Wealth Distribution

[jtabeb]

Re: Wealth Distribution

That's is the problem with FIRE at large in the economy. It's not just the squids out there, it's as you say the remoras as well. All the people who's job it is to collect "frictional" costs of transactions in the economy. (Remember, FIRE is an economic rent-eater, which is NOT a productive benefit to society).

I have purchase two houses that I located and researched myself, and was stupid enough to pay a real estate "professional" to help me buy the houses both times. (NEVER AGAIN).

Now on the other hand, IN a BAD MARKET trying to SELL a house, my realtor was worth every damn penny. (The difference in the first case was no value added, in the second, MUCH value added).
SO I would say that it's hard to characterize FIRE minions as leaches in all cases BECAUSE, they are WORTHLESS when you don't need them but PRICELESS when you do need them.

Again, value added to me is someone else's cost. How do you control these interactions? I think the ONLY way is SIMPLE yet ADEQUATE regulation. As long as they playing field is level and the frictional costs are minimized with reference to the value added we do fine. (And has always been a hall-mark of successful markets, I might add).

[cjppjc]

Re: Wealth Distribution

I have purchase two houses that I located and researched myself, and was stupid enough to pay a real estate "professional" to help me buy the houses both times. (NEVER AGAIN).

Now on the other hand, IN a BAD MARKET trying to SELL a house, my realtor was worth every damn penny. (The difference in the first case was no value added, in the second, MUCH value added).

Glad to hear that your agent was worth the money when you sold your home. I would be interested to learn of the financial terms of your purchase transactions. Since I've never heard of a buyer "paying an agent." Unless the property was not on the market and the agent approached the owner.

[jtabeb]

Re: Wealth Distribution

Ash there will always be inequality, ALWAYS. Regardless if due to education, environment, wealth or god given ability it will always be with us.

The best we CAN do is make sure that there truly is a LEVEL field of competition (you may start out with a better or worse field position, that is the nature of inequality.) But AT LEAST you ain't running your drive uphill, while the other guy get to run his drive running downhill. That's not the system we have now. What we have now is a HIGHLY TILTED playing field that benefits few and disadvantages many. That's why people ARE PISSED OFF. And they have every right to be so and also to DEMAND that this situation be remedied. Government has failed for thirty years to take action to level the field of play. I hope and I pray that they have enough time to do so before calamity befalls us all.

I think EJ has it exactly correct in that you owe everyone an EQUAL opportunity to succeed. That DOESN'T mean you are mandating success and ensuring that you shield people from failure, it should be the exact opposite. It does mean that you provide equal access to educational opportunities and access to capital.

There will always be winners and losers.
I think it will be a financial disaster if you MANDATE that "Everyone Gets a Medal".

Everyone SHOULD however, get a fair chance to compete. That's what good governance IS and it is what good governance provides. (Unfortunately right now, we have NEITHER).

A different question is what level of security does society provide for ALL of it's citizens when they come on hard times. Right now, that may be the most important question.

But I honestly think the there is a solution that addresses BOTH of these questions simultaneously, and I would think that THAT would be the optimal solution.
(Unfortunately it would require dismantling our entire financial system and re-structuring it from the ground up.)
I hope Obama has the balls to try it and succeed, because in the end, it's our only hope for a sustainable future.

Notice I didn't say fail.
Sound policy doesn't fail.
BAD Policy fails.
BAD implementation of sound policy ALSO fails.

(So I REALLY HOPE that our policy makers get the policy AND the implementation RIGHT!)

[jtabeb]

Re: Wealth Distribution

They buyer ALWAYS pays for the agent (who do you think the seller gets his money from;))

Plus I was conned, err, I mean convinced that I NEEDED a "BUYERS AGENT" to make a purchase. I was younger and less informed, what can I say.

(Can't complain TOO MUCH, I made $50K on the deal in 18 months which I then put into something I had done MUCH more research on, and I'm happy to say I can't complain much about that either.)

[ThePythonicCow]

Re: Wealth Distribution

... And if they do, then maybe we have more of a conflict between ethics and the practical needs of society.

I've just started reading a book that goes into these ethical and economic questions in detail. It is Value Wars: The Global Market Versus the Life Economy (by John McMurtry, 2002, Pluto Press). Follow the link for more details.

