Category: Law and Inequality

Payday Lenders’ Creative Electoral Tactics

Who’d guess that my worries about the political power of the financial sector and Jaya’s concerns about misleading ballot initiative wording would converge? Easha Anard reports on the trend:

Payday lenders are spending millions of dollars to back ballot initiatives that challenge state restrictions on their cash-advance practices. . . . [In Arizona], Yes on 200 is financed by the local affiliate of the Community Financial Services Association, a national payday-lending group. . . . . [T]he wording of the ballot initiative suggests it would impose further regulation on payday lenders; in fact, it would roll back much tougher rules. Yes on 200 is promoting the initiative with a counterintuitive strategy: spending money on ads that depict payday lenders as unscrupulous. One ad says, “Arizonans agree: Payday lenders who rip off hard-working Americans need to be stopped,” and asks voters to support the ballot initiative.

Now those are people you can trust! No regulation needed for them.

I wonder if Bryan Caplan would consider those who want to regulate payday lending financial illiterates–and approve this “noble lie” as a way of promoting better policy?

Parasitism, Inc.: A Deficient Markets Hypothesis

elgrecomoney.jpgAccoring to an article by Jonathan Ford of Prospect, the finance sector gobbled up nearly 35% of total corporate profits in the US and Britain in 2005. As financier-turned-academic Paul Woolley observes in the piece, “There is no economic merit in a sector that makes exceptional profits and devours capital and labour, and then justifies it on the grounds that you can get some ‘cash back.'”

Woolley’s analysis animates the article and should wake up anyone still complacent about the validity of the “efficient markets hypothesis.” Ford points out a cozy revolving door relationship between academics, regulators, and tycoons in high finance. All were complicit in a parasitic reallocation of money from the real economy to speculative games designed to enhance cream-skimming at the top:

While the efficient market idea held sway, academics viewed the expansion of finance with equanimity. . . . Financial instruments always existed for a purpose—such as to pass on risk cheaply and efficiently to the investor best placed or most willing to bear it. If that were not the case these products simply would not exist. More trading was beneficial because it enhanced liquidity, and liquidity lowers costs and promotes efficient pricing.

But, according to Woolley, the scale of derivatives trading should be seen as symptomatic of distorted markets. . . . [M]omentum causes mispricing which in turn creates an insatiable demand for active management. This then spills into the derivatives markets in various ways. For instance, the investor responds to the volatility of the equity market by hedging his risk and buying a put option (giving the right to sell shares at a pre-determined price). The seller of the put protects his own exposure by selling equities. The investor has thus brought about, at a cost, the very event he was seeking to insure against.

Both Ford and Woolley still endorse “market solutions” to the crisis, such as “lengthening the period over which performance is assessed,” so that bonuses depend less on quarterly and annual results. Dilip Abreu has proposed similar realignment of incentives for ratings agencies. But I’d like to see more public involvement in investment decisions generally–a move featured in the stimulus plan Timothy Canova has suggested.

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Evolutionary Pressures on Minds and Bodies

Corpus 2.0, a recent design project on potential human bodily evolution, has been spreading around the web. One model with a shoulder bump finds it much easier to keep her handbag steady. Other forms of “progress” include a “ridge in the nose developed for wearing glasses, ears moulded to accommodate earphones, a thumb with an extra joint for sending SMS messages more efficiently and a foot adapted to create the same posture as wearing high heels.” This work struck me as a less critical version of the “future farms” and other body modifications both proposed and ridiculed at the “Design and the Elastic Mind” show at MOMA earlier this year.

While many find these particular modifications to bodily form grotesque, opposition to unfortunate evolutionary pressures on attitudes and mental habits strikes me as much less developed. That’s one reason I cautioned against runaway “cognitive enhancements” in an article last year. The founder of Better Living Through Chemistry predicts that we should be happy to choose “average hedonic set point[s] of our children. . . . [so that] allelic combinations . . . .that leave their bearers predisposed to unpleasant states of consciousness . . . will be weeded out of the gene pool. . . [leading to] some form of paradise-engineering.” Following Walker Percy, I think such people are actually quite useful to a world too prone to “irrational exuberance”–even if introversion is maladaptive for the introvert himself.

Rankings Abroad: Watch out for the Sin Bin

This piece in the CHE covered the increasing importance of international rankings systems to universities around the world (including the US).

Shanghai Jiao Tong University’s “Academic Ranking of World Universities,” assigns scores to institutions on the basis of four factors: quality of education, quality of faculty, research output, and per capita performance. . . .Quality of faculty counts the number of staff members who have won . . . awards as well as the number of “highly cited researchers” in 21 fields. . . . The “Times Higher Education-Quacquarelli Symonds World University Rankings” is more heavily focused on reviews by academics, which account for 40 percent of an institution’s score. A survey of employers contributes 10 percent. The rankings also consider the faculty-student ratio, the proportion of international faculty members and international students, and the number of citations per faculty member.

Germany reached a recent decision on dividing nearly two billion euros among designated universities largely on the basis of how strong they were in research. In France, a central goal of a new law intended to shake up the higher-education system is increased collaboration among institutions involved in scientific research.

Meanwhile, rankings appear to be shaping secondary schools abroad as well; Neal Lawson reports that in Britain, “private companies will run ‘sin bin’ schools for excluded pupils and . . . more parents are using lawyers to secure school places.” Lawson worries that rankings-mania will make education “a positional good – one that is valued only because it gives one child a better education than another.”

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Thinking Transcendentally

The mortgage crises follows a pattern of reasoning analogous to that sometimes followed in the national security context. When it comes to national security, we are warned that the Constitution is “not a suicide pact.” This catch-phrase is used for the argument that in times of national security threats, constitutionally protected civil liberties should not be used to constrain the necessary actions of executive officials. Why? Because security is a necessary condition for the enjoyment of civil liberties. Without security, so the argument goes, we can have no liberty. Thus, when times are tough, we should not allow constitutional commitments to get in the way of allowing officials to act as necessary to protect national security. (I critique a specific application of this argument here).

