Category: Income Inequality Page 3 of 5

Uber has become like Walmart. Drivers now make less than the minimum wage when we do the math,” said Abdoul Diallo of the newly formed Uber Drivers Network, which opposes new lower fare rates set by the company.

The high-tech livery-service firm recently slashed passenger fares to compete with car services such as Lyft, Gett and regular yellow cabs, a move that drivers say takes money out of their pockets.

Some Uber drivers claimed fares — and their paychecks — had been chopped 25 percent in recent months.

Other drivers said they make less than a living wage, just $7 to $12 an hour after expenses and fees — far less than the $25.79 an hour Uber promises drivers can make by joining its fleet, protesters said.

Drivers began complaining that Uber was taking them for a ride back in July, when the company temporarily launched its less-than-taxi-rate Uber X service.

In late September, Uber extended those cuts permanently — outraging drivers.

Uber treats drivers like private contractors, saddling them with insurance, gas and vehicle expenses but the company has total control over fares.

In its essence the sharing economy is similar to offshoring and outsourcing in how it works.

Let us establish the basics: high income for individuals, absent government fiat, is based on a tight supply of whatever it is they are selling, and nothing else.

This can be a generally tight labor market, as in the late 90s or most of the years from 45 to 68, or it can be in a specific area. If you have an occupation where most people can’t compete, you make more money. This could be because you have skills they don’t have, it could be because of artificial scarcity imposed by regulation (most professions which require licensing), it could because of geography, and so on.

Hotels make decent money because any Joe or Jill can’t sell their rooms. Taxi drivers (or, more accurately, those who own the licenses) used to make decent money because any schmo with a car couldn’t compete. And so on.

In manufacturing terms, when those jobs pretty much had to be in a first world country, and the government enforced the ability of unions to strike by forbidding replacement workers, assembly line workers made good money.

So the sharing economy increases capacity. It increases supply to areas which had constricted supply.

Supply increases, and the profits and/or wages of those in the old sector go down. Spotify claims artists receive 6 cents to .84 cents per thousand plays. That means 1 million plays will get you 6K to 8.4. But there’s reason to doubt those numbers, Swift has refuted them, and earlier reports were lower as well, plus Indie labels get less.

All of these platforms: Spotify, AirBnB, etc… take huge margins. Spotify takes 30%. This is in line with what App Stores take, again, 30% being standard.

That number is one we’ve become numb to, but it’s essentially oligopoly or monopoly profits, a huge distribution rate. If you add that much to the cost of a product, it will sell far fewer copies and make far less money. That percentage comes directly out of profits.

In most cases, one or two sites control most of the business. Maybe three. That makes them oligopolies or monopolies. You go through them, or you don’t make a living, and once they are established, they are essentially impossible to dislodge.

In the fifties or sixties this would have been recognized as clear abuse of monopoly or oligopoly power and they would have been busted up or regulated.

But they aren’t. Instead what they do is lower prices, vastly concentrate earnings (30% is a lot, and makes you billions if you control any reasonable platform, even if that billions is from equity), and they lower wages and earnings to everyone who doesn’t control the platform.

Now the sharing plaftorms would be ok (minus the oligopolistic abuse) in a genuinely booming economy where there genuinely weren’t enough workers, and where companies were competing for workers by increasing wages and treating them well (think how programmers were treated during the late 90s internet boom.)

Bring the extra resources online, let people earn some extra cash by driving occasionally, and move people over to the parts of the economy that are booming and need workers.

We don’t live in that world. We haven’t, absent a few years, since somewhere between 1968 and 1980.

Instead what the sharing economy does is lower the value of specific types of labor and assets, allowing more people to compete, but reducing the actual earnings for those who are in that market.

Reduced prices might increase standards of living, and in any single case they do. The number of musicians who can’t earn a living under the new regime (not just Spotify) is much less than the number of people who can consume much more music. People who want to be driven prefer to pay less to Uber. AirBnB makes it cheaper to travel. Etc… There are genuine gains.

