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BASEL: FAULTY

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or The True Cause of the 2008 Financial Crisis (Questions and comments in subsequent post.)

Oceans of ink have been spilled in attempts to explain the 2008 Financial Crisis. Yet its true causes remain obscured by a fog of myth and bias.  Now, as we witness the creeping socialization of our credit industry and listen to populists push ever more onerous regulation, it seems like a good time to take a deep breath and consider what really did cause the crisis.

Spoiler alert: Hollywood got it wrong. The crisis was not caused by subprime lending, or CDO’s, or CDS’s, or savings gluts, or Glass Steagall repeal, or even “Greedy Wall Street Bankers”. Yes, some of these played ancillary roles, but they were small potatoes.

So what did cause the crisis? The causes were complex, but one force overwhelmed all others: regulation. Bad regulation.  Mainly, the Basel I and Basel II Capital Standards.

This news will be a letdown for many.  “Where’s our scapegoat?” they will ask.  “It’s easy to get a good hate on for ‘Greedy Wall Street Bankers’.  But ‘International Bank Capital Standards?’   Forget it.  Who do we blame?  Ourselves?”

Fact is, we have drawn all the wrong lessons from the financial crisis.  The crisis was not a failure of the free market, but of government. Further, it was limited to the European banks and the US shadow banks.  In fact, the great untold secret of the crisis was the strength of the US commercial banking industry.

The story is a simple one.  So simple, in fact, that I’m astonished so few have focused on it.

With typical American myopia, we remember the 2008 financial crisis as a purely domestic disaster.  Europeans like to pile on this myth, bloviating at the evils of American capital finance.  So one can be forgiven for not noticing that the 2008 crisis was not entirely, or even mostly, an American crisis. It was above all a European crisis (and still is.)  The proportion of US banks that failed or needed to be recapitalized was peanuts compared to Europe.

A brief word about bank capital standards.  Because bank assets (mostly loans) are risky while bank liabilities (mostly deposits) are fixed and largely government guaranteed, regulators rightly require banks to hold a minimum amount of shareholder’s capital with which to absorb any losses on bad assets. Historically, 10% has represented quite a lot of capital while 5% has been the frontier between adequate and insufficient capital.  Very simplistically, a bank with 5% capital could suffer a 5% loss on its assets before creditors are compromised and the bank fails or authorities elect to bail it out.

Basel I was promulgated in 1988 to establish a new regime for bank capital standards.  The new rules made sense in theory as regulations occasionally do. Instead of a fixed capital requirement for a bank — requiring, say, equity of 5% across the board — Basel tried to make capital requirements proportional to a bank’s balance sheet risk.  Its method was to assign “risk weightings” to each class of assets.  Thus, a bank whose assets consisted of nothing but Treasury Bills would need to hold very little capital, while a bank specializing in construction lending might need to maintain quite a high capital ratio.

Fair enough.  But Basel I had two fatal flaws.  First, there was no lower limit on a bank’s leverage ratio (equity less goodwill divided by assets.)  This proved to be a crucial difference between European regulation and more conservative U.S. regulation, which retained a leverage constraint.  The second failing was that the risk weightings proved completely bogus.

Basel II was issued in 2004 and compounded the deficiencies of Basel I.  The essence of Basel II was the abdication by international regulators of any role in bank supervision.

Basel I drove European banks to become much bigger and more highly leveraged.  As long as banks were adding assets that Basel deemed “low risk”, there was virtually no limit to the size of a bank’s balance sheet or the leverage a bank could attain.

Think for a minute about the implications of this expansion.  First, heightened leverage alone made the financial system far more unstable, as a top-heavy ship is vulnerable to a rogue wave.

Second, Basel stoked an insatiable appetite for assets of all kinds. Especially coveted were assets that Basel (erroneously) classified as “low risk.”  Things like AAA rated sub prime MBS and Greek sovereign debt (oops.)

Just how big was this Basel-driven demand for assets?  Massive, stupendous, and colossal are three descriptors that come to mind.  But they are woefully inadequate.

