Saturday, June 22, 2013

Latest Theft-in-Plain-Sight Algorithm? (Profits Without Production)

Of course the game is rigged. And it has picked up the speed of electron transfer since the early 80's under his majesty RR's financial wizards (hat tip to David Stockman and Paul Craig Roberts).

We get glimmers of this game but no calls for revolution from our friendly centrist economists now and then and today's essay is en pointe.

The following responses from his readers, however, are not so muted.

  • SpecialAgentA
  • New York City
The game is rigged and has been proactively rigged from the nuts and bolts of the electoral process to the lofty, theoretical clouds of academia, from the grim theaters of war to the procedural courts of justice. Our world, the entire economy, the climate of the Earth, the meaning and purpose of all activity, all of it is increasingly being refashioned by the desperate greed of the rentier class, seeking profit through monopolization and money power, the pedestrian "survival of the richest".

We all know this. Any interaction with a Too Big To Fail entity shows us what a farce life has become. It all just serves an increasingly sociopathic elite, drunk on the piles of money that sit in offshore accounts and entranced by the achievement of another zero, while the middle class disappears back home. We are trapped by our own institutions that have become rotted by myopic pursuit of money power. We need to have the confidence and space to ask fundamental, thoughtful questions again about our society, like what is the economy for? Is it to entrench and enhance the power of a dwindling few, or is it to enhance the lives and opportunities of the vast majority? Somewhere along the line, it became impossible and somehow even treasonous to ask such questions or to find a way to refresh free enterprise.
  June 21, 2013
  • Tim Newlin
  • Frederiksberg, Denmark
History teaches us that things constantly change. Every product we consume or use today has become more mechanized and outsourced; the food we eat, the cars we drive, the homes we live in, and the clothes we wear. Add to this the explosive growth of capitalization and the reduced role of government regulation, and you get today's huge income disparity and lower labor compensation. It is no mystery, many saw it coming, few did anything about it.

The only real growth sectors for employment today are the service and leisure industries. Manufacturing has simply followed the natural law of business to strive for efficiency - it has no social conscience. It is government's job to monitor this and redistribute profits through taxation. Here in Scandinavia they recognized this and did something about it. The working middle class citizens of the US have been asleep at the wheel, bought into the campaigns of the 1%, and are all dreaming of a lottery win.
  June 21, 2013
  • Tim Kane
  • Mesa, Arizona
American society is based upon the following 4 legs: 1) Common Law, 2) Civil Liberties (Bill of Rights), 3) Free Contract, 4) Democracy.

This was a nifty system.

1 - Common Law gave us serviceable pragmatic justice system.
2 - The Bill of Rights ended the (real) culture wars: generally you are free to do whatever you want to the point it doesn't affect other people.

3 - Free Market gave us perpetual class/economic warfare. Under such a system bargaining power is everything. What you make is a function of it. In such a society, everything that goes on around you is all about people trying to enhance their bargaining power, whether its personal grooming, advertising on tv, or the machinations in Washington and Wallstreet.

History has told us that the rich get richer, the poor get poorer, until wealth becomes so concentrated that society collapses. Almost every great nation, civilization, empire has expired this way.

Our founding fathers knew all about this, especially the fall of Rome.
4 - Democracy or political socialism: 1 man, 1 vote. When the playing field for bargaining takes place becomes too unlevel, the agencies of democracy can work to level the playing field by altering bargaining power configurations: antitrust, collective bargaining, regulation, progressive taxation etc.

The Founders did not anticipate the limited liability corporation, nor its ability to use science and propaganda to manipulate the public.
People vote against their interest with regularity
  June 21, 2013
  • Karen Garcia
  • New Paltz, NY
From the AFL-CIO come these CEO-to-worker salary ratios:

1982 -- 42:1
1992 -- 201:1
2002 -- 281:1
2012 -- 354:1

The CEOs are fighting like mad against Dodd-Frank rules requiring them to divulge both their own compensation and that of their employees. The idea is that if they get too greedy, they will (gasp!) lose their tax breaks.

Of course, this is only on paper.
Dodd-Frank is still only one-third operative, and is being whittled away by the minute. Since it's been left up to the SEC to write the reporting rules, and since Chairperson Mary Jo White comes to her job straight from protecting and defending the predatory financial class, we should not hold our breaths. And guess what her dithering predecessor, Mary Schapiro, is up to? She's lobbying Mary Jo White on behalf of General Electric, which pays zero corporate taxes, and wants to keep it that way.

Back in the day, what was good for General Motors was good for America. And with a CEO-worker pay ratio of 18:1, it's still better than most.

Today, what's good for Apple is only good for Apple. GM workers, unlike the FoxConn wage slaves and the $9/hr Apple retail store drones, can at least afford to buy the product that they manufacture and sell.

Today's class of corporate CEOs are pathological hoarders in dire need of an intervention (taxes, taxes, taxes). The corrupt house they've built with the aid of their political puppets is collapsing under its own top-heavy weight. And we're all being crushed in the process.  June 20, 2013
  • charles
  • san francisco
There is a bigger problem at work than monopoly rents per se: The financial sector used to account for 2% of our economy, as measured by volume of activity. That 2% served the important purpose of facilitating the other 98%, which was our productive economy.

