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Why do Chinese save so much and Americans so little?  Why are financial prices so volatile?  Why does real estate boom-and-bust repeatedly?  Why are women and minorities more likely to be poor?

These are the last four "big questions" that Nobel Prize-winning economist George Akerlof and co-author Robert Shiller address in their new book Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism.  Some of their answers will seem obvious to many progressives, but the answers are still economic heresy.

More below the fold....

Animal Spirits, Part III - Saving, Stock Prices, Real Estate, Minority Poverty

This week, Morning Feature explores Akerlof and Shiller's new book Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Wednesday we considered their rebuttal of the myth of the Rational Economic Actor. Yesterday we examined their answers to four "big questions" of recessions, banking, unemployment, and inflation. Today we look at their other four "big questions" of savings, investment volatility, real estate cycles, and minority poverty. Tomorrow we'll conclude the series with a critique of their theory.

Economic theories that assume we're Rational Economic Actors struggle to find answers for obvious anomalies.  The fundamentals say we should save for unexpected expenses and our retirements, yet most Americans have net zero savings.  Most corporations' assets, liabilities, and profits are quite stable day-to-day or month-to-month, yet short term stock prices remain unpredictable.  History shows real estate is a marginal investment that only barely exceeds inflation, yet the real estate market sees periodic booms followed by inevitable busts.  We're four decades out from the Civil Rights Act, yet women and minorities are still far more likely to be under or unemployed and struggling with poverty.

Technical explanations, once you wade through the jargon and equations, read more like excuses and denial than analysis.  Akerlof and Shiller argue that only by understanding our animal spirits - individual and cultural impulses that drive our intuitive reasoning - can we explain these phenomena.  The authors' answers probably won't surprise most progressives.  What's surprising is that their answers remain at the fringe of contemporary economic theory.

Four more "big questions."

Yesterday we looked at Akerlof and Shiller's answers to the questions of why economies fall into depression, why central banks have power, why some can't find jobs even in a good economy, and why there is a long term trade-off between unemployment and inflation.  Today we turn to the last four of their eight "big questions."

  1. Why is saving so arbitrary?  Saving is not only important for individuals - to have a "rainy day fund" for unexpected expenses, and for retirement - but also for nations.  Nations that save have a larger pool of capital to develop and maintain their potential.  As recently as the early 1980s, Americans saved an average 10% of our incomes.  Now we save an average 0%.  The authors say the fundamentals haven't changed (I disagree somewhat), yet our behavior obviously has.  They attribute that to a cultural change, shaped by stories that celebrate spending even in debt.  Advertisers so often equate spending with "freedom" that whipping out the credit card becomes a patriotic act.  Studies show Americans are more likely to buy an item, and to spend more for it, if shown a credit card (not their own).  We know we should save - 76% of Americans say they save too little - but our culture of consumption trumps reason.

Note: I disagree somewhat with the authors here.  The fundamentals of saving vs. consumption have changed, or at least our perception of them has.  Saving requires some confidence in our exposure to risk.  When our risk feels too high - when we almost daily hear stories of colleagues, family, and friends whose life savings were wiped out by an ordinary bad event like a job loss, illness, or injury - we have less incentive to be frugal self-investors.  Bad events happen to everyone, and if we perceive that saving merely pushes back an inevitable collapse by a few weeks, why not enjoy the money while we have it?  Most of us don't calculate this formally, but we do reason it through at an intuitive level.  Still, this may be less a change in fundamentals than another story-explanation.

  1. Why are financial prices so volatile?  Here the authors look at the wide variability of stock and other investment prices.  The key, for them, is not merely that these variations can't be predicted, but that conventional theories can't explain them after they happen.  Not even feedback-based models reproduce the same wide swings.  The authors argue the technical variations are so magnified by mass psychology that investment markets are chaotic - not just disruptive but destructive - unless carefully and sensibly regulated.
  1. Why do real estate markets go through cycles?  In this chapter the authors debunk the oft-repeated canard that "real estate can only increase in value."  It's a persistent story because it feels as if it should be true.  Land is basically inelastic in supply, and population growth implies increasing demand, thus it seems like prices should always increase.  But they don't.  Historical analysis shows residential real estate price growth barely exceeds inflation - 0.9% annual gain over the last century - well below the average 3.4% annual GDP growth since 1929.  But unlike the price of most items, we tend to remember what we paid for a home decades ago.  We look at the total increase, don't devalue it for inflation, forget past real estate collapses, and buy into the periodic stories that real estate is the path to personal wealth.
  1. Why is there special poverty among minorities?  Over 40 years after the passage of the Civil Rights Act forbidding discrimination based on race and sex, women still earn only 68 cents on the dollar as compared to men, and the poverty rate among African Americans is three times that of whites.  Black unemployment is double that of whites.  And for Native Americans the statistics are even worse.  Akerlof and Shiller refute the neoclassical technical explanations - which seem to me merely denials and excuses - and place the blame squarely on racism and sexism.  Stories of white male superiority hurt women and minorities in two ways: they fuel intentional or negligent discrimination, and they cause too many women and minorities to give up.  The authors reject claims that affirmative action is no longer needed, insisting such programs not only help to limit discrimination but tell a much-needed story of hope: "We're trying to correct past mistakes."