Unfortunately, philosophers (like lawyers, it seems) trade in uncommon concepts using common language, so often require a rather demanding precision of language in order to accurately convey their thoughts.

Translation: it's slow reading. I'm only on page 7 at this moment.

I'm looking forward to this book helping me to form a useful conceptual framework for understanding these matters. McMurtry is no fan of the globalist elite, that's for sure.

[cjppjc]

Re: Wealth Distribution

They buyer ALWAYS pays for the agent (who do you think the seller gets his money from;))

Plus I was conned, err, I mean convinced that I NEEDED a "BUYERS AGENT" to make a purchase. I was younger and less informed, what can I say.

(Can't complain TOO MUCH, I made $50K on the deal in 18 months which I then put into something I had done MUCH more research on, and I'm happy to say I can't complain much about that either.)

Oh I must have misunderstood you when you wrote:

I have purchase two houses that I located and researched myself, and was stupid enough to pay a real estate "professional" to help me buy the houses both times. (NEVER AGAIN).

If the houses were listed for sale your research and ability to locate them must be tremendous. I would hate to have to hide something from you anytime.

As for the buyer always paying, I guess the seller only pays in a tough market.

Now on the other hand, IN a BAD MARKET trying to SELL a house, my realtor was worth every damn penny.

[jtabeb]

Re: Wealth Distribution

I found the houses, called the listing agent and then was then "informed" I needed to be represented by a "buyers agent" for the transaction. (Which they ever so thoughtfully managed to locate for me, in-house, of course).

[ASH]

Re: Wealth Distribution

Ash there will always be inequality, ALWAYS. Regardless if due to education, environment, wealth or god given ability it will always be with us.

The best we CAN do is make sure that there truly is a LEVEL field of competition (you may start out with a better or worse field position, that is the nature of inequality.) But AT LEAST you ain't running your drive uphill, while the other guy get to run his drive running downhill. That's not the system we have now. What we have now is a HIGHLY TILTED playing field that benefits few and disadvantages many. That's why people ARE PISSED OFF. And they have every right to be so and also to DEMAND that this situation be remedied. Government has failed for thirty years to take action to level the field of play. I hope and I pray that they have enough time to do so before calamity befalls us all.

I think EJ has it exactly correct in that you owe everyone an EQUAL opportunity to succeed. That DOESN'T mean you are mandating success and ensuring that you shield people from failure, it should be the exact opposite. It does mean that you provide equal access to educational opportunities and access to capital.

There will always be winners and losers.
I think it will be a financial disaster if you MANDATE that "Everyone Gets a Medal".

Everyone SHOULD however, get a fair chance to compete. That's what good governance IS and it is what good governance provides. (Unfortunately right now, we have NEITHER).

I don't think anyone is arguing that some degree of inequality is a problem. Top-down enforcement of equality-of-outcome is a rather extreme idea; you wouldn't find too many posting on iTulip advocating that. But what if this problem doesn't reduce to a neat, morally-satisfying narrative, once overpaid bankers are out of the picture? What if there is a problem both at the top of the distribution and at its bottom? What if in an efficient labor market, with a perfectly level playing field (within our borders), the economic value of a common American worker's labor really isn't worth the cost of living the (formerly) middle class American lifestyle? Might we not still be faced with a social problem associated with the income disparity between well-compensated workers in occupations whose labor isn't easily tradeable (or in protected industries, like defense engineering or government), and everyone else? As I see it, that doesn't really present an ethical problem, but it does present a practical social problem. The fact that there's a big pool of cheap skilled labor overseas and capital with which to employ it says that global equilibration of the wages of labor will result in lower wages in America and higher wages in the developing world. Even absent FIRE, I think there will be social problems if a bimodal wage distribution develops where today's relatively well-compensated professionals continue to do about as well as they do today, but everyone else's wages converge with those that prevail in the developing world. It seems to me that even if incomes at the top end of the distribution stop their FIRE-fueled ascent, there is a market force acting to lower income at the bottom of the distribution. FIRE is a big problem -- perhaps the biggest problem -- but another challenge we face is that the American worker yearns for a "normal" that resulted from a world very different than the one in which we live today.

My big picture view is that the natural outcome of less valuable common labor is that the common material standard of living in the US needs to fall. We've been putting it off through spending on credit, but that isn't sustainable. On the other hand, allowing that material standard of living to fall for some, but not all, isn't necessarily healthy for society... especially when maintaining former living standards depends upon working in protected industries or directly for the government. That is a recipe for corruption.

