BOOKS AND ARTS OCTOBER 22, 2011
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Margin Call is the smartest movie you will ever see about the Financial Crisis. Debuting at a time when the Occupy Wall Street movement seeks to make caricatured villains of bankers and much of the public puts the blame for a lagging economy squarely on their shoulders, this movie offers an extremely thoughtful, fair and—for that very reason—ultimately much more powerful critique of how our financial system really works.
It tells the story of a roughly 24-hour period at a fictional investment bank on the eve of the 2008 financial collapse. In a sequence of events that mirrors what really must have happened at several real-world banks, a lowly junior analyst discovers that his firm’s dangerously high risk exposure to mortgage-backed securities could bankrupt the entire company and alarm bells ring right up the chain of command in an effort to avert disaster before it’s too late. By the movie’s finale, that effort has set in motion the inevitable system-wide collapse that we are all still dealing with today. Together with the film’s cast, the writer and director J.C. Chandor masterfully shows how each and every person up the chain of banking seniority would have to weigh difficult decisions and wrestle with the moral and financial consequences of their actions.
And herein lies the key to Margin Call’s truth: It examines the thoughts and motivations of individuals, resisting the easy narrative shortcut of lumping everyone responsible for the disaster into some monolithic, single-minded group. By doing so, Margin Call manages to do what almost no book, blog, newscast or Senate hearing has adequately done for the American people: to explain not just how the financial crisis happened (which financial giants failed in what order, which government entities bailed them out, etc.), but rather, to explain why it happened.
The standard trope about the crisis until now has generally been to point the finger at greedy banks and corrupt corporations. This isn’t an unreasonable reaction; when something as disastrous as the Great Recession happens, it is natural to want a bad guy to blame and punish. Hollywood, for its part, has always been inclined to this kind of Manichaeism—after all, every good story needs a hero and a villain. And the nefarious banker makes for a pretty perfect villain. Michael Douglas’s iconic portrayal of Gordon Gekko in Oliver Stone’s Wall Street set the mold for this character, and a batch of post-financial crisis films have followed suit: from narratives like Wall Street 2 and Company Men, to documentaries like Inside Job and Capitalism: A Love Story.
The problem with this portrayal is that it simply does not reflect reality. There were no capitalist masterminds who were able to maliciously game the entire financial system, no conspiratorial “fat cats” who single-handedly brought about the crisis. That’s why there have been no major prosecutions of any of the leading figures of American finance: because they didn’t actually break any laws. (Investigations across Wall Street since 2008 have turned up a few cases of isolated fraud and some infractions of SEC regulations, but nothing that could possibly be seen as a major cause of the crisis). And this is the core dilemma that is so vexing to the American people. How can something so bad, that hurt so many people and caused so much damage, have come about without any overt wrongdoing?
Margin Call attempts to give an honest answer to that question. There is no character in the film who breaks the law, engages in conspiracy, or does anything a reasonable person would label as unquestionably immoral. Even when the CEO of the film’s fictional bank makes the decision to sell all the company’s toxic assets—the act that literally sets in motion the complete collapse of the entire American financial system—it is an understandable, if difficult, choice. What else can he do? If he doesn’t sell first and start the catastrophe, someone else will. The outcome is inevitable, so what good could it possibly do for him to sacrifice himself and his firm and all his employees’ jobs if it makes no difference to the outcome?
That is the core conundrum of what economists call a collective action problem. If no individual person or firm’s actions can make a difference, the only reasonable thing to do is assume everyone else will follow their most selfish (and possibly destructive) instincts. Everyone has an incentive to follow the worst path they suspect others of following, and so it becomes a self-fulfilling prophecy. This explains not only why bubbles burst, but also why they build up in the first place. After all, why did the big investment banks start packaging and selling huge amounts of the mortgage-backed securities that eventually triggered the crisis? Because all the other banks were doing it. They were seeking higher profits, of course, but profits are the raison d’être of any company and the basis of its survival. Each bank’s employees knew that if they didn’t get in on this extremely lucrative new branch of the business, they’d fall behind their competitors, their share price would go down, they’d get fired.
