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economic rent

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I've railed against simplistic conservative misreadings of Adam Smith before, so Dustin Mineau's explanation of how economists duped us into attacking capitalism (by explicating the concept of economic rent) was a very intriguing read:

I admit, reading the term, "economic rent" can cause eyes to glaze over quickly. A more accurate description is "unearned income". It is people and companies who make money by doing zero work and risk little or none of their own assets.

Many conservative economists claim to be staunch followers of Adam Smith. They shout slogans such as "Supply and Demand!" "Capitalism"! " "Let the markets work!" However, for anyone who actually read Adam Smith, you would note that the "invisible hand" was not his only observation of the inner workings of capitalism. Adam Smith recognized that many in the economy were making gobs of money, but weren't contributing anything. He was referring to what was eventually called "economic rent".

"Adam Smith and future classical economists," he reminds us, "existed in a time where the noble families of medieval Europe were still the large landowners:"

The nobles had just turned into Rentiers. Because they owned the land, they were able to rent it out to capitalist and workers and claim a portion of their profits and wages by charging "rent". They were able to do this without ever working. It was unearned income.

Much of the work done by economists from Adam Smith until the late 19th century was all about finding and identifying "rent-seeking". These classical economists didn't want to overthrow capitalism, they wanted to free it from the "rent-seeking" parasites.

Because "many modern economists no longer make a distinction between land and capital," he continues, "therefore the concept of economic rent is no longer discussed in our politics:"

Rent-seeking is any income that is unearned. An alternative definition is "profit without a corresponding cost of production". "Economic Rent" can come from ownership of land and just "renting" it out for money. It can also come from collecting so much capital that a firm now has a monopoly and can set the price independent of supply demand considerations, It can be from government monopoly granting, control of other "land" like our rivers, broadband spectrum, or "mineral rights" of land. It can come from control of financial assets like capital gains, dividends, and interest on loans(especially usury). It can also come from political favors from the government.

A side effect of this is that "when progressives rail against the unearned income of the rentiers, we lack the vocabulary to properly express what is happening:"

Instead, conservatives try to make it look like liberals are railing against capitalism itself or against businesses in general. In some cases we may even come to believe it ourselves. Many times when we're fighting against the "excesses of capitalism", what we are actually fighting is parasitic rentiers that are hurting the true capitalists as much as the workers.

"One could argue, he concludes, that "history is repeating itself:"

200 years ago, the conservative vs. liberal mantra was that conservatives were fighting to keep the power of the nobles and large landlords intact. The liberals were the ones trying to free themselves politically and economically from their control. Today it's the same. Conservatives are fighting to maintain the privilege of the Rentiers by pretending to defend capitalism itself. And once again, us liberals are fighting to free the market from the parasitical Rentiers.

Lynn Parramore's observation that medieval peasants got more vacation time than you is an interesting one, despite the obvious caveat that "Life for the medieval peasant was certainly no picnic:"

His life was shadowed by fear of famine, disease and bursts of warfare. His diet and personal hygiene left much to be desired. But despite his reputation as a miserable wretch, you might envy him one thing: his vacations.

Plowing and harvesting were backbreaking toil, but the peasant enjoyed anywhere from eight weeks to half the year off. The Church, mindful of how to keep a population from rebelling, enforced frequent mandatory holidays. Weddings, wakes and births might mean a week off quaffing ale to celebrate, and when wandering jugglers or sporting events came to town, the peasant expected time off for entertainment. There were labor-free Sundays, and when the plowing and harvesting seasons were over, the peasant got time to rest, too. In fact, economist Juliet Shor found that during periods of particularly high wages, such as 14th-century England, peasants might put in no more than 150 days a year.

As for the modern American worker? After a year on the job, she gets an average of eight vacation days annually.

"Shor's examination of work patterns," writes Parramore, "reveals that the 19th century was an aberration in the history of human labor:"

When workers fought for the eight-hour workday, they weren't trying to get something radical and new, but rather to restore what their ancestors had enjoyed before industrial capitalists and the electric lightbulb came on the scene. Go back 200, 300 or 400 years and you find that most people did not work very long hours at all. In addition to relaxing during long holidays, the medieval peasant took his sweet time eating meals, and the day often included time for an afternoon snooze. "The tempo of life was slow, even leisurely; the pace of work relaxed," notes Shor. "Our ancestors may not have been rich, but they had an abundance of leisure."

