{"id":626,"date":"2011-08-19T01:30:00","date_gmt":"2011-08-19T01:30:00","guid":{"rendered":"http:\/\/www.patheos.com\/blogs\/yimcatholic\/2011\/08\/thoughts-on-the-economy-catholic-and-not\/"},"modified":"2015-01-22T12:38:29","modified_gmt":"2015-01-22T17:38:29","slug":"thoughts-on-the-economy-catholic-and-not","status":"publish","type":"post","link":"https:\/\/www.patheos.com\/blogs\/yimcatholic\/2011\/08\/thoughts-on-the-economy-catholic-and-not.html","title":{"rendered":"Thoughts on the Economy: Catholic, and Not"},"content":{"rendered":"\n<\/head>
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Ok, class. Today\u2019s lesson is on a little thing called \u201cregression to the mean.\u201d That\u2019s a fancy way of saying that when something gets out of whack, you know, like when one thing shoots for the stars while everything else is holding steady, see, well, it will move back to where it belongs. And usually suddenly. Like a bursting bubble, which by now everyone with a pulse and a 401k is familiar with. Right?
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So lookee there at the graph above. No, those aren\u2019t the returns of the stock market indices of Japan, France, Sweden and the United States. It\u2019s better than that. It\u2019s a graph of the percentage of Total National Income that the top 1% of income earners gleaned from their labors in each of those countries. The other 99% of us aren\u2019t represented in this particular series. See how usually the \u201ctop tier\u201d pulls down about 8-9% of a nations gross income? Not in the U.S., no siree. We can beat that! Let shoot for more like 18%.<\/p>\n

Statisticians would call that more than a couple of standard deviations above normal. You know, like housing prices were a few years back. Which means one thing: it ain\u2019t a gonna last. Castles in the air, are made of just that. And then there\u2019s the old market maxim,<\/p>\n

Pigs get fat, but hogs get slaughtered.<\/em><\/p>\n

Now, I believe in a few things unequivocally: God, Death, Taxes, and Regression to the Mean (RTM). The income distribution in the United States is definitely \u201cout of whack.\u201d And that\u2019s not just my Joe Six-Pack opinion, but a fact.<\/a> And as RTM is sort of like the law of gravity, in markets anyway, the sheer weight of the injustice in skewness will be righted one way, or another.<\/p>\n

But I\u2019m a nobody, so let me find some somebodies that you might listen to instead (if the graph isn\u2019t speaking loudly enough!).<\/p>\n

Pope Benedict XVI:<\/p>\n

The economy doesn\u2019t function with market self-regulation but needs an ethical reason to work for mankind. Man must be at the center of the economy, and the economy cannot be measured only by maximization of profit but rather according to the common good.<\/em><\/p><\/blockquote>\n

He said that yesterday, enroute to World Youth Day<\/a>. But that\u2019s to be expected right? Il Papa believes in mercy and justice, as his encyclical Caritas in veritate<\/a><\/em> makes that pretty clear. There\u2019s more in today\u2019s papers<\/a>.<\/p>\n

How about some opinions of a couple of big-time money men? Surely you saw Warren Buffet\u2019s op-ed piece<\/a> in the NY Times, right. Bah! You hiss\u2026easy for him to say. Besides, you rationalize, he\u2019s supports policies I find repugnant (true) so I\u2019ll discount what he is saying. Okey dokey. Here\u2019s another fellow\u2019s opinion. Goes by the name of Jeremy Grantham and he runs Grantham, Mayer and Otterloo<\/a>, a respected money management firm in Boston. Here\u2019s what he has to say about that graph above (and more below),<\/p>\n

Personal income progress is very modest. Productivity has been very high \u2013 remarkably so compared to the rest of the developed world average \u2013 but the U.S. continues its odd and long history of \ufb02owing all economic gains to corporations and the very rich and basically none to the average hour worked. Therefore, it should come as no surprise that we are facing weak demand. <\/em><\/p>\n

