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Ch 1: America’s 1% Problem

  • Top 1% own >1/3 of the nation’s wealth; 1/5 of the nation’s income
  • Get outsized gains in income (65% of total gain from ‘02-‘07)
  • Bottom-middle grew faster in the past, not so since ~2000
    • Past 30 years:
      • bottom 90%: wages increased by 15%
      • top 1% wages increased by 150%
      • top 0.1% wages increased by 300%
  • Bottom and middle have wealth in homes, not stock/ bond investments
  • 37% of americans below poverty line (before government programs)
  • stronger link between parental education with kids education in US than in Europe

Ch 2: Rent Seeking and the Making of an Unequal Society

  • Rent seeking - getting more income by grabbing larger share of wealth, not creating it
    • Taking wealth from society destroys value. i.e. monopoly restricting productivity
      • This can be limited by government policy, but rent seekers lobby government
      • Big in financial sector. Asymmetry of information taking advantage of the poor
  • Rent seeking includes getting resource rights cheap and maximizing profits
  • Big corporations lobby hard for their industries; bankers have 2.5 lobbyists per U.S. representative

Government Munificence

  • Government procurement -> in drugs or defense - paying above costs for stuff
  • deregulation
  • Granting natural resource rights
    • auctions are best. i.e. EM spectrum rights
  • Tariffs - government giving unfair advantages to US businesses
    • sometimes invest in R&D and increases efficiency, but also gives “old and tired” industries postponement of inevitable failure

Ch 3: Markets and Inequality

  • Changes in economy. i.e. US manufacturing was a large middle-class workforce, and now its moved to China and jobs that replace them aren’t as well paying.
  • Also tech reduces demand for low skill labor
  • Not a given that innovation will be skill based. Can be resource based?

Globalization

  • Argues that the free flow of labor is more important than free flow of capital
    • low wage workers have very low bargaining power. Corporations can go elsewhere and get cheap labor

Unions

  • Union membership down 10% from 1980 to 2010.
    • Says labor flexibility isn’t as important as strong worker protection.
  • Historically, compensation and productivity moved up together. Not anymore. Wages stagnant.
  • Capital gains tax 15%. Benefits top most
  • to 1% overall tax rate gone from 37% to 30% from 1979 to now
    • average from 22.2% - 20.4%

Ch 4: Why it Matters

  • Top 1% saves 20% of income; if 5% of that 20% is taken and given to middle income and the poor (1% of their total income), it would turn into 1.2-2% of their income being spread into the economy because of recirculation of money
  • Low capital and dividend taxes in Bush era. Companies paid out high dividends because they thought it wouldn’t last
    • Means smaller cash reserves and less investment in general (outside of real estate)
  • Deregulation serves short term self interest and profits over long term social and economic consequences
  • IMF states longer growth spells are correlated with more equal income distribution. Inequality reduces efficiency and productivity.
    • Less public investment because of wealthy not wanting to sponsor it via taxes.
    • Basic research is funded by gvt too.
    • $3.2B spent on lobbying in 2011
  • Rent seeking: waste resources for more monopoly power and preferential tax/political treatment
    • scarcity of oil not priced. Oil not sustainable and therefore prices should reflect that, but they don’t.
  • inequality arises because private rewards differ from social returns
  • Hunger impairs productivity because you’re forced to spend limited cognitive resources on saving money and feeding your family, not on stuff to get them out of the situation.
  • Happy workers are the most productive
    • In experiment: Individuals in same job, 1/2 see increase wage and 1/2 see decrease wage:
      • Decreases overall productivity because lower wage condition decreases productivity more than higher wage increases productivity
  • Consumerism: long term relationship between GDP and wellbeing?
    • maybe not. Relative income (i.e. keeping up with the Joneses) has people overextending financially.
  • Higher social protections may increase willingness for high-risk, high-reward ventures
  • Incentive pay imperfect. Rewards quantity over quality
    • better would be to compare performance to people in similar positions or performance over time
    • i.e. bankers making short sighted, risky investments in ‘08
  • Most are motivated by intrinsic rewards (achievement) over extrinsic rewards (wealth)
    • Also motivated to make the team proud
      • Companies with shared profits did better in downturns than those without.
  • Progressive taxation:
    • fairness and perception of fairness increases productivity

