Thomas Piketty And The Economics Of Jealousy

It seems like only yesterday the big crisis in the U.S. economy was our very low rate of personal savings.  In a complex economy requiring more and more capital to produce a dollar of GDP, how can we expect to stay successful if nobody saves?  The rate of personal savings in the U.S. hit a low of only 1.5% in 2005, and since has recovered some, to 3.9% by 2012 and then to just over 5% today.  But still that compares to rates of over 10% in many European countries and much higher in Asia.  A study from the People's Bank of China in 2013 put the personal savings rate in China close to 50%, at least in some months.

As recently as 2013 you could still find articles talking about this personal savings crisis.  Here is one from Leslie Kramer of CNBC in May 2013.

Many economists and fund industry experts say that unless Americans change their spending habits and learn how to save, we will soon be facing a full blown retirement crisis and it may be turn out to be a deeper and more harrowing experience than many have already envisioned. 

Back then (barely more than a year ago) people analyzing why our savings rate was so low often pointed to the very poor incentives to save, starting with the Fed's near-zero interest rate policy, followed by high taxes on interest, dividends, and capital gains.  With interest rates on bank savings and money market funds well less than 1%, and even that 1% taxed as ordinary income, and with at least some inflation, however minimal, it is clear that cash and near cash investments have been earning negative returns for years.  Longer term fixed income investments may earn barely positive returns after taxes and inflation, but those could well get wiped out by principal declines when interest rates start to rise.  You can buy higher interest "junk" bonds, but at your peril -- they can default and wipe out your investment at any time.  Equities have earned strong returns over long periods, but subject to periodic sharp and sickening declines, such as the decline of over 50% that occurred in 2008 - 09.  And if you do have long-held equity investments that have appreciated substantially, then when you sell them you must pay capital gains tax on all the appreciation, most of which will be inflation rather than real gain.  In short, if you save and invest in the U.S., between Fed policy, taxes, and wide market swings, you could as easily lose as gain.  No wonder the savings rate is low.

Then earlier this year came out the translation of Thomas Piketty's book "Capital in the Twenty-First Century."  I haven't seen anything about the crisis of low personal savings since.  Is it coincidence?

I will not claim to have read Piketty's book from end to end (I'm not sure that's even possible).  However, I have bought it and looked through it for highlights.  On the kindle, where after you buy a book they can track of how much of it you have read, this has been declared the least-read book of the year -- less read than even Hillary Clinton's "Hard Choices," if you can imagine that.  Still, if you are left-wing economist you are seemingly required to declare this one of the greatest economics books of all time.  Gushingly favorable notices have come from the likes of Nobel Prize winners Robert Solow, Joseph Stiglitz and, of course, Official Manhattan Contrarian Worst Economics Writer Paul Krugman.  In the New York Review of Books Krugman calls "Capital" a "magnificent, sweeping meditation on inequality."

Piketty asserts that inequality is high and increasing and that he has identified the key to understanding why.  It is that r > g.  r is the rate of return on capital; g is the rate of growth of the economy.  If the rate of return on existing capital exceeds the rate of economic growth, then, asserts Piketty, the owners of existing wealth get richer faster than anyone else can catch up with them.  In other words, the rich get richer and the poor get poorer.  From page 377:

We have also learned that the relative movements of the return on capital and the rate of growth of the economy, and therefore of the difference between them, r - g, can explain many of the observed changes, including the logic of accumulation that accounts for the very high concentration of wealth that we see throughout much of human history.

Aha!  Now you tell us that all you have to do is save some and you are on the ineluctable path to becoming a plutocrat!  The former crisis of low personal savings does not fit with this and is no longer part of the narrative.  

But wait:  is r really greater than g when the government has been running for years a zero interest rate policy specifically to make it so that nobody can earn any positive return on savings?  I can't seem to find the answer to that here.  I do find this on the same page 377:

In all likelihood, inheritance will again play a significant role in the twenty-first century, comparable to its role in the past. . . .  Whenever the rate of return on capital is significantly and durably higher than the growth rate of the economy, it is all but inevitable that inheritance (of fortunes accumulated in the past) predominates over saving (wealth accumulated in the present). . . .  The inequality r > g in one sense implies that the past tends to devour the future: wealth originating in the past automatically grows more rapidly, even without labor, than wealth stemming from work, which can be saved.  Almost inevitably, this tends to give lasting disproportionate importance to inequalities created in the past, and therefore to inheritance.

