Tag Archives: finance

Why is Cuomo Leaving Wall Street Cash on the Table?

Co-Written with Lenore Palladino.

Governor Andrew Cuomo has claimed that he’s “a progressive Democrat who’s broke.” But in his most recent executive budget, he proposes ending a little-known tax that could make all the difference. For the last century, New York State has had a stock-transfer tax, which taxes nearly every stock trade. Since 1981, it’s been instantly rebated—no money is actually collected—leaving potential revenue on the table even as financial profits skyrocket. Cuomo suggests ending the tax, citing “unnecessary administrative work.” But New York’s stock-transfer tax can be easily re-implemented, instead putting that administrative work to good use.

Cuomo should work to end or reduce the tax rebate, rather than take the tax off the books. New York isn’t broke so much as unequal: one in every twenty-two people in New York City is a millionaire, while 56,987 New Yorkers live in homeless shelters. A tax like this could raise hundreds of millions of dollars.

The financial sector grew as a share of the economy by 175 percent from 1947 to 2013. This rapid growth has led many to observe that the financial sector increasingly relies on rent-seeking: making money from moving money around only to make more money. Financiers no longer need bother with productive investments.

Wall Street is flush with cash, but the state’s coffers continue to struggle. Public employment in New York dropped by 4.2 percent between December 2007 and June 2014. A modest 0.02 percent tax on stock transactions would raise hundreds of millions of dollars annually. New York City faces incredible risks from climate change. A recent report estimates that, without adaptation, the annual costs of climate change will be between $3.8 billion and $7.5 billion per year at mid-century. The stock-transfer tax could provide, on its own, a major head start toward protecting New York City from devastation.

Opponents of a tax on stock transactions claim that it would reduce trading and jobs and harm the economy, and it would certainly slow down short-term, highly speculative trading to some extent. The real question is: What are the costs that New Yorkers face right now from runaway speculation and insufficient public investment? Our research finds that New York would gain more from the revenue raised, which could be funneled toward job creation, even though falling trade may cause some job loss in the financial sector. Of course, some of those astronomical profits that Wall Street banks keep reporting could be put toward the tax as well.

Finance has increased inequality, pulled money out of the job-creating economy and largely sustained itself on grift. To reduce these negative effects, we should tax financial transactions as well. In the wake of the recent financial crisis, a tax could be a way to reduce systemic risk. Although the New York stock-transfer tax would cover only stock trades, it could provide a model for a more comprehensive national tax on a broader range of financial transactions, like derivatives.

Such a tax isn’t unprecedented. After all, New York had one in place from 1905 to 1981. From 1914 to 1966, the United States levied a modest tax on sales and transfers of stock. House Speaker Jim Wright pushed for a renewed federal tax in 1987, proposing a fee of 0.25 to 0.50 percent on the buyer and seller in each securities transaction, highlighting the tax’s progressive aspects. More recently, Senator Tom Harkin and Representative Peter DeFazio proposed the Wall Street Trading and Speculators Tax Act, which would assess a tax of 0.03 percent on trades of stocks, bonds, futures, options, swaps and credit-default swaps and would generate some $350 billion over nine years. Representative Keith Ellison proposed the Inclusive Prosperity Act, which would entail a 0.5 percent tax on stocks, a 0.1 percent tax on bond trades and 0.005 percent tax on derivatives; that bill was projected to raise similar amounts.

On May 6, 2014, ten European nations issued a joint statement that a financial tax would commence in 2016 as a means to reduce speculation and raise revenue. The initial tax will focus on the trading of stocks and some derivatives. The European Commission estimates that a broad tax could raise 31 billion euros ($39 billion) in annual revenue.

In New York, revenue is desperately needed. Governor Cuomo should support Assemblyman Phil Steck’s bill, which would begin collection for 40 percent of the tax and was supported by economist Jeffrey Sachs. Sachs has said that the “financial transactions tax is a solid idea that has been resisted by Wall Street for years.” Instead of repealing the tax, New York should restart collection and use the revenues to stimulate equitable economic growth.

This article originally appeared in the print version of The Nation and online.

