Tyler Cowen quotes himself in commenting on a paper on the central role that the financial sector has played in the rise in incomes of the ultra-rich:

…for 2004, nonfinancial executives of publicly traded companies account for less than six percent of the top 0.01% income bracket. In that same year, the top twenty-five hedge fund managers combined appear to have earned more than all of the CEOs from the entire S&P 500. The number of Wall Street investors earning over $100 million a year was nine times higher than the public company executives earning that amount.

I can’t help but wonder if the Olympian compensation of hedge fund managers has produced something of a positive feedback situation in compensation among those who can get away with it. There comes a point at which compensation is no longer about what you can buy with it but becomes a way of keeping score.

I think it’s unconscionable that those who are most proximately responsible for the financial crisis have suffered so little for their bad bets. As I’ve said before IMO compensation should be capped at every institution that took a penny of federal money or guarantees at the level of a GS-14. If that left these institutions unable to retain employees capable of running them, I would shed no tears.

To date the financial sector has suffered remarkably little. There have been some reports lately that the hammer is about to fall but I have little doubt that it will fall most heavily on those least responsible and not fall nearly as heavily as it should and not nearly heavily enough to shrink the financial sector to the level that’s appropriate for the non-financial sector.

All of which does leave me with a question. If the extraordinarily high incomes of hedge fund managers had the secondary effect of pushing up the incomes of non-financial executives and the air comes out of those incomes, that doesn’t necessarily mean that the air will come out of the incomes that the puffed-up incomes carried along with them. I suspect it almost certainly won’t. How do you rein in compensation that was never really justified to begin with?

I suppose it might be answered that the market will discipline them. Unfortunately, there’s no reason to believe that the new enterprises that out-compete the old, inefficient ones will be American enterprises.

Another front in the war between ideologies. Economists’ petitions:

Policy entrepreneurs often organize petitions and recruit economists to sign on. An analysis of the petitions shows how fundamental ideology really is. In particular, the analysis shows how powerful the idea of liberty is in drawing lines.

With Carrie Milton, we studied all economist petitions since 1994. Each petition is about a specific issue, but the range is vast, including, for example, tax cuts, health care, cap-and-trade, immigration, protectionism, card-check, and the minimum wage.

Each petition advises a course of action. We classified each petition by whether it would augment liberty (for example, a petition against protection) or reduce liberty (for example, raising the minimum wage). There were 15 pro-liberty petitions and 13 anti-liberty petitions.

We compiled all the signatures. On the 28 petitions there were 9,532 signatures representing 5,884 individuals. The number of signatures on all 15 pro-liberty petitions was almost twice that on the 13 anti-liberty petitions.

The remarkable thing is that virtually every single economist who is active in signing petitions leans heavily in one direction or the other.

A number of top insurers have announced that they plan to eliminate child-only policies as a direct consequence of the healthcare reform bill passed earlier this year:

Some of the country’s most prominent health insurance companies have decided to stop offering new child-only plans, rather than comply with rules in the new health-care law that will require such plans to start accepting children with preexisting medical conditions after Sept. 23.

The companies will continue to cover children who already have child-only policies. They will also accept children with preexisting conditions in new family policies.

Nonetheless, supporters of the new health-care law complain that the change amounts to an end run around one of the most prized consumer protections.

“We’re just days away from a new era when insurance companies must stop denying coverage to kids just because they are sick, and now some of the biggest changed their minds,” Ethan Rome, executive director of Health Care for America Now, an advocacy group, said in a statement. “[It] is immoral, and to blame their appalling behavior on the new law is patently dishonest.”

I certainly agree that attacking the health insurers’ move on moral grounds is the right line of attack. Apparently, our legislators made the oversight of not mandating that health insurers lose money on health insurance while they were mandating that individuals purchase health insurance.

I do have a question, however. Let’s assume that you believe that it is immoral for health insurers to stop offering policies they believe they’ll lose money on. Under those circumstances is it moral for legislators to pass a law that would have that consequence as a foreseeable outcome? Just checking.

There is a war going on in our society. It can be bowdlerized as a war between those who think that government can do no wrong and those who think that the government can’t do anything right. Fronts in the war include the halls of Congress, the town square, the editorial pages of the country’s newspapers, the trench warfare of the blogosphere, and the sniping of social media. This morning I found several new skirmishes.

