plutocracy

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2014: Same as 2013?

Well, it looks that way. We seem to be stuck in something akin to the mud that engulfed my neighbors car a week or so ago. There’s lots of huffing and puffing, by those with a job at least, and not much coming out the other end. The experts call it stagnation. The rest of us call it something less polite.

Most of the non-economists I chat with, those that whose eyes don’t glaze over at the word ‘economics’, are now entering a kind of stoic acceptance of our economic mediocrity. It is, as they say, the way it is. We are powerless to overcome the slowing of growth to a crawl. After all don’t the experts all seem to agree that our technologies nowadays are incapable of igniting much of anything. And those technologies that are most eye-catching don’t seem to generate many jobs – Google, Apple, and so on are actually smallish employers given their outsized presence in our day to day loves. Indeed, given the efficiency enhancing, by which mean labor saving, nature of many modern technologies, the adoption of a digital way of life is probably job destroying on a net basis.

Or so it seems.

Let’s put this bluntly: it didn’t have to be this way. Not at all. That it was, and remains so, is testimony to the intense politicization of everyday life, of business, of the workplace, and of academia. Of everything. It was not so long ago that a Republican administration could position its economic policy along Keynesian lines. The Bush economic team crowed about the ‘stimulus’ of the federal deficit they created by slashing taxes. It would, we were assured, boost the economy. It didn’t. Is that an indictment of Keynes?

Presumably in the eyes of those involved it must be because those same people are now regularly found decrying any sort of deficit, arguing that stimulus is vaporous.  Besides, they preach, any policy that involves creating a deficit is precisely offset by the counter measures taken by households and businesses who recognize that it a deficit has to be paid off via a future surplus which means higher taxes. So people save in order to pay those future higher taxes and thus neutralize the stimulus. Hey presto! A ready made right wing argument for debasing the role of government in the economy.

Politicization of economics is nothing new of course. It’s just that in the good old days people were a little more up front about it. Marx, after all, didn’t exactly hide his thinking about capitalists. And Adam Smith’s famous work is mostly a peon to the greatness of the various ‘freedoms’ that enable those capitalists. Although we must toss Smith a line: at least he spoke darkly of the nature of businessmen who will collude, cheat, or connive at the slightest hint of potential profit.

Nowadays economics has shed its older and more accurate title of political economy, and has become an adjunct to the mathematics departments of our universities. This was a consequence of the effort made to expunge politics in the wake of the Marxist critique, because, well, he had a point and made economists look like the shills for capitalists that they were. The result of this cleansing was the introduction of a lot of math to dress older ideas up and make them look scientific; the search for newer ideas that suited a more scientific outlook; and the elimination of any vestiges of social, political, or psychological friction that may prevent the newer ideas from being tractable to that math.

So what we have today, part from outlying remnants of opposition, is a sanitized, dehumanized, and mechanistic relic of the late 1800’s, updated with a few nutty add-ons designed to double down on sanitization, dehumanization, and mechanization. Thus we end up with a view of people as being a kind of omniscient, coldly calculating, infinitely rational, and hyper aware machine capable of undertaking the counter measures postulated by those who deny that government has a role to play in the economy. Or at least a positive role.

I don’t know about you, but I feel that whenever anyone has to string together a long series of highly interdependent arguments each of which itself depends on very particular and delicate assumptions in order to arrive at a very precise and easily unbalanced end point, I get queasy. There has to be a simpler argument. One that is more robust, albeit less precise or elegant in mist explication.

So. No people don’t offset a deficit creating policy exactly. They just aren’t that smart, rational, farsighted, and informed enough. And, no, the math doesn’t ‘prove’ a thing. So deficits can help. Demand matters.

It’s a matter of being pragmatic.

Business managers won’t expand their businesses if they cannot sell the extra stuff they produce. Period. In order to induce business expansion the most effective policy, therefore, is to create extra demand for that extra stuff. The government can do this. Especially when no one has much of a need for investment capital precisely because there’s insufficient demand to justify expansion. Duh. So there’s no danger of the government somehow gobbling up all the capital and thus blocking business. Stimulus is a stimulus. It works. Keynes was right. Move on.

But we haven’t done that.

Not by a long shot. Instead we have been cutting the deficit furiously – it is down radically from its crisis-driven high point. We are cutting government jobs – teachers, fire and police personnel mainly. We are hunkering down. We are self-inducing stagnation.

And that seems to be the acceptable mainstream policy adopted by both our political parties, advocated in the media, and defended by orthodox economists everywhere. It’s called austerity to give it a kind of puritanical moral tone. It sounds better than calling it what it is: stupid, cruel, and shameful.