European banks in 2007 had aggregate tangible equity of roughly 1 trillion euros (at the time, about $1.1 trillion.) With a sensible leverage ratio of 5.0%, this equity would have supported E20 trillion in assets.  But by 2000, the average European bank leverage ratio already had dwindled to 3.8% (insufficient), and then fell further — to 3.0% (wow) in 2007.*  That may not sound like a big deal, but it’s more than a 20% systemic increase in leverage in just 7 years. This meant that for European banks alone, the Basel Regs goosed asset demand by at least E7 trillion ($8 trillion).**  To think of it another way, European bank assets in 2007 exceeded what would have been prudent leverage (i.e. 5%) by E13 trillion ($15 trillion) — a third of European banking system assets.

This is, I believe, a conservative estimate, and these are very, very, very, big numbers.  Eight trillion dollars was far more than the total US issuance of sub-prime mortgage backed debt in the 2000’s.  It was many multiples of Chinese dollar holdings. Eight trillion dollars was roughly equivalent to the US national debt in 2007. 

The biggest European universal banks drove most of this demand, largely through their United States dollar-based offices.  Here, they found easy funding through money market funds and gorged themselves in our bountiful capital markets. (For a far more elegant treatment of this issue, I strongly recommend reading “The Global Banking Glut” published in 2012 by Hyun Song Shin.) By 2007, leverage ratios for these banks were wafer thin, even though by Basel standards capital remained adequate.  Some banks were off the charts.  The leverage ratio for Barclay’s was 2.1%, and for UBS 1.8%.  Even mighty Deutsche Bank, that paragon of financial probity, was leveraged nearly 100 to 1. 

Leveraging US shadow banks (including Lehman, Countrywide, WAMU, General Motors, and especially Fannie and Freddie) contributed further trillions to this demand.  The much decried leverage of US brokerage houses was largely a competitive response to the Basel-driven leveraging of the European universal banks (along with some poorly timed capital liberalization from the SEC.)

Moreover, these superfluous assets were overwhelmingly funded short term, typically overnight.  Thus, European banks became extremely vulnerable to runs if (when) short term creditors got jittery.  Runs don’t occur because short term creditors know something bad is going on.  Runs occur because short term creditors think something bad might happen and want to get their money out before anyone else gets wise.  Shoot first and ask questions later is always the default strategy.  That is why it is essential for the central bank to stand foursquare behind the funding of every bank in the system.

Just about the only expert I have found who correctly identified Basel as the principal cause of the financial crisis is Jeffrey Friedman in his 2011 book “Engineering the Financial Crisis.”  In it, he focuses on the “Recourse Rule”, an offshoot of the Basel II discussions that reduced by 80% the capital required for AA and AAA rated tranches of asset backed securities.  Adopted in 2001, the Recourse Rule allowed US-based banks (including US branches of foreign banks) to employ dramatically higher leverage if deployed in “low risk” RMBS.

The mechanisms that enabled banks to borrow in such obscene amounts were the Asset Backed Commercial Paper and Repo markets (see any number of superb books and articles by Gary Gorton.)  Because short term financing was ostensibly “collateralized,” there was an illusion that these loans were without risk.  But as things came apart, collateral values plummeted, and ultimately lines to banks were pulled entirely.

Credit standards declined as well.  One of the most powerful concepts in economics is “the law of diminishing marginal returns.”  As European banks and shadow banks reached for that marginal asset, they increasingly had to compromise on credit quality.  Deferring to Basel’s guidance, most did not understand (or chose to ignore) the risk inherent in these assets, and rating agencies happily abetted this willful self delusion.  Turned out that as long as one could borrow and was not too choosy about credit, one could always find an investment bank willing and able to whip up that marginal asset and feed the beast.  If it smelled a little too much, no problem.  A small fee to AIG got you a credit default swap.  Hey presto, AAA.

Much of the leveraging I describe was done with derivatives.  For instance, the value of UBS’s derivatives book soared from E26 billion in 2002 to E450 billion in 2007.  Now, derivatives are very useful tools.  Properly managed,  such increases would not necessarily have heightened risk for a bank or for the system overall.  But too often, these derivatives were used to create “synthetic” assets structured to skirt Basel standards and boost trader bonuses; remarkably, Basel II allowed banks to value most derivatives using their own internal models.  Moreover, as we now all know from the “London Whale” fiasco, even derivative positions intended as conservative hedges have a funny way of ballooning out of control.

