inequality - What We're Reading - StockBuz2024-03-28T18:10:36Zhttp://stockbuz.ning.com/articles/feed/tag/inequalityWhy CEO Pay Is So High (And Going Higher)http://stockbuz.ning.com/articles/why-ceo-pay-is-so-high-and-going-higher2015-05-19T08:55:30.000Z2015-05-19T08:55:30.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>The numbers are in on 2014 CEO compensation, and as the old Seinfeld joke goes, they are real and they are spectacular. CEO pay is also controversial as the income gap widens in America.</p>
<p>The average S&P 500 company CEO made 373 times the salary of the average production and non-supervisory worker in 2014, up from 331 times in 2013, according to the AFL-CIO.</p>
<p>Why is CEO pay rising sharply, and how are CEO pay packages structured to maximize executive compensation? Here are the basics you need to know to understand the big numbers behind the CEO headlines.</p>
<p><strong>1. How much do CEOs get paid?</strong></p>
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<p>The average pay package last year was $22.6 million, up from $20.7 million in 2013, according to an analysis of companies' proxy disclosures by executive-compensation data firm <a class="inline_asset" href="http://www.equilar.com/" target="_self">Equilar</a>.</p>
<p>The average gain in total compensation for the 200 highest-paid U.S. CEOs worked out to 9.1 percent last year. That handily thrashed the 2.4 percent economic growth and meager increase in personal income that other Americans enjoyed.</p>
<p>The average U.S. family made $51,939 in 2013, according to the Commerce Department. The average worker makes $24.87 an hour, up 2.2 percent in the last 12 months, according to the most recent unemployment report from the Labor Department.</p>
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<p><strong>2. How much of the money comes from salary, and how much from bonus and stock options?</strong></p>
<p>A little more than a third of CEO pay comes in cash—the exact percentage fluctuates based on market conditions.</p>
<p>A survey by the Hay Group for <em>The Wall Street Journal</em>, released last month, found that 37 percent of CEO pay was in cash last year, up from 35 percent in 2013, while the percentage paid in stock and stock options dropped 4 percentage points, to 54 percent. Pensions and perks made up the rest of the CEOs' package at the 50 major companies studied.</p>
<p>Hay found that companies added to the stock portion of CEO packages after the 2008 financial crisis, when stock prices were low and giving execs equity was likely to make them richer in the long term. The shift toward cash now may reflect higher stock prices, according to the study.</p>
<p><strong>3. How tightly is CEO pay tied to performance?</strong></p>
<p>Not very tightly at all, according to a much-cited 2000 study in the <em>Journal of Management</em>. It found that variations in company performance account for only about 5 percent of the variation between how much companies pay their top executives. The No. 1 variable is the size of the company, accounting for 40 percent of the difference.</p>
<p>Last year, the CEO compensation growth of 9.1 percent trailed the S&P 500's 13.4 percent total return.</p>
<p>CEO compensation is not a good proxy for long-term company performance, either.</p>
<p>Of executives who were among America's top 25 highest-paid CEOs in any year between 1993 and 2012, 22 percent worked for financial firms that took federal bailout money, according to the left-leaning Institute for Policy Studies.</p>
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<p><strong>4. What do CEOs need to do to cash in big?</strong></p>
<p>Equilar's data shows that there is a connection between the biggest CEO checks and companies that have been making deals, such as going public, doing big mergers or divestitures and reorganizations. Examples abound.</p>
<p>•<a class="inline_quotes" data-gdsid="37243" data-inline-quote-symbol="YHOO" href="http://data.cnbc.com/quotes/YHOO" target="_self">Yahoo</a> CEO Marissa Mayer made $42.1 million, up 69 percent from 2013, as the search-engine company sold its shares in Chinese e-tailer <a class="inline_quotes" data-gdsid="" data-inline-quote-symbol="BABA" href="http://data.cnbc.com/quotes/BABA" target="_self">Alibaba</a>'s initial public offering. That drove a 25 percent total return for Yahoo shareholders.</p>
