“Three Expensive Milliseconds”: Society Is Devoting An Ever-Growing Share Of Its Resources To Financial Wheeling And Dealing
Four years ago Chris Christie, the governor of New Jersey, abruptly canceled America’s biggest and arguably most important infrastructure project, a desperately needed new rail tunnel under the Hudson River. Count me among those who blame his presidential ambitions, and believe that he was trying to curry favor with the government- and public-transit-hating Republican base.
Even as one tunnel was being canceled, however, another was nearing completion, as Spread Networks finished boring its way through the Allegheny Mountains of Pennsylvania. Spread’s tunnel was not, however, intended to carry passengers, or even freight; it was for a fiber-optic cable that would shave three milliseconds — three-thousandths of a second — off communication time between the futures markets of Chicago and the stock markets of New York. And the fact that this tunnel was built while the rail tunnel wasn’t tells you a lot about what’s wrong with America today.
Who cares about three milliseconds? The answer is, high-frequency traders, who make money by buying or selling stock a tiny fraction of a second faster than other players. Not surprisingly, Michael Lewis starts his best-selling new book “Flash Boys,” a polemic against high-frequency trading, with the story of the Spread Networks tunnel. But the real moral of the tunnel tale is independent of Mr. Lewis’s polemic.
Think about it. You may or may not buy Mr. Lewis’s depiction of the high-frequency types as villains and those trying to thwart them as heroes. (If you ask me, there are no good guys in this story.) But either way, spending hundreds of millions of dollars to save three milliseconds looks like a huge waste. And that’s part of a much broader picture, in which society is devoting an ever-growing share of its resources to financial wheeling and dealing, while getting little or nothing in return.
How much waste are we talking about? A paper by Thomas Philippon of New York University puts it at several hundred billion dollars a year.
Mr. Philippon starts with the familiar observation that finance has grown much faster than the economy as a whole. Specifically, the share of G.D.P. accruing to bankers, traders, and so on has nearly doubled since 1980, when we started dismantling the system of financial regulation created as a response to the Great Depression.
What are we getting in return for all that money? Not much, as far as anyone can tell. Mr. Philippon shows that the financial industry has grown much faster than either the flow of savings it channels or the assets it manages. Defenders of modern finance like to argue that it does the economy a great service by allocating capital to its most productive uses — but that’s a hard argument to sustain after a decade in which Wall Street’s crowning achievement involved directing hundreds of billions of dollars into subprime mortgages.
Wall Street’s friends also used to claim that the proliferation of complex financial instruments was reducing risk and increasing the system’s stability, so that financial crises were a thing of the past. No, really.
But if our supersized financial sector isn’t making us either safer or more productive, what is it doing? One answer is that it’s playing small investors for suckers, causing them to waste huge sums in a vain effort to beat the market. Don’t take my word for it — that’s what the president of the American Finance Association declared in 2008. Another answer is that a lot of money is going to speculative activities that are privately profitable but socially unproductive.
You may object that this can’t be right, that the invisible hand of the market ensures that private returns and social returns coincide. Economists have, however, known for a long time that when it comes to speculation, that proposition just isn’t true. Back in 1815 Baron Rothschild made a killing because he knew the outcome of the Battle of Waterloo a few hours before everyone else; it’s hard to see how that knowledge made Britain as a whole richer. It’s even harder to see how the three-millisecond advantage conveyed by the Spread Networks tunnel makes modern America richer; yet that advantage was clearly worth it to the speculators.
In short, we’re giving huge sums to the financial industry while receiving little or nothing — maybe less than nothing — in return. Mr. Philippon puts the waste at 2 percent of G.D.P. Yet even that figure, I’d argue, understates the true cost of our bloated financial industry. For there is a clear correlation between the rise of modern finance and America’s return to Gilded Age levels of inequality.
So never mind the debate about exactly how much damage high-frequency trading does. It’s the whole financial industry, not just that piece, that’s undermining our economy and our society.
By: Paul Krugman, Op-Ed Columnist, The New York Times, April 13, 2014
“Low Wage Jobs Endanger Nothing”: Wall Street’s 2013 Bonuses Were More Than All Workers Earned Making The Federal Minimum
Purveyors of Ferraris and high-end Swiss watches keep their fingers crossed toward the end of each calendar year, hoping that the big Wall Street banks will be generous with their annual cash bonuses.
