Park Slope and The Rats of NIMBY

Elisabeth Rosenthal at NYT:

Park Slope, Brooklyn. Cape Cod, Mass. Berkeley, Calif. Three famously progressive places, right? The yin to the Tea Party yang. But just try putting a bike lane or some wind turbines in their lines of sight. And the karma can get very different.

Last week, two groups of New Yorkers who live “on or near” Prospect Park West, a prestigious address in Park Slope, filed a suit against the administration of Mayor Michael R. Bloomberg to remove a nine-month-old bike lane that has commandeered a lane previously used by cars.

In Massachusetts, the formidable opponents of Cape Wind, a proposed offshore wind farm in Nantucket Sound, include members of the Kennedy family, whose compound looks out over the body of water. In Berkeley last year, the objections of store owners and residents forced the city to shelve plans for a full bus rapid transit system (B.R.T.), a form of green mass transit in which lanes that formerly served cars are blocked off and usurped by high-capacity buses that resemble above-ground subways.

Critics in New York contend the new Prospect Park bike lane is badly designed, endangering pedestrians and snarling traffic. Cape Wind opponents argue the turbines will defile a pristine body of water. And in Berkeley, store owners worried that reduced traffic flow and parking could hurt their business.

But some supporters of high-profile green projects like these say the problem is just plain old Nimbyism — the opposition by residents to a local development of the sort that they otherwise tend to support.

Ryan Avent:

The Times piece delves into the psychology of this kind of neighborhood opposition, but what it doesn’t say is that as annoying as this is, it has a far smaller impact on net emissions than the far more common anti-development strain of NIMBYism. Bike lanes make New York City a teeny bit greener. But New York is already much, much greener than most American cities, thanks to its dense development pattern and extensive transit network. Net emissions fall a lot more when someone from Houston moves to New York than when someone from New York starts biking.

Happily, lots of people would LOVE to move to New York. This is one huge benefit we don’t need to subsidize to realize. Unhappily, the benefit is nonetheless out of reach because of the huge obstacles to new, dense construction in New York. New York can’t accommodate more people unless it builds more homes, and it can’t build more homes, for the most part, without building taller buildings. And New Yorkers fight new, tall buildings tooth and nail. They fight them on aesthetic grounds, and because they’re worried about parking and traffic, and because they’re worried about their view, and because they just think there’s enough building in New York already, thank you. And many do this while heaping massive scorn on oil executives and the Republican Party over their backward and destructive views on global warming.

Of course, the obstruction of development is offensive for lots of reasons: it makes housing and access to employment unaffordable, it reduces urban job and revenue growth, it tramples on private property rights, and so on. But the environmental hypocrisy is galling, and it’s not limited to New York. My old neighborhood, Brookland, voted overwhelmingly for Obama (about 90-10, as I recall). Many of the locals are vocally supportive of broad, lefty environmental goals. And yet, when a local businessman wants to redevelop his transit-adjacent land into a denser, mixed-use structure, the negative response is overwhelming, and residents fall over themselves to abuse local rules in order to prevent the redevelopment from happening.

This project would bring new retail with it, which would enable more local residents to walk to a retail destination. It would bring new residents, and those residents would be vastly more likely to walk or take transit to destinations than those living farther from Metro. Forget the economic benefits to the city, the people occupying the new housing units would have carbon footprints dramatically below the national average. But this basically does not matter to the NIMBYs however much they profess to care about the environment.

To the extent that public opinion matters and can be shaped, I think it would be a huge boon for humanity for attitudes toward NIMBYism to turn decidedly negative. People should be ashamed of this behavior, which is both selfish and extravagantly dismissive of property rights.

Kevin Drum:

Earlier today, I linked to a Ryan Avent post complaining that although dense cities like New York are much greener than towns and suburbs, his lefty, environmentally-aware neighbors fight against new high-density developments in the city anyway. A little later, I had an email exchange with HW, a lefty, environmentally-aware New Yorker who thinks Ryan has it all wrong. Here’s the exchange:

HW: It is true that people living in NY have much much lower carbon footprints than those who live in lower density areas. It’s also true that it is a highly desirable place to live. So wouldn’t the way to accomplish more people living in high density areas like NY be to replicate it elsewhere? Or should we insist on cramming more people into NY against NYers’ will and make it a less desirable place to live?

Wouldn’t it be better for 8 million people to live in NY and have it serve as a beacon for a great, lower carbon footprint lifestyle? If you cram an extra million people in, sure, you lower their carbon footprints, but you may also make high density urban living far less attractive and less likely to be replicated around the country.

Avent mentions problems with parking and traffic as a throw-away, but I can tell you, the 4-5-6 running up from midtown to the Upper East Side is quite literally crammed wall-to-wall with people every morning. Parking is unlikely to be an option for anyone unwilling to spend several hundred dollars a month. And yes, another ten skyscrapers will result in the city becoming a darker and more depressing place. Not to mention the fact that the last ten high rises that went up on the Upper East Side were creatures of the housing bubble, resulting in massive losses and lots of empty units.

So would it be so terrible if we built up the downtown areas of Jersey City, White Plains and Stamford instead?

My reply: Well, that’s the funny thing. Building new high-density areas is the obvious answer here, but no one ever does it. Why? I assume it’s because it’s next to impossible to get people to move to new high-density developments. You get all the bad aspects of density without any of the good aspects of living in a big, well-established city.

It’s a conundrum. We could use more well established cities, but no one wants to live in the intermediate stages that it takes to build one. And of course, in well-established smaller towns and cities, the residents fight like crazed weasels to prevent the kind of development that they associate with crime and gangs.

I don’t really know what the answer is.

HW again: I’m not sure that’s entirely true. What about all the downtown redevelopment projects that have happened around the country? Or the urban centers that sprout up around the core of big cities like NY. Next time you are in NY, look across the East River and take a gander at Long Island City. It’s as close to midtown as the Upper East Side, easy to build there, far less expensive, and just as dense. And every single one of those luxury high rises went up in the past 12 years; it’s literally a skyline that didn’t exist 12 years ago. Jersey City is a similar story, both for residential and financial (every big bank has moved their IT back office out there). Or look at the gentrification of Brooklyn!

So why obsess on cramming a couple hundred thousand more people on the island of Manhattan, which will push it past the bursting point? It’s just not a smart premise. In fact, I’ll go further: it bears no relationship to reality. No one would stop a luxury high rise in any of the other four boroughs or right across the river in NJ and it’s just as dense and low-carbon to live in those spots. It’s just that Ryan Avent doesn’t WANT to live in those spots. He wants to live in a cheaper high rise in Manhattan (which, by the way, has seen tons of them go up already in the past decade — in the Financial District, Hell’s Kitchen, the Upper East Side). Avent should ride the 4/5/6 at 8 am every morning for a week, come back, and tell us if his article makes any sense. As a 4th generation NYer, I don’t think it even begins to.

I don’t really have a dog in this fight since I’ve lived in the leafy suburbs of Orange County all my life. But I thought this was an instructive response that was worth sharing. Back to you, Ryan.

Avent responds to the e-mail exchange:

I’m just pointing out the obvious here — many more people would like to live in Manhattan, it would be good economically and environmentally if they did, and it’s bad that local neighborhood groups are preventing them from doing so because they’re worried about their view. Further, my guess is that even without a relaxation in development rules Manhattan will cram in a couple hundred thousand more people, and demand will continue to rise; somehow, Manhattan will manage not to burst. Though it might eventually be swamped, if city-dwelling NIMBYs continue to make Houston exurbs ever more affordable relative to walkable density.

The transportation problem can be solved, in part, by better transportation policy. It is a crime that the subways are crammed while drivers use the streets of Manhattan for free, but that’s a policy failure, not a density failure. It’s also worth noting that heights fall off sharply as one moves away from the central business districts of Lower and Midtown Manhattan. If developers could build taller in surrounding neighborhoods and add residential capacity there, then more Manhattan workers could live within easy walking distance of their offices, and fewer would need to commute in by train.

Finally, let me point out that this is not about what I want. I’m not planning a move to New York, and I’m not remotely suggesting that the government should somehow mandate or encourage high-density construction. I’m simply saying that it should be easier for builders to meet market demand. It should be easier for builders to meet market demand in Manhattan, and Brooklyn, and Nassau County, and Washington, and downtown Denver, and so on. People clearly want to live in these places, and it would be really good for our economy and our environment if they were able to do so. And I find it very unfortunate that residents deriving great benefits from the amenities of their dense, urban neighborhoods are determined to deny those benefits to others.

Matthew Yglesias:

I don’t want to say too much about the debate over increased density in Manhattan because, again, ebook proposal. But one reality check on this whole subject is to note that the population of Manhattan 100 years ago at 2,331,542 people. It then hit a low of 1,428,285 in 1980 and has since then risen back up to 1,629,054.

Back in 1910 there were only 92,228,496 people in the United States. Since that time, the population of the country has more than tripled to 308,745,538. And if you look at Manhattan real estate prices, it’s hardly as if population decline in Manhattan has been driven by a lack of demand for Manhattan housing. Back around 1981 when I was born, things were different. The population of the island was shrinking and large swathes of Manhattan were cheap places to live thanks to the large existing housing stock and the high crime.

Karl Smith at Modeled Behavior:

Many years ago I gave a talk entitled, Green Manhattan, where I made the case that Metropolis was the greenest place in America.

Naturally, I got a lot of funny looks but the line that seemed to win a few converts was this: the best way to protect the environment is by keeping people out of it.

I admit I took a few liberties in the talk, not discussing how agriculture would be performed and supported, for example. Nonetheless, I think this framing breaks the intuition that green is about living with nature rather than letting nature live on its on.

Megan McArdle:

New York hasn’t actually been growing steadily; it’s been rebounding to the population of roughly 8 million that it enjoyed in 1950-70 before the population plunged in the 1970s.  It’s really only in the last ten years that the population has grown much beyond where it was in the 1970.

This matters because I think you can argue pretty plausibly that New York’s infrastructure has put some limits on the city’s growth–that by 1970 the city had about grown up to those limits, and that we can push beyond them only slowly.  The rail and bus lines that sustain the business district are pretty much saturated, and the roads and bridges can’t really carry many more cars at peak times.  Adding busses could conceivably help you handle some of the overflow, but unless those busses actually replace cars, they’ll also make traffic slower.

Unless you plan to fill the city entirely with retirees who don’t need to go to work, there’s actually not that much more room to build up New York–you could put the people there, but they wouldn’t be able to move.  And even the retirees would require goods and services that choke already very congested entry and exit points.  There has been peripatetic talk about switching all deliveries to night, but that would disturb the sleep of low-floor apartment dwellers, and be fantastically expensive, forcing every business to add a night shift.

At the very least, the current city dwellers are right that adding more people would add a lot more costs to them–crammed train cars, more expensive goods.  In New York, much more than in other places, the competition for scarce resources like commuting space is extremely stark.

That doesn’t mean it is impossible to add a lot more people to New York.  But doing so requires not just changing zoning rules–as far as I know, there’s already quite a lot of real estate in the outer boroughs that could accommodate more people, but it’s not close to transportation, so it’s not economically viable.  If you want to add a lot more housing units, you also need to add considerable complimentary infrastructure, starting with upgrading the rest of the subway’s Depression-era switching systems (complicated and VERY expensive because unlike other systems, New York’s trains run 24/7).  And ultimately, it’s going to mean adding more subway lines, because short of building double-decker streets, there’s no other way for enough people to move.

Those lines don’t have to go to the central business district; there’s already been some success developing alternate hubs in Queens and Brooklyn.  But they do have to go from residential neighborhoods to somewhere that people work, and they have to add actual extra carrying capacity to the system–line extensions do no good if the trains are already packed to bursting over the high-traffic areas of the route.