Worse, this explosion in derivatives engendered a silent, insidious rise in systemic counter-party risk.  Off balance sheet SIV’s exacerbated this problem. When crunch time came, there were hundreds of trillions of dollars of notional claims piled on top of tens of trillions of book commitments, with no capital to back them up.   No European bank could have any confidence in the ability of any counter-party to meet its obligations.  Moreover, since each European country had its own regulatory and bankruptcy regime, it was unclear how these claims would be resolved even if the counter-parties could be identified and held accountable.

So we can see that, far from causing the crisis, the subprime bubble was simply the bastard child of Basel I.  By allowing minimal capital to be held against assets that turned out to be garbage, Basel created an appetite for these assets that would not otherwise have existed.

The important point is that, in January, 2008, there was an immense overhang of dodgy longer term assets held by a variety of egregiously leveraged players, most of it funded overnight.  The Basel I and II capital standards mandated a European banking system that became like a forest overstuffed with dry tinder.  The sub prime crisis was just the spark that set it all alight.

Incidentally, the ferocious demand for assets from 2002 to 2007 also meant that trading anything always made profits.  That’s why all those bond traders on Wall Street made so much money in the 2000’s; the trade only went one way. So when we decry the billions in Wall Street bonuses for the 1%, recognize that they were just a gift from the guys and gals in Basel.  We can’t really blame the traders for confusing that gift with genius.

In contrast with their European counterparts and the “shadow banks,” American commercial banks in 2007 boasted strong balance sheets. They, too, were subject to the Basel Regs, but US managements and regulators had prudently insisted on higher capital ratios for US domestic operations than Basel permitted. Wells Fargo’s tangible ratio was 5.8%, Wachovia’s was 4.3% and US Bancorp’s was 5.3%.  (I omit Citi, JPM, and BAC because of differences in accounting for their sizable derivatives portfolios.). The average leverage ratio of US commercial bank holding companies in 2007 was  5.6%***. Not only was this nearly double that of the Europeans, it turned out to be far more than adequate to weather the crisis

Crucially, the funding profiles of US banks were also far superior to those of the Europeans.  This made them far less vulnerable to runs.  In 2007, Wells Fargo had $500 billion in assets and only $50 billion in what one might classify as “hot” funding.  Compare that to UBS, with E2 trillion in assets (ex-derivatives!) and E1.2 trillion in hot funding.  (You can easily check all these numbers for yourself on Edgar.)  Truth is, most US commercial banks and European universal banks were not then, and still are not, in the same business.  This is a fact that has evidently not dawned on US regulatory authorities.  The Europeans had much more in common with the US “shadow-banks.”

Listening to populists pontificate today, one would think that the entire US banking industry had needed a bailout back in 2008. But in fact, the banking industry suffered a loss in only one year and that loss was manageable— roughly $40 billion in 2008.*** If not for Citigroup and Wachovia (whose losses stemmed largely from its acquisition of Golden State, a shadow bank), the industry would have been profitable even in that dismal year.

 Let me emphasize this point.

 In the worst financial crisis in 80 years, the entire US banking industry suffered an aggregate loss that was less than what was spent to bail out Chrysler and GM.  Some crisis.

Yes, some banks failed or were forcibly merged.  That’s entirely to be expected, even welcomed, in a capitalist economy. Yes, TARP was imposed on the industry by government fiat, but that was completely unnecessary.  Yes, Citi and BankAmerica were given equity infusions. That was unfortunate, but of course, the bank “bailouts” ultimately made a tidy profit for us taxpayers.  In contrast to the European banks and the shadow banks, the US commercial banking system functioned effectively during the crisis and essentially as intended.

To summarize:

  1. Thanks to abundant capital, adept management and effective regulation, the broad US commercial banking industry proved extraordinarily resilient during the financial crisis of 2008.
  1. Far from destroying the economy, commercial banks, by absorbing troubled “shadow-banks,” helped stabilize the economy.
  1. Therefore, more oppressive banking regulation was the last thing the industry or the economy needed.

In other words, this was not an industry that needed to be nationalized by the regulators, some of whom were the very people who had caused the crisis to begin with. To socialize the delivery of credit to our economy, which seems to be the unspoken agenda of the current administration, is a breathtakingly misguided policy.  (If you think I’m alone in holding these views, read “Comradely Capitalism” in the August 20 Economist.)  With apologies to Bernie Sanders, it seems that Wall Street has not cornered the market in arrogance.