Most of the authors' answers to these four questions may not surprise progressives.  The answers may even seem absurdly obvious.  Yet these answers are heresy in neoclassical economics.  Those seeking explanations for why so many supposedly brilliant economists overlooked the oncoming train wreck of 2008 need look no further than that fact: neoclassical economic theory treats ordinary human behavior as heresy, insisting we are all Rational Actors conducting transactions in transparent Efficient Markets.  The Reagan Revolution replaced common sense with conservative fantasy.

Happy Friday!

Originally posted to NCrissieB on Fri Jul 10, 2009 at 04:31 AM PDT.

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Comment Preferences

  •  Tips for common sense explanations. :) (25+ / 0-)

    While yesterday's questions were more technical, today's seem (to me at least) common sense.  But as the old adage says: "common sense isn't common enough."

    As always, ::smooooooooochies:: to Kula, wherever she is, and ::hugggggggggggggggs:: to the Kula Krew!

    •  When You Design Your System for the Public Square (7+ / 0-)

      to be privately owned and operated by sociopaths, and you protect them Constitutionally to set the mainstream agenda and choose the participants in order to advance their interests, common sense is the last thing you're going to find in the larger shared reality of the society.

      And that takes much of the pressure off that would drive reality grounding in every sphere, economics included.

      Of course, when the system was designed, the owners of mainstream public square weren't sociopaths, and the framers did warn us that their system would need updating.

      That fine print gets you every time.

      We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

      by Gooserock on Fri Jul 10, 2009 at 05:03:38 AM PDT

      [ Parent ]

  •  Great Diary (7+ / 0-)

    I actually just started reading this very book.  Now I'm looking forward to finishing it.

    "I always found it interesting that people would cast aspersions on failure, as if it were a bad thing." -- Michael Steele, RNC Chairman

    by journeyman on Fri Jul 10, 2009 at 04:40:19 AM PDT

    •  It's well worth reading. (8+ / 0-)

      However, tomorrow I may disappoint you, as I'll offer some criticisms of their theory.  The criticisms are less about what they include than what they omit: any mention of extrinsic conditions that have changed the U.S. economy since 1970.  I agree with most of their ideas, but I disagree with their tacit conclusion that if we reintroduce the Keynesian economics that worked so well in the post-World War II era, we'll see the same results.  We're just not holding the same cards we held then.

      Good morning! ::huggggggggggs::

      •  Looking Forward to It (5+ / 0-)

        I, for one, am just glad to see the Chicago Sect being exposed as premised on faulty assumptions.  Especially when there are so many things in our economy that can only be explained by their innovators assuming irrational behavior on the part of consumers.

        "I always found it interesting that people would cast aspersions on failure, as if it were a bad thing." -- Michael Steele, RNC Chairman

        by journeyman on Fri Jul 10, 2009 at 05:13:35 AM PDT

        [ Parent ]

  •  I think recent events don't bear out with #5 (5+ / 0-)

    or rather your interpretation.

    Savings rates by individuals have been oppositte to what you suggest. Now that we are in the midst of depression people are saving again. When equity in our houses was skyrocketing people were spending like drunken sailors.

    •  The recent trends may be too recent ... (7+ / 0-)

      ... to be stable enough as trends.  Or it may be that we're willing to save to avoid imminent risks - if we sense we may lose our jobs next week or next month - but less willing to be frugal long-term given the long-term risk of being wiped out by an ordinary but not imminent bad event.  Or I might simply be wrong.  It wouldn't be the first time.... :)

      Good morning! ::hugggggggggs::

  •  Good morning Crissie and Krew (12+ / 0-)

    I have a couple of thoughts on this diary.  I was in a rehab center briefly after surgery and met a man whose wife had recently been admitted following a stroke and would never go home again.  In order to qualify for state aid to cover her costs, the man was going to lose everything he had worked for his whole life, except he could keep his car and home. It was questionable if he could maintain his home after losing everything else and he would not be able to leave any of his possessions to his children.  After hearing his story, my husband and I realized how vulnerable we really are - everything we've worked for and planned to pass on to our children can be taken away.  I so get the mindset of people who decide not to save - why bother?  I realize that not everyone will lose everything they have, but it's like a sword hanging over your head.

    •  That's not irrational. (6+ / 0-)

      It may not be "rational" in the sense that economists use that term - a decision arrived at through formal, quantitative analysis - but if the underlying story is true then it's sound intuitive reasoning.  If it's true that long-term risk is so high that we're all but certain to lose our life savings to ordinary bad events, why bother to save?

