plutocracy

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Quote of The Day #7

“When the preferences of economic elites and the stands of organized interest groups are controlled for, the preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy.” – Martin Gilens & Benjamin Page, ” Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens, forthcoming this Fall

Wow. The second shoe drops.

Whilst we are all absorbing the impact of Piketty – and I repeat: go read it before you comment on capitalism henceforth – in come Gilens and Page with a blockbuster paper that shreds any concept that America is a functioning democracy, where by democracy we mean a state whose policies are influenced by popular sentiment.

We are an oligarchy, with a slew of special interest groups providing a supporting cast to an economic elite who manage to direct policy to their advantage. Not always, but often enough to skew society prodigiously. Having established with their research that American policymaking is dominated by an elite, Gilens and Page end:

“Americans do enjoy many features central to democratic governance, such as regular elections, freedom of speech and association, and widespread (if still contested) franchise. But we believe that if policymaking is dominated by powerful business organizations and a small number of affluent Americans, then America’s claims to being a democratic society are seriously threatened.”

Double wow.

All of a sudden we have solid research confirming what many of us have been arguing on the basis of simple observation: to all intents and purposes America is an oligarchy not a democracy.

The acid test is that applied by Gilens and Page. Just how often does actual policy match what appears to be majority opinion. The answer they find is that it matches depressingly infrequently. The elite governs on behalf of themselves with the rest of us benefitting only to the extent that our wishes fall into line with those of the elite. If they clash then tough on us.

As it happens the majority and the few have closely aligned interests some of the time. So it can appear, as it did for many years after the Reagan revolution, that the new course for the nation was in all our interests. But that was an illusion. It was a mirage concocted by the convergence of opinions and was not reflective of any substantial power of the majority or resonance with its beliefs. It was a mere coincidence.

And as the Reagan revolution ground the middle class down, abetted by both Bush presidencies and Clinton as well, the preferences of the elite began to diverge from those of the majority. Significantly as it turns out. This was especially true in the Great Recession and is reflected in the enormous influence over subsequent policy. Policies that helped the majority were generally impossible to put in place, whereas policies that assisted the elite were passed in abundance. The only great exception being health care reform, and even there the influence of the elite and business groups made its passage tenuous and its success terribly difficult to achieve.

This fits neatly with the Piketty thesis. So neatly that it is downright scary.

The huge point of all this is that the constant accumulation of ever greater shares of wealth by an elite allows it to exert ever greater power on the political stage. This much is obvious. It has also been overlooked by most analysts of American policy because it was always held as self-evident that America remained a functioning democracy and that the majority had some influence over their own fate. So observed outcomes must, in some way, reflect what the majority “wanted”. Or, at least, this would be the conclusion drawn by those under the misguided thrall of rational theory which holds that our major political parties naturally converge on positions that reflect the majority because that assures those parties of continued power.

Rational theory, of course, never adequately accounts for the real world. It looks pretty, and can be expressed in dynamite formal terms, but is has an unfortunate tendency to miss the efforts of real people. In this case the efforts of an elite to garner a disproportionate amount of power. Perhaps this is because the elite contains many of the academics who propound rational theory.

In any case, the conjunction of the Piketty book and the Gilens and Page paper ought to stir the blood of anyone who values democracy. I know it has my attention.

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Class Based Economics

Buried somewhere in the pile of stuff I have accumulated as I think about inequality are these statistics:

  1. Of all the income generated between 2009 and 2011 in the US 121% went to the top 1% of income earners
  2. The top 1% owns just over half of all investment assets including 64.4% of all bonds
  3. And, the bottom 90% incurs 72.5% of all debt

Think through the consequences of these numbers.

Basically we have an economy where the top 1% reaps all the rewards; where less well off people constantly fall further behind; and where the top folk lend to the bottom folk so that the less well off can keep on consuming and thus boosting the profits of the businesses the top folk own. This is a nice game for the rich as long as it lasts. Here in the US that would be the past forty years or so.

This is really simple.

It explains why our economic policies focus on preserving creditors, bailing out lenders, and keeping the inflation alarms ringing even when there is no inflation. Those policies benefit the top 1%. Those policies are advocated for and set by the people who will benefit from them. That a healthy does of inflation would alleviate the debt burden on those down the income ladder is scoffed at by those in power. Inflation, not unemployment, is the true bogey man of central banks everywhere because it is the bogey man of the wealthy.

