Dollar’s resurgence can only be a first step

This is not to say that the currency realignment that is currently underway is necessarily a problematic development; on the contrary, it has the potential to boost the global economy by supporting the recovery of some of its most challenged components. But the only way to take advantage of the realignment’s benefits, without experiencing serious economic disruptions and financial market volatility, is to introduce complementary growth enhancing policy adjustments, such as accelerating structural reforms, balancing aggregate demand, and reducing or eliminating debt overhangs.

Provide yourself hope while eliminating debt

If youve decided you want to get rid of your debts but are having trouble doing it, that might be because you havent prepared your brain for it.

To free yourself of oppressive debt, you are going to have to treat yourself and make yourself feel good. Im not talking about indulging yourself once again with the credit card. Rather, you need to give yourself hope that you can really chop away at that debt mess until its gone.

Why Consumers’ Credit Reports Contain Errors

If you think your credit report contains an error, you’re not alone. The Federal Trade Commission released a report Monday morning that details systemic errors in the compilation and maintenance of credit ratings, which determine what people pay for mortgages, auto loans, and credit cards–or even whether they can get them in the first place.

Among the findings: nearly 26 percent of consumers in a survey conducted by the FTC found at least one potentially material mistake on at least one of the three credit reports, and 20.6 percent had changes made after attention was drawn to the errors. “One out of five Americans has an error on their credit report,” FTC Chairman Jon Leibowitz told 60 Minutes in a report that aired Sunday night. “Its a pretty high error rate.” (The entire FTC report can be seen here.) And after completing the dispute process, 5 percent of the survey participants were found to have errors that could have resulted in them receiving less favorable terms for loans.

The consumer credit rating business is a large oligopoly dominated by three players: Experian and Equifax, which are both publicly held companies, and TransUnion, which was acquired last year by a partnership of the private equity firm Advent International and a unit of Goldman Sachs from investors who included the Pritzker family. Penny Pritzker, the prominent Obama fundraiser who may be tapped to be the next Commerce secretary, was chairman of TransUnion.

The 60 Minutes report sheds light on an Orwellian system–people only tend to learn about flaws in their credit report after they have been denied, there’s a lack of transparency, and efforts to correct errors frequently are stymied by bureaucracy and poor customer service. None of the companies responded to the 60 Minutes report. The Consumer Data Industry Association, a Washington, DC-based trade group, issued a response to the segment, noting that other studies have shown better error rates. CDIA also tried to deflect blame, noting that inaccurate information may come due to “identity theft or a consumer’s lender may only have partial identifying information when an account is opened or the consumer may not choose to provide it.” It suggested that consumers be vigilant about checking and monitoring their credit.

Judging by the FTC report, consumers have good reason to be vigilant. The FTC enlisted 1,001 participants who collectively reviewed 2,698 credit reports. They identified errors, went through the dispute-resolution process, and then compared the fixed reports with the original ones. The results were less than confidence-inspiring. Of the participants, 263, or 26.3 percent, identified potentially material errors and prepared dispute letters; 206, or 20.6 percent, had changes made to a credit report (ie, the agency admitted there was incorrect information). Nearly 13 percent of the participants had at least one of their credit scores altered as a result of their process. And 5.2 percent of the participants “experienced a change in score such that their credit risk tier decreased” and hence might be eligible for better lending terms.

CFPB Signals Renewed Crackdown on Credit Rating Data Providers

Consumer credit rating companies, and the firms that feed them with consumer data, have been put on notice by the Consumer Financial Protection Bureau that they must do a better job addressing complaints and inaccuracies.

In a bulletin issued on Wednesday, companies that supply information to consumer reporting companies, also known as “furnishers,” will be under added scrutiny by the CFPB when they investigate disputes forwarded by the consumer reporting companies. An upgraded, electronic database is intended to better enable then to review information provided with disputes and documents submitted by consumers.

Consumers may file a dispute with a consumer reporting company about an incorrect or challenged item on their credit report. If they do, the consumer reporting company typically inform their furnisher of that dispute and forward all relevant materials.

An electronic system, known as “e-OSCAR,” is used by the three largest nationwide consumer reporting companies – Equifax Information Services, TransUnion, and Experian Information Solutions – to send information relating to consumer disputes to furnishers. In a December 2012 study, the CFPB flagged the fact that this system did not provide any means for credit reporting companies to forward to furnishers any documents submitted by consumers.

