TIME Economy

Job Growth Good, Labor Market Bad

What happens with workforce participation will determine how you experience the recovery

Midway through the year, how is America’s economic recovery really doing? It’s complicated.

We’ve just gotten what in many ways appears to be a stellar jobs report. The U.S. economy created a whopping 288,000 jobs in April, and the unemployment rate fell to 6.3%, its lowest level since 2008. Unfortunately, it didn’t fall just because tens of thousands of new jobs were created in construction and retail, for example. A bigger reason it fell is that fewer people are looking for work. In fact, the workforce-participation rate–the percentage of people who are actually in the labor market–dropped to its lowest level since 1978.

The question now is whether or not people who are shut out of the labor market for various reasons will be able to return to work as the recovery strengthens. Ultimately, the answer will determine how most Americans experience the next few years–how much it will cost you to buy a new car or home or what you will pay in student loans.

It’s not hard to see why workforce participation is such a hot topic. Over the past five years, the percentage of the population working in America has dropped to the levels of Europe as a whole. Typically in the U.S., about 15% of unemployed people are among the “long-term unemployed,” meaning they’ve been out of a job for more than six months. After the Great Recession, that share reached 45%, and even today it’s still 37%. The long-term unemployed suffer not just economically but also socially: they have higher rates of divorce, depression and suicide.

Will those people ever work again? Many experts say no, because research shows that employers often discriminate against the long-term unemployed and also their skills tend to atrophy. “More than ever before, skill erosion will be a major obstacle for those who wish to return to the workforce,” declared a recent Conference Board report. And then there’s another group: the baby boomers dropping out of the workforce who had likely planned to retire anyway but may have pushed the decision up by a few years because of gloomy work prospects. Historically, few such people ever return to the workforce once they leave.

So what does all this mean for the price of your mortgage or car loan? The amount of slack in the labor market is one of the key factors helping the Fed decide whether to raise interest rates. When markets are slack, or too many people who want work don’t have it, wages and prices stay down. But if labor markets get tight, wages go up, and that causes inflation. When inflation starts to rise, so do interest rates.

But inflation is tricky. It moves fast and often unexpectedly, which means it’s important for central bankers to try to anticipate it. That’s why there are vigorous disagreements about what to make of these latest numbers. Economists who see the bulk of labor-market dropouts as a lost cause believe they don’t really matter with respect to inflation. The short-term unemployment rate, which they believe is a better measure of the true slack in the labor market, is just a little more than 6%, right around where it ought to be historically. And important metrics, like the National Federation of Independent Business survey, show the labor market is as tight as it was in 2005. Whatever the unemployment rate, we may not have enough workers with the right skills. And a tighter labor market implies that inflation could come on sooner rather than later–and that rates could rise as early as 2015.

Plenty of people in the fed believe that could and should happen, but chair Janet Yellen isn’t one of them. Yellen recently said, “My own view is that a significant amount of the decline in [labor] participation during the recovery is due to slack, another sign that help from the Fed can still be effective.” The data on her side include the recent disproportionate declines in the unemployment rate for lower-income workers. The idea is that companies are starting by hiring cheap labor and they’ll eventually hire more workers higher up the pay scale. There’s also the fact that right before the Great Recession, there was a nascent trend toward older workers staying in the workforce longer, in part because of better health and the desire to work but also perhaps out of necessity: the average retirement savings of Americans ages 55 to 64 is about $120,000, not enough to fund anyone’s golden years.

If that’s the case, we may see many of those longer-term unemployed people come back into the workforce, keeping inflation (and rates) lower for longer. In economics, three’s a trend. The next two months of data will be crucial in understanding where labor markets, interest rates and the price of your debt are headed.


Nigeria’s Nollywood Is Thriving Despite Terrible Conditions

Nollywood film set- Brookeville, MD
The Washington Post—The Washington Post/Getty Images

Nollywood Is Hollywood with more bribes, gunplay, and crime

Nigeria—with its booming growth, and its nearly 300 missing girls—has been all over the news lately. I’ve been here for the last 7 days, first reporting on the Africa meeting of the World Economic Forum in Abuja, and now in Lagos, to report a piece on the country’s burgeoning film industry, Nollywood. In some ways, the story of this industry is the story of the entire Nigerian and even African economy. It’s about sheer entrepreneurial will overcoming any number of obstacles, from inept governance, to corruption and crime, to the lack of basics like power, roads, and infrastructure.

