Thinking

Sexual Competition, Mimetic Desire, and Neoliberal Market Society

In neoliberal market society, everyone faces the discipline of the market. In order to survive—ie in order to obtain the means to pay for the family’s food, rent, clothing, et cetera—ordinary people have to compete in the labor market. Investors have to compete with each other. And, of course, firms compete against their rivals. Indeed, even a pure monopolist has to worry about entry. A lot of ink has been spilt on the precariat workforce. But insecurity is the calling card of the neoliberal market society. Moreover, the closer we get to the neoliberal utopia, the fairer the verdict of the market. For the losers, there is no escape from the harsh sentence. So far we are still with Polanyi and Hoffer. But we must go further.

Houellebecq would suggest that we pay attention to the onset of ‘savage sexual competition’ as a result of the sexual revolution. In his account, the West made a wager with history that maximizing freedom would maximize happiness; and lost. (In Elementary Particles, Houellebecq articulates this pathos quite well but fails to surmount the last chapter problem. He picks up the same subject again in Soumission and this time gets his pathetic characters to ‘slouch towards Mecca‘ to escape their predicament.) For the neoliberal subject the rigors of sexual competition are, if anything, harsher than the rigors of the labor market. The liberalization of the sexual economy from the 1960s onwards must therefore be seen as an important component of the neoliberal condition. We need to investigate the market discipline faced by the neoliberal subject in the sexual marketplace. But we must go further still.

If we want to ground the analysis of neoliberal market society in the lived experience of the neoliberal subject, we must reckon with mimetic desire à la Girard. For we are not only enslaved by an obligation to enjoy. The pleasure principle is merely the beginning. What a neoliberal subject wants is not some independent draw from a fixed and exogenously given distribution. Nor are her desires merely correlated with those of others. She wants what others want because they want it. So she wants the iPhone X because, admit it, it’s cool. She knows what they will all think when they see the device in her hand. But that’s simply a case of ‘keeping up with the Joneses’—which is what we tend to find across consumer markets; a largely benign case of mimetic desire. Things get much more zero-sum when only a few can win and others must lose. The higher the college’s ranking, the more attractive the potential partner, the more prestigious the job etc, the more cut-throat it gets. Because desire is largely mimetic, neoliberal subjects are always found locked in mimetic rivalry—with their friends in high school, at work, or at a bar; and anonymously, with an amorphous mass of peers on job sites, dating platforms and so on and so forth.

In Girard’s scheme, mimetic rivalry engenders violence in archaic society. The instability intensifies until everyone gangs up against a single victim; a scapegoat, whose murder at the hands of the mob restores consensus and reestablishes the social peace. The ‘sacrificial crisis’ and the act of collective violence are not mythical, but real; a common solution arrived at by all archaic societies and ritualized as human sacrifice. This is the dark heart of our all-too-human past.

Neoliberal market society unleashes mimetic rivalry on an unprecedented scale. But it does so in a contained manner. Moreover, the modern state enjoys a near-absolute monopoly of violence. The violence engendered by the intensification of mimetic rivalry is therefore projected onto other domains—onto the political plane, onto video-games, on screen, onto 4chan, and perhaps most tragically, onto the neoliberal self. Perhaps that what is behind the curves studied by Case and Deaton.

If we want to interrogate the neoliberal condition, we must go beyond the whipsaw of global macro forces; beyond market discipline as currently understood in terms of the commodification of labor and capital. We need to start thinking about the market discipline faced by the neoliberal subject in the sexual marketplace as well. More generally, we need to take a broader view of the ever-intensifying market-like competition in neoliberal market society, eg for college admissions. We must get a handle on the attendant intensification of mimetic rivalry; the trauma thereby visited upon the neoliberal subject; and the socio-political consequences of that trauma.

 

 

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Thinking

Something very peculiar is going on at the top of the US wealth distribution

Inspired by the FT piece on the world’s überwealthy, I decided to explore the very top of the US wealth distribution. Figure 1 displays the average net worths in constant 2016 dollars of the top 1 percent, 0.1 percent, 0.01 percent, and 0.001 percent of the wealthiest adults in the United States over the past 100 years. (All data that appears in this post is from here.)