Since then, the CFPB has been working to ensure that the dispute system was improved. The “e-OSCAR” system has now been upgraded so that the three companies can now send furnishers any relevant dispute documents mailed in by consumers. The CFPB is also currently working to expand the capacity of the system.

With this national database in place and operational, the CFPB issued the notice to detail its ongoing expectations of how furnishers should comply with the requirements of the Fair Credit Reporting Act, particularly when it comes to investigations of consumer disputes.

The CFPBs expectations detailed by the CFPB include:

  • When a consumer files a dispute about a credit report item, companies need to be able to receive information about the dispute and must investigate the consumers concerns.
  • Furnishers must report the results of the investigation to the consumer reporting company that sent the dispute originally.
  • Furnishers are required to report the results of the investigation to nationwide consumer reporting companies if those companies may have received inaccurate or incomplete credit information. Furnishers also have to modify, delete, or permanently block disputed information that is incomplete, inaccurate, or cannot be verified.

If the CFPB determines that a furnisher has engaged in any acts or practices that violate the Fair Credit Reporting Act or other federal consumer financial laws, it will take supervisory and enforcement actions, possibly including restitution to harmed consumers.

The CFPB accepts consumer complaints about credit reporting. If a consumer is dissatisfied with the resolution of a dispute with a consumer reporting company or if the consumer reporting company does not respond, consumers can submit a complaint with the Bureau.

Outside the Box: The Return of the Dollar

The Return of the Dollar

By Mohamed El-Erian
Project Syndicate, Nov. 13, 2014

LAGUNA BEACH – The US dollar is on the move. In the last four months alone, it has soared by more than 7% compared with a basket of more than a dozen global currencies, and by even more against the euro and the Japanese yen. This dollar rally, the result of genuine economic progress and divergent policy developments, could contribute to the “rebalancing” that has long eluded the world economy. But that outcome is far from guaranteed, especially given the related risks of financial instability.

Two major factors are currently working in the dollar’s favor, particularly compared to the euro and the yen. First, the United States is consistently outperforming Europe and Japan in terms of economic growth and dynamism – and will likely continue to do so – owing not only to its economic flexibility and entrepreneurial energy, but also to its more decisive policy action since the start of the global financial crisis.

Second, after a period of alignment, the monetary policies of these three large and systemically important economies are diverging, taking the world economy from a multi-speed trajectory to a multi-track one. Indeed, whereas the US Federal Reserve terminated its large-scale securities purchases, known as “quantitative easing” (QE), last month, the Bank of Japan and the European Central Bank recently announced the expansion of their monetary-stimulus programs. In fact, ECB President Mario Draghi signaled a willingness to expand his institution’s balance sheet by a massive €1 trillion ($1.25 trillion).

With higher US market interest rates attracting additional capital inflows and pushing the dollar even higher, the currency’s revaluation would appear to be just what the doctor ordered when it comes to catalyzing a long-awaited global rebalancing – one that promotes stronger growth and mitigates deflation risk in Europe and Japan. Specifically, an appreciating dollar improves the price competitiveness of European and Japanese companies in the US and other markets, while moderating some of the structural deflationary pressure in the lagging economies by causing import prices to rise.

Yet the benefits of the dollar’s rally are far from guaranteed, for both economic and financial reasons. While the US economy is more resilient and agile than its developed counterparts, it is not yet robust enough to be able to adjust smoothly to a significant shift in external demand to other countries. There is also the risk that, given the role of the ECB and the Bank of Japan in shaping their currencies’ performance, such a shift could be characterized as a “currency war” in the US Congress, prompting a retaliatory policy response.

Furthermore, sudden large currency moves tend to translate into financial-market instability. To be sure, this risk was more acute when a larger number of emerging-economy currencies were pegged to the US dollar, which meant that a significant shift in the dollar’s value would weaken other countries’ balance-of-payments position and erode their international reserves, thereby undermining their creditworthiness. Today, many of these countries have adopted more flexible exchange-rate regimes, and quite a few retain adequate reserve holdings.

But a new issue risks bringing about a similarly problematic outcome: By repeatedly repressing financial-market volatility over the last few years, central-bank policies have inadvertently encouraged excessive risk-taking, which has pushed many financial-asset prices higher than economic fundamentals warrant. To the extent that continued currency-market volatility spills over into other markets – and it will – the imperative for stronger economic fundamentals to validate asset prices will intensify.

