How to the 1% earn their livings?

• 18 percent are financial professionals.
• 42 percent are executives, managers, or supervisors in nonfinancial businesses. More than half of those are in closely-held (presumably often small) businesses.
• 7 percent are lawyers.
• 6 percent are in medicine.
• 3 percent are in arts, media, or sports.
• Less than 1 percent are professors or scientists.

From Greg Mankiw.

No one was fired. Not one person.

The Washington Post reports:

The Securities and Exchange Commission, which failed to stop Bernard Madoff’s long-running investment fraud despite repeated warnings, has disciplined eight agency employees over their handling of the matter but did not fire anyone.

The SEC’s head of human resources and a law firm hired to advise the agency had recommended that SEC Chairman Mary L. Schapiro fire one person, whom the SEC described as a manager in the office that inspects investment firms.

But the chairman decided not to fire the employee, because doing so “would harm the agency’s work,” SEC spokesman John Nester said.

The disclosure that no one was terminated comes at a time when street protesters and other critics who blame Wall Street for the country’s economic plight are questioning whether the government is serious about holding powerful wrongdoers accountable. This week, a federal judge excoriated the SEC for letting firms such as Citigroup settle fraud charges without admitting or denying wrongdoing.

In summary, Bernie Madoff operated, under the watchful gaze of the SEC, a Ponzi scheme that led to the largest financial fraud in U.S. history. To make amends for their failure to recognize and prevent such fraud, the SEC has disciplined seven people and fired none.

The punishments given the SEC employees varied and included suspensions, pay cuts and demotions.

The employee recommended for termination received one of the more severe penalties, a 30-day suspension along with a reduction in pay and grade. Another was given a pay cut of 5.7 percent. At the low end, one employee was suspended for seven days, another for three days and two others were issued counseling memos, a step below a reprimand.

Whether or not the SEC had to tools to prevent the reckless financial activities that led to the collapse of Lehman, or of Madoff’s Ponzi scheme, is a fair question. Whether or not they used the tools they did have available is also fair game, and here the SEC usually fails. Too often they have proven themselves either unwilling or unable to carry out their duties.

The SEC’s inspector general issued a 477-page report in 2009 concluding that the agency “received numerous substantive complaints since 1992 that raised significant red flags concerning Madoff’s hedge fund operations.”

Herein lies one problem with government failure. When the markets fail, the call is for more government. When the government fails, the call is for more government. The result is a slow but consistent march of government into our lives. The secondary and tertiary results are both great and unforeseen. The incompetence at the SEC will certainly continue, and if OWS looks for accountability in DC in addition to Wall Street, they won’t find it.

Puppetry vs. Engineering

A few years ago, Joe Therrien, a graduate of the NYC Teaching Fellows program, was working as a full-time drama teacher at a public elementary school in New York City. Frustrated by huge class sizes, sparse resources and a disorganized bureaucracy, he set off to the University of Connecticut to get an MFA in his passion—puppetry. Three years and $35,000 in student loans later, he emerged with degree in hand, and because puppeteers aren’t exactly in high demand…he’s working at his old school as a full-time “substitute”…[earning less than he did before].

…Like a lot of the young protesters who have flocked to Occupy Wall Street, Joe had thought that hard work and education would bring, if not class mobility, at least a measure of security…But the past decade of stagnant wages for the 99 percent and million-dollar bonuses for the 1 percent has awakened the kids of the middle class to a national nightmare: the dream that coaxed their parents to meet the demands of work, school, mortgage payments and tuition bills is shattered.

This is fairly uncommon example of wasted educational dollars – puppetry should replace basketweaving in our standard example of a useless college major – but offers a salient point: not all education is worth the price. In fact, the price of education has outpaced inflation due to both government subsidies for education and our mistaken belief that if some education is good, more must be better. That is not always true. We believe that if college is good for some, then it must be good for all. While the average college graduate makes more lifetime earnings than one with a high school degree alone, that scale may be tipping. And it should. (China is having the same problem.)

If the average college student was studying the works of classical Greece, the literature of the Western Canon, hard sciences like chemistry and physics, and advanced mathematics, the argument for more college for more students would be a strong one. But that is not the average college experience, which is usually associated with alcohol, drugs, sex, “finding yourself,” and classes slightly more rigorous than puppetry but a far cry from the rigor of an engineering curriculum. $200,000 to learn electrical engineering is a sound investment, if it is learned well. But $150,000 for a degree in sociology or “critical theory” (which for the un-indoctrinated is Marxism)?

