Relevant and even prescient commentary on news, politics and the economy.

Fiduciary duty and self-interest

Lifted from comments from Linda Beale’s post Graphs Show It Clearly–the richest are much richer and most of us are poorer discussing the main points and data from David Cay Johnston’s Reuters article The richest get richer is Bruce Webb’s thinking on how the American market system was designed over time:
Defenders of Goldman who base that defense on “greed is good” reductionist understanding of capitalism are simply ignoring the legal and I would say moral structure in which banking and management were embedded: that of fiduciary responsibilities and principal/agent law.

Before Glass-Steagal repeal (and similar legal and business culture changes dating back to the fifties) there was an understanding that commercial bankers had a fiduciary responsibility to their customers,that the relation in question was one of agent to principal. And the same for management, managers were agents of the owners whether directly in a private firm, or indirectly via the Directors of either a joint-stock company or as in insurance of a mutual structure where policy holders were ‘owners’. On the other hand investment banks ad law firms and reinsurance companies like Lloyd’s and it’s ‘Names’ we’re generally set up on a partnership basis where the agents were principals, at least at top levels.

  But that distinction broke down, maybe as early as the rise of the Conglomerate and the Multinational where the link between the manager/agent and the principal/owner the principal/mutual holder became attenuated to the point of near nonexistence with the result that what had been agents, say a plant superintendent, now reported to an executive suite at ‘Corporate’ where one-time agents were de facto principals. As exemplified by the bastard blend of President and Chairman of the Boardand Chief Executive Officer into a single person whose theoretical agency relation to ownership was at best mediated through a board of Directors often largely serving under his direction.


  And this attenuation of Agent-Principal relations broke down entirely when Glass-Steagal and other actions simply smushed together the partnership and joint-stock/mutual models where the formal and legal structure remained the latter even as the decision making went with the former.

  Thus Goldman-Sachs Corporate culture. Instead of maximizing profits for the partners on one hand or for the shareholders on the other and all while maintaining a fiduciary responsibility to the customer/depositor, the executives and traders, who in law are simple hired help, i.e agents promoted themselves in their own minds to principals. Something complicated by the fact that various forms of stock based compensation made certain top executives both de facto and de jure principals quite beyond their selected/elected Chairman/CEO/President blended position.

  This obviously needs some polish, it is a blog comment after all, but I think I am on to something, something I have been bouncing around in my mind since I first took a course on Post WWII American History back in the early eighties, that is post multi-national conglomerate but prior to the barrier break represented by Glass-Steagal repeal. That is we are seeing a confluence of several streams that have mostly reduced all notions of fiduciary responsibilities and/or principal-agent law into a fetishizing of maximizing individual self-interest as if every trader at G-S was in the same legal and moral position as a medieval chapman selling goods from his pack purchased with his own money from the producer.

  So yes capitalism is organized around the principle of principals maximizing their self-interest. But not everyone is, or should be considered,a principal. And no “Well duh, capitalism equals maximizing return” does not in itself wipe out the entire legal and moral structure that grew up around it. Agency and fiduciary responsibilities still are or should be operative. That is you don’t get to operate Wall Street on the principle “We eat what we kill” no matter what some hot-shot MBA trader might think.

(Dan here…Title added, introduction edited for  clarity)

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NYT Americas Exploding Pipe Dream

This from today’s Times.

http://www.nytimes.com/2011/10/29/opinion/blow-americas-exploding-pipe-dream.html?_r=1&ref=opinion

America’s Exploding Pipe Dream

By CHARLES M. BLOW

We are slowly — and painfully — being forced to realize that we are no longer the America of our imaginations. Our greatness was not enshrined. Being a world leader is less about destiny than focused determination, and it is there that we have faltered.

We sold ourselves a pipe dream that everyone could get rich and no one would get hurt — a pipe dream that exploded like a pipe bomb when the already-rich grabbed for all the gold; when they used their fortunes to influence government and gain favors and protection; when everyone else was left to scrounge around their ankles in hopes that a few coins would fall.

We have not taken care of the least among us. We have allowed a revolting level of income inequality to develop. We have watched as millions of our fellow countrymen have fallen into poverty. And we have done a poor job of educating our children and now threaten to leave them a country that is a shell of its former self. We should be ashamed.

Poor policies and poor choices have led to exceedingly poor outcomes. Our societal chickens have come home to roost.

This was underscored in a report released on Thursday by the Bertelsmann Stiftung foundation of Germany entitled “Social Justice in the OECD — How Do the Member States Compare?” It analyzed some metrics of basic fairness and equality among Organization for Economic Co-operation and Development countries and ranked America among the ones at the bottom.

