Larry Summers in Washington Post

Well, he's a known genius.  So let's see what he has to say:

". . . . When Steve Jobs revolutionized personal computing, he and Apple shareholders did very well, but those shareholders are all over the world, and a much smaller benefit flowed to middle-class American workers, both because production was outsourced and because the production of computers and software was not terribly labor-intensive.

"The market system distributes rewards increasingly inequitably. On one side, the debate is framed in zero-sum terms, and the disappointing lack of income growth for middle-class workers is blamed on the success of the wealthy. Those with this view should consider whether it would be better if the United States had more, or fewer, entrepreneurs like those who founded Apple, Google, Microsoft and Facebook. Each did contribute significantly to rising inequality. It is easy to resent the level and extent of the increase in CEO salaries, but firms that have a single owner, such as private equity firms, pay successful chief executives more than public companies do. And for all their problems, American global companies have done very well compared with those headquartered in more egalitarian societies over the past two decades. Where great fortunes are earned by providing great products or services that benefit large numbers of people, they should not be denigrated."

A bit of fuzzy thinking here, just like Gingrich with his Henry Ford and Bill Gates examples.  THOSE AREN'T THE PEOPLE WE ARE AFTER!  On the other hand, did the capitalist system really have to promise Bill Gates $60 BILLION dollars for him to write some crummy code that turned up on a lot of computers?  And Apple has always been priced too high for what you get.

But I'm getting distracted.  The point is NOT to take money from the hands of real entrepreneurs and investors.  It's to take money from the skimmers -- the people who don't provide jobs, and whose daily work typically does more harm than good to consumers.  I'm not sure, but I think Larry might be one of those.  Any consulting he does for any individual corporation or bank is sure to benefit that bank, almost certainly at the expense of society.  Those are the payments that we want to tax, just like we should have taxed those consulting fees that Gingrich got from Freddie Mac.


Seriously, if he is so smart, why is simplifying so much?  Is it truly beyond his big brain to figure out a system where investment is still encouraged and rewarded, AND skimmers get taxed?

To his credit, he then says "Meanwhile, those who call concerns about rising inequality misplaced or a product of class warfare are even further off base" and makes a few obvious points about income inequality.

And he ends with three suggestions:

"First, government must not facilitate increases in inequality by rewarding the wealthy with special concessions.  Where governments dispose of assets or allocate licenses, preference should be on the use of auctions to which all have access. Where government provides implicit or explicit insurance, premiums should be based on the market rather than in consultation with the affected industry. Government’s general posture should be standing up for capitalism rather than for well-connected capitalists."

The first and last sentences are obvious, but they are old news.  Government, including both Administrations that Larry served in, has always placed well connected capitalists over capitalism.  It shouldn't but it does.  We know the problem Larry, where's the Harvard solution?  The middle two sentences are too specific and vague at the same time.  

On to No. 2:

"Second, there is scope for pro-fairness, pro-growth tax reform. The moment when more great fortunes are being created and the federal deficit is growing is hardly the time for the estate tax to be eviscerated. And there is no reason tax changes in a period of sharply rising inequality should reinforce the trends in pretax incomes produced by the marketplace."

Can't argue with the estate tax point.  And the other point is good too, but I resent his "produced by the marketplace" dig at the end.  Yes, one can say that the skimmers' income is "produced by the marketplace," but only because the marketplace has become corrupt.    

And then No. 3:

"Third, the public sector must ensure greater equity in areas of the most fundamental importance. It will always be the case in a market economy that some will have mansions, art, etc. More troubling is that middle-class students’ ability to attend college has been seriously compromised by increasing tuitions and sharp cutbacks at public universities, and that, over the past generation, a gap has opened between the life expectancy of the affluent and the ordinary."

Ok, states have to keep tuitions low.  Good.  How is that done?  Raise taxes on the skimmers.  And STOP all student loan programs -- as the Economist recently explained, if we lend the kids more money, that translates directly into higher tuitions.  Not a good deal for the kids.

Talent vs. Striving III

Back to Hambrick and Meinz, who are really starting to annoy me.  I found the following attributed to Hambrick on a site called psychcentral. “A person with a 150 IQ is in theory much smarter than a person with a 120 IQ, but those additional 30 points produce little measurable benefit when it comes to lifetime success,” Brooks writes in “The Social Animal.”   Hambrick’s response: “David Brooks and Malcolm Gladwell are simply wrong. The evidence is quite clear:  A high level of intellectual ability puts a person at a measurable advantage — and the higher the better.” The problem is that Hambrick is oversimplifying.  Like a true scientist (I suppose), he has "controlled" all the other variables, and yes, ALL other things being equal, the person with 150 IQ -- or better working memory -- will, in the majority of cases, have a "measurable" superiority at some specific task for which working memory is important. But that's not what Brooks and Gladwell are saying.  They are saying that in the overall mix of things, those IQ points do NOT typically result in more success in life.  And although I don't know what statistics they are pointing to, I have little trouble accepting what they say, especially since Hambrick admits that PRACTICE is a much larger contributor to mastery than is "working memory."  If people in the 120 IQ range "practice" more, then Hambrick's critique goes out the window. And just to play it out, let's consider who the 150 IQ crowd is.  As you start going up the IQ scale,   you'll find more introverts, and introversion often puts a cap on just how "successful" a person can be, at least in most business environments.  And you start encountering more and more weirdos.  Admit it, you know it's true.  Sure, some of them go on to start companies like Microsoft and Apple, but some of them move to Montana and mail letter bombs. To say without any proof that the Gladwell/Brooks assertion about "success" is "wrong" shows a serious lack of mental rigor and scientific objectivity. 'Nuff said.

SAT II and Shakespeare (Talent vs. Striving, cont'd).

Oh, speaking of the SAT (in the recent post about striving vs. talent), here’s a sample question from the SAT II – English Literature (available for free on the SAT web site).  I'm using it here to demonstrate that you have to dumb yourself down for reading comprehension on the SAT.  So rather than viewing people who get 800s on the SAT as "profoundly gifted" (per Hambrick and Meinz, the authors of the NYT article) let's just acknowledge that they've learned how to take an SAT test:

Read the following poem carefully before you choose your answers.

Passage

	Against that time (if ever that time come) When I shall see thee frown on my defects, When as thy love hath cast his utmost sum, Called to that audit by advised respects—
	Against that time when thou shalt strangely pass, And scarcely greet me with that sun, thine eye, When love, converted from the thing it was, Shall reasons find of settled gravity— Against that time do I ensconce me here
	Within the knowledge of mine own desert, And this my hand against myself uprear, To guard the lawful reasons on thy part. To leave poor me thou has the strength of laws, Since why to love I can allege no cause. (1609)

If the speaker is implying in line 10 [the bolded line above] that he is not deserving of love, which of the following most strongly supports the implication?

    (A) "defects" (line 2)

    (B) "utmost sum" (line 3)

    (C) "strangely" (line 5)

    (D) "love, converted" (line 7)

    (E) "settled gravity" (line 8)

The practice quiz gives the following hint, which of course you won’t get on the actual test: "Look for the choice that most directly comments upon a perceived shortcoming in the speaker."

 

The obvious answer is “defects.”  A person who acknowledges that he has “defects” might consider himself unworthy of love.  And that's the right answer.  End of issue.  