Even if they thought the securities might crash at some unknowable point in the future, it would happen regardless of their own decision whether or not to get involved, and in the meantime it was their job to get the timing right for their shareholders and lock in profits before that bubble bursts. It was by this exact same thinking that so many millions of ordinary Americans bought or refinanced homes they couldn’t really afford in the expectation of making an outsized return on their investment. Virtue this was not. But in a capitalist economy, decisions aren’t made on virtue, they’re made on self-interest. These courses of action were logical on the individual level. The problem was that collectively they made everyone worse off.
The difficult truth is that with systemic failures like the one that caused our current economic crisis there is no one to blame because everyone is to blame. The only enemy in Margin Call is the system itself. And not just the banking system, for the “real economy” or “Main Street,” as politicians like to call it, is just as dependent on Wall Street as Wall Street is on them. Wall Street exists, as one of the movie’s characters poignantly puts it, because the rest of society demands that it exist; they demand all the aspects of a modern, affluent civilization that an advanced financial system makes possible. Through our government and through our own actions in the marketplace, we all set the rules, we all took advantage of the massive expansion of cheap credit and affordable housing and ballooning asset prices, we all benefitted from the upside of the bubble, just as we are all suffering from its aftermath today.
In the end, however, this sympathetic portrayal of the bankers’ dilemma offers perhaps the most damning indictment one can make of the modern capitalist financial system. After all, if such disaster can come about even when decent people are more or less trying to do their best, then the flaws of the system must run very deep indeed. It means that the problem can’t be fixed by just rounding up a few bad apples and throwing them in jail. The kind of collective action problem that brought about the financial crisis is exactly the kind of market failure where some kind of outside intervention is most appropriate and necessary—where it should be in the interest not only of the general public, but also of the banks themselves, for the government to step in and establish rules to prevent anyone from starting off a competitive cycle of ever-riskier behavior. And indeed, the bankers seemed to agree on this: After the crisis, all the major investment banks issued multiple statements supporting a move by the federal government to impose regulatory reform.
The problem arises, of course, when theory gets translated to practice. The Dodd-Frank financial reform law was passed only over the objections of major banks, who are now advocating that large parts of it be repealed. Perhaps the banks’ statements in support of reform were just a cynical ploy to begin with, but that wouldn’t explain why essentially all major American banks complied with new international capitalization standards outlined by the Basel III accords (and actually met their requirements years ahead of the deadline) even though they reduced profit margins. The fact is bankers are astute to the flaws of Dodd-Frank. Many economists question whether some of its more controversial regulations will actually reduce systemic risk, or rather just create needless red tape and encourage risk to shift to other even more dangerously unregulated sectors of finance like hedge funds. Also, its stringent measures will not apply to foreign banks, thus putting U.S. firms at a disadvantage without removing the risk of a global meltdown. By contrast, economists were in near unanimous agreement that Basel III would reduce international systemic risk.
Generally speaking, the best kind of reforms are those that avoid trying to predetermine exactly what kinds of financial transactions or activities should or should not be allowed, but instead seek to better align individual incentives with the collective interest—essentially to reward bankers for regulating themselves. Requiring individual pay to be more strongly linked to long-term investment returns and firm performance would be one step in the right direction, but even that strategy poses problems. Every new set of rules has limits and creates an incentive to skirt them or offload risk to overlooked areas.
And this is the ultimate—and ultimately unsatisfying—conclusion of Margin Call: that there may be no true and final fix for the problem; that, to a large extent, it may be simply unavoidable that bubbles will build and burst, and that financial crises will continue to happen in any economy that resembles free market capitalism, for the instincts and behaviors that cause them are so basic to human nature. In the film’s ending scene, the bank’s CEO stares out over the Manhattan skyline and recounts for his junior analyst a near-epic list of the world’s financial booms and busts—dating back some 400 years. The message is clear: This has happened before, it will happen again. Human nature does not change. The real question to take away from the movie is not whether we should reform our financial and economic system to prevent another crisis. The question is whether we can at all.
Daniel Krauthammer is a writer in Los Angeles.
22 comments
Lol at "The problem with this portrayal is that it simply does not reflect reality." That's a pretty Cainish response. Helpfully, Krauthammer (the Good) explains precisely why "the problem with that analysis is that it is wrong". It's something I've thought about, on occasion--the legality of what was being done. But we live in a society of laws. The Constitution bans bills of attainder and their ex post facto application. If prosecutors take bankers to court and fail to win, it's bad for everyone as it implicitly recognizes that their actions were legal. People calling for bankers' scalps live with the clarity that it wasn't, even though it usually was. If the only way attorneys win is by perverting the rule of law as we understand it, it could have dreadful consequences.
