Justin Hicks Ph.D.
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Income Trajectories in the US: Deregulation does NOT free markets...

1/8/2016

2 Comments

 
So; I don't BLOG much; but I wanted to write this here so I can reference it easily. There is a misconception as to what is REALLY at stake in the current political-economic climate both here in the US and abroad. There is a misconception that a "free-market" is one that is "deregulated."  Here's some data and a brief look at things.

So; here’s the income trajectories of the lower four deciles of the US income distribution (I just pulled this off the BLS website and converted it into a graph in excel.)
Picture
Consider the top 0.1% in wealth versus bottom 90%: CLICK HERE

The top don’t spend their money.  Instead, it’s all put into financial markets where it’s tax insulated, and never even enters the real world again.  It just sits and grows as corporate profits increase (at an increasing rate).  All the while, the wealthy lobby to get more deregulation to guarantee that their now completely synthetic fortunes continue to grow, while earned wages stagnate or fall (in real terms after accounting for inflation)…

The top .1% doesn’t have to do anything to “earn".  They just enjoy the current laws and what they guarantee; more to come.  1981 was a turning point with massive tax reforms and corporate legislation that gave corporations more rights than individuals. Deregulation has continued since.

Bill Clinton was the worst; signing into law the Gramm-Leach-Bliley act.  It effectively opened the floodgates for financial institutions to both aggregate in size and scope, but to also pass all risk onto the unknowing (fraud is still rampant among the rating agencies and companies… there is simply too much vested interest.) 

Here’s a speech by Sen. Dorgan of North Dakota BEFORE the signing of GLB in 1999: CLICK HERE. 

Deregulation is NOT good for “free markets.” 

​Free-markets are by definition: a market where ALL costs and benefits of goods and services are fully accounted for in the market price.  Free-markets was a term that was aimed at the CONSUMER’s freedom to choose… NOT a corporations freedom to do WHATEVER is necessary to increase profits (through tax-loopholes, lobbying and re-writing of corporate law etc).  If Jefferson were to step into today’s world; he’d abhor what he saw.
Picture
Here’s the top 0.1% versus the bottom 90%:

You can see clearly: it’s financial reform after the OPEC oil crisis in the late 70s where things make a dramatic change from the post-war time of 1945 through 1980.

1981 started things; and it’s only continued.  We’re the blind fools (household's earning $250K or lower. We’re the ones paying a HUGE percentage of our earned incomes in taxes; which has a HUGE impact on our daily lives… while both the mega-wealthy and corporate entities enjoy a tax-free life.  They live without any real economic tradeoffs.  Their personal economic well being cannot ever be put into jeopardy again… they're completely insulated.  Corporations can go bankrupt while their personal fortunes remain insulated.  They are also insulated through structured finance to eliminate their effective taxes to nearly 0%.  (I'll edit for clarity/spelling/punctuation later... this is informal; and for discussion purposes).
2 Comments
Joel B
1/9/2016 01:47:07 pm

A few quick thoughts:
1. Free markets implies competitive markets. I'm not certain the conditions for a competitive market have existed in a good since the 1880s. I think you would agree, therefore regulation should be to impose more free markets, with minimal complications. There are no longer first best solutions, only second best. The philosopher in me would argue that instead of arguing over the death/end of history philosophers should have been talking about the death of economics.

2. If not for the vast stored wealth, who would fund our massive deficits and public debt? I often think we traded off inflation for inequality in the 70/80s, and now we are paying for it in deflation (until we innovate something else to buy). The past social structure died and we have not found anything new.

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Justin (TCE)... the owner of this site... link
1/9/2016 06:44:45 pm

Hey Joel,

Thanks for commenting! I agree totally; I'd argue that there are almost zero free markets in existence (with the exception of some types of Ag).

Free markets (pareto efficient anyway) have to have all relevant info incorporated into the sale price... we're drifting so far from that (especially in financial markets) that it isn't even funny.

I know you like to play in derivatives etc... but those markets shouldn't even exist. At this juncture, they do little to provide insurance-features... and pretty much just distort things.

Common stock is also ridiculous when umbrella corporations exist. No one (including the CEO... or especially the CEO?... have any idea what the value of the company is. It's the most horrid game of incomplete and assymetric information; where people's retirement funds are all "invested."

Corporations shouldn't exist as they do today. A piece of paper shouldn't be able to own another piece of paper... corporate rights do nothing but distort value and hide losses. They don't incite innovation. They don't help us solve real problems.

Profit incentives are now so tied to policy, that often the product is almost secondary to all the other financial accounting smoke and mirrors.

Then... you talk about the financial sector itself... ugh... that's a long conversation (mind you... I believe in the use of money, savings, store of value... etc etc... without it; I wouldn't have what I do today, nor be able to leverage as I have)...

But; again... it's SO distorted insofar as information (risk and who assumes that risk)... that I cannot vote status quo again.

We're going to have a global meltdown. It'll make the "great recession" look silly.

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    Justin Hicks is an applied microeconomist; writing on innovation and related themes...

    He's also really into bikes... so; they're going to show up here too...

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