Income Inequality and Financial Crises

LOUISE STORY

New York Times

August 21, 2010

David A. Moss, an economic and policy historian at the Harvard Business School, has spent years studying income inequality. While he has long believed that the growing disparity between the rich and poor was harmful to the people on the bottom, he says he hadn’t seen the risks to the world of finance, where many of the richest earn their great fortunes.

Now, as he studies the financial crisis of 2008, Mr. Moss says that even Wall Street may have something serious to fear from inequality — namely, another crisis.

The possible connection between economic inequality and financial crises came to Mr. Moss about a year ago, when he was at his research center in Cambridge, Mass. A colleague suggested that he overlay two different graphs — one plotting financial regulation and bank failures, and the other charting trends in income inequality.

Mr. Moss says he was surprised by what he saw. The timelines danced in sync with each other. Income disparities between rich and poor widened as government regulations eased and bank failures rose.

“I could hardly believe how tight the fit was — it was a stunning correlation,” he said. “And it began to raise the question of whether there are causal links between financial deregulation, economic inequality and instability in the financial sector. Are all of these things connected?”

Professor Moss is among a small group of economists, sociologists and legal scholars who are now trying to discover if income inequality contributes to financial crises. They have a new data point, of course, in the recent banking crisis, but there is only one parallel in the United States — the 1929 market crash.

Income disparities before that crisis and before the recent one were the greatest in approximately the last 100 years. In 1928, the top 10 percent of earners received 49.29 percent of total income. In 2007, the top 10 percent earned a strikingly similar percentage: 49.74 percent. In 1928, the top 1 percent received 23.94 percent of income. In 2007, those earners received 23.5 percent. Mr. Moss and his colleagues want to know if huge gaps in income create perverse incentives that put the financial system at risk. If so, their findings could become an argument for tax and social policies aimed at closing the income gap and for greater regulation of Wall Street.

This inquiry is one that some conservative economists are already dismissing.

R. Glenn Hubbard, for instance, who was the top economic advisor to former President George W. Bush, said income inequality was not the culprit in the most recent crisis.

“Cars go faster every year, and G.D.P. rises every year, but that doesn’t mean speed causes G.D.P.,” said Mr. Hubbard, dean of the Columbia Business School and co-author of the coming book “Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, and How to Reclaim American Prosperity.”

Even scholars who support the inquiry say they aren’t sure that researchers will be able to prove the connection. Richard B. Freeman, an economist at Harvard, is comparing about 125 financial crises around the globe that occurred over the last 30 years. He said inequality soared before many of these crises. But, Mr. Freeman added, the data from different nations is difficult to compare. And Professor Freeman says he has found some places, like the Scandinavian countries, where there were crises without much inequality, suggesting that other factors, like deregulation, may be the best explanations.

For his part, Mr. Moss said that income inequality might have complicated links to financial crises. For instance, inequality, by putting too much power in the hands of Wall Street titans, enables them to promote policies that benefit them — like deregulation — that could put the system in jeopardy.

Inequality may also push people at the bottom of the ladder toward choices that put the financial system at risk, he said. And low-income homeowners could have better afforded their mortgages if not for the earnings gap.

(Mr. Hubbard has a different take: He says many lower-income homeowners should not have had mortgages in the first place. The latest crisis, he says, was caused by policymakers who decided to “democratize credit” by expanding home ownership. Their actions were driven by a desire to address inequality, but those policymakers were misguided and should have improved education instead, he adds.)

Scholars who study inequality often focus on people at the bottom. But, Mr. Moss said, the incentives of people at the top also deserve more scrutiny.

He pointed to the recent work of Margaret M. Blair, who teaches at Vanderbilt University Law School and is active with the Tobin Project, the nonprofit organization Mr. Moss founded a few years ago to study issues like economic inequality. She is researching whether financial workers promote bubbles and highly leveraged systems, even unconsciously. Ms. Blair said that because financial bubbles often lead to higher returns, financial workers have the potential to make more, and this pattern can influence their trading strategies and the policies they promote. Those decisions, in turn, drive even greater income inequality, she said.

After the 1929 crash, the income gap narrowed dramatically and remained low for decades, because of the huge wealth lost by people at the top and the sweeping financial reforms introduced in the 1930s that reined in Wall Street.

So far, the results are not as dramatic in the wake of the recent financial crisis. The income gap narrowed slightly in 2008, according to the most recent data available, but it remains unclear if it will continue shrinking.