The chirpy David Brook’s piece in the New York Times the other day certainly put forward the optimistic story—7% growth, a GDP that recently jumped by 89% thanks to a recalculation by the World Bank, huge consumer spending potential, a growing middle class, etc., etc. But what I have taken away from my reporting here is that this growth is happening in spite of incredible governmental roadblocks, and that much of the money is still flowing out of the country, or up to a small group of elites. If things got even a little bit better, Nigeria, already the largest economy in Africa, could truly boom in a more inclusive way.

Consider electrical power, or the lack of power, which everyone from Africa’s richest man, Aliko Dangote, to the small producers of Nollywood says is the biggest obstacle to doing business here. The power setup in Nigeria is similar to the water setup in India. The government controls a grid, which runs haphazardly—sometimes because of poor infrastructure, other times because power gets pulled to choice areas. Either way, it means people have to buy generators and diesel to keep the lights on. (BTW, the lights just literally went off in my hotel, supposedly one of the nicest in Lagos, as I wrote this post.)

I spoke today with a filmmaker who was in the middle of making movie when his generator blew out. He bought a new one the next day, but it was stolen by one of the neighbors. (He hired the local vigilante police to find it; the real ones never come because they don’t get paid off.) Lack of power is one big reason production values in Nollywood, which churns out more movies than Hollywood and is second only to Bollywood in terms of number of films produced, have remained low for so long. But this kind of crime is just the tip of the iceberg.

The same producer released 50,000 copies of a movie to local distributors in Alaba Market, which is the birthplace and heart of Nollywood, and the largest consumer electronics market in West Africa. The next day, he got a call from Greece, from someone who’d seen his movie via a black market tape. It turned out that 100,000 copies had already been pirated (he believes by his own distributors in Alaba). The $5,000 in profit he’d hoped to make on his $5,000 investment was gone.

In fact, Alaba embodies all that is good and bad about the Nigerian economy. It is vast, chaotic, rough, entrepreneurial, and lawless. To get there from Lagos’ main business district, you drive hours in standstill traffic, on roads that are half pavement and half dirt. Once at the perimeter, I had to hitch a ride with a boy who had a motorbike, speeding along through the narrow market streets to get to where the Nollywood section was because the market itself is so big. (I felt like an extra in the Bourne Identity.)

Inside, you feel its possible to get lost and never emerge. It was a sea of bodies all selling everything you can image: extension cords, plantain chips, porn, cassava, washing machines, black market DVDs. Everyone everywhere is looking for money-making angles. One woman was selling empty plastic bags, and another was buying them and filling them with grain, to sell again. There was an open sewer with a 6 foot long board over it and a couple of guys had commandeered it and were making people pay a 25 naira toll to walk across.

Once inside, you see the different layers of the Nollywood economy—I followed a young man who’d come 80 minutes to buy DVDs for 50-85 naira that he would sell in a stall at home for 100 naira (about 75 cents). Interestingly, the foreign pirated movies, like 12 Year A Slave, sell for 35 naira—less than the local stuff, which is more popular. Distributors take the movies given to them by filmmakers and make copies of them (sometimes making extras for themselves), which they keep in warehouses and sell in the market to people from all over—Ghana, Kenya, Nigeria, the Caribbean.

Once, I was told, four of the biggest filmmakers in Lagos got upset about the distributors pirating stuff and skimming too much off the top, and decided to go into the market with armed military police. They all came out a little while later, running, and being shot at by the distributors. Some of the larger filmmakers have since started their own stalls in Alaba and many now do their own distribution.

Despite all this, the industry thrives. The recent World Bank rebasing of GDP numbers has found that Nollywood contributes 1.4 % of the country’s yearly GDP (entertainment is 3 % in the US, so 1.4 % is really very good for a county like Nigeria). There is an entire ecosystem of stars, minders, and hangers-on here on Victoria Island. I went to a Nollywood party last night and saw them all getting dressed for the red carpet at an event sponsored by MTV and Absolut Vodka. They are already huge in Nigeria, obviously, but are also big in Africa and are increasingly grabbing the diaspora market in the UK, Caribbean, Germany, etc, in part because the industry is finally starting to digitize; expats are coming home and building out digital video on demand platforms, which is bolstering demand and helping production budgets and quality to grow.