- chaitless
October 22, 2011 at 8:50am
That said, regulations like Glass-Steagall that create a firewall between depository banking and investment and proprietary banking are a no-brainer. Note that we didn't suffer a systemic crisis in the same areas of finance until we got rid of them. To feebly say we know of no regulation, so let's not do very much is wrong. Americans can live with banks that are as profitable as supermarkets (read: not very) if it means that the probability of shenanigans that cause financial crises goes down by a thousand times. As Paul Volcker noted, there is very little helpful innovation that has occurred, even with astounding bank profitability. One principal point of profits is to invest in making better products. Banks have used ATMs, online operations, and debit/credit cards in order to reduce costs and they're even forcing customers to pay for the privilege of using them, even though it should be the other way around, as they gain lots of business where none existed before (paying by card) and can more cheaply meet the routine (ATM) and complex (online transactions) needs of millions of people with less overhead.
- chaitless
October 22, 2011 at 8:59am
Nah. Just because the regulators and the Congress were asleep and both enabled and turned a blind eye does not make it legal to package essentially phony debt instruments -- mortgages intentionally issued to people with no ability to pay -- slice, dice, and wrap with an equally fake rating and then sell them. That's just securities fraud on a massive scale. The only justification given here is that, "Everyone was doing it, ergo it must be legal." About as legal as bootlegging. There were plenty of people up and down the chain who knew what was going on and lots of internal efforts to limit exposure accordingly. There should be lots of people in jail by now except that Obama is afraid of Wall Street. What is worse is that the government allowed the recipients of the proceeds of this fraud to walk off with their ill-gotten gains. The honchos at various firms who made huge sums doing this, or participated in the profits, should have been stripped of their gains.
- roidubouloi
October 22, 2011 at 8:31pm
In the past 100 years concentration of income in the top 1% reached its peak on the eve of the 1929 crash and on the eve of the 2008 crash, in 1928 and in 2007, when the top 1% share of total pre-tax income reached 23.9% and 23.5%, respectively. (Between 1929 and 2008 the inequality index (i.e., the percentage of pretax income in the top 1%) looks like a bowl, bottoming out in 1976 at 9.9%). This suggests two things. One, when so much income is concentrated at the top, the investor class (i.e., that top 1%) is essentially trading assets among themselves, moving assets around from one balance sheet to another, without much benefit to society, or the economy, as a whole. Two, such concentration of income is self-correcting; it isn't corrected because of some laws passed by Congress or by the redemption of the top 1%, rather the concentration of income leads to anti-social behavior among the investor class that damages not just the investor class but everybody else. If our system necessarily leads to concentration of income, then I suppose I agree with Krauthammer: it's the system that is flawed. On the other hand, if our system does not necessarily lead to concentration of income, or if such concentration can be mitigated, then I don't agree with Krauthammer. We know what the top 1% believe: concentration is inevitable so get over it.
- rayward
October 23, 2011 at 1:13pm
The Other Krauthammer writes: "The problem with this portrayal is that it simply does not reflect reality. There were no capitalist masterminds who were able to maliciously game the entire financial system, no conspiratorial “fat cats” who single-handedly brought about the crisis. " Agree. While on the surface the actions look criminal, the problem was that it happened slowly, over a period of a decade or more. And every day was a smaller step towards the line of what was right and wrong. The new guys that came in thought this was how it was always done, and the older guys shook their heads at how senseless it had all become. Of the older guys, there were those like Jeremy Iron's character that understood if it wasn't money, it'd be something else that was being traded. Then there were those like Spacey's character that had moral qualms about what they were doing, but they needed the money and continued to do it anyway. Humans are very capable of cheating, regardless of their moral compass, if they stand to make a large gain while shouldering a very small % of the responsibility. This is what looting is all about. That a wall street trader was told to go sell something they knew had little value was easy to do IF the money was good AND if you knew an entire industry was doing the same. As I've noted before, of the 3 entities that participated in the meltdown--gov, consumers and wallstreet--two acted exactly as I expected them to act. Wall street peddled their wares as quickly as they could. Consumers lapped up the seemingly free money. Government was the only entity that did NOT act as I'd expect. They failed in their mission here. They had the tools. They had the laws. They had the knowledge. They knew this was a problem. But they did not want to be the adults and say "stop"
- seattleeng
October 23, 2011 at 3:07pm
Rayward writes: "In the past 100 years concentration of income in the top 1% reached its peak on the eve of the 1929 crash and on the eve of the 2008 crash, in 1928 and in 2007, when the top 1% share of total pre-tax income reached 23.9% and 23.5%, respectively." Sounds good, but the various government agencies that measure income distribution don't believe these figures for a moment. The census bureau reports after-tax, post-transfer gini coefficient was 0.409 in 1986, and 0.394 in 2002. Thus, in their view, income inequality as DECREASED in the last few decades.
