The Future Of Economic Progress


On April 16, 2014, Kemal Dervi writes on Nation Of Change:

Slowly but surely, the debate about the nature of economic growth is entering a new phase. The emerging questions are sufficiently different from those of recent decades that one can sense a shift in the conceptual framework that will structure the discussion of economic progress – and economic policy – from now on.

The first question, concerning the potential pace of future economic growth, has given rise to serious disagreement among economists. Robert Gordon of Northwestern University, for example, believes that the US economy will be lucky to achieve 0.5% annual per capita growth in the medium term. Others, perhaps most carefully Dani Rodrik, have developed a version of growth pessimism for the emerging economies. The key premise, common to many of these leading analysts, is that technological progress will slow, including the catch-up gains that are most relevant for emerging and developing countries.

Follow Project Syndicate on Facebook or Twitter. For more from Kemal Derviş, click here.

On the opposite side are the “new technologists.” They argue that we are at the beginning of a fourth industrial revolution, characterized by truly “intelligent machines” that will become almost perfect substitutes for low- and medium-skill labor. These “robots” (some in the form of software), as well as the “Internet of things,” will usher in huge new productivity increases in areas such as energy efficiency, transport (for example, self-driving vehicles), medical care, and customization of mass production, thanks to 3D printing.

Second, there is the question of income distribution. In his instantly famous book, Thomas Piketty argues that fundamental economic forces are fueling a persistent rise in profits as a share of total income, with the rate of return on capital constantly higher than the rate of economic growth. Moreover, many have observed that if capital is becoming a close substitute for all but very highly skilled labor, while education systems need long adjustment times to supply the new skills in large quantities, much greater wage differentials between highly skilled and all other labor will cause inequality to worsen.

Perhaps the US economy in ten years will be one in which the top 5% – large capital owners, very highly skilled wage earners, and global winner-take-all performers – get 50% of national income (the percentage is not far below 40% today). Though national circumstances still differ greatly, the fundamental economic trends are global. Are they politically sustainable?

The third question concerns the employment effects of further automation. As was true in previous industrial revolutions, human beings may be freed from much “tedious” work. There will be no need for cashiers, call operators, and toll collectors, for example, and less need for accountants, travel or financial advisers, drivers, and many others.

If the “technologists” are half-right, GDP will be much higher. So why should we not rejoice at the prospect of a 25- or 30-hour workweek and two months of annual leave, with intelligent machines taking up the slack?

Why, with all this new technology and imminent productivity increases, do so many continue to argue that everyone has to work more and retire much later in life if economies are to remain competitive? Or is it just the highly skilled who have to work harder and longer, because there are not enough of them? In that case, perhaps older workers should retire sooner to make room for the young, who have skills more appropriate to the new century. If such a shift were to increase overall GDP, fiscal transfers could pay for early retirement, while retirement itself could become a flexible and gradual process.

Finally, there is the question of climate change and possible natural-resource constraints, issues that have become more familiar over the last decade. Will these factors impede long-term growth, or can a transition to a clean-energy economy fuel another technological revolution that actually increases prosperity?

As these questions move to the top of the policy agenda, it is becoming clearer that the traditional focus on growth, defined as an increase in aggregate GDP and calculated using national accounts invented a century ago, is less and less useful.

The nature and measurement of economic progress should involve a new social contract that allows societies to manage the power of technology so that it serves all citizens. Working, learning, enjoying leisure, and being healthy and “productive” should be part of a continuum in our lives, and policies should be explicitly aimed at what facilitates this continuum and increases measured wellbeing.

The trends underpinning widening inequality will have to be counteracted using many policy instruments, with tax regimes and life-long, inclusive, and affordable education and health care at the center of the effort to ensure equity and social mobility. Though the quality of human lives can still be greatly improved, even in the advanced countries, focusing on aggregate GDP will be less helpful in achieving this goal.

The questions surrounding future economic growth are becoming clearer. But we are only at the start of the process of creating the new conceptual framework needed to enable national and global policies to advance the cause of human progress.

The 11th Lesson We Need To Learn From Charles Keating’s Frauds: Bring Back Glass-Steagall


On April 16, 2014, William K. Black writes on OpEd News:

On April 2, 2014, as news broke of the death of Charles Keating, the most infamous savings and loan fraud, I posted an article entitled “Ten Lessons We Must Learn from Charles Keating.”   (The April 2 date was ironic, because it was the 27th anniversary of the meeting at which the senators who would become known as the “Keating Five” began to seek to intimidate the savings and loan regulators on Keating’s behalf.)

I failed to explain perhaps the most important lesson we should have learned from Keating and Lincoln Savings.  One of the subtle aspects of the savings and loan debacle that is often overlooked is that we ran a real world test of the importance of the provisions of the 1933 Banking Act known as the Glass-Steagall Act.  Glass-Steagall prohibited “commercial” banks that received federal deposit insurance (created by the same 1933 banking act) from owning equity positions in nearly all financial assets (“investment banking”).  With very limited exceptions, a commercial bank could not own real estate, companies, or stock in companies.  (Banking regulators, hostile to Glass-Steagall despite its immense success, would later add many exceptions.)  The ideas behind Glass-Steagall’s separation of “banking” from “commerce” always made eminent sense from conservative and progressive perspectives.  Commercial banks received a federal subsidy through deposit insurance, so it made no sense for them to be allowed to compete against regular businesses that lacked that subsidy.  It would distort markets to allow such a subsidy.

It was also dangerous to allow commercial banks to make much riskier investments.  Losses are much lower on prudently underwritten loans than equity investments.

Glass-Steagall represented another lesson learned from the Great Depression — conflicts of interest matter.  There were obvious potential conflicts of interest in combining commercial and investment banking.  If a bank investment in a company was going bad, the temptation would be to loan the company large amounts of money to try to delay or prevent its failure.  Similarly, if a loan customer was experiencing a liquidity problem and could not repay its loan the temptation could be for the bank to buy newly issued stock in the company.