Lesson:  Don’t overthink it.  If you overthink it, you’ll likely end up going down a rabbithole.  Here's what happens.  You ask yourself:  is "defects" really the "best" answer?  Look at the context from the first two lines:

Against that time (if ever that time come)
When I shall see thee frown on my defects

Here, the speaker (Shakespeare, for the record – Sonnet 49) is noting that the time that his lover (the young man of the sonnets, actually) will “frown on my defects” might never come.  He is acknowledging that he has defects, and he is implying that his lover knows them, and he is even contemplating that s/he might never even frown upon them; in other words, that s/he will know about them and accept them.  Right now he feels loved, and there is no indication in these two lines that he feels that he doesn’t deserve the love.  Of course, the hypothetical tells us to assume that the speaker is “implying . . . that he is not deserving of love.”  But it’s just not clear that the “defects” passage is where the “implication” is.  Let's look elsewhere.

What are the other choices?  Well, b,c, and d clearly make no sense.  Eliminate those. 

But what about “settled gravity”?  

When love, converted from the thing it was,
Shall reasons find of settled gravity—
Against that time do I ensconce me here

Here we’ve got “love” finding “reasons” of “settled gravity”.  This is probably ambiguous, but one way of reading is it that his lover might find good reasons – hitherto unknown to the lover – to stop loving him.  "Gravity" means "weight," and "settled" can certainly mean “agreed upon.”  In other words, reasons that everyone would agree upon – i.e. GOOD reasons.  These are not mere “defects” – which could be something as slight as a physical defect or an annoying habit, but real “reasons,” which could well mean “moral defects”. 

So the choices are:  “defects” – which might just be physical defects or annoying habits that the lover overlooks initially but which after a while start to grate on the lover and turn love to disdain.  If that “definition” of defects is open, then answer (a) is suboptimal, since that kind of “defect” would not imply that the speaker is unworthy of love.

Reasons of “settled gravity” – we can’t tell exactly what this means, and maybe the speaker is being sarcastic, but it seems likely that this refers to real, good reasons for not loving the speaker.  If that’s what it means, then it means that the speaker has reason to know that he is not actually worthy of love.  That seems to match the question better.  Yes, the word “reasons” is not in the quote.  But “settled gravity” is the modifier that makes the reasons what they are – and creates the implication of a true moral defect, and unworthiness of love.

But the makers of the test were apparently unaware of this potential for confusion, and they even list this as an “easy” question.

For the record, I’ve looked at four books of the Sonnets (the Bush/Harbage Pelican version, the Duncan-Jones Arden version, the Cross/Brooke Yale version), and the Wright/Lamarr Folger version), and none of them provide a clear answer to the question.  Wright and Lamarr give“for staid decorum” for “of settled gravity,” which seems like a bit of a stretch.  This would have to be the “sarcastic” interpretation suggested above.  In their “translation” of the entire sonnet, they seem to equate “reasons of settled gravity” with “prudence.”  I’m not saying this interpretation is wrong, it’s just far from clear.  They don't explain why they reject the plain language interpretation of "settled gravity."

Cross and Brooke simply give "for a grave demeanor" with no further explanation.  So they read the line as "Shall reasons find for a grave demeanor," even though the line says absolutely nothing about demeanor or looks.

Bush and Harbage are more straightforward in acknowledging the ambiguity of the line:  for “of settled gravity” they write:  “for continued coldness (?) “of sufficient weight(?).  I have no idea where they get “coldness" from (or "continued," for that matter).  I still think "agreed upon" is better than "sufficient" for "settled" but I won't quibble -- their “reasons of sufficient weight” option is similar to my reading as suggesting true defects, for which there is good reason not to love the person.

Duncan Jones gives “gravity” as “the mature judgment associated with age” and cites 2H4 (Henry IV Pt. 2) line 1.2.60 (where the Chief Justice says: "There is not a white hair on your face but should have his effect of gravity" and Falstaff responds "His effect of gravy, gravy, gravy." She thinks the sonnet parallels Henry V’s rejection of Falstaff (a different, much later, passage of the same play), and she says:  “Since neither his own love nor that of the young man can be justified, the future cessation of the youth’s affection needs no justification either.” It’s not clear where in the text she is getting the "no justification for cessation" idea from. But it seems inconsistent with the premise of the SAT II question, which is that the speaker is not worthy of love, and that the cessation of love CAN be justified in some way.  It also seems inconsistent with what she just said about "mature judgment." Seriously, it’s hard to tell what she’s saying or where she’s getting it.

So by now you've spent fifteen minutes thinking about it and are no closer to the right answer than you were when you first looked at the problem.  No matter how you look at it, there are problems with BOTH answers.  In your mind you're trying to figure out which one is less wrong, which might well lead you to check "settled gravity," which at least has a chance of being right (and it is consistent with one of the suggestions from Cross and Brooke).  But remember -- if you have to think about it this long, it's because you're thinking of something the question writer didn't think of.   Just check "defects" and move on!

Talent vs. Striving in NYT

In an article titled "Sorry Strivers, Talent Matters," David Hambrick and Elizabeth Meinz, Associate Professors of Psychology, take issue with the notion (proposed by K. Anders Ericsson and spread by Malcolm Gladwell in "Outliers," David Brooks in "The Social Animal", and Geoff Colvin in "Talent is Overrated") that if you're above a certain intelligence level (120 IQ), talent does not matter so much -- you can achieve mastery by putting in 10,000 hours of practice (which seems to be the requirement for mastery in most fields).

Here is the first of their two reasons for saying so (their second is their own work, which is obviously the reason they are writing this in the first place):

"Exhibit A is a landmark study of intellectually precocious youths directed by the Vanderbilt University researchers David Lubinski and Camilla Benbow. They and their colleagues tracked the educational and occupational accomplishments of more than 2,000 people who as part of a youth talent search scored in the top 1 percent on the SAT by the age of 13. (Scores on the SAT correlate so highly with I.Q. that the psychologist Howard Gardner described it as a “thinly disguised” intelligence test.) The remarkable finding of their study is that, compared with the participants who were “only” in the 99.1 percentile for intellectual ability at age 12, those who were in the 99.9 percentile — the profoundly gifted — were between three and five times more likely to go on to earn a doctorate, secure a patent, publish an article in a scientific journal or publish a literary work. A high level of intellectual ability gives you an enormous real-world advantage."

I'm happy to report that the Ericcsson/Gladwell point remains fully intact, and if anything, this result supports the "pro-striver" side of the debate.  

Let's take this paragraph apart piece by piece.  "(Scores on the SAT correlate so highly with I.Q. that the psychologist Howard Gardner described it as a “thinly disguised” intelligence test.)"  Very clever, they are using a quote from multiple-intelligences guru Howard Gardner (who presumably would be in the pro-striver crowd) against the pro-striver position.  And I will even admit that it's probably true, there is a correlation.  But let's see what they do next:

"The remarkable finding of their study is that, compared with the participants who were “only” in the 99.1 percentile for intellectual ability at age 12, those who were in the 99.9 percentile — the profoundly gifted — were between three and five times more likely to go on to earn a doctorate, secure a patent, publish an article in a scientific journal or publish a literary work. A high level of intellectual ability gives you an enormous real-world advantage."

Labeling the SAT-score 99.9 percentile as "profoundly gifted" should qualify as scientific malpractice.  If you've taken the SAT, you know five things:

1.  You can improve your score by studying (striving)

2.  There are no advanced concepts -- no calculus, no trigonometry.   You just need to be a bit clever in applying some very basic math, none of which is beyond the grasp of a 120 IQ twelve year old.

3.  If you're in the 95th percentile or above, the questions were almost certainly written by someone dumber than you.  On reading comprehension, you need to be thinking about what that person would see as the "right" answer, as opposed to what a more nuanced analysis might yield (see next post).