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Figure 1. Average net worths at the top of the food chain.

We see that the neoliberal wealth boom is simply unprecedented. After fluctuating at historical levels until the 1980s, the fortunes of the richest Americans took off like a rocket. The rich have never been quite as rich as they are today.

Figure 2 zooms into the past twenty years. Within a very broad upward march, we can see dramatic fluctuations with the asset price booms of the late-1990s and the mid-2000s. But notice how the fortunes of the really rich had a different trajectory from the merely rich; especially over the past decade. Why?

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Figure 2. Average net worth of the wealthiest over the past twenty years.

Figure 3 zooms in even further to 2004-2014 and allows us to examine the anomaly up close. While the total net worth of the top 1 percent and the 0.1 percent contracted sharply in 2009, that of the top 0.01 percent and the top 0.001 percent suffered only a mild correction. Concretely, while the former fell by 17 and 16 percent respectively in 2007-2009, the latter fell by only 3 and 4 percent. Why? Conversely, the former grew by 6 and 4 percent in 2010-2011, while the latter contracted by 17 and 13 percent. Why??

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Figure 3. Average net worths of the top echelons.

Perhaps thresholds contain some information that may help us figure out what’s going on here. Figure 4 displays the threshold net wealth required for admission into these rarified echelons since the mid-1960s.

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Figure 4. Threshold net worths for the upper echelons.

We see that fluctuations in the top 1 percent, 0.1 percent and 0.01 percent are similar: Rapid rises in the late-90s and mid-2000s booms and sharp corrections during the recessions. But quite strikingly even the bottom rung of the top 0.001 percent seem to have avoided a comparable loss in 2008-2009. Again, we zoom in to see what’s going on over the past decade or so. Figure 5 below displays the threshold net worths for the upper echelons over 2004-2014.

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Figure 5. Threshold net worths for the upper echelons.

The evidence from the bottom rungs of the upper echelons is even more striking. It is clear that the very richest of individuals were able to protect themselves much better against global macro fluctuations than those right below them.

The 0.001 percent constitute the extreme top of the wealth distribution reported in the Piketty-Saez-Zucman database. The minimum personal net wealth in this rarified realm is a staggering $530 million. There are approximately 2,000 adults in the United States who clear that threshold. Their average net worth is $2.1 billion, up an astounding 792 percent since 1985. By comparison, the average net worth of the top 1 percent grew 322 percent and the average net worth of US households grew 289 percent over the same 30 year period 1985-2014.

More generally, over the past thirty years, the further up we go, the greater the gain. Table 1 displays the compounded rate of growth of average net worths in the upper echelons. The differentials may look small until you recall the magic of compounding. If your wealth grew at 7.2 percent instead of 4 percent, you’ll end up 2.5 times richer in thirty years. See the third column of Table 1 for exact figures.

Table 1: Accumulation rates.

Annual growth in net worth (1985-2014, compounded) In 30 years $1,000 invested at these rates accumulates to…
1 percent 4.03% $3,272
0.1 percent 5.04% $4,372
0.01 percent 6.14% $5,975
0.001 percent 7.24% $8,141

Piketty has shown in Capital that larger fortunes grow at higher rates. The Piketty-Saez-Zucman database corroborates that finding. One reason why that holds is that the truly wealthy have access to lucrative investment strategies unavailable to lesser investors. Another is that business equity accounts for a much greater portion of their net worth than that of lesser mortals. Yet another may be that they have easier access to leverage (which mechanically increases return on equity).

But all this still doesn’t explain how the truly rich enjoy greater protection against global macro fluctuations. Surely, they didn’t all short US housing in 2007? Perhaps the truly wealthy avoided the 2008-2009 bloodbath simply because housing is an insignificant portion of their portfolio?

It could also be that the billionaires who populate the very top of the food chain own serious equity in superstar firms which continued to perform relatively well through the financial crisis and the recession? Is that what explains this anomaly?

