Friday, January 30, 2015

Inflation, Debt, Return on Capital, and Inequality

One of the most striking conclusions to be drawn from Thomas Piketty’s masterful work Capital in the Twenty-First Century is that the postwar era, from 1945 to the present, was an anomalous period economically, unlike any other period in history.  Prior to 1910, the developed world experienced centuries of very slow per capita growth.  That era came to an end with World War I, which was soon followed by the Great Depression and World War II.  This catastrophic period destroyed much physical capital.  It was necessarily followed by a period of great economic and social activity as the developed world strived to rebuild and reconstitute itself.  Business was good and economic growth was high.  Incomes grew quickly and a middle class emerged as a significant social and economic construct.  However, since about 1970-1980 growth has been slowing down and appears to be returning to its low historical norm.

It is interesting to ponder what such a return to the norm might mean for the future.  After all, most of us born prior to about 1980 grew up and formed our opinions and expectations during this unusual and abnormal era.  More ominously, perhaps, economists formed their theories of how the world works during this period as well.  We could be in for a nasty surprise.

Piketty points out that not only was high growth unique to this postwar period, but high inflation as well.  He provides this plot of the rate of inflation since 1700 for four developed countries including the US.

The rate of inflation hovered around zero up to the time of the first world war, grew by various amounts during the war and postwar years, began to fall but experienced a significant blip around 1980, and then resumed its fall in all countries.  One could examine this chart and conclude that we appear to be returning to the historical norm of very low inflation.  An indefinite period of near zero inflation is not something we have experienced in our lifetimes.  If we are entering such a period, it would be a good idea to ask what this might mean for our economies and for our societies.

Piketty provides some insight into the role inflation has played in the past and what role it might play in the future.  In the following chart he discusses the history of British national debt and the role of inflation and government decisions.

Britain accumulated an enormous public debt in fighting the Napoleonic Wars, reaching almost 200% of GDP (national income is closely equivalent to GDP).  The British government needed money to conduct these conflicts and chose to borrow it from its wealthy citizens, who could afford to lend it, rather than tax them to obtain it.  The earnings on this national debt became the basis for a long and steady period of growth in wealth for the already wealthy.

Piketty defines two forms of capital (wealth), that with nominal value and that with real value.  A government bond has nominal value and if the value of currency appreciates or depreciates this value remains constant.  Real capital, such as real estate holdings or stocks in a company, will tend to follow the inflation rate.  The British government debt was held as bonds with nominal value.  Since inflation was around zero for the next hundred years this form of wealth retained its value and provided a steady income. 

The British could have reduced their national debt by taxing the earnings from this debt.  Instead it chose to shelter its wealthy from such an inconvenience, and practiced a century of austerity instead.  Austerity generally means that the poorer you are the more you suffer from a decrease in government services.

“The most interesting historical example of a prolonged austerity cure can be found in nineteenth-century Britain….it would have taken a century of primary surpluses (of 2-3 points of GDP from 1815 to 1914 to rid the country of the enormous public debt….Over the course of this period, British taxpayers spent more on interest on the debt than on education.  The choice to do so was no doubt in the interest of government bond holders but unlikely to have been in the general interest of the British people.  It may be that the setback to British education was responsible for the country’s decline in the decades that followed.”

The British acquired an even greater public debt by the end of World War II.  This time, however, inflation was running at around 4%, relatively modest for that period, and the national debt quickly disappeared.  Nominal assets such as government bonds get clobbered by inflation and debts are quickly paid off with depreciated currency.  The four countries in the first chart all benefited from historically high inflation in disposing of the wartime debts that had accumulated.

“Historically, this is how most large public debts were reduced, particularly in Europe in the twentieth century.  For example, inflation in France and Germany averaged 13 and 17 percent a year, respectively, from 1913 to 1950.  It was inflation that allowed both countries to embark on reconstruction efforts in the 1950s with a very small burden of public debt.  Germany, in particular, is by far the country that has used inflation most freely (along with outright debt repudiation) to eliminate public debt throughout its history.”

The fact that inflation has decreased considerably in recent years means that a significant fraction of the debt accumulated in countering the Great Recession will likely have to be repaid in the more traditional way: taxes and/or austerity.  With European countries—and the US—possessing debts hovering around 100% of GDP:

“There is hope that European austerity might last only ten or twenty years (at a minimum) rather than a century.  Still, that would be quite a long time.  It is reasonable to think that Europe might find better ways to prepare for the economic challenges of the twenty-first century than to spend several points of GDP a year servicing its debt, at a time when most European countries spend less than one point a year on their universities.”

The ease with which inflation allowed governments to finance large expenditures without acquiring burdensome debt left the impression that inflation was a social good that would allow an expansion of government services at little cost.

“In the twentieth century, a totally different view of public debt emerged, based on the conviction that debt could serve as an instrument of policy aimed at raising public spending and redistributing wealth for the benefit of the least well-off members of society….in the nineteenth century, lenders were handsomely reimbursed, thereby increasing private wealth; in the twentieth century, debt was drowned by inflation and repaid with money of decreasing value.  In practice, this allowed deficits to be financed by those who had lent money to the state, and taxes did not have to be raised by an equivalent amount.  This “progressive” view of public debt retains its hold on many minds today, even though inflation has long since declined to a rate not much above the nineteenth century’s, and the distributional effects are relatively obscure.”

Piketty regards the redistribution that occurred in the twentieth century due to inflation as a powerful mechanism for social change, but he warns that inflation is devastating only to certain types of wealth.  Nominally-valued bonds held by the wealthy are affected of course, but so are the savings of the non-wealthy affected as well.  Inflation only works when lenders have not prepared for it.  Anticipation of inflation will now quickly drive up the interest lenders will demand for the purchase of government debt and any spending benefit from depreciating currency disappears.

It is possible that inflation might also have a redistributive effect in transferring wealth from those whose earnings come from investments to those whose earnings come mainly from wages.  As it happens, wages and average return on capital tend to follow the increase in consumer prices.  Modern wealthy investors now anticipate the effects of inflation and move their assets around to compensate.  Assets that perform well in periods of low inflation can be converted to assets that perform well when inflation is high

“Some people think, wrongly, that inflation reduces the average return on capital.  This is false, because the average asset price (that is, the average price of real estate and financial securities) tends to rise at the same pace as consumer prices….it is likely that inflation changes the distribution of this average return among individual citizens.  The problem is that in practice the redistributions induced by inflation are always complex, multidimensional, and largely unpredictable and uncontrollable.”