This is not to say that the currency re-alignment that is currently underway is necessarily a problematic development; on the contrary, it has the potential to boost the global economy by supporting the recovery of some of its most challenged components. But the only way to take advantage of the re-alignment’s benefits, without experiencing serious economic disruptions and financial-market volatility, is to introduce complementary growth-enhancing policy adjustments, such as accelerating structural reforms, balancing aggregate demand, and reducing or eliminating debt overhangs.

After all, global growth, at its current level, is inadequate for mere redistribution among countries to work. Overall global GDP needs to increase.

The US dollar’s resurgence, while promising, is only a first step. It is up to governments to ensure that the ongoing currency re-alignment supports a balanced, stable, and sustainable economic recovery. Otherwise, they may find themselves again in the unpleasant business of mitigating financial instability.

How to Distort Income Inequality

By Phil Gramm and Michael Solon
Wall Street Journal, Nov. 11, 2014

The Piketty-Saez data ignore changes in tax law and fail to count noncash compensation and Social Security benefits.

What the hockey-stick portrayal of global temperatures did in bringing a sense of crisis to the issue of global warming is now being replicated in the controversy over income inequality, thanks to a now-famous study by Thomas Piketty and Emmanuel Saez, professors of economics at the Paris School of Economics and the University of California, Berkeley, respectively. Whether the issue is climate change or income inequality, however, problems with the underlying data significantly distort the debate.

The chosen starting point for the most-quoted part of the Piketty-Saez study is 1979. In that year the inflation rate was 13.3%, interest rates were 15.5% and the poverty rate was rising, but economic misery was distributed more equally than in any year since. That misery led to the election of Ronald Reagan, whose economic policies helped usher in 25 years of lower interest rates, lower inflation and high economic growth. But Messrs. Piketty and Saez tell us it was also a period where the rich got richer, the poor got poorer and only a relatively small number of Americans benefited from the economic booms of the Reagan and Clinton years.

If that dark picture doesn’t sound like the country you lived in, that’s because it isn’t. The Piketty-Saez study looked only at pretax cash market income. It did not take into account taxes. It left out noncash compensation such as employer-provided health insurance and pension contributions. It left out Social Security payments, Medicare and Medicaid benefits, and more than 100 other means-tested government programs. Realized capital gains were included, but not the first $500,000 from the sale of one’s home, which is tax-exempt. IRAs and 401(k)s were counted only when the money is taken out in retirement. Finally, the Piketty-Saez data are based on individual tax returns, which ignore, for any given household, the presence of multiple earners.

And now, thanks to a new study in the Southern Economic Journal, we know what the picture looks like when the missing data are filled in. Economists Philip Armour and Richard V. Burkhauser of Cornell University and Jeff Larrimore of Congress’s Joint Committee on Taxation expanded the Piketty-Saez income measure using census data to account for all public and private in-kind benefits, taxes, Social Security payments and household size.

The result is dramatic. The bottom quintile of Americans experienced a 31% increase in income from 1979 to 2007 instead of a 33% decline that is found using a Piketty-Saez market-income measure alone. The income of the second quintile, often referred to as the working class, rose by 32%, not 0.7%. The income of the middle quintile, America’s middle class, increased by 37%, not 2.2%.

By omitting Social Security, Medicare and Medicaid, the Piketty-Saez study renders most older Americans poor when in reality most have above-average incomes. The exclusion of benefits like employer-provided health insurance, retirement benefits (except when actually paid out in retirement) and capital gains on homes misses much of the income and wealth of middle- and upper-middle income families.

Messrs. Piketty and Saez also did not take into consideration the effect that tax policies have on how people report their incomes. This leads to major distortions. The bipartisan tax reform of 1986 lowered the highest personal tax rate to 28% from 50%, but the top corporate-tax rate was reduced only to 34%. There was, therefore, an incentive to restructure businesses from C-Corps to subchapter S corporations, limited-liability corporations, partnerships and proprietorships, where the same income would now be taxed only once at a lower, personal rate. As businesses restructured, what had been corporate income poured into personal income-tax receipts.

