FIRE Economy Explosion Fallout -- Part I: Recession ends, depression begins - Eric Janszen

[bart]

Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins - Eric Janszen

It speaks for itself:

[bart]

Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins - Eric Janszen

In general, unemployment benefits are based on an individual's earnings in the base period. As of December, 2008, CA benefits ranged from $40 to $450. California state unemployment benefits are subject to Federal income taxes, and you may elect to have taxes withheld from your unemployment check.

http://swz.salary.com/salarywizard/l....html#Benefits

[Jay]

Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins - Eric Janszen

Appropriate penalties virtually always stop or control undesired or unwanted behavior.

I generally agree with this statement when it pertains to planned crimes, which appears to be its context. Crimes of passion are not effectively limited by penalty, and those also happen to be the crimes which most often evoke capital punishment.

[Ann]

Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins - Eric Janszen

Anyone here who is unemployed from a well paying job, like to educate us on how much unemployment insurance they receive?

An article I found for my father who had the say question stated that unemployment insurance pays 38 cents of each salary dollar, on average. The article was several years old. Sorry. I cannot find it again, but I do recall that number. It struck me at the time as low.

[cjppjc]

I looked it up




How much? In general, unemployment benefits are based on an individual's earnings in the base period. As of December, 2008, NJ benefits ranged from $85 to $560. New Jersey state unemployment benefits are subject to Federal income taxes, and you may elect to have taxes withheld from your unemployment check

[ASH]

Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

i think technology and, as i said earlier, financialization and the global labor arbitrage are all implicated. but financialization, in particular, has been a political and cultural choice, not just an economic one. look at ej's lists of the 100's of bankers who got million dollar bonuses in spite of making bad decisions. and the mortgage brokers and real estate hustlers and condo flippers who made bundles. my point is that there's more to income disparities than "ability."

jk -- I think one comes to different conclusions about the link between financial outcome and ability depending upon whether one is most concerned about the outliers and the extremes of income disparity, versus understanding the meat of the population in the center of the distribution. In my view, the various opinions expressed on this topic in this thread are all valid in context. If one is concerned about why there is a non-uniform distribution of wealth and seeks to explain the distribution within a few standard deviations of the mean, then ability has a lot to do with it. This is especially true within a particular trade or profession (which adjusts out some of the structural biases that lead to extreme income disparity). But if one is most concerned about the degree of income disparity, then one has to understand the outliers, and in this case the structural and cultural issues which have been cited are the dominant factors. I see the clash of opinions arising because (a) we are most incensed by the outliers, and (b) we find it offensive if the general validity of the link between ability and wealth is stretched to seemingly justify the outliers on the basis of merit. In fact, the structural and cultural arguments which best explain the outliers do not invalidate an ability-based model to explain the majority of the wealth distribution, and the ability-based model doesn't explain the outliers very well.

[zoog]

Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins - Eric Janszen

Anyone here who is unemployed from a well paying job, like to educate us on how much unemployment insurance they receive?

An article I found for my father who had the say question stated that unemployment insurance pays 38 cents of each salary dollar, on average. The article was several years old. Sorry. I cannot find it again, but I do recall that number. It struck me at the time as low.

How much? In general, unemployment benefits are based on an individual's earnings in the base period. As of December, 2008, NJ benefits ranged from $85 to $560. New Jersey state unemployment benefits are subject to Federal income taxes, and you may elect to have taxes withheld from your unemployment check

Generally it is approximately 50% of your former weekly salary / 40-hr pay, based on what you made in the last few quarters. However there is a maximum cap (this may vary by state?) so depending on just how "well paying" your job was, the percentage could be less.

Note: I am not unemployed... yet?:eek: ... but looked into the topic a couple months ago to run the numbers on what my life might be like if I do lose my job.

[leegs]

Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

jk -- I think one comes to different conclusions about the link between financial outcome and ability depending upon whether one is most concerned about the outliers and the extremes of income disparity, versus understanding the meat of the population in the center of the distribution. In my view, the various opinions expressed on this topic in this thread are all valid in context. If one is concerned about why there is a non-uniform distribution of wealth and seeks to explain the distribution within a few standard deviations of the mean, then ability has a lot to do with it. This is especially true within a particular trade or profession (which adjusts out some of the structural biases that lead to extreme income disparity). But if one is most concerned about the degree of income disparity, then one has to understand the outliers, and in this case the structural and cultural issues which have been cited are the dominant factors. I see the clash of opinions arising because (a) we are most incensed by the outliers, and (b) we find it offensive if the general validity of the link between ability and wealth is stretched to seemingly justify the outliers on the basis of merit. In fact, the structural and cultural arguments which best explain the outliers do not invalidate an ability-based model to explain the majority of the wealth distribution, and the ability-based model doesn't explain the outliers very well.

