LVTFan's Blog

How a $9 B. Tunnel Could Make Jersey Homeowners ($18 B) Richer

How a $9 B. Tunnel Could Make Jersey Homeowners Richer | The New York Observer.

Amazingly, neither the article nor the underlying study made any suggestion that the homeowners or the owners of commercial property enriched by this proposed new tunnel connecting New Jersey and Manhattan might logically be financed by a tax on the land value that the public investment would create.

Most worthwhile infrastructure projects will pay for themselves, but we're not in the habit of asking them to.

Instead, we finance them via taxes on labor and on sales, which most of us acknowledge are a burden on the economy, and then scratch our heads about why we have unemployment and poverty.

Oh, when will we ever learn?

The study the article references is called "The ARC Effect: How Better Transit Boosts Home Values and Local Economies." [ARC is the name for the proposed new Hudson River tunnel, called "Access to the Region's Core."] It didn't mention how it also boosts the value of the land under commercial properties.  (The homes, incidentally, don't appreciate; it is the value of the sites on which they sit which are affected by the provision of public goods and services.) 

The response I tried (repeatedly) to post went this way:

Bingo!

So wouldn't the logical way to finance that provision of infrastructure be to collect some significant portion of the land value it creates?

Why on earth should we tax wages and sales to finance public goods like infrastructure, or services, or, indeed, ANY of the publicly-provided things which cause land to rise in value?

Unless, of course, special interests played some role, and Leona Helmsley was accurately describing tax structure (not referring to ad hoc tax evasion): "WE don't pay taxes.  The little people pay taxes."

Look for Fred Harrison's paper on the Jubilee Line in London, called Wheels of Fortune: Self-Funding Infrastructure and the Free Market Case for a Land Tax.  Here's the abstract:
  

It is often assumed that government intervention is required to bring to fruition large scale infrastructure projects because the large initial capital outlays such projects require must be funded from the public purse. In Wheels of Fortune, Fred Harrison shows that large scale infrastructure projects can be made self-funding and hence completed without direct government involvement.

Infrastructure projects almost always bring about a large increase in the value of adjoining land. For example, it is estimated that the Jubilee Line extension increased adjoining land values by close to 3 billion BPS. When such infrastructure projects are funded by government they therefore involve a substantial transfer of wealth from a large number of taxpayers to a small number of property owners.

Harrison argues that a fairer and more efficient means to fund infrastructure projects is to capture and use the increases in land values that they bring.

This monograph sets out a free market case for a land tax or some form of levy on land as a means of achieving the goal of self-funding infrastructure and ensuring that those who receive the benefits of such projects meet the costs. It will be essential reading for those concerned with how large scale infrastructure projects can efficiently be completed and those interested in fairer and more efficient tax regimes.

Which part of "fairer and more efficient" doesn't appeal to us?

Joe Stiglitz: the people are being cheated and the economy is getting poorer

Joe Stiglitz made some important observations in a talk on July 26 at the University of Queensland.  Here are the first few paragraphs from an article on the University's website:

Inadequate taxes on mining means the people of Australia are being cheated and the economy is getting poorer, a Nobel Prize-winning economist told a crowd of 1400 people at The University of Queensland last night.

Professor Joseph Stiglitz shared his thoughts on the proposed mining tax in response to a question from an audience member during the seventh UQ Centenary oration.

“Natural resources lead to an appreciation of the currency and that leads to an imbalanced economy because it's hard for any other sector to do well, competing with imports or exporting,” Professor Stiglitz said.

“You're selling off your assets and in many cases you're selling them off at a very low price.

“If you are taking resources out of the country and you are not reinvesting those resources in one way or another – a stablisation fund, human capital, infrastructure – then your economy is getting poorer, not richer, and a good accounting framework can show that,” he says.

“When you're taking out natural resources from an economy you ought to have a subtraction from GDP - a firm that held a resource and was selling it off would take off depreciation and that would show up in its books as depreciation.”

A bit of searching returned another account of that same evening:

Professor Stiglitz told a packed UQ Centre that Australia's economic stimulus package was the best designed in the world.

AND he said natural resources - coal, iron ore - should be properly valued at market just like the electromagnetic spectrum.

The government auctions the spectrum to the highest bidders who want to operate mobile phone networks, cable companies, television and radio stations. 

Basically, a country - like Australia - will end up poor if doesn't get the best price for its assets - and natural assets are not renewable, once they are gone they are gone. If the proceeds from the sale of these assets are not invested in infrastructure to support and grow other sectors the economy (manufacturing and value-adding, goods creation) then a country and it's people will not prosper - HELLO! HELLO! Drowning not waving.

"It should be subtracted from Gross Domestic Product (GDP)," he said. "You are selling off assets at a very low price if you don't have adequate taxes on mining - you are being cheated," he said to audience applause.

He thinks resources should be auctioned off to the highest bidder - the free market at work. Of course, the mining industry will make all kinds of threats.

To everyone's amusement he joked about how mining companies bamboozled, threatened and bribed governments of developing, fragile nations. 

