Rich Getting Richer, ever wonder why?

Special interests. Big business in particular is highly motivated to protect their market share and they normally do it under the guise of restrictive regulations - the primary intent is to restrict competition. The irony is that it is the left who are most supportive of protecting the interests of bug business.

I am not anti-regulation but there are clearly two sides to regulations. For example currently in my state vehicle emissions/safety inspections is being reviewed. The rules are simply dumb. The biggest advocates for not changing the rules so that the make sense are those who have business interest in inspecting vehicles every year, even newly purchased vehicles but not many old vehicles on the road. The system wastes millions of dollars, gives little social benefit and is full of fraud. regulatory issues like this should be a no brainier to fix.

 

Regulations force oversight which is comforting to have when investors (who may themselves be more interested in the short term potential than the longer term reality of their investments) are out to lunch.

 

Derivatives NEED sophisticated investors. Government can not police every transaction, every type of transaction. Government often gives people a false impression of being protected. Government at best is reactionary. The market and brain power in the market will always be one step ahead of regulators.

 

The very nature of derivatives is crazy, and the "investors" are often the sophisticated FS wizards. We even have derivatives based on derivatives. It's just gambling.

 

reactive, ace. the word is reactive. you are reactionary. regulation is reactive.

by that "thinking" then we should also do away with all criminal law---hell, all law---because it requires an act be committed before it can do anything, so is necessarily reactive.
because criminals are always a step ahead, there's no point in criminal law.

great argument.

 

If government is reactionary then putting regulations in place now (after the derivative orgy) that might go so far as to criminalize certain practices, will at best, hopefully offer a deterrent, and at least, provide the Justice Department with ammunition to bring perpetrators to justice.

But you're talking about allowing the foxes free reign of the hen house in the hopes that they will not act in accordance with their own nature.

 

Being reactive in not inherently negative - that is your leap. the point is what it is. In the world of financial regulation at best government reacts to crisis. Government can not prevent them due to some big limitations primarily in the area of scope. How can a few hundred regulators, regulate a multi-trillion dollar industry. It is a fools game to think it can.
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But it is a zero sum game for "the big boys". For every winner there is a loser. The problem is when unsophisticated investors get involved. Government through the falseness of regulations actually encourages people to get involved in high risk activity that they should avoid.

 

ace, regulation is a word for law. the same logic applies with finance as with anything else. law establishes the basic rules of the game. it establishes sanctions for violation and assumes that people who do not play by the rules will sooner or later be caught. it's not that hard. and there's nothing mystical about finance. it's merely a specialized game. so it isn't some magical area of society operated by ubermenschen whose Amazing Feats are limited by the actions of little people from the government who simply cannot understand what their Mighty Brains are thinking.

that's the sort of thinking that made it seems reasonable to repeal glass-steigel. even yr boy newt has lately been wandering around, hoping someone gives a shit, saying that was a bad idea. the whole deregulation of finance was a bad idea, he now says. and it was. thing is that it was people like gringrich and that idiot greenspan who sold that bill of goods. so who really cares about their mea culpas now that the shit has hit the fan?

 

It depends on what you are trying to do. For example, you could set rules about capitalisation (that would be hilarious for derivatives!) and you can set rules about the information that has to be provided to (for example) retail customers, how much can reasonably be charged, etc.

Here's one - should retail banking be separated and capitalised separately from the derivatives business?

Regulation should be about the security of the market, ensuring a confident and well-informed customer base and about non-criminality, for example.

It can also cover areas such as the order in which payments against credit cards are applied.

There is a lot that regulation can do. Nobody suggests they examine every transaction. However, when anyone is acting in a non-compliant manner, the regulator needs teeth.

 

Sen Tom Coburn (one of the last guys I would have expected) released a report today, "Subsidies of the Rich and Famous"

Rich getting richer, wonder why?

$30 billion/year in benefits from tax giveaways and federal grants......so where's the share sacrifice?

His Republican colleagues cant be happy to see this come out.