That sounds a lot more like a prediction for the future than an explanation of why we supposedly have too much inequality today.  And what basis does Piketty have to predict that inherited wealth will come to dominate in the future?  Got me.  Even if you grant that r is greater than g, or has been for some substantial periods in the past, if that meant that inherited wealth would dominate, shouldn't we now be dominated by the heirs of the Vanderbilts, the Fords, the Carnegies, the Morgans, and so forth.  Instead, as Jonah Goldberg points out in Commentary, most large fortunes in the United States seem to dissipate or get eclipsed quickly, while almost all the largest fortunes today have been made in the current generation:

Fewer than 1 in 10 of the 400 wealthiest Americans on the Forbes list in 1982 were still there in 2012. (Lawrence Summers notes that if Piketty was right about the stable return on capital, they should have all stayed on the list.) Of the 20 biggest fortunes on the Forbes list in 2013, 17 (85 percent) were self-made. Of the three remaining entries, only one—the Mars candy family—goes back three generations. 

Oh well.  Maybe it doesn't really matter if any of this is true or not.  You need to get way toward the back of the book (past page 500) before you get to the really important point:  we must take the wealth away from those who have gotten too rich!  And thus we find proposals for much higher marginal income tax rates and for a global wealth tax to prevent anyone from getting too rich.  And how rich is too rich?

A[n income tax] rate of 80 percent applied to incomes above $500,000 or $1 million a year would not bring the government much in the way of revenue, because it would quickly fulfill its objective: to drastically reduce remuneration at this level but without reducing the productivity of the US economy, so that pay would rise at lower levels. 

Up to this point in the book I thought that the problem was the accumulation of wealth in the hands of a few and the passing of that wealth by inheritance; now all of a sudden the problem is current income above a certain level.  Piketty is explicit that his desire for this tax is not to raise revenue (to his credit he admits that it won't raise much) but rather to punish anyone who dares to be too successful.  And is it just my cynicism, or is that level of "$500,000 or $1 million a year" picked to be just above the level that an academic economist with a modestly successful book can expect to earn?  Somehow, all the proposals for punitive action against the evil "one percent" always seem to come from people in percents 2 and 3.  Those people are themselves very affluent, but somehow consumed by jealousy.  That's not much of a basis for economic policy.  

Left Behind In Salisbury, CT -- Or Not

President Obama's discussion of young urban black men getting "left behind" by the modern economy prompted a response from Selena Zito of Real Clear Politics, pointing out that it's not just young blacks.  Zito travels to the northwest Ohio town of Van Wert, "a farming and manufacturing community," and finds, quoting a local, that "Van Wert is very much a town that has been left behind."  Though neither urban nor very black, Van Wert has suffered from the closing of many of its businesses and the opening of a nearby Wal-Mart that has left many vacancies in the otherwise charming downtown.  Citing Walter Russell Mead, Zito bemoans the decline of America's "core institutions, ideas and expectations" that "shaped American life for 60 years after the New Deal," an "old system" where "both blue-collar and white-collar workers held stable jobs, and living standards for all social classes steadily rose." 

I often enjoy the writing of both Zito and Mead, but I think they just have a fundamental mis-perception of the supposedly "good old days" and of the processes of creative destruction that were at work then just as much as now.

First, let's consider Salisbury, Connecticut, the town where I'm hanging out this week.  It is the most northwest town in Connecticut, bordering both New York and Massachusetts.  If the decline of manufacturing and agriculture makes a town "left behind," then Salisbury has to be the most left behind town in the whole country.  In this town, manufacturing and agriculture have declined from total dominance right down to the vanishing point.  

At the Salisbury Association on Main Street, they have this week an exhibit on Salisbury during the Civil War.  The exhibit begins with a description of Salisbury and its economy as the war opened in 1861:

In 1861 Salisbury was a bustling industrial and farming town of 3000 people.  Along the brook flowing from Mount Riga to Salisbury center stood two forges, a tannery, the Washinee Woolen mill, a grist mill, hattery, and two additional forge and trip hammer shops.  The great mine at Ore Hill provided tons of rich iron ore, while local charcoal burners produced mountains of fuel to power the furnaces and forges belonging to Landon & Company, Oliver Ames, and Barnum and Richardson in Amesville and Lime Rock.  In addition to the heavy industries, many Salisbury businesses flourished.  Lakeville was home to a brass and tin shop, the Welch & Seymour firm that made surgical splints, as well as the highly successful cutlery factory operated by A.H. Holley.  Outside the village centers, scores of substantial farms supplied meats, grain, fruit and dairy products to a wide range of near and distant consumers.