"I assume that's not the case in Australia," he mused.

To prosper, a country needs to set up a stabilization fund (from a mining tax, if not a resources auction) for nation building.

This is what he calls an investment fund for building infrastructure and to grow value-adding industries, maintain education, job creation.

Not only that but the sell-off of natural resources should appear on a country's accounts as a kind of depreciation of assets - otherwise the accounts are not accurate. ...

He made these comments at the end of the oration after he explained the difference between the financial sector and the economy - the economy is not the financial sector.

The financial sector (the banks and regulators) are the culprits behind the global financial crisis which has crippled the global economy. Apparently, moneylenders have been skimming 40 percent of the profits from companies that actually make and produce things. His big point was that this is not really the role of the financial sector. The financial sector's job is to support economic growth, not cripple it. 

"Finance is a means to an end," he said. "The lack of balance between the financial sector and the economic sector was actually the real problem in this economic crisis (NOT the real estate bubble)."

The second account concludes with:

And as for Climate Change and the price of carbon and waiting for the rest of the world before we do anything?

Economies are not restructuring because there is no carbon price. The western world worries about the growing and changing consumption patterns of China and India.

Professor Stiglitz doesn't believe the West should begrudge them at all.

It's not consumption that's evil - it's profligacy. WASTE! Now, I wonder who wastes more the West or countries raising people out of poverty?

India and China will follow the wasteful ways of the West if the world fails to set a carbon price and force everyone to consume less to save the planet - the planet will force us to change in the end (*he says).

"If we had agreed to have a price on carbon at Copenhagen that would have been the answer," he said. "It would have provided an increase in global aggregate demand (global economic spending) as firms all over the world needed to retrofit (their business to meet pollution standards)."

So why is the US not hearing this advice?   There is a lot here that speaks to issues which Americans would be wise to attend to.   Alaska pays for a large portion of its costs by taxing its natural resources, and also provides an annual income to every permanent resident, of any age, from the proceeds of investing oil revenue into a broadly diversified portfolio, through the Alaska Permanent Fund.   We have sacrificed many American lives in Iraq, but not produced a situation in which Iraq's oil revenue gets used either to finance infrastructure and government-provided services OR to provide an income to every citizen.

Re-read these excerpts with Iraq in mind, and then thinking of Afghanistan, and then of America.

Postscript:  see also Karl Fitzgerald's account of Stiglitz's 7/30 talk.

Can a mother's affection prevent anxiety in adulthood?

Can a mother's affection prevent anxiety in adulthood? - CNN.com.

STORY HIGHLIGHTS

• Adults who received above-average levels of affection were less likely to be anxious
• The study followed nearly 500 infants into their 30s
  
• The babies-turned-adults were interviewed about their levels of emotional distress
  
• The findings make a strong case for policies that would help foster positive interactions

So.

How do we create the sort of society in which, up and down the income and wealth spectrums -- mothers -- and fathers -- are physically and emotionally available to their children?

Do we permit the structures which require them both to be working 40-hour (or longer) weeks throughout their children's early years?

Do we permit structures which keep wages down so that in the years in which people are most fertile, they do not have sufficient income to provide for their family's most modestly defined needs, so that life is a scramble, a flight without a safety net, for the vast majority of our families and therefore their children?

The article hints:

A smaller proportion of mothers with lower socioeconomic status exhibited "extravagant" or "caressing" affection than did better-off mothers, for instance. Although the researchers controlled for socioeconomic status and other characteristics, it's possible that social and financial difficulties during childhood could play a role in adult emotional distress.

Is this what our ideals have inspired or permitted?

This is what happens when we endorse or accept structures which funnel wealth and income to a small subset of our society.

Life, liberty, pursuit of happiness.  Security, sufficiency, even prosperity.  Are we on the right track, or has something gone terribly wrong?

The Woodpeckers' Tree System

The Woodpeckers' Tree System

The Woodpeckers were advancing in civilization and took up something like the English land system.  It was shown that holes in a tree trunk were fixed improvements which could not be made unless ownership of the tree was secure.  Full title to the trees was, therefore, confirmed to various Woodpeckers.

Thereupon the more active and long-headed Woodpeckers began to affix to each vacant tree a little red leaf like a seal, so as "to hold it until is is wanted."

The Woodpeckers increased in number so that there were not unclaimed trees enough for everybody; later all the convenient trees were full, and there were still more applications.

Why Georgists Corrected Predicted the Crisis, and Why Conventional Economists Couldn’t « Econamici

Why Georgists Corrected Predicted the Crisis, and Why Conventional Economists Couldn’t « Econamici.

This is a particularly good analysis which I hope readers of this blog will appreciate!   Polly Cleveland has a number of good posts on her blog -- see also  http://mcleveland.org/blog/index.php/2009/02/the-great-real-estate-bubble-of-the-roaring-twenties/.

The Rich Catch Everyone Else’s Cutback Fever

The Rich Catch Everyone Else’s Cutback Fever - NYTimes.com.

