Distribution and all that

from Peter Radford

Rumor has it that Obama’s next State of The Union address will focus heavily on inequality which has become quite a vogue issue in some Washington DC circles. I doubt anything will come of his speech, these obligatory speeches get swamped by politics the moment they end, but it will be interesting to hear what he has to say, because it is, as you all now, an issue that I have been prattling on about for some time now.

Let’s take a look at some background.

All economies, ours included, ration stuff. That’s what they do. In more polite circles this rationing is called allocation or distribution. We don’t use the rationing word because it makes people uneasy and conjures up Soviet era images of bureaucrats mucking around in the minutiae of our lives in ways we resent.

But rationing is rationing by any other name.

By this I mean that the economy and its institutions, and particularly its rules, set the context within which we all buy and sell things, and acquire what we can from the very long list of the things that we want.  This recognizes the basic fact that resources are not infinite, nor is ability evenly distributed, and we all have varying degrees of opportunity to get what we want. Merit is never sufficient. The only time merit comes into play is when the opportunity exists to express that merit. Nor does hard work guarantee anything. It too needs a heavy dollop of good fortune to make a difference in our lives.

At its root the world is a very lumpy place. Opportunities, resources, skills, and all else we need are unevenly distributed about the place. This unevenness naturally leads to scarcity. And scarcity leads to the need to ration who gets what.

In our economy prices do the rationing. Or at least they do superficially. This means that if you are wealthy you get more stuff. If you are poor, not so much. Getting to be wealthy is very difficult nowadays, especially, as it turns out, in modern America. Who knew we were so class riddled and hidebound? If you’re unlucky enough to be born poor the chances very very high you will stay that way. The land of opportunity is more myth than reality. And is certainly more myth now than it used to be.  A level of inequality is always around and is actually a good thing because the plausible prospect of wealth motivates people to innovate and work hard. Our current problem is that the prospect of advancement is a whole lot less plausible than it was.

So our way of rationing things has created a few very wealthy folk and a whole mass of very poor folk. The kind-of-ok middle is less ok than before, but isn’t destitute.

This all matters for a variety of reasons.

In terms of economics the collapse anything resembling equality as it was a fews decades back has done a great deal of damage. It has reduced the level of demand in the economy by syphoning off more and more income to people who already have most things they want and so are not inclined to spend their increasing income. At the same time a large number of people who want more are unable to spend because they aren’t being paid enough. So, overall, the economy is sputtering along with less spending than it could have. And since spending by some people implies earnings by others, the missing demand causes us to have lower profits and fewer jobs than we might expect given the total income the economy generates.

We are stuck in a sub-optimal zone we can’t break free from.

Why did our price system produce this distorted rationing outcome?

Because the rules that set the context within which prices do the rationing, and the institutions that condition that context and operate those rules, are rigged. We are not playing a fair game. Our economy has been constructed – or rather reconstructed since the early 1980′s – so that people who earn income from capital or land, people we can generally call rentiers, are privileged. Whereas people who earn their income from work are not. On top of this we have turned our economy into a financially dominated one, rather than one based on making or providing real goods and services. This has allowed financiers to get their hands on a greater share of the pie, to the detriment of us all.

An easy way of showing this is simply to look at tax rates. A hedge fund manager, some of whom make billions of dollars a year, can pay as little as 15% on that income, whilst the rest of us face tax rates that escalate up to around 35%. Likewise, if you sit at home and earn your income from a stock portfolio the gains on that portfolio are taxed not as income, but as capital gains, and thus at a lower rate. Since about 80% of all stocks are held by the very wealthy this distorts their share of after tax income and helps perpetuate their stranglehold on our national wealth.

None of this is a revelation. It’s an old problem made much worse by our policies of the last few decades. Here’s a good summation:

“The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”

That’s a quote from Keynes near the end of his General Theory published in 1936. No wonder our rentier class hates him.

So: it is the rules we set via policy and legislation that lay the groundwork for the market to ration outcomes. And the market rations via setting prices. Right now rentiers rule and thus get a disproportionate share of the national spoils. Hence our extreme inequality.

Back to Obama.

Absent his health care reform he has done precious little, other than talk, about inequality since he arrived in office. His fancy speeches rarely translate into policy.

I would like to think this is because of the adamant opposition of the Republicans who are, after all, steadfastly opposed to most efforts to redistribute our national income. Indeed they have been the main force changing the rules to increase the privilege of the rentiers. But they were abetted along the way by the Democrats who have acquiesced to the long decline in the share of national income going to the Federal government by way of taxes, and have supported a variety of the deregulatory efforts that opened the door for the financial sector to syphon off our wealth. So our erstwhile left-leaning major party does not have clean hands. It is also culpable, although less so.

How did this happen?

Because inequality matters politically. Especially when money is equated with free speech as the Supreme Court decided in the Citizens United case. This opened pandora’s box and led to wholesale corruption in our politics. If a few very wealth people can spend their fortunes on elections they can buy influence and protect their interests. They can ensure the game is rigged. So it was a Democrat who scotched an effort to change the tax rate on hedge fund managers. He was bought off by big election campaign donations.

This flood of money has successfully shifted the center of gravity of our political discourse. Issues that had general bi-partisan support a few decades ago are now highly contentious. One is the level, if any, of redistribution the government undertakes to undo the effects of our market based rationing.

Recent statistics show that bottom 20% of wage earners get about 2.3% or all our national income. The top 20% get about 57.9%. This was the raw income each segment earned in 2010. But government programs and taxation shifted things about. After that adjustment the bottom 20% was better off, with 9.3%, and the top 20% was worse off with 47.2%. So the government acts to re-ration and ameliorate some of the damage done by the rigged rules. Of course it could do more: it could un-rig the rules. But the odds of that are low given the grip the rentiers have on power.

And the rentiers are getting support from Republican voters who have shifted they support for redistribution dramatically in recent decades. It was only a few years ago that Republican voters supported government programs by a 60% to 40% margin. That has now flipped. Only 40% of Republicans support helping the poor or unemployed. This turn about is mirrored in other statistics that show Republican voters lack of sympathy for the less fortunate. When asked they seem to think that the rich got that way by dint of hard work, and that the poor are destitute because they don’t work hard enough. Neither Democratic or independent voters think this way. Indeed those groups identify the lack of opportunity as the big problem, not the lack of hard work.

Here we are then. On the eve of a major speech about a vital topic that affects us all, and with both parties aligned against any truly constructive response because they are in the pocket of the very people who benefit most from the current level of inequality. That most voters – those Democrats and independents – think we have a problem and want action is neither here nor there. We will get a speech and then the rentiers will pull the strings.

Chin up though. The tide is shifting. There is sufficient pain out there, sufficient inequality, and sufficient anger about it, that even our corrupt system cannot avoid forever. And the rentiers are suffering. After all we have a surplus of capital our economy, which gives rise to a delicious irony: the basis of rentier power is the scarcity of capital, which thus commands a high price in our world of market based rationing. If it is now comparatively more abundant, it is worth less. A whole lot less. Especially with interest rates so low – which is why rentiers are clamoring for higher rates.

Keynes talked boldly, and wrongly, about the demise of rentier power. He called it ‘the euthanasia of the rentier’. He argued, perhaps more tongue in cheek than real, that the rentier phase of capitalism is a transitional one.

We can all hope, can’t we?

Let’s hear what Obama has to say about distribution and all that.