THE 1% SOLUTION / THE ECONOMIST ( VERY HIGHLY RECOMMENDED READING )

Inequality


The 1% solution

Apr 15th 2011, 15:03 by M.S.


MY COLLEAGUE and I have something in common: we both think (http://www.economist.com/blogs/democracyinamerica/2011/04/inequality_and_politics) concentrations of power in alliances between gargantuan business institutions and gargantuan government institutions are generally terrible. My colleague and I don't have much in common in how we analyse the formation of those concentrations of power, or what we think should be done about them. Another thing my colleague and I have in common is that we each think the other guy's approach to this problem is hopelessly naive. And another thing we don't have in common is that I largely agreed with Joseph Stiglitz's article in Vanity Fair (http://www.vanityfair.com/society/features/2011/05/top-one-percent-201105?currentPage=all) , which my colleague describes as an example of self-refutingly absurd liberal ideology. To sum up the basic thrust of what I agree with in Mr Stiglitz's piece: I think the rich are getting much, much richer, while regular people (in the developed world, which is what we're talking about here) are at best treading water. I think that wealth brings power, and the fact that the rich are getting much, much richer relative to everyone else means that the rich also exert increasing influence over the economy, government and society. I think income mobility and equality of opportunity have declined in America over the past 40 years, to the point where America is now more segregated by class divisions than many European countries. I think a major reason for these shifts has been the increasing dominance, since the Reagan era, of an ideology that is indifferent to or actively celebrates inequality of income. I think this ideology is bad: bad for the economy, bad for society, bad for art and culture, bad for the moral character of those who subscribe to it. My chief difference with Mr Stiglitz is that I think his confidence that inequality will eventually lead to a vociferous political reaction against wealthy financial elites in America is misplaced.


I'm going to get to more fundamental issues, but first, I have to address my colleague's reference to a post by Scott Winship (http://www.scottwinship.com/1/post/2011/04/nobel-laureate-joseph-stiglitz-is-all-sorts-of-wrong-on-inequality.html) that claims that Mr Stiglitz got all his numbers wrong. The first claim on that post is that the top 1% of American earners take in not "nearly a quarter" of all American income, as Mr Stiglitz says, but 18% of all income, according to figures by Emmanuel Saez and Thomas Piketty, respected economists. But a commenter quickly notes that Mr Winship made a mistake here: he used Messrs Saez and Piketty's figures for income not including capital gains. This is like saying that the Queen of England doesn't really earn that much, if you don't count the money the state pays to maintain her palaces and cover her servants, food, clothes, parties and travel. The top 1% earn a large and increasing portion of their income from capital gains; it's my understanding that for hedge-fund managers, the entirety of their income is counted as capital gains due to the carried-interest rule. Mr Winship has a number of other problems with Mr Stiglitz's figures. And I don't know whose figures are better. But I am confident that on each of these claims, an argument between Mr Winship and Mr Stiglitz is going to come down to an abstruse conflict over different data sets. There is simply no way that Joseph Stiglitz inserted, say, the figure that the top 1% of Americans control 40% of the country's wealth off the top of his head. And all of the authorities Mr Winship cites also agree that inequality of income has grown markedly in America over the past 30 years. Arguing over percentages seems to me, to quote Mr Stiglitz, like an effort to "(pretend) that what has obviously happened has not in fact happened."


More importantly, I don't understand why my colleague, who professes to be rather indifferent to the level of inequality in society, cares whether the top 1% take in 18% or 25% of national income. I tend to think that the fact that defenders of inequality spend so much time trying to fight back on these stats suggests that they are not so confident that there is nothing morally wrong with yawning differences in wealth, or with extraordinary portions of overall income being harvested by those at the very tip of the pyramid.


