Apparently, kvetching about income inequality is the new black. Over at zero hedge there’s a guest post complaining, mostly, about the financial sector:

Capitalism is supposed to be an economic system in which the means of production and distribution are privately owned and operated for profit; decisions regarding supply, demand, price, distribution, and investments are not made by the government; Profit is distributed to owners who invest in businesses, and wages are paid to workers employed by businesses. The American economy is in no way a free market capitalistic system. It has become a oligarchic consumer capitalist society that is manipulated, in a deliberate and coordinated way, on a very large scale, through mass-marketing techniques, to the advantage of Wall Street and mega-corporations.

To be honest I agree with a lot of that. The body of the post itself is full of interesting charts and graphs which serve as an excellent demonstration of how to lie with statistics. So, for example, the chart labelled “Pay Per Worker in the Financial Sector, etc.” fails to consider the enormous run-up in the DJIA that took place from 1982 to 1998. Of course financial workers will benefit from such a run-up. Lots of people did. And that’s where nearly all of the great increases in the incomes of financial service workers took place.

In the total economy there are sectors that are winners and those that are losers, sometimes from an absolute standpoint and sometimes just from a relative one. You could draw similar charts for other “winner” sectors.

Nowhere in the post are there any figures or charts that show real totals. We see, for example, that in the middle Aughts the financial sector racked up a whopping 40% of U. S. business profits. Is that because financial sector profits were going up or profits in other sectors were going down? There’s no way to tell from the post itself.

I agree that we’re enormously over-built in the financial sector and that keeping those assets tied up in financial services when that sector really needs to contract is a drag on the economy. Unfortunately, the policy that we’ve seen for the last couple of years has been specifically targeted at preventing that sector from shrinking, not what we should be doing.

The post presents no prescriptions. As such it is a lament. I do that occasionally around here but you’ll also notice that I have affirmative prescriptions as well.

A final word on the post cited above. I found the comments unintentionally humorous. My guess is that there are precious few farmers or coalminers commenting at zero hedge. Practically every commenter is probably involved in indirect production in one way or another. And yet for some reason they denounce other sorts of indirect production while apparently considering their own efforts as direct production. Odd, that.

In a post at naked capitalism Yves Smith asks:

How do libertarians propose to respond to the power of large enterprises?

noting that large enterprises may enjoy economies of scale over smaller ones.

If you feel qualified to respond, feel free to do so over at Yves Smith’s place. I found the comment thread very dreary reading, largely consisting of authoritarians verbally beating up on imaginary libertarians. However, I don’t think I’m the target audience for the question.

It did bring to mind a slightly different question: is there really such a thing as a natural monopoly? I have my doubts. The examples given in the comments thread, e.g. telephone companies, telegraph companies, electric power companies, and the example frequently encountered (John D. Rockefeller’s Standard Oil) almost certainly aren’t.

It all starts with railroads. As a rule the railroads didn’t own the land over which their rails were laid. They had rights-of-way, easements, granted to them by state and local governments over public land and private land alike. That’s the very image of a state-created monopoly. Telegraph companies had an intimate relationship with the railroads. The telegraph wires frequently shared the easements with the railroad companies (or even used the rails themselves), the railroads hauled the equipment for the telegraph companies at preferred rates, and so on.

Standard Oil enjoyed a similar relationship with the railroads, see here and here. The lands that Standard Oil initially developed for oil were the same lands reached by the railroads. It’s hard to imagine Standard Oil growing to be the giant it became without the railroads. So, in a sense, ultimately Standard Oil, the archetype of the natural monopoly, was itself a creature of the state.

I think that’s the case with most monopolies. Can anyone give an example of a truly natural monopoly?

In a recent post, I cited a post and column written by Simon Johnson, formerly chief economist of the IMF, to the effect that income inequality was a major source of the economic problems of the United States. His focus was on those with no more than a high school education:

The distribution of income in the United States is undoubtedly becoming more unequal. Specifically, over recent decades, it has become harder for people with only a high-school education to build a secure middle-class future for their families.

Since those with high school only or less are disproportionately immigrants or the children of immigrants and since, although the studies of the impact of immigration on wages in the United States have produced ambiguous results, the studies have uniformly illustrated downwards pressure placed on wages for those with high school educations or less by competition with immigrants for those jobs, to my mind the problem of low income growth among the lowest income earners and immigration are indivisible. Unionization is unlikely to produce improved economic prospects for this group. Why pay unskilled workers in the United States more when the world is full of unskilled workers who will work for much less?