New York already has a financial transaction tax on the books — it’s time to start collecting it

Co-Written with Lenore Palladino.

Recently re-elected Governor Andrew Cuomo likes to complain that he’s “a progressive Democrat who’s broke.” Here’s a simple way to raise millions of dollars and make the economy safer at the same time: a small tax on financial transactions. Politically impossible? Not in New York, where Governor Cuomo could lead the way to reinstate New York’s Stock Transfer Tax, which remains on the books but currently is not collected.

A modest tax on financial transactions would raise revenue while slowing down the frenetic short-term trading that could drive us straight into another financial crisis. Gridlock at the federal level will make congressional action tricky. New York State has had a financial transaction tax-specifically a stock transfer tax– on the books since 1906, but since 1981 has instantly rebates all of the money.  It’s time to start collecting.

The case for a Financial Transaction Tax

The idea for a financial transaction tax has been around for since John Maynard Keynes’sGeneral Theory. The basic argument is that a small fee would be trivial for long-term investors, and only deter the activities of socially useless high-turnover speculators. The idea began to gain traction in the late 70s and 80s with the rapid growth of the financial sector. In 1989, Lawrence Summers and Victoria Summers proposed a U.S. Securities Transfer Excise Tax, arguing that it could raise some $10 billion annually. Recently, the International Monetary Fund (IMF) has supported a financial transaction tax as well. A metastudy by Neil McCulloch and Grazia Pacillo finds that a Tobin Tax (a type of FTT) would be “feasible and, if appropriately designed, could make a significant contribution to revenue without causing major distortions.”

From 1914 to 1966, the United States levied a 0.02 percent tax on sales and transfers of stock. Federally, Speaker Jim Wright pushed for a renewed tax in 1987, proposing a fee of 0.25 percent to 0.5 percent on the buyer and seller of each securities transaction, highlighting the tax’s progressive aspects. More recently, the “Wall Street Trading and Speculators Tax Act” was proposed by Senators Harkin and DeFazio, which would assess a tax of 0.03 percent on trades of stocks, bonds, futures, options, swaps, and credit-default swaps, and would generate $352 billion over 10 years.

Such a tax would not be unprecedented. On May 6th, 2014, ten European nations issued a joint statement that a financial tax will begin in 2016 as a means to reduce speculation and raise revenue. The initial tax will focus on the trading of stocks and some derivatives, even though the initial proposal included taxing most financial products. The European Commissionestimates that a broad tax could raise $39 billion (31 billion EUR) in annual revenues.

New York’s Stock Transfer Tax

Capital intermetiation is an important and integral part of the modern economy. However, rapid deregulation has allowed it to become poisoned by rent-seeking and hyperactive trading while exacerbating rising inequality. A modest tax on financial transactions could reduce the propensity for systemic risk, while providing much-needed money to revenue-starved governments. However, it’s unlikely that such a tax can be passed at the federal level, given the partisan climate.  That’s why New York’s Stock Transfer Tax is such an important opportunity.

There was a Stock Transfer Tax in place in New York from 1905-1981. Revenue from the tax was split between the city and state (in the 1960s the full revenue reverted entirely to New York City). Beginning October 1, 1979, 30% of the tax was rebated to the investor, which was increased to 60% in 1980 and then the full value of the tax in 1981 Because of this quirk in its phase-out, the STT was never repealed. Instead, 100 percent of the revenue is rebated to the trader. Because the tax remains on the books, politically putting the tax in place would not require passage by the legislature of a new tax, but instead the reduction of the rebate, whether by 100% or some smaller percentile.

Governor Cuomo included a repeal of the tax in his Executive Budget (S. 6359), by calling for a full repeal of the tax due to its “unnecessary administrative work for the financial services industry as well as for the Department of Taxation and Finance,” (along with a separate proposal by the Governor to repeal the bank tax). This followed a recommendation by his Solomon/ McCall Commission to repeal ‘nuisance taxes’ like the STT. Assemblyman Phil Steck proposed a bill (A. 8410) to reduce the rebate and re-start collection of 40% of the nominally-collected tax. The threat of a final repeal of the tax prompted action from a variety of stakeholders, including a call by Jeffrey Sachs for a reinstatement of collection. The final enacted budget bill (S. 6359) did not include a repeal of the tax; it remains on the books as a fully-rebated tax.

