January 29, 2015

Of the 1%, By the 1%, For the 1%: The Emerging Consensus


Mon Apr 11, 2011 at 01:02 PM EDT

Of the 1%, By the 1%, For the 1%: The Emerging Consensus

by DSWright

On the heels of an extremely damning op-ed by the now ex-Inspector General of the Troubled Asset Relief Program (TARP), Nobel-Prize winning economist Joseph Stiglitz has written what could become a historic document.

In the May 2011 edition of Vanity Fair Stigiliz’s article titled "Of the 1%, by the 1%, for the 1%" presents America not as the land of opportunity where hard work, innovation, and little bit of luck can propel a poor man or woman to the top but as a plutocracy where the rich get richer by rigging the economy, via the political system, in their favor:

The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent…While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall.

What is also worth noting is how pervasive this view of the American economy is becoming both at home and abroad…

For instance, the International Monetary Fund (IMF) recently posted on its official blog a story called "Warning! Inequality May be Hazardous to Your Growth" which states:

Many of us have been struck by the huge increase in income inequality in the United States in the past thirty years. The rich have gotten much richer, while just about everyone else has had very modest income growth.

"Modest income growth" is a nice way of saying no growth at all. In fact, average wages in America have not gone up in real terms since 1973 (ouch).

The hope for conservatives and Big Business has always been that potential voters see themselves not as workers with stagnant wages but as consumers who like cheaper products made overseas with low/slave wages or even as investors who profit from the increased earnings corporations reap from lower labor costs. So far it is working.

Stiglitz makes another interesting point in his article, that there is a mythology built by the rich on how they become so privileged:

Economists long ago tried to justify the vast inequalities that seemed so troubling in the mid-19th century—inequalities that are but a pale shadow of what we are seeing in America today. The justification they came up with was called “marginal-productivity theory.” In a nutshell, this theory associated higher incomes with higher productivity and a greater contribution to society. It is a theory that has always been cherished by the rich. Evidence for its validity, however, remains thin.

What is so productive about trading equities, currencies, debt, or commodities? What is being produced for the economy?

The Wall Street answer is (try not to laugh) "risk management" that their activities help offset risk by providing liquid markets to buy and sell in. Which just goes to show you that the rich are not totally without a personality or a sense of humor. And when the market blew up (risk management not being produced, liquidity evaporating) and the Banksters still gave themselves performance bonuses – what was produced then? Silence. Hard to defend the indefensible.

Stiglitz pops another mythological balloon on what activities are actually getting rewarded. Many Americans assume/are told that innovators who come up with breakthrough products are the most rewarded. WRONG:

Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin.

Rigging the economy is apparently more rewarding than breaking barriers. Who knew?

But what about America’s religion? No no, the real one – economic growth. How many times are the American people told "a rising tide lifts all boats." The mantra of the current consensus that growth will solve all these problems. Think again:

So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong. An economy in which most citizens are doing worse year after year—an economy like America’s—is not likely to do well over the long haul.

Stiglitz lists 3 reasons why massive inequality is bad for growth.

1. Growing inequality is the flip side of shrinking opportunity. People are not getting opportunities and are therefore being underutilized in the economy.

2. Rigging the economy for the 1% creates distortions. Monopoly power and special interest tax breaks create inefficiencies by rewarding behavior outside of a market process (politics). Those distortions then multiply and ripple throughout the rest of the economy creating yet more inefficiencies.

3. Thwarts "collective action." America has an under-investment in infrastructure, basic research, and education because the rich are so rich they can provide those services for themselves without the need of a larger society.

This can lead to even more disastrous political and social effects:

The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs. The rich don’t need to rely on government for parks or education or medical care or personal security—they can buy all these things for themselves. In the process, they become more distant from ordinary people, losing whatever empathy they may once have had

I am not sure how empathetic Wall Street ever was, but the Top 1% as a whole used to see themselves as part of the larger society and country. That seems to be rapidly changing.

A central political question I always ask myself (Cicero first noted it) is Qui Bono or who benefits? That question is nowhere more apparent than when analyzing the tea party phenomenon. Poor, dumb people who have no idea what they’re talking about and are actually screwing themselves and their children out of a better country. The people are real, but there is astro-turfing going on at the organizational level by the Top 1%.

Stiglitz offers an explanation of why the Top 1% would do that, and why they benefit:

[The Top 1%] also worry about strong government—one that could use its powers to adjust the balance, take some of their wealth, and invest it for the common good. The top 1 percent may complain about the kind of government we have in America, but in truth they like it just fine: too gridlocked to re-distribute, too divided to do anything but lower taxes.

Want to get rich? Don’t waste your time in the computer lab, invest in government officials:

[O]ne big part of the reason we have so much inequality is that the top 1 percent want it that way. The most obvious example involves tax policy. Lowering tax rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride…Lax enforcement of anti-trust
laws, especially during Republican administrations, has been a godsend to the top 1 percent. Much of today’s inequality is due to manipulation of the financial system, enabled by changes in the rules that have been bought and paid for by the financial industry itself—one of its best investments ever…Wealth begets power, which begets more wealth.

But what about serving the country they take so much from and pay so little back to?

Trickle-down economics may be a chimera, but trickle-down behaviorism is very real. Inequality massively distorts our foreign policy. The top 1 percent rarely serve in the military—the reality is that the “all-volunteer” army does not pay enough to attract their sons and daughters, and patriotism goes only so far. Plus, the wealthiest class feels no pinch from higher taxes when the nation goes to war: borrowed money will pay for all that…With the top 1 percent in charge, and paying no price, the notion of balance and restraint goes out the window. There is no limit to the adventures we can undertake; corporations and contractors stand only to gain

I just want to take a moment here and reiterate this is not some whiny young progressive (like moi) this is a Nobel-prize winning economist who teaches at Columbia and was formerly the Chief Economist for the World Bank. I am a little amazed myself at his language but I am also in no position to question it.

The cultural and social consequences of such inequality may be the harshest aspect. America coming apart at the seems:

Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is this: the erosion of our sense of identity, in which fair play, equality of opportunity, and a sense of community are so important. America has long prided itself on being a fair society, where everyone has an equal chance of getting ahead, but the statistics suggest otherwise: the chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe. The cards are stacked against them.

Wait, what? A good portion of Americans came here from Europe for social mobility and now social mobility is higher in "the old country"???

Stiglitz ends on an ominous note, one that others have spoken to as well:

The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.

But it’s not just Stiglitz, the IMF, Jeffrey Sachs, Ex-Inspector General Barofsky, and many many others are now wondering aloud if the American economy is not hopelessly broken and corrupt.

This recognition and emerging consensus could lead to some serious instability. Americans are used to a high standard of living and are even more unlikely to accept a lower one if the cause is not the business cycle but a corrupt class of parasitic plutocrats stealing their prosperity in back room deals in Washington and New York.

Ball is in your court reader…

Originally posted to DSWright on Mon Apr 11, 2011 at 01:02 PM EDT.


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