Musings on Plutocracy

I trust readers don’t mind that we are a bit heavier than usual on the political-related postings tonight, since this is a slow news week. But that may be useful, given that the big new subtexts at the INET Conference were the importance of “political economy” (three years ago, that expression was seen as having a decidedly Marxist color to it) and the rising wealth and power of the top 1%.

One nagging question is how the increased concentration of income and wealth in the top strata came to pass. The story that this group and their hangers-on would have us believe is that it is all the result of merit and hard work. Two offerings raise doubts about that line of argument.

One is from Robert Scheer in “The New Corporate World Order,” which points out the too-often-ignored fact that US taxpayers support a very high level of military spending, which makes the world safe for US corporations. Do you think US companies would have put plants in China in the absence of a strong US military? Expropriation is always a possibility with an authoritarian government, particularly since they can use trumped up charges to make the process look legitimate (labor or environmental violations that lead a plant to be seized and auctioned to locals, for instance). As Scheer notes,

General Electric, which was bailed out by taxpayers and which stored so much of its profit abroad that it paid no taxes for the past two years, was forced to tighten up, but while cutting its foreign workforce by 1,000 it cut a far more severe 28,000 in the United States….consumer purchasing power is down in the U.S. thanks to the devastating collapse of a housing bubble GE Capital fed with suspect mortgage financing that provided the company with well over half of its profits before the crash…

Of course it will be argued that multinational corporations have the right to arrange their business as they see fit in order to maximize profit. But if that is the case, do beleaguered American taxpayers have to foot the bill? When those corporations run into trouble overseas because of financial hustles or hostile locals and need the diplomatic and military might of the U.S. government to protect their interests abroad, it is again the U.S. taxpayer who must pay to maintain this new world order….. If the companies don’t feel that way, let them operate under the flag of Liberia or the Cayman Islands.

No less important than U.S. military muscle is the power of the American government to construct and enforce a worldwide trade and finance structure to the advantage of U.S.-based multinational corporations. That is why the companies spend so much money lobbying Congress on matters ranging from regional trade agreements to international banking regulations. It is precisely the impact of trade agreements like NAFTA that has facilitated the erosion of well-paying jobs. And it was the deregulation of international banking standards, led by the U.S. Treasury Department under the past five presidents, that created the conditions for the recent disastrous housing and banking meltdown…

Corporate lobbyists attest with their every breath that big government and big business are bedmates in a bountiful venture that impoverishes the rest of us. It is time to admit that we are, in practice if not surface appearance, close to the Chinese communist model of state-sponsored capitalism that sacrifices the interests of ordinary workers, be they in the public or private sector, for the exorbitant profits of the superrich.

Many readers probably agree with Scheer’s assessment. But it does not tell us how we got into this situation where the very richest have gotten such a stranglehold on policy. The recent book Winner-Take-All Politics by Jacob Hacker and Paul Pierson offers an explanation. Per David Runciman in the London Review of Books (hat tip Michael Thomas):

The real beneficiaries of the explosion in income for top earners since the 1970s has been not the top 1 per cent but the top 0.1 per cent of the general population. Since 1974, the share of national income of the top 0.1 per cent of Americans has grown from 2.7 to 12.3 per cent of the total, a truly mind-boggling level of redistribution from the have-nots to the haves. Who are these people? As Hacker and Pierson note, they are ‘not, for the most part, superstars and celebrities in the arts, entertainment and sports. Nor are they rentiers, living off their accumulated wealth, as was true in the early part of the last century. A substantial majority are company executives and managers, and a growing share of these are financial company executives and managers.’

Hacker and Pierson believe that politics is responsible for this. It happened because law-makers and public officials allowed it to happen, not because international markets, or globalisation, or differentials in education or life-chances made it inevitable. It was a choice, driven by the pressure of lobbyists and other organisations to create an environment much more hospitable to the needs of the very rich. It was even so a particular kind of politics and a particular kind of choice. It wasn’t a conspiracy, because it happened in the open. But nor was it an explicit political movement, characterised by rallies, speeches and electoral triumphs. It relied in large part on what Hacker and Pierson call a process of drift: ‘systematic, prolonged failures of government to respond to the shifting realities of a dynamic economy’.

Yves here. I’m not certain I buy the drift theory; the push to the right, meaning for deregulation, less progressive taxation, a reduction in social welfare programs and weakening of labor bargaining power, was the result of an orchestrated effort by an extreme right wing long keen to dismantle the New Deal, and also got some support from large corporations. The big problem of the 1970s was that only a few Keynesian economists decried the big budget deficits of the late 1960s, which with the economy already running in high gear, was certain to cause serious inflation. And then two prominent Keynesians, Samuelson and Solow, further discredited the reigning orthodoxy by declaring that the Philips curve (which has limited empirical support) meant you could not have high inflation and high unemployment at the same time (note I am not a fan of Keynesians; Keynes himself would have been very opposed to a budget deficit in a boom). But such major errors in succession and the perceived severity of the malaise (compounded by the appointment of a particularly weak Fed chairman, Arthur Burns) opened the policy field to new ideas.