I could write (and have written) ad nauseam about our woeful state, but it might be more powerful to see it for yourself. So here are some of the sad data from the report

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Poverty Levels and Health care reform

By divorced one like Bush

It seems to go without saying, that if there is reform, there will be some type of assistance for those who need it. Some numbers are bandied about as to the cutoff points. The Mass Connector has it’s formula up that you can play with by punching in your own numbers and picking a Mass zip code.

However, I have noted in my very early posts here at AB, that we seem to have slowly understated over time the amount of money actually required to be middle class in the US. I looked at this further here. It’s not just the amount of money, it is the standard of living that has been down graded as we argue over implementing social policy. The clearest standard is that it takes two earners to accomplish what one earner use to. Now, with 47 million and rising, bankruptcy due to medical bills hitting 73% of all filings, having health care seems to no longer be a marker of having achieved middle class and thus the American Dream.

Such thinking could be a problem if we truly want to solve our issue of access to health care services. Mass knew that those at 350% to 450% of poverty would have difficulty buying insurance in their system. They may not view it as such, but this is an admission that our numbers regarding what income level is middle class (other than simple mean and median) are bogus. We are lying to ourselves and when we lie to ourselves, we prevent ourselves from actually resolving the issue in question. We’re faking ourselves out! In doing so, we are further moving away from what was the accepted standard of living as representative of the American Dream. In fact, it has occurred to me that the political approach of redefining what will be considered a successful campaign and thus problem solved regarding any social oriented piece of legislation by reducing the expectations or size of the problem to be resolved has only lead our standard of living and thus the American Dream being defined down. It’s one step removed from just plain ignoring the problem as if it does not exist. Though ignoring a problem is at least not patronizing to those with the problem as is defining it down and declaring it solved.

This brings me to the defined poverty level. A couple weeks ago I received an email as part of an ongoing health care debate that claimed to prove via a referenced article that there are not 47 million uninsured because 48% of those are earning 250% of poverty which is about $65K and thus choose not to purchase health insurance. I suspected there was something wrong and thus went looking.

Well, it turns out that 250% of poverty at $65K per year is for a family of 5! A gross income of $65K for a family of 5 leaves nothing for purchasing health insurance. It is also an income level that in Mass would have subsidies to help pay for health insurance.

I then thought: I wonder what the poverty level was in the old days. You can find the data I used here.
You can find the converting here. Then click on “Relative Values – US” in the left hand column.

The following chart looks at 5 decades (though I could not find exactly 1960 and 1970) and then compare them using CPI, Unskilled Labor, GDP per Capita and Share of GDP.
Certainly based on the CPI conversion, the numbers coming forward to today seem to be as they should. But then, poverty levels are based on CPI. However, looking at Unskilled labor, that family of 5 is getting under paid compared to the old days of 1962. The family has been on a over all downward trend. In the 70’s it was a real roller coaster being down by ’73, up by ’75, heading down by ’76, bottoming in 1978. Even their poverty level based on GDP/cap and share of GDP bottomed. Funky times indeed. From the 1978 bottom this family had a steady gain but, it peaked in 1996. This is the same year the income share to the 99% fell below personal consumption.

What I find most interesting is just how dramatic the change at 250% of poverty level for a family of 5 is based on the GDP share and per capita. My interpretation is that a person at this level of income has continually become poorer even though the income that is considered 250% of poverty level has remained constant comparatively over the decades based on CPI. I guess this bodes well for those who have finagled the CPI? Most interesting, is 2007. It is the only year where this family’s income was valued more than the share of GDP and GDP per capita values. Frankly, I don’t know what to say about it. It is no wonder people don’t know if they are coming or going regarding their financial condition. Though a tendency toward the “going” feeling certainly can be understood. Even the anger expressed at the town halls can be more readily appreciated in that the mind can only handle so many cycles of ups and downs before it finally starts to crack.

It is this clash between the CPI and the GDP converters that is the fake out. If we continue to have such a dichotomy, then our efforts to assure “affordable health care” will be never ending because we are simply not being honest about how much it costs to be middle class and have the American Dream. Nor should we expect the apparent lunacy to subside as longs one’s mind has to deal with the clash between what it is living verse what it is being told it is are living.

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Define Rich, part II: Rat Race and the American Dream

by Divorced one like Bush

There were some good responses to the first posting that I agreed with. They were, could we say, jumping the gun as to how I want to proceed, however. So, with this post I want to continue with looking at phrases/concepts/thoughts that are a part of, or were a part of any discussion regarding “rich”.

