearly there is “art” in their work, too, given that they are to be credited for creating the eerie illusions with paint. Yet it is Bolin who is named as the artist; his assistants aren’t named at all.  What is it about the art world — or our world more generally — that makes this asymmetrical attribution go unnoticed so much of the time?

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See also Hennessey Youngman on “How to make An Art.”