I met a young woman who is the star of “Lekki Wives,” a take off on the real housewives theme. Lekki is like New Jersey—a part of Lagos where strivers live. Her character, Lovette, is a lens into the various socioeconomic issues that Nigerians now face—inequality, corruption, wealth than can be taken away in minutes, etc, etc. While there are plenty of sensational Nollywood films—thrillers, horror pics, religious ones—an increasing number show the way the country is changing and the challenges its facing.

I have another day of reporting to do, but so far, I’ve come away feeling that Nollywood, like the Nigerian economy itself, could be much bigger, but only if the government actually gets its act together and supplies basic business infrastructure needs (or the industry gets big enough to build it all out themselves, as rich business men like Dangote have done). Of course, the former would require a sea change in the political economy. It can’t come soon enough.

TIME Globalization

Nigeria’s Missing Girls: The End of Terror Is Nowhere in Sight

A member of Boko Haram in a suburb of Kano, Nigeria, in 2012.
A member of Boko Haram in a suburb of Kano, Nigeria, in 2012. Samuel James—The New York Times/Redux

Terrorism is the most pressing of many issues facing Nigeria, TIME's Rana Foroohar writes after a visit to Abuja, amid the government's sluggish response to the April kidnapping of almost 300 girls by the militant Islamic group Boko Haram

Outside the airport in Abuja, Nigeria, where the World Economic Forum’s Africa conference recently wrapped up, I noticed a local workman’s truck, which had a sign painted on the back that read, “Every problem has an expiry date.”

There are plenty of problems in Nigeria–inefficiency, inequality, corruption, unemployment–but the most pressing one right now is terrorism. It is unclear what the expiry date might be. Nearly three hundred girls taken from their boarding school in the northeast of the country by a militant Islamic group called Boko Haram are still missing. A new report by Amnesty International claims that the national government headed by President Goodluck Jonathan knew about the impending attack–and did nothing.

At panels I attended at the World Economic Forum (WEF), just as the report was coming out, President Jonathan said that the kidnappings would be “a turning point in our fight against Boko Haram, and the beginning of the end of terror in Nigeria.” At the WEF evening welcome soiree last Thursday night, a Nigerian pop star serenaded the President, his coterie of plumbed generals, and the rest of us, in tones that managed to be both mournful and saccharine, with a song about the missing girls. It seemed tone-deaf at a forum sponsored by the government, which began with a moment of silence for the missing girls, but offered no real sense of urgency around finding them, or combatting the growing terrorism in the country.

The big question at the WEF was whether terrorism, and in particular the kidnappings, would have any impact on the Nigerian investment story, which up until now has been one of the biggest recent success stories in emerging markets. Just a few weeks ago, Nigeria “rebased” its GDP numbers to account for the fact that old calculations weren’t taking into account new industries like telecoms and Nollywood. The result was that Nigerian GDP grew by 89 % overnight, making the country the largest economy in Africa, trumping South Africa. Growth is high–around 7 %–the middle class is growing strongly, and oil and gas represents about 14 % of the economy, about half of what was previously thought. Overall, that means more growth is coming from sustainable sources. Six out of ten of the world’s fastest growing economies are in Africa, and Nigeria is first among them.

Yet unemployment is still high and inequality even higher. Half of Nigerians live in poverty, despite vast oil and gas wealth. In fact, that’s one reason that many prominent citizens say that Boko Haram has gained a foothold in the country. Some Nigerians are getting wealthy, but there aren’t jobs for enough of them, particularly given that over 50% of the population is under 18 years old. That’s exactly the kind of demographic and economic combination that bred the Arab Spring uprisings.

“Terrorism hasn’t stopped business from coming here to Nigeria yet, but the situation is out of hand,” says Aliko Dangote, the head of Dangote Holdings and Africa’s richest man. “I think the government is trying to get themselves together [around this issue]. I think they have been taken by surprise–there are people in places like Spain who are saying, ‘where are these Nigerian girls?’ That hasn’t happened before. It’s good that the government has asked the US and the UK to help. And it’s important that the private sector do its part, too. Unless we create more jobs, we won’t eliminate Boko Haram. Even if we do, another such group will come. We have to empower our people.”