Piketty even surmises that inflation could act to benefit the wealthy because they are in a better position to gain access to the opportunities and expertise required to obtain higher than average rates of return on their capital.  It takes wealth to accumulate wealth.

A future of low growth rates and low inflation would seem to involve stagnating wages and a healthy return on capital.  That is what the past tells us.  The past also tells us that if we wish to both retire national debt and redistribute wealth, the most efficient and fair way is to impose a small but progressive tax on wealth.  That is the message Piketty has bequeathed to us.

Monday, January 26, 2015

Climate Change and Capitalism: Must Everything Change?

Naomi Klein has produced one of the most provocative books yet on the evolving tale of our planet’s inevitable warming: This Changes Everything: Capitalism vs. The Climate.  She provides a detailed look at the roles the various participants have played in the global warming arena as we have edged ever closer to what appears to be a point of no return.  Few are left unscathed.

We have the somewhat arbitrary goal of limiting emissions to the point that global warming will not exceed 2 degrees Celsius, but the world has no clear path to attaining that goal, and we are, in fact, on schedule to reach 4 degrees of warming by the end of this century.

“In Copenhagen, the major polluting governments—including the United States and China—signed a nonbinding agreement pledging to keep temperatures from increasing more than 2 degrees Celsius above where they were before we started powering our economies with coal.  (That converts to an increase of 3.6 degrees Fahrenheit.)

Predicting exactly what effects a given temperature rise will cause is uncertain, but it is clear that major changes in the environment are on the way.  Complex systems such as the earth’s can produce nonlinear excursions that are difficult to predict and impossible to counter.

“In a 2012 report, the World Bank laid out the gamble implied by that target.  ‘As global warming approaches and exceeds 2 degrees Celsius, there is a risk of triggering nonlinear tipping elements.  Examples include the disintegration of the West Antarctic ice sheet leading to more rapid sea-level rise, or large scale Amazon dieback drastically affecting ecosystems, rivers, agriculture, energy production, and livelihoods….’  In other words, once we allow temperatures to climb past a certain point, where the mercury stops is not in our control.”

“The World Bank also warned when it released its report that ‘we’re on track for a 4˚C warmer world [by century’s end] marked by extreme heat waves, declining global food stocks, loss of ecosystems and biodiversity, and life-threatening sea level rise.’  And the report cautioned that ‘there is also no certainty that adaption to a 4˚C world is possible.’  Kevin Anderson….of the Tyndall Centre for Climate Change Research….is even blunter; he says 4 degrees Celsius warming—7.2 degrees Fahrenheit—is ‘incompatible with any reasonable characterization of an organized, equitable and civilized global community’.”

Opinions vary as to how much time is left before action to curb carbon emissions will be too little and too late.  Klein selects this one:

“….so much carbon has been allowed to accumulate in the atmosphere over the past two decades that now our only hope of keeping warming below the internationally agreed-upon target of 2 degrees Celsius is for wealthy countries to cut their emissions by somewhere in the neighborhood of 8-10 percent a year….this level of emission reduction has happened only in the context of economic collapse or deep depressions.”

Given a situation so dire, how can so many people reside comfortably in a state of denial over humanity’s role in climate change?  Psychologists can provide many explanations for why people are able to ignore facts that counter firmly-held beliefs.  Klein describes those whose beliefs are most threatened as those with the most to lose if global warming was accepted as truth: free-market capitalists.

“….their deep fear that if the free market system really has set in motion physical and chemical processes that, if allowed to continue unchecked, threaten large parts of humanity at an existential level, then their entire crusade to morally redeem capitalism has been for naught.  With stakes like these, clearly greed is not so good after all.  And that is what is behind the abrupt rise in climate change denial among hardcore conservatives: they have come to understand that as soon as they admit that climate change is real, they will lose the central ideological battle of our time—whether we need to plan and manage our societies to reflect our goals and values, or whether that can be left to the magic of the market.”

“Climate change detonates the ideological scaffolding on which contemporary conservatism rests.  A belief system that vilifies collective action and declares war on all corporate regulation and all things public simply cannot be reconciled with a problem that demands collective action on an unprecedented scale and a dramatic reining in of the market forces that are largely responsible for creating and deepening the crisis.”

Klein also directs criticism at many of the traditional environmentalists—referring to them as “warmists”—who collaborate with climate deniers by propagating the belief that incremental measures can address our difficulties.

“So here’s my inconvenient truth: I think these hard-core ideologues understand the real significance of climate change better than most of the ‘warmists’ in the political center, the ones who are still insisting that the response can be gradual and painless and that we don’t need to go to war with anybody, including the fossil fuel companies.”

In other words, if the free-market ideologues see global warming as an excuse for a social revolution, they are correct.  Klein believes that social and economic revolutions are not only necessary, but also desirable. 

Klein spends much of her book describing the ever more environmentally damaging attempts to gain access to ever more fossil fuel supplies—even as the earth bakes from past carbon emissions—as evidence that nothing of significance can be accomplished under our current oligarchic system.  The energy companies have always created “sacrifice” zones where fuels were to be extracted.  The environment could be destroyed and people harmed as long as such things took place in remote locations where the inhabitants were powerless.  But now the whole world is in danger of becoming a sacrifice zone.  Fracking takes place in our back yards.  Canada has given over enormous sections of its wilderness to destruction in order to generate more excess fossil fuels.  Companies wish to subject Arctic waters to the threat of oil spills.

Too many people now see their homes and livelihoods threatened and they have begun to fight back.  Klein covers the protests that extreme extractive practices have generated among indigenous peoples and others around the globe.  She sees within these growing protests a level of resolve that she believes could form the foundation for a social movement broad enough to enact the necessary changes.

“….only mass social movements can save us now.  Because we know where the current system, left unchecked, is headed.  We also know, I would add, how that system will deal with the reality of serial climate-related disasters: with profiteering, and escalating barbarism to segregate the losers from the winners.  To arrive at that dystopia, all we need to do is keep barreling down the road we are on.  The only remaining variable is whether some countervailing power will emerge to block the road, and simultaneously clear some alternate pathways to destinations that are safer.  If that happens, well, it changes everything [emphasis mine].”

Global warming thus can be converted from a tragedy to an opportunity to remake society and correct its accumulated defects.  Klein makes valid arguments that restricting globalized trade, moving from fossil fuel power to renewable power, and relying more on local production of food would entail dramatic change.  Decentralizing economic power and distributing it to many more players could significantly alter the inequality that has characterized our current situation.  However, Klein takes this notion of an opportunity for change quite a bit too far.  She notes that major movements of the past have yet to reach their goals: decolonization, civil rights for minorities, feminism, and sovereignty for Indigenous peoples.  She suggests that the remnants of these movements might coalesce into something truly productive.

