I strongly suspect that I will never read James Kwak’s and Simon Johnson’s book, 13 Bankers. If it’s as described by James Kwak in his post this morning:

In 13 Bankers, Simon and I argue that the key forces behind the transformation of the financial sector and the resulting financial crisis were political, not simply economic. To this argument, at least two good questions spring to mind: Why finance? And why then? Hacker and Pierson have good answers to both of these questions. Their answer to the latter question is better than (though not inconsistent with) the answer we gave in our book.

To the former question, their argument is simple: business interests in all sectors organized a takeover of political power that pushed organized labor and other groups protecting middle-class interests to the sidelines and made possible decades of policies that have enriched the super-rich at the expense of everyone else, including the merely affluent. Finance was simply the biggest and most profitable of these sectors–and, we would emphasize, the one best able to hold the government hostage in a financial and economic crisis.

The answer to the second question is a bit more involved but particularly important. Many people, including Simon and me, have observed that American politics and the American economy reached some kind of turning point around 1980, which conveniently marks the election of Ronald Reagan. (We also pointed to other factors such as the deregulation of stock brokerage commissions in 1975 and the high inflation of the 1970s.) Other analysts have put the turning point back in 1968, when Richard Nixon became President on the back of a wave of white, middle-class resentment against the 1960s. Hacker and Pierson, however, point the finger at the 1970s. As they describe in Chapter 4, the Nixon presidency saw the high-water market of the regulatory state; the demise of traditional liberalism occurred during the Carter administration, despite Democratic control of Washington, when highly organized business interests were able to torpedo the Democratic agenda and begin the era of cutting taxes for the rich that apparently has not yet ended today.

I agree with the timing he suggests but I find other things about his exegesis puzzling. For example, he characterizes the Nixon presidency as “the high-water market of the regulatory state” and notes the efforts of banks and other businesses to gain advantage through lobbying and political contributions. Do they not see the connections between these two?

Those in a position to exercise such influence know with a certainty born of experience that it’s cheaper to buy politicians and regulators than it is to comply with regulation. A stronger regulatory state goes hand in glove with greater influence of big business. Not only is buying influence more cost effective than compliance, it’s an opportunity to prevent upstarts and beat down smaller competitors, inevitably much less able to wield the tools that established power brings.

In the light of this I ask a series of rhetorical questions:

1. Have they never heard of regulatory capture?
2. In the light of the intimate relationship between increased regulation and greater influence for big businesses why would they propose increased regulation as a means of dealing with bigger businesses?
3. What difference between the actions of the later Bush Administration and the early Obama Administration have driven them to conclude that there’s a marked difference between the two?
4. Why is this time different?

As I’ve said before here the reforms we really need are not increased regulation or more regulators but a different approach to regulation and different incentives for regulators. Barring that we can only see increasing concentration of power in Washington and in the boardrooms of the largest companies, reduced creativity, and a stagnating economy.

Yesterday afternoon my wife, niece, and I had the delight of entertaining Amba in our home. Her blog, Ambivablog, has been on my rather select blogroll for a very long time. Along with other very interesting writers she now posts at a group blog, Ambiance. I cooked brunch for all of us and we dined, drank tea, and chatted the afternoon away.

As has been my experience in meeting bloggers with whom I’ve corresponded for many years, I found Amba even more intelligent, engaging, and charming in person than is reflected in her writing, always beautifully crafted. And as has been my experience in meeting in person those whose thoughts I’ve shared in the blogosphere for so many years, meeting her was much more like seeing an old friend again than it was like welcoming a stranger.

I don’t know whether it’s apparent from my writing but in person although I try to be as kind and considerate as possible I’m also frequently fairly direct. I ask direct questions. In this case I took the opportunity of Amba’s visit and the occasion of the ninth anniversay of the attacks on September 11, 2001 to give my niece the opportunity of hearing a first-hand account of the events of that terrible day. Amba and her husband, Jacques, lived a bit more than mile from the World Trade Center at the time, heard the planes fly over their heads, and could testify to what it felt to be a New Yorker on that fateful day. A first-hand account, face to face, with a perceptive and sensitive individual who actually lived the experience is worth a thousand written accounts.