Parramore identifies the precarious nature of today's middle-class existence, as well as the irony that "this cult of endless toil doesn't really help the bottom line:"

Study after study shows that overworking reduces productivity. On the other hand, performance increases after a vacation, and workers come back with restored energy and focus. The longer the vacation, the more relaxed and energized people feel upon returning to the office.

(It's almost as if one of the corporate goals of this setup is workers' terrified obedience, rather than mere productivity...)

In the course of explaining why market-based healthcare reform can't succeed, Smirking Chimp examines the proposition that "No 'free market' solution to providing health care can work without price controls:" He notes that "In other countries, 'market-based' solutions work because of decidedly non market-based practices, like government-mandated price-setting:"

Any solution that places pricing power in the hands of monopolies and near-monopolies will always fail to deliver an affordable product, whether that market is cable TV or health insurance. Monopolies inevitably lead to high prices.

He quotes from this Jacobin article by Benjamin Day (executive director of single-payer advocacy group Healthcare-NOW), which points out that Aetna, one of the largest insurers, "is pulling out of state health exchanges in 2017. The company's action marks the failure of every market-based reform included in the Affordable Care Act (ACA):"

The last gasp of the ACA's market-based reforms reveals an uncomfortable truth about our health-care system: we cannot afford to expand or even maintain our current access to care without cost controls, and health-care costs cannot be controlled with competition or markets.

The only cost control that works without undermining access to care is also the kind that Republican and Democratic leadership have foresworn this election: public budgeting and rate-setting through a single-payer system, or regulations that force nonprofit insurers to act like a single-payer.

The idea of taxing conspicuous consumption is gaining ground, as Smirking Chimp explains when talking to economist Robert Frank (lauded as "arguably the country's leading expert on wretched excess"):

The reason the nation's wealthiest have become a menace to the commonweal, Frank has concluded, is not because of how much more they make than the rest of us. It's how much more they spend. [...] It boils down to this: Scrap the income tax.

The specter of "trickle-down consumerism" haunts middle-class lives:

Whatever you do, just don't call it keeping up with the Joneses on steroids. Frank finds that too judgmental. The reason the median family is spending 50 to 75 percent more to buy a house that's at least 50 percent bigger than the ones they bought in 1970, or proud parents are spending more than three times as much on weddings than they did in 1980, Frank says, has less to do with envy or status-seeking than what he calls "context." [...]

"The better schools are located in the neighborhoods where the houses are more expensive," he said. So middle-class families "bid up the prices, of course, in the better school districts."

"Frank doesn't expect his recommendations to come to fruition overnight," the piece observes, although:

...other once-unthinkable things, such as a tax on carbon consumption and legalized gay marriage, gained rapid acceptance once they had gathered momentum. "Things happen incrementally until they don't," said Frank. "Revolutions, when they come, are never widely predicted."

TruthDig's Paul Street looks at the ubiquitous "PBS NewsHour" program and how it is funded:

The claim [of neutrality] has long been contradicted by the string of corporate-image commercials (purchased by leading financial, defense, auto, insurance and rail corporations) that appear before the network's nightly "NewsHour" broadcast--along with a list of corporate-sponsored foundations and superwealthy individuals who pay for the show, along with "regular viewers like you."

It is important that PBS news products exist within "the narrow capitalist parameters of acceptable coverage and debate that typify the more fully and explicitly for-profit and commercialized corporate media:"

Whatever the global issue of the day or week, "NewsHour" anchors and their invited "experts" can be counted on to report and reflect in accord with the doctrinal assumption that Washington always operates with the best of intentions. They almost uniformly treat the U.S. as a great, benevolent and indispensable force for freedom, democracy, security, peace and order in a dangerous world full of evil and deadly actors.

"Today's PBS, Street continues, "is not about to blow the whistle on the moral contradictions:"

There is a natural connection between the "P" in PBS standing for "Plutocracy" and it standing for "Pentagon." The core economic interests of the nation's superwealthy corporate and financial elite have long been global in nature. And, as the arch-neoliberal guru and New York Times columnist Thomas Friedman explained in New York Times Magazine on the eve of the U.S.-led bombing of Serbia, "The hidden hand of the market will never work without a hidden fist--McDonald's cannot flourish without McDonnell Douglas, the builder of the F-15. And the hidden fist that keeps the world safe for Silicon Valley's technologies to flourish is called the U.S. Army, Air Force, Navy and Marine Corps." Friedman is a PBS favorite. He has appeared on "NewsHour" and other PBS productions at least 50 times by now.