 

I read this earlier today. I've never been a fan of Tom Coburn and this surprised me, though I do know he's a member of the "Super Committee" and have heard that his efforts at compromise with the Democrats on the committee have been sincere (Bucking Grover Norquist might be a good indication of that). It's possible that what he's come to find out as a member has changed his view of things, though I doubt his conservative stance on social issues will be affected.

Speaking of Grover:
http://www.washingtonpost.com/blogs/plum-line/post/grover-norquist-gop-leaders-will-listen-to-my-marching-orders/2011/11/15/gIQABF7nON_blog.html

 

Well, the lower top income tax and the thrashing of the capital gains and estate taxes come to mind. But there's probably some plain, unplanned economic patterns at play as well.

For one thing, developed countries have comparative advantages in knowledge intensive or capital intensive industries, whereas undeveloped nations have an advantage in labour intensive industries. Freer trade and the industrialization of formerly poor countries means that the labour intensive jobs that used to be emblematic of the middle class have moved to the East, leaving behind mostly very low paying jobs or very high paying jobs, with not much inbetween(although real wages have still been rising). Higher productivity in manufacturing in the West also displaces people from industry in to service sector McJobs.

This is probably even more accentuated in America because of how advanced it is. If China is the worlds sweatshop, then America is it's designer and CEO. America specializes in things like information technology, finance and insurance, all of which are very talent intensive jobs, and none of which require much grunt work.

The internationalization of business has made mulit-nationalism extremely profitable, however, organizing multi-national supply chains, dealing with various sorts of laws, tax codes, infrastructures, distributors and suppliers, is a lot more complicated then just turning raw materials in to finished goods and selling them locally. As a consequence, talent is more rewarded then before.

So, I think it's America's talent intensive specialties and the internationalization of business that is most responsible.

Also, America has a pretty shoddy education system, and high rates of child poverty. In the information economy, having an education is almost essential for getting a good job, but a lot of American's are left behind and aren't capable of partaking in the post-industrial economy. Poverty is obviously often a generational thing which is not only very unfair, but it means that America's workforce isn't as well equipped for its role as the worlds CEO as it should be. Poor children are difficult to educate, often wind up in jail(paid for by tax payers) or on unemployment insurance.

Combating child poverty and focusing more on schooling could lead to a cheaper more educated workforce, that would drive up America's GDP, and allow its less wealthy citizens to still have a higher standard of living. It might even save the government money in lower welfare spending on poor adults, on higher taxes from richer citizens, and from lower incarceration rates

 

While much of that is true in terms of trends (if not necessarily regarding poorer children and somewhat optimistic regarding education), it doesn't adequately explain the rapid acceleration of the richest away from the rest of the nation. Nor does it explain why this isn't happening so clearly in other developed nations which have followed the same pattern.

There are other forces at work, and much of it has been discussed in this thread.

 

I don't think there are very many countries that have followed the same pattern, though. When I think of Western nations with comparative advantages in finance, I can think of Britain and Switzerland only which, admittedly, score much better on the Gini Coefficient. America is, though, largely alone in basing such an excessive part of its economy on finance.

America is probably even more unique when it comes to talent driven output more generally. In terms of patents and start-ups, America is definitely at the front of the pack. Japan is second and - I'm not sure how much innovation is responsible for this but - they have a pretty bad Gini Coefficient themselves.

American productivity growth was also much higher then the rest of the developed worlds for the past few decades, in particular after the seventies, when most nations evened out productivity wise, and when this period of divergence began.

America is also unique in having a very bad social safety net, so generational poverty and bad education is perpetuated more.

So I think the idea that specialization in talent intensive fields and the displacement of manufacturing jobs by productivity gains is still valid even though America's inequality is so unique in the rich world. That's to be expected, because American talent, America's specialization in talent intensive fields, American productivity and American rates of poverty are unique from the rest of the rich world.

Anyway, I'd expect that inequality has been growing everywhere in the rich world, just not nearly as much. It's certainly been growing in Canada. I would think that freer trade, talent-intensive specialties and productivity gains have been partly responsible. However, not trade, but productivity gains and income concentrated industries were much stronger in America then elsewhere. Also, bad welfare systems and financialization are somewhat, if not totally in the case of scant welfare, unique to America. It's not inconsistent with my argument, then, that the divergence hasn't been as strong in other countries, because the factors I cited aren't as strong, or aren't present, in other countries.