4.  If you don't know all of the SAT words that are in the study guides, you are at risk of losing some points on the vocabulary.

5.  A large number of the SAT words in the study guides are simply not encountered by normal twelve-year-olds or even high schoolers.  The most efficient way of learning them is to simply focus on them and learn them.

I would be willing to admit that any kid who scores 99.9% on the SAT WITHOUT preparing for it probably is "profoundly gifted."  But also probably very lucky (see no. 3 above).  There is no suggestion that the kids in the cited study didn't study, and it's almost certain that many of them did, especially the ones in the 99.9 percentile.

So this study has taken two highly artificial groups and compared them -- the 12-year-old kids who scored in the 99.1 percentile (for 12-year-olds) vs. those who scored in the 99.9 percentile.  What can we say about 12-year-olds who scored 99.9 vs. those who scored 99.1?  Clearly, they did something to remove the possibility of losing points -- they probably made absolutely certain that they knew all the vocabulary backwards and forwards, had practiced the math stuff enough to ensure they had time to go back and make sure they didn't make any careless errors, and they also dumbed down their thinking on reading comprehension enough to be sure they got all those questions right, too.   All that means is that they were a lot more anal than the people who scored in the 99.1 percentile.  It does not mean they were more intelligent.

But then what is the "proof" that these "profoundly gifted" people were more intelligent after all?

They "were between three and five times more likely to go on to earn a doctorate, secure a patent, publish an article in a scientific journal or publish a literary work." In other words, they were more anal than the mere 99.1'ers. With the exception of getting a  patent (which can take very little effort, but often reflects a desire to get rich), all of these activities require some dedication.  It's exactly what you would expect from people who at age 12 were sitting inside compulsively memorizing SAT words, in order to prove how "smart" they were to some grown-ups who had selected them for a "smartness" study.   And perhaps even more importantly, none of those activities translates very well to real-world success.  We all know Ph.Ds who are idiots, and we know that they must have written scientific articles to become Ph.Ds (and note that the Hambrick/Meinz study itself presumably qualifies as such an article).  And don't get me started on patentees and authors.

In order to somehow prove that "talent" matters as much as they say it does, they'd have to come up with a much better way of measuring "talent" than SAT scores and doctorates, patents, scientific articles, and literary works. 

The authors go on to tout their own results as reinforcing the SAT "findings":

"In our own recent research, we have discovered that “working memory capacity,” a core component of intellectual ability, predicts success in a wide variety of complex activities. In one study, we assessed the practice habits of pianists and then gauged their working memory capacity, which is measured by having a person try to remember information (like a list of random digits) while performing another task. We then had the pianists sight read pieces of music without preparation.

"Not surprisingly, there was a strong positive correlation between practice habits and sight-reading performance. In fact, the total amount of practice the pianists had accumulated in their piano careers accounted for nearly half of the performance differences across participants. But working memory capacity made a statistically significant contribution as well (about 7 percent, a medium-size effect). In other words, if you took two pianists with the same amount of practice, but different levels of working memory capacity, it’s likely that the one higher in working memory capacity would have performed considerably better on the sight-reading task."

Where to begin with this?  Again, it overwhelmingly proves Ericsson's point about striving -- by far the largest contribution to a pianist's ability to sight-read (nearly half) is practice.  The factor that they have identified -- working memory -- gives only a 7% contribution.  It's hard to tell what this means in this context.  The authors just say it means that for two pianists who have practiced the same amount, it's "likely that the one higher in working memory capacity would have performed considerably better on the sight-reading task." 

In their recent article on this subject in the Oct. 2011 "Current Directions in Psychological Science," they explain that the data comes from a study that they did in 2010, and produce a chart with sight-reading on the y-axis and working memory on the x-axis that shows that (1) for pianists who haven't practiced all that much, better working memory means better sight-reading (as represented by a blue line that slopes upward from y =3 to y = 4), and for pianists who have practiced a lot better working memory also means better sight-reading (as represented by a red line that slopes upward from y = 5.5 to y = 6.5).

Of course, their point is that everything else being equal, working memory makes a difference for sight-reading.  That's fine, and hardly surprising -- you can readily imagine why this correlation is so.  If working memory is hard-wired (and I have no reason to believe it isn't), then working memory (which is the ability to have a lot going on in your head at the same time) is obviously going to help you sight-read music, everything else being equal.  But I have no idea how important this small, incremental ability in "sight-reading" is in the total mix of qualities that makes for a great pianists.  And the authors don't come close to telling us.

As an example, it's pretty obvious that a chess player with a better memory for opening sequences will be better than one who, everything else being equal, does not have as good a memory.  And perhaps that's why Grandmaster Sergio Mariotti -- who supposedly had a photographic memory -- got to be a grandmaster.  But he never was able to distinguish himself particularly among grandmasters. 

In the end, their data support rather than refute what the pro-strivers have been telling us:  The pianists with poor working memory who have practiced a lot score 5.5 on sight reading, while the people with excellent working memory who have practiced only a little score only 4.0.  That sounds like a pretty good argument for practice and striving to me!

And beyond that, we're only talking about a 7% contribution.  As above, the best the authors can say is that it is "likely that the one higher in working memory capacity would have performed considerably better on the sight-reading task."  That means that at least in some cases, all other things being equal, pianists with worse working memory managed to do better at sight reading than those with better working memory.  For those pianists, talent did not matter one bit.


To their credit, the authors hedge a bit here and there, e.g. "None of this is to deny the power of practice. Nor is it to say that it’s impossible for a person with an average I.Q. to, say, earn a Ph.D. in physics."  But then they go on to say: "It’s just unlikely, relatively speaking. Sometimes the story that science tells us isn’t the story we want to hear."

I haven't heard anything from "science" that I don't want to hear.  The results of the research they've provided us do nothing to diminish the value of practice; they only confirm it.

n.b., by coincidence, I had earlier today listened to Jane McGonigal's TED Talk on the value of videogaming.  She cites the Ericcson study (via Gladwell) for the point that because video-gamers have put in 10,000 hours of gaming by the time they finish high school, they must have gotten very good at SOMETHING.  We just need to figure out what that something is!  (And to her credit, McGonigal suggests four somethings: (1) urgent optimism - the desire to act immediately, combined with reasonable hope of success; (2) weaving tight social fabrics -- takes trust and builds bonds to play games with people; (3) blissful productivity -- gamers know they are happier working hard than just hanging out; (4) epic meaning -- gamers want to be attached to world-changing activities.).   

Elizabeth Warren for President (in 2016)

She's the only candidate on any horizon who comes close to embodying what I'm saying here, and (not coincidentally) the only one I can imagine going along with my cottage-cheese requirement.  She recognizes that nobody gets rich by themselves, and she might actually be able to whip up some support for enforcing the social contract I've been talking about.  Here's a link to a Nov. 18 NYT profile.

She'll become a Senator in 2012, and will probably not be as careful with her votes as Senator Obama was.  But that's fine, that's WHY we'll vote for her in 2016.

You can just tell that she's not interested in the money or the perks.  I'd love to see what happens when some lobbyist offers her tickets to a hockey game.

TED Talks

A handy spreadsheet with available TED talk downloads is here.  Many good talks on many subjects by a variety of speakers, all free to download under a Creative Commons license.

Hypocrisy Gingrich-Style

I actually like to hear Newt Gingrich speak.  He is very articulate, and sometimes what he says makes sense.  (Of course, sometimes it doesn't -- see post on OWS).  But the idea that he could make $1.6 to $1.8 million in "consulting fees" for trying to help Freddie Mac bolster its image with Republicans is sickening on many levels. 