But added to offshorng, outsourcing, oligopolistic storefronts like AppStores and Amazon, and with increase parts of the economy moving into the sharing economy, while in the meantime older jobs have been deskilled (all fast food is deskilling of cooks jobs, for example), and you reach a point where “there are hardly any good jobs”. Prices are not dropping faster than good jobs.

The other effect of this is that because many of these trends are naturally oligopolistic or monopolistic (even fast food is, if you take a bit of time to think about all the small business restaurants they put out of business), they tend to concentrate wealth and income radically. That leads to capture of the political process by the rich (yes, even more than already), and that leads to policies like, well, turning anti-trust law into a dead letter, or endless copyright extension, or vast numbers of anti-union policies.

As Stirling Newberry once pointed out to me the more humans are fungible; that is one human can replace another and do whatever that person is doing, the less they have value. That doesn’t mean that fungibility is necessarily bad, it increases efficiency, can increase economic capacity, and so on, IF we choose to distribute the gains properly. But absent trends moving in opposite directions it decreases the amount everyone except those who control the points of coordination of the economy make while vastly centralizing wealth, income and power.

The Sharing Economy really isn’t. Sharing is the wrong word. And for now, while some of us many win and get income we need for it, overall we’re losing.

The way we distribute resources; the way we distribute necessities and the good stuff of life is going to have to change. Ultimately a market which clusters into oligopolies; deskills jobs; makes humans interchangeable; is not one which can produce widespread prosperity, let alone well being. If we continue to distribute goods and power primarily by market success, even if we manage a fix, it will only last a few decades at most—and there is no guarantee, this time, that we will manage a fix.

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Falling Oil Prices Are Mostly Bad News

By Ian Welsh

On November 5, 2014

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Yes, it’s nice to play less for gasoline and heating fuel, but while some of the decline in oil prices are a result of the new unconventional oil supplies which have come on line, much of it is that the world is going into recession—demand is down from every major economy. That’s not good.

Yesterdays’ post showed what happened in the US job market over the last 6 years. It never recovered for most people. Remember, in terms of business cycle that was the recovery and the boom. Those were the good times.

As for oil, the drops are to many conventional oil producers advantage if they can sweat them out. Much of the unconventional oil which came online is not viable below $80/barrel. The viability numbers you see for countries like Saudi Arabia are not their profit break even numbers, pumping Saudi oil costs less than $10 a barrel, rather they are what the Saudi government budget needs. But the Saudis can handle a few years making less if it send their competitors into bankruptcy.

Remember that in the late 90s oil was under $20 a barrel. I would want to see oil under $40 a barrel, with excess supply, to expect an economy as good as the late 90s one was. Remember also that this is not the first time this “run a shitty economy until new sources of oil come on line” play has been tried—while the details were different, this is exactly what Carter, Reagan and the Fed of the late 70s and early 80s did. Temporize waiting for the new oil supply.

But while new oil did eventually come online, notice also that the economy never really got good ever again: you have about 4 good years in the late 90s and the rest is crap (again, for ordinary people. The wealthy did very well).

Finally, those fools in places like Canada (my home and native land) who thought the good times would never end and that letting the mixed economy (aka. manufacturing) die, are about to reap the whirlwind.

All Commodity Booms End. No exceptions. Always.

Repeat that until it sinks in.

The old Canadian economy ran as follows: during times when commodity prices were high the Canadian dollar went up making our manufactured goods uncompetitive, but we used the money from selling commodities to subsidize manufacturing. During times when commodity prices were low, the profits from manufacturing were used to subsidize the the resource producing areas of the country.

Harper, that feckless provincial incompetent and neo-liberal ideologue, has broken the Canadian mixed economy, which existed before him for over 100 years. This is probably because he’s an economist, meaning he was indoctrinated to believe neo-liberal dogma. Or perhaps he’s just a fool, hard to say.

The only Federal leader who understands the Canadian mixed economy is NDP leader Mulcair (Justin Trudeau, while has nice abs, is not very bright, unlike his father, who was a genius.)

It might not be too late to rebuild Canadian manufacturing during the oncoming recession. My fellow Canadians, think carefully about who you vote for, especially those of you in Southern Ontario. Your housing values will not stay where they are if Canada’s entire economy is based on boom and bust commodity cycles and there are no jobs except in resource extraction, flipping burgers and finance. Mulcair tried to warn you, years ago.