As is true of all your posts, this one is well articulated and right on in IMO . . . except the last phrase 'majority of the wealth distribution'.

The majority in terms of number of people - yes I think you are right. The majority in terms of dollars - I can't agree. I would certainly think that the top 1% would qualify as outliers, yet they own ~40% of the wealth. One could argue that in our current system, a near majority of wealth distribution in terms of dollars is present in the outliers, and arguably not primarily attributable to ability.

It is the extreme nature of this disparity, resulting from our oligopoly, that in my opinion really overshadows the typical concern over redistribution of wealth, using taken to mean middle class folks paying for welfare moms with Cadillacs.

Of course there are many good reasons to object to excessive amounts of the latter type of wealth redistribution, but I think the bigger problem is the redistribution in the other (upward) direction.

[jk]

Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

jk -- I think one comes to different conclusions about the link between financial outcome and ability depending upon whether one is most concerned about the outliers and the extremes of income disparity, versus understanding the meat of the population in the center of the distribution. In my view, the various opinions expressed on this topic in this thread are all valid in context. If one is concerned about why there is a non-uniform distribution of wealth and seeks to explain the distribution within a few standard deviations of the mean, then ability has a lot to do with it. This is especially true within a particular trade or profession (which adjusts out some of the structural biases that lead to extreme income disparity). But if one is most concerned about the degree of income disparity, then one has to understand the outliers, and in this case the structural and cultural issues which have been cited are the dominant factors. I see the clash of opinions arising because (a) we are most incensed by the outliers, and (b) we find it offensive if the general validity of the link between ability and wealth is stretched to seemingly justify the outliers on the basis of merit. In fact, the structural and cultural arguments which best explain the outliers do not invalidate an ability-based model to explain the majority of the wealth distribution, and the ability-based model doesn't explain the outliers very well.

ash, i think your argument is well-taken, but doesn't address the evolution of wealth disparity over time, even within the same political/economic system. why is wealth disparity \more extreme recently than any time since the 1920's? something changed, and it is not the distribution of abilities over the population.

[WDCRob]

Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

I don't know if it's online anywhere, but I saw a presentation by Robert Shiller at the Library of Congress a couple years ago where he was talking about the change in the distribution of income. (ETA: just searched his homepage and didn't find the presentation there.)

Wish I could remember the details now, but IIRC he made a pretty good case that it was tax policy that had driven the increasing gap between the have and the have nots.

He suggested we index inequality, and adjust policy to maintain whatever level of inequality we agreed was appropriate.

[jk]

Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

I don't know if it's online anywhere, but I saw a presentation by Robert Shiller at the Library of Congress a couple years ago where he was talking about the change in the distribution of inequality. (ETA: just searched his homepage and didn't find the presentation there.)

Wish I could remember the details now, but IIRC he made a pretty good case that it was tax policy that had driven the increasing gap between the have and the have nots.

He suggested we index inequality, and adjust policy to maintain whatever level of inequality we agreed was appropriate.

that's a great, rational idea. unfortunately it requires that we make conscious decisions about things we can barely bear to think about, let alone discuss. it requires we take responsibility in a way that our polity is incapable of.

[ASH]

Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

The majority in terms of number of people - yes I think you are right. The majority in terms of dollars - I can't agree. I would certainly think that the top 1% would qualify as outliers, yet they own ~40% of the wealth. One could argue that in our current system, a near majority of wealth distribution in terms of dollars is present in the outliers, and arguably not primarily attributable to ability.

I should have been clear. I agree with you. I meant the majority of the population -- not the majority of the wealth.

[ASH]

Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

ash, i think your argument is well-taken, but doesn't address the evolution of wealth disparity over time, even within the same political/economic system. why is wealth disparity \more extreme recently than any time since the 1920's? something changed, and it is not the distribution of abilities over the population.

I didn't specify a mechanism, but here's my take on what affects the extrema, framed as my take on wealth in general. (Mind you, somebody like me theorizing about wealth is a lot like a virgin writing a sex column.)

The trivial case is when one is wealthy to begin with. An enormous pile of capital times a modest rate of return can result in an impressive income and compounding wealth -- provided one is able to avoid farming management of the fortune out to Madoff types, or dissipation of the family fortune by incompetent offspring. Tax law is the most important non-ability-related factor which I can think of that changes over the decades, and which would affect the rate of increase of old wealth.

