The Way Home

In this post I’m going to weave together a number of threads that have been common themes here. To understand it you’ve got to cast your mind back to 1970. 4% of the U. S. population were immigrants, most of whom had lived in the United States for more than ten years. Imports comprised 5% of GDP. 90% of the wealth and income were held by 90% of the people. The rich were still rich—the top 1% of income earners received about 10% of income with the top .5% receiving about half of that.

Now fast forward to today. 14% of the U. S. population are immigrants, many of whom have been here less than 10 years. Imports are 15% of the U. S. economy. The top 1% of income earners receive about 20% of total income with the top .5% receiving most of it.

What in the heck happened? It is the thesis of this post that the changes can be attributed to changes in the following:

  • Finacialization
  • Immigration
  • Globalization
  • Federal Reserve policy


By “financialization” I mean the increasing importance of the financial sector to the economy. Since 1970 the percentage of income attributable to the financial sector has grown from 5% to nearly 10% today. That is the largest single factor in the increase in income inequality over the period.

One of the major factors in increasing financialization was interstate branch banking. Interstate branch banking had been made illegal by the McFadden Act of 1927, reinforced by the Bank Holding Company Act of 1956. These were effectively repealed by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The Gramm–Leach–Bliley Act increased the scope of activities in which commercial banks were allowed to operate, culminating in the financial crisis of 2007-2008.

I don’t believe that the Reagan era banking reforms had as much impact as some do. 1994 was a watershed year for financialization and, not coincidentally, for increasing income inequality.

Just as financialization had many causes it had many effects. One of these effects was a drastic change in how businesses invested. In 1970 28% of business investment was in the financial sector. By 2000 half was and, in some cases, as much as 78%. There has been a transmogrification in the idea of the firm from managerial investment in innovation and production to a financial model. Said another way today’s large businesses are less interested in producing more goods more efficiently than in realizing more revenue at less risk.


Since the enactment of the Immigration and Nationality Act of 1965, the percentage of immigrants in the United States has skyrocketed, most of them from Mexico and Central America with limited skills or command of English. That this would promote income inequality should be obvious. Not only has the slack labor market created by immigration held wages down for working class Americans, it has further predisposed American businesses to utilize minimum wage (or sub-minimum wage) labor rather than investing in increased productivity for their workers.


Although globalization began with Japan’s trade policy, subsidizing exports and discouraging imports, it has not ended there. Japan’s model has been successfully emulated, first by South Korea and then by China.

It was one thing when entire supply chains moved from the United States to Japan or South Korea, countries that are, if not actually friendly towards us are at least not actually hostile but another when they extended into China and even moved there wholesale. The enormous loss of American manufacturing jobs in the early Aughts was not a consequence of the operation of the markets. That’s fatuous. It was a direct consequence of policy, first granting China Most Favored Nation trading status and then its admission to the WTO. If it had been a consequence of markets, the job loss would have preceded the policies. It did not.

Federal Reserve Policy

Since the financial crisis of 2007-2008, Federal Reserve policy, specifically its policy of quantitative easing, has explicitly fostered financialization, consolidation of the financial sector, and income inequality. With its track record I do not think it is too extreme to wonder why we have a Federal Reserve at all?

Imagine for a moment that the Federal Reserve had seen its job as one of fostering increased productivity and production rather than ensuring that the DJIA always rose. I don’t know what policies it would have adopted but the U. S. economy would certainly be different.


The factors listed above have worked synergistically to create the economy we have today. They are not the result of market forces in operation or at least not merely the result of market forces in operation but the consequences of policy decisions. That economy is one of increased income inequality with the rich becoming extremely rich while young people don’t see a lot of hope for the future. That is reflected in reduced rates of home ownership, reduced marriage rates, reduced birth rates, and increasing rates of suicide and substance abuse by working age people.

We didn’t arrive at this point because of tax policy and changes in tax policy won’t solve the problems that created our present situation. Neither will giving people “free stuff” for the same reason.

If we don’t solve these problems, things will only go from bad to worse. The divide between the ultra-rich and the rest of us will only get greater. Political dysfunction will become more exaggerated. The professional class will see their incomes increasingly dependent on the federal government. The U. S. economy will become larger but weaker.


Government By Referendum

I have reservations about Megan McArdle’s response to the recent UK elections as expressed in her Washington Post column:

Ever since the Brexit referendum in 2016, there have been two main arguments against going forward with Brexit. The first is that Brexit would have horrifying economic consequences, which is quite possibly true, but largely beside the point. The British people voted for it, and surely the British people have a right to lower economic growth, if they want it. I mean, 48 percent of them didn’t, of course, but the same complaint could be lodged against nearly any modern election; there’s almost always a sizable minority that bitterly opposes whatever the majority wants. If that’s grounds for ignoring the 2016 referendum, then it’s grounds for arguing that no government should ever do anything except periodically meet to declare National Puppies Are Cute Day.

Where I disagree is in that may be construed as supporting direct democracy by 50%+1 of the voters which, at least in the United States, would be a grave error. It would be fine in a small consensus-based society like Switzerland’s but in the United States?

What is missing from the formulation is the constraint of law. Our system as designed was planted thick with laws, including the Constitution defining a limited government of defined powers, the common law, and stare decisis. That’s what prevents 50%+1 from imposing draconian taxes on the other 50%-1 of the population or having that 50%-1 hauled off to re-education camps for daring to disagree with the 50%+1.

And that is what concerns me about the present state of affairs. Nowadays it appears that, if you can find a judge somewhere who agrees with you, you can enforce your will on the entire country. That is no rule of law.

I’ll still demur from giving my opinion about Brexit. It’s not my decision to make. But I will go so far as to say that if the Remainers really wanted to remain in the European Union the decision is something that should never have been put up for referendum.