It Is Ezra Klein Week Here At Around The Sphere

Ezra Klein:

There’s lots of interesting stuff in Ed Glaeser’s new book, “The Triumph of the City.” One of Glaeser’s themes, for instance, is the apparent paradox of cities becoming more expensive and more crowded even as the cost of communicating over great distances has fallen dramatically. New York is a good example of this, but Silicon Valley is a better one

[…]

The overarching theme of Glaeser’s book is that cities make us smarter, more productive and more innovative. To put it plainly, they make us richer. And the evidence in favor of this point is very, very strong. But it would of course be political suicide for President Obama to say that part of winning the future is ending the raft of subsidies we devote to sustaining rural living. And the U.S. Senate is literally set up to ensure that such a policy never becomes politically plausible.

Klein again:

Yesterday afternoon, I got an e-mail from a “usda.gov” address. “Secretary Vilsack read your blog post ‘Why we still need cities’ over the weekend, and he has some thoughts and reflections, particularly about the importance of rural America,” it said. A call was set for a little later in the day. I think it’s safe to say Vilsack didn’t like the post. A lightly edited transcript of our discussion about rural America, subsidies and values follows.

Ezra Klein: Let’s talk about the post.

Tom Vilsack: I took it as a slam on rural America. Rural America is a unique and interesting place that I don’t think a lot of folks fully appreciate and understand. They don’t understand that that while it represents 16 percent of America’s population, 44 percent of the military comes from rural America. It’s the source of our food, fiber and feed, and 88 percent of our renewable water resources. One of every 12 jobs in the American economy is connected in some way to what happens in rural America. It’s one of the few parts of our economy that still has a trade surplus. And sometimes people don’t realize that 90 percent of the persistent poverty counties are located in rural America.

EK: Let me stop you there for a moment. Are 90 percent of the people in persistent poverty in rural America? Or just 90 percent of the counties?

TV: Well, I’m sure that more people live in cities who are below the poverty level. In terms of abject poverty and significant poverty, there’s a lot of it in rural America.

The other thing is that people don’t understand is how difficult farming is. There are really three different kinds of farmers. Of the 2.1 million people who counted as farmers, about 1.3 million of them live in a farmstead in rural America. They don’t really make any money from their operation. Then there are 600,000 people who, if you ask them what they do for a living, they’re farmers. They produce more than $10,000 but less than $250,000 in sales. Those folks are good people, they populate rural communities and support good schools and serve important functions. And those are the folks for whom I’m trying to figure out how to diversify income opportunities, help them spread out into renewable fuel sources. And then the balance of farmers, roughly 200,000 to 300,000, are commercial operations, and they do pretty well, particularly when commodity prices are high. But they have a tremendous amount of capital at risk. And they’re aging at a rapid rate, with 37 percent over 65. Who’s going to replace those folks?

EK: You keep saying that rural Americans are good and decent people, that they work hard and participate in their communities. But no one is questioning that. The issue is that people who live in cities are also good people. People who live in exurbs work hard and mow their lawns. So what does the character of rural America have to do with subsidies for rural America?

TV: It is an argument. There is a value system that’s important to support. If there’s not economic opportunity, we can’t utilize the resources of rural America. I think it’s a complicated discussion and it does start with the fact that these are good, hardworking people who feel underappreciated. When you spend 6 or 7 percent of your paycheck for groceries and people in other countries spend 20 percent, that’s partly because of these farmers.

More Klein here and here

Will Wilkinson at DiA at The Economist:

IN THIS chat with Ezra Klein, Tom Vilsack, the secretary of agriculture, offers a pandering defence of agricultural subsidies so thoroughly bereft of substance I began to fear that Mr Vilsack would be sucked into the vacuum of his mouth and disappear.When Mr Klein first raises the subject of subsidies for sugar and corn, Mr Vilsack admirably says, “I admit and acknowledge that over a period of time, those subsidies need to be phased out.” But not yet! Vilsack immediately thereafter scrambles to defend the injurious practice. Ethanol subsidies help to wean us off foreign fuels and dampen price volatility when there is no peace is the Middle East, Mr Vilsack contends. Anyway, he continues, undoing the economic dislocation created by decades of corporate welfare for the likes of ADM and Cargill will create economic dislocation. Neither of these points is entirely lacking in merit, but they at best argue for phasing out subsidies slowly starting now.

Mr Vilsack should have stopped here, since this is as strong as his case is ever going to be, but instead he goes on to argue that these subsidies sustain rural culture, which is a patriotic culture that honours and encourages vital military service:

[S]mall-town folks in rural America don’t feel appreciated. They feel they do a great service for America. They send their children to the military not just because it’s an opportunity, but because they have a value system from the farm: They have to give something back to the land that sustains them.

Mr Klein follows up sanely:

It sounds to me like the policy you’re suggesting here is to subsidize the military by subsidizing rural America. Why not just increase military pay? Do you believe that if there was a substantial shift in geography over the next 15 years, that we wouldn’t be able to furnish a military?

To which Mr Vilsack says:

I think we would have fewer people. There’s a value system there. Service is important for rural folks. Country is important, patriotism is important. And people grow up with that. I wish I could give you all the examples over the last two years as secretary of agriculture, where I hear people in rural America constantly being criticized, without any expression of appreciation for what they do do.

In the end, Mr Vilsack’s argument comes down to the notion that the people of rural America feel that they have lost social status, and that subsidies amount to a form of just compensation for this injury. I don’t think Mr Vilsack really believes that in the absence of welfare for farmers, the armed services would be hard-pressed to find young men and women willing to make war for the American state. He’s using willingness-to-volunteer as proof of superior patriotism, and superior patriotism is the one claim to status left to those who have no other.

Ryan Avent at Free Exchange at The Economist:

I’ll add a few comments. First, it may be that the economists who understand the economic virtues of city life aren’t doing a sufficiently good job explaining that it’s not the people in cities that contribute the extra economic punch; it’s the cities or, more exactly, the interactions between the people cities facilitate. It’s fine to love the peace of rural life. Just understand that the price of peace is isolation, which reduces productivity.

Second, the idea that economically virtuous actors deserve to be rewarded not simply with economic success but with subsidies is remarkably common in America (and elsewhere) and is not by any means a characteristic limited to rural people. I also find it strange how upset Mr Vilsack is by the fact that he “ha[s] a hard time finding journalists who will speak for them”. Agricultural interests are represented by some of the most effective lobbyists in the country, but their feelings are hurt by the fact that journalists aren’t saying how great they are? This reminds me of the argument that business leaders aren’t investing because they’re put off by the president’s populist rhetoric. When did people become so sensitive? When did hurt feelings become a sufficient justification for untold government subsidies?

Finally, what Mr Klein doesn’t mention is that rural voters are purchasing respect or dignity at the price of livelihoods in much poorer places. If Americans truly cared for the values of an urban life and truly wished to address rural poverty, they’d get rid of agricultural policies that primarily punish farmers in developing economies.

Andrew Sullivan

Arnold Kling:

Ezra Klein sounds like my clone when arguing with the Secretary of Agriculture.

James Joyner:

Essentially, Vilsack justifies subsiding farmers on the basis that rural America is the storehouse of our values, for which he has no evidence. And he’s befuddled when confronted with someone who doesn’t take his homilies as obvious facts.

Nobody argues that America’s farmers aren’t a vital part of our economy or denies that rural areas provide a disproportionate number of our soldiers. But the notion that country folks are somehow better people or even better Americans has no basis in reality.

Jonathan Chait at TNR:

Why is it so common to praise the character of rural America? Part of it is doubtless that rural life represents the past, and we think of the past as a simpler and more honest time. But surely another element is simply that rural America is overwhelmingly white and Protestant. And completely aside from the policy ramifications, the deep-seated veneration of rural America reflects, at bottom, a prejudice few would be willing to openly spell out.

Hey Kids, Tyler Cowen Wrote A Book!

Tyler Cowen’s new book, “The Great Stagnation”

Tyler Cowen:

That’s the title and it’s by me, the Amazon link is here, Barnes&Noble here.  That’s an eBook only, about 15,000 words, and it costs $4.00.  If you wish, think of it as a “Kindle single.”

Your copy will arrive on January 25 and loyal MR readers are receiving the very first chance to buy it.  Very little of the content has already appeared on MR.

Many of you have read my article “The Inequality that Matters,” but there I hardly touched on median income growth.  That is because I was writing this eBook.

Has median household income really stagnated in the United States?  If so, why?  Are the causes political or something deeper?  What are the important biases in how we are measuring national income and productivity and why do they matter for economic policy?  Are we getting enough value for all the extra money we are spending on the health care and education sectors?  What do some major right-wing and left-wing thinkers miss about this phenomenon?

How does all this relate to our recent financial crisis?

I dedicated this book to Michael Mandel and Peter Thiel, two major influences on some of the arguments.

Why did big government arise in the late 19th and early 20th centuries, what is its future, and why is science so important for macroeconomics?  How can we fix the current mess we are in?

Read (and buy) the whole thing.

Scott Sumner:

How great was Tyler Cowen’s marketing coup?  Well he forced a technophobe like me to actually learn how to use Kindle.  I wasn’t too happy about that, which makes me inclined to write a very negative review.  But that’s kind of hard to do credibly when I agree with the central proposition of the book; that technological progress (at least as traditionally measured) has slowed dramatically, and will continue to be disappointing for the foreseeable future.

In an earlier post I argued that my grandma’s generation (1890-1969) saw the biggest increase in living standards; most notably a longer lifespan (due to diet/sanitation/health care), indoor plumbing and electric lights.  Less important inventions included home appliances, cars and airplanes, and TVs.  From the horse and buggy era to the moon landing in one life.  And all I’ve seen is the home computer revolution.  Not much consolation for a technophobe like me.  I’m probably even more pessimistic than Tyler.

The parts of the book I liked best were those that discussed governance.  I had noticed that there was a correlation between cultures that are good at governance, and cultures that are good at running big corporations.    But Tyler added an interesting perspective, arguing that the technologies that facilitated the growth of big corporations also facilitated the growth of big government.  I don’t recall if he made this point, but I couldn’t help thinking that the neoliberal revolution, which led to some shrinkage in government size, was also associated with a move away from the big corporate conglomerates of the 1960s, towards smaller and more nimble businesses.

Tyler has a long list of complaints about the wasteful nature of our government/education/health care sectors, which he hinted is really just one big sector.  While reading this section I kept wondering when he was going to mention Singapore, which has constructed a fiscal regime ideally suited for the Great Stagnation.  When he finally did, on “Page” 830-37, he did so in an unexpected context, as an example of a society that reveres scientists and engineers.  He had just suggested that the most important thing we could do to overcome the stagnation was:

Raise the social status of scientists.

My initial reaction was skepticism.  First, how realistic is it to expect something like this to happen?  I suppose the counterargument is that every new idea seems unrealistic, until it actually occurs.  But even if it did, would it really speed up the rate of scientific progress?  My hunch is that if we doubled the number of people going into science, there would be very little acceleration in scientific progress.  First, because the best scientists (think Einstein) are already in science, driven by a love of the subject.  Second, with a reasonably comprehensive research regime, progress in finding a cure for cancer may require a certain set of interconnected discoveries in biochemistry that simply can’t be rushed by throwing more money and people at the problem.  Similarly, progress in info tech may play out at a pace dictated by Moore’s law.  Given Moore’s law, no amount of research could have produced a Kindle in 1983.  Could more scientists speed up Moore’s law?  Perhaps, I’m not qualified to say.  But that’s certainly not the impression I get from reading others talk about information technology.

Here’s another exhortation that caught my eye:

Be tolerant, and realize there are some pretty deep-seated reasons for all the political strife and all the hard feelings and all the polarization.

I couldn’t help thinking of Paul Krugman and Tyler Cowen, the two brightest stars of the economic blogosphere.  If only one of those two are able to have this sort of dispassionate take on policy strife, how likely are the rest of us mere mortals to be able keep a clear head and remain above the fray?  Still, it’s great advice.