Think about this: stagnation is a way to ossify or freeze in place our current economic relationships. Without growth to provide wiggle room we cannot easily redistribute or bolster our social policies. People feel too put upon to go along with extending the safety net – it feels as if each dollar spent on such things is coming directly out of our particular pocket. So people oppose government policies, even if they happen to help them. Stagnation works to the advantage of those at the top. Austerity becomes a cover for their continued domination.

Aided and abetted, naturally, by right wing economists who claim to be scientific but are actually simply shills for a certain world view. Just like in the old days.

This is where we were in 2010, in 2011, 2012, and 2013. The austerity view has failed every single test it has taken in the real world. We are not wallowing in hyperinflation. Deficits have not ballooned to the size that the bond market has cut and run. Our workforce has not suddenly become the world’s dumbest. We have not debased our currency. And we are not stuck with circumstances beyond our control.

This stagnation is what we did to ourselves. Happily if you’re a rentier living off an income generated by bonds, property, or dividends. Sullenly if you’re one of the majority. And since the rentiers run the show we can safely predict that 2014 will be more of the same. Stagnation for us. A gold mine for them.

Come to think of it we have debased something. We debased our democracy.

Let’s work on righting that wrong this year. It surely can’t hurt. Well only the plutocrats. And we don’t care about them. Do we?

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Are You Being Served?

That was the title of an old British sitcom. It is also an appropriate question in today’s economy. David Cay Johnston does us all a favor by focusing our attention on the plight of our modern era domestic class.

I have written about this topic both directly and tangentially for years: inequality is the defining issue of our era. And what makes it most vexing is that we created the current situation via deliberate policy. It was not an accident. Nor was it some unfortunate unintended consequence of a mysterious force like a free market or globalization. It could have, and should have, been avoided.

As you know I place the economic schism of contemporary America in the context of what I see as the conflict between capitalism and democracy.

Capitalism, however we define it, tends to lead to significant concentrations of wealth. We know this because we have ample historic evidence of such an effect. Both our recent Gilded Ages were associated with huge and increasing disparities of income. And both were followed by massive collapses of the economy.  We know full well what a relatively unfettered capitalist economy looks like. We just lived through one.

Democracy , which ought not be conflated with freedom, has an opposite effect. It tends to result in a more even distribution of wealth because of the redistributive consequences of policies that appeal to the majority of voters. We know this too: the evidence of the post-war era throughout the western world supports it, as does the recent counter attack by plutocrats like Mitt Romney. His infamous 47% comment is hardly the stuff of a true believer in democracy. It was the rage of a plutocrat feeling put upon by the desires of the masses. He called them moochers. We call them voters.

When you get the two forces out of balance you end up damaging society. Too mush capitalism and you arrive at today’s inequality. Too much democracy and you lose the innovative edge that drives future prosperity. The trick is to find an acceptable middle ground where the pay-off to capital is still enough to boost growth, but not enough to plunge us all back to the dark ages of outright laissez-faire, exploitation, and mass hardship.

In my mind, growing up as I did in the UK, nothing more epitomizes a divided society than the Edwardian era. It was an age of huge wealth, rapid growth, great power, and a massively divided society. Domestic servants – my grandmother included – were a very large part of the economy. While on the surface society was both prosperous and successful, the imbalance caused by those deep divisions in wealth made it both fragile and unsustainable. When society came into contact with a disorienting event that fragility gave rise to a great reorganization of society, even though the reorganization took a generation to work through.

That even came in the form of the First World War, which shattered not just the prior complacency of the ruling class, but empowered the masses who bore the brunt of its suffering. Then came the Great Depression as a second and confirming shock after which democracy took hold sufficiently to lead to the rise of the modern middle class. We would all do well to remember that the modern middle class is not the natural progeny of market based economics, but is, instead, the offspring of the democratically enabled redistribution of wealth implied by the post-war social contract. The permanent and increasing integration of women in the workforce; the provision of retirement and other government backed benefits; and the acceptance of a balance between the returns to wages and the returns to capital all were political results of the tilt away from pure capitalism towards a greater balance with democracy. Those masses that the right wingers so revile asserted themselves through the ballot box and brought the often vacuous phrase “We the People” to life.

But after nearly forty years of regression, the near worship by our elite of market based solutions to each and every problem, the relentless pursuit of profit at the expense of wages, and the toxic criticism of the role of government we are back, as Johnston argues, in a neo-Edwardian era. Only this time it’s worse.