S&Ls, however, could operate under radically different rules during the 1980s.  State chartered S&Ls had the investment powers permitted by the states, while remaining eligible for federal deposit insurance.  Texas led the Nation in a type of investment, the acquisition, development, and construction (ADC) loan.  While ADC loans were nominally structured as loans, it was the norm in Texas that they were in economic substance (and for accounting purposes) properly classified as “investments” rather than “loans.”  I will not explain the details of ADC loans in this column.  I will note briefly only several implications of ADC lending.  First, ADC loans (that were actually “investments”) were the single greatest cause of losses in the S&L debacle.  Second, Keating’s unholy jihad against our reregulation of the industry was concentrated on our effort to regulate “direct investments” that included direct ownership positions and most ADC loans.  Third, the accounting for ADC loans was a classic example of a “Gresham’s” dynamic in which “bad ethics drives good ethics out of the profession.”  The accounting profession tried repeatedly (the EITF issued three notices to practitioners) to end the rampant false classification of ADC loans as true “loans” rather than “investments.”  Each of these efforts failed because the fraudulent S&L and bank CEOs were almost invariably able to find an audit partner at a top tier audit firm to bless ADC deals as a “loans” even when they were obviously investments.  Fourth, when classified, improperly, as loans the worst ADC “loans” were the nearly perfect “ammunition” for accounting control fraud.  If they were classified properly as “investments” they would have been a far poorer fraud scheme.  Fifth, banks, particularly in Texas, made enormous amounts of ADC loans that were improperly classified as “loans.”  This allowed them to evade Glass-Steagall.

Dick Pratt, the Chairman of the Federal Home Loan Bank Board, was a theoclassical economist so he had the agency’s econometricians’ study which state’s S&Ls reported the highest profits so he could use that state’s asset powers as the model for federal deregulation.  He led the drafting of the Garn-St Germain Act of 1982, which used Texas as its model for federal deregulation.  Texas led the nation in deregulating ADC loans.  Pratt, like all good theoclassical economists, ignored fraud (except when he was leading it — see the chapter in my book on “goodwill” accounting).  He failed to understand that Texas S&Ls reported the highest earnings because ADC loans were such ideal fraud ammunition.

Pratt also failed to understand the implications of the regulatory “race to the bottom” that he would trigger through federal deregulation.  California responded to Garn-St Germain with the Nolan Act (Nolan, fittingly, would later be convicted of corruption).  The Nolan Act allowed a California chartered S&L to place 100% of its assets in direct investments.  Hundreds of real estate developers, including Charles Keating (who infamously called the Nolan Act “a license to steal”), rushed to get a California S&L charter through merger (Keating’s purchase was funded entirely by Michael Milken’s Drexel Burnham Lambert) or the grant of a new (de novo) charter.

Lincoln Savings made large amounts of ADC loans that were actually investments — but never accounted for as investments.  My primary focus in this column, however is the investments they openly classified as “direct investments” that would have been prohibited by Glass-Steagall had they been a commercial bank.  The results of Lincoln Savings’ direct investments confirmed the wisdom of Glass-Steagall and greatly amplified a concern that the Act’s sponsors shared.

  1. Lincoln suffered enormous losses on its direct investments (including its ADC loans).  This was universally for true for S&Ls that made significant numbers of direct investments.  Alan Greenspan and George Benston’s study praised 33 S&Ls whose direct investments exceeded 10% of total S&L assets (the “threshold” for our rule restricting direct investments).  Within two years all 33 of the S&Ls they urged us to make the “model” for S&Ls had failed.  They were overwhelmingly accounting control frauds.
  2. Lincoln exploited its federal subsidy from federal deposit insurance to out-compete regular real estate developers.  While Lincoln Savings was a California-chartered S&L it invested overwhelmingly in Arizona.  Lincoln Savings and other Arizona S&L control frauds quickly came to dominate Arizona real estate development and to create a regional bubble in real estate prices that led to a regional recession when it burst.
  3. Keating exploited the conflict of interest.  When the direct investments (real estate development projects) he caused Lincoln Savings to make turned out to have huge losses he caused Lincoln Savings to make over $300 million in loans to “buyers” of the bad real estate.  The “buyers” “purchased” the terrible investments at prices far above market value.  This, and a helpful outside audit partner, created a fraudsters’ dream:  Lincoln Savings’ massive losses on the real estate investments (enough to make it recognize it was insolvent) disappeared, Lincoln Savings reported huge (albeit fictional) gains on the “sale” and on the interest “payments” (which were self-funded by Lincoln Savings to itself), and Lincoln Savings “upstreamed” over $90 million in cash to its parent holding company (ACC).  ACC was on the verge of financial collapse — and it paid the huge salaries of the nest of nepotism that was the Keating clan.
  4. Keating showed why federally insured lenders that can make direct investments are optimal structures for accounting control fraud and corruption.  Keating used loans and direct investments to suborn those that aided and abetted his frauds.  He made it clear that Glass-Steagall was also a vital protection against fraud and corruption.

These are the four key lessons about Glass-Steagall that we should have learned from Lincoln Savings and its 33-fellow S&Ls that became both lenders and investment bankers.  The proponents of repealing Glass-Steagall went 0 for 34 when we ran the real world experiment with their ideas during the S&L debacle.  Unfortunately, Glass-Steagall was doomed by the combination of politicians eager for campaign contributions from big finance and theoclassical economists who inhabit a fantasy-based world of dogma that ignored the results of the real life experiment with unlimited direct investments that Keating’s economic troika of Greenspan, Benston, and Daniel Fischel (then, U. Chicago — Law) claimed would prove that Glass-Steagall was a harmful relic of a primitive age when we foolishly believed in regulation.  The politicians and the economists ignored the conclusive results of the experiment and embraced dogma (and contributions).

