My beef with Tom

In my "Work and the Labor Process" class we read some parts of Braverman's Labor and Monopoly Capital and discussed the phenomenon of deskilling work. Then we read some other stuff that rejected that phenomenon and said work was in fact still skilled, it was just a different kind of skill.

For example - Tom did a study on these furniture makers in a factory. He was arguing although the work appeared unskilled it was actually skilled once you took into account their knowledge of the job.  They even made little jigs to help make their job easier or to fix recurring defections.

We had several disagreements about this in class because I could not accept this as "skill".  I think the workers have experience (aka they've been on the job long enough to know from eyeballing if there is a mistake or have even created a jig to make their job easier on themselves) but I don't want to call that skill. You know what you are doing on the job because you've been there and any "inventions" you make to make your life easier perhaps isn't "taking pride in your craft" but a necessity you must do so you don't get sacked at yelled at.

I guess I could be okay with the argument what i'm calling "experience" is accrued "on the job skill" but this is the larger point:

I think Tom was dead set on convincing me it IS skill because IF it is skill then we can say the workers should be remunerated for it accordingly.  But I think if you fall into that argument you end up having to explain how every single job is skilled work and deserves fair pay.  We should just argue that any job regardless of skill deserves a living wage.  Then discussions of what is skilled work and what is not can be separated from whether workers deserve subhuman wages or not.

Puerto Rico - Initial Thoughts

What the fuck!

Hedge funds and other investors reap the rewards of the riskiness of the bonds - with yields on Puerto Rican bonds surpassing those of Greece. but actually don't want anything to do with the risk and will pull teeth (Puerto Rican citizen's teeth) to get paid in full what they paid pennies on the dollar for. Assholes.

Some lender should lend money to puerto rico to buy back a chunk of its debt at these depressed prices and then lend some more for development projects.  Who can do this without imposing some type of structural adjustment, "you must austerity" bull? Not at all within purview of Fed but maybe tie it in with calls for the fed to buy up muni bonds??? According to an off the record source, the fed can legally do this.

National Infrastructure Bank

All of today I've been trying to wrap my head around why a national infrastructure bank would be a good idea. 

After hours of googling, reading, and talking to myself - it just seems like it has a lot of potential to be good for the people but the proposals that are out there are not headed in that direction.

The whole point of a NIB is to increase infrastructure investment.  Though there are many proposals they all have this sort of structure:

A NIB is originally capitalized by federal fund appropriation - the government says its okay to start a bank and gives it $x amount of dollars- lets say $60 billion- to start with.

They can use that initial starting money to "leverage private investment" which I think means use some sort of mechanism to make the $60 billion into $120 billion (maybe through a bond offering or something). But they don't have to do this, they can just stay unleveraged and stick with the $60 billion.

They take applications for infrastructure projects that state/local governments or private firms would like to do and pick the best ones and give them low-interest loans.  The projects usually have to have some sort of monetary benefit so the loans can be repaid- like taxes or tolls. 

Upon repayment, the NIB can make more loans. 

The increased infrastructure investment comes from the fact that these borrowers probably wouldn't have made these investments without the low-cost loans. 

This seems to make sense.  However I have questions:

First- is it actually the case that state/local governments and private firms are credit constrained? Maybe they actually have access to loans that aren't high interest but they just don't want to make those investments. 

Second- how is this sustainable? Banks offer low-interest loans to finance these projects and owe interest to bondholders - is the spread really that big?

Third- the only thing that the NIB seems to be incentivizing is projects that have future revenue streams like tolls and taxes. This is what makes them want to offer the loan in the first place.  However, does this mean the only infrastructure that is being increased is infrastructure that will further tax people.  Aren't the federal funds used for initial capitalization our tax money already? We are being taxed to fund further taxation.

Fourth- the projects that have the most social benefits are exactly the ones that can't be charged per user.  It is easy to imagine Amtrak wanting a low-cost loan from NIB to expand their services but why the hell would anyone want to take out a loan to improve a public good?

To be fair I did read something about California's I-bank doing some good stuff - like making sure communities benefit from these infrastructure projects and that any wages paid via their loans are good wages.  This type of leveraging I'm down with.  

The NIB will probably increase infrastructure spending but also

enrich bondholders
not be sustainable
tax on tax on tax
give companies low cost loans to charge more fees

Wouldn't it be easier to just tell the government own up to the responsibility for our infrastructure?

Walk the Walk

That moment when most academic economists admit there is no such thing as a free market system and the market depends on government intervention to facilitate its functioning and then you read article after article saying that stock prices incorporate all available information and are the best guess about future performance...walk the walk guys.  You can't pose as a respectable, sane person on the one hand and on the other say financial markets are perfect. #behavioraleconomics  #emoinvestors #emoswooptrades #pumpanddumprevolution

Banks and business

Why would firms like McDonalds lobby against things like Dodd-Frank and financial firms not reciprocate by lobbying for things that would benefit firms like McDonalds?

Jim Crotty suggests that if there is some "solidarity" (my word, not his) between firms and banks, it would be easier to make the environment better for both.  