Have you missed the phrase: Rat Race?
Wonder why we ask: Is the American Dream dead?
Could it be that in an economy where “rich” is not or will not be defined, the race is won and the dream obtained? After all, we’re all rich now! Sodahead specifically asked the question.

We have polls regarding the Dream. From the group: Change to Win, the 2006 American Dream Survey:

A majority of American workers feel both the country (63%) and the national economy (63%) have gotten off on the wrong track. Just 26% of workers say the country is headed in the right direction, while 28% say the national economy is headed in the right direction.

The most widespread serious worries of American workers today include the prospect of not being able to afford health care when they need it (a serious concern for 77%), not having enough money for retirement (77%), losing their health care benefits (72%), not being able to keep up with bills (69%), and having their standard of living slip further and further (68%).

When asked the open ended question of what the American Dream means to the them, respondents say it means having a good job and being able to make a comfortable living (37%) while notably, almost no one mentions being wealthy or affluent (1%).

From New American Dream.org 2004 survey report:

More than 4 in 5 Americans (85%) say that our society’s priorities are out of whack.
Nearly all Americans (93%) agree — more than half agree strongly (52%) — that Americans are too focused on working and making money and not enough on family and community.
More than 4 in 5 Americans (83%) agree that they wish they had more of what really matters in life.
Less than 3 in 10 say that having a bigger house or apartment (29%) or nicer things (16%) would make them much more satisfied.

In this survey is a chart of phrases asked to be rated in how well it describes the American Dream and importance for society on a 10 point scale. They report the percentage that rated each phrase at 8 or higher. The following are significant for this discussion:
“To consume or buy what we want”. Only 55% said it described the Dream and 49% said it was important.
“Achieving an affluent or wealthy life style”. Only 49% said it described the Dream and 44 % said it was important.
These are low numbers compared to the other phrases.

Thus, between these two surveys, the idea of getting rich so that you can consume as you please is not a big part of the Dream. In fact this survey found:

Over the past 5 years, nearly half of Americans (49%) say that they have voluntarily made changes in their life which resulted in making less money.
What kinds of changes have Americans who are downshifting made? One in three Americans (33%) say they have ”quit working outside the home” and more than 1 in 4 say they have either changed to a lower paying job (28%) or reduced their work hours (26%).

That brings us to the phrase: Rat Race.

A rat race is a term used for an endless, self-defeating or pointless pursuit…The rat race is a term often used to describe work, particularly excessive work; in general terms, if one works too much, one is in the rat race.

Now, consider that there were 38.8 million hits for “is the American Dream Dead” but only 3.98 million hits for “rat race”. “Houston, we have a problem.” People know what the American Dream is and they know we ain’t livin’ it, BUT, they have no idea what they have been living.

In that 3.98 million hits, only 1 MSM article came up early regarding “rat race” and how to get out of it. Early was page 2, second listing. Contrast that with the dead American Dream search having the first 3 hits being MSM articles.

This is how the article from MSN Money Staff, 7/20/07 begins:

Looking to get off the paycheck-to-paycheck treadmill or to drop out of the rat race altogether? Here’s what you’ll need: a solid plan for how you’ll spend your time and a way to either earn dramatically more or spend much, much less.

This is not an impossible dream. In 2004, 7.5 million U.S. households had $1 million in assets, not including their homes. The number of people worth $5 million has quadrupled in the past 10 years and numbers nearly 1 million.

So, the way to get out of the race is to win the race? Obviously they have not read what Americans believe the American Dream is. Or, could this article be getting at just how expensive it is to have the American Dream? Or, are they supporting the impression from the surveys that the chances of getting the Dream are slim and less so for the next generation? After all, what is 7.5 million households compared to a projected 110 million by 2010?

If we can not conceptualize (though we used to) what it is we are doing while having a feeling that we don’t like what ever it is we are doing because it is not part of the American Dream, then how can we define rich? However, if you are rich, and you make money from money, could there be any better environment than to have the masses unable to recognize their dilemma? Talk about putting your capital to work! Just as there is a campaign to not define rich, there has been a campaign to make the American Dream synonymous with the goal of making money. For instance, the purpose of business was not always defined as making money, however that is the pat answer returned today. (I’m going to write about this too some day.)

Just read that MSN article again. Nothing in there gives the reader permission to simply down size, to get off the rat race. No, you have to make sure you have enough money. They even suggest doubt about your being able to be happy with less. And, in the end you may already be rich. There closing sentence:

On the other hand, you may not be as poor as you think. Check out GlobalRichList to get a different take on how you compare with others.