Ryan Avent at Free Exchange at The Economist:

Mr Cowen’s book can be very briefly (too briefly) summarised as follows. The rich world faces two problems. The first is that a decline in innovation has reduced the growth rate of output and median incomes, making it hard for rich countries to meat obligations accepted when expectations were higher. The second is that a lot of recent innovation is occuring in places like the internet, where new products are cheap or free and create very few jobs.

Mr Sumner’s response is a good one. What Mr Cowen is essentially saying, he suggests, is that the actual price level is tumbling. Technology has created a lot of great things that are available for free, and so the price of a typical basket of household consumption is dropping like a rock. People used to spend a lot of money going to movies, buying books and records, making expensive long-distance phone calls, paying for word processing software, and so on. Now, a lot of that can be done at almost no cost. Prices are falling.

That has a couple of implications. It suggests that real incomes are actually rising, at least for those consuming the bulk of the free online content. And perhaps real incomes are too high, in some cases, for labour markets to clear. Given broader disinflation (understated because non-purchased goods aren’t included in price indexes) both prices and wages may need to adjust, but if they’re sticky, then they won’t. What’s needed is reinflation.

To a certain extent, Mr Cowen is concerned about society’s ability to pay off old obligations, and one reason society might struggle to do this is that new innovations deliver value through non-monetary transactions. But the value is still there, and that’s what should really matter for the paying-off of obligations. When you borrow, you’re offering to compensate the lender with more utility tomorrow for less utility today. Thanks to the internet, utility today is cheap, and that’s only a problem because the obligations we acquired yesterday were denominated in dollars. But we can print enough money to meet yesterday’s obligations. Indeed, we should, in order to offset the deflationary pressures from the cheap innovations.

Imagine a world in which technology has advanced to the point that robots can build robots that operate at basically no cost at basically no cost, such that people can have anything that want anytime for free; the only constraint on consumption is the time available. That would be a cashless economy, and as a result, debtors would be totally unable to pay creditors. But does that matter?

Paul Krugman:

Tyler Cowen argues that technological change since the early 1960s hasn’t been as transformative for ordinary peoples’ lives as the change that went before.

I agree. I wrote about that a long time ago, using the example of kitchens:

Better yet, think about how a typical middle-class family lives today compared with 40 years ago — and compare those changes with the progress that took place over the previous 40 years.

I happen to be an expert on some of those changes, because I live in a house with a late-50s-vintage kitchen, never remodelled. The nonself-defrosting refrigerator, and the gas range with its open pilot lights, are pretty depressing (anyone know a good contractor?) — but when all is said and done it is still a pretty functional kitchen. The 1957 owners didn’t have a microwave, and we have gone from black and white broadcasts of Sid Caesar to off-color humor on The Comedy Channel, but basically they lived pretty much the way we do. Now turn the clock back another 39 years, to 1918 — and you are in a world in which a horse-drawn wagon delivered blocks of ice to your icebox, a world not only without TV but without mass media of any kind (regularly scheduled radio entertainment began only in 1920). And of course back in 1918 nearly half of Americans still lived on farms, most without electricity and many without running water. By any reasonable standard, the change in how America lived between 1918 and 1957 was immensely greater than the change between 1957 and the present.

Now, you can overstate this case; medical innovations, in particular, have made a huge difference to some peoples’ lives, mine included (I have a form of arthritis that would have crippled me in the 1950s, and in fact almost did 20 years ago until it was properly diagnosed, but barely affects my life now thanks to modern anti-inflammatories.) But the general sense that the future isn’t what it used to be seems right.

David Leonhardt interviews Cowen at NYT

Derek Thompson at The Atlantic:

Tyler Cowen’s celebrated Kindle publication “The Great Stagnation” has received a lot of attention from the Web community. The New York Times David Leonhardt gets the author to sit for an e-interview on his e-book and asks a good first question: If our innovation motor is broken, what should we do know?

Cowen responds that we should double down on science…

The N.I.H. has done a very good job in promoting medical innovation and this is in large part because it allocates funds on a relatively meritocratic basis; Congress doesn’t control particular grants and on many important fronts the N.I.H. has autonomy. It is one reason why the United States is the world leader in medical research and development and I would expand its funding, provided it retains this autonomy. Basic research is often what economists call a “public good” and it offers economic and health returns for many years to come.

… and get realistic about clean energy.

“Clean energy” is a very important issue, for reasons of climate change, but it won’t be a job creator in a useful sense. In terms of energy production, fossil fuels are quite powerful. With green energy, at this point, we are simply looking to break even, namely to receive some of our current power but without the negative environmental consequences which accrue from carbon. That’s a worthy goal, but we shouldn’t start thinking about green energy as speeding up economic growth or creating jobs. It’s more like a necessary burden we will have to bear and the fact that these costs lie in front of us – from both the climate change and from the technological adjustments — is a sobering thought.

These are smart thoughts from a very smart guy. But let’s think about NIH funding from a jobs perspective. If the government increases science funding and this results in more pharmaceutical drugs coming online, that’s a great thing for the pharmaceutical industry. But new drugs, like any new technology, can be disruptive. For example, a drug to ease the side-effects of end-of-life diseases might replace the need for home health aides, which are projected to be one of the fastest growing jobs in the country for low-skilled workers. That’s not a reason not to develop a totally useful rug! But it throws a wrench into a claim (one that I’ve often made, too) that innovations in biosciences are pure job-creators.

Ezra Klein:

Cowen’s characterization of plumbing, fossil fuels, public education systems, penicillin and so forth as “low-hanging fruit” bugs me a bit. It took human beings quite a while to figure all that out. But Cowen is right to say that once discovered, those innovations produced extremely high returns. From the economy’s perspective, the difference between having cars and not having cars is a lot larger than the difference between having cars and having slightly better cars. A 1992 Honda Accord and a 2010 Honda Accord aren’t the same, but they’re pretty close.

The obvious rejoinder to this is, “What about the internet?” The problem, as Cowen points out, is that the Internet is not yet employing many people or creating much growth. We needed a lot of people to build cars. We don’t need many people to program Facebook. It’s possible, Cowen thinks, that the Internet is just a different type of innovation, at least so far as its ripples in the labor market are concerned. “We have a collective historical memory that technological progress brings a big and predictable stream of revenue growth across most of the economy,” he writes. “When it comes to the web, those assumptions are turning out to be wrong or misleading. The revenue-intensive sector of our economy have been slowing down and the beg technological gains are coming in revenue-deficient sectors.”

Maybe the Internet just needs some time to come into its growth-accelerating own. Or maybe the Internet is going to be an odd innovation in that its gains to human knowledge and enjoyment and well-being will serve to demonstrate that GDP and even median wage growth are insufficient proxies for living standards. Either way, we’re still left with a problem: Stagnant wages are a bad thing even if Wikipedia is a big deal.

And it’s not just the Internet. Even when we’re growing, things look bad. The sectors that are expanding fastest are dysfunctional. We spend a lot of money on education and health care, but seem to be getting less and less back. The public sector is getting bigger, but it’s not at all clear it’s getting better. For much of the last few decades, the financial sector was was generating amazing returns — but that turned out to be a particularly damaging scam. And economic malaise is polarizing our politics, leaving us less able to respond to these problems in an effective or intelligent way.

Kevin Drum:

Tyler makes a bunch of other arguments in “The Great Stagnation” too, some more persuasive than others. Like some other critics, I’m not sure why he uses median wage growth as a proxy for economic growth. It’s important, but it’s just not the same thing. Besides, median wage growth in the United States slowed very suddenly in 1973, and it’s really not plausible that our supply of low hanging fruit just suddenly dropped by half over the space of a few years. I also had a lot of problems with his arguments about whether GDP generated by government, education, and healthcare is as “real” as other GDP. For example, he suggests that as government grows, its consumption is less efficient, but that’s as true of the private sector as it is of the public sector. A dollar of GDP spent on an apple is surely more “real” than a dollar spent on a pet rock, but there’s simply no way to judge that. So we just call a dollar a dollar, and figure that people are able to decide for themselves whether they’re getting the same utility from one dollar as they do from the next.

The healthcare front is harder to judge. I agree with Tyler that we waste a lot of money on healthcare, but at the same time, I think a lot of people seriously underrate the value of modern improvements in healthcare. It’s not just vaccines, antibiotics, sterilization and anesthesia. Hip replacements really, truly improve your life quality, far more than a better car does. Ditto for antidepressants, blood pressure meds, cancer treatments, arthritis medication, and much more. The fact that we waste lots of money on useless end-of-life treatments doesn’t make this other stuff any less real.

To summarize, then: I agree that the pace of fundamental technological improvements has slowed, and I agree with Tyler’s basic point that this is likely to usher in an era of slower economic growth in advanced countries. At the same time, improvements in managerial and organizational efficiency thanks to computerization shouldn’t be underestimated. Neither should the fact that other countries still have quantum leaps in education to make, and that’s going to help us, not just the countries trying to catch up to us. After all, an invention is an invention, no matter where it comes from. And finally, try to keep an even keel about healthcare. It’s easy to point out its inefficiencies, but it’s also easy to miss its advances if they happen to be in areas that don’t affect you personally.

David Brooks at NYT

Cowen and Matthew Yglesias on Bloggingheads

Let’s Go Back To WikiLeaks And Learn Something Interesting!

John Vidal at The Guardian:

The US fears that Saudi Arabia, the world’s largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show.

The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom’s crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%.

The revelation comes as the oil price has soared in recent weeks to more than $100 a barrel on global demand and tensions in the Middle East. Many analysts expect that the Saudis and their Opec cartel partners would pump more oil if rising prices threatened to choke off demand.

However, Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, met the US consul general in Riyadh in November 2007 and told the US diplomat that Aramco’s 12.5m barrel-a-day capacity needed to keep a lid on prices could not be reached.

According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as “peak oil“.

Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment. He argued that Aramco had badly underestimated the time needed to bring new oil on tap.

One cable said: “According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described, and the timeline for their production not as unrestrained as Aramco and energy optimists would like to portray.”

It went on: “In a presentation, Abdallah al-Saif, current Aramco senior vice-president for exploration, reported that Aramco has 716bn barrels of total reserves, of which 51% are recoverable, and that in 20 years Aramco will have 900bn barrels of reserves.

“Al-Husseini disagrees with this analysis, believing Aramco’s reserves are overstated by as much as 300bn barrels. In his view once 50% of original proven reserves has been reached … a steady output in decline will ensue and no amount of effort will be able to stop it. He believes that what will result is a plateau in total output that will last approximately 15 years followed by decreasing output.”

Kevin Drum:

This won’t come as a surprise to anyone who’s been following the oil industry over the past few years. Matthew Simmons’ Twilight in the Desert, which I reviewed six years ago, made a detailed case that Saudi Arabia’s production capacity had pretty much maxed out already, and Business Week published an article three years ago based on internal Saudi documents that said much the same: the Saudis could pump 12 million barrels a day in short spurts but only 10 million barrels on a steady basis — and that’s all there is. Production capacity just isn’t going up.

Steve LeVine at Foreign Policy:

The issue is pivotal. Put simply, the price of oil — the price you are paying at the pump, indeed the cost of everything in your home — is wholly determined by what oil traders think Saudi reserves and production capability really are. As an example, oil plunged yesterday to their lowest price of the year — $87.87 a barrel — when Saudi Arabian Oil Minister Ali al-Naimi (pictured above) suggested that the kingdom will put new oil supplies on the market to compensate for any uptick in global demand.

The thing is, the Saudis are highly secretive about these figures — unlike almost every important petro-state on the Earth outside the Middle East, the Saudis will not permit their oilfields to be independently audited. One might wonder why that would be the case, and the late Matt Simmons, for example, made much hay suggesting that the reason is that the Saudis simply don’t have as much oil as they claim. I myself got ahold of documents back in 2008 suggesting the same. Sensible voices, however, said such are the thoughts of the conspiratorial-minded, and that the Saudis genuinely possess what they claimed — they were denying the right to verify because … well because that’s just what they do.

