Lately, here in the United States, we have witnessed an astonishing socio-economic trifecta which tells us where we stand. Unfortunately for progressive thought, we are not in a good place, to wit—
1. In the McCutcheon decision, wealthy campaign donors were given the go-ahead to buy political candidates and elections by the "conservative" majority on the Supreme Court. This decision follows on the heels of the Citizens United ruling, which got the ball rolling vis-a-vis dismantling the 1974 Federal Election Campaign Act. The court's four liberal justices understood the consequences.
In their dissent, the court's four liberal justices called their colleagues' logic "faulty" and said it "misconstrues the nature of the competing constitutional interests at stake." The dissent continues, "Taken together with Citizens United v. Federal Election Commission, today's decision eviscerates our Nation's campaign finance laws, leaving a remnant incapable of dealing with the grave problems of democratic legitimacy that those laws were intended to resolve."
Unfortunately for democratic legitimacy...
2. A Princeton/Northwestern study found that there isn't any democratic legitimacy to defend in so far as "the preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy." The study found that policy in the United States is created at the behest of an economic elite.
And we have recently learned just how small that elite group is...
3. The work of University of California-Berkeley economists Emmanuel Saez, Gabriel Zucman and others has recently come to the attention of our mainstream media. It turns out the Occupy folks got it wrong. It wasn't the top 1% of earners which posed a problem for democratic legitimacy. It was the top 0.1%, and within that smaller group, the top 0.01% who received most of the income gains of the last 30 years. And with the publication Thomas Piketty's Capital In The 21st Century, those paying attention have come to understand that the grotesque inequities of 19th century capitalism will likely be repeated in the 21st.
All these events or findings are of a piece. Taken together, they document the ongoing failure of the classic liberalism which dominated 20th century economic thinking.
The progressive dream dies hard, but before I get to that, permit me to pound the final nails into the liberal coffin.
Inevitable Social Inequality
In the Internet Age everything and everybody is interconnected, yet, the humans who can access all that information have not changed at all. And thus the vast psychological distance between the sociology and economic departments in American universities has not been bridged, nor will it be anytime soon. If that bridge did exist, liberal economists, including those who contribute to public policy, might be astonished to read the first paragraph of Stanford sociologist David B. Grusky's Contours of Social Stratification.
Contemporary stratification research seeks to characterize inequality and explain its persistence despite modern egalitarian or anti-stratification (progressive) values.
Take a moment to let that first paragraph sink in before turning to Table 2 from that document.
We are interested in class C, industrial societies. There are two things to notice. First, the state socialism experiments of the 20th century (those with "low-medium" inequality) all failed. China may be politically communist, but economically, it has adapted most (if not all) of the features of Classical Liberalism.
Second, the work of Piketty, Saez and others tells us that the "advanced" industrial countries are moving rapidly from the "medium" inequality of the post-World War II decades to the "medium-high" inequality of a 19th century-like Class system. Up to now, thankfully, we have avoided the "high" inequality of feudalism, slavery, caste societies etc.
In short, it looks like "medium-high" inequality is as good as it gets.
And so we have the answer to Buttonwood's question, as posed in Back to the 19th Century (The Economist, March 10, 2014).
Another important issue is the extent to which inequality (or equality) is normal. Here we may have been misled by the middle of the 20th century which saw a dramatic reduction inequality, known as the Great Compression. This was down, Mr. Piketty suggests, to the effect of world wars, high taxes and high inflation which destroyed private wealth (by contrast, in the 19th century, many upper class people lived quite comfortably off the income from government bonds).
Although Buttonwood does not have the answer—he has never met a researcher in stratification studies—we do have it, thanks to the wonderful interconnectedness of the Internet.
Inequality in large, complex human societies is normal, typical, expected, etc.
History and current circumstances do not permit any other answer.
You now have a distinct advantage in any discussion of income and wealth inequality, an advantage which liberal economists like James Galbraith do not have. And now let us turn to him.
The Progressive Dream Dies Hard
Although James Galbraith is overshadowed by his illustrious father, John Kenneth Galbraith, he towers over mediocrities like Paul Krugman, who is little more than a publicity whore. If you're going to pick a fight, go with the best.