I wanted to comment about David Brooks’s column this morning in which he worries that we don’t have the industry or determination of prior generations of Americans:

If you look at America from this perspective, you do see something akin to the “British disease.” After decades of affluence, the U.S. has drifted away from the hardheaded practical mentality that built the nation’s wealth in the first place.

The shift is evident at all levels of society. First, the elites. America’s brightest minds have been abandoning industry and technical enterprise in favor of more prestigious but less productive fields like law, finance, consulting and nonprofit activism.

We didn’t lose a half million engineering jobs in the United States over the last ten years because of a mental shift. The loss of jobs caused the mental shift. High-paying jobs in science or engineering just weren’t on offer but jobs in finance and law were.

I think that over the last 30 years or so there’s been an enormous miscalculation, a management error of spectacular scale. This has resulted in the loss not merely of jobs (that would be bad enough) but of whole career paths under the tremendously bone-headed misapprehension that career paths aren’t important. You can’t preserve the senior engineering positions while off-shoring the junior ones. Junior engineers become senior engineers. Reducing the number of juniors will eventually reduce the number of seniors as well until nothing is left but the smile.

William Easterly presents maps of the world, the United States, and the vicinity of New York University to illustrate that “income inequality behaves like a fractal”. There’s a reason for the infinite symmetry that he points out: it’s an artifact. Although he claims that a

tastefully chosen color scheme that is consistent across all maps (rich is red or brown-red, poor is pale yellow, in between is orange)

since there’s no consistency in the colors between maps there’s enormously less to this than meets the eye. In the map of the world the United States (rich) is colored in a deep reddish brown; Burundi (poor) on the other hand is drawn in a pale yellowish tan. In the map of the vicinity of NYU the West Village (rich) is colored the deep reddish brown; the Lower East Side pale yellowish tan.

The per capita GDP (the figure being used to decide on the colors) in the United States is about $46,000. The per capita GDP in Burundi is $300, a 15,000-fold diffence.

However, the per capita GDP of the West Village is $101, 346 while the per capita GDP in Lowest East Side is $14,916, a less than eight-fold difference. If the same color scheme had been used in both maps the entirety of the NYU map would have been deep reddish brown. The color scheme decision is apparently arbitrary. It proves very little more than that it is possible to color a map with different colors to suit yourself. If it demonstrates anything about income inequality it is to refute the idea that there’s a great deal of income inequality within the United States rather than to support it.

Felix Salmon adds:

The trend, then, I think, is for inequality to increasingly ignore national borders. You can get rich clusters across borders, as in say the area between Porto Alegre, Montevideo, and Buenos Aires, or any number of megaregions in Europe. At the same time, the gaps between the richest and the poorest areas of most countries are only growing larger.

Easterly’s map of the world, where every country is a uniform color, conceals more than it reveals. Once upon a time, national borders were useful boundaries to use when measuring per-capita income across the planet. And given that statistical agencies are still national, that’s not going to change any time soon. But those numbers are going to be less and less informative as pockets of wealth spring up in poor countries, and pockets of poverty persist in middle-income nations.

Menzie Chinn, co-blogger at Econbrowser, has some charts and graphs by which he presumably intends to debunk the notion that the federal government is expanding. They illustrate nicely that the number of federal employees as a percentage of population, although it’s grown over the last ten years, has been pretty constant for the last 50 years.

Rather than argue the case one way or the other I would ask what the operative definition of the federal government expanding is? We have fewer men and women in uniform than we did at the height of World War II. Does that mean that the military has contracted since then?

That total federal spending has grown in absolute terms and as a percentage of GDP over the last fifty or so years can hardly be denied. I’m not sure that’s the way to define the federal government expansion, either.

However, on a related note there’s a question I’d like to ask. It’s pretty clear that median compensation for federal employees is higher for the country, generally. The usual retort to that is that the difference can be attributed to the people with college and post-graduate degrees who work for the federal government. Here’s my question: is that true?

One way to get at the answer would be to look at the pay levels of federal government employees without post-graduate degrees. Is their total compensation higher or lower than the pay levels of people who don’t work for the government (at whatever level) and don’t have post-graduate degrees.