Of such bricks is a media elite edifice constructed.

stack ranking

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As Evonomics explains, stack ranking is destructive--both in corporations and on sports teams:

Stack-ranking and other business practices of individual selection have been widespread, from General Electric to Microsoft, and is a standard modus operandi in sports teams including the focus of this piece, the European soccer team, Real Madrid. However, the wisdom behind the application of these models, both in business and sport, is under scrutiny. [...]

This mismatch of incentives for individuals within a group is most certainly an area of concern for managers of all kinds. The relevance of these findings for management strategies in industry has gained some recent publicity, mainly following a popular TED talk by Margaret Heffernan which referenced [evolutionary biologist William] Muir's original experiments with specific focus on how traditional 'pecking orders' may not be the most productive organizational structure. [...]

Research on salary allocation shows one mechanism why this can occur, finding that pay inequality is linked to detrimental issues within teams, such that teams with highly unequal salary structures tend to also elicit more negative affect for their members, which can then lead to greater within-group problems.

C-level executives receive enormous feasts, while the rest of us fight over the table scraps; signing bonuses in soccer appear to have much the same effect:

Upon review, the Galactico policy of acquiring (or selecting for) top players by paying extraordinarily large sums of money [...] is likely to attract players with a pre-existing tendency to benefit individually at the expense of the team. Indeed, while the chance to sign for Real Madrid is a flattering opportunity for any player, the likely stack- ranking environment would seem more likely to attract certain traits. Accordingly, the relatively disappointing return of trophies and high turnover rate of world class players may be a consequence of the nature of the players recruited, or the behaviors which are coerced out of players by the high incentives to be the most productive or stand out performer.

Perhaps this in-group rivalry leads to an excess of competing against each other rather than against the opposite teams?

working parents

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The Center for American Progress report "Workin' 9 to 5: How School Schedules Make Life Harder for Working Parents" looks at "the unrealistic expectations that schools too often have for working parents and the ways in which school policies put pressure on already stretched families:"

By closing at 3:00 p.m., shutting down intermittently and frequently, hosting important school events in the middle of the day, and more, schools make it really hard for parents to balance their commitments to their children and their jobs.

[...] In fact, nearly half of all workers report not having any form of flexibility in their work schedules. Almost 40 percent of all workers do not even have paid vacation

The report enumerates and examines "the multitude of ways that U.S. public schools make life unnecessarily harder for working parents:"

Throughout the school year, schools are closed for 29 days, more than two workweeks longer than the average private-sector worker has in paid vacation and holidays.
As a consequence, even if full-time workers devoted all of their paid vacation time and holidays to cover school closings, they would still need to find an alternative way to care for their children on at least 13 days throughout the school year.

If families pay out of pocket for child care to cover the excess school closure days and hours, it would cost an average of $6,600 per year, or 9 percent of an average family's income. [...]

Misaligned school schedules cost the U.S. economy $55 billion in lost productivity annually.

What to do?

CAP recommends policy changes at the federal, state, and local levels to align school and work schedules. These policy solutions should extend the length of the school day, reduce the number of school closures, reform the calendar year, and rethink engagement strategies.

The idea of "a 9-to-5 school day" deserves serious consideration.

shell games

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As the new report "Offshore Shell Games 2016" indicates, "Overall, multinational corporations use tax havens to avoid an estimated $100 billion in federal income taxes each year." The downside, of course, is that "when corporations don't pay what they owe, ordinary Americans inevitably must make up the difference:"

In other words, every dollar in taxes that corporations avoid must be balanced by higher taxes on individuals, cuts to public investments and services, and increased federal debt.

"Most of America's largest corporations maintain subsidiaries in offshore tax havens," the report observes:

At least 367 companies, or 73 percent of the Fortune 500, operate one or more subsidiaries in tax haven countries [and] these 367 companies maintain at least 10,366 tax haven subsidiaries.

For those keeping score at home, that's 28 for each corporation, but it gets worse:

A Citizens for Tax Justice analysis of 27 companies that disclose subsidiary data to both the Securities and Exchange Commission (SEC) and the Federal Reserve revealed that weak SEC disclosure rules allowed these companies to omit 85 percent of their subsidiaries on average. If this rate of omission held true for the entire Fortune 500, the number of tax haven subsidiaries in reality could be nearly 55,000, rather than the 10,366 that are being publicly disclosed now.

(That would bring the average up to almost 150 tax havens per Fortune 500 firm.) Crooks and Liars notes that "Congress - for obviou$ rea$on$ - refuses to stop this 'deferral' loophole:"

And then these same companies fund "think tanks" and other propaganda mills that tell us we have a huge budget "deficit" and "debt" problem and therefore need to cut spending on things that make people's lives better.

