Posts Tagged ‘banks’


As Ed Brayton [ht: sm] explains,

Sometimes a single image just sums up perfectly what is wrong with an issue or a society. This one certainly seems to capture the problems in our educational system. It’s an email sent to teachers by a credit union offering to loan them money to buy school supplies they should already have.

It’s bad enough that teachers are put in a position where they have to buy school supplies for their students anyway, but now a bank wants to loan them money and charge them interest for it. Because that’s not too predatory or anything. The way we fund public schools in this country is ridiculous.


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The current situation—what I continue to refer to as the Second Great Depression—presents a real problem for mainstream economists. Corporate profits (and, with them, the stock market and salaries at the top end of the income distribution) continue to soar while workers’ wages stagnate (based on high levels of unemployment and a declining value of the federal minimum wage).

Clearly, the modeling tools of mainstream economics are useless in analyzing these trends. For example, the only way you can get involuntary unemployment in a neoclassical world is for wages to be too high (that is, above the equilibrium wage rate), such that the quantity supplied of labor is greater than the quantity demanded of labor.

This has forced an economist like Paul Krugman to look elsewhere and to stumble on a tradition that looks a lot more like Marx and Kalecki than traditional neoclassical (and, for that matter, Keynesian) economics. In this alternative tradition, there’s a fundamental conflict between labor and capital, the Reserve Army of labor regulates the level of wages, and corporations prevent the state from enacting the kinds of stimulus measures and social programs that would decrease the economy’s dependence on the “state of confidence” of private employers and investors.

The question is, how does one model fundamental features of the Second Great Depression in this alternative tradition? Krugman seems to think he can do it in with an efficiency-wage model. But, remember, that model was invented to make sense of situations in which employers offer wages above the equilibrium wage rate (in order to purchase worker loyalty, decrease “shirking,” and increase effort) and, by extension, employers choose not to decrease wages as much as they might in the face of massive unemployment.

But the problem, as I’ve explained before, is not downwardly rigid nominal wages but upwardly rigid real wages. That is, even as the economy recovers, firms are not willing to bid up the prevailing wage rate. As a result, real wages remain constant while, with increasing productivity and economic growth, corporate profits rise. The real coordination failure is exactly the opposite of the one posed in the efficiency-wage story: each employer actually wants to pay the lowest wages possible, while hoping that all other employers offer higher wages, in order to buy back the goods and services being produced. All you need to do is work through Nick Rowe’s attempt to use an efficiency-wage model to make sense of Krugman’s problem to realize it’s probably not going to get us very far.

So, if the efficiency-wage model is a nonstarter, where else might we look? One possibility, it seems to me, is the labor-surplus model first developed by W. Arthur Lewis. I understand, the purpose of that model was quite different: it was designed to make sense of “dual economies” in which peasant workers trapped by “disguised unemployment” and receiving a “subsistence” wage (equal to the average product of labor) in the “backward,” noncapitalist rural/agricultural sector could be induced via a higher “industrial” wage rate (equal to the marginal product of labor) to move to the “modern,” capitalist urban/manufacturing sector, which would absorb them as long as capital accumulation increased the demand for labor.


That’s clearly not what we’re talking about today, certainly not in the United States and other advanced economies where agriculture employs a tiny fraction of the work force (and much of agriculture is organized along capitalist lines). But, in my view, a suitably modified labor-surplus model might be a better starting point than the efficiency-wage model for making sense of what is going on in the world today.

What I have in mind is redefining the subsistence wage as the federally mandated minimum wage, which regulates compensation to workers in the so-called service sector (especially retail and food services). That low wage-rate serves a couple of different functions: it’s a condition of high profitability in the service sector while keeping service-sector prices low, thereby cheapening both the value of labor power (for all workers who rely on the consumption of those goods and services) and making it possible for those at the top of the distribution of income to engage in conspicuous consumption (in the restaurants where they dine as well as in their homes). In turn, the higher average wage-rate of nonsupervisory workers is regulated in part by the minimum wage and in part by the Reserve Army of unemployed and underemployed workers. The threat to currently employed workers is that they might find themselves unemployed, underemployed, or working at a minimum-wage job.

In addition, the profits captured from both groups of workers are distributed to a wide variety of other activities, not just capital accumulation as presumed by Lewis. These include high CEO salaries, stock buybacks, idle cash, and financial-sector profits (with a declining share going to taxes). And, if the remaining portion that does flow into capital accumulation takes the form of labor-saving investments, we can have an economic recovery based on private investment and production with high unemployment, stagnant wages, and rising corporate profits.

