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The magic of the market

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Master of the Universe emeritus Vikram Pandit has gotten bounced from his perch as CEO of Citigroup, but, unlike most unemployed Americans, he won’t have to worry about how to pay the bills until he can find another job.

Citigroup’s stock today is worth about a tenth of what it was trading at when Pandit took over. Indeed the company exists today only because the U.S. government saw fit to deploy many billions of taxpayer dollars to keep it from going bankrupt in the fall of 2008, after Citi and friends caused a global financial meltdown through their grotesque mismanagement of their clients’ assets.

As a token of the firm’s gratitude for the role he played in all this, Pandit is walking away with approximately $260 million in compensation. (In America in 2012, this is known as “letting the market reward performance.”).

This heartwarming success story ought to be appreciated in the context of the latest statistics regarding the distribution of wealth in America. In what follows, I’ve used the consumer price index to transform all the figures into current, inflation-adjusted dollars:

*Median household income in the US was approximately $51,000 in 2011. This means half of all households lived on $4,250 per month (before taxes) or less.
*One out of five American households, or about sixty million Americans, lived on $20,000 or less, or $1,667 per month before taxes.
*Forty years ago, median household income in the US was $47,000 per year. The poorest fifth of American households lived on $19,500 or less.
*Over the past forty years, America’s gross domestic product has tripled. When taking into account population growth, this means Americans are on average more than twice as rich as they were in 1972. But the word “average” is tricky: as the old statistics joke has it, if you’ve got one foot in a campfire and the other in a bucket of ice water you are on average comfortable.

Obviously neither average American families nor poor ones are appreciably better off in economic terms than they were four decades ago: Household income for most Americans in general, and the poorer half of the population in particular, has barely budged since the early 1970s.

So where have all those trillions of dollars in increased wealth gone? Consider: in 1972 the 95th percentile of household income was $127,500. In 2011 it was $186,000. So what Paul Ryan thinks of as the very bottom rung of the “upper middle class” is doing somewhat better for itself.

But when we look at people even Mitt Romney would think of as “well off” we get a real glimpse into where all the money has gone. In the late 1970s the richest 10,000 American families had an average annual income, in 2011 dollars, of $5.8 million per year. Today this same group’s income has increased more than five times in real terms, to an average of $30 million per year (thanks to the mysterious wisdom of The Market, Vikram Pandit has been smack in the middle of this cohort).

It wasn’t always this way in America. Between 1950 and 1965 the nation’s economy boomed – but so did median family income. Indeed, every dollar of increased GDP during these years resulted in an eighty-one cent increase in median family income, which rose from under $30,000 to nearly $50,000 over that time span, where it’s been stuck ever since.

During the post-war boom, as America got rich, most Americans shared in the wealth. Over the past several decades, the nation as a whole has gotten vastly wealthier, but the vast majority of Americans have seen little or no improvement in their economic circumstances. Instead, crony capitalists like Pandit have profited from a political system that’s more interested in bailing out irresponsible financiers than it is in doing anything about the economic circumstances of people who can’t list “almost wrecked the world economy” as a professional accomplishment.

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  • Malaclypse

    Yes, but why won’t you talk about Matt Yglesias’ i-Phone or Megan McArdle’s blender? Why do you hate America?

    • Lee

      Theres a lot to hate about America seems to be a very good reason.

    • DrDick

      Because Socialism!

    • Rhino

      And why are you ignoring the fact that a brown guy getting fired is such a great sign for how far we have come in eliminating racism?

    • Cheap Wino

      Ironically I in earnest started to ignore Yglesias after

      • Cheap Wino

        Oops.

        After this post.

        • mark f

          Is that the infamous “let them eat smartphones” post?

          • Cheap Wino

            Heh. No, this one basically said that because he personally would rather live the lifestyle of a university professor than of the multimillionaire CEO of Dean Foods that income inequality wasn’t as important as you think.

            • mark f

              Ahh, another good one.

  • spencer

    And yet it’s not enough for them – they complain incessantly about how Obama demonizes them, and about how the rest of us don’t appreciate them. They cry about their hurt widdle fee-fees when they could just go home and count their money.

    They’re lucky they haven’t met the same fate as the marketing department of the Sirius Cybernetics Corporation, if you ask me.

    • Lee

      During the first Gilded Age, the rich were exactly the same apparently. I wonder if having x amount of money does something to a person’s personality that makes them a complete sociopathic cry-baby or whether they would be this way without their money.

      I can’t really comprehend why so many people, even a lot on the bottom, are very fond of wide gaps in wealth.

      • Njorl

        At least in the first gilded age they were making things. They used their wealth to corrupt the system so as to garner the profits for themselves, but at least something came of it.