- seattleeng
October 23, 2011 at 3:11pm
Actually, income inequality between 1928 and 2008 has ups and downs, the ups and downs occurring mostly during the years immediately following the 1929 crash and immediately before the 2008 crash; indeed, a big down occurred between the late 1990s and early aughts (consistent with sea's observation), and the second half of the 1980s saw a steep rise in inequality as did the second half of the 1990s (actually much steeper in the second half of the 1980s). The graph of income inequality still looks like a bowl when viewed from the period 1928-2008. What's interesting is that the bottom of the bowl, between the 1950s and 1970s, is almost flat (i.e, few ups and downs). Of course, those were the years of high marginal federal income tax rates (as indicated in my prior comment, the index I refer to is pre-tax income). Not that I'm suggesting we go back to high marginal income tax rates, or go back to the 1950s, 1960s, or 1970s. But I do miss Elvis.
- rayward
October 23, 2011 at 3:49pm
The volatility reported in income distribution is overwhelmingly due to reporting changes and market performance. For example, CEO salary largely tracks the S&P performance. Which is no surprise. The top 1% saw thier share of the income jump from 9.1% in 1986 to 13.2% in 1988 in the Saez data. Do you think that was a real change? No, it was because tax laws changed, and suddenly it made sense for people to take gains that previously had been deferred. It was not some that could be repeated year after year. And this was preceeded by small businesses being allowed to organize is S-corps instead of C-corps. This law was passed in the early 80's. And in 1981, there was a huge surge in business income that was suddenly being reported as personal income. These are not my comments. Saez covers both of these in his writings. He says "almost all the increase in top incomes from 1981 to 1984....is also due to the surge in S-corporation income" As I've noted before, if you took 100% of the money earned by the top 5% and gave it to the bottom 95%, the Saez data would still show massive inequality. Therefore, it's not a reliable predictor of what is happening. Find a better source.
- seattleeng
October 23, 2011 at 4:13pm
The Other Krauthammer got one thing right. Human nature is the problem, something most of today's conservatives don't take into account. They think the Market is some holy organism that regulates itself independent of human greed, which comes from fear. And, yes, there were many actual laws broken by cowardly banking criminals in the run-up to the 2008 financial-system crash. Accountants were bribed to hide the poisonous content of mortgage bundles, and then ratings agencies like Standard & Poors were bribed to overrate the value of the bundles, so suckers around the world would bite. Considering the amount of profits involved that didn't come from any sweat or labor, that was perfectly expected and natural, human nature being what it is. Easy money is in our DNA. We're coming to the point where the big banks are going to have to be nationalized. Paul Harvey, my favorite conservative commentator, after Reagan's deregulation caused the S & L's to collapse in the late Eighties: "If business cannot control itself, it will be controlled." Amen, Mr. Harvey. You were a true, old-fashioned conservative who didn't worship that dimwit Ayn Rand. Rand wanted no government regulations and taxes to be voluntary. Given human nature, that's a formula for anarchy, which we now have a strong taste of.
- magboy47.
October 23, 2011 at 5:08pm
What volatility? The top 1% share is volatile on the edges of the bowl, but not in the middle. One can look at short-term volatility, as does sea, or long term trends, as do I. The problem with looking at the short-term is, well, the volatility. S corporations have been around long before I started practicing in the 1970s. The big change occurred with check the box, which allowed entities to elect subchapter k (partnership) status, entities that before would have been treated as C corporations. Almost all investment entites today elect subchapter K, which has made the federal income tax essentially elective for many high end taxpayers. Maybe sea can give us a seminar on that.