Writing for the magazine Dissent, Galbraith wrote a detailed and informative review of Piketty called Kapital for the Twenty-First Century? (Capital with a "K" is obviously a reference to Karl Marx. I am also reminded of the old Woody Allen joke from Annie Hall — "I heard [the progressive magazines] Commentary and Dissent had merged and formed Dysentery )
Galbraith starts off by examining the flaws in Piketty's idea of what constitutes "capital" and what does not.
To summarize so far, Thomas Piketty’s book about capital is neither about capital in the sense used by Marx nor about the physical capital that serves as a factor of production in the neoclassical model of economic growth. It is a book mainly about the valuation placed on tangible and financial assets, the distribution of those assets through time, and the inheritance of wealth from one generation to the next.
Why is this interesting? Adam Smith wrote the definitive one-sentence treatment: “Wealth, as Mr. Hobbes says, is power.”
Private financial valuation measures power, including political power, even if the holder plays no active economic role. Absentee landlords and the Koch brothers have power of this type. Piketty calls it “patrimonial capitalism”—in other words, not the real thing.
I recommend that you read the critique which precedes this brief summary. However, before Galbraith wrote this brief summary, he got to the heart of the matter. We need to set it up.
How original and how reliable are these measures? Early on, Piketty makes a claim to be the sole living heir of Simon Kuznets, the great midcentury scholar of inequalities. He writes:
Oddly, no one has ever systematically pursued Kuznets’s work, no doubt in part because the historical and statistical study of tax records falls into a sort of academic no-man’s land, too historical for economists and too economistic for historians. That is a pity, because the dynamics of income inequality can only be studied in a long-run perspective, which is possible only if one makes use of tax records.
The statement is incorrect. Tax records are not the only available source of good inequality data. In research over twenty years, this reviewer has used payroll records to measure the long-run evolution of inequalities; in a paper published back in 1999, Thomas Ferguson and I tracked such measures for the United States to 1920—and we found roughly the same pattern as Piketty finds now.
And now we get to the important stuff.
It is good to see our results confirmed, for this underscores a point of great importance. The evolution of inequality is not a natural process.
You can see where I'm going with this.
The massive equalization in the United States between 1941 and 1945 was due to mobilization conducted under strict price controls alongside confiscatory top tax rates. The purpose was to double output without creating wartime millionaires. Conversely, the purpose of supply-side economics after 1980 was (mainly) to enrich the rich.
In both cases, policy largely achieved the effect intended.
Yes, that's how it worked. However, Thomas Piketty, whose work Galbraith is reviewing, also concludes that the post-World War II decades in the "advanced" economies were an historical anomaly. Galbraith is undeterred.
Under President Reagan, changes to U.S. tax law encouraged higher pay to corporate executives, the use of stock options, and (indirectly) the splitting of new technology firms into separately capitalized enterprises, which would eventually include Intel, Apple, Oracle, Microsoft, and the rest. Now, top incomes are no longer fixed salaries but instead closely track the stock market. This is the simple result of concentrated ownership, the flux in asset prices, and the use of capital funds for executive pay.
During the tech boom, the correspondence between changing income inequality and the NASDAQ was exact, as Travis Hale and I show in a paper just published in the World Economic Review.
While all of this is true, it misses the point. Wealthy elites establish self-interested competitive advantage by shaping policy through corruption of the political process. “Wealth, as Mr. Hobbes says, is power.” Special interest dominance in politics and financialization of the U.S. economy began in earnest under Reagan and proceeded apace during subsequent administrations up to the current day. The inequality wedge visible in various income graphs grew and grew. In the post-Reagan Era, Republicans have run the show (held the White House) for 12 years, and Democrats have run it for 14 years. Legislating inequality has been a bipartisan affair.
However, if "medium-high" inequality is the best complex human societies can achieve, the evolution of inequality is entirely a natural process. And so is corruption of the political process in modern industrial "democracies" which creates such inequality. And thus we are forced to conclude that if we hadn't gotten Ronald Reagan in 1980, we would have gotten another version of Reagan sooner or later. Reagan himself was an historical accident (aside from being a bad Hollywood actor). Crucially, the trend Reagan initiated is the historical norm.