So Messrs. Piketty and Saez report a 44% increase in the income earned by the top 1% in 1987 and 1988—though this change reflected how income was taxed, not how income had grown. This change in the structure of American businesses alone accounts for roughly one-third of what they portray as the growth in the income share earned by the top 1% of earners over the entire 1979-2012 period.

An equally extraordinary distortion in the data used to measure inequality (the Gini Coefficient) has been discovered by Cornell’s Mr. Burkhauser. In 1992 the Census Bureau changed the Current Population Survey to collect more in-depth data on high-income individuals. This change in survey technique alone, causing a one-time upward shift in the measured income of high-income individuals, is the source of almost 30% of the total growth of inequality in the US since 1979.

Simple statistical errors in the data account for roughly one third of what is now claimed to be a “frightening” increase in income inequality. But the weakness of the case for redistribution does not end there. America is the freest and most dynamic society in history, and freedom and equality of outcome have never coexisted anywhere at any time. Here the innovator, the first mover, the talented and the persistent win out—producing large income inequality. The prizes are unequal because in our system consumers reward people for the value they add. Some can and do add extraordinary value, others can’t or don’t.

How exactly are we poorer because Bill Gates, Warren Buffett and the Walton family are so rich? Mr. Gates became rich by mainstreaming computer power into our lives and in the process made us better off. Mr. Buffett’s genius improves the efficiency of capital allocation and the whole economy benefits. Wal-Mart stretches our buying power and raises the living standards of millions of Americans, especially low-income earners. Rich people don’t “take” a large share of national income, they “bring” it. The beauty of our system is that everybody benefits from the value they bring.

Yes, income is 24% less equally distributed here than in the average of the other 34 member countries of the OECD. But OECD figures show that US per capita GDP is 42% higher, household wealth is 210% higher and median disposable income is 42% higher. How many Americans would give up 42% of their income to see the rich get less?

Vast new fortunes were earned in the 25-year boom that began under Reagan and continued under Clinton. But the income of middle-class Americans rose significantly. These incomes have fallen during the Obama presidency, and not because the rich have gotten richer. They’ve fallen because bad federal policies have yielded the weakest recovery in the postwar history of America.

Yet even as the recovery continues to disappoint, the president increasingly turns to the politics of envy by demanding that the rich pay their “fair share.” The politics of envy may work here as it has worked so often in Latin America and Europe, but the economics of envy is failing in America as it has failed everywhere else.

Mr. Gramm, a former Republican senator from Texas, is a visiting scholar at the American Enterprise Institute. Mr. Solon was a budget adviser to Senate Republican Leader Mitch McConnell and is a partner of US Policy Metrics.

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Important Disclosures

The Return of the Dollar

Furthermore, sudden large currency moves tend to translate into financial market instability. To be sure, this risk was more acute when a larger number of emerging economy currencies were pegged to the dollar. This meant that a significant shift in the dollars value would weaken other countries balance-of-payments positions and erode their international reserves, thereby undermining their creditworthiness. Today, many of these countries have adopted more flexible exchange rate regimes, and quite a few retain adequate reserve holdings.

But a new issue risks bringing about a similarly problematic outcome: by repeatedly repressing financial market volatility over the last few years, central bank policies have inadvertently encouraged excessive risk taking. This has pushed many financial asset prices higher than economic fundamentals warrant, to the extent that continued currency market volatility spills over into other markets. As it does the imperative for stronger economic fundamentals to validate asset prices will intensify.

This is not to say that the currency re-alignment that is currently underway is necessarily a problematic development. On the contrary, it has the potential to boost the global economy by supporting the recovery of some of its most challenged components. But the only way to take advantage of the re-alignments benefits, without experiencing serious economic disruptions and financial-market volatility, is to introduce complementary growth enhancing policy adjustments, such as accelerating structural reforms, balancing aggregate demand, and reducing or eliminating debt overhangs.

After all, global growth, at its current level, is inadequate for mere redistribution among countries to work. Overall global GDP needs to increase.

The dollars resurgence, while promising, is only a first step. It is up to governments to ensure that the ongoing currency re-alignment supports a balanced, stable, and sustainable economic recovery. Otherwise, they may find themselves again in the unpleasant business of mitigating financial instability.

Is the Dollar’s Resurgence Stable?

Two years ago, my friend Mohamed El-Erian and I were on the stage at my Strategic Investment Conference. Naturally we were discussing currencies in the global economy, and I asked him about currency wars. He smiled and said to me, John, we dont talk about currency wars in polite circles. More like currency disagreements (or some word to that effect).