The American consumer accounts for an estimated 60 percent of the country’s economic activity.

But the Top 5 percent in income earners — those households earning $210,000 or more — account for about one-third of consumer outlays, including spending on goods and services, interest payments on consumer debt and cash gifts, according to an analysis of Federal Reserve data by Moody’s Analytics.

That means the purchasing decisions of the rich have an outsize effect on economic data. According to Gallup, spending by upper-income consumers — defined as those earning $90,000 or more — surged to an average of $145 a day in May, up 33 percent from a year earlier. Then in June, that daily average slid to $119. ...

After virtually shutting down during the financial collapse in late 2008, the wealthy began to open their wallets wider last year, in part because a stock market rally helped them feel better off financially.

By spring of last year, the savings rate — which represents the percentage of after-tax income not spent — of the top 5 percent of income earners had turned negative, according to the analysis by Moody’s Analytics. That meant the group was spending more than it made.

Less well-off consumers remained more frugal, most likely constrained by unemployment, declines in home values and the disappearance of easy credit. So the savings rate actually rose last year for those in middle-income brackets as they cut spending.

Would you like to imagine how much more stable our economy might be if it was less dependent on the spending mood of 5% of us?   We would not be so dependent on their demand for luxury goods and perhaps more of us closer to the bottom of the income spectrum -- including those with young children -- could meet more of our needs.

What would it take to increase wages for those who work full-time?  What would it take to create more jobs, to have jobs chasing workers, driving wages up, instead of workers competing for jobs, which drives wages down?  What would it take for us to live up to our ideals?

Regular readers of this blog probably know the answer.  It starts with shifting our taxation off productive activity, and onto that which is created socially and by nature.

Striking it Richer: The Evolution of Top Incomes in the US, updated to 2008 - Emmanuel Saez

saez-UStopincomes-2008.pdf (application/pdf Object).

Just a few days ago, I posted some comments about the 2007 data on income concentration.  Now I see that Emmanuel Saez, of UC-Berkeley, has updated the spreadsheets to account for the 2008 data, and written a 9-page summary, titled "Striking it Richer: The Evolution of Top Incomes in the United States (Updated with 2008 estimates)"

Here are some highlights, drawn mostly from my exploration of the spreadsheets (available at http://elsa.berkeley.edu/~saez/TabFig2008.xls):

• while the number of households has risen, the number of tax returns has fallen slightly -- about half a million.  Something similar happened in 2002.  [Table A0]
• Average income (excluding capital gains) per taxpayer fell from $54,080 in 2007 to $51,255
• Average income including capital gains fell from $60,285 to $54,315.
• Capital gains represented 6.0% of income other than capital gains in 2008, down from 11.5% in 2007and 10.6% in 2006 [Table A0]
• Looking at income excluding capital gains:
• • The top 10% showed a slight increase in share of income from 45.61% to 45.60%.  This represents a new high.
  • Within that top 10%, something new occurred:  The share of the 90th to 95th percentiles hit a new high, and the share of the next 4% (95th to 99th) came close to a high.  The next.9% rose slightly.  The shares of the top .01% and next .04% fell somewhat, bringing their shares back to levels of 2005. [Table A1]
• Looking at income including capital gains:
• • The top 10% shows a slight descrease in share of income, from 49.74% to 48.23%.  This is the lowest percentage since 2004, but higher than any year before 2004.
  • The shares accruing to the 90th to 95th and 95th to 99th percentiles rose significantly.  The shares accruing to the top 1% came down somewhat, particularly in the top .1%.  The top .01%shows the largest drop, from 6.24% to 5.37% of total income. [Table A3]
• Capital gains represent a significant share of the income at the very top of the income spectrum.
• • In 2007, capital gains represented 55.9% of the income of those in the top .01% and 36.7% of income of those in the next .09%.  These figures dropped to 44.8% and 24.0% in 2008.
  • In 2008, capital gains represented only 1.4% of the income of those in the 90th to 95th percentiles, and 3.3% of the income of those in the 95th to 99th percentiles.   But if we look at the top 10% in total, capital gains represent 10.9% of income.  This reflects both the high incomes in the top income group (10.4% of income to the top .1% of us -- Table A3), and the large percentage of that income which comes from capital gains (for the top .1%, 34.1% of income is  is capital gains; for the top .01%, 44.8% is capital gains).

Should we continue to tax capital gains at a lower rate than wages?  Readers of this blog know that I am generally opposed to standard income taxes.  But it seems to me to be folly to permit those who "realize" huge capital gains to pocket the lion's share of that gain, while we ask those who work for a living to pay a larger share of their wages in taxes.

"Capital," as distinct from "land" and "labor," does not appreciate.  What rises in value is land and scarce or finite natural resources.  And those ought to be treated as our common treasure rather than subject to privatization by anyone who claims title.  Secure title is vital, but it must be subject to the prior and rightful claims of the entire community, satisfied by compensating the community for the value taken.