As you contemplate what is natural and what is not in large, complex human societies, let us take a brief break. This clip is from 1951.
So it helps Galbraith not at all to say that corruption of policy-making is "not a natural process" in light of what we know about social stratification in complex human societies.
The lay reader will not be surprised [that the political process was corrupted].
Academics, though, have to contend with the conventionally dominant work of (among others) Claudia Goldin and Lawrence Katz, who argue that the pattern of changing income inequalities in America is the result of a “race between education and technology” when it comes to wages, with first one in the lead and then the other. (When education leads, inequality supposedly falls, and vice versa.)
As I've noted before, economists who benefit from the status quo always find a way to rationalize (defend) it, in this case by postulating some phony "race between education and technology" which allegedly sets wages. But reality is never the same as the rationalization.
Piketty pays deference to this claim but he adds no evidence in favor, and his facts contradict it. The reality is that wage structures change far less than profit-based incomes, and most of increasing inequality comes from an increasing flow of profit income to the very rich.
Yes. And now, Galbraith briefly considers the world as a whole.
In global comparison, there is a good deal of evidence, and (so far as I know) none of it supports Piketty’s claim that U.S. income today is more unequal than in the major developing countries. Branko Milanović identifies South Africa and Brazil as having the highest inequalities. New work from the Luxembourg Income Study (LIS) places Indian income inequality well above that in the United States. My own estimates place United States inequality below the non-OECD average, and my estimates agree with those of the LIS on India.
Yes, again. To quote sociologist David B. Grusky, "the brute facts of poverty and massive inequality are still everywhere with us."
According to Forbes, the global situation is much worse than Galbraith's brief review implies.
Oxfam International, a poverty fighting organization, made news at the World Economic Forum in Davos earlier this year with its report that the world’s 85 richest people own assets with the same value as those owned by the poorer half of the world’s population, or 3.5 billion people (including children). Both groups have $US 1.7 trillion. That’s $20 billion on average if you are in the first group, and $486 if you are in the second group.
Oxfam’s calculations of the richest individuals are based on the 2013 Forbes Billionaires list. I decided to take a closer look at this group of 85 in search of trends. That’s when I realized that they are by now a much wealthier group. The rich got richer. And it was quite fast and dramatic. For example, while last year it took $23 billion to be in the top 20 of the world’s billionaires, this year it took $31 billion, according to Luisa Kroll, Forbes wealth editor, writing on Forbes.com.
As a result, by the time Forbes published its 2014 Billionaires List in early March, it took only 67 of the richest peoples’ wealth to match the poorer half of the world.
(For the purpose of this blog, I will put aside the conversation about the importance of income inequality versus impoverishment. This has recently been skewing strongly toward recognition of the importance of income distribution and its inequality, most recently with the publication of Capital in the Twenty-First Century by Thomas Piketty.)
Each of the 67 is on average worth the same as 52 million people from the bottom of the world’s wealth pyramid. Bill Gates,the world’s richest man, with a net worth of $76 billion, is worth the same as 156 million people from the bottom.
Who are the 67? The biggest group—28 billionaires, or 42% of them—is from the United States. No other country comes close...
Forbes goes on to tell us some things about those 67 people. But do we care who they are? Not really, in just the same way that we should not care that it was bad Hollywood actor Ronald Reagan who opened the flood gates which allowed Rentiers to establish a Kleptocracy. We care only about the inevitable existence of someone like Reagan and the inevitable existence of some very small group of people (67 in 2014) who have as much wealth as the bottom 3,500,000,000.
Galbraith might have concluded that great economic inequality is the natural condition of humankind because there is high inequality everywhere in the developing world, and increasing inequality in the developed world. Perversely, he does not come to that conclusion. Why not?
The answer is surprisingly simple and deceptively so. Galbraith is a Progressive, an adherent of the secular religion called Progress. To Galbraith, or Thomas Frank, who is quoted below, there is some kind of progressive social evolution in which "advanced" economies like the United States are fairer and "better" than developing economies like India, Brazil and South Africa. And that is demonstrably true—up to a point. Progress is not free, the story goes—you must work hard to achieve and maintain it—but once attained, societies are poised to take the next step on the progressive ladder.