        Modern financial institutions are organized crime. They are levying a private tax on commerce and adding nothing. One reason men like Pandit can get away with looting these companies is that the board members own very little stock. They take advantage of bizarre rules of incorporation to get control of the company, get appointed to high level executive jobs, and make their fortune through salary or stock options with perverse incentives.

        They don’t just do it in one company either. Sometimes execs of one financial company sit on the boards of other financial companies. They approve sweetheart deals for CEOs, knowing that they’ll get reciprocity down the line.

        • Lee

          This plus infinity. The Robber Barons of the First Gilded Age also contributed more to useful public institutions like museums and libraries.

          • Cody

            Is it safe to say, shit has really hit the fan when we wish for the Robber Barons of the first Gilded Age to come back?

            • rea

              Back in 1895, the bankers, led by J. P. Morgan, bailedout the US treasury. Now it works the other way around.

    • DrDick

      They will never rest until they have it all and the rest of us are living under bridges and begging them for the crumbs off their floors. Capitalism is simply a more efficient rent extraction machine.

  • Funkhauser

    I’ll just leave this right here.
    http://elsa.berkeley.edu/~saez/TabFig2010.xls

    • Vance Maverick

      The “~saez/” part of that URL is promising, but the “.xls” at the end is scary.

    • Warren Terra

      Given that it doesn’t even display in my browser, that I’d have to download it and open it in Excel, that thing you’ve “left right there” is gonna stay right there, so long as I’m concerned. You coulda at least said why anyone would bother to go to the trouble looking at it requires, or perhaps uploaded it into a public Google Docs spreadsheet or equivalent.

      • Leeds man

        It displays in Firefox, if you have Excel (or in my case, an expired trial version which still displays, but read-only).

        • BigHank53

          Excel files can contain macros. Due to MicroSoft’s entertaining* attitude towards security, those macros have administrator-level privilege over your machine. Opening the file isn’t the issue; what happens afterward (and the cleanup) is.

          *Entertaining for those running other operating systems, at any rate.

          • Leeds man

            Good to know Hank, but isn’t “Disable macros with notification” the default? So simply clicking “cancel” would prevent any damage? Or is it potentially more insidious than that?

          • nixnutz

            There are no macros. It’s the supporting data from this paper, “INCOME INEQUALITY IN THE UNITED STATES, 1913-2002” by Piketty and Saez from 2004. There are a ton of tables and graphs in there but most of them seem to also be in the paper.

  • Joshua

    Keep in mind that Romney’s plan to resolve this includes cutting capital gains and investment taxes to zero, so you don’t need to pay taxes on your savings account interest.

    • Davis X. Machina

      Work is punishment for sin… wage income is the wages of sin.

      Investment income is generated from wealth — is the outward sign of the Lord’s election, unearned, and bestowed without desert, upon those He has chosen from before the beginning of all time.

      That should clear things up….

      • DrDick

        But not if you are poor or unemployed, when your lack of work and income reveals your dissolute and sinful ways.

    • Davis

      There’s a good reason it’s called unearned income. He also wants to eliminate the estate tax, aka, windfall tax on lucky heirs.

      • BigHank53

        You don’t expect those grandkids to be put through college on money that’s been taxed twice, do you?

      • Davis X. Machina

        Sperm Bingo for all!

    • Keep in mind that Romney’s plan to resolve this includes cutting capital gains and investment taxes to zero

      In an amazing coincidence, that is also his plan to address gender inequality, the shortage of jobs for recent college graduates, and the federal deficit.

      • nixnutz

        Don’t forget gun violence.

        • Malaclypse

          Also, once capital gains are at zero, slutty sluts can buy their own damn birth control.

          Until Scalia says they can’t.

          • mark f

            Slutty sluts sans birth control means babies, which means time off, which means I don’t have to pay you much money and I get to shame them for it. It’s the perfect policy!

    • njorl

      I have big plans for that dollar.

    • Cheap Wino

      At the beginning of the debate he brought that up twice as some kind of panacea for the middle class issues. “I’m going to cut capitol gains taxes for middle class Americans” is his big come on? Who falls for that kind of crap? Why didn’t I hear more about that bullshit line in the post-debate mashups?

      • Cody

        Because everyone in the media knows Romney’s policy is beyond reproach. He was a CEO, how could he be wrong about money policy? Why wouldn’t we all want 0% capital gains tax!

      • redrob64

        Who falls for that kind of crap?

        A large portion of the middle and working class apparently.

        Why didn’t I hear more about that bullshit line in the post-debate mashups?

        Because many of the talking heads who did them have enough money that their income includes substantial capital gains, yet they consider themselves middle class.

  • Major Kong

    Say, does anyone know how to build a guillotine?

    Um, no reason, just curious.