We'd be far better off it we placed our tax burden onto value which is rightly common treasure, value which can't be hidden or moved off-shore, or otherwise spirited away: that which the classical economists recognized as land -- the value of urban and other well-located, well-served land, of natural resources, and the myriad other things of similar characteristics.  (See "land includes" in the tag list at left.) 

I'll reprise the table in the prior post below, and add to it the corresponding 2008 data.  Aggregate income excluding capital gains rose slightly (far less than has been the pattern in recent years), while capital gains dropped by 48%, to 6% of other income.  Not surprisingly, the effect is most pronounced in the top 1%, and particularly the top .01%: 

	Income Concentration, selected years 1913-2008
	Year	Top .01%	Next .09%	Next .4%	Next .5%	Next 4%	Next 5%	Bottom 90%
distribution per 10,000 population		1	9	40	50	400	500	9,000
1913		2.76%	5.86%	6.11%	3.23%	n/a	n/a	n/a
1917		3.37%	5.04%	5.94%	3.39%	12.90%	9.87%	59.49%
1920		1.66%	3.69%	5.79%	3.69%	13.49%	10.69%	60.99%
1935		2.19%	4.20%	6.24%	4.04%	15.61%	12.21%	55.51%
1944		1.16%	2.59%	4.50%	3.02%	11.48%	9.75%	67.49%
1953		0.97%	2.09%	3.97%	2.88%	12.11%	10.29%	67.69%
1960		1.17%	2.07%	3.88%	2.91%	12.54%	10.90%	66.52%
1970		1.00%	1.78%	3.48%	2.77%	12.64%	10.96%	67.37%
1981		1.37%	2.20%	3.67%	2.78%	13.02%	11.51%	65.46%
1991		1.96%	3.17%	4.86%	4.48%	14.36%	11.82%	60.45%
2002		3.14%	4.20%	5.70%	3.83%	15.20%	11.75%	56.18%
2007		6.04%	6.24%	7.04%	4.19%	15.17%	11.07%	50.26%
2008		5.03%	5.37%	6.47%	4.08%	15.57%	11.71%	51.77%
	Source: Piketty and Saez 2008 spreadsheet, Table A3 (includes capital gains in both income and fractile definitions) and LVTfan calculations

Income Concentration: Piketty & Saez data through 2007

One of my standing Google Alerts brought me to someone's blog post about income concentration in the US, which took me back to my spreadsheets on the subject.  My spreadsheets start with Piketty & Saez's annual spreadsheet, and then add in some calculations.  Many people who report on their data seem to me to miss the most important columns.  What many people report is this breakout:

• Top .01%
• Top .1%
• Top .5%
• Top 1%
• Top 5%
• Top 10%

The data is powerful.  Looking at income including capital gains and fractiles defined using that income definition (their Table A3), we find the following income shares for 2007:

• Top .01%:   6.04%
• Top .1%    12.28%
• Top .5%    19.31%
• Top 1%     23.50%
• Top 5%     38.67%
• Top 10%    49.74%
• and by inference, bottom 90%  50.26%. 

But where it gets interesting is to break out the fractiles individually, and then to look at trends.  Here are a few selected years from the P&S tables, which start in 1913:

Income Concentration, selected years 1913-2007
Year	Top .01%	Next .09%	Next .4%	Next .5%	Next 4%	Next 5%	Bottom 90%
distribution per 10,000 population	1	9	40	50	400	500	9,000
1913	2.76%	5.86%	6.11%	3.23%	n/a	n/a	n/a
1917	3.37%	5.04%	5.94%	3.39%	12.90%	9.87%	59.49%
1920	1.66%	3.69%	5.79%	3.69%	13.49%	10.69%	60.99%
1935	2.19%	4.20%	6.24%	4.04%	15.61%	12.21%	55.51%
1944	1.16%	2.59%	4.50%	3.02%	11.48%	9.75%	67.49%
1953	0.97%	2.09%	3.97%	2.88%	12.11%	10.29%	67.69%
1960	1.17%	2.07%	3.88%	2.91%	12.54%	10.90%	66.52%
1970	1.00%	1.78%	3.48%	2.77%	12.64%	10.96%	67.37%
1981	1.37%	2.20%	3.67%	2.78%	13.02%	11.51%	65.46%
1991	1.96%	3.17%	4.86%	4.48%	14.36%	11.82%	60.45%
2002	3.14%	4.20%	5.70%	3.83%	15.20%	11.75%	56.18%
2007	6.04%	6.24%	7.04%	4.19%	15.17%	11.07%	50.26%
chg 2002-2007	+2.90%	+2.04%	+1.34%	+0.36%	-0.3%	-0.68%	-.5.92%
chg 1991-2007	+4.08%	+3.07%	+2.18%	-0.29%	+0.81%	-0.75%	-10.19%
chg 1970-2007	+5.04%	+4.46%	+3.56%	+1.42%	+2.53%	+0.11%	-17.11%
Source: Piketty and Saez 2007 spreadsheet, Table A3 (includes capital gains in both income and fractile definitions) and LVTfan calculations

One way to read this is that of the 17.11% of income which the bottom 90% lost between 1970 and 2007, nearly 30% went to the 1-in-10,000 fellow, 26% went to the 9-in-10,000, 21% went to the 40-in-10,000, and the remaining 24% went to the 950-in-10,000.   I'm willing to guess (or concede, if you will) that half or more of those 50-in-10,000 in 2007 were not in the top 50-in-10,000 37 years earlier (and that many in the 1970 top 50-in-10,000 were no longer alive in 2007).