American's used to be supposed to be able to get a good paying, honest job with a high school diploma. But the social fabric of lower class American's is somewhat shredded. Looking at distribution of education between income quintiles, the bottom are ravaged by unemployment, part-time jobs and broken families, which is unsustainable given that they might have dependents. In the year 2000 the top quintile contained more then twice as many employed people as the bottom, more then six times as many people with full time jobs. The majority of households in 2000, in the lowest quintile, didn't have a fully employed member. Even in absolute terms, the amount of employed people only in the top five percent exceeded that of the bottom quintile. Again, that's in absolute terms. This is very indicative, I think, of the displacement of classically middle class jobs by productivity and by America's new roles as an information economy, as the CEO of the world and as the designer of the world. Now, more then ever, a quality education is crucial to success but, now more then ever, disadvantage is being perpetuated by generational poverty.

I've only read through half the thread, but I still agree with my original post. The idea that compounding investment returns explains the divergence is very interesting, but doesn't fully correlate with history. The ability of the rich to compound investment gains is as old as capitalism, and is present in every rich country, but the massive divergence has only occurred in America, and for the past few decades. By comparison, the factors I listed are, I think, more unique to the country and the time period in which this divergence has taken place, and are therefore a more satisfying explanation imo.

Another thing which might explain the divergence more then anything would be a change in corporate culture.

 

A better educated workforce in America is critical, for all the reasons you state, but could you explain what you mean by "cheaper"? Less burden on the economy or cheaper in the sense of wages? I think it's the former but just want to make sure.

 

The simple answer is that, since Reagan, the gap has grown because that has been the policy. The background you describe is accurate, but doesn't explain the situation. The rich look after the rich. While everyone is able to cope, that's OK. However, the ship is sinking for many. Can you think of any other reason for continuing the Bush tax cuts that contribute so much to the deficit?

If it was solely down to the reasons described above, we would see a larger minority pulling away from the pack.

 

Oh, cheaper in that they require less government protection. They're less likely to get jailed or unemployed. I remember reading about one program in America - I think it was called Head Start - that evidently actually saved the government money. Also, some of the least indebted and most sophisticated rich countries have the most thorough welfare systems(like Sweden and Denmark)
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I'm not sure. Even if you focus on the top 1% pulling away from the rest of the top quintile, that's still one in one hundred American's, ie. a lot of people. A lot of people have pulled away from the pack. Finance, information tech etc. doesn't employ very many people, and even within those sectors, the divide between management and grunts is massive. A soaring finance sector, along with stagnating manufacturing, could then send a lot of people in absolute terms - but small as a percentage of the population - soaring in comparison to the rest.

Besides, aside from the tax butchery of the past thirty years, I can't think of much that would adequately explain the massive increase in the wealth of the one percent. It truly dwarfs whatever tax cuts have been handed out.

 

arw,

Do you believe the US government has or has had a hand in facilitating this take off?

Do you believe there is an finite amount of wealth available overall or is the availability of wealth infinite and available to all who wish to pursue it? I 'm not talking about wealth that can be gained by global market players outside the US but wealth availability within the US economy.

If the US economic pie has the bottom 87.7% owning a mere 12% of the wealth and if the available wealth is a finite or somewhat finite number, do you see any indication that there is contentment on the part of the wealthiest Americans to curtail their advance on obtaining the remaining 12%?

 

I agree that there is more going on, and that there is a global restructuring - largely as a result of globalisation and the opportunities that it has afforded.

There are also questions of cheaper credit for some people, different options for income, the tougher impact of the drop in house prices on others, etc.

The question for our societies is how to deal with that global restructuring, though.

We are at a crossroads. What kind of civilisation do we want? What level of inequality is acceptable? How do we address these issues? Different countries have different answers to these questions, and there is the question of whether democracy will work to find a solution or whether plutocracy comes into play.