      That's an intuitive grasp of the formal, quantitative analysis expressed in risk tolerance equations.  In a poker tournament if you have very few chips left, it's correct to go all-in if you hold an Ace, two face cards, or any pair.  Your probability of losing is already so high that you may as well play any reasonable hand and hope for the best.  Similarly, if long-term risk is as high as many perceive you may as well take your chances while you can, rather than waiting to lose your life savings to a mountain of medical bills.

      The key phrase is "if the underlying story is true."  How high is most Americans' long-term economic risk?  Many of us perceive it to be unacceptably high, but that may be more compelling story than economic reality.

      Good morning! ::huggggggggggs::

      •  Income volatility (3+ / 0-)
        Recommended by:
        NCrissieB, addisnana, kktlaw

        In his 2006 book The Great Risk Shift, Jacob Hacker argues that statistics like the unemployment rate or average income levels are highly misleading, in that they don't give any indication of how smooth or bumpy the ride is for individual families. If two guys in Dayton lose decent union jobs because their plant moved to Mexico, an unemployed guy in Louisville finally gets another job after an 18 month search, and a woman lands a corporate management gig in Phoenix that pays substantially more than any of her previous jobs, neither the employment nor income stats show so much as a wiggle, but life has changed dramatically for four families, and catastrophically so for two of them.

        When he does look at those things, he finds that instability of American families has increased tremendously since the 1970s.

        The probability of a 50% or greater [income] drop for an average person [in a given year] was just 7% in the 1970s. It's risen dramatically since, and while (like income volatility) it fell in the strong economy of the 1990s, it has recently spiked to record levels. There is nothing extraordinary about "falling from grace". You can be perfectly average-- with an average income, an average-size family, an average liklihood of losing your job or becoming disabled-- and you're still two-and-a-half times as likely to see your income plummet as an average person was thirty years ago.

        Hacker observes:

        The mystery, it turns out, is not just why Americans have come to face greater economic risk. There are straightforward reasons why workers and their families experience heightened financial instability in today's economy and society. The big puzzle is why political and corporate leaders have been so slow to respond. In fact, the puzzle is even deeper than that. Political and corporate leaders haven't simply failed to respond; they've actually piled on new risks, even as Americans have become increasingly less secure.

        So, at least the "probability of losing" part of your hypothesis checks out. The second part, that people therefore conclude they may as well not save against a rainy day-- that part, I still have to think about.

        •  The trends correlate well. (1+ / 0-)
          Recommended by:
          DBunn

          And the causal explanation makes sense at an intuitive level.  But you're right, correlation and a causal explanation that "makes sense" is not proof of causality.

          Another of my criticisms of Akerlof and Shiller, in tomorrow's diary, is my sense that most people make better decisions than "experts" think we do.  We may make them differently - using intuitive reasoning rather than formal, quantitative analysis - but we get to answers that are quite similar, and often the differences can be explained in terms of factors their equations don't include.

          For example, economists say we "wrongly" discount long-term risks and benefits in favor of nearer-term risks and benefits.  And there are studies to show that we do discount long-term in favor of short-term prospects.  The question is whether we're "wrong" to do that.

          Uncertainty climbs exponentially as events get more remote in time.  Contingent events, even if they seem likely, may not happen and thus may void the consequent prospect.  And there's always the chance we'll die - which we all know, even if we pretend not to know - before the prospect can mature.  It's reasonable to discount long-term prospects ... even if we don't work it out by formal, quantitative analysis, even if we can't explain why we do it.

          I'm generally distrustful of experts who tell us, essentially, that we're all idiots for not making our decisions by formalized procedures.  Especially when many of those experts were telling us, just 18 months ago, that the economy was really fine and we just couldn't appreciate how good it was....

          Good morning! ::huggggggggs::

    •  My mom keeps sending me checks for no (13+ / 0-)

      apparent reason and I keep trying to give the money back to her -- but her reason for doing so is exactly what you are saying.

      My dad fell and had some bleeding in his brain and never really recovered from that.  My mom tried taking care of him, but just couldn't provide all the care he needed, so she moved him into a nursing home. It was a few thousand a month and she calculated just how long she would last before she was totally bankrupt and the state would take over.  I couldn't believe that, in this country, she would have to completely bankrupt herself to get care for my dad.

      My dad died after his first month in the nursing home, so Mom didn't have to spend every dime they ever saved. But now she is freely passing it on to her kids and grandkids and as much as I want her to keep it for herself, she wants us to have it rather than hospitals and nursing homes.  

      "How wonderful it is that nobody need wait a single moment before starting to improve the world." ~ Anne Frank

      by theKgirls on Fri Jul 10, 2009 at 05:06:36 AM PDT

      [ Parent ]

      •  I can certainly understand that, Kgirls (10+ / 0-)

        I feel much the same way.  My only hope is to hang onto the house.  Had it ten years now, and while it's worth slightly less than I paid for it, it's also still worth more than I owe on it.  Some legacy, but the only one I will apparently have for my family.

        Maybe they can squeeze a few bucks out of it when I'm gone.  I hope so, because the way things are going (my daughter and her husband escaped the axe at work yesterday, an axe they face every single quarter now), it may be the only boost I can give them.