In some of the WEF meetings, President Jonathan tried to play down the link between terror and poverty, presumably to turn the spotlight away from the fact that the government has much more to do in terms of building infrastructure, improving education, bolstering efficiency in agriculture, and cutting corruption, all of which would improve job growth in Nigeria. “Terrorism is a recent problem for us,” he said. “It’s not about poverty, but extremism.”

But a number of Western businesspeople I spoke to at the WEF said they were concerned about terrorism spreading, particularly further south to areas like Lagos, where the State Department recently issued a warning about potential attacks on Sheraton Hotels. While big oil and financial deals will likely continue without interruption, consumer goods companies–food suppliers, retailers, and others that depend on a secure and growing middle class–were more concerned. That’s in part because of what the Amnesty Report implies about the attention that the Nigerian government pays to safety and security, particularly for women and girls in the country.

A glut of research from institutions such as the World Bank and the UN shows that if girls don’t stay in school, and women aren’t economically empowered, economies don’t grow in a sustainable way. “For things to work here [in Nigeria] you need two things: foreign direct investment, and local capacity, meaning human capacity. That requires education. If you have a situation in which women and girls can’t be educated, that’s a big deal,” says John Rice, the vice chair of G.E., and a co-sponsor of the WEF Africa conference.

“There’s a good news story and a bad news story here,” says Rajiv Shah, the administrator of USAID, here attending the WEF meeting in Abuja. “The good news is that Nigeria is thriving economically. But the bad news is that this [incident with the girls] cuts to the heart of the continuing problems with safety and security here. Boko Haram has displaced 500,000 people in northern Nigeria. The president has instructed Secretary Kerry that we will do everything we can to help.”

Yet at the end of the day, the impetus for managing the crisis has to come from Nigerian leaders themselves–and so far, most seem much more interested in discussing foreign direct investment and GDP growth and privatization of the country’s various industries rather than talking about how to ensure security for its people, and particularly how to find the missing girls and insure that something like this never happens again. “People have no idea how fragile things are here,” says Anton du Plessis, managing director for the South Africa based Institute for Security Studies. “You can have growth without development.” That’s exactly the situation in Nigeria right now.

TIME World Economic Forum

An Hour With Africa’s Richest Man

Honoree Aliko Dangote at the Time 100 Gala at Jazz at Lincoln Center in New York on April, 29, 2014.
Honoree Aliko Dangote at the Time 100 Gala at Jazz at Lincoln Center in New York on April, 29, 2014. Jonathan D. Woods for TIME

I’m waiting for Aliko Dangote. Everyone is. Africa’s richest man, worth $24.7 billion (more than Carl Icahn, George Soros and any number of lesser Western billionaires) is probably the most in-demand person at the World Economic Forum here in Abuja, Nigeria. He enters the Hilton on a red carpet, a mere 30 minutes late, with minders, the head of his foundation, and the second of his three grown daughters in tow. The hotel employees literally bow before him, lesser oligarchs wave and backslap, and the merely rich try to bum rides on his private plane. “I don’t know what to do, my wife really needs to get home,” says an Indian businessman to one of the numerous Dangote staffers hovering nearby, who smiles sympathetically and promises to look into things.

Dangote himself is unassuming. A 57-year-old man with an almost shy smile, he’s a practicing Muslim that acquaintances call “generous” and “prayerful.” He’s also a sharp elbowed business titan, the 24th richest in the world, who has survived ten different regimes in Nigeria, building a $2 billion empire on cement, sugar, salt, and more recently, energy. Dangote sat down with me in his suite at the Transcorp Hilton in Abuja Wednesday to discuss wealth, power, politics, and the future of Africa. Below are lightly edited excerpts from our talk:

TIME: I hear you haven’t taken a vacation in 20 years. Is that true?

Dangote: It used to be. I was working very hard for a long time to build up my business. Now, I try to take a week’s vacation every two weeks. We live in Lagos, on Victoria Island, but I like to go to Miami with my family. I used to own two homes in Atlanta. But it was a lot of trouble. There are leaky roofs, you have to call people. It takes up too much time to own property everywhere. Now I stay at the St. Regis. I used to like cars a lot, too. I had 25 of them, Porches, Ferraris. I would drive from Lagos to Kano at 180 miles per hour. But I stopped that after I had my second daughter.