Whereas domestic servants like my grandmother were given room and board along with their pitiful pay, today’s equivalents are not. They both pay taxes – despite what the Romneys of the world say – and they pay for their own room and board. They are thus worse off than their predecessors. They are also more exposed to the neglect and exploitation of the maxims undergirding modern big business. As corporate America pursues profit at any expense, and decouple productivity growth from wages, it acts to drive down those wages and thus the ability of workers to progress. Big business has done more to destroy the concept of opportunity and to deconstruct our middle class than any other force. Companies like Walmart and MacDonald’s have made it socially acceptable to pay wages so low that many of their employees have to rely on welfare to sustain themselves.

Of course we all benefit from being able to buy incredibly cheap products. But the cost to society is huge. And, amongst other things, one major and little commented upon side effect of the low wage economy is that we, the taxpayers, end up having to provide welfare for those caught in it. So those supposed low costs, which is the big benefit society is supposed to reap from a low wage regime, is an illusion. We end up subsidizing the profits of the likes of Walmart whose workers can only work for those low wages as long as taxpayers help out and chip in welfare to top up their incomes.

This is not a sustainable balance for our society. We ought not subsidize the greed of the Walton family whose low wage policy means we have to pay extra in taxes to support their workforce via welfare. They ought to be able to pay for their own workers. And they ought to pay a living wage.

Recent rumblings and resistance amongst low wage workers suggest that we have hit a tipping point. Or that we are close to one. The business model that companies like Walmart employ, which is based on exploitive wages offset by taxpayer subsidy, is, in fact, far worse than the old Edwardian domestic service model. The older exploitation was partially offset by a paternalism that sugar coated it for a while. Now the exploitation is both unabashed and lauded by a large part of our elite who, brought up on a steady diet of market magic economic theories, see nothing wrong with lowering wages and imposing greater burdens on those least able to carry that burden. After all, as we are told, poverty is a great incentive to the poor to get to work. And to get to work at any wage they can find. Which is usually lower than a living wage.

In this vein Rand Paul, whose economic ideas are based on the fictions of Ayn Rand and the Austrian School of thought, can credibly argue that unemployment assistance hurts workers because it stops them from seeking low wage work. This is another throw back to pre-democratic days. Samuel Smiles wrote a very popular book in the Victorian era arguing exactly the same thing. It was called “Self Help” and was aimed at the poor who, Smiles argued, could help themselves by pursuing the puritan virtues of hard work and self reliance. Government aid was seen as a hindrance to self help by conservatives then as it is is now.

But in the interim, between that old era, and today’s replication of it, we experienced the alternative. An age of government assisted and democratically enabled redistribution to mitigate the many evils of capitalism without surging all the way to outright socialism.

Marx saw the emergence of modern democracy as a step along the road to socialism. He was wrong. It was a bulwark against socialism. Modern capitalists, our plutocrats and the elite that enable them, would do well, though, to recall Marx’s insights. Capitalism has within it the engine of its own destruction. This is because of its massive and destructive influence of society. In modern terms this influence is the inequality that now threatens us all. They would do equally well to recall that it was democracy that provided sufficient respite and prevented all out socialism from emerging throughout the western world.

Getting that balance correct is crucial. Right now we have it wrong.

Are you being served?

If so, think twice. You may be the one in service.

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When is a Contract a Contract?

Dean Baker complains about AIG bonuses being honored because they’re contracts, whereas Detroit and, possibly, Chicago city employees pensions are in line to be slashed despite being contracts.

Such is life in a plutocracy.

This really ought not surprise anyone. The rules for the elite are, and have always been, different. A contract to pay the CEO of a large financial company that had to be saved by taxpayers and whose activities contributes mightily to the enormous economic crisis we are still trying to leave behind is considered sacrosanct. After all it is a contract. And we know what that means. Well it means we have to pay up even though its morally repugnant, smacks of corruption, and is just plain daft. The contract has to stay.

But those workers out in Detroit, they contributed to the problems Detroit had. They pretty much drove it into bankruptcy because of their padded employee benefits and wages. Chicago looks like it’s going down the same road. Those contracts are the cause of the problem. The city has every right to break the contract as part of its bankruptcy proceedings. In this case the contract is repugnant, possibly corrupted by unions influence, and is just plain daft. It has to go.

It used to be comforting to think that the saying “one rule for the rich, another for the poor” was just that: a saying. We could all pretend that America was a land of equal laws, even though we all knew deep down that rich folk can always get away with stuff we can’t.