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For 30 years to the year 2000, consumers compensated for their lack of progress in hourly wages partly by working harder and longer and in greater numbers (i.e., a higher participation rate) and partly by borrowing. But in the 10 years after 2000, the participation rate in the workforce has dropped\u00a0dramatically (see Exhibit 2) and hours worked per person has \ufb02attened so that the only way for individuals to grow their consumption more recently was by borrowing even more and, to some extent, by speculating in housing. Rising house prices provided the (apparently) real backing for more debt and, even where that backing did not exist, the ingenuity (and, we must admit, greed) of the \ufb01nancial system still supplied the debt.<\/em><\/p><\/blockquote>\n

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And all of that has gone. And since creating and destroying illusions seems a wretched way to proceed, we can hope (non-mortgage brokers anyway) that it does not return. Today the arti\ufb01cial sugar-coating of increasing debt has been removed and we must live with the reality that an average hour\u2019s work has not received a material increase for 40 years (see Exhibit 3). Without increased debt and without gains in hourly wages, how can there be sustained broad gains in consumption? Only Chanel suits, Hermes scarves, BMWs, and their ilk have very strong sales, and these top-end items are just too small a fraction to carry the day. <\/em><\/p>\n

If we want to dig out of our current morass, don\u2019t we have to change this equation and isn\u2019t the most direct way of doing this to divide the pie more evenly? That would mean lower income and sales taxes for the bottom 75% of earners and higher taxes for the top 10%! We have allowed the vagaries of globalization and the plentiful supply of cheap Chinese labor to determine our income distribution, which has become steadily steeper, to the point where we have become one of the least <\/em>
\negalitarian developed societies. <\/em><\/p>\n

Wouldn\u2019t it be better for us to decide deliberately and by ourselves that income distribution which creates the best balance of social justice and incentive to work? I am not suggesting that we\u00a0become some goody two-shoes Scandinavian country. But how about going back to the levels of income equality that existed under the Presidency of that notable Pinko, Dwight Eisenhower (see Exhibit 4 Ed., Top of the post). And don\u2019t think for a second that this more equal income distribution somehow interfered with economic growth: the 50s and 60s were the heyday of sustained U.S. economic gains.<\/em><\/p><\/blockquote>\n

Golly gee, Wally<\/a>, I mean Jeremy\u2026you\u2019ve got a point. And maybe we should actually make stuff again!<\/a> In fact, our next guest will state the obvious: if everyone is wealthier, the economy would be more vibrant. But why is everyone (political candidates, pundits, et al.,) squawking like they can never raise taxes, you know, like ever? Follow the money, is all I can say. Jack Bogle, the founder of the Vanguard Group, has a hypotheses that has merit: a sea change in capitalism<\/a>.<\/p>\n

Sounds like a movie, doesn\u2019t it? The Rise of the Planet of the Agents!<\/em> As Grantham points out further, the gravy train keeps on a rolling, and Atlas hasn\u2019t shrugged, but has cozyed up to Caesar instead.<\/p>\n

Looking at corporate pro\ufb01t margins, one could argue the same for them \u2013 that they do not seem to be connected to economic reality. A sub average economic recovery, threatening to become painfully sub average, has not stopped corporate pro\ufb01ts from quickly rising to a level that is about as high as they have ever gotten. The average worker, with \ufb02at wages for decades and with 16% to 18% of the workforce either out of work (9%), discouraged to look for work (4%), or forced to work only part-time (5%), must feel as if he (or she) is in a depression (see Exhibit 2). <\/em><\/p>\n

It looks likely to take several years before normal employment is reached. Corporations are spending on capital equipment but are doing little in the way of domestic recruiting. Pro\ufb01t margins in the \ufb01nancial system were protected, along with bonuses, which in some cases set records last year despite the undeniable fact that these were the guys who helped bring the Western world to its knees. Ah, justice! There never was \u2013 and perhaps, with luck, never will be again \u2013 such a terrible comparison between the economic well-being of corporations and their of\ufb01cers and the economic ill-being of their ordinary employees.<\/em><\/p><\/blockquote>\n

Read the whole report<\/a>. And then juxtapose it against the thoughts of the head of the Vatican\u2019s bank, Ettore Gotti Tedeschi, who talks of the neutrality of money. Here\u2019s an excerpt from his interview with The Catholic World Report,<\/em><\/p>\n

Yet, according to some analysts, human selfishness inevitably leads people to concentrate wealth in the hands of just a few.<\/strong><\/em><\/p>\n