Ch 5: A Democracy in Peril

  • “Civic Virtue” is what makes people vote. If everyone who thinks like me didn’t vote, things would be determined by people I disagree with.
    • If political system seems “stacked against me”, this erodes trust.
    • Conversely, wealthy who see politics working for them vote more
  • Social contracts and social capital hold societies together. Honesty and integrity
    • Soviet Union after fall lacked this. everybody stole because “if I don’t steal this, someone else will”
      • Reduced economic output
  • Majority of people abstain from individually beneficial, socially harmful thing if they think others do too. (and vice versa)
  • “Ultimatum game” - two people. One given $100 and asked to distribute
    • 2nd person can veto and everyone looses the money.
    • Typically 2nd person vetoes anything less than $20 because its unfair and neither get anything
    • At $30-40, 2nd person accepts because they understand the power differential
    • Perceptions of unfairness affect behavior
  • 61% believe economic system benefits the wealthy
    • They also believe favoring the wealthy is worse than overregulation of them
  • Disillusionment leads to lack of participation in politics, but also can lead to populists and extremists who attack system
  • Media diversity is important to reduce disillusionment
    • must be able to trust information
  • Disenfranchisement - making voting harder
    • Republicans think people voting who shouldn’t is a bigger problem (require IDs)
    • Democrats believe the bigger problem is people who can vote, not voting
      • time and $ is required to get ID for example
        • Effect is poop people not voting and increasing their disillusionment so less are likely to vote again later
  • Citizen’s united vs. FEC in 2010 said money was free speech in campaign finance
    • Makes people’s power lower. More power to corporations who get lawmakers elected who appoint judges who make rulings like this
  • Disillusionment and disenfranchisement both effective in keeping the poor and middle class from voting
    • Reverse efforts include free campaign financing, reducing citizen’s united ruling’s impact
  • One person, one vote not so accurate now. Median voter has higher income than median citizen. i.e. people who vote are typically richer.
  • Globalization
    • Financial markets (especially in poor countries) exercise outsize control over countries’ debtors (people who they’re borrowing from/ in business with)
      • Financial markets provide “discipline” but can be wrong and fickle
        • markets are short-sighted and seek advancement of financiers
  • WTO forces financial market liberalization. Reduces ability of countries to regulate foreign banks operating there.
  • Uruguay Round Trade Agreement - has gripes with IP terms that give rent seekers more money, and doesn’t allow developing countries a say in regulating IP
  • There’s more globalization and as countries develop, we were a model, lecturing about balanced budgets, free markets, rent seeking, but now we’re hypocrites

Ch 6: 1984 is upon us

  • Perceptions of inequality decreasing as it is actually increasing. Less interaction between low and high class?
    • Beliefs and perceptions are more important in shaping collective behavior over individual behavior
    • “discriminatory equilibrium” - pay some lower wages discriminatorally, their productivity goes down, which means they deserve lower wages
  • Milton Freidman blames Great Depression on government failures
  • Social constructs - ideas and perceptions. They don’t change fast because your opinions depend of everybody else
  • Politicians use same tactics as advertisers to change public opinions/ideas/perceptions
  • Battle of ideas is all framing and persuasion, not facts
    • “Efficient markets” not true because of information asymmetry. People incentivized to do research and short companies as an example
    • Algorithmic traders can effectively “steal” info from researchers who make a discovery because they can see people making large orders and do the same in a nanosecond
  • Mortgage restructuring: instead of foreclosing, banks could have “written down” the principle and had a debt-equity conversion to give bank capital gain when the house is sold
    • Would have forced banks to realize losses and required capital, which they didn’t have
  • Regulation: incomes grow more in times of regulation
  • Corporate welfare: tax breaks and government subsidies. Good place to start spending cuts
    • no downside risk distorts markets (if taxpayers can always bail out companies)
  • IMF in developing countries - financial sector has lots of influence
    • “contractionary spending” - cut spending to pay back debts. May not be best
    • Author emphasizing more capital controls because liberalization of markets lead to instability
  • GDP per capita = output/number of people. Not a good measure of success of individuals
    • Health and public sector jobs distort GDP. Their inefficiencies inflate GDP
  • GNP: gross national product. Used to be used until the 1990’s when GDP took over because of globalization
    • GNP: gross income of citizens
    • GDP: value of goods and services produced in a country
    • when no trade between countries occurs GDP = GNP
    • GDP over GNP incentives foreign companies to set up and extract resources and their output contributes to countries GDP, but decreases GNP because profits go overseas
  • New push for better metric than GDP these days