Today?  It's literally all gone.  In the intervening 153 years, the population has crept up to 3,747 (while the population of the U.S. has multiplied by more than 10 times in the same period), but the "bustling industrial and farming" economy has almost completely disappeared.  The iron businesses that once defined Salisbury have been gone for a good century.  As to other manufacturing, I can't find a single factory of any kind today in this town.   The closest possibility is a very small ITW facility in the Lakeville section of town, but I don't detect them actually making anything there.  A site that has compiled some census data for the town has a big 1.66% of its workforce engaged in "production, transportation and material moving" -- but there is a company in this town that provides school bus transportation that could account for pretty much all of that.  

Agriculture?  There are still a few farms, but if there's a story to be told about agriculture around here it's that even the tiny amount of remaining agriculture is still declining.  One of the most popular posts on this blog continues to be one of the very first, called the "Defunct Agriculture Tour," with pictures of recently abandoned farms in this area where the land has been leaving agriculture and reverting to forest for a good century and a half.  The census data show all of 0.63% of the workforce engaged in "farming, fishing, forestry."  That would be fewer than 25 people, and some of them are in the firewood business.

So therefore we've been left really, really behind, right?  Well, actually not.  The fact is that in the modern international economy there are thousands upon thousands of types of goods and services that can be sold on a world market.  Without actually making any tangible things to speak of, this is a very upscale town.  

So what do they do?  The two largest businesses are private boarding schools, Hotchkiss and the Salisbury School.    Hotchkiss charges like the most expensive colleges, with annual tuition, room board and fees coming to $52,430.   The buzz is that starting next year they plan to fill the place up in the summers, and charging top dollar, with students from China looking to learn English.  Also in Salisbury is sports car racing mecca Lime Rock Park, made famous by frequent visits from Paul Newman while he was alive.  A regional bank, Salisbury Bank, has its headquarters here.  Ascendant Compliance Management is a consulting firm that advises the securities industry on regulatory compliance.  And I could go on.  The side roads are dotted with beautiful houses, many of them second homes of people from New York or Boston.  The unemployment rate is 4.6%, well below the national average, and median household income is reported at $65,625, well above the national average.  The loss of all the manufacturing and almost all the agriculture did not "leave the town behind," but rather was the impetus to move on to new and better opportunities.

And that, by the way, has always been the deal in the United States as far as I can tell.  This business from Mead and Zito that there was once an "old system" where everybody had a stable job and incomes just rose naturally and steadily -- that's a pure fiction.  The real big picture story of the U.S. economy from the 1800s through close to the present is the vast involuntary exit of virtually everybody from agriculture -- forced out by inexorable market pressures, mechanization decreasing the need for labor, painfully low incomes, backbreaking work for little pay, crop failures, bankruptcies and foreclosures.

Below is a chart from Department of Agriculture data of the decline of the percent of jobs in agriculture in the United States from 1790 to 2000, going from 90% of all jobs down to just 2.6%.  Even if you assume that  Mead's "old system" only refers to the period immediately after World War II, that period started with about 17% of U.S. employment in agriculture.  There was plenty of pain in the loss of those last 10 million or so agricultural jobs in the 1950s, 60s and 70s..  But that's how the modern economy was created. 

The idea that there was some kind of more humane "old system" in the post-war period is just an illusion resulting from diverting our gaze from the vast dislocation out of agriculture during that period, and focusing instead on the world of large-scale manufacturing that then was on the ascendancy and provided for what seemed like stability and security.  Today, such large-scale manufacturing is no longer the future in the United States.  We can look upon that change as creating people and towns that are "left behind," or alternatively we can look upon it as giving people the chance, with a strong push from behind and with a vastly expanded international economy, to pursue new and better opportunities.  The same principle applies to the young black men who are the focus of President Obama's attention.