When talking heads speak of how the rise of China and India’s educated classes will challenge our international and economic strength, they are not referring to China’s production of 24-year-olds with MAs in education or, to take the five examples Time used for their article on student debt, “I Owe U,” specialized studies, multimedia design, English, history, and global studies. China and India may overtake us, however, if they take the lead in educating top-rate engineers, scientists, and those with degrees in technical fields. This is not to deny the value of English, history or specializations – wait, what exactly is “specialized studies?” – but rather the returns on those investments, for an individual or society, will not be the same as a degree in biochemistry or chemical engineering.

A letter to the editor at Time put it this way:

Of the five young adults featured with large portraits in your article, there was not one with a major in science or math. Specialized studies, multimedia design, English, history and global studies? Give me a small break. Nothing wrong with an interest in these areas, but it’s pretty predictable that the people who major in them are unemployed or underemployed.

Three additional notes on higher education. 1, the myth of Chinese and Indian engineers overtaking us is just that, a myth. 2, We have the best technical graduate schools in the world… that do a fine job of educating foreigners. Those foreigners are often sent back home in what has been called a “reverse brain drain.” They should be allowed and encouraged to stay. 3, Charles Murray has argued for more education, which is different from more schooling.

“Nearly everyone needs more education after high school,” Mr. Murray said. “What they don’t need is to chase after this fraudulent, destructive, antediluvian thing called a B.A. The B.A. is really the work of the devil.”

The source of the quotation on puppetry was The Nation via Alex Tabarrok at Marginal Revolution. His comments are worth reading.

And for the record, my MA is in economics – somewhere between global studies and engineering in both rigor and value. As a financial decision, grad school was, as of now, not worth the money. Besides two years lost wages and the price of tuition, I returned to the job market at a lower salary then when I left due to a career change. I value the education I received though, which is more important to me than the money. It was an individual decision though, not one made because I felt I had to get an MA. Thus I have no right to complain about my “crushing” student loan payments.

Bryan Caplan Offers Questions for Protestors

If you were an employer, would you want to hire an Occupy Wall Street protester? Probably not. In fact, it’s hard to imagine an employer seeing a protester on TV, then thinking, “I’ve got to hire him!” Protesters are arguably showing off some traits that employers value, like IQ, initiative, teamwork, and determination. But they are also showing off many traits that employers avoid: A can’t-do attitude, eagerness to blame others, non-conformity, and defiance.

These observations would presumably annoy, even outrage, the typical protester. They might complain that employers’ stereotypes about protesters are unfair. But I suspect that protesters more likely to concede the facts, then attack employers’ preferences: “How dare employers expect deference! Who do they think they are?”

Two question for protesters:
1. If you were an employer, would you hire someone like you?
2. Really?

Source.

Thomas Sowell on Uncommon Knowledge

Tom Sowell discusses his latest book, The Thomas Sowell Reader, a collection of some of his better and more lasting writings over the years.

Here Sowell discusses inequality, Barack Obama, his young years as a Marxist (Sowell’s not Obama’s), Ronald Reagan, OWS…

Part 1 of 5.

Part 2 of 5.

Part 3 of 5.

Part 4 of 5.

Part 5 of 5.

The Greatest Generation vs. OWS

By Michael de Adder, Halifax Herald

The Rich Get Poorer

From Greg Mankiw:

Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.
According to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927.  The 99.9th percentile income fell from $2,155,365  to $1,432,890.  During the same period, median income fell from $32,879 to $32,396.
These recent numbers illustrate the broader phenomenon, discussed in this paper, that high-income households have riskier-than-average incomes.

The Impact of Obama’s Student Loan Legislation

I previously blogged about how Obama’s student loan legislation proposals will have short-term benefits with long-term costs. Daniel Indiviglio examines the three major pieces of the proposed legislation – consolidation, payment limits, and loan forgiveness – and how they will affect the average borrower. The answer: not much. I may have been far too generous in saying it will have a short-term benefit. Perhaps it only offers long-term costs.

Consolidation

The first would clearly be the most significant, because it is aimed at helping more student loan borrowers. How much would an interest rate reduction of up to 0.5% affect payments?

For the average borrower, the impact would be small. In 2011, Bachelor’s degree recipients graduating with debt had an average balance of $27,204, according to an analysis done by finaid.org, based on Department of Education data. That average has ballooned from just $17,646 over the past decade.

Using these values as the high and low bounds of average student debt over the last ten years, the monthly savings for the average student loan borrower would be between $4.50 and $7.75 per month. Clearly, this isn’t going to save the economy. While borrowers with bigger balances would save more, this is the average. And even someone with $100,000 in loans would only cut their monthly payments by $28.50.

The provisions on payment limits and loan forgiveness will have an even smaller impact. Indiviglio concludes:

By calling for these measures, President Obama seeks to respond directly to young Americans stressed about their student loans. Indeed, one of the vague objectives of the Occupy Wall Street movement is for student debt forgiveness. But from a practical standpoint, these executive orders won’t have much of an impact on the economy. To take on the student debt problem more aggressively, the president would need some actual legislation that would shake the fundamental framework of the student loan system.