    • Malaclypse

      I’m more interested in tumbrels, myself. You need to get the logistics down for the plan to come together…

      • Paul Campos

        Orwell notes in his essay on Dickens that because of A Tale of Two Cities the word “tumbrel” now has a sinister sound in English even though it merely means a kind of cart.

        • greylocks

          I thought Tumbrel was a social media site.

          • No, that’s “tumbrl”.

            .

            • redrob64

              Someone should create a social media site called “tumbrel” to organize the sans culottes for…you know…the festivities.

      • c u n d gulag

        Guillitine’s are too good for the likes of our scum. Death comes too quick.

        Iron Maiden production also needs to be dramatically increased.

        Hopefully within this country – but we may actually need to outsource some of this, if we’re to meet the number of new holes to poke in this nations rich assholes.

        And how much would we be willing to pay, to see “Stretch” Gregory on the rack?

        • greylocks

          The traditional American practice of tarring and feathering strikes me as wholly appropriate.

        • arguingwithsignposts

          What about Guillettotines?

      • DrDick

        Don’t forget the pitchforks and torches.

        • Hogan

          Full Damiens, maybe?

          • DrDick

            Oh my! That does seem rather ghastly. Appropriate, nonetheless.

        • Davis X. Machina

          Ames/True Value shut its last US-based pitchfork factory, in WV, back in ’05.

          We have no significant pitchfork-manufacturing capacity any more.

      • Rhino

        Yep. Amateurs study weapons and tactics. Professionals concern themselves with supply lines and transport.

    • rea

      And here I chime in with a remark about knitting and a sense of deja vu . . .

      • Rhino

        And I with satisfaction that now I get the joke…

    • If I may, a slight correction:
      Say, does anyone know how to build a guillotine?

  • Sherm

    I’ve been trying to lower my blood pressure for the past two months, and you go ahead and post these stats. Thanks.

    The bottom line is the that the tax code has been incentivizing this greed for decades. It won’t end until we have a true progressive tax code again, and a return to the Clinton tax rates is woefully insufficient. Why wouldn’t these bastards squeeze every dollar they can at the expense of their workers and the US economy when they get to keep nearly every last cent they make. I just filed my 2011 return last week, and my effective rate was 34%. Romney’s effective rate last year was 13.9%. Romney has an elevator for his cars. I drive a ’98 Nissan. Enough said.

    • And Rmoney artifically inflated that rate so it would conform to something he said earlier in the year; once he files an amended return in 2013, it will be more like 11%.

      Ooops, sorry, that’s not gonna help your BP.

    • Leeds man

      You have a car? Luxury!

    • njorl

      I had a 98 Nissan Sentra. I put it through hell and it kept going. Bits of it kept breaking off, and the overhead upholstery detached, but the important parts never failed. I’ll bet Anne Romney has had one of her Cadillacs let her down, and had to use the chase Cadillac for the rest of the day.

      • Sherm

        My Maxima is going strong. Plan on driving it for at least two more years, then passing it on to my daughter when she turns 16.

      • As I remember the two-Caddy deal, they have one for the mansion in La Jolla, & one for the mansion in Mass., so she’d have to have one shipped from the other coast if an upholstery stain appeared on the other.

  • bradp

    Citigroup’s stock today is worth about a tenth of what it was trading at when Pandit took over. Indeed the company exists today only because the U.S. government saw fit to deploy many billions of taxpayer dollars to keep it from going bankrupt in the fall of 2008, after Citi and friends caused a global financial meltdown through their grotesque mismanagement of their clients’ assets.

    Damn that market!

    • DrDick

      Actually a sentiment I agree with.

    • Cody

      The pay-days of these CEOs should be brought up every time Romney mentions his experience.

      Romney: I was CEO and did very well for myself and my company!

      Obama: Pandit oversaw the meltdown of a global powerhouse in banking, and made twice as much as you!

      Romney: Shit, I need to get a better job! I only ruined one company!

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  • williamockham

    All true but we should recognise the inherent limitations of comparisons of average household incomes over extended periods of time. The definition of “household” is roughly one or more persons living under the same roof. The structure and number of households has changed considerably over the last forty years. For example, two cohabitating working adults each making $50,000 each is one $100,000 household. If they separated there are two $50,000 households. With no economic changes at all the average household income fell from $100,000 to $50,000. It creates the illusion of economic collapse where in fact there was none. Changes in family structure, more divorces, less coupling up, can create an inaccurate picture of our actual situation. Please understand that this is not a brief for social or economic conservatism; it’s a comment on statistics and their uses. William Ockham

  • Observer

    In America in 2012, this is known as “letting the market reward performance.”

    Interesting how Paul conveniently skips over the part where the government intervenes with billions and billions and then blames “the market”.

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