economics

Economist Michael Mandel, at Mandel on Innovation and Growth, posted these two figures showing that the real earnings of college graduates (full-time workers ages 25-34) have been declining since before the recession. According to Mandel:

• Real earnings for young male college grads are down 19% since their peak in 2000.
• Real earnings for young female college grads are down 16% since their peak in 2003.

Mandel poses the following questions:

…no one has given me a good explanation yet of why young American college grads should have been hit so hard. Is there increased competition with young college grads around the world?  Are new college grads lower quality than their predecessors? Has information technology reduced the need for young grads? I really would like to know.

For more depressing news about the earnings of college graduates, see these posts on how the economic recession will depress the earnings of college grads for their entire lifetime and a look at the trend in college graduate earnings since 1979.

Lisa Wade, PhD is an Associate Professor at Tulane University. She is the author of American Hookup, a book about college sexual culture; a textbook about gender; and a forthcoming introductory text: Terrible Magnificent Sociology. You can follow her on Twitter and Instagram.

Cross-posted at Montclair SocioBlog.

George W. Bush did not really say, “The problem with the French is that they have no word for entrepreneur.”  But that statement does fit with the American tendency to view our country as the land of entrepreneurship (literally “enterprise”).  America is, after all, the land of opportunity, where anyone can become rich.  And the way to get rich is to be an independent, risk-taking entrepreneur and start your own business.  That’s what we do here in the US, and we do it better than most.  At least that’s what we think.

But look at this chart showing the rate of start-ups per working-age population:

The US ranks 23rd.  That doesn’t quite square with all those photo-ops where the president (Obama, Bush, Clinton – they all do it) goes to some small successful company out in the heartland.  What is it about these other countries that makes for more risk-takikng?

James Wimberly has an answer: the safety net.  He makes the point with an analogy – his own photos of kids on a rope-walk – a single rope hung between two platforms in what looks like the Brazilian rain forest.  (It’s really just a replanted hillside, formerly the site of a favela). The kids have safety devices – hard hats, a safety harness, guide-ropes to hold on to.  Without these, only a few of the most f oolhardy would try a Philippe Petit walk.  But the safety devices allow lots of kids to take a risk they would otherwise avoid.

The same logic applies to small business.

How many Americans are locked into jobs they hate by the fear of losing health benefits? No Dane ever has to worry about losing her right to medical care by quitting her job to go it alone

Safety devices cost money, but they pay off.  On the rope-walk, you can see the reward in the expression on the kids’ faces when they reach the other platform.  In the national data, you see it in the those start-ups.

The countries with significantly higher startup rates than the USA are those with stronger, more comprehensive, and more centralised social safety nets, along with correspondingly higher taxation.

See Wimberly’s entire post – with the photos, footnotes, and comments – for a fuller explanation.

Originally posted at Organizations, Occupations and Work.

Last week I discussed the connection between the Occupy Wall Street protests and the long-term transfer of national income into the finance sector. Well the problem is worse than Wall Street’s power over the national economy and polity.

There really are two faces to financialization. The most familiar face is the dominance of the finance sector over the rest of us: the giant profits and bonuses at the big banks and investment houses and the instability generated by too big to fail but rapaciously imprudent financial services firms. The other face is the financialization of the rest of the economy. Greta Krippner figured this out first. Greta discovered that since the 1980s firms in the non-finance sector have increasingly invested, not in the production of goods and services, but in financial instruments. The productive economy, Main Street in some formulations, has increasingly abandoned production in favor of financial shenanigans. Finance related income, including interest, foreign exchange profits, and stock market investments have risen from about 1/8^th of corporate profits to around 30%. In the manufacturing sector the move from production to financial strategies has been even more dramatic, rising to a ratio of finance revenue/profit as high as .60 after 2000.

The most well-known examples of this type of financialization might be the financial arms of automobile manufacturers. General Motors established its financial arm General Motors Acceptance Corporation (GMAC) in 1919 and Ford established its financial service provider Ford Motor Credit in 1959. Before the 1980s, the main function of these financial institutions was to provide their automotive customers access to credit to increase car sales. Starting in the 1980s, these firms broadened their portfolio. GMAC entered mortgage lending in 1985. In the same year, Ford purchased First Nationwide Financial Corporation, the first thrift that operated at the national level, to enter the savings and residential loan markets. In the 1990s both GMAC and Ford Motor Credit expanded their services to include insurance, banking, and commercial finance. In 2004, GM reported that 66 percent of its $1.3 billion quarterly profits came from GMAC; while a day earlier, Ford reported a loss in its automotive operation but $1.17 billion in net income, mostly from its financing operation.