This time, after all, the system did not collapse as it did in 1929. The status quo on income inequality looks like it was essentially maintained. Mr. Moss said he supported the government intervention in 2008, though he noted, "Financial elites made off rather well."

http://www.nytimes.com/2010/08/22/weekinreview/22story.html?_r=1

Philosophy and the Habits of Critical Thinking

Interview with John Searle (California Univ.-Berkeley)

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Is it hard to do philosophy?

It's murder, absolutely. I compare it ... if you really want to know how to do it, you get up in the morning, there's a large brick wall and you run your head against that brick wall. And you keep doing that every day until eventually you make a hole in the wall. That's what it feels like. But metaphorically the wall has ceased to exist, right? Using the metaphor that you're always... Unfortunately I keep banging the wall. And then once I get one wall battered into shape then I've got to work on another one. Now the way it actually works out is that you're constantly fighting with a whole lot of apparently contradictory ideas, and yet they all seem appealing and you have to find some way to resolve them.

So take an obvious case. We're all conscious and it's real. All you do is pinch yourself and you know this is real. How can matter be conscious? You know, what you've got in your skull is about a kilogram and a half, three pounds of this gook. It's about the texture of English oatmeal -- it's slimier. And it's gray and white. And now how can this three pounds of gook in your skull, how can that have all these thoughts and feelings and anxieties and aspirations? How can all of the variety of our conscious life be produced by this squishy stuff blasting away at the synapses? A hundred billion neurons, glial cells, synapses, how does that produce consciousness? And that's typical of philosophical problems. On the one had you want to say, well, consciousness couldn't exist because, you know, how does it fit in with the physical world? On the other hand we all know it does exist, so you have to find some way to resolve that. That's a typical philosophical problem.
...
What do you hope to impart to your students? Once they've had John Searle, what do you want them to have taken away?

A whole lot of things. There's always the immediate objective of the course. You should understand from this course how language works, if it's a course on the philosophy of language. And you should understand the predominant theories, the dominating theories about how language works, but I'm not bashful about telling you which theories I think are right. I mean, I'll teach you the other guy's theories, but I'm not concealing from you my own opinions. When you go away from this course you should know that. You should understand the material of the course. And then you should have acquired a certain kind of disciplined practice of reading and studying in the course, of reading the articles and writing the term papers and preparing for the exams. And really, if I am successful, then you ought to be able to go and read the latest philosophy journals and read the articles and read the latest stuff on this. I mean, I tell my students that if I'm successful in the course they should, in an undergraduate course, they should be able to pass a Ph.D. qualifying exam in this course, in the philosophy of language or the philosophy of mind, which are two courses I teach.

However, having said all that, I have to say I think the most important thing that I try to convey, and the most important thing any professor can convey, is to exemplify a style of thinking and a mode of sensibility. It's what you provide an example of that is as important, and in some ways more important, than what you actually say explicitly. You convey by example what it's like to actually engage in a process of investigation and research, what it's like to formulate ideas and have them challenged by other ideas, and then deal with the conflicts of these ideas. So the style that you exemplify, the mode of sensibility you express, I think is as important as the content of the course. Now you don't want to get too self-conscious about that. You don't want to go into class thinking, well you know, today I've got to really exemplify this. You do your thing. But at the end of the semester, or even more importantly ten years later, when the student comes back to the campus, if you ask yourself what difference could I have made to these students, I think that's as important as the content of the course.

Is there something that students can do to prepare for the next millennium?

Work hard. You see, what I've found about Berkeley students in particular is that they hunger for commitment. And what they want to know from the professor is, does this material matter to you? Are you really intellectually committed to this material? And they are remarkably instinctive at spotting phonies, at spotting fake commitments or various forms of intellectual concealment. I think there's a kind of instinctive ability to spot this, and Berkeley students are looking for commitment and they hunger for intellectual commitment. And not everybody does. When I've taught at other universities, I teach at a lot of universities, and at some universities I've taught at you get students whose IQs are as high as the Berkeley students, they're just more apathetic. They just don't much care about it. They don't have the hunger for commitment. They don't have the passion that I find in my Berkeley students.

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Professor Searle, thank you for taking time to be with us today and giving us a sense of the habits of critical thinking.

Thank you very much for having me.

Thank you. And thank you very much for joining us for this Conversation with History.

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For the full-text of the interview, please click here.

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Thinking clearly, writing clearly

Jefferson Flanders

Blogger News Network

“The problem is to teach ourselves to think, and the writing will take care of itself,” observed author and journalist Christopher Morley.