New York could serve as a pilot program for an eventual national tax. A modest tax on stock transactions would raise millions annually, which could be used to offset any minimal job loss. If the revenue was directed toward creating public jobs and infrastructure, New York could reduce the twin risks of climate change and rampant economic inequality at the same time.

Instead of repealing the tax, Governor Cuomo should re-start collection and use the revenues to stimulate equitable economic growth.

This piece originally appeared on Vox.

The Case for a Financial Transaction Tax

The financial industry is a behemoth. Over the past 150 years, it has grown dramatically as a share of GDP. And entrance into its ranks has become a great way to enter into the top 1 percent of earners. (According to recent data, financial professionals have nearly doubled as a share of Americans in the top 1 percent.) At the same time, Wall Street is one of the most reviled institutions in the United States, with a recent study finding the lowest trust in finance recorded over 40 years.

Here are three good reasons to be distrustful of Wall Street, followed by one policy that would address all of them.

1. The Financial Industry Engages in Rent-Seeking

In economics, rent-seeking is the practice of making money simply by moving money around and collecting the resulting fees, rather than by facilitating profitable investment. The latter role is necessary for functioning markets; rent-seeking, however, is not.

There is now a strong literature suggesting that at some point, finance largely becomes extractive, while remaining at the same efficiency level. Thomas Philippon finds that the cost of financial intermediation has not fallen in 30 years. As Gautam Mukunda writes in a recent Harvard Business Review article, “Creative work increases a society’s wealth. Distributive work just moves wealth from one hand to another. Every industry contains both. But activity in the financial sector is primarily distributive.” Other studies come to the same conclusion:

  • Ozgur Orhangazi finds a negative relationship between real investment and financialization. The author proposes two channels to explain the relationship: “First, increased financial investment and increased financial profit opportunities may have crowded out real investment by changing the incentives of firm managers and directing funds away from real investment.”
  • Stephen Cecchetti and Enisse Kharroubi examine a sample of developed and emerging economies and find that financial development is good for emerging economies, but is detrimental to productivity growth for advanced economies.
  • Jean-Louis Arcand, Enrico Berkes and Ugo Panizza find that when private sector credit exceeds 110 percent of GDP finance begins to become a drag on growth, a situation the U.S. is currently in.

This rent-seeking has increasingly starved the public sector across the nation. The Financial Times reports that “public investment in the U.S. has hit its lowest level since demobilization” after World War II.

2. The Financial Industry Makes Inequality Worse

The International Labor Organization’s (ILO) Global Wage Report finds that the financialization of the economy has been the most important factor in the decline of income share accruing to labor in developed countries. This is because the financial industry primarily distributes wealth upward.

A 2011 study examining the U.S. finds that, “financialization accounts for more than half of the decline in labor’s share of income, 10 percent of the growth in officers’ share of compensation, and 15 percent of the growth in earnings dispersion between 1970 and 2008.” In a paper published this year in the British Journal of Political Science, Christopher Witko finds, “financial deregulation was one policy translating the political power of these actors into economic outcomes.” That is, the rise of finance was a money grab by the 1 percent.

Because relatively few low-income and middle-income families own financial assets, they largely haven’t benefited from the rise of finance. Instead, it’s enriched the wealthy while saddling the middle class with debt. A recent study by Emmanuel Saez and Gabriel Zucman finds,

The key driver of the declining bottom 90%  share is the fall of middle-class saving, a fall which itself may partly owe to the low growth of middle-class income, to financial deregulation leading to some forms of predatory lending, or to growing behavioral biases in the saving decisions of middle-class households.

The charts below show how finance has enriched the top, whose wealth came from equities, while sucking money from the middle, whose wealth consisted of housing and pensions:

 

Those who had no assets at all saw their incomes shrink while wages remained stagnant for decades. As Matt Yglesias notes, in 2013, 25 hedge fund managers took home more twice as much as every kindergarten teacher in the country combined. This while hedge funds have failed to perform better than the market.