In my view, banks are the ones taking in the profits these days with low regulation, leverage, and excess reserves.  They fund democrats and republicans and have been shown love from both sides.  Banks run the show and there isn't any reason for them to waste resources lobbying for things that do not directly benefit them.  

Then why would firms like McDonalds lobby against things like Dodd-Frank without reciprocation? I'm not sure, perhaps Jim is right and they are trying to secure the most unregulated world for all business.  Or perhaps banks have some power over firms.  Perhaps via access to repo markets or their access to funds.

Stiglitz's Credit Rationing Model: Some Thoughts

Although I think the point of the Stiglitz model is to explain the movement and dynamics of interest rates and the effect of monetary policy, it offers some insights into how bank's behavior can deviate from the "normal way" banks behave.

"Equity markets are imperfect so that firms cannot fully divest themselves from the risks they face so they borrow.  There is a probability that they may not be able to meet their debt obligation- that they may go bankrupt. Because the costs of bankruptcy are high, firms will act in a risk-averse manner. How risk adversely they behave depends on their net worth"

How does this fit into what was actually happening during and after the most recent financial crisis?

Investment bank's net worth was strong on the books, but they must have known that they were actually buying crap and selling crap since they bet against it.  Perhaps the model shouldn't depend on "net worth" but perceived net worth, or the net worth of all other banks, or the net worth that everyone agrees upon.  Sort of like Keynes' beauty contest.

The heart of the credit rationing model, in my view, is that banks will loan when it is profitable to loan.  This makes some sense.  Even at higher interest rates, banks may not make loans because their expected profit is not maximized because of adverse selection - the people most willing to pay a high interest rate are the ones most likely to default. However, juxtaposing this with the fact banks were pushing out subprime loans to anyone who could sign a paper doesn't agree with this type of risk argument. The difference was that there was "no skin in the game" for all parties. Originators, packagers, sellers, raters, and buyers (thought they were great investments).

Black Wealth: Game Theory's Contributions

For a long time I've wanted to investigate the extent of US slavery's implications on black wealth. Seeing that Azealia Banks recently called for reparations, it seems a good a time as any to start.

Black PEOPLE were white people's wealth.

This makes me think of Marx's primitive accumulation, where he outlines how and through what means capitalists originated their initial wealth. Instead of stolen land, wealth was enslaved by coercion and force.

Furthermore, the value of slaves accounted for an estimated 100% of productive output,

"In 1860, slaves as an asset were worth more than all of America’s manufacturing, all of the railroads, all of the productive capacity of the United States put together,” the Yale historian David W. Blight has noted. “Slaves were the single largest, by far, financial asset of property in the entire American economy.” The sale of these slaves—“in whose bodies that money congealed,” writes Walter Johnson, a Harvard historian— generated even more ancillary wealth." (Coates, 2013).


Black people are systematically denied wealth.

It is well documented during Jim Crow there were systemic laws and rules that prevented black wealth from accumulating, see here and here.

Black wealth was often stolen or destroyed.

In the New Jim Crow, Michelle Alexander argues this same systemic form of social control still exists today in the form of mass incarceration.  "Criminals" are LEGALLY discriminated against and barred from wealth building (home ownership loans) among other things such as voting, employment, and serving on juries.


Black Wealth vs. White Wealth Today

Implications of a lack of wealth

Black people were people's wealth then were (and still are) systematically denied wealth, and currently the wealth gap is at a staggering 13x.  But so what? What does lacking wealth even translate into? Luckily we have a team of mostly white men to shed some light on the issue: Jared Bernstein and Ben Spielburg have aggregated studies dealing with this issue in their set of inequality slides while Sam Bowles has utilized the tools of game theory to analyze wealth effects on social efficiency.

Lack of wealth constrains economic mobility, contractual opportunities, overall economic efficiency and democracy

Economic Mobility

Even if the way black wealth has been treated throughout history doesn’t bother you, wealth inequality should be alarming because it kills the soul of America- the American Dream. The idea that anyone can “make it” is not represented in the data. Bradbury and Triest find  the more unequal a locality, the more likely it has lower levels of economic mobility.  A Pew Research study on economic mobility finds that there is "stickiness" at the ends of the mobility latter, indicating 66% of those at the bottom, will stay at the near the bottom. The study also finds upward mobility in terms of wealth is more likely among whites than blacks.  Furthermore, the study finds that “people who grow up in an affluent household and don’t graduate college are 2.5 times more likely to earn a top 20 percent income than people who grow up in a low-income household and do graduate" (Bernstein and Spielburg, 2014).

Opportunities

Embedded in the rags to riches story is that America is that this is the land of “opportunity”. No matter how wealth is distributed, all face the same opportunities.  Sam Bowles argues this claim is rooted in the Walrasian paradigm and it is not an accurate representation of how the world works.

The Walrasian paradigm is a world based on certain assumptions that simplify complex problems and to try and gain some insights into them.  One of these assumptions is that exchanges are completely contractible, meaning if a lender were to lend to a borrower, there would be a way for the lender to enforce the contract and surely be paid back. 