<p>•John Malone's unending deal-making has long helped spawn big paydays for the executives who have led a multiyear effort to spin off many of the businesses of <a class="inline_quotes" data-gdsid="141328" data-inline-quote-symbol="LMCA" href="http://data.cnbc.com/quotes/LMCA" target="_self">Liberty Media</a>, where Malone is chairman, without having to pay taxes. Among the beneficiaries are Liberty CEO Greg Maffei ($74 million, paid by Liberty), <a class="inline_quotes" data-gdsid="44083" data-inline-quote-symbol="DISCA" href="http://data.cnbc.com/quotes/DISCA" target="_self">Discovery Communications</a> chief David Zaslav ($156 million), and Tom Rutledge ($16 million) of Malone-controlled <a class="inline_quotes" data-gdsid="71413" data-inline-quote-symbol="CHTR" href="http://data.cnbc.com/quotes/CHTR" target="_self">Charter Communications.</a></p>
<p>•<a class="inline_quotes" data-gdsid="149396" data-inline-quote-symbol="GPRO" href="http://data.cnbc.com/quotes/GPRO" target="_self">GoPro</a> founder Nicholas Woodman made $77.4 million. GoPro went public last June, and has zoomed in value to $6.88 billion.</p>
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<p><strong>5. What can shareholders do about runaway CEO pay?</strong></p>
<p>The short answer: Not much.</p>
<p>Under the 2010 Dodd-Frank law, public companies must hold an advisory shareholder vote on executive compensation every three years. But the vote is nonbinding unless a company decides otherwise.</p>
<p><strong>6. How is executive compensation regulated?</strong></p>
<p>Not heavily. The tax code limits a company's ability to deduct pay of top executives above $1 million a year, but the provision exempts some forms of performance-based pay and has been criticized by politicians of both major parties as loophole-ridden.</p>
<p>The Securities and Exchange Commission is considering a proposal to make companies explain their executive compensation, including explicitly comparing executive pay to stock performance, both at the company and its peers and competitors. The proposal passed a preliminary vote last month and is now in a public comment period.</p>
<p>Courtesy of <a href="http://www.cnbc.com/id/102688361" target="_blank">CNBC</a></p>
</div>Icahn: "income inequality.....is dampening GDP growth"http://stockbuz.ning.com/articles/icahn-income-inequality-is-dampening-gdp-growth2014-08-14T14:22:15.000Z2014-08-14T14:22:15.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>Among other things, I’m known to be a “reductionist.”  In my line of work you must be good at pinpointing what to focus on – that is, the major underlying truths and problems in a situation. I then become obsessive about solving or fixing whatever they may be. This combination is what perhaps has lead to my success over the years and is why I’ve chosen to be so outspoken about shareholder activism, corporate governance issues, and the current economic state of America. Currently, I believe that the facts “reduce” to one indisputable truth which is that we must change our system of selecting CEOs in order to stay competitive and get us out of an extremely dangerous financial situation. With exceptions, I believe that too many companies in this country are terribly run and there’s no system in place to hold the CEOs and Boards of these inadequately managed companies accountable. There are numerous challenges we are facing today whether it be monetary policy, unemployment, income inequality, the list can go on and on… but the thing we have to remember is there is something we can do about it: Shareholders, the true owners of our companies, can demand that mediocre CEOs are held accountable and make it clear that they will be replaced if they are failing. I am convinced by our record that this will make our corporations much more productive and profitable and will go a long way in helping to solve our unemployment problems and the other issues now ailing our economy. We can no longer simply depend on the Federal Reserve to keep filling the punch bowl.</p>
<p>Federal Reserve Chair Janet Yellen recently commented on our Monetary Policy at the International Monetary Fund saying, “Monetary policy faces significant limitations as a tool to promote financial stability.” She continued that, “Its effects on financial vulnerabilities, such as excessive leverage and maturity transformation, are not well understood and are less direct than a regulatory or supervisory approach.” Yellen’s comments suggest, and I agree, that we are in an asset bubble.</p>
<p>Adding to this, Standard & Poor’s issued a report just a few days ago titled, “<a href="http://stockbuz.net/articles/s-p-on-income-inequality-education-jobs-and-taxes" target="_self">How Increasing Income Inequality is Dampening U.S. Economic Growth and Possible Ways to Change the Tide</a>.” In it they say: “Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening GDP growth, at a time when the world’s biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population.”</p>