You came from a certain amount of wealth. What was your upbringing like?

My great-grandfather was a kola nut trader, and the richest man in West Africa at the time of his death. My father was a businessman and politician. I was actually raised by my grandfather. It’s traditional in my culture for grandparents to take the first grandchild and raise it (Dangote’s older sister died as a baby in a car accident). I had a lot of love, and it gave me a lot of confidence.

You started with a loan from your uncle and built the most successful locally owned business conglomerate in Africa. What were the turning points?

I always tried to move up the food chain. I started with cement, and then moved into textiles, and banking. When I was trading sugar, I added salt and flour, so that then we could do pasta. And then I thought, why not make the bag for it too? So, we started making packaging.

This is a very entrepreneurial culture, but not a lot of people have your kind of success. What did you do differently?

We had a lot of capital, and we were able to build out our own power grid. The number one thing that kills businesses in Africa is power, or the lack of power. We wanted to have our businesses completely independent, with our own grid. So we built it. It took $1.2 billion. That’s a lesson I took from the financial crisis. It’s so important to have capital. At that point, we had about $2 billion in debt from expanding so quickly, so we had to scale back. But if I had more capital [in hand] in 2008, I could have bought so many things – homes, airplanes, land – so cheaply.

Now you are going up the food chain again, getting into energy, and in particular oil and gas refining. Nigeria has a lot of oil, but not a lot of refined gas. A lot of people feel that Africa could grow a lot faster with more of its own refinery capacity.

Yes, we’ll finish our refinery in 2017, and with it a petrochemical factory. This should take us to the next level. It’s all about integrating what we have. From the sugarcane we use, we can make ethanol. People say, “why get into agriculture?” but there is huge vertical integration between food and fuel, and Africa has both. Our rice and sugar business will create 180,000 new jobs in the next four years. We want to have a market capitalization of $100 billion by 2017. It’s my goal for my 60th birthday!

What’s your goal for this World Economic Forum meeting?

I want people to understand what’s really here. I feel Nigeria is like Colombia. People think about it based on information from 20 years ago. You think about Colombia, and all you think of is drug cartels, but really, there’s a lot of investor interest. It’s the same here in Nigeria. It’s not the 1970s. Things have changed.

But isn’t that the crucial juxtaposition here? You have growth, but no security. You have 8 % GDP growth, and over 200 missing girls that have been taken from their homes by Boko Haram.

It’s true. It hasn’t stopped business, but the situation is out of hand. I think the government is trying to get themselves together [around this issue]. I think they have been taken by surprise – there are people in places like Spain saying “where are these Nigerian girls?” It’s good that they’ve asked the US and the UK to help. And it’s important that the private sector do its part, too. Unless we create more jobs, we won’t eliminate Boko Haram. Even if we do, another such group will come. We have to empower our people.”

TIME World Economic Forum

Africa’s Middle Class Is at the Crossroads

People holding signs take part in a protest demanding the release of abducted secondary school girls from the remote village of Chibok, in Lagos, May 5, 2014.
People holding signs take part in a protest demanding the release of abducted secondary school girls from the remote village of Chibok, in Lagos, May 5, 2014. Akintunde Akinleye—Reuters

Nigeria's 8% growth and 233 missing girls pinpoint the continent's challenges

The World Economic Forum’s annual Africa meeting is starting today in Abuja, Nigeria. The story here was supposed to be an optimistic one–last week, the World Bank upgraded the country’s GDP numbers by 89 %, making it the number one largest economy in Africa. Yet the fact that there are still 233 missing girls that have been abducted from their homes in the northeast of the country by the Islamic radical group known as Boko Haram is casting a large shadow on that story. Standard & Poor’s rating agency recently downgraded the country’s credit based on rising terrorism (a car bomb last week outside Abuja, the second in recent weeks, killed 19 people), and corruption (the central bank head was put on suspension a few weeks ago after $20 billion was found unaccounted for in the Treasury).

On the shuttle buses and in the halls of the WEF meetings here in Abuja, I hear Western business people recalibrating their notions of political risk in this country, and fretting about whether a country that can’t keep girls safe in their schools can turn itself into the sort of middle class consumption society that everyone here hopes it can.