3. The Financial Sector Is Increasingly Engaged on High-Frequency Trading

One particularly negative form of trading that the STT could reduce is High-Frequency Trading (HFT). HFT is a useless and distortionary practice that allows investors to make money off of millisecond-quick trades. (HFT recently attracted attention in Michael Lewis’ book “Flash Boys.”) The practice has been derided by Nobel laureate Joseph Stiglitz as a sophisticated version of front-running (buying a stock shortly before a pending order to take advantage of the price increase).

The problem is that instead of channeling money toward profitable investment, HFT is a prime example of making money off of moving money around. A recent study finds that a one millisecond advantage can increase a firm’s earnings by $100 million a year. Ironically, while bridges are vulnerable to collapse across the country and infrastructure in general is sorely undercapitalized, high-speed traders spent $2 billion on infrastructure in 2010 — for high-speed cables to NYSE. HFT does nothing to benefit markets, but instead makes them more volatile. 

The solution: A Financial Transaction Tax

When an industry has negative impacts on the broader public, economists call these effects “externalities.” It doesn’t mean we should destroy the industry, but rather, limit the harmful behavior. In much the same way that we should tax carbon dioxide — and do tax cigarettes and alcohol — we should also tax financial transactions.

The idea for a financial transaction tax has been around since John Maynard Keynes’ “General Theory.“ However, the idea began to gain traction in the late ’70s and ’80s with the rapid growth of the financial sector. In 1989, Lawrence Summers and Victoria Summers proposed a U.S. Securities Transfer Excise Tax, arguing that it could raise some $10 billion annually. Recently, the International Monetary Fund (IMF) hassupported a financial transaction tax as well. A metastudy by Neil McCulloch and Grazia Pacillo finds that a Tobin Tax (a type of FTT) would be “feasible and, if appropriately designed, could make a significant contribution to revenue without causing major distortions.”

From 1914 to 1966, the United States levied a 0.02 percent tax on sales and transfers of stock. Federally, Speaker Jim Wright pushed for a renewed tax in 1987, proposing a fee of 0.25 percent to 0.5 percent on the buyer and seller of each securities transaction, highlighting the tax’s progressive aspects. More recently, the “Wall Street Trading and Speculators Tax Act” was proposed by Sens. Harkin and DeFazio, which would assess a tax of 0.03 percent on trades of stocks, bonds, futures, options, swaps and credit-default swaps, and would generate $352 billion over 10 years.

Such a tax would not be unprecedented. On May 6, 2014, 10 European nations issued ajoint statement that a financial tax will begin in 2016 as a means to reduce speculation and raise revenue. The initial tax will focus on the trading of stocks and some derivatives, even though the initial proposal included taxing most financial products. The European Commission estimates that a broad tax could raise $39 billion (31 billion EUR) in annual revenues.

Further, there was a Stock Transfer Tax (a type of FTT) in place in New York from 1905 to 1981; revenue from the tax was split between the city and state (in the 1960s the full revenue reverted entirely to New York City). Because of a quirk in its phase-out, the STT remains technically legal in New York, though it is automatically rebated to the trader at a rate of 100 percent. Reducing this rebate would be a great way to boost revenues for New York and show the viability of a more expansive tax.

Finance is an important part of any economy. But the unprecedented rise of finance has harmed the real economy, propelled inequality and created opportunities for rent-seeking. To rein in Wall Street and prevent another financial crisis, and to give governments much needed money to invest, we should levy a modest tax on financial transactions. Right now, the financial industry subsists on monetizing privilege. It needs to shrink so we can grow.

This article originally appeared on Salon

This is your brain on money: Why America’s rich think differently than the rest of us

Consider the following recent headlines:

The Internet is replete with apologias for the rich. They are thinly sourced and even less well thought. The goal is simple: to justify the unjustifiable chasm between the rich and poor, globally and within our nation. But the irony is that, rather than being better than the rest of us, in many ways the rich are worse.