Learn. Or reap the consequences.

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Japanification and the end of the American Dream

By Ian Welsh

On August 14, 2014

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Stirling Newberry and I have been writing about Japanafication for years—on blogs, at least since 2004.

Those of us who are old enough remember when Japan was THE miracle economy. Technologically advanced, vibrant and rich. It was eating America’s lunch, and most other countries. For peak alarmism at this fact in a fictional form, read Michael Chrichton’s Rising Sun.

Tokyo real estate was worth more than the entire world’s real estate combined.

Then the bubble crashed. Japanese policy was to protect the banks, and to bury the bad loans on the books. They undertook literally decades of stimulative policy, mostly pouring useless concrete (exactly the wrong thing to do unless your country really lacks that sort of infrastructure, which Japan did not.)

To put in terms familiar to my readers, they extended and pretended.

Japan went into semi-permanent stagnation.

We have, now, the news of a quarter drop in GDP of 6.8% annualized for the last quarter. (This is blamed on increased sales taxes, but it was coming anyway.)

The long stagnation is over (it’s been over for a bit). Japan is actually in decline.

This is important because Japanification was always the plan for the US after the bubbles: extend and pretend, stagnate wages and employment. Pretend.

But there were significant differences between the two countries. Japan started with massive savings and a huge trade surplus. It is now in trade deficit and savings compared to debt are way down. Economic equality was relatively high, as well, spreading demand.

America came out of the financial crisis with a trade deficit, a pathetic savings rate and massive inequality. This is why I predicted that Japanification would not work in the US. It could not, because there was no saved fat to be used to create the long bright depression the Japanese had.

This brings us to stimulus and development (not just for developing countries). The money must be used not for pork projects with no follow on, but to create new industries or to bring money off the sides into the economy. Pouring concrete (and not even bothering to shore up nuclear reactors in areas which were not electorally viable) was pointless in Japan. Buying bonds is pointless and even harmful.

Likewise you cannot have real open trade flows and expect to keep whatever you are building. You build it, you make it work and once an industry is systemized, it can be moved to a low cost domiciale. It takes deliberate government policy to prevent that.

Monetary policy in Japan could never work, because the money went to the wrong things, and much of it immediately decamped overseas in the so-called carry trade—borrow low in Japan, buy securities somewhere else where they had a higher return.

All of this should be obvious and uncontroversial. It is not, it flies directly in the face of modern neo-liberal theory and it is that theory, in the face of decades of failure, that the Japanese followed.

The human capacity for ideologically driven stupidity and atrocity is endless. (Those who do not believed me are invited to study Church history and its effect on society from 1000 AD to 1900 AD or so.) People will ignore the evidence in front of their eyes, years of failure and continue doing the “safe”, “orthodox” thing no matter what the results. This is true even for well-meaning people.

Of course, in the US, Japanification has a US twist: it massively increases the wealth of the already wealthy, through unconventional monetary policy. American leaders are far too greedy to make Japanification work: any surplus, or room to lend, or room to print money, must be given away to rich people as quickly as possible.

I point out, finally, that the first sin in Japanification was buying the bad loans. This was a huge mistake in the US too, bailing out the banks and not forcing them and their share and bondholders to take their losses was the main mistake of the financial crisis. Yes, things might have been worse if the US had done so (though steps mitigating the hit on the regular economy would have been easy enough to take with the 4 TRILLION dollars used bailing out rich people), but even so, the US would have recovered better afterwards.

Instead the US has an economy in which 90% of the population has seen an actual decrease in income and wealth, while 10% has seen an increase: with the 1% and the .1% and the .01% benefiting most of all.

Japanification was the plan for America. It isn’t working, it could never work, but the policies in place are nonetheless doing what is most important to their architects: they are making the rich richer, and everyone else poorer and doing it quickly.

The Bush years were the long suck. This is the deep dive, and remember, the US isn’t in recession yet (though it is in depression). The pain when it happens (and absent nuclear war, there is always another recession), will be unbelievable.

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Democracy and Size? Can a populous democracy work?