A big part of the problem has been misleading statements, delays and half-hearted efforts on the part of government. President Goodluck recently told local media that the government was doing “everything it can,” including taking help from the U.S, which has offered up a counter-terrorism team to track the abductors. But the general feeling amongst participants here at the WEF is that the lack of urgency around the issue represents the failure of government to provide the sort of basic security that is crucial to both African growth, and Western investment.

“There’s a good news story and a bad news story here,” says Rajiv Shah, the administrator of USAID, here attending the WEF meeting in Abuja. “The good news is that Nigeria is thriving economically. But the bad news is that this [incident with the girls] cuts to the heart of the continuing problems with safety and security here. Boko Haram has displaced 500,000 people in northern Nigeria. The president has instructed Secretary Kerry that we will do everything we can to help.”

Yet at the end of the day, the impetus for managing the crisis has to come from Nigerian leaders themselves–and so far, most seem much more interested in discussing foreign direct investment and GDP growth and privatization of the country’s various industries rather than security, and particularly the missing girls. But the two are linked. Research shows that countries don’t rise economically unless they can assure education and economic empowerment for women. Until Nigeria can protect its school children, it may find inclusive growth illusive.


Why Buffett Should Vote ‘No’ on Coke

Berkshire Hathaway Inc. CEO Warren Buffett Interview
Warren Buffet Chris Goodney—Bloomberg/Getty Images

The discussion over inequality is all the rage these days, and it’s been given a new wrinkle with the hoopla over Warren Buffett’s abstention from a vote over Coke’s new compensation plan, which would award billions of dollars to Coke managers in Coke stock if they hit certain performance targets. Buffett told CNBC that he opposed the idea, but wouldn’t directly vote against it, because he loved the company, which was run by “great people” (which, it must be said, includes his son, who sits on the firm’s board). Traditionally, Buffett has opposed excessive corporate compensation, as well as the stock buyback plans that often fuel oversized packages, because, as he said in a 1999 letter to shareholders, “repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price.”

I couldn’t agree more, and I wish he’d gone further and actually voted “No” to the Coke proposal. Pumping up corporate compensation with excessive stock deals fuels not only inequality but bad decision making (since executives are incentivized to do things that pump up prices in the short term but cut growth in the longer term.

Buy backs are a case in point. Even more than in the late 1999s, buybacks are all the rage right now. University of Massachusetts professor William Lazonick, who studies the effects of buybacks on corporate compensation and inequality, recently put out a paper showing that between 2003 and 2012, 449 of the S&P 500 companies gave out more than half of their earnings, some $2.4 trillion, on buying back shares of their own company. While this might seem like a vote of confidence, it’s hardly coincidental that his research shows that buybacks also tend to go hand-in-hand with lower future earnings and bull markets. Companies don’t buy back stock in down markets because they believe that the market has undervalued their great products and ingenuity; they do it in bull markets because they want to bolster their own pay at a time when underlying growth is sagging.

It’s a strategy being carried out today at companies like Apple, which just announced more share buybacks even as it announced lower earnings, and at Yahoo, which has offset an underwhelming growth story by buying back stock. It’s happening at Coke, too, and most of the country’s largest blue chip firms. It’s no wonder that execs want to be paid in stock – buybacks almost always bolster share prices over the short term, and investment income like stock makes you a lot richer than earned income from actual labor. It also decreases the amount of the economic pie that goes to labor versus management.

All this worries me. If you chart the rise of share buybacks against R&D spending in corporate America since the 1980s, the lines make a perfect X. We are very clearly bankrupting our future growth here. As Lazonick puts it, “Since the mid-1980s, corporations have funded the stock market rather than the market funding corporations.” Not to mention workers, or jobs (most large American corporations have had zero net job growth here at home over the last 30 years, even as corporate pay has risen to nosebleed levels). No wonder Thomas Piketty’s book on inequality and the triumph of capital over labor is at #1 on Amazon.


Here’s Why This Best-Selling Book Is Freaking Out the Super-Wealthy

Thomas Piketty FRED DUFOUR—AFP/Getty Images

There are many reasons why French academic Thomas Piketty’s 685-page tome, “Capital in the 21st Century,” has vaulted to the top of the Amazon.com best seller list and is being discussed with equal fervor by the world’s top economic policy makers and middle class Americans who wonder why they haven’t gotten a raise in years. The main reason is that it proves, irrefutably and clearly, what we’ve all suspected for some time now—the rich ARE getting richer compared to everyone else, and their wealth isn’t trickling down. In fact, it’s trickling up.