“So climate change does not need some shiny new movement that will magically succeed where others failed.  Rather, as the furthest-reaching crisis created by the extractivist worldview, and one that puts humanity on a firm and unyielding deadline, climate change can be the force—the grand push—that will bring together all of these still living movements.  A rushing river fed by countless streams, gathering collective force to finally reach the sea.”

Combining a well-constructed plea for dramatic action to battle global warming with a collection of social thrusts that appear orthogonal to the problem at hand seems like a ridiculous strategy.  Many of those who might be convinced to become an activist on the issue of climate change would likely be turned off by one or more of the items on her version of a wish list.  Most people would be uncomfortable with a movement that “changes everything.”

Most reviewers of Klein’s book justifiably give her credit for her research and the completeness of her assessment of the climate change issue.  They part company with her when she gets to the point where she describes this grand social movement that will change everything.  They have little faith that people will be willing to give up much in the way of customary creature comforts in order to save the planet and succumb to gloom and doom.

Klein is so exercised by the anticipated big-energy generated global havoc that she spends little time considering technical developments that could be critical in the global warming arena.  She addresses the one thrust easiest to shoot down: the mad scientists who want to accommodate ever increasing levels of carbon dioxide by dimming the sunlight reaching earth.  What could possibly go wrong there!

Klein also makes the mistake of equating capitalism as a system with capitalism as it currently exists—a system run by oligarchs to serve their wishes.  Within the context of regulated capitalism and planned social goals, there is much that can be done to dramatically lower usage of fossil fuels.

Peter H. Diamandis and Steven Kotler have produced a book titled Abundance: The Future is Better Than You Think.  They provide a tour through a number of promising technologies, some available now, some imminent, and some still far off.  They make the point that energy generation, water usage, and food production are all areas that could look dramatically different in the near future.  Whether or not these technologies will come to fruition and address climate change on a reasonable timescale is unclear, but these authors certainly believe they will.

An even more interesting approach has been documented by Amory B. Lovins in an article in Foreign Affairs: A Farewell to Fossil Fuels.  His energy plan incorporates a continuing growth in renewable energy sources, but the main focus is on using energy, whatever the source, more efficiently.  The potential energy savings are stunning.  He points out that such savings have been taking place for decades driven by the motivations of capitalism.

“Underlying this shift in supply is the inexorable shrinkage in the energy needed to create $1 of GDP. In 1976, I heretically suggested in these pages that this ‘energy intensity’ could fall by two-thirds by 2025. By 2010, it had fallen by half, driven by no central plan or visionary intent but only by the perennial quest for profit, security, and health. Still-newer methods, without further inventions, could reduce U.S. energy intensity by another two-thirds over the next four decades, with huge economic benefits. In fact, as Reinventing Fire, the new book from my organization, Rocky Mountain Institute (RMI), details, a U.S. economy that has grown by 158 percent by 2050 could need no oil, no coal, no nuclear energy, and one-third less natural gas -- and cost $5 trillion less than business as usual, ignoring all hidden costs. Today’s fossil carbon emissions could also fall by more than four-fifths without even putting a price on them.”

“This transformation requires pursuing three agendas. First, radical automotive efficiency can make electric propulsion affordable; heavy vehicles, too, can save most of their fuel; and all vehicles can be used more productively. Second, new designs can make buildings and factories several times as efficient as they are now. Third, modernizing the electric system to make it diverse, distributed, and renewable can also make it clean, reliable, and secure.”

“This transition will require no technological miracles or social engineering -- only the systematic application of many available, straightforward techniques. It could be led by business for profit and sped up by revenue-neutral policies enacted by U.S. states or federal agencies, and it would need from Congress no new taxes, subsidies, mandates, or laws. The United States’ most effective institutions -- the private sector, civil society, and the military -- could bypass its least effective institutions. At last, Americans could make energy do their work without working their undoing.”

Lovins’s plan was described in an era of high energy prices.  Should the current low prices persist, the motivation to move in this direction might diminish without the application of some sort of carbon tax.  Such a tax, gradually increased, could also serve as the mechanism for shortening the time scale for implementing these energy efficiencies and thus addressing global warming in a more timely manner.  The tax could also be used to encourage the transition with credits and subsidize those who might be temporarily harmed by higher energy prices.

And as for the energy companies who seem determined to burn every ounce of fossil fuel they can get their hands on, welcome to “creative destruction.”  It couldn’t happen to a more deserving bunch.

Monday, January 19, 2015

The Inexorable Growth of Wealth

There is truth in the oft quoted phrase “It takes money to make money.”  A more relevant manifestation of that sentiment might be “It takes wealth to make wealth.”  Everyone sees money flow through their hands, but it is only those who can accumulate more than they need to cover the fundamental needs of food, clothing, and shelter who are in a position to create wealth and use it to create more wealth.  What is not immediately obvious is that wealth seems to grow even faster as it becomes larger, allowing significant fortunes to increase in an unbounded manner.

This dynamic is explained in Thomas Piketty’s book Capital in the Twenty-First Century.  Piketty has made his charts and tables available here.  He defines capital as anything that has a market value, making the terms wealth and capital synonymous.  His basic conclusion is that the rate of earnings from capital has always exceeded the growth in income (equivalent to the rate of growth in GDP) except in unusual circumstances where high rates of taxation were in effect.  Consider this chart of the return on capital (pretax) in Britain over the past few centuries.

The “real” rate of return differs from the “observed” by Piketty’s estimate of the cost of managing the assets earning income.  What is startling is the constancy of this value of about 5% over time.  At early times, wealth was mostly in the form of land when agriculture was a dominant component of the economy.  Over time, agriculture diminished in importance and was superseded by real estate and financial instruments such as stocks and bonds, yet the rate of return remained relatively constant. 

The anomalous period was the era of the Great Depression and the two world wars.  Much wealth was destroyed in that calamitous period, but what wealth there was was highly valued.  It was immediately after this era that periods of high economic growth were observed as regions devastated by war rebuilt themselves.  High growth in GDP translates into high growth in incomes, allowing more people to pass that transition point where they earned enough to be able to save and accumulate resources.  It can truly be said that this was the period in which a middle class began to be formed.  Home ownership became more widespread and that became the dominant contributor to the growth of wealth in this middle class.

