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Racist voter suppression, which is still a contributing factor to inequality, has a long and shameful history in U.S. elections.   Before the Civil War, the North-South constitutional compromise gave 3/5 representation in national elections to slaves in the South who, of course, couldn’t vote.  After the Civil War, the voting imbalance for national elections became even worse because former slaves were now counted for complete representation but still couldn’t vote.  During the hundred year Jim Crow era, this disenfranchisement was enforced by procedural barriers, extreme intimidation, including the KKK and lynching, and outrageous Supreme Court decisions.  Throughout the states of the old Confederacy, these abuses, reinforced by extreme economic and educational repression, continued unabated until the mid-20^th Century.  Even by 1944, only 5% of age-eligible African-American voters were registered to vote.

The voting Rights Act of 1965 was an effort to end racist voter suppression.  Along with Brown v. Board of Education of 1954 and the Civil Rights Act of 1964 it was part of the campaign to end the hundred year Jim Crow system of pervasive racist segregation, blatantly unequal education, restricted employment, judicial abuse, and voter suppression of African-Americans in the South.   Southern Whites responded to this campaign with rage and intense resistance by mobs, police departments, and leading politicians at all levels of government.  In 1956, 101 members of congress, all from states of the old Confederacy, signed the Southern manifesto in defiance of the Supreme Court.  Public schools were shut down and their funding diverted to vouchers for segregationist private schools.  A multitude of defiant state and local laws and police and mob violence led to massive clashes and unpunished murder against civil rights advocates, and eventually the assassination of Martin Luther King Jr.

Within about a decade, this overt racism mostly gave way to still pervasive covert racism that relied on implicit (dog whistle) rather than explicit terms to support racist policies, including voter suppression.  This transition was reflected in Nixon’s cynical Southern Strategy to capture votes influenced by racism.  As his chief advisor John Ehrlichman explained, the point was to present a position on crime, education, or public housing in such a way that a voter could “avoid admitting to himself that he was attracted by a racist appeal.”  Most southern politicians quickly embraced these ideas while rejecting the civil rights laws and Great Society of the Democrats.  Consequently, the formerly solidly democratic South became solidly Republican instead.  In addition, Nixon managed to name four justices to the Supreme Court who supported this agenda, despite the rejection of two of his nominees for previous segregationist activity.

Thus the stage was set for the Regan administration to continue the reversal of the earlier civil rights gains.   Fears that African-American’s gains could come only at white’s expense were shamelessly exploited with code words like “welfare queens, reverse discrimination, and affirmative action.”  This was done to elicit support for cutting taxes by gutting the safety net and for consolidating Republican control by limiting civil rights protections, including for minority voting.  The Great Society and civil rights laws had been developed to ameliorate hundreds of years of violent and corrosive repression that resulted in up to $24 trillion in multigenerational African-American devastation from lost wages, stolen land, educational impoverishment, and housing inequalities.  Yet, this uncontestable history was callously disregarded to present the claim that it was actually the much better off whites who were the victims because of government handouts to lazy blacks.

Although the usual techniques for voter suppression like poll taxes, literacy tests, and understanding clauses were hampered by the Voting Rights Act, many other forms of voter suppression remained well established.  A relatively recent innovation, particularly after the election of an African-American president in 2008, was the requirement for government-issued photo IDs.  This was said to be necessary to discourage voter registration fraud, although there were only 26 convictions for fraud or 0.00000013% from 197 million federal votes from 2002 to 2005.  These requirements prey on the structural difficulties, some imposed by cynical Republican governments, for impoverished minorities to obtain photo IDs.  Reportedly, roughly 25% of black, 16% of Latino, and only 8% of white voters are without a current, government-issued ID.  Countering this and other forms of voter suppression became more difficult after the 2013 Supreme Court ruling, in which the conservative and libertarian majority of the Supreme Court gutted the Voting Rights Act, particularly its preclearance provision for states with a history of abuses.

Despite all of this, the key to voter suppression remains the severe socio-economic disadvantage of minorities, particularly African-Americans, as a result of growing inequality (enhanced by voter suppression) and the devastating residue of centuries of slavery and Jim Crow.  Those in power use congressional redistricting to minimize minority representation.  They limit the locations and hours of voting stations so minorities must miss work, travel long distances, and wait in long lines to vote.  They send mass mailings to minority neighborhoods and remove names from the rolls when return to sender cards came back.  (This technique resulted in removal of 180,000 names in Florida in 2012, of which only 85 were found to be correctly identified.)  They create requirements for W2 forms, bank statements, and utility bills that are difficult for minorities who are unemployed, less likely to have bank accounts, and who live in multigenerational housing.

Global economist Branko Milanovic, who studies inequality, regards this kind of voter suppression as a major tool of the plutocrats entrenched at the top of US government to facilitate the growing inequality that benefits them.  He points out that the overlapping influence of race and class has resulted in the overwhelming difference of voting of 80% for the top decile and only 40% for the lowest decile.  As conservative activist Paul Weyrich, whose ALEC drafted model voter-ID legislation, has said, “I don’t want everybody to vote.  (GOP) leverage in the elections quite candidly goes up as the voting populace goes down.”

Behind the Carbon Curtain:  The Energy Industry, Political Censorship, and Free Speech.  Jeffrey A. Lockwood. 2017.

I liked this book about censorship by the energy industry in Wyoming enough to buy a second copy from Amazon so I could write an Amazon book review.  I bought the first copy at the New Mexico School of Mining bookstore, of all places, after attending a graduation ceremony.  I am afraid the book will never get the attention it deserves because the author is from a little known university of the nation’s least populous state, Wyoming, and because much of the activity described takes place in that region, which must seem remote to many potential readers.

However, as the author points out, Wyoming can be viewed as a lens into America for this topic.  It produces 1/5 of the nation’s energy and is second only to Texas in total BTUs produced.  In Wyoming, fossil fuel taxes and royalties account for 60% of state revenues or at least 2/3 to 3/4 when allied activities are considered.  Hence, the fossil fuel industry, individuals it has made rich, and politicians it finances have the opportunity to exert enormous financial pressure on public institutions like its university, museums, and schools and, of course, on government itself.  The author examines how this industry and its captains handle this opportunity with respect to censorship.

Usually, censorship is regarded as a tool of government or religion to maintain its power or authority.  However, in this case, censorship originates as a tool of industry and its captains to serve its own purposes either directly or through the politicians it controls.  In Wyoming, many individuals with backgrounds or fortunes from the fossil fuel industries hold elected offices, serve as government officials, and serve on the boards of public institutions like the University of Wyoming, museums, and public schools.  In addition, the industry finances many of the state’s politicians at all levels of government, as well as think tanks, academic institutions, and programs placed in the state’s schools and university.

The author’s approach to showing how this power is used begins by reporting many seemingly small narratives that are well below the national radar but that cumulatively become pervasive.  He begins with the story of the Carbon Sink, a piece of land art installed by the UW Art Museum that displeased the energy industry.  The large outdoor artwork was destroyed as a result of pressure from industry and the legislators it supports.  For good measure, follow-up included withdrawal of industry support for university museum fundraising, removal of $2 million from the museum’s budget, and passage of a law requiring submission of future similar art work to the UW energy resources council and the governor.  Another sequence that involved suppression of art is described for the photographic exhibit, THE NEW GOLD RUSH: Images of Coal Bed Methane in the Nicolaysen Art Museum of Casper, Wyoming.

The author continues with the stories of several scientists who were fired, censured, had research defunded, or were directed away from conducting research or presenting information to the general public due to objections from the fossil fuel industry and its politicians.  Forbidden activities included studies or opinions that reached the public regarding fracking and water contamination, fracking and markedly increased earthquakes, dumping enormous volumes of waste water from fracking, finding that natural gas may be worse than coal for global warming if leakage exceeds 3%, and finding that flared excess gas and fracking effluents from new wells produced dangerous toxic smog in downwind communities.

Although these events were painfully important for individual careers and communities, they were merely indicators of the widespread intimidation that created a far more important climate of pervasive self-censorship.  The author documents this by providing many examples of industry and its top politicians publicly endorsing this process and privately implementing it by phone calls and meetings or by actions on boards of directors for universities and museums.   He then provides multiple examples of enforcement of this censorship by subordinate university administrators, university department heads, and museum administrators afraid of losing funding or losing their jobs.

Of course, industry driven censorship does not stop here.  It also engages in preemptive educational censorship to determine what can and cannot be taught to the state’s children and even in its university.  In 2013, a bill was passed supporting a curriculum developed by energy companies to promote “energy literacy” in grade schools.   Subsequently, politicians offended by the inclusion of anthropogenic climate change in the Next Generation Science Standards (NGSS) initiated a struggle for its implementation by passing a budget footnote denying it state funds.  Other struggles over curriculum and teaching materials took place at the state and local levels.

For the University of Wyoming, the legislature imposed upon the trustees a decision to have the industry-dominated advisory Energy Resources Council approve the hiring for the School of Energy Resources.  In 2013, Robert Sternberg was hired as the new university president with assurance to the legislature that he would be “building programs…in collaboration with the energy industry.”  He replaced the provost with a candidate who had ties to the energy industry.  A cascade of resignations and firings followed.  He conducted a review of the UW College of Law by a task force stacked with energy industry supporters to assess its shortcomings “with regard to energy, natural resources, water, and environmental law.  The dean resigned in protest over the duplicitous politics that provided no voice for his faculty.  Subsequently, an investigative journalist showed that this plan to reeducate law students was based on demands from a single trustee with connections to the energy industry.

In his final two chapters, the author discusses the fate of free speech in market society.  He offers climate change as the most powerful example of how energy corporations have controlled public discourse.  Well-funded think tanks and their scientists-for-hire have successfully manufactured the illusion of scientific controversy where none existed by recycling fatuous claims in a version of “proof by repetitive assertion.”  This was merely repetition of techniques used by industry to delay action against the hazards of tobacco in the 1960s and acid rain in the 1980s.

In today’s era of market fundamentalism these techniques have been facilitated by the commodification of public and private life.  This commodification may be the most potent tool of censorship.  In the starkest sense, free speech now becomes the property of those who purchase it.  When speech can be bought and sold, only the rich can speak in ways that are heard, particularly after Citizens United.  The top 0.1% have as much wealth as the bottom 90%.  With the concentration of wealth comes the consolidation of speech.  In this setting, the author finds two structural defects that foster censorship in Wyoming, the hegemony of the energy industry and the connection between political elections and corporate money.

 

The Crisis of the Middle-Class Constitution.  Ganesh Sitaraman.  2017.

The author, from the Vanderbilt Law School and the Center for American Progress, maintains that the number one threat to American constitutional government today is the collapse of the middle class.  To make his case, he reviews the interplay of constitutional theory and the conflict of economic classes throughout history with special reference to the novel aspects of the US Constitution, which is a middle class constitution.

From the ancient Greeks onward, political philosophers were preoccupied with the problem of economic inequality and its relationship to the structure of government.  They sought to prevent the clash of wealthy elites with everyone else from leading to the rich oppressing the poor or the poor seeking to confiscate and redistribute the wealth of the rich.  In ancient Athens, from the time of Solon in 594 B.C. until 403 B.C., requirements for holding political power evolved from birth to wealth to geography to citizenship alone.  In the next century, the golden age of Athens, democracy flourished.  All 20,000 to 30,000 (male) citizens were entitled to direct participation.  Leaders were selected by lottery rather than elections to eliminate advantages for wealthy or privileged elites.   The majority of citizens who participated were essentially from the middle class.

This pattern changed for the great republics that followed throughout history, including Rome, Florence, Venice, and England.  All had what the author calls class warfare constitutions that entrenched economic class into the structure of government in the hope of preventing instability, class warfare, and revolution.  According to Aristotle, the best achievable constitution was what he called a middle constitution, but it required balancing of the interests of the rich and the poor by a strong middle class, such as was present in Athens.  Aristotle also described what the author calls a class warfare constitution in the absence of a strong middle class.   In this system, checks and balances are created between the rich and the poor by awarding divisions of government according to class, like today’s House of Lords and House of Commons.  This became a dominant form of constitution for republics for the next two millennia.

The history of the ancient Roman Republic provides an example of the operation of a class warfare constitution.  Around 493 B.C., a struggle between the patricians and plebeians eventually led to the formation of the plebeian assembly and tribunes to balance the aristocratic senate and consuls.  Eventually this separation of political powers between economic classes failed to prevent major political instability because its provisions were not enforced.  Over the centuries, the elite class of large landowners took control with impunity of more and more of the vital public lands they shared with plebs.  Beginning in 133 B.C., first one then another of the Gracchus brothers became a tribune and was killed along with many followers when addressing this land use issue with land reform.  In the century of extreme violence that followed, the Republic fell to a succession of strong leaders as Rome descended into class war, civil war, and finally rule by the Caesars.

During the two thousand year history of republics with class warfare constitutions that followed, scholars such as Polybius, Cicero, Machiavelli, Giannotti, Harrington, Hume, and Montesquieu continued to consider the problem of creating a constitution that would provide stable government by managing class conflict.  In Florence of the 1530s, Giannotti revived the concept of Aristotle’s middle constitution for stable government.  He concluded that mixed governments were unstable because of the inevitability of winners and losers in issues between the rich and the poor.  He observed that if the emerging mediocri (middle class) in Florence could become strong enough it could hold the balance of power and make stable mixed government possible.  In England in 1656, Harrington noted that political power follows economic power and that an economically unequal society could not be politically equal.  In France in 1748, Montesquieu, known also for his theory of separation of powers, recognized that reasonable equality was essential for well-functioning government.  He therefore suggested establishing outer bounds of wealth and then passing laws that will equalize inequalities through burdens they impose on the rich and relief they afford to the poor.

In the US in 1787, the founding fathers broke with tradition and created a middle class constitution, rather than a class warfare constitution as had been the norm for republics since ancient Rome.   This change was influenced by centuries of constitutional scholarship, the ideals of the Enlightenment, and the unique American economic circumstances.  In 1774, early America was astonishingly equal due to an agrarian society with widespread small property holdings and a boundless frontier.  At that time America was considerably more equal than it is today.  In 1774, the top 1% of households had just 8.5% of total income or 7.6% when only free households are included, while in 2012, the top 1% had 19.3%.  Thus the existence of a strong middle class facilitated the balance of power between the rich and the poor needed for a middle class constitution.

In this constitution, the separation of powers was between the branches of government, rather than between the economic classes.  Hence, there was no formal provision for special powers for property that would facilitate evolution of a landed aristocracy.  Nevertheless, sceptics still feared capture of government through informal means if an elite group with shared beliefs managed to control all the parts of government.  Thus a prerequisite for this government is a continuation of the reasonable equality and the strong middle class present at the time of its establishment to maintain the balance of power between the rich and the poor.

The first obstacle to this balance for the middle class was the regional institution of slavery.  Although America was quite equal overall in 1774, this was not the case in the South.   The slave-owning South in 1774 had almost exactly the same high level of inequality as the US does today.  This problem was partly addressed by the Civil War and the 13^th, 14^th, and 15^th Amendments.  However, efforts to provide equality of the freedmen after the Civil War were undermined by political and Supreme Court maneuvers against reconstruction and by a southern reign of terror that included disenfranchisement, night raids, the KKK, and guerrilla warfare.