<p>There is also a dire situation regarding pension funds which supports the view that Main Street Americans are the ones falling victims to entrenched CEOs and Boards doing poor jobs at running companies. A study by Ray Dalio, founder of Bridgewater Associates, calculates 85% of public pension funds going bankrupt in three decades and only able to achieve 4% returns on their assets. These inexcusable numbers are mainly due to pension and mutual fund managers “voting with their feet” or simply voting for current management of companies in their funds, regardless of their effectiveness on shareholder value.</p>
<p>Our current system of corporate governance protects mediocre CEOs and boards that are mismanaging companies and this must be changed. With this system we will not meet the needs of Main Street America, nor will we be ready for when the asset bubble we have today bursts – whether it is the next one, five, ten, or 20 years. Nobel Laureate and professor of economics at Columbia University, Joseph Stiglitz recently told CNBC, “These very strong stock market prices are in a sense a symptom of the weak economy, not a symptom that we are about to have a strong recovery to our real economy.” He also said, “In the United States, from 2009 to 2012, 95 percent of the gains went to the upper 1 percent. Ordinary Americans are using up their savings.”</p>
<p>Currently, we must focus on the simple solution that I believe could alleviate many of these problems we are facing. The solution is <span><strong>shareholder activism</strong></span>. Icahn Enterprises L.P. (IEP) reported its Second Quarter 2014 results on August 5th and as I said, I am very pleased with our performance. What makes me especially happy is that I believe that IEP’s performance not only in Q2 but since 2000, gives testimony to my belief that activism, when properly practiced, meaningfully enhances value for all shareholders as well as the economy in general. If you bought IEP in the beginning of 2000 you would have an annualized return of 21.5% compared to the S&P 500’s 3.8% and if you bought IEP April 1 2009 you would have an annualized return of 34.3% compared to the S&P 500’s 20.5%, through July 31 2014.</p>
<p><a href="http://www.shareholderssquaretable.com/chart-a-the-bottom-line/"><img src="http://media.tumblr.com/92136499c560126317707ded58d4818f/tumblr_inline_na76czoDj11sk9spg.jpg" /></a></p>
<p>Even more telling is the annualized return of a person who invested in 23 companies whose Boards Icahn designees joined between January 1 2009 and June 30 2014: if the person invested in each company on the date that the designee joined the Board and sold on the date that the Icahn designee left the Board (or continued to hold through June 30, 2014 if the designee did not leave the Board) they would have obtained an annualized return of 27%.</p>
<p><a href="http://www.shareholderssquaretable.com/chart-b-the-bottom-line/"><img src="http://media.tumblr.com/b5b128bd4c083ce4a56ec154b6f6090c/tumblr_inline_na76f3Sa4I1sk9spg.jpg" /></a></p>
<p>I believe that the main reason for our success is we adhere to the activism model which we have spent many years developing. What we essentially do is attempt to hold managements accountable through our rights as shareholders and seek to ensure the right people run the companies we invest in. We do not micromanage however. If a company is doing more poorly than its peers we take a hard look, and in a number of these cases the CEO is not the right person to be running the company.</p>
<p>True corporate democracy does not exist in America and as a result many unfit CEOs are not held accountable. Poison pills and other board tricks disenfranchise stockholders. As a result entrenched CEOs and Boards of Directors may be protected even if they are ineffective. Many large money managers agree but amazingly hardly anything is done about it - even though <span><strong>the most important thing in a company is its CEO</strong></span>. To this point, in a recent essay in the Wall Street Journal, Bill Gates discusses one of his and Warren Buffett’s favorite books, ‘Business Adventures’ by John Brooks. Gates says, “Brooks’s work is a great reminder that the rules for running a strong business and creating value haven’t changed. For one thing, there’s an essential human factor in every business endeavor. It doesn’t matter if you have a perfect product, production plan and marketing pitch; you’ll still need the right people to lead and implement those plans.”</p>
