Semi-Daily Journal

It's even more astounding when you see the French -- always accused of a state corporatism which protects a corrupt elite -- putting people in jail for malfeasance, like the did in the Elf trial yesterday.

For years French have been cynical about corruption of officials of large companies with close government ties of government ownership. Eventually something happened.

I wonder if in the US we haven't even begun this phase of cynicism. But then there's Elliot Spitzer, and there's a little hope. I wish he would put someone in jail rather than just doing plea deals, though.

On the mutual fund scandal, Gretchen Morgenson's Sunday column in the Times notes that there has been some voting-with-feet for specific fund companies, and she cites some poll results suggesting that the public is concerned.

It also seems that there has been a sharper response in some localities to the more blatant problems. The intersection of reasonably easy to understand misdeeds and the Wisconsin 529 program seems to have been something of a lightning rod for Strong, for instance.

Meanwhile, following an exchange on the trade sanctions topic, I popped my copies of Mancur Olson's books on the nightstand, and that's started me thinking about why the majority coalition seems to be acting on narrower interests than its share of income would otherwise seem to imply. (I'm inclined to treat the corporate scandals as isomorphic to 'tax theft' in that framework.) Weak leadership is my short answer so far.

Last, the Onion this week has the topic well-covered this week with the top story "Congress Raises Executive Minimum Wage To $565.15/Hr."

The same people that are profiting from this are buying the politicians with their campaign contributions. At some point accumulation of wealth income disparity leads to a corruption that requires a minor revolution to set right.

The thing I find astonishing about the mutual fund skimmers/market-timers is their brazenness. With all the business scandals of 2002, would you not have expected them to pull their snouts out of the trough until things had blown over? I am afraid there is a big shoe out there, like Fidelity, waiting to drop.

Is Dr. Temin suggesting that msiguided attempts to address the apparent prolem of corporate fraud in the 1930's may have actually made the Great Depression worse. I ask for two reasons: (a) one relates to a recent and strange zeal of the rightwing to praise some accounts of poor FDR policy that fail the ha-ha test and show the book author and book reviewer have not read the past literature including the noteworthy work of Dr. Temin; and (b) if Dr. Temin is proposing some theory that the policy reactions may have worsened the Depression, his writer is certainly a more worthy read.

The thing I find astonishing about the mutual fund skimmers/market-timers is their brazenness. With all the business scandals of 2002, would you not have expected them to pull their snouts out of the trough until things had blown over? I am afraid there is a big shoe out there, like Fidelity, waiting to drop.

BobNJ wrote, "The thing I find astonishing about the mutual fund skimmers/market-timers is their brazenness."

It's not astonishing at all. The fact that people ever purchase load mutual funds, or funds with high annual expenses, shows that there are a bunch of suckers out there waiting to be fleeced.

BobNJ wrote, "The thing I find astonishing about the mutual fund skimmers/market-timers is their brazenness."

It's not astonishing at all. The fact that people ever purchase load mutual funds, or funds with high annual expenses, shows that there are a bunch of suckers out there waiting to be fleeced.

Paul Krugman's concern with corporate wrongdoing was proper from the onset and has been far far too little noted to date. The mutual fund wrongdoing has harmed American families saving for retirement in profound ways and is little noticed given the seriousness.

"Subsequent work has tended to exonerate businesspeople and blame the transformation of the end of a bubble into the Great Depression on the administration and the Federal Reserve."

This is absurd. The abuses in the 20's ranged from crooked utility holding company schemes to the Peruvian Bond scandals. The most that can be said about this is that there was no SEC, and no serious regulation of any financial institutions. So, there were no laws, other than common law fiduciary laws and State Blue Sky laws to regulate the blatant thievery that was going on.

The violent rejection of responsibility on the part of the financial elites continues today, and can easily be demonstrated. Prosecutors seem to think that the Enron, Global Network, and other recent violators of fiduciary duties, did not commit any actual crimes, and prosecution is greatly in doubt. More to the point, financial interests completely stopped all efforts at changes in applicable law, except the most cosmetic and irrelevant.