It’s Not the Stimuli But the Responses

In response to the comments on my post yesterday about the fallacy of drawing analogies among the politics of various different countries, yes, many Western countries are experiencing the same stresses. My very point is that their responses will be informed by each country’s own history, experience, preferences, social conditions, and so on.

That’s also the fallacy on which the “cafeteria” theory of politics relies. Those who think that we can import government programs from other countries as we would automobiles will be shocked to learn that the political viability of those programs rests on factors which simply don’t exist here—things like social cohesion, greater trust in government, conformity with rules just because they’re rules, and so on.


Getting Your News From Facebook

In case you’re not aware of it, Pew Research has found that a third of Americans rely on Facebook as a primary news source and more than half rely on it at least part of the time. To me that just proves that P. T. Barnum was right.

To be more charitable I think that’s to be expected with the collapse of local reporting. Today newspaper newsrooms employ just about half as many people as they did just 20 years ago and a lot of that decline is in local dailies. Nowadays if you’re looking for local news you may have little choice other than to turn to Facebook.

IMO it also explains the decline in readership of supermarket tabloids. Why check out the National Enquirer for news when you can get the same fake news on Facebook and people won’t look at you funny in the supermarket checkout line for reading it?


Is M4A a Winning Issue?

You might be interested in this analysis from Larry Sabato’s Crystal Ball of the effect of support for “Medicare for All” on House elections. Here’s the conclusion:

An analysis of the impact of Medicare for All on the 2018 House elections indicates that Democratic challengers and open seat candidates in competitive districts who endorsed a version of Medicare for All similar to that proposed by Bernie Sanders and Elizabeth Warren did significantly worse than those who did not. This negative effect, close to five points of margin after controlling for a variety of other factors, was clearly large enough to affect the outcomes of some House contests.

Yet more evidence for my hypothesis that the progressive wing of the Democratic Party, about 10% of the electorate, cares more about their ideology than do for the party.


About the Hong Kong Demonstrations

I would be a bit more skeptical about the claims that the demonstrations in Hong Kong are being funded by the U. S. government. I’ve looked into them a bit and to the best of my ability to determine they derive from one of two sources, either a) the Chinese government or b) organizations that genuinely despise the U. S. government. So far I have not seen the claims echoed in anything that resembles a reliable source. My tentative conclusion is that the claims are propaganda, disinformation.


Reminder: All Politics Is Local

I truly wish that people would not analogize from U. S. politics to British politics and vice versa. The Tories are not the Republicans and Labour is not the Democratic Party. Indeed, from an ideological standpoint both the Democrats and the Republicans would fit handily within the Conservative Party with room to spare. Even with today’s surge in “democratic socialists” among Democrats, they’re more like Tories than they are Labour.

And, for goodness sake, American conservatives should feel no sense of kinship with Likud. Any more than with AfD.

Every country’s politics is uniquely its own. To understand it you need a sophisticated understanding of its history, society, and economy.

That’s why I avoid commenting about other countries’ politics. I don’t know enough and it’s none of my business. Heck, I avoid talking about other states’ politics.


Recessions: a First Order Approximation

As I read this post by Manhattan Contrarian Francis Merton comparing and contrasting the German and U. S. economic situations, a thought occurred to me. Can oil prices be used as a very much simplified predictor of U. S. recessions? The kind of thing I’m thinking of is “as long as the price of oil stays below X per barrel, the U. S. economic will continue to expand”.


Neither Snow Nor Rain Nor a Huge Operating Deficit

You might find this article by Kevin Kosar at RealClearPolicy on the financial woes of the United States Post Office informative:

About $8.8 billion — that is how much the U.S. Postal Service lost in the past year. That is an eye-popping number. The agency is also carrying $11 billion in debt and has more than $120 billion in funded pension and health liabilities.

To be sure, some of that deficit is due to actuarial factor. For example, USPS’s workers’ compensation charge was $3.5 billion last year — much higher than usual due to a change in the way this expense is computed. But even if one wipes away this expense and other “uncontrollable costs,” the U.S. Postal Service still lost $3.4 billion.

The USPS doesn’t just have one problem it has many. Its former business model is being eroded and, when you’re dealing with an employee list and retired employee list as vast as the USPS’s, even small changes in things you can’t control, like interest rates and health care expenses, can be enormously expensive.

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The U. S. Employment Model

At Forbes Steven Denning has an article on a subject I addressed a week or so ago—that so many of the jobs being produced today are bad:

When U.S. unemployment is at a 50-year low, why do so many people have trouble finding work with decent pay and adequate predictable hours? A new economic indicator—the US Private Sector Job Quality Index (JQI)—gives the answer: we have lots of jobs, but they are increasingly low-quality jobs.

“The problem is that the quality of the stock of jobs on offer has been deteriorating for the last 30 years,” says Dan Alpert, an investment banker and Cornell Law School professor. The JQI is built and maintained by Alpert and his fellow researchers at Cornell University Law School, the Coalition for a Prosperous America, the University of Missouri-Kansas City, and the Global Institute for Sustainable Prosperity. (As to how the JQI is constructed, see the technical note below.)

He asks five questions:

  1. If Unemployment Is So Low, Why Don’t Wages Go Up?
  2. Why Is Participation In The Workforce So Low?
  3. Weren’t Manufacturing Jobs Replaced By Other Jobs?
  4. Why Didn’t High Tech Save the U.S. Economy?
  5. Why Has U.S. Productivity Stalled?
  6. What Do The New Jobs Actually Look Like?

It’s an interesting article and I encourage you to read it.

The one point I would add is that what has happened has not been accidental but the consequence of policy. We have been maximizing the number of minimum wage jobs. The Germans call this “the American employment model”. Its success, such as it is, depends on a continuous flow of unskilled or semi-skilled workers.