Henry George wrote about a wedge driven through society.  That was 130 years ago.

So what's your guess for 2008? 

• Do you think the bottom 90% of us will have more than 50% of the income, or drop below 50%?
• Do you think the share of the 90th to 95th percentile will rise or fall?

The data is due out shortly.  I'll report it when I see it.

Martin Wolf (FT): Why were resources expunged from neo-classical economics?

Why were resources expunged from neo-classical economics? | Martin Wolf's Exchange | FT.com.

So far, there are over 150 comments on this one, which ends with "What do readers think."

I'm delighted to see that some wise people are taking up the ideas of Henry George and bringing them to the attention of thoughtful people.

The comments are quite good, too.

Why were resources expunged from neo-classical economics?

Something strange happened to economics about a century ago. In moving from classical to neo-classical economics — the dominant academic school today — economists expunged land — or natural resources. Neo-classical value theory — based on marginalism and subjective valuation — still makes a great deal of sense. Expunging natural resources from the way economists think about the world does not.

In classical economics, land, labour and capital were the three factors of production. With neo-classical economics, the standard production function had just two factors of production: capital and labour. Land — by which we mean the totality of natural resources — was then incorporated into capital.

All thinking about the world involves a degree of abstraction. Economics has taken this principle further than any other social science. This is a fruitful intellectual procedure. But it is also risky. The necessary process of abstraction may end up leaving essential aspects of the world out of the analysis. That can be intellectually crippling. I believe that that is exactly what has happened, in this case.

The idea that land and capital are the same thing is evidently ludicrous. It requires us to believe that the economic machine is self-sustaining — a sort of perpetual motion machine. Capital is the product of savings and investment. It is the result of human frugality and the invention required to imagine and create new capital goods. Labour is also — and in today’s circumstances, increasingly — a form of capital. Parents, governments and individual people invest in their own skills, so making themselves more productive. Yet there would be no economy — indeed no humanity — without a constant inflow of natural resources into the system: what lies above our heads (the sun and the atmosphere), what lies close to us (the soil, the seas and location itself) and what lies beneath us (fossil fuels, metals and minerals and heat). Humanity does not make these things; it exploits them. Some of these resources are also appropriable and so a source of unearned personal wealth.

Why did this compelling distinction disappear from economics? After all, no economist can believe that the economic system will move without a constant infusion of external resources.

One reason was that the classical world view implies diminishing returns. Since the supply of land was fixed, it would become ever scarcer. Rents — the price of resource scarcity — would rise, profits would fall and growth slow. But the economy did not show signs of diminishing returns. Technical progress seemed to offset any tendency towards diminishing returns. So assuming that land, like capital, could be effectively expanded, without limit, via land-augmenting technical progress, seemed to be the right thing to do.

Another reason may have been political. Henry George argued that resource rents are not a reward for the efforts of the owners, but the fruit of the efforts of others. It would be both just and efficient to socialise rents, he argued, and then use the proceeds to finance the infrastructure that makes resources valuable. But the powerful owners of natural resources wished to protect their unearned gains. In practice, therefore, the tax burden fell on labour and capital. Economics, one might argue, was pushed into supporting this way of organising economic life.

Yet it would seem to me that this way of thinking by economists is no longer sensible, if it ever was. Land must again be treated as separate from labour and capital.

First, resource scarcity is an increasingly pressing issue. It shows up in concerns over pollution (including global warming), in the discussion of “peak oil” and so forth. The idea that diminishing returns will become a more significant factor in the next century than in the past two seems to me to be compelling, now that modern economic growth has spread across the globe. So we need to return to economic models that incorporate resources, as a matter of course.

Second, in a globalised economy, taxing labour and capital will become increasingly difficult. That leaves land. The Australian government is right to want to extract the full rental value of its mineral resources for the benefit of the Australian people. Similarly, the people of the UK should wish to extract the rental value of London for their own use. The benefits of infrastructure investments that make London more productive would automatically be recouped if land rents were heavily taxed. Meanwhile, the taxation of capital and land could be reduced.

I can see the objection that natural resources are necessary for the operation of capital and labour. Thus, the distinction between land, labour and capital is hard to draw. I agree with this. But there are two responses: first, from the point of view of economics, resource scarcity may mean diminishing returns, which are economically important; second, some natural resources are not appropriable and can be treated as free (sunlight, for example), but others are indeed appropriable.