        More huggs. :)

        "No man is my enemy, my own hands imprison me, love rescue me." -- Love Rescue Me/U2

        by winterbanyan on Fri Jul 10, 2009 at 05:13:27 AM PDT

        [ Parent ]

    •  "Trust" talk (8+ / 0-)

      Couples should confer with a attorney who specializes in Trusts and put everything of value (cars, houses, land, jewelry, etc.) into one trust including approximately half the estate's worth, and the other half into the other person's trust.

      IANAL, but in the case of the man who might lose everything, if they had had a trust, the wife, being unable to manage her trust, her holdings would revert to her husband's trust, and his estate would be protected and hers would be empty.

      Then there is the added provision that the estate needs only to be probated at the death of the last parent.

  •  We saved a ton of money when we (11+ / 0-)

    lived in Tokyo.  It's a cash-based society. Few places took credit and there are no checking accounts. And on top of that, the exchange rate was somewhere around 100 to 1, so psychologically, it just hurt to spend 500 yen even though spending 5 dollars seemed okay...  

    Some stores, mostly the ones that had expensive items, took credit. I wouldn't think twice about putting 10,000 yen on my credit card, but when I had to hand over a 10,000 yen note, I hesitated and often decided against it.

    I use credit almost exclusively here -- to the point that when I did use cash at the grocery, my then five year old didn't even know what it was.  And was absolutely fascinated that they gave me some of that paper back, along with some shiny silver coins.  

    "How wonderful it is that nobody need wait a single moment before starting to improve the world." ~ Anne Frank

    by theKgirls on Fri Jul 10, 2009 at 04:57:07 AM PDT

  •  In the olden days, it was easy to save money (10+ / 0-)

    because the dollar went further than it does now.  Simply everything we buy, from luxuries to essentials, costs more than it did when I was first married.  The consequence of this is that people, after paying for the essentials and a few luxuries, have very little money left over to save or invest.  The dollars we do put in a bank saving account merits about 4% interest, but we don't have enough dollars to venture into higher yielding ventures.  Obviously this didn't happen overnight or even within the past few years, so many younger people have no idea one could live quite comfortably and still save money on many less $$$.  

    Constant rising costs have caused the demise of the middle class.

    •  Savings? What's that? (11+ / 0-)

      When I remember how much I used to be able to save, I'm aghast at the way every penny now is being stretched to cover the ever-rising cost of living.

      No frills here.  None.  We've cut every conceivable expense.  And we still can't save.  

      And where is that bank that's giving you 4% on savings?  Mine gives me .5%.

      No, that decimal point is not a typo.  Revolting when you consider how much they're charging in interest on any type of loan.  And forget the interest on credit cards.

      Huggs and good morning! :)

      "No man is my enemy, my own hands imprison me, love rescue me." -- Love Rescue Me/U2

      by winterbanyan on Fri Jul 10, 2009 at 05:03:34 AM PDT

      [ Parent ]

      •  Yup, the elites in the financial sector have (6+ / 0-)

        skimmed off the cream for their playtime and left most of us with crumbs to survive on. Really makes you want to break out the torches and pitchforks, especially when you look at how systematically it's been done. ::grrrr:::

        Even with the changes in resources and circumstances in the past 30 years or so, there's no excuse for how heavily the odds have been stacked against ordinary people being able to just live our lives in reasonable security.

        Good morning, Winter!  Extra :::Huuugggsssss:::

        Information is abundant, wisdom is scarce. The Druid

        by FarWestGirl on Fri Jul 10, 2009 at 07:05:00 AM PDT

        [ Parent ]

        •  "In reasonable security," indeed. (6+ / 0-)

          I don't think most of us think we 'deserve' lives of idle luxury.  At some level, I think most of us are okay with the idea that we weren't born into the wealth-earner class, so we'll have to work for a living rather than by investing inherited wealth.  It's not even so much that we resent they can live by investing their inherited wealth, as that investment does contribute to society.

          The problem arises when we sense that no matter how diligently we self-invest - get an education, work to get jobs that maximize our potential, produce more than we consume, live frugally and save for the future - we're going to get wiped out the first time we lose a job or get injured or ill ...

          ... and be no better off (at that point) than if we'd taken it easy and enjoyed life as it came.

          When you feel as if the only thing you gain by 'climbing' is a longer fall, all so the wealth-earners can have a second yacht with a helipad, it's difficult to motivate yourself to 'climb.'

          Good morning! ::hugggggggggs::

          •  Absolutely! Fatalism takes over and we end up (3+ / 0-)
            Recommended by:
            NCrissieB, addisnana, kktlaw

            saying, WTF, it doesn't matter anyway. Or we finally pick up the pitchforks and have a little barbeque. :::sigh:::

            :::huuugggsss:::

            Information is abundant, wisdom is scarce. The Druid

            by FarWestGirl on Fri Jul 10, 2009 at 07:34:03 AM PDT

            [ Parent ]

            •  I think that's driving health care. (5+ / 0-)

              Most of us realize the biggest single risk we face is ordinary health issues.  You have to get very lucky to not get some serious injury or illness in middle adulthood.  We know our health care system is hopelessly broken and none but the very wealthy (or those fortunate enough to work for companies with very good health care) are ever more than one serious injury or illness away from financial ruin.  We have to fix that, or people won't self-invest.