The next challenge to the middle class was the transformation from an egalitarian agrarian society into a more unequal urban society due to the industrial revolution and the closing of the western frontier.   Inequality increased greatly as urban wage-laborers found themselves at the mercy of the plutocrats of the Gilded Age.  Progressives like Teddy Roosevelt responded with constitutional amendments democratizing the country, corporate and income taxes, antitrust laws, campaign finance reforms, and professionalization of government officials.  These changes were not enough.  Subsequently, the World Wars, Great Depression, New Deal policies, and unionization were necessary, as well, for return to reasonable equality and a strong middle class that lasted from the 1940s to the 1970s.

During this golden period, the share of income for the top 10% fell from 49% to 35%; the share of wealth for the top 0.1% fell from 25% to 10%; home ownership rose from 44% to 64%; and male worker’s wage increases of 96% kept pace with productivity increases of 108%.  Government policies critical to rebuilding the middle class included the GI Bill, funding for growth through infrastructure and basic research, regulation for financial stability like Glass-Steagall, the FDIC, and the SEC, progressive taxation, Medicare, and Medicaid.  Additional policies with middle class support enhanced the quality of life, such as regarding safety, civil rights, and the environment.

Inevitably, the plutocrats counterattacked under the banner of neo-liberalism.  Since the Reagan Revolution of the 1980s, policy choices, globalization, technology, and capture of government by wealth have caused inequality to again soar to the level of the slave-owning antebellum South and the Gilded Age.  From 1979 to 2008, 100% of income growth went to the top 10%, and income for the bottom 90% actually declined.  From 1976 to 2014 the share of income for the top 1% grew from 9% to 21%.  By 2014, the twenty wealthiest individuals were wealthier than the bottom half of the US population.  From 1979 to 2013 CEO’s salaries rose from 30 to 296 time those of their workers.  An IMF study found that the decline of unionization contributed to about half the rise of inequality from 1980 to 2010.  As the US has become stratified by wealth, inter-generational economic mobility has decreased substantially.

All of these changes have greatly reduced the size, income, and influence of the middle class to balance the excesses of the rich.  From 1970 to 2012, the middle class decreased from 65% to 41%, while the affluent increased from 7% to 16% and the poor increased from 8% to 19% (Reardon and Bischoff).

The threats to the republic from this destruction of the middle class come in two forms: 1. Oligarchy or oppression of the poor by the rich and 2. Populist authoritarian demagogues leading overthrow of the rich by the poor.  (Amazingly, the Trump campaign managed to divert the latter to service of the former.)

According to Jeffrey Winters, who has spent a lifetime studying oligarchs, the US is already a modern oligarchy.  With increasing inequality, the wealthy isolate themselves from the rest of society by purchasing their own elite education, living conditions, protection, and other services.  As their social empathy drops, they are less likely to support programs for the public good that benefit others unlike themselves.  Hence many of them press for smaller government to avoid taxes, evade regulations, and defund social programs that benefit the general public.  They have used their enormous resources to provide extensive funding for lobbying, political campaigns, ideological think tanks, and media that serve their perceived interests, particularly since the Citizens United decision of 2010.

These efforts have been spectacularly successful in achieving rule by the economic elite rather than by the majority.  Right wing and libertarian ideologues first gained control of the Republican Party, then by 2016 all three branches of the federal government (as feared by the founding fathers).  For the congressional and executive branches, a study of 1779 government policy outcomes over two decades showed that across all areas they overwhelmingly reflected the preferences of the affluent and business groups and that the views of the middle class and the poor had no influence at all (Gilens).  For the judicial branch, the five conservative judges on the Supreme Court prior to Justice Scalia’s death were in the top ten of the most pro-business justices in history.  Groups that are best able to get their cases to the Supreme Court are pro-business, anti-regulatory, and ideologically conservative.

Three options for dealing with the crisis of the middle class constitution are discussed:  1. Accept the status quo and adopt a class warfare constitution.  This is not going to happen for obvious practical reasons and because it is antithetical to American tradition.  2. Safeguard the political process by severing the link between economic power and political power, such as by campaign finance law, prevention of regulatory capture, and an increasingly professional civil service.  This approach is unlikely to succeed because of the “hydraulic problem” (money for influence blocked in one channel will find another) and the “paradox of process” (the well-to-do are better equipped with lawyers and lobbyists to navigate political and regulatory processes).  3. Rebuild the middle class through a complex process including tax policy, wage and benefit policy, education, structural reform in business and finance, corporate long-termism, a new labor movement, and prospective self-correcting mechanisms such as automatically triggering relevant laws when inequality reaches a certain level.

The most significant obstacle to these reforms is the problem of foxes guarding the hen house (government by economic elites).  The author suggests that progress may be made by finding and supporting individuals in government not yet captured, social movements with mass mobilization, and facilitation of change during emergencies.  In any event, saving the Republic will require the Republican Party to reclaim its tradition of progressive conservatives who believe in reform to preserve the best American traditions without radical change.

The Anatomy of Inequality: Its Social and Economic Origins and Solutions. Per Molander. 2014.

The author, Per Molander, was a consultant to the Swedish government, the World Bank, the OECD, the UNDP, and the European Commission.  His book begins with a simple observation: virtually all human societies are marked by inequality at a level that surpasses what could be expected from normal differences in individuals’ capabilities alone.  The book addresses three questions:  1) Why are all societies unequal.  2) Can inequality be influenced?  3) How do the classical ideologies of liberalism, conservatism, and social democracy relate to inequality as a phenomenon?

The evolution of inequality is presented from primates to prehistorical humans to the present.  Chimpanzees already manifest some inequality in association with dominance drive and aggression that leads to formation of hierarchies and coalitions.  Present day hunter-gatherers have very limited inequality due to nomadic existence and lack of surplus.  Early farmers (18,000 to 10,000 BCE) developed storage, settlements, and increasing hierarchy that led to surplus wealth that could be unequally accumulated and transmitted across generations.  Emerging states added to these tendencies with increasing division of labor, control of key resources, and a monopoly on organized violence.  The transition to the Middle Ages included 1000 years of absent population and economic growth during which poverty and inequality increased.  In modern times rapid population and economic growth occurred, but inequality continued to increase, except during the mid-Twentieth Century from the World Wars and the Great Depression

When certain individuals or groups get the upper hand in the fight for power, there is no natural force that can return a society to its previous equilibrium.  Consequently, inequality has been rising throughout history along with the rise of surplus production that can be concentrated in the hands of ruling elites.  Absent regulation, the only constraint on this process is the need for ruling elites to leave enough resources for their subjects to remain alive and reasonably fit to work.  This is illustrated graphically by the extraction ratio, which defines the efficiency of a ruling group to extract the surplus from the rest of the population.  As the size of the surplus increased from hunter-gatherers to the present, so did the level of inequality.  Still, in modern OECD countries the level of inequality varies considerably according to the level of ambition for redistribution, with inequality highest in the US, Portugal, Israel, and the UK and lowest in the Scandinavian countries, the Netherlands, and Slovenia (Table 3.1).

 

With respect to the cause of ubiquitous inequality, the author utterly rejects the common explanation that people differ with respect to capability and effort.  He points out that in 2015, the richest eighty persons in the world owned as much as the poorest 3.5 billion.  That this gap by a factor or 10 to 100 million can be explained by differences in productivity and effort is a physical impossibility.  Economist Branko Milanovik calculated that a person’s real income was 80% dependent on circumstances beyond her control, mainly country of birth and family background, and 20% dependent on other factors, including chance and effort. The author then points to the role of chance in the dynamics of the many negotiations that take place at all levels of the economy and the role of inheritance in amplifying these advantages.  He uses game theory as developed by John Nash, a Nobel laureate in economics, to show that this process is inherently unstable and leads away from equilibrium.

In negotiation, the promise of gain is balanced by the risk of losing.  Accordingly, two negotiators with equal abilities and equal assets can be expected to arrive at an equal division of the contested asset.  However, any advantage in assets for one of the negotiators results in increased tolerance for risk, a stronger negotiating position, and correspondingly increased prospects for a bigger piece of the pie.  In the next round of negotiations, this results in an even stronger position with better results, and so on in a positive feedback loop with an ever-increasing rate.  In this sequence, if one player starts with only 1% greater assets, after 70 or 80 rounds, the weaker player’s assets are depleted (Diagram 4.3).  In actual negotiations, even if players are identical, minor disruptions in circumstances through no fault of anyone are likely to favor outcomes for one or the other.  These minor differences will then be intensified in subsequent rounds and further intensified across generations with inheritance until inequality is entrenched.

Consequently, an unstable pattern of asymmetrical negotiations becomes established in favor of the class of ruling economic elites.   This cycle leads to continually increasing inequality as those at the top with sufficient assets to tolerate considerable risk, such as factory owners, negotiate with those who have far fewer assets, such as their workers.  This negotiating process is a power relationship.  Hence, the power of government is the main force that can alter it by redistribution and regulation.  Not surprisingly, reducing the size of government to prevent this is a cornerstone of the neo-liberal ideology that favors economic elites.  Of course, these elites also use their great advantage in assets in attempts to control government and direct its activities in their favor.

The author does not advocate unrealistic plans to eliminate inequality but rather advocates managing it to obtain an equilibrium at some desired level to prevent numerous possible bad outcomes.  Those on the right have tried to strike equality from the political agenda, but most others take it seriously.  Consequently, the three main Western ideological currents of liberalism, conservatism, and socialism are examined to see how they relate to the problem of inequality.  The term “liberalism” appears to have a European slant so that it refers to market liberalism, with divisions of left liberals who accept some government redistribution and right liberals who do not.  In the US, these divisions would more closely match terms used for liberals and conservatives or Democrats and Republicans.

In any event, liberalism is characterized as having an individualistic perspective, a scientific world view, and interest in contracts according to a constitution.  Liberalism is said to mostly promote fairly equal opportunities but not market interference for differences in outcomes.  (In the US, this would be more representative of right liberalism, called conservatism, than left liberalism.)  Conservatism is characterized as emphasizing knowledge skepticism (possible unintended consequences) to justify the status quo on the basis of tradition, local customs, property rights, and religion, including Hinduism, Islam, and Christianity.  Conservatism is more likely to accept inequality that others would reject on moral grounds, such as with sexism, racism, and slavery.  Problems with both liberalism and conservatism include ever-growing inequality from the unrestricted bargaining game and lack of legitimacy for a system mostly determined by history and luck.

Social democracy accepts that there is no stable, egalitarian equilibrium in the bargaining game to prevent escalating inequality.  Consequently, a wide spectrum of measures is employed to level both opportunities and outcomes.   These measures include progressive taxation and transfer policies, a well-developed social security system, strong trade unions, and an active education policy.  Without an active distribution policy such as this, society moves relentlessly toward increasing inequality until the extraction limit is reached. These successful programs do have costs, but so does inequality.  The problem for social democracies is finding the right balance and keeping the right balance.

 

Jeffrey Sachs: The Strange Case of Dr. Shock and Mr. Aid.  Japhy Wilson.  2014.

This book is from the undisguisedly partisan Verso Counterblasts series said to be “challenging the apologists of empire and capital” that also targets Bono, Thomas Friedman, and others.  The author, who is not an admirer, divides Jeffrey Sachs’s career into two portions.  In the first portion Sachs is a Harvard professor delivering neo-liberal economic shock therapy to Latin America, countries of the former Soviet Empire, and finally Russia.  In the second portion he is a Columbia professor championing aid to poor African nations and denying his earlier association with neo-liberalism and his responsibility for the devastating effects of earlier shock therapy, particularly for Russia.

Shock therapy was devised by Milton Friedman and the Chicago School of Economics to spread neo-liberal economics (market fundamentalism) around the world.  It was antidemocratic in that it exploited a major crisis, such as a major economic collapse or fall of government, to rapidly impose extreme neo-liberal economic reforms without public debate before the population was able to organize against the harsh realities to follow.  The four pillars of the neoliberal project were free trade, deregulation, privatization, and austerity.  In developing nations, implementation included crushing labor unions and ending protection for native industries with resultant increasing unemployment, falling standards of living, and increasing inequality.  Considerable coercion was required for the antidemocratic imposition of these reforms when their draconian consequences inevitably encountered strong popular resistance.  This took the form of years of assassinations and torture in Pinochet’s Chile, organized disappearance of 30,000 opponents in Argentina, and violent overthrow of the democratically-elected parliament in Yeltsin’s Russia.  Most of this violence was directed against workers and peasants who objected to harsh shock therapy rather than against communist revolutionaries as claimed by state propaganda.

As a thirty-year-old Harvard professor, Jeffrey Sachs began his career as a shock therapist in Bolivia in 1985.  The crisis of hyperinflation was used as a rationale for imposing the entire neo-liberal reform package.  Hyperinflation was tamed, but with severe social consequences that included increased unemployment from 20% to 30%, decreased real wages by 40%, and significantly increased poverty and inequality.  Nevertheless, these results earned the approval of the neo-liberal IMF, and Sachs went on to advise the Latin American governments of Brazil, Argentina, Peru, and Venezuela.  In 1989, the transition from communism to democracy provided Sachs with the opportunity to bring neo-liberal shock therapy to Poland.  Ironically, the government by Solidarity, the workers’ party, implemented the fundamentally anti-worker changes.  By 1993, industrial production was down by 30%, unemployment, which had been nonexistent, was up to 25% in some areas, and poverty and inequality were dramatically increased.  Fortunately for Poland, enough democracy remained so that even Solidarity and Lech Walesa were defeated in elections and the neo-liberal policies were discontinued.  Nevertheless, Sachs’s experiment was once again celebrated in the corridors of global power, and he went on to advise countries throughout the post-communist world from Slovenia to Mongolia.

Sachs reached the pinnacle of this phase of his career in 1991 when he was invited to Russia to serve as economic advisor to President Yeltsin.  Although Sachs was unable to acquire the debt restructuring and the aid he thought necessary from Washington and the IMF, the entire package of neo-liberal reforms was deployed in an atmosphere of government crisis without popular support.  Indeed, Yeltsin got parliament to award him the right to govern by decree for one year while instituting the reforms.  However, the consequences of these reforms were so disastrous that parliament withdrew its support.  Yeltsin responded by illegally suspending parliament and attacking its building with tanks, then operated for the next three months as an unlimited dictatorship to force through further neo-liberal reforms.  Finally, the December 1993 parliamentary elections demolished the party of the prime minister, and the new prime minister announced that “the era of market romanticism [was] over.”  Sachs’s time at his pinnacle was also over. He resigned in January, 1994.

The economic crisis induced by shock therapy in Russia has been described as the longest and deepest recession in recorded human history.  Between 1991 and 1998, GDP declined by 43%; industrial production fell by 56%; capital investment fell by 78%; 80% of firms went bankrupt; 70,000 factories closed with massively increased unemployment; food production fell by half; living standards dropped by half; people living in poverty increased from 2 million to 74 million; suicides doubled; deaths from alcoholism tripled; and life expectancy lost 5 years.  What emerged was not a vibrant commercial society, but a brutal class system of vertiginous inequality, in which notorious oligarchs and their cronies were utilizing the power of the state to appropriate natural resources and asset-strip public companies.

