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.

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.

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.

By James Kwak

The neolithic political ideology of Thomas and Friends is so overbearing and obvious that it’s not worth writing about (except in parody, which I won’t attempt here). Duncan Weldon has taken up the more interesting question of what Thomas, Percy, and their friends can tell us about the economy of Sodor, that strange island trapped somewhere off the coast of Great Britain and in a weird time warp that vaguely resembles the mid-twentieth century.

Like Duncan, I have watched plenty of Thomas videos, in my case in the company of my three-year-old son Henry. One thing that has often struck me about Sodor Railways is the vast amount of excess capacity. The most common plotline goes like this: Some engine has a job to do. However, said engine chooses to do something else out of vanity, unwillingness to go out in bad weather, curiosity, or something similar. Late in the episode, either the engine realizes the error of his ways and does his job, or some other engine does it for him. In either case, the original engine learns his lesson: that it is best to be Really Useful and not to cause Confusion and Delay. (Only, he never really learns the lesson — see the next episode.)

Read more at Medium.

By James Kwak

Is it the money?

No.

Federal Reserve Chair Ben Bernanke, the man who saved the global economy, is becoming an adviser for Citadel, a hedge fund management company. Bernanke will provide advice to Citadel’s fund managers and will also meet with its clients (that is, the limited partners who invest in those funds).

It’s easy to see why Citadel wants Bernanke. He’s a smart man. He knows the inner workings of the world’s central banks as well as anyone. Although he won’t be a registered lobbyist, he can pick up the phone and get anyone in the world to answer, if he wants to. And, perhaps most importantly for the bottom line, the wow factor of having Bernanke meet with investors will help immeasurably with sales — bringing investments in the door.

The bigger question, as always, is why Bernanke wants Citadel.

Read more at Medium.

By Simon Johnson

The political debate about finance in the US is often cast as markets versus regulation, as if “more regulation” means the efficiency of private sector decisions will necessarily be impeded or distorted. But this is the wrong way to think about the real policy choices that – like it or not – are now being made. The question is actually what kind of markets do you want: fair and well-functioning, with widely shared benefits; or deceptive, dangerous, and favoring just a relatively few powerful people?

In a speech on Wednesday, Senator Elizabeth Warren (D., MA) laid out a vision for better financial markets. This is not a left-wing or pro-big government agenda. Senator Warren’s proposals are, first and foremost, pro-market. She wants – and we should all want – financial firms and markets that work for customers, that encourage innovation, and that do not build up massive risks which can threaten the financial system and bring down the economy. Continue reading “No More Cheating: Restoring the Rule of Law in Financial Markets” →

By James Kwak

Beeping iPads! Buzzing phones! Zapping watches! Soon, apparently, we won’t be able to complete a thought without being interrupted by some “intelligent” piece of technology.

The solution, according to Steven Levy, is yet more technology:

a great artificial intelligence effort to comb through our information, assess the urgency and relevance, and use a deep knowledge of who we are and what we think is important to deliver the right notifications at the right time. . . .

the automated intake of our information will allow us to “know by wire,” as super-smart systems learn how to parcel things out in the least annoying and most useful fashion. They will curate better than any human can.

First of all, I’m skeptical. So is Levy, apparently; just a few paragraphs up, he writes, “the idea of One Feed to Rule Them All is ultimately a pipe dream.” The same factors that make it impossible for one company to create a perfectly prioritized feed make it impossible for one company to create a perfectly prioritized stream of notifications.

Read more at Medium …

By James Kwak

Dan Davies put together a brilliant roundup of the clever business models that financial technology startups are pitching to their investors — and why most of them are deeply flawed. Some of them apply much more broadly than to just the financial services industry. Number three, for example — “Hoping that a load of people who actively mistrust each other will trust you instead” — is a decent description of the business-to-business marketplaces that Ariba was trying to build when I worked there back at the beginning of the millennium.

I’d like to add two more general principles that apply to technology companies that are trying to serve the financial services industry — mainly learned during my years working at an insurance software company before going to law school.

Read more on Medium …

(I’m going to try switching to a Brad DeLong-style approach in which I put the beginnings of my Medium posts here, and then you can decide if you want to read more or not. I can’t put the whole post here because they have thirty-day exclusivity.)

By James Kwak

Did you know that blogging is dead? That’s what I hear, anyway. I plan to say something about it once I figure out if I have anything to say on it.

Anyway, as you have probably noticed, I do most of my sporadic writing over at Medium these days. Since I last checked in here, I wrote stories about:

• Why I crippled my smartphone;
• The misleading campaign against the estate tax; and
• The fallacy on the first page of Gregory Mankiw’s textbook

I also posted an essay by Walt Glazer about inequality.