Ch 7: Justice for all? How Inequality is Eroding Rule of Law

  • Laws incentivize people to take into account externalities (usually with stick, not carrot)
  • Transaction costs: inherent cost to collect money from one group to another.
    • Smoker vs. non-smoker. one has “air rights” and sells to other
    • one way may be much more efficient than the other. Grave consequences
  • Predatory lending: banks and insurance agencies used their political muscle to get “subsidies” (i.e. avoid regulation) of bad loans from government
  • Bankruptcy laws: 2005 congress made it harder for debtors to discharge debts in bankruptcy. 25W% lifetime wage garnishment. This incentivized banks to give out worse loans because its less risk for them
    • Banks pushed for this hard, but if things go opposite, they demand compensation
    • Student loans not dischargeable in bankruptcy. Incentivizes quantity over quality because people who don’t finish or don’t get a good job still are required to pay back
    • Gvt tried to put completion rate and student satisfaction into gvt backed loan requirements, schools fought back and largely won.
  • Foreclosure: banks wrote bad loans and didn’t keep good records, so when people couldn’t pay, they couldn’t prove who. Their defense was “most do ow” without burden of proof
  • Banks and those with capital can offer small deals before litigation and promise a long and hard legal battle if the victims don’t take it. This slap on the wrist is almost always worth the major profits they make with the fraud.

Ch 8: The Battle of the Budget

  • After recession, house republicans didn’t want to increase debt ceiling without deficit reduction
  • Early 2000’s, USA ran 2% of GDP surplus. Worried FED chair and encouraged tax cut and this started deficit growth
    • War in Afghanistan and Iraq increased deficits by Trillions and will continue because of disability payed out to soldiers.
    • Medicare drug benefit increased deficits too. Gvt couldn’t negotiate prices
  • To reduce Deficits:
    • increase capital gains taxes. The rich get dividends when taxes are low instead of company investing in for future growth.
    • close loopholes in tax code. Municipal bond interest exemption. Municipalities borrow at a lower rate to get people to invest and don’t pay taxes on it. Gvt effectively subsidizing the rich. direct subsidy would be more efficient for municipalities.
  • Tax on rent doesn’t cause distortion because land can’t go away. Same with natural resources and monopoly power.
  • Summary:
    • reduce deficits, tax top, eliminate tax loopholes the top uses, eliminate tax subsidies to corporations, increase rent tax, tax pollution, tax financial sector, charge market prices for resources.
  • Balanced budget multiplier
    • Keep deficit the same but increase spending and taxes, the increase in spending stimulates GDP and increases taxes.
    • National debt decreases in medium term because taxes and in long term because more GDP growth and increased tax revenue
  • Poor are more likely to spend 100% of their income. Unemployment for them is stimulative for GDP. Rich save a lot so unemployment for them is not.
  • US can’t be compared to Greek debt crisis because the treasury can print money and buy US gvt bonds. The EU doesn’t for Greece. Not a correct comparison for welfare programs and overspending because of this.
  • Corporate loan interest is tax deductible and depreciating capital assets (machines, etc.) can reduce income
    • Tax code incentivizes investment
  • If mortgage interest deduction and deduction for healthcare benefits were reduces, it would be an effective in crease in tax on middle class.
    • mortgage interest deduction incentivizes excessive indebtedness. Government subsidizing debt, helps banks.
      • raises housing prices in urban and low-income areas because supply is limited and not much incentive between owning and renting.
    • can’t remove mortgage interest deduction when market is bad and people are underwater because it will further in crease expense of owning while reducing prices
  • supply side Reganomics is a myth, what was profitable before tax cut is still profitable. maybe not as much though.
  • Social security - reduced poverty by 17% -> all elderly people
    • currently in deficit. already those at the top get less than those at bottom.
      • to be sustainable, increase taxable income from $100k cap and reduce benefits and increase tax %
  • Medicare - obamacare reduced medical costs?
    • Paul ryan medicare voucher program?
  • Austerity- reduced spending. contradictory. gct not like a household; gvt can expand spending and create jobs unlike household budget analogy
    • He compares budget cutters to bloodletters in medieval times.
  • Stimulus was too small and short-lived due to bad economic analysis. Thought recovery would be quicker because firms should have not laid everybody off, but they did and unemployment hit 10%
  • Gvt spending when at full employment is moot. since it’d have to crowd out other spending (from private entities)
    • But when unemployment is high, (GDP increase/gvt spending) i.e. multiplier is >1
  • European structural reforms after recession increased competition, more privatization, gvt assistance not encouraging movement into new sectors of the economy
    • improves supply side, but issue is demand in recession recovery.

Ch 9: A Macroeconomic Policy and A Central Bank by and for the 1%

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