According to the author, the next phase in Sachs’s career was the transformation from Dr. Shock to Mr. Aid as noted in the book’s title.  This consisted of efforts to rehabilitate his reputation by denying responsibility for the Russian catastrophe, distancing himself from neo-liberalism, and advocating aid for the impoverished in Africa and elsewhere.  In 2002 he left Harvard to head the Earth Institute at Columbia University with an annual budget of $87 million to focus on sustainable development.  That same year he was appointed by Kofi Annan to chair the UN Millennium Project for which funding was delayed.  In 2006, he launched the Millennium Villages Project, an ambitious development program with funds from multiple sources, to combat poverty for 500,000 Africans in 83 villages of Ethiopia, Ghana, Kenya, Malawi, Mali, Nigeria, Rwanda, Senegal, Tanzania, and Uganda.

In the final portion of the book, the author attempts to rebut evidence for Sachs’s transformation and for Sachs’s claim that his earlier role had been mischaracterized.  Many examples are provided for earlier statements by Sachs strongly advocating neo-liberal policies in Bolivia, Poland, and Russia that are denied in his later statements.  His responsibility in Russia is mitigated somewhat by the failure of Washington and the IMF to provide necessary aid and debt restructuring.  For the second phase of Sachs’s career, the author notes challenges to Sachs’s claims for success of the Millennium Villages Project, particularly the lack of comparison to control villages to document the significance of any changes.

The author presents Sachs’s later representation of himself as a critic of libertarianism and the free market fallacy and as identifying with the social democracies of northern Europe as misleading.  He reports that Sachs never advocates collective action or the strengthening of unions and that his loyalty continues to lie firmly with the capitalist class and the defense of its privilege.  He reports that Sachs insists that deficit cutting should start now and that suffering from austerity is not an anomaly but an adjustment to be accepted.  He maintains that Sachs’s strategy of population control, technical fixes, and market-based solutions and his endorsement of the existing distribution of wealth and power is entirely in conformity with the agenda of today’s ruling classes.  These are the author’s conclusions.

On the other hand, the author appears to distain even the more humane mixed economy variety of capitalism that prevailed until the rise of Chicago School neoliberalism forty years ago.  And Sachs does lead a large organization pursuing sustainable development and has mobilized considerable funding to fight third world poverty.  In my view, the reader needs to pursue multiple other sources before deciding whether the present Mr. Aid Sachs has sincerely distanced himself from the shock therapy of the earlier Dr. Shock Sachs.

Success and Luck: Good Fortune and the Myth of Meritocracy

World War II was followed by thirty years of strong economic growth with no increase in economic inequality.  This has been followed by forty years of slower growth with rapidly increasing inequality.  Compelling evidence suggests that this sequence is counterproductive, not just for the poor and middle class, but for the wealthy themselves.  Nevertheless, economic elites advance whatever arguments they can to justify their privileged status.  One of these arguments is meritocracy, which is the claim that some combination of innate superiority, ability, and hard work justifies the enormous differences between their wealth and incomes and everyone else’s.  In Success and Luck, Cornell economics professor Robert H. Frank examines this claim.

Conservatives correctly observe that people who amass great fortunes are almost always extremely talented and hardworking.  Liberals also correctly note that countless others have those same qualities yet never earn much.  In recent years, social scientists have discovered that chance events play a much larger role in this difference than once imagined.  Nevertheless, it is human nature to underestimate and rationalize fortune’s role in one’s own success, while embracing bad luck as an explanation for failure.  The dark side of this delusion is that those who are oblivious to their own advantages are often similarly oblivious to other people’s disadvantages and reluctant to pay the taxes required to support the investments for a good environment for everybody and to help the less fortunate.

Obviously, large numbers of elites who inherited their wealth and opportunity have no claim to meritocracy. In addition, all children of high income parents have greatly enhanced prospects for success, regardless of actual inherited wealth.  Children with low test scores and high income parents are more likely to achieve college bachelor’s degrees (30%) than children with high test scores and low income parents (29%) (see fig. 8.2). Nevertheless, elites who made their own fortunes generally are extremely talented and hard-working.  Still, it’s one thing to say that 1% more talent or hard work merits 1% more income, but it’s quite another to say that magnification of these small personal performance differences by chance to thousands-fold differences in earnings is merited.

In today’s winner-take-all markets technology enormously extends the reach of one or a few winners from a large pool of similarly talented, hard-working competitors, where luck often plays a pivotal role, so they can take all the gains.  For instance, in the recording industry, 15% of sales are accounted for by the top one-thousandth of 1% of titles, and sales are less than 100 each for 94% of titles.  Luck plays an important role in this process when critics with highly variable tastes eventually decide which titles will get air-time and the chance for success.

Professor Frank illustrates this situation with a numerical simulation showing that when luck counts for only a tiny fraction of total performance, the winner of a large contest will seldom be the most skillful contestant, but will usually be one of the luckiest.  Two factors are involved: 1) The inherent randomness of luck means the most skilled contestant is no more likely to be lucky than anyone else.  2) With a large number of contestants, there are bound to be many with close to the maximum skill level, and among those at least some will also happen to be very lucky.  For instance, with 100,000 contestants where luck counts for only 2% and ability and effort count for 98%, 78% of winners do not have the highest score for ability and effort.  The math and results of various combinations of luck with hard work and ability are shown in an appendix (see Fig A1.2).

Examples are provided for small differences related to luck that influence outcomes.  In professional hockey, 40% of players were born in the first three months and 10% were born in the last three months of the year, presumably because the traditional January 1 cut-off date for youth hockey gave the older players a better chance to be chosen for elite squads.  Children born in summer months are the youngest in their classes and less likely to hold the high school leadership positions that are associated with higher wages later in life and better chances to become large company CEOs.  Assistant professors of economics in top schools are more likely to be awarded tenure the earlier the first letter of their names appears in the alphabet, possibly because co-authors in economics publications are listed alphabetically.  For eight representative track and field world records, seven were set with a tail wind (less than 2 m/ sec), one with no wind, and none with a head wind.  Examples are also provided for the importance of chance in individual success of very talented and hard-working people like Bill Gates.

The remainder of this small book (149 pages) discusses reasons for persistence of false beliefs about luck and talent and the consequences of those false beliefs, particularly with respect to increasing inequality and the lack of support for government programs and infrastructure.  In the last part of the book, the author presents his case for replacing the progressive income tax with a progressive consumption tax that he thinks would better address these problems, although relevance to the rest of the book is weak.

 

American Amnesia: How the War on Government Led Us to Forget What Made America Prosper. Jacob S. Hacker and Paul Pierson.  2016.

The first half of the Twentieth Century was characterized by economic extremes that included marked inequality at the turn of the century, severe economic collapse with the Great Depression, and recovery by enormous, debt-fueled World War II spending.  This was followed from the 1940s to the 1970s by a brief Goldilocks just-right period when a mixed economy (democratic capitalism) not only made the US rich by providing robust growth but also avoided increased inequality by sharing gains at all levels of income.  The mixed economy that made this possible was a combination of market forces to generate growth and democratic government action to correct for the many predictable market failures that result from misalignment of investor’s self-interest and the public interest.

A key component of the success of the mixed economy was bipartisan support for the active role of government, including from the leading Republicans and business leaders of the day, such as Eisenhower, Nixon, GE’s Owen Young, and GMs Charlie Wilson.  These leaders supported collective bargaining, extensive social insurance, a reasonable social safety net, provision of crucial public goods, and interventions tackling market failures.  Government activity during this Goldilocks period included redistributive progressive taxation, heavy investment in education and infrastructure, dominant investment in basic science and computer science, administration or oversight of social insurance, regulation of business and finance, and much more.

Government action contributed enormously to the strong economic growth of this period.  Increased productivity is the source of the growth of per capita GDP, and technical change is the source of almost all 20^th century increased productivity (88% 1909-49).  Most of the basic science that led to this technical progress during the period of the mixed economy was funded by government.  The US Defense department created the internet and provided funding and the biggest early market for many high tech items like computer chips and integrated circuits.  The US government funded 18 of the 25 biggest advances in computing technology in the critical years of 1946-65, and 60-70% of university computer science and EE research in the 1970s to the 1990s.  Government funding of infrastructure and education also contributed substantially to increasing productivity.  The federally funded interstate highway system alone increased productivity by one-third in the late 1950s and one-fourth in the 1960s.

Government actions to prevent or cushion the effects of many market failures were a major source of capitalism’s legitimacy during the years of the mixed economy and created a non-socialist alternative to harsh laissez-faire systems.  Even Friedrich Hayek in The Road to Serfdom saw no reason “why the state should not be able to assist the individual in providing for those common hazards of life against which, because of their uncertainty, few individual can make adequate provision….The case for the state’s helping to organize a comprehensive system of social insurance is very strong.”  Hence, where markets failed to do so, government worked to prevent increasing inequality, provided collective goods, regulated against externalities like pollution and excessive financial risk, protected consumers and investors from corporate predation and their own myopic behavior, and provided social insurance.

So, what happened?  What kind of American amnesia allowed the strong growth, widely shared gains, and decreased national debt (from 129% to 30% of GDP) of the mixed economy of the 1940s-1970s to be discarded in favor of weaker growth, gains almost entirely to the rich, and markedly increased national debt (from 30% to 100% of GDP) with market liberalism?  Unfortunately, inflation and stagnation of the 1970s provided the opportunity for powerful economic interests to pursue tax cuts and deregulation to increase their fortunes by pressing for the shift to market liberalism.  In retrospect, this shift did little to address the causes of the economic turmoil of the 1970s.  The inflation was related to the 1973-4 OPEC oil embargo, Johnson’s earlier guns and butter spending, and Nixon’s loose monetary policy prior to reelection.  The stagnation was related to slowing of post-war expansion, greater competition from recovering trading partners, and Carter’s appointment of Paul Volker to control inflation by raising interest rates.

The right wing extremist libertarian Koch brothers, Charles and David, played a leading role in creating this antigovernment shift that targeted the mixed economy.  Beginning in the 1970s, they brought together many of the nation’s wealthiest families into a rich people’s movement with a political infrastructure that rivals—and in some ways surpasses—that of the GOP itself.  This organization now includes hundreds of nonprofit foundations that funnel hundreds of millions of dollars of tax-free, untraceable “dark money” to massive campaign contributions and lobbying.  This system was enhanced by financing the legal campaign that led to the Citizens United decision that removed limits for corporate donations to these foundations and PACs.

The Koch network invested heavily in intellectuals, university institutes, think tanks, and right wing media to shape public opinion.  The Koch’s secretive semiannual donor summits raised $889 million for the 2016 elections and were attended by many right wing billionaires, media celebrities, politicians, and even two Supreme Court justices.  Enormous sums were also raised by allied but separate groups like Karl Rove’s PAC American Crossroads, which had a budget of $3oo million for the 2012 elections.

Business leaders and associations were also captured by this right wing antigovernment wave.   A widely circulated 1971 Lewis Powell memo (from the corporate lawyer and later Nixon Supreme Court justice) was a very influential blueprint for extensive transformation of US politics, academia, and media to serve right wing business agendas.  The Chamber of Commerce switched course from relatively nonpartisan business advocacy to open collaboration with the GOP and extreme policies when Thomas Donohue became president in 1997.  The chamber registered $1.1 billion in lobbying outlays from 1998 to 2014 and also spent additional large sums on Republican campaign contributions and efforts to influence the nation’s legal system.  Of course, corporations also make direct political expenditures.  From 1998 to 2014, FIRE (finance, insurance, and real-estate) alone spent $6 billion on lobbying and $3.8 billion on campaigns.

The Chamber now essentially engages in political money laundering when it disguises the self-serving nature of donations from corporations and the superrich by redirecting them without attribution to their real targets.  Donohue said, “I want to give them all the deniability they need.”  For example, the health insurance industry silently transferred $102 million by this route to fight health care reform while negotiating publicly with the Obama administration.  Many of the nonprofit foundations of the Koch network, such as Donor’s Trust and Freedom Partners, do the same thing.  For example, three-fourths of $558 million donated for climate change denial was untraceable due to use of these conduits (Jane Mayers, Dark Money).

The third leg of this attack on the mixed economy was the transformation of Republicans from a center right party that believed in compromise for fair governance of multiple constituencies to a radical right party that created dysfunctional government to obtain total victory for one constituency only—the rich and powerful.  From 1994 on, the more a tax fell on the wealthiest Americans, the more important it was to cut it—particularly the estate, dividend, and capital gains taxes and the top marginal tax rate.

During this time Republicans purged their ranks of many of their own moderates, routinized filibustering to block all majority party initiatives, provoked repeated government shutdowns, impeached President Clinton, resorted to mid-decade gerrymandering, systematically attempted to disenfranchise voters unlikely to vote for the GOP, refused to raise the debt ceiling to finance spending already appropriated, and blocked appointments of many federal judges and all appointments for some statutorily established bodies.  Republican appointees to the current Supreme Court (before the death of Scalia) are four of the six and one of the ten most conservative in the last seventy-five years.

Why would Republicans want to move so far to the right?  To begin with, the Republican base is becoming older, whiter, more rural, and more male.  Before the 1960s, conservatives were divided between Democrats in the South and Republicans elsewhere.  The Civil Rights Act of 1964 changed that.  Within a generation, southern conservatives changed from Democrats to Republicans at least partly from racial antipathies easily pandered to by ostensibly race-neutral language conveying racially charged messages.  Other catalysts for Republican transformation are Christian conservatism, polarizing right-wing media, and growing bankrolling by business and the wealthy.  Key components of the well-funded right-wing propaganda machine include Rupert Murdoch’s Fox News, built by Roger Ailes, a former consultant to Republican candidates, and conservative talk radio that dwarfs on-air minutes of liberals by more than 10 to 1.

The two major figures within the Republican Party for its transformation were Newt Gingrich and Mitch McConnell.  Gingrich’s strategy was to make bipartisan government dysfunctional to create misdirected voter anger against it and shift control to his antigovernment Republicans.  In a 1988 speech, he said, “This war has to be fought with a scale and a duration and a savagery that is only true of civil wars.”  His PAC sent out tapes to Republicans telling them how to demonize Democrats, including by a long list of “contrast words”: betray, corrupt, sick, decay, incompetent, disgrace, traitors, pathetic, obsolete.  McConnell knew that voters would punish and reward politicians for events they have no control over, including failure of their opposition to play by the norms.  Hence, he worked to deny even minimal Republican support to Obama by unprecedented use of the filibuster, procedural delay, and protracted bad-faith negotiation.  Supporting roles are described for several other Republicans, including Tom DeLay, John Boehner, Paul Ryan and organizers of the Tea Party.

