October | 2012 | JMGshortcuts

We’re often told that the typical third world country is characterized by a small percentage of the population hogging a huge share of wealth and power. Everyone else, the story goes, lives in varying degrees of penury and has little political influence.

For a long time, Americans liked to think of their country as the antithesis of this cliche, but socioeconomic trends over the past three decades are changing that.

It’s generally understood that we live in a time of growing inequality. We now know, for example, that there is a large and growing gap between rich and poor. And money has corrupted our political system so it only benefits a privileged few, resulting in the concentration of political power at the top.

The presidential debates should focus on this subject, but both candidates are too busy shoring up their bases and trying to ingratiate themselves to the precious undecided voters who tip the scales in tight elections. These gladiatorial contests ignore rising inequality and the erosion of the middle class, ambiguously defined as households making an average annual income ranging from $30,000 to $90,000.

Since the mid-1970s, we have seen the living standards of most Americans stagnate. Average wages have remained flat or declined.

Today, the wealthiest 1 percent of American households has a higher total net worth than the bottom 90 percent combined. That same top 1 percent also has more pretax income than the bottom 50 percent.

Income inequality has reached the highest level since the Great Depression and shows no signs of moderating. During the first full year of tepid recovery from the most recent recession, the top 1 percent of earners realized 93 percent of all income gains.

The fruits of our economy flow increasingly to a tiny minority of corporate CEOs, top-tier symbolic analysts in the legal and financial professions, sports stars and entertainment-industry celebrities who can leverage their market power into membership in a new class of super-rich.

Meanwhile, most American families are trying to keep body and soul together, seeing little or no improvement in their living standards, despite the fact the both parents are often working. This is crazy in an economy in which consumer spending is an important source of economic growth.

New research indicates that the growing gap between rich and poor may retard future growth, shortening economic expansions by as much as one third.

The increasing concentration of income has spawned a second Gilded Age. With it comes the ever greater ability of the new super-rich class to buy political influence through contributions to increasingly costly election campaigns, endowments for issue-oriented think tanks and control of advertising media.

It all translates into special tax breaks, such as allowing the hedge fund manager who makes millions to treat his or her income as capital gains, or the major corporation making billions in profits to have little or no tax liability. Both are egregious examples of corporate welfare that results from the unholy marriage of big corporations and big government.

Occupy Wall Street and the Tea Party crowd share a common resentment of how big government and corporate America are in bed with each other. They see the fat cats running the show, while they’re getting hammered.

We are told that’s the way the cookie crumbles in an age of international competition, rapid technological advances and the relentless drive to cut short-term costs. Sure, capitalism is unrivaled in its ability to produce material well-being. But no economic recovery is sustainable unless we can distribute its fruits more widely.

Growth is important, but recovery is little more than an illusion unless the economy can produce a more equitable distribution of wealth. That’s why we should insist that the presidential candidates give us practical proposals to help the middle class share in any future economic recovery.

originally published: October 20, 2012

In the years since the 2008 financial meltdown, free markets have suffered a shattering loss of credibility, especially among Americans who have lost their jobs, homes and the money they saved for retirement and college for their children.

Since the days of Adam Smith, more nonsense has been written about free-market capitalism than any subject other than religion.

Beginning in the 1960s, ivory-tower economists started developing a host of “rigorous” quantitative models that claimed to show how markets actually work.

These models (expressed in obscure differential equations rather than clear English) focused primarily on markets for common stocks and other financial securities that were assumed to represent the closest real-world approximation of the free-market ideal.

They were all wrong.

But they still became mainstream thinking among 1980s and ’90s Wall Street rocket scientists and remained so right on into the 2008 collapse. Several of the models’ developers even won the Nobel Prize in economics, with its impressive gold medal and seven-figure check.

It may come as a surprise to some, but markets are by no means artificial entities invented in an ivory tower. They are entirely natural and instinctive products of human pragmatism.

Let’s look at some of the popular myths about markets that have brought us so much grief. The first is that the amount of goods and services consumers are willing to buy at the so-called “market price” always equals the amount producers are willing to sell.

The evidence indicates that real-world buyers and sellers are forever chasing transaction prices that coincide just long enough for them to strike deals. The price agreed upon for one deal may be different from that of a similar one struck at the same instant on the other side of the room.

This should come as no surprise to anyone who’s ever bought a knock-off Rolex wristwatch, Mont Blanc pen or Vuitton handbag at a bargain price from one of the sidewalk stalls that line Manhattan’s Canal Street, where the sweaty reality of free markets truly flourishes.

Another myth is that markets are perfectly efficient because decisions to buy and sell are made by coldly rational androids that seek only to maximize their personal satisfaction in objective ways, possess complete information and have absolute freedom to enter into transactions or to pass on them.

But real-world markets are usually chaotic, with the average buyer or seller trying to guess what every other average buyer and seller thinks is the right price. And what about situations like the one faced by a fisherman forced to sell his fresh fish at the end of the day for whatever price a restaurant chain offers, because it’ll spoil overnight?

Many economists claim that market-price changes are entirely random and independent of each other, like consecutive coin tosses. But normal people instinctively know that prices are determined by human beings who negotiate knowing what the last transaction price was. The real world is like an unbalanced roulette wheel, full of patterns and dependencies.

Still another myth is that markets work best when they’re not subject to any meddling by external institutions like government. But markets need regulation as both President Obama and Governor Romney acknowledged in their first debate.

We can’t rely on the myth that a seller knows his economic success ultimately depends on his reputation among potential buyers. The argument that he has a powerful economic incentive to maintain a reputation for honesty can easily fall prey to natural instincts that may be those of a con artist.

Market myths like these provided justifications for the deregulation mania on Wall Street and elsewhere. If we want to recover from the Great Recession they helped cause and avoid a repeat of it, we’d better learn the difference between myth and reality.

originally published: October 13, 2012

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Month: October 2012

Reality check: Myths cloud free-market debate