However this anomaly is resolved, one thing is clear. We should be very careful in extrapolating what we see in, say, the Forbes 400 to the rest of the rich. The oligarchs are in a class all by themselves.


Bonus round. In 2014Q4-2017Q1, US household wealth grew by 12.9 percent according to the Federal Reserve. If net personal wealth grew at the same rate it would be around $79 trillion. And if the shares of the upper echelons remain unchanged, the estimated aggregate net worths of the top 1 percent, 0.1 percent, 0.01 percent and 0.001 percent would be $29, $15, $8, and $4 trillion dollars respectively. That would place the aggregate net worth of the 1 percent at roughly the same level as the aggregate personal wealth of all US residents as late as 1990. See Figure 6 below.

Table 2: Aggregate wealth and wealth shares of the upper echelons (2014).

Aggregate Net Worth (trillions of 2016 dollars) Shares
1 percent 26 37%
0.1 percent 13 19%
0.01 percent 7 10%
0.001 percent 4 5%
Net Personal Wealth 70 100%
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Figure 6. Aggregate personal wealth of US residents. 

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Thinking

Why Housing Has Outperformed Equities Over the Long Run

Jorda et al. are at it again. Over the past few years, they have constructed the most useful international macrofinancial dataset extending back to 1870 and covering 16 rich countries. The Policy Tensor has worked with the previous iteration of their dataset. I documented the reemergence of the financial cycle; the empirical law that all financial booms are, without exception, attended by real-estate booms; and that what explains medium-term fluctuations not just in real rates (a result originally obtained by Rey) but also in property returns, is the consumption to wealth ratio (equity returns on the other hand are explained by balance sheet capacity, not the consumption to wealth ratio).

There are two main findings in Jorda et al. (2017). First, they corroborate Piketty’s empirical law that the rate of return exceeds the growth rate. The gap is persistent and is only violated for any length of time during the world wars. Excluding these two ‘ultra-shortage of safe asset’-periods, the gap has averaged 4 percent per annum. That is definitely enough to relentlessly increase the ratio of wealth to income and drive stratification, as Piketty has shown.

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Jorda et al. (2017)

The second finding is truly novel. Jorda et al. (2017) find that housing has dramatically outperformed equities over the long run. This is true not just in the aggregate but also at the country level.

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Jorda et al. (2017)

Matt Klein over at Alphaville is truly puzzled by this failure of standard asset pricing theory. As he explains,

The ratio between the average yearly return above the short-term risk free rate and the annual standard deviation of those returns — the Sharpe Ratio— should be roughly equivalent across asset classes over long stretches time. There might be short periods when an asset class’s Sharpe ratio looks unusually high, especially in individual countries, but things tend to revert to their long-term average sooner or later.

More generally, the expectation of asset pricing theory is that Sharpe ratios should be roughly equal across not just asset classes but arbitrary portfolios as well. Deviations from equality imply the existence of extraordinary risk premia which ought to be eliminated through investors’ search for higher risk-adjusted returns.

This, of course, goes back to the hegemonic idea of Western thought. Competition serves as the organizing principle of evolutionary biology, economic theory, and international relations; as the cornerstone of America’s national ideology; and as the guiding star of modern governance and reform efforts. But there are some rather striking anomalies of this otherwise compelling broad-brush picture of the world—persistent sources of economic rents and the existence of substantial risk premia, eg on balance sheet capacity.

But I believe something much more elementary is going on with property. The next figure shows the global wealth portfolio. We see that housing constitutes the bulk of global wealth.

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Jorda et al. (2017)

What explains the superior risk-adjusted performance of housing is the fact that housing assets are not, in fact, owned by the rich or market-based financial intermediaries like other asset classes, but quite broadly held by the small-fry. More precisely, the marginal investor in housing is your average homeowner who finds it extraordinarily hard to diversify away the risk posed by her single-family home to her balance sheet. Since it is so hard for her to diversify this risk away, she must be compensated for that risk.