Parties that become too extreme on the major issues of the day are supposed to lose.  So why are Republicans winning even as middle of the road voters remain moderate?  Turnout favors the GOP, whose affluent and elderly are more likely to vote than younger and minority Democrats, some of whom experience GOP-directed voter suppression.  The increasingly rural base of the GOP is favored in all federal elections.  With two senators per state, the smaller rural states with one-sixth of the population control one-half of senate seats.  This same pattern contributes to the rural bias of the Electoral College, for which states are assigned one vote for each senator and for each congressman.  After the 2014 election, Democrats had won the majority of votes for all seated senators but had only a 46 to 54 minority of seats.  In the last five presidential elections (one after this book was written), Democrats won the general election four times but the presidency only twice because of the Electoral College.  For the House of Representatives, Democrats won 51% of the vote but only 46% of seats in 2012 due to gerrymandering and higher percentages of Democrats packed into urban districts.

According to Mann and Ornstein (It’s Even Worse Than It Looks), the first step in dealing with dysfunctional government and the overthrow of the mixed economy is to understand the origins of the problem.  Seeing Republicans and Democrats as equally at fault superficially suggests objectivity, but it’s an abdication of responsibility.  As they wrote:

However awkward it may be for the traditional press and nonpartisan analysis to acknowledge, one of the two major parties, the Republican Party, has become an insurgent outlier—ideologically extreme; contemptuous of the inherited social and economic policy regime; scornful of compromise; unpersuaded by conventional understanding of facts, evidence, and science; and dismissive of the legitimacy of its political opposition.  When one party moves this far from the center of American politics, it is extremely difficult to enact policies responsive to the country’s most pressing challenges.

Unfortunately, the prospect of sensible reform of our political dysfunction is likely to depend on a series of GOP electoral defeats.  When conservative business leaders like the Koch brothers invested in Cato, Heritage, AEI, and other intellectual weapons of the right, they were playing the long game.  When Gingrich and McConnell developed a strategy to tear down American government to build up GOP power, they were playing the long game.  Those who believe we must rebuild a mixed economy for the Twenty-first Century need to play the long game, as well.  Americans must remember what made America prosper.

The Reactionary Mind: Conservatism from Edmund Burke to Sarah Palin.  Corey Robin.  2011.

Corey Robin’s book is a collection of his essays and hence does not provide a straight-line analysis explaining conservatism.  Part one focuses first on historical topics like the French Revolution, American slavery, Richard Nixon’s southern strategy, and the rise of Thatcher and Reagan.  Then it focuses on intellectuals like Hobbes, Burke, Maistre, Nietzsche, Buckley, Rand, and Scalia.  Part two explores the linkage of conservatism and violence.

I did not find the book particularly enlightening as an explanation for the origins of conservative thinking and behavior.  I don’t think modern conservatives choose their politics from reading earlier philosophers and intellectuals.  I think their conservatism comes from the interaction of their social and economic context with inherited personality traits like dominance, territoriality, and level of empathy.  Reportedly political preference is up to 40% genetically determined.  In my view, books like The Righteous Mind by Jonathan Haidt and Moral Politics: How Liberals and Conservatives Think by George Lakoff are more to the point for this subject.

Nevertheless, I did find that this book provides many satisfying quotes, at least for those with my political persuasion.  Some of these quotes are listed below:

 

Marxism-Leninism and free-market economic rationalism have much in common.  Both exhibit scant sympathy for the casualties of economic progress. (John Gray)

That is what conservatism is: a meditation on—and theoretical rendition of—the felt experience of having power, seeing it threatened, and trying to win it back.

More than the reforms themselves, it is the assertion of agency by the subject class that vexes their superiors.

Conservatism is the theoretical voice of this animus against the agency of the subordinate classes.

Historically, the conservative has favored liberty for the higher orders and constraint for the lower orders.  What the conservative sees and dislikes in equality, in other words, is not a threat to freedom but its extension.

“The real object” of the French Revolution, Burke told Parliament is “to break all those connections, natural and civil, that regulate and hold together the community by a chain of subordination.”

Conservatism (is) the opposition to the liberation of men and women from the fetters of their superiors, particularly in the private sphere.

Reaction…begins from a position of principle that…some are fit, and thus ought, to rule others.

The conservative defends particular order—hierarchical, often private regimes of rule—on the assumption, in part, that hierarchy is order.  “Order cannot be had,” declared Johnson, “but by subordination.”

Conservatism is about power besieged and power protected.  It waxes in response to movement from below and wanes in response to their disappearance…”

For that is what the capitalist is: not a Midas of riches but a ruler of men.

…Conservatism invariably arises in response to a threat to the old regime or after the old regime has been destroyed.

Conservatives are hostile to the goals of the left, particularly the empowerment of society’s lower castes and classes…

You start out in 1954 by saying, “Nigger, nigger, nigger.”  By 1968 you can’t say “nigger”—that hurts you.  Backfires.  So you say stuff like forced busing, states’ rights and all that stuff.  You’re getting so abstract now you’re talking about cutting taxes, and all these things you’re talking about are totally economic things and a by-product of them is blacks get hurt worse than whites.  And subconsciously maybe that is part of it. (Lee Atwater commenting on Nixon’s Southern Strategy)

Conservatism adapts and adopts, often unconsciously, the language of democratic reform to the cause of hierarchy.

That is the task of right wing populism: to appeal to the mass without disrupting the power of elites or, more precisely, to harness the energy of the mass in order to reinforce or restore the power of elites.

Far from being an invention of the politically correct, victimhood has been a talking point of the right ever since Burke decried the mob’s treatment of Marie Antoinette.  The conservative, to be sure, speaks for a special type of victim: one who has lost something of value, as opposed to the wretched of the earth.

…Conservatism really does speak to and for people who have lost something.  It may be a landed estate or the privileges of white skin, the unquestioned authority of a husband or the untrammeled rights of a factory owner.

…We’re still left with a puzzle about (Ayn) Rand: How could such a mediocrity, not just a second-hander but a second-rater, exert such a continuing influence on the culture at large?

What is truly bizarre about conservatism: a ruling class resting its claim to power upon its sense of victimhood.

Making privilege palatable to the masses is a permanent project of conservatism.

…Conservatives have never been wild about the idea of freedom.  It threatens the submission of the subordinate to the superior.

In the United States, the free market has generated a long economic boom from which the majority of Americans has hardly benefited.

After the Soviet empire fell…Western free-marketeers applied shock therapy to formerly Communist countries with disastrous results.

Watching Jeffrey Sachs and the IMF in Russia, he (John Gray) could not help but see the free market as “a product of artifice, design and political coercion.”

I believe that one ought to have only as much market efficiency as one needs, because everything that we value in human life is within the realm of inefficiency—love, family, attachment, community, culture, old habits, comfortable old shoes. (Edward Luttwak)

He (Scalia) tells the power elite exactly what they want to hear, that they are superior and that they have a seat at the table because they are superior.

When we talk about America’s victory in the Cold War, we are talking about countries like Guatemala, where Communism was fought and defeated by means of the mass slaughter of civilians.

Ken Feinberg, head of the September 11 Victims’ Compensation Fund, announced that families of victims would receive compensation for their loss based in part on the salary each victim was earning–$300,000 for a $10,000 a year grandmother and $3,870,000 for a Wall Street trader.

David Cole theorized a dual justice system in America:  Granting maximal rights to all citizens would have a high cost in terms of safety, he observed, while denying those rights would have a high cost in terms of freedom.  So what does America do?  It does both:  It formally grants rights to all, but systematically denies them to blacks and the poor.

…Hierarchy, with its twin requirements of submission and domination.

Since 9/11, many have complained, and rightly so, about the failure of conservatives—or their sons and daughters—to fight the war on terror themselves.

…The most visible effort of the GOP since the 2010 midterm election has been to curtail the rights of employees and the rights of women.

Modern conservatism came onto the scene of the twentieth century in order to defeat the great social movements of the left.  As far as the eye can see, it has achieved its purpose.

As long as there are social movements demanding greater freedom and equality, there will be a right to counter them.

 

How Will Capitalism End?  Wolfgang Streeck.  2016.

Professor Streeck, Director of the Max Planck Institute for Social Research in Cologne, begins with a review of the 2013 book Does Capitalism Have a Future?  He notes that post-World War II democratic capitalism was based upon the shotgun marriage of markets to pursue economic growth and democracy to prevent market excesses, such as soaring inequality, financial crises, hardship of market losers, and externalities like pollution.  Since the 1970s, the reasonable balance between these contradictory forces has shifted to market dominance that has resulted in decreasing legitimacy and increasing inequality and distributional conflict.  Consequently, the five authors of the book share the conviction that a structural crises bigger than the recent Great Recession looms for capitalist society, and each presents his view of how it may come about:

1. Wallerstein sees resource depletion, growing need for infrastructure, and demise of centrist liberal dominance as causing the final decline of the US-centered world order followed by a global confrontation between defenders and opponents of capitalism to determine what comes next. 2. Calhoun sees the possibility of a large-scale collapse of capitalist markets followed by a centralized socialist economy or Chinese-style state capitalism, although sufficiently enlightened capitalists could still intervene to save capitalism. 3. Mann sees US weakness leading to a shift of economic power from the West to the rest of the world with a move toward more statist economies that are jeopardized by unsustainable consumption and possibly even catastrophic change like nuclear war or escalating climate change.  4. Collins sees technological displacement of labor as having destroyed the manual working class in the twentieth century and about to destroy the middle class in the twenty-first century leading to unemployment of 50-70% finishing capitalism by mid-century and probably leading to socialism with or without violent social revolution.  5. Derluguian sees parallels with the decline of Communism due to internal political dysfunction from institutional and economic decline leading to fragmented social movements pitted against economic elites in the transition to post-capitalism.

The author sees all of these scenarios as contributing and reinforcing each other as capitalism collapses from its own internal contradictions.  He suggests that what comes after capitalism in its final crisis, now under way, is not socialism or some other defined social order, but a lasting interregnium.  This is defined as a breakdown of system integration that deprives individuals of institutional structuring and collective support and that shifts burdens for security and stability to the individuals themselves.  Neoliberal ideology glorifies this breakdown of structured order and de-institutionalization as the arrival of free society built on individual autonomy.  This neoliberal narrative neglects the very unequal distribution of risks, opportunities, gains, and losses that comes with de-socialized capitalism, including the “Mathew effect” of cumulative advantage.  When this narrative no longer works, perhaps some crisis in middle class employment, as predicted by Collins, or some other wide-spread disorder will bring about the end of the post-capitalist interregnium and the emergence of a new order.

The trajectory toward financial crisis began in the 1970s, after three decades of successful democratic capitalism, when the profit-dependent classes reacted to declining post-war growth by rejecting the redistribution that provided the system with its legitimacy.  With the loss of sufficient taxation, costs of dealing with the resultant distributional conflict were projected into the future, first by inflation in the 1970s, next by rising public debt in the 1980s, and then by increased private debt (with increased financialization) in the 1990s and 2000s, until the crisis of 2008.  This was followed by central banks turning private debt into public assets, while overall indebtedness remained higher than ever.

Thus the post-war standard model of democracy transitioned to the neoliberal Hayekian model that substituted economic discipline for political legitimacy.  This process was augmented by globalization that undermined labor’s bargaining power, increased the difficulty of taxation of mobile capital, and limited state control of finance.  Consequently, five systemic disorders have befallen capitalism, including stagnation, oligarchic redistribution, plundering of the public domain, corruption, and global anarchy.  With respect to oligarchic inequality, some of the rich already consider their fate as independent from the fates of the societies from which they extract their wealth.  Hence, they no longer care to contribute to those societies.  The ratio of average income between the top 400 taxpayers and the bottom 90% is 10,327 to 1, and the ratio of wealth between the top 100 households and the bottom 90% is 108,765 to 1.  Corruption extends beyond the legal definition to gross violation of rules, systematic betrayal of trust, and monopolization of political power by extreme wealth.

All of this is discussed in the introduction of How Will Capitalism End?  The following chapters are separate essays that considerably enlarge on these subjects and others, such as the European Union, the Euro, and the views of other authors.  Selected excerpts from these chapters that are listed below will generally be limited to new or incidental concepts rather than restatements of the main points already discussed in the introduction:

1. How Will Capitalism End? The “Matthew principle” governing free markets: “For unto everyone that hath shall be given, and he shall have abundance: but from him that hath not shall be taken even that which he hath.”  Crisis symptoms for the industrialized countries featured slowing growth, rising debt, and rising inequality.  Increasing government debt was related to declining overall levels of taxation rather than excess redistributive democracy, since it occurred during declining unionization, welfare-state cutbacks, and exploding income inequality.  The capitalist victory over democratic oversight is Pyrrhic because it has destroyed the only agencies that could save capitalism by limiting its excesses.
2. The Crisis in Democratic Capitalism. Standard economics is basically the theoretical exaltation of a political-economic social order serving those well-endowed with market power, in that it equates their interests with the general interest and hides the fact that the economy is also a moral economy. The average citizen will pay for financial stabilization in this system with his or her private savings, cuts in public entitlements, reduced public services, and higher taxation.  Today’s democratic states are being turned into debt-collecting agencies on behalf of a global oligarchy of investors.
3. Citizens as Consumers: Considerations on the New Politics of Consumption. The sustained growth after World War II was fueled by Fordist consumerism, which was satisfied by the mass production of standardized consumer durables like cars and refrigerators. By the 1970s, this market was saturated, and growth slowed.  Capital attempted to restore growth by making goods less standardized and by developing new markets—essentially commercializing social life from supplying needs to supplying wants.  Neoliberal capitalists have advocated this individualistic approach for politics, with the claim that privatization is superior to standardized collective action by government.  However, collective goods like distributive justice and general rights are indivisible and cannot be commoditized, particularly for people with limited purchasing power.  Citizenship demands generalized support to the community as a whole, particularly in paying taxes.
4. The Rise of the European Consolidation State. The growing state debt of the 1980s resulted from a general decline in progressive taxability rather than from increased citizen entitlements. Nevertheless, the fiscal consolidation state of the 1990s was inspired by neoliberal politics to cut taxes and the state in favor of the private sector by offering citizens private credit as a substitute for previously free public services.  Thus, the state shifted from protecting society from the vagaries of markets to protecting markets from the vagaries of democratic politics. This was facilitated in the US due to powerful anti-taxation politics and a constitutional commitment never to compromise its “full faith and credit.”  Compared to the US, the European consolidation state has the disadvantages of continued popular support for distributive democracy and the lack of a hegemonic currency.
5. Markets and Peoples: Democratic Capitalism and European Integration. The democratic states of the capitalist world have not one sovereign, but two: their people, below, and the international “markets” above. Globalization, financialization and European integration have weakened the former and strengthened the latter.  Authoritarian market liberalism is now entirely shielded from democratic pluralism and can only act as the guardian and guarantor of a liberal market economy.
6. Heller, Schmitt and the Euro. The European Union has moved the governance of the political economy to a multinational level where state democracy cannot follow. In this system, multistate authority protects markets from egalitarian-democratic infringement. Consequently, the European Central bank is the most independent central bank in the world with a mandate to protect the currency but no mandate for full employment.  Hence, growth through egalitarian redistribution in the Keynesianism social welfare state has been replaced by growth through stronger incentives for the winners and more severe punishment for the losers in the Hayekian system.
7. Why the Euro divides Europe. In Northern Europe, particularly Germany, growth came from exports, so those countries were wary of inflation and debt and had no need for currency devaluations. Indeed, the German economy has thrived despite numerous revaluations by competing on quality rather than price.  In Southern Europe, growth and social peace were driven by domestic demand supported by inflation, budget deficits, and labor unions at the cost of decreased international competitiveness, which was occasionally made good by devaluations of national currencies.  When the Euro replaced national currencies, southern countries acquired excessive debt but could no longer resort to individual devaluation.  Consequently, the European Union, controlled by northern countries, had the power to impose punishing austerity on southern countries, particularly Greece, in the name of reform, although neither side had a claim to superior economic morality.  This is in keeping with the finding of political economy that natural laws of the economy are in reality nothing but projections of social-power relations which present themselves ideologically as technical necessities.  Thus monetary systems, as in the European Union, conform first to power and only secondarily to the market.
8. Comment on Wolfgang Merkel, “Is Capitalism Compatible with Democracy?” Post-World War II democratic capitalism came about as a historical compromise between a then powerful working class and a then weakened capitalist class to restore markets and private property in exchange for steady economic improvement and social security for all. As capitalism recovered, it broke through this post-war democratic-institutional containment and gained primacy over the citizens it was supposed to serve well on the road to a “Hayekian dictatorship of the market.”  In a 2014 essay, Merkel identifies many problems, including privatization, deregulation, growing neoliberalism, financialization, retrenchment of the welfare state, and the victory of shareholders over workers.  He finds adverse consequences of asymmetric political participation by lower classes, rising inequality, financial pressures to turn countries into “market conforming democracies”, and transfer of power from parliaments to executives.  Professor Streeck adds to this list declining growth, decreasing concessions from the rich to the poor, and ease of tax evasion by corporations and the rich.  To restore democracy as a meaningful corrective to capitalism would require the daunting tasks of re-embedding capitalism in democracy (instead of the other way around) and de-globalizing capitalism, such as by finding a less destructive monetary regime than the EMU.
9. How to Study Contemporary Capitalism? Modern society is capitalist society; hence an understanding of both sociology and economics is required for its study. The extensive discussion of this interaction that follows is briefly summarized here according to four points: 1. Capitalism is a dynamically unstable social system driven by and dependent on expansion and accordingly often in critical condition.  2. Conceiving of capitalism as a regime of rational action in response to material scarcity underestimates the role of socially generated imaginaries, expectations, dreams, and promises.  3. Capitalism is a political system driven by tension between a moral economy (social justice) and an economic economy (market justice).  4. Capitalism is a way of life shaped by interactions between market expansion, collective social values, and government social policy.

