How about this:

It's easier to make money in abstract financial markets when you already have lots of money to do it with.

When you don't have a lot of money at hand, it's easier to do it through concrete business.

So, the gradual offshoring and decay of more and more of the "concrete" methods of making money harms those in this country who have less to start with. The focus on more of the "abstract" financial methods helps those who already have a lot.

I know I'm really just striking a balance between your statement and Ian's post, but it does seem to make some sense to me. Then again, it does seem like an oversimplification and I have virtually no experience in finance or economics :).

People who create things like concrete or pots and pans, even software should be paid handsomely. Money go around in circles should not be so highly rewarded. I am talking about the George Soros of the world. We used to have a term "middle-men" but I think his category is more like pirate. They make money be reducing the value of money that other people own. They are like friction in an engine.

Most of the traders sell liquidity which is the lubricant of the engine.

I posted this rather comprehensive study on different economic systems:
http://agonist.org/gandalf/20060903/geekonomics

Abundance sucks, communism is too stiff and capitalism has regular envy revolutions. Fair rewarding by skills leads to an unfair system. I suggest that a lottery based economic system will be tested in a US state, not here!

-- Happy fishing in ocean of noise!

a flea market. The same commercial principles apply:

When you have too little to sell, you don't attract buyers.
When you have too much to sell, you must dump the price and extend your selling period.

Being middle sized and well informed is the best. Banks, George Soros and Warren Buffett have liquidity problems. W. B. sits on cash because can't find enough worth of buying.

Many people think that everything what they don't comprehend or don't have experience is easy. I call it The Boss Syndrome. That weakness in people's logic is used when financial products are sold to public. It doesn't matter if you know the latest price in realtime if you don't have a clue what's the next price.

Skills and knowledge are capital too.

-- Happy fishing in ocean of noise!

Not the point I was trying to make.

Changes in tax policy made funneled money to the top 5% and to the top 1 and .1 and .01%.

That increased their wealth, and drove up demand for financialization.

Public companies are worth more than private ones because you can speculate in them but that isn't what drove financialization, it's a symptom, not a cause.

have something to do with this, but they are belated. As rates fell in the 80s, you began to have a lot of the securitization of debt.

The pricing of stocks and real estate followed along as rates went lower and lower. The lowering of rates largely drove the financial expansion with the rich, of course, looking for their bread of life.

But the Bush tax cuts rather ice the cake for the rich. The Reagan cuts helped as well, no question, but you still paid 50% on dividends under Reagan.

http://www.truthandpolitics.org/top-rates.php

Now I don't agree that just because you can speculate in public companies they are worth more. All of the regulation required to disclose accounting facts about the entities make them more transparent and so they price differently.

I do however think you are right to call attention to the expansion of financial wealth without regard to what it produces; whether the money being made is driving industry out of the country is not clear to me because of the small business stats.

The Prudent Bear whom I've followed for years believes that a kind of financial driven mania has emerged and that finance is driving rather than regulating economics.
http://www.prudentbear.com/creditbubblebulletin.asp

I tend to think he is right, but I don't think that there is something overtly political behind the phenomenon. I just think people with money know-how will get rich any way you will let them.

Don't agree. You get lots of rich people because you let them get rich. There was a concerted effort to destroy the laws created during the great depression to halt another great depression. This was already visible by 1984 - weatlh disparities were visible at that point, I remember reading about it in high school.

It would be child's play to dry up the growth in wealth - taxed earned and unearned income the same, slap down currency restrictions, institute a Tobin tax, tax short term capital gains much more heavily than long term gains, and tax secondary investments higher than primary investments.

The increase in market cap is much more simply explained as monetarily driven inflation than other fashion. While transparency increases market value it is not capable of explaining a generation long bull market complete with bubble.

can correlate the market's expansion with lower rates and higher earnings, how much more simple can it get?

I believe I can. I have models I have used for years. Your own Canadian Bank Credit Analyst in Montreal has been modeling this stuff for decades. It is far better than I am.

Incidentally, we do tax short term gains more heavily. We have also section 1244 for small business corporations. You get to write them off against ordinary income as opposed to capital gains.

Nonetheless, I agree with the conclusion of your piece. I do think our hegemony will decline as a result of our financial policy. I just don't see it quite as political. It is more a matter of bumbling.

You're on to something, but I think you are just overstating it a bit.

From Krugman today:

"More broadly, right-wing commentators would like you to believe that the economy's winners are a large group, like college graduates or people with agreeable personalities. But the winners' circle is actually very small. Even households at the 95th percentile — that is, households richer than 19 out of 20 Americans — have seen their real income rise less than 1 percent a year since the late 1970's. But the income of the richest 1 percent has roughly doubled, and the income of the top 0.01 percent — people with incomes of more than $5 million in 2004 — has risen by a factor of 5.

