The shifting battleground

from Asad Zaman

The bull charges the red flag being waved by the matador, and is killed because he makes a mistake in recognising the enemy. Samuel Huntington argued that the era of the clash of nations is over. However, he created a red flag when he painted the civilisation of Islam as the new enemy. Trillions of dollars have been spent in fighting this enemy, created to distract attention from the real enemy.

The financial deregulation initiated in the Reagan-Thatcher era in the 1980s was supposed to create prosperity. In fact, it has resulted in a sky-rocketing rise in inequality. The gap between the richest and the poorest has become larger than ever witnessed in history. Countless academic articles and books have been written to document, explain and attempt to provide solutions to the dramatic increase in inequality. The American public does not need these sophisticated data and theories; it experiences the fact, documented in The Wall Street Journal, that the quality of jobs and wage earnings are lower today than they were in the 1970s. Growing public awareness is reflected in several movies about inequality. For instance, Elysium depicts a world where the super-rich have abandoned the ruined surface of the planet Earth to the proles, and live in luxury on a satellite. 

Efficient Allocations?

from Peter Radford

Willford King has written:

“It is easy to find a man in almost any line of employment who is twice as efficient as another employee, but it is very rare to find one who is ten times as efficient. It is common, however, to see one man possessing not ten times but a thousand times the wealth of his neighbor … Is the middle class doomed to extinction and shall we soon find the handful of plutocrats, the modern barons of wealth, lined up squarely in opposition to the propertyless masses with no buffer between to lessen the chances of open battle? With the middle class gone and the laborer condemned to remain a lifelong wage-earner with no hope of attaining wealth of even a competence in his old age, all the conditions are ripe for a crowning class-conflict equaling in intensity and bitterness anything pictured by the most radical follower of Karl Marx. Is this condition soon coming to pass?” [Emphasis in original]

That was in 1915. My how times change.

Well maybe not. That comment about the middle class has a very contemporary ring to it.

A couple of things pop out at me when I read that quote – no doubt you will find your own emphasis. 

Decomposing the top decile US income share into 3 groups, 1913-2013

from David Ruccio

McCloskey disses democracy

from Peter Radford

Actually it’s McCloskey dissing what she calls leftish economists generally, although poor Piketty and his notorious book provides the moment she seizes to attack us misguided folk. Riven through with fundamental error and hopelessly soft we have all, apparently, misunderstood the great sweep of history.

The lesson from which is that all is swell if we just leave it alone. We need to set aside our petty and foolish concerns about the environment, and a whole host of other nonsense about market imperfections – and, yes, government imperfections too – we need to acknowledge the great wealth that surrounds us, and gorge on the pile of goodies that capitalism has brought us.

Oh, and we all need to shut about poverty. It doesn’t exist.

‘Just desert’ and neoclassical income distribution theory

from Lars Syll

Walked-out Harvard economist Greg Mankiw has more than once tried to defend the 0.1 % by invoking Adam Smith’s invisible hand:

[B]y delivering extraordinary performances in hit films, top stars may do more than entertain millions of moviegoers and make themselves rich in the process. They may also contribute many millions in federal taxes, and other millions in state taxes. And those millions help fund schools, police departments and national defense for the rest of us …

[T]he richest 1 percent aren’t motivated by an altruistic desire to advance the public good. But, in most cases, that is precisely their effect.

When reading Mankiw’s articles on the “just desert” of the 0.1 % one gets a strong feeling that Mankiw is really trying to argue that a market economy is some kind of moral free zone where, if left undisturbed, people get what they “deserve.”

Where does this view come from? Most neoclassical economists actually have a more or less Panglossian view on unfettered markets, but maybe Mankiw has also read neoliberal philosophers like Robert Nozick or David Gauthier. The latter writes in his Morals by Agreement:

The rich man may feast on caviar and champagne, while the poor woman starves at his gate. And she may not even take the crumbs from his table, if that would deprive him of his pleasure in feeding them to his birds.

Now, compare that unashamed neoliberal apologetics with what three truly great economists and liberals — John Maynard Keynes, Amartya Sen and Robert Solow — have to say on the issue:

Profit inflation

from David Ruccio

A couple of weeks back I wrote that, when mainstream economists debate the causes of inflation, they focus only on labor costs and forget all about profits.

Piketty phenomena – “Riding a Wave of Growth: Global Wealth 2014” (chart)

from Edward Fullbrook

The Boston Consulting Group (BCG) is a leading player in what is called “the global wealth-management industry” and which in effect is plutonomy’s tactical cavalry in financial markets. BCG have just “released” a report disclosing that in the year 2013 the wealth of the world’s people worth $100 million or more increased 19.7 percent.  That compares, they say, to 3.7 percent for the wealth of sub-millionaires.  Naturally they are overjoyed at this latest redistribution.

“Wealth” meaning what? Like most people and as also with the symbol “capital”, they use “wealth” to stand for two different things, and also like most people, economists especially, they often lose track of which referent they are trying to talk about.  But we can overlook that here because the 19.7 percent and 3.7 percent refer to financial wealth and, with exceptions, that is all plutonomists and their agents really care about.

The report documents how the upward redistribution of wealth to the 0.1 percent and especially to the 0.01 percent is accelerating, in other words, how the plutonomist programme (pre-Piketty it was never reported by mass media)  is now restructuring the world at an even faster rate.  Here is a taster of how they see the next five years. 