Capitalism legitimizes competition that deprives one’s peers of their livelihood by outbidding them and that has no ceiling for legitimate economic gain.  The resultant fear and greed provide superior motivation for innovation that leads to continuous uncertainty, which in turn leads citizens to demand political intervention to stabilize their social existence against market pressures.  This conflict is the very substance of politics in contemporary capitalism.  Social justice claims that workers should have recourse to due process and should receive a good day’s wage for a good day’s work and that nobody should starve, be unattended when ill, live on the streets, or be poor because of old age.  In recent decades, these claims have been trumped by market justice claims based on marginal productivity that has led to soaring inequality and undermined social justice.  A key concept is “investor confidence” which is capital owners’ pronouncement of their self-diagnosed psychological condition to signal whether expected returns conform to what they feel entitled to.  Political economy should be able to expose the market mechanism for what it is: the outcome of a struggle between conflicting concepts of and claims to justice, rather than between subjective morality and objective laws of what is technically possible.

10. On Fred Block, “Varieties of What? Should We Still Be Using the Concept of Capitalism?” Post-war democratic capitalism with democracy to contain the excesses of markets was fragile from its beginning. Capitalism is powerfully capable of protecting and extracting itself from political control. When social constraints led to the profit squeeze of the 1970s, political control over capitalism began to decay with increasing globalism because democracies at the level of the nation state were helpless against capitalism’s new international opportunities for evading those constraints.  Fred Bock’s view of capitalism as embedded in democracy and subject to its political control is not supported by the experience of the last four decades.  This raises the question of whether intellectuals should spend their time developing reasonable ideas for governments to repair democratic capitalism or to cease looking for better varieties of capitalism and instead begin to seriously think about alternatives to it.
11. The Public Mission of Sociology. The author believes the moment is approaching in which the foundations of modern society will again have to be rethought, like they were in the New Deal and after the Second World War.  Since the 1980s, the victory of advocates for market-liberalism over the market-correcting capacity of popular democracy has had disastrous results.  Financial deregulation has exacerbated distributional conflict and imposed unprecedented uncertainty.  Consumption and destruction of nature in service of capital accumulation have threatened the global commons that is the very basis of life on earth.  The political defeat of labor by capital has resulted in growing polarization between a large, impoverished surplus population of losers, overburdened middle class families, and a small elite of winner-take-all super-rich whose greed knows no limits.

The issues of democratic capitalism discussed in this book represents a blend of social and economic concerns.  Yet sociology remained on the sidelines while market-liberalism economics (that happened to serve elites) dominated policy with the claim that it was a skilled trade like dentistry with a toolkit of proven techniques.  Sadly, this brand of economics lacks concern for the social impact of its policies and overstates its status as a science, given its simplistic rational choice theory, unrealistic assumptions for models that lack empiric validation, and almost complete inability to foresee the 2008 financial crisis.  Obviously, a balance must be struck between the needs of people and the needs of capital.  Sociologists and political scientists, in alliance with heterodox economists of different stripes, have begun working on a new sort of political economy, a socio-economics that would again make the economic subservient to the social rather than vice versa.  It is high time for the mainstream of the discipline to remember its roots and join the battle.

Rise of the Robots: Technology and the Threat of a Jobless Future.  Martin Ford.  2015.

The just right “Goldilocks” period of the US economy after World War II ended in the 1970s when growth slowed and capital began to take a larger share of gains than labor.  Consequently, inequality soared from 1973 to 2013, when productivity gains of 107% were almost all retained by business owners and investors while production workers’ wages fell by 13%.  This era marked a fundamental shift in the relationship between workers and machines made possible by enormous advances in digital technology.  This shift is just beginning.  Due to accelerating advances in computers and artificial intelligence, machines are now poised to move from merely enhancing the productivities of workers to actually becoming workers themselves.  Resultant massive unemployment could cause the collapse of the feedback loop between productivity, rising wages, and increasing consumer spending that supports our economy.  Thus the author asks if accelerating technology could disrupt our entire system to the point where a fundamental restructuring may be required if prosperity is to continue?

In the Goldilocks years after World War II, technological progress markedly increased productivity but did not adversely affect labor because it occurred in areas like mechanical, chemical, and aerospace engineering that allowed workers to become more valuable and command higher wages.  This pattern was transformed in the 1980s when the increasing roles of information technology and automation displaced or deskilled workers and led to decoupling of the historical correlation between rising productivity and rising incomes. (See fig. 2.1)  This resulted in the following seven deadly trends:

1. Stagnant wages—from 1973 to 2013 weekly wages fell from $767 to $664 in 2013 dollars, and the increase of median household annual income from $50,000 to only $61,000 (compared to $25,000 to $50,000 from 1949 to 1973) was due to women entering the workforce. Since the 1960s, the inflation-adjusted minimum wage has actually fallen by 12%. 2.  Income share decreasing for labor and increasing for corporations (See fig. 2.3).  3.  Declining labor force participation—consistent decline for men from 86% to 70% from 1950 to 2013 but increased combined rate for men and newly arriving women, which peaked at 67% in 2000, then declined.  4.  Diminishing job creation, lengthening jobless recoveries, and soaring long-term unemployment (See fig 2.6).  1998 to 2013 saw increases of US output by 42% and population by 40 million with no increase in hours of employment.  5.  Soaring inequality—95% of income gains were by the top 1% from 2009 to 2012, with the obvious risk of political capture by financial elites.  6.  Declining incomes and underemployment for recent college graduates—for those with only bachelor’s degrees, income fell by 13% from 2000 to 2010, and only half found jobs utilizing their education.  7.  Job market polarization and part-time jobs—solid middle income jobs destroyed are mostly replaced by lower-wage service jobs and a smaller number of high skill jobs.

Practitioners of economics and finance point to earlier overstated warnings about technology and tend to dismiss anyone who argues that this time might be different.  They point out that previously new jobs were created as old jobs were destroyed, as with the transition from horses and buggies to motor vehicles, and they offer globalization, financialization, and politics as alternate explanations for the deteriorating status of workers.  The author counters that there is a fundamental difference between the earlier innovations that displaced workers from older industries to newer ones with similar jobs and the more recent rapidly accelerating digital innovations that are just beginning to eliminate enormous numbers of workers at all skill levels without generating replacement jobs.  Occupations amounting to nearly half of US total employment may be vulnerable to automation within the next one to two decades, according to a 2013 Oxford University study.

With respect to globalization, the fraction of US workers in manufacturing has fallen steadily due to automation since the 1950s, long before NAFTA in 1990 and the rise of China in the 2000s (See fig. 2.8).  Also, in 2011, 82% of goods and services purchased in the US were produced in the US, and only 3% were imported from China.  With respect to financialization, its share of GDP has increased from 2.8% to 8.7% since 1950; its share of corporate profits has increased from 13% in 1978-1997 to 30% in 1998-2007, and its employees have 70% higher salaries—with much of this activity geared toward rent-seeking.  However, this may be viewed as a ramification of the growth of information technology.  Powerful computers now account for nearly two-thirds of stock trading and are essential for innovations like exotic derivatives and CDOs.  With respect to politics, conservative business interests have successfully conducted a sustained and organized assault on forces that counter inequality, including regulations, high marginal tax rates, and private sector unions.  If a nation fails to implement policies designed to mitigate the changes brought on by advancing technology, should we label that as a problem caused by technology or politics?

Information technology has evolved to a general purpose technology that is simultaneously transforming many sectors of the economy.  Automation has replaced workers with devices like ATMs and self-service check-out systems and has the potential to replace 50% of fast food workers.  On-line retailers like Amazon and Netflix, have moved jobs to the internet and warehouses where they are much more easily automated.  Retail employment is threatened by fully automated vending systems like Redbox movie-rental kiosks that now serve Chicago with seven employees rather than the seven for each of dozens of previous Blockbuster stores.  Expansion of business on the internet also increases inequality because the income from on-line activity nearly always follows a winner-take-all distribution.

Commercial software already produces automated articles in sports, business, and politics and has the potential to produce 90% of news articles within fifteen years.  Commercial software is available to almost completely manage most aspects of the execution of business projects.  IBM’s Deep Blue computer used AI, machine learning, and enormous capacity to defeat world chess champion Gary Kasparov in the 1990s, and its successor Watson accomplished the more difficult task of defeating the Jeopardy champions in 2011.  The migration of these capabilities into the cloud is almost certain to be a powerful driver of white-collar automation.  Only the health care and education industries are relatively resistant to these changes, with the result that their relative costs are accelerating.  (An excellent brief discussion is provided for why health care is simply not comparable to other markets.)

In the near future, rapidly increasing capacity in fields like big data, artificial intelligence (AI), machine learning, artificial neural networks, and 3D printing is poised to replace human employment as never before.  Advancing AI and machine learning will eliminate many white collar positions, such as in middle management and the professions, even in the fields of computer science and engineering.  As a result, even increasing education, which is advocated for students as protection against automation, is experiencing diminishing returns.  With up to 50% of jobs at risk to automation and up to 25% at risk to offshoring (presumably with some overlap), the potential impact on employment is staggering.

These examples point to the theoretical catastrophic endpoint of relentless progression toward automation—at least in the absence of policies designed to adapt to the situation.  Members of the non-elite general public are already well into this trajectory due to rising inequality, stagnant wages, a decreasing education premium, and loss of worker power from globalization and automation.  Their ability to face the coming crisis is further jeopardized by the rising political power of those elites who have promoted policies to limit business responsibility and to lower taxes by weakening the safety net.  As a result of the transition from defined benefit pensions to often under-funded 401K plans, 50% of American households aged 65-69 have retirement balances of $5,000 or less.  Their plight could be compounded in coming decades by another severe financial crisis or by dislocations from global warming, since the same elites are determined to prevent or reverse policies designed to lessen those possibilities.

Unfortunately for elites, future decades will likely be precarious for them as well, even for the portion who are pushing for oligarchy (see the main post in darkcashnet.net for their identities).  The demand required by the economic system to generate their riches comes mostly from consumer spending—more than two-thirds in the US and more than 60% in other developed countries.  If jobs are automated away, consumers will lack the purchasing power necessary to drive this demand, and a fundamental restructuring of our economic rules will be required.  If this occurs, some form of direct redistribution of purchasing power will become essential if economic growth is to continue.

The author, a Silicon Valley CEO, believes the most likely solution to restore purchasing power is likely to be some form of basic income guarantee, such as by returns from a centrally managed sovereign wealth fund.  For example, a $10,000 annual basic income would require new revenue of about $1 trillion after adjustment for reducing or eliminating numerous antipoverty programs.  Since ever more taxable income is rising to the very top, taxation should be restructured to mirror the income distribution.  In addition to concern for the health of an economy with extreme inequality, there is the moral question of whether a tiny elite should be able to, in effect, capture ownership of society’s accumulated technological capital.  Today’s innovations do not really compare to the groundbreaking work of pioneers like Alan Turing and John von Neumann.  The computer technology that makes automation possible exists in some measure because millions of middle-class taxpayers supported federal funding for basic research in the decades following World War II.  Hence, the general public has a legitimate claim on the returns of decades of enormous incremental development that it supported, particularly when the dysfunctional nature of the alternative is considered.

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World.  Ruchir Sharma.  2016.

Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management, spent 25 years traveling to analyze the economies of the world for investment.  In his introduction, he lists the principles he formulated for this task, which include the following: impermanence is the norm; forecasts are limited to 5 to 10 years; biases are stifled; ideological single factor theories are avoided; economies are likely to return to long-term averages; multifactor growth should be balanced, and dynamic indicators used should be manageable and not subject to political or marketing manipulation. As an unsentimental businessman, he then presents ten rules, each with its own chapter, to use in identifying the next big winners and losers in the global economy.

1. People Matter: Is the talent pool growing? Population gains together with productivity gains determine the rate of economic growth. For much of the post-World War II era, the rate of global economic growth has been almost 4%—half from population growth and half from productivity gains.  However, population growth since 1990 and productivity gains since 2005 have each decreased to about 1%.  Hence, overall growth has decreased to about 2%, and this lower rate is projected into the foreseeable future.  In the US, working age population decreased from 1.7% to 0.5% and productivity decreased from 2.2% to 1.3% after 2005.

Changing demographics exacerbate this trend for working age population.  Since 1960, average life spans have increased from 50 to 69, with the fastest growing portions over 65 and particularly over 80.  At the same time, due to aggressive birth control policies, births per woman have decreased globally from 4.9 to 2.5, even in India and Mexico.  The fertility rate is actually less than the replacement rate of 2.1 in 83 countries, including the US, Japan, and much of Europe. Consequently, the portion of working age people (15-65) who drive the economy is decreasing, while the portion of nonproductive older people is increasing.