It's the worst kind of influence peddling -- he went against his supposed principles for the sake of money.  So although it's sickening, it's also very sweet to see it come home to roost.  When Freddie Mac and Fannie Mae were deemed to have been a big part of the meltdown problem, Gingrich immediately remembered how much he didn't like them (and could only remember getting about $300K from Freddie Mac).  Now that this has been disclosed, he's trying to tell us that he was merely giving Freddie Mac history lessons.  Bye Newt, and good riddance.

But Gingrich is far from unique.  I just read somewhere that either one hundred or two hundred K Street lobbyists are former Capitol Hill staffers.  And it's a rare lobbyist that will refuse a client or a position based on principles.  So how does one find a truly principled (current or former) politician or staffer?  Is there some kind of a test we can give them?


The answer is probably not.  The system simply has to be changed so that it's simply not worth it for people to become lobbyists -- either because the politicians can't be influenced, or because there isn't enough money to be made. 

Which brings me back to my point from previous posts.  Here, we've got a perfect example of someone in the 1% who is making money in a way that does more harm than good to society.  Gingrich is not a job creator.  Clearly, it was in Freddie Mac's interest to pay Gingrich those fees -- they wouldn't have done so if it wasn't.  So the "free market" is not the answer here.  Why can't we just impose a gigantic tax on income from this kind of work?

Just to bring it home, take a look at Jack Abramoff, who made $20 million a year buying politicians and their staffers.  He feels bad about it now, and he explained the system to the rest of us on Sixty Minutes a couple of weeks ago.

Here are some of the highlights of the Sixty Minutes appearance:

Abramoff: When we would become friendly with an office and they were important to us, and the chief of staff was a competent person, I would say or my staff would say to him or her at some point, "You know, when you're done working on the Hill, we'd very much like you to consider coming to work for us." Now the moment I said that to them or any of our staff said that to 'em, that was it. We owned them. And what does that mean? Every request from our office, every request of our clients, everything that we want, they're gonna do. And not only that, they're gonna think of things we can't think of to do.

Abramoff: At the end of the day most of the people that I encountered who worked on Capitol Hill wanted to come work on K Street, wanted to be lobbyists.

Stahl: You're telling me this, the genius of figuring out you could own the office by offering a job to the chief of staff, say. I'm having two reactions. One is brilliant. And the other is I'm sick to my stomach.

Abramoff: Right. Evil. Yeah. Terrible.

Stahl: 'Cause it's hurting our country.

Abramoff: Shameful. Absolutely. It's the worst thing that could happen. All parts of the system.

Stahl: I'm mad at you.

Abramoff: I was mad at me-- 

Stahl: Was buying favors from lawmakers easy? 

Abramoff: I think people are under the impression that the corruption only involves somebody handing over a check and getting a favor. And that's not the case. The corruption, the bribery, call it, because ultimately that's what it is. That's what the whole system is. 

Stahl: The whole system's bribery? 

Abramoff: In my view. I'm talking about giving a gift to somebody who makes a decision on behalf of the public. At the end of the day, that's really what bribery is. But it is done everyday and it is still being done. The truth is there were very few members who I could even name or could think of who didn't at some level participate in that.

Abramoff: If you make the choice to serve the public, public service, then serve the public, not yourself. When you're done, go home. Washington's a dangerous place. Don't hang around.

Anti-Business or Anti-1%

Jennfer Rubin in today's Washington Post had the following to say about Newt Gingrich's performance in last night's GOP debate:

"He shines with the putdowns of the media, chiding them for failing to confront the OWS protestor with the inanity of their own anti-business rhetoric."


Here's the relevant part of the transcript from the debate.

CRAMER: Governor Perry, 30 seconds to you.
Do you think that companies can both be profitable and be able to create jobs? Do you think it's a dichotomy? Do you think they can do it?
PERRY: There better be. And that's the reason the tax plan that I laid out, a 20 percent flat tax on the personal side and a 20 percent corporate tax rate, that will get people working in this country. We need to go out there and stick a big old flag in the middle of America that says "Open for business again."
(APPLAUSE)
CRAMER: Mr. Speaker, how about to you, can corporations do both?
GINGRICH: Sure. Look, obviously, corporations can and should do both. And what is amazing to me is the inability of much of our academic world and much of our news media and most of the people on Occupy Wall Street to have a clue about history.
(APPLAUSE)
GINGRICH: In this town, Henry Ford started as an Edison Electric supervisor who went home at night and built his first car in the garage. Now, was he in the 99 percent or the one percent?
Bill Gates drops out of college to found Microsoft. Is he in the one percent or the 99 percent?
Historically, this is the richest country in the history of the world because corporations succeed in creating both profits and jobs, and it's sad that the news media doesn't report accurately how the economy works.
(APPLAUSE)
BARTIROMO: Mr. Speaker -- I'm sorry, but what is the media reporting inaccurately about the economy?
GINGRICH: What?
BARTIROMO: What is the media reporting inaccurately about the economy?
(LAUGHTER)
GINGRICH: I love humor disguised as a question. That's terrific.
I have yet to hear a single reporter ask a single Occupy Wall Street person a single rational question about the economy that would lead them to say, for example, "Who is going to pay for the park you are occupying if there are no businesses making a profit?"
(APPLAUSE)

Both Rubin and Gingrich are taking the typical GOP line against OWS, which is to equate it with socialism.  As I've said before, if OWS includes anti-capitalistic elements, that's just an artifact of the movement's inclusiveness.  The single unified message I hear from OWS is that there is a problem when 1% of the people are taking home a disproportionate share of the wealth generated by our economy, while the bottom 99% struggle to find jobs, and struggle even more to prepare for their retirements.

Gingrich was a history professor and purports to be schooling OWS on history.  But seriously -- what does the fact that Henry Ford and Bill Gates managed to get rich in the US have to do with the OWS movement?  Let's take that argument apart piece by piece.

First of all, Bill Gates?!  After Henry Ford, the first poster-child for beneficial entrepreneurship is Bill Gates?!  Creator and perpetuator of the Microsoft monopoly on bad, buggy, virus-attracting software?  About Henry Ford, I get it:  he built good cars, and made he them cheap enough -- and paid his workers well enough -- that workers on his innovative assembly line could afford to buy them.

But Microsoft?  Great business strategy, yes.  But DOS was awful compared to Apple's original operating system, which is why Microsoft came up with Windows, which also was awful for many years.  And Word was inferior to WordPerfect for the longest time, until Microsoft was able to leverage its monopoly in its crummy operating system into a virtual monopoly on word processing programs.  Yes, Gates is currently redeeming himself, and that's all to the good.  But it's quite far fetched to assume that Microsoft -- which could be a poster-child for everything WRONG with capitalism -- has been an engine of job growth and economic benefit.  Microsoft is a monopoly; if Microsoft hadn't gotten it, some other corporation would have.  Or perhaps we would all be using an open source operating system, and we'd have more disposable income to pump into the economy for other things.  Bill Gates is smart, and I think even a nice guy, and was at the right place at the right time, but I'd be very interested in hearing a theory on how a US economy without Bill Gates would have been worse than the one with him.