This week I note that he actually uses the words currency war in an essay he wrote for Project Syndicate:

Yet the benefits of the dollars rally are far from guaranteed, for both economic and financial reasons. While the US economy is more resilient and agile than its developed counterparts, it is not yet robust enough to be able to adjust smoothly to a significant shift in external demand to other countries. There is also the risk that, given the role of the ECB and the Bank of Japan in shaping their currencies performance, such a shift could be characterized as a currency war in the US Congress, prompting a retaliatory policy response.

This is a short treatise, but as usual with Mohameds writing, its very thought-provoking. Definitely Outside the Box material.

And for a two-part Outside the Box I want to take the unusual step of including an op-ed piece that you might not have seen, from the Wall Street Journal, called How to Distort Income Inequality, by Phil Gramm and Michael Solon. They cite research Ive seen elsewhere which shows that the work by Thomas Piketty cherry-picks data and ignores total income and especially how taxes distort the data. That is not to say that income inequality does not exist and that we should not be cognizant and concerned, but we need to plan policy based on a firm grasp of reality and not overreact because of some fantasy world created by social provocateur academicians.

The calls for income redistribution from socialists and liberals based on Pikettys work are clearly misguided and will further distort income inequality in ways that will only reduce total global productivity and growth.

Im in New York today at an institutional fund manager conference where I had the privilege of hearing my good friend Ian Bremmer take us around the world on a geopolitical tour. Ian was refreshingly optimistic, or at least sanguine, about most of the world over the next few years. Lots of potential problems, of course, but he thinks everything should turn out fine with the notable exception of Russia, where he is quite pessimistic. A shirtless Vladimir Putin was the scariest thing on his geopolitical radar. As he spoke, Russia was clearly putting troops and arms into eastern Ukraine. Why would you do that if you didnt intend to go further? Ian worried openly about Russias extending a land bridge all the way to Crimea and potentially even to Odessa, which is the heart of economic Ukraine, along with the Kiev region. It would basically make Ukraine ungovernable.

I thought Putins sadly grim and memorable line that The United States is prepared to fight Russia to the last Ukrainian pretty much sums up the potential for a US or NATO response. Putin agreed to a cease-fire and assumed that sanctions would start to be lifted. When there was no movement on sanctions, he pretty much went back to square one. He has clearly turned his economic attention towards China.

Both Ian Bremmer and Mohamed El Erian will be at my Strategic Investment Conference next year, which will again be in San Diego in the spring, April 28-30. Save the dates in your calendar as you do not want to miss what is setting up to be a very special conference. We will get more details to you soon.

It is a very pleasant day here in New York, and I was able to avoid taxis and put in about six miles of pleasant walking. (Sadly, it is supposed to turn cold tomorrow.) Ive gotten used to getting around in cities and slipping into the flow of things, but there was a time when I felt like the country mouse coming to the city. As I walked past St. Barts today I was reminded of an occasion when your humble analyst nearly got himself in serious trouble.

There is a very pleasant little outdoor restaurant at St. Bartholomews Episcopal Church, across the street from the side entrance of the Waldorf-Astoria. It was a fabulous day in the spring, and I was having lunch with my good friend Barry Ritholtz. The president (George W.) was in town and staying at the Waldorf. His entourage pulled up and Barry pointed and said, Look, theres the president.

We were at the edge of the restaurant, so I stood up to see if I could see George. The next thing I know, Barrys hand is on my shoulder roughly pulling me back into my seat. Sit down! he barked. I was rather confused what faux pas I had committed? Barry pointed to two rather menacing, dark-suited figures who were glaring at me from inside the restaurant.

They were getting ready to shoot you, John! They had their hands inside their coats ready to pull guns. They thought you were going to do something to the president!

This was New York not too long after 9/11. The memory is fresh even today. Now, I think I would know better than to stand up with the president coming out the side door across the street. But back then I was still just a country boy come to the big city.

Tomorrow night I will have dinner with Barry and Art Cashin and a few other friends at some restaurant which is supposedly famous for a mob shooting back in the day. Art will have stories, I am sure.