A frequent commenter has repeatedly asserted that, no, the problem is not insufficient income growth among the lowest income earners but rather too much income growth among highest .1% of income earners. I see only the most indirect of relationships between how high the incomes of the top .1% of income earners are and the failure of the incomes among the lower quintiles of income earners to grow over the last 30 years. It might reasonably be said that the two things have common causes but I do not believe that one causes the other.

I’m also skeptical that the assertion of the primacy of incomes among the top .1% of income earners passes muster from a numerical standpoint so I thought it might be helpful to put some facts about the highest income earners on the table.

According to information drawn from the Internal Revenue Service and quoted in a link from the Tax Foundation the top .1% of income earners amount to some 141,000 households which account for about $1 trillion of adjusted gross income, about 12% of the whole. The next 4.9% amount to about 50 times as many households and about twice as much income. Why is the income of the top .1% harmful and disruptive and that of the next 4.9%, a significantly larger amount, isn’t?

I have found it terribly difficult to ferret out exactly who those who are in that next 4.9% are. Their incomes start at about $200,000. Many, I suspect, are owners of small to medium sized businesses who show up all over the Bureau of Labor Statistics’s numbers. Hundred of thousands are physicians.

According to the Bureau of Labor Statistics the total number of physicians in the United States is about a half million:

Since the median income of physicians is right around that $200,000 figure, at least half of physicians are among that next 4.9% of income earners just below the ultra-rich.

The next largest identifiable chunk of people I’ve been able to identify among that next 4.9% of income earners are those in the financial services industry. They account for a much, much smaller number than physicians and have a lower median income. Lawyers don’t make the cut. There are about as many of them as there are of physicians but the median income for lawyers is about half that of physicians (and lower than the median income of GPs as well). That means that only a relative few are among those 4.9% of top income earners, perhaps tens of thousands of very wealthy lawyers and almost all, presumably, graduates of the handful of elite law schools, many of them working for top Wall Street law firms.

There are about 86,000 dentists with a median income of around $157,000. Clearly, some dentists fall within that next 4.9% of top income earners.

CEOs are clearly among the highest income earners. With just under 298,000 of them and a median income of $167,280, both their numbers and median incomes are below those of physicians but there are probably about 100,000 CEOs among that next 4.9%, a sizeable number. It may be that many of the balance of the top income earners who aren’t among the ultra-rich are management in large companies below the top management level. My experience has been that there’s a large gap between the guys at the very top and those farther down the ladder and that’s borne out by the BLS’s median income statistics for managers.

Disclosure: our household income does not put us among the ultra-rich (top .1%) or even the top 4.9% of income earners after the ultra-rich. We are upper middle class and I have never wanted anything else.

I’ve just come up with what I think is a pretty succinct statement of my views on the economy. Let’s try this on for size.

Wages and prices remain above the market clearing level. Neither monetary nor fiscal stimulus can do much about this. Government spending can ameliorate some of the worst effects of the necessary adjustment. Bailing out the institutions that most need to adjust just prolongs the process.

You can debate my formulation or, preferably, give your own statement of the underlying problems with the economy.

Mohammed El-Arian, the CEO of bond giant PIMCO takes to the pages of the Washington Post to make a plea for I’m not sure exactly what:

Policymakers must break this active inertia by implementing a structural vision to accompany their current cyclical focus. Measures are needed to address key issues, which include the change in drivers of growth and employment creation; the high risk of skill erosion and lost labor productivity; financial deleveraging in the private sector; debt overhangs; the uncertain regulatory environment; and the unacceptably high risks facing the most vulnerable segments of society.

Specific measures would include pro-growth tax reform, housing finance reform, increased infrastructure investments, greater support for education and research, job retraining programs, removal of outdated interstate competition barriers and stronger social safety nets.

along with skepticism about the effectiveness of additional monetary or fiscal stimulus. Matthew Yglesias quickly erects a straw man to attack:

After all, if there’s a clash between what policies would be good for PIMCO’s investment positions and what policies would be good for the global economy, El-Erian has a responsibility to push for policies that would be good for PIMCO’s investment positions. Is there such a clash? Well, readers of The Washington Post op-ed page have no way of knowing. So what’s the point of publishing it?

which Felix Salmon sets fire to with equal promptness:

The oversimple answer to the question is that El-Erian controls over $1 trillion in assets: if you wanted to put a face to the famous bond vigilantes, it would probably feature that famous moustache. If you care what the bond vigilantes might be thinking, then you can probably get a pretty good sense of it by reading El-Erian’s frequent op-eds.

