Author Archives: James Kwak

I Agree with Milton Friedman!

By James Kwak

In Capitalism and Freedom, Milton Friedman asks what types of inequality are ethically justifiable. In particular (pp. 164–66):

“Inequality resulting from differences in personal capacities, or from differences in wealth accumulated by the individual in question, are considered appropriate, or at least not so clearly inappropriate as differences resulting from inherited wealth.

“This distinction is untenable. Is there any greater ethical justification for the high returns to the individual who inherits from his parents a peculiar voice for which there is a great demand than for the high returns to the individual who inherits property? …

“Most differences of status or position or wealth can be regarded as the product of chance at a far enough remove. The man who is hard working and thrifty is to be regarded as ‘deserving’; yet these qualities owe much to the genes he was fortunate (or fortunate?) enough to inherit.”

I think Friedman is correct here. This is basically the same point that I made in my earlier post: the money that you make because you are smart and hard working is the product of good fortune just as much as the money that you inherit directly from your parents.

Read more at Medium.

Over at Medium: Geo-Engineering Doesn’t Reduce Long-Term Risk

By James Kwak

Mark Buchanan — who is actually a physicist, after all — makes a compelling argument against relying on geo-engineering to deal with our climate change problem. For one thing, some of the proposed technologies simply won’t work, because they do nothing about the fact that the poles are warming faster than the rest of the planet. For another, the geo-engineering fairy is being used to lobby against other approaches — conservation and renewable energy sources — that would deal with climate change at its source.

Another reason to be skeptical of geo-engineering is the effect it has on the risk profile of humanity’s future. Technology has produced some amazing things in the past century. But, with zero exceptions that I can think of, they weren’t things that our species needed to survive, or to prevent widespread natural and societal devastation. If we’re talking about technologies that can make our lives better in all sorts of ways, like the Internet or DNA sequencing or quantum computing, then risk is good: we want to place lots of bets that have a high chance of failure but high potential returns.

Read more at Medium.

Over at Medium: Organized Crime on Wall Street

By James Kwak

One of the central dramas of the early seasons of The Wire is the cat-and-mouse game between Avon Barksdale’s drug operation and the detectives of the Major Crimes Unit. The drug dealers started off using pagers and pay phones. When the police tapped the pagers and the phones, Barksdale’s people switched to “burner” cell phones that they threw away before the police could tap them. By Season 4, Proposition Joe advised Marlo Stanfield not to use phones at all.

Well, apparently, Wall Street currency traders don’t watch The Wire. I don’t think anyone was surprised to learn that major banks including JPMorgan, Citigroup, Barclays, RBS, and UBS conspired to manipulate currency prices — something that regulators have been investigating for over a year and a half. One common strategy was cooperating to time large transactions in order to manipulate daily benchmark rates at which other client transactions are executed.

Read more at Medium.

Over at Medium: “Payout Baby!!!”

By James Kwak

“In my many years of experience working in compliance, do you know how many fixed and variable annuities I’ve seen being invested in IRAs??? Countless.

“Investing a tax deferred investment within a tax deferred account simply does not make sense, except for very very few exceptions. … And when brokers answered me honestly as to why they picked annuities over mutual funds or even plain vanilla stocks??? Payout baby!!!”

That’s a compliance officer at Wells Fargo talking about the kinds of abuses that brokers — who advise clients about where to put their money, even if they aren’t “registered investment advisers” — inflict on their customers. For context: The benefit of an annuity is that taxes on earnings are deferred until withdrawals — but you get that benefit in any IRA, so there’s no point in putting an annuity (which has higher costs than an ordinary mutual fund) in an IRA. Yet in this case the brokers were pushing annuities because of the (legal) kickbacks they were getting from the annuity providers.

Read more at Medium.

Over at Medium: The Importance of Taxing Capital

By James Kwak

“At present, when zero interest rates make capital costs as low as they have ever been but corporate profits are at record levels, there needs to be much less concern with capital costs and more concern with the distributional aspects of capital taxation.”

That’s Larry Summers — with whom I have often disagreed in the past — at a Brookings event on the tradeoff between equality and efficiency. For most of our lives, government policy in the United States and most of the developed world has been focused (at least in theory) on efficiency: colloquially speaking, making the pie bigger rather than worrying about how the pie is divided up. Rising tide, boats, you know the rest: Laffer Curve, unleashing the job creators, and so on. Inequality is something we profess to regret while doing nothing about it.

Read more at Medium.

Why Your Wages Aren’t Going Up

By James Kwak

Unemployment is down to 5.4%! Yay!

That was the summary of last week’s unemployment report. Yet the two-track “recovery” — about to enter its seventh year — continues. Average hourly wages increased by only 0.1% in April and 2.2% for the past twelve months, which amounts to basically nothing when you take inflation into account.

This is what the new normal looks like. Wages barely rise during periods of economic “expansion” (you know, the opposite of recession), then fall when unemployment spikes during a recession. In the long run, that means that average real earnings actually go down, and household income can only keep up if people work more hours. Yet the number of full-time jobs is lower today than it was before the financial crisis.

Read more at Medium.

Greg Mankiw Forgot What He Teaches

By James Kwak

I’ve written several times about what I call the Economics 101 ideology: the overuse of a few simplified concepts from an introductory course to make sweeping policy recommendations (while branding any opponents as ignorant simpletons). The most common way that first-year economics is misused in the public sphere is ignoring assumptions. For example, most arguments for financial deregulation are ultimately based on the idea that transactions between rational actors with perfect information are always good for both sides — and most of the people making those arguments have forgotten that people are not rational and do not have perfect information.

Mark Buchanan and Noah Smith have both called out Greg Mankiw for a different and more pernicious way of misusing first-year economics: simply ignoring what it teaches — or, in this case, what Mankiw himself teaches. At issue is Mankiw’s Times column claiming that all economists agree on the overall benefits of free trade, so everyone should be in favor of the Trans-Pacific Partnership, among other trade agreements.

Read more at Medium.