Now, in these years of crisis, we are exposed to the ugly truth far too frequently. Big business and rich people have one set of laws. The rest of us another. In their laws a contract is inviolate. To break it you have to have extreme extenuating circumstances and/or a well paid lawyer. In our laws a contract is a suggestion. To break it you have to be a creditor who has friends amongst the elite and/or a well paid lawyer.

We are hearing a great deal lately about how those onerous public employee pensions are breaking that back of our cities. A line is forming as cities compete to break longstanding agreements with workers. Rich suburbs are trying to separate themselves from less well off inner cities in order to pay lower taxes and avoid supporting the old infrastructure that many commuters complain about as they go to work each day. The media is writing screeds about how old union contracts are now hopelessly expensive, and about how much of each year’s operating revenue is shelled out to support retirees as opposed to fixing today’s potholes.

Yes, perhaps, those contracts were a bad deal. But they were negotiated in good faith. They were, and still are contracts.

And, yes, I get that sometimes a contract is worthless if there’s no means to honor it. Perhaps that’s where Detroit actually is. Yet again, that’s exactly where AIG was.

So I wonder, why is it acceptable to honor one and not the other? And if we can bail out GM, why can’t we bail out Detroit? After all they used to be one and the same, back in the day when a contract was contract.

Before the plutocracy, that is.

 

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Another Walmart Goodie?

The Cleveland Plain Dealer reports that a Walmart in Canton Ohio is having a drive to raise food for the needy. How socially aware of them. And so unusual for Walmart, which normally displays a regard for society at the level of Attila the Hun.

Except.

In this case the food drive is designed to help Walmart employees and not the public.

I wonder whether we file this piece of corporate wisdom in the same category as the recent MacDonalds advice personal finance to its employees who were assumed, in the illustrative budget they were given, to have no heating costs and so on. Only then could they save anything given the wages MacDonalds pays.

Back to Walmart.

Now it could be that a few employees had set the drive up on their own, without management consent, and that it is thus a local well intentioned effort to help co-workers. I am suspicious though. Mainly because Walmart’s management operates along the lines of a cross between the Gestapo, the Stasi, and the NSA. Remember, this is a company that has locked its employees in so that they don’t take unauthorized breaks. So the idea of anything resembling a food drive taking place without management consent is tenuous to say the least.

Maybe Walmart could pay its employees enough that they didn’t have to rely on charity for subsistence. Then again that might disrupt this year’s divined payout to the Walton family. Or it might lower senior management bonuses. And we don’t want to do that. Personally I am surprised we haven’t seen this food drive held up as another example of the “have-nots” trying to mooch of the “haves”. I just don’t get why the little people – the kind who resort to working for below living wages at places like Walmart – can’t make do with less. It’s not as if they have important things to do, or that they work for what they earn, like, say, the Walton family does.

Horrid, don’t you think?

Addendum:

You will notice in the story that there is a fund within Walmart that gives grants to employees in need – things like being homeless count as a “need” in this case. What you might miss as you read the article is that this fund is financed by employee payroll deductions. It isn’t a company effort at all. Although the company spokesman is clearly trying to position it such that the fund is viewed as an example of Walmart’s employee outreach. The gall of the company is astonishing. More astonishing is that, apparently, homelessness is common enough amongst its employees that it gets a mention as an example of the type of problem the fund is set up to offset.

Living wages? No. That can’t be part of the problem. Can it?

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Inequality Is Political

Let me end the week by tying a few things together. Bear with me.

First, I have spent some time talking about inequality. I see this as our greatest long term issue, but more in terms of politics than economics. Why? Because the extent of inequality in society is something we choose through our political action or inaction. There will always be some degree of inequality. I see that a a fact of life. Asymmetries abound. Inconsistencies, mistakes, and plain dumb luck all conspire to make the distribution of society’s spoils a very lumpy and uneven affair. This we cannot change. But we can, I believe, expand or contract the difference between top and bottom if we so choose. There is no “natural” level of inequality, it is entirely a function of policy.

With that said, I see our current level as both morally unacceptable and socially disruptive.

I will leave the moral commentary as self explanatory: there is no way our CEO’s can justify their disproportionate share of the spoils. It was not long ago that they were satisfied with much less. Only in the past few decades has it become socially acceptable for them to rake in what they do now.

As for the social impact, I see two vectors through which damage is done.

One is the slow erosion of demand. The demand created by wage incomes and the demand created by capital incomes is not equal. So even though the total remains the same the distribution plays a role. In other words an economy with a 50/50 split between wages and capital incomes experiences different performance than one with a 30/70 split. This is due to the way in which people with power incomes – which tend to be wage driven – save or spend as opposed to people with higher incomes – which tend to have a higher capital component – save or spend. That’s just the way I see it. Others disagree.

