This past June, I was invited to visit the New York Mercantile Exchange (or NYMEX) by my friend Steven Spivak, a professional commodities trader.
For those of you unfamiliar with the NYMEX, it's the exchange where commodities like orange juice, pork bellies, gold, crude oil, natural gas, copper, and silver are traded. (A good deal of the Eddie Murphy movie Trading Places takes place there.) The New York Stock Exchange (NYSE) trades primarily in equities, as opposed to the commodities traded on the NYMEX.
Bells Are Ringing
To my surprise, I was asked to ring the opening bell for the gold and crude oil exchanges, both commodities I'm heavily invested in. As soon I rang the bells, all hell broke loose. Traders like Steven were buying and selling commodity futures -- as well as put and call options -- as fast as they could.
For Steven, it didn't matter if the market was going up or down. He was busily buying and selling as he ran between the gold and crude oil pits. In less than an hour, he'd made over $70,000 in profits. Not bad for a guy in his 20s.
During that hour, I was standing next to a NYMEX employee. I asked him if he understood what was going on. He replied, "No. I've worked here for nineteen years and I've never bothered to learn. I like my job, and I don't like the pressure these guys go through every day." Although I didn't ask, I suspect he's lucky to make $70,000 a year.
Run, Don't Walk
The reason I'm comparing my young friend Steven to this older, clearly less well-off man is to give you an idea of the disparity between individuals' earning power in this country. Financially, millions of Americans are being left in the dust.
A few days later, as I was driving back to Phoenix, I was held up at a crosswalk by two young, overweight people crossing against the light. Instead of hurrying, they looked at me as if to say, "We're in a crosswalk. We have our rights. The government protects us from impatient drivers like you."
As I watched their ample backsides waddle slowly in front of me, I thought back to my hour in the trading pits of the NYMEX, and to the idea of relative speeds of wealth creation.
Clueless in La-La Land
Which brings me to my politically incorrect thesis for this week: Most Americans live in la-la land.
They're clueless about what's going on in the world of money, and still think we're the richest country in the world. In reality, we're the biggest debtor nation there is.
Most Americans also still think our government will protect them. The world is changing at an alarming rate, yet most people here waddle stubbornly through the crosswalk, so to speak, still believing that this country has the right of way and that our political institutions are still sound.
Midterm elections will take place in a couple of months. The common question regarding the outcome is: Will the Democrats or Republicans win? But the question should be: What difference does it make? Regardless of which party wins, the rich still make the rules.
The Chickens Come Home to Roost
In Thomas Frank's book What's the Matter with Kansas? : How Conservatives Won the Heart of America, which I highly recommend, a poor man reports that he voted Republican because he wanted to get back at Wall Street.
Can you imagine that? I always suspected that a lot of people aren't very bright. To paraphrase a popular statement, a poor person voting for a Republican is like a chicken voting for Col. Sanders.
Recently, Congress worked diligently to have English passed as the official language of the United States. They also worked hard to make burning the American flag illegal. Now, I'm in favor of speaking English as well as of not burning the flag. But don't our political leaders have bigger and more pressing issues to focus on?
What about Medicare, which is running in the red? And what about Social Security, which will soon be running in the red? In case you don't know how in trouble both programs are, as of 2004, Medicare's long-term fiscal gap is over $60 trillion, while Social Security reportedly has a $10 trillion shortfall.
Yet in spite of these financial challenges, millions of Americans continue to waddle through the crosswalk of life, expecting our government to take care of them instead of building wealth. They're living in la-la land.
The Catastrophe Ahead
Donald Trump and I co-authored a book, to be published next month, about what individuals can do to address the massive problems facing this country. Our point of view is that, while it would be nice to change the government, doing so seems to be an unrealistic goal at this time.
Instead of changing the government, we recommend that you change yourself and prepare for the economic turbulence that lies ahead. If you think political action can save this country from itself, I'm afraid you're dreaming -- or perhaps daydreaming as you waddle through that figurative crosswalk.
In the next five years, the United States and the world will go through some of the most financially disturbing times in the history of the world. Once again, the rich will become very, very, rich, and the unsuspecting will be left like the passengers on the S.S. Titanic, heading straight for an economic iceberg.
One way to approach the coming changes is to ask yourself whether you'll be like my friend Steven Spivak -- trading rapidly, earning over $70,000 an hour -- or like that 19-year NYMEX employee, who's content to work for $70,000 a year at best. While both men are working for a dollar that's declining in value, one is earning more than enough of them to stay ahead of its erosion.