<p>The mantra of opponents of shareholder activists, such as lawyer Marty Lipton is that “short-termist” is synonymous with “shareholder activist.” But my record belies this statement. I have held many positions for long periods of time; some up to 30 years.</p>
<p>Again, I believe that the kind of shareholder activism that IEP practices has been extremely successful because we seek to bring true corporate democracy to the companies we are involved with through exercising our rights as shareholders to hold CEOs accountable and change unproductive management that needs to be changed. I believe that America needs this to correct the economic course we are on and push back against the approaching storm clouds resulting from the many problems we face today, including a major asset bubble that continues to grow.</p>
<p>Courtesy of <a href="http://carlicahn.tumblr.com/post/94535545751/the-bottom-line-by-carl-icahn" target="_blank">Tumblr</a></p>
</div>10 Basic Laws of Economicshttp://stockbuz.ning.com/articles/10-basic-laws-of-economics2014-06-09T15:00:11.000Z2014-06-09T15:00:11.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><div class="tr_bq"><a target="_blank" href="http://ts1.mm.bing.net/th?&id=HN.608015310269187478&w=300&h=300&c=0&pid=1.9&rs=0&p=0"><img class="align-left" src="http://ts1.mm.bing.net/th?&id=HN.608015310269187478&w=300&h=300&c=0&pid=1.9&rs=0&p=0" height="178" width="178" /></a>Jeffrey Dorfman's recent column in Forbes ("<a href="http://www.forbes.com/sites/jeffreydorfman/2014/06/05/10-essential-economic-truths-liberals-need-to-learn/">10 Essential Truths Liberals Need to Learn</a>") is not a partisan attack on liberals. It is a clear-cut summary of some basic laws of economics that hold no matter what your political beliefs happen to be. Unfortunately, too many Republicans, Democrats, and bureaucrats are guilty of ignoring these laws. In my experience, it's also true that too many investors fail to understand these fundamental truths. I've only listed the laws here; for an explanation of each be sure to read <a href="http://www.forbes.com/sites/jeffreydorfman/2014/06/05/10-essential-economic-truths-liberals-need-to-learn/">the whole thing</a>: (HT: <a href="http://www.aei-ideas.org/2014/06/10-essential-economic-truths-liberals-need-to-learn/">Mark Perry</a>)</div>
<p></p>
<blockquote>1) Government cannot create wealth, jobs, or income.</blockquote>
<blockquote>2) Income inequality does not affect the economy.</blockquote>
<blockquote>3) Low wages are not corporate exploitation.</blockquote>
<blockquote>4) Environmental over-regulation is a regressive tax that falls hardest on the poor.</blockquote>
<blockquote>5) Education is not a public good.</blockquote>
<blockquote>6) High CEO pay is no worse than high pay to athletes or movie stars. </blockquote>
<blockquote>7) Consumer spending is not what drives the economy.</blockquote>
<blockquote>8) When government provides things for free, they will end up being low quality, cost more than they should, and may disappear when most needed.</blockquote>
<blockquote>9) Government cannot correct cosmic injustice.</blockquote>
<blockquote>10) There is no such thing as a free lunch.</blockquote>
<div>I'll add one to the list: Monetary policy can facilitate the creation of jobs only to the extent it fosters low and stable inflation.</div>
<div>Courtesy of <a href="http://scottgrannis.blogspot.com/" target="_blank">CalifiaBeachPundit</a></div>
</div>Yellen 'U.S. Income and Wealth Inequality is ‘Very Worrisomehttp://stockbuz.ning.com/articles/yellen-u-s-income-and-wealth-inequality-is-very-worrisome2014-05-08T00:23:03.000Z2014-05-08T00:23:03.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p class="p1"><em><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290626?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1290626?profile=original" width="300"></a></em></p>
<p class="p1"><strong>Interesting today was the Janice Yellen addressed the distribution of wealth and the effect that Fed policy has has on income inequality. Mentioning the Koch brothers at least three (3) times and that continuance of same not only affects taxpayers ability to <span style="text-decoration: underline;">influence democrac</span>y but can affect <span style="text-decoration: underline;">social stability</span>. This is the first time I've EVER heard any Fed member address this and it will be interesting to see if such "speak" continues going forward.</strong></p>