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More On The Latest Bank of America Shakedown

Following up on my recent post about big time shakedown prosecutions, I thought I would look in a little more depth at the latest settlement of the government with Bank of America, just announced a few days ago.   The headline number is that Bank of America will pay close to $17 billion to some combination of the federal government, six states that joined in the settlement, and a "consumer relief" fund.  Is the settlement a bona fide resolution of legitimate claims, reasonably related to the claims settled, or is it just a shakedown, in other words an extortion of a large arbitrary number by threats to abuse government power?

My verdict:  shakedown.  I'll lay out my reasons, but by all means you should read some of the stuff they have released and form your own conclusions.  Here is a link to the Justice Department page announcing the settlement.  That page contains several other links with additional information.  The most important are the Settlement Agreement and the so-called "Statement of Facts" that accompanies the settlement.

If you think this settlement must have something to do with advantage-taking committed against low-income and subprime borrowers, you are wrong.  That alleged conduct has been the subject of multiple other investigations and proceedings, but not this one.  This one is supposedly about "fraud" and "misrepresentations" committed against purchasers of mortgage-backed securities.  Weren't those purchasers largely sophisticated mutual funds and hedge funds that are very capable of looking out for themselves?  Yes -- but why would you think that just because the settlement is a recovery for wrongs allegedly done to those sophisticated investors, that those investors will benefit in any way from it?   In fact, as far as I can tell there is no effort at all to tie the recovery to losses actually suffered by anyone, and furthermore none of the money is going to any of the supposed "victims" here.  A better way of looking at this is that those investors are just the excuse for Holder and a group of state AGs to get their name in the papers attached to a big number.

The "Statement of Fact" is 30 pages long, and excruciating reading, but actually relatively short for this kind of thing.  Of the various items discussed, all but a couple relate to the activities of either Merrill Lynch or Countrywide, entities that the government pressured BofA into taking over as the financial crisis got going.  I'll give you a few exemplars of the conduct the government thinks warrants this kind of settlement.  As the first example, from one of the few instances relating to BofA itself, on page 2:

Bank of America did not have third-party, loan-level due diligence conducted on the specific mortgage loans collateralizing the BOAMS 2008-A securitization. This was contrary to its past practice. . . .   Bank of America did not disclose in the BOAMS 2008-A offering documents that third-party, loan-level due diligence was not conducted on the loans collateralizing BOAMS 2008-A. 

Or try this from page 11 (conduct of Countrywide):

During the period from August 2005 to 2007, Countrywide received information regarding the performance and characteristics of loans that it originated under various products and programs and securitized into RMBS. That information suggested that certain products had the potential to perform poorly, particularly in a challenging economic environment. 

Imagine that!  Or from page 16 (again conduct of Countrywide):

Although Countrywide disclosed in certain of its SEC filings (i) the attributes of Pay-Option ARMs that were held by CB and (ii) the increasing volume and dollar amount of loans that were experiencing negative amortization, the Offering Documents did not disclose that certain Pay-Option ARM loans included as collateral were loans that CB had elected not to hold for its own investment portfolio because they had risk characteristics that CFC management had identified as inappropriate for CB.  

And believe me, I'm not cherry-picking here.  It's one pile of nothing after another.  They even quote from several emails.  You would think that after subpoenaing what must have been millions of emails they would have at least a few dozen embarrassing admissions to throw back at BofA, but again they have literally nothing.

So who gets the money from this settlement?  Go through the Settlement Agreement, and you find that of the $17 billion, about $10 billion goes to some combination of the federal government and the six participating states.  There's no specification of what office or fund gets the money to spend.  So is it just a slush fund to spend on whatever pet project Justice may want to have free from any oversight?  Sure looks like it.  Then there's $7 billion for what they call "consumer relief."  Wait a minute -- I thought this settlement had nothing to do with injured consumers.   And what does "consumer relief" consist of?  Supposedly there's a description in "Annex 2", but when you go there you find that the whole thing consists of this one cryptic paragraph:

Eligibility: The Consumer Relief eligibility criteria shall reflect only the terms set forth below and the following principles and conditions: (1) Consumer Relief will not be implemented through any policy that violates the Fair Housing Act or the Equal Credit Opportunity Act; (2) Consumer Relief will not be conditioned on a waiver or release by a borrower, provided that waivers and releases shall be permitted in the case of a contested claim where the borrower would not otherwise have received as favorable terms or consideration; and (3) Eligible modifications may be made under the Making Home Affordable Program (including the Home Affordable Modification Program and the Housing Finance Agency Hardest Hit Fund) and any proprietary or other modification program. Nothing herein shall preclude the implementation of pilot programs in particular geographic areas that do not violate the Fair Housing Act, the Equal Opportunity Credit Act, or any other federal or state civil rights law.  