Tedeschi<\/strong>: Actually, hoarding wealth isn\u2019t selfishness, it\u2019s stupidity. Just think about it: whether you produce cars or books or newspapers, when is it that you get rich? When people buy a lot of cars, or books, or newspapers. This can happen only when everyone, or at least most people, have purchasing power. So when everyone is rich on average, they will buy two cars, whole libraries, six newspapers a day\u2026. But people living at a level of minimum subsistence will resort to buying a used car and only one newspaper, on Sundays, when they have time to read.<\/em><\/p>\n

This is why one can\u2019t stay rich if there are only two or three in his or her community who are rich. Only in authoritarian countries with vast natural resources, all of which are in the hands of only one or two families, can poverty remain side-by-side with isolated wealth. But in a globalized world, in a democracy which is truly democratic, including in its social relationships, such an imbalance cannot endure. Democracies create the environments that allow the laws of economics to have full play, so if a rich person makes everyone else rich, then he or she can stay rich too.<\/em><\/p>\n

This must be why, in an interview, you once said: \u201cTo be rich is not a defect, to be poor is not a merit.\u201d<\/strong><\/em><\/p>\n

Tedeschi:<\/strong> Here I was making a rather paradoxical point. How can a rich man get to heaven, if it is as impossible as a camel\u2019s attempting to get through the eye of a needle? To answer this we should first of all ask ourselves what it means to create wealth. Man, who was born to work, but also to think, if successful in thinking and working, produces results, which are called wealth and progress. People have different kinds of aptitudes, some more obvious and some less.<\/p>\n

We are not all alike. Just think of artists, musicians\u2026it\u2019s a matter of natural gifts. Among the possible talents there are those of the businessman who knows how to manage an idea, formulating it in a product and translating it into the ability to produce wealth, to create jobs, to advance well-being and innovation. I say that this gentleman has in himself something of the saint, something grand, which not only should not be discouraged, but ought to be actively supported. This is why I think that many businessmen are worthy of beatification! They have created wealth, which is also of service to those who do not have this talent, helping them to better their lives.<\/em><\/p><\/blockquote>\n

And his thoughts on Max Weber and his Capitalism Success = Protestant Work ethic?<\/p>\n

What is the difference with Max Weber\u2019s reasoning and the Catholic understanding of these issues?<\/strong><\/p>\n

Tedeschi:<\/strong> Weber interpreted the birth of capitalism in the Protestant world according to a very interesting and logical analysis which, regrettably, has been registered in history books as the sole truth about the birth of modern-day economics. Basically, what Weber says is that the humus, or intellectual environment, that engendered modern capitalism, with the Industrial Revolution, was to be found in the so-called Protestant world. In his opinion Catholic teaching created an attitude toward eternal life, based on an immanent vision of the supernatural, that deprived the Catholic mindset of the energy necessary to forge ahead with industrial development.<\/em><\/p>\n

This claim, that the energies that produced capitalism were spawned by the Protestant milieu, has led to a rather partial and therefore warped interpretation of history, which has come to be the only interpretation around. But, of course, I wasn\u2019t there in 1905 to discuss things with him!<\/em><\/p><\/blockquote>\n

You\u2019ll want to read the whole thing<\/a>. But always keep in mind that despite the pronouncements and encyclicals, etc., which you should read to inform yourself on the thoughts of the Church, action politically to make changes in our system is the province of the laity. The Pope, Bishops and Priests are merely a handful of voters, you see. This is where we<\/em> have to push and prod our political leaders to change the status quo, via the ballot box, e-mails, letters, etc. and advocate decisions that do the opposite of what Grantham writes,<\/p>\n

Economic policy making has been stuck between half-hearted Keynesian stimulus, mostly chosen, apparently, to avoid projects with a high social return on investment, and ill-timed \u201cAustrian\u201d cut-backs. Clearly, this mishmash has not been effective at job creation. Conversely, we were great at job destruction: no other country laid off workers with such panic. Where Dutch and German companies, among others, tried to protect their workers\u2019 social capital by limiting \ufb01ring, we protected short-term pro\ufb01ts.<\/em><\/p><\/blockquote>\n

Yipee! How shortsighted of us. How about a song. Remember these guys (and these days)?<\/p>\n