The growth of a middle class is the positive aspect of Piketty’s economic history.  The negative aspect arises from the historical fact that high rates of growth of GDP are an historical anomaly.  Up until World War I the rate of economic growth was on the order of 1-2%.  The higher rates that we have become accustomed to in the postwar years are apparently returning to the historical norm.  Given that income growth will fall far behind growth in wealth from the higher income from wealth, we face a situation where the wealthy will become ever wealthier while the rest get left behind.

Consider this plot of the top income groups in the US over time (top 1%, top 1-4%, top 5-10%).

The volatility is in the income possessed by the top 1%.  It peaks dramatically just prior to the stock market crash and the great depression, falls significantly during the high-tax and highly-regulated era associated with World War II and its aftermath, and then around 1980 the top 1% begins to again grow rapidly with time.  There are a number of things operative that explain this increase: taxes were lowered, policies were put in place that favored the wealthy, and the rate of growth began to slow. 

Remember that the media quotes total GDP whereas the number of interest is per capita GDP.  If population grows by 1% and the quoted GDP grows by 1% there is no actual growth in average individual income.  Consider this plot of per capita GDP growth in Western Europe and North America over time.

Western Europe with its high taxes and high social benefits has been, and still is, creating income at a greater rate than the more economically “liberated” new world.  Note that the high-growth postwar years appear to be replaced by an extended period where growth is descending back to the historical norm.  

Given this data we would expect to see growth in income inequality.  In fact, it turns out the growth in inequality is even worse than one might imagine.  Piketty tells us that not all wealth is equal.  He concludes that the larger the amount of wealth possessed, the faster it will likely grow.

Piketty looked at two sources of information on how the investments of the very wealthy performed over time.  The first involves the magazine Forbes and its annual ranking of the wealth of the world’s billionaires.  This is an imperfect source of information for detailed analysis, but it does allow him to draw a conclusion:

“….the largest fortunes grew much more rapidly than average wealth.  This is the new fact that the Forbes rankings help us bring to light, assuming they are reliable.”

Piketty provides a few specific examples.

“Between 1990 and 2010, the fortune of Bill Gates….the very incarnation of entrepreneurial wealth….increased from $4 billion to $50 billion.  At the same time, the fortune of Liliane Bettencourt—the heiress of L’OrĂ©al, the world leader in cosmetics…..increased from $2 billion to $25 billion, again according to Forbes.  Both fortunes thus grew at an annual rate of more than 13 percent from 1990 to 2010, equivalent to a real return on capital of 10 or 11 percent after correcting for inflation.”

“In other words, Liliane Bettencourt, who never worked a day in her life, saw her fortune grow exactly as fast as that of Bill Gates, the high-tech pioneer, whose wealth has incidentally continued to grow just as rapidly since he stopped working.  Once a fortune is established, the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size….money tends to reproduce itself.”

There is nothing mysterious about this growth in wealth.  It is simply due to the fact that the very wealthy have the resources to expend in wisely managing their wealth—another variation on the thesis that it takes wealth to make wealth.  To make this point more clear Piketty looks at a more robust source: financial reports from university endowments—which range in size from the merely large to the astonishingly large.

“….US universities publish regular, reliable, and detailed reports on their endowments, which can be used to study the annual returns each institution obtains.  This is not possible with most private fortunes.  In particular, these data have been collected since the late 1970s by the National Association of College and University Business Officers, which has published voluminous statistical surveys every year since 1979.”

Picketty’s analysis of this data is summarized in this table:

Piketty draws two conclusions from this table.  The first is that the rate of return for university endowments is considerably higher than that of wealth in general, and is consistent with the picture obtained from the Forbes surveys of personal wealth.  The second conclusion is that the larger the endowment, the larger is the likely rate of return on investment.

“The higher we go in the endowment hierarchy, the more often we find ‘alternative investment strategies,’ that is, very high yield investments such as shares in private equity funds and unlisted foreign stocks (which require great expertise), hedge funds, derivatives, real estate, and raw materials, including energy, natural resources and related products (these too require specialized expertise and offer very high potential yields).”

“Concretely, Harvard currently spends nearly $100 million a year to manage its endowment.  This munificent sum goes to pay a team of topnotch portfolio managers capable of identifying the best investment opportunities around the world.”

Piketty also arrives at this interesting conclusion about investment risk and return on investment:

“….the year-to-year volatility of these returns does not seem to be any greater for the largest endowments than for the smaller ones….In other words, the higher returns of the largest endowments are not due primarily to greater risk but to a more sophisticated investment strategy that consistently produces better results.”

The very wealthy also have options available to them to protect their wealth from both taxes and foolish children who might squander it, and thus preserve it for generations.

“….wealthy people are constantly coming up with new and ever more sophisticated legal structures to house their fortunes.  Trust funds, foundations and the like often serve to avoid taxes, but they also constrain the freedom of future generations to do as they please with the associated assets.  In other words, the boundary between fallible individuals and eternal foundations is not as clear-cut as sometimes thought.”

We seem to have entered a long-term period of low growth which translates into small gains in income—at best—for the majority, while large fortunes have accumulated that are in a position to grow without bound.  Piketty fears, as we should also, that this disparity in wealth will be a destabilizing factor in society. 

Large fortunes have become nearly immune to taxation because most of the income is derived from capital rather than wages.  Piketty’s long-term solution would be a small progressive tax on wealth, one that would still allow wealth to grow, but not in so robust a fashion.  If average income is to grow at 1-2% per year, it is hard to justify a situation where large fortunes—particularly inherited fortunes— grow at 10% per year.

Tuesday, January 13, 2015

The Minimum Wage, Employment, and Social Choices

The standard explanation for why increasing the minimum wage will decrease employment is based on the assumption that labor participates in a perfect market where increased costs for labor will diminish demand.  Thomas Piketty adds a little nuance to that argument and suggests that raising the minimum wage is the only way to increase income at the bottom of the pay scale.  Piketty’s reasoning is found in Capital in the Twenty-First Century.  Piketty has posted the tables and figures from the book here.

“To an even greater extent than other markets, the labor market is not a mathematical abstraction whose workings are entirely determined by natural and immutable mechanisms and implacable technological problems: it is a social construct based on specific rules and compromises.”