Morley made that observation in his 1923 book Inward Ho! and, despite the passage of time, his insight remains relevant in the first decade of the 21st century. Writing with clarity requires thinking with clarity; thinking clearly is generally reflected in clear prose (although clear thinkers can sometimes struggle to express themselves.)

What do we mean by clarity of thought, or (perhaps less poetically) clear thinking? Also called “critical thinking,” it is, as Sharon Begley of the Wall Street Journal has explained, the ability “to evaluate evidence, to tell fact from opinion, to see holes in an argument, to tell whether cause and effect has been established and to spot illogic.”

Clear thinking is founded on inquiry, observation, and reasoning. Confronted with a problem to solve, or an issue to consider, the clear thinker gathers evidence, evaluates and analyzes it, considers the alternatives, makes a judgement, and reaches a well-reasoned conclusion. Throughout this step-by-step process, the clear thinker asks questions at every stage. Is the information accurate? Does it come from a reliable source? Is it sufficient in depth and breadth? Are there alternative explanations? Has bias crept in? Is there enough known to reach a conclusion? The purpose is to get as close to the truth as is humanly possible (while recognizing that some things are unknowable).

In a sense, the clear thinker takes on the role of detective or investigative reporter: relying on empirical data, employing both induction (reasoning from specific observations) and deduction (reasoning from general propositions) before arriving at a decision, a solution, or a conclusion. Humans have always been fascinated by mysteries and their investigation; from Hamlet to Sherlock Holmes to CSI: Miami, we have been intrigued by the puzzle-solving process. Clear thinking employs those same logical techniques. Scientists, physicians, social scientists, historians, journalists, intelligence analysts, lawyers, and managers turn to them when they confront intellectual challenges in their field of work.

Examining assumptions
One distinctive quality found in clear thinkers is their willingness to examine their own initial assumptions and biases. Clear thinkers recognize that their own background, education, and prejudices can lead to blind-spots, as can relying on conventional wisdom. They strive to overcome these barriers to well-founded reasoning by remaining alert to self-delusion and groupthink.

Moreover, clear thinkers must summon the courage to abandon prior opinions or theories when the evidence doesn’t support them. When journalist David Halberstam arrived in Saigon in the early 1960s, he was convinced the U.S. was right to intervene in the ongoing civil conflict; before he left in 1964, Halberstam’s reporting had led him to conclude that the U.S. was making a mistake and was losing the war—a conclusion he shared with his readers, much to the dismay of the government. Historian Allen Weinstein began his research on the Alger Hiss case believing that Hiss was innocent of charges of spying for the Soviet Union in the 1930s and 40s, only to change his mind after reviewing the evidence. Weinstein let the facts shape his understanding, rather than forcing the facts to fit his preferred theory.

Intellectual honesty also demands acknowledging when the evidence is weak or fragmentary, or when there are plausible alternative explanations, or when something remains obscure. Clear thinking considers the accuracy, relevance, and depth of the data in question; it calls for assessing arguments on their merits; it means arriving at the most logical conclusion based on the available facts.

The clear thinker believes that the world, with all its ambiguities and complexity, can be understood. While experts may have deep technical knowledge on a topic (say, for example, global warming or genetic engineering), a generalist nonetheless can grasp the underlying facts and concepts, and assess competing claims, using the tools of clear thinking. The clear thinker looks to break down complicated ideas into more manageable components, and to examine and understand these components. As author, lawyer and journalist Jack Fuller has argued, “The principle of elegance, after all, assumes that the truth has a simple beauty, which ought to be communicable.”

Clear writing
Communicating the results of clear thinking, as Christopher Morley suggested, becomes easier for the writer who starts with a logical, organized argument supported by the facts. There is a natural, persuasive flow to this argument and, consequently, a reader is more likely to understand and be convinced by what is written.

Clear writing founded on clear thinking will be direct, organized, and concise. It will avoid stridency or complexity; it will be free of jargon and inflated language; it will favor concreteness over abstraction. Clear writers write to express, not impress.

Yet the clear writer does not have to sacrifice aesthetics in pursuit of clarity: active verbs, varied sentence lengths, vivid descriptions, and precise language are all part of clear writing and can be shaped into a distinctive, appealing style. Clear writing, like clean design in architecture, can offer both functionality and grace.

Reprinted from Neither Red nor Blue. This essay has also been published through the At Work Newswire.

Copyright © 2007 Jefferson Flanders

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