Even if this is not true the second vector of damage is, I believe, supported by a more secure argument. It is politically disruptive, over time, for the majority of the spoils from growth to go to a concentrated few. History is replete with societies whose stability was undone by inequality. More often than not this instability was offset by force – authoritarian or autocratic oppression preserved the unequal society. So I ought restrict myself to making the argument that long term and large movements away from relative equality are destabilizing for democratic societies.

And this is where I see we are today.

There has been a consistent and very large shift in the degree of inequality in the US during the past three to four decades. This shift is potentially destabilizing. It fosters a deterioration of allegiance to social programs as they are viewed, even by their beneficiaries, as burdensome. It degrades the level of collective commitment to redistribution of wealth. And, in my view, redistribution is the key to stolid democracy because it prevents the concentration of wealth that can be used to subvert it. Money buys power, it always has, and is not equal to free speech no matter what out right wing Supreme Court says. So the prevention of excessive accumulation of wealth is the surest safeguard of democracy we have.

We can make a kind of converse argument too.

The paraphernalia of capitalism is, I think, a better mechanism for generating wealth than any other. Private property, relatively free exchange, and modest government interference in markets have, by and large, produced wealthier societies than other combinations and other principles. But capitalism also breeds greater inequality because those lucky enough to flourish within it are able, absent social constraints, to accumulate more rapidly than those less lucky. Hence the need for the redistributive urge of democracy.

A wise capitalist is, therefore, one who surrenders substantial wealth in order to preserve democracy, and not one who seeks to undermine it by excessive accumulation. Similarly, a wise democrat is one who tolerates some element of inequality as the price paid for the extra wealth generating power of capitalism.

The two systems clash. The two systems enable each other, but only in moderated form. We can understand the combination as having a feedback loop that prevents either system from careening off into a pure form.

Today’s high[er] level of inequality suggests, to me, that the feedback loop is not working well. We have too little redistribution and too much accumulation. If this continues we risk destroying both systems because neither capitalism nor democracy in a pure form can survive the social instability they engender. With democracy being the more likely loser of the two.

However, as I see it, our current leadership is oblivious to such risks and sees its role as protector of an economic system that comprises of, and only protects, those with capital. Redistribution, the heartbeat of democracy, is looked at askance. This we know because of the almost total agreement that “entitlement programs” throughout the western world are regarded as being unaffordable. Which they may be if society’s goal is to enable excessive accumulation.

We can detect this bias in our leadership in all sorts of ways. The latest being the downgrading of French sovereign debt by Standard and Poor’s. This downgrade comes despite the French having made good progress towards debt control and deficit reduction. Better progress than, for instance, the British whose economy S&P still lauds. Why does S&P express a negative attitude towards the French with their superior record? Because the French didn’t make progress by reducing entitlements or by reducing redistribution, they did it by raising taxes – by reducing excessive accumulation. They defended democracy not capitalism. They tried to protect that feedback loop.

Another example, closer to home, is the almost total emphasis in Washington on debt control and deficit reduction even though the evidence is piling up that such emphasis is causing great long term damage to the economy. By some accounts we have reduced our future wealth production capability by 7% because we decided to protect capital and not jobs/wages. This reduction will then be used to justify, further, the argument that we can no longer afford to redistribute as much as before.

This will make inequality worse. It will undermine our politics further.

One last thing: recent research has shown a remarkable consistency of support amongst voters for redistribution, no matter what their expressed political opinions are. Indeed so-called Tea Party supporters are far more likely to support higher taxes and increased government spending when they discus programs is substance rather than in theory. This is a well known paradox in American politics. The longstanding  tradition of opposing “big” government is an abstract not a concrete notion. It motivates Tea Party supporters when they are confronted only with the abstraction. But when they are asked to comment in detail on actual programs and to comment at a concrete level they express an attachment to redistribution that is, in political terms, to the left of center.

The implication is clear: our leadership, in political terms, sits well to the right of the majority of voters, even those who vote for right wing politicians. There is a disconnect of epic proportions. Why? Because our governments, and our major financial institutions worldwide, are run, or deeply conditioned by, corporate and plutocratic interests. Those interests scorn redistribution. Thus they scorn democracy. And they are armed, by and large, with economic theories that argue inequality is not a problem, but rather is a natural outcome of free markets at work.

Until the influence of those interests is reduced we can expect inequality to increase, and with it the risk of greater social tension and confrontation.

I know many of you disagree with me, but I hope this is a more clear exposition of my point of view.

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