A guy named Eric Green is appointed to "monitor" the consumer relief.  He's a fairly prominent guy in the mediation business, and maybe even a man of integrity.  But is there any chance that this $7 billion will not end up being another slush fund going most or all to Democratic party activists of one form or another?

A couple more issues.  There's no mention whatsoever in the Settlement Agreement or Statement of Facts that most of the indentures for mortgage backed securitizations contain provisions whereby when a loan is found not meeting the underwriting criteria of this trust, that loan can be put back to the issuer who then must substitute a conforming loan.  The existence of such a provision would completely undermine the significance (if there otherwise would be any) of essentially all of the allegations of wrongdoing in the Statement of Fact.  So what if BofA did inadequate due diligence on the loans that went in here if it has a duty to substitute a conforming loan on request?  Now, I don't specifically know that all BofA indentures at issue here had this provision; but I am in this business, and all the indentures I have seen have them.  Indeed, there is a huge amount of civil litigation going on around the country right now where buyers and trustees have sued issuers to force substitution of conforming loans.  And suppose that some, or even many, of the BofA/Merrill Lynch/Countrywide indentures lacked this provision.  Still, we know from the prevalence of the provision throughout the industry that the sophisticated buyers were able to demand it when they wanted it.  The failure in the Settlement Agreement and Statement of Facts to address this issue is frankly an insult to the intelligence of public readers of the document.  How can you ask us to evaluate whether this is a bona fide settlement versus a shakedown if you won't even tell us whether the supposedly defrauded buyers had the usual right to put back non-conforming loans for substitution?  The fact that they don't mention the issue tells you all you need to know.

The federal government is getting about $9 billion out of the approximately $10 billion going to government entities.  What's the theory that they deserve this money?  Perhaps because Fannie and Freddie lost money guaranteeing many of these mortgages?  Well, first, they don't say how many of these mortgages were guaranteed by Fan and Fred; and to the extent the mortgages were so guaranteed, that would mean that the MBS bonds were good, and would be inconsistent with the theory of the case that the buyers were defrauded.  And didn't Fan and Fred have the complete ability to audit to their hearts' content any loans that they were guaranteeing?  Well then, I can't think of any reason at all why the federal government should get a dime of this money.  Oh, unless it's a shakedown. 

Actually, Fan and Fred, egged on by Congresspersons led by Barney Frank and Mel Watt, were the prime sources pushing BofA, Merrill and Countrywide to make all these iffy subprime loans in the first place.  And where are these players today?  Fan and Fred are bigger than ever in dominating the mortgage guarantee and securitization business.  No prosecutions there.  Barney Frank has mercifully sailed off into the sunset.  And Mel Watt?  He's now the head of F/F's so-called "regulator," the FHFA.  And hard at work pushing for another round of untenable subprime mortgage lending.

Then there are the six states participating in the settlement:  California, Delaware, Kentucky, Maryland, New York, North Carolina.  Did I mention that the AGs of all six are Democrats?  Kudos to the Republican AGs of this country for not joining in on this pile on.

At Bloomberg News they're treating the settlement like some kind of important accomplishment for the government, and quoting the government spokesman without the slightest inkling that he is blowing smoke:

The government said Bank of America and its Merrill Lynch and Countrywide Financial units sold billions of dollars of mortgage securities backed by toxic loans and misrepresented the risks to investors.  “It’s kind of like going to your neighborhood grocery store to buy milk advertised as fresh, only to discover that store employees knew the milk you were buying had been left out on the loading dock, unrefrigerated, the entire day before, yet they never told you,” Associate Attorney General Tony West said during the press conference.

If you think that's embarrassing, try the New York Times, where the entire angle is whether BofA may get away with paying less than the entire $17 billion (because some of it will be tax deductible, and some of the "consumer relief" may never come to pass).  The article is larded with quotes from their activist buddies from places like the Urban Justice Institute and the Neighborhood Assistance Corporation of America.

Does anyone in the press actually look at whether this matter involves any actual wrongdoing or whether it makes any sense?  Try Holder The Shakedown Artist at IBD.