Thus, for both economic and political reasons, we should put natural resources into the heart of economics, thereby remedying a neoclassical mistake.

 

Wealth concentration in China exceeds US

Global Times - Wealth concentration in China exceeds US. In the US, the wealthiest 5 percent people hold 60 percent of the wealth of the country, but the middle-class families enjoy the largest part of the incomes.

Let's see what the data says.  My source is the 2007 Survey of Consumer Finances, from the Federal Reserve Board.   One can look at it a number of different ways.  Here are two.

1. The top 1% of wealthholders have 33.8% of the Net Worth; the top 5% hold 60.4% of the NW.  The next 45% hold 37.1% of the NW.   The top 1% of wealthholders have 16.4% of the income; the top 5% have 33.0% of the income.  The next 45% have 44.6% of the income.    If the 50th to 95th percentiles of the wealth distribution constitute America's middle class, the article's statement is true.   Source: http://lvtfan.typepad.com/lvtfans_blog/2010/04/americas-wealth-distribution-2007-wealth-concentration-part-1-of-3.html

2. The top 10% of income recipients get 59.4% of the income.  The top 20% of income recipients get 70.3% of the income.  The 40th to 80th income percentiles receive 21.0% of the income; the 40th to 90th receive 31.9% of the income.  Source: http://lvtfan.typepad.com/lvtfans_blog/2010/04/americas-wealth-distribution-2007-wealth-concentration-part-2-of-3.html, Table 3.

Are some of those top 10% income folks part of our "middle class?"

How would you advocate viewing the data, and what conclusion would you reach?

Greater Fools

The dangers of financial illiteracy in America : The New Yorker.

This is a good article, by James Surowieki, on the prevalence of financial ignorance in America.   I'm going to take the liberty of including the entire article here, but want to preface it with the thought that the problem is deeper and broader than he suggests.  Remember that Case and Shiller (2003, if I recall correctly) found that people buying homes expected them to appreciate significantly; this expectation likely caused them to take on amounts of debt that in the absence of such an expectation would have made absolutely no sense.

How many people realize that houses depreciate?  Houses depreciate. (A May, 2006, Federal Reserve Board study cited 1.5% as an annual depreciation for single-family housing stock.)  What rises in value is land.  It rises in value for reasons which have nothing at all to do with the activity or inactivity, presence or absence of any individual landholder.  It rises because of increased in population (general and local); because of public investment in infrastructure and services which appeal to buyers and tenants (residential and commercial); because of advances in technology (e.g., elevators, air conditioning, even fiberglass boats!).  It is also influenced by interest rates and by loan underwriting rules, and by pent-up demand for a place to live, and a willingness to commit a huge portion of one's savings (if any) and present and future income to paying a seller for value he didn't create, on the basis that this is a better choice than paying a landlord for value he didn't create.

(The alternative, of course, is to reform our taxes, and place more of the burden onto the value of land, not a square foot of which will disappear or be hidden, and less on buildings, wages, purchases and other standardly-used tax bases which behave badly when taxed.  But our financial ignorance goes far beyond ignorance of personal finance.   Very few of us have a realistic understanding of political economy, the science which deals with the natural laws governing the production and distribution of wealth and services.  Very hard to make sense of the micro if you have an unrealistic or limited understanding of the macro!)

Individuals buying their first homes hoped to supplement their meager wages with significant unearned increases in land value.  But they failed to note what Leona Helmsley laid out: it is the little people who pay the taxes, and the little people who support the public spending which enriches those who hold our best-located land (be they individuals or corporations, domestic or otherwise).   Details, details. 

Here's the article:

GREATER FOOLS

by James Surowiecki July 5, 2010

Halfway through his Presidency, George W. Bush called on the country to build “an ownership society.” He trumpeted the soaring rate of U.S. homeownership, and extolled the virtues of giving individuals more control over their own financial lives. It was a comforting vision, but, as we now know, behind it was a bleak reality—bad subprime loans, mountains of credit-card debt, and shrinking pensions—reflecting a simple fact: when it comes to financial matters, many Americans have been left without a clue.

The depth of our financial ignorance is startling. In recent years, Annamaria Lusardi, an economist at Dartmouth and the head of the Financial Literacy Center, has conducted extensive studies of what Americans know about finance. It’s depressing work. Almost half of those surveyed couldn’t answer two questions about inflation and interest rates correctly, and slightly more sophisticated topics baffle a majority of people. Many people don’t know the terms of their mortgage or the interest rate they’re paying. And, at a time when we’re borrowing more than ever, most Americans can’t explain what compound interest is.

Financial illiteracy isn’t new, but the consequences have become more severe, because people now have to take so much responsibility for their financial lives. Pensions have been replaced with 401(k)s; many workers have to buy their own health insurance; and so on. The financial marketplace, meanwhile, has become a dizzying emporium of choice and easy credit. The decisions are more numerous and complex than ever before. As Lusardi puts it, “It’s like we’ve opened a faucet, and told people they can draw as much water as they want, and it’s up to them to decide when they’ve had enough. But we haven’t given people the tools to decide how much is too much.”