But that's not even the main problem with Gingrich's point.  OWS is not fed up with the Henry Fords of the world.  That's something like at most 0.001 percent of the 1%, probably less.  OWS is fed up with the 99.99% of the 1% that are NOT creating jobs; i.e. the ones that are skimming off a system that in reality does not behave the way Economics 101 tells us a capitalist economy should behave.  These are the people who are taking home several hundred dollars an hour for every hour they "work," when their "work" is at least as likely to harm the economy as to benefit it.  Yes, this group includes some people who figure out ways to bring great products to the market.  But it also includes people who figure out ways to maximize corporate profits at the expense of consumers and labor.  The end result of the dialog OWS has started should be to figure out which of the 99% fall into the former category, and which fall into the latter, and then use the tax system to curb the excesses of the latter.  Only a Randian believes that the market never needs correction from outside; once you admit that the market is imperfect, you can see the tax system as one way to address market failure.  That's not the same as socialism.

Back to Gingrich's question: "I have yet to hear a single reporter ask a single Occupy Wall Street person a single rational question about the economy that would lead them to say, for example, 'Who is going to pay for the park you are occupying if there are no businesses making a profit?'"

One could nitpick here by pointing out that Economics 101 tells us that in perfect competition (for a market in equilibrium), businesses are not supposed to make "profits."  They can only pay their employees and officers competitive wages; if they pay too much, their competitors will undercut them.  But assuming he is speaking more generally about the idea that taxing the 1% will destroy corporations, and thereby cause jobs to be lost, his answer still makes zero sense.

Again, the portion of the 1% that we are concerned about are the people who are skimming money out of the economy, by virtue of the fact that they are in positions where large sums of money (typically from consumer-taxpayers) flow through their hands.  Large corporations handle huge sums of money, so that's where skimmers congregate and thrive.  The skimmers are able to divert some of that huge cash flow into the their own pockets without appreciably affecting the corporation's ability to compete with other corporations, which are in any event doing the same thing.

To be clear, we are not talking about taxing corporations -- we are talking about taxing the money that is siphoned out of corporations -- the incomes of the 1%.  There is no evidence that taxing the 1% more heavily will cause corporations to shut their doors.  The main point is to recapture anti-competitive corporate profits by taxing the income of the people who have been skimming those profits off.  If that means that these skimmers will make less money, so be it.  If the result of the tax is that it won't make sense for corporations to pay their officers more than $300 an hour or so, that's not such a bad thing -- the skimmed money will instead flow back to consumers in the form of reduced prices, or perhaps into research and development.  The corporation's lust for life will cause it to survive regardless:  corporations are just as amoral towards their officers as they are to the rest of us.

And if we more heavily tax the 1%, we will actually get more money to pay for parks.  We could probably even afford some porta-potties.

To be continued . . . .

So: What do we change? Part I

I think I've already come out in favor of term limits.  Still, the counterargument is that this will just put all the power in the hands of political staffers, who have far too much power already.

So the real problem is with the people who are attracted to these jobs -- both as Congresspeople and staffers.  Obviously, many of them are decent citizens, hoping to do their part to make America a better place to live.  But many staffers are shamelessly ambitious, looking forward to high paying lobbying jobs, judgeships, or running for political office themselves.  And of course, the politicians are mainly looking toward the next election.  Nearly all of them -- politicians and staffers -- enjoy the grandeur of the offices on Capitol Hill, and the thrill of having high paid lobbyists and lawyers suck up to them for political favors.  Who wouldn't?

But how about making the job less attractive?  How about this for phase I:  Anyone working on Capitol Hill MUST eat only cottage cheese (or a vegan equivalent) for lunch.  That's it. Nothing else.  Put down that steak sandwich!

Hey -- maybe I will put that down as a petition on change.org.  If enough people sign it, then that would send a clear message to our politicians that they will remember every time they sit down for lunch:  They work for us.

Tax Cuts for the Wealthy -- Then and Now

John Kenneth Galbraith, in The Great Crash, 1929, made two points that are very relevant today.  First, he observed that the 1925-26 tax cuts for the wealthy left the wealthy with lots of cash on hand to dump into an overheating market (according to an internet source, in 1925-26 the top marginal income tax rate decreased from 73% to 25%).   Second, he pointed out that the historically unequal distribution of wealth led to suboptimal consumption of market goods (in other words, if only the rich can afford to buy consumer products, industry suffers from lost potential sales to lower and middle class consumers). 

So it makes sense to tax the rich for their own good -- so they don't pump all that extra wealth into the stock market, causing all these gigantic bubbles.  Instead, let the middle class keep a bit more of their hard-earned income, and maybe they'll spend it in ways that help, rather than hurt, the economy.

Eliot Spitzer has some decent ideas for OWS in Friday Nov. 4's Slate.com, which he breaks down into three organizing ideas and five policy ideas:

Organizing ideas:

1.  Get organizers at each college in the country to get 100 kids to show up for a day-after-Thanksgiving protest.

2.  Conduct rallies against State governments demanding a millionaire's tax.

3.  Recruit some minorities.

 

Policy Ideas:

  

1. Call for a full rollback of the Bush tax cuts for all those above $1 million in annual income. 

2. Demand true accountability on Wall Street; make sure that senior executives of banks that bet against the very products they sold to the public are fired.

3. Demand a financial service transaction fee.  (Not sure why he adds the word "service" here, but I assume he just means a  financial transaction fee).

4. "Start a petition drive in every state demanding that the state municipal governments stop using Goldman Sachs for advice and underwriting until Goldman Sachs returns the $12.9 billion dollars it received, from the taxpayers, as a part of the AIG bailout."

5.  Demand that the New York Fed add “public” board members who truly represent the public.

I endorse all of these ideas, for reasons already expressed. 

The top 0.1%

Just noticed Paul Krugman's recent column, in which he suggests that OWS has set the bar too low, by focusing on the top 1% instead of the top 0.1%.  I don't think so. 

Here's what he says:

"If anything, the protesters are setting the cutoff too low. The recent budget office report doesn’t look inside the top 1 percent, but an earlier report, which only went up to 2005, found that almost two-thirds of the rising share of the top percentile in income actually went to the top 0.1 percent — the richest thousandth of Americans, who saw their real incomes rise more than 400 percent over the period from 1979 to 2005.
Who’s in that top 0.1 percent? Are they heroic entrepreneurs creating jobs? No, for the most part, they’re corporate executives. Recent research shows that around 60 percent of the top 0.1 percent either are executives in nonfinancial companies or make their money in finance, i.e., Wall Street broadly defined. Add in lawyers and people in real estate, and we’re talking about more than 70 percent of the lucky one-thousandth."

So this gives us some more rough statistics:

Top 0.1% (by income)
 
60%: "executives in nonfinancial companies or make their money in finance"
10%: lawyers and people in real estate
30%: who knows?

This actually isn't all that different from what we saw before, where 31% were probably the same non-financial executives, and 14% were in finance, for a total of 45% in the "class" that is now 60%.  Lawyers still seem to command about the same share, although we don't know what kind of lawyers we're talking about.  No info on doctors.  Krugman also doesn't tell us what the "floor" for the top 0.1% is, so we can't try to translate that to an hourly rate.

He makes essentially the same point about this group that I made about the 1% -- very few of them seem to be job creators.  Presumably, some percentage of the top 1% or top 0.1% are people who have created jobs.  How hard can it be to determine who those people are, what their incomes are, how many jobs they have created, and what percent of the top 1% or (0.1%) they make up?  If someone would just do that, we could probably figure out a way to give THAT class of useful citizens incentives to keep doing what they are doing, while allowing us to tax the rest of the 1% (or 0.1%) that are more parasitical than productive.

Do the 1% deserve it, part III

Of course, you might say that we need to pay top dollar to talent in order to keep our corporations competitive with other corporations.  But in our society, that sort of "top dollar" might well just be the first, relatively low-taxed $500 K.  After that, you start giving back to the society that made your first 500K possible.