Most of the really smart people go to work for capital, and immediately start figuring out reasons why things are not the fault of the moneyed class, but rather are the fault of the stupid government. I go to one seminar after another where I hear about the miserable treatment of capital and never hear a word about the immiseration of the workers who flood the bankruptcy courts.

I wonder if any of the economists on this board have ever been to meetings of creditors at a bankruptcy court.

Masaccio

Agreed!

But not, to me at least, surprising. We don't have a securities and accounting regulatory system any more--haven't since the Reagan administration. One of the questions that concerns me--and I wish would concern more economists--is that of how accurate collected financial data can be in the absence of reliable auditing.

Meantime, I'm planning on moving half my savings to Europe and am wondering if there are any Western European mutual fund companies and banks doing business in the USA. Capital flight has begun.

We are skeptical. Look at Enron. How many
have been convicted so far? How much did they
lose of the public's money? Rich guys land
on their feet.

Alan Krueger - Professor of Economics, Princeton University:

http://www.nytimes.com/2003/11/13/business/13scene.html

Why Jobs Were So Late
By ALAN B. KRUEGER

HE latest reports from the Labor Department suggest that what might be called the Energizer Bunny recession in the job market - it just keeps going and going - might finally have come to an end.

If sustained job growth has indeed arrived, why did it take so long? Although there are no definitive answers, it is possible to piece together some plausible stories and to rule out others.

A popular explanation for why it has taken at least 20 months from the official end of the recession for job growth to resume - seven and a half times as long as the average in other postwar recoveries - is that exceptionally fast productivity growth made hiring workers unnecessary. On Monday, President Bush endorsed this view, telling BMW workers in Greer, S.C., "You see, high productivity, it creates a short-term problem, unemployment."

Implicitly, this view argues that for some reason there are limits to how fast the gross domestic product (that is, output of goods and services) can grow, so, by definition, faster labor productivity growth results in slower job growth.

Many have argued that this predicament afflicted Europe in the 1980's, causing an ailment known as "Euro-sclerosis," or prolonged job stagnation....

Hal, similarities with this NBER working paper on "The Causes of American Business Cycles":
http://econ-www.mit.edu/faculty/download_pdf.php?id=646
make me suspect the main antecedent of 'administration' is the Hoover administration, and so he's talking about "the inability of central banks and political leaders to free themselves from [an] inflexible monetary arrangement" in 1931. The paper also places responsibility for a 1937 shock with the Fed.

As I consulted the print WSJ to see what else was said in the article, I was struck by what the other two professors (Holmstrom and Kaplan from MIT and Chicago, respectively) are described as arguing. Basically, it's that the corporate governance system can't be fundamentally broken because we're doing so well considering, and otherwise there would be serious misallocation of capital and we wouldn't observe the sort of "productivity" growth we've seen. This seems to be somewhat selective use of the productivity statistics, insofar as the latest available MFP and output-per-unit-of-capital statistics aren't great (-1% and -4%, respectively), though those statistics are unfortunately aged (2001).

The article by Alan Krueger is on a much discussed topic on this wonderful Blog.

To me this seems to have been a constant of American life for decades, back at least to the savings-and-loan and BCCI scandals. So I've been continuously appalled for that whole time. No wonder I'm nuts. Nothing much ever seems to happen.

All the crooks have been smart enough to grease both parties generously. Sen. Lieberman, Arthur Anderson's boy in the Senate, was the Democratic point man on Enron. His summation was "It would be as bad to do too much, as to do too little". A truism, but not the right thing to say at that moment.

Nader was right on this issue. It's not a business-vs.-labor or business-vs.-environmentalists issue. It's small investors (and pensioners) against management (and other big players), but the "business Democrats" have double-crossed the very people they claim to speak for.

- Basically, it's that the corporate governance system can't be fundamentally broken because we're doing so well considering, and otherwise there would be serious misallocation of capital and we wouldn't observe the sort of "productivity" growth we've seen. -

That is not not not the point. We are seeing a divergence of income and wealth. The middle class is losing ground steadily to the wealthiest households. There is the allocation of resources problem!

anne, just to be clear, "it's"="Holmstrom and Kaplan argue" -- I had meant to note the Panglossian character of that argument in the previous post. I agree that there is a resource allocation problem in the redistribution of income and wealth to the corporate elite (having likened it to the 'tax theft' of Olson's 'stationary bandits').

