"Whenever I go into a restaurant, I order both a chicken and an egg to see which comes first"

Sunday, December 22, 2013

The Chimera of Income Equality - It Will Never Happen

Joseph Stiglitz wrote a long essay in the New York Times (12.22.13) in which he argued that there is a correlation between income inequality and an erosion of trust.  According to him the increasing accumulation of wealth in the hands of the relatively few is responsible for most of today's ills.  If it hadn’t been for greedy Wall Street capitalists, the financial system would never have crashed.  If industrialists, financiers, entrepreneurs, entertainment moguls and sports heroes hadn’t been so good at what they do, the nation’s wealth would be spread more equally.  If incomes were more equal, we would be able to trust each other a lot more.

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This is nonsense of course.  Although the financial crisis was provoked by an unregulated industry which sought to leverage funds in any way possible, the various federal agencies charged with financial oversight were negligent at best. The millions of consumers who willingly signed up for the free lunch that sub-prime mortgage lenders were offering were just as complicit.

In other words, Wall Street was doing what it does best – make money – and doing it within a federal regulatory system. Most if not all of the new, creative, financial instruments devised by investment bankers were not illegal.  They simply took advantage of the bureaucratic and political myopia of Washington and were one step ahead of federal watchdogs. Looked at in hindsight, of course retail banks and investment banks should have been kept separate.  Of course accountants should not both prepare taxes and offer financial advice.  Of course investments which are so complicated, so disaggregated, and so geographically dispersed to take advantage of local tax laws should never have been allowed.  Did the financial industry ever cross the line into illegal transactions? Certainly, but not always nor universally. 

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The crisis happened because of political and regulatory cycles. Ever since Ronald Reagan the United States had been on a de-regulatory binge, and with the successive conservative Republican administrations, it has gotten worse.

This conservative de-regulatory juggernaut did not simply happen.  Congress and the President are elected by the people, and voters  must take responsibility for the exuberance of Wall Street and the indifference of Washington.  We are the ones who voted in laissez-faire representatives.  We are the ones who insisted on small government, on loosening the reins on the private sector, and on caveat emptor – individual responsibility.

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Capitalism is supposed to work exactly the way Wall Street did.  Companies are supposed to look for small advantage, loopholes, ingenious instruments, ways to dance close to the fire. Even our most ‘trusted’ companies like Apple and Microsoft don’t simply sit around doing the right thing.  They are outsourcing, depositing in off-shore tax havens, cutting costs to the thinnest margins, and making money for their shareholders.

Stiglitz disingenuously conflates the Wall Street crisis with inequality.  It is not just the financial manipulators of Goldman Sachs, Lehman Brothers, and Enron before them that are the problem, but all who accumulate wealth.  Following his argument, not only can we not trust Wall Street, but Apple, General Mills, or Pop Tarts are all suspect.

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Stiglitz is wrong. Even though ‘progressives’ may think otherwise, most Americans believe in the pursuit of wealth. Everybody wants to make money.  Everyone wants to move up a notch or two, be better off than their parents, provide a better life for their children.  Only Occupy Wall Street with their harangues against the One Percent have raised the issue of inequality in political terms.  The Walmart checker who has a chance to be promoted to Small Appliance Manager does not have Donald Trump in her sights, but the few extra dollars in her paycheck.

Does she ‘trust’ Walmart to give her a raise and higher position? No, but she hopes that her performance, commitment, and responsibility will give her a chance. Does the McDonald’s burger flipper ‘trust’ the company to one day wake up and give her a living wage?  Of course not, and so she turns to collective action – hoping that her fellow workers and ‘progressives’ clamoring for a higher minimum wage will bail her out.

Ever since the days of hucksters, charlatans, snake-oil salesmen, and revivalist preachers, Americans have learned to trust no one.

If we have capitalism in our blood, we have the American version. We have survived the law of the six-gun, the perils of the frontier, and the unregulated, wild Wild West. We have learned not to trust anyone selling the Brooklyn Bridge, and anyone who buys is is a sucker. Unfortunately, millions of decent Americans fell for the sub-prime mortgage offers hook, line, and sinker. Again not surprising because there is a sucker born every minute.

Who can you trust in this anything-goes free market? A client can’t form a personal, trusting relationship with the manager of his local Signet Bank because it will soon be bought by Wells Fargo and then by Chase Bank.  He can’t trust GMAC Mortgage Company because his mortgage will be bought and sold so many times that it doesn’t pay to even try to remember the name of the lender.

We don’t care.  We have learned to live in and adjust to a dynamic market.  Buying and selling for advantage and profit is our way of life.  We don’t hold it against anyone.  Knowing that we can’t trust our bank to stay put; and knowing that we can’t trust federal regulators either we diversify our portfolio, hedging against venal politicians in Congress and corrupt tax dollar-hungry ones in City Hall.

In other words, we have learned how to swim in these turbulent waters.  Trust is not the issue – awareness, caution, risk management, and self-protection are.  We could care less about the One Percent and about Inequality with a capital ‘I’. We care about our accumulation of wealth.