Paul Piff and his co-authors, who have done extended research on the behaviors of the wealthy, find that lower class individuals are more generous, charitable, trusting and helpful than upper class individuals. In another study, they find individuals with expensive cars were more likely to cut off other drivers and pedestrians. Further, in laboratory experiments, wealthy participants were more likely to take valued goods, cheat, lie and endorse such behavior. These studies have support from other sources. For instance, the wealthy actually donate less to charity as a share of their income than the middle class. Their giving is more dependent on the economic climate than the middle class. It is unsurprising that Christ warned, “it is easier for a camel to go through the eye of a needle than for a rich person to enter the kingdom of God.”

The rich tend to behave badly, but their bad behaviors are often socially accepted; a behavior that would be seen as inappropriate by a poor person is seen as a minor offense by the rich. (See: casual drug use.) The reason is simple: in a society that worships wealth, those with wealth are worshipped as well. A young economist wrote in 1844,

“The extent of the power of money is the extent of my power. Money’s properties are my – the possessor’s – properties and essential powers… I am bad, dishonest, unscrupulous, stupid; but money is honoured, and hence its possessor. Money is the supreme good, therefore its possessor is good. Money, besides, saves me the trouble of being dishonest: I am therefore presumed honest. I am brainless, but money is the realbrain of all things and how then should its possessor be brainless?”

Economist Chris Dillow cites research by Cameron Anderson and Sebastien Brion, showing that overconfident individuals are seen by others as more competent. He argues that, “overconfident people are more likely to be promoted. And this could have positive feedback effects. Higher status will itself breed even more overconfidence. (E.g. “I got the job so I must be good.”) And if bosses employ like-minded subordinates, the result could be entire layers of management which are both over-confident and engaged in groupthink.”

This effect is reinforced further by the “just-world” bias, which leads us to believe that the rich and powerful deserve their positions. In a famous study, Melvin Lerner found that when students were informed that another student had randomly won a prize, they attributed positive characteristics to the student who had won. Studies have also shownthat people attribute negative characteristics to victims — from Kent State students shot by the National Guard, to young black men shot by police, to low-wage workers.

A more recent study by Justus Heuer, Christoph Merkle and Martin Weber finds rather the same thing: Investors are fooled into believing risk-taking is based in skill, rather than chance. Like the students in the experiment, investors believe managers who are simply reaping returns from risky bets are, in fact, oracles. Another study by Arvid Hoffmann and Thomas Post finds that “the higher the returns in a previous period are, the more investors agree with a statement claiming that their recent performance accurately reflects their investment skills (and vice versa).” Research by Charles O’Reilly and others finds that narcissistic CEOs are better paid than other CEOs. Another study finds that employees that spend more time grooming make more than workers who do not. (The effect is particularly strong for men of color.) All of this should leave us skeptical of the idea, promoted by many free-market fundamentalists, that compensation is set by objective market factors. As Christopher Lasch notes, “Nothing succeeds like the appearance of success.”

Many defenders of the rich argue that the rich are special and therefore merit special treatment. (Charles Murray has gone as far as to argue that the rich should preach their virtues to the poor.) Americans overwhelmingly believe that the wealthy have individually earned their place in society. But this is unlikely. Numerous studies find that financiers are vastly overpaid, and hedge fund managers, even the best, rarely beat the market. CEOs are also vastly overpaid, and largely benefit from a shift in tax policy that allows rent-seeking to flourish.

A famous economist once wrote,

“This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments.”

The economist was not Marx, but Adam Smith.

In “The Son Also Rises,” Gregory Clark finds that wealth can persist for 10 or more generations. But biases, like the self-serving bias and optimism bias, lead the wealthy to attribute to themselves what is actually caused by factors beyond their control. Lucky people are seen as skillful, and are constantly worshiped for their success. Eventually they begin to believe what others say, leading to a narcissistic personality — or as Paul Piff says, “characteristics we would stereotypically associate with, say, assholes.”

There’s an apocryphal story in which F. Scott Fitzgerald says, “The rich are different from you and me,” and Ernest Hemingway retorts,“Yes, they have more money.” In his story, “Rich Boy,” Fitzgerald writes of the wealthy: “They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves. Even when they enter deep into our world or sink below us, they still think that they are better than we are. They are different.”

All humans all delusional. It is only the rich who have that delusion fostered. All humans are, to some extent, assholes. But only rich people can get away with it.