              •  I agree, and that's why it may actually not run (5+ / 0-)

                out of steam before it gets done. If the current situation continues an awful lot of people may conclude that the only way out is to out-Galt Galt and take ourselves totally out of the contributing, (and breathing) class. I think the estimate I heard recently of 20K people dying every year from not being able to get treatment is very low. And I haven't heard anything at all about estimates of how many people commit suicide because they know they can't afford care, but I would bet it's a significant number.

                Information is abundant, wisdom is scarce. The Druid

                by FarWestGirl on Fri Jul 10, 2009 at 07:51:29 AM PDT

                [ Parent ]

    •  Yes, it's as if there was a consensus (9+ / 0-)

      response to the calls for equality which went something like this--"Ok, if they want to be equal, let them all be equally deprived and we, the elite, will keep the bulk of riches to ourselves."

      It's the "swimming pool solution" writ large.  If you don't remember, when the southern municipalities were ordered to integrate swimming facilities, the response, most often was just to shutter them entirely.

      Also, before I head out to the store, the prohibition on discrimination only applies to governmental entities, some interstate commerce facilities, and private entities that receive significant government subsidies.
      Yes, affirmative action is needed for the simple reason that exclusive behavior mainly aims to cement common interests--the object is not to exclude, but to bond and to weed out those who don't go along with the group agenda.  Which is why it is very hard to prove that discrimination is either gender or race based.

      How do you tell a predator from a protector? The predator will eat you sooner rather than later.

      by hannah on Fri Jul 10, 2009 at 05:14:43 AM PDT

      [ Parent ]

      •  OT, but speaking of swimming pools (7+ / 0-)

        CNN has been all over the Philadelphia swimming club fiasco this morning.  As it turns out, this pool is frequented by most lower and working class families, and some of the members are calling for the president of the club to resign.  

      •  Legal correction ... (8+ / 0-)

        Also, before I head out to the store, the prohibition on discrimination only applies to governmental entities, some interstate commerce facilities, and private entities that receive significant government subsidies.

        This isn't true.  The so-called "Ollie's Barbeque" case essentially held that all commerce is "commerce between the states," and thus the Civil Rights Act applied to all businesses.

        As to the rest, I agree.

        Good morning! ::huggggggggggs::

        •  You're probably correct and I defer, (4+ / 0-)
          Recommended by:
          Orinoco, DBunn, NCrissieB, addisnana

          but enforcing this prohibition is damned difficult.  I think it took years for Shoney's to shape up even though, if I recall correctly, employees were willing to testify about discriminatory directives.  And not so long ago there was the Secret Service incident...........

          Treating people like equals is really resented in some quarters.  You're supposed to be able to treat people according to what you think they deserve.

          If you can't punish and reward, how else are you going to get people to do what you want? Every independent action (good or bad) registers as a challenge to authority.  

          So, the question we are left with is why there's so much emphasis on authority in the land of the free.  I think it's because for one reason or another, our people are insecure.  Authoritarianism feeds on fear and fear is re-enforced every time "national security" is used as an excuse.  Talk about a vicious circle.

          How do you tell a predator from a protector? The predator will eat you sooner rather than later.

          by hannah on Fri Jul 10, 2009 at 06:34:21 AM PDT

          [ Parent ]

          •  Treating people as equals ... (6+ / 0-)

            ... isn't quite as straightforward as it seems.

            For example, you might casually ask a spouse or a friend, "Would you take a look at my ankle?  It's really sore."  To some extent you compliment them by asking; you value their input even if it's not expert input.  But you wouldn't ask the same of a physician unless you were willing to pay him/her.  Most people wouldn't, even if the physician were a friend.  That is his/her profession, after all, and it's "not fair" to "take advantage of" his/her expertise.

            So there are ways we think we should treat people as equals, and some important ways we often don't.  People in offices are far more likely to seek advice from their peers than they are from supervisors or those who've done the job longer.  In part that is not wanting to seem incompetent, but in part it goes to a curious wrinkle on our concept of "fairness."  It's "fair" to ask for advice from a peer, but many think it's "not fair" to "bother" a supervisor or senior colleague.

            That spills over into other social status forms as well.  Studies show women are more likely to seek advice from other women than from men (because men are still too often seen as 'superior'), and that minorities are also more likely to seek advice from within their minority groups.  When we don't "feel" equal to others, when we perceive them as having a higher status, we're less likely to seek their advice unless we've no other choice.

            That's one of the ways stories of white male superiority work against women and minorities.  It's an odd form of self-discrimination, based on some curious twists in our notions of "fairness."