Piketty’s 15 years of painstaking data collection—he poured over centuries worth of tax records in places like France, the U.S., Germany, Japan and the U.K—provides clear proof that in lieu of major events like World Wars or government interventions like the New Deal, the rich take a greater and greater share of the world’s economic pie. That’s because the gains on capital (meaning, investments) outpace those on GDP. Result: people with lots of investments take a bigger chunk of the world’s wealth, relative to everyone else, with every passing year. The only time that really changes is when the rich lose a bundle (as they often do in times of global conflict) or growth gets jump started via rebuilding (as it sometimes does after wars).

This is particularly true in times of slow growth like what we’ve seen over the last few years. I’ve written any number of columns and blogs about how quantitative easing has buoyed the stock market, but not really provided the kind of kick that we needed to boost wage growth in the real economy, because it mostly benefits people who hold stocks–that’s the wealthiest 25 % of us. Meanwhile, consumption and wage growth remain stagnant. And as Piketty’s book makes so uncomfortably clear, it’s likely to get worse before it gets better. No wonder I saw an advertisement for a storage company on the subway the other day that read, “The French aristocracy didn’t see it coming, either.”

That’s one of Piketty’s biggest messages–inequality will slowly but surely undermine the population’s faith in the system. He doesn’t believe, as Marx did, that capitalism would simply burn itself out over time. In fact, he says that the more perfect and advanced markets become (at least, in economic terms), the better they work and the more fully they serve the rich. But he does believe that rising inequality leads to a less perfect union, and a likelihood of major social unrest that mirrors the sort that his native France went through in the late 1700s. Indeed, the subsequent detailed collection of wealth data in the form of elaborate income and tax records made France a particularly rich data collection ground for his book. (Bureaucracy is good for something!)

My feeling about this book is similar to that of New York Times’ columnist Paul Krugman. It’s going to be remembered as the economic tome of our era. Basically, Piketty has finally put to death, with data, the fallacies of trickle down economics and the Laffer curve, as well as the increasingly fantastical notion that we can all just bootstrap our way to the Forbes 400 list. It’s telling and important that Piketty credits his work to the fact that he didn’t forge his economic career in the States, as so many top thinkers do, because he was put off by the profession’s obsession with unrealistic mathematical models, which blossomed in the 1980s to the exclusion of almost all other ideas and disciplines, and the false ideologies that they were used to justify. “The truth is that economics should ever have sought to divorce itself from the other social sciences and can only advance in conjunction with them,” he argues.

Indeed, had more top economists followed the lead of other social scientists and ditched their black box models in favor of spending time in the field—meaning on Main Street, where trickle down theory hasn’t ever really worked—they might have come to the same conclusions that Piketty has. We can only hope that the politicians crafting today’s economic programs will take this book to heart.


The Digital Economy Is Profoundly Unequal

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Is unbridled innovation good for society? Can we trust the internet? Can we afford not to? These are some of the big picture questions being asked right now at the annual Institute for New Economic Thinking conference in Toronto. It’s a George Soros-sponsored academic shindig that has become a touchstone for the key economic policy conversations in the year ahead. This year, the topic is how to manage the societal fallout from our rapidly expanding digital world. At a time when much of what happens on the internet–from NSA snooping to runaway viruses like the Heartbleed bug to cyber-warfare with China–makes people scared, how do we craft a digital world that feels safer and more secure? And how can we make sure that the benefits of the digital economy–which currently accrue mostly to the top quarter of society–are more equally shared?

I discussed these issues with Quartz editor Kevin Delaney and the Guardian’s Heidi Moore, this week on WNYC’s Monday Talking (listen below). And I’m listening to some of the world’s top thinkers on the topic debate them here in Toronto. One of the things that I’ve found fascinating so far is how unequal the digital economy really is. Yesterday, University of Michigan professor Lisa Cook gave an illuminating (and somewhat depressing) presentation about this. For starters, innovation is making our economy more bifurcated. People who make their living interacting with technology and the digital world make a median salary of $74,000 a year. Those that don’t make $34,000. Women and minorities (with the exception of Asians) lag behind. 70 % of people in the “innovation economy” are non-Hispanic whites. And even for women with technology degrees, there’s a big pay differential. Men in the innovation economy make $80,000 per year and women make $53,000, in part because they tend to be concentrated in areas like life sciences, which pay less than physics or engineering or computer science.