The legislative response to the Great Depression involved radical reforms that came from strong presidential and congressional leadership addressing the causes of the Great Depression and a sophisticated understanding of the implications of deposit insurance for why commercial and investment banking should be separated.  The Dodd-Frank Act, by contrast, exemplified the timid and unfocused response that occurs when there is weak presidential leadership, politicians who are still heavily influence by the desire for political contributions, and the lack of intellectual rigor sufficient to escape the dead hand of neoclassical dogmas that had (once again) been falsified by reality.  The first sentence of the Dodd-Frank Act (which would have shortened it by over 300 pages) should have been: “‘The Commodities Futures Modernization Act of 2000′ and ‘The Financial Services Modernization Act of 1999′ are repealed.”  The CFMA was designed to destroy Brooksley Born’s efforts to as CFTC chair to protect us from financial derivatives.  It created the infamous regulatory “black hole” that AIG’s senior derivatives officers exploited to loot AIG.  The FSMA (Gramm-Leach-Bliley) destroyed Glass-Steagall’s protections.  Notice that the active word in both Acts is “modernization.”  They were both sold under the twin lies that financial regulation was archaic and unnecessary and that it was vital that we “win” the regulatory “race to the bottom” with European banks and bank (non) regulators.  Everyone that participates in such a race loses.

American Democracy No Longer Works


On April 15, 2014, Thom Hartmann writes on The Thom Hartmann Program and OpEd News:

Washington politicians don’t give a damn about you or me. They only answer to billionaires and giant corporations. Thanks to 40 years of Supreme Court decisions, American politics is no longer about the “will of We The People” — it’s only about the money.

As a result, we longer have a functioning democracy in America.

Years of corporate-friendly Supreme Court decisions, like the decision in Citizens United, have rigged and corrupted American politics so badly that average hard-working Americans have little to no influence in Washington.

Instead, our “elected officials” are only answering to the wishes of the wealthy elite and private interest groups.

A study published in Perspectives on Politics by Martin Gilens of Princeton University and Benjamin Page of Northwestern University finds that when the wealthy elite or powerful interest groups want a policy passed or not passed, Washington listens.

But, when We The People speak up and sound out about a particular policy or piece of legislation, Americans are right to be cynical.


In his dissent in Citizens United, Supreme Court Justice John Paul Stevens pointed out that the Court’s decision would lead to fewer and fewer people even bothering to show up to vote. He said from the bench:

“When citizens turn on their televisions and radios before an election and hear only corporate electioneering, they may lose faith in their capacity, as citizens, to influence public policy. A Government captured by corporate interests, they may come to believe, will be neither responsive to their needs nor willing to give their views a fair hearing. The predictable result is cynicism and disenchantment: an increased perception that large spenders call the tune and a reduced willingness of voters to take part in democratic governance.”

He added that unlimited corporate and fat-cat money would also scare the hell out of politicians themselves, so they’d do what the rich guys want and to hell with the average voter:

“To the extent that corporations are allowed to exert undue influence in electoral races, the speech of the eventual winners of those races may also be chilled. Politicians who fear that a certain corporation can make or break their reelection chances may be cowed into silence about that corporation.”

And, four years later, we find that Stevens was totally right.

In their study, Gilens and Page write that, “Ordinary citizens…have little or no independent influence on policy at all.”

They go on to say that the wealthy elite have, “a quite substantial, highly significant, independent impact on policy…more so than any other set of actors,” while powerful interest groups do pretty well too, with, “a large, positive, highly significant impact on public policy.”

Gilens and Page looked at a data set of over 1,700 policy issues over a 20-year period, and compared that data to public opinion surveys taken during the same time, that were broken down by income and support from interest groups.

In a functioning democracy, free from corruption and the money of private interest groups, you’d expect that as more and more average citizens approved of a policy or piece of legislation, lawmakers would be more and more likely to adopt that policy or piece of legislation.

But that’s not the case anymore here in America.

Instead, according to Gilens and Page, as more and more average American citizens support a policy or piece of legislation, the probability of it being adopted by lawmakers in Washington stays the same. It doesn’t matter if 10 percent of Americans support it, or 90 percent of Americans support it.

But the same can’t be said for the interests of the wealthy elite.

That’s because, as more and more members of the wealthy elite support a policy or piece of legislation, the likelihood that lawmakers in Washington adopt that policy or piece of legislation increases steadily.

And the same is true with well-funded special interest groups. The more special interest groups support a policy or piece of legislation, the greater the likelihood that lawmakers will adopt it.

You also see similar results when you break up Americans by income groups.

When more and more Americans in the bottom 10th percentile supported a particular policy or piece of legislation, the likelihood that it would be adopted by lawmakers stayed relatively the same.


But, as more and more Americans in the 90th income percentile or the even richer wealthy elite supported a policy or piece of legislation, the likelihood that it would be adopted by lawmakers increased dramatically.

When it comes to working class Americans, it doesn’t matter if they’re in the bottom 10th income percentile or the 50th income percentile: they’re ignored by our politicians for the preferences of the wealthy elite.

The bottom line here is that the elites are getting what they want, while the rest of us aren’t, because money has taken over our political process.

For the first time in American history, a majority of lawmakers in the House of Representatives are millionaires, and a startling number — at both the federal and state level — are being bankrolled by billionaires like the Koch brothers.

This isn’t what the founders had in mind when they founded our once-great nation.

Thomas Jefferson once said that, “Those seeking profits, were they given total freedom, would not be the ones to trust to keep government pure and our rights secure. Indeed, it has always been those seeking wealth who were the source of corruption in government…”

The only other time in American history when the influences of money and corruption were as rampant as they are today was during the Gilded Age of the late 19th century, and that period of corruption directly led to the crash of 1896, the worst crash we have ever seen.

That crash brought on a massive populist revolt, which led to things like the direct election of senators, ballot initiatives in the states, and women gaining the right to vote.

If the current levels of corruption and greed in Washington remain unchecked, it’s almost certain that we’ll have another great crash, maybe as soon as 2016.

When that crash happens, let’s get ready to react to it with another progressive populist revolt, and, like with the last progressive populist era, let’s amend the Constitution, this time to say that money is not speech, and corporations aren’t people.

Only then will the majority of Americans regain our democracy and political process, and make America great again.


Is Our Tax System Fair?