In an editorial in the Wall Street Journal the recession of the early 1980s and the Great Recession, now declared at an end, are contrasted:

As the nearby chart shows, in 1983 the recovery surpassed its previous peak in gross domestic product very rapidly from the recession’s trough. Growth rose by 4.5% in 1983, 7.2% in 1984 and 4.1% in 1985, and it kept climbing through the rest of the 1980s. This is the kind of recovery you would expect coming out of a severe recession, since the deeper the trough the steeper the rebound.

This time, even after a year of recovery through June 2010, real GDP remained 1.3% below its previous peak in the fourth quarter of 2007, according to the NBER sages. The current recovery peaked with 5% growth in the last quarter of 2009 but has decelerated in 2010—to 1.6% in the second quarter. This tepid growth, in turn, has contributed to the sorry state of job creation, slow business investment and the overall sense of malaise.

Our readers know the competing explanations for this undeniably disappointing performance. White House economists and liberals say the financial roots of this recession have made the recovery unusually difficult, the fiscal stimulus saved the day, and thus we need more of it. Our view is that hyperkinetic government policies have done more harm than good, leading to uncertainty and higher costs that have undermined business and consumer confidence and slowed the economy’s otherwise natural recuperative powers.

That can be contrasted neatly with President Obama’s statements in practically any of his appearances:

Obama took head-on the criticism that his policies have been anti-business, and argued his administration has done much to stabilize the economy.
“Look, let’s look at the track record here,” Obama said.

“When I came into office, businesses — some of the same commentators who are on CNBC — were crying, ‘Do something!’ because as a consequence of reckless decisions that had been made, the economy was on the verge of collapse. Those same businesses now are profitable; the financial markets are stabilized.”

Obama has come under criticism from business groups for some of his policies, notably the Wall Street reform bill and proposals to raise certain business taxes, as well as for rhetoric that has sometimes bashed corporate America.

Another skirmish is taking place between Paul Krugman and Raghuram Rajan. Dr. Krugman, writing the New York Review of Books, mounts a defense of Fannie Mae and Freddie Mac, the Federal Reserve, the Congress, and the White House:

The idea that the government did it—that government-sponsored loans, government mandates, and explicit or implicit government guarantees led to irresponsible home purchases—is an article of faith on the political right. It’s also a central theme, though not the only one, of Raghuram Rajan’s Fault Lines.

In the world according to Rajan, a professor of finance at the University of Chicago business school, the roots of the financial crisis lie in rising income inequality in the United States, and the political reaction to that inequality: lawmakers, wanting to curry favor with voters and mitigate the consequences of rising inequality, funneled funds to low-income families who wanted to buy homes. Fannie Mae and Freddie Mac, the two government-sponsored lending facilities, made mortgage credit easy; the Community Reinvestment Act, which encouraged banks to meet the credit needs of the communities in which they operated, forced them to lend to low-income borrowers regardless of risk; and anyway, banks didn’t worry much about risk because they believed that the government would back them up if anything went wrong.

Rajan claims that the Troubled Asset Relief Program (TARP), signed into law by President Bush on October 3, 2008, validated the belief of banks that they wouldn’t have to pay any price for going wild. Although Rajan is careful not to name names and attributes the blame to generic “politicians,” it is clear that Democrats are largely to blame in his worldview. By and large, those claiming that the government has been responsible tend to focus their ire on Bill Clinton and Barney Frank, who were allegedly behind the big push to make loans to the poor.

While it’s a story that ties everything up in one neat package, however, it’s strongly at odds with the evidence. And it’s disappointing to see Rajan, a widely respected economist who was among the first to warn about a runaway Wall Street, buy into what is mainly a politically motivated myth.

Dr. Rajan responds:

My book suggests that many—bankers, regulators, governments, households, and economists, among others—share the blame for the crisis. Because there are so many, the blame game is not useful. Let us try and understand what happened in order to avoid repeating it. I detail the hard choices we face in the book. While it is important to alleviate the miserable conditions of the long-term unemployed today, we also need to offer them incentives and a pathway to building the skills required by the jobs being created. Simplistic mantras like “more stimulus” are the surest way to detract us from policies that generate sustainable growth.