Ryan Avent at Free Exchange at The Economist:

It’s interesting to look at recent production data with this kind of news in mind (to see production numbers you can download  this PDF, or check out charts at the Oil Drum). What we observe is that from around 2004, oil production hasn’t increased very much, even as prices have soared. Now, one reason for this plateau may be the lag in bringing new supply online. During the cheap oil 1990s, production growth and exploration were limited. As prices rose in the early 2000s, producers brought existing, high-cost facilities online, adding to supply. But once existing production was running at capacity, the industry had to wait to get new facilities up to increase supply, and that process doesn’t happen overnight. So it could be that, globally, we’re experiencing a temporary period of high prices and stagnant supply while new extraction is set up.

Of course, in an environment of growing demand, a temporary supply limit can be costly.

But let’s think about one other potential dynamic. In the old days, OPEC attempted to use its cartel status to artificially limit supply and raise prices. This, however, was difficult to orchestrate; there was always the incentive to cheat and sell more than one’s quote of oil at the artificially high price, and as more participants cheated the supply limit fell apart. But as global supply runs against natural limits, incentives begin shifting the other way.

If an individual gains information suggesting that oil reserves are overstated, then they’re likely to expect an increase in future prices. Such an individual could bet on this outcome by buying oil futures, but this behaviour is limited by the nature of the contract; at some point traders may need to take delivery of actual oil, in which case they’ll need a place to store it, and that storing activity would be highly visible in the form of rising inventories.

But what if you’re an oil producer, and you learn this information? Well, obviously you’d like to make the same bet, and hold on to your oil until you can sell it at a higher price. Fortunately for you, oil producer, nature has provided a natural storage tank. All you have to do to make your bet is not produce any more oil than you need to sell to cover costs.

All of which is to say, the world doesn’t need to experience declines in potential oil production to see a rise in oil prices. All it needs is for oil producers to see that such limits loom and begin betting on the near-certainty of rising prices. Of course, different countries will face different liquidity constraints; some leaders may find themselves producing full out in order to sustain their socialist paradise, particularly when prices temporarily dip thanks to recession. But at those times, other countries with fiscal room to spare should cut back their production further—to buy more, essentially, when prices are low in order to sell more when prices are high.

Ariel Schwartz at Fast Company:

Even Jeroen van der Veer, the chief executive of Royal Dutch Shell, has admitted that oil supply may no longer keep up with demand by 2015. But the just-released cables, which detail a back-and-forth between the U.S. consul general and geologist Sadad al-Husseini, the former head of exploration at Saudi Aramco, confirms that the situation is serious.

Weasel Zippers

Israel Matzav:

If this is taken seriously, it should accelerate the search for alternative energy sources and reduce the influence of ‘our friends the Saudis.’ Both those results would be blessings.

There’s Something Strange In The Numbers Here, Waiter

Chart via Calculated Risk

Calculated Risk:

From the BLS:

The unemployment rate fell by 0.4 percentage point to 9.0 percent in
January, while nonfarm payroll employment changed little (+36,000),
the U.S. Bureau of Labor Statistics reported today.

And on the benchmark revision:

The total nonfarm employment level for March 2010 was revised downward by 378,000 … The previously published level for December 2010 was revised downward by 452,000.

The following graph shows the employment population ratio, the participation rate, and the unemployment rate.

Ryan Avent at Free Exchange at The Economist:

LOOK almost anywhere in the recent economic data and the signs point to an accelerating recovery. A solid fourth quarter GDP report contained a truly blockbuster increase in real final sales. Manufacturing activity is soaring. Consumer spending is up and the trade deficit is down. Markets are trading at their highest level in over two years. And so economists anxiously awaited the first employment figures for 2011, hoping that in January firms would finally react to better conditions by taking on lots of new help.

Instead, the Bureau of Labour Statistics has dropped a puzzler of an employment report in our laps—one which points in many directions but not, decidedly, toward strong job growth. In the month of January, total nonfarm employment grew by a very disappointing 39,000 jobs. This was not at all what forecasters were expecting. Earlier this week, an ADP report indicated that private sector employment rose by 187,000 in January; the BLS pegged the figure at just 50,000. There were some compensating shifts. December’s employment gain was revised upward from 103,000 to 121,000. November’s employment rise, which was originally reported at 39,000, has been revised to a total gain of 93,000.

But there is bad news, as well. The BLS included its annual revision of the previous year’s data in this report, and while job growth over the year looks stronger than before, the level of employment looks worse. In March of last year, 411,000 fewer Americans were working than originally reported. And thanks to a weaker employment performance in April through October, 483,000 fewer Americans were on the job in December than was originally believed to be the case. For now, the economy remains 7.7m jobs short of its previous employment peak.

Felix Salmon:

The BLS press release makes this very clear in a box right at the top, which says that

“Changes to The Employment Situation news release tables are being introduced with this release. In addition, establishment survey data have been revised as a result of the annual benchmarking process and the updating of seasonal adjustment factors. Also, household survey data for January 2011 reflect updated population estimates.”

The effects here are large and unpredictable: the total number of people holding jobs in December 2010, for instance, was revised down by a whopping 452,000 — but despite that, the official December 2010 payrolls number now shows an even bigger month-on-month rise than it did before. More generally the size of the total civilian labor force was revised downwards by 504,000, almost half of which came from the Latino population. That has all manner of knock-on effects: the BLS warns that “data users are cautioned that these annual population adjustments affect the comparability of household data series over time.”

This is a messy report, then — even messier than you’d expect from a monthly data series which is mainly valued for its speed as opposed to its accuracy. At the margin, it’s bad for markets, which concentrate on the headline payrolls number, and it’s good for politicians, who tend to concentrate on the headline unemployment number. But for anybody who’s neither a trader nor a politician, it’s a noisy series which is best treated with a whopping great amount of salt — especially in January, and especially also when any big-picture message is so murky.

Instapundit:

Does this mean that most of the “fall” came from discouraged workers dropping out of the workforce? That would explain the difference between this and the Gallup survey, which showed unemployment rising to 9.8% instead of falling. Or am I missing something?

Matthew Yglesias:

At first glance I thought that was people dropping out of the labor force, but it seems instead to be the conjunction of two different things. One is upward revisions of the last couple of months’ worth of jobs data. The other is a downward revision to the baseline estimate of how many people there are. Basically, more people had jobs a month ago than we thought had been the case, and also there were fewer unemployed people than we thought had been the case.

The upshot is that the new data looks a lot better than the old data. But the new data doesn’t say the situation improved dramatically over the past month, it merely says that last month’s take on the situation was too pessimistic.

Mark Thoma

Brad DeLong:

I want a trained professional to analyze this. It is not unusual for the series to do something odd around Christmastide. It is not unusual for the series to diverge. Not this much.

 

Falling, Falling, Falling

Sudeep Reddy at WSJ:

In California, former auto worker Maria Gregg was out of work five months last year before landing a new job—at a nearly 20% pay cut.

In Massachusetts, Kevin Cronan, who lost his $150,000-a-year job as a money manager in early 2009, is now frothing cappuccinos at a Starbucks for $8.85 an hour.

In Wisconsin, Dale Szabo, a former manufacturing manager with two master’s degrees, has been searching years for a job comparable to the one he lost in 2003. He’s now a school janitor.

They are among the lucky. There are 14.5 million people on the unemployment rolls, including 6.4 million who have been jobless for more than six months.

But the decline in their fortunes points to a signature outcome of the long downturn in the labor market. Even at times of high unemployment in the past, wages have been very slow to fall; economists describe them as “sticky.” To an extent rarely seen in recessions since the Great Depression, wages for a swath of the labor force this time have taken a sharp and swift fall.

Huffington Post:

When hard times hit, employers typically are reluctant to reduce wages. But this downturn has been different: More than half the workers who found new work by early 2010 after losing jobs between 2007 and 2009 said their pay had dropped, according to Labor Department data cited in the WSJ. A full 36 percent said the new job paid 20 percent less than their former one.

While headlines have focused on the national unemployment rate of 9.4 percent, the pain extends far beyond those 14.5 million who are deemed officially unemployed by government statistics. The only other instance of such severe wage reductions since the Depression was during the recession of the early 1980s, but the current slump is on track to be far worse, the WSJ notes.

Among people who are lucky enough to have work, living standards have been significantly downgraded. Almost a third of America’s working families are now considered low-income, earning less than twice the official poverty threshold, according to a recent report. The recession reversed a period of improvement.

This trend spells a grim future for the American worker, and for the American economy.

“They’re no longer working actively, with a chance to advance and gain more experience and skills,” said Brandon Roberts, manager of the Working Poor Families Project and a co-author of the report on low-income working families. “They’re just putting pieces together to stay afloat, to meet basic needs.”

Calculated Risk:

Even for those who can find work, the impact of the great recession lingers …

Note: Wages are typically sticky downward for those workers who do not lose their jobs – but for those who lose their jobs, wages can fall sharply when they eventually find new work (this happened in the early ’80s too).

James Pethokoukis:

Some liberal economists, for instance, claim wages have been falling since the Golden Era of the 1970s. More likely that they actually went up by at leasts 20 percent in real terms, according to researchers at the Fed.  But I have no doubt that wage growth slowed during the downturn and many folks have suffered a real and permanent loss of income. I think you will hear Democrats talk more and more about wage insurance — having government temporarily make up the shortfall between old and new jobs — especially with Gene Sperling back in the White House. He is a big proponent of the policy.  And we shouldn’t forget that John McCain proposed something like this back in 2008 during the campaign.

Ezra Klein

Rob Bluey at Heritage

Ryan Avent at Free Exchange at The Economist:

Is downward wage rigidity a problem? Mr Reddy’s anecdotes indicate that many of those who’ve been without work for a long time are willing to take new jobs at significant pay cuts, but perhaps others are still holding out for the wages they’re used to.

On the other hand, there may not be jobs available for them. Why would that be the case? Why wouldn’t firms swap out older, more expensive workers for the cheaper unemployed ones available to them? One possibility is that firms are worried about the disruptive impact of such workforce turnover and have decided that it’s better to keep employing existing labour at existing wages. But then we might expect new firms to start up and hire jobless workers; if the unemployed were just as productive as the employed, new businesses could operate at a significant cost advantage over competitors. But Robert Hall argues that credit conditions remain tight for new businesses, who are the big job creators.

Or it could be that jobless workers are simply much less productive than those who continue to work. Ragu Rajan indicates that this kind of structural explanation could be behind most current unemployment, and he therefore emphasises the importance of retraining. But if so many workers are now too unproductive to hire, one has to ask why firms had them on payrolls before the recession. Mr Rajan points to the unusual growth and subsequent collapse in the construction industry, but as Mr Shimer notes unemployment has basically doubled among all subgroups within the labour force. The data seem not to point toward structural factors as the primary driver of unemployment.

Perhaps the problem is a shortfall in demand, which is preventing existing firms from expanding. It could be that the real interest rate simply isn’t low enough to induce firms to invest in new plants and equipment—investments that would produce corresponding jobs.

These are the factors with which economists are currently wrestling in an attempt to understand unemployment. I do think it’s worth pointing out that a little bout of inflation would be helpful in resolving all of the above issues, with the possible exception of structural skills mismatch. So I continue to find criticism of the Fed’s decision to resume easing perplexing.

Ed Morrissey:

In one sense, this is just the normal response to supply and demand.  Labor is a commodity in that sense, and the cost of labor increases when supply is short, and decreases when supply is glutted.  As a hiring manager for several years in the Twin Cities, we had to repeatedly increases wages across the board (not just for new hires) to keep staff on board and to entice qualified applicants to work for us when unemployment in the area was in the 3% range.  Right now it’s more like 7% in this region, and I’m certain that had I remained in that career, I would be finding it much easier to keep the call center staffed without having to raise compensation levels at all.