Both options are available to each of us. Which reality you choose -- deciding on how much you can earn and how fast you can earn it -- will determine your station in life five years from now, when things start to get really sticky.
Conclusion - truth be told, lazy people won't get far in this present time esp in any sort of businesses or workplaces. The smarter and well-connected you are...the better as in the present modern society, people look-up to these types of people to do business with or to rub shoulder with. Yes! luck too play a small part in getting and staying rich. So ..... good luck if you think you want to be rich hahaha.
Wednesday, January 10, 2007
Why Income Inequality Matters
The holiday season was very joyous on Wall Street. CEOs and lots of others took home some of the biggest checks ever.
I like a $50 million bonus as much as the next guy (although the most I can recall getting was $1,000), but those huge paydays beg a larger social and economic question: Does income inequality matter?
Mind the Gap
I'm not asking if we should care about the well-being of our poorest citizens. We should. This is a more subtle question: Should we care about the size of the gap between the rich and poor?
If we succeed in raising the incomes of the poor, does it matter if incomes at the top are rising even faster, making us a more unequal society overall?
By coincidence, I was in Brazil in December while those giant Wall Street bonuses were being handed out. Brazil has one of the largest gaps between rich and poor on the planet. Having experienced that gap firsthand -- from the slums run by drug traffickers at one end to the lovely apartments with bulletproof doors at the other -- I'm convinced that income inequality does matter.
If the gap between rich and poor gets too large, and if those at the bottom feel they have no meaningful route to the riches at the top, then the fabric of society will fray, or even come unraveled entirely.
Violence Literally Doesn't Pay
Life gets pretty scary -- no matter how much money you've got -- when a segment of society decides that they're no longer going to play by the rules.
Shortly before I arrived in Brazil, a British tour bus was hijacked and robbed in broad daylight on the way from Rio's international airport to a ritzy beach area. While I was there, two Supreme Court justices were carjacked on the same road.
Overall, the murder rate in Brazil is five times that of New York City. As in the United States, much of that violence is poor-on-poor, although the toll redounds everywhere. The New York Times reported recently on a World Bank study concluding that if Brazil had the much lower homicide rate of Costa Rica, Brazil's GDP would have been three to eight percent higher in the 1990s.
As one economist explained in the article, "You have money spent on guarding stuff rather than making stuff." And when international investors look around the globe, they choose safer places.
The Gini Out of the Bottle
Is this violence a direct result of income inequality? Almost certainly not. Brazil has a history of slavery and colonization that was far more brutal than the U.S. It would require a team of sociologists, historians, economists, and criminologists to explain the roots of violence in Brazil. Based on my knowledge of academics, I don't think they would come to a conclusion anyway.
Still, one can't spend time in Brazil without wondering about income inequality at home. Let's take a look at some numbers.
The most convenient statistic for measuring income inequality is called a Gini coefficient, which measures a country's distribution of income from 0 (absolute equality, with each person sharing the same amount of wealth) to 1 (absolute inequality, with one person controlling all of the nation's wealth).
Here's what that statistic looks like for a handful of countries, including contemporary and historic figures for the U.S.:
Japan: .25
Sweden: .25
India: .33
The United States 1970: .39
The United States 2005: .47 (Note that a small fraction of the increase over time is due to a change in the methodology for calculating the Gini coefficient; still, income inequality has climbed steadily by this measure over the past four decades.)
Brazil: .58
A Reason to Get Up in the Morning
So what? Obviously income inequality is just one statistic; it doesn't reflect the size of the pie, only how it's divided. The Soviet Union was a very equal place -- equally poor. ( come to think of it, it is better option as compared to the huge gap )
In fact, there are some really good things about income inequality, namely that it motivates risk, hard work, and innovation. I'm sure Wall Street bankers are motivated by a love of their work -- but a $50 million bonus can also help you get out of bed in the morning.
As a matter of fact, high salaries motivate not only the people who get them, but also the people who would like to get them in the future -- a phenomenon that economists refer to as a "tournament effect."
Thus, a $50 million bonus for a Wall Street CEO also inspires that ambitious guy in the mailroom to get out of bed if he thinks he's got a shot at being CEO someday. Even my undergraduate economics students work harder because they need good grades in order to get coveted investment banking jobs.
A Bigger Pie, or a Bigger Slice?
What's the problem, then? I think there are at least two reasons to be cognizant of income inequality in the U.S.:
Is there still really a path from rags to riches?
I've spent enough time in inner-city schools to wonder if we're really providing an opportunity for the motivated and gifted to make their way from the projects to Wall Street.
Yes, it happens -- you can watch Will Smith do it at your local multiplex in The Pursuit of Happiness, which is inspired by a true story. But how often does it not happen?