- rayward
October 23, 2011 at 5:56pm
Oh yeah. Like right-wing and libertarian anti-regulatory fanaticism had nothing to do with the lapses of government oversight. I suppose that mistakes were made.
- roidubouloi
October 23, 2011 at 9:04pm
Ray, ask yourself the simple question about your source of data: If 100% of the income from the top 5% were confiscated and given to the bottom 95%, would your source show massive improvements to income equality? Your source would not. it is a rigged game. There's not much more to discuss unless you are using data that would show a big improvement to inequality under those conditions.
- seattleeng
October 24, 2011 at 1:39pm
The answer is quite clear, seattle, but you don't like it. So, like any other fact inconvenient to your libertarian narrative, you ignore it. Since 1980, the top 10% have gained 17% of GDP share. Almost all of that went to the top 5%. (The 90-95% segment maintained its position.) That is $2.5 trillion in today's economy. Distributed to the bottom 90% of households, that would come to $25,000 per household. Given that median household income in the US is approximately $50,000, one would have to say that that would make quite a substantial difference in household income, well-being, and equality. Were the top 5% suffering so between 1940 and 1980 that we should feel pained at the prospect that their income share would return to its level during our period of greatest economic growth and shared prosperity? Only for a Randian.
- roidubouloi
October 24, 2011 at 1:55pm
“There were no capitalist masterminds who were able to maliciously game the entire financial system, no conspiratorial “fat cats” who single-handedly brought about the crisis. That’s why there have been no major prosecutions of any of the leading figures of American finance: because they didn’t actually break any laws.” This article, it seems to me, largely misses the point--either unwittingly or disingenuously. DK starts by eliding two key issues above: Whether the law was broken and whether the system was gamed. OK--even if there was no systematic breaking of the letter of the law as far as anyone seems to be able to tell, that's just the beginning of the story. The real point is that big finance has become so politically powerful that it doesn’t need to break laws. With the Goldman Sachs-Office of the Secretary of the Treasury revolving door that emerged during the Clinton and Bush administrations, the obvious question became: Why break the law when you can make (or un-make) the law? Between Robert Rubin, Larry Summers taking time off from their day jobs to engineer the gutting of Glass-Steagall and then Hank Paulson, while at G&S, successfully lobbying for increased leverage for risky bank investments, only to come in later as Sec Treas to plead for/demand bail outs for said disastrous investments, the bottom line is that the political system in important respects is owned by the banks. All DK can say about this is, well, that’s just the way the free market works. And what about the case of Brooksley Born at the CFTC? The heavily Wall Street-influenced Clinton administration essentially marginalized her when she tried to do the government’s job of regulation and earned the wrath of Rubin and Summers. When Born attempted to regulate OTC derivative contracts in 1997-8, this was the result (BB interview in Stanford Magazine): “Born recalls taking a phone call from Lawrence Summers, then Rubin’s top deputy at the Treasury Department, complaining about the proposal [to regulate OTC derivative contracts], and mentioning that he was taking heat from industry lobbyists. She was not dissuaded. ‘Of course, we were an independent regulatory agency,’ she says....But the tide of opinion that had risen up against Born was irreversible. Language was slipped into an agriculture appropriations bill barring the CFTC from taking action in the six months left in her term.” Now, that’s how the process works, and it is, as claimed, legal. So, then why does DK confine himself to the smoke screen of the legality question? As I said, simply claiming that it was the government and not the banks that screwed up misses the reality of the complex, subtle, insidious interaction between the machinery of government--regulatory and legislative--and the possessors of huge amounts of wealth, i.e. the leadership of the financial industry. The explanation can’t simply be: The government was “asleep at the switch” or watching porn on their computers. When the results of this malfeasance finally manifested themselves, and, given the lack of illegality, there were two non-judicial options: the Swedish option of nationalization or the market option of letting the insolvent banks fail. But of course the former was regarded as a socialist non-starter, and while the latter was normally the preferred option, all of a sudden, all these great financial free-marketeers wanted to shelter in the lee of “big government” because otherwise “the system would fail”. So, ultimately what we get is self-sustaining crony capitalism packaged in a fascist, corporatist business model in which big but not small business failure has been rewarded. It’s not illegal--it’s worse, because it really is slowly destroying confidence in the system.