Put another way, the risk premium on property is high because property returns are low when the marginal value of wealth to the marginal investor is high (ie, when times are bad for the average homeowner) and high precisely when the marginal value of wealth to the marginal investor is low (ie, when times are good for the average homeowner). This is as it should be given the relatively progressive vertical distribution of housing wealth.

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Thinking

How Long Can China Defy the Laws of Macrofinancial Gravitation?

The International Monetary Fund has warned that China’s debt is approaching “dangerous” levels. The Fund expects China’s non-financial sector debt to exceed 290 per cent of GDP by 2022, compared with 235 per cent last year. How long can China’s debt binge last? Recent research by economists at the Bank of International Settlements suggests not long.

Drehmann, Juselius and Korinek (2017) have emphasized the role played by debt service burdens in puncturing credit booms. There is an interesting lead-lag structure between new lending and debt service burdens. New lending mechanically increases the debt service burden, but the weight is felt with a lag.

When taking on new debt, borrowers commit to a pre-specified path of future debt service. This implies a predictable lag between credit booms and peaks in debt service which, in a panel of household debt in 17 countries, is four years on average.…Debt service peaks at a well-specified interval after the peak in new borrowing.…The reason is that debt service is a function of the stock of debt outstanding, which continues to grow even after the peak in new borrowing. 

Credit booms have a clear mechanical path. An exogenous increase in the risk-bearing capacity of the financial sector drives a lending boom. Credit-to-GDP ratios rise. Debt service ratios follow. At some point, debt service becomes too onerous to sustain, the lending boom is arrested and a financial crisis breaks out.

We illustrate these dynamics with the US experience. Figure 1 plots the detrended Credit-to-GDP gap and the Debt Service Ratio for the US private nonfinancial sector. We see that the credit gap peaked at 12.4 and the debt service ratio peaked at 18.4 just as the Great Recession began in the last quarter of 2007. The denouement of the credit boom triggered the onset of the Global Financial Crisis (GFC) as credit defaults made their way to dealer balance sheets.

US.png

Figure 1. US private nonfinancial debt service ratio and credit gap.

 

Figure 2 plots the Chinese nonfinancial sector’s credit gap and debt service ratio. As of 2016Q4, China’s credit gap was an astounding 24.6; twice as high as the peak American gap of 12.4. And China’s debt service ratio was 20.1 as of 2016Q4, already larger than America’s peak ratio of 18.4.

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Figure 2. Chinese nonfinancial sector’s credit-to-GDP gap and debt service ratio.

The importance of these indicators comes from the fact that they are the strongest predictors of financial crises. In particular, the BIS researchers quoted above have shown that positive shocks to the debt service ratio significantly increase the probability of a financial crisis over the near term (1-3 years). They find that “debt service is the main channel through which new borrowing affects the probability of financial crises.”

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Figure 3. Nonfinancial private debt service ratios in the United States and China.

Figure 3 displays the debt service ratios of the United States and China for 1999Q4-2016Q4. Since then the Chinese government has pushed through yet another credit expansion (which is what prompted the scolding from the IMF). It is hard to escape the conclusion that Beijing would find it hard to achieve a soft landing.

Mechanically, we know what will happen soon. A correction in property prices will destabilize the $28 trillion shadow banking flywheel built on top of real estate. Whether or not it leads to a dramatic implosion would depend on the strategy pursued by Beijing. Xi is definitely sold on Geithner’s financial Powell doctrine. But whether the crisis can be contained with techniques of financial fire-fighting that have evolved since 2007 remains to be seen. What is certain is that Beijing would have to absorb a significant portion of private liabilities onto the national balance sheet. As a result, public debt is likely to balloon.

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Thinking

Towards a Natural History of Capitalism: economic rents, regimes of accumulation, and oligarchy

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Margin Call (2011)

This is an ongoing conversation with Ted Fertik. 

It was great talking today man. The first battle in the great war between Braudel and Marx was very productive. You have really helped me clarify my own thoughts. Tell me if this sounds like a reasonable offer for an armistice:

The labor theory of value explains some fraction of the variation in economic value and wage slavery is an important feature of the lived experience in modern times. I personally find a narrower Marxist frame quite useful: examine the strategies used by capitalism to deal with labor militancy within the larger political economy. On such home turf so to speak, attention to wage labor, labor’s share of labor productivity growth, and more generally the tug-of-war between labor and capital is decidedly warranted. But working with Braudel we can go much, much further. Here’s a strategy.