I'm convinced that part of what's going on in Brazil is that the socioeconomic ladder is broken. There's no real path from favela to bulletproof apartment, and some people with guns have decided that they don't want to play by the rules made by the people in those apartments.
Income inequality doesn't motivate anything good when there's no hope of sharing in the pot of gold.
There's a very interesting strain of economic research showing that our sense of well-being is determined more by our relative wealth than by our absolute wealth.
In other words, we care less about how much money we have than we do about how much money we have relative to everyone else. In a fascinating survey, Cornell economist Robert Frank found that a majority of Americans would prefer to earn $100,000 while everyone else earns $85,000, rather than earning $110,000 while everyone else earns $200,000.
Think about it: People would prefer to have less stuff, as long as they have more stuff than the neighbors.
The point -- and this is still a nascent field -- is that a nation may be collectively better off (using some abstract measure of well-being) with a smaller, more evenly divided pie than with a larger pie that's sliced less equitably. Reasonable people can and should argue about that.
What's clear, however, is that one key difference between poverty in 1900 and poverty in 2007 is that even the poorest households -- in Brazil or the U.S. or anywhere else -- can turn on the television and see how the other half lives. It's one thing to be poor; it's another to be continually reminded exactly how poor you are.
At a minimum, we should question whether a bigger pie is always better.
Name Your Poison
There's no right answer as to how society ought to look. That's a matter of personal philosophy. Indeed, I still find a thought experiment proposed by philosopher John Rawls as relevant as anything that economics can offer.
Rawls argued that decisions about economic justice should be made behind a "veil of ignorance." How would you want the world to look if you were going to be born tomorrow but didn't know the economic station into which you would be born?
If you were going to be born somewhere in America tomorrow -- in the projects of Chicago or perhaps into one of those families that brought home $50 million this bonus season -- what would you want the economic landscape to look like today?
Would you want a distribution of income that looked more like Sweden's, or Brazil's? It's worth thinking about.
Conclusion - Yes! even here in Singapore, we can easily see the huge gaps in incomes between the haves and the have-nots. If this continue...then pretty soon the have-nots will feel differently. They can only see and feel....the injustice of the whole system of modern economic landscapes. The point I want to point out the riots in Indonesia soon after Suharto fell from grace but the Chinese would paid the price of that, becoz they were seen to be the "haves" by the rest of society they were living in. I not help but to notice that the same is true in S'pore too with the majority - the chinese is better off as compared to the malay, luckily the chinese is also the majority here. So the situation is not grave yet...as compared to many other countries.
I like a $50 million bonus as much as the next guy (although the most I can recall getting was $1,000), but those huge paydays beg a larger social and economic question: Does income inequality matter?
Mind the Gap
I'm not asking if we should care about the well-being of our poorest citizens. We should. This is a more subtle question: Should we care about the size of the gap between the rich and poor?
If we succeed in raising the incomes of the poor, does it matter if incomes at the top are rising even faster, making us a more unequal society overall?
By coincidence, I was in Brazil in December while those giant Wall Street bonuses were being handed out. Brazil has one of the largest gaps between rich and poor on the planet. Having experienced that gap firsthand -- from the slums run by drug traffickers at one end to the lovely apartments with bulletproof doors at the other -- I'm convinced that income inequality does matter.
If the gap between rich and poor gets too large, and if those at the bottom feel they have no meaningful route to the riches at the top, then the fabric of society will fray, or even come unraveled entirely.
Violence Literally Doesn't Pay
Life gets pretty scary -- no matter how much money you've got -- when a segment of society decides that they're no longer going to play by the rules.
Shortly before I arrived in Brazil, a British tour bus was hijacked and robbed in broad daylight on the way from Rio's international airport to a ritzy beach area. While I was there, two Supreme Court justices were carjacked on the same road.
Overall, the murder rate in Brazil is five times that of New York City. As in the United States, much of that violence is poor-on-poor, although the toll redounds everywhere. The New York Times reported recently on a World Bank study concluding that if Brazil had the much lower homicide rate of Costa Rica, Brazil's GDP would have been three to eight percent higher in the 1990s.
As one economist explained in the article, "You have money spent on guarding stuff rather than making stuff." And when international investors look around the globe, they choose safer places.
The Gini Out of the Bottle
Is this violence a direct result of income inequality? Almost certainly not. Brazil has a history of slavery and colonization that was far more brutal than the U.S. It would require a team of sociologists, historians, economists, and criminologists to explain the roots of violence in Brazil. Based on my knowledge of academics, I don't think they would come to a conclusion anyway.