This is simple class economics.

It also helps explain why the economic theories that undergird such policies endure remarkably despite being thoroughly debunked both intellectually and empirically. That Robert Lucas can argue that the distribution of income is both inconsequential and harmful to study is more a statement about his total lack of scientific standing than it is about the economy. Inequality matters. It matters hugely. To those in the economy if not to economists. And, contrary to the mystical ravings and incantations of those who defend “free” markets, said free markets have no internal equilibrating mechanism to combat or offset the workings of capitalism.

Capitalism naturally begets inequality and thus needs to be repressed whenever inequality reaches an unacceptable level. The repressive force is known to us all as democracy, within which the much feared mob asserts itself and forces the redistribution of the gains made by capitalists. In the US this is known as “we the people” refusing to play along with the rigged games played by businesses everywhere and at every time.

Except, of course, we have been duped into just that. Playing along. Thus assuring the destruction of the once much admired American middle class.

It turns out that the aforementioned middle class was the creation, not of American “exceptionalism”, superior management, access to resources, basic freedoms, superior opportunity, or any other thing, but of a freaky coincidence: the raw power of the super-rich was undermined for a while by the epic struggles and costs associated with fighting lots of global wars. Once the wartime social improvements introduced to mollify returning veterans and to produce sufficient war material were eliminated by the resurgent wealthy, they could revert to the long term onward accumulation of wealth and power by the few. Those golden post-war decades were an aberration needing to be swept away so that the top folk could entrench themselves once more.

Or so to seems.

Is a modern day CEO really worth 354 times that of the average worker, whereas a 1980’s CEO was only worth 42 times? Of course not. Modern CEO’s are just much better at cheating and rigging the game. The economy hasn’t benefitted one bit from the spike in CEO incomes. So much for marginal productivity theory. It never was based much on reality, but it sure looked elegant, and sounded good. Especially if you wanted to defend inequality.

The more I think about it the more I come to realize that the entire corpus of post-war American economics was based on a misreading of history. The Kuznets curve was acceptable because it told the “right” narrative. It “proved” that capitalism could – no that it was – benign. And benign, moreover, within itself. It didn’t need lots of heavy handed government action to rein in its excesses. The Lucas Critique was nothing more than an attempt to prevent analysis that might endanger belief on the magic of markets. It was an ideological intrusion into the marketplace of ideas designed to stifle diversity and impose a single version of the truth. The awesome ignorance of the sweep of history and the equally stunning preference for isolation from power realities within much of modern economics is a disaster for all those who suffer the consequences of policy advice given out by professors of that economics.

Anybody born after about 1910 and reaching influence back in those golden decades had no real grasp of history relevant to the creation of economic theory. The entire neoclassical era was an intellectual misreading of the fundamental nature of markets. At the very least it was an attempt to justify a panglossian interpretation of the inner workings of real economies. Those rose-tinted explanations of markets turned economics into a mere belief system far from its more scientific origins. It was a belief system that could be deployed to support class based politics and a business driven policy agenda. It was a lie used to create the massively unequal society we now live in. It was culpable, as was anyone teaching it.

Capitalism is a nasty brute force that has useful side effects: it produces masses of stuff and thus the raw material to better society. But it doesn’t do the bettering. That’s the domain of the social, cultural, and political forces that are need to harass and suppress it. Any economics that ignores historical or political reality is thus entirely irrelevant. It ought to be ignored. It ought to be ridiculed. It is damn near unethical to continue to propagate it whilst arguing that you are theorizing about actual economies.

We must undermine anyone who does so theorize. They are purveyors of class based economics. They should be called such.

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Score Two For The Plutocrats

Wow. What a week for the plutocrats.

First we were given the latest Paul Ryan budget which, predictably, reached its targeted balance by crushing social spending programs like food stamps and Medicaid. Then, today, we we told of the Supreme Couret’s decision to strike down all limits on personal political campaign donations, thus opening the door to an even greater flood of plutocrat money into our already distorted political arena. Taken together the whiff of class war hangs heavy in the air.

Why do we spend so much time on Paul Ryan? Because he is a rare bird: he is a Republican who puts forward a plan or an alternative to the administration’s position. That it is absurd, cruel, and dangerous is almost beside the point. At least it’s a plan rather than a simple negation of whatever Obama says.