Founded in 1943 GE Capital was designed to provide loans for the customers of home appliances. However, under the post-1980 leadership of Jack Welch, its scope rapidly expanded to small business, real estate, mortgage lending, credit cards, and insurance. After running a close second for more than two decades, it topped GMAC as the largest nonbank lender in 1992. The profit return to financial expansion was extraordinary. In retrospect this should not be surprising; the same financial deregulation than broke down the walls between various types of financial firms also freed non-financial firms to enter these markets. Simultaneously deregulation created fertile fields in which to capture income in multiple financial markets.

This kind of financialization is in many ways more insidious than the concentration of wealth and power on Wall Street. At this point many of us, including political movements such as Occupy Wall Street and even the Tea Party movement can see that financial power and concentrated wealth undermine democracy and capitalism respectively. I think that the financialization of the non-finance sector has undermined the real economy by reducing capital and management commitment to production and further marginalizing labor’s role in U.S. corporations. The result has been an incremental exclusion of the general workforce from revenue generating and compensation setting processes. While once CEOs were celebrated for expanding employment and market share, they are now lauded for increased profitability and decreased employment. They have accomplished this transition by shifting the creative energies and investment strategies of their firms away from the production of goods and services and into financial investments.

Recently Ken-Hou Lin and I have found that as financial strategies replace production ones, income inequality climbs dramatically. In fact as industry financialization rises so does capital’s share of income. In addition, financialization is associated with higher compensation for corporate officers and higher income inequality among employees. We estimate that about half of the post 1970s decline in labor’s share of income, 10 percent of the growth in officers’ share of compensation, and 15 percent of the growth in earnings dispersion between 1970 and 2008 are linked to the financialization of the non-finance sector. One way to think about financialization is that it is a system of income redistribution which strengthens the hand of finance capital and weakens the hand of labor associated with the real economy.

My colleague and co-author, Lisa Wade (you’d know her better as one of the people behind SocImages), gave a seven-minute speech at an Occupy Teach-In at our shared institution, Occidental College.  She said I could post it for you.

In the video she says she’s optimistic about the movement because it’s deeply sociological, drawing our attention to the way we organize our society, not just the individuals in it.  She contrasts this ability to critique the system with the early years of the Great Depression, during which many of the unemployed felt like they had failed their families because of personal faults (leading to a rise in the suicide rate).  Then, using the truly inspirational story of the 1955 Montgomery bus boycott (in which people walked to work and rode carpools for over a year!), she warns students that the movement is about to stop being fun and require real commitment. She ends by asking the the audience whether they can rise to the occasion and make the sacrifices needed to move Occupy forward to achieve specific demands.

Also see the three-minute bit on hook up culture that she did for MTV Canada.

Cross-posted at Bytes of China.

Oh how this Toyota Highlander advertisment is reflective of the new global order.  I saw this picture in Guangzhou’s domestic terminal. A Chinese couple is getting out of their Japanese brand car into what appears to be a private yacht. A white male greets them, taking their travel items and appears to be eager in their service.

This advertisement reflects a new Chinese imaginary — one that is global, expansive, unlimited, and exploratory. It also tells us who has the power to live out this imaginary. Ten years ago or even five years ago, I don’t think this advertisement would’ve existed. But now companies have turned to the Chinese consumer, encouraging them to participate in this lifestyle. The entire global economy right now depends on the Chinese elite and middle-class to spend. But how long can this go on for until we see the next crisis? For how long can each system create “value”?

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Tricia Wang is an ethnographer, sociologist, and researcher. She is on a Fulbright in China observing how digital technologies are mediating new conceptions of information and desire among youth & migrants. She is a student at UC San Diego’s PhD Sociology program.  She blogs at Bytes of China.

Thanks to Benjamin B. for the tip!

Cross-posted from Family Inequality.