Just to be clear.  No one believes that the banking industry should be entirely unregulated.  Deposit insurance and the Fed backstop make moral hazard a real issue.   But the threat of moral hazard is way overblown. If moral hazard were really as imminent a threat as some contend, it would have been the commercial banks, not the shadow banks, that took the most risk prior to the crisis.  The critical point is that, imperfect as it may have been, the US commercial bank regulatory regime ex-ante proved more than up to the job.

My belief, and I think the belief of most Americans, is that regulation is often necessary, but that less regulation is always preferable to more.  It’s not that we have unquestioned faith in the free market to get the economy right. It’s just that we have a whole lot more faith in the free market than we have in the teeming minions who populate the D.C. bureaucracy.  Clearly not everyone agrees with us.  Democrats who even give lip service to admiring private enterprise are now vanishingly rare.  And, if the banking industry is any indicator, the influential populist fringe seems to regard the private sector with a distrust that borders on contempt.

If it is true that flawed regulation caused the financial crisis, then we should all be profoundly skeptical of the crush of new regulation now being imposed on the banking industry. For instance, few US banks needed more capital after the crisis, and they certainly don’t need more now.   For US banks, there was no need for Basel III (no, I’m not kidding. It’s baaaack), let alone the additional capital burden arbitrarily levied on the large US banks to “break them up” through the back door.  It is especially disheartening to see our US regulators kowtow before global regulators whose competence is, let us say, an open question.

Dodd Frank was far more an effort to pass “landmark legislation” that aped FDR and was seen to punish “the banks” than it was a good faith effort to fashion an effective regulatory framework.  It was an attempt to fix a system that wasn’t broke.  Flawed as it was on paper, its implementation has made things much worse.  It’s pretty clear, as underscored by the GAO’s recent criticism of “Living Wills” implementation, that the regulators are mostly making this stuff up as they go along.  And woe betide the bank that complains.

Just as the Basel Regs produced monstrous unintended consequences, Dodd Frank and Basel III are having profound negative repercussions of their own. Today’s Rube Goldberg meets Alice in Wonderland world of contradictory and redundant regulation, in concert with adversarial audits, has imposed a massive continuing burden on the banking industry and has cost the economy hundreds of billions of dollars with scant benefit to anyone except bureaucrats and lawyers.  It has contributed to the economy’s growing inequality and is, I believe, the primary reason for our dismal economic recovery.

Bank geeks far more qualified than I agree with me that the regulatory world has spun out of control.  One is Andrew Haldane, former Executive Director of Financial Stability at the Bank of England who penned a 2012 article titled “The Dog and the Frisbee” that has not gotten nearly the attention it deserves. In it, he contends that the current regime of regulatory micro-management is misguided at best and self-destructive at worst.  He argues persuasively that simpler regulation is far preferable to complex regulation.

When I first considered writing this piece I had intended to open with my favorite Mark Twain quote.  So imagine my consternation when I went to see “The Big Short” and discovered that Hollywood had cribbed the very quote I had wanted to use. I said to myself, “I can’t use that now.”  But thinking on it, I reckoned that Mark Twain can be called on to skewer all kinds of myths and foolishness and such like, even myths passionately embraced by Hollywood.  So I’ll see your Mark Twain and I’ll raise you an Einstein:

“It’s not what I don’t know that worries me.  It’s the things I know for sure that just ain’t so.”

“The problems that exist in the world today cannot be solved by the level of thinking that created them.”

With a nod to Maynard Keynes, I would conclude by saying that when times are good, euphoria reigns and we think prosperity will never end.  When times are tough, as they continue to be for many, we regard the future as a thing of radical uncertainty.  We can’t imagine that conditions will ever improve.  But our economy is not nearly as fragile as we sometimes think it is. Now is not the time to further rein in our animal spirits.  Let’s loosen the reins — just a bit — and see what a little more freedom can accomplish.

 

*I derived these averages myself using available historical data.  I’m confident that they are not too far out of line. They include all of the large surviving European Institutions.  They do not include failed banks like Fortis, nor the Greek, Baltic, or Icelandic banks.  Nor do they include British building societies, Spanish cajas, or German landesbanken.  Once commanding a major share of European financial assets, these institutions, of course, were vaporized.