The goal is to make money we are told. You know, the rhetoric about the lazy people, those wanting more of the American Dream than they are willing to work hard enough for? You don’t want to be like them! Yet, the pursuit of this goal is the incarnation of the concept “Rat Race”.

We have had our ideas about our purpose in and of life reduced to the concept of “rat race”, while having the concept removed from our daily lexicon so that we can’t even voice what we are experiencing. Our American dream has been reduced to “an endless, self-defeating or pointless pursuit” while we have been losing the words to voice the experience. Did you know, that the reason we can not remember our very early years is because as infants, we do not have use of language and thus can not form memories. You need words and their understanding in order to structure and reason your life out.

Defining “rich” is part of understanding the American Dream. The Dream is a life style within the framing of equality of power. The American Dream is the goal. The goal has always had a dollar amount tied to it. Because the Dream cost money, it is vulnerable to manipulation by those of unequal power: the rich.

To be continued.

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I’m converting dollars. (In order to save the rustbelt)

With all the discussion about our plight money wise I thought it would be interesting to see just how distorted our view can become depending on what factor we choose as a comparison. Also, I find this site fun.

So, just how do we compare today to the fondly remembered yesterday? I am very grateful to you for asking. Let’s see, we need a base. Let us use Social Security (OASDI to be complete) as a base dollar source. There have been suggestions that we need to raise the wage cap. OK, maybe, but what should it be? Using this OK, but what should it be? Using this pdf chart I picked 3 different years as starting points. 1937, because “In the Beginning” there was poverty. 1966, because the beginning went so well, we added more. And 1983 because we became enlightened .

Using the Measuring Worth site I produced this chart:

The 6 factors are explained at the Measuring Worth site. My short hand is: C Bundled = Consumer Bundle, Unskilled = Unskilled Wage. The N in NGDP stands for nominal.

So, what number do we pick? The one that shows the current cap is set way to high, so we obviously are covering too much in OASDI as compared to the past. Or the one that shows the current cap is too low, so we obviously are not covering as much in OASDI as in the past.

I vote for the one which shows that the $94,200 cap is about the proper income to be earned by the Unskilled Labor force allowing such a person to have maintained their standard of living based on the Consumer Bundle. Yet even at that, their share of GDP would be historically rather low.

Anyone recall me presenting an argument that we have pushed the cost of the American Dream up to the point that one has to be in the top 10% of income earners to have it? It also takes 2 people working to do it.

In fact how uncanny that the median household income in which the wife is not working, for 1967 (couldn’t find a number for 1937) converts to an Unskilled Labor income of $48,353 and the Consumer Bundle is $51,019.

Maybe we shouldn’t feel to bad. Based on Measuring Worth’s President George Washington example, the current President George is getting screwed by about $100K. But, this does not include the benefits received by the present George. Guess we are getting the short end compared to being president.

Saving the rustbelt goes beyond a geographic area. Saving the rustbelt is referring to a demographic group.

Update: Link American Dream

Update: fixed the chart link paragraph missing before the chart.

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More on Income and saving the rustbelt

This is a continuation of looking at the income of the top 10% of this country. Before we go further, let’s look at what kind of a money machine we are when compared to other countries.
This is a chart of GDP by country for 2005 based on data from data360.org.

We seem to be quite the money generator. Japan, being next in line is only 36% of us. However, look at GDP per capita:

To accomplish what Switzerland has achieved we would have needed 16% more in GDP for 2005. That is raising our’s from $12,455 trillion to $14,453 trillion. Switzerland is considered to have a more equal distribution of income with the top 20% taking 40.3% compared to us (or US) at 49.7%. The wealth held by the top 10% is 71.3% for Switzerland and 69.8% for us. If you would like to see more on distribution, this article has a bar chart of income for the middle class as a percent of the top 10% by country.

Households in the top quintile, 77% of which had two income earners, had incomes exceeding $91,705. Households in the mid quintile, with a mean of one income earner per household had incomes between $36,000 and $57,657.

Recall that for the top 10% we are talking breakouts of:
90 to 95% $110,424
95 to 99% $176,925
99 to 100% $812,497
At 90% $96536, at 95% $130,373 at 99% $310,062.
The low limit for the top 20% is $88,030 (Wikipedia). The average individual income for a college graduate is $45,500 (2004, Wikipedia).