New figures show that the bonus bonanza of 2013 didn’t disappoint. According to the New York State Comptroller’s office, Wall Street firms handed out $26.7 billion in bonuses to their 165,200 employees last year, up 15 percent over the previous year. That’s their third-largest haul on record.
That money will no doubt boost sales of luxury goods. Just imagine how much greater the economic benefit would be if that same amount of money had gone into the pockets of minimum-wage workers.
The $26.7 billion Wall Streeters pocketed in bonuses would cover the cost of more than doubling the paychecks for all of the 1,085,000 Americans who work full-time at the current federal minimum wage of $7.25 per hour.
And boosting their pay in that way would give our economy much more bang for the buck. That’s because low-wage workers tend to spend nearly every dollar they make to meet their basic needs. The wealthy can afford to squirrel away a much greater share of their earnings.
When low-wage workers spend their money at the grocery store or on utility bills, this cash ripples through the economy. According to my new report, every extra dollar going into the pockets of low-wage workers adds about $1.21 to the national economy. Every extra dollar a high-income American makes, by contrast, only adds about 39 cents to the gross domestic product (GDP).
And these pennies add up.
If the $26.7 billion Wall Streeters pulled in on their bonuses last year had instead gone to minimum wage workers, our economy would be expected to grow by about $32.3 billion — more than triple the $10.4 billion boost expected from the Wall Street bonuses.
This immense GDP differential only speaks to one price we pay for Wall Street’s bonus reward culture. Huge bonuses, the 2008 financial industry meltdown made clear, create an incentive for high-risk behaviors that endanger the entire economy.
And yet, nearly four years after passage of the Dodd-Frank financial reform, regulators still haven’t implemented the modest provisions in that law to prohibit financial industry pay that encourages “inappropriate risk.” Time will tell whether last year’s Wall Street bonuses were based on high-risk gambles that will eventually blow up in our faces.
Low-wage jobs, on the other hand, endanger nothing. The people who harvest, prepare and serve our food, the folks who keep our hotels clean, and the workers who care for our elderly all provide crucial services. They deserve much higher rewards.
By: Sarah Anderson, Moyers and Company, Bill Moyers Blog, March 12, 2014; This post originally appeared at Other Words
The politics of paranoia can lead policymakers into some unfortunate directions. On everything from homeland security to education to guns, paranoid politicians invariably end up pushing some truly bizarre proposals for no good reason.
In the latest example, some far-right congressional Republicans have decided to wage a war on census data because they have paranoid ideas about “big government.”
A group of Republicans are cooking up legislation that could give President Barack Obama an unintentional assist with disagreeable unemployment numbers — by eliminating the key economic statistic altogether.
The bill, introduced last week by Rep. Jeff Duncan (R-S.C.), would bar the U.S. Census Bureau from conducting nearly all surveys except for a decennial population count. Such a step that would end the government’s ability to provide reliable estimates of the employment rate. Indeed, the government would not be able to produce any of the major economic indices that move markets every month, said multiple statistics experts, who were aghast at the proposal.
“They simply wouldn’t exist. We won’t have an unemployment rate,” said Ken Prewitt, the former director of the U.S. Census who is now a professor of public affairs at Columbia University.
The core issue is something called the American Community Survey, which the Census Bureau uses as a supplemental to the decennial reports, providing information on commuting, income, family structure, educational attainment, housing, and finance. The results are used extensively by businesses, researchers, academics, and government agencies, and have been an invaluable tool for decades.
Right-wing lawmakers, however, have come to believe nefarious government officials are collecting the information as part of a larger scheme — it’s never been entirely clear to me what they see as the point of the plot — that must be stopped. Sen. Rand Paul (K-Ky.), who revels in strange conspiracy theories, proposed legislation in March to make elements of the American Community Survey optional, apparently because he didn’t realize that they were already optional.
But it’s not just the American Community Survey that congressional Republicans are eager to crush.
Indeed, Rep. Jeff Duncan’s (R-S.C.) bizarre proposal, which has 10 co-sponsors, would also explicitly eliminate the agricultural census, economic census, government census, and mid-decade census.
