22 July 2014 | By ken in Society | No Comments Yet

The New Norm?

Researchers have created an “index of corruption,” using a data base of court cases to rank different states.

According to Fortune, the “researchers studied more than 25,000 convictions of public officials for violation of federal corruption laws between 1976 and 2008. And they found the cost to be an average of $1,308 per year, or 5.2% of those states’ average expenditures per year.”

Before this systematic research, we all had impressions and opinions. So it will come as no surprise that topping the list of the most corrupt states are Mississippi and Louisiana. But who would have thought that Illinois ranks as the forth most corrupt state? And what about New York, the financial capital of the world?

According to the report, “states with higher levels of corruption are likely to favor construction, salaries, borrowing, correction, and police protection at the expense of social sectors such as education, health and hospitals.” The paper explains that “construction spending, especially on big infrastructure projects, is particularly susceptible to corruption because the quality of large, nonstandard projects are difficult for the public to gauge, while the industry is dominated by a few monopolistic firms.”

To be sure, the data is based on legal proceedings and inevitably leaves out the corruption that does not come to the attention of prosecutors.

And it leaves out the private sector, including the financial industry, where the pattern has been for firms caught engaging in questionable practices to pay out immense fines without acknowledging guilt. Corruption there is massive, fueled by billions of dollars of profit.

Peering into these murky depths, another study based on a statistical analysis of trades strongly suggests that “A quarter of all public company deals may involve some kind of insider trading.” According to The New York Times: “The study, perhaps the most detailed and exhaustive of its kind, examined hundreds of transactions from 1996 through the end of 2012.”

“The results are persuasive and disturbing,” wrote The Times, “suggesting that law enforcement is woefully behind — or perhaps is so overwhelmed that it simply looks for the most egregious examples of insider trading, or for prominent targets who can attract headlines.”

The business school professors who did the study are so confident in their findings of pervasive insider trading that they determined statistically that the odds of the trading “arising out of chance” were “about three in a trillion.” (It’s easier, in other words, to hit the lottery.)

“But, the professors conclude, the Securities and Exchange Commission litigated only “about 4.7 percent of the 1,859 M.&A. deals included in our sample.”

It seems an inexorable conclusion that we are getting more corrupt. At the very least, corruption is becoming more pervasive and acceptable. As the new norm, businesses and individuals will feel that they will have to join the crowd in order to remain competitive.

As a result, elected officials will have fewer compunctions about accepting bribes or “contributions” to their favorite causes in exchange for favors. Investors will expect to know more that “outsiders” know and will be upset if challenged. Bankers will think it a reasonable goal to rig markets, and will figure out ever more ingenious ways to do that.

Or has all of this already happened? Perhaps we are just catching up with reality.

Fleeing Taxes

17 July 2014 | By ken in Society | No Comments Yet


What would you say to someone who tried to avoid taxes by registering as a resident in a state where he had, say, just a mailbox? Better yet, what would that state’s department of taxation say?

No deal, to be sure. But businesses are “moving” like mad, and “merging” to avoid U.S. taxes. The Treasury Department is objecting, according to a story in The New York Times, but it looks like they are going to continue to get away with it.

As the Treasury Secretary put it in his letter to Congress calling for action, “The firms that engage in these ‘inversions,’ still expect ‘to benefit from their business location in the United States, with our protection of intellectual property rights, our support of research and development, our investment climate and our infrastructure, all funded by various levels of government.’” And in most cases, few employees will actually have to relocate.

But nothing will be done because those businesses have friends in Congress. “Republicans in the House . . . have so far declined to pursue legislation on inversions and may not call a hearing or bring a bill to a vote.”

As a result of these and other manipulations of the tax code, our corporate tax rate is nowhere near what is should be. But without someone to pin the blame on, the public will continue to be virtually ignorant.

And it’s perfectly legal, unlike “moving” to another state without actually “moving.” Where are our “friends” when we need them?


14 July 2014 | By ken in Society | No Comments Yet

Magical Thinking in Kansas

There are two big ideas that don’t make sense but sometimes work in the world of macro-economics: cut taxes to increase revenue and spend money you don’t have to increase growth.

The second is a staple of Keynesian thinking, and the U.S. government employed it in its stimulus package of 2008 to get us out of the Great Recession. The basic idea is to prime the pump, using water to get the well to start producing more.

The first is a staple of conservative policy, and it includes the notion that smaller taxes will force the government to cut back, always a good thing for conservatives who tend to view government as the problem. But, then, so the theory goes, businesses and individuals will have more money to spend and that will grow the economy.

Being somewhat paradoxical, these ideas need to be applied carefully. Spending money you don’t have can lead to inflation and burdensome debt. Cutting taxes can reduce the government’s ability to pay its own employees and provide essential services, further injuring the economy.

So it was something of a shock when the governor of Kansas pushed for dramatic tax cuts in 2012 with absolute faith in the counter-intuitive idea that cutting taxes would increase revenue: “Our new pro-growth tax policy will be like a shot of adrenaline into the heart of the Kansas economy.”

But as The New York Times pointed out in a sharply worded editorial this week: “the growth didn’t show up.” In fact, in the last six months when unemployment declined throughout the country, Kansas was “one of only five states to lose employment . . . . It has been below the national average in job gains for the three and half years Mr. Brownback has been in office. Average earnings in the state are down since 2012, and so is net growth in the number of registered businesses.”

I suspect The Times enjoyed the opportunity to demonstrate the falsity of that conservative cliché, what it called the governor’s “magical ideology,” while the “evidence of failure is piling up” and his “re-election campaign is faltering because of his mistake.”