This problem has been partly offset in some developed countries like the U.S., Canada, Germany, and Australia by immigration.  In the US, immigrants account for only 13% of the population but 25% of new businesses (30% in Silicon Valley).  Increased participation of retirees and women in the workforce also helps.  Automation, which is viewed as a threat to jobs (47% at risk in the US in one to two decades), may actually be important to counter workforce shortages.  Government programs, such as baby bonuses in Russia or extensive paid leave for mothers in Sweden, have had little effect on fertility.

2. The Circle of Life: In national politics, particularly in developing countries, crisis forces reform, reform leads to growth and good times, and finally, good times encourage arrogance and complacency that lead to new crises. The bold new leaders who emerge often have early successes from reform, but if they stay for long, this is followed by staleness and corruption. Many examples of this pattern are reviewed, such as Putin in Russia, Erdogan in Turkey, Suharto in Indonesia, and Mohamad in Malaysia.  Even worse, populists without reform arise in some countries, such as Chavez in Venezuela and Kirchner in Argentina.

Vladimir Putin is an example of this sequence.  He was elected president in 2000 during the severe depression after Russia’s transition to a market economy.  His reforms of taxation, debt reduction, management of Russia’s oil wealth, and reigning in oligarchs led to doubling the size of the economy and increasing average Russian annual salaries from $2,000 to $12,000.  However, by 2008, he transitioned to demagoguery, corruption, and aggressive nationalism, with the result that average income fell to $8,000, the economy slowed to negative growth, inflation increased to 16%, and billionaire wealth connected to government was 70%.

3. Good Billionaires, Bad Billionaires: “…Whatever one’s ideology, it is hard to dispute the growing view that low levels of inequality fuel long runs of strong economic growth, and that high or rapidly rising inequality can prematurely snuff out growth.” Moreover, inequality is presently very high and getting higher.  In 2014, the top 1% had 48% of global wealth (50% of financial wealth in the U.S.).  The much smaller fraction of super wealthy is getting an even more disproportionate share.  The number of billionaires has doubled in the last 5 years and tripled in the last 10.  Good billionaires are not necessarily bad for the economy, but bad billionaires are.

Good billionaires are in industries like technology, manufacturing, pharmaceuticals, telecoms, retail, e-commerce, and entertainment.  These industries make the most positive contributions to productivity, have fewer corrupt ties to government, and are less likely to generate popular backlashes.  Bad billionaires are in rent seeking industries like construction, real estate, gambling, mining, metals, oil, and gas that may compete for access to national wealth and that may be tied to government corruption.  The 70% portion of bad billionaires in Russia is by far the largest.  Bad billionaires are also more likely to have inherited wealth from families with close ties to corrupt government, such as in Indonesia.

4. Perils of the State: The checklist for governments includes the following: 1) the level of government spending, which can be too much or too little, and whether it goes to productive investment or giveaways, 2) misuse of state companies and banks to pump up growth and contain inflation, 3) activities that are either choking or encouraging private business.

For spending in developed nations, France tops the list with 57%.  Greece’s bloated spending has decreased to 47% after forced reforms.  Sweden, Finland, Belgium, Denmark, and Italy have around 50% spending, but mostly with better management.  The US, Austria, and Australia at 35-40% are light spenders.  For spending in developing nations, Russia probably tops the list at close to 50% (official figures claim only 36%).  Other big spenders from 41-35% include Brazil, Argentina, Poland, Saudi Arabia, and Turkey.  Light spenders include Mexico, Taiwan and South Korea at 22%.  Too much spending may include lavish subsidies, wasteful state corporations, and other inefficiencies.  Too little spending, as in Mexico, Pakistan, Nigeria, and Egypt, may include inadequately funded law enforcement, large black markets (more than 30% in Pakistan Venezuela, Russia, and Egypt compared to 8% in the U.S.), and civil war (62 conflicts from 1979 to 1997 averaged 15 years duration and 30% decreased GDP).

State-owned companies and banks may be sources of artificial creation of jobs, artificial suppression of prices, inefficient subsidies, and bad or corrupt loans.  For government and state company employment, highest levels are 33% in Norway, Saudi Arabia and Russia and 30% in China, and lowest levels are less than 10% in Japan, Korea, and Taiwan.  Wasteful Energy subsidies (gas, oil, etc.) amount to more than 10% of GDP in Saudi Arabia, Iran, Iraq, and Turkmenistan and 28% of GDP in Uzbekistan.  Enthusiasm for state companies has faded in emerging stock markets from 30% in 2008 to 15% in 2013. In China their share of GDP has decreased from 70% to 30%, and 73 million state jobs have been eliminated in the last few decades.  Assets controlled by state banks are 75% in India, 50% in Russia, Hungary, Taiwan, and Malaysia, and 40% in China, Thailand, Indonesia, and Brazil.  Reportedly, China’s recent stimulus to maintain unrealistically high growth targets has generated $6.8 trillion in wasted investment, including a great deal of empty real-estate.

5. The Geographic Sweet Spot: Nations that qualify as geographic sweet spots combine the pure luck of an advantageous location for trade with the good sense to make the most of it. For the largest emerging nations, combined import and export trade account for 70% of GDP. Profitability from proximity has occurred between Dubai and Iran, Hong Kong and China, Eastern Europe and Western Europe, Southeast Asia and the US, and Mexico and the US.  To benefit from their locations, countries must open their borders to trade with their neighbors, the wider world, and their own provinces and second cities.  Also, nations have redrawn trade routes to their advantages, such as when China created six of the world’s ten busiest ports, all of them man-made.  Other regions, such as parts of Africa and South Asia, have lost out due to inadequate policies and infrastructure.
6. Factories First: Is investment rising or falling as a share of the economy? Investment is the strongest driver of economic growth. Best investments to support growth are in new technology, new roads and ports, and especially new factories.  However, investment becomes increasingly nonproductive above about 35% and results in slower economic growth.  This is particularly concerning for China, where investments have grown from 37% of GDP in 2002 to a remarkable 47% in 2014 to maintain unrealistic growth targets.  Investment binges that lead to crashes can be good or bad depending upon what they leave behind.  In the US, the dot-com bubble of the late 1990s, funded by venture capital and stocks rather than debt, left behind a vast network of fiber optic cables important for future growth, but the housing market bubble of the 2000s, funded by staggering debt, left behind the deepest post World War II recession.

For emerging countries, investments are optimal at 25-35% of GDP and weak at 20% or less, and manufacturing ranges from 10% of GDP in Chile to 30% in China.  South Korea, Malaysia, China, and Indonesia are four of the top five for both investment and manufacturing.  For developed countries investments average only about 20% of GDP, from 17% in Italy, to 20% in the US, to 26% in Australia.  For these countries, manufacturing amounts to about 20% or more in only a few, particularly Germany, which has increased exports from 26% to 46% of GDP since 1995 and which is ranked in the top three for 27 of the top 51 global industries, compared to 21 for the US and 19 for China.

It is becoming tougher and tougher for developing nations to get in the manufacturing game and stay there.  The entire manufacturing sector has shrunk from 24% to 18% of global GDP since 1980.  In addition, rich nations have a big lead in advanced manufacturing, have less need for cheap labor due to automation, and have learned to block tricks like export subsidies, undervalued currencies, and reverse-engineering.  Consequently, some developing countries have tried to replace the manufacturing escalator to growth with a service escalator.  However, the rise of these service industries has been insufficient to drive mass modernization.  Even India’s IT services employ only about two million people, or less than 1% of the workforce.

7. The Price of Onions: Is inflation high or low? In the postwar era, low inflation has been a hallmark of every long run of strong economic growth. Of the fifty-six nations that, since 1960, have had runs of GDP growth greater than 6% for at least a decade, 3/4 had inflation rates lower than the emerging-world average.  The miracle economies of South Korea, Taiwan, Singapore, and China had booms lasting three decades or more and rarely saw inflation at greater than the emerging-world average.  In recent times, a boom cannot last if inflation is rising because the central bank will have to raise interest rates and likely choke off growth.

Global average annual inflation was 1% from 1210 to 1933, but this concealed sharp and frequent swings between high inflation and deflation.  After 1933, deflation disappeared and was replaced by unbroken inflation.   For developed countries, inflation peaked at 15% in 1974 (with the OPEC embargo), then fell to 2% since 1991.  In developing countries, inflation peaked at a staggering 87% in 1994 (with Russia, Turkey, and Brazil in triple digits), then fell to 6% since 2002.  Inflation was tamed largely by the rise of politically independent central banks that enforce inflation targets of around 2% for 92% of global GDP.   Outliers in 2015 include Argentina at 30%, Russia at 16%, Nigeria at 9%, and Turkey at 8%.  After World War II, extended bad negative demand-driven extensive deflation has occurred only in Hong Kong from 1998 to 2005 and in Japan for two decades after 1990 when high debt and oversupply of everything resulted in steadily falling consumer prices and prolonged low growth.  Good positive supply-driven deflation occurs as well, such as in the English industrial revolution when prices fell by half and output rose sevenfold and in the digital revolution when prices plummeted as quality skyrocketed.

Today, importance is decreasing for consumer prices and increasing for asset prices (stocks and real estate) as signals of sharp economic downturns.  Globalization has stabilized consumer prices by international shopping but destabilized local asset markets by introduction of foreign high end buyers that lead to bubbles.  Every major economic shock in recent decades has been preceded by an asset bubble, with increased severity when fueled by debt.  Five years later, the economy will be below its previous trend by 1-1.5% for a bubble not fueled by debt, by 4% for a stock market bubble fueled by debt, and by 9% for a housing bubble fueled by debt.  Consequently, the Fed needs to consider asset markets as well as consumer goods when stabilizing prices, particularly since the composite valuation of stocks, bonds, and houses in the US is now at a fifty year high, well above the highs of 2000 and 2007.

8. Cheap is Good: Does the country feel cheap or expensive? An overpriced currency will encourage locals and foreigners to move money out of a country and sap its economic growth. A currency that feels cheap will draw money into a country and boost its economic growth. The critical category to watch is the current account, which captures how much a nation is producing compared to how much it is consuming.  This consists of the trade balance (exports minus imports) plus other currency flows, such as interest payments to foreigners, foreign aid, and remittances from locals working abroad.  Cross-border capital flows were $280 billion or 2% of GDP in 1980, increased to $9 trillion or 16% of GDP in 2007 with globalization, and decreased to $1.2 trillion or 2% of GDP in 2014 with deglobalization.

A country with a current account deficit of 5% for five years is highly likely to have a significant slowdown and some kind of crisis.  To predict changes, watch whether the locals are moving money into or out of the country, including by illicit channels that show up in the errors and omissions column of the balance of payments.  China is the leading exporter of illicit capital at $125 billion per year until 2013, increasing to an annual rate of $320 billion at the beginning of 2015—an alarming sign.

The collapse of an overpriced currency in Thailand in the 1990s provided an example of a currency crisis. The strong baht led to extravagant spending, real-estate and stock bubbles, and heavy borrowing in foreign currencies.  The current account hit 8% in 1995-6.  When the bubble burst, investors pulled money out of the country, the baht fell 50% against the dollar, and foreign loans couldn’t be repaid.  Subsequent events provided an example of a currency contagion, when investors pulling money out of Thailand triggered a pullout from neighboring countries that could pay their bills and eventually from emerging countries everywhere.  For developed countries the current account deficit as a percent of GDP was 6% for the US in 2006 and 1.6% for the Eurozone in 2008 but has fallen to 2.5% in the US and a surplus of 1.6% for the Eurozone.

Conversely, devaluation to encourage exports usually does not lead a country to prosperity.  Negative consequences include higher prices for foreign goods, difficulty repaying foreign debt, and possibly even a trade war if others retaliate.  China was a rare exception when it devalued the yen in 1993.  But China had little foreign debt, little reliance on imports, and, most important, a strong manufacturing sector.  Japan and Germany in the 1980s and 1990s showed a path to strong growth despite massive currency appreciation by engaging in high quality advanced manufacturing for which customers were willing to pay a premium.

9. The Kiss of Debt: Is debt growing faster or slower than the economy? Economic slowdowns and financial crises are most often preceded by excessive growth of private debt (companies and individuals) not government debt, as shown by studies of 30 credit binges in 150 countries and of 430 severe financial crises. The usual pattern is excessive private sector borrowing (credit mania), often in response to some invention or innovation, which leads to overproduction, such as of fiberoptic cables in the late 1990s, and careless extension of credit, such as in the subprime lending of the 2000s.  Eventually, some financial accident occurs, typically after the central bank is forced to raise interest rates, and the bubble bursts.  As a result of the financial crisis from excessive private debt, government debt subsequently increases due to decreased tax revenues, increased public safety net spending, and shifting of bad debt to government books.  Hence, there is no historic basis for the idea that financial crises typically have their roots in fiscal government borrowing.

Obviously, credit is essential for economic expansion but only at a rate that is reasonably proportionate to growth of GDP.  The magic number for spotting coming trouble is a five year increase in private credit of 40% as a share of GDP (or 20% per year).  For instance, the Thailand financial crisis of the late 1990s was preceded by five years of robust 10% annual economic growth but an excessive growth of private debt of 67% of GDP.  After the financial crisis of 2007, a few countries and industries cut back, such as in the US, but total global debt (combined private and public) has continued to grow from $142 trillion to $199 trillion or from 269% to 286% of GDP.  In 2015, the US total debt of around 250% of GDP (150% private, 100% public) is pretty normal for a developed country with a per capita income over $50,000, but the Chinese total debt of over 250 % of GDP (232% private, 40% public) is by far the largest for an emerging nation with a per capita income of $10,000.

The most alarming credit binge is in China, which accounted for $21 trillion of the $57 trillion increase in global debt since 2007 and resulted in a record 80% five-year increase of private debt by 2013 with associated real-estate and stock market bubbles.  This is a threat to the global economy.  One possible outcome would be like that of Taiwan, which crossed the 40% threshold in the late 1990s.  Taiwan responded by sharply pulling back on lending and reigning in crony capitalism, which limited the damage to slowed growth from 9% to 7% for the next five years.  An alternate worse outcome would be that of Japan in the 1990s after rising debts led to collapse of its stock market and real-estate bubbles.  Rather than sharply reducing debt, Japan increased borrowing to subsidize failed companies, which resulted in two decades of stagnating growth and increased total debt from 250% of GDP in 1990 to 400% today.

10. The Hype Watch: How is the country portrayed by global opinion makers? The basic rule: the global media’s love is a bad sign, and its indifference is a good one. From 1980 to 2010, 122 Time magazine covers featured the economic status of a country or region.  When the story was upbeat, economic growth slowed in 66%, and when it was downbeat, it increased in 55% in the next five years.  A similar pattern was found in other publications, with the exception of the Economist, which did somewhat better with improvement in two-thirds after an optimistic cover and slowing in more than half after a pessimistic cover.