The problem with this story is that all of human history contradicts it, and so do current, well-established trends, especially in the United States, as Piketty and the Berkeley researchers have convincingly demonstrated.
What can be done? It turns out that Thomas Piketty is (quoting Galbraith again) " a garden-variety social welfare democrat in the mold, largely, of the American New Deal."
Piketty devotes only a few pages to the welfare state. He says very little about public goods. His focus remains taxes. For the United States, he urges a return to top national rates of 80 percent on annual incomes over $500,000 or $1,000,000. This may be his most popular idea in U.S. liberal circles nostalgic for the glory years. And to be sure, the old system of high marginal tax rates was effective in its time.
Galbraith knows that returning to high tax rates wouldn't work in the globalized world of 2014.
But would it work to go back to that system now? Alas, it would not.
By the 1960s and ’70s, those top marginal tax rates were loophole-ridden. Corporate chiefs could compensate for low salaries with big perks. The rates were hated most by the small numbers who earned large sums with (mostly) honest work and had to pay them: sports stars, movie actors, performers, marquee authors, and so forth.
The sensible point of the Tax Reform Act of 1986 was to simplify matters by imposing lower rates on a much broader base of taxable income. Raising rates again would not produce (as Piketty correctly states) a new generation of tax exiles.
The reason is that it would be too easy to evade the rates, with tricks unavailable to the unglobalized plutocrats of two generations back. Anyone familiar with international tax avoidance schemes like the “Double Irish Dutch Sandwich” will know the drill.
Having been realistic with Piketty's suggestion, Galbraith indulges his own Progressive fantasy.
If the heart of the problem is a rate of return on private assets that is too high, the better solution is to lower that rate of return. How?
Raise minimum wages! That lowers the return on capital that relies on low-wage labor.
Tax corporate profits and personal capital gains, including dividends!
Lower the interest rate actually required of businesses!
Do this by creating new public and cooperative lenders to replace today’s zombie mega-banks. And if one is concerned about the monopoly rights granted by law and trade agreements to Big Pharma, Big Media, lawyers, doctors, and so forth, there is always the possibility (as Dean Baker reminds us) of introducing more competition.
None of Galbraith's policy recommendations has a snowball's chance in Hell of becoming reality, but the progressive dream dies hard.
A Clue Is A Terrible Thing To Waste
Thomas Frank's Plutocracy without end: Why the 1 percent always defeats the middle class is a remarkable document. Frank is the editor of the left-leaning magazine Harpers.
I’ve been writing about what we politely call “inequality” since the mid-1990s, but one day about ten years ago, when I was traveling the country lecturing about the toxic curlicues of right-wing culture, it dawned on me that maybe I had been getting the entire story wrong.
All the economic developments that I spent my days bemoaning—the obscene enrichment of the CEO class, the assault on the regulatory state, the ruination of average people—were very possibly not what I thought they were. When I talked about these things, I assumed they were an outrage, an affront to the affluent nation I still believed we were; once the scales fell from our eyes and Americans figured out what was happening, I argued, we would yell “stop,” bring this age of folly to a close, and get back to middle-class prosperity as usual.
Here's that all-important clue.
What hit me that day was the possibility that my happy, postwar middle-class world was the exception, and that the plutocracy we were gradually becoming was the norm.
Maybe what was happening to us was a colossal reversion to a pre-Rooseveltian mean, and all the trappings of ordinary life that had seemed so solid and so permanent when I was young—the vast suburbs and the anchorman’s reassuring baritone and the nice appliances that filled the houses of the working class—were aberrations made possible by an unusual balance of political forces maintained only by the enormous political efforts of its beneficiaries.
Maybe the gravity of history pulled in the exact opposite direction of what I had always believed. If so, the question was not, “When will we get back to the right order of things,” but rather, “Would we ever stop falling?”
Today, of course, the situation has grown vastly worse. The subject of inequality is discussed everywhere; there are think tanks and academic conferences dedicated to it; it has become socially permissible for polite people to wonder about the obscene gorging of those at the top. Sooner or later the question that everyone asks, upon discovering just how much of what Americans produce goes to the imbeciles in the penthouses and executive suites, is this: How much further can this thing go?
