My Conversation with Brink Lindsey and Steve Teles

This is an out-of-synch bonus episode, rushed out because I think their new, just-out book — The Captured Economy: How the Powerful Slow Down Growth, Enrich Themselves, and Increase Inequality — is so important.  You will find the podcast here, lots of rapid fire back and forth.

Everyone wanted me to interview them together, but I said no, I would instead interview them separately and ask about 2/3 the same questions to see how their answers might hang together, or not.  That is how co-authors should be treated!  I also asked each what the other has for breakfast, and by the end each had confessed to several crimes, to avoid a longer sentence of course.

Here is the smallest of bits:

COWEN: Are higher levels of executive compensation part of the problem?

TELES: There you probably would get a different answer between me and Lindsey.

COWEN: That’s why I asked

Recommended, again here is the podcast (no transcript, we wanted to get this out right away).


I got a bad link.

sorry, fixed,

“How the powerful slow down growth, enrich themselves and increase inequality”.

Are you sure you aren’t talking about the IRS and Congress? Imagine the boom that would result from much lower taxes and far fewer regulations and red tape.

I am interested in their two answers to the question posed by Cowen. My view is that, first, inequality is a problem and needs to be addressed. My view is also that while income inequality can be a problem by contributing to wealth inequality, the latter is the main problem. The graph of wealth inequality in the U.S. during the past 100 years will notice that it's bowl shaped, the vertical axis being the level of inequality, with the top of the bowl around the years 1928 and 2007 (and today) and the bottom of the bowl during the long period of shared prosperity after the war, and with a steep drop in wealth inequality following the 1929 financial crisis and a steep climb in wealth inequality starting around 1980. Nothing really new there. But what's often forgotten is that the steep drop in wealth inequality following the 1929 financial crisis did not coincide in a drop in income inequality; instead, even during the worst years of the depression, income inequality was high. I would think there are a few lessons here. First, wealth inequality is primarily the result of a rise in asset prices, the rise in asset prices producing lots of (capital) income for those fortunate enough to own the assets. Second, (non-capital) income inequality isn't such a big deal.

"My view is that, first, inequality is a problem and needs to be addressed."



Thanks for clearing that up

Yes, yes Donald. (.04545450-.047619048)/.047619048=-.0454545

Because it is vile to live in a society where the wealthy can (and do!) treat those with less money as serfs and even slaves. Eg: all the light shed recently on sexual abuse in Hollywood.

The first lesson from my comment: "First, wealth inequality is primarily the result of a rise in asset prices, the rise in asset prices producing lots of (capital) income for those fortunate enough to own the assets." One might conclude that the owners of assets have an incentive to promote policies that increase asset prices. One might conclude that owners of assets have an incentive to promote policies that promote price volatility. One might conclude that asset price volatility can produce falling asset prices - what goes up must come down - and that falling asset prices can quickly become uncontrollable. The second lesson from my comment: "Second, (non-capital) income inequality isn’t such a big deal."

It interests me about that wealth inequality due to asset prices, that is that if the owners sell the value of the assets will fall thus income generated from the selling is just wealth changing hands among the wealthy (excluding housing a rise in housing costs does make it hard for first time buyers). It seems not so consequential. The income generated and consumed seems to me what is important.

I wonder how the distribution of consumption among income groups has changed with the growth in inequality.

I found a link on the subject:

Another one: Does Income Inequality Lead to Consumption Inequality?

I think what you mean by "consequential" is that (non-capital) income is the true measure of economic prosperity. Asset prices can go up, down, and all around, but how much of that movement actually represents economic growth or economic contraction. Sure, when asset prices go up one feels wealthier and may spend more. And when asset prices go up, one may sell the appreciated asset and spend more. All is well until some event occurs that triggers selling by every owner of assets. causing asset prices to plummet and financial markets to lock up. Relying on rising asset prices for economic growth seems rather stupid, doesn't it? Yet much of current policy is designed to promote rising asset prices, including monetary policy as well as tax policy (e.g., the tax preference for capital income). Are we stupid? Insanity has been defined as repeating the same behavior and expecting a different result. Maybe we aren't stupid, just insane.

I recall a couple of years ago Ray Dalio complaining because asset prices were too stable. No, he wasn't complaining that asset prices were falling, he was complaining that asset prices were too stable. He could make money on falling asset prices or on rising asset prices, but not stable asset prices. Dalio isn't stupid.