“How Mr. Volcker Would Fix It”

Last month Paul Volcker, former Chairman of the Federal Reserve, presented to the Group of 30, an organization devoted to international economic issues, a speech entitled “Three Years Later: Unfinished Business in Financial Reform.”

The real treasures were found in his to-do list for further reforms. That heavy lifting includes addressing capital requirements (make them tough and enforceable), derivatives(make them more standardized and transparent) and auditors (ensure that they are truly independent by rotating them periodically).

He also spoke of the perils of institutions that are too large or interconnected to be allowed to fail. Calling this the greatest structural challenge facing the financial system, he said we must shrink the risks these companies pose, “whether by reducing their size, curtailing their interconnections or limiting their activities.”

He also discussed with Gretchen Morgenson, the author of the article, the unmentioned problems with money market accounts:

Money market funds held $2.63 trillion as of last Wednesday, and, Mr. Volcker said, many people mistakenly think that these funds are as safe as bank accounts. But the safeguards on bank deposits — strong bank capital requirements and federal deposit insurance, for example — do not exist for most money market funds. There is also little official surveillance of the funds’ investment practices.

I was pleased to see that Fannie Mae and Freddie Mac also received his attention.

THE other area that cries out for change, Mr. Volcker said, is the nation’s mortgage market, now controlled by Fannie Mae and Freddie Mac, the taxpayer-owned mortgage giants.

“We simply should not countenance a residential mortgage market, the largest part of our capital market, dominated by so-called government-sponsored enterprises,” Mr. Volcker said in his speech. “The financial breakdown was in fact triggered by extremely lax, government-tolerated underwriting standards, an important ingredient in the housing bubble.”

While he acknowledges that we cannot eliminate Fannie and Freddie anytime soon, “it is important that planning proceed now on the assumption that government-sponsored enterprises will no longer be a part of the structure of the market,” he said.

TOTPS is not fan of Fannie and Freddie – they played a significant role in inflating the housing bubble with their unaccountable lending and buying practices. (And where is OWS in complaining about the bonuses paid to their CEOs?!) Fannie and Freddie will eventually go away, and the sooner the better. They were unnecessary since inception – Volcker: “You ought to be either public or private; don’t mix up private profit-making opportunities with an institution that is going to be protected by the government but not controlled by it.” – and proved themselves disastrous.

But I digress. Volcker makes solid and vital recommendations that are both simple and enforceable. Of course the devil will be in the details, but he clearly does not feel that Dodd-Frank was sufficient. (Joe Klein describes Dodd-Frank as “the watered-down, overly complicated and difficult-to-enforce” reform package.)

One wonders where Obama, Geithner, et al. will attack next, but they should start with a few large-scale reforms. First, allow the Republicans to repeal Dodd-Frank. It is… well… as Klein described it. (They would never do this for political reasons, but it is a lesson in the dangers of rushing important legislation and on how not to spend political capital.)

Second, return the Glass-Steagall Act which prohibited commercial banks from engaging in the investment business,  and third, repeal the Commodity Futures Modernization Act of 2000 which prohibits the federal government from regulating financial derivatives.

Third, increase capital requirements for banks (so they are not over leveraged) and lower the lending requirements of banks (so they can more easily extend credit). Banks do business by borrowing and lending. Increased capital requirements lower their exposure; lowered lending requirements allows them to lend more. They will not easily be able to securitize those mortgages and sell them to others. The will most likely keep those mortgages and loans on their books where they belong. With the separation of commercial and investment banks and the regulation of derivatives, markets should be calmed over concerns with imprudent lending and risky investments tools. Allow commercial banks the ability to lend as they see fit, not according to a one-size-fits-all policy.

Fourth, privatize Fannie and Freddie. The government will lose money, but they have lost already, and can end the liabilities once and for all. Fifth, consider regulating money market accounts as deposit accounts – strong bank capital requirements in exchange for federal deposit insurance. I’m not convinced it is necessary, but out of deference to Mr. Volcker it should be considered.

Lastly, wait and see where things fall. The market may not respond immediately, and the last thing we need is more legislation rushed through Congress for fear of doing nothing.

 

Taxpayers Ought to Protest

Thomas Sowell offers some new random thoughts:

Have you ever heard anyone as incoherent as the people staging protests across the country? Taxpayers ought to be protesting against having their money spent to educate people who end up unable to say anything beyond repeating political catch phrases.

There are a few other gems in the column on everything from food stamps and welfare to political “solutions” and Republican debates.