This pattern occurs because periods of rapid or slow growth are often near the ends of their runs and about to return to baseline by the time they come to the attention of the media.  Mainstream opinion about which nations are rising or falling typically gets the future wrong, because it extrapolates recent trends into the unknowable future and gets more convinced the longer a trend lasts.  IMF extrapolation for continued high growth at a slightly more modest rate for China and India predicts quadrupling in size for a combined expansion of $53 trillion by 2030.  The historically much more realistic expectation of return to baseline (regression to the mean) would result in only doubling for an expansion of $11 trillion.  This results in an enormous $42 trillion gap between predictions by the two techniques.  Also, poor economies have much more potential for rapid “catch-up” growth, which encounters the likelihood of slowdown when per capita GDP reaches 75% of that of the US.

11. The Good, the Average, and the Ugly—Summary. For three decades before 2008, global economic annual growth was 3.5%.  However, the future potential growth rate is estimated to be limited to 2.5% due to structural changes of depopulation, deglobalization, and the need for deleveraging.  Although the post 2008 recovery has been weak, recovery in the US has been stronger than in most developing nations and needs to be judged by the new standards.  The “kiss of debt” rule of growth of debt by over 40% of GDP in five years is the single most reliable indicator of a coming major economic slowdown. China’s economic growth prospects now rank among the ugliest in the emerging world and are a threat to the global economy, since China has displaced the US as the leading source of global growth.  Selected countries are listed below according to the author’s view of their economic prospects:

Good:  US, Germany, India, Mexico, Peru, Argentina, Poland, Romania, Pakistan, Vietnam, and the Philippines.

Average:  Japan, South Korea, Taiwan, UK, Spain, Italy, Czech Republic, Hungary, Kenya, Sri Lanka, and Columbia.

Ugly:  China, Russia, France, Turkey, Canada, Brazil, Saudi Arabia, Nigeria, South Africa, Thailand, Malaysia, and Australia.   

Global Inequality: A New Approach for the Age of Globalization.  Branko Milanovic.  2016.

In this book, inequality is characterized globally, between nations, and within nations.  Inequality is often quantitated by the Gini Scale, which assigns a score of 0 for complete equality (everyone’s income is the same) and 1 for complete inequality (one person has all of a country’s income).  The scale is often expressed as a percent, so a score of 0.4 becomes 40.

The source of most inequality is that between countries, not that within countries.  (See fig. 1.5)  The global Gini of 70 is significantly greater than Ginis within individual countries, which range from the high 20s in Scandinavia and central Europe to the mid-60s in Columbia and South Africa.  More than 2/3 of income difference is explained by one variable—the country of residence.  Compared to the Congo, income is greater by a factor of 93 in the U.S., 71 in Sweden, 13 in Brazil, and 3 in Yemen.  Hence, there is essentially a citizen premium whereby the country of birth (independent of individual effort) is essentially a rent.

Wealth inequality is greater than income inequality, and both kinds of inequality are increasing. The global top 1% claimed 15.7% of income and 46% of wealth in 2010, compared to 14.5% of income and 32% of wealth in 2000.  For hyper-wealthy individuals (the top 0.0001% with more than $1 billion in 1987 dollars), the share of GDP more than doubled from 1987 to 2013 from less than 3% to more than 6%, mostly because of increased numbers of individuals in that category.  Meanwhile, even in advanced countries like the U.S. and Germany, 1/4-1/3 of the population has negative or zero wealth.

Since 1970, the marked inequality between countries has decreased somewhat, but the inequality within countries has increased in ways that differ substantially between emerging and developed nations.  This has resulted in hollowing out of the middle class of the developed world.  From 1988 to 2008, relative income growth was 75% for the developing world middle class (mostly China and other Asian counties) and 65% for the global top 1% (mostly rich countries) but only 0-5% for the rich countries’ middle class.  (See fig. 1.1) Consequently, China’s middle to upper class (80^th percentile) is converging with the U.S. lower to middle class (20^th percentile).  (See fig. 1.6)

 However, for absolute income growth, those at the top got the lion’s share (19% for the top 1%, 44% for the top 5%, and 60% for the top 10%).   The rich countries’ middle class, essentially from the 70^th to the 90^th percentiles, got 20%.  The developing world middle class and all others got only the remaining 20%.  The share of income for the developing world middle class is much lower than suggested by its relative increase since 1988 because its starting baseline was so low.  (See fig. 4)  In 2008, global per capita after tax income was $71,000 for the top 1%, $1,400 at the 50^th percentile, and under $450 for the bottom decile.

Technology, globalization, and political influence of the rich are said to be the three major forces responsible for this evolving pattern of markedly increasing inequality.  For the past several decades, these forces have resulted in the income from economic growth going almost entirely to the wealthy elite rather than to the general population.  On the other hand, inequality could be decreased by benign forces, such as education, social transfers, and progressive taxation.  Malign forces, such as wars, natural catastrophes, and epidemics could also drive down inequality but drive down mean income, as well.

In the U.S., inequality is quite high, particularly compared to other developed countries.  Those at the top in the U.S. do well and account for 50% of the global top 1%, but the middle class and poor are comparatively worse off.  U.S. inequality was at a sustained peak until about 1933 with the Great Depression and high unemployment, fell after World War II with the New Deal, strong unions, and high marginal taxes, and rose again after 1980 with globalization, reduced marginal taxes, declining unions, and mostly pro-rich government.  Half of the recently increased income inequality in the U.S. comes from just five counties—Manhattan (borough); Santa Clara, San Francisco, and San Mateo Counties in California (Silicone Valley), and King County in Washington (Seattle).

The author sees increasing inequality in the U.S. as inevitable for the foreseeable future due to a perfect storm of the following economic, social, and political factors:

1. Higher substitution of capital for labor (automation and robots).
2. Highly concentrated capital ownership among the rich.
3. Decreased power of labor versus capital (globalization, decreased unions, service jobs).
4. Increased tendency for the same people to have both high labor and high capital income (CEOs, children with inheritance and high paying jobs).
5. Assortative mating—skilled, usually rich, individuals marrying each other, particularly with increased women in the workforce at higher positions.
6. Growing importance of money in electoral politics.

• The rich as the major contributiors to campaigns and lobbying.
• Congress enormously more responsive to the rich (6 times more responsive for the rich than the middle class; not responsive for the poor).

7. Democracy suppression by the rich directed against minorities and the poor.

• Suppression of voting by poor and minorities—voting 80% for the top decile, 40% for the lowest decile.
• Creation of False Consciousness of middle class and poor by media and think tanks—1) Diversion from economic interests toward divisive social or religious interests. 2) Misbelief in USA social mobility (now less than Europe).  3) Misbelief in USA equality (more inequality and smaller middle class than Europe).  4) Blaming the poor as responsible for their own poverty and undeserving of support.
• Gerrymandering redistricting to dilute the vote of the poor and minorities.
• Citizens United—financed by the rich to increase their political influence.

8. Declining middle class (defined as 25% below to 25% above the median).

• 1979-2010 decreased share of population from 33 to 27% and of income from 26% to 21%.
• Leads to decreased support for social services like education and health care.
• Decreases middle class ability to limit power of both the rich and the poor.

9. Race—less support for the safety net than in Europe because voters see the beneficiaries as outside of their group, rather than within it, as in Europe (until recent high immigration).
10. Favorable taxation for the rich.

The author sees the consequences of increasing inequality as lower economic growth and an increased risk of plutocracy or populism.  He sees plutocracy (dictatorship by the propertied class) as emerging in the U.S. due to the entrenchment of the rich at the top of politics.  He sees this as leading to social separatism like that of Latin America with the rich paying for their own higher quality education, policing, etc. and not supporting public goods like education, health care, and infrastructure.  He sees the influence of populism emerging in Europe which has multiparty systems, more democracy, and less political influence of money, while the welfare state built on homogeneity is being undermined by globalization, rising inequality, and markedly increased immigration.

Phishing for Phools: The Economics of Manipulation & Deception.  George A. Akerlof and Robert J. Shiller.  2015.

The authors, both Nobel laureates in economics, argue that the common economic model of a free market with assumed perfect conditions is woefully inadequate for formulating policy in the real world.  Although free markets have contributed greatly to prosperity, they have also included many failures such as unfair distribution of income, inadequate social protections, and externalities like pollution that are mitigated by government intervention.  Phishing for phools is added to this list of market failures.  It is defined as manipulation and deception that are intrinsic to markets and that inexorably arise from the same profit motive that produces prosperity.

In the past four decades, behavioral economics has identified many aspects of human psychology that differ greatly from the rational man of economic models and that are highly vulnerable to phishing.  These include many cognitive biases and thinking in terms of narratives onto which marketers can graft other stories.  For a much longer time, advertising and marketing in both business and politics have used sophisticated techniques to understand and exploit these same vulnerabilities.

Numerous examples are drawn from all walks of life to show the pervasiveness of phishing for phools.  For the financial crisis of 2007, the untoward actions of investment banks, rating agencies, and the trading of derivatives and credit default swaps are discussed.  Rip-offs regarding cars, houses, and credit cards are revealed.  Phishing in politics is said to undermine democracy, particularly because of the oversize role of money in elections and lobbying.  For Pharma and phood, abuses before and after the Food and Drug Act of 1906 are discussed, including the 2006 lobbying victory that barred competitive bidding for Part-D Medicare drug coverage.  Bankruptcy for profit by fraudulent bookkeeping in the savings and loan crisis of 1986-95 is described.  The rise of Michael Milken’s junk bond industry that enabled the excesses of leveraged buyouts by corporate raiders is reviewed.

The phishing equilibrium is pervasive but not comprehensive.  That is because we have individuals who step back from the profit motive and act as leaders of business and government.  It is these heroes who make the free-market system work as well as it does, not the unadulterated actions of markets.  Some of these individuals work in or have founded organizations that measure and enforce standards, like the Food and Drug Administration, the National Bureau of Standards, and the Better Business Bureau.  Other individuals have developed legal protections for consumers or have worked to regulate business and finance in government agencies that may be strikingly underfunded by the enemies of regulation in congress.

The final section of the book discusses the competing stories of the free market.  (Remember the importance of narrative in human thinking.)  During the Age of Reform from 1890 to 1940, Populism, Progressivism, and the New Deal led to a new, more expansive view of the role of government.  The old story is that in the post-World War II years there was a consensus that government met real needs by Social Security, Medicare, securities supervision, deposit insurance, the interstate highway system, aid to the indigent, supervision of food and drugs, environmental protection, auto safety laws, laws against mortgage-gouging, civil rights, and gender equality.

The new story achieved currency in the 1980s when Ronald Regan said, “Government is not the solution to our problem; government is the problem.”  This story is derived from an unsophisticated interpretation of standard economics that says free-market economies without government interference yield the best of all possible worlds.  Actually, the free market is a double-edged sword that does produce great prosperity but that also produces highly significant harmful effects from which we need protection.  The authors provide three examples of important old story protections and new story efforts to end or minimize them by “reform” or defunding.

Social Security: In the old story, for those over 65, Social Security provides more than half of unearned income for the bottom 80% and still provides 31% for the top 20%.  Without it, the poverty rate for those over 65 would rise from 9% to 44%.  Nevertheless, in the new story, the Bush administration, in 2004, proposed to privatize a significant portion of the program.  The plan essentially gave the most vulnerable citizens government loans to be paid back with high interest rates in order to speculate in stocks and bonds. The authors thought that the plan was “to be blunt, daffy.”  In addition, the Paul Ryan plan to privatize Medicare would result in a typical person over 65 paying 68% rather than 25% of health care costs out of pocket by 2030.

Securities Regulation: In the old story, securities regulation is one of the most important government functions.  In the new story, these functions are to be undone by deregulation and defunding.  Both of these likely contributed significantly to the financial crisis of 2007.  In 2014, the SEC oversaw close to $50 trillion of assets with a budget of 0.003 cents per dollar of asset.  This is 1/400 of mutual funds budget of 1.03 cents per dollar for overseeing assets.  Quite possibly, this new story defunding of regulators, with workloads and salaries to match, contributed to the eight-year delay between notification of the SEC of suspicions about Madoff’s pyramid scheme and his arrest in 2008.

Citizens United: In the old story, more than a century of campaign law aimed at limiting distortions by moneyed interests in elections.  The Tillman Act of 1907 disallowed direct contributions by corporations to political campaigns.  New laws in 1974 created the Federal Election Commission and limited campaign contributions and spending.  McCain-Feingold of 2002 prohibited PACs, which had arisen to circumvent earlier campaign law, from mentioning candidates in advertising within thirty days of primaries and sixty days of general elections.  In the new story, Citizens United, a right wing nonprofit political organization challenged McCain-Feingold in 2007 by paying to release a partisan documentary about Hillary Clinton.  With new story thinking, the conservative majority of the Supreme Court denied the distinction between free speech by individuals and free speech by corporations.  John Paul Stevens wrote in dissent that this defies common sense.  Metaphorically, we must place some limits on those with resources to unleash huge loudspeakers that can drown out the messages of less well-endowed others.

The authors conclude that it is wrong only to picture the healthy (i.e. “efficient”) working of markets because it means that modern economics fails to grapple with deception and trickery that are inherent in competitive markets.  Thus phishing for phools is not just an occasional nuisance that should be considered on a case-by-case basis.  It is a generality that is an inevitable and inherent part of free markets.  Thus phishing for phools should be cast in an Adam Smith-style general equilibrium framework, which is the benchmark for thinking for all economists.

The Nobel Factor: The Prize in Economics, Social Democracy, and the Market Turn.  Avner Offer and Gabriel Soderberg.  2016.

The authors argue that in 1969 the Swedish business elite managed to acquire the Nobel name for a prize in economics for the purpose of exaggerating the scientific authority of market-liberalism to overturn Social Democracy.  This prize in economics was not part of the original group of Nobel prizes awarded every year since 1901.  This is hardly surprising since Alfred Nobel had written that he hated business and considered himself a social democrat.  Nevertheless, the prize was created by the central bank of Sweden by providing an endowment funded by taxpayers and by persuading the Nobel Foundation (dominated by businessmen), the Royal Swedish Academy of Science (which resisted), and the Nobel family to lend the prestige of its name.  However, the family insisted in setting the prize apart by naming it the “Prize in Economic Science in Memory of Alfred Nobel.”

The authors contend that the Nobel-selection committee, which did not include a single left-leaning economist until the 1990s, was biased from its onset toward the right compared to economists generally.  This is documented by multiple surveys of economists over several decades that consistently show 2/3 favored Social Democratic norms, while only 1/3 strongly opposed them in both Europe and the U.S (see fig. 1).  A study of doctoral students in the top six American universities showed that 2/3 were left of center in 1985 and still left of center when followed up in the 2000s.  A poll of senior American economists by the Economist in 2008 found 46% Democrats, 44% independents, 10% Republicans, and 80% supporting Obama’s policies.

The politics of the selection process are examined by a review of the history of the committee and by extensive graphic analysis of the lifetime patterns of citations of the candidates’ research.  Prizes were split relatively evenly between left-leaning and right-leaning economists, but did not reach the 2/3 to 1/3 split in the discipline.  The committee advanced its viewpoint by focusing on studies of markets and by presenting economics as more scientific than it is.  Some highly regarded liberal economists appear to have been blackballed—permanently for J. K. Galbraith and Joan Robinson and temporarily for Stiglitz and Akerlof.  On the other hand, the prize in 1974 rescued the status of the conservative Friedrich von Hayek (author of The Road to Serfdom), whose career had been at a dead end since the 1950s.