As a consequence, Duncan’s bill would eliminate the existence of the unemployment rate and the measurement of the nation’s GDP, among other thing.
Maurine Haver, founder of business research firm Haver Analytics and a past president of the National Association for Business Economics, told the Huffington Post‘s Michael McAuliff, “Do they understand that these data that the Census Bureau collects are fundamental to everything else that’s done? They think the country doesn’t need to know how many people are unemployed, either?”
The answers to these questions are unclear — Duncan and other supporters of this proposal have not explained why they oppose the data, why they see the need to eliminate the data, or even if they understand what it is they’re doing.
Duncan, incidentally, is the same deeply confused congressman who spewed bizarre conspiracy theories about the Boston Marathon bombing, going so far that Homeland Security Secretary Janet Napolitano felt the need to say Duncan’s ignorant inquiries were “full of misstatements and misapprehensions,” and “not worthy of an answer.”
By: Steve Benen, The Maddow Blog, May 2, 2013
In his latest salvo in his back-and-forth with Paul Krugman over the significance of the national debt, Joe Scarborough, writing in POLITICO today, displayed such a foul misunderstanding about economics, Krugman must have choked on his oatmeal laughing as he read it.
In “Paul Krugman is wrong – but don’t take my word for it,” the MSNBC host made the following point:
Investors may be growing skittish about U.S. government debt levels and the disordered state of U.S. fiscal policymaking.
From the beginning of 2002, when U.S. government debt was at its most recent minimum as a share of GDP, to the end of 2012, the dollar lost 25 percent of its value, in price-adjusted terms, against a basket of the currencies of major trading partners. This may have been because investors fear that the only way out of the current debt problems will be future inflation.
It also may have been because space aliens raided the Treasury in the dead of night because Nicholas Cage and Chuck Norris were off duty, having been contracted by the Navy to fight a flotilla of krakens in the Caribbean the week before. Scarborough may as well have argued that, because it would have displayed a better understanding of how foreign exchange markets actually work. The value of the dollar is determined by foreign countries’ demand for it and our supply of foreign exchange. And while foreign investors in 2002 may have begun to fear widening debt that was eventually caused by a recession in 2008 — despite the fact that the housing bubble was far from inflated in 2002 and that these investors eventually failed to foresee the crash itself — it’s more likely that the value of the dollar fell because our current account deficit essentially doubled between 2002 and 2006 (but don’t take my word for it).
Scarborough continued to make arguments that could be debunked by a remedial high school economics teacher shortly after:
More troubling for the future is that private domestic investment—the fuel for future economic growth—shows a strong negative correlation with government debt levels over several business cycles dating back to the late 1950s. Continuing high debt does not bode well in this regard.
While it’s true that government borrowing can “crowd out” private investment by bidding up interest rates, it isn’t currently happening — interest rates remain low. Furthermore, investors seem to have more confidence in U.S. Treasuries than they do in the market (but don’t take my word for it, “investors continue to buy U.S. government debt as a refuge against a renewal of turmoil in global financial markets and concern the U.S. recovery may falter”). The real reason that private investment and government debt appear to have an inverse relationship, both now and during any recession, is that economic contraction causes both tax revenue and private investment to fall.
So whose word should we take?
If you believe that I am wrong and Paul Krugman is right…then take it up with the RAND Corporation whose senior economist wrote everything you have read here other than this concluding paragraph. The debt crisis is real and waiting another decade to fix it is not an option. Anyone who suggests it is operates well outside the mainstream of where serious economists reside.
If the recent financial crash has taught us anything, it’s that “the mainstream of where serious economists reside” is less credible than a bootleg DVD salesman convention. But what’s even more troubling about Scarborough’s column — and POLITICO’s decision to publish it — is that he doesn’t even say whose words we should take or what those words actually are. Scarborough names neither the “senior economist” nor the study or studies that he is citing. Nor does the RAND Corporation even have a single “senior economist” — a search for “senior economist” on RAND’s website indicates that the think tank has at least a dozen “senior economists” on staff. So we can’t even debunk the man inspiring Scarborough to spew such noxious filth. At least we can debunk him.