There is rarely a scarcity of low-skilled workers that might drive up wages at the bottom of the wage scale.  Consequently, without a floor on hourly earnings, employers have little economic motivation to not lower wages as much as possible.  A minimum wage provides that floor, but it can also act as justification for keeping wages at that floor value.  There need be no implicit or explicit collusion among employers to establish a target salary, the minimum wage provides it for them and sets up a situation Piketty refers to as a monopsony. 

If the established minimum wage is too high it can lead to a decrease in employment, but if it is too low it can also have a negative economic effect.  Underpaid workers are not injecting sufficient demand back into the economy.

“….if a small group of employers occupies a monopsony position in a local labor market (meaning that they are virtually the only source of employment….), they will probably try to exploit their advantage by lowering wages as much as possible, possibly even below the marginal productivity of the workers.  Under such conditions, imposing a minimum wage may be not only just but also efficient, in the sense that the increase in wages may move the economy closer to the competitive equilibrium and increase the level of employment.”

“Various studies carried out in the United States between 1980 and 2000, most notably by the economists David Card and Alan Krueger, showed that the US minimum wage had fallen to a level so low in that period that it could be raised without loss of employment, indeed at times with an increase in employment….On the basis of these studies, it seems likely that the increase in the minimum wage of nearly 25 percent (from $7.25 to $9 an hour) currently envisaged by the Obama administration will have little or no effect on the number of jobs.”

Piketty has looked at how the bottom 10% of wage earners have fared in both France and the US.  It seems that only by increasing the minimum wage can the lowest paid keep up with the average increase in wages for the population as a whole.

“Inequalities at the bottom of the US wage distribution have closely followed the evolution of the minimum wage: the gap between the bottom 10 percent of the wage distribution and the overall average wage widened significantly in the 1980s, then narrowed in the 1990s, and finally increased again in the 2000s.”

To make this trend clear, Piketty provides this plot of minimum wages in the US and in France, both represented in 2013 currency.

Note that until 1980 the US minimum wage was more generous than that in France and was maintained at a level roughly consistent with the $9 target set by Obama.  After 1980 a sequence of Democratic presidents raised it and a sequence of Republican presidents held it down.  When we have Republican presidents the poor do not fare well.

Piketty referred to the labor market as “a social construct based on specific rules and compromises.”  The same could be said for economic policies as a whole.  They are not determined by “natural and immutable mechanisms,” but by decisions made by voters and their representatives.

Consider this chart of the share of the top 10% of income ladder of the total income (or wages) over time.

Note that income inequality was lowered considerably in the period from the 1940s to the 1970s.  Note also that 1980 was again a turning point.  The ascendency of free-market mythology and the acceptance of it by Republican presidents changed our world.  A new set of rules and compromises were put into place and the rich got richer and the poor got poorer.  This is not economics; this is politics.

Until the Democrats get off their tails and come up with a counterrevolution to the counterrevolution of the 1980s and convince the nation that there is a better way, we are stuck with what we have now.

Friday, January 9, 2015

Race and the Criminalization of Welfare

Welfare refers to the assistance a government provides to those who are in need.  In most civilized societies there is a recognition that no one should have to live in abject poverty.  It is unhealthy for the unfortunate individuals involved and it is unhealthy for society as a whole to allow such conditions to persist.  Unfortunately, what passes for a welfare system in the United States has evolved to a state where those who must ask for assistance are assumed to be part of a defective underclass whose very existence is a threat to society.  Those who dare apply for welfare are now treated with the same consideration accorded to a suspect in a criminal investigation.

Kaaryn Gustafson, a law professor at the University of Connecticut, published an article in the Journal of Criminal Law and Criminology in 2009 titled The Criminalization of Poverty.  She later expanded that work into a book published under the title Cheating Welfare: Public Assistance and the Criminalization of Poverty.  Her early article will be used as a source for this discussion.

Gustafson provides this opening to her paper:

“Lost in these contemporary understandings of welfare is the association of welfare with wellbeing, particularly collective, economic wellbeing. Many of the current welfare policies and practices are far removed from promoting the actual welfare of low-income parents and their children. The public desire to deter and punish welfare cheating has overwhelmed the will to provide economic security to vulnerable members of society. While welfare use has always borne the stigma of poverty, it now also bears the stigma of criminality. This change in perspective has under-examined implications for both welfare law and criminal law.”

There has been a constant theme that has persisted throughout the past century with respect to social legislation: southern politicians have always sought to protect their right to treat blacks differently than whites.   This began with the Social Security Act which the South would only vote for if traditionally black occupations such as farm labor and domestic help were excluded from coverage.  They also insisted that distributions of welfare benefits were left to states and localities to manage in order to legally impose discriminatory policies.  Over time, welfare became almost universally associated with poor black mothers; explicit racial themes were converted to fears about “welfare fraud” and discrimination became open and universal.

Gustafson provides a history of this evolution.

“The criminalization of welfare recipients entails a long historical process of public discourse and welfare policies infused with race, class, and gender bias. State and federal government aid programs developed in the first half of the twentieth century supported white, male workers and the white women and children dependent upon their wages while they excluded a huge segment of poor women of color and their children. The Social Security Act created Aid to Dependent Children (ADC), a program specifically designed for poor mothers and their children and originally intended to support the widows of working men.”

The demographics changed between the end of the war and 1960 as the number of widowed mothers decreased in relative terms and the population of divorced and single mothers became much larger.

“Welfare offices in many states and locales adopted "suitable home and "substitute parent" rules, which were essentially morality standards, and which were arbitrarily and discriminatorily applied, and commonly excluded women of color from the welfare rolls, especially in the South….many welfare offices continued to engage in midnight raids on the homes of ADC recipients in order to police ‘man in the house’ rules. The stated reason for surprise visits was to catch men sleeping in the homes of women receiving welfare. Unmarried women with men in their beds were deemed morally unfit and their households therefore unsuitable for assistance….The unstated but underlying goals of the rules were to police and punish the sexuality of single mothers, to close off the indirect access to government support of able-bodied men, to winnow the welfare rolls, and to reinforce the idea that families receiving aid were entitled to no more than near desperate living standards.”

Note that such midnight raids carried out without a warrant would be unconstitutional if welfare recipients were accorded the rights possessed by normal citizens.  There was a time when the courts protected poor people from such activities, but over time it has been clearly stated that welfare investigators have the right to make unannounced searches of residences.

The practice of midnight raids continued through most of the 1960s.  By that time welfare was firmly viewed as a “black problem.”