By Ian Welsh

On April 15, 2014

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I, and others, have noted a number of times that the only nation which handled the financial crisis correctly was Iceland: they bailed out ordinary people, let the banks go bankrupt, and jailed bankers who had broken the law.

The only one.

Iceland’s population is tiny, but it isn’t size, exactly, that matters, what matters is that politicians and bankers can’t live in a bubble in Iceland.

You live in a bubble when you don’t have to deal with ordinary people: you take a helicopter everywhere; fly on a private jet, your kids go to private school, you stay in hotels ordinary people can’t afford, and you live in enclaves far away from the hoi polloi. You are surrounded at all times by people who work for you or someone who is dependent on you: your daily interaction is with other people like you, or with retainers.

Iceland is too small for the bubble to work. Politicians in Iceland could not avoid the Icelanders they would have been impoverishing if they bailed out bankers, and let ordinary people go bankrupt. The people who taught their kids, prepared their food, whom they say on the street every day would be people they had fucked over. Their lives would be living hell, even without violence (Iceland being a very peaceful society), they would have been social pariahs. Everyone knew them, and given the population size, would recognize them, and in that small a country, would probably eventually see them and be able to treat them as they deserved.

Now in Iceland’s case this is related to population size, but in larger countries it is related to the absolute rule for prosperous and egalitarian societies: elites must not be able to opt out of their own society. They must go to the same schools, eat the same food, travel on the same planes, buses and roads, and so on. If the economy does badly, they too much suffer.

Under no circumstances, in a democratic society which wishes to not turn into an oligarchy, can a bubble be allowed to form. Under no circumstances can elites be allowed to prosper if the rest of the population is not.

This does not guarantee a wonderful society: if the mass of the population are bigots or racists or unpleasant, that will be reflected in public policies and government. The government will be no better than the people, but it won’t be a lot worse, either.

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The Age of the Obvious: Thomas Piketty’s Capital

By Ian Welsh

On March 27, 2014

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The economist Thomas Piketty, who along with Emmanuel Saez has done great work on the concentration of income, has written his magnum opus, Capital(pdf). The title is an obvious reference to Marx’s Kapital, and the book is a huge survey of 200 years of economic history, specifically relating to what Piketty calls Capital. It is here, as Galbraith points out in his excellent review, where Piketty starts moving away from Marx: for Piketty, capital is just anything that is valued in money: capital is wealth, whereas for Marx it is whatever allows Capitalists to control the means of production, and thus workers.

Piketty’s argument is that:

1) If national income grows slower than capital (wealth, really), then capital tends to concentrate. If income grow faster than wealth, then capital tends to disperse.

2) Capital grows faster the more of it you have: so if you have a hundred thousand, you get more returns than someone with ten thousand. A million gets less than a billion, and so on. This contradicts orthodox economics, with its claim of diminishing returns, but it is a common sense observation of how the world actually works today, and Marx noted the concentration of money and capital in his time.

3) The long term growth rate for wages over the last 200 years has been about 2 to 2.5% (tech increase of a bit over 1%+ population increase). The long term growth rate for capital (money/wealth), has been 4 to 5%. There have been periods and places where this is not true, but it is generally true.

4) Wealth is wiped out by war, financial collapse and depression, or it is controlled by confiscatory taxation and inflation. The good period after the war is thus created by the wars and depression, and the policies that followed from them.

5) The Industrial Revolution created a period where income grew faster than wealth. That period was extended by the cataclysms of the early 20th century. But the gains from the Industrial Revolution are mostly gone: once every part of the World has gone through it (China, India, Africa), that’s it—you return to an era where wealth grows faster than income and inequality is thus permanently high.

This is an important book: it marshals a lot of data, and puts it together in a coherent model.

But the model is not as new as it might seem. Piketty spends a lot of time distancing himself from Marx, and well he should, because this argument, even with a different model of what Capital is than Marx used, isn’t that much different from Marx’s view on the concentration of Capital, nor is his view of post – WWII history particularly different from a fairly orthodox reading of it: the financial collapse, depression, and two World Wars destroyed the wealth and thus power of the rich, and made it possible to put in place policies which were hostile to their interests and which made it so that more of national income was distributed to ordinary people.