It is time to go sing for my supper, and I will try not to keep the guests from enjoying what promises to be a fabulous meal from celebrity chef Cyrille Allannic. After Ians speech, I think I will be nothing but sweetness and light, just a harmless economic entertainer. After all, what could possibly go really wrong with the global economy, when youre being wined and dined at the top of New York? Have a great week.

John Mauldin, Editor
Outside the Box

The Return of the Dollar

By Mohamed El-Erian
Project Syndicate, Nov. 13, 2014

LAGUNA BEACH The US dollar is on the move. In the last four months alone, it has soared by more than 7% compared with a basket of more than a dozen global currencies, and by even more against the euro and the Japanese yen. This dollar rally, the result of genuine economic progress and divergent policy developments, could contribute to the rebalancing that has long eluded the world economy. But that outcome is far from guaranteed, especially given the related risks of financial instability.

Two major factors are currently working in the dollars favor, particularly compared to the euro and the yen. First, the United States is consistently outperforming Europe and Japan in terms of economic growth and dynamism and will likely continue to do so owing not only to its economic flexibility and entrepreneurial energy, but also to its more decisive policy action since the start of the global financial crisis.

Second, after a period of alignment, the monetary policies of these three large and systemically important economies are diverging, taking the world economy from a multi-speed trajectory to a multi-track one. Indeed, whereas the US Federal Reserve terminated its large-scale securities purchases, known as quantitative easing (QE), last month, the Bank of Japan and the European Central Bank recently announced the expansion of their monetary-stimulus programs. In fact, ECB President Mario Draghi signaled a willingness to expand his institutions balance sheet by a massive euro;1 trillion ($1.25 trillion).

With higher US market interest rates attracting additional capital inflows and pushing the dollar even higher, the currencys revaluation would appear to be just what the doctor ordered when it comes to catalyzing a long-awaited global rebalancing one that promotes stronger growth and mitigates deflation risk in Europe and Japan. Specifically, an appreciating dollar improves the price competitiveness of European and Japanese companies in the US and other markets, while moderating some of the structural deflationary pressure in the lagging economies by causing import prices to rise.

Yet the benefits of the dollars rally are far from guaranteed, for both economic and financial reasons. While the US economy is more resilient and agile than its developed counterparts, it is not yet robust enough to be able to adjust smoothly to a significant shift in external demand to other countries. There is also the risk that, given the role of the ECB and the Bank of Japan in shaping their currencies performance, such a shift could be characterized as a currency war in the US Congress, prompting a retaliatory policy response.

Furthermore, sudden large currency moves tend to translate into financial-market instability. To be sure, this risk was more acute when a larger number of emerging-economy currencies were pegged to the US dollar, which meant that a significant shift in the dollars value would weaken other countries balance-of-payments position and erode their international reserves, thereby undermining their creditworthiness. Today, many of these countries have adopted more flexible exchange-rate regimes, and quite a few retain adequate reserve holdings.

But a new issue risks bringing about a similarly problematic outcome: By repeatedly repressing financial-market volatility over the last few years, central-bank policies have inadvertently encouraged excessive risk-taking, which has pushed many financial-asset prices higher than economic fundamentals warrant. To the extent that continued currency-market volatility spills over into other markets and it will the imperative for stronger economic fundamentals to validate asset prices will intensify.

This is not to say that the currency re-alignment that is currently underway is necessarily a problematic development; on the contrary, it has the potential to boost the global economy by supporting the recovery of some of its most challenged components. But the only way to take advantage of the re-alignments benefits, without experiencing serious economic disruptions and financial-market volatility, is to introduce complementary growth-enhancing policy adjustments, such as accelerating structural reforms, balancing aggregate demand, and reducing or eliminating debt overhangs.

After all, global growth, at its current level, is inadequate for mere redistribution among countries to work. Overall global GDP needs to increase.

The US dollars resurgence, while promising, is only a first step. It is up to governments to ensure that the ongoing currency re-alignment supports a balanced, stable, and sustainable economic recovery. Otherwise, they may find themselves again in the unpleasant business of mitigating financial instability.

How to Distort Income Inequality

By Phil Gramm and Michael Solon
Wall Street Journal, Nov. 11, 2014

The Piketty-Saez data ignore changes in tax law and fail to count noncash compensation and Social Security benefits.