Most of the other ways to be wealthy involve the same structural feature: income that scales with volume of business transacted, concentration by hierarchy, and a large volume of business. No one gets wealthy earning a base salary. In order to get wealthy, you need an income that scales with the volume of business, shared among as small a number of beneficiaries as possible. That's one reason small business owners often rank high in the income distribution (income related to business volume -- if profitable -- and concentration by hierarchy). Law firm partners who share in profits also do quite well, as do those at the top of multi-level marketing companies, and the like. In many of these cases, business volume and the ability to turn a profit is highly dependent upon ability, but the structure of the compensation native to a particular profession acts as a multiplier. In other words, if you are good and work in a profession where structurally your income is tied to business volume and is concentrated by company hierarchy, then you will do much better financially than someone of equal ability working in a salaried position.

That brings me to the case du jour, which is the financial industry. The reason we see such out-sized bonuses at financial companies is much the same as above. However, more so than the other cases cited, the effort required to provide the services does not scale linearly with the volume of business (measured in dollars invested), so investment bankers can increase the amount of money they manage without having to dilute the bonus pool accordingly. Further, financial leverage means that an investment banker can transact in sums many multiples of that entrusted to his care, and profit accordingly. To the extent, then, that wealth consists of skimming off a modest percentage of an astronomical sum, investment banking is structurally in a sweet spot.

The main non-ability-related factors which affect the extent to which these structural games can be exploited include tax law (again), and the financialization of the economy (which you pointed out). The impact of changing tax law is pretty obvious. I think financialization of the economy is important, because when the volume of economic activity loses its moorings in real things, then volume-related income can grow accordingly.

[Chris Coles]

Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins - Eric Janszen

Over the last few months I have been working on completing a new book, not this time about gravity, but the way the FIRE economy has removed access to equity capital investment at the grass roots of society and how we might resolve the problem by the acceptance of a set of rules for such investment. The book is finished, and will be distributed for free as a closed, readable only PDF file. But, as I have work to do on my web site and I have to resolve how to fund the first batch of the book itself; it is not yet available. (I am aiming to use this free PDF as viral marketing to see if I can self fund the rest of my ongoing adventure). The title will be: The Road Ahead from a Grass Roots Perspective. I give you chapter 10, The Fulcrum for Change. I must add, this chapter, taken on its own, does not give a complete view of what I am trying to get across, but it does address what I believe is the starting point for the debate about why we have a distortion of prosperity.

Chapter 10

The Fulcrum for Change

Before we can define what must be altered to bring about the changes needed, we have to look back to where the FIRE economy began and learn a classic lesson from history. I believe that we can define that beginning precisely, both in time and location. It was at a meeting in London in 1964 between two individuals, Jim Slater and Peter Walker and a London Based savings institution. The conversation went something like this.

Slater Walker; we have identified a company that we believe has hidden value and we have come to you because we need funding to enable us to purchase a block of their shares sufficient to be able to take control of that company and break it up to “unlock” that hidden value. (Up to that point in time, a public company was considered to be sound and well run if it had, over time, built up internal prosperity, some in the form of a cash surplus, some in fully depreciated property with an understated “book value” are two examples sufficient to give you an idea of the picture Slater Walker presented).

They got the funding and they proceeded to do precisely what they had set out to do, they broke up the company and released substantial hidden value to the shareholders, the original savings institutions. Once this single event became visible, an unstoppable new paradigm slowly emerged which we now describe as the FIRE economy. Looking back, at the time, it was so easy to see the short, even medium term benefits.

But no one saw that they had also changed the fundamental direction of the responsibilities of the savings institution; from external, arms length investment, to internal investment with the primary aim of generating additional prosperity for the savings institution at the expense of the overall prosperity of the external community.

That the underlying philosophy of the savings institution changed direction and where in the past they had invested the savings of the nation – at arms length and thus without an expectation of control over the external community of savers; they now invested to bring increased prosperity to the savings institution.

The balance between the prosperity of the external community and the internal savings institutions changed. From that moment onwards, all investment became centred upon the need to maximise the prosperity of the savings institutions, what we now describe as the FIRE economy.

From that momentous meeting onwards, Savings institutions lost sight of their underlying responsibility to invest equity capital to create long term prosperity at arms length and instead concentrated upon investment into “privateers” who would bring that prosperity back into the savings institutions.

What should have happened was the savings institution should have told Slater Walker that they could have all the funding they needed to compete with the existing company and through competition, force the existing company into using its hidden value to in turn compete against them. What happened instead is that from that moment, the savings were not invested as equity capital into new industry, but were instead, invested back into the institutions themselves.