Will this result in a "brain drain" as corporate executives move overseas and start managing the businesses from over there?  Perhaps that's a risk we're willing to take. 

A word about stock options.  I don't mind at all if executives are paid in stock options, and I find it misleading when people talk about executive compensation in terms of how much money the executives made off of their stock options.  True stock options have a value on the day they are "issued."  That's the only value that's relevant when determining what executive compensation was.  The amount an executive makes off of exercising an option should not count as income for purposes of the "cap."

Of course, there have been instances when executives have been compensated by backdated stock options.  That's different, and that's straight compensation.  For tax purposes, we obviously need mechanisms to distinguish backdated options from real options.

 

Try a Financial Transactions Tax

A financial transactions tax would impose a small tax on certain financial transactions.  The main idea is to reduce the sort of unproductive speculation that resulted in the partial destruction of the world economy, the loss of hundreds of thousands of jobs, the loss of any realistic expectation of a comfortable retirement for millions of people (due to the low interest rates and uncertain stock market caused by the continuing crisis), and the loss of homes for thousands of families.

There are some very smart people on both sides of this issue.  Keynes proposed it in 1936.  Joseph Stiglitz (Nobel Laureate) is for it.  Kenneth Rogoff (Harvard Economist and International Chess Grandmaster) says it might do more harm than good.  Larry Summers was for it (1984) until he started making tons of money by being against it (see Summers, L. H. and V. P. Summers, 1989. When financial markets work too well: a cautious case for a securities transactions tax, Journal of Financial Services Research 3, 163–188).  President Obama was for it until he was against it.  James Tobin (Nobel Laureate who came up with one form of the idea, a tax on currency speculation) recanted, at least for a while.

Interestingly, Wikipedia discusses various flavors of the tax at length, and talks about experiences in different countries, without once mentioning that a form of it was in effect in the U.S. from 1914 to 1966.  According to the Center for Economic and Policy Research:

"The FST is not a new idea. The U.S. had a transfer tax from 1914 to 1966 which levied a 0.02% tax on all sales or transfers of stock. In 1932, Congress more than doubled the tax to help financial recovery and job creation during the Great Depression. Transactions taxes were imposed in most financial markets until the last two decades, and there still is a 0.5% stamp tax imposed on each trade on the London Stock Exchange. The U.S. already has a very modest FST, which is used to finance the Securities and Exchange Commission and the Commodity Futures Trading Commission."


See http://www.cepr.net/documents/fst-facts-myths-12-10.pdf

Note:  I saw at least one site that purported to quote this paragraph but gave 0.2% instead of 0.02%.  I haven't done any double-checking.


I personally have not analyzed any of the proposals closely. There are clearly a lot of questions:  will it harm liquidity?  Will it decrease or increase volatility?  Can it be implemented in only one country or does it need to be implemented the world over?  Will it really rake in the projected $100 billion per year in revenue?

All of these are fair questions.  But we can sit around and theorize about them ad nauseam without ever knowing the answer.  Why not show some leadership on this issue?  It was OUR banks that plunged the world economy into financial crisis.  Why don't we try a bold solution like this and see what happens?

A couple of years ago, we pumped $700 billion of hard earned tax dollars into the economy, without any appreciable effect (well, except to enable a few upper middle class families to trade in their rusting minivans for a $5000 discount on Japanese-made Priuses (Prii?), and to feather the nests of replacement windows contractors who rely on cheap if not illegal itinerant labor to do the real work).  Why not see if we can make some of that back, while imposing a tax on the kind of reckless behavior that got us here to start with?

If it works, great.  If it doesn't work, we can always repeal it -- it's hard to imagine that it would cost us more than the $700 billion we've already spent on one try.

Do the top 1% "deserve" it, part II

Starting from where we left off the last time.  To recap, here are the top 1% by income, to the best of anyone's knowledge.


31% "started or manage nonfinancial businesses"
16% doctors
14% "in finance"
8% lawyers
5% engineers
2% sports, entertainment or the media.

Again, there is a missing 24%.  That's everyone else -- hereditary wealth, rich-neighborhood real estate agents, university presidents, successful authors (unless they are counted in entertainment/media), former politicians with fat pensions who command huge speaking fees, etc. -- and it would be interesting to have that broken down too.

The inquiry of this post is whether we should impose higher taxes on these people.  Below I sometimes refer to a "cap".  The most draconian version of this would be to simply confiscate any earnings above a certain amount.  I'm not proposing that.  By "cap," I'm referring to a cap on relatively tax-free income.  I'm using $500K per year as a possible benchmark.  The idea is that you get taxed normally up until you reach that "cap" and then you get taxed more severely for money you make above that "cap."  The basic idea is that $500K per year will still attract competent people into those lines of work, but the "cap" will result in increased tax revenue.  We don't want the "cap" to stop uniquely talented people from applying those talents to the benefit of society.  But as we look at the issue, it's not clear that there are all that many uniquely talented people earning more than $500K who are doing a whole lot of good for society in the first place.  In some cases, the market channels talented, brilliant people into the game of making money for its own sake, which does little good for -- and has done much harm to -- to society.

To recap, we agree that the person who buys some raw materials and makes and sells a pair of shoes should get to keep as much of his profit as possible.  That person is turning his time into useful goods, and that should be encouraged.

We're less sure about the person who hires ten unskilled laborers and pays them peanuts to work on an assembly line.  Yes, we get cheap shoes as a result, and the workers get jobs they might not otherwise have.  But right now we're focusing on whether he should be able to retain ALL of the profits he has made, or whether we -- "the people,"  the government -- should tax some of it.  After all, he wouldn't be able to make that money if "we the people" weren't there buying his shoes and manning his assembly line.

On the one hand, as above, he's doing a social good, and we need people like him.  On the other hand, he has leveraged the labor of others, and he is "skimming" off money based on the volume of his business.  If there were perfect competition, he'd only be able to pay himself a living wage, because that's what all his competitors would be doing.  But he's paying himself much more than that, and that comes at a cost to consumers and his workers.  Either he is charging customers more than necessary, or he's paying his workers less than necessary, or both.

There is no particular reason that he, as opposed to the consumers or the workers, is morally entitled to keep those "golden crumbs" that fall off of the large volume of his business, which we all helped create.  Pure free marketeers think that the "market" somehow ensures the "correct" distribution, and they rather simplistically insist that if we tax the poor capitalist we won't get any shoes or jobs out of him.  But why not say that he can keep the first few 100K at normal tax rates, and then whatever he "skims" over and above that is taxed at higher rates, because we know that it must have been skimmed?

If one of the values of our society is that people's earnings potential should be capped at a certain amount per hour, then maybe we cap him and then take the rest and redistribute it.  Most of us probably wouldn't mind if there were a cap on earnings of $500 per hour -- few of us will ever see that.  If the ability to monetize more than $500 for every hour spent is a result of market imperfections, maybe there's no harm in imposing a cap, or at least imposing a significant tax on earnings above that amount.

On the other hand, we need to be careful.  How does one compensate the capitalist for the risks he takes; the amount of capital he put at risk?  To the extent the income he pulls in is return on capital, that's different again.

So for now, let's give these risk-takers a pass.  They are the "job creators" that the Republicans are so concerned about.  But they are an incredibly small percentage of the people that are in that first 31%.