Finally, a note on method. Perhaps Krugman believes that by labeling other economists as politically extreme, he can undercut their credibility. In criticizing my argument that politicians pushed easy housing credit in the years leading up to the crisis, he writes, “Although Rajan is careful not to name names and attributes the blame to generic “politicians,” it is clear that Democrats are largely to blame in his worldview.” Yet if he read the book carefully, he would have seen that I do name names, arguing that both President Clinton with his “Affordable Housing Mandate” (see Fault Lines, page 35) as well as President Bush with his attempt to foster an “Ownership Society” (see Fault Lines, page 37) pushed very hard to expand housing credit to the less well-off. Indeed, I do not fault the intent of that policy, only the unintended consequences of its execution. My criticism is bipartisan throughout the book, including on the fiscal policies followed by successive administrations. Errors of this kind by an economist of Krugman’s stature are disappointing.

I don’t know the truth of the matter, I don’t know what needs to be done, and, worse, I honestly don’t believe that anyone else does, either. I don’t know whether I’d consider myself a non-combatant in the war, a conscientious objector, or a freebooter.

You see, I think that government is capable of either success or failure but I’d rather think of things in terms of what government can do effectively and what it can’t do effectively. The terrible conundrum in which I believe that we find ourselves is that the government is doing too much of something it can do effectively (e.g. wage war), too much of things that it can’t do effectively (e.g. manage the economy), and not enough of things that it can’t do effectively but noone else is willing to do at all (e.g.. mass engineering projects like the Apollo Program, viz. re-vamping the power grid).

The challenge, as I have said before, is on a completely different plane than the one on which the war is being fought. It’s not so much whether the government can do no right or do no wrong. We need for the government to do things differently and the combatants are so committed to the status quo that they’re overly concerned with reaching the correct answer and not nearly concerned enough with whether there’s a path to that correct answer. More about that later.

There’s an old joke about the revised short form 1040. It has just two steps:

1. Write down the total of your wages, royalties, interest, dividends, and other income.
2. Send it in!

In an instance of reality imitating waggery a British official has suggested that all paychecks be sent not from employers to employees but directly to the government:

The UK’s tax collection agency is putting forth a proposal that all employers send employee paychecks to the government, after which the government would deduct what it deems as the appropriate tax and pay the employees by bank transfer.

The proposal by Her Majesty’s Revenue and Customs (HMRC) stresses the need for employers to provide real-time information to the government so that it can monitor all payments and make a better assessment of whether the correct tax is being paid.

Well, yes, that would ensure that the proper amounts are being deducted. Or at least that some amount was being deducted.

But wait! It’s also the perfect solution to whatever problem is posed by income inequality. The government could then return exactly the same amount to each individual. It’s so simple.

The National Bureau of Economic Research, the official scorekeeper for the business cycle in the United States, says that the recession ended about 15 months ago in June 2009:

CAMBRIDGE September 20, 2010 – The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

Based on the sluggish economic activity since the end of the recession, I think that we can reasonably conclude that a V-shaped recovery is now out of the question and the best we can hope for is a U-shaped recovery or, IMO more likely, an L. Their timing would also appear to rule out a double-dip.

Barry Ritholtz:

No, we are not still in a recession as some people have asserted. No,its not a depression. The wheel has turned, the trough is more than a year behind us. This is not a robust recovery, but the economy is now expanding, not contracting.

Phil Izzo:

The decision by the NBER means that any future downturn in the economy would be considered a new recession and not a continuation of the recession that began in 2007.

Over the weekend James Joyner stepped up to the plate in the discussion of income inequality with a post whose title I took as a pathetic grab at attention ;-). His commenters don’t seem to be buying his position.

To save it from oblivion the following is the comment I wrote to that post.

The increase in income inequality is beyond doubt, however reckoned. The open questions are

1. are the income increases of the top .1% coming at the expense of the lower 99.9%?
2. what are the causes of the tremendous growth in income of the top 1%?
3. is the increase in inequality a bad thing?
4. will the measures proposed for remediation actually have that effect?
5. will the adverse secondary effects of actions intended to remediate outweigh their benefits?

Since my ideal society is something resembling a 21st century equivalent of Jefferson’s yeoman farmers, I would answer “Yes” to #3. James has provided a bit of an argument for why the answer to #1 may be “No”.

I do think that policy is a major cause of the increase in inequality. For instance, the examples given by James (Bill Gates, Warren Buffett, LeBron James, and Lady Gaga) are all beneficiaries of government policies restricting the free flow of information. Maybe not Warren Buffett but definitely the rest.

Additionally, many of those in the lowest two income quintiles have lost ground or stalled due to other policies including immigration and trade policies.