Reading the highlights of Ryan’s latest budget proposal whilst deeply immersed in the subject of inequality is almost surreal. Can it be true that a real life class warrior reveals his intentions so manifestly just as I am reading about the melting away of our middle class brought about by the steady erosion of social spending, safety nets, and government spending on infrastructure and education?

It’s as if Ryan had timed things perfectly to throw an even starker highlight on the shift in American society begun by his hero, Ronald Reagan.

The few decades since Reagan took office have seen an upward redistribution – or, more properly, a staunching of the pre-existing downward redistribution – of around 15% of our national income. That’s a dramatic reorganization of society. It swamps any effects from favorite targeted of the left such as globalization or outsourcing. They may be significant, but they pale in comparison to the raw power grab represented by the slashing of tax rates, especially those on capital incomes and estates. It accounts for the stagnation of wages most Americans have experienced and the consequent run up in debt that they indulged in to support a rise in living standards. It also helps explain the flood of savings the wealthy poorer into the economy and the subsequent urge to find higher returns and thus higher risk. This last effect brought us the insane banking of the real estate bubble, the ridiculous home prices that have since collapsed, and the plunge into economic malaise that lingers on to this day.

A more unequal economy is a more unstable economy. Or so the past few decades have taught me. And regular people are less able to weather instability well: they simply lack the resources to combat the risks of life that they are now expected to bear.

I have bemoaned this before: if the right wingers want to create an economy full of more individual responsibility they need to follow through with a second step. Those newly empowered responsible citizens need to be compensated for the additional risks they are being asked to bear. That means upping wages to create the cash flows needed to cover those risks.

Instead we have witnessed just the opposite. The risks were expanded, but the cash flows were crimped tightly shut. The deflating of the middle class was a direct consequence. It was intended. Anything Ryan and his ilk say to the contrary is denied by the evidence of history.

As for the Supreme Court: what can we say?

The decision appears narrow at first: it removes any limit on an individual’s ability to give money to candidates or political parties. It keeps a limit on donations to any one candidate, but eliminates the cap on aggregate donations. It encourages an increase in the money flowing into politics and is thus a threat to democracy. The cover is some cooked up defense of first amendment rights. The reality is that the Supreme Court is enabling, no, it is willfully encouraging, the gutting of our democracy. It is beyond argument that a flood of money is distorting the political landscape. It means that a few powerful and wealthy voters can get their point of view across more volubly than those less well off. It thus crushes the concept of our each having an equal voice in the governance of society. The damage to freedom is enormous. The threat of even greater inequality looms larger than before.

It is a stunning decision. It is a terrible decision. It demonstrates clearly that the Supreme Court is either undeniably advocating the ending of democracy, or that it is utterly out of touch with the everyday reality of American politics. To argue, as some justices have, that it will encourage transparency is appalling. That the hand over of power to the wealthy is transparent hardly a comfort to those of us who value democracy.

Chief Justice Roberts is right when he says, as he does in the decision, “There is no right in our democracy more basic, than the right to participate in electing our political leaders.” I just wonder why he thinks that right ought apply more to plutocrats than others.

Taken together the Ryan budget with its advocacy of more economic power for the wealthy, and the Supreme Court’s decision with its partial closure of the political process to those without wealth, add up to a new front in the ongoing class war that has been a feature of American society these last four decades.

One last thing: in its youth America was proud of its egalitarian nature. It led the way to institute high taxes on capital, incomes, and estates in order to limit the emergence of class stratifications based on wealth. It was less crippled than “old” Europe by the distortions great inequality always brings in its wake. Yet here we are in denial of that history and in the midst of a concerted effort to mold America into an old European style society complete with a plutocratic upper class in control of the economy. Worse: we are headed towards a society even more distorted than that of old Europe.

Is that really what we want?

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More Profit Bias

There’s quite a fuss surrounding those disincentives to work within Obamacare that the Congressional Budget Office mentioned last week. If you recall it was spun by right wingers as a loss of jobs, when, in fact, it was a reduction in the supply of labor because workers decided not to work. It was a good thing. Not a bad thing.

Still it riles mainstream economists.