The only option that seems attractive to me is one that EJ has mentioned: reducing living costs. To some extent, we can maintain a decent standard of living here in the US even in the face of labor cost competition if we can just reduce some of our inflated living expenses. EJ cites housing as the biggest offender. And there is certainly a tie-in to FIRE through the asset price inflation (and cheap credit) that has encouraged high home prices and over-built homes. On the other hand, smaller houses would be an expression of reduced material standard of living -- you can't get away from that entirely.

[ASH]

Re: Wealth Distribution

... in comparison to those $200k engineers mentioned by jtabeb and exemplified by yourself.

Just to be clear, I'm not a $200k engineer... that was JT's "for instance". We were running around $200k gross when my wife was working, but I don't do that well by myself. Now, my brother who works (and has to cover living expenses) in silicon valley....

And I'm thinking that in ten or twenty years, when there is more III-V compound semiconductor infrastructure overseas -- and more engineers trained in this particular niche -- the free market value of my labor will fall. Ultimately, except for the fact that I work in a semi-protected market and there just aren't that many people trained in my area (yet), an equally talented Indian or Chinese Ph.D. (probably American-trained) can provide equal economic value for a lot less in wages. (First they came for the fab workers, but I didn't speak up; I was an engineer. Then they came for silicon circuit engineers, but I didn't speak up; I was an optoelectronic device guy. Then they came for the laser diode engineers, but I didn't speak up; I worked in defense...)

Of course, the plan is to be doing the outsourcing in ten to twenty years... not getting outsourced. That plan may or may not work out for me personally, but the problem for American society as a whole remains.

[jtabeb]

Re: Wealth Distribution

. Even absent FIRE, I think there will be social problems if a bimodal wage distribution develops where today's relatively well-compensated professionals continue to do about as well as they do today, but everyone else's wages converge with those that prevail in the developing world. It seems to me that even if incomes at the top end of the distribution stop their FIRE-fueled ascent, there is a market force acting to lower income at the bottom of the distribution. FIRE is a big problem -- perhaps the biggest problem -- but another challenge we face is that the American worker yearns for a "normal" that resulted from a world very different than the one in which we live today.



The only option that seems attractive to me is one that EJ has mentioned: reducing living costs.

I think you have to tackle the biggest problems FIRST (at least that's what's saved my life many times). I think most people agree, FIRE is killing the real economy (the one we actually want to preserve).

I agree that the second part will be the Second most important decision we will have to make as a society. And I actually think the solution SOLVES all of the major problems that this crisis has created.

As you said, wage rate differentials going to the lowest common denominator through global wage rate arbitrage.
You see a similar impact through environmental arbitrage. (Although transportation costs were reducing this back when we had $140 a barrel oil)

These combine to produce a lack of global demand and unemployment and falling wages in high wage rate countries. (and will eventually leak over into low wage rate countries as well).

That's one heck of a problem, but as it turns out there is a fix that not only solves these problems, but also solves our domestic funding problems (YES we have to cut budgets, but if we got them to a sustainable level, we could finance those requirements, what that level is, I don't know).

There is a big problem with the solution however, and that is going to be how do you maintain the value of the dollar (don't worry, I got that covered too).

Okay, Now that I've made all these BIG claims, hopefully I can keep your interest so here goes: (Very simplified, but still long)

First we need to match the monetary system to the real world constraints of our environment. What that means in a nut shell is that the concept of "growth for growth's sake" MUST DIE. Yearly increases in every economic metric are not desirable and not economically relevant or necessary. Why do we need more production or growth if we already have TOO MUCH of something (like housing for example or commercial real estate).

The problem is our economy and indeed our entire monetary system are predicated on exponential growth (compound interest). Here is an idea. Since our physical world is bounded by linear constraints, how about we have a economy and monetary system that seeks to grow at LINEAR rates, not exponential ones. (I know, human population growth is an exponential function, that is going to have to become a linear function as well, one way or another).

How to do this. Well the simplest way is to change our monetary system to a linear form of accounting. The rental fee of money concept comes into play. Instead of paying interest, you pay "money rent". If you lent me a ladder for a week you may charge me $20, two weeks and it's $40, three weeks and it's $60. The point is, the fee is determined by the rental cost and how long I keep the ladder. You don't for example rent ANYTHING at interest in the real world, except of course, money.