<p class="p1"><em>Income and wealth inequality in America are “very worrisome,” Federal Reserve Chair Janet Yellen told Sen. Bernie Sanders at a congressional hearing on Wednesday. In her first appearance before Congress as the nation’s central banker, the new Fed chief told Sanders that “there is no question that we’ve had a trend toward growing inequality and I personally find it a very worrisome trend that deserves the attention of policy makers.” Yellen added that “it greatly concerns me” that the growing <span style="text-decoration: underline; color: #00ff00;"><strong>wealth and income gap “can shape and determine the ability of different groups to participate equally in the democracy and have grave effects on social stability over time.”</strong></span></em></p>
<p class="p1"><em>Sanders, a member of the Joint Economic Committee, questioned Yellen about a <a href="http://www.princeton.edu/%7Emgilens/Gilens%20homepage%20materials/Gilens%20and%20Page/Gilens%20and%20Page%202014-Testing%20Theories%203-7-14.pdf"><span class="s1">recent study</span></a> by Princeton and Northwestern professors on how a small number of powerful players are taking over our democracy. “If policymaking is dominated by powerful business organizations and a small number of affluent Americans, then America's claims to being a democratic society are seriously threatened,” Princeton’s Martin Gilens and Northwestern’s Benjamin Page asserted. “When a majority of citizens disagrees with economic elites and/or with organized interests [in the U.S.], they generally lose,” the professors wrote. “Moreover, even when fairly large majorities of Americans favor policy change, they generally do not get it.”</em></p>
<p class="p1"><em>In the richest country on earth, Sanders said, almost all of the new wealth and income flows to the top 1 percent, creating the most unequal distribution of wealth and income of any major country in the world. As a consequence, the senator added, the middle class is disappearing and more Americans living in poverty today than at any time in our nation’s history.</em></p>
<p class="p1"><em>The richest 400 Americans today own more wealth than the bottom half of the population – more than 150 million Americans. The top 1 percent owns about 38 percent of the financial wealth of America. The bottom 60 percent owns a mere 2.3 percent.</em></p>
<p class="p1"><em>Today, <span style="color: #00ff00;">the Walton family</span> — the owners of Wal-Mart and the wealthiest family in America — is now worth $148 billion, which is <span style="color: #ff0000;"><span style="color: #00ff00;">more wealth than the bottom 40 percent.</span> </span></em></p>
<p class="p1"><em>From March of 2013 to March of 2014, the industrialists Charles and David Koch increased their wealth by $12 billion – from $68 billion to $80 billion. Bloomberg now estimates that the Koch brothers are worth more than $100 billion. </em></p>
<p class="p1"><em>Las Vegas casino magnate Sheldon Adelson, increased his wealth by $11.5 billion since last year and is now worth over $38. billion.</em></p>
<p class="p1"><em>In terms of income, 95 percent of all new income generated in this country went to the top one percent from 2009-2012, the latest information available. </em></p>
<p class="p1"><em>Meanwhile, almost 22 percent of American children are living in poverty and we have the highest rate of childhood poverty of any major country on earth.</em></p>
<p class="p1"><em>The typical middle-class American family earned less income last year than it did 25 years ago – back in 1989.</em></p>
<p class="p1"><em>As a result of the Supreme Court decision in Citizens United and other cases, the wealthiest people and largest corporations in this country can now spend an unlimited sum of money to influence the political process.</em></p>
<p class="p1"><em>Courtesy of <a href="http://www.sanders.senate.gov/newsroom/recent-business/fed-chief-us-income-and-wealth-inequality-is-very-worrisome" target="_blank">Bernie Sanders</a></em></p></div>Throwback Thursday Readshttp://stockbuz.ning.com/articles/throwback-thursday-reads-12014-05-01T16:58:11.000Z2014-05-01T16:58:11.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><ul>
<li>On this day in <b>1965</b>: In a boardroom on Cove St. in New Bedford, MA, a young, crew-cut Warren Buffett takes control of decrepit textile maker Berkshire Hathaway Inc., whose stock closes that day at $18 a share. Over the next thirty-three years, the stock price rises to $84,000 a share.  <i><span class="footer">Source: Roger Lowenstein, Buffett: The Making of an American Capitalist (Random House, New York, 1995), p. 130. Courtesy of <a href="http://jasonzweig.com" target="_blank">JasonZweig</a></span></i></li>