Let's now think about some of the others in that 31% -- those who, according to Brooks, "started or manage nonfinancial businesses," minus the ones who "start" the businesses.  The job of most of these people is to keep corporate profits at existing corporations as high as possible, and their salaries can be seen as reflecting their cut of those profits, to which they contribute.  These individuals are not taking risks to get products to consumers and provide jobs.  Rather, they have the specific mission of keeping their companies profitable.  And since competition is the enemy of profit, that often means finding ways of selling more products without really competing.

Let's take an extreme example.  At any major pharmaceutical company, there are probably ten or more people making that kind of money, whose sole goal is to work to keep the company's drug prices artificially high.  This can be done by misleading advertising (getting consumers to ask doctors for drugs they don't need), influencing doctors to prescribe the drugs, and playing games with patents (e.g. "evergreening" via Orange Book manipulations, anticompetitive settlements with generics, lobbying for special extensions).  The work of these people does direct harm to consumers and taxpayers.  The drug prices stay high, and consumers and government programs like Medicaid and Medicare) pay more for health care.

This is obviously antithetical to any free market principle.  It's made possible by the patent system, which (among other things) addresses the "market failure" that suggests that nobody will do certain kinds of research if others could simply free-ride on the results of that research.  But having a valuable patent can cause all kinds of behavior -- like that outlined above -- which is designed to prevent competition even beyond what the patent is supposed to permit.

And then of course, there is the issue of CEO compensation.  Multi-million dollar severance packages for corporate CEOs who have only served a year or two is tantamount to looting the corporation at the expense of the shareholders.  Imposing a big tax on those packages will get revenue for the government, or it will discourage those packages.  What's wrong with that?

So the question for any of the 1% is whether the money these people make reflects the operation of a truly free market, or whether it derives from market perturbations.

31% "started or manage nonfinancial businesses" -- apart from those who actually start the businesses, tax them high on the assumption that they are more concerned with keeping corporate profits high at the expense of labor and consumers, while avoiding free market competition. 

16% doctors -- yes they provide a service, but their ability to charge so much comes from their monopoly status, as well as the insurance industry's grip on healthcare.  Since health insurance is so widespread, consumers don't have incentives to shop around for doctors and doctors simply don't compete with each other on price.  Yes, in one sense insurance operates to keep prices down (because insurance companies negotiate with doctors), but on the other hand, it also causes a lot more people to go to doctors, and a lot more treatments to be ordered, than may be strictly necessary.

14% "in finance" -- it's far from clear what good any of these people do for society, and the harm they have done is self-evident.  What's worse, the ability to make mega-money in this sector siphons off talent (supposedly 43% of Princeton graduates) that could have actually gone to work to solve the world's problems.  Yes, we need banks, we need a stock market, etc.  But the money that falls into the laps of these people is always just a percentage of some huge transaction involving other people's money.  They create nothing.  And the incentives that drive them -- in contrast to invisible hand theory -- are almost always anti-social.  E.g. investment bankers encourage mergers so they can rake in huge fees, regardless of whether the mergers are good for society or not.  There is no reason not to let the tax system "cap" their income.  Cap it at 500K and you'll still attract plenty of "talent."  But you may prevent some of the extreme behavior and market manipulations.

8% lawyers -- these are typically very hard workers, and they come in several flavors, but their compensation typically derives from the amount of money that they are able to save corporations.  Thus, a lawyer who can win a multimillion dollar lawsuit, is going to be worth $800 per hour or more.  Yes, each hour they spend they "produce" something, but the value of what they proof is based solely on what it will do for the bottom line of some corporation somewhere, often at the expense of some other corporation somewhere, or -- in the case of the Federal Government -- at the expense of tax payers.  There doesn't seem to be any "free market" reason to let the market decide how much these people should be paid.  The world won't end if they are taxed on money earned above a few hundred thousand per year.  If they stop working, that just means that more lawyers will be able to get into the game.

Personal injury lawyers are a different sort.  But there's no reason not to tax their recoveries above a certain amount.  I.e. if they recover over 10 million in fees for a few hundred hours of work, then some of that can certainly go back to the people. Let's make every person injury case a kind of qui tam action, where the government gets a cut.

And then consider tax lawyers -- they make their money by saving their clients millions of dollars in taxes that otherwise would go into public coffers.  Why not tax them?
 5% engineers  -- we'd have to know more about who these people are.  If they are really pulling this kind of money in through "engineering" as opposed to managment, then perhaps they deserve it.  I.e. if they are inventing and improving new products that their companies can us to provide jobs and goods, that's fine.  They can keep a lot of the money.  

2% sports, entertainment or the media. -- these people are "skimming" in the sense that movies, sporting events, etc. cost much more than they ought to.  There's obviously some kind of monopolistic/oligopolistic/anti-competitive behavior going on when you can't see a movie anywhere in your area for less than $8 (note that I'm skipping over many interesting questions about film studios vs. cinemas vs. entertainers).

But beyond that, these people are doing essentially the same things as entertainers were doing fifty or a hundred years ago, for a fraction of the return.  Technology, combined with growing populations, growing markets (here and abroad), and growing societal wealth has enabled them to leverage their "talent" to the point that some of them make tens of thousands of dollars per hour.  Bottom line:  Nobody needs to make that much.  That is not a reward for talent; that's skimming. 

And with these people, we can be pretty sure they'd be doing the same thing even if a lot less money were involved -- they have jobs that are mostly fun.  They can afford a pay cut.  I heard Bill O'Reilly recently say that if they start taxing him too much, he'll just stop doing this.  Good riddance, Bill; there are plenty of equally opinionated and equally interesting blowhards out there just waiting in the wings to take your place.  And they'll do it for less.

Ok, so now we've looked at the "rich" 1%.  What's the harm in increasing the taxes on any of these people?  Why not just give it a try and see what happens?

Do the top 1% "deserve" it?

Yes, I know the title is ambiguous. I'm talking about whether they "deserve" their wealth and/or income.  Again, from before, there are no good statistics on who the top 1% are. But let's use the third-hand income statistics that David Brooks used:


31% "started or manage nonfinancial businesses"
16% doctors
14% "in finance"
8% lawyers
5% engineers
2% sports, entertainment or the media.

According to CNN Money, that first 31% is "executives, managers and supervisors."  In other words, people who "started" nonfinancial businesses are probably a very small fraction of this 31%; we're mostly talking about  people who have done well enough in the corporate hierarchy to get a paycheck in the $500K range.  And as previously observed, these numbers add up to 76%, so there are 24% of "earners" that no one wants to put a label on.  As previously suggested, a good chunk of these may well be people living off of inherited wealth.  But I don't know.

Remember again that we are looking at income here.  The top 1% by net worth is going to be a different, though doubtless overlapping, group of people.  We don't have any information (at least I haven't found any) that attempts to break that group down in terms of profession.

Before we go through each one, let's get a sense of how much these people are making per hour.

The $516K floor for the top 1 percent is household income.  Let's just assume that typically, this means that at least one of the earners is making at least $400K.  Not always true, but 400K is a nice round number.  Let's say that these people work 2000 hours per year (that's 40 hours a week plus two weeks vacation).  That means that for every hour they put in, they are making $200.  Not bad for an hour's work, even better if you get that for every hour you work.

The question is whether that is a "real wage" that somehow reflects the person's just deserts, or whether it represents something else.  In the old, pre-industrial revolution days, you could judge most workers by the hour -- they would be able to "earn" whatever they could make in an hour, minus the material costs of making it.  I.e. a shoemaker starts with some leather and some metal parts and makes a shoe.  His hourly wage depends on how fast he can make shoes and how much he can sell them for, minus the cost of materials.