Published on Apr 15, 2014

Robert Reich has a special Tax Day message, explaining why the wealthiest 1% pay a much lower tax rate than the rest of us–and what we can do about it. You can sign his petition here:…

It’s tax time again when our minds turn toward paying the taxes we owe or possibly getting a tax refund. But what we don’t think about enough is whether our tax system is fair. The richest one percent of Americans are now getting the largest percent of total national income in almost a century. So you might think they’d pay a much higher tax rate than everyone else. But you’d be wrong. Many millionaires pay a lower federal tax rate than many middle-class Americans.

US Is An Oligarchy Not A Democracy, Says Scientific Study

On April 14, 2014, Eric Zuesse writes on Common Dreams:

In America, money talks… and democracy dies under its crushing weight. (Photo: Shutterstock)A study, to appear in the Fall 2014 issue of the academic journal Perspectives on Politics, finds that the U.S. is no democracy, but instead an oligarchy, meaning profoundly corrupt, so that the answer to the study’s opening question, “Who governs? Who really rules?” in this country, is:

“Despite the seemingly strong empirical support in previous studies for theories of majoritarian democracy, our analyses suggest that majorities of the American public actually have little influence over the policies our government adopts. Americans do enjoy many features central to democratic governance, such as regular elections, freedom of speech and association, and a widespread (if still contested) franchise. But, …” and then they go on to say, it’s not true, and that, “America’s claims to being a democratic society are seriously threatened” by the findings in this, the first-ever comprehensive scientific study of the subject, which shows that there is instead “the nearly total failure of ‘median voter’ and other Majoritarian Electoral Democracy theories [of America]. When the preferences of economic elites and the stands of organized interest groups are controlled for, the preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy.”

To put it short: The United States is no democracy, but actually an oligarchy.

The authors of this historically important study are Martin Gilens and Benjamin I. Page, and their article is titled “Testing Theories of American Politics.” The authors clarify that the data available are probably under-representing the actual extent of control of the U.S. by the super-rich:

Economic Elite Domination theories do rather well in our analysis, even though our findings probably understate the political influence of elites. Our measure of the preferences of wealthy or elite Americans – though useful, and the best we could generate for a large set of policy cases – is probably less consistent with the relevant preferences than are our measures of the views of ordinary citizens or the alignments of engaged interest groups. Yet we found substantial estimated effects even when using this imperfect measure. The real-world impact of elites upon public policy may be still greater.

Nonetheless, this is the first-ever scientific study of the question of whether the U.S. is a democracy. “Until recently it has not been possible to test these contrasting theoretical predictions [that U.S. policymaking operates as a democracy, versus as an oligarchy, versus as some mixture of the two] against each other within a single statistical model. This paper reports on an effort to do so, using a unique data set that includes measures of the key variables for 1,779 policy issues.” That’s an enormous number of policy-issues studied.

What the authors are able to find, despite the deficiencies of the data, is important: the first-ever scientific analysis of whether the U.S. is a democracy, or is instead an oligarchy, or some combination of the two. The clear finding is that the U.S. is an oligarchy, no democratic country, at all. American democracy is a sham, no matter how much it’s pumped by the oligarchs who run the country (and who control the nation’s “news” media). The U.S., in other words, is basically similar to Russia or most other dubious “electoral” “democratic” countries. We weren’t formerly, but we clearly are now. Today, after this exhaustive analysis of the data, “the preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy.” That’s it, in a nutshell.

Capitalism Is Not Working – 200 Years Of Data Shows Worsening Inequality Is An Inevitable Free Market Outcome

On April 15, 2014, Scott Baker writes on OpEd News:

What are the grand dynamics that drive the accumulation and distribution of capital? Questions about the long-term evolution of inequality, the concentration of wealth, and the prospects for economic growth lie at the heart of political economy. But satisfactory answers have been hard to find for lack of adequate data and clear guiding theories. In Capital in the Twenty-First Century, Thomas Piketty analyzes a unique collection of data from twenty countries, ranging as far back as the eighteenth century, to uncover key economic and social patterns. His findings will transform debate and set the agenda for the next generation of thought about wealth and inequality.

UPDATE : A look at the reviews of other economists to the Piketty work and a look a central Piketty prediction that global growth will collapse from 2020-2100.

Piketty shows that modern economic growth and the diffusion of knowledge have allowed us to avoid inequalities on the apocalyptic scale predicted by Karl Marx. But we have not modified the deep structures of capital and inequality as much as we thought in the optimistic decades following World War II. The main driver of inequality–the tendency of returns on capital to exceed the rate of economic growth–today threatens to generate extreme inequalities that stir discontent and undermine democratic values. But economic trends are not acts of God. Political action has curbed dangerous inequalities in the past, Piketty says, and may do so again.

A work of extraordinary ambition, originality, and rigor, Capital in the Twenty-First Century reorients our understanding of economic history and confronts us with sobering lessons for today.

The book draws on reams of data from the United States and numerous other countries. Most of the data comes from income tax records and estate tax/inheritance records. The sheer quantity of data that underlies Piketty’s conclusions is unprecedented, and as a result his work deserves a great deal of credibility.

While the book is quite long, the major conclusion can be summarized very briefly: Piketty has found that, over the long run, the return on capital is higher than the growth rate of the overall economy. In other words, accumulated and inherited wealth becomes a larger fraction of the economic pie over time. This happens more or less automatically, and there is no reason to believe this trend will change or reverse course.

Piketty argues that the reduction in inequality in developed countries after World War II was a “one-off” that was driven entirely by political choices and policies. It did not happen automatically. Those policies have now been largely reversed, especially in the United States. As a result the drive toward increased inequality is likely to be relentless.

Piketty’s solution is a global wealth tax. While this seems politically unfeasible, he argues that it is the only thing likely to work.

[From the New Yorker] – At first, Piketty concentrated on getting the facts down, rather than interpreting them. Using tax records and other data, he studied how income inequality in France had evolved during the twentieth century, and published his findings in a 2001 book. A 2003 paper that he wrote with Emmanuel Saez, a French-born economist at Berkeley, examined income inequality in the United States between 1913 and 1998. It detailed how the share of U.S. national income taken by households at the top of the income distribution had risen sharply during the early decades of the twentieth century, then fallen back during and after the Second World War, only to soar again in the nineteen-eighties and nineties.