I'm afraid that I must qibble with a piece of Rayward's phrasing: "for those fortunate enough to own the assets". Indisputably, luck plays a part in wealth distribution—it certainly doesn't hurt to have rich parents, and to not come down with expensive medical conditions—but there's nothing to prevent the average person from acquiring wealth by dilligently pursuing opportunities to improve one's job skills, and by living frugally and investing carefully.

Our progressive brethren are given to recounting cherry-picked stories of prudent hard-working people impoverished by cancer or fraud; but I suspect that the vast majority of the asset-poor didn't get any more education than the law required, had all the children they wanted (or couldn't be bothered to prevent), and never denied themselves the little pleasures of life so long as they had cash on hand or hadn't yet maxed out their credit cards.

I have an employee who worked at low paying retail jobs for most of his career. He rented a single room, and worked two jobs.

He then was able to save enough to purchase a house - not a great house, but a house.

He also found a job with us and gets paid a lot more per hour, and bought a newish car.

1) Working extra hours is really helpful. Assuming people should only work 40 hours a week like a professor is a luxury.

2) Getting a better job is important, too. I think many people don't know how to strive, to keep looking for a better job, unless you feel the current job is really allowing growth.

3) What's the message from Bernie Sanders though?

The rich should be paying you more ! You should work less! You deserve free stuff!

I have not listened yet. I will save it for my walk a little later. But this seems related:

Only 25% of American’s think Trump’s tax plan is a good idea. Less than 15% think they’ll benefit.

Something like that can't last. A congress, a political party, can't serve ~15% with ~25% approval for long. They will have to come up with a better plan.

Famous Bulgarian communist Dimitrov famously pointed out that nazism was the dictatoship of Krypp and Thyssen. Likewise, famous Yugoslavian dissident Milovan Djilas pointed out that the commmunist regime had become, as British writer George Orwell, by the way, had argued a few years earlier, the dictatorship of a New Class, which was obvioulsy defined by its collective control of the means of production.
In the same vein, the American refime can be defined as the dictatorship of Wall Street, K Street, Main Street, Sillicon Valley, politically connected churches, oil barons, the Chinese, Japanese, Zionist and Saudi lobbies and powerful public workers' unions and elite universities. The Americannstate has become the executive committee of those special interests.

Your criticisms of the American regime are (sometimes humorously) over the top, but (sometimes sadly) with a grain of truth.

As we digest the news of the week ..

Why did the Trump inner circle think of Russian oligarchs as their friends? Because they were. And so the dark side of a government by the billionaires is that it might be (a bit in spirit) for the billionaires.

Some polls say that Trump has turned Republicans against a free press. Why he would do that looks to be a collision of ideas. There is the narcissism, connected to authoritarian tendencies, but it might not be connected to a real populist yearning. Did the oligarchs just make oligarchy look good to the billionaires?

Can we remember any American billionaires who sought to be thought leaders against democracy?

So you know, why call the FBI when the people you go clubbing with offer you a little shady intelligence. Back-scratching, and a truly elite disregard for norms, are already in place.

Famous communist leader Leon Trotsky created the concept of degenerate workers' state, a state where the stalinist-like bureaucracy wrested country from the toiling masses. America has become a degenerate capitalist state where special interests, specially malefactors of great wealth, wrested the control from "We, the people".

The bright side is that when someone names a really long list of "special interests" we end up back at something like democracy:

"Wall Street, K Street, Main Street, Sillicon Valley, politically connected churches, oil barons, the Chinese, Japanese, Zionist and Saudi lobbies and powerful public workers’ unions and elite universities."

As long as everyone's "special interest" is coveted, and with "main street" it probably is.

I don't think so. The so-called Main Street is a junior partner in the coalition that controls American lives. Itis assured control over its own employees and customers (by de-fanging pro-labor and consumer legal provisions). Americans now are reduced to choose between two representatives of the pluticratical forces that control American society, the puppeteers, if you will.

nazism was the dictatoship of Krypp and Thyssen

No. It wasn't.

Well, I listened as I rode my bike down to the beach and a egg and chicken breakfast burrito (die chickens, die).

It all sounds fine, and unfortunately did not challenge my priors. #ama

A good follow up listen,

In the spirit of "the pea might be under another walnut shell."

Such is life in Trump's America.

This was very good, a return to form!