<li>GS, MS and others <a href="http://www.zerohedge.com/news/2014-05-01/which-we-learn-us-gdp-actually-contracted-first-quarter" target="_blank">revised their GDP #</a> to a <strong>negative</strong> after today's poor construction spending numbers.  A negative GDP print has many wondering if we are, in fact, in a recession.  A recession as defined by the Fed is two consecutive GDP reports. </li>
<li>The weak U.S. recovery has nothing to do with inequality says <a href="http://scottgrannis.blogspot.com/2014/04/taking-measure-of-our-discontent.html" target="_blank">CalifiaBeachPundit</a></li>
<li><a href="http://www.mckinsey.com/insights/business_technology/The_rising_strategic_risks_of_cyberattacks?cid=other-eml-alt-mkq-mck-oth-1405" target="_blank">McKinsey</a> says businesses are still extremely concerned over cyber attacks and aren't anywhere prepared as they should be (yet).  70% of the respondents said that security concerns had delayed the adoption of public cloud computing by a year or more</li>
</ul>
</div>What The 1% Don't Want You To Knowhttp://stockbuz.ning.com/articles/what-the-1-don-t-want-you-to-know2014-04-21T17:54:31.000Z2014-04-21T17:54:31.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>It's no longer Gordon Gecko.  Now it's Gordon Gecko's kids who inherited that wealth.  Dynastic fortunes tend to take an ever-growing share of national wealth.  You have a situation (now) where dynasties come increasingly more dominant of  the top of the economic spectrum.   Nobel Peace Prize winner Bill Moyers with NYT columnist Paul Krugman on the new book that’s the talk of academia and the media, <em><a href="http://www.hup.harvard.edu/catalog.php?isbn=9780674430006" target="_blank">Capital in the Twenty-First Century</a></em> by Thomas Piketty.  This 42-year-old who teaches at the Paris School of Economics, shows that two-thirds of America’s increase in income inequality over the past four decades is the result of steep raises given to the country’s highest earners.</p>
<p><iframe width="500" height="281" src="//player.vimeo.com/video/92308666" webkitallowfullscreen="" mozallowfullscreen="" allowfullscreen=""></iframe></p>
</div>Roubini: The Instability of Inequalityhttp://stockbuz.ning.com/articles/roubini-the-instability-of-inequality2011-10-30T02:00:00.000Z2011-10-30T02:00:00.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>This from Nouriel Roubini @ <a target="_blank" href="http://www.project-syndicate.org/commentary/roubini43/English">Project Syndicate</a> <span style="color: #ff0000;"><em>"Unless the relative economic roles of the market and the state are rebalanced, the protests of 2011 will become more severe, with social and political instability eventually harming long-term economic growth and welfare"</em></span></p>
<p> </p>
<p>NEW YORK – This year has witnessed a global wave of social and political turmoil and instability, with masses of people pouring into the real and virtual streets: the Arab Spring; riots in London; Israel’s middle-class protests against high housing prices and an inflationary squeeze on living standards; <a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1289998?profile=original"><img height="169" width="208" src="http://storage.ning.com/topology/rest/1.0/file/get/1289998?profile=original" class="align-right" style="padding: 10px;"></a>protesting Chilean students; the destruction in Germany of the expensive cars of “fat cats”; India’s movement against corruption; mounting unhappiness with corruption and inequality in China; and now the “Occupy Wall Street” movement in New York and across the United States.<br> <br> While these protests have no unified theme, they express in different ways the serious concerns of the world’s working and middle classes about their prospects in the face of the growing concentration of power among economic, financial, and political elites. The causes of their concern are clear enough: high unemployment and underemployment in advanced and emerging economies; inadequate skills and education for young people and workers to compete in a globalized world; resentment against corruption, including legalized forms like lobbying; and a sharp rise in income and wealth inequality in advanced and fast-growing emerging-market economies.<br> <br> Of course, the malaise that so many people feel cannot be reduced to one factor. For example, the rise in inequality has many causes: the addition of 2.3 billion Chinese and Indians to the global labor force, which is reducing the jobs and wages of unskilled blue-collar and off-shorable white-collar workers in advanced economies; skill-biased technological change; winner-take-all effects; early emergence of income and wealth disparities in rapidly growing, previously low-income economies; and less progressive taxation.