- ccarrick@vzavenue.net-old
October 24, 2011 at 2:37pm
Roid writes: "Since 1980, the top 10% have gained 17% of GDP share. Almost all of that went to the top 5%." Same thing I said to Ray applies to you: "Ray, ask yourself the simple question about your source of data: If 100% of the income from the top 5% were confiscated and given to the bottom 95%, would your source show massive improvements to income equality?" You must look post-tax, post-transfe, etc. And even more illuminating is when you adjust for hours worked. You are pointing out that welfare recipients who get 100% of their money from the government and that worked 0 hours in a year saw less gains than a husband and wife team working 4100 hours in a year. Please. Find some data that really shows what is happening. Of course, the gov data can do just that. But you don't like the data because it shows that the rich haven't really posted much in the way of gains at all.
- seattleeng
October 24, 2011 at 9:38pm
As is your standard practice, seattle, you have no idea what you are talking about, make up claims out of whole cloth, and simply deny widely available data on the point. Thousands of economics papers are being written about the phenomenon of the huge increase in the skewness of US income distribution over the last 30 years and you simply deny that any such thing has occurred. You would think a couple of those economists or economic journals would have noticed by now that the phenomenon to which thousands of pages and hours of research are devoted does not exist. True nutcase stuff, seattle, right up there with creationism, climate change denial, and the earth-centered universe. As for the data you claim to want but will ignore as usual, look right here for example: http://www.cbpp.org/cms/index.cfm?fa=view&id=2098 Trends in the Distribution of After-Tax Income: An Analysis of Congressional Budget Office Data by Isaac Shapiro and Robert Greenstein The Congressional Budget Office recently released tables on after-tax income in the United States in 1994. A comparison of these data to data CBO previously had released for 1977 finds that the gains in after-tax income since the late 1970s have gone overwhelmingly to households in the upper parts of the income scale. This analysis finds that average after-tax income climbed 9.5 percent during the 1977-1994 period, after adjustment for inflation. But most income groups did not share in these income gains. The bottom two-fifths of families experienced a decline in their average after-tax income over this period, after adjusting for inflation, while the after-tax income of the middle fifth of families remained essentially unchanged. By contrast, the after-tax incomes of high-income families rose sharply. The average after-tax income of the top 20 percent of families rose 25 percent during this period, after adjusting for inflation. The average after-tax income of the top one percent of households rose 72 percent. As a result, the proportion of after-tax income that different groups of families received changed markedly over this period. In 1977, the top one percent of families received 7.3 percent of the national after-tax income. By 1994, they received 11.4 percent of after-tax income, as much as the bottom 35 percent of the population combined. The top one percent of families received $146 billion more in after-tax income in 1994 than they would have received if their share of national after-tax income had remained the same as in 1977. Recent Income Trends The Congressional Budget Office compiles information on after-tax family income based primarily on Census data and IRS data. The CBO data are currently available for selected years from 1977 through 1994. CBO only recently released data for 1994 to Congressional staff. This analysis examines the 1994 data and compares them to data for earlier years. This analysis finds that average after-tax family income was 9.5 percent higher in 1994 than in 1977, after adjusting for inflation.(1) The increase in income was much greater than this for high-income families, while as a group, low- and middle-income families lost ground or simply stayed even. * The top one percent of families experienced an average gain of 72 percent in their after-tax income from 1977 to 1994. (See Figure 1.) This was nearly eight times the 9.5 percent overall average gain. * The average after-tax income of the top fifth of families rose 25 percent during this period. * Among all other income groups, however, after-tax income either grew by less than the average or declined. For example, the average after-tax income of the next-to-the-top fifth of families grew just four percent over this period. _____________________________ Enough of your libertarian bullshit about welfare queens. Welfare recipients have nothing to do with the relative economic fortunes of the vast majority of Americans even if your description of them were accurate.