Tom Bozzo - I knew that.

Sorry if I did not make myself clear. My argument is with Holmstrom and Kaplan entirely, and I thank you for spotting this so well. Your posts are interesting and useful.

Anne

I think the problem with income divergence is going to be of considerable and growing importance.

Please note the Alan Krueger column. Productivity in the first year after this recession turns out to have grown at a below average clip for post WWII recessions. We have some thinking to do about employment.

http://www.nytimes.com/2003/11/13/business/13scene.html

Randolf Fritz is right about the demise of the SEC. I watched it from an excellent vantage point. I know of two very fine litigators who were moved from fraud cases to insider trading cases. I know that the registration section of the SEC stopped dealing with tax shelters. SEC staffers, experienced people, lobbied State Securities Commissioners to stop certain kinds of regulation of small offerings, despite what their personal views on the subject. I saw CFTC bull-dog investigators pulled off a huge fraud case and put to work in market regulation (or some bureaucratic something).

And I saw the IRS swamped with abusive tax shelters at a level that defies belief.

Are there ecomomic models of the economy that include corruption and phony regulation? Or models that include estimates of the differences between the accounting we see in public filings, and those shown to the IRS and those which the managers use among themselves?

Thank heaven for Gretchen Morgenstern, and occasionally Floyd Norris. When I read their columns, I think that maybe someone is noticing that the business community wears the same outfit the administration loves so well.

Masaccio: I've had serious conversations with law professors who advocate eliminating the SEC altogether and simply putting a $1.00 tax on every trade on the public markets. Then, with that money, use it to advertise to educate the public and warn that corporate officers, brokers, CPAs, lawyers, venture capitalists etc. can be crooked and to be very wary before investing. Then just rely on the common law and fiduciary duty law to regulate the fraud and corruption.

Zizka: "To me this seems to have been a constant of American life for decades, back at least to the savings-and-loan and BCCI scandals." Two decades, to be exact--starting in the Reagan administration. Prior to that the federal system at least provided a check on the state systems, which were pretty corrupt.

Masaccio, thank you for the support.

Cal, one thing that Enron showed us is that even informed, knowlegeable investors can be taken in by fraud. Even the pros were taken in. So I think those law professors are wrong.

"That is not not not the point. We are seeing a divergence of income and wealth. The middle class is losing ground steadily to the wealthiest households. There is the allocation of resources problem!"

Posted by: anne on November 13, 2003 01:21 PM

I think that many (a majority of?) economics professors believe, deep down inside, that such a divergence indicates a more efficient economy. The more productive profit more. Corruption, fraud and theft are, of course, somehow taken care of by the market.

Barry, 'deep down inside' is a tough standard. I assume that deep down inside Grover Norquist can't believe his own more extreme pronouncements on what he'd like to do with government (and this is just looking at the incentives, rather than assuming there is a warm and fuzzy Grover inside him: he'd be out of a job, and he'd have to trust a collection of roving bandits not to rob him of all 50 cents of his tax-free earnings). But for all I know he really could be the equivalent of Lionel Hutz imagining the world without lawyers.

Still, I think 'more inequality is necessarily better' (in the sense of indicating a more efficient economy), or 'any particular distribution of income/wealth is necessarily an efficient outcome' should get relatively few takers among economics professors. This is in part because they should be aware of conditions of imperfect competition, increasing returns, and externalities that keep us off the Pareto frontier. Also, given those assumptions, even social welfare function deniers should accept the basic logic of this post in describing the market's implicit SWF (if there were one):
http://www.j-bradford-delong.net/movable_type/2003_archives/002425.html

Last, there should be even less take-up on the proposition that markets are somehow inherently self-regulating -- not from anyone who knows the first thing about the subject, anyway.

I have become Death, the destroyer of worlds.