We pay attention to the connection between regimes of accumulation built on economic rents (ie, earnings over and above what would obtain under free market competition) on the one hand and oligarchy on the other. Think about this: If competition were the dominant fact of the market-capitalism quasi-object then the distribution of wealth ought to get more diffuse under greater competitive pressure and over time simply due to entropy.

But how then do we explain higher rates of accumulation precisely when competition is supposed to be the fiercest, ie in the modern neoliberal era?? The reality is that neoliberalism is an intensification of market discipline only for the losers while the winners have grown fat feasting on the anti-market.

Industrial concentration, rents, and oligarchic distributions of wealth track each other. The political economy of this threefold comovement demands interrogation. What ties the three together is the fact that regimes of rapid rates of wealth accumulation are built on the systematic harvesting of persistent economic rents. Rents serve not only as attractors of capitalism’s attention, as in the standard picture; but also as sources of high rates of accumulation itself.

This gets more interesting as you go into the details. For instance, oligopolistic firms share their rents with their employees. What explains the distribution of compensation of employees is interfirm variation rather than within-firm variation. In measuring the rates of accumulation, we therefore have to include what looks like extraordinary labor compensation (high salaries, bonuses and stock options) at oligopolistic firms (beginning with CEO compensation) as well as their supernormal profits.

The beauty of the neoliberal regime is that the capital market acts to ‘rationalize’ sectors into stable oligopolistic regimes. These rents find their way all the way to the coffers of core market-based financial intermediaries who use their privileged access to lucrative asset classes (which are unavailable to retail investors, eg fixed-income derivatives) and their privileged information on order flow and endogenous fluctuations, to corner some serious rent. That’s your market-based financial regime of accumulation. Then you have surveillance platform capitalism of the Valley, pace Zuboff. And so on and so froth throughout the history of capitalism. I think this is a powerful frame of reference.

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Thinking

Yellen Let the Cat Out of the Bag

Lowflation

The Fed has failed to deliver on its inflation target consistently.

So in the Q & A after her speech, Yellen spelled out why the FOMC expects inflation to “return” to target. It was a remarkably honest admission. This is from the FOMC Press Conference on June 14, 2017.

Yellen: [The neutral rate] is hard to pin down; especially given the fact that the so-called Phillips curve appears to be quite flat—that means that inflation doesn’t respond very much or very quickly to movements in unemployment. Nevertheless, that relationship, I believe, remains at work.

Yellen is wrong. As I have argued previously, the ‘second unbundling’ has transformed the inflation process in the core of the world economy such that global slack drives inflation; not domestic slack. More recently, Auer, Borio and Filardo (2017) have shown that the intensity of participation in global value chains explains the time-variation and the international cross-sectional variation in the strength of that relationship. They have thus tied the mutation of the inflation process directly to Baldwin’s ‘second unbundling’. How long do we have to wait before the FOMC catches up with the BIS?

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How the affluent get $500 billion in tax giveaways each year

After I finished writing this post, I found these very useful tables here. They help triangulate the class structure and are more helpful at the beginning of my piece than at the end. 

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BIG GAINS IN THE NEOLIBERAL ERA have largely been cornered by the wealthy. We may even have been underestimating the true wealth of the ultrarich by a factor of 2 because the truly wealthy hide nearly half their wealth in offshore secrecy jurisdictions. I have hitherto emphasized paying attention to the very top of the distribution—the 0.1 percent—because the concentration of material resources in the hands of oligarchs is a significant threat to democracy. Indeed, ultraconservative billionaires are behind the insurgency that used to be called the GOP.