It may not be quite as bad as it sounds, either.  While compensation falls as the jobless have to settle into new, less-lucrative jobs, prices are also falling in other areas, especially in real estate.  Retail prices have stabilized, but retailers are still relying on heavy discounting to move inventory.  Buying power may not be declining as much as wages, although it’s certainly not increasing.

The reason that the problem is worse than at any time since the Depression, assuming that the WSJ is correct in that analysis, is that we have had the worst extended unemployment since that time.  The best way to resolve this problem is, not coincidentally, the best way to resolve the housing crisis and other economic woes: stimulate job-creating growth.  Unfortunately, as the Obama administration pursues its regulatory expansion, it will disincentivize that kind of domestic investment, which will perpetuate this problem for at least another two years.

The Ballad Of Daisy And Jay, Part Two

Chrystia Freeland at The Atlantic:

If you happened to be watching NBC on the first Sunday morning in August last summer, you would have seen something curious. There, on the set of Meet the Press, the host, David Gregory, was interviewing a guest who made a forceful case that the U.S. economy had become “very distorted.” In the wake of the recession, this guest explained, high-income individuals, large banks, and major corporations had experienced a “significant recovery”; the rest of the economy, by contrast—including small businesses and “a very significant amount of the labor force”—was stuck and still struggling. What we were seeing, he argued, was not a single economy at all, but rather “fundamentally two separate types of economy,” increasingly distinct and divergent.

This diagnosis, though alarming, was hardly unique: drawing attention to the divide between the wealthy and everyone else has long been standard fare on the left. (The idea of “two Americas” was a central theme of John Edwards’s 2004 and 2008 presidential runs.) What made the argument striking in this instance was that it was being offered by none other than the former five-term Federal Reserve Chairman Alan Greenspan: iconic libertarian, preeminent defender of the free market, and (at least until recently) the nation’s foremost devotee of Ayn Rand. When the high priest of capitalism himself is declaring the growth in economic inequality a national crisis, something has gone very, very wrong.

This widening gap between the rich and non-rich has been evident for years. In a 2005 report to investors, for instance, three analysts at Citigroup advised that “the World is dividing into two blocs—the Plutonomy and the rest”:

In a plutonomy there is no such animal as “the U.S. consumer” or “the UK consumer”, or indeed the “Russian consumer”. There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the “non-rich”, the multitudinous many, but only accounting for surprisingly small bites of the national pie.

Before the recession, it was relatively easy to ignore this concentration of wealth among an elite few. The wondrous inventions of the modern economy—Google, Amazon, the iPhone—broadly improved the lives of middle-class consumers, even as they made a tiny subset of entrepreneurs hugely wealthy. And the less-wondrous inventions—particularly the explosion of subprime credit—helped mask the rise of income inequality for many of those whose earnings were stagnant.

But the financial crisis and its long, dismal aftermath have changed all that. A multibillion-dollar bailout and Wall Street’s swift, subsequent reinstatement of gargantuan bonuses have inspired a narrative of parasitic bankers and other elites rigging the game for their own benefit. And this, in turn, has led to wider—and not unreasonable—fears that we are living in not merely a plutonomy, but a plutocracy, in which the rich display outsize political influence, narrowly self-interested motives, and a casual indifference to anyone outside their own rarefied economic bubble.

Through my work as a business journalist, I’ve spent the better part of the past decade shadowing the new super-rich: attending the same exclusive conferences in Europe; conducting interviews over cappuccinos on Martha’s Vineyard or in Silicon Valley meeting rooms; observing high-powered dinner parties in Manhattan. Some of what I’ve learned is entirely predictable: the rich are, as F. Scott Fitzgerald famously noted, different from you and me.

What is more relevant to our times, though, is that the rich of today are also different from the rich of yesterday. Our light-speed, globally connected economy has led to the rise of a new super-elite that consists, to a notable degree, of first- and second-generation wealth. Its members are hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition—and many of them, as a result, have an ambivalent attitude toward those of us who didn’t succeed so spectacularly. Perhaps most noteworthy, they are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home. Whether they maintain primary residences in New York or Hong Kong, Moscow or Mumbai, today’s super-rich are increasingly a nation unto themselves.

Kevin Drum:

The super rich, she writes, “are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home.” Thus the fury of the financial elite at the suggestion that perhaps they were responsible for the crash of 2008 or that they owe it to the rest of the country to do anything about it:

When I asked one of Wall Street’s most successful investment-bank CEOs if he felt guilty for his firm’s role in creating the financial crisis, he told me with evident sincerity that he did not. The real culprit, he explained, was his feckless cousin, who owned three cars and a home he could not afford.

….A Wall Street investor who is a passionate Democrat recounted to me his bitter exchange with a Democratic leader in Congress who is involved in the tax-reform effort. “Screw you,” he told the lawmaker. “Even if you change the legislation, the government won’t get a single penny more from me in taxes. I’ll put my money into my foundation and spend it on good causes. My money isn’t going to be wasted in your deficit sinkhole.”

I don’t know if this attitude is truly new. Maybe not as much as Freeland suggests. Still, it certainly feels as if America is dominated more and more by an elite class that cares less and less about the public good because they don’t really feel like they have a stake in the public good anymore: they’ve never served in the Army or the Peace Corps, their kids never come within yelling distance of public schools, they donate their money exclusively to their own churches and their own global foundations, and they whine constantly about taxes even though their incomes have skyrocketed and tax rates have fallen dramatically over the past several decades. To them, taxes aren’t part of a social contract, they’re just pure welfare: they don’t care about education or infrastructure or unemployment or healthcare because they don’t have to. Within their own bubble, they don’t need to rely on the public versions of any of that stuff.

Jamelle Bouie at Tapped:

The whole thing is very good, though I have a small quibble with this passage:

What is more relevant to our times, though, is that the rich of today are also different from the rich of yesterday. Our light-speed, globally connected economy has led to the rise of a new super-elite that consists, to a notable degree, of first- and second-generation wealth. Its members are hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition — and many of them, as a result, have an ambivalent attitude toward those of us who didn’t succeed so spectacularly.

If “ambivalent” is code for disdain — passive or otherwise — then these nouveau riche aren’t so different from their predecessors; with few historical exceptions, the rich have always been ambivalent about the poor and less fortunate. Indeed, I wouldn’t be shocked if the presence of “meritocracy” (as if these people have no prior advantages) intensified feelings of disdain. After all, if you can succeed, why can’t these people (and as a corollary, “what right do they have to my wealth”)?

To be fair, disdain for the less fortunate is completely understandable as a response to visible disparities. On some level, we all know that our position is an accident of birth. For a lot of people, a sense of class superiority is a necessary part of the illusion that they are “deserving” of their good fortune.

Felix Salmon:

It’s not that these people are utterly bereft of noblesse oblige: Chrystia points out that “in this age of elites who delight in such phrases as outside the box and killer app, arguably the most coveted status symbol isn’t a yacht, a racehorse, or a knighthood; it’s a philanthropic foundation.” But those philanthropies don’t benefit the left-behind middle classes: they tend to follow a barbell distribution, with the money going either to the world’s poorest or else to well-endowed universities and cultural institutions. The US middle class is sneered at for being fat and lazy and unworthy of their wealth:

The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.

I heard a similar sentiment from the Taiwanese-born, 30-something CFO of a U.S. Internet company. A gentle, unpretentious man who went from public school to Harvard, he’s nonetheless not terribly sympathetic to the complaints of the American middle class. “We demand a higher paycheck than the rest of the world,” he told me. “So if you’re going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.”

This mindset is dangerous, but it’s not clear how dangerous it is.

The real threat facing the super-elite, at home and abroad, isn’t modestly higher taxes, but rather the possibility that inchoate public rage could cohere into a more concrete populist agenda—that, for instance, middle-class Americans could conclude that the world economy isn’t working for them and decide that protectionism or truly punitive taxation is preferable to incremental measures such as the eventual repeal of the upper-bracket Bush tax cuts.

Mohamed El-Erian, the Pimco CEO, is a model member of the super-elite. But he is also a man whose father grew up in rural Egypt, and he has studied nations where the gaps between the rich and the poor have had violent resolutions. “For successful people to say the challenges faced by the lower end of the income distribution aren’t relevant to them is shortsighted,” he told me. Noting that “global labor and capital are doing better than their strictly national counterparts” in most Western industrialized nations, ElErian added, “I think this will lead to increasingly inward-looking social and political conditions. I worry that we risk ending up with very insular policies that will not do well in a global world. One of the big surprises of 2010 is that the protectionist dog didn’t bark. But that will come under pressure.”

If this is true, then the members of the super-elite should be falling over each other to pay more in taxes out of simple enlightened self-interest—rather than saying that a perfectly sensible tax hike is “like when Hitler invaded Poland in 1939.”

But it seems to me that the inchoate anger of the masses shows no sign of cohering into anything at all, let alone protectionism, which seems to have been dying a slow death ever since the protests against Nafta. The Tea Party, which is the closest thing we have to a populist revolt, is bought and paid for by plutocrats and shows no protectionist tendencies whatsoever. If they keep on going on their present trajectory, they’re just as likely to continue unimpeded as they are to run into some kind of atavistic class warfare.

So I’m unconvinced that the plutocrats have any real incentive to restrain themselves, or to stop moaning around an Upper East Side dinner table that $20 million a year isn’t all that much—it’s really only $10 million a year, after taxes.

Matt Steinglass at DiA at The Economist:

Ms Freeland expresses the hope towards the end of her article that the global super-rich will at some point realise that in the long run, by refusing to pay the taxes that are needed to maintain the infrastructure of the countries they operate in or to educate the workers they expect to staff their businesses, they are courting a disastrous political reaction: protectionism, confiscatory taxes, or something worse and more violent. I’m not entirely sure the super-rich need fear such a reaction. Back in mid-2009, Barack Obama told the assembled plutocrats of Wall Street that they ought to be more grateful to him; he was “the only thing standing between you and the pitchforks.” The plutocrats smiled, and departed by helicopter. To the extent any pitchforks have been seen, they were applied to the Democrats’ behinds last November. Perhaps, rather than attempting to stand between Wall Street and any hypothetical pitchforks, Mr Obama should have gotten out of the way.

The other day I was on a Singapore Airlines flight in which every video feature on the inflight entertainment system was preceded by an advertisement for condominiums in a luxury beachfront apartment/shopping development with three canted, burnished-steel towers supporting a huge steel lintel with an artificial park on top, trees, lake, and all, 200+ metres up. It looked like the spoiler of some gigantic Formula 1 racecar. As the ad played, a chyron across the bottom of the screen repeated something along the following lines: “Republic of Singapore, zero capital gains tax, zero wealth tax, zero inheritance tax…” ad nauseum. I sort of think this is the world the super-wealthy are operating in, one in which every threat made by some puny government can be flicked away by the threat of moving to Singapore or some other principality slavishly devoted to wealth. Though given that I was watching this ad in economy class, it’s probably just some pathetic low-rent imitation of the real thing, which is in fact beyond the imagination of mere wage-earners like me. There’s a Victor Pelevin short story along these lines, in which a Russian neuro-physicist discovers that the possession of a certain quantity of dollars propels people’s consciousnesses into an alternative dimension; to all outward appearances such oligarchs seem to still function in our reality, but in fact they are experiencing a universe invisible and completely alien to us mortals. State security authorities promptly hook up a couple of money-nauts to a psychic imaging machine developed by the KGB and transfer billions of dollars to their accounts. It turns out that the universe, as they experience it, looks like a long corridor, lit with a faintly greenish light, with something unidentifiable just around the corner. It’s a strangely haunting, off-kilter story. As Ms Freeland says, the Russians always seem to be sharper at expressing these kinds of things.