Low inflation is bad for ordinary people (who tend to borrow) and good for the wealthy (who tend to lend). Policies since 1979 have favored crushing inflation. This has increased the power of the rich.

High marginal taxation is good for ordinary people (they don’t pay the taxes, they get the benefit of the money, and the rich are kept weak).

There is no fundamental analysis of the mode of production or the mode of violence, either, and without those you cannot determine how much power various groups have to take a share of the national income. How many people are needed for production? How many people are needed for violence?

Piketty’s book is important primarily because it proves the obvious, and this is the age of the obvious. You must prove, beyond a reasonable doubt, what any educated individual already should know because there is a lot of money in obfuscating the obvious. It pays very well to be a conservative ideologue spouting off about economic freedom, because very rich people want the government to make them rich, bail them out, and not tax them.

Political decisions are important: in 1929 Hoover, the Fed, and later FDR did not bail out the rich. They were allowed to lose their money, and thus much of their power. That was a decision: another decision could have been made, and in 2008 it was made: the rich were bailed out. It was made differently in 2008 because the rich have spent the last 80 odd years obsessing over what went wrong in 1929 that allowed FDR, the New Deal and everything which flowed from it. Ben Bernanke’s entire career was “how do we make sure the rich don’t lose their money so that FDR doesn’t happen.” He was chosen to be the Fed Chairman precisely to ensure that the next Great Crash, which everyone who wasn’t an idiot knew was coming, wouldn’t wipe out the rich.

The cost of his actions is the actual drop in ordinary Americans wealth and income, the impoverishment of the south of Europe, the austerity in England, the failed Arab Spring, the Ukrainian Maidan revolution, and so on. Yes, a Great Depression was forstalled, but a long Depression was created instead, and there were other options: other ways to forestall a depression.

History is not inevitable: decisions are made by people that change its outcome.

As for Piketty’s prescription: a wealth tax is fine as far as it goes, but the question isn’t whether the rich should be taxed, the question is how to create a world where they can be taxed.

That question, and questions like how we could increase the technological rate of improvement, increase the power of the commons, allow national policy by dismantling so-called “free trade”, and so on, are not dealt with.

But Piketty’s book is still important, because it proves the obvious beyond a reasonable doubt. In this it is similiar to the mountain of evidence of climate change. We can now say that climate change is happening and anyone who denies it is a fool. Likewise we can now say that allowing returns on unearned wealth to be higher than labor income, in a capitalist economy, leads to high inequality and doesn’t improve the economy. We should have known that already; we did know it already; now it has been proved to the point where we can say anyone who denies it is a fool.

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You will never, again, have a good economy for ordinary people so long as this continues

By Ian Welsh

On March 18, 2014

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Reuters on Ben Bernanke’s post-Fed career:

Bernanke was paid at least $250,000 for his first public speaking engagement, in Abu Dhabi, since stepping down in January, according to sources familiar with the matter. That compares to his 2013 paycheck of $199,700, and the appearance was only the first of three around the world this week.’ (two weeks ago)

Ben Bernanke bailed out investors to the tune of trillions of dollars. Now they are making sure he, personally, will be rich, so that no Federal Reserve Chairman ever thinks of not putting them first, second and last.

You cannot, and will not, have a good egalitarian economy while this sort of thing goes on. It is not possible. Those who have been in such positions should be given a very nice pension (say 5x median income) and not allowed to keep any additional earnings for the rest of their lives.

I can hear fools squealing already “gold plated pensions” and “paying them not to work” and “not fair”.

It would be far cheaper than the status quo. Far, far cheaper. Right now people like Ben Bernanke and Bill Clinton (worth 100 million after repealing Glass-Stegall and pushing through NAFTA) don’t work for you, they work for the people who will make them rich after they leave office. That costs you far far more than a generous pension for the rest of their lives.

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Creating a Prosperous Society Where People Love Their Work

By Ian Welsh

On January 15, 2014

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Are you most productive doing what you love, or doing something you are indifferent to or hate? If you could try your hand at doing anything, would you be doing what you’re doing? Are you on track to eventually spend your life in the work of your dreams, or is it clear that will likely never happen?