The authors set the actions of the Nobel Committee in the context of the struggle between social democrats and market-liberalism of business elites.  Market-liberalism is characterized as considering market exchange as superior to all alternatives with no role for government and with no concern for advantages from inequality of endowments of wealth, connections, ability, education, and health or for unequal rewards.  Nordic Social democracy is characterized as a vision of reciprocal solidarity, in which immediate self-interest is subordinated to collective advantage, with the addition of government programs to correct market failure so that health, education, welfare, and housing are pulled out of the market and predation of labor is prevented by central negotiation between employers and trade unions.

The authors note that due to social democracy with mixed economies, no societies on earth are farther from serfdom than the Nordic welfare states, which are among the richest and most equitable in the world.  In these states earnings growth is shared by all rather than just a few at the top as in the U.S. (see fig. 2).  In addition public sector social insurance is more than an order of magnitude cheaper to administer than market insurance for sickness, disability, and unemployment.  Compared to the U.K., the U.S. health system costs twice as much, has inferior outcomes, and fails to cover everyone.

According to the authors, the market-liberalism favored by the Nobel Committee is not entitled to the authority of science because it lacks natural science’s widely shared core principles and requirement for empiric validation.   Its main feature is that its doctrines are highly convenient for great wealth, polluting industry, risky finance, and those who don’t want to pay taxes or help the needy.  Moreover, the mostly theoretical neoclassical economics at its base has been largely discredited in the last several decades by the rise of empiric and behavioral economics.  These disciplines have disproven many of the theoretical conclusions, assumptions, and models about perfect markets, rational choice, and so on by actual rigorous measurement and observation.

Models of market efficiency (the invisible hand) fail because assumed extensive uniformity, perfect information, and perfect competition, not to mention an absence of bad faith, opportunism, and fraud do not exist in the real world.  Also, efficiency is worth having, but so are other values, such as truth, justice, freedom, loyalty, and obligation.  Models of Rational Choice (informed self-interest) fail because of the same assumptions and because actual human choice has been shown to differ greatly from that of models.  Also, the self-interest model excludes other influences, such as friendship, love, loyalty, charity, and integrity.  The Just World Theory, which states that everyone gets what he deserves regardless of prior endowments, justifies inequality and hardship as arising from individual desert.  Thus its purpose is to dismantle constrains on the wealthy and dismantle protections for everybody else.  It is essentially a license to inflict pain. The Optimal Taxation Model suggested a low linear tax of 20-30% with marginal rates declining as income increased until they reached zero for the top earner.  The model is open to many criticisms, and other top economists have suggested a top rate of 78%, not zero.

Despite these and many more shortcomings, market-liberalism, with authority boosted by several Nobel Prizes, managed to gain political ascendancy in the past several decades and helped bring about the negative consequences of the “market turn” referred to in the book’s title.  The massive redistribution of wages and benefits away from workers and toward wealthy elites caused soaring inequality.  Deregulation contributed to the financial crisis of 2007.  The introduction of ownership equity incentives for managers led to systematic plundering of corporations.  Privatizing of welfare functions led to inferior programs with higher risk, lower employer contributions, and high fees (25-40% for pension investment).  Imposition of austerity by the IMF and World Bank according to the “Washington Consensus” led to slower economic growth, collapsed wages, lower standards of living, and increased corruption throughout Latin America, Southeast Asia, Russia, and Eastern Europe.

The authors ask, “What warrant does Nobel economics provide for the market turn?  As science, not much….Economics, even Nobel economics, does not hang together very well….The massive empirical turn in economics during the last two decades, the work of field experiments and historical ‘natural experiments’, is a silent repudiation of equilibrium economics.  To recapture validity, economics has to come down to the ground of argument, evidence, and counterargument, supported by reason and an open mind.”

 

 

The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Centrury.  Walter Scheidel.  2017.

The author’s thesis is that throughout recorded history extremely violent shocks have been necessary for essentially all substantial reductions in inequality.  These shocks are identified as the Four Horsemen of Leveling—mass mobilization warfare, transformative revolution, state failure, and lethal pandemics.  An enormous volume of examples from all of recorded history and from all parts of the globe is presented in support of these findings.

The exhaustive review shows that high inequality has been the default condition of humanity for thousands of years as “history has alternated between long stretches of rising or high and stable inequality interspersed with violent compressions.”  This pattern has been a feature of human existence ever since agriculture began producing surpluses that could be captured by predatory elites with hereditary property rights.  This process was enhanced by state formation, commercialization, and the exercise of political, military, and ideological power by elites.  This has been the norm from the ancient and premodern civilizations of Mesopotamia, China, India, Egypt, Rome, Greece, Medieval Europe, Mesoamerica, South America, and others up to the major countries of the modern world.

The first of the Four Horsemen of Leveling, warfare, must rise to the level of mass mobilization to result in widespread reduction of inequality.  With wars of sufficient intensity and duration, both winning and losing sides experience substantial decreases in inequality, not just from destruction of capital, but also from a changed political climate with respect to inflation, taxes for the rich, and conditions for workers.  World Wars I and II, where all combatants lost a great deal and experienced considerable leveling, are prime examples of this process.  Earlier preindustrial warfare usually did not rise to this level and usually did not contribute to a widespread reduction of inequality because of its more limited scale.

The second Horseman, transformative revolution, requires similarly pervasive mobilization of resources in every single town and village to achieve radical leveling.  The Twentieth Century Communist Revolutions of Russia, China, and some smaller states are prime examples of this process.  These revolutions resulted in markedly reduced inequality brought about by expropriation, extreme bloodshed, and considerable loss of wealth.  Many earlier uprisings, including the French Revolution, also sought redress of grievances but rarely succeeded in significantly reducing inequality, at least in part because the necessary violence and control were beyond preindustrial means.

The third Horseman, state failure, occurred when earlier states were unable to check internal and external challengers, protect key allies and associates of rulers, and extract revenues required for these tasks and for enriching the power elite.  Typical outcomes included loss of control of subjects and territory and replacement of state officials by warlords.  Inequality decreased because the wealth of elites had been protected by the state and in many cases had been acquired by close association with the state as a source of rents and corruption.  Examples of this occurred in Bronze-age Greece (Mycenae), the Tang Dynasty in China, the western half of the Roman Empire, the Classic Maya Civilization, and modern Somalia.

The fourth Horseman, lethal pandemics, resulted in such massive loss of life that market forces changed to the disadvantage of elites and in favor of workers and peasants.  In the Fourteenth Century, the Black Plague killed 1/3-1/2 of Europeans and resulted in large tracts of abandoned and idle land and a shortage of workers.  Thus the value of lands and rents of elites deceased markedly, and the wages available to surviving workers increased markedly.  Interestingly, then as now, elites who favored laissez-faire when it worked for them, now demanded government intervention to suppress the rising cost of labor.  However, the imbalance was so severe that market forces asserted themselves over government fiat and coercion.  Examples include the Black Plague, the Columbian Exchange (gold and silver to Spain and Portugal in return for small pox and measles to the Americas, which probably caused more devastation than the Black Plague), the Justinian Plague of early Byzantium, the early Roman Empire Plague, and numerous others.

Special attention is given to the Great Compression of 1914 to 1945, which included World War I, the Great Depression, World War II, and the Great Communist Revolutions.  The extreme violence of the time resulted in massive loss of life (well over 100 million killed), massive destruction of property, and extensive redistribution of property by taxation and inflation to fund the war and by confiscation in communist countries.  As a consequence, inequality decreased markedly, particularly after World War II, so that the top 0.01% lost over 90% of wealth in France and Japan and 80% of income in the U.S.

Inequality remained low for several decades after World War II until about 1980 when it began an inexorable rise back to the much higher levels before the Great Compression.  Numerous additional examples are provided to show that this is the usual sequence.  Once violent shocks have passed, nothing is left with sufficient strength to restrain the market and other forces that inevitably lead to rebounding inequality.  Thus the relative equality of the Great Compression that many of us thought was the normal status quo was actually a marked exception from the long-term baseline of much higher inequality.

In addressing the role of violence in falling inequality, the author mentions but does not try to answer some interesting related questions.  He does not study the inverse of his thesis, namely whether high inequality gives rise to violent shocks.  However, he does comment that “there is currently no compelling reason to assume a systematic causal connection between…inequality and…violent shocks.”  Also, he focuses on the distribution of material resources within societies but not between countries.  Hence, he acknowledges that northern European countries manage inequality much better than the U.S., showing that policy differences matter, but limits discussion to his view that European policies may be unsustainable due to aging and slower economic growth.

So what hope is there for those who think extreme inequality is not only unfair but bad for economies?  The author explores a wide variety of potential candidates for peaceful alternatives for reduction of inequality.  These include land reform, farm debt relief, economic development, democratization, education, emancipation, economic crises, and others.  Generally, these conditions are found to have no correlation with consistently reduced inequality, except when associated with violence, such as with land reform.  In addition, transformative violence from the Four Horsemen of Leveling is unlikely to return any time soon in the modern world, and no sane person would want it to.  Consequently, the next long stretch is likely to be a relatively peaceful return to rising inequality.

Democracy for Realists: Why Elections Do Not Produce Responsive Government.  Christopher H. Achen & Larry M. Bartels.  Princeton University Press.  2016.

The authors challenge the cherished American notion that general citizens obtain the government policies they want by democratic elections.  They argue that election outcomes are essentially random and do not validate voters’ policy preferences.  They begin by examining political science theories of how elections transmit the preferences of ordinary people to be enacted by government.  They divide these into the three older theories of populist voting, leadership selection voting, and retrospective voting and the newer theory of group identity voting.

In the populist model (folk theory), voters know their policy preferences and have them implemented either by direct democracy or by representative democracy.  In direct democracy, voters rule by choosing policies themselves via initiative and referendum procedures.  In representative democracy, voters elect candidates whose policy preferences are most similar to theirs to represent them in assemblies that enact their preferences.

The leadership selection model dispenses with the notion that the voters themselves decide issues by electing candidates to carry out their will.  Instead, democracy means only that voters have the opportunity of accepting or refusing the individuals who are to rule them.  Thus voters don’t need to know policy so long as the leaders they elect make the best political decisions for them in order to compete for their votes.

The retrospective model regards voters as merely appraisers of past events, performance, and actions.  Thus election outcomes hinge not on ideas, but on public approval or disapproval of actual past performance of incumbent political leaders.  The authors compare this form of voting to driving by looking in the rear view mirror.  They state that it works about as well in government as it would on the highway.

The authors present voluminous information to show that none of these models satisfactorily explains election results.  For the populist and leadership selection models, they show that voters have insufficient understanding of their own perceived political preferences and those of their parties and candidates to vote on this basis.  In addition, voters are commonly mistaken in highly partisan directions about easily measureable facts, such as crime rates and changes in deficits.  Consequently, numerous studies show very little correlation between voters’ preferences and those of the parties and candidates they elect and the actual political outcomes that result.

For the retrospective model, the authors show that voters have insufficient understanding of whether times have been good or bad and whether government is responsible for perceived changes to vote on that basis.  For instance, votes for incumbents have been shown to fall significantly after acts of nature, such as shark attacks and hundreds of droughts and floods, for which government clearly is not responsible.  This is compounded by the incentive for political and ideological entrepreneurs to construct self-serving explanations and solutions for people’s hardships, which are then amplified by the mass media.

For retrospective voting, only the state of the economy is correlated with election results, but even that correlation is limited.  When a president’s term is divided into sixteen quarters, only the two before the election matter.  A president will be punished for an economy that does well for four years overall, but tumbles for the last two quarters, and he or she will be rewarded for the reverse.  Politicians know this, so income growth usually increases during the last years of four year presidential terms, likely as the result of political manipulation of the economy.  Thus, even for the economy, overall performance matters much less than very short term performance just before elections.

The authors argue that these older models of voting do not explain even the great partisan realignments, such as with the New Deal and with the Civil Rights Acts, as for changing policy preferences.  For the New Deal, incumbent Republicans were punished for economic collapse in 1932, and incumbent Democrats were rewarded for recovery in 1936.  However, contemporaneous elections in state governments and many foreign countries showed that incumbents of opposing parties were similarly punished and rewarded whether they were liberal or conservative.  Hence, these election results were not directed at specific policies, but rather at incumbents.  In addition, the recession of 1938 led to Democratic losses in congress and state governments.  If the presidential election had been held that year, the great realignment might not have occurred.

This brings us to the group identity theory of voting.  The authors conclude that the primary sources of voting behavior are partisan loyalties, social identities, group attachments, and myopic retrospection, not policy preferences, ideologies, or realistic assessment of circumstances.  Party is the strongest identity, but others include race, ethnicity, religion, social class, and region.  Identities are emotional attachments that transcend thinking and may trump facts and policy reasoning.  Voters first choose, or commonly inherit the choice of, a party validating their political and social identities, and only then adapt their policy choices to fit those of their candidates and parties.  Hence, in thinking about politics, it makes no sense to start from issue positions.

Consequently, the authors find that election outcomes are essentially random choices among the available parties—musical chairs.  When the party balance is close, which it usually is in two party systems according to the “Law of the Pendulum,” outcomes turn on the voting choices of “pure independents” who do not even lean toward one party or the other.  These “swing voters,” who are the least informed and the least engaged, are often swept along by the familiarity of an incumbent, the charisma of a fresh challenger, or a sense that it is “time for a change.”  Hence, elections do not produce policy mandates, even when they are landslides.

Even well-informed and highly educated citizens are not exempt from these findings.  They are likely to have more elaborate and internally consistent worldviews that just reflect better rehearsed rationalizations.  Indeed, they are often more subject to partisan and confirmatory bias than less attentive voters.  The authors emphasize that “this is not a book about the political misjudgements of people with modest educations.  It is a book about the conceptual limitations of human beings—including the authors of this book and its readers.”

Given these findings about elections, what is good about democracy?  First, elected governments are accepted as legitimate, which facilitates peaceful and orderly transfers of power.  Second, in well-functioning democracies, parties that win office are inevitably defeated in later elections, sometimes due to random events, such as droughts, floods, or untimely economic slumps.  This inevitable turnover is key to preventing any one group or coalition from becoming too entrenched in power and leading to the abuses of dictatorships or one party states.  Third, electoral competition provides incentives for rulers to tolerate loyal opposition.  Fourth, in well-functioning democracies, reelection-seeking politicians will strive to avoid being caught violating consensual ethical norms.

Given the limitations of voting, what are the concerns about democracy?  After scrupulous efforts to present data in a nonpartisan manner throughout the book, the authors reveal what some would argue is partisan bias in only the last several pages.  In their view, “more effective democracy would require a greater degree of economic and social equality.”  Power imbalances are very large in favor of the wealthy, the educated, corporations, major media, ethnic majorities, and racial majorities.  Organized, powerful, often minority policy demanders routinely get what they want at the expense of less powerful, unorganized majorities.  Hence, the authors believe the folk theory of democracy should be abandoned in favor of the group identity theory to better understand the contributions and limitations of citizens, groups, and political parties in the search for political and social progress.