I point all this out because I believe our thinking about what middle America is, as defined by the American dream needs to reconsider the income it actually takes. The bottom of the top 20% is not far from the start of the top 10%. I thus question what are we talking when we talk “middle America”? Is it based simply on an income number at the peak of a curve, or does it refer to a defined life style? Part of the American Dream is home ownership (yes we all know that ownership is at record highs, for now anyway). Yet according to this study, they find:

However, most of the gains have been among families without children and upper-income families with children. The study defines upper-income families as those families that earn above 120 percent of local area median. In 2003, the homeownership rate for upper-income families with children was 90.8 percent, while the rate for their low- to moderate-income counterparts was significantly lower at 59.6 percent – yet in 1978 some 62.5 percent of low-to moderate-income working families with children owned their homes.Ultimately, had the 1978 homeownership rates for working families with children prevailed in 2003, an additional 2.3 million children would now be living in owner-occupied homes.

If you would like to see how your area is performing, they have an interactive page that let’s you choose the location and the jobs.
The dream seems now only to be a definite with a 2 person, college educated and working household. That combination is not far from being in the 10% group. Thus, we have raised the dream to something beyond which a large portion of the population will not reach considering only 28% have a 4 year degree even though 64% of high school students are entering college. It looks even worse with people suggesting that you need an IQ of 110 to succeed in college. I mean, can we push the dream any further out or be anymore aristocratic in our arguments? While we have done this, the median income for a bachelors has been going down from a high in 1999 of $70,925 to $68,728 in 2003. In fact, all levels of education have seen a decline and anyone with an associates degree or less has seen the median decline to less than that earned in 1991. But it does suggest that 2 people with an associates could even be in the top 10%!

Was the American Dream based on 2 people working or 1? Was the dream that more people would obtain it or fewer as time passed and the country earn more?

We have now arrived at that entity called income. The thing that is so necessary to get the American Dream (or save a state or few). The following 4 charts look at the 4 sources of income: wages, entrepreneurship, dividends and interest based on sub groups of 90 to 95%, 95 to 99%, 99 to 100% and 99.9 to 100%. The first is dividends. It is obvious, the top is not getting the money from this.

The next is interest. The only curve I found that looked similar to the post 1950’s is the federal fund rate. So, it appears that as THE bank raises what it will charge, people will take some advantage of it. There is a lag in the time the rate starts to decline and when the population moves from this form of income.

Next is entrepreneurship. I think this shows, that something more than freeing up capital has to happen to generate a shift of earning money from just going to work to earning money from creating work. Note how it moves counter to income from interest.

Even those in the low end of the top 10 take advantage of a life altering event. But, it is clear just going to college is not going to push an entrepreneurial spirit considering this lower 90 to 95% group is at the upper end of the college degree for a single person working. They show minimal initiative toward self reliance in producing income for themselves. The next chart confirms this. They do take advantage of interest rates rising, but they are not buying companies or shares of companies to make money. They are following the what I would consider the American Dream, go to work, earn a comfortable living that supplies the comforts and advantages of modern living.

Finally is the share of income from wages.

The lower end of this group is not seeing an increase of income from wages. But look at the change in the top 1% and the top 0.1%. They have the greatest increase of their income coming from wages. The entire top 5% sees this, but it is the very top that is seeing a doubling (32 to 63% for the top 1%) and tripling (18.1 to 58.2 for the top 0.1%) of the percentage from wages. Where do you suppose such an increase in income via wages could be coming from? What is the motive or reasoning?

So, the very top is getting a higher share of the income we (all of US, they don’t do it alone) generate via starting companies and then are paying themselves greater shares of the income said company generates. Is this not greed? Or is there an insulating effect do to globalization? I believe it is both and frankly don’t care which came first. Is this what we would expect if supply side tax cutting was raising all boats as suggested? It sure is not trickling down. I say it is not what would be expected. I would not hypothesize that we would see only the top 5% contributing to growth via entrepreneurship as compared to the pre 1929 crash when the top 10% contributed toward growth via entrepreneurship. Loosing the 90 to 95% group to wages is most telling as to how much the American Dream is one of an implied contract based on labor and not on entrepreneurial freedom. It is also a sign of failure of policy if promoting entrepreneurship as a viable means of obtaining the American Dream was the goal.

These charts show that everyone is earning the majority of their money by working for someone. Again, the American dream is based on labor supplied to another, even for the highest income earners. If we are going to change what is happening in Michigan or Ohio or in this country, we are going to have to figure out a way to get those who decide how much some one will be paid to start paying more to those below the top 1% because the top 1% is where the greatest concentration of income is happening and it’s happening through wages. It is not that we don’t have the growth and thus don’t have the money. We have it.
Update: I have fixed the link for the dividends chart and removed one that was a dead end. Sorry for the mix up.

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