The Fourteenth Banker Blog

January 19, 2011

Institutional Deeds, Personal Choices

Filed under: Running Commentary — thefourteenthbanker @ 11:55 AM

H/T Credit Writedowns for this piece addressing causation of our economic malaise. The gist is that the problem is neither the business cycle nor structural imbalances.  Quoting Harold Meyerson of the Washington Post:

This grim new reality has yet to inform our debate over how to come back from this mega-recession. Those who believe our downturn is cyclical argue that job-creating public spending can restore us to prosperity, while those who believe it’s structural – that we have too many carpenters, say, and not enough nurses – believe that we should leave things be while American workers acquire new skills and enter different lines of work. But there’s a third way to look at the recession: that it’s institutional, that it’s the consequence of the decisions by leading banks and corporations to stop investing in the job-creating enterprises that were the key to broadly shared prosperity.

While I agree with this premise, we need to share the blame a little more broadly. Large banks and corporations are filling a vacuum. Yes, they help create the forces that create the vacuum, but nevertheless it is our inability to govern ourselves politically, financially, or consumptively  that allows the collective to go down a path that in retrospect was foolish. We did more in an intentional fashion to build the export machines of Japan and Germany than we did to build our own. We allowed other nations to be more frugal and save and invest while we spent and borrowed. We allowed our education system to become mediocre for a country of our prosperity. We let the free market misallocate our resources while China had an industrial policy that has created a relative competitive advantage in manufacturing that will be very hard of us to rebalance. Let me come back to culpability.

CR digs deeper on changes in family income over the last 60 years. Basically we had 30 years of income growth that was across the spectrum of income levels. Then, for the last 30, we have had disproportionate income growth among the very wealthy and relative stagnancy among the vast majority.

For thirty years after World War II the wealth of the country increased in a balanced manner. The average income containing the greater contribution from the top earners of the day, grew at a rate very similar to the income growth of the broader population, represented by the median.

Yes there were “fat cats” and they had significantly larger incomes than the bulk of the population. And these top incomes grew over those three decades, but at almost the same rate as the majority of the populace.

Then something happened. From 1979-2009 it appears that the American pie suddenly got smaller. In the later three decades the real median income growth was less than 10% of the rate seen from 1949 to 1979. And as the pie got smaller, the fat cats took a much larger share. The average income grew at a rate 254% that of the median income. You might say that, as the cow gave less milk, the top of the economic ladder skimmed more and more cream off the top.

Meyerson identifies the force majuere to be corporate America:

Our multinational companies still invest, of course – just not at home. A study by the Business Roundtable and the U.S. Council Foundation found that the share of the profits of U.S.-based multinationals that came from their foreign affiliates had increased from 17 percent in 1977 and 27 percent in 1994 to 48.6 percent in 2006. As the companies’ revenue from abroad has increased, their dependence on American consumers has diminished. The equilibrium among production, wages and purchasing power – the equilibrium that Henry Ford famously recognized when he upped his workers’ pay to an unheard-of $5 a day in 1913 so they could afford to buy the cars they made, the equilibrium that became the model for 20th-century American capitalism – has been shattered. Making and selling their goods abroad, U.S. multinationals can slash their workforces and reduce their wages at home while retaining their revenue and increasing their profits. And that’s exactly what they’ve done.

Yes, this is what they have done. And “they” are responsible. Yet, “they” are a reflection of us. “They” have filled the vacuum that we left for them. Granted, we stupidly did not know that this is what they would do.

So now we stand at a point in time. The headlines of the last few days have shown that our largest banks have a big interest in Facebook and Groupon. These are quick scores. They are to be sold to investors that are also looking for quick scores. The banks skim the fees and the investors look for a fast bounce and then get out before the next technological innovation, leaving the slow witted holding the bag while the company valuations eventually decline.

Are you powerless over this allocation of resources? No. These allocations of resources are based on anticipated revenue streams from the participation of the masses, the shrinking middle and growing underclasses in spending their time and resources reflexively on what these services promote. I am not saying they are all bad? They are a reflection of us. Our desire to communicate and affiliate is not a bad thing. But is our way of going about it the best way? Is a ‘not bad’ thing the same as a good thing?

What could you do intentionally to change your future? I have no ill-will for Groupon or its founders. But I promise you that if there is a net 20% decrease in subscribers, Wall Street will not allocate those resources that direction. If instead you buy a small solar panel, Wall Street will allocate resources in that direction.

Let’s begin making conscious choices to make our future better.

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3 Comments »

  1. Yes, Pogo was right.

    That said, here are a few things I see:

    1. The dumbing down of a public school education.
    2. The rise of the 24/7 “news” cycle coinciding with the death of the Fairness
    Doctrine, leaving us with more noise and less real in-depth analysis and
    information.
    3. The rise of 24/7 talk radio – geared to your specific prejudice.
    4. The 3 day work week in DC, where members no longer bring their families,
    so the days of them really KNOWING anyone from the other side are slim and
    none. These guys used to fight like hell on the floor then go drink to-
    gether; they went to church together, their wives played bridge. Hard to
    demonize someone you actually KNOW.
    5. The rise of lobbying and
    6. The rise of BIG money in campaigns. And now, thanks to Citizens’ United,
    anonymous money.
    7. Ronnie Ray-gun instilling the belief that regulations always kill
    business, government is always the problem, never the solution.
    8. The minimization of unions (even as I admit their faults). Who speaks for
    labor now? K Street sure speaks for Big Bidness.

    Comment by Sandi — January 21, 2011 @ 1:12 PM | Reply

    • WELL SAID Sandi!!!!

      14th I’m not disagreeing with your plea for good choices, but in a complex society such as ours where laws prohibit choices it is not as easily done.

      For ex, I came across an amazing socially empowering business plan the other day and would love to invest my money in it. Goes without saying I don’t have $MM lying around, so technically i don’t fit the accredited investor category and therefore I can’t invest. Not without jumping through a million hoops.

      It’s my money, I live in a Free Nation (haha), I’m legally sane, but I can’t decide what business I do or don’t wish to support. Point I’m making is that all these rules and regs we have that were supposedly put in place to protect the little guy, well they’re now strangling the little guy.
      Same thing with my 401k, I’ve been all cash for last year, I’d love to buy a farmland……can’t. Bottom line is the big boys have made rules in every area that force the people to hand them over their hard earned money which they then gamble with……..but our free democracy does not even allow us to say no to it.

      I’m not saying alternatives will and should not emerge, in fact I know they are in the making…..but it is very very hard to want to make a good choice and actually be able to make it, given the stranglehold that big boys have over us.

      Comment by Vocal banker — January 21, 2011 @ 8:01 PM | Reply

  2. The American public intellectual Chris Hedges, makes an interesting distinction. He says he is not anti-capitalism. But there is globalized capitalism, regional capitalism and local capitalism. The questions is, where are the mechanisms to create strong regional and local economies?

    Comment by tippygolden press — January 27, 2011 @ 9:10 PM | Reply


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