More on Capitalism: Is America Russia?

We really are at an important point in our history. The model of capitalism that dominated the Reagan era has been manifestly revealed as a failure. So the search is on for what to replace it with. At the risk of being repetitive I think it a subject worth continuing to discuss.

Which is why the current series in the Financial Times under the general rubric of “The Future of Capitalism” has been so interesting to follow. Today’s issue is no exception: one of my favorite economics writers, Martin Wolf, weighs in on Simon Johnson’s Atlantic Monthly article describing America as in the thrall of an elite. Here is the Wolf comment: Cutting Back Financial Capitalism is America’s Big Test .

There is a growing consensus that the financial sector needs to be constrained. Johnson pushes the argument to the limit by saying that such is the power of the financial sector that we are prevented from adopting policies sufficient to cure our systemic problems. We are therefore doomed to repeat the current crisis sometime in the future. In a nutshell Johnson says we have become an ’emerging market’ economy: think Russia or Thailand in the 1990’s. Those nations failed to solve their economic crises effectively because both had within them an elite group powerful enough to prevent legislation that harmed it. Consequently what damage did accrue was deflected onto the general populace and the elite managed to persist or even grow in influence with the result that subsequent crises became inevitable.

So the question Wolf asks is: has America become Russia?

Is America so controlled by its financial sector that solutions necessary for long term stability are not even discussed because they would harm the economic interests of the elite?

Wolf answers with a qualified no.

He agrees that the banks are far too influential in Washington and that such things as the stress tests designed to reveal bank weaknesses have therefore been biased to allow most if not all banks to pass. But he also argues that the elite has less direct power than its equivalent in Russia. This, I think, is a valid point. Our banks indisputably wield enormous influence in Washington, but not in the Russian way where corruption is endemic and oligarchs literally make life and death decisions with respect to legislation. Here the influence is more subtle: lobbying is our form of corruption. Where I disagree with Wolf is in his distinction between the two. Just because our corruption is more subtle doesn’t mean that the elite has less influence. On the contrary: because lobbying is seen as an extension of free speech it can be wrapped in the flag. It has constitutional authenticity. The elite can mobilize America’s citizenry to protect its lobbying power by arguing that limits on the ability to buy legislative privilege are actually attacks on the American way of life itself. Overcoming the patriotic ardor of a citizenry thus threatened has become, arguably, the biggest hurdle to getting strong regulation of finance on the agenda.

While Obama and Geithner both mouth strong bromides about getting regulation back in place, it takes no effort at all to see the continuing power of the banking lobby: the Geithner plan is a thinly veiled giveaway of taxpayer money to the elite; bank accounting rules were changed recently to accommodate relaxed reporting of asset values; and any suggestion of a centralized regulatory authority is met with gales of protest. This is hardly evidence of strength. The elite looks very comfortable even within the storm of criticism swirling around it. On the contrary: given the reduced number of players left in the market the central core of the elite looks more powerful. Goldman Sachs earnings reflect an ‘enhanced market position’ according to its CEO. What he means is that his company has reinforced its oligopolistic rent seeking capability – rent seeking is what economists call any activity that allows an economic actor to extract profits above ‘market norms’.

So, overall, I err on the side of Johnson. We have an inherently unstable political and economic structure presently. For the democratic process to re-assert itself we need to break the elite’s ability to channel wealth for its exclusive use. While that power exists, as it has for the past three decades, America is a lot more like Russia than any of us would care to admit.

Wolf is right too: the title of his comment says it all.

Cutting back financial capitalism is America’s big test.

We are failing thus far.