You can see all of my Medium stories here, or you can read the whole Bull Market publication (now including Brad DeLong!).

By James Kwak

Supposedly President Obama is making “middle-class economics” one of the key themes of his final two years in office. I don’t really know what this is supposed to mean in a country where people making ten times the median household income call themselves “middle class” and there are tens of millions of people in poverty.

For starters, I think it’s important to understand the distribution of wealth in the country as it stands today. That’s the theme of a story I wrote on Medium earlier this week, “The Magnitude of Inequality,” which uses charts and pictures to try to convey just how unequal a society we live in.

Yesterday I published another story on Medium about one of Obama’s “middle-class economics” proposals: the forthcoming Department of Labor rule that will try to protect people’s retirement savings from financial advisers’ conflicts of interest. It’s a complicated topic to understand, and the administration proposal will undoubtedly help—but not very much, given the scope of the retirement security problem.

By James Kwak

This week I returned to one of my favorite topics: raising taxes, particularly on the rich. First I wrote an article for Medium about the single most obvious change that should be made to the tax code: eliminating the step-up in basis at death for capital gains taxes. If you’re not sure what step-up in basis means, or why it’s a ridiculous idea, you should read the article.

Then today I wrote an article for the Atlantic about why (a) killing 529 plans was a great idea in President Obama’s latest tax proposals and (b) why 529 plans are impossible to kill. Here’s the crux of the matter:

“If you’re poor, a 529 plan gives you nothing, since you don’t pay income taxes; the American Opportunity Tax Credit gives you $4,000 ($5,000 under Obama’s proposal) because you can take $1,000 of the credit per year even if you pay no taxes. If you’re in the ‘middle class’ (making at least $74,900 and able to save $3,000 per year per child), a 529 plan gives you $5,800; the AOTC gives you $10,000 ($12,500 under Obama’s proposal). If you’re in the upper class, a 529 plan gives you $26,300; the AOTC gives you nothing. Do I even need to write the rest of this article?”

My editor took out that last sentence, but I liked it so much I’m putting it back here. (Those number are based on some basic scenarios I described in the article.)

Every politician likes to say that he is in favor of simplifying the tax code, eliminating tax breaks for people who don’t need them, and helping the middle class. Only it just isn’t true.

By Simon Johnson

The Obama administration urgently needs to nominate a qualified individual as Undersecretary for Domestic Finance at the Treasury Department. The Dodd-Frank financial reforms are under sustained and determined attack, and the lack of a confirmed Undersecretary is making it significantly harder for Treasury to effectively defend this important legislation. Failing to fill this Undersecretary position would constitute a serious mistake that jeopardizes a signature achievement of this presidency.

In the continuing absence of an Undersecretary for Domestic Finance, the administration has recently displayed an inconsistent – or perhaps even incoherent – policy stance on financial sector issues. On the one hand, in mid-December, the White House agreed to rollback a significant part of Dodd-Frank – the so-called “swaps push-out,” which was shamefully attached at the behest of Citigroup to a must-pass government spending bill. The White House put up little resistance to this tactic and, at the critical moment, lobbied House Democrats to support the repeal of Section 716. Continue reading “Nominate A Qualified Undersecretary Of Domestic Finance Now” →

By James Kwak

This morning I posted an article over at Medium about the question—raised again by Goldman analysts earlier this month—of whether JPMorgan should be broken up. The answer is obviously yes. The interesting thing is that this is not a socialist-vs.-capitalist, academic-vs.-manager, regulator-vs.-businessman sort of argument. It’s a shareholder-vs.-manager issue, and the shareholders are wondering why Jamie Dimon insists on defending an empire that is best known for crime and ineptitude.

Earlier this month I wrote another Medium article about whether or not directors have a so-called fiduciary duty to maximize profits. The answer is no. They can do pretty much whatever they want, as long as they have enough sense to come up with some sort of plausible justification for whatever else it is that they want to do. Whether that’s a good thing or a bad thing is a closer question, and it depends on whether you view directors as protectors of great institutions against rapacious fund managers, or whether you see them as cronies who are too willing to cater to their golf-club buddies in the executive suites.

By Simon Johnson

The shadow primary for the Democratic Party is in full swing. What will be the ideas, themes, and messages that win support in 2016 – and will they carry the day in the presidential election?

You can vote now at the Big Ideas project on almost every viable proposal from the progressive wing of the Democratic Party. Expressions of interest will feed into conversations on Capitol Hill and with presidential candidates. Nearly 1 million votes have already been cast.

Voting ends Friday at noon. Currently, in the section on the Economy & Jobs, the proposal to restore Glass-Steagall is in third place; breaking up Citigroup is close behind. (Vote now for these or for your own priorities.) Continue reading “Vote in the Democratic Shadow Primary Now: Support Elizabeth Warren” →