Working America, Financial Markets and the power of organized interests

1. Working America, Financial Markets and the power of organized interests SLWK 710

2. Overview of this Week’s session • The focus of this session is on the market economy, investments and taxes…and how this impacts the poor. • Wheelan articulates the basic laws of economics, markets and investment in his hallmark down-to-earth way. • I’d recommend reading these chapters first and then begin to review the npr podcasts and articles next to bring it to life.

3. Financial markets • Financial instruments must create value. • Both the buyer and seller must feel they are maximizing their utility (or..are better off as a result of entering their end of the deal). • The financial tools had became so complex that even Wall Street executives were unclear what exactly they were buying a selling. • The consequences of this were evident in the great recession of 2008

4. Why are we learning about this as social work practitioners? • Understanding the big picture, provides us access to a way to advocate for our clients – Those most vulnerable, subject to injustice, like impoverished Americans. • Poverty is a social condition, but it is also a product of the “unintended” consequences of economics and the way market functions. • Knowledge is power. Understand this, you will understand how to advocate for your clients in a more impactful way.

5. Financial instruments Financial instruments are based on 4 simple needs: • Raising Capital • Storing, protecting, making profitable use of excess capital • Insuring against risk • Speculation

6. Raising Capital • Americans spend large sums of money without actually having it – through credit. • Credit makes the world go around in the US. • This is true for individuals, firms, through selling shares of businesses to the public, etc. • Wheelan notes “modern economies cannot survive without credit” What are the consequences of this? Who gets access to these loans/investment and who is taken advantage of? Think Kiva.org vs. Payday loans

7. Storing, protecting, making profitable use of excess capital • Impact of inflation for those who invest vs. those that cannot (or do not) “the ruthless and most efficient thief” is inflation. • Need to make productive use of capital or the thief of inflation will swallow it. • Financial markets allow us to “consume” our money over time in a way that accounts for the ups and downs of our economic state and inflation. True for individuals and true for firms. And…what if you have no excess capital????

8. Insuring against risk • Protecting ourselves against the unpredictable. • Pay a predictable amount over time, so that you don’t get hit hard when the unpredictable occurs. • Financial markets provide an array of products that function essentially as an insurance policy. • A key role of financial markets is for individuals and firms to spread their nest egg over time?

9. Relate this back to serving impoverished clients Again – relate to those who are poor. • Some are poor because of inadequate income; but some are poor as a result of a catastrophic event (e.g. health crisis) without the insurance of savings or investments that address the thieves of inflation and market fluctuations. • Think about the importance of the Affordable Health Care Act (HR 3962), auto insurance, homeowner insurance in these circumstances.

10. Speculation • The urge to speculate – to try to predict what will happen with a financial product can: help us to mitigate risk OR throw us into financial ruin when we are wrong and aggressive (think – credit default swaps) • What teachable moments were there as the cross-section of speculation AND people trying to maximize their gains without high accountability for the negative unintended consequences? What do you think government’s role should be in this?

11. Investment rule in basic economics • Basic economics provides us with a basic set of rules to which decent investment advice must conform: • Save. Invest. Repeat • Take Risk, earn reward • Diversify • Invest for the long run

12. Save, invest and repeat Capital is scarce. This is the only reason that any kind of investing yields returns. The more you save and the sooner, the more rent you can command from the financial markets. Albert Einstein is said to have called compound interest the greatest invention of all time.

13. Take Risk, earn reward • Simply put: • Riskier investments must offer a higher expected return in order to attract capital. • You are rewarded financially for investing your money in more risky propositions -- on average… • It’s the “on average” part that is the complicating factor. Bad things can happen financially, in addition to all those good things. Dishonesty in this world (think Madoff) Who takes these risks?

14. Diversify • So how does one deal with these risks? • Diversify A well-diversified portfolio will significantly lower the risk of serious losses without lowering your expected return.

15. Invest for the long run • May the odds be ever in your favor.. • The odds are stacked in your favor if you are patient and willing to endure the occasional setback. • A diverse, reasonable investment portfolio will survive the bumps in the road and expect a positive expected return. • Think 401K in jobs where money is taken from one’s paycheck over time and perhaps includes a company match. • What are the consequences of those who do not or cannot invest for the long run? Poor now, more poor later….is this acceptable?

16. Organized interests • Even when smart people, including well respected economists have “the answer” about how to benefit all economically – it doesn’t mean the issue is fixed. Politics enter into the equation and interests of individuals and/or groups can stop, thwart, or change the trajectory of a beneficial economic policy issue. (think pork barrel legislation) Organized interest groups with good and harmful intentions for a wider group of citizens form and act to influence policy.

17. Organized interests • When it comes to interest group politics, it pays to be small. (Wheelan’s example of Mohair farmers) • Small, well-organized groups are most successful in the political process because the costs of favors they get from the system are spread over a large, unorganized segment of the population. • It doesn’t really get noticed.

18. Death by a thousand subsidies • The benefits of a $7 billion tax subsidy are bestowed on a small group of farmers, making it quite lucrative for each one of them. The costs are spread over the remaining 98 percent of us. (and they don’t notice) • Two percent who care deeply about something are a more potent political force than the 98 percent who feel the opposite but aren’t motivated enough to do anything about it.

19. Protection of weak systems..why? • Sometimes policies protect weak or ineffective systems… • If policies aimed at protecting weak outdated technologies prevail, they slow the economy and have painful consequences for our society. (Think Wheelan’s example of teacher certification)

20. Societal progress • Most of you have in some way indicated you wanted societal progress on behalf of the most vulnerable. Most thought it highly beneficial for the gov’t to redistribute wealth in some way. • What holds us back from achieving this?? • “Creative destruction” is needed for societal progress – but many firms have a vested interest in keeping the status quo because it means they keep their money flowing to them. • They may not be invested in societal progress for those most vulnerable.

21. The more you know… • The more you are aware of the factors that impact our economy, the more you will become effective advocates as Social Workers for victims of “our GDP economic success” as Americans • As you review the 6 links to readings and podcasts, think about how this relates to what Wheelan tells us about how our market economy benefits some, and not others. Think about what the government’s role should be and where it should remain out of it.

22. The more you know • Private equity firms – someone took the risk – so he/she/they should reap the rewards, right? • Does it matter who suffers as a result? • Everyone should have an equal chance at taking those risks…the American ideal is that anyone – regardless of where they came from can make it big. Barack Obama used this as part of his platform in this initial election campaign. • What are the factors that level the playing field… think about the impact of education in wealth and poverty?

23. Discussion Board questions • Critically examine how the availability of credit could support impoverished citizens to gain wealth. When can available credit hurt those who are poor? • In American society our “insurance policy” for the unexpected events in life is often investment in the market. Describe the effective aspects of this vs. entitlements. Describe why (and for whom) this is ineffective.