There will always be lousy but necessary jobs that few people want to do. The garbage must be picked up, the toilets must be cleaned and the bed pans must be emptied. But a society is a better society when more people are doing what they love, or at least working for themselves, out from under close supervision. Almost no one likes being micromanaged, and normal jobs are called wage slavery for a reason.

We want people to stretch themselves, we want them to reach for their dreams, we want them to get up each morning looking forward to the day’s work. We want that for the cold hard calculated reason that such people are more productive, and we want it for the warm soft calculated reason that we’d rather live in a society with as many such people as possible because they’re a lot more enjoyable to spend time around than people who hate their jobs.

It’s not hard to create a society which makes it more likely that people can do what they want. It’s not hard to create an economy which encourages people to start new businesses or to launch new careers. But such a society cannot exist if we prefer to be mean, if we want to punish people for failure. It cannot exist if we see someone else’s success as our failure or if we allow envy to infect our public policy.

People fail to pursue their dreams because they fear failure or because the opportunities aren’t available. Fear of failure is rational: pour everything into a new business which fails, and many businesses fail, and you can be left with no money, no source of income, and lose everything. In a country without universal health care, you could even lose your life if you lose your insurance and become ill or have an accident.

So the first thing a society needs to do is have in place a basic social net: a basic income below which people cannot drop, so they will not become homeless if they fail. Universal health care so they can pursue their dreams without being chained to a health insurance premium. Bankruptcy laws which allow most debts to be wiped away in the event of failure, not just so that people don’t lose everything, but so they can try again. Many entrepreneurs fail more than once before they create a business which works, and we want that, we want bankruptcy. We also want bankruptcy because it is important that lenders do their due diligence and accept the real risk of lending, rather than insisting that the government act as their bill collector. It is not in the government’s interest for people to become impoverished, as impoverished people cannot contribute to society nearly as well.

Credit and calculable law are needed for entrepreneurship. People must be secure in the title to their property so they can borrow against it. They must know that contracts are generally upheld and that basic physical safety is taken care of. Taxation must be calculable, though it doesn’t have to be low. Eras with top marginal income tax rates in from 80% to over 90% have had far more growth than our own low tax periods, and much higher corporate tax rates do not correlate with low economic growth either. After all, first you have to make a profit, or make so much money you’re in the top bracket. As the saying runs, it’s a good problem to have.

Credit in in the modern era is ultimately a product of government. Banks create money when they lend, they do not lend money they have on deposit, though the amount of money they can lend may be some multiple of what they have on deposit. Since the ability to create money is a government grant, and since a government grant is a grant from the people of a nation, the government has the right to influence or even set interest rates. This ability is already used, with central banks setting overnight rates, treasuries influencing bond rates at different durations, and so on. Mortgages in many countries will simply not be issued if they do not meet requirements set down by governments, and so on.

If we want people to do things, we have to make sure the money is available for them to do it. This can mean credit, or it can simply mean the government paying for or subsidizing what is needed. In many countries health care is provided out of taxes. At one time, post-secondary education was virtually free for those who qualified, because governments understood that educated people make more money, create more jobs and contribute more in general. With progressive taxation a government can easily provide free or very cheap education knowing that it will take a portion of every extra dollar earned as a result of that education. Rationing education is short-sighted and foolish, even on a pure cold-cash calculation.

A basic income is another thing governments do and can offer. In the modern day this is generally done through a complicated hodge-podge of systems, from welfare to unemployment insurance to student loans and tax breaks. This is vastly inefficient, and should be simplified. If we aren’t willing to let anyone go without basic lodging and food we should simply guarantee the necessary level of income to anyone over the age of 18 or whatever age children usually leave home. It is simple enough to do it in a way so that everyone is still better off working, it is vastly cheaper than paying an army of social workers to determine who is worthy, and it assumes the most basic tenet of liberty: that adults have the ability to know what they want to do. Nothing is more counter-productive than policies which, say, restrict welfare recipients from going to university, so they can’t improve themselves and have a better chance to contribute to society.