So, what to do? Cook says the good news is that there’s reason to think that more diversity is good for business, and that can help drive change. Her research shows that co-ed patent teams, for example, are much more productive than single sex ones. And while pipeline issues used to be a big problem, women are getting more and more STEM degrees – roughly 40% of them now go to women, up from around 9% in 1970. Now, female entrepreneurs just have to start monetizing those educational gains. Cook says that women are founding less than 5% of new tech start-ups. All I can say is follow the money, sisters!


Can $68 Billion Make Wall Street Any Safer? Nope

This week, U.S. financial regulators announced that Too Big To Fail (TBTF) banks will be forced to increase their capital cushion by $68 billion, to comply with new financial reform rules. But if you think that’s going to finally make our financial system safe, you are wrong. At least, that’s the verdict from an all-star panel that spoke on the topic of financial stability on Thursday at the Institute for New Economic Thinking annual conference, being held this year in Toronto.

The panel was made up of a diverse group of heavy-weights: Andy Haldane, head Bank of England’s stability board, Stanford professor Anat Admati (author of “The Banker’s New Clothes”), Richard Bookstaber from the U.S. Treasury’s Office of Financial Research, and Boston College professor Edward Kane. What’s disturbing is that they all came to the same conclusion—not only have we not repaired the financial regulatory system since Lehman, but we may have made things worse by creating a complicated spaghetti bowl of new rules that don’t actually address the fundamental problem. (Those would be Dodd-Frank and Basel III.) Banks need a lot more money, and the financial lobby needs a lot less.

Haldane, one of the most influential voices these days in economic policy circles, laid out the situation with stark numbers showing that, amazingly, global TBTF banks are bigger, more complicated and riskier than before the crisis. In 2006, for example, such banks held $1.3 trillion on their balance sheets. Today, they hold $1.7 trillion. Back then, they held $19 trillion worth of derivatives, those “weapons of financial destruction” that Warren Buffett complained about. Today, they have $31 trillion. Thanks to the Fed’s post crisis low interest rate policy, they pay less than ever to borrow money, which means that debt is cheap. That’s one reason the amount of debt held by such banks is still about 21 times their assets. Yes, those “leverage ratios” are lower than the 32X average in 2000. But holding that much in liabilities means that if asset prices go down even 5%, banks will once again be in the gutter. And history shows that happens about once ever 20 years–meaning, if big banks don’t put away a lot more capital, we can look forward to another Lehman Brothers event in our lifetime.

Which kind of puts this week’s capital announcements in context. Sure, it’s great that banks are being required to hold 5% of their own cash, rather than the usual 3%. But no other business in America, not to mention individuals, would be able to survive with a balance sheet that looked like this. Bankers would argue that things have changed hugely from the pre-crisis days till now. After all, the CEOs of the world’s top banks got paid an average of $20 million a year back then (many U.S. chiefs got more), and only $9 million now. Yet the value of these banks’ stock has plummeted over that time, as has their asset base. If you look at pay as a percentage of assets, it’s now 42%—3 percentage points higher than it was back in 2006.

What’s the solution? The panelists had plenty of ideas. Make banks hold a lot more cash–more like 25% of their balance sheet. Make risk models, which are amazingly simplistic given the complexity of the global financial system, a lot more sophisticated. And make financial institutions pay criminally for bad behavior. The U.S. Supreme Court’s Citizen’s United decision, which gave corporations the same rights as people, paved the way for ever more lobbying money to make its way into our system. (Some 96 % of all Dodd-Frank consultations were taken with bankers themselves, which is perhaps one reason the system looks as ineffectual as it does.)

If companies get the upside of being people, they should get the downside too, argued Ed Kane. That means prosecution for malfeasance, and punishments like being split up if they take on risk that leads to a taxpayer bailout (no, nobody believed the current Dodd-Frank promises of no more bailouts would actually hold in a financial crisis). It may sound wacky–but so does the fact that bankers are getting more pay per dollar of assets today than they were before they wrecked our financial system.

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