A better answer is that there simply isn’t a clash between what’s good for the global economy and what’s good for Pimco, which is overwhelmingly a long-only investment house. Pimco’s long-term health is a function of there being a strong global economy which generates lots of savings for Pimco to manage. If you’re running a few million or even a few billion dollars, then you can significantly grow your assets under management by taking bold bets which pay off. If you’re running a trillion dollars, that’s no longer the case. At that point, your assets under management are much more a function of the global savings rate than they are of your own expertise as a fund manager.

I saw the op-ed as a plea to abandon parochial and partisan interests, high-minded but unlikely. Additionally, I think his prescriptions betray a fundamental lack of understanding of the problems we face. Take education, for example. We already spend a trillion dollars a year out of the public purse, most of the spending coming from state and local governments. As with defense, healthcare, and any number of other critical areas, we not only spend more than any other single country on education, we very nearly spend more than all the rest of the countries of the world put together. Far from not spending enough in these areas we’re spending far too much. We’re just not getting a good enough return on our investments.

Our problem is that our spending on defense, healthcare, and education remains targeted in inefficient and ineffectual ways, is unsustainable, and diverts resources from other potentially more productive economic sectors which have far greater potential for producing increased employment. We have already engaged in what is laughingly called healthcare and financial reform, in each case woefully inadequate and more likely to exacerbate the problems we face than solve them. The other countries of the world are focused on their own problems. Don’t expect Germany, China, or Japan to suddenly become good global citizens and become willing to take one for the team. They have their own problems and their own political imperatives.

Brad DeLong, Megan McArdle, and Tyler Cowen are all confessing policy issues on which they’ve been wrong. Fair is fair so I’ll confess a public affairs issue on which I’ve been wrong.

I didn’t recognize just how callow Barack Obama is or, possibly, how stubborn he is. Oh, I believed him when he said he’d devote more resources to Afghanistan. I just thought he’d catch on sooner to what a losing proposition trying to create a 16th century state there is let alone a 21st century one. I’d’ve voted for him anyway. I didn’t have the choice between him and the Perfect Presidential Candidate I had the choice between him and John McCain. Sen. McCain has nearly all of the problems that President Obama has and then some.

However, unlike Megan I was right on invading Iraq, unlike Dr. DeLong I’ve never believed you can fine-tune the economy or that the members of the Federal Reserve Board or federal regulators were capable of doing it, and unlike Dr. Cowen I’ve always recognized that median income was growing too slowly. I’d seen too much going on around me, with my family, and with myself to believe otherwise.

I still think I’m right about what’s wrong with the economy: too many bad policy decisions over too long a period and too great an ability of people in sectors in which we’re enormously over-invested to dragoon the federal government to their aid to prevent the necessary and inevitable realignment.

I honestly don’t know whether I’m right about the role that demographics is playing in the current economic troubles. It would certainly be nice if I were wrong. If I’m right we’re in terrible, terrible trouble.

Remember how I’ve been saying that I didn’t know what the Fed was smoking in predicting an annual 3% or better GDP growth for 2010? Turns that the Bureau of Economic Analysis now says that having my ear to the ground put me closer to the truth than the Fed’s models put them:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.6 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the “second” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.

The GDP estimates released today are based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 2.4 percent (see “Revisions” on page 3).

The increase in real GDP in the second quarter primarily reflected positive contributions from nonresidential fixed investment, personal consumption expenditures, exports, federal government spending, private inventory investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the second quarter primarily reflected a sharp acceleration in imports and a sharp deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending.

As I pointed out yesterday, supporting consumer spending means that imports are going to increase.

A couple of things in this report pop out at me. First, that’s quite a revision. A difference of a third. I’ll refrain from expressing my emotional reactions to that. Second, note that government consumption and gross investment declined from the advance estimate. Doesn’t that mean that the CBO will need to revise their projections of the effect of fiscal stimulus downward, too? After all they’re measuring inputs rather than outputs and if the inputs weren’t as large as they presumably thought shouldn’t the outputs be lower?