That is exactly the right question to ask. And now a strange thing happens. Tom Frank can not live with the clue. He starts talking about Republicans and Glenn Beck!
But the cosmic cavalry never shows up. No deus ex machina will arrive to rescue the middle-class society, either. The economic system is always in some sort of crisis or another; somehow it always manages to survive.
One of the ways it manages to survive, in fact, is by working the public into paroxysms of fear at those who proclaim the inevitable destruction of the system. I refer here not only to the Republicans’ routine deploring of “class war,” by which they mean any criticism of plutocracy, but also to the once-influential right-wing radio host Glenn Beck, who in 2009 and 2010 was just about the only one in America who thought to take seriously the obscure French anarchist tract, “The Coming Insurrection.” Night after night in those dark days, Beck would use the book to terrify his vast audience of seniors and goldbugs—anarchy was right around the corner!—and to this day you can still find the tract on the reading lists of 9/12 clubs across the country.
Let us not forget that it was thanks to the energetic activity of those 9/12 clubs and the closely aligned Tea Party that the obvious and conventional — and maybe even inevitable —response to the 2008 catastrophe was not the response the public chose.
The government response to the 2008 catastrophe had no chance of ever being what the public might want, and had nothing to do with the Tea Party and 9/12 clubs. The government, independently of who is running the show, is almost a wholly-owned subsidiary of America's economic elites (look once again at the introduction to this essay).
Frank forgets all about the clue and capitulates at the end by sticking with the progressive story, though he does up the difficulty of things.
The ugly fact that we must face is that this thing can go much farther still. Plutocracy shocks us every day with its viciousness, but that doesn’t mean God will strike it down. The middle-class model worked much better for about ninety-nine percent of the population, but that doesn’t make it some kind of dialectic inevitability. You can build a plutocratic model that will stumble along just fine, like it did in the nineteenth century. It requires different things: instead of refrigerators for all, it needs bought legislatures and armies of strikebreakers—plus bailouts for the big banks when they collapse under the weight of their stupid loans, an innovation of our own time.
All this may be hurtful, inefficient, and undemocratic, but it won’t dismantle itself all on its own.
That is our job. No one else is going to do it for us.
That is our job. Oh, my! Talk about Sisyphus pushing a rock uphill.
What IS Our Job?
I'm about to give humanity some advice. Imagine that! I can't think of anything more futile.
To humans everywhere, and especially Progressives, I suggest that you take the clue Thomas Frank ultimately rejected and run with it. Don't run away from Reality. Work with it instead.
In the case we're discussing today, the reality is that all large, complex human societies have "medium-high" or "high" inequality. When there are historical exceptions to the rule, they are shortlived—human societies eventually trend back toward the "pre-Rooseveltian mean" (quoting Frank).
My advice is deceptively simple—start talking openly about this historically persistent social reality. Examine deep causes, look at innate (and sometimes contradictory) human preferences. For example, is it the case that "conservatives" actually want an authoritarian and stable social order? (I believe that's what they want.) That these people are very uncomfortable in an "open" liberalized society? Well, why is that? What's going on there?
It is not sufficient to divide the United States into two parts, America proper (good liberals) and Dumfuckistan (bad conservatives). That solves nothing. While liberals and conservatives fight with each other, the real owners of the United States are robbing us blind.
But that's only one example. Once you open up the Human Nature can of worms, things get complicated fast. But that's what you've got to do. I am a Determinist, meaning I think the Human Condition is written in stone, but if humans want to give themselves Free Will and actual choices, they've first got to to examine who they are.
In the case of social inequality, the historical record provides ample and sufficient evidence regarding how large, complex human societies evolve over time, especially when there are great concentrations of economic, political and military power (the United States, the Roman Empire, etc.). If you want to create a "better" society, you have to start with the Awful Truth and proceed from there.
Otherwise, humans are simply operating in the dark, as they always do. And Thomas Frank basically admits as much. Once you've pushed that rock to the top of the mountain, it always rolls right back down again.
So, if you're a dissatisfied human—and if you're being honest, who isn't?—that's your job.