Finally, while we can have an interesting discussion about questions like the role of unions in wage inequality, or the role of lax regulation in exploding C.E.O. pay, there is no question that the policies of the current majority party — a party that has held a much-needed increase in the minimum wage hostage to large tax cuts for giant estates — have relentlessly favored the interests of a tiny, wealthy minority against everyone else.

According to new estimates by Thomas Piketty and Emmanuel Saez, the leading experts on long-term trends in inequality, the effective federal tax rate on the richest 0.01 percent has fallen from about 60 percent in 1980 to about 34 percent today. Meanwhile, the U.S. government — unlike any other government in the advanced world — does nothing as more and more working families find themselves unable to obtain health insurance."

Of course there are higher earnings - productivity has roughly doubled in thirty years and almost all of that has gone to earnings rather than wages.

Krugman's perspective, but I don't see a political argument for what you call financialization here.

First of all, the taxes were quite high in 1980 and needed to come down, independently of the rich.

Second, interest rates were quite high and needed to come down, independently of the rich.

It is easier to argue that the move down in rates started the financial asset expansion of the last 25 years and that lowering of tax rates helped it along.

While there is no question that that the ease with which the rich got much richer was due in part to the lowering of tax and interest rates,I don't see this as political.

I think much of the minimum wage business and health care are political. Globalization has political roots. The failure to manage pension funds is political. The failure of the unions is political. The folly of education is, and so on.

Why were tax too high in 80's?

High progressive taxation is correlated with the best economic times the US ever had. The fact of the matter is that lowered tax rates are highly correlated with reduced wage growth for the majority of the US population.

Interest rates were too high in the 80's because they were coming off squeezing out inflation from the stagflation period. Let me put it to you this way - interest rates were lower on average in the 50's and 60's than in the 80's and most of the 90's and that didn't cause an explosion in inequality or and explosion in rich people. Quite the contrary.

One of the markers of being rich is when you can actually borrow at damn near close to prime and make the spread. Ordinary people don't get to do that. What matters is that spread, and the ability to move money around freely. (ie. the carry trade from Japan, for example, has been free money for a long time now - for some people. But not for you (well, probably not you, who knows.)

Are you thinking of the post war era here?

"High progressive taxation is correlated with the best economic times the US ever had."

The post war boom was enormous, but it was off the heels of the greatest depression and war we had ever had.

If you are talking about the last 30 years here:

"The fact of the matter is that lowered tax rates are highly correlated with reduced wage growth for the majority of the US population,"

you will probably be able to correlate the reduced wage growth with globalization. Just use the rise of the Pan Asian economies at this time. They are going vertical while our manufacturing goes in the tank, along with stagnating American wages.

As far as the negative carry goes, that seems to be more a result of a currency game the Japanese are playing to stay in the export hunt. But it has made a lot of hedge funds rich.

I think the explosion of rich people is a largely a result of the financial asset inflation which took place as rates went down and present values of earnings and cash flows went up.

One reason the tax rates in 1980 could be said to be too high was because of the tax shelter abuse that they were causing. An entire tax shelter industry was sucking capital from growth based industry.

The marginal rate had been higher before but it began to effect more people with what was referred to as "bracket creep."

So the rate structure needed overhauling.

No free money for me, sorry.

Let me add this afterthought. The post war capital markets were small compared to today.

Organized institutional participation began growing by leaps and bounds as all these financial products got moving in the 80s, as rates began to fall. Put and call options had been over the counter; The Nasdaq had been nothing. There were no futures contracts in financial instruments. Financial engineering was unheard of.

The periods are hard to compare.

Response got so long, and I think this is an interesting conversation, so replied in a post.

But the winners' circle is actually very small.

Both Krugman and right-wingers don't like the thruth. The winners are the richest and the poorest. (The losers are in the middle class.)

productivity has roughly doubled in thirty years and almost all of that has gone to earnings rather than wages.

My understanding is that during the last 50 years the percentage of the wages of the US GDP has not changed. But women are working now, thus the average wage has come down.

-- Happy fishing in ocean of noise!

Winners are not the poorest - winners are the richest, period. The poorest have had worse wage growth over the last thirty years than even the middle.

As for Krugman, I have never found him to be substantially wrong about an economic point of fact (you can, of course, disagree with him on theory, though it might be rather dangerous). Every time I've looked into it, those accusing him of getting it wrong have had to chop razor fine and ignore his obvious meaning.

And finally a chart of the last 5 years shows that the share of wages has dropped significantly. Not sure what 50 years shows.