The Strain is too much
Picking up where I left off …
And, just for fun …
We need more billionaires!
No. Really.
That’s the message delivered by Michael Strain in this morning’s Financial Times.
After all, where would be without them?
Strain is, as we all know, associated with the American Enterprise Institute, and is thus a wholly owned subsidiary of the billionaire class. He is expected to do the bidding of the people who write large checks to purchase the intellectual cover that the AEI produces. In his role as a loyal protector of his benefactor’s interests he has to produce articles, papers, and other influential output that justify their continued dominance of our society.
When last I wrote I was trying to explain how the business class has always had an outsized political influence in American politics. In this effort I was using Arthur Schlesinger’s study of the Jacksonian era as an example of one of the few periods when that grip on society slipped slightly.
My starting point, to repeat myself, was the assertion that democracy exists in its modern incarnation as a mitigating force acting to reduce the anti-social effects of unfettered capitalism. That’s why any credible reading of modern history tracks the slow but steady expansion of the franchise throughout the 1800s and into the last 1900s. All the trappings of modern democracy — all its various mechanical instantiations — have been put in place within that timeframe, and all had to be torn away from the reluctant grip of a pre-existing elite whose political dominance rested on relative wealth. This was not a process of open minded or generous discovery of the efficacy of democracy by that elite. It was a defensive and much regretted move designed to fend off social unrest, uprising, and the possibility of the loss of that wealth.
So democracy is best thought of a struggle to reduce the predations of capitalism and the advantages that it bestows on the elite who thrive within the liberties it is based upon.
The problem with such struggle is that it has to be ongoing because capitalism itself is an ongoing activity. Precisely because the goal of democracy is to increase the share of wealth flowing into the hands of the lower classes — whose work is an essential ingredient in the creation of the wealth in the first place — it is resented by the capital owning class. Whenever wealth is shared more evenly the loss is felt acutely by the wealthy. So they start to agitate in order to re-establish their prior status.
Thus, there is a cyclicality in the process of struggle. Gains by each side are followed by losses. It is only when the lower classes are in the ascendancy that we can truly say that democracy exists. When the wealthy are in the ascendancy the institutions and norms of democracy might remain in place, but their effect is hollowed out and corrupted. There are elections but they have no substantial meaning for the majority of voters. Life goes on as before. The wealthy accumulate greater shares, until the imbalance becomes intolerable and the threat of uprising and social unrest triggers another bout of concessions and a temporary reappearance of democracy.
It is following in this train of thought that I look at the neoliberal era less in terms of its economic theorizing — which was always twisted by the geopolitics of the Cold War — but as the seizure of power by the business class. To indulge in endless critiques of Cold War economics and its overt ideological underpinnings is fun but uninteresting as an exercise in trying to explain contemporary politics.
This is particularly true when we consider the extreme lengths that economists have gone to in order to build their theories in order to justify certain social arrangements — most of which seem to benefit the business class. And none of which entertain power as an explanatory component of theory.
Yes, that’s a generalization. But, equally, it is relevant.
Back to Strain and his benefactors:
The seizure of power by the business class in the 1980s and culminating in its complete control by the end of the 1990s, rested on the careful creation of ideologically coherent views of society. These views had to provide an attractive but anodyne explanation to voters as to why American style capitalism was preferable not simply to Soviet Union style authoritarianism, but, more importantly, to European style social democracy. It was this latter social arrangement that was the greater threat because it maintained a role for private business, but within limits. The route to abundant profit was occluded by the acceptance of the necessity of a strong role for the state as the true representative and defender of the people.
Remember: this was in the latter years of the New Deal experiment with democracy. It was an era of high tax rates and compromise by business — something that grated on the wealthy whose reduced status became the motivation for reaction. The billionaires were unhappy.
That we have so many nowadays is testimony to the extent of their triumph in recapturing power and their destruction of democracy.
So why is Strain complaining?
It’s that recent election in New York City.
The winner, Zohran Mamdani, has made one or two comments about the abundance of billionaires. We could, he suggest, do with a few fewer. He has even had the temerity to argue in favor of an extra 2% tax on incomes over $1 million. Worse, he wants to raise New York’s corporate tax rate to parity with surrounding states. This is hardly Marxist or zealous redistribution. Personally I regard it is fairly timid given the extraordinary inequality that exists in the city — it has the highest Gini score of all cities in the nation.
Mild though this is, it requires violent rebuttal by folk like Strain, whose livelihood depends on doing the bidding of the billionaire class.
My disappointment with Strain, though, stems from his argument. It’s old. It’s tired, and it is tone deaf. It is the same old Cold War economics that we’ve seen before. I was hoping for originality. What I got was a retread of a Nordhaus working paper from 2004 (NBER Working Paper 10433 to be precise).
Note the date. 2004 was before the Great Recession revealed Cold War economics as a hollow exercise in logic rather than as an explanation of real world economic activity. It was the heyday of what we all called the “New Economy”. It was before we fully understood the corporate dominance of the internet and the way in which information could be distorted by social media. It was before we used the word “platform” much, and it was certainly before we realized that platforms were simply a way of consolidating control over advertising dollars.