With the help of other researchers, including Saez and the British economist Anthony Atkinson, Piketty expanded his work on inequality to other countries, including Britain, China, India, and Japan. The researchers established the World Top Incomes Database, which now covers some thirty countries, among them Malaysia, South Africa, and Uruguay. Piketty and Saez also updated their U.S. figures, showing how the income share of the richest households continued to climb during and after the Great Recession, and how, in 2012, the top one per cent of households took 22.5 per cent of total income, the highest figure since 1928.

The question is what’s driving the upward trend. Piketty didn’t think that economists’ standard explanations were convincing, largely because they didn’t pay enough attention to capital accumulation—the process of saving, investing, and building wealth which classical economists, such as David Ricardo, Karl Marx, and John Stuart Mill, had emphasized. Piketty defines capital as any asset that generates a monetary return. It encompasses physical capital, such as real estate and factories; intangible capital, such as brands and patents; and financial assets, such as stocks and bonds. In modern economics, the term “capital” has been purged of its ideological fire and is treated as just another “factor of production,” which, like labor and land, earns a competitive rate of return based upon its productivity. A popular model of economic growth developed by Robert Solow, one of Piketty’s former colleagues at M.I.T., purports to show how the economy progresses along a “balanced growth path,” with the shares of national income received by the owners of capital and labor remaining constant over time. This doesn’t jibe with modern reality. In the United States, for example, the share of income going to wages and other forms of labor compensation dropped from sixty-eight per cent in 1970 to sixty-two per cent in 2010—a decline of close to a trillion dollars.

Some people claim that the takeoff at the very top reflects the emergence of a new class of “superstars”—entrepreneurs, entertainers, sports stars, authors, and the like—who have exploited new technologies, such as the Internet, to enlarge their earnings at the expense of others in their field. If this is true, high rates of inequality may reflect a harsh and unalterable reality: outsized spoils are going to go to Roger Federer, James Patterson, and the WhatsApp guys. Piketty rejects this account. The main factor, he insists, is that major companies are giving their top executives outlandish pay packages. His research shows that “supermanagers,” rather than “superstars,” account for up to seventy per cent of the top 0.1 per cent of the income distribution. (In 2010, you needed to earn at least $1.5 million to qualify for this élite group.) Rising income inequality is largely a corporate phenomenon.

Many C.E.O.s receive a lot of stock and stock options. Over time, they and other rich people earn a lot of money from the capital they have accumulated: it comes in the form of dividends, capital gains, interest payments, profits from private businesses, and rents. Income from capital has always played a key role in capitalism. Piketty claims that its role is growing even larger, and that this helps explain why inequality is rising so fast. Indeed, he argues that modern capitalism has an internal law of motion that leads, not inexorably but generally, toward less equal outcomes. The law is simple. When the rate of return on capital—the annual income it generates divided by its market value—is higher than the economy’s growth rate, capital income will tend to rise faster than wages and salaries, which rarely grow faster than G.D.P.

If ownership of capital were distributed equally, this wouldn’t matter much. We’d all share in the rise in profits and dividends and rents. But in the United States in 2010, for example, the richest ten per cent of households owned seventy per cent of all the country’s wealth (a good surrogate for “capital”), and the top one per cent of households owned thirty-five per cent of the wealth. By contrast, the bottom half of households owned just five per cent. When income generated by capital grows rapidly, the richest families benefit disproportionately.

80% tax on imcome over 1 million dollars a year and net worth tax

Given that inequality is a worldwide phenomenon, Piketty aptly has a worldwide solution for it: a global tax on wealth combined with higher rates of tax on the largest incomes. How much higher? Referring to work that he has done with Saez and Stefanie Stantcheva, of M.I.T., Piketty reports, “According to our estimates, the optimal top tax rate in the developed countries is probably above eighty per cent.” Such a rate applied to incomes greater than five hundred thousand or a million dollars a year “not only would not reduce the growth of the US economy but would in fact distribute the fruits of growth more widely while imposing reasonable limits on economically useless (or even harmful) behavior.”

Piketty is referring here to the occasionally destructive activities of Wall Street traders and investment bankers. His new wealth tax would be like an annual property tax, but it would apply to all forms of wealth. Households would be obliged to declare their net worth to the tax authorities, and they would be taxed upon it. Piketty tentatively suggests a levy of one per cent for households with a net worth of between one million and five million dollars; and two per cent for those worth more than five million. “Or one might prefer a much more steeply progressive tax on large fortunes (for example a rate of 5 to 10 percent on assets above one billion euros),” he adds. A wealth tax would force individuals who often manage to avoid other taxes to pay their fair share; and it would generate information about the distribution of wealth, which is currently opaque. “Some people think that the world’s billionaires have so much money that it would be enough to tax them at a low rate to solve all the world’s problems,” Piketty notes. “Others believe that there are so few billionaires that nothing much would come of taxing them more heavily. . . . In any case, truly democratic debate cannot proceed without reliable statistics.”

Reality of attempts to implement wealth taxes

The nations of the world can’t agree on taxing harmful carbon emissions, let alone taxing the capital of their richest and most powerful citizens. Piketty concedes as much. Still, he says, his proposal provides a standard against which to judge other proposals; it points to the need for other useful reforms, such as improving international banking transparency; and it could be introduced in stages. A good place to begin, he thinks, would be a European wealth tax that would replace the property tax, which “in most countries is tantamount to a wealth tax on the propertied middle class.” But that may be utopian, too. If the European Union moved ahead with Piketty’s proposal, it would produce a rush to tax havens like Switzerland and Luxembourg. Previous efforts to introduce wealth taxes at the national level have run into problems. Spain, for example, adopted a wealth tax in 2012 and abolished it at the start of this year. In Italy, a wealth tax proposed in 2011 never went through. Such difficulties explain why governments still rely on other, admittedly imperfect, tools to tax capital, such as taxes on property, estates, and capital gains.