Leading into the collapse of 2008, the financial sector accounted for 40% of all activity.
The extra 38% share is not just excess activity. It is a computerized engine for extracting wealth from the system, in billions of tiny little increments. By comparison with this, Apple sitting on its cash is benign. Yes, Apple could be investing more, but the banks are an engine for active DIS-investment in the global economy.
I trust you will touch on this in future columns.  June 21, 2013
  • Dean H Hewitt
  • Sarasota, FL
Your observation is correct. The underlying truth is the rich and powerful bought the Republican Party at the right time. Citizen United allowed a collapsing party to have one more bite at the apple. 2010 and gerrymandering gave control of the house and state governments to Republicans. And what has the result been, think Mexico. Like the 1,000 families who control so much of the wealth in Mexico the top 1% are doing it here. And until maybe 2022, we are hopeless.

Expect total chaos like we have seen. Attacks on women, the weak, seniors and their programs have been steadily assaulted. The reasons are two fold. Keep the middle class from making the rich, corporations and powerful pay their fair share. Second make the middle class protect the middle by making womens' rights vulnerable, senior plans like Medicare and SS unsustainable, and try to stop the foolishness of cutting everything that will limit the elite.

We are in a war and only sanity from the independents and backbone from the president and Democrats can turn out the crooks. June 21, 2013

Blog: The Conscience of a Liberal

Profits Without Production

By Paul Krugman

Published: June 20, 2013 664 Comments

One lesson from recent economic troubles has been the usefulness of history. Just as the crisis was unfolding, the Harvard economists Carmen Reinhart and Kenneth Rogoff — who unfortunately became famous for their worst work — published a brilliant book with the sarcastic title “This Time Is Different.” Their point, of course, was that there is a strong family resemblance among crises. Indeed, historical parallels — not just to the 1930s, but to Japan in the 1990s, Britain in the 1920s, and more — have been vital guides to the present.

Yet economies do change over time, and sometimes in fundamental ways. So what’s really different about America in the 21st century?

The most significant answer, I’d suggest, is the growing importance of monopoly rents: profits that don’t represent returns on investment, but instead reflect the value of market dominance. Sometimes that dominance seems deserved, sometimes not; but, either way, the growing importance of rents is producing a new disconnect between profits and production and may be a factor prolonging the slump.

To see what I’m talking about, consider the differences between the iconic companies of two different eras: General Motors in the 1950s and 1960s, and Apple today.

Obviously, G.M. in its heyday had a lot of market power. Nonetheless, the company’s value came largely from its productive capacity: it owned hundreds of factories and employed around 1 percent of the total nonfarm work force.

Apple, by contrast, seems barely tethered to the material world.
Depending on the vagaries of its stock price, it’s either the highest-valued or the second-highest-valued company in America, but it employs less than 0.05 percent of our workers. To some extent, that’s because it has outsourced almost all its production overseas. But the truth is that the Chinese aren’t making that much money from Apple sales either. To a large extent, the price you pay for an iWhatever is disconnected from the cost of producing the gadget. Apple simply charges what the traffic will bear, and given the strength of its market position, the traffic will bear a lot.

Again, I’m not making a moral judgment here. You can argue that Apple earned its special position — although I’m not sure how many would make a similar claim for Microsoft, which made huge profits for many years, let alone for the financial industry, which is also marked by a lot of what look like monopoly rents, and these days accounts for roughly 30 percent of total corporate profits. Anyway, whether corporations deserve their privileged status or not, the economy is affected, and not in a good way, when profits increasingly reflect market power rather than production.

Here’s an example. As many economists have lately been pointing out, these days the old story about rising inequality, in which it was driven by a growing premium on skill, has lost whatever relevance it may have had. Since around 2000, the big story has, instead, been one of a sharp shift in the distribution of income away from wages in general, and toward profits. But here’s the puzzle: Since profits are high while borrowing costs are low, why aren’t we seeing a boom in business investment? And, no, investment isn’t depressed because President Obama has hurt the feelings of business leaders or because they’re terrified by the prospect of universal health insurance.

Well, there’s no puzzle here if rising profits reflect rents, not returns on investment. A monopolist can, after all, be highly profitable yet see no good reason to expand its productive capacity. And Apple again provides a case in point: It is hugely profitable, yet it’s sitting on a giant pile of cash, which it evidently sees no need to reinvest in its business.

Or to put it differently, rising monopoly rents can and arguably have had the effect of simultaneously depressing both wages and the perceived return on investment.

You might suspect that this can’t be good for the broader economy, and you’d be right. If household income and hence household spending is held down because labor gets an ever-smaller share of national income, while corporations, despite soaring profits, have little incentive to invest, you have a recipe for persistently depressed demand. I don’t think this is the only reason our recovery has been so weak — weak recoveries are normal after financial crises — but it’s probably a contributory factor.

Just to be clear, nothing I’ve said here makes the lessons of history irrelevant. In particular, the widening disconnect between profits and production does nothing to weaken the case for expansionary monetary and fiscal policy as long as the economy stays depressed. But the economy is changing, and in future columns I’ll try to say something about what that means for policy.

It's really not that hard figuring out how that algorithm radically changes the quality of your life, is it?

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