It's almost all a sham, though:

For many companies, increasing profits held offshore does not mean building factories abroad, selling more products to foreign customers, or doing any additional real business activity in other countries. Instead, many companies use accounting tricks to disguise their profits as "foreign," and book them to a subsidiary in a tax haven to avoid taxes. [...] The 298 Fortune 500 companies that report holding offshore cash had collectively accumulated more than $2.49 trillion that they declare to be "permanently reinvested" abroad.

That's rather reminiscent of the $1.8 trillion in cash that corporations were hoarding while the rest of us dug out from the Great Recession. As far as proposing solutions, the reports offers a few:

The most comprehensive solution to ending tax haven abuse would be to stop permitting U.S. multinational corporations to indefinitely defer paying U.S. taxes on profits they attribute to their foreign subsidiaries. In other words, companies should pay taxes on their foreign income at the same rate and time that they pay them on their domestic income. Paying U.S. taxes on this overseas income would not constitute "double taxation" because the companies already subtract any foreign taxes they've paid from their U.S. tax bill, and that would not change. Ending "deferral" could raise up to $1.3 trillion over ten years, accord¬ing to the U.S. Treasury Department.

"bullshit jobs"

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David Graeber explains why capitalism creates pointless jobs. Instead of using technology to increase our leisure time, he explains that it "has been marshaled, if anything, to figure out ways to make us all work more:"

In order to achieve this, jobs have had to be created that are, effectively, pointless. Huge swathes of people, in Europe and North America in particular, spend their entire working lives performing tasks they secretly believe do not really need to be performed. The moral and spiritual damage that comes from this situation is profound. It is a scar across our collective soul. Yet virtually no one talks about it.

Graeber is more than happy to pick up the slack:

But rather than allowing a massive reduction of working hours to free the world's population to pursue their own projects, pleasures, visions, and ideas, we have seen the ballooning not even so much of the "service" sector as of the administrative sector, up to and including the creation of whole new industries like financial services or telemarketing, or the unprecedented expansion of sectors like corporate law, academic and health administration, human resources, and public relations. And these numbers do not even reflect on all those people whose job is to provide administrative, technical, or security support for these industries, or for that matter the whole host of ancillary industries (dog-washers, all-night pizza deliverymen) that only exist because everyone else is spending so much of their time working in all the other ones.

These are what I propose to call "bullshit jobs."

It's as if someone were out there making up pointless jobs just for the sake of keeping us all working.

That's quite contrary to the efficient-market hypothesis, isn't it? Graeber continues by noting that "The answer clearly isn't economic: it's moral and political:"

The ruling class has figured out that a happy and productive population with free time on their hands is a mortal danger (think of what started to happen when this even began to be approximated in the '60s). And, on the other hand, the feeling that work is a moral value in itself, and that anyone not willing to submit themselves to some kind of intense work discipline for most of their waking hours deserves nothing, is extraordinarily convenient for them.

It's also clearly not an accidental situation, as he points out by writing that "If someone had designed a work regime perfectly suited to maintaining the power of finance capital, it's hard to see how they could have done a better job:"

Real, productive workers are relentlessly squeezed and exploited. The remainder are divided between a terrorised stratum of the - universally reviled - unemployed and a larger stratum who are basically paid to do nothing, in positions designed to make them identify with the perspectives and sensibilities of the ruling class (managers, administrators, etc) - and particularly its financial avatars - but, at the same time, foster a simmering resentment against anyone whose work has clear and undeniable social value. Clearly, the system was never consciously designed. It emerged from almost a century of trial and error. But it is the only explanation for why, despite our technological capacities, we are not all working 3-4 hour days.

Paul Krugman comments that "the austerity death spiral in Europe" should have taught us something:

When the private sector is frantically trying to pay down debt, the public sector should do the opposite, spending when the private sector can't or won't. By all means, let's balance our budget once the economy has recovered -- but not now. The boom, not the slump, is the right time for austerity.

He notes that "the austerity drive in Britain isn't really about debt and deficits at all; it's about using deficit panic as an excuse to dismantle social programs:"

And this is, of course, exactly the same thing that has been happening in America.

In fairness to Britain's conservatives, they aren't quite as crude as their American counterparts. They don't rail against the evils of deficits in one breath, then demand huge tax cuts for the wealthy in the next (although the Cameron government has, in fact, significantly cut the top tax rate). And, in general, they seem less determined than America's right to aid the rich and punish the poor. Still, the direction of policy is the same -- and so is the fundamental insincerity of the calls for austerity.