Quoting from the blurb"
In The Captured Economy , Brink Lindsey and Steven M. Teles identify a common factor behind these twin ills: breakdowns in democratic governance that allow wealthy special interests to capture the policymaking process for their own benefit. They document the proliferation of regressive regulations that redistribute wealth and income up the economic scale while stifling entrepreneurship and innovation. When the state entrenches privilege by subverting market competition, the tradeoff between equity and efficiency no longer holds.
Goldman-Sachs runs the debt cartel and they conspire with Treasury and the wealthy to keep the government yield curve stable and flat. Thus, they can predict price volatility, they actually compute it. If you know volatility and rates ahead of time then then they front run the market daily. All the senators have financial advisors connected to the cartel for inside trading.

"A belief that explains an event as the result of a secret plot by exceptionally powerful and cunning conspirators to achieve a malevolent end" a conspiracy theory. Were the Goldman traders also seen on the grassy knoll?

Nothing wrong with a conspiracy theory when there are conspiracies.

Just because you're paranoid doesn't mean they're not after you.

A rolling stone gathers no moss. Your turn.

A stitch in time saves nine. Now you go.

Not at the grassy knoll, but in the debt advisory committee. A committee made of financial analysts of the primary dealers in government debt. They meet with Treasury officials to lan the debt offerings before they appear. The obvious reason is that the primary dealers sell the debt and they know how much money their clients have.

No one doubts that GS is the head primary dealer which is why top Treasury officials come from GS.

Why would the debt advisory committee meat with Treasury? To make sure the offering is mostly met with low volatility. How low? Whatever the primary dealers compute with their clients after the debt advisory committee plans the offering.

And so on, yielding knowledge of today's volatility before the market opens, leading surplus to put on the stock market. The stock price direction, as an index, is a function of the PE ratio, the one year safe rate and volatility.

This is the ramp up scenario we see each day, wealthy people taking advantage of prior information.

Congress would never make interest payments otherwise, they are about bankrupt.

Would be very interested in a transcript. Speech-to-text, anyone?

From the preview: "As Mancur Olson famously argued...and as economists...Acemoglu [et al.]...have found recently, when institutions are weak to resist capture by the powerful ...economic decline, corruption, and political instability grow in a vicious cycle. This is the cycle that has taken hold in the U.S."

Let's analyze this: Mancur Olson has great theories but little empirical backing, while Acemoglu et al may have the latter, but what is his sample size? The Byzantine Empire lasted about 1000 years and had no 'decline' (except at the very end), ditto the Old, Middle and Late Egyptian empires, the Roman Empire lasted about 300 years without 'decline' except at the very end, and several Chinese dynasties lasted 300 years (the norm for empires is about 200 years). In short, is Acemoglu et al. simply comparing modern Africa to modern USA/Europe and drawing conclusions? Very common fallacy to do this; another one is to divide the earth into northern and southern hemispheres and track performance. Also Greece, China and the Philippines are corrupt yet GDP increases slowly over time. And even in the USA, this supposed "cycle" has not prevented real GDP/capita from increasing since falling from 2008.

There's a chapter on intellectual property in this book, but I bet it's just knee jerk parade of horribles of the kind AlexT does.

"There you probably would get a different answer between me and Lindsey" - says the co-author Teles. So there was disagreement on executive compensation, but what version ended up in the book?

Bonus trivia: the American Revolution was started over an insignificant tea tax that was to pay for the Indian wars vs the French, and in the Roman Empire most taxes were less than about 3% of income, say many estimates (slave labor helped a lot to keep tax rates down, as will, in our future, robotic labor). So who thinks people fight over taxes being too high? Certainly not the 99%.

Ray, It was No Taxation Without Representation, not No Taxation.

OK Donald Pretari, thanks, but see also this from Google: "The British government argued instead that the colonists enjoyed virtual representation, that they were represented in Parliament in the same way as the thousands of British subjects who did not have the vote, or towns not represented in Parliament, such as Birmingham and Manchester.". You don't seen Birmingham and Manchester trying to BrExit do you? Or maybe I spoke too soon?

Consider Bill Gate. In 25 years at Microsoft he gained 25 billion. He quit some ten years ago, invested in the wealth funds and is now worth 100 billion. How did that happen?

Congress delivers a premium to wealth for keeping interest expenses affordable. The premium arrives in the front run stock market.

When Congress borrows way too much, the wealthy buy something else before the market crashes, they have advanced warning.

None of that is true.

Tyler, you should interview Henry Marsh.

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