Inequality and Accountability

January 24th, 2014 at 9:31 am

Thanks to the fading of the budget deficit as the only thing “responsible” policy makers must talk about, issues of greater near-term concern to both the economy and most of the people in it are surfacing in the echo chamber of public debate.

Inequality has most notably surfaced of late, thanks in part to the President’s elevation of that theme.  As I and others have written lately, this is a real advance, but it matters, of course, where you take it.  To me, the two most fruitful avenues are its impact and what to do about it.

On impact, a primary concern is that at today’s excessive levels, the inequality of income and especially wealth begins to block opportunities for those on the wrong side of the divide.  On what to do about it, I’m with Krugman re jobs and full employment.  But Mark Schmitt makes a strong case for the targeting the outsized political influence of concentrated wealth.  And it’s not like you have to choose one.

In fact, there’s another important part of this inequality debate that I haven’t heard enough about lately—an issue I wrote a lot about back during the Occupy Wall St. movement: accountability.

Here’s how I described the issue back then:

Protest movements are often born of two interacting injustices: the lack of opportunity and the lack of accountability by the persons perceived to be blocking that opportunity.

Given the facts of the income distribution, the trends in real middle-class incomes and poverty, the failure of policy to do much to change these trends, the government bailouts of the only class that’s benefitted from the recovery so far, the absence of clear punishment/accountability for the financial and political institutions that helped inflate the debt bubble that continues to squeeze economies across the globe, and the dysfunctionality of the current political system (they’re arguing more about whether they can keep the lights on than whether they can help solve the economic problems), the more interesting question is what took so long for such protests to show up?

This thought came back to me today upon reading this headline in the NYT:

Fined Billions, JPMorgan Chase Will Give Dimon a Raise

That’s Jamie Dimon, the CEO of JPMorgan.  The piece points out that last year, after the bank suffered a multi-billion dollar loss from an out-of-control derivative trade (the infamous “London Whale” episode), Dimon’s compensation was cut in half to $11.5 million.  This year, the board apparently agreed to replace some of the cut, despite large fines related to the bad trade, JPM’s role in the mortgage backed security crash, and turning “a blind eye to signs of fraud” around the Madoff scheme.

The debate pitted a vocal minority of directors who wanted to keep his compensation largely flat, citing the approximately $20 billion in penalties JPMorgan has paid in the last year to federal authorities, against directors who argued that Mr. Dimon should be rewarded for his stewardship of the bank during such a difficult period.

Regarding that stewardship point, it’s worth noting that the bank was, in fact, highly profitable last year, to the tune of $18 billion.

Those facts and numbers help explain why accountability—and lack thereof—is another important part of what I believe people think about and hear when the broad “inequality” issue is raised.  But it goes beyond that.  The financial sector, now highly profitable—JPM isn’t the only bank posting double-digit profits in the billions—helped mightily to inflate the housing bubble from which most American households are still recovering.

So, when policy makers are thinking about the policy set implied by the inequality debate, I’d strongly add accountability–and thus, government oversight–to the list.  I don’t think we can count on corporate boards to do it for us.

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5 comments in reply to "Inequality and Accountability"

  1. smith says:

    Regarding inequality, there is no getting round basic math. If the 1% are taking 20% of income, vs. a more historical 10% to 12% average, nothing will address that unless you take away a big chunk of that income. The only way to do that is with taxes, for example, Eisenhower rates that reach 90% of money earned over $2 million (in today’s dollars). But income tax alone won’t adequately reach the 1%, you’d have to raise capital gains, qualified dividends, corporate rates, and eliminate carried interest to raise effective rates.
    Then to tighten the labor market while at the same time expanding the labor pool, one should allocate funds (from the new taxes) to address the child care gap (what parents do, and let’s face it this means mothers) of 3:00 pm to 5:00 pm care, 3 and 4 year old care, and July and August care. Good to recall also the toll July and August takes on disadvantaged youth (accounts for huge gap that develops).

  2. Perplexed says:

    -“…but it matters, of course, where you take it. To me, the two most fruitful avenues are its impact and what to do about it.”

    This is “Loser Liberalism” at its finest! Instead of focusing on the origins of the problem we divert the discussion to “how do we help those poor unfortunate folks that are “left behind” by the “advancement” of “modern technological” societies. Framing the “problem” in this context will be sure to “crowd out” most of the needed discussion of the true sources of the inequality and insure that the status quo regarding these sources, and its beneficiaries, are left undisturbed. Unfortunately, (or maybe fortunately) we are quickly approaching the point at which this “inequality problem” is likely to (and already to some extent e.g. The Occupy movement and the resulting government crackdown) severely stress the entire political system that generated it. Our wealth GINI is .87, a startling number that itself defies any “marginal products” explanation. A number so extreme that if we don’t deal with it, it will deal with us.

    IMHO, this is a “problem” we can only begin to address by understanding that this level of inequality is a “symptom” and not itself the underlying problem (although it surely generates lots of other problems once its “baked in” to and fully entrenched it the “system”).