<br> <br> The increase in private- and public-sector leverage and the related asset and credit bubbles are partly the result of inequality. Mediocre income growth for everyone but the rich in the last few decades opened a gap between incomes and spending aspirations. In Anglo-Saxon countries, the response was to democratize credit – via financial liberalization – thereby fueling a rise in private debt as households borrowed to make up the difference. In Europe, the gap was filled by public services – free education, health care, etc. – that were not fully financed by taxes, fueling public deficits and debt. In both cases, debt levels eventually became unsustainable.<br> <br> Firms in advanced economies are now cutting jobs, owing to inadequate final demand, which has led to excess capacity, and to uncertainty about future demand. But cutting jobs weakens final demand further, because it reduces labor income and increases inequality. Because a firm’s labor costs are someone else’s labor income and demand, what is individually rational for one firm is destructive in the aggregate.<br> <br> The result is that free markets don’t generate enough final demand. In the US, for example, slashing labor costs has sharply reduced the share of labor income in GDP. With credit exhausted, the effects on aggregate demand of decades of redistribution of income and wealth – from labor to capital, from wages to profits, from poor to rich, and from households to corporate firms – have become severe, owing to the lower marginal propensity of firms/capital owners/rich households to spend.<br> <br> The problem is not new. Karl Marx oversold socialism, but he was right in claiming that globalization, unfettered financial capitalism, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct. As he argued, unregulated capitalism can lead to regular bouts of over-capacity, under-consumption, and the recurrence of destructive financial crises, fueled by credit bubbles and asset-price booms and busts.<br> <br> Even before the Great Depression, Europe’s enlightened “bourgeois” classes recognized that, to avoid revolution, workers’ rights needed to be protected, wage and labor conditions improved, and a welfare state created to redistribute wealth and finance public goods – education, health care, and a social safety net. The push towards a modern welfare state accelerated after the Great Depression, when the state took on the responsibility for macroeconomic stabilization – a role that required the maintenance of a large middle class by widening the provision of public goods through progressive taxation of incomes and wealth and fostering economic opportunity for all.<br> <br> Thus, the rise of the social-welfare state was a response (often of market-oriented liberal democracies) to the threat of popular revolutions, socialism, and communism as the frequency and severity of economic and financial crises increased. Three decades of relative social and economic stability then ensued, from the late 1940’s until the mid-1970’s, a period when inequality fell sharply and median incomes grew rapidly.<br> <br> Some of the lessons about the need for prudential regulation of the financial system were lost in the Reagan-Thatcher era, when the appetite for massive deregulation was created in part by the flaws in Europe’s social-welfare model. Those flaws were reflected in yawning fiscal deficits, regulatory overkill, and a lack of economic dynamism that led to sclerotic growth then and the eurozone’s sovereign-debt crisis now.<br> <br> But the laissez-faire Anglo-Saxon model has also now failed miserably. To stabilize market-oriented economies requires a return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of unregulated markets and the continental European model of deficit-driven welfare states. Even an alternative “Asian” growth model – if there really is one – has not prevented a rise in inequality in China, India, and elsewhere.<br> <br> Any economic model that does not properly address inequality will eventually face a crisis of legitimacy. Unless the relative economic roles of the market and the state are rebalanced, the protests of 2011 will become more severe, with social and political instability eventually harming long-term economic growth and welfare.<br> <br> Nouriel Roubini is Chairman of Roubini Global Economics, Professor of Economics at the Stern School of Business, New York University, and co-author of the book Crisis Economics.</p></div>