I honestly don’t know the answer to the question and I don’t even have a good idea of how to ferret out the answer. I can say with pretty fair confidence that the explanation (i.e. educational attainment) doesn’t hold water for local governments. Most local government employees are police officers, firefighters, and teachers. At least here in Chicago most police officers and firefighters don’t have post-graduate degrees. Indeed, a majority don’t have college degrees. Most are high school grads who’ve served in the military. Their pay is pretty darned good for high school only.

Most public school teachers have education degrees and are nine or ten month employees. And education degrees are notoriously lightweight. The pay in Chicago for a starting teacher with bachelors only for a nine month position is pretty darned good for such low requirements. Better than college-only non-civil servants.

What’s the situation for federal employees?

A scant two days after Mayor Richard Daley announced he would not be seeking re-election as mayor of Chicago, the Sun-Times has produced a poll of the leading candidates for the job. Here are the results:

That supports the observations I’ve been making about a Rahm Emanuel candidacy rather nicely: it’s far from a done deal. I think the national media has misunderstood what Mr. Emanuel meant when he said he was interested in being mayor of Chicago. I think that what he meant was that he was interested in being crowned mayor of Chicago, the way he was anointed Congressional representative from my district, not that he was interested in running for mayor in a crowded field of Chicagoans with constituencies and organizations of their own.

Mayor Daley has declined to endorse a successor; I see no reason to doubt his word that he doesn’t plan to. There’s a big difference between running as the designated successor and running as just another guy on the ballot. Rahm Emanuel is a smart guy, I strongly suspect that polls like this will show him what his real prospects are, and I wouldn’t be surprised if we see an announcement from him soon that he doesn’t plan to go anywhere.

I suspect that what we’re going to see at first is struggle within racial, ethnic, and other factions, then struggle between the winners of those factions. There are several credible African American prospects, e.g. Terry Peterson, Jesse Jackson, Jr., and James Meeks, as well as several solid prospective Hispanic contenders, e.g. Gery Chico and Luis Gutierrez. I expect we’ll see more possibilities being raised within each group. So, for example, I don’t see a female candidate in the poll above. I also don’t see any Bobby Rush proteges there.

I continue to believe another contest between the southeast side and the southwest side is more likely than not.

There’s a matching set of links from Clusterstock that deserve to be read together. Andy Xie, formerly of Morgan Stanley, points out the obvious—that the financial sector has overflowed its banks and is threatening to drown the rest of the economy:

Why do large service organizations exist? The main reason is precisely that one cannot price its product instantly. The quality of the product may take years to prove. A large organization provides the confidence to buyers through the reputation effect. If its previous customers are happy, it has incentives to protect its reputation. Hence, new customers also should buy from it with confidence.

A hospital, for example, fits this description well. A reputable hospital can charge a premium for its services, using revenues to purchase good equipment and hire good doctors. This sustains its reputation. A hospital with a reputation for bad quality, however, faces the opposite issue. Thus, unless one is willing to invest a lot to build a good reputation, it’s stuck in a vicious cycle.

Every city has this good hospital-bad hospital phenomenon. But even good hospitals experience the 20-80 phenomenon. This same, inherent inefficiency can be found throughout large, white-collar service organizations.

[…]

Financial services providers are intermediaries by definition. They match buyers and sellers of stocks, bonds, commodities and other financial products. They fit perfectly the definition of information broker. They can still make a living by brokering among institutional investors who are, by definition, few.

But institutional investors are intermediaries, too. Why should savers give them money to manage? Not for superior performance: More than 90 percent of institutional investors underperform market indexes. The main justification is that they bring down costs of information acquisition and processing, as well as transactions. This justification looks shakier by the day. Any individual can have access to as much information as a fund manager at virtually no cost. I’m afraid the financial services industry is likely to decline structurally.

As financial services industry loses value-added to customers and the real economy, it is increasingly dependent on gaming the system and profiting from customer ignorance. This makes the industry and financial market more volatile and bubble-prone. In the last financial crisis, the financial sector survived by holding the real economy hostage.

There’s lots more there. And, as if on cue, former Oppenheimer & Co. analyst Meredith Whitney predicts a dramatic downsizing among Wall Street firms:

Securities firms around the world will cut as many as 80,000 jobs in the next 18 months as revenue growth begins to slow, said Meredith Whitney, the former Oppenheimer & Co. analyst who now runs her own firm.