    This is not a mystery, we know what generates inequality (even if economists refuse to support the public interest by measuring and recording rents as a percentage of GDP). We have “baked inequality in” to our measurements and intentionally obfuscated the more legitimate sources of inequality (those that provide a public benefit beyond what they cost society) with those that divert income and wealth to individuals in ways that take from, instead of contributing to public welfare (e.g. Corporations, remember, this was what they were supposed to do, why they were allowed in the first place). We also know that legislation like the 1914 Clayton Act that strips the power of those whose product is “labor” (the 95%) from protections afforded to producers of all other products and services, works in conjunction with other legislation to empower those who buy labor at the expense of those who sell labor. Nothing will change (other than more social unrest) if we don’t get at the “roots” of this problem. Just as we separate “earned” vs. “unearned” income, we can, with some political will (and lots of help from economists) separate “marginal products” inequality from “legislated” inequality. We can start by separating income generated through capitalist competition and real risk undertaking (without help or free government insurance) from income generated with help from government granted monopolies and government granted tax expenditures. This distinction alone will likely produce rather startling results that will lead us quite quickly to the most damaging (and correctable) sources of inequality. Monopolies granted today are no different in their impacts than those granted by monarchs. They work against capitalism, not in favor of it, yet economists “go along” with the misguided presumptions that monopolies are a “component” of capitalism. Nothing could be further from the truth; its competitive capitalism that generates welfare to society and monopoly profits that again threaten it. The monopolies and other government granted corporate welfare are “tainting” the name of competitive capitalism and, combined with unequal protections that undermine the power of labor and the ability of laborers to “pool their risk,” generating unprecedented inequality that has very little (not nothing, but very little) to do with differences in “marginal contributions.” Loser Liberalism cannot solve this problem, but equal protection and competitive capitalism might stand a chance. We must however, as Schmitt & Lessig suggest, reclaim “our” Republic first, we really don’t stand much of chance otherwise. The “Lesters” now in control are the source of most of the “illegitimate” (as in that without net public benefit) inequality; if we don’t regain control of our Republic, we don’t stand a of changing that and will instead continue to search aimlessly for “Loser Liberalism” solutions for the victims.

  3. Robert Buttons says:

    There is a revolving door between government and Wall St. If we insist on impartial govt oversight, we must first close that door. But……the best and brightest gravitate towards the private sector, so closing the door closes off the best and brightest potential overseers. Catch 22. Now that is one of many reasons govt oversight tends to fail: the oversight doesn’t have the brainpower to stay ahead of the game.

    If we could just let the losers lose (absolutely no bailouts) we would fix the moral hazard problem. If we restrain the ridiculous, insane, out-of-control liquidity, we would have fewer malinvestments and derivatives of derivatives in the Wall St. Casino(tm). The requisite amount of oversight would drop exponentially…..of course the downside of this plan is half of Wall St would have to find productive work.

  4. readerOfTeaLeaves says:

    Last week, at Jesse’s Cafe Americain, the blog owner posted a video interview by Greg Hunter at ‘USA Watchdog’ with UMKC Prof. Bill Black. I don’t know about the reputation of ‘USA Watchdog’, but Jesse’s Cafe has a stunning gift for prescience. Partway through the video interview, Hunter asks something like “JPMorgan lost as much (money as) the entire market capitalization of Dell Computer. Why does Jamie Dimon still have a job?!”

    CEOs tend to have a lot of control over Board appointments.
    Which may explain why Jamie Dimon still has a job. And a bonus.

    The market cap of Dell Computer = $24.38 billion.

    In Oct 2013, JPMorgan Chase said it had ‘stockpiled’ $23 billion for expected settlements and other legal expenses. Meanwhile, the bank posted losses of $380,000,000 in 2013Q3.

    Gotta hand it to Dimon – it’s quite a feat to preside over a company that set aside the equivalent of the entire market cap of Dell, and get a bonus of millions.

    Inequality is one part of the economic conundrum.
    But Carville might want to update his old “It’s the economy, stupid” mantra to, “It’s the lack of accountability, stupid.”

    • Perplexed says:

      Thanks for the link to the Bill Black interview.

      Bill Black’s book, “The Best Way to Rob a Bank is to Own One” is a real “eye opener” and insider’s view of how the role of government capture by banker’s actually operates. It also describes well what the reality is for actual regulators who dare to contest this “system” that is ultimately controlled by bankers and their political cronies. The corporate controlled media has effectively marginalized Black’s voice when he should have been THE “GO TO GUY” throughout most of the banking and counterfeit mortgage fraud crisis. It really puts the government’s actions in letting the banks dictate how to handle the fraud and crisis in perspective when you understand that they knew, in considerable detail, what criminal bankers were really capable of from the S&L crisis. IMHO, no one who has read Black’s book would be able to see any justification of selling indulgences to criminal bankers as was done by the Justice Department. If you’re not completely convinced after reading Black’s book (not likely but possible I suppose), try “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street” by Neil Barofsky for another great insider’s account of how things really work under government by and for the plutocrats.