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Saturday, March 24, 2012

Does Opportunity Justify Economic Inequality?

From 1993 to 2010, the incomes of the richest 1 percent of Americans grew 58 percent while the rest had a 6.4 percent increase.  In 2010, the first year of an economic recovery, the top 1 percent of Americans captured 93% of the income gains. Beyond the danger to the American republics in there being an economic elite so far removed from the vast majority of the population is the question of whether the trend is baleful, economically speaking. It is not clear that even such an income gain being snagged by so few registered in the minds of the general populous as a problem. The key to any concern would seem to be whether opportunity for the many is compromised as a result of extreme economic inequality.

In 2011, inequality was not exactly the top priority of American voters: only 17 percent thought it is extremely important for the government to try to reduce income and wealth inequality, according to a Gallup survey. That is about half the percent who said reigniting economic growth was crucial. However, 29 percent said it was extremely important for the government to increase equality of opportunity. More significant, 41 percent said that there was not much opportunity in America, up from 17 percent in 1998. The question is whether the concurrent increase in economic inequality was viewed as causing the decrease in opportunity. According to David Hume’s naturalist fallacy, a correlation does not itself mean a causal relationship exists. The fact that economic inequality was increasing as opportunity was decreasing does not in itself mean that the increasing inequality was reducing opportunity. There might be a causal relationship, but more is needed to support it than a correlation.

According to the New York Times, comparisons across countries “suggest a fairly strong, negative link between the level of inequality and the odds of advancement across the generations. The link makes sense: a big income gap is likely to open up other social breaches that make it tougher for those lower down the rungs to get ahead. And that is exactly what appears to be happening in the United States, where a narrow elite is peeling off from the rest of society by a chasm of wealth, power and experience.” Additionally, that elite can use its wealth as power to reserve the opportunities itself. For instance, donations to universities (and lobbying government officials) could be used to keep financial-aid-based admissions down to a certain level such that there are plenty of spots available for children of the well-off. Appeals seemingly in the interest of the masses can even be utilized, as in wanting to reduce subsidized student loan programs because students are suffering from too much debt.

In my view, the business-government dynamic is crucial to why increasing economic inequality is harmful both politically and economically. Minimizing the harm to reduced opportunity ignores the injustice that comes with the inequality itself. Wealth can easily be made into power, which in turn can be used in political, economic and societal realms in self-serving ways. The primacy of opportunity assumes that anyone can be rich if he or she just works hard enough. Both on account of the way the system is designed and the differences between people, not everyone will succeed even if given the opportunity.

Furthermore, conditioning one’s objection to economic inequality in society on whether one’s opportunity is affected can be viewed as self-centered as well as rather narrow because one is indifferent to the negative effects of the inequality on others apart from any decreased opportunity as long as one believes that one’s own opportunity is not adversely affected. Put another way, too many Americans are willing to look the other way on how the elite can unfairly use their advantage aside from restricting opportunity. The right of the elite to so much wealth is tacitly acknowledged as long as opportunity is still thought to exist.  As long as it does, society has no right to take from the rich even if they compromise the republics themselves. This is a very minimalist notion of social contract—one that the 1% benefit from. This is hardly an accident—political ideology established in society being in the interest of the relatively few beneficiaries of the vast majority of income gain.

Therefore, whether increasing economic inequality causes less opportunity for the masses is a question that can be relegated to the more important question of whether the inequality itself is inherently unfair and/or a threat to the republics, the economy, and even society. How the wealth has been and is gained as well as used are relevant to the ethical question of fairness, and thus to whether the concentration of wealth is legitimate. Crucially, a focus on opportunity misses this point. Besides its ethical dimension, absolute or relative economic inequality could be harmful in building up pressure of resentment and even revolution, as evinced in the Occupy Wall Street Movement (which has been safely marginalized—with its own complicity). As the interests of the elite and the masses diverge and the elite (e.g., Goldman Sachs) gains more and more power, the strangling of the lower and lower-middle classes may ensue—a development that could not be good for a society’s stability. A focus on opportunity recalibrated in terms of being promoted to manage a McDonalds’ restaurant misses this point. In short, we are missing the iceberg coming up in front of our ship because we are satisfied if we can still get a deck chair.

Eduardo Porter, “Inequality Undermines Democracy,” The New York Times, March 21, 2012. http://www.nytimes.com/2012/03/21/business/economy/tolerance-for-income-gap-may-be-ebbing-economic-scene.html

Thursday, March 22, 2012

Wickard v. Filburn: Federalism v. Congress

If you are wondering how the Congress got away with taking over so much from the state legislatures, you need look no further than Wickard v. Filburn, on which the U.S. Supreme Court unanimously decided that the interstate commerce clause can reach all the way to penalize a farmer for growing his own wheat.

 Filburn and his wheat.  Courtasy of Mary Lou Spurgeon  NYT

The complete essay is at "Is the E.U. a Federal System?"