This piece originally appeared on Salon.

Young people are rising up around the world, but not in America

Last weekend, a Maybach limousine pulled up to the Venetian casino and resort in Las Vegas. Out stepped Sheldon Adelson, billionaire Republican donor, for his four-day Republican convention. Donors and politicians, from Chris Christie to Scott Walker and Jeb Bush, shook hands and exchanged promises among the gleaming lights of the most gaudy city in America.

It’s a story that we’ve heard so often it’s beaten us into a stupor: wealthy businessmen sliding their arms around our politicians and co-opting the political process. It’s not even surprising anymore. But it should be; it should piss us off.

Already long gone are the heady days when thousands gathered in New York City’s Zuccotti Park and around the country. The leaves have since settled and in a lot of ways things are back to normal. We have crushing student debt at the tune of $1 trillion, education is unaffordable, there is a lot of work to do but (paradoxically) few jobs and new policies that could help our generation are languishing in Congress. Myopic politicians are more concerned with the next election than doing what’s right for our futures.

“Workers of the World, Unite. You have nothing to lose but your chains!”

So ended one of the most revolutionary political documents ever penned. And while the world has seen myriad revolutions — most recently in Latin America, the Middle East and Ukraine — revolutionary activity in Western Europe and the United States has never been sustained. So where is the revolution to enact change and usher our generation into a better tomorrow? Where is the battle cry to secure our future?

Jesse Yeh looks out across the UC Berkeley campus. He does just about anything to avoid debt, using the university’s library instead of buying textbooks, scrounging for free food at campus events and occasionally skipping meals. Image Credit: AP

If complaints were kindling, our generation would have a bonfire going. We will likely see slower economic growth, more unemployment and greater inequality than our parents. For all the social progress, retrograde attitudes remain powerful. The government feels more and more an extension of the free market, rather than a bulwark against it. And global warming, still denied by large swaths of the population, threatens not just economic growth, but also ecological collapse. Our current course could cause the earth to warm by as many as six degrees Celsius, which would create millions of refugees, stir up conflict and dramatically increase the incidence of natural disasters.

Why, then, have we not launched a sustained, revolutionary movement to wrest back control and set us on a better course? The most prominent movement, Occupy Wall Street, produced much in the way of slogans. But compared with the Tea Party or the leftist movements of the ’40s and ’60s, it has done little to change policy.

Here are three reasons we have not seen a revolution, even though it’s sorely needed:

Money has become political power.

One important factor is that economic power increasingly influences the political sphere. A recent Demos report, Stacked Deck, finds that Adelson and his wife gave more money in 2012 to influence elections than the combined contributions of the residents of 12 states.

Research by Larry Bartels finds that individuals with higher socioeconomic status have more influence on legislative outcomes than the poor and middle class. Martin GilensDorian WarrenJacob HackerPaul Pierson and Kay Lehman Schlozman have all recorded similar findings — in politics, money talks. A recent study finds that, sure enough, members of Congress are far more likely to meet with donors than constituents.

Sheldon Adelson listens as New Jersey Gov. Chris Christie speaks during the Republican Jewish Coalition Saturday in Las Vegas. Several possible GOP presidential candidates gathered as Adelson, a billionaire casino magnate, looks for a new favorite to help in the 2016 race for the White House. Image Credit: AP

When money talks, it doesn’t speak for us.

This problem is compounded by the fact that the wealthy don’t have the same priorities as the rest of us. Benjamin I. Page, Larry M. Bartels and Jason Seawright find that the very wealthy are far less likely than the general public to believe that “government must see that no one is without food, clothing or shelter,” and that “the government in Washington ought to see to it that everyone who wants to work can find a job.”

These divergences, combined with the fact that the wealthy are far more likely to be politically active because they are more likely to see results, tilts the economy toward the interests of the wealthy.

The quintessential example is the minimum wage, which 78% of Americans believe should be “high enough so that no family with a full-time worker falls below official poverty line.” However, only 40% of the wealthy agree — and the minimum remains stubbornly below the poverty line.

The wrong narrative has taken hold.