Unsurprisingly, the less people know, the more they run into trouble. Gary Rivlin’s blistering new examination of the subprime economy, “Broke, U.S.A.,” is full of stories of financially ignorant people bamboozled into making bad decisions — refinancing out of low-interest mortgages, say, or buying overpriced credit insurance — by a consumer finance industry adept at creating confusing products. Such stories are backed up by the numbers. A study by economists at the Atlanta Fed found that thirty per cent of people in the lowest quartile of financial literacy thought they had a fixed-rate mortgage when in fact they had an adjustable-rate one. A study of subprime borrowers in the Northeast found that, of the people who scored in the bottom quartile on a very basic test of calculation skills, a full twenty per cent had been foreclosed on, compared with just five per cent of those in the top quartile.

What can be done? One solution is regulation: the financial-reform bill now before Congress will create a consumer financial-protection agency that should help curb the finance industry’s most predatory excesses. Another solution is to tinker with “choice architecture” — doing things like enrolling people in 401(k)s automatically — in order to “nudge” them toward better decisions. Both of these strategies are necessary, but they’re not enough on their own, because financially illiterate consumers are always going to be easy victims. We also urgently need proper financial education.

This seems obvious, but it’s surprisingly controversial. Some suggest that financial illiteracy is an example of what economists call “rational ignorance” — inattention that is justified because the costs of paying attention outweigh the benefits. But few decisions affect us more directly than the ones we make about our money. Critics also argue that financial education may make people overconfident, and therefore more likely to make bad decisions. In fact, the reverse is true: the less people know, the more overconfident in their abilities they tend to be. In a German study, eighty per cent of those surveyed described themselves as confident in their answers on a questionnaire, yet only forty-two per cent got even half the questions right. This is known as the Dunning-Kruger effect: people who don’t know much tend not to recognize their ignorance, and so fail to seek better information. No wonder, then, that the least knowledgeable people in the Atlanta Fed study were also the least likely to do research before getting a mortgage. By contrast, well-informed people are more likely to ask others for help. If financial education taught people only how little they actually know, it would accomplish quite a lot.

The government’s new consumer-protection agency has the authority to “review and streamline” financial literacy programs, but that’s not enough. We really need something more like a financial equivalent of drivers’ ed. There’s evidence that just improving basic calculation skills and inculcating a few key concepts could make a significant difference. One study of the few states that have mandated financial education in schools found that it had a surprisingly large impact on savings rates. And the Center for American Progress has found that, across the country, education and counselling by nonprofit organizations, like the Massachusetts Affordable Housing Alliance, have helped low-income families buy and hold onto homes, even during the housing bubble. The point isn’t to turn the average American into Warren Buffett but to help people avoid disasters and day-to-day choices that eat away at their bank accounts. The difference between knowing a little about your finances and knowing nothing can amount to hundreds of thousands of dollars over a lifetime. And, as the past ten years have shown us, the cost to society can be far greater than that. ♦

 

Aging in Place

On one of the NYT blogs in the "New Old Age" series, someone ("been there" in Boston)  posted a very wise comment I thought worth passing along.  The original post was entitled "No Place Like Home."

Think about it with respect to public policy such as California's Proposition 13. 

I've added a bit of formatting to make it easier to read.

I understand the current sentiment for "growing old in place", but I really believe we need to rethink the idea of spending limited resources trying to keep elderly people living in the homes they raised their families in. This feel-good concept actually has several drawbacks in a variety of areas. As larger numbers of baby boomers move into retirement these issues will only get worse.

• First, with one or two elders living in a three or four bedroom home, young growing families have too few move-up houses available to them so they build new houses in the exurban ring which 30 years down the road will exacerbate the real estate pull back as the boomer generation passes and the baby bust can't replace their numbers.
• Second, as this article points out, access to services and health care is terribly expensive and inefficient when those needing a high level of health care are in single family homes.
• Third, the stress of owning a home that an elder cannot adequately repair or maintain becomes a constant low level of stress in their lives.
• Fourth, all too often, the elderly are stuck in a financial situation where the ongoing costs of their primary home are wrecking their budget. Reverse mortgages with their high fees and lousy financial terms are a terrible solution. We need to develop a wider array of 55+ housing solutions at a wider selection of price points and housing styles in the communities where elders live so they can maintain the relationships that nurture them while providing housing situations that allow them access to all the services they will need.

I couldn't have said it better!   Policies which significantly favor older homeowners over their younger fellow community members (e.g., California's Proposition 13 or Florida's Save Our Homes) drive up housing prices, monthly housing expenses, commuting expenses, pollution, sprawl, commuting time, profits for mortgage lenders.  They lead to the premature need for adding infrastructure, destroying farmland, spending public money to enrich private entity landholders.