No. 2004 was still a year when the glow of technological novelty was strong and the rents that flow from innovation in technologies where network scales matter had not yet strangled competition. Nordhaus set out to examine what appeared to be the very high stock prices of technology companies and the relationship between rapid productivity growth and corporate profits. Were, he asked along the way, speculators attributing the correct rate of capture of profit from innovation to the firms involved? Or was there, by inference, a bubble in stock prices because of an error in that rate of attribution?
We do not need to examine the details Nordhaus presented. Our interest is in Strain’s use of his conclusion.
Which is, notably, that businesses and there “innovators” are pretty awful at retaining a large portion of the profits from innovation. The depreciation per year of the firm’s capacity to protect that profit is due to all sorts of things: competition, poor intellectual propter protection, and the arrival of yet newer innovations all play a part. Nordhaus estimated that surplus profits from innovation depreciate by about 20% per year. After a few more assumptions and estimates he arrives at the conclusion that over the entire postwar period (1948-2001) business only managed to retain 2.2% of the profit generated from innovation. The rest flowed into society as “social surplus” — i.e. better products, lower prices, etc.
It is this 2.2% figure that Strain then applies to his billionaires in order to demonstrate his point: we need more of them because they are generating a ton of surplus and they are awful at keeping it for themselves. He uses Jeff Bezos as his example — confirming the tone deaf nature of the business class in view of the absurd spectacle of Bezos’ wedding last week. Strain says that because Bezos has accumulated personal wealth of about $240 billion, and applying that factor of 2.2%, we can argue Bezos has created around $11 trillion for society as a whole.
Wow. We need more billionaires.
Do some simple math: just handful of billionaires can account for the entirety of economic activity. The mere multi-millionaires have no impact. And the ordinary folk? They enter only as a rounding figure. If at all.
This is, of course, if we accept Bezos as an innovator. And if we accept that Nordhaus’s analysis still holds two decades further into the “New Economy”. And if we accept that Bezos hasn’t been able to build suitable moats around his wealth to prevent the sort of depreciation critical to Nordhaus’s conclusion. Is, in other words, Bezos that hapless? Is he that lacking in skill? Or, to generalize, are all our billionaires that incompetent in protecting their wealth that they allow it all to flow downhill to the lesser folk? Do need better and more clever billionaires?
With Bezos suitably established as a pillar of society, and with the AEI’s duty duly done, Strain then goes on the make the usual assortment of comments we expect from people paid to do the bidding of the business class. Take this as an example:
“One of the central moral promises of democratic capitalism is that people receive their just rewards. In our system, economic inequality is tolerable if not reflects differences in effort, risk taking, skill, and choices. The evidence strongly suggests that this promise is being kept — remuneration is primarily determined by productivity.”
I know.
I choked on my coffee too.
As a pablum citation of Cold War nonsense it is a classic. As a statement about reality it is fantasy.
The implication, given the difference between Bezos’s wealth and that of, for the sake of argument that of most Amazon employees, is that he must work prodigious hours each week. They do. So he, in order to work harder and thus “earn” that extra wealth he must be in the office 24/7 … no 48/14 … no … you do the math. And his skill at loading those packages is just stunning. His fulfillment rate is legendary. Quite why Amazon needs to employ anyone else is baffling. Given the wealth difference, and using Strain’s standard explanation of it, Bezos alone would be sufficient to generate Amazon’s profits.
It all falls apart in the light of day.
But as a parable based on Cold War logic it is wonderful.
And notice the conflation of capitalism with democracy as in “democratic capitalism”. Given that democracy exists precisely to reduce the effects of capitalism linking the two into one conjoined system is simply a trick to create an illusion useful only to the business class and its billionaires. At no point must the everyday voter realize the threat to democracy that capitalism represents. Or, even more importantly, vice versa. That would empower the lesser folk and give them a clarity of purpose the billionaires want to avoid.
Strain goes on:
“It is outrageous to single billionaires out for punitive policies. They should not be treated as pariahs who need to be knocked down a peg or two nor seen as revenue-generating machines for the rest of society. Rather, they deserve to be treated as we all should — as full citizens, with rights and duties, who both benefit from and contribute to society.”
This nasty attitude that people like Mandani have is why, presumably, billionaires need so many special benefits in the tax code. Like the tax on capital income being lower than the tax on work. It is why, probably, they manage to pay a lower average tax rate than their employees. And it is obviously why they so desperately need the tax cut currently being discussed in Congress. It’s a sort of welfare program for the rich so that they can be compensated for appearing so exploitive. It has nothing to do with their control of politics. Nothing.
After all, they are just simple citizens like the rest of us.
With no extra privileges.
And a very large crew of hangers-on like Strain eager to explain how important they are and why free markets return to each of us only what we each deserve. I think they call it marginal productivity. Or Cold War logic. Or, to paraphrase Martin Luther King: socialism for the rich and free markets for the poor.
In which case: who is more properly called a socialist?
Bezos who gets all sorts of subsidies, tax breaks, special treatments, and legal wheezes, or Mamdani, who does not?
I wait for Strain to explain.
And I wait …
And wait …