The next corollary is that you have to own something to be able to "rent it". You can't rent me a phantom ladder. Modern credit is our phantom ladder in this case, it too has to go.

How do you replace it? You monetize credit when it is created, in other words you have a 100% reserve system, vs a fractional reserve system. The money get's created by the government (where it should be created) and then distributed through intermediaries. They pay a lower rental fee to the government and are able to rent it out at a higher fee. (remember the physical ladder example, this money actually exists). In this way banks serve their intended role as allocators of money. (They make money if they allocate wisely, loose money if they do not). Please note difference here, the government collects seigniorage as a function of currency creation. That becomes part of it's revenue and it gets to spend that revenue. (The money "rent" that the government collects is a revenue source and flows to government coffers to pay it's expenses, money printing to fund expenses is not allowed)

Now we get to the people part. What do we do in this new system. I'll tell you what "Guaranteed minimum income" paid out of government receipts.(notice I said receipts of funds, not ISSUANCE of funds). Everyone gets this, no matter how rich or how poor. The AMOUNT is going to be a matter of some debate.

You don't get government services for free, you have to BUY them, with income or guaranteed income. Want none, then BUY none, and GET none. Want Single Payer health care, you have to pay for it. Taxes we all still have to pay. (We all need roads, bridges, defense, a legal system, you get the idea).

No about that dollar value problem. Ah yes, it is vexing isn't it. There is one thing that seems to work throughout history and that is the allowance free market conversion of fiat currency into physical things. The thing that I think saves the dollar is free market conversion of gold into currency and back again. No interest is yielded, only capital appreciation. (you know like the Chinese have done with the Yuan and Gold and Silver). I think that is the best and only way to provide an adequate check over the governments tendency to want to over issue currency. Every person gets to vote on how their government is managing the money supply, and they can vote with their feet if they are not happy.

Wouldn't everyone just take all their cash and buy gold an silver? No, and here's why. You are not allowed to buy things with gold and silver. You can change them into cash first and THEN buy things, but you ain't allowed to transact in gold and silver. You can save in it, but you can't transact in it.

Notice I said "save". Wouldn't every one just save all their money and drive the price to the moon? Not if the system were stable (linear growth), Honest (everyone knows EXACTLY how the system works) and Accountable (if I don't trust it, I'm buying gold, screw them).

What incentive is there to invest? Plenty! Much as I like gold NOW, I know I'd have to put my money to work to be able to retire on. That means, I need real growth. Not Inflationary growth, I mean Apple, Microsoft, Intel, Google type of growth. There are very few jobs (outside the FIRE sector) that pay you enough to be able to save enough in gold terms to retire on (they don't call them golden parachutes for nothing). So I know since my income is not big enough, I'm going to have to invest, and invest PRODUCTIVELY, that means the companies I invest in are going to have to provide goods and services that benefit society and are needed/desired by society.

This is a small hint of where I think we SHOULD go, but I think I've rambled enough to give you a general idea. Hope it provokes some thinking on everyone's part.




As for the last part, give me a Mid-Century Modern home with 4 bdrms and about 2000 sq and I will be ecstatic. (And I think most people would be too, after they've had a chance to see one. We got way too caught up in QUANTITY of HOUSE and weren't giving a crap about QUALITY of house.)

Point is WE NEED to ALLOW domestic DEFLATION to occur, and POLICY DECISIONS are preventing it. We are being denied the very medicine we need to return to a stable economic foundation.

[ThePythonicCow]

Re: Wealth Distribution

How to do this. Well the simplest way is to change our monetary system to a linear form of accounting. The rental fee of money concept comes into play. Instead of paying interest, you pay "money rent". If you lent me a ladder for a week you may charge me $20, two weeks and it's $40, three weeks and it's $60. The point is, the fee is determined by the rental cost and how long I keep the ladder. You don't for example rent ANYTHING at interest in the real world, except of course, money.

I don't see any difference between renting for some fixed rate of charging and simple interest. If you loan me $500 at 12% per annum simple interest computed monthly, then I owe you 1% per month ($5) plus the principal when I payoff the loan (the original $500). Interest compounds only if some interest is unpaid, adding to the outstanding debt.