If our incentives instead encouraged the prompt and ongoing redevelopment of choice sites, well-served by taxpayer-funded infrastructure and services, there would be affordable, appealing housing for people of all ages and stages, all places on the income spectrum.  It wouldn't be single-family houses downtown; it might be midrises or highrises, close to all the amenities which make downtown areas good places to live: medical care, restaurants, entertainment, libraries, emergency services, etc.  

We just need to rationalize -- make rational! -- our system of incentives and privileges.   We ought to align our incentives with where we want to go, and with what eliminates privilege for some which are funded by burdens on others.  (Some of our privileges are so things we're so used to that we don't see that they burden and victimize others.  Private collection of land rent and natural resource value is in that category.)

Why Do People Become Terrorists?

I heard an NPR story about this woman's work and have not yet tracked it down; in my search, I found this recent NYT article, which pretty well covers what I heard on the radio.  
Private Trauma Gives Jessica Stern Insights on Terrorism

Here are a few paragraphs -- please read the whole thing online, because I've omitted some important material!:

“I’ve really been studying perpetrators and violence all my life.”

How she came to this realization is the subject of her new book, “Denial: A Memoir of Terror,” which Ecco published last week. The book recounts how, in 1973, when Ms. Stern was 15, she and her younger sister were raped at gunpoint in their home in Concord, Mass. The police disbelieved the girls’ account and bungled the investigation; their father, in Europe at the time, didn’t think it necessary to cut his trip short and return. The whole community, she writes, seemed to be in denial.

The experience created in Ms. Stern a kind of emotional numbness — a calmness, even a fearlessness, that has proved oddly useful in her current work.

“I am fascinated by the secret motivations of violent men,” she writes in “Denial,” “and I’m good at ferreting them out.” She found that terrorists would talk openly to her, she said, because she could “go into a state where I almost tried to become that person, and where I felt that if I allowed myself even the tiniest judgmental thought, they could probably sense it.” ...

Not the least of her contributions, he went on to say, was that she was one of the very first terrorism scholars to realize that the way to discover what terrorists were thinking was to go and talk to them.

“She was asking the right questions of the right people,” he added, “and if some of that comes from her own experience of being terrorized, then the lessons were very fruitful.”   ...

She began to come to terms with what was a traumatic family history even before the rape: her mother died when she was 3; her father, a German émigré who had been persecuted by the Nazis, remarried but six years later divorced his second wife, leaving his daughters with her for almost two years while he lived on his own.

And with the help of an investigator, Ms. Stern even tracked down the story of her rapist, who served 18 years in prison and then hanged himself. He turns out to have been responsible for at least 44 rapes or attempted rapes between 1971 and 1973, all with a trademark methodology that the police somehow failed to pick up on. Among other things, he found most of his prey at girls’ boarding schools or at Radcliffe College, and many of his attacks involved two or more young women. ...

Ms. Stern interviewed friends or relatives of the rapist and uncovered a long and depressing history of parental abandonment (he was adopted, though he didn’t know it for years, and a woman he thought was his aunt was really his mother); confused sexual identity; drug use (he even dropped acid once with Timothy Leary); and possible childhood molestation (his parish church harbored a series of predatory priests). He had probably been traumatized himself, and then in the classic fashion went on to traumatize others.   ...

Writing the book, she added, taught her a lot about the effects of post-traumatic stress syndrome, of which she now considers herself a victim, and also helped refine her thinking about terrorism. Her researches have taught her that there is no common denominator in determining why people become terrorists, but she has identified a checklist of risk factors. These include alienation, coming from a society with a youthful population bulge or a high male-to-female ratio and, for the people who wind up being used as cannon fodder by the terrorists, poverty.

To the list she would now add sexual humiliation, and in January she published an article in Foreign Affairs in which she pointed out that sexual abuse of boys in the Islamic religious schools known as madrasas is not uncommon, and neither is the rape of boys in Afghanistan, especially on Thursday, known as “man-loving day,” because Friday prayers are thought to absolve a sinner of all his guilt.

“I’ve known about this for years,” Ms. Stern said, “but until I wrote this book, I didn’t make the connection. I’m not sure how you study it, but I do think it’s there. Humiliation is definitely a risk factor, and this may be a particular kind of it.”

She paused and added: “But why humiliation in some places and some people but not others? Harvard is a humiliation factory, and yet we don’t produce a lot of terrorists.”

Most of those at Harvard come from a lot of money, and/or can expect to earn a lot of money in this society, which probably cushions them greatly from the effects of any humiliation they might suffer at the hands of their classmates or teachers.  Who cushions the poor from what they suffer as ordinary humans in a society which is structured to concentrate income and wealth in relatively narrow slices of the spectrum?

Or is this an inconvenient thing we ought to continue to ignore?

Relatedly, one might think about how someone who is in the 20% of America which receives, say, 4% of America's income might feel about those who are in the 1% who receive about 20% of America's household income, and what their opportunities are to move up even a quintile or two.

See also the next post, about a neurologist looking at his own family history, and the difference that a secure and serene childhood can make in one's chances in life.  I heard these two stories within a couple days of each other -- what a juxtaposition!