Money also shapes narratives and ideology. Baruch Spinoza, a 17th century Dutch philosopher, argued that “those who believe that a people … can be induced to live by reason alone … are dreaming of a fairy tale.”

We see the world through our ideology and what’s taken hold is the idea that the free market will give us what we deserve and that’s fair. But it’s not fair. This ideology often does not reflect the interests of the poor, but rather those who shape the narrative: those with money and power. A young economist, also known as Karl Marx, noted in 1848, “The ideas of the ruling class are in every epoch the ruling ideas.” If we’re not here to help create an equal and fair society, then what the hell are we doing?

To see the power of wealth in shaping perspectives, we can turn to new research by Andrew J. Oswald and Nattavudh Powdthavee. Compared with those who did not win the lottery, the researchers find that lottery winners in the U.K. are more likely to switch their political affiliation to the right after winning and believe that current distributions of wealth are fair. The rich are biased toward believing that the current society is just (called the “just world hypothesis”).

To take one example of how much our narratives have changed, it’s worth remembering that Americans once believed in high taxes on estates to ensure high levels of opportunity and competition. Americans did not want to live in a Jane Austen society of wealthy and snooty aristocrats and prided itself on the fact that the wealthy had earned their wealth.

Lamenting on the death of this model, Richard Hofstadter wrote, “Once great men created fortunes; today a great system creates fortunate men.” The Waltons and Kochs, parasites living off their parent’s work rather than creating their own fortunes, are examples of how the old story of the “self-made man” is increasingly out of date. Yet it sticks around because politicians keep repeating it, members of the media keep broadcasting it and suddenly we’re all talking as if a tale worthy of Hollywood is somehow fact.

There’s another disturbing narrative that’s closely linked to the others: economic growth comes from the wealthy (“job creators”) and growth is the palliative for inequality. While the former was always dubious, there was a time when economic growth was broadly shared (see chart). However, the ’90s and 2000s produced ample growth that accrued largely to the richest members of society. The wealthiest 1% have also accrued 95% of the benefits of the current recovery. These benefits aren’t serving the wealthy because they work harder, but rather because they own assets (like stocks) and the Bush tax cuts dramatically increased the returns to such assets. There was a time when the old story that economic growth benefited everyone was true, but it no longer reflects reality.

It’s time for a new story.

How we’re going to get there.

Sadly, until recently there has been no real resistance to the power of money and false narratives. Democrats and Republicans have generally adhered to a neo-liberal consensus that government is bad and markets are good. It was Bill Clinton, not Ronald Reagan, who declared the “end of big government.”

Few politicians are willing to argue that government is good, that the social safety net needs to be expanded, not contracted, and that “freer markets” may not solve our most grievous social ills. Since the rise of “New Democrats,” who are happy to shred social security and Medicare in the name of deficits and are unwilling to take a stand on climate change, there has been no real “left” in the country.

Traditional bastions of leftist resistance, like unions, found little support from the Carter and Clinton White House. Regulations in the public interest, like those enacted to prevent another Great Depression or protect the environment, were rolled back with equal fervor by Democratic and Republican administrations. Young people realize this, and Pew Data show we are far more skeptical of the idea that there are major differences between the Republican and Democratic parties.

We are disenchanted with concentrated economic and political power and feel, rightly, that alone, they can do nothing. We find few politicians representing our interests, and almost none outside the grip of economic elites. We are bombarded with false narratives, but have yet to see a new one take hold. This very alienation from the channels of power only makes our movements more ineffectual — we have many Sartres, but few Debses or Naders actually fighting for change.

Image Credit: AP

It’s time for a different narrative.

The story we’re going to build and spread using the world’s greatest communications platform questions the idea that we can have unlimited growth in a finite world. This story will remind us that the engine of economic growth has always been a strong and open middle class. This story will reject racism, xenophobia, sexism and homophobia in favor of an open and tolerant society. This story is a uniquely Millennial story.

It is our story. It is the story of a generation that will be worse than its parents. It is the story of a generation looking for jobs where few exist. It is the story of a generation burdened by debts we did not create. It is the story of a generation on the verge of taking over. This here is planting season.