But that is not the end of the story. The main driver of regional polarization is the two-tier polarization of the US economy into a high-productivity tradable sector that accounts for just 2 percent of new jobs but a third of new value added and a low-productivity non-tradable sector. Affluent, college-educated workers have managed to corner all the wage gains over the past generation due to their near-monopoly on jobs in the former. The rest have seen their incomes stagnate and their share of the national pie shrink.

Figure 1 displays the share of pretax income of the top 1 percent of income earners. We see that vertical income polarization has returned to levels last achieved in the roaring twenties. But affluence in America goes deeper. Not everyone in the 99 percent has lost ground in the neoliberal era. Those in the top 20 percent—roughly speaking, families earning six-figure incomes—have done relatively well. Figure 2 shows the share of the next 19 percent of income earners. We see that their share of the national pie has increased slowly but steadily over the past two generations.

 

Rational public finance would see the government lean against the inequity of the market. Through progressive taxation, tax credits, subsidies, and spending targeted at less fortunate families and regions, fiscal policy ought to be used to ensure a more equitable distribution of the national economic pie. Congress can’t stop talking about making life easier for hard-working Americans. In reality, as we shall see, tax giveaways largely benefit the affluent.

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Figure 3. US non-discretionary federal budget breakdown.

Figure 3 presents a top-level breakdown of the non-discretionary federal budget. Medicare, social security, and the military consume two-thirds of the US budget. But the largest component by far, accounting for a third of the budget, is “tax expenditures”—technical jargon for tax credits, subsidies, and other giveaways that is fiscal spending in all but name.

In the current fiscal year, tax expenditures account for nearly $1.5 trillion. The biggest of these giveaways is exclusion of employer contributions for medical insurance premiums and medical care, which will cost the public purse $2.7 trillion over 2016-25, according to the US Treasury. Preferential treatment of unearned capital gains (which are taxed at 15 percent instead of the 35 percent charged on earned income) will cost a cool $1 trillion over the same period. Exclusion of imputed rental income will cost $1.2 trillion, and the mortgage interest deduction will cost $950 billion. (All these numbers are from here.)

Who benefits from these giveaways? Figure 4 shows the distribution of the beneficiaries. The affluent, the top 20 percent of income earners, get 51 percent of all tax expenditures. The rest is split regressively among the lower classes.

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Figure 4. Shares of tax expenditures by income quintile.

If we drill down further, we find that some of these giveaways are much less regressive than others. For instance, one-half of the $66 billion earned income tax credit goes to the lowest quintile and 95 percent of the $59 billion child tax credit goes to the bottom 80 percent. The employer-sponsored health insurance exclusion is somewhere in the middle. Two-thirds of this supermassive $258 billion giveaway goes to the bottom 80 percent. Pension contribution, capital gains, local taxes and the mortgage interest deduction are much more regressive. Some 94 percent of the $83 billion capital gains giveaway ends up in the top quintile, as does two-thirds of the $140 billion pension contribution exclusion.

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Figure 5. Distribution of selected tax breaks.

Figures 5 and 6 drills down into the most regressive giveaways. We have not included the $17 billion carried interest giveaway to ultrarich hedge fund managers and other such long-running scandals. But the picture that emerges is not pretty. The top quintile gets the vast bulk of the giveaways for capital gains, state and local taxes, mortgage interest, charitable contributions and capital gains exemption at death. All in all, the top quintile cornered $446 billion of the $873 billion given away in 2013, according to the Congressional Budget Office.

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Figure 6. Percentage shares of quintiles for selected tax giveaways.

Beyond the regressive distributional impact, these giveaways distort incentives and harm the economy in various ways. For instance, Weicher notes that the mortgage interest deduction (MID),

…encourages taxpayers to pay for homes with debt rather than with cash or financial assets, causes wasteful and unproductive misallocation of physical and financial capital, and distributes benefits disproportionately to upper income households. Furthermore, the MID results in less economic productivity, reduced labor mobility and greater unemployment, depressed real wages, and a lower standard of living. The MID is so damaging to the economy that nearly every economist believes that “the most sure-fire way to improve the competitiveness of the American economy is to repeal the mortgage interest deduction.”

A truly progressive politics will have to take on not just the rich but the affluent as well.

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