- roidubouloi
October 25, 2011 at 12:33am
And thousands are being written saying there isn't any significant change in income distribution when transfers, hours worked, etc, are considered. Roid writes: " In 1977, the top one percent of families received 7.3 percent of the national after-tax income. By 1994, they received 11.4 percent of after-tax income" Well well well. As I said, a very small change. Saez et al report 20%! See how stilted their research is! Now, the data you cite doesn't take into account transfers in to the bottom 99%. There is $1T in welfare Nor does it adjust it for hours worked. Factor in both of those, and that 11.4% figure will be virtually unchanged from the 1977 figure.
- seattleeng
October 25, 2011 at 12:29pm
Well, well, well, seattle. I see you are still algebraically challenged. 11.4% divided by 7.3% is more than a 50% increase. And that is just for the top 1%, and in 1994. The figure is much higher now. Yes, the figure of course takes in transfers because it is the net income of the top 1%, after they have paid their taxes whether those taxes are used for transfers or something else. And th CBO report takes into account negative income taxes, transfers. When it says the after tax income of a segment declined, that means it went down, after transfers. There is nothing else to "factor in." You just keep making up bullshit. Really, it is astonishing your ability to spin nothing into shit. And no, there are not thousands or even hundreds of economics papers that share your fantasy that income inequality has not grown hugely in America, unless you include the nonsense you read on right-wing websites, Cato, or Heritage. Garbage.
- roidubouloi
October 25, 2011 at 11:00pm
To drive home the point about how you massacre simple algebra, here is the quote without your bastardization. "In 1977, the top one percent of families received 7.3 percent of the national after-tax income. By 1994, they received 11.4 percent of after-tax income, as much as the bottom 35 percent of the population combined." That implies that, if the after-tax share of the top 1% in 1994 were reduced to its 1977 level, before the beginning of the steep rise, the bottom 35% could see a 56% increase in its after-tax income. What is "small" or trivial about that? For a libertarian wack-job like you, it is never small or trivial when it is coming from the pockets of people who are literally rolling in dough. It is only small and trivial if it enhances the income of other people for whom it in fact has a much greater impact. Pure nuttery, seattle, pure nuttery.
- roidubouloi
October 25, 2011 at 11:06pm
As if on cue, here is Timothy Noah today linking the latest CBO report on income inequality. It gives the lie to everything you say above, seattle, down to the last, tiny, little detail. http://www.tnr.com/blog/timothy-noah/96671/afternoon-reading-assignment
- roidubouloi
October 25, 2011 at 11:15pm
Just printed it after seeing it linked from taxprof blog. Very good report that does a great job of taking everything into account, including transfers, hours worked, etc. It has definitely turned my thinking. It does an especially good job of touching all the literature and thinking out there. I'll continue to digest.
- seattleeng
October 26, 2011 at 1:36pm
The top pieces that pop out at me from this report: 1) There is a very real gap between the gains made by the top 1% and everyone else. Previously I had believed it would be normalized when adjusted for transfers and hours worked, but that is not the case. 2) The notion that the middle classes have "lost ground" compared to previous middle class generations is put to bed here. As I have noted before, today's middle class is certainly better off than the middle class of 1977. In fact, every group is better off today (more after tax income) than their peer group from 1977 3) As the CBO notes, market income is responsible for 80% of the total increase in the Gini index. They note the research in the area, but very likely here is that we've seen growth of highly skilled workers slow at a time while demand is increasing. Thus, higher salaries. At the same time, we've seen the available pool of lower-skilled workers grow, and the demand for lower-skilled workers fall as automation has replaced many of them. Thus, their wages tend to stagnate. Some of this stagnation is masked by the lesser skilled work force picking up more hours. 4) The money shot in this report, which is the graph showing the top growth in after tax income with the top 1% having 275% is not new data. This has been around for a long time. Note, though, that the top 1% earn 14% of the income today, and 7.6% of the income in 1979. If there's $10T in income, this means the top 1% had $760B in 1979, and $1.4T in 2007. Those are roughly $640B in gains. What if we gave that to everyone else? That would mean that each quintile would see an extra $128B. The middle quintile today earns about $1.44T, or 14.4% of the after-tax income. That would go to $1.57T. Which means their share of today's income would be 15.7%. Miniscule. In other words, if the growth of the top 1% were hammered down to 0 in that graph, the increases in the other groups would be fairly modest. On a dollar value, it'd be around $6K which is certainly not trivial. Overall good report.
- seattleeng
October 27, 2011 at 12:36pm