At first sight, that simple statement seems innocuous but in fact, it underpins the complete destruction of the industrial society. Instead of investment of savings into industry created by the industrious of the savers community, all future investment had to compete with the returns available internally to the FIRE economy. Savings were from then onwards used internally, within the institutional economy to change the value of the paper assets held by the institutions.

Investment between the institutions from that moment became the dominant producer of the income of the institutions.

Let me give you an example, a parallel if you like. If a savings institution buys 10 million new issued shares, say of a base issue value of say, $0.10, ten cents, then the issued capital of the company will be $1 million. So the value of the investment into job creation for the savers of the local community is $1 million. But the stock market value might now be, say, $60 and the savings institution now buys those same 10 million shares for $600 million from another similar savings institution, that money, the $600 million, is not invested as new job creation equity capital back into the savers local community; but instead, the money stays within the savings institutions internal economy. The savings are not invested into the local community, but instead drained off and used by the institutions for their own benefit.

Once you change the emphasis from investment of equity capital into the industrious of the community of savers; to investment BETWEEN the savings institutions, you automatically lock out the savers who now cannot benefit directly from local investment. And that is exactly what has happened. The prosperity of the community has been surrendered and instead used as the base investment between institutions.

By far the majority of that prosperity has now been transferred from the local communities into the holdings of the savings institutions as investment between the institutions.

And that brings in another consequence of the way this new intra institutional investment has developed. If you invest savings as equity capital to create new employment into the local community, the money has to be used to pay all those job creation costs I have described earlier. So no matter if that business fails, the investment retains a value as the money circulates within the local community.

But if you instead take those savings and allow the savings institution to pay another savings institution a NOTIONAL value, (for a $0.10 share certificate), of, say, $60 this morning and the value later that day reduces to say, $50; that reduced value is totally lost; evaporated. There is no value other than the notional value anyone will place upon the share based upon what the stock market places as a market on the value. While values go up everyone can pretend that this is the way to make more money than by investment into the local community; but the moment the trend turns down, all those savings can completely disappear with no benefit to anyone. Exactly what is happening today! Much more importantly, now we can see from history where we, the savers, the people of the external communities, have to drive the debate. We have to address the fundamental philosophy of the savings institutions. We must forge a new order.

Savings institutions have to recognise they have a duty to invest the majority of the savings of their local communities back as equity capital, via free marketplaces, under free market rules into a fully competitive free society. Investment into inter/intra institutional vapourware must stop.

Savings must be reinvested back into local communities as equity capital. There is no other road towards a prosperous free enterprise community. Every other road perpetuates the mistakes of past history with a feudal mercantile economy dominated by the intra institutional investment policies of the FIRE economy that very effectively destroy value in a downturn.

Finally, perhaps of even greater importance is a need to recognise why, all those decades ago, before Slater Walker, housing costs for the employees and business rents in general in the likes of London were so much lower. In a capitalist economy, where the savings are directed back into equity investment into job creation within the local communities; it made no sense to raise asset values. Why? Surely the imperative to make money from rents and increased asset values, (as increased income for the financial institutions), should remain? I take you back to the debate about the need for incentive to keep costs low. In a capital based society it makes no sense at all to drive up the costs of fixed assets. You are creating a competitive society where you need to keep fixed costs as low as possible. By that, you in turn create low rents, which in turn reduce the pressure to pay ever higher wages to cover the costs of the fixed assets. In truth, I doubt that anyone, other than the financial institutions, has benefited in any way at all from the ever rising costs of housing. Higher rents, mortgages, business premises rents drive up the cost of everything to the point where your local community can no longer compete against most other nations.

Yes, your banks have made a fortune. But now your local economy can no longer compete against lower cost nations to the extent that the majority of you are left with low quality jobs, no skills, no opportunities for the young and a constant, ever present problem of trying to address unemployment within more and more communities throughout the nation. You will not be able to achieve prosperity for the majority until you let go of the notion that prosperity comes from driving up asset prices. Prosperity comes from investing equity capital into the industrious job creators within your local communities, not fixed assets.

[rjwjr]

Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

you still have not explained how, given the unchanging disparity of abilities among the population over generations, nonetheless the income distribution changes over time. more specifically, you have not addressed the fact that recently incomes have become more unequal than at any time since 1929, yet the distribution of abilities - however defined- over the population is no more extremely dispersed. what's changed?

The power of compound interest.

This may seem like a flippant answer, but it is my serious answer. "The rich get richer" is true in many respects. Obviously not true for Mike Tyson, many pro athletes, many lottery winners, etc., but definitely true for most capable wealth creators.