Similar reasoning seems to be at stake in the present financial crisis. In nearly as direct a catch-phrase, we are warned that leaving financial obligations untouched as they are would be an economic “suicide pact,” leading to unpredictable, though likely dire, consequences for the country as a whole. (Bernanke: action is “urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and our economy.”) In times of threat to the overall security of the economy, background beliefs in individual economic decisions and legal obligations (more or less, some version of laissez faire capitalism) should not be deployed to constrain the necessary actions of executive officials. Why? Because structural security of the economy is a necessary condition for the good of us all. Thus, when economic times are particularly tough, we should empower executive officials to act as necessary to protect economic security.

Both of these rationales depend on a form of transcendental argument: the necessary condition for the possibility of X (enjoying liberty), is Y (the provision for security). My central question is: Can We Think Transcendentally about Something Other Than Security?

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Reds

One of the certainties of being a tax policy scholar who is not opposed to all taxes is that I am called names on a regular basis. The most common epithets are the standby favorites of the Cold War era: commie, pinko, commie-pinko, socialist, red, Marxist, Marxist/socialist . . . you get the idea. It pretty much does not matter what one says — again, unless one says that all taxes are theft — but the most surefire way to become subject to this kind of name-calling is to advocate any kind of income redistribution. Thus, while giving a talk last year, someone asked me if my argument might suggest that we should increase the estate tax. When I said yes, another academic (!) in the room said, “Oh, I see, so you believe in ‘from those who have the ability to those who have the need,’ right?”

I bring this up now because of the recent

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The New Gilded Age

Larry Bartels’s new book Unequal Democracy: The Political Economy of the New Gilded Age helps explode some persistent myths about income inequality. We are frequently told that inequality–even the extreme growth in inequality witnessed over the past 30 years–is an inevitable concomitant of globalization, or is necessary for economic growth, or can’t be remedied by politics. Bartels’s work complements the growing consensus–led by people like David Cay Johnston, Jacob Hacker, Stephen Gosselin, Barbara Ehrenreich, and Robert Frank, among many others–that all these complacent contentions are not merely unsupported, but actually reverse the true causes and effects at work. Political change has accelerated US inequality–and only political change can address it.

This quote doesn’t do Bartels’s book justice, but it discloses one foundation of his argument:

[T]he real incomes of middle-class families have grown twice as fast under Democrats as they have under Republicans, while the real incomes of working poor families have grown six times as fast under Democrats as they have under Republicans. These substantial partisan differences persist even after allowing for differences in economic circumstances and historical trends beyond the control of individual presidents. . . .

[E]scalating in equality is not simply an inevitable economic trend—. . .a great deal of economic in equality in the contemporary United States is specifically attributable to the policies and priorities of Republican presidents. . . . .Voters’ seemingly straightforward tendency to reward or punish the incumbent government at the polls for good or bad economic performance turns out to be warped in ways that are both fascinating and politically crucial.

Insights like this should not be news–one need only to look at how lopsidedly the tax cuts of 2001 and 2003 helped the very wealthy in order to see real partisan differences in attitudes about inequality. But it turns out that the same political ignorance that libertarians like Ilya Somin and Bryan Caplan have been complaining about turns out to be quite helpful to their fiscal strategy:

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Who Owes What to the Very Poor?

That’s the subtitle of a new book edited by Thomas Pogge (on a theme that I tried to tackle a few years ago). Bookforum brought two good reviews to my attention. James Sterba of Notre Dame admires the book, but thinks the authors should be more radical:

[Many contributors] seem particularly concerned to empirically demonstrate that social institutions, particularly global ones, have the effect of depriving the poor of the resources they need for a decent life. Pogge, for example, frequently compares current practices to the historical examples of Stalin’s disastrous economic plan of 1930–33 . . . But why is it not enough just to point out that the rich are interfering with the poor by keeping them from using the surplus resources that the rich possess?

The poor clearly are coercively restricted from using the surplus of the rich to meet their own basic needs; and if the poor have no other way to meet those needs, why are these obvious social facts not enough to show that the rich are harming the poor by interfering with them? Suggesting that some complicated empirical argument is needed here, when in fact none is required, may weaken the strong case that exists for a right to freedom from poverty based on a negative right of noninterference. . . .

I would think that recognizing a right to freedom from poverty applicable both to existing and future people requires us to use up no more resources than are necessary for meeting our own basic needs here and now, securing for ourselves a decent life but no more. To use up more resources than this, it would seem, would be to deprive at least some future generations of the resources they would require to meet their own basic needs.

Here’s an excerpt from a review by Brian Harward:

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Taking Inequality Personally

The Washington Times has accused Barbara Ehrenreich of being a Marxist for her work exposing the effects of inequality in the US. (Maybe they bought into that scurrilous Facebook app “What German Philosopher is She“?) I wonder if intellectuals’ attitudes toward inequality are rooted in encounters like these:

In the first meeting of my first seminar of my first year, [real-estate developer Charles] Kushner’s son Jared entered my classroom and promptly took the seat across from mine, sharing the room, so to speak. I was drawing an annual salary of $15,500 and borrowing the remainder for survival in Cambridge, in order that he might be given the best possible education. [About 5 years later] Jared . . . purchased The New York Observer for $10 million, part of which he made buying and selling real estate while also attending my seminar. As publisher, one of his first moves was to reduce pay for the Observer‘s stable of book reviewers. I had been writing reviews for the Observer in an effort to pay my debts.

I guess somebody isn’t going to be supporting estate tax repeal.