Knowing that they will always have enough to keep a roof over their head and food in their belly people are far more likely to pursue their dreams, to do the work they really want to and to start new businesses. It is true that some people will take advantage of such a system, it is also true that such a system will have much lower administrative costs than current systems. And since the basic income will not be a great income, but only basic, it will not be attractive to many.

It will also put pressure on businesses to treat their employees better. If a business cannot make a job more attractive than living at barely above subsistence then perhaps that job shouldn’t exist. Do all the fast food jobs really make our societies richer? If a job really needs to be done, like janitorial work or garbage collection or cleaning the bums of our parents and grandparents, then does it not deserve to be compensated well? If your CEO doesn’t show up for work, or if the janitor who cleans the toilets doesn’t show up, who do you miss most? And do you really want the person looking after your parents in an old-folks home or hospital to hate their job?

Most money from a basic income, assuming high progressive rates on the rich and the same corporate tax rates as were the norm in the 50s and 60s, will wind up back in the government coffers in any case, after it goes through multiple hands and supports many jobs.

These are the first two thing required to increase the number of people who do work they want to do, or at least don’t hate—freedom from fear of devastating loss and the availability of opportunities to gain the necessary skills, education and credit.

The third thing is to reform laws so people can do what they love.

Consider Silicon Valley in California, one of the greatest entrepreneurial hotspots in the world. New tech business after new tech business has been started there, from Hewlett Packard to Apple. Millions of jobs have spun out from Silicon Valley to the rest of the world. What made Silicon Valley possible? Well the first thing is government money, both to buy products like early computers and to support Stanford University, which histories of the Valley put at the heart of its culture. But another reason Silicon Valley happened in California and not in Massachussets, say, around MIT (though there is a tech corridor around MIT) is this: California law makes non-compete agreements illegal.

A non-compete agreement is a legal contract which states that someone can’t work in a business which competes with their current employer, generally for a few years. So if you have a great idea for a new product in the same line of business you can’t quit and go set up a new company.

Silicon Valley’s history is of startup after startup directly competing with the company the founders left. There would be no Silicon Valley as we know it if California allowed non-competes.

This is a general principle. If law does not allow people to do what they want, well then, they can’t do it. Barriers to entry, barriers to the creation of new businesses are too much to deal with in this article, but just note that what is good for a specific business is rarely good for business as a whole. If I own a business I don’t want my employees to leave and compete against me. That’s bad for me. But it’s good for whatever business I’m in for their to be more competitors and new products and it’s good for society as well.

Likewise laws on protected works and intellectual monopolies in terms of copyrights and patent law can stifle the creation of new businesses. If a person or company is forbidden from creating a product or must pay overly high licensing fees, the business will not happen. There is a balance here, some protection for actual inventors and creators is needed, but in our current society we are very far from the correct balance, and much law that seems to protect creators in fact only creates intellectual rents, stifles the economy and inhibits competition. To cover intellectual properties properly would take another huge article, so I won’t go into it futther here. The basic principle is simple: if it’s illegal to start a business or engage in a career, or it costs too much to be worth it, people won’t. Every time we pass a law which protects incumbents from competition or which protects the work of the past, we ossify our economy and make it harder for people to do the work they want to do, sticking more and more of them in jobs they hate.

The more people who are both free and able to work in jobs they enjoy; who are able to start new businesses; who are able to pursue professions they prefer, the better off everyone will be. This is true both in pure economic terms and in softer terms: happy people are healthier and they are far more fun to be around than unhappy people.

In economies which are running cold, people turn mean. Seeing scarcity all around, they feel that they are in competition for scarce good jobs, scarce good education and scarce happiness. They start blocking other people and insisting that everyone pay upfront intead of behind. Bosses, knowing that there aren’t enough jobs, become mean as well, treating employees badly, knowing they have nowhere to go and confident that if they lose one, or a hundred, or a thousand employees to mistreatment, more will be ready to work, impelled by fear of hunger and poverty.