** 7,000 = (1000 /.038- 1000 / .030).  13,333 = (700 / .050 – 700 / .030).

***  Note that these are my own estimates for bank holding companies.  I was unsuccessful in obtaining aggregate numbers for BHC’s from Y9 data.  A recent Fed publication shows roughly a 6.6% leverage ratio for the industry in 2007, but this seems too high.  It may be based on risk-weighted assets.  Also, FDIC data (which do not include holding companies or non-bank subsidiaries) show commercial banks losing money in just one year — $11 billion in 2009.  My estimate probably double counts these bank-level losses and includes non-cash items like goodwill write-downs, DTA write-downs, and reserve building far beyond realized economic losses.

 




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ahofer
17 days ago
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I wrote a very similar piece years ago
Princeton, NJ or NYC
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Spot the Irony, by David Henderson

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The following is from C.J. Ciaramella, "New York Prosecutors Gave Themselves $3.2 Million in Bonuses With Asset Forfeiture Funds," Reason Blog, November 28, 2017:

The Suffolk County District Attorney's Office in New York doled out $3.25 million in bonuses to prosecutors from its asset forfeiture fund since 2012, according to records obtained by Newsday through a Freedom of Information request.

Newsday reported that the funds were $500,000 more than previously reported, leading to consternation from local legislators:

Bonus recipients included deputy chief homicide prosecutor Robert Biancavilla, who received a total of $108,886 between 2012 and 2017, and division chief Edward Heilig and top public corruption prosecutor Christopher McPartland, who each received $73,000, according to records obtained from county Comptroller John Kennedy's office through the Freedom of Information Law [...]


Task: spot the irony.

Hint: It has to do with Mr. McPartland.

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ahofer
18 days ago
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subtle
Princeton, NJ or NYC
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A Range of International Poverty Lines

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Poverty is inevitably a relative phenomenon; that, whether you are "poor" depends on the typical standard of living in your society. For example, the World Bank has used a poverty line of $1.90 per person per day since 2015. If you multiplied this poverty line by a family of 3, for 365 days in a year, it equates to an annual poverty line of $2,080 per year for that family. For comparison, the US poverty line in 2016 for a three-person family with a parent and two children would be $19,337.

It would take some odd mixture of clueless, heartless, and moral blindness to argue that poverty in the United States or other high-income countries should be defined in the same way as in low-income countries. But by similar logic, it seems unsuitable to use the same poverty line for what the World Bank would classify as "low-income" countries with a per capita GDP of less than $1,005 per year (for example, Afghanistan, Ethiopia, and Haiti), "lower middle income" countries with a per capita GDP between $1,006 TO $3,955 (like Bangladesh, Nicaragua, and Nigeria), and "upper middle-income" countries with a per capita GDP from $3,956 TO $12,235 (like Mexico, China,and Turkey). Thus, the World Bank is now planning to use "A Richer Array of Poverty Lines," in the words of Franciscon Ferreira.

The figure shows per capita income on the horizontal axis, with the groups of countries separated by income level. The corresponding poverty line for each country as determined by that country is plotted on the vertical axis. The horizontal line shows an average poverty line for the countries within that income group.

The underlying data for national poverty lines is from an article by Dean Jolliffe and Espen Beer Prydz, "Estimating international poverty lines from comparable national thresholds," which appeared in the Journal of Economic Inequality (2016, 14, pp. 185-198). An ungated version is available from the World Bank here.
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ahofer
18 days ago
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Seems to me it should be geared to the cost of a small dwelling and a couple of nutritious meals a day in each country.
Princeton, NJ or NYC
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Progressive Redistribution: What's Happened? What's Next?

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Is the rise in economic inequality around the world during the last few decades mainly a matter of economic forces that have affected wages, or a matter of political forces that reduced the extent of redistribution? What are the long-term patterns across the world in income redistribution? Does more redistribution happen in the more unequal countries?