Little by little the prosecutors of this country are forfeiting all the credibility that they ever had with that part of the public that pays attention.

Full disclosure:  Willkie Farr represents Bank of America in some matters, although not in this matter.

The Perry Prosecution And Giving Prosecutors The Benefit Of The Doubt

Seemingly every day brings news of one or more high profile prosecutions of major institutions or political figures.  Frequent recent targets include the likes of big banks (JPM, Bank of America, Citigroup), pharmaceutical companies (Prizer, GSK), and state governors (Blagojevich, Walker, Christie).  Probably you read the headlines and never get too much into the details of the alleged conduct or of the law allegedly violated.  It's way too complicated to try to figure out, and anyway, why would prosecutors be going after these guys if they didn't do at least something wrong?

And that's why the current criminal prosecution of Governor Rick Perry of Texas is doing such a great service to the country.  There's nothing complicated about it.  He threatened to, and then carried out, a veto of funding for a state office headed by a political rival who had been convicted of DWI.  Isn't that his job?  How could it possibly be a crime?  Anybody can understand it completely in less than 10 seconds.  This prosecution is blatantly outrageous overreaching.  The myth of the prosecutor in the white hat has been busted.

And thus you see the voices on the Left that are usually completely reliable in defending any and all initiatives beneficial to the Democratic party drawing the line on this one.   For example, Obama political guru David Axelrod tweeted: "Perry indictment seems pretty sketchy."  Or, from Ben White of Politico: "It seems quite perverse to indict a governor for exercising his clearly delineated constitutional authority."  Or, from Jonathan Chait of New York Magazine: "The indictment of Rick Perry is unbelievably ridiculous."  And so forth.

So now that you understand that it is entirely possible for a prosecutor to engage in gross misuse of his powers and office in furtherance of personal and political objectives, let me suggest to you that the Rick Perry prosecution is just the bare little tip of the tip of the iceberg.   As venal as many politicians and business people may be, prosecutors, on average, are just as venal and probably worse.  And the more high profile the prosecution, the more likely it is to be some kind of a vehicle to get some prosecutor's name in the press, at the expense of the lives and careers of people who did nothing wrong but happened to be in the way at the time.

I've covered the subject multiple times here, but as isolated instances rather than as a pervasive phenomenon, which is what it is.  So it's time to bring some of this together in one place.

For example, in the world of the big banks, it seems like one or another of them settles yet another threatened prosecution for one or multiple billions literally every week or two.   On July 1, 2013 in Annals Of Government Self-Promotion, Big Bank Edition, I covered some dozens of dubious settlements between big banks and various prosecutors and regulators, including a $25 billion settlement of five of them with 49 state AGs over alleged wrongful activities in enforcing underwater mortgages.  Then on July 25, 2013 in Our "Disinterested, Neutral, Expert" Regulators In Action, it was a settlement of about $500 million by JPM with FERC for what to all appearances was a perfectly legitimate energy trading strategy that embarrassed the regulators by being too successful.  On September 24, 2013 in More On The Government's "Sick Game" With J.P. Morgan, it was a $920 million settlement by JPM over the London Whale trading losses that to any rational observer should have been no concern to prosecutors or regulators whatsoever.  In recent months I've been failing to pay attention to this issue, even as Citigroup and JP Morgan did $7 billion and $13 billion settlements last year over allegations of misrepresentations as to mortgage backed bonds.  The latest in this line is a recently announced proposed settlement of BofA with Justice for some $17 billion, largely over the activities of BofA's ill-fated acquisition Countrywide.  Didn't BofA take over Countrywide as a favor to the federal regulators?  That won't help you when they need a scalp!

I've also been writing for years about the endless prosecutions of pharmaceutical companies for what is called "off-label marketing," that is, promoting drugs for uses not specifically approved by the FDA.  My first article on this subject was in 1999, and a more recent post was December 4, 2012 (The Second Circuit Stands Up For Free Speech).  If the drug has been established as safe and effective, aren't truthful statements about it protected by the First Amendment?  You would think so, but check out this 2009 roundup from Bloomberg of huge settlements paid by pharma companies for threatened prosecutions over the exercise of their rights, including what is dubbed "the largest criminal fine in U.S. history" of $1.19 billion paid by Pfizer in 2009.  No corporate entity will actually take these cases to trial, but an individual got himself convicted in 2009 and took his case to the Second Circuit in 2012, where the appeals court upheld his constitutional rights against prosecutorial overreach.  But just because they're dead wrong, don't get the idea that the prosecutors are going away on this one. 