            •  Now that's a fascinating observation :) (3+ / 0-)
              Recommended by:
              Orinoco, NCrissieB, addisnana

              Need to give that some more thought, but even as I read I was nodding.

              At what point does this become self-defeating?

              "No man is my enemy, my own hands imprison me, love rescue me." -- Love Rescue Me/U2

              by winterbanyan on Fri Jul 10, 2009 at 06:53:17 AM PDT

              [ Parent ]

              •  It gets self-defeating quite quickly. (5+ / 0-)
                Recommended by:
                hannah, Orinoco, DBunn, winterbanyan, addisnana

                And yes, I was fascinating to read that research in Akerlof and Shiller's chapter on fairness.  Turns out we think of "fairness" in terms of "equity" rather than "equality."  It makes sense, once you think on it.  You might ask an office peer if you can borrow a dollar for the soda machine or to spot you a lunch in the cafeteria (with a promise to buy his/hers the next day, or such) ... but most of us wouldn't do that with a subordinate.  It wouldn't be "fair" to treat the subordinate as an "equal" in that context.

                But when that "equity" concept is based on false status divisions like race or gender, it gets very self-defeating, very quickly.

    •  That's true, but only barely. (7+ / 0-)

      Yes, the inflation-adjusted median family income has declined since the mid-1970s, but by only a very tiny amount.  By and large it's flatlined, that is, median family incomes only just pace with inflation.

      So a family on a median income in 2009 would have (almost) the same saving potential as a family on a median income in 1979.  The difference is today's median income family expects (and has) a higher standard of living than the median income family of 30 years ago.  We "gave ourselves a raise," at least in the short term, by not saving 10% of our incomes.

      Good morning! ::hugggggggggs::

      •  That's true too (8+ / 0-)

        Compared to now, in the sixties, seventies, etc., we actually had very little to buy.  Our clothes fit in small closets, toys filled one toy box, kids rode bikes everywhere, one car to a family, little pre-processed meals.

      •  so true... (10+ / 0-)

        When my parents first got married, they had to live with my dad's parents because they couldn't afford an apartment. They saved for a year and finally were able to get a one bedroom apartment -- and by that time, my mom was six months pregnant. My brother spent the first couple of years of his life in a crib in the living room -- but only on weekends.  My mother needed to keep working to be able to afford the apartment, so she took him over to the in-laws on Sunday evening and he lived there during the week, then my parents picked him up on Friday evening.

        My little sister didn't want to move out of my parent's house until she could afford a two-bedroom place.  (The extra bedroom was to store all of her stuff and to have some place just in case anyone wanted to come visit.) She needed a TV, stereo, microwave, and complete furnishings before she'd consider going out on her own.  

        Things are very different between generations...

        "How wonderful it is that nobody need wait a single moment before starting to improve the world." ~ Anne Frank

        by theKgirls on Fri Jul 10, 2009 at 05:36:35 AM PDT

        [ Parent ]

        •  My parents "lived poor" (10+ / 0-)

          all the time I was growing up.  I never had what other kids had, Mom would even argue that "Stars and Stripes" Band-Aids cost 2 cents more and therefore were beyond our means.  And on and on.

          But they got a lot more help from their parents when they were young marrieds than I ever got from them.  Interesting, huh?

          The things that helped them get going, and keep going with a growing family, never came my way.  Some kind of disconnect there...

          "No man is my enemy, my own hands imprison me, love rescue me." -- Love Rescue Me/U2

          by winterbanyan on Fri Jul 10, 2009 at 05:40:30 AM PDT

          [ Parent ]

  •  Great diary, Crissie (11+ / 0-)

    As one whose savings was wiped out by illness four years ago and the subsequent loss of income, followed last winter by 5 months of unemployment which wiped me out again, what I find is a now deep-rooted conviction that savings are there only for a crisis, and inadequate at best.

    Why do I say that? Because the wipe-out of major illness forced me into bankruptcy.  Because all the savings I managed to garner during the years since were wiped out by unemployment...and eventually I wound up on food stamps.  With wages falling (in my case over 50% since 2007) I find myself thinking: why bother?  I can barely eke out a living right now.  I've squeezed everything I can squeeze, have no health insurance, etc.

    As a middle class (just below median income) person now, my life is all about day-to-day.  Unless something changes, there won't be any savings for the next time around.

    So we wind up, many of us, in the depression spiral: less income, less savings, less spending...and all of that helps delay economic recovery which would, long term, benefit me and everyone else.

    The story I'm telling myself now is: it doesn't freaking matter.  I'll work till I drop.  No retirement.

    And I think that's the story a lot of Americans are telling themselves now: wise economic practices only wind up cratered in a crisis, whether that crisis is an illness or an economy screwed up by the big investor class.

    This kind of attitude does not bode well.

    Huggs and good morning!