Even in the pre-industrial age we had bankers and merchants.  These were people who dealt in large sums of money -- and often large numbers of people, or a few very rich people -- and paid themselves by skimming something off the top.  Already, one can ask the question whether they "deserved" that money.  Yes, they had the drive and the initiative to set up the bank or the business, and that should be encouraged.  That's capitalism.  But we can observe that the rewards were not really related to the effort or time put in.  Instead, the rewards derived from an imperfection in the market -- the merchants and bankers were able to sell their goods or services to a lot of people, while paying themselves a "percentage" as opposed to an hourly wage.

I'm leaving the hereditary aristocracy out of the analysis for now, on the assumption that nearly everyone can now agree that their gains were "ill-gotten."


With the industrial age came industrialists, who were able to put people to work on assembly lines, and then simply "skim" off the profits of the enterprise.  In other words, if the industrialist was able to get ten people together to make 100 shoes per hour, it was no longer the case that those "shoemakers" would get the benefit of their labor in the sense that the old shoemaker did.  How much the shoemakers now made depended solely on the labor market -- how little could the capitalist get away with paying his shoemakers?  That number -- labor cost -- now simply became another input (along with raw materials and rent) into the shoe production business.  The capitalist is now the shoemaker, and he gets to keep for himself the differential between the costs of production (materials, labor, and rent) and the sales.  Of course, he also makes decisions on whether investing in marketing will result in the ability to sell more shoes or charge higher prices for the shoes he sells.

For shoes, this is not necessarily a bad thing.  The capitalist provides cheap shoes (by the miracle of the assembly line) and provides jobs to people who otherwise might not be able to get them.  The capitalist is also taking risks, although nowadays, you can buy insurance to cover any risk, so that's theoretically just another cost of production.
 
So we can agree that we need a capitalist to manage the risks.  But that only really means we need one person per business, right?  Not anymore.  As the business grows, we need more and more "managers" to deal with all the decisions that have to be made in all of the aspects of the business.  While these people get paid salaries, and thus might seem to be "wage earners" in the sense that the assembly line workers are, there is an important distinction.  They are not actually producing the product.  They are reacting to market conditions and making decisions that presumably help the business stay competitive and maximize profits, but their "hourly" output is not shoes, it's "profit."  In other words, these people contribute to the enterprise's ability to maintain a high differential between costs of production and sales.  They are partaking in the capitalists profits.


And it's the higher ranking ones of these that get paid the most.  The bigger the company, the greater the gross sales, and the easier it is to skim hundreds of thousands or millions of dollars here and there to pay these "mini-capitalists."

(I've never read Das Kapital.  I wonder if I am accidentally simply reconstructing it?)

So that's the 31% -- these are people who are skimming corporate profits.  Nice work if you can get it.  And of course, the "invisible hand" may well be determining how much these people take.  Presumably, the capitalists at the very top would like to pay everyone below them as little as possible, but they need good people.  Perhaps these high earners ARE that good, in the sense that they are able, through their good decisions and policies, to cause the company to make additional profits over and above their wages.  Theoretically, if a given company is overpaying these people, or has too many of them on the payroll, its competitors will be able to undercut their prices in the marketplace.

But the question for the rest of us is how much should we tax these people?  I.e. they are big fat targets because of their incomes.  And their incomes are not proportionate to their actual "labor" in any sense; they derive from corporate profits, which in turn, come from us -- the consumers.  Would taxing them somehow distort the economy?  Would they stop doing what they are doing? If they did, would this be a bad thing?

Take marketing, for instance.  If a marketing "whiz" simply won't work if he doesn't get to keep his entire $500K per year, should we the public care?  Maybe not.  Maybe we would actually benefit, if we were free from his manipulations.

So the question for any of the 1% is whether the money these people make reflects the operation of a truly free market, or whether it derives from market perturbations.


To be continued . . . .

David Brooks "The Wrong Inequality"

In my last post, I cited statistics from David Brooks's Oct. 31, 2011 op-ed "The Wrong Inequality."  But the article irritated me enough to cause me to write a separate post about it.

Brooks agrees that "the zooming wealth of the top 1 percent is a problem," but he says:

"it’s not nearly as big a problem as the tens of millions of Americans who have dropped out of high school or college. It’s not nearly as big a problem as the 40 percent of children who are born out of wedlock. It’s not nearly as big a problem as the nation’s stagnant human capital, its stagnant social mobility and the disorganized social fabric for the bottom 50 percent."

He concludes: "If your ultimate goal is to reduce inequality, then you should be furious at the doctors, bankers and C.E.O.’s. If your goal is to expand opportunity, then you have a much bigger and different agenda."

He seems to be hugely missing the point.  It's not that we should be upset about "zooming" incomes of the rich in the abstract.  OWS is upset because of the control over the government that that "zooming" wealth enables the top 1% to exert.  

Yes, there are many problems in this country that can't be directly traced to the excesses of the top 1% (although of course, the current recession and much of the country's crippling debt burden can).  But what are we supposed to do to solve those problems, which have been with us since long before the Occupy Wall Street movement?  Is he proposing we start a "stop having kids out of wedlock movement"?

No, OWS has identified a specific problem that CAN be fixed:  The US government is largely controlled by wealth.  Fixing THAT problem might not immediately solve the other problems that Brooks is talking about, but at least it will align government more closely with the aims and needs of the majority of people, and bring the government back into harmony with its founders' democratic ideals.  That's not a call for big government as opposed to small government -- we just need a government that acts in the interests of the majority, rather than the wealthy minority.  And perhaps if that happens, solutions to the social problems will start to appear. 

Who are the 1%?

The answer seems to be nobody really knows.  But here are some figures:

Numbers from Suzy Khimm in the Oct. 6, 2011Washington post:

By household income:  Any household with total income greater than or equal to $516,633 (2010) (in in 2010 (in 2007 it peaked at $646,195) (adjusted for 2011 dollars, according to calculations by the Tax Policy Center).  This is the minimum; the average income is $1,530,773 (note that "average" income, as Nassim Taleb has explained, is not a particularly helpful concept (unlike, e.g. average height).  When Bill Gates walks into a room, the average person in that room becomes a billionaire).  According to CNN, IRS figures say the top 1% floor for adjusted gross income was $343,927.


By net worth:   average of $14 million in 2009 (per a 2011 report from the Economic Policy Institute) (peaked at $19.2 million in 2007) (not clear if 2011 dollars).  As mentioned above, "average" net worth is not a helpful concept; we'd be much more interested in knowing what the minimum net worth is.  Interestingly, Khimm's post as it reads today is already corrected to fix a misconception about floor vs. average.  But it's still not as helpful as it could be.

By profession:  David Brooks's column today gives the following for top 1% of "earners" (all prefaced by "about"):

31% "started or manage nonfinancial businesses"
16% doctors
14% "in finance"
8% lawyers
5% engineers
2% sports, entertainment or the media.

That adds up to 76% -- one might well ask who are the other 24% (of the top 1%).  I wonder if it's "earnings" off of inherited wealth?  That would be pretty shocking.

Brooks's numbers are consistent with numbers reported in the above-referenced CNN article:

"A separate study found that financial professionals made up about 14% of the top rank in 2005.
Executives, managers and supervisors working outside of finance accounted for 31%, the largest share, according to an analysis by Jon Bakija of Williams College, Adam Cole of the Treasury Department and Bradley Heim of Indiana University. Medical professionals came in at 15.7%, while lawyers made up 8.4%."

So the numbers apparently come from different sources, and people have been lumping them together.