In the United States, the very idea of a new wealth tax looks like a nonstarter politically, as would the notion of raising the top rate of income tax to eighty per cent.

SOURCES – Amazon, Guardian UK, New Yorker, youtube

Four Eras Of Slavery, For The Benefit Of Corporations

On April 14, 2014, Paul Buchheit writes on Nation Of Change:

David Horowitz, founder of an organization called the “Freedom Center,” argued that blacks should not be paid reparations for the enslavement of their ancestors. Among his reasons are that:

·       There Is No Single Group Clearly Responsible For The Crime Of Slavery

·       Most Americans Have No Connection (Direct Or Indirect) To Slavery

·       Reparations To African Americans Have Already Been Paid

But slavery, in its various forms of physical and mental torment, has been a part of U.S. history from the beginnings of our country to the present day. There are numerous modern-day corporations who profited immensely – themselves or their predecessors – from slave labor. Only token amounts have been paid back, along with a few scattered apologies.

Four eras of abuse can clearly be identified.

First Era: Before Emancipation

Prior to the Civil War, King Cotton was the rallying cry for the South. With cotton accounting for 60 percent of all U.S. exports, and 75 percent of all the cotton purchased by Great Britain, slaves were needed more than ever. African-Americans in tens of thousands were herded to the deep south, chained neck to neck as they became the hapless tools of industry.


By 1840 there were more millionaires along the Mississippi River than throughout the rest of the nation. Cotton was more valuable than all other U.S. commodities combined. In this “great laboratory of American capitalism” slaves were the most valuable property, and that meant big business for the slave traders, even in the North, as the Fugitive Slave Act legitimatized capture and transport to the South.


Cotton drove the textile industry in the northern states. In 1860, New England had over half of the manufacturing operations, and consumed two-thirds of all the cotton used in U.S. mills. Senator Charles Sumner of Massachusetts called it ”a conspiracy of the lords of the loom and the lords of the lash.”

Before the start of the Civil War, the mayor of New York City sought independence from the Union in order to continue its lucrative trading with the South.


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Other industries flourished as well, through the predecessors of companies that still exist and thrive today. The Norfolk Southern Railroad leased slaves for one-year terms of hard labor. The parent company of USA Today had links to the slave trade. Insurance companies such as Aetna issued policies protecting slaves as property. Many Wall Street firms, who held slave auctions outside their doors, had their beginnings in the cotton trade. Lehman Brothers, which began investing in 1850, founded the New York Cotton Exchange in 1870. The predecessors of JP Morgan/Chase got their start with loans to slave owners, at times with enslaved Africans as collateral. In 2005 JP Morgan apologized for its predecessors’ slave trading activities in Louisiana, and Bank of America and Wachovia also apologized for their early involvement with slave trading.

Second Era: Slavery by Another Name

Slavery was abolished after the Civil War, but in name only. The great hope of Reconstruction lasted just ten years. Now, as Douglas Blackmon documents, a new version of slavery had begun, with arrests for petty ‘offenses’ such as talking too loud or looking at a white woman. A man committing an actual offense such as stealing a pig could be sentenced to five years of hard labor. These were the “Pig Laws.” For many blacks, incarceration meant death, as convict leasing programs allowed companies to work prisoners until they could no longer stand on their feet.

The predecessors of U.S. Steel were complicit in this second era of slavery. One of the tens of thousands of victims was 22-year-old Green Cottenham, arrested in Alabama in March, 1908 for “vagrancy.” That means he couldn’t prove, at the moment of his arrest, that he was employed. It was a tactic used by local sheriffs and judges to put black men in jail. Ironically, Green’s arrest was on the anniversary of the 15th Amendment, which gave blacks the right to vote in 1870.

Cottenham was found guilty and sentenced to thirty days of hard labor. When he was unable to pay court and jailhouse fees, his sentence was extended to a full year, and he was sold to Tennessee Coal, a subsidiary of US Steel. The company forced him to live and work in a mineshaft deep in the black earth, where he worked every day from 3 AM to 8 PM digging and loading tons of coal. If he slowed down he was whipped. He drank the water he was standing in. He was surrounded by caverns filled with poison gas and walls that often collapsed, crushing or suffocating miners. At night he was chained to a wooden barracks. Crazed men were always nearby, filthy and sweaty, some homicidal, some sexual predators. A boy from the Alabama countryside had been deposited in the middle of hell.

Third Era: World War 2 Slave Labor

Slave labor in the Nazi years generated massive profits for many of our most prominent corporations, starting with Ford and General Motors. Henry Ford, who had published ”The International Jew: The World’s Foremost Problem,” was a dear friend of Nazi Germany. His company used prison labor to produce a third of the military trucks for the German army. Ford’s Dearborn, MI factory was called an “arsenal of Nazism.” In Germany, Ford’s worker-inmates were said to have labored for twelve hours a day with six ounces of bread for breakfast and a dinner of turnips and potatoes.

General Motors worked with the German company that built Auschwitz. General Electric partnered with a German company that used slave labor, and invested in the builder of gas chambers. Kodak used prison labor for the manufacture of German arms. Nestle admitted acquiring a company that used forced labor during the war.

Finally, IBM was responsible for the punch card machines that allowed the Nazis to tabulate train shipments to the death camps.

Fourth Era: The Present Day

The 13th Amendment bans slavery “except as punishment for crime.” The 14th Amendment bans debt servitude. But each inmate in a modern-day private prison, according to Chris Hedges, “can generate corporate revenues of $30,000 to $40,000 a year.” Prisoners accused of minor drug crimes have replaced the vagrants. And private probation companies are keeping them in debt. The system seems little different from the corrupt local governments in the deep South a century ago.

The Corrections Corporation of America and G4S are two of the prison privatizers who sell inmate labor to corporations like Chevron, Bank of America, AT&T, and IBM. Nearly a million prisoners work in factories and call centers for as little as 93 cents an hour.

More corporate profits come from the probation business, which, in direct opposition to the 14th Amendment, keeps people in prison for being too poor to pay their court costs and probation fees. It’s called ‘peonage,’ or debt slavery.