Ryan Avent at Free Exchange at The Economist:

It’s always a little amusing (and, to me, still a bit stunning) to read about the really rich and how rich they are and what that level of really richness allows the really rich to do. But the interesting policy questions continue to be, first, what are the sources of the wealth and, second, what distortions result from it. On the first, it seems to me that we should obviously think differently about money earned from superstar effects and money derived from access and rent-seeking. Rich growth wealthy from the invention of Google or bets against an unsustainable housing bubble are in a different category from those who happened to know the people doling out government contracts or mineral rights.

But the second issue is actually the more important, and it’s the one for which we currently lack a firm grasp. What does this concentration of wealth mean? We read Ms Freeland and other similar stories, and it’s clear that the rich have strong opinions. And they channel their vast resources in support of their opinions, and they build institutions and hobnob with policymakers and opinionmakers and rotate through administrations, and one eventually asks: is the mass of non-rich people being hoodwinked? Are the elite systematically bending the rules to favour themselves and undermine a modern society based on broad improvements in living standards?

Well, are they? I don’t know. Part of the problem assessing the impact of the shadowy world of global billionaires on public policy is that it’s so shadowy. It does seem like the circuit of elite elbow-rubbing events is designed, in part, to help align the worldview of politicians and journalists with that of the very rich. And if that’s the main route through which the elite wield influence, then we could be in trouble, given the extent to which the media world’s economic troubles are pushing it toward models based on support from moneyed patrons.

Daniel Drezner:

Fifteen years ago Samuel Huntington coined the term “Davos Man” to describe the kind of globalized elite that jetted off from global conference to global conference. His point was that Davos man was an exceedingly rare bird, and that nationalism, religion, language and culture were still the most potent forces binding groups together in the world.

It’s in this context that I read Chrystia Freeland’s new cover story in The Atlantic. It’s well worth the read, but like Kevin Drum, I’m not sure that the phenomenon Freeland is identifying is all that new.

Furthermore, I’m not entirely convinced they’re as powerful as Freeland or Drum or Felix Salmon suggests. As Freeland pointed out, they fought a lot of the Obama administration’s first-half policies tooth and nail — and they actually lost a fair amount of the time. Indeed, nary a year ago some pundits were declaring the death of Davos man.

That said, there are three trends that are worth further consideration. First, as Freeland observes, the rich are now work much harder than they did a century ago. Second, more and more of the rich are coming from outside the OECD economies.

Third, the rich have attracted a lot of intellectual capital into their web. Indeed, the call for an economist code of ethics is based in no small part on the ways in which successful economists score moneymaking gigs as they move up the career ladder.

Again, I’m not sure if Freeland is right. I am sure that it’s an interesting argument however. So, in the interest of further research your humble middle-class blogger is headed off tonight to investigate the beliefs and activities of the super-rich from much closer than normal.

The Washington Wizards Drink Our Milkshake

Tyler Cowen in The American Interest:

[…] All that said, income inequality does matter—for both politics and the economy. To see how, we must distinguish between inequality itself and what causes it. But first let’s review the trends in more detail.

The numbers are clear: Income inequality has been rising in the United States, especially at the very top. The data show a big difference between two quite separate issues, namely income growth at the very top of the distribution and greater inequality throughout the distribution. The first trend is much more pronounced than the second, although the two are often confused.

When it comes to the first trend, the share of pre-tax income earned by the richest 1 percent of earners has increased from about 8 percent in 1974 to more than 18 percent in 2007. Furthermore, the richest 0.01 percent (the 15,000 or so richest families) had a share of less than 1 percent in 1974 but more than 6 percent of national income in 2007. As noted, those figures are from pre-tax income, so don’t look to the George W. Bush tax cuts to explain the pattern. Furthermore, these gains have been sustained and have evolved over many years, rather than coming in one or two small bursts between 1974 and today.¹

These numbers have been challenged on the grounds that, since various tax reforms have kicked in, individuals now receive their incomes in different and harder to measure ways, namely through corporate forms, stock options and fringe benefits. Caution is in order, but the overall trend seems robust. Similar broad patterns are indicated by different sources, such as studies of executive compensation. Anecdotal observation suggests extreme and unprecedented returns earned by investment bankers, fired CEOs, J.K. Rowling and Tiger Woods.

At the same time, wage growth for the median earner has slowed since 1973. But that slower wage growth has afflicted large numbers of Americans, and it is conceptually distinct from the higher relative share of top income earners. For instance, if you take the 1979–2005 period, the average incomes of the bottom fifth of households increased only 6 percent while the incomes of the middle quintile rose by 21 percent. That’s a widening of the spread of incomes, but it’s not so drastic compared to the explosive gains at the very top.

The broader change in income distribution, the one occurring beneath the very top earners, can be deconstructed in a manner that makes nearly all of it look harmless. For instance, there is usually greater inequality of income among both older people and the more highly educated, if only because there is more time and more room for fortunes to vary. Since America is becoming both older and more highly educated, our measured income inequality will increase pretty much by demographic fiat. Economist Thomas Lemieux at the University of British Columbia estimates that these demographic effects explain three-quarters of the observed rise in income inequality for men, and even more for women.²

Attacking the problem from a different angle, other economists are challenging whether there is much growth in inequality at all below the super-rich. For instance, real incomes are measured using a common price index, yet poorer people are more likely to shop at discount outlets like Wal-Mart, which have seen big price drops over the past twenty years.³ Once we take this behavior into account, it is unclear whether the real income gaps between the poor and middle class have been widening much at all. Robert J. Gordon, an economist from Northwestern University who is hardly known as a right-wing apologist, wrote in a recent paper that “there was no increase of inequality after 1993 in the bottom 99 percent of the population”, and that whatever overall change there was “can be entirely explained by the behavior of income in the top 1 percent.”⁴

And so we come again to the gains of the top earners, clearly the big story told by the data. It’s worth noting that over this same period of time, inequality of work hours increased too. The top earners worked a lot more and most other Americans worked somewhat less. That’s another reason why high earners don’t occasion more resentment: Many people understand how hard they have to work to get there. It also seems that most of the income gains of the top earners were related to performance pay—bonuses, in other words—and not wildly out-of-whack yearly salaries.⁵

It is also the case that any society with a lot of “threshold earners” is likely to experience growing income inequality. A threshold earner is someone who seeks to earn a certain amount of money and no more. If wages go up, that person will respond by seeking less work or by working less hard or less often. That person simply wants to “get by” in terms of absolute earning power in order to experience other gains in the form of leisure—whether spending time with friends and family, walking in the woods and so on. Luck aside, that person’s income will never rise much above the threshold.

It’s not obvious what causes the percentage of threshold earners to rise or fall, but it seems reasonable to suppose that the more single-occupancy households there are, the more threshold earners there will be, since a major incentive for earning money is to use it to take care of other people with whom one lives. For a variety of reasons, single-occupancy households in the United States are at an all-time high. There are also a growing number of late odyssey years graduate students who try to cover their own expenses but otherwise devote their time to study. If the percentage of threshold earners rises for whatever reasons, however, the aggregate gap between them and the more financially ambitious will widen. There is nothing morally or practically wrong with an increase in inequality from a source such as that.

[…]

If we are looking for objectionable problems in the top 1 percent of income earners, much of it boils down to finance and activities related to financial markets. And to be sure, the high incomes in finance should give us all pause.

The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices. Most of the time investors will do well by this strategy, since big, unexpected moves are outliers by definition. Traders will earn above-average returns in good times. In bad times they won’t suffer fully when catastrophic returns come in, as sooner or later is bound to happen, because the downside of these bets is partly socialized onto the Treasury, the Federal Reserve and, of course, the taxpayers and the unemployed.

To understand how this strategy works, consider an example from sports betting. The NBA’s Washington Wizards are a perennially hapless team that rarely gets beyond the first round of the playoffs, if they make the playoffs at all. This year the odds of the Wizards winning the NBA title will likely clock in at longer than a hundred to one. I could, as a gambling strategy, bet against the Wizards and other low-quality teams each year. Most years I would earn a decent profit, and it would feel like I was earning money for virtually nothing. The Los Angeles Lakers or Boston Celtics or some other quality team would win the title again and I would collect some surplus from my bets. For many years I would earn excess returns relative to the market as a whole.

Yet such bets are not wise over the long run. Every now and then a surprise team does win the title and in those years I would lose a huge amount of money. Even the Washington Wizards (under their previous name, the Capital Bullets) won the title in 1977–78 despite compiling a so-so 44–38 record during the regular season, by marching through the playoffs in spectacular fashion. So if you bet against unlikely events, most of the time you will look smart and have the money to validate the appearance. Periodically, however, you will look very bad. Does that kind of pattern sound familiar? It happens in finance, too. Betting against a big decline in home prices is analogous to betting against the Wizards. Every now and then such a bet will blow up in your face, though in most years that trading activity will generate above-average profits and big bonuses for the traders and CEOs.

To this mix we can add the fact that many money managers are investing other people’s money. If you plan to stay with an investment bank for ten years or less, most of the people playing this investing strategy will make out very well most of the time. Everyone’s time horizon is a bit limited and you will bring in some nice years of extra returns and reap nice bonuses. And let’s say the whole thing does blow up in your face? What’s the worst that can happen? Your bosses fire you, but you will still have millions in the bank and that MBA from Harvard or Wharton. For the people actually investing the money, there’s barely any downside risk other than having to quit the party early. Furthermore, if everyone else made more or less the same mistake (very surprising major events, such as a busted housing market, affect virtually everybody), you’re hardly disgraced. You might even get rehired at another investment bank, or maybe a hedge fund, within months or even weeks.

Moreover, smart shareholders will acquiesce to or even encourage these gambles. They gain on the upside, while the downside, past the point of bankruptcy, is borne by the firm’s creditors. And will the bondholders object? Well, they might have a difficult time monitoring the internal trading operations of financial institutions. Of course, the firm’s trading book cannot be open to competitors, and that means it cannot be open to bondholders (or even most shareholders) either. So what, exactly, will they have in hand to object to?

Perhaps more important, government bailouts minimize the damage to creditors on the downside. Neither the Treasury nor the Fed allowed creditors to take any losses from the collapse of the major banks during the financial crisis. The U.S. government guaranteed these loans, either explicitly or implicitly.

Guaranteeing the debt also encourages equity holders to take more risk. While current bailouts have not in general maintained equity values, and while share prices have often fallen to near zero following the bust of a major bank, the bailouts still give the bank a lifeline. Instead of the bank being destroyed, sometimes those equity prices do climb back out of the hole. This is true of the major surviving banks in the United States, and even AIG is paying back its bailout. For better or worse, we’re handing out free options on recovery, and that encourages banks to take more risk in the first place.

In short, there is an unholy dynamic of short-term trading and investing, backed up by bailouts and risk reduction from the government and the Federal Reserve. This is not good. “Going short on volatility” is a dangerous strategy from a social point of view. For one thing, in so-called normal times, the finance sector attracts a big chunk of the smartest, most hard-working and most talented individuals. That represents a huge human capital opportunity cost to society and the economy at large. But more immediate and more important, it means that banks take far too many risks and go way out on a limb, often in correlated fashion. When their bets turn sour, as they did in 2007–09, everyone else pays the price.

Ross Douthat:

But it’s interesting to read it in tandem with Cowen’s earlier piece critiquing the “break up the banks” argument advanced by Simon Johnson and James Kwak, and embraced by the progressive left (along with a few libertarians and conservatives). There, Cowen argued that shrinking the banks would treat the symptoms of the bailout culture, rather than the disease:

There’s a different way to think about the bailouts, namely that the U.S. government stands at the center of a giant nexus of money raising, most of all to finance the U.S. government budget deficit and keep the whole show up and running. The perception at least is that our country requires the dollar as a reserve currency, requires New York City as a major banking center with major banks, and requires fully credible governmental guarantees behind every Treasury auction and requires liquid financial markets more generally. Furthermore the international trade presence of the United States (supposedly) requires the federal government to strongly ally with major commercial interests, just as our government sides with Hollywood in trade and intellectual property disputes. To abandon banks is to send a broader message that we are in commercial and political decline and disarray, and that is hardly an acceptable way to proceed, at least not according to the standards of the real Washington consensus.