This is because when a worker exercises a choice and decides to retire, quit, or otherwise stop working it imposes a cost on society. In raw form: they stop paying taxes and yet keep on receiving benefits like Obamacare. The rest of have to make up the loss. This choice on the part of some workers – the CBO suggests it may be as many as 2.5 million by 2024 – to prefer leisure over work is a result of an adverse incentive in the health care law. So say orthodox economists who look at the world entirely through their incentive tinted glasses.

They do not comment, however, on the equally adverse incentive that currently distorts our labor markets: that is the absence of health care insurance forcing some people to work when they might otherwise have retired. It is, apparently, just fine that some people are forced to work beyond retirement age just so they can get health care coverage, but it is not fine that they retire when they can get coverage without working. Hmm. A little anti-worker. No?

Let’s apply this logic to business.

Our tax code is littered with tax deductions that reduce the amount of taxes a business pays. This is thus a burden on society. We have to make up the lost tax revenue from other sources. Tax gurus call these losses of revenue ‘tax expenditures’: they are ways in which we decide to spend our tax revenues. In this case we ‘spend’ by deciding to forgo collecting the tax in the first place.

Now, our orthodox economist friends will say that the corporate decision to take those tax deductions is entirely reasonable because [a] they are legal, and [b] they allow the business to maximize profits, which is what businesses are supposed to do.

So. A worker maximizing leisure and imposing costs on society is a bad thing. But a business maximizing profits and also imposing costs on society is a good thing.

Profits good. Leisure bad.

Yet the entire structure of the marginal theory underpinning the supply of labor into the economy hinges on the individual decisions of workers balancing the rewards they get from working and leisure respectively. It’s just that if they choose leisure that’s naughty because it imposes social costs. The fact that the worker is supposed to have made a rational choice and thus enhanced their welfare – and, presumably, society’s total welfare – is neither here nor there.

Meanwhile the, likewise rational, decision by the business to maximize its profits is greeted with applause. Despite the social costs.

And these folk try to persuade us that economics is ‘positive’ or ‘scientific’ and untainted by any traces of ideological bias.

Which it is, if you don’t mind the anti-worker pro-profit bias.

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Executive Payola

There’s quite a rumpus, again, about executive pay. The amount our top CEO’s extract from us all has reached epic proportions. The Fortune 500 CEO’s average pay levels about 200 times that of our average workers. This is about 1,000 times more than it used to be back when the economy was doing well in the first decades after World War II.

This is absurd. It is sick. It is rapacious. It is an enormous disincentive to those in the bowels of every one of those companies. The corporate message is clear: work you butts off so our CEO can make an even larger bundle next year. Oh, and that might mean you all have to work longer hours and accept a pay cut. Efficiency, after all, can leave the world a harsher place. Especially if you have no power to rig the game.

CEO’s as group are on the make. They cannot be trusted. They are anti-social. They set a negative and destructive example to our youth.

I hope I am being clear.

I mean: do we all honestly think those corporations being ransacked for cash by their CEO’s are 1,000 times better off than they used to be? Is the economy humming along so superbly that we need to hand out outsized rewards to our top executives?

Well, now I think about it, profits stood up remarkably well during the recent crisis and now take a record percentage of our collective annual income. Perhaps that attack on wages needs to be rewarded. So I can see shareholders and capitalists everywhere being willing to fork over some of the gains.

Who needs workers anyway?

Oh. Wait. Someone has to buy all that stuff. Well, maybe the government can give them just enough handouts to allow them to shop a little.

Rats. The grand economic game is a little more complicated than those CEO’s think it is. They’ve crippled the consumption machine that produces the sales their companies need. Never mind. Give them a big pay increase. They need an incentive. Workers don’t. They just work. CEO’s lead. That’s worth a bonus.

No?

I mean, leadership is hard. Especially when you have such evident disregard for the people you are leading.

Addendum:

Hmmm. If an executive bonus is an incentive, wouldn’t an increase in the minimum wage also be an incentive? It might get more people to work. It might make them work harder. Isn’t that what incentives do?

Oh. No. wait a minute. I get it. Executive bonuses align management and shareholder goals. That means a bonus is share in the profit. Wages are simply a cost that diminishes profit, and don’t align anything with anything else. A share in the profit isn’t a cost, its, well, a share of the profits. Wages are just costs.

So bonuses are a good expense. Wages are a bad expense. Get it?

Neat trick. Very smart. Some CEO thought that one up no doubt. Give her a bonus.

 

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