Whatever else there is a shortage of there’s certainly no shortage of advice on what President Obama should do next. This morning there’s contradictory advice from two top Democratic operatives. Marshal Foch Bob Shrum advises President Obama to get on the attack:

First, Obama and Democrats have to redraw the battle lines for the midterms. Don’t cast the campaign merely—and too cautiously—as a choice between the Bush collapse and an Obama turnaround that a majority of Americans don’t yet believe in. They are already rid of Bush; their anger at the status quo drives them toward the GOP—a reversal of the dynamic that swept in Democrats in 2006 and propelled the improbable Obama in 2008.

What’s called for is a starker choice rooted in progressive conviction. September is the time and tax cuts are the cause—if the President and his party are bold enough to break with the conventional wisdom that this issue invariably favors Republicans, and wage the battle not in the arcane interstices of the legislative process, but in the glare of the national spotlight.

while Doug Schoen recommends that he dash for the center:

I first met with Mr. Clinton privately in early 1995, after the Republicans gained control of Congress for the first time since 1954. I warned him that he could not be re-elected in 1996 unless he turned around his administration’s reputation: from one of big-spending liberalism (represented by his attempt to massively overhaul the health-care system) to one of fiscal discipline and economic growth.

Mr. Clinton did just that, and now Mr. Obama must do the same—and quickly. Yet the White House seems to believe its approach should be to blame George W. Bush for everything. Polls suggest that this approach is likely to have only the most limited success.

I have little doubt that Mr. Schoen will be castigated as a DINO for his advice but it probably needs to be remembered that Bill Clinton won re-election in 1996; Bob Shrum has been a top advisor for nearly every failing Democratic presidential run in recent memory.

The problem this time around is that there’s very little center to run to. I think that fiscal discipline and economic growth are always good advice. The paths that actually produce those things are far from clear.

Mr. Shrum’s advice is presumably intended to buck up the base but it will do so at the expense of, well, everybody else and the reality with which progressives much come to terms is that while President Obama may not be able to win without them he can’t win with their support alone.

When I re-read the column by Simon Johnson that I quoted yesterday, the paragraphs before the one I quoted jumped out at me:

Excessive consumer debt is an outcome of prolonged inequality – in trying to remain middle class, too many people borrowed too much, while unscrupulous lenders were only too willing to take advantage of such people.

Raghu Rajan, the former chief economist at the International Monetary Fund, and Robert Reich, the former Labor Secretary, also have new books with related themes that link persistent inequality of income to the onset of financial crisis through various mechanisms. Mr. Rajan’s “Fault Lines” is more about the global economy (and overspending at the level of the American economy); Mr. Reich’s “Aftershock” focuses on the social and political impact of the crisis (and why, without addressing inequality, our financial problems will recur).

The distribution of income in the United States is undoubtedly becoming more unequal. Specifically, over recent decades, it has become harder for people with only a high-school education to build a secure middle-class future for their families.

There’s something in this statement that I wonder if Dr. Johnson appreciates. When you strip out the qualifiers and subordinate clauses, he’s attributing the financial crisis to immigration.

That may seem like a stretch but here’s how the chain of reasoning works. Income inequality induced people to borrow too much. Lack of education is a driver of income inequality. An astonishing proportion of those with high-school educations only (or less) are immigrants. If, by waving a magic wand, you could remove immigrants with high-school education only or less from the equation, whatever problem lack of higher education causes would be cut nearly in half. More, since although the effects of immigrants on wages are ambiguous, the effects of immigrants on wages in the lowest income quintile is indisputable. The reasonable conclusion then is that the financial crisis was caused by immigration.

To be honest I think a lot of that reasoning is actually inside out. [I just chopped out an expansion on this thought I spent an hour on as unintelligible.] Rather than wander off into the weeds let me leave you with a link on public sector educational attainment levels and point out that

• By law GS workers must be American citizens.
• According to all resources I’ve been able to identify a minority of immigrants are legal permanent residents.
• The naturalization rate among LPRs is around 50%.

Based on that, I suspect that a lot of native-born Americans who have high-school only are working for the government at one level or another. Here in Chicago, for example, a lot of police officers and firefighters have high-school only. That may skew the results a bit.