Examples are more than disturbing. In Louisiana, Gregory White, a homeless man, was arrested for stealing $39 worth of food and ended up spending 198 days in jail because he was unable to pay his fines. In Ohio, Howard Webb, who makes $7 an hour as a dishwasher, accumulated almost $3,000 in court costs and probation fees. In Georgia, Thomas Barrett stole a can of beer from a convenience store, was fined $200, and before long owed his probation company $1000, more than a month’s pay.

Reparations? One of the arguments against it is that the sheer number of African Americans – 42 million – makes the whole concept unfeasible.

But a financial transaction tax is feasible. It will come to us from the Wall Street firms that used to hold slave auctions outside their doors.

We are a nation of job serfs, enslaved to the OWNERS of productive capital wealth.

Slavery, in its various forms of physical and mental torment, has been a part of U.S. history from the beginnings of our country to the present day with modern-day corporations profiting immensely.

Binary economist Louis Kelso said, “We are a nation of industrial sharecroppers who work for somebody else and have no other source of income. If a man owns something that will produce a second income, he’ll be a better customer for the things that American industry produces. But the problem is how to get the working man [and woman] that second income.”

The Super Rich Are Richer Than We Thought, Hiding Huge Sums, New Reports Find

On April 12, 2014, The Huffington Post published two reports: The Distribution of US Wealth, Capital Income and Returns Since 1913 at and The Missing Wealth of Nations: Are Europe and The U.s. Net Debtors or Net Creditors? at

According to the two The Huffington Post, the new pair of reports suggests that the super rich are richer than we thought.

The first report by Professors Emmanuel Saez (UC Berkeley) and Gabriel Zucman (LSE and UC Berkeley) addresses the question of how to measure total wealth, finding that there is an increasing concentration in the top one-thousandth.

So where is all this wealth going? The second report, by Zucman, demonstrates that a lot of the money is held in offshore tax havens — far more than previously known.New York Times columnist Paul Krugman summed up the numbers Friday, arguing that they tell us “something important about how the world really works.”

“At the commanding heights of the US economy, hiding a lot of one’s wealth offshore is probably the norm, not the exception,” Krugman wrote.



We’ve Lost 90 Years In The Fight For Economic Equality.

On April 11, 2014, Thom Hartmann writes on the Thom Hartmann Program:

The wealth gap today is as bad as it was in the 1920s. New research from economists Emmanual Saez and Gabriel Zucman shows that those at the very top hold more of the wealth than at any time since 1928. In fact, only the super-wealthy, the top tenth of the top one percent, have seen huge gains in assets over the last three decades. Even people in the top ten percent of income earners have been losing ground compared to the super rich.

Most of us know that wages have been stagnant for decades thanks to Reaganomics, but the growing inequality problem is not just about our weekly pay. Average Americans have lost wealth from home values, pensions, savings, and total assets, and our broken economy prevents them from making up any ground. Meanwhile, the wealthy elite have seen larger and larger income gains, and they’ve stashed billions away in property, savings, and various types of low-or-no-tax investments.

After the Great Depression, progressive tax systems helped keep inequality at bay. High tax rates on the super rich leveled the playing field, and encouraged business growth and investment. For decades, it made more sense for the corporate elite to higher more employers or expand operations. But today, low taxes make it more lucrative for the rich to screw workers and cash out. If we ever want to close the wealth gap, we need to break this cycle.

We need to return to a progressive tax system – one that rewards hiring workers more than sitting around collecting a dividend check. In fact, let’s put a 100 percent tax on income over a billion, and leave the super-rich with no other money-saving option except investing in our great nation once again. Find out more at

Fed Shows Growing Worry About Low Inflation

On April 9, 2014, Jon Hilsenrath writes in The Wall Street Journal:

Federal Reserve officials are growing concerned the U.S. inflation rate won’t budge from low levels, the latest sign of angst among central bankers about weakness in the global economy.

The Fed began 2014 hopeful that a strengthening U.S. economy would push very low inflation from 1% toward the 2% level that officials associate with healthy business activity. Three months into a year marked by unusually harsh winter weather, which appears to have damped economic growth, there is little evidence of such movement.

According to the minutes from the Fed’s March meeting, Fed officials had a lot of angst over whether they were sending the wrong signals about interest rates. WSJ’s Victoria McGrane discusses on the News Hub. Photo: Getty Images.

Fed officials expressed worry about the persistence of low inflation at a policy meeting last month, according to minutes of the meeting released by the central bank Wednesday. They discussed at the March 18-19 meeting whether to make a more explicit commitment to keeping short-term interest rates pinned near zero until they saw inflation move up, but chose instead to take a wait-and-see approach.

Low inflation is high on the agenda of global central bankers and finance ministers gathering in Washington this week for semiannual meetings of the International Monetary Fund. Bank of Japan officials are trying to overcome more than a decade of on-again-off-again deflation, and inflation in Europe is running close to zero.

“We think there is also a risk of deflation, negative inflation. And we think that if this were to happen, this would make the adjustment both at the euro level, and even more so for the countries in the periphery, very difficult,” IMF chief economist Olivier Blanchard said of Europe on Tuesday, after the IMF released updated economic projections. “We think that everything should be done to try to avoid it.”

On its face, flat consumer prices sound like a blessing that holds down household costs. But when tepid inflation is associated with small wage gains, excess business capacity and soft global demand, as now, economists see it as a sign of broader economic malaise that restrains investment and hiring. Exceptionally slow wage and profit gains also make it harder for household and business borrowers to pay off debt.

Fed officials believe the U.S. economy was soft in the early months of the year in part because of the weather, and they are now expecting a pickup. But if that doesn’t happen, they could wait longer to start raising interest rates. Many central-bank officials and market participants don’t expect rate increases until well into 2015.

“In light of their concerns about the possible persistence of low inflation, members agreed that inflation developments should be monitored carefully,” the Fed minutes said.

IMF officials have been chiding European Central Bank officials, in particular, for failing to do enough to lift inflation in the euro area from well below 1%. Like the Fed, the ECB expects inflation to rise this year, but it is under greater pressure to act.