Peter H. Lindert tackles these questions and others in "The Rise and Future of Progressive Redistribution," published as Working Paper 73 by the Commitment to Equity Institute at Tulane University (October 2017). This is a background paper for the Angus Maddison Development Lecture that Lindert recently delivered at an OECD conference.  Here's his summary of the findings:
(1) In every country supplying adequate data, government budgets have shifted resources progressively, from the rich to the poor, within the last hundred years. Before World War I, very little was redistributed through government, mainly because government was so small, due in turn to poverty, lack of state capacity, and lack of mass suffrage. 
(2) For all that has been written about a shift of political sentiments and government policy away from progressivity since the late 1970s, no such trend is clear yet, pending research on more countries. A slow sustained rise in progressivity shows up in data from the United States, Argentina, and Uruguay. Among democratic welfare states, the closest thing to a demonstrable reversal against Robin Hood is the slight retreat in Sweden since the 1980s. Globally, the most dramatic swing since the late 1970s has been Chile’s record-setting return toward progressivity after the regressivity of Pinochet.
(3) Adding the effects of rising public education subsidies on the later equalization of adult earning power strongly suggests that a fuller, longer-run measure of fiscal incidence would reveal a history of still greater shift toward progressivity. This revision has its greatest impact in Japan, Korea, and Taiwan, which have excelled in raising lower ranks’ earning power through primary and secondary education, but have offered little in direct transfers to the poor.
(4) Finding that redistribution of government budgets has continued to march slowly toward progressivity carries a strong implication for our interpretation of the rise in income inequality since the 1970s, so firmly established by the World Top Incomes Project and by Thomas Piketty (2014). That rise may owe nothing to a net shift in government redistribution toward the rich, despite the lowering of top tax rates. If so, it is all the more important to explore what non-fiscal forces have widened gaps in market incomes around the world.
(5) The stability or slow advance in net fiscal progressivity since the late 1970s has not matched the rise in overall social transfers, because less-progressive public pension benefits have risen as a share of transfers, and of GDP, in most countries. That is, social insurance policy has betrayed a mission drift away from investing in children and working-age adults, and toward accepting rising pension bills. This mission drift toward the elderly implies a missed opportunity for pro-growth leveling of income.
Let me add  few points from the main text of the paper that seemed worth reemphasizing. Here's a figure showing the extent inequality before redistribution (shown on the horizontal axis) and after redistribution (shown on the vertical axis). The upward-sloping line shows what would happen if redistribution was zero; thus the fact that all countries are below the line shows that inequality is lower after tax and spending policy than before.

For example, you can see in the upper right that Honduras, Colombia, and Brazil all started with similar levels of inequality, but Brazil did more to redistribute income. Indeed, many of the "green box" Latin American countries have relatively high levels of inequality to start, and do relatively little about it. At the lower left, countries like Korea and Japan started of with relatively low levels of inequality, and also did relatively little to reduce inequality (that is, the points are close to the upward-sloping line). The "black dot" countries of western Europe started with middling levels of inequality, and did a lot of redistribution. The US starts with  a somewhat above-average level of inequality, and makes a below-average effort to reduce it.

A shortcoming of this figure is that it focuses on data from a single recent year. Thus, it doesn't look at the role of education in reducing inequality over time. Lindert discusses this point at some length. He writes: 
"Many studies of fiscal redistribution have already quantified a same-year effect of public subsidies to education, yet none has treated the larger deferred effects. The studies of the United States, Sweden, and Latin America do include a same-year effect, as if the benefits of taxpayers’ paying for your (say) fifth-grade education accrue to your parents this year and not to you, the student, any time in the future. Convention has thus equated public education with babysitting. As convenient as this convention may be, it misses most of what public education spending does to the different income ranks. ...
Public spending on education affects the inequality of later pre-fisc earnings, and the progressivity of government’s contribution to reducing that inequality, through two channels. One is that a rise in inequality of adults’ accumulated schooling should directly widen the inequality of their earnings. The other is that a rise in their average schooling should bid down skilled-wage premiums, again reducing the inequality of earnings or of income. While it is not easy to trace these inequalities in education subsidies and in final earnings, this strong link should be pursued, given that the international literature on social rates of return to schooling shows consistently high average rates."
Lindert lays out a range of categories for the relationship between education and inequality over time. In particular, he emphasizes looking at the ratio of spending per pupil on tertiary education vs. spending per pupil on preschool and primary education. In countries with universal education, like most high-income countries, this ratio is relatively low. In  countries of Latin America that have historically tended to fund college education for the well-to-do, and not much primary education for everyone else, this ratio looks pretty high.