The Congressional Budget Office has a new report on trends in the income distribution. The big news is the 1%’s blitzkrieg assault on equality.*

The headline image will be this one, which shows the changing share of after-tax-and-transfer household income. Every group except the top 1% had a smaller share of income in 2007 than they did in 1979, or just an equal share in the case of the 81st-99th percentile group. That means the gains in the top quintile are all concentrated in the top 1%.

That is very important and a source of outrage for the hundreds of thousands of Facebook users posting, commenting, or “liking” Occupy Wall St. and its related pages.

But it would be misleading to view the chart as showing that incomes fell for the other groups, since it shows shares of the total income. Income growth has been very skewed toward the top, but it is by no means confined to the top 1%. Here is my graph showing the income cutoffs for each quintile, and for the top slices separately. These are the cutoffs in 1979 and 2007 (in inflation-adjusted dollars), with the percentage change in the backgrounded bars.

(Note there is no lower cutoff for the bottom quintile — the price of entry for that group is always $0).

Two thoughts about this.

• Even if there were no 1%, if the graph only included the green bars, there would be plenty of increasing inequality for what might then be called “the 80%” to protest. The 81st-99th folks may be lucky to have the popular anger directed at the grotesque opulence of the sliver above them. (I’m not diminishing the extremity of the gains for the top 1%, but, as Matt Taibbi describes, the object of opposition is not just their income, but their influence.

• If you look at the families and networks of the top 1%, how many of them have relatives, friends, and even co-“workers” who are only in the top 10%? Would a self-respecting 1% family be appalled if their son married someone from a stable 5%-er family?

What I’m wondering is whether the 1% folks are merely a statistical convenience rather than a socially cohesive group (dare I say, class?). That’s an empirical question that national income distributions can’t necessarily answer.

*I should mention that the report is not just another rehash of Census numbers, though. Two adjustments they made seem especially good. First, they used a tricky matching method to combine Current Population Survey numbers (which do better at benefits and low-income households) combined with Internal Revenue Service data (which is better for high-end data). Second, they adjusted for household size and composition, and calculated distributions before and after taxes and transfers, and among different kinds of income. The report is here, a summary is here, and the blog post version is here.

Our financial system is dominated by banks considered too big to fail.  And that is a problem for the rest of us.  As Time magazine explains:

“Too big to fail is opposed by the right and the left, though not apparently by the people drafting legislation,” says Simon Johnson, an MIT professor and the author of a recently published book on the subject, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. “The current financial-reform bills are effectively a wash on the issue.”

The question is how large banks ought to be allowed to become. When large banks run into trouble, regulators are often unwilling to let them fail, as bank failures can wipe out individual depositors. What’s more, banks often fund their operations by borrowing from other banks. The bigger the bank, the more likely it is to put other banks at risk if it fails. Mass bank failures, especially of big banks, means people can’t get loans. And no loans, no economy.

That’s why the government decided to bail out most of the nation’s largest banks at the height of the financial crisis. And here’s where the problem potentially gets worse. Once bankers understand that the government will bail out their firms when their loans or other financial bets go bad, they are likely to take riskier and riskier bets. That, of course, leads to more potential bank failures — and more taxpayer-funded bailouts.

Not only have attempts at reform largely failed, government regulators have often tried to paper over financial problems by encouraging our dominant banks to swallow smaller, less stable ones, thereby worsening the problem.

So, who are our ”too big to fail” banks and how did they get so big?  Here is a time line that charts the process and highlights the winners.

Of course there are answers to this “too big to fail” problem.  One is turning our banks into public utilities.  Here is Yves Smith talking about this solution:

The Economist posted a graph, based on Bureau of Labor Statistics data, that shows how U.S. consumer spending changed between 2007 and 2010. The results provide a good snapshot of the economic trade-offs Americans are making (i.e., we’re buying more canned veggies and eating out less), as well as which industries are taking the biggest hit as consumers redefine their products as less essential.

The “nominal” numbers refer to the unadjusted overall changes in spending; the “real” numbers are adjusted for the fact that prices rose by about 5.2% on average, so consumers are getting less for what they spend. So the light blue bars tell you the absolute change in what we’re spending; the dark blue bars, the change in spending relative to how much we’re buying. When adjusted for price inflation, consumer spending fell by about 8%:

Via Talking Points Memo.