By: Samuel Knight, Washington Monthly Political Animal, February 16, 2013
By its very definition, war spending—indeed, any government spending—improves GDP, as anyone who has ever taken an economics 101 course knows. Spending on World War II is credited with helping the U.S. decisively climb out of its depression slump. Likewise, the Iraq War helped the economy in some ways. But to many experts, the costs will far outweigh and outlast the benefits.
As U.S. operations in Iraq end, tallying up the costs and benefits of a nine-year ordeal is a daunting task. Estimates on Iraq War spending vary. The Congressional Research Service has put the Operation Iraqi Freedom pricetag at $806 billion. President Obama said that the Iraq War would cost over $1 trillion, all told. Either way, compared to past U.S. conflicts, spending on the Iraq war has been relatively small—at its height, spending on WWII helped drive government spending to 42 percent of GDP, according to the Congressional Budget Office. At its height, operations in Iraq cost around 1 percent of GDP.
But the long-term costs will well exceed this total, and the budgetary consequences are far-reaching.
On the positive side, the Iraq War did bolster the economy in some ways.
“It reduced unemployment compared to what it otherwise would have been” both with military and contractor jobs, says Stan Collender, a senior partner at Qorvis Communications who has also worked on both the House and Senate Budget Committees.
According to figures from the Commerce Department, GDP has grown at an average quarterly rate of 4.1 percent since the start of 2003, when the Iraq War began. While the war’s contribution to that growth was likely small, Collender believes it is significant.
“[Troops] were getting hazardous duty pay, which means they were sending more money home. We weren’t really on a wartime economy, certainly not compared to Vietnam or WWII, but you can’t say that it wasn’t an insignificant part of economic or GDP, given where the economy has been.”
Coming to a hard figure on the costs versus benefits of the Iraq War may indeed be impossible—particularly because untangling those costs from those of the simultaneous war in Afghanistan is difficult. However, it is clear that the costs of the war will ultimately go far beyond those of the costs of combat and reconstruction.
One key way that the war’s costs will outlast its operations is in veterans’ health care. A recent paper from the Center for American Progress estimates that the projected total cost of veterans’ healthcare and disability will run between $422 billion and $717 billion.
Columbia University Economics Professor Joseph Stiglitz and Linda Bilmes, a lecturer at Harvard’s Kennedy School of Government, have also argued that fighting in Iraq diverted resources from Afghanistan, prolonging conflict in that country. All told, Stiglitz and Bilmes have put the cost at well over $3 trillion.
Whatever the cost, some experts say that it wasn’t what was financed in the Iraq War but how it was financed that is problematic.
“The problem is not the impact on the GDP. It basically was financed through debt, which is a completely different issue,” says Anthony Cordesman, the Arleigh A. Burke Chair in Strategy at the Center for Strategic and International Studies.
“It’s really the decision of how to pay for it that has had such a negative effect on the U.S. economy. Because unlike any previous war in U.S. history, this was paid for entirely by debt at the same time that we cut taxes,” says Bilmes. While entitlements and other mandatory spending make up a majority of annual federal budgets and contribute heavily to deficits and debt, the Iraq War also contributed significantly. The Center for Budget and Policy Priorities has estimated that the wars in Iraq and Afghanistan, together with the Bush tax cuts, will account for almost half of the projected $20 trillion debt in 2019.
Cordesman stresses that asking “what if” can be an exercise in futility. Calculating the opportunity cost of engaging in the Iraq War, as opposed to however else government might have spent (or not spent) the same amount of money, “borders on the absurd,” he says, as there are countless alternatives to any option. “The opportunity cost of every decision you take is almost inevitably suboptimal,” he says.
Aside from whatever opportunities the U.S. missed by engaging in Iraq, there are also unquantifiable costs. A recent memo from the Center for American Progress, a left-leaning think tank, argues that ending Saddam Hussein’s regime empowered Iran, “remov[ing] the most significant check on Iran’s hegemonic aspirations.” Many returning vets will also face personal economic difficulties, coming home to a difficult job market.
Of course, the human costs of the Iraq War are without a doubt its most lasting and tragic legacy. In addition to more than 32,000 U.S. soldiers wounded in Iraq, the war killed over 4400 U.S. soldiers, according to Icasualties.org, not to mention more than 104,000 Iraqi civilian casualties, according to Iraqbodycount.org.
By: Danielle Kurtleben, U. S. News and World Report, December 15, 2011