Finally, Lindert fingers an uncomfortable culprit that is likely to exert pressure over time for less progressive social spending: that is, the aging of populations around the world. He writes:
"The only clear threat to progressive social spending comes from demography and politics. All populations are aging faster than careers are lengthening, thus raising the share of adult life spent in retirement. In addition, and perhaps in response, policy has shifted toward helping the elderly and keeping them out of poverty.  This does not necessarily threaten the progressivity in government treatment of the elderly themselves, but it definitely threatens to erode progressive social spending on children and adults under 65, hurting both progressivity and economic growth. The dangerous shift in priorities can be described either as a shift from investing in people for the long run to insuring them for the short run, or, in Martin Ravallion’s (2013) terminology, a shift from promotion to protection. ... 
"What trend can we foresee in this political mission drift toward favoring the elderly? The elderly share of the adult population will continue to rise. This demographic fact of life has a clear implication for providing for old age: As the share of elderly rises, their annual benefits past the age of 65 should not rise as fast as the average annual incomes of those of working age.
"This clear warning ... does not mean pensions have to drop in real purchasing power. Pensions should still keep ahead of the cost of living – it’s just that they cannot grow as fast as earned incomes per person of working age, which historically grow at about 1.8 percent a year, adjusting for inflation. ... Thus as long as consumption per elderly person keep in step with wage and salary rates, population aging threatens to raise the share of GDP devoted to subsidizing the elderly. To avoid paying for this with an upward march in tax rates, or with cutbacks in public spending on more productive – and progressive -- investments in the young, society needs to trim the relative generosity of annual pension subsidies."
There are many possible takeaways from this analysis, but here are a few of mine: 1) The growth of economic inequality around the world is mainly about economic factors, not a political retreat from redistribution. 2) In the longer-term, addressing the underlying forces that generate inequality--in particular, unnecessarily high inequality of educational opportunity and achievement--is a powerful force. 3) Helping the elderly more is going to be increasingly popular for politicians, but a tradeoff is that it becomes harder to make social investments that will pay off in the long term. 
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ahofer
18 days ago
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Interesting throughout.
Princeton, NJ or NYC
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"Don’t get in the elevator with him, you know, and the whole every female in the press corps knew that, right, don’t get in elevator with him."

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"Now people are saying it out loud. And I think that does make a difference."

Said newswoman Cokie Roberts, speaking about John Conyers. The question, of course, is why didn't she or any of the other women in the press corps say it out loud? And what are you still not saying out loud? Are you just waiting until somebody else exposes one of the politicians you have been protecting or is there no one else you're just hanging back not talking about until the day comes when you'll be saying, once again, oh, yeah, we all knew that?
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ahofer
19 days ago
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disappointing
Princeton, NJ or NYC
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The anti-natalist.

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"David Benatar... believes that life is so bad, so painful, that human beings should stop having children for reasons of compassion," writes Joshua Rothman (in The New Yorker).
In Benatar’s view, reproducing is intrinsically cruel and irresponsible—not just because a horrible fate can befall anyone, but because life itself is “permeated by badness.” In part for this reason, he thinks that the world would be a better place if sentient life disappeared altogether....

He provides an escalating list of woes, designed to prove that even the lives of happy people are worse than they think. We’re almost always hungry or thirsty, he writes; when we’re not, we must go to the bathroom. We often experience “thermal discomfort”—we are too hot or too cold—or are tired and unable to nap. We suffer from itches, allergies, and colds, menstrual pains or hot flashes. Life is a procession of “frustrations and irritations”—waiting in traffic, standing in line, filling out forms. Forced to work, we often find our jobs exhausting; even “those who enjoy their work may have professional aspirations that remain unfulfilled.” Many lonely people remain single, while those who marry fight and divorce. “People want to be, look, and feel younger, and yet they age relentlessly”....
Death is worse, he says, so killing yourself is no answer. The only way to avoid the badness of death is never to have been born. Too late for that!
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ahofer
20 days ago
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"he thinks that the world would be a better place if sentient life disappeared altogether...."
Princeton, NJ or NYC
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