Saturday, June 23, 2012

It isn't blasphemous to exit the Euro

Sometimes I think I'm too cynical. But if this exchange on Dr. "Doom" Nouriel Roubini's twitter feed is to be believed, I guess I'm not cynical enough.

Roubini also lists the threats to the world economy in the doom-alicious A Global Perfect Storm that risk making 2013 into an especially 'lucky' '13.

  • Synchronized slowdowns in economies of Europe, the US and China
  • Political transition in China and elections in the US
  • Continued political risk in the Middle East, especially concerning Iran
  • Monetary policy depleted and fiscal stimulus limited by already high debt

Update ...and right on queue, the WSJ opines on Berlusconi's Latest Clown Act Italy's former prime minister turns populist euroskeptic. Too bad he never delivered on promised reforms.

Saturday, June 16, 2012

The Price of Inequality

Nobel prize winning economist Joseph Stiglitz came to Seattle Town Hall this week to talk about a new book, The Price of Inequality. Here's the way I heard it.

US inequality

The US is the most unequal of all industrial nations as measured by Gini index. As much as Americans take pride in the equality of opportunity and social mobility offered by our country, that seems to be a thing of the past. While inequality is rising in wealthy countries around the world, it's rising faster here.

To quote the OECD: “The wealthiest Americans have collected the bulk of the past three decades’ income gains. The share of national income of the richest 1% more than doubled between 1980 and 2008: from 8% to 18%. The rising incomes of executives and finance professionals account for much of the rising share of top income recipients. Moreover, people who achieve such a high income status tend to stay there: only 25% drop out of the richest 1% in the US, compared to some 40% in Australia and Norway, for instance.”

Rent seeking

The greater wealth accumulating at the top is not due to greater contributions to society. Rent seeking, in the forms of outrageous executive salaries and bonuses, regulatory privilege, corporate welfare and transfers from the bottom to the top, explains much of the wealth of the top few percent. That's not to mention the 15% tax rate paid by the likes of Mitt Romney. As Warren Buffet says, “It's class warfare, and my class is winning.”

Rent seeking distorts the economy away from productive activity. Because the payoff is so high, the best and brightest rush eagerly from graduate school to the high-stakes increasingly zero sum sleazy gambling house that is the finance industry, forgoing useful arts like medicine or research.

Political disfunction

Some have propagated the idea that greater inequality leads to a more efficient economy and therefore greater wealth in total. But, how to explain the fact that several countries have less inequality and higher GDP and also higher quality of life. Looking at the lack of growth in median household income over the past thirty years, one must conclude that little is trickling down.

Inequality and polarization go hand in hand, leaving our country divided and unable to deal with important issues, like the deficit or the environment. The unfortunate Citizens United decision gave corporations the same freedom of political speech protection enjoyed by individuals, leading to unlimited corporate money in politics, pushing America further from democracy to plutocracy.


Stiglitz offered a few thin rays of hope. Can America change course? Well, it has in the past. As in our own age, inequality was high in the gilded age of the late 1800's and again in the 1920's. Also notably, both eras were marked by financial crises. In each of these cases, America changed course to temper the worst of the excess.

In more recent times, Brazil has succeeded in swimming against the tide of rising inequality. Stiglitz credits the Brazilian elite for realizing that a more level playing field would lead to a more stable and functional society. Will their American counterparts realize that the collapse of the middle class is not in anyone's best interest?


Monday, June 11, 2012

Capital stock vs. GDP per person

From the Economist of May 26, Special report: China's economy, Investment: Prudence without a purpose; Misinvestment is a bigger problem than overinvestment.

That's a nice linear relationship shown in all the Asian countries. What explains the lower slope of the US - high GDP but lower growth in capital stock? Is the US underinvesting / overconsuming? Much of the growth over this time in America was the rise of the finance industry, which is not capital intensive, whereas the Asian countries are more weighted towards manufacturing.

I wonder what the breakdown is of each economy in terms of manufacturing vs. services.

A political economy

A recent piece in the Economist ( A new anthology of essays reconsiders Thomas Piketty’s “Capital” , May 20, 2107) ends with these words: &q...