… This analysis bears on one of the main policy recommendations of Johnson and Kwak, namely to break up the big banks so they cannot soil Washington with such powerful lobbying and privileges. I believe this recommendation will not achieve its stated ends and that Washington would find another way to assemble privileged financial institutions — no matter what their exact form — within its ruling coalition. Breaking up the large banks would be striking at symptoms rather than at root causes, namely the ongoing growth of political power and the reliance of that power upon an ongoing inflow of capital.

If you do wish to break or limit the power of the major banks, running a balanced budget is probably the most important step we could take. It would mean that our government no longer needs to worry so much about financing its activities.

This, too, seems plausible to me. But what if you wove both a balanced budget and the Johnson-Kwak bank break-up into the same agenda (as, arguably, Tom Coburn tried to do this year), simultaneously downsizing the national debt and downsizing the too-big-to-fail banks that effectively fund it? I understand that this is not the most politically realistic conceit, since it would require some sort of progressive-conservative alliance in the service of policies that (as Cowen notes) most voters reject in favor of the more appealing combination of “high government spending and relatively low taxes.” But it seems like the approach that’s implied by his arguments. And I wonder if it’s better to advance politically unrealistic solutions, in the hopes of making them more realistic, than to give up and accept a system that’s all-too-likely, in Cowen’s words, to “again bring our economy to its knees” as “the price of modern society.”

Will Wilkinson at DiA at The Economist:

I’ve long had the sense that folks in finance are getting spectacularly rich by somehow gaming the system, but the nature of the system is too inscrutable for me to formulate a sufficiently informed hypothesis on my own. But it’s not so inscrutable to Mr Cowen. He offers what sounds to me a quite plausible story about the way the financial-regulatory-political system has been, and continues to be exploited and destabilized. “It’s as if the major banks have tapped a hole in the social till and they are drinking from it with a straw,” Mr Cowen writes. His account of the way strategies of “going short on volatility” both increase inequality and threaten the stability of our entire market system is too detailed to summarise here, but merits close attention. I strongly sense that some story like this one largely explains the top 1%’s dramatic separation from the rest of the income distribution. Here’s Mr Cowen’s bottom line:

For the time being, we need to accept the possibility that the financial sector has learned how to game the American (and UK-based) system of state capitalism. It’s no longer obvious that the system is stable at a macro level, and extreme income inequality at the top has been one result of that imbalance. Income inequality is a symptom, however, rather than a cause of the real problem. The root cause of income inequality, viewed in the most general terms, is extreme human ingenuity, albeit of a perverse kind. That is why it is so hard to control.

Surely there is some kind of structural injustice here. But it’s just terrifically hard to say where precisely it lurks and what ought to be done about it. We can easily treat symptomatic inequality through progressive redistribution, but this won’t cure our deeper institutional malady. The deeper problem is that Wall Street can and continues to drink our milkshake—that there is a draining hole in the social till that has already caused our economy to collapse once—not that the banker’s portions of milkshake are growing faster than ours.

Ryan Avent at DiA at The Economist

Ezra Klein

Mike Konczal at Rortybomb:

Tyler Cowen has written an article for the American Interest titled The Inequality That Matters. It’s about inequality, the financial sector and the possibility of reform. I really enjoyed the essay and recommend you check it out; I’m going to write a few critical comments.

1. The essay doesn’t tackle what I think is, in one sense, the most important question – how much did a broken financial system inflate the housing bubble, especially in the United States?  It’s one thing if the financial sector drinks our milkshake a bit;  it’s another if they are creating bubbles to profit on the way up and on the way down, either by choice or by accident.

The Magnetar Trade (given musical treatment above) is instructive here, where you can take informational asymmetries in the private securitization market combined with opaque pricing of CDS to pump hot money into housing that you profit on if it collapses. The analogy used, a correct one, is to the movie The Producers, but this is at the scale of hundreds of billions of dollars.

Research by Adam Levitin and Susan Wachter in their paper Explaining the Housing Bubble finds that mortgage debt prices were dropping in 2004-2006 as volume was rising, which is consistent with a shift of the supply curve outward.   But this supply was through private mortgage-backed securities which were both difficult to price on fundamentals and difficult to cross-compare to other instruments;  the private-financial market for these MBS are thus created as complex, heterogeneity and without regulatory standards.  So it’s not just that finance sits at the center of some profitable things;  it reorganizes the space to its own advantage, and the disadvantage of all other players.

2. The essay talks about how the financial sector goes “short on volatility”, which is a bet that things won’t go crazy in the short term, or a bet that takes on tail risk.  As Kevin Drum mentions someone is on the other side of that bet.  And what do we call a product that pays out in times of high volatility, in times when an event out of the ordinary happens?  One thing to call it is “insurance.”

Speaking at a conceptual level, I think it is fair to say that we regulate the #$@% out of people who hang the sign “insurance” on their door, and do not for those, like AIG did, that provide insurance without hanging the sign. As a result actual insurance agents who hang the sign are kind of how we idealize the boring bankers of times gone past.

There’s good reason we regulate insurance – it needs to pay out exactly at the moment when it is the least likely to get paid. I wrote a post for the Atlantic Business section that asked how should you think of zombie insurance? How would you price a contract that paid $100 if the world turned into The Walking Dead, where cities were overrun with armies of zombies?

The short answer is that you wouldn’t pay anything, since when you need to collect it the person on the other end is probably a zombie. This “who can credibly commit to backstopping bad events” goes towards a notion of the role the government can play in financial markets.

Kevin Drum:

Tyler Cowen has a big piece about income inequality in The American Interest that’s well worth reading. However, it’s not really about the growth of inequality. It’s about Wall Street. In particular, it’s about this question: why do financial professionals make so damn much money?

The answer, of course, is that they work in an industry that’s become ungodly profitable. But how? Tyler attributes it to the practice of “going short on volatility.” That is, modern finance professionals mostly gamble that what happened in the past will keep happening in the future, and disasters will never happen. In most years this makes them a lot of money (because, in fact, disasters rarely happen).

But this is mysterious. After all, not everyone is going short on volatility. In fact, by definition, only half of the punters on Wall Street are doing it. The other half are taking the other side of the bet. Tyler explains this with an analogy to a bet that the Washington Wizards, one of the worst teams in basketball, won’t win the NBA championship. If you make that bet year after year, you’ll keep making money year after year.

This is a useful analogy precisely because it wouldn’t work. After all, to make that bet, you have to find someone willing to take the other side and bet that disaster will strike and the Wizards will win. But they know just how unlikely that is, so they’re going to require very long odds. On a hundred dollar bet, they’ll want $100 if they win but will only be willing to pay off one dollar if you win. That won’t make you rich.

So how can you make money doing this? Answer: find someone who doesn’t know much about basketball and pays off two dollars on this bet instead of one. Additionally, you need to borrow money so you can make lots of bets. So instead of placing a $100 bet and making a dollar, you borrow a million dollars, make lots of bets on lots of teams, and make $20,000. It’s the road to riches.

The questions this raises should be obvious. First, why would anyone be dumb enough to offer you such mistaken odds? Second, shouldn’t the interest on the loan wipe out the profit from such a tiny betting margin? Third, why would anyone loan you this money in the first place, knowing that you have no chance of paying it back if disaster strikes, one of your teams wins, and you lose your entire stake?

As near as I can tell, the answer to #1 is that Wall Street traders are bad at pricing tail risk. The answer to #2 is that Wall Street hedge funds, using techniques pioneered in the mid-90s by Long Term Capital Management, have figured out ways to borrow large sums of money at virtually no cost. And the answer to #3 is that Wall Street lenders are also bad at pricing tail risk.

Or are they? Tyler argues that, in fact, both sides are betting that as long as everyone is doing this, the occasional disasters will be so epically disastrous that central banks will bail them out. They have no choice, after all, if the alternative is the destruction of the global economic system. So the tail risk is smaller than you think. Borrowers will make money in good years and default in bad years. Lenders, meanwhile, will also make money in good years, secure in the knowledge that on the rare occasions when everything goes pear shaped and borrowers can’t pay back their loans, the government will make them whole. As Tyler reminds us, “Neither the Treasury nor the Fed allowed creditors to take any losses from the collapse of the major banks during the financial crisis.”

But I don’t find this persuasive as a behavioral explanation. The problem is that there’s simply no evidence I’m aware of that Wall Street executives ever thought about this or priced it into their models. Sure, they may have been reckless or stupid. However, they weren’t setting prices for financial instruments based on the idea that, yes, they were taking a genuine risk of going bust, but they could price that away because they’d get bailed out by Uncle Sugar when it happened. Rather, they really, truly, believed that they weren’t exposed to very much risk. As near as I can tell, this was true on both the buy side and the sell side.

Tim F. answers Kevin:

To answer Kevin, finance is incredibly profitable because the finance sector has a greater information asymmetry between buyers and the sellers than almost any other sector on Earth. Even today most customers more or less take it on faith that the people selling them financial instruments are dealing on good faith. They do it because from FDR until the 70’s or so that was true. Financial instruments were less complicated and oversight was much stronger. That is to say that it was harder to cheat and more cheaters got caught. They also do it because they have to; if you don’t want to take your bank’s word for it then you can either keep a lawyer on retainer, or else live in a cave on public land. Too bad for us that assumption is no longer remotely true. Computers became a commodity and investors started making more bets on other people’s bets. That is to say, cheating got a lot easier because most people could no longer understand what their banks were up to. At the same time deregulation made it that much harder to catch cheaters and also opened vast new opportunities for semi-legal schemes as well as the nakedly illegal kind.

The lack of any real risk premium (after all, we’re all hostages if they fail) certainly pads the bottom line, but the meat and potatoes for Goldman and BofA is the vast gulf between how well they understand what they’re doing versus how well their customers understand it. They don’t even need to understand their own business that well. The sizable fortune that they made and kept over mortgage derivatives just emphasizes how important it is to know more than your customers, who largely had no idea about the flyblown shit that Goldman and company shoveled into each AAA-rated MBS.

These days Goldman has a supercomputer that sits on the main trading network and jumps everyone else’s bid by milliseconds. Nobody seems to care. If that isn’t a straw comfortably stuck in the social till then I don’t know what is.

Matthew Yglesias

James Joyner

“Norm!”

Max Fisher at The Atlantic with the round-up

Sarah Laskow at Capitol New York:

LONGTIME VILLAGERS OFTEN TALK ABOUT the change in their neighborhood as synonymous with the rise of bars and restaurants that create street traffic and noise unlike that in any other neighborhood. Words and phrases like rowdy, circus atmosphere, zoo are used to describe the street scene at night. When bar owners and nightlife operators argue that the East Village has always been a nightlife destination, they respond: Yes, but. Something’s different now.

Academics have a word for what the neighborhood has become: a nightscape. Bars and restaurants were once peripheral to the main drag’s primary economic drivers: supermarkets, coffeehouses, boutique shops, record stores. But in post-industrial cities, nightlife has grown into an industry in its own right. As in any industry, shop owners tend to cluster. A century ago, that meant the creation of a Garment District. Now it means the creation of a Party District.

There are a few of them of course. You’ll hear similar complaints about the Meatpacking District, about areas of Fifth Avenue or Smith Street in Brooklyn, or the side streets of the Flatiron District. But the Party District below 14th street east of Third Avenue is the largest, the densest, and still growing. To hear the people who live further up near the Stuyvesant Town end of the East Village talk, the Party District is spreading largely north, and somewhere around the summer of 2009, it wholly enveloped the stretch of Avenue A between the northwest corner of Tompkins Square Park and 14th Street.