    "No man is my enemy, my own hands imprison me, love rescue me." -- Love Rescue Me/U2

    by winterbanyan on Fri Jul 10, 2009 at 04:57:41 AM PDT

    •  I'm in the same spiral (11+ / 0-)

      And that idea that our children might live at least as well as we once did is really over, gone, out the window.

    •  Many feel the same way. (9+ / 0-)

      Whether our long-term risk are as dire as you and others (including me) believe is less important - as an economic driver - than that we believe those risks to be unmanageable.  That's Akerlof and Shiller's point about the importance of stories as economic drivers in themselves.  It doesn't matter whether a story is true; if we believe it's true and act on it, it's an economic driver regardless.

      That's why I think health care reform is so important to our economic recovery.  We need that security if we are to have any incentive to save for our futures.

      Good morning! ::hugggggggggs::

      •  Couldn't agree more! (10+ / 0-)

        Especially since I had health insurance at the time I got so ill... and they managed to wiggle out of paying for most of the costs for an emergency surgery.

        That threat is hanging over too many heads.  Remove that, and you'll get an immediate improvement in confidence.  Force insurance companies to reduce premiums and provide the services they contracted to provide, and folks will breathe a whole lot easier.

        And our businesses will become more competitive.

        "No man is my enemy, my own hands imprison me, love rescue me." -- Love Rescue Me/U2

        by winterbanyan on Fri Jul 10, 2009 at 05:34:51 AM PDT

        [ Parent ]

        •  This is why we need a public option (2+ / 0-)
          Recommended by:
          NCrissieB, kktlaw

          Force insurance companies to reduce premiums and provide the services they contracted to provide,

          There's just no effective way to do this, since a for-profit company can and will charge whatever the market will bear.  The only real solution is to change the market, by adding an actor who is not mandated to turn a profit.

          Contracting to provide health care by providing health insurance is one of the biggest bait and switch scams in our economy. You think you're buying care, when what you actually have is an insurance contract full of fine print, loopholes, and a requirement that expenses be approved. And, you're paying in advance, so the longer the insurance company (not the doctor or nurse or other health care provider) can delay paying for services by withholding that "approval," the longer they can hold on to your premiums, the more they can make on the float.

          Joe Biden thinks Americans won't stomach a single payer system because we are all about choice. To a certain extent he's right: I've checked out the three major health care facilities in my area, and I chose the one I like best. I would not like to be forced to use one of the other facilities, because they seem more crowded and less organized than the place I use when I'm sick or broken. Choosing how they get paid? I couldn't care less, I only care that they do get paid when they provide services.

          Good morning! and ::hugggggggggggs:: to the Kula Krew. :)

          "The problems of incompetent, corrupt, corporatist government is incompetence, corruption and corporatism, not government." Jerome a Paris

          by Orinoco on Fri Jul 10, 2009 at 08:12:06 AM PDT

          [ Parent ]

  •  Hope leaves when fairness dies (10+ / 0-)

    I think affirmative action is a way of trying to make life "more fair." (#8) I think people may save when they are scared, like now. But if you thought you were playing by "fair rules" and then lost it anyway while AIG was still paying bonuses..well I'd say that hope leaves when fairness dies.

    This is easier to understand economic theory.
    Thanks for the diary...

    •  I agree on your point. (7+ / 0-)

      I'd quibble (a tiny bit) on the term "fairness," but it's a very technical, semantic quibble having to do with that term's economic rather than colloquial meaning.  But yes ... when we sense a game is rigged, we don't play unless the game is fun anyway (e.g.: Vegas).  Working hard, living frugally, and saving for the future isn't "fun," and there's no jackpot possibility.  Why play that game?

      Good morning! ::huggggggggs::

  •  Besides, it's become clear that the (10+ / 0-)

    proponents of "savings" were looking for capital to sustain their speculative enterprise.  The rational person might well conclude that a mature capitalist economy should have achieved the point where enterprise is self-sustaining and self-renewing.  Why do they keep looking to workers' savings to bail them out?

    Well, the answer is that they're not.  They're looking to workers' savings as additional pots of money to play with, inflate the speculative bubble and then get out while they watch it burst.

    Americans are generous and their desires quite modest.  But, they are not suckers to be taken advantage of forever.

    How do you tell a predator from a protector? The predator will eat you sooner rather than later.

    by hannah on Fri Jul 10, 2009 at 05:02:22 AM PDT

    •  That happened in the 1980s and 1990s, yes. (7+ / 0-)

      When economic risk seems manageable, saving money helps us individually (be ready for the unexpected, have a modest retirement) and collectively.  We need capital to create and maintain productivity.  When we sense that's what our savings are doing - while they're accruing interest for our later needs - we have both personal and social reasons to save.

      But if we sense our savings are being dissipated in speculative schemes that only benefit the rich, and we'll be wiped out the first time some ordinary bad event happens ... we lose both motives to save.

      Good morning! ::hugggggggggggs::

  •  Hi Crissie and all da krew! (9+ / 0-)

    Darn it, Crissie! I learnt something here and I hadn't yet made room for learning thingys today.