Still, one can't spend time in Brazil without wondering about income inequality at home. Let's take a look at some numbers.
The most convenient statistic for measuring income inequality is called a Gini coefficient, which measures a country's distribution of income from 0 (absolute equality, with each person sharing the same amount of wealth) to 1 (absolute inequality, with one person controlling all of the nation's wealth).
Here's what that statistic looks like for a handful of countries, including contemporary and historic figures for the U.S.:
Japan: .25
Sweden: .25
India: .33
The United States 1970: .39
The United States 2005: .47 (Note that a small fraction of the increase over time is due to a change in the methodology for calculating the Gini coefficient; still, income inequality has climbed steadily by this measure over the past four decades.)
Brazil: .58
A Reason to Get Up in the Morning
So what? Obviously income inequality is just one statistic; it doesn't reflect the size of the pie, only how it's divided. The Soviet Union was a very equal place -- equally poor. ( come to think of it, it is better option as compared to the huge gap )
In fact, there are some really good things about income inequality, namely that it motivates risk, hard work, and innovation. I'm sure Wall Street bankers are motivated by a love of their work -- but a $50 million bonus can also help you get out of bed in the morning.
As a matter of fact, high salaries motivate not only the people who get them, but also the people who would like to get them in the future -- a phenomenon that economists refer to as a "tournament effect."
Thus, a $50 million bonus for a Wall Street CEO also inspires that ambitious guy in the mailroom to get out of bed if he thinks he's got a shot at being CEO someday. Even my undergraduate economics students work harder because they need good grades in order to get coveted investment banking jobs.
A Bigger Pie, or a Bigger Slice?
What's the problem, then? I think there are at least two reasons to be cognizant of income inequality in the U.S.:
Is there still really a path from rags to riches?
I've spent enough time in inner-city schools to wonder if we're really providing an opportunity for the motivated and gifted to make their way from the projects to Wall Street.
Yes, it happens -- you can watch Will Smith do it at your local multiplex in The Pursuit of Happiness, which is inspired by a true story. But how often does it not happen?
I'm convinced that part of what's going on in Brazil is that the socioeconomic ladder is broken. There's no real path from favela to bulletproof apartment, and some people with guns have decided that they don't want to play by the rules made by the people in those apartments.
Income inequality doesn't motivate anything good when there's no hope of sharing in the pot of gold.
There's a very interesting strain of economic research showing that our sense of well-being is determined more by our relative wealth than by our absolute wealth.
In other words, we care less about how much money we have than we do about how much money we have relative to everyone else. In a fascinating survey, Cornell economist Robert Frank found that a majority of Americans would prefer to earn $100,000 while everyone else earns $85,000, rather than earning $110,000 while everyone else earns $200,000.
Think about it: People would prefer to have less stuff, as long as they have more stuff than the neighbors.
The point -- and this is still a nascent field -- is that a nation may be collectively better off (using some abstract measure of well-being) with a smaller, more evenly divided pie than with a larger pie that's sliced less equitably. Reasonable people can and should argue about that.
What's clear, however, is that one key difference between poverty in 1900 and poverty in 2007 is that even the poorest households -- in Brazil or the U.S. or anywhere else -- can turn on the television and see how the other half lives. It's one thing to be poor; it's another to be continually reminded exactly how poor you are.
At a minimum, we should question whether a bigger pie is always better.
Name Your Poison
There's no right answer as to how society ought to look. That's a matter of personal philosophy. Indeed, I still find a thought experiment proposed by philosopher John Rawls as relevant as anything that economics can offer.
Rawls argued that decisions about economic justice should be made behind a "veil of ignorance." How would you want the world to look if you were going to be born tomorrow but didn't know the economic station into which you would be born?
If you were going to be born somewhere in America tomorrow -- in the projects of Chicago or perhaps into one of those families that brought home $50 million this bonus season -- what would you want the economic landscape to look like today?
Would you want a distribution of income that looked more like Sweden's, or Brazil's? It's worth thinking about.
Conclusion - Yes! even here in Singapore, we can easily see the huge gaps in incomes between the haves and the have-nots. If this continue...then pretty soon the have-nots will feel differently. They can only see and feel....the injustice of the whole system of modern economic landscapes. The point I want to point out the riots in Indonesia soon after Suharto fell from grace but the Chinese would paid the price of that, becoz they were seen to be the "haves" by the rest of society they were living in. I not help but to notice that the same is true in S'pore too with the majority - the chinese is better off as compared to the malay, luckily the chinese is also the majority here. So the situation is not grave yet...as compared to many other countries.
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