[Supercilious]

Re: Wealth Distribution

There are two different issues here:
1) Any society/economic model in which a minority of top wealth individuals consistently achieve higher rates of wealth growth, and that wealth is transfered across generations is doomed to fail.

Basically, it's a mathematical reality that a tinny minority succeeds in time to capture all the wealth of the society. There are a lot of referenced papers written on this subject, and I'll post here just an old link (I think I gave it before) with a plain language (albeit long) explanation about how and why.... It's pretty simple and intuitive.

2) The second issue is that of banking (and basically the whole FIRE sector) as a phenomenon of economic parasitism.

The issue is basically as simple as in the case above. In any economy where the banking (FIRE) sector achieves higher growth and profit rates than the rest of economic activities, inevitably, in time, the FIRE sector gets to the point in which it strangles the economy. In such case it's just a matter of time until the level/rate of wealth required/extracted by the FIRE sector surpasses the level/rate of wealth accumulated/created by the rest of the economy. This is what happened to US and other advanced western economies and this is the true source of the current crisis.

Don't get me wrong. Any economy needs banking, investment, insurance and real estate services in order to run efficiently and be competitive, exactly as our body needs its blood in order to function.

Unfortunately there are only two extremes used in dealing with the FIRE issues:
-leaving it unchecked, to flourish and grow without limits (in a "rational markets" approach used in the developed western world) which inevitably results in the equivalent of a form of leukaemia.
-suppress it artificially (by tough government control) in favour of production of goods or rapid industrial development (as it happened in former communist countries and in some of the economic growth champion countries of developing world), which is equivalent to a severe form of anaemia.

Obviously, both these approaches are wrong. The key is to have a healthy blood count, unfortunately there are few stories of success.

One could say one of these cases is Switzerland, but in their case the Swiss banks are not kept in check but let to "service" other countries. Still, the Swiss FIRE sector doesn't strangle the Swiss economy because most of Swiss economy is international FIRE.

Another case of relative success is Singapore. Everybody talks about the revaluation of the Yuan, meanwhile Singapore. which started its high rate of development as a currency manipulator (like China) is ending that chapter and has performed successfully a currency revaluation.
Are they already out of the woods? IMHO no. Not yet.
Do they have a good chance to get away with it (currency manipulation and forced rapid development into a modern society)? Definitely yes!
Will they be able to keep themselves from developing a FIRE leukaemia? Probably yes, because they seem to go towards the Swiss model. Their FIRE sector is targeting other countries and not feeding on its own host.

The problem with the FIRE parasite is that most societies seem to oscillate between the extremes of fascism/corporatism (where the banks/corporations are directly or indirectly the owner of the government) and communism/socialism (where the governments are directly or indirectly the owners of banks/corporations)

The answer to this conundrum is simple and obvious. As we accept that in any modern society there should be a separation between church and state, maybe we should understand that we also should have a separation between corporations (especially the FIRE sector) and state.

And we also have the case of .... Dubai, where is very difficult to differentiate between state, church/religion and corporations. One may ask what is the definition of extravagant failure?

[jtabeb]

Re: Wealth Distribution

1+.2+.2+.2+.2+.2

vs
1.02*1.02*1.02*1.02*1.02*1.02

Do the series, it diverges fast.

[Anon21456]

Re: Wealth Distribution

1+.2+.2+.2+.2+.2

vs
1.02*1.02*1.02*1.02*1.02*1.02

Do the series, it diverges fast.

Right now the first formula is being used.
Except when politician are involved.

[ASH]

Re: Wealth Distribution

I don't see any difference between renting for some fixed rate of charging and simple interest. If you loan me $500 at 12% per annum simple interest computed monthly, then I owe you 1% per month ($5) plus the principal when I payoff the loan (the original $500). Interest compounds only if some interest is unpaid, adding to the outstanding debt.

I agree that this is very similar to -- or the same as -- simple interest. JT's point, I think, is that he wants neither debts (nor assets) to grow by compounding. However, it seems to me that even if the borrower's debt doesn't compound, the lender has the opportunity to compound his profits by 'renting' out the profit on the loan to another borrower.

JT -- in your proposed system, would the 'rent' payments on borrowed money drop as you paid back the loan principal? Unlike borrowing a ladder, you can return a portion of the money that you borrow over time.