Back to Runciman:

One of Hacker and Pierson’s complaints about the way we usually regard politics is that we miss what’s really going on by focusing on the show of elections and the competition between parties. This is the theatre of electoral politics…‘This is no doubt why politics as electoral spectacle is so appealing to the media: it’s exciting and it’s simple…

It is easy to assume that if the rich have been winning in recent decades, the process must have started with the election of the pro-big business, anti-big government Ronald Reagan in 1980 (and concomitantly, Margaret Thatcher in Britain in 1979). But Hacker and Pierson argue that the real turning point came in 1978, during the presidency of Jimmy Carter. This was the year the lobbyists and other organised groups who were pushing hard to relax the burden of tax and regulation on wealthy individuals and corporate interests discovered that no one was pushing back all that hard. Despite Democratic control of the White House and both Houses of Congress, 1978 saw the defeat of attempts to introduce progressive tax reform and to improve the legal position of trade unions. Instead, legislation was passed that reduced the tax burden on corporations and increased the burden on their employees (through a hike in the payroll tax, a regressive measure). All this happened because the politicians followed the path of least resistance – as elected politicians invariably do – and the better organised and better-funded resistance came from the representatives of big business, not organised labour.

Yves here. ECONNED also depicted the Carter Administration as the where the policy shift took place. Back to the article:

What took place in the 1980s was therefore an extension of the Carter years, not a reversal of them. The process of deregulation and redistribution up the chain accelerated under Reagan, who was broadly sympathetic to these goals. Yet it happened not because he was sympathetic to them, but because his sympathies were allowed free rein in a political environment where the opposition was muted and the expected coalition of interests opposed to the changes never materialised.

Yves again. What they are missing is the concerted effort to change social values, which has started as a reaction to the 1960s. That was a big contributor to the lack of pushback. Adam Curtis’ four part BBC series, The Century of the Self, covers this nicely (I strongly recommend it, you can view it on Google Video), as does David Brock’s The Republican Noise Machine. Back to Runciman:

So where did the resistance go? This is the real puzzle, and Hacker and Pierson take it seriously because they take democracy seriously, despite its unhealthy fixation on elections. Democracies are meant to favour the interests of the many over those of the few. As Hacker and Pierson put it, ‘Democracy may not be good at a lot of things. But one thing it is supposed to be good at is responding to problems that affect broad majorities.’ Did the majority not actually mind that they were losing out for the sake of the super-rich elite?….Hacker and Pierson….see strong evidence that the American public do still want a fairer tax system and do still see it as the job of politicians to protect their interests against the interests of high finance. The problem is that the public simply don’t know what the politicians are up to. They are not properly informed about how the rules have been steadily changed to their disadvantage. ‘Americans are no less egalitarian when it comes to their vision of an ideal world,’ Hacker and Pierson write. ‘But they are much less accurate when it comes to their vision of the real world.’

Yves again. This actually does ring true. I was gobsmacked when I lived in Australia to see at all levels of income and education how much better informed people were about domestic and international politics. But many readers would probably disagree with the premise about democracies and instead argue that this is a classic Mancur Olson collective action problem. Back to the article:

Hacker and Pierson’s argument is really a return to a much longer-standing critique of democracy, one that flourished during the 1920s and 1930s but was supplanted in the postwar period by expectations of rational behaviour on the part of voters. This traditional critique does not see the weakness of democracy as a matter of the voters wanting the wrong things, or not really knowing what they want. They know what they want but they don’t know how to get it. It’s because they don’t understand the world they live in that democracy isn’t working. People aren’t stupid, but when it comes to politics they are ignorant, lazy and easily satisfied with pat answers to difficult questions. Hacker and Pierson recognise that it has become bad manners to point this out even in serious political discourse. But it remains the truth. ‘Most citizens pay very little attention to politics, and it shows. To call their knowledge of even the most elementary facts about the political system shaky would be generous.’ The traditional solution to this problem was to supplement the ignorance of the voters with guidance from experts, who would reform the system in the voters’ best interests. The difficulty is that the more the experts take charge, the less incentive there is for the voters to inform themselves about what’s going on. This is what Hacker and Pierson call the catch-22 of democratic politics: in order to combat what’s taking place under the voters’ radar it’s necessary to continue the fight under the voters’ radar. The best hope is that eventually the public might wake up to what is going on and join in. But that will take time. As Hacker and Pierson admit, ‘Political reformers will need to mobilise for the long haul.’

Yet time may be one of the things that the reformers do not have on their side…This, again, is one of the traditional critiques of democracy: while decent-minded democrats are organising themselves to make the world a better place, the world has moved on. In a fast-moving financial environment, it is usually easier to assemble a coalition of interests in favour of relaxing the rules than one in favour of tightening them. Similarly, it’s easier not to enforce the rules you have than to enforce them: non-enforcement is the work of a moment – all you have to do is turn a blind eye – whereas enforcement is a slow and laborious process.

This is a gloomy prognosis, but any realistic assessment is unlikely to be upbeat. I’d be curious to get reader input on both the Hacker/Pierson analysis and what remedies they see as viable.


This post originally appeared at naked capitalism and is reproduced here with permission.

3 Responses to "Musings on Plutocracy"

  1. Joseph Patrick Bulko, MBA   April 25, 2011 at 10:08 am

    I love the smell of plutocracy in the morning! NOT!! Here’s my plan to swipe back power from the financial barons: A Modest Proposal to Save the American Economy: Entrepreneurial Blitzkrieg as Job Creation Vehicle