Tuesday, March 20, 2012

Fraudulent Foreclosures

Looking at foreclosures from 2008 to 2010 of federally-backed mortgages serviced by five major banks, federal investigators at the Department of Housing and Urban Development (HUD) found that bank managers “ignored widespread errors in the foreclosure process, in some cases instructing employees to adopt make-believe titles and speed documents through the system despite internal objections.” Generally, the banks engaged “in a pattern of unfair and deceptive practices.” This finding contradicts the self-serving statements by managers at the banks that blamed low-level employees. The investigation found that the managers had actually been the active agents. That is, the shortcuts were in many cases formulated and directed by managers. The inspector general at HUD pointed to “simple greed” to explain how so many people could have participated in the misconduct. Considering that millions of Americans were tossed out of their homes as a result, I would sociopathic indifference or even callousness to the mix. Additionally, the rush to sign documents may have undercut the banks’ own positions with respect to both the foreclosure process and the homeowners—adding incompetence to the mix.

                  Four million foreclosures in the US during the 2007-2011 period.      Spencer Platt/Getty

In terms of bankers trying to foreclose on as many people as possible without any regard to whether any of those people would be homeless, the Milgrim study in 1961 is relevant. In the experiment, an overwhelming majority of subjects thought they were giving lethal electric shocks to another person—the harm being justified, the subjects reported, because they had just been following orders. Whereas those subjects could hear the screams from their victims, the fraudulent paper-pushers at the banks operated at quite a distance from the sheriffs knocking on people’s doors with eviction notices. While not lethal electric shocks, the harm in suddenly having to scramble to find housing is sufficient for us to find more than greed operating in the minds of the bank managers who could not push foreclosure documents out the door fast enough. Additionally, pushing the blame on lower-level employees merely adds refusal to accept responsibility to the mix of pathology. Is there a personality disorder characterized by not being willing to resist “still more” (i.e., greed), indifference (or even enjoyment) in inflicting harm on others, and a refusal to accept responsibility? If so, the big American banks—those that are too big to fail—may be a magnet for such a pathology, or person. Consider the following findings from the report.

At Bank of America, the concerns of two employees regarding whether documents were being properly notarized were ignored by managers. One vice president admitted that the underlying facts and figures in documents were not checked as a matter of policy in her department.

At Wells Fargo, employees handling foreclosure documents were assigned bogus titles. One newly minted vice president had worked at a pizza restaurant. At least one mid-level manager was told to sign affidavits without reading or verifying the data.  When informed that the documents department was critically understaffed, managers shortened the review period to less than two days instead of five or seven days. At JP Morgan Chase, employees took on inflated titles like “vice president of Chase Home” solely in order that they could sign documents.

A manager in Ally Financial’s foreclosure department admitted to signing up to 10,000 affidavits a month without bothering to review them for accuracy. At JP Morgan Chase, operations supervisors routinely signed foreclosure documents certifying (falsely) that they had personal knowledge of the facts.

Perhaps most obvious is the systemic nature of the fraud—meaning that managers made it policy. Lest it be concluded that they were simply reckless in order to be single-mindedly efficient, it should be noted that the NAZI death camps were also quite efficient. If the customer is merely a number, it could be all too easy for a certain personality type to dehumanize and destroy a customer’s life without any semblance of empathy or conscience. So in addition to greed, we might find abuse of power—even sadism—and a dangerous refusal to admit or accept responsibility existing in the corporate cultures of even the biggest and wealthiest banks.

Additionally, to the extent that signing masses of documents merely put more of a supply before the next bottle neck in the foreclosure process—perhaps even giving the borrowers reason to trash their respective houses knowing they would be leaving in a year—the scramble to sign as many affidavits as possible evinced stupidity as well as a sadistic efficiency. More often than not, unethical or unfeeling business conduct is associated with a lack of competence regarding the business itself. Even so, the feedback loop is woefully inadequate, even when the results of government investigations are in the public domain.


Nelson Schwartz and J.B. Silver-Greenberg, “Bank Officials Cited in Churn of Foreclosures,” The New York Times, March 13, 2012. http://www.nytimes.com/2012/03/13/business/federal-report-cites-bank-officials-in-foreclosure-surge.html?pagewanted=all

Sunday, March 18, 2012

Spain’s Deficit Violating E.U. Law

In early March, 2012, Spanish Prime Minister Mariano Rajoy announced that Spain’s budget-deficit target would not be the 4.4% that had been promised by his predecessor to the E.U. Commission in 2011. Instead, the anticipated deficit in 2012 would be 5.8 percent. That announcement put the state of Spain on a collision course with the enhanced enforcement of deficit limits by the Commission and the ECJ. Even though Rajoy had signed onto the added-enforcement “pact” a month before, he said of the 5.8 percent, “This is a sovereign decision made by Spain.” A few days after his announcement E.U. finance officials met and accepted a 5.3% target. Although it comes with a “tough deficit target” for 2013, one wonders whether the proposed strengthening of the “fiscal pact” will ever be enforced—and in a way that is fair to all of the states.

The complete essay is at "E.U. & U.S."