“By the mid-1960s, low-income women of color were being blamed for all sorts of social problems. An oft-cited 1965 report by Daniel Patrick Moynihan promoted the idea that the problems of inner cities-poverty, joblessness, and crime—could be traced to a ‘tangle of pathology’ perpetuated by unmarried black mothers….In Moynihan's popular portrayal, low-income African-American mothers were a social threat because they gave birth to and raised sons who became the criminal, urban underclass.”

In the 1970s and beyond the blather from neoliberal economists took hold and the idea of welfare as a social support system transitioned to welfare as wasteful counterproductive program for rewarding those unwilling to work.  The real level of support was allowed to fall (along with the minimum wage), and the procedure for obtaining aid became more complex.  The poorest and least educated segment of our society was required to keep detailed financial records, fill out complex forms, and navigate a bewildering bureaucracy.  The goal was no longer to provide support, but to identify and punish those who might be abusing the system.

“Throughout the 1970s, '80s, and '90s, the value of the welfare grant, adjusted for inflation, declined dramatically. The weighted average maximum benefit per three-person family was $854 in 1969 (in 2001 dollars), but plummeted to $456 by 2001. It became increasingly hard for welfare recipients to cover their most basic expenses-food, clothing, and rent-with their welfare grants. Unable to survive on welfare checks and facing barriers to employment, many welfare recipients turned to other sources of income, whether help from kin or participation in underground labor markets, and attempted to hide those sources from the welfare office for fear of losing the small checks they received.”

“Office caseworkers, hired to replace the social workers, processed the routine paperwork that welfare recipients regularly submitted to the office to document their continuing financial need. In a process known as "churning," the federal government increased the amount of information and paperwork required to determine welfare eligibility, and denied benefits to low-income families who failed to keep up with the paperwork. Income-eligible families were removed from the aid rolls for their failures to provide verification documents in a timely manner.”

Then along came Ronald Reagan who would make a career out of race baiting in an attempt to capture white votes.

“In the 1970s, the image of low-income mothers took a particularly negative turn….California Governor (later President) Ronald Reagan used the symbol of the ‘welfare queen’ to propel his ideas on limited government and increased crime control.  Reagan used references to the welfare queen to portray an image of widespread depravity and criminality among low-income women of color.  Despite the factual inaccuracies of Reagan's descriptions, the symbol of the welfare queen resonated with the public.”

“….that is not to say that cheating welfare recipients did not exist. But rather than treat a few exceptional instances of criminal activity as the exceptions they were, politicians—and the media and public, as well—adopted  these cases as typifying poor, African-American women on welfare. These ‘welfare queens’ were treated not merely as stereotypes of poor black mothers on aid, but as archetypes—perfect examples of what welfare recipients become over the course of years on the dole.”

Reagan claimed to be focusing on reducing waste and fraud in government.  However, he went about it in a curious manner   One of his first moves after becoming president was to fire all the Inspectors General whose duties consisted of identifying waste and fraud in the various programs.  The only program abuses he seemed interested in concerned welfare programs.

“Upon taking office, Reagan abruptly fired all of the Inspectors General.  Rather than focusing on waste and fraud throughout federal government, President Reagan focused instead on welfare fraud, particularly on fraud committed by welfare recipients. In Reagan's view, the poor, and not the welfare bureaucracies, were the sources of fraud and waste….Despite the congressional concern about welfare fraud by recipients, the Washington Post reported that an audit of the Department of Health and Human Services (formerly Health, Education and Welfare) released shortly before Reagan fired its Inspector General found that ‘[t]he greatest cheaters ... are not individual welfare or health care recipients, but doctors and pharmacists and other providers of services who overbill the government’.”

Let’s make sure we understand how the system is intended to work.  You take money away from those who need it, encouraging them to use unreported means to acquire enough cash to live on; then you use the money they were deprived of to investigate and prosecute those who you catch.  Got it?

Then along came Bill Clinton.  At this point we will switch to Matt Taibbi’s description of the state of affairs in his book The Divide: American Injustice in the Age of the Wealth Gap.  Taibbi provides a more colorful—and appropriately indignant—assessment of government abuse of welfare programs.

“All of this goes back to Bill Clinton.  It is not a coincidence that radical welfare reform took place on the same watch that also saw a radical deregulation of the financial services industry.  Clinton was a man born with a keen nose for two things: women with low self-esteem and political opportunity.  When he was in the middle of a tough primary fight in 1992 and came out with a speech promising to ‘end welfare as we know it,’ he could immediately smell the political possibilities, and it wasn’t long before this was a major plank in his convention speech (and soon in his first State of the Union address).

“Clinton understood that putting the Democrats back in the business of banging on black dependency would allow his party to re-seize the political middle that Democrats had lost when Lyndon Johnson threw the weight of the White House behind the civil rights effort and the War on Poverty.”

“Bill Clinton’s political formula for seizing the presidency was simple.  He made money tight in the ghettos and let it flow free on Wall Street.  He showered the projects with cops and bean counters and pulled the cops off the beat in the financial services sector.  And in one place he created vast new mountain ranges of paperwork, while in another, paperwork simply vanished.”

What was accomplished under Clinton was the obliteration of the notion that people of very low income have a right to income assistance.  Income assistance is now available at the discretion of the government.  And the government in control is not the federal government, it is the state government.  There are therefore 50 arbitrary ways in which poor people can be helped or hurt by states according to their whims; centuries of discrimination were thus blessed by federal legislation.  States were encouraged to vigorously prosecute welfare fraud.  Situations that once would have merely required repayment of excess funds received, can now lead to criminal charges and felony convictions.  Funds that could have been used to assist needy people are now being diverted to law enforcement.  Social workers are being replaced by fraud investigators.  

Gustafson provides details.

“Congress passed the Personal Responsibility and Work Opportunity Reconciliation Act in 1996. The legislation eliminated the broad, federally-governed AFDC program and ended cash aid as a federal entitlement to all income-qualified families.   Replacing AFDC entitlements, the federal government distributed state block grants through a federal program known as Temporary Assistance for Needy Families (TANF).   The new welfare policies threatened that those who failed to play by the rules-by meeting mandatory work requirements, by abiding by behavior reforms, and by reporting all details of income and household composition-would be harshly punished with new penalties.   In addition, states were allowed to place their own conditions upon receipt of welfare and could establish time limits even shorter than the federal ones.   Those welfare recipients who failed to meet their obligations under the new system would be excluded from benefits and have the safety net pulled out from under them—in some cases permanently.”

Being caught and punished for some violation of the rules (the most common of which seems to be missing a mandatory meeting at the welfare office) is referred to as sanctioning.  States have the discretion of punishing an individual by limiting his or her access to funds or they can choose to punish an entire family for one member’s sins with a full-family sanction.

