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Interesting Reads

– Why have US manufacturing companies been manufacturing abroad. (Hint: it is not about cheaper labor abroad) (Carl Rove: Part 1; Part 2; Part 3)

– Along the same idea: Apple, America and the Squeeze of the Middle Class (NYTimes)

– Do Great Things (enough with the “Social Networks”) (TechCrunch)

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Of all crowds that were anticipating to turn the page earlier this month and welcome a new year, banks and financial corporations standout.  By all means, 2011 was a terrible year for financial corporations.  Profits deep down in the red, SEC fraud charges by the dozens,  smaller bonuses and thousands of fired employees. Yet Wall Street’s worst memory of 2011 was not reflected on its accounting books nor its stock price.  It was hash-tagged OWS on twitter feeds.  It was the unions, the teachers, and the construction workers protesting for justice and equality. It was the angry community waking up to realize how badly the US economy has buried itself in crony capitalism (emphasis on crony).

There are no doubts that banks are a necessity for every successful economy, regardless of its ideological structures.  Without a healthy banking system an economy cannot grow, innovate and improve the welfare of its people.  Anyone who wishes banks to wither is ignorant.  That said, the 2008 bailout was necessary, otherwise the recession would have become a depression.  Unfortunately, the greedy banker cried for help and bit his helper soon after.  Instead of lending out money back to the community, help homeowners stay afloat or do anything worthwhile, banks invested money in more risk.  They gave the employees fatter paychecks, and hired more lobbyist to make sure the government does not intervene.  It was both the arrogance and ignorance of most bankers that led them back to a deeper hole they dug themselves out of in 2008.  It is capitalism eating its own.  Yet, financial corporations have the audacity to blame regulations and taxes for the state of the economy.  Instead of modesty and humility in face of global anger, many bankers have replied to their critics with sheer cockiness.  Take one John Paulson, president of President of Paulson & Co. , for example stating

“The top 1% of New Yorkers pay over 40% of all income taxes, providing huge benefits to everyone in our city and state. Paulson & Co. and its employees have paid hundreds of millions of dollars in New York City and New York State taxes in recent years and have created over 100 high paying jobs in New York City since its formation… Instead of vilifying our most successful businesses, we should be supporting them and encouraging them to remain in New York City and continue to grow.”

and more recently GOP presidential candidate Mitt Romney, a.k.a Gordon Gekko, to an interview with the Washington Post suggested that concerns about Wall Street conduct and inequality are driven by “envy”.

As most of the media and critics are focusing more on the extent at which the practices of the financial industry and the claims of bankers such as that depicted above have been unethical, few have shown how economically inaccurate they are.  Consider for example,

“…the top 1% of New Yorkers pay over 40% of all income taxes…”

Intuitively, at a corporate marginal tax rate of about 25% and high income that financial corporations have generated over the past decade, the above statement could be true.  This is not the case.  Not even close.  The figure below plots corporate income taxes as a percentage of total income for many sectors.

Corporate income taxes for the financial industry is on average much lower than the US average (about 15% lower) and lower than all other sectors, including America’s beloved child, the manufacturing sector. Furthermore, the spike in the last two years is caused by a dip in income rather than an increase in taxes.  That fact that financial corporations pay 40% of total taxes is solely because of the high income they generated off the taxpayer’s back.  In fact, the financial industry has it much (much) easier than other industries when it comes to taxation (among many other) matters.  It seems like corporations have a regressive tax structure across industries.  The more you earn, the lower you will be taxed.

How could this happen?  

The complicated tax structure along with smart book keeping and accounting makes it hard to identify why financial corporations pay less taxes.  One thing clear is that the tax code is biased towards certain industries, and the income that is taxable varies wildly across different industries as seen clearly in the second figure below.

The recent outcry and anger towards Wall Street is justified.  Their crony practices led us to a recession in 2008 and then again in 2011 (although the NBER does not classify the slump in 2011 as a recession).  The anger toward all forms of US governments is also well placed.  Congress is indeed bought.  After the great recession in 2008, financial corporations spent more on lobbyists than they ever did.  The amount spent alone by investment & securities (this does not include consumer/retail banks and other forms of financial banks) corporations alone in 2010 on lobbying in Capitol Hill topped 100 million USD.

The figure shows a sudden increase in the amount spent lobbying in 2007 right around the time a problem in the financial system started appearing.  More money was thrown into congress to ensure that the bottom line of financial companies remains untouched.

(It is important to mention that not all banks have wasted money on lobbying or indulged themselves in questionable practices.  There are many banks that have operated over the past decade in a more responsible manner without being involved in risky investments that appeared lucrative over the decade.  One example is M&T Bank, based in Buffalo with over 2 billion $ in assets).

What to do about it?

Clearly, the public outrage is far from being over, as it shouldn’t be just yet.  With elections coming up, more should be done to pressure candidates into taking strongs stands against the corrupt system that took over in the past decade.  For one, limit the amount of money corporations can pour into political campaigning (that includes Super PAC’s) as well as into lobbying.  This should be uniform across all sectors and not just the financial corporations.

Moreover, reenact a modern version of the Glass Steagall Act.  The Dodd Frank Bill is a start but far from satisfactory.  Another, easier to implement policy, is a financial tax.  That includes both a uniform increase of the marginal tax rate on all financial corporations closer to the 25% that we often hear about, and the much talked about Tobin tax, which limits the risky practices that high risk banks are involved in.  One problem is that most of the bigger banks operate outside the US as well, so it would be easy for them to channel capital to other regions and avoid such taxes.  Thus, more should be done on tracking banks’ capital (this also helps in monitoring the risk of the financial sector).

Hopefully, the public outrage does not just fade away as fast as the banks want it too.  But this will all be meaningless unless it leads to substancial changes in the political economy, reform of the tax structure and a lesson to the greedy culture that Wall Street has come to embody over the past 25 years.

Countermetrics; metrics that measure economic performance from a different perspective.  Rather than using metrics to measure the economy, we should be using metrics that measure human well-being in an economy.  This goes beyond GDP and other generic output measures.  What is in a high GDP/capita ratio today, if a country cannot offer its residents healthcare or a decent education?

A good set of metrics do not simply measure a society’s performance today but should also indicate how ready an economy is to cope with the future.  Furthermore, a society does not solely comprise of a certain group but the entire population belonging to it.  Any metric that we use should take into account both ideas into consideration.  An improved economic situation for the top 1% of earners in a country does not inform on how well the remaining 99% are doing.  Neither does it inform on how well this economy will do in 2020.  This is were the traditional metrics economists have used in the past decades failed.  Any metrics that should be used has to take into account at least education, environment, health and innovation as they account for both, current well-being and are necessary bases for true “growth” in the future.

As I search for new intuitive metrics that can measure well-being, I will also try to write a weekly post on economic events that have been missed out or wrongly reported by the media (both left and right media) and throw-in some daily interesting articles circulating the web and economic blogosphere.