Now, I can’t say the labor-surplus model is the only way to model some of the stylized facts of the Second Great Depression. But, to my mind, it’s certainly a better starting-point than the efficiency-wage model.


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Only in America

Posted: 21 December 2013 in Uncategorized
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This past year, Chicago [ht: sm] replaced its previous transit card (the Chicago Card, which worked quite well, thank you) with a new one (the Ventra Card, which hasn’t, for large parts of the year). The question is, why?

Well, my friends, here’s your compelling argument: under the old system, rich investors didn’t get a piece of the action. Under this one, they most decidedly do.

The contract to replace Chicago’s fare payment system was awarded to the publicly traded corporation Cubic in 2011 by the previous mayor, Richard M. Daley, for $454 million, and implemented with alacrity by the current mayor Rahm Emanuel. I’ll have much more to say about this company and its many dubious works in the next part of this series. For now, consider this. In a separate part of the project, Chicagoans are offered the following opportunity, as advertised on the back of their Ventra cards: “Go beyond transit. Call or go online to activate your Money Network® MasterCard® Prepaid Debit Account and use your Ventra Card for purchases, direct deposit, bill pay, and at ATMs.” This is how the City of Chicago intended to turn its millions of captive citizens over to the commercial banking industry: hoovering spare change from the pockets of Chicago’s marginal communities into corporate America’s overstuffed coffers.


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Why 2 big 2 jail?

Posted: 17 December 2013 in Uncategorized
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I’ve read two arguments that, in my view, serve to explain why the heads of the major banks that caused the Second Great Depression have not been prosecuted and subsequently jailed.

The first, admitted by Eric Holder, is that the Justice Department has been afraid of undermining the fragile recovery.

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”

The second, offered by Judge Jed S. Rakoff, a leading authority on the securities laws and the law of white collar crime, concerns the decision to investigate companies but not the individuals who run and own those companies.

If you are a prosecutor attempting to discover the individuals responsible for an apparent financial fraud, you go about your business in much the same way you go after mobsters or drug kingpins: you start at the bottom and, over many months or years, slowly work your way up. Specifically, you start by “flipping” some lower- or mid-level participant in the fraud who you can show was directly responsible for making one or more false material misrepresentations but who is willing to cooperate, and maybe even “wear a wire”—i.e., secretly record his colleagues—in order to reduce his sentence. With his help, and aided by the substantial prison penalties now available in white-collar cases, you go up the ladder.

But if your priority is prosecuting the company, a different scenario takes place. Early in the investigation, you invite in counsel to the company and explain to him or her why you suspect fraud. He or she responds by assuring you that the company wants to cooperate and do the right thing, and to that end the company has hired a former assistant US attorney, now a partner at a respected law firm, to do an internal investigation. The company’s counsel asks you to defer your investigation until the company’s own internal investigation is completed, on the condition that the company will share its results with you. In order to save time and resources, you agree.

Six months later the company’s counsel returns, with a detailed report showing that mistakes were made but that the company is now intent on correcting them. You and the company then agree that the company will enter into a deferred prosecution agreement that couples some immediate fines with the imposition of expensive but internal prophylactic measures. For all practical purposes the case is now over. You are happy because you believe that you have helped prevent future crimes; the company is happy because it has avoided a devastating indictment; and perhaps the happiest of all are the executives, or former executives, who actually committed the underlying misconduct, for they are left untouched.

As a result, the banksters—the true mobsters of our casino economy—are allowed to continue their predatory lending, money laundering, and derivatives trading with impunity.

Affluenza defense

Posted: 16 December 2013 in Uncategorized
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Apparently, a Texas teenager [ht: ck] who killed four people while driving drunk was sentenced this week to ten years probation in lieu of jail time, after the defense argued he was a product of “affluenza”—

a condition in which growing up wealthy prevents children from understanding the links between their behavior and the consequences because they are rarely held accountable for their actions.

What’s next? Are we going to not jail bankers who took risky decisions, brought the world economy to its knees, and created the Second Great Depression because, as a result of their wealth, they didn’t understand the links between their behavior and its consequences? Or CEOs who closed plants in the United States and shipped the jobs overseas, or who replaced workers with machines and computers, thereby sending hard-working people to the unemployment lines—are they also to be excused from the responsibility of paying for their crimes because of their wealthy condition? Or, finally, are we going to give a “get out of jail” card to large retailers who do everything in their power—inside and outside the law—to make sure their workers never benefit from union representation?

Then again, I guess we have.


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