“Sanctions are a routine occurrence. Researchers estimate that between 33% and 52% of TANF recipients have been sanctioned.”

“….a study conducted by Yeheskel Hasenfeld found that approximately half of the sanctioned adults surveyed did not know they had been sanctioned.   For these families, the welfare system may seem so complex, arbitrary, and mystifying that they cannot determine why their benefits are fluctuating. This suggests that rather than creating a set of incentives that will ‘make work pay,’ the current welfare system is simply punishing people who cannot figure out how the system works.”

Researchers have also determined some of the issues associated with state determination of policies.

“Schram has shown that those states that have instituted the punitive full-family sanctions are those with the largest populations of African Americans.  Other researchers examining TANF sanctions found that ‘limited education and being African American predict sanctioning when [one] control[s] for a wide range of other personal and demographic characteristics.’   In short, it appears the ‘carrot and stick’ approach is overwhelmingly being used as a stick against some of the most marginalized and vulnerable populations—women of color and their children.”

Welfare caseloads are falling.  Does that mean the program is a success?

“While many people assume that transitions from welfare to work account for dramatic decreases in welfare caseloads, a number of studies indicate that sanctions actually account for much of the decline.

The decision to provide block funding to the states has also created some perverse incentives as caseloads have fallen.

“If that money is not spent, the states and counties lose it; rather than laying off government employees and losing the stream of federal funding, many counties are transferring former welfare caseworkers and civil fraud investigators into positions as deputized welfare fraud investigators.”

“Second, the welfare fraud investigators are gaining political leverage.  Welfare fraud investigators are unionizing. In many states they have formed associations and even hired lobbyists.   These associations urge legislators to step-up efforts to investigate and prosecute welfare fraud and to move investigations from the civil to the criminal arena.”

Welcome to the real United States of America.

Let us return to Matt Taibbi for an appropriate final comment.  He refers often to the fact that the San Diego region is home to the most aggressive welfare enforcement tactics in the US, while at the same time having served as ground zero for the explosive mortgage fraud that nearly drove the world economy over the cliff.

“Now the political momentum in both parties traveled in the same direction.  Both parties wanted to merge the social welfare system with law enforcement, creating a world that for the poor would be peopled everywhere by cops and bureaucrats and inane, humiliating rules.  They wanted to put all the sharp edges of American life in that one arena, and they succeeded.”

“And on the other hand, both parties wanted the financial services sector to become an endless naked pillow fight, fueled by increasingly limitless amounts of cheap cash from the Federal Reserve (literally free cash, eventually).  If they turned life in the projects into a police state, they turned life on Wall Street into its opposite.  One lie in San Diego is a crime.  But a million lies?  That’s just good business.”

Monday, January 5, 2015

Banks and Their Debt Collection Fraud

The conventional wisdom has held that banks that issue credit cards must charge large rates of interest in order to cover losses on unpaid debts.  It is presumably not cost effective to try and collect large numbers of small unpaid balances.  That may have been true in the past, but never underestimate the ingenuity of those who are after a quick buck.

As an indication that something new has been afoot in the banking world, consider this article from Reuters (3/2013): States probing top U.S. banks over debt collection.

“The largest U.S. banks face a multi-state investigation into whether they helped debt collectors pursue faulty judgments against credit card customers, according to people familiar with the matter.”

“At issue is whether weak record-keeping by banks or a failure to pass accurate information to collection agencies harmed consumers.”

“The allegations against the banks echo those central to last year's $25 billion federal-state mortgage settlement to resolve charges that the banks "robo-signed" documents and pursued foreclosures with faulty information.”

“This latest probe targets the same banks, including Bank of America, JPMorgan Chase, Citigroup and Wells Fargo, said the sources who spoke on condition of anonymity because the investigations are continuing.”

Matt Taibbi discusses the new mechanics of debt collection in his book The Divide: American Injustice in the Age ofthe Wealth Gap.  In a chapter appropriately titled Big Frauds he considers the practices of Chase Bank and focuses on the story of Linda Almonte a former employee who was fired for pointing out to her supervisors that they were distributing data to debt purchasers that was incorrect.

“The law is, of course, supposed to be precise, and civil lawsuits are designed to be careful, evidenced-based determinations of right and wrong, liability and no liability.  But the business of credit card litigation by its very nature has to be half-assed, brutal, reckless, and stupid.  The business model just doesn’t work otherwise.  The giant consumer credit merchants like Chase who file lawsuits against card holders by the tens of thousands couldn’t even begin to make real money, real margins, if they had to do anything like real legal work or meet anything like a real evidentiary standard.”

Chase, and other banks, decided that by mass producing legal motions they could do essentially no work, legal or otherwise, and still win enough cases to turn a profit.  They could pursue this path with their own collection of collaborating law firms, or resell the debt at a discount and let the debt purchasers play the game with their own herd of law firms.

“The system is really a game of mathematical probabilities that the companies have built around the high probability of obtaining uncontested legal judgments.”

The first play in the game is to have a computer create an affidavit form based on whatever information exists in the bank’s database.

“When a bank like Chase goes into court to sue a credit card holder, it must formally list the facts of the case: who owes what, how long the amount has been owed, when the account was opened, and so on.  The procedures in every state are different, but at some point in the process, all states require an affidavit from the bank as asserting these facts.  The same process holds true, incidentally, for foreclosure filings.  The filings for all these court actions, be they credit card default suits or home foreclosures, include affidavits in which an ostensibly authoritative bank executive attests to the facts of the case.”

Taibbi describes some of the things Linda Almonte learned when she was assigned to Chase’s credit card litigation department.  The first thing she noted was that the signers of these affidavits were not high ranking bank officers, they were low-paid employees whose main job was to falsify these affidavits by claiming that they were accurate even no check of accuracy was ever intended to be made.  They were told to assign themselves a lofty title, but never use that title unless signing affidavits. 

“She eventually learned that the whole system operated like a factory.  At one end of the office, a paid-by-the-hour temp worker would generate an affidavit on a computer screen, using an automated program that created the legal document and automatically filled in the data from the customer account.  Once the document was generated, the temp would print it out and then stick all the unsigned affidavits in a drawer.”

“The robo-signers would then open the drawer, pick up hundreds of affidavits at a time, head back to their cubicles, and sign their names to them, one after another.”