However, the real world does not work this way.  Even though many times lenders do find ways to somehow through coercion or other methods get their money back, there is not yet an enforceable way to get repayment. The lender-borrower relationship is an incomplete contract.

This seemingly small change in assumption yields major changes in insights.

*For an in depth presentation of the mathematical model as another way to draw the following conclusions see Bowles, Microeconomics, chapter 9.

Incomplete contracts are ubiquitous.  They are characterized by the fact that not all aspects of an exchange can be specified. For example, how much effort a worker should exert or how careful an insured person should be. If an individual can invest their own wealth in a project it rectifies two issues of incomplete contracts: adverse selection and moral hazard.  Adverse selection is the problem of not knowing the quality of a project that is bought or invested in.  In the lender-borrower problem, the lender doesn’t know the quality of the project the borrower will engage in.  The moral hazard problem concerns the action the borrower (agent) takes.  If the borrower already has the money, they might take risks that would be harmful to the lender (principle). 

An investor with enough wealth to fund a project on their own is the residual claimant of that project.  The investor has the incentive to have a quality project and to act in ways that would benefit the project.

When investors lack wealth and have to borrow to invest, the adverse selection and moral hazard problems return. Sometimes borrower’s wealth is so low that the incomplete contract problems are too risky to overcome; meaning the amount of wealth the borrower can invest in the project is not enough to convince the lender that the project is of good quality and/or that the borrow will not engage in risky behavior so the lender would rather invest money in alternatives. In other words, the opportunity cost for the lender would be too large. The people who cannot borrow are credit market excluded.

For similar reasons, the wealthier can borrow larger amounts, have lower quality projects, or a lower interest rate. The wealthier can borrow more (same quality and interest rate) because their extra wealth convinces the lender their interests align and the borrower will not have a bad project or act in harmful ways.  If a person with some wealth and a person with more wealth borrow the same amount at the same interest rate, the quality of the wealthier can be of lower quality.  The reasoning for this is the same as why the wealthier can borrow a higher amount, their wealth helps clear up the incomplete nature of a lender-borrower relationship. 

Clearly in the world of incomplete contracts, unequal wealth distributions do not offer the same opportunities for everyone. People with less wealth cannot borrow as much as they’d like or are charged a higher interest rate.  Some low-wealth borrowers are barred borrowing at all.

Social Efficiency

The equal opportunity sentiment reflects a belief commonly found in economics, namely who owns the wealth is not important. The Second Fundamental Theorem and the Coase Theorem state whatever the distribution of the initial wealth, (with complete contracts or incomplete respectively) a Pareto optimum will occur (Pareto optimum allocation meaning no one can be made better off without making someone worse off). In other words, the distribution of wealth in society doesn’t matter for efficiency in the society.

But Bowles argues wealth does matter for allocative efficiency by determining the set of opportunities facing a citizen, “Thus wealth differences have qualitative effects, excluding some and empowering others…Wealth difference may persist across generations due to the more limited opportunities to borrow and less lucrative investment opportunities of those who do not inherit wealth from their parents” (Bowles, 2006).

A lack of wealth impeding economic mobility and social efficiency is not anything new. It can be seen in the crop liens of the post bellum South.  Most farmers did not have enough wealth to post collateral for loans, so instead of collateral, lenders staked a claim on the planted crops.  Since cotton was a more secure crop to sell, relative to corn, farmers were forced to produce cotton, leaving individuals and the community worse off. 

Renting is a more current phenomenon with the same results.  A home owner is a residual claimant, meaning they own the house so they have a stake in what happens to it, so they take care of it.  If everyone in the neighborhood was a homeowner, the individual and the community would be better off, however, as of 1995 about a third of the population rented (Bowles, 2006). 

As from the lender-borrower relationship characterized above, borrowers with little or no wealth may have better equality projects than wealthy borrowers, but will not be lent to.  Social efficiency suffers from some low wealth borrowers being shut out of the credit market all together. A number of studies have shown people who received inheritances are more likely to be self employed or start their own business (Bowles, 2006).

Wealth determines contract options, contract options determine power level, those with more wealth exercise power. It is only a small step to see how wealth not only constrains mobility, opportunity, social efficiency but also democracy itself.

Lack of wealth undermines democracy 

Gilens and Page found that the US represents an oligarchy more so than democracy. In one of the researcher's own words, "ordinary citizens have virtually no influence over what their government does in the United States. And economic elites and interest groups, especially those representing business, have a substantial degree of influence." (Kapur, 2014).

The historical and current denial of black wealth in itself is unjust.  Furthermore, it destroys everything America is supposed to be a symbol of: economic mobility, opportunity, democracy and freedom.

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Bernstein, J. & Spielburg, B. (2014). Increasing Inequality: It's happening, it matters, and there's something we can do about it. Center on Budget and Policy Priorities. 

Bowles, S. (2006). Microeconomics: Behavior, Institutions, and Evolution. Princeton University Press. 

Coates, T. (2014). The Case for Reparations. The Atlantic.

Kapur, S. (2014). Scholar Behind Viral Oligarcy Study Tells You What it Means. TPM