The IMF reduced its growth and inflation forecasts for 2014 and 2015 in projections released this week. It sees consumer-price inflation in developed economies this year of 1.5%, compared with 1.4% in 2013. It expects global growth this year of 3.6%, better than the 3% growth in 2013, but less than the 3.7% growth it projected in January.

Bruce Kasman, chief economist with J.P. Morgan Chase, said inflation is also softening in developing economies, most notably China. The development, he said, is taking pressure off central banks in places like India and Turkey to raise interest rates to prevent their economies from overheating.

“Six months from now, I think we’ll see that inflation in the emerging markets is materially less than it was a year ago,” Mr. Kasman said.

For years since the financial crisis ended, critics have warned central bankers that their low-interest-rate policies risked pushing consumer prices much higher as they flooded the world financial system with money.

But weak demand in many developed economies, combined with excess supply in places such as China, have hampered firms from raising consumer prices.

“Below-target inflation is a world-wide phenomenon, and it is difficult to be confident that all policy makers around the world have fully taken its challenge on board,” said Charles Evans, president of the Federal Reserve Bank of Chicago, in a speech in Washington on Wednesday.

The Commerce Department’s personal consumption expenditures price index, which is the Fed’s favored measure of inflation, was up 0.9% in February from a year earlier. The Labor Department’s consumer-price index, an alternative measure, was up 1.1%.


Low inflation is high on the agenda of global central bankers and finance ministers gathering in Washington this week for semiannual meetings of the International Monetary Fund. Above, the Federal Reserve building in Washington.

The aluminum sector offers one stark view of the global tides holding down inflation. Aluminum prices are in the third year of a decline that has dented profits at the world’s top producers and caused them to cut capacity to try to end an aluminum glut that analysts say has lasted for more than a decade.

Since April 2011, at a time when stimulus measures in China and the U.S. were boosting metals prices, raw aluminum prices on the London Metal Exchange have dropped more than 35% to around $1,800 a ton. The average cost of making raw aluminum at a smelter is around $2,000 a ton, so many smelters around the world have been operating at a loss.

At some point, the oversupply will run its course, but it doesn’t appear to have happened yet. On Tuesday, Alcoa Inc., AA -1.26% the world’s top aluminum producer by revenue, said it swung to a net loss of $178 million, or 16 cents a share, from a profit of $149 million a year earlier, mainly because prices for raw aluminum fell 8% year-over-year. It also took a $255 million charge related to closing plants in Brazil, Australia and upstate New York. Alcoa said those closures eliminated 421,000 tons, or 10% of its overall capacity. Russia’s United Rusal PLC, the world’s No. 1 producer by volume, is planning to reduce production by 330,000 tons, or 8%, in 2014.

Although Chinese government officials have pledged to reduce capacity, cuts have been resisted by local leaders eager to preserve jobs. Aluminum production in China is expected to increase 9% this year and 7% next year, according to Deutsche Bank.

In the U.S. and Europe, signposts of soft consumer demand also are evident. In Switzerland, executives at Swatch Group AG told The Wall Street Journal earlier this month that consumers were switching to lower-cost timepieces. In the U.S., companies such as Procter & Gamble Co. and Georgia Pacific Corp., among others, have been blitzing consumers with deals and coupons to lift sales.

Carnival Corp. is filling cabins on its cruise ships by reducing ticket prices—a situation the Miami-based company hopes is temporary. “As the economy improves and as demand is there, we should be able to get the pricing back without any problem,” Chief Financial Officer David Bernstein told analysts last month.

Jon Hilsenrath writes about the terrifying dangers of low inflation.

“The main objective of the Eurosystem is to maintain price stability: safeguarding the value of the euro.”

The Houghton-Mifflin Dictionary defines inflation as “A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.” In other words, inflation means price INstability.

What’s missing is any appreciation in the centers of financial power of the fact that during the latter half of the 19th century, at a time when the economy was experiencing incredible growth, prices were falling. According to my colleague Michael Greaney at the Center for Economic and Social Justice (, “part of this was due to the at-first official, and then unofficial policy of deflation followed by the U.S. government to restore parity of the paper currency with gold.  This, however, was achieved by 1879 and convertibility restored. The real reason for the falling price level was the rapid expansion of agricultural, commercial, and industrial capacity and production, spurred by Abraham Lincoln’s 1862 Homestead Act. To duplicate the situation in the U.S. during that period and improve upon it, CESJ’s proposed “Capital Homestead Act” should be enacted.

“It is, frankly, economic suicide to weaken the currency further and expand the national debt at a time when the currency should be strengthened by restoring an asset backing, and promoting productive activity to restore the tax base and pay down the debt.

“…we simply don’t understand how ECB officials can, at one and the same time, have the goal of guarding against inflation and be concerned about reaching that stated goal, terming it “dangerous” if they succeed in doing what they say they’re trying to do.”

There is something seriously wrong with the ECB’s monetary and fiscal policy.  It’s called “Modern Monetary Theory,” originally developed from theories of Georg Friedrich Knapp, and it’s in place pretty much throughout the world.

“We’ve contended for years that Keynesian economics, the basis of MMT, embodies fundamental contradictions,” says Greaney.  ”This seems to prove it. Still, the experts keep insisting that something that has never worked to solve the problems they think they’re addressing, and is even going directly counter to them, just has to work if they just go even deeper into debt.

“The fact is that they don’t have to. The problems the world’s central banks try to solve by artificially manipulating currencies would solve themselves by making monetary and fiscal policy consistent with the original purpose of commercial and central banking. That is to create money for private sector investment by purchasing mortgages and discounting and rediscounting bills of exchange based on the present value of existing and future marketable goods and services, respectively.”

By creating money in ways that finance widespread capital ownership by people who, consistent with Adam Smith’s dictum that the purpose of production is consumption, will spend their dividends rather than reinvest them, consumption power can be sustained naturally, rather than artificially induced through inflationary government stimulus. This is the program embodied in Capital Homesteading.