Technically, signing an affidavit implies that the information contained therein has checked for accuracy.   But, of course, no checking had been done or could have been done.  Almonte recounts the comment by one of the signers who was so proud of his productivity that he claimed “It was a six hour flight and I signed like two thousand affidavits.”

The final step in the assembly line was for a notary to come in and claim that he had witnessed the signatures.

“Then, once they were finished, they would stick the stack of documents back into the same drawer, where they would be retrieved (maybe that day, maybe later) by a notary, who would stamp the affidavits.  The notaries, according to Linda, were almost never in the room when the documents were signed.”

How accurate might this data be that was taken from cardholder files that were often many years old?  Almonte was assigned to a project that was intended to release a large number (23,000) of records for which a legal finding in favor of Chase had supposedly been obtained.  These would be the easiest to collect on and could be sold to a purchaser for a significant fraction of their face value.  Since she was being asked to attest to the accuracy of the documentation, she decided to check the files to see if the claim of a legal finding was accurate. 

“….there were many problems with the accounts Linda was seeing flowing in from places like California and Illinois.  Some were not even judgments.  In some files, the cardholders were not even delinquent.  In still others, Chase actually owed the cardholders money.  In still more, there were judgments, but the judgments weren’t against the borrower—they were against chase itself.”

She sent the following result of her investigation to her superiors:

“Upon completion of the California PAN files we have 11,472 accounts (including MRA’s) with a total balance of $110,138,641.18.  Between 50-60% of the files are missing judgments, or the judgment does not contain a date and signature.”

She was told to not worry, it wouldn’t make any difference.  And her bosses were right.  The beauty of the system from their point of view was that accuracy made little difference in the performance of the project as a money maker.

Taibbi explains:

“At one point in time that process also required significant legal due diligence and the transfer of documentation, but executives soon realized that in the overwhelmed modern court system, simply attesting to having the right documentation works just as well as really having it.  This is the same realization that struck Bank of America when it found that saying it had foreclosure documents was almost as good as having them….”

The banks also know that the probabilities are in their favor.  They know that about two-thirds of those whose cases go to court never show up to contest the case.  Since a judge is not likely to review the bank’s records, that is an automatic win for the banks or the purchasers of debt.  Of the remainder, some will choose to pay the supposed debt and some will contest the case.  The banks win in two of the three cases.  It makes no economic sense for a bank or debt purchaser to get involved in an actual legal case, so those are usually dropped.  The profit has already been made.

“What all this means is that the bulk of the credit card collection business is conducted without any supporting documentation showing up or being seen by human eyes at any part of the process.  The meat of the business is collecting unopposed default judgments from defendants who either never receive a summons or receive one and never appear in court.”

Defendants who never receive a summons?  How could that be?  Aren’t summons presented face-to-face and don’t they require a signature from the person being served?

“Thanks to intense state-by-state lobbying by companies like Chase and MBNA, it’s usually enough to send a notice by mail to some old address, often the original mailing address when the account was opened, which might have been ten years earlier.  In some states, banks and debt buyers can even make use of an automated online summons system, in which a few lines of customer data are entered (perhaps and perhaps not by an actual human being), and, get this, a postcard is then sent in the mail to whatever ancient address the company has on file.”

In some locations serving of a summons to an individual by a live human being is still required.

“On paper, it’s a simple and logical system, but here again the question of margin creeps in.  Most of these process servers are paid bulk rates by the lawyers and make as little as four dollars per customer to serve notice.

“So what happens?  Many process servers and law firms engage in a wink-wink-nudge-nudge business called gutter service or sewer service, in which the law firm hands the list of summonses to the server, and the server simply dumps them (in the ‘gutter,’ hence the name).

“In return, the process server hands the law firm an ‘affidavit of service,’ swearing that he properly served the customer.  Process service once required a signature of the defendant to prove proper service; now all that is needed is the server’s own word that he did the job.”

If this leaves you slightly incredulous, Taibbi provides this information:

“Around the time that Chase was obtaining judgments against those 23,000 account holders, dozens of law firms and process servers in New York State alone were being accused of gutter service practices.  William Singler, the head of a Long Island firm called American Legal Process, was arrested for gutter service in the spring of 2009….”

“Later on, several states would sue Chase, based in part upon information given by Linda, and some would mention the practice.  A suit signed and filed by California attorney general Kamala Harris in the spring of 2013 would make particular note of it.  ‘Defendants, through their agents for service of process,’ the state’s complaint read, ‘falsely state in proofs of service that the consumer was personally served, when in fact he or she was not served at all—a practice known as “sewer service”’.”

So, it becomes more understandable why two-thirds of the people never show up in court.  And what happens to these unfortunates?

“So how do you collect money from a cardholder who doesn’t answer his or her summons?  That’s easy: you take it!  The laws are different from state to state, but in most places in America, once the bank or debt buyer has that default judgment in hand, it can legally do just about anything to the cardholder.  It can put a lien on his property, it can attach her salary, it can even take his car or her office furniture.”

“In the state of New Jersey, for instance, the bank or debt buyer can basically take anything the cardholder owns, so long as it leaves him with the clothes he’s wearing and maybe a little pocket change—technically, a thousand dollars worth of personal property.  The state charges only a five-dollar fee to green-light the attachment of a bank account or the repossession of an automobile.”

“’There are people out there who never knew they were served and taken to court,’ says Linda,  ‘Then five years later they go to sell their house, and they find they can’t do it because of a missed payment at Circuit City years ago’.”

Taibbi’s book is focused on comparing the way our society treats the wealthy and powerful as opposed to the way the poor and powerless are treated.  His chapter on massive bank fraud is titled Big Frauds.  He precedes it with a chapter called Little Frauds in which he describes how those who apply for welfare are assumed to be guilty of fraud unless an investigation renders them innocent.  In the case of the welfare recipient who is deemed to have misreported information, loss of benefits and perhaps criminal charges are the options available.  A simple mistake can lead to jail time.  There are many people hired to search out a few dollars of welfare fraud.  Few people seem to be concerned about bank fraud where billions of dollars are involved.

“Banks commit the legal crime of fraud wholesale; they do so out in the open, have entire departments committed to it, and have employees who’ve spent years literally doing nothing but commit, over and over again, the same legal crime that some welfare mothers go to jail for doing once.  But they’re not charged, because there is no political crime.  The system is not disgusted by the organized, mechanized search for profit.  It’s more like it’s impressed by it.”

Chase eventually settled with Linda Almonte, and fired some lawyers and bank employees.  Taibbi views it as mere public-relations fluff.  More information can be found here.

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