Insider trading?  The prosecutor's office for the Southern District of New York has been completely consumed for multiple years with a jihad against what they falsely call "insider trading," even though the majority of the cases are not against insiders at all but rather against investment professionals who have made the mistake of making too much money and attracting attention as a potential useful scalp.  I covered the thinness of the prosecution legal theories on July 13, 2014 in The Impending Demise Of The Insider Trading Jihad.  An appeal contesting the legal theories has been argued in the Second Circuit, and a decision is expected imminently.  Of course in the mean time the poor schmos have had to endure millions in legal fees and suffer a conviction as the price of seeking to vindicate their rights to behave lawfully and earn a living.  Eighty or so other people who were not willing to go through that hell have had guilty pleas coerced out of them.  But Preet Bharara has great name recognition here in New York.

Check out if you will the new indictment against Federal Express for the sin of shipping prescription pharmaceuticals from what the feds contend are illicit online pharmacies.  The indictment alleges "money laundering," or, in other words, as a FedEx spokesman put it in the Memphis Daily News, "FedEx, of course, requires customers to pay for our services."  FedEx points out in its defense that it has been asking the feds for years for a list of objectionable pharmacies, but the feds decline to provide one.  No surprise there.  And by the way, the same Memphis Daily News article notes that UPS settled with Justice last year over similar allegations for $40 million.

Looking for more?  Then look, for example, at the careers of Eliot Spitzer or Rudy Giuliani, who each rode a series of phony but big name prosecutions to fame and higher office.  They are the model that hundreds of other young and ambitious prosecutors try to follow.

I can't see any reason why prosecutors are entitled to the slightest benefit of the doubt.  Thanks to the Perry prosecution for helping others to learn this important lesson.

And Then There's Japan

As Europe's economies stagnate, or even decline a little, Japan has just turned in as stunningly bad a quarter of economic performance as one can conceive.  The Financial Times reports here that Japan suffered economic contraction at an annual rate of 6.8% in the second quarter.

How is it even possible to have an economy shrink at such a rate?  Well, perhaps we should mention that since early 2013 Japan has been engaged in a world-leading blowout Keynesian economic experiment of rapidly increasing government spending and taxes, aka "fiscal stimulus."  The program is often referred to as "Abenomics," after Japanese Prime Minister Shinzo Abe.

Here from the Council on Foreign Relations in June (before these latest disastrous numbers were out) is a backgrounder on "Abenomics" and how it was supposed to end close to two decades of economic stagnation in Japan.  Abenomics includes both monetary and fiscal "stimulus."  CFR describes the fiscal side of the program as follows:

Abe . . . ordered a hefty 10.3 trillion yen short-term stimulus package, approved by the cabinet in January 2013, which will go toward infrastructure projects with a focus on building bridges, tunnels, and earthquake-resistant roads.  . . .  Abe announced in October 2013 that he would raise the consumption tax in April 2014 from 5 percent to 8 percent; this is projected to increase to 10 percent in 2015.

Rapidly increasing government spending and taxes, on top of an economy with a debt to GDP ratio already exceeding 200%.  What could go wrong?

The FT correctly points out that there is likely a not small element of statistical aberration in the 6.8% quarterly decline.  Abe announced the tax increase several months before it took effect, giving the people the opportunity to game it by making their purchases in advance of the increase and stopping all purchases as soon as the increase took effect.  Thus there had been a reported 6.7% gain in GDP in the first quarter.  

Yet the contraction more than wiped out the earlier gain: growth from January to March was revised down in Wednesday’s report, from 6.7 per cent to 6.1 per cent, while the government also said it now believed the economy had shrunk slightly in the final quarter of 2013.

So the net, net is, three quarters in the thick of Abenomics, and Japan's economy has not grown, but rather has declined.  And remember, they count government spending on goods and services, no matter how wasteful, at 100 cents on the dollar in the GDP calculation.   If you figure (as I do) that government spending is worth at best half of what private spending is worth, then the economic decline is several points worse than they are reporting.