What the hockey-stick portrayal of global temperatures did in bringing a sense of crisis to the issue of global warming is now being replicated in the controversy over income inequality, thanks to a now-famous study by Thomas Piketty and Emmanuel Saez, professors of economics at the Paris School of Economics and the University of California, Berkeley, respectively. Whether the issue is climate change or income inequality, however, problems with the underlying data significantly distort the debate.

The chosen starting point for the most-quoted part of the Piketty-Saez study is 1979. In that year the inflation rate was 13.3%, interest rates were 15.5% and the poverty rate was rising, but economic misery was distributed more equally than in any year since. That misery led to the election of Ronald Reagan, whose economic policies helped usher in 25 years of lower interest rates, lower inflation and high economic growth. But Messrs. Piketty and Saez tell us it was also a period where the rich got richer, the poor got poorer and only a relatively small number of Americans benefited from the economic booms of the Reagan and Clinton years.

If that dark picture doesnt sound like the country you lived in, thats because it isnt. The Piketty-Saez study looked only at pretax cash market income. It did not take into account taxes. It left out noncash compensation such as employer-provided health insurance and pension contributions. It left out Social Security payments, Medicare and Medicaid benefits, and more than 100 other means-tested government programs. Realized capital gains were included, but not the first $500,000 from the sale of ones home, which is tax-exempt. IRAs and 401(k)s were counted only when the money is taken out in retirement. Finally, the Piketty-Saez data are based on individual tax returns, which ignore, for any given household, the presence of multiple earners.

And now, thanks to a new study in the Southern Economic Journal, we know what the picture looks like when the missing data are filled in. Economists Philip Armour and Richard V. Burkhauser of Cornell University and Jeff Larrimore of Congresss Joint Committee on Taxation expanded the Piketty-Saez income measure using census data to account for all public and private in-kind benefits, taxes, Social Security payments and household size.

The result is dramatic. The bottom quintile of Americans experienced a 31% increase in income from 1979 to 2007 instead of a 33% decline that is found using a Piketty-Saez market-income measure alone. The income of the second quintile, often referred to as the working class, rose by 32%, not 0.7%. The income of the middle quintile, Americas middle class, increased by 37%, not 2.2%.

By omitting Social Security, Medicare and Medicaid, the Piketty-Saez study renders most older Americans poor when in reality most have above-average incomes. The exclusion of benefits like employer-provided health insurance, retirement benefits (except when actually paid out in retirement) and capital gains on homes misses much of the income and wealth of middle- and upper-middle income families.

Messrs. Piketty and Saez also did not take into consideration the effect that tax policies have on how people report their incomes. This leads to major distortions. The bipartisan tax reform of 1986 lowered the highest personal tax rate to 28% from 50%, but the top corporate-tax rate was reduced only to 34%. There was, therefore, an incentive to restructure businesses from C-Corps to subchapter S corporations, limited-liability corporations, partnerships and proprietorships, where the same income would now be taxed only once at a lower, personal rate. As businesses restructured, what had been corporate income poured into personal income-tax receipts.

So Messrs. Piketty and Saez report a 44% increase in the income earned by the top 1% in 1987 and 1988though this change reflected how income was taxed, not how income had grown. This change in the structure of American businesses alone accounts for roughly one-third of what they portray as the growth in the income share earned by the top 1% of earners over the entire 1979-2012 period.

An equally extraordinary distortion in the data used to measure inequality (the Gini Coefficient) has been discovered by Cornells Mr. Burkhauser. In 1992 the Census Bureau changed the Current Population Survey to collect more in-depth data on high-income individuals. This change in survey technique alone, causing a one-time upward shift in the measured income of high-income individuals, is the source of almost 30% of the total growth of inequality in the US since 1979.

Simple statistical errors in the data account for roughly one third of what is now claimed to be a frightening increase in income inequality. But the weakness of the case for redistribution does not end there. America is the freest and most dynamic society in history, and freedom and equality of outcome have never coexisted anywhere at any time. Here the innovator, the first mover, the talented and the persistent win outproducing large income inequality. The prizes are unequal because in our system consumers reward people for the value they add. Some can and do add extraordinary value, others cant or dont.

How exactly are we poorer because Bill Gates, Warren Buffett and the Walton family are so rich? Mr. Gates became rich by mainstreaming computer power into our lives and in the process made us better off. Mr. Buffetts genius improves the efficiency of capital allocation and the whole economy benefits. Wal-Mart stretches our buying power and raises the living standards of millions of Americans, especially low-income earners. Rich people dont take a large share of national income, they bring it. The beauty of our system is that everybody benefits from the value they bring.