The big question here is whether the evident failure of austerity to produce an economic recovery will lead to a "Plan B." Maybe. But my guess is that even if such a plan is announced, it won't amount to much. For economic recovery was never the point; the drive for austerity was about using the crisis, not solving it. And it still is.

moral markets

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In "What Money Can't Buy," Michael Sandel asks the questions "Do we want a society where everything is up for sale? Or are there certain moral and civic goods that markets do not honor and money cannot buy?" to which NYT's Nicholas Kristof remarks:

This issue goes to the heart of fairness in our country. There has been much discussion recently about economic inequality, but almost no conversation about the way the spread of markets nurtures a broader, systemic inequality.

Market fundamentalism, Kristof observes, "is gaining ground:"

It's related to the glorification of wealth over the last couple of decades, to the celebration of opulence, and to the emergence of a new aristocracy. Market fundamentalists assume a measure of social Darwinism and accept that laissez-faire is always optimal.

That's the dogma that helped lead to bank deregulation and the current economic mess. And anyone who honestly believes that low taxes and unfettered free markets are always best should consider moving to Pakistan's tribal areas. They are a triumph of limited government, negligible taxes, no "burdensome regulation" and free markets for everything from drugs to AK-47s.

If you're infatuated with unfettered free markets, just visit Waziristan.

Paul Waldman brings the sarcasm in it's hard out there for a billionaire,

America's barons feel assaulted, victimized, wounded in ways that not even a bracing ride to your Hamptons estate in your new Porsche 911 can salve. And now that the presidential campaign is in full swing, their tender feelings are being hurt left and right.

Pyramid-scheme tycoon Frank Vandersloot is the national finance co-chair of Romney's campaign (to which he donated $1 million), but he whines that the Obama campaign's mention of this fact is equivalent to being placed on an "enemies list:"

What VanderSloot obviously wants is a situation in which he can put millions of dollars into influencing the course of elections and policy debates, but nobody ever criticizes him for it. Well, that's just not how things work in a democracy.

drained

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The Demos report entitled The Retirement Savings Drain (PDF) should open many 401(k) advocates' eyes when it points out that:

administering the average defined benefit plan, or traditional pension, costs 46 percent less than a typical 401(k) to provide the same benefit level in retirement, largely because of the higher fees and lower investment returns of 401(k)s and the ability of defined benefit plans to pool risk.

Using median incomes and actual average contribution rates, the report reveals that the lifetime costs of 401(k) fees can be as much as $154,794 for a hypothetical two-earner household:

To put that in perspective, that's the average cost of a house in many parts of the country, or more than the cost of a public-university education, including room and board, for two children.

Another key fact reported by Demos relates to relative costs:

In the long run, the average mutual fund earns a 7 percent return, before fees, matching the average return of the overall stock market. However, the post-fee returns average only 4.5 percent, meaning that, on average, fees eat up over a third of the total returns earned by mutual funds.

The report also asks, "why are fees, which limit Americans' already-scarce retirement savings, still so high?"

The answer is that the market for individual-account retirement savings is neither efficient nor competitive. 401(k) savers and plan-sponsoring employers lack information about the true costs or even existence of retirement plan fees and how they reduce returns.

The Department of Labor's new fee disclosure rules will take effect on 1 July, and may prompt workers into asking their employers difficult questions about their retirement benefit options. Perhaps fewer fund managers will be selected on such criteria as golf vacations for HR directors...


update (5/31):
Calling 401(k) fees "a pernicious rip-off," Forbes notes that a nagging and costly question persists:"

Whenever I asked the question "how much are 401k savers being overcharged" over the years, I haven't been able to get a decent answer. The government doesn't really track it and the middleman and your employer don't want you to know.

WSJ previews the sobering news about 401(k) fees:

There are more than 50 million Americans with investments in 401(k) and other defined-contribution retirement-savings plans. They're about to be getting more information about the fees they pay. [...]

Retirement-plan administrators have to provide detailed information to employers by July 1 about the fees they charge. Employers have to share that information with workers in their plans by Aug. 30, and once a year after that. The charges include investment-related fees and fees for administering a plan itself.


update (6/1):
Reuters wonders if we should scrap the 401(k) system and start over, looking ahead to investors' reaction "when 401(k) account statements hit their mailboxes this summer:"

A new format mandated by federal regulators will give investors a more transparent view of the fees they pay and a study released this week suggests many will be shocked by what they see [because] fees are not well understood by investors and even plan sponsors.

A recent AARP survey found that 71 percent of retirement savers do not think they pay any investment fees at all.

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