I’m wary, however, of the focus on the top .1% of income earners. The next 4.9 percent (the top .9-5% of income earners) have seen income growth equal in dollars to the top .1%. That group includes hundreds of thousands of doctors of medicine (much of whose income is derived from tax dollars), thousands or tens of thousands of public officials (whose incomes are completely derived from tax dollars), tens of thousands of lawyers and dentists (protected or subsidized by the government), and so on.

IMO the large incomes of that next tier of high income earners is no less damaging than the very large incomes of the ultra-rich and a very large proportion of their income is the consequence of policy.

I didn’t see much interest in addressing my substantive points. I guess it’s more fun to beat up on “the rich” than to discuss the matter honestly.

This post is a follow-up to my earlier post this morning. According to the Census Bureau the working age resident population in the United States can be divided into three cohorts, roughly equal in size: ages 20-34, ages 35 to 49, and ages 50 through 64. That last cohort corresponds roughly to Baby Boomers (rather arbitrarily the Baby Boom is considered to have taken place from 1946 through 1964 so the oldest of the middle cohort are Baby Boomers, too). I’ve already documented that Baby Boomers have higher levels of educational attainment and have realized higher incomes throughout their working lives than the cohorts that followed them.

Contrary to what you might anticipate from reading the NYT article I cited in my earlier post, the unemployment rate is significantly lower than in either of the younger cohorts. Indeed, the unemployment rate for those 50 to 64 is lower than the unemployment rate for those 35 to 49 and the unemployment rate for those 35 to 49 is lower than that for those 20 to 34.

Older workers tend to stay unemployed longer than younger ones. This is both because it can be harder for an older worker to find a job and because older workers keep looking for a job longer than younger workers do and, consequently, don’t fall into the category of “discouraged job-seekers” so quickly. The reasons usually given for this include fewer options for further education or otherwise obtaining credentials and reduced alternatives for otherwise dropping out.

I think that the role that foreign born status plays in unemployment is a legitimate one. I find it terribly difficult to ferret out the statistics. Most of those gathering statistics have an agenda and the Bureau of Labor Statistics does not generally break out employment by native/foreign born status.

In most OECD countries the unemployment rate for foreign-born workers is higher than for native born ones. I see little reason the U. S. should be much different.

I’m not certain of this but it may be the case that immigrants and the children of immigrants constitute a larger proportion of the youngest cohort than they do of the others. When you combine that with the lower rates of educational attainment among immigrants and the children of immigrants (the high school and college dropout rate of foreign-born Hispanics is extremely high) and the LIFO phenomenon I’ve mentioned previously it wouldn’t be surprising if they constituted a number of the unemployed disproportionate to their numbers in the population.

When I read this article in the New York Times about the problems of those who are over 50 and unemployed, several thoughts occurred to me. The first was that the article is misleading about the scope of the problem, as you can see by examining this graph. The rate of unemployment as a percentage of those in the age cohort is actually significantly lower for those over fifty than it is, say, for those under 30. LIFO.

However, I also noticed that the unemployment rate among those over 50 is higher than it frequently is during an economic downturn. Since it’s been an observed phenomenon that those who are over 50 and unemployed tend to be unemployed longer I couldn’t help but wonder if that was contributing to the large number of people remaining unemployed during the Great Recession.

It does make some sense. Getting a degree or another degree is unconscionably expensive these days and people under thirty have a much, much longer period over which to amortize the expenses of education than someone over 50 does. It’s a lot harder to justify for someone over 50. One a side note I know of a woman who resigned from a tenured teaching position to go to law school. After graduating from law school and passing the bar she was unable to get a job as a lawyer and is now working as a teachers assistant (a non-tenured position) in the same district where she used to have tenure.

And someone over 50 is less likely to move in with their parents than someone under 30. It’s more the other way around.

The article left me with many other questions. Did the woman highlighted in the article turn down a job in Chicago when Boeing moved from Seattle? How much of her unemployment is just betting wrong? The article also didn’t mention her health status. Based on the picture in the article I wouldn’t be surprised if the woman didn’t have some significant health problems which may be contributing to her protracted unemployment.

Which shows the importance of healthcare reform in resolving the problems with our economy. Oh, wait. We’ve already had healthcare reform.

It may also bear mentioning that Seattle has the lowest rate of new business formation of any major city in the country.