Needless to say, Official Manhattan Contrarian Worst Economics Writer Paul Krugman wasted no time in coming out with an article arguing that Europe and Japan were in stagnation because they still would not engage in enough "stimulus."

The not-enoughers — a group that includes yours truly — have argued all along that the clear and present danger is Japanification rather than Hellenization. That is, they have warned that inadequate fiscal stimulus and a premature turn to austerity could lead to a lost decade or more of economic depression, that the Fed should be doing even more to boost the economy, that deflation, not inflation, was the great risk facing the Western world.

How about making government spending 100% of GDP?  Would that be enough "stimulus" for you, Paul?  In that direction of course lies North Korea, where everybody starves.

At National Review, Kevin Williamson comments:

I’ll bet you your next unemployment check that if Japan continues to slide, the answer from the Left will be: “Abe was on the right track, but he didn’t go far enough."

Hard to make a safer bet than that.  No amount of real world demonstration of failure of their recommended policies can ever make the likes of Krugman and the IMF recognize reality.  Is there any escape from this mass hysteria?

Why Are We Supposed To Admire Europe?

The crisis of the eurozone has been off the front pages around here for a while.  And of course trendy left wing opinion is in thrall to the European model of high tax, high spend, cradle-to-grave social programs, single payer health care and long vacations.  So are the economies over there performing in any remotely satisfactory manner?

You won't find it in today's New York Times (maybe tomorrow?), but second quarter economic statistics are in for Europe, and the news is ugly -- stagnation in some places to even decline in others.  From Bloomberg news this morning:

German gross domestic product shrank 0.2 percent, more than economists forecast, while French data also released today showing the economy stagnated prompted the government to scrap its 2014 deficit target. Combined with Italy’s unexpected slide into recession, the reports may add pressure on the European Central Bank to expand stimulus. . . .  Euro-area GDP growth probably slowed to 0.1 percent in the second quarter from 0.2 percent in the first three months of the year, according to a separate Bloomberg survey.

Well, I suppose you can count 0.1% as "growth" if you have a sufficiently powerful microscope available to measure it.   And from the BBC:

Growth in the eurozone flatlined in the second quarter . . .  according to official figures.  The eurozone saw 0.0% growth compared with the first quarter, according to Eurostat figures.

Seems that Eurostat doesn't have quite as high-powered a microscope as Bloomberg News.

If you think that U.S. economic performance remains sub-par, you really need to look at the EU.  While U.S. unemployment is 6.1% (systematically understated I would say, but that's another story), the eurozone per its statistical agency Eurostat admits to a rate of 11.5%, and the countries that engage in the most irresponsible government spending are generally well above the average (Greece - 27.2%; Spain - 24.5%; Portugal - 14.1%; Italy - 12.3%).  

Can we learn from this then that irresponsible government spending and debt accumulation lead to the destruction of economic growth and to destruction of opportunity for young people coming into the system?  That would be my conclusion, but remarkably everybody who's anybody seems to reach exactly the opposite conclusion.  For example, Bloomberg has an editorial today entitled "Europe's Economy Is Broken" that advocates, in jargon-laden mumbo jumbo, for yet more government spending as the cure for the stagnation:  

German policy makers have resisted proposals to loosen the euro area's agreed fiscal targets. The European Commission has echoed the same line, insisting that supply-side reforms are the key to recovery. This is short-sighted. Europe needs both demand-side and supply-side stimulus -- but the first is both more urgent and can be delivered more promptly.

"Demand side stimulus" is fancy schmancy economist-speak for additional wasteful government spending.  I can't find the IMF yet coming out as advocating more "fiscal stimulus" for Europe, but since that is their normal M.O., I predict it won't be long.

Mind you, these are countries that are already spending close to 50% of GDP on the government, and in some cases more.   Here's a helpful chart from Wikipedia via the Heritage Foundation that lists government spending as a percent of GDP by country.  Examples:  France 56.1%; Greece 51.9%; Spain 45.2%; Portugal 49.4%; Germany 45.4%; UK 48.5%.  (For comparison, the U.S. is at 41.6%, Switzerland at 33.8%; Singapore at 17.1%.  Do you notice any correlation between government spending level and relative economic success?)  If spending of 56.1% of GDP on the government hasn't yet "stimulated" France into economic rapture, how is pushing that up to 60% going to make things any better?

In my case, I can't find anything to admire about how the Euorpeans run their economies.