But a wise blogger once said that it's a good principle to argue about other people's main points, not to quibble over side issues. So let me get to the main thrust of my colleague's point about the liberal "Ouroboros". He agrees that the financial-governmental complex is a new version of the military-industrial complex, which itself is still very much perniciously in business:


The problem is that we are multiplying military-industrial complexes. But this explosion in public-private "partnerships", and the inevitable political corruption and economic distortion they produce, is not at bottom due to a plot of the top 1%. It is due in no small part to the success of progressive ideologues like Mr Stiglitz in arguing for ever greater government control over everything.


I can't find any way to make sense of this argument. Here are some examples of bad public-private partnerships: the growth in outsourcing of military and intelligence missions to private security contractors like Blackwater/Xe; the semi-private for-profit but implicitly state-guaranteed status of Fannie Mae and Freddie Mac; implicit government bail-out guarantees for too-big-to-fail financial institutions (TBTFs) such as Citibank, AIG et al.


In the first case, defence and intelligence were formerly government monopolies, and the explosion in extremely profitable outsourcing was a result of the privatisation mania of the 1980s, driven by radical-right free-enterprise fanatics like Eric Prinz. Government control over the military has decreased, not increased, and that trend is certainly not the fault of progressive ideologues. In the case of Fannie Mae and Freddie Mac, LBJ's decision to privatise them was driven by a desire to minimise the government's balance sheet, and had little ideological character; had they remained straight-up government agencies as they were from the 1930s to the late 1960s, they would have played an even more marginal role in the financial crisis. You certainly can't argue that their public-private character resulted from a drive for "ever greater government control over everything"; it was the opposite. In the case of implicit government guarantees for TBTFs, the problem was precisely a lack of explicit rules for government's role regarding systemically important financial institutions, particularly non-bank institutions. The only way to argue that the problem here is too much liberal-driven government involvement would be to argue that we should a) do away with federal deposit insurance and the rest of the New Deal/Basel underpinnings of the modern financial system as they obtain in every developed country, and b) that we should have let the banks, insurers and hedge funds all fail in September 2008. This would not be a serious position and I'm sure my colleague doesn't hold it.


I cannot think of any field in which the growth of public-private partnerships results from "progressive ideologues...arguing for ever greater government control over everything." In every case I can think of, the growth of public-private partnerships is linked to the Washington Consensus-era belief of both conservative and neo-liberal ideologues that anything government can do, the private sector can do better. For that matter, there are plenty of examples of really great public-private partnerships, like many charter schools, or build-operate-transfer deals to get roads, railways, bridges and airports built more efficiently than they might be if done by government. Anyway, the point is that trying to describe the history of the past 30 years, with its great growth in inequality and increasing influence of money on politics, as one of increasingly progressive ideology leading to growing government intervention in the economy seems to me impossibly far-fetched.


The final thing that struck me about my colleague's argument is his objection to Mr Stiglitz's observation that "Wealth begets power, which begets more wealth."


Progressives thrill to this sort of vague slogan, but we are rarely offered an intelligible explanation of how exactly wealth begets power, nor are we offered an intelligible approach to reducing the power of wealth over policy and politics.


Really detailed explanations of how wealth begets power are very valuable, and I agree we should work on more of them. I also agree that figuring out how to reduce the power of wealth over policy and politics is a tough nut to crack. But I really hope my colleague agrees with the basic premise that wealthy people are more powerful than poor people, and that most wealthy people tend to use their power to try to get more wealth. Personally, I think that these disparities of wealth should not be reproduced in the political arena, and that in a truly (hence impossibly) fair democracy, David Koch would literally find it no easier to get the governor of Wisconsin on the phone than my cousin Lisa would. (Actually, it should be easier for Lisa, since she's a Wisconsin voter.) To get anywhere near that kind of fairness, we would have to institute radically different rules for the political game in America, and I don't expect my colleague to share all my beliefs about how to weigh the political equality of citizens against the freedom of billionaires to spend their money on politics. But I do think that if we don't agree that rich people have more political power than poor people and that they use that power to pursue their economic interests, then we've really got a communications problem.