We will have to fight to make our story heard. We will have to mobilize to make it happen. We have occupied parks; let us occupy statehouses, campuses and the media. For too long we have, in the words of John Mayer, waited on the world to change. But, as Frederick Douglass noted, “Power concedes nothing without a demand.” We cannot simply imagine a better world, we must make it happen.

It begins with a new story.

Originally published on Policymic.

How Wall Street is crushing Main Street

Co-Written with Wallace Turbeville.

The conservative assertion that government spending “crowds out” private investment has been ascendant since Ronald Reagan’s claim that “government is not the solution to our problem; government is the problem.” The idea is that the government is so big that it discourages private investors from competing in the marketplace.

Today, we face the reverse condition: the casino market that dominates the finance sector is crowding out important public investments. The deregulation of the financial sector — promoted by Republican and Democratic administrations — has changed America from an economy focused on sustainable growth toward a free-for-all for the wealthy.

This change is called “financialization.” The financial sector has grown to almost 8 percent of GDP, from about 4 percent in Reagan’s time. That the financial sector has grown isn’t necessarily a problem; what is a problem is that it has grown faster than the rest of the economy. The purpose of the financial sector is to facilitate investment in a wide array of activities — to grease the wheels of the economy, so to speak. If the rest of the economy doesn’t grow along with the financial sector, it is not fulfilling that purpose.

Financialization causes many problems. First, the financial industry is a poor producer of middle-class jobs, disproportionately benefiting high-end earners (see chart). Second, the financial industry is extremely myopic when it comes to economic trends. One study finds that the growth of the financial sector has decreased long-term investment in the real economy because financiers work in short-term gains and losses. Finally, financial “innovations” like securitization and derivatives have freed trading markets to grow unconstrained by the actual amount of stocks, bonds, and commodities in the real economy. One need only to recall the mortgage-backed market that crashed in 2008 to grasp the scope of this phenomenon.

A consequence of the rise of the financialization machine is that there is less money available for government investment in the real economy. Direct federal investment is already constrained by fiscal dysfunction, so indirect investment is even more important. When the Federal Reserve tries to pump up the economy through easy money, that easy money flows disproportionately to the supercharged investment in the financial sector. The banks end up using it to backstop trading businesses, rather than lending it to productive enterprises that generate jobs in the real economy.

State and local governments, already strapped by tax bases decimated by the Great Recession, have to compete with the financial industry, since investing in Wall Street is more profitable than investing in Main Street. The financial sector’s preference for the trading markets means that small businesses and households, the bulwark of state and local government tax bases, lose out in the competition for investment. As a result, critical public infrastructure investments have been ignored. One study estimates that our infrastructure system needs a $3.6 trillion investment over the next six years. In South Dakota, Alaska, and Pennsylvania, water is still transported via century-old wooden pipes. Large portions of U.S. wastewater capacity are more than half a century old. And in Detroit, some of the sewer lines date back to the mid-19th century.

Government investment in research and development has plummeted, and this will not be replaced by private investment that must compete with the short-term returns from capital investment in trading. The Financial Times reports that “public investment in the U.S. has hit its lowest level since demobilization” after World War II. That’s a shame, because investments in science, for example, produce huge benefits, both in terms of well-being and economic growth. The Human Genome Project, for instance, cost 3.8 billion in public funding and has produced economic gains of $796 billion. That’s a return of $140 to $1! The internet, too, was a product of government research and has produced tens of trillions of dollars in economic output and growth.

 

Public spending in the U.S. is far below the international average (see chart), and the rise of finance is part of the cause. By taking up a larger and larger share of the economy’s resources and using them for the economic equivalent of roulette, we’ve allowed important public investments to be passed up.

This is simply unsustainable. Rabindranath Tagore once warned of “precocious schoolboys of modern times, smart and superficially critical, worshippers of self, shrewd bargainers in the market of profit and power” who, “driven by suicidal forces of passion, set their neighbors’ houses on fire and were themselves enveloped by flames.” Today, these schoolboys increasingly sit on Wall Street, diverting resources from the real economy into fat paychecks. The only question is when the economy will again be enveloped by flames.

Originally published on The Week.