    __________________________________________

    Morning Feature pics for your a.m. perusal.
    A butterfly, wildflowers and a boidy:

     title=
    Painted Lady

     title=
    Desert Lily against field of sand verbena

     title=
    An oriole shows off its bee-eating skill

    ______________________________________

    P.S. If I am looking for some help with a legal issue. (One of my photos was repeatedly used without  permission by a TV station. I've written to them but they don't respond. And I registered the photo with the Gov Copyright Office.) Is there anyone on the faculty at Blogistan Polytechnic Institute who might point me in the right direction?

    "When the well is dry, we know the worth of water." - Poor Richard's Almanac

    by desertguy on Fri Jul 10, 2009 at 05:17:44 AM PDT

  •  Crissie, you mean all those (8+ / 0-)

    Saturday morning "get rich quick" real estate shows we're bogus!

    My wife and I are 61 and we never got caught up in the credit card bingeing. From the first day of our marriage to 38 years later we've always been big on budgetting/saving. I have 2 credit cards in my wallet; 1, I can't remember the last time I used, and the other never has a balance due. So, we've managed OK.

    Having said that, though, the reason why we've managed OK is that having been born in 1948, we were able to catch America when verities meant something: Study, get your degree, work hard, get ahead. We got jobs with meaningful benefits that offered savings plans. Very different time, this economy is so different, glad I wasn't born in 1978.

  •  Morning all, and silent sunny hugs. (6+ / 0-)

    For a variety of reasons what Poirot calls the leetle grey cells they are not working so well thez mornng.

    When they are up and synapsing I'll be back.

    Meanwhile, as per above message to Kgirls and co., enjoy the sun that is with us until Sunday noon.

    •  Yes, it's a nice morning today. :) (4+ / 0-)

      Slightly overcast but the sun peeks through from time to time.  Slight overcast is better (for me) because it takes the edge off of the otherwise brutal South Blogistan summer heat.

      Sorry your leetle grey cells aren't at full functionality yet.  But that's why G*d invented coffee.... :)

      Good morning! ::hugggggggggggs::

      •  Hmmph. (3+ / 0-)
        Recommended by:
        NCrissieB, addisnana, kktlaw

        But that's why G*d invented coffee.... :)

        and here I thought it was the Ethiopians... Caffeine is the coffee plant's way of getting a mobile creature (humans) to spread coffee plants to new fertile territory. A fairly successful strategy, so far.

        Good morning! and ::hugggggggggggs:: I think I'll go make a cup... ;^)

        "The problems of incompetent, corrupt, corporatist government is incompetence, corruption and corporatism, not government." Jerome a Paris

        by Orinoco on Fri Jul 10, 2009 at 08:25:24 AM PDT

        [ Parent ]

  •  Just got my Prudential statement yesterday (6+ / 0-)

    they include a performance chart to show how all their investment funds are doing. For the last year, of the 36 funds they list on the chart, 30 lost money. The worst performing fund was Specialty-Real Estate, 046503-ING Real Estate Instl -- down 42.13% over the past year.

  •  Once again, as with all things heady and weighty, (6+ / 0-)

    it is enlightening to begin the understand the 'whys' of change.  The adage "You can't go home again" has never been truer, and with Crissie's guidance through these heady/heavy weighty matters, it certainly helps me better understand that Obama has reached the same conclusion and what he is trying to do about it.  Thanks!

  •  Well, the Krew has covered my responses to (3+ / 0-)
    Recommended by:
    Orinoco, NCrissieB, kktlaw

    about everything, so I guess all I have to say is thanks, Crissie and

    Good morning! :::Huuuggsss:::

    Information is abundant, wisdom is scarce. The Druid

    by FarWestGirl on Fri Jul 10, 2009 at 07:07:39 AM PDT

  •  Economic theories (2+ / 0-)
    Recommended by:
    NCrissieB, kktlaw

    Economic theories that assume we're Rational Economic Actors ignore to our peril the obvious,  pointed out by Hamilton over two hundred years ago:

    Has it not, on the contrary, invariably been found that momentary passions, and immediate interest, have a more active and imperious control over human conduct than general or remote considerations of policy, utility or justice?

                    -- The Federalist, No. 6

    •  Excluding Hamilton's class, of course.... (1+ / 0-)
      Recommended by:
      kktlaw

      Alexander Hamilton was a snob who thought he and his kind were somehow above the rest of us mere beasts.  In his draft constitution, based on the arguments he had made at the Constitutional Convention, both the President and Senate would have been elected to life terms, but only after several layers of indirection to neuter popular voting.  He believed government should intervene to protect business owners from the masses, both employees and dissatisfied customers.

      Hamilton may have disagreed with Adam Smith on human motivation, though probably not by much as Smith also believed the masses are fundamentally selfish, stupid beasts who needed the firm guidance of our betters ... folks like Hamilton, who of course weren't acting on their own passions or immediate interest but on considerations of policy, utility, and justice....

      Good afternoon! ::huggggggggggs::

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