The reductions, about 10 percent of current levels, will come after 2010 compensation payments, Whitney, 40, said in a report dated Aug. 31 and obtained by Bloomberg News today. The industry’s payouts will be “down dramatically,” said Whitney, who started New York-based Meredith Whitney Group after correctly predicting Citigroup Inc.’s dividend cut in 2007.

Here is a vital point:

“The key product drivers of Wall Street’s revenues and profits over the past decade have been in a structural decline over the past three years,” Whitney said in the report. “2010 marks the first year in many in which Wall Street-centric firms will go through structural changes.”

I think I’d go farther than that. As Mr. Xie correctly points out Wall Street’s revenues have been under pressure due to technological change for the better part of the last couple of decades. When you add that pressure to a certainty born of experience that, not only will they not be subjected to market discipline if they fail, they will not be allowed to fail, together with incomprehensibly large prospective financial rewards it creates a perfect Petrie dish for increasingly risky, er, innovations.

When people talk about unionization as a cure for income inequality in the United States, I suspect they’re thinking more of Norma Rae than On the Waterfront and more about the Rouge strike than about GM’s Indianapolis stamping plant:

A faction within the union consists of what are known as “GM Gypsies”–workers who have transferred to this plant from other GM plants that were shut down. They’re trying to put in enough time to retire on full benefits, which means they don’t want to take permanent jobs at JD Norman; they feel that unless they can get something very close to what GM pays, they seem to think they’re better off with a plant shutdown, which makes everyone eligible for transfer.

However, there are workers in the plant who don’t want to transfer. Indianapolis is their home. They’re angry at the gypsies for trying to shut down a plant that is good for the local community, and good for them. I’ve heard that these folks are disproportionately close to retirement, in which case they’re eligible to take their GM pension, and then go to work for JD Norman at reduced wages.

I have nothing against unions. I’ve been a union member myself a couple of times. How does closing the Indianapolis stamping plant help American workers? This isn’t the 1920s or 1930s. Is pitting one group of workers against another in the face of the likelihood that the plant will be closed entirely what unionization means today?

As I think I’ve mentioned before I get about three ideas for blog posts for each post that I actually begin writing and, of the posts I actually start writing, perhaps 25% end up in the bit bucket for various reasons. Right now, in reaction to the Slate series I mentioned below on income inequality, I’m mulling over the idea of writing a post on income inequality in the second ward of Chicago. Not the United States. Not Illinois. Not Cook County or even just Chicago. The Chicago second ward. Here’s a map of the Chicago wards if you’re not that familiar with the city.

My guess offhand is that there’s considerable income inequality just within that ward which includes a great deal of the Loop. (Indeed, there’s considerable income inequality just within zipcodes.) What are its sources? Social consequences? Political implications?

Is there anything to be learned from such an exercise? I’m not sure.

Here’s where I’m going with this. It’s unquestionably true that incomes among the top 5% of income earners are enormously higher than among the bottom 5% of income earners. No argument. Some attribute the increasing inequality to the ultra-rich having incomes that are too high. I think it’s that most people who aren’t among the rich (top 5% of income earners) don’t have higher incomes. However, incomes among the bottom 95% of American income earners are enormously higher than the incomes of the bottom 95% of Chinese income earners. What are the sources of that inequality? Social consequences? Political implications?

If there were a policy approach that would raise the incomes of 95% of Americans to the detriment of 95% of Chinese would it be moral? I know it might be politically popular here but would it be moral?

And here’s the hard one. If there were a policy approach that would raise the incomes of 95% of Chinese to the detriment of 95% of Americans would that be moral?

The easy way around such questions is to say that such decisions aren’t up to policy makers to make but IMO that’s simply a head fake. Policy makers make decisions that have implications of this sort practically every day and I sincerely doubt that our society will change into some sort of anarcho-capitalist Utopia in the foreseeable future.

Over the period of the last 30 years the incomes of poor people all over the world have risen spectacularly and, realistically, much of that increase was to the detriment of most income earners in the United States. These income earners are also consumers and in their role as consumers they’ve benefited from the lower costs of goods sold in the United States that have been a consequence of that change. For many it probably wasn’t that good a deal.

Reversing that trend (if such a thing be possible) would almost certainly mean reversing the betterment of lives (not everybody’s but a lot of people’s) in places other than the United States. Right thing to do?