Yes, income is 24% less equally distributed here than in the average of the other 34 member countries of the OECD. But OECD figures show that US per capita GDP is 42% higher, household wealth is 210% higher and median disposable income is 42% higher. How many Americans would give up 42% of their income to see the rich get less?

Vast new fortunes were earned in the 25-year boom that began under Reagan and continued under Clinton. But the income of middle-class Americans rose significantly. These incomes have fallen during the Obama presidency, and not because the rich have gotten richer. Theyve fallen because bad federal policies have yielded the weakest recovery in the postwar history of America.

Yet even as the recovery continues to disappoint, the president increasingly turns to the politics of envy by demanding that the rich pay their fair share. The politics of envy may work here as it has worked so often in Latin America and Europe, but the economics of envy is failing in America as it has failed everywhere else.

Mr. Gramm, a former Republican senator from Texas, is a visiting scholar at the American Enterprise Institute. Mr. Solon was a budget adviser to Senate Republican Leader Mitch McConnell and is a partner of US Policy Metrics.

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Database: Nashville bank profits hit post-recession highs as lending grows

Its been a good year for Nashville banks.

Lending among Nashville banks continued to rise in the third quarter as their bottom lines collectively increased to post-recession highs, according to FDIC call report data collected for 31 Middle Tennessee lenders tracked by the Nashville Business Journal.

Through the third quarter of 2014, Nashville-based banks reported $172.2 million in collective net income, a 20 percent increase from the first nine months of 2013, when they posted $143.4 million in net income. Going back to the third quarter of 2011, profits among the banks tracked by the NBJ have doubled.

Alongside the growth in bank bottom lines, theres been an uptick in lending in the past year. As of Sept. 30, Nashville banks collectively reported $14.3 billion in net loans, the total loans minus money they set aside in case loans default. Thats up 10.5 percent from the $12.9 billion in net loans reported in September 2013.

The activity underscores the strength of the Nashville economy, and further reinforces the view among some bankers in town that businesses are now opening up to the idea of borrowing to fund new investments or expansions. Earlier this year, we reported on how commercial and industrial lending statewide had yet to reach pre-recession highs. Since then, more bankers have pointed to improved loan demand from potential borrowers.

Though these numbers dont reflect all lending activity in the region (regional banks are excluded because of how data is reported to the FDIC), several Nashville bank heads at the larger regional and national banks also point to robust loan growth in the past year.

Nedbank Corporate Property Finance funds and takes equity in R450m …

Nedbank Corporate Property Finance has entered into a partnership with Rejem Property Development (Pty) Ltd and Style Star Investments (Pty) Ltd to develop the R450 million Newmarket Value Centre in Alberton.

The transaction has been made possible through a joint venture between Nedbank Corporate Property Finances investment arm (acting through Linton Projects (Pty) Ltd), Rejem and Style Star, a division of the Moolman Group. Linton Projects and Rejem jointly own 56% of the undivided shares in the project, while Style Star owns the remaining 44%.

As part of the greater Newmarket Park mixed-use development, being undertaken by Rejem and Linton, the 34 000 m² value centre boasts tenants such as Builders Warehouse, Virgin Active, Food Lovers Market and Checkers Hypermarket. Restaurants include Spur, John Dory, Panarottis and Mugg amp; Bean. The centre is expected to open in October 2015.

Ken Reynolds, regional executive: Nedbank Corporate Property Finance for Gauteng says that the centre is being designed to become an 80 000 m² regional shopping centre in time. The development site is the old Newmarket racecourse, and Newmarket Park is a 77.3 hectare property south-east of the Alberton CBD.

It is surrounded by well established residential areas and there is scope for major development in this node. The bank financed and holds an equity stake in the Makro that opened on the site in April last year, making the value centre our second development in the park so far.

Rejem Property Development and the Moolman Group have strong reputations in property development, with sound knowledge and experience, and Nedbank Corporate Property Finance is proud to partner with these trusted and successful developers once again, concludes Reynolds.

We have established a close relationship with both parties and will continue to be a dependable partner that not only provides agile solutions but also equity partnerships where appropriate. Our continued collaboration with strong developers, as well as our equity stake in developments such as this one highlight why Nedbank continues lead the market in realising property opportunities.