Superdive, more than any other establishment, was the sign that the area has reached some sort of tipping point. There were already more bars in the area than there had been ever before, but none like Superdive. When Superdive opened, bright young things across the city talked about it. They also talked about keg service, the bar’s primary innovation. By calling in advance, customers could secure a keg of almost any beer imaginable: PorkS.L.A.p, Chimay, Allagash White, or any one of the hundreds of German, Czech, Belgian, or British beers on the 16-page keg menu prepared by “Kegmaster Matt.” A New York Press review noted that Superdive was “the stuff of frat-boy dreams—in a good way. We think.” Urban Daddy called it “a world of crazy—an all-out raucous, beautiful disaster of a bar.” It was rumored, briefly, that customers could pour their own well drinks.

In short order, party-seekers were lined up behind the bar’s velvet rope to get in. Positive reviews came rolling in on Yelp, and private parties booked the space, night after night. Upper Avenue A had had theme bars (one of Superdive’s predecessors at the space was Korova Milk Bar, which had a Clockwork Orange leitmotif lost on many of the patrons), and the original location of the neighborhoods most notorious gay bar, The Cock. Superdive was self-conscious, though. It promised not just beer or a dance floor, but an experience directly targeted at a crowd the East Village had perhaps hoped it hadn’t overtly been catering to: Not some group of characters out of an old Lou Reed song, so much as the group of characters you’d find on Bourbon Street, or worse, North Avenue in White Plains. There was some irony in the marketing of Superdive, but not much.

Matthew Yglesias:

Street noise is a very real issue in large swathes of Manhattan and I think it’s perfectly understandable that people prefer not to have lively nightlife scenes located directly outside their windows. So when I read Sarah Laskow’s long and excellent account of liquor license battles in the East Village, I’m not-unsympathetic to the incumbent residents’ concerns. But as she observes at the end, there’s a real cost to this attitude:

At the meeting with Kao, the locals gave him the same reason for opposing him that they had given Warren, when he wanted to open a burger bar in the space: according to the current license, the only type of business that should be selling liquor at 200 Ave. A is a bookshop. With rent set at $10,000 in the East Village Party District, that’s as unlikely as it sounds.

The broader issue, as she explains, is that cities are driven by agglomeration:

Academics have a word for what the neighborhood has become: a nightscape. Bars and restaurants were once peripheral to the main drag’s primary economic drivers: supermarkets, coffeehouses, boutique shops, record stores. But in post-industrial cities, nightlife has grown into an industry in its own right. As in any industry, shop owners tend to cluster. A century ago, that meant the creation of a Garment District. Now it means the creation of a Party District.

Basically the East Village really “wants” to be full of nightlife establishments just like Qiaotou, China wants button factories. Restricting the creation of new button factories in Qiatou will help incumbent button makers (and alleviate neighborhood concerns about factory smoot) but it’s hard to call a bar scene into existence that way. Similarly, making it hard to open a new bar in the East Village isn’t going to create a button factory. It’s going to create an underutilized space. That means somewhat more unemployment in the city, somewhat less tax revenue in the city, and thus at the margin higher tax rates and fewer social services for everyone.

Meanwhile, as a policy analyst living in a different city the right way to look at the neighborhood concerns is this. Will another bar on the block make living on that block worse? I have no reason to doubt it. But it’s not like there’s some excessive quantity of affordable housing in Manhattan. If a given block becomes less desirable to live on, that just means someone else will live there. In equilibrium, we’re looking at lower housing costs and higher employment rates.

Ryan Avent:

Matt is right that “nightlife”, like a lot of other industries, often clusters. People like to have options when they go out, and they like going where there are other people around, so watering holes that cluster together often find that they do better than they might outside of a nightlife cluster, despite the impact of increased competition within the cluster. And Matt is right to say that when you limit liquor licenses in an area, you cut off the potential gains of clustering to the consumer, you cut off the potential gains of clustering to the businesses, and you cut off the potential gains of competition to the consumer, since you effectively hand existing businesses a great deal of market power.

But I’m constantly reminded of another side of this equation whenever I’m in London. London, like cities and towns across the British Isles, is filled with pubs. They vary in type, quality, and clientele. I was very lucky this time around to find a near-perfect gastropub just a five minute walk from my flat. It was quiet and well-maintained with a great menu, and while there were always people there, there was also always a free seat. Kids were welcome during the day, as were dogs. Every time I went I thought to myself how great it would be to have such a place close by back in Washington. And every time I thought that, I immediately reminded myself that such a place, back in Washington, would be perpetually packed and fairly unpleasant. In the Washington area, you can’t have a place that’s both really good and quiet in a neighborhood-y sort of way.

That’s largely because it’s very difficult to open new bars. And the result is a pernicious feedback loop. With too few bars around, most good bars are typically crowded. This crowdedness alienates neighbors, and it also has a selecting effect on the types of people who choose to go to bars — those interested in a loud, rowdy environment, who will often tend to be loud and rowdy. This alienates neighbors even more, leading to tighter restrictions still and exacerbating the problem.

Megan McArdle:

I don’t want to push this argument too far–London has a sizeable population of obnoxious drunks, many of whom decide to get into fistfights outside their local pub.  (An editor at the Economist who had recently moved to the United States was asked how he had enjoyed his first New Year’s in New York.  “It made me quite homesick,” he replied.  “All those drunks throwing up in the subway were like a breath of London.”)

But it is true that London also has more quiet pubs New York–and New York, in turn, has more of them (outside of the East Village) than DC does.  And this does make bars and cafes noticeably more unpleasant for the neighbors, as well as the customers.  Which in turn causes residents to fight like hell to keep out any business that might attract a late-night crowd.

One possible solution is upzoning–neighborhood bars aren’t so obnoxious when you’re ten floors above them. But of course, the local residents tend to fight that as well.

Matthew Steinglass at DiA at The Economist:

I think these observations are all apt, but I’m also wondering why a comparison of pub quality in these three places would focus primarily on regulatory or economic issues rather than that diffuse and confusing beast we call culture. I can think of two reasons why people tend to write disproportionately about economic and regulatory reasons for these kinds of problems. First, they’re concrete. You can investigate the regulatory issues surrounding licensing businesses in your area pretty easily, and those rules are discrete and public and clear. Then you can analyze the expected results. Second, problems with regulatory and eocnomic origins are amenable to solution. Change the regulations and you might in principle have solved the problem, even if in this case nobody can figure out quite how to do that.

But what strikes me overwhelmingly about the difference between bars/pubs in London, New York and Washington is that these three cities have completely different nightlife cultures. Those cultures are irreducible to the regulatory environment or to economic behaviour. The regulatory environment in London doesn’t do much to explain why, when you walk through Southwark on a winter’s evening at 6:30pm with the thermometer tipping 0 degrees centigrade, you see crowds of men and women in long dark coats standing on the sidewalk sipping pints of bitter. It doesn’t explain the fact that up until 1990 there basically wasn’t a decent atmospheric bar with good food in Washington, DC, or not one that would be recognised as such by someone from New York or London. It doesn’t explain the fact that even though breweries are allowed to own pubs in England, and are prevented from doing so in America, most pubs in London that are bought up by breweries or conglomerates have retained their individual characters and atmospheres, while in America they would almost certainly be swept under by company-wide branding campaigns. It doesn’t even explain why bars in Washington have gotten so much better over the past 15 years that when I go back, I barely recognise the place.

Andrew Sullivan

McArdle responds to Steinglass:

One can argue about whether our posts should reflect more on culture, but I can tell you why they do focus on regulatory issues:  we all live in DC.  And in DC, regulatory decisions are very clearly driving what the bar culture looks like.

The gentrification boom in DC has hit up against a limited supply of bars–and neighborhood commissions that are very resistant to quickly opening more of them.  The result is that no bar stays un-crowded for long; if it’s any good at all, it’s soon overwhelmed with a tidal wave of people fleeing the standing-room-only crowds at all the other bars.  The bars aren’t like this because most people in DC want to spend their Friday nights packed like cheap sardines; the bars are like this because there are so few of them in the areas where people under 35 live, that the only people who can bear to be in them are the people who will tolerate any conditions, including those of veal calves, if only they can endure them while holding a drink.

This is a new development in the areas of DC where, as it happens, Matthew Yglesias, Ryan Avent and I, all like to go out of an evening.  When I moved to DC a scant three and a half years ago, there were enough bars where you could enjoy a Thursday night seated in the company of friends. Then came January 2009, when I held a birthday get-together at a previously local place on 11th street.  Unfortunately, there wasn’t much getting together; more than half the people were turned away because of overcrowding.  Several bars had been shut down in Adams Morgan because the weren’t serving enough food to comply with their tavern licenses; the result was that Adams Morgan relocated to U Street.

Since then, this pattern has been repeated over and over; any bar that opens is pleasant for a month or so, then completely, miserably jammed.

We All Get Punched In The Gut

Chart from Calculated Risk

Calculated Risk:

From the BLS:

The unemployment rate edged up to 9.8 percent in November, and nonfarm payroll employment was little changed (+39,000), the U.S. Bureau of Labor Statistics reported today.

David Leonhardt at NYT:

Overall employment growth fell to 39,000, from 172,000. Private-sector hiring fell to 50,000 — which isn’t nearly enough to keep up with normal population — from more than 100,000 in each of the previous four months. Average hourly pay rose just 1 cent, to $22.75, the smallest gain in five months. The average length of the workweek remained stuck at 34.3 hours.

What’s causing this? No one knows, to be honest. But the most likely suspect is the same one that has been hurting the economy for much of this year. Financial crises do terrible damage, and the economic aftershocks from them tend to last longer and be worse than people initially expect.

Steve Benen:

I realize that economists tend to emphasize that it’s unwise to overreact to any one report, but this one feels like a punch to the gut. For all the indications that the job market was starting to pick up a little steam, this morning’s jobs report suggests the exact opposite.

Ryan Avent at Free Exchange at The Economist:

There is little to be happy about in this report, in other words. But there are some indications that the November numbers may be an aberration. September’s job losses were revised down to 24,000 in this report, while October’s job gains were revised upward, from 151,000 to 172,000. Through November, weekly data on initial jobless claims showed significant improvement. And of course, many other indicators have been flashing positive signs in recent weeks.

It’s likely, then, that the November figures will be revised up in future months to show a better performance more in keeping with broader trends. And it’s important to remember that monthly data are noisy. America’s labour markets have yet to generate job growth sufficient to bring down the unemployment rate. But the pace of recovery has been improving. There is good reason to suspect that when all is said and done this report will appear as a blip marring a strengthening upward employment trend. All the same, policymakers in Washington weighing whether to extend unemployment benefits and tax cuts should heed the obvious weakness in labour markets. They can and should make sure that November’s number remains an anomaly.

Don Suber:

Unemployment rose to 9.8% in November — or a full two points higher than what Barack Obama said it would be if we had done nothing.

One year ago, unemployment was at 10%, which proves Obamanomics has stalled the economy, as there was a net gain of only 39,000 jobs this November.

President Obama can no longer blame President Bush for this mess. Obama has spent record amounts of money and increased the size of the federal government from being 20% of the economy under Bush to now 25% of the economy as he increased the budget from $2.8 trillion a year to $4 trillion.

He has failed.

He is a failure, America.

Nice guy, but a failure none the less.

But he did ban Four Loko.

Philip Klein at the American Spectator

John Cole:

Just a reminder. The Republicans, energized over their November victories, went to Washington and immediately went about securing tax cuts for millionaires and billionaires as priority #1, all while blocking any attempts at job growth legislation and continuation of unemployment benefits. Meanwhile, this is happening:

[…]

A competent political party would be able to make the Republicans pay a political price for this and be forced to make very uncomfortable votes. Does anyone know where I can find a competent political party?