Stiglitz doesn’t stop with invoking the One Percent; but goes after a characteristic of a free market which is as deeply ingrained as profit – incentive.  There is something wrong, he says, in being motivated to excellence by economic reward:
Similarly, teachers must be given incentive pay to induce them to exert themselves. But teachers already work hard for low wages because they are dedicated to improving the lives of their students. Do we really believe that giving them $50 more, or even $500 more, as incentive pay will induce them to work harder? What we should do is increase teacher salaries generally because we recognize the value of their contributions and trust in their professionalism. According to the advocates of an incentive-based culture, though, this would be akin to giving something for nothing.
“We” should increase teachers’ salaries, Stiglitz says.  The famous “we”. Teachers are poorly paid because, for better or worse, both employees and employers value teaching far less than other professions.  Historically women have been willing to accept lower pay and have been less successful in union organizing. Women have liked the bargain of regular hours, summer vacation, and decent working conditions.  Taxpayers have been understandably unwilling to unilaterally raise teacher salaries because it is the right thing to do.

Incentives are not a bad thing in a low-wage profession.  Reverse incentives have been shown to be particularly effective.  That is, teachers are given a bonus at the beginning of the year, and it is taken away if their performance is lacking.  According to recent research, teachers under this system perform better than those who work towards a bonus.

Even when decent salaries are paid, bonuses are common not just in corporate headquarters but in most professional jobs.  If you do exceptionally well, you will be recognized and rewarded.  Where does the issue of trust come in?
Of course, incentives are an important component of human behavior. But the incentive movement has made them into a sort of religion, blind to all the other factors — social ties, moral impulses, compassion — that influence our conduct.
If Stiglitz traveled outside his intellectual aerie and into the hinterland, he would find that these values are alive and well.  In small towns and cities in the South, for example, social ties that go back generations are still strong.  Religion is the glue which not only holds traditional communities together but gives them an outlet for their compassionate impulses.  Mega-churches, for all the criticism heaped on them by the ‘progressive’ Left, provide adult education, counseling, social welfare services, schooling, and moral support.  There is most definitely trust and bonding in these communities. Stiglitz goes on:
For our economy and society to function, participants must trust that the system is reasonably fair. Trust between individuals is usually reciprocal. But if I think that you are cheating me, it is more likely that I will retaliate, and try to cheat you.
This is nonsense regardless of the economic theories cited by Stiglitz. A friend was recently cheated by his local market.  The owner sold me a piece of fish that he swore “came in this morning”, when it was really days old.  Did my friend try to cheat him back? Give him some wooden nickels or Canadian quarters?  No.  He stopped buying from him, as did many other customers, and he lost most of his fish business to Whole Foods.  I may have never been cheated by my local mechanic, but if I find out that I have, I will simply go someplace else.

Stiglitz never gives up when he gets a bee in his bonnet:
As the trust deficit persists, a deeper rot takes hold: Attitudes and norms begin to change. When no one is trustworthy, it will be only fools who trust. The concept of fairness itself is eroded. A study by the National Academy of Sciences (2012) suggests that the upper classes are more likely to engage in what has traditionally been considered unethical behavior. Perhaps this is the only way for some to reconcile their worldview with their outlandish financial success, often achieved through actions that reveal a kind of moral deprivation.
He, of course, does not define ‘unethical’ behavior.  People on the margins, those in the bottom percentiles of the economic spectrum cheat whenever they can.  One of the most hardworking, entrepreneurial, and honest men I know cheats on his taxes by doing a mainly cash business.  That is the only way he can survive.  He and his employee, an equally hardworking and honest woman are complicit in further cheating the government because he pays her in cash.

A big problem in inner-city schools is cheating. Students have never learned even the basics of ethical and moral social behavior.  They have rejected the whole idea of school and adherence to majority norms, so they cheat to get ahead or to get out of responsibility.

Many people drive unlicensed vehicles because they cannot afford the insurance – i.e. they cheat the state. Others cheat the taxpayers of their state by going on public assistance when they could easily work.  Cheating is not restricted to the One Percent.  It is everywhere, endemic, and knows no restrictive categories.

Finally, and not unsurprisingly, Stiglitz reverts to the old ‘progressive’ chestnut – more government, more regulation, more statism:
I suspect there is only one way to really get trust back. We need to pass strong regulations, embodying norms of good behavior, and appoint bold regulators to enforce them… We need higher norms for what constitutes acceptable behavior…But we also need regulations to enforce these norms — a new version of trust but verify. No rules will be strong enough to prevent every abuse, yet good, strong regulations can stop the worst of it.
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The system works fine as it is.  People trust when they feel trust is warranted and necessary.  People are suspicious and wary about most transactions and better off for it. Most people are smart, and while a few gullible souls will always take charlatan bait, the rest of us will not.  We can be trusted to do the right thing, and we do not need government to show us the right and true path.


  1. The system is not fine 'as it is'. While I don't have the time nor interest in disputing your points one by one - let's just put it this way, Mr. Stiglitz is a Nobel Prize winning economist, a professor at Columbia University, a former vice president of the World Bank and the former chairman of the Council of Economic Advisors. Other than being a middle aged white man who likes hearing the sound of his own voice - who exactly are you ?

  2. Hi Mr.Parlo though I wasnt planning to comment on any of your articles but after reading the preceding comment, I wanted to personally thank you for this blog. Thank you for the hours you spend writing these posts, thank you for not telling me b.s. like the previous commenter or the Nobel winner schmuck does, thank you for telling me what you honestly believe.


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