But the point is that no one understands the economy well enough to speak with arrogant certainty about how it works. Economics is not a religion, without evidence of its efficacy. Besides, there are competing interests and warring sectors, that make it impossible to prescribe one definitive solution to all our needs. Rich and poor do not want or need the same things.

Sometimes the media paper over our differences and our conflicts by talking about “The Economy” as if we all participated equally in its triumphs and failures. The jobless figures do introduce discordant notes, but even there it ignores the critical differences between the chronic, long-term unemployed, the unemployable, and the part-time employees who have settled for the jobs they can get and given up on the jobs for which they are qualified.

I can appreciate that given the complexity of our problems, our divisions and conflicts, we might want to settle for the appearance of certainty – even when unwarranted. And others may be impressed by the convictions of politicians, even though they may not understand the issues they appear to address.

But we need more.


10 July 2014 | By ken in Society | No Comments Yet

“John Henryism” and Other Syndromes

A team of psychologists set out to study the resilience of high achieving disadvantaged youths, starting with the assumption that their “success stories also translated into physical health benefits.” As the New York Times put it in its account of the research: “These young people were achieving success by all conventional markers: doing well academically, staying out of trouble, making friends and developing a positive sense of self.”

“When we looked beneath the surface, though, these apparently resilient young people were not faring well. Compared with others in the study, they were more obese, had higher blood pressure and produced more stress hormones (like cortisol, adrenaline and noradrenaline). Remarkably, their health was even worse than peers who, at age 11, had been rated by teachers as aggressive, difficult and isolated.”

The researchers speculated about the causes: the students felt tremendous internal pressure to succeed as they were the first in their families to attend college. Then, many felt socially isolated and disconnected from peers as a result of racism and ethnic discrimination. (See, “Can Upward Mobility Cost You Your Health?”)

One of the study’s authors, Sherman A. James, a sociologist at Duke University, calls this single-minded determination to succeed and uncompromising work ethic, even in the face of overwhelming odds, “John Henryism,” after the legend of a black railroad worker who defeated a steam-powered drill only to drop dead of exhaustion.

But is this true only for African-Americans? And what about other minority groups? To be sure, Professor James’ speculations seem plausible, but there may well be additional consequences and other causes: peer group disapproval of those who excel, as well as the inherent pressure of competition itself and the fact that those who achieve high grades at school know that they face life-long pressures to continue achieving in highly competitive careers.

And what about parental ambivalence? I recall that much as my father insisted his son get the education that had been unavailable to him in “the old country,” he felt threatened by my success and never asked a question about what I did.

And then there are the more subtle consequences that show up years later as self-defeating behaviors, depression, anxiety, and exhaustion, as well as parental neglect – or over-involvement.

Counseling can be valuable but there is a cost to progress, and sometimes it is a price we have to pay.


07 July 2014 | By ken in Society | No Comments Yet

Everybody Loses

The conventional argument against high speed trading is that it gives an advantage to those with faster technology, not better judgment. It’s unfair. It’s analogous to insider trading, using information not generally available – in this case, milliseconds before it is available to others.

In Flash Boys, Michael Lewis, describes the ingenious technology and shows how it skims profits off the trades of others, working in effect as a tax on the system. He calls it “legalized theft.”

But in his review of Lewis’s book, James Surowiecki noted an even more insideous problem: to sniff out market prices in the process of trying to beat them, high speed traders flood the market with fake orders. They are looking to cheat the market, but, worse, they actually distort the market with spurious activity.

Surowiecki notes “Most high-frequency traders aren’t interested in the real economy at all. They aren’t concerned about a company’s earnings, or its future prospects. The only information that they’re interested in, and that they devote so much energy and money to uncovering, is information about what other investors are going to do.” In that way, they represent the vanguard of investor capitalism, in which the goal of investment is entirely to profit from trading, without regard to its social purpose or value.

He notes that high speed trading now accounts for about half of all stock market activity, and adds: “one recent study of trades in 120 randomly selected Nasdaq stocks found that increased high-frequency trading cost the average institutional investor as much as $10,000 a day.”

Trading in stocks has come a long way from the informal deals made under the buttonwood tree on Wall Street two hundred years ago. It quickly became centralized and regulated – but now it is going in the other direction. Public exchanges are proliferating and globalizing — there are 13 in the U.S. now — competing with each other for bigger shares of the market in markets. Moreover, there are over 40 private markets, “dark pools,” making regulation virtually impossible. Computers and electronic communication have amplified and globalized the process, increasing the chance of manipulation.

The relationships between buyers and sellers are increasingly irrelevant. As Surowiecki noted: “trading is entirely automated—humans may come up with the algorithms that the computers use, but machines do all the trading.” As a result, new glitches occur, such as the “flash crash” of May 6, 2010, when the Dow plunged more than six hundred points in a matter of minutes, and many high-frequency firms just stopped trading. That, in turn, accelerated the decline and made it harder for prices to return to normal.

There has always been a powerful destructive side to capitalism. As productivity soared and new wealth was created, environments were polluted and workers impoverished. This, though, may be different in that the financial system itself is being polluted.

High speed trading with its exclusive focus on maximizing investment returns may make it harden to direct capital where it is most needed or would be socially productive. And it may end up driving all but those who can afford it out of financial markets, as people conclude there is no point in trying to compete with complex algorithms and powerful computers.

In the long run, Surowiecki concludes: “Making investing less valuable will make people less willing to invest.”