We can’t all be rich, but we can all be prosperous, and we become prosperous as a group, as a society, not blocking each other, but by opening up opportunity for all, treating everyone as adults, and understanding that other people’s success is our success in the broadest sense. It is certainly true that in a competitive market environment there will be losers and if your closest competitors win, you can lose as a result, but for everyone else in society, the success is beneficial so long as those who succeed to not shut the avenues to success behind them. And if failure does not mean disaster, if there are second and third and fourth acts in life and those who try are allowed to try again, then the fear that both stops people from trying and makes those who are successful try and stop those behind them is greatly reduced.

Societies are prosperous together. Individuals are rich separately. Let us remember this, and remember that fundamental economic success for societies requires generosity and kindness, not parsimony and cruelty.

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Too Much Money Chasing The Wrong Returns

By Ian Welsh

On November 26, 2013

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There is too much money in the world being invested in all the wrong ways.

The amount of money being created by the Federal Reserve, Bank of Japan and the ECB is dwarfed by the amount of money being produced by Chinese banks and shadow banks.

This money is being spent on unproductive enterprises. About 70% of all sales of Brooklyn homes, for example, are going to hedge funds, investors and international buyers, who are looking for income. In Australia much of the real-estate is driven by Chinese buyers, so Australians buy in the US, because the US is cheaper, and so on.

Money creation is out of control, we are creating vast amounts of money, and then spending it either unproductively or harmfully. As I noted earlier, virtually the entire run up for the Dow can be explained by “Federal Reserve giving rich people money.” In China the money is also going into real-estate, most of it shoddy, and entire rural communities are being forced off their land and into the newly built slums (because, very quickly, that is what they will become. We have a lot of experience with what happens with these sort of planned prebuilt cities: and virtually all of it is bad.)

Money is permission to do things. It allows you to control what people do. Vast leveraged financial games and real-estate purchases intended to create income streams are not productive, all they are doing is moving money around, they are not creating new real services or goods which improve people’s lives. Instead they are meant to concentrate money and power, permanently, in the hands of a small class of people and make it so that everyone else has to pay those people to survive: this is about permanent extraction of virtually all value from the majority to the minority.

This is not a sustainable economic model. It is creation of money from thin air without underlying economic growth to justify that creation of money. The money is used to buy up control of the system and future revenue streams, but it does so by damaging the real economic health of the majority of people, making them economic cripples. People who live paycheck to paycheck cannot create demand for new products and services, cannot themselves create new products and services, are unhappy and increasingly unhealthy and generally unpleasant to be around, because their lives are unpleasant.

Almost all new job creation in the past seventy years has been in services: aka, McJobs and administrative jobs which create little to nothing of value. What is happening now is accelerating that trend.

When catastrophe hits, and it will, we will be unable to respond effectively, because we will have created billions of economic cripples, of people who, never having been allowed to do anything of significance, never having had any economic agency, and never having worked at a job which wasn’t meaningless, will not easily be redeployed to do what is useful, and needed. The real economy is what people do to create services and products which are good for other people. A de-skilled, demoralized population, in the face of climate change and economic collapse, while it will respond as best it can, will be very hard to mobilize, not least because there will be nobody with the legitimacy to mobilize them.

A basic rule of economic governance is this: when the “private” sector is not doing productive things with money, you must either change the incentives so they are, or simply take the money away from the people who are using it in unproductive ways and spend it yourself. Make every building at least energy neutral, build the smart power-grid, fund electric cars and 3D printers in a big way, create high speed trains, go to Mars, radically decrease carbon emissions, provide a basic income for everyone, fund advanced research, and so on.

The first step to getting out of our current mess, then, is 95% marginal tax rates on all income over 5 million, 90% on all income over 1 million, and a huge increase of corporate tax rates to over 70% unless they are doing what is in the public interest. (Tax breaks on 20% corporate taxation rates do not affect corporate behavior.)

There are more fundamental fixes, mind you, but these are the basic, brain dead fixes that are doable within the current system, without radical changes. This is what basic economics, as understood in the 1950s with slight updates for an understanding of sinks and supply bottlenecks, tells you to do.

Do not give money, free money, to people who are not spending it in ways beneficial to society as a whole.

And take away money from people who are spending it in harmful ways.

Money is a social creation, it is permission to tell people what to do. You do not give money, and permission, to those who use it badly.