GUEST BLOGGER: Lies, Damn Lies and Occupy Wall Street—Charles Trzcinka

Charles Trzcinka is the James W. & Virginia E. Cozad Chair in Finance at the IU Kelley School of Business

In all the discussion about the tactics of the OWS movement there has not been much attention on what the movement believes about the economy.  The purpose of this memo is to provide students with facts, analysis and a guide to sources of information to help evaluate the claims of the OWS movement. From the title you can see my opinion—the OWS assertions are just anti-establishment babble. I strongly believe that a career choice in finance is both socially useful, moral and clearly remunerative.

Investment Banks are Bad

If any opinion is clear, it is that OWS do not like investment banks. It is not clear what they would do differently. Investment banks help companies raise capital to create jobs. Countries without this ability are poor and the poor in these countries are destitute relative to the United States. How else will savings get to companies who need to invest?  During the 20^th century many countries attempted to severely restrict investment banking by government ownership of firms. The result was large scale poverty. There a many studies examining this and for a nice overview read:  Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity by Raghuram Rajan and Luigi Zingales.

Banks Caused the Crash of 2008

Wrong again. The crash was caused by the fall in housing prices. Some banks took big risks with securitization and made the situation worse but the crash also happened in countries where the banks did not take the risks such as Canada and China.  There have been many books written about the crash. For a review of 21 books (10 by academics and 11 by journalists) see http://www.argentumlux.org/documents/Lo__2011__-_Reading_About_the_Financial_Crisis__JEL_.pdf

The article describes some facts that would make the OWS crowd uncomfortable:

·         There were higher levels of leverage in 1998 than 2006 for Goldman Sachs, Merrill Lynch, and Lehman Brothers.   In 2006 the compensation of the top 95 bank CEO was almost all concentrated  in stocks and options which means that the CEO stood to lose the most personally by any risk-taking and they did lose. 

Bank Bailout hurt the common person

This is not close to true. The bailout was about $250 billion and was mostly paid back. The Obama administration claims that the taxpayers have already made $20 billion on this deal. That is, the administration is bragging about its investment. You can see a report by the General Accounting Office that more or less supports this (www.gao.gov). It’s worth noting that the Tea Party movement also made this claim and they were also wrong.

Corporate Greed Causes Poverty

It’s often shouted that corporate greed is causing the income distribution to be skewed to the rich, commonly defined as the top 1% of the income distribution. The claim ignores the fact that corporations have been seeking profits for over 200 years. They are not more profit –seeking today than they were 50 years ago when the income distribution was much flatter.

Corporate Greed is immoral

The OWS movement is constantly asserting that the profit motive is immoral. To me this is a perversion of Judeo-Christian values since capitalism is by far the best system for raising the income of everyone. For a mainstream argument, you could look at Michael Novak, a leading Catholic social theorist, who has written widely on the morality of democratic capitalism - and advocated a moral-cultural system that would nourish the values and virtues on which free societies depend. "Three in One: Essays on Democratic Capitalism" introduces his basic ideas. The point is simple: if we want to increase human welfare this is no better way than the market system.

The Income Distribution is the widest its ever been

This is another distortion -lie. Here is a graph from Paul Krugman. The 1% is increasing but is not yet close to the “gilded age” 


(Note from Larry -- I could not insert the diagram. Sorry. It shows the share of the top 1% was much higher than now until about 1940. The share declined and then began to rise. Chuck gives you a link below where you can draw income share graphs for many countries from the early 20th century through 2008.)

You can generate more plots like this at (http://g-mond.parisschoolofeconomics.eu/topincomes/).  You find a similar U-shaped pattern in Australia, Canada, Ireland, and New Zealand but less so in France, Germany, Japan, and Sweden. The rising tide started during the Carter administration and continued through Reagan, Bush, Clinton, Bush and Obama. It is worldwide and hardly due to US policy. It appears to be strongly related to education.

Finally it is worth noting that the “99%” has also gained in the past 10-20 years just not enough to satisfy the OWS crowd.

Wall Street Controls Politics with its money

This is simply wrong. Nobody has ever found a reliable relationship between political contributions and policy. Most conclude that campaign spending has a very small effect on election outcomes regardless of who does the spending. (For example see Stephen Levitt’s Using Repeat Challengers to Estimate the Effect of Campaign Spending on Election Outcomes in the U.S. House." Journal of Political Economy, 1994, 102(4), pp. 777-98. ). There are of course examples of how money twisted some policy but for every such example there are plenty of examples of political contributors who wasted their money.  The OWS movement appears to believe that because people have money and because some of them make big contributions that politics is corrupted by money. But this is like arguing that because companies spend money on advertising, it must be effective. It is not. Most advertising expenditures are wasted because it’s so hard to predict which will be effective. Political contributions are for the most part simply wasted and there is plenty of money on both sides of most issues.

Challenges for Capitalism
The OWS movement appears to believe that the 2008 global financial crisis marks the beginning of the end of modern capitalism. It is a strange belief because it presumes that there is a viable replacement waiting in the wings. The truth is that, for now at least, the only serious alternatives to today’s dominant Anglo-American paradigm are other forms of capitalism. But there are challenges to market economies. See for example an essay by  Kenneth Rogoff (http://www.project-syndicate.org/commentary/rogoff87/English)


Rogoff points to five serious challenges currently facing modern capitalism: a failure to price public goods (clean air, water, etc.) effectively, high levels of inequality, “the provision and distribution of medical care,” the undervaluing of “the welfare of unborn generations” and, finally, financial crises. Rogoff points out that economics has solutions these problems, if politicians dare to implement them:


On being a finance major
Your choice to be a finance major puts you at the heart of these challenges. Congratulations on having the insight, intelligence and now the courage to do so.