Piketty, plutonomists, and the legal framework

from Edward Fullbrook

Plutonomists, like real-world economists, know that the main determinant of income and wealth distribution is the legal framework in which an economy functions.    The Plutonomy Movement, by far the most powerful political force of our age, is founded on the underground application of this basic principle.  Occasionally this becomes manifest when one of plutonomy’s strategic documents is leaked.   Such an event happened last week when the Bank of American Merrill Lynch report “Piketty and Plutonomy: The revenge of inequality” found its way into non-plutonomist hands.  In addition to posts on this blog, there was coverage in the Chinese and the Australian press and Brad Delong posted an excerpt from the report including three graphs.  Here is another excerpt, very brief, and number 42 of the report’s 45 figures.  Red indicates “regulatory legislation” and green “deregulatory legislation”. 

US poverty rate, actual and simulated, 1959 – 2012 (graph)

from David Ruccio

One of the points Thomas Piketty makes in his new book is that mainstream economists enshrined as “laws” of capitalist development certain “facts” that only had relevance during the immediate postwar decades.

“Piketty and Plutonomy: the Revenge of Inequality” – 1

from Edward Fullbrook

Bank of America Merrill Lynch has released a report titled “Piketty and Plutonomy: the Revenge of Inequality”.  Here is a bit about it from  the South China Morning Post.

It is interesting but not wholly surprising to see that Hong Kong has topped another index which it may not be so proud of. It leads the rankings of an analysis which shows the wealth of the uber-rich as a proportion of an economy’s gross domestic product. According to a Bank of America Merrill Lynch report, the net worth of Hong Kong’s billionaires in 2013 represented 76.4 per cent of the city’s gross domestic product.

Sweden’s billionaires were a distant second accounting for 20.7 per cent of GDP. Next was Russia with 20.1 per cent, Malaysia 18 per cent, Israel 18 per cent, Philippines 16.5 per cent and Singapore 16.3 per cent. US billionaires accounted for 13.8 per cent of GDP, Britain’s 6.2 per cent, China’s 3.5 per cent and Japan’s 1.9 per cent.

The report, titled Piketty and Plutonomy: the Revenge of Inequality, examined Thomas Piketty’s highly successful tome, Capital in the Twenty-First Century. Analysis of plutonomy – where economic growth is powered by and largely consumed by the wealthy few – is critical, the authors say, for understanding the complexities of today’s markets, as they go on to enumerate 10 implications of plutonomy for investors.

Piketty projects that the global private wealth to national income ratio will rise from 440 per cent in 2010 to record highs of 500 per cent by 2030, levels that were last seen in 1910. Hong Kong is also highly placed in terms of income inequality when ranked in terms of relative Gini coefficient levels. Hong Kong is third after Colombia and Brazil. One of the report’s conclusions is that unless there is policy intervention, in the longer term “emerging markets are likely to become entrenched and egregious plutonomies”.

more on Bank of America’s plutonomy report soon

USA income redistribution chart 1964 to 2010

from David Ruccio

As if to illustrate the point I made the other day (about earnings at the top being themselves distributions of the income captured by capital), Seth Ackerman put together the chart above (from data in Simon Mohun’s recently published article on unproductive labor) comparing the sum of profits and managerial compensation to non-managerial compensation, both as shares of total net income.

Indeed, in a direct rebuttal of the neoclassical marginal-productivity theory of distribution, capital’s share of income has been growing at the expense of labor’s share since the late-1970s.

Plutonomy and its 12-point manifesto

from Edward Fullbrook

This appeared on my screen last night.

                                               The Plutonomist Manifesto

1. Because democracy is our worst enemy, we must work to convert every democracy in the world to a fake democracy.
2. We, The One-percent, achieve these conversions of the system of government through three forms of targeted ownership.
   a. Owning mass media, the internet and the Web.
   b. Owning all major political parties. We achieve this ownership by making the electoral process extremely expensive, thereby making election dependent on our financial support.
   c. Owning economists. In today’s world the economics profession determines what the electorate sees and does not see regarding the economy. Therefore it is imperative that we control it.  We achieve this by maintaining remunerative revolving doors, by financing think tanks and university economics departments, by funding Trojan Horse organizations to co-opt non-One-percent economists, and by our Nobel Prize.
3. In countries with real democratic traditions, plutonomy revolutions are achievable only by using Trojan Horse Methods (THMs). Subversion rather than violence or open campaigning is our means of conquest.
4. The use of THMs means that sometimes we must be seen to give support to our opponents.
5. We must be vigilant against leakages (for example, the Citigroup documents) of the existence of our program.
6. When approached always give lip-service in support of democracy.
7. The middleclass is both our means to success and our ultimate obstacle. It is they, not the poor, who have what we want. Hence the necessity of THMs.
8. Ridicule all suggestions of our existence as the work of conspiracy theorists, and label people who support middleclass interests over ours as “leftists”.
9. Channel funds to the emerging neo-fascists parties in the US and EU countries because their shenanigans camouflage our redistributions.
10. We must work to expand and refine our armoury of redistribution mechanisms.
11. The success we have had in the USA and the UK in redistributing middle-class income and wealth to ourselves must now in the next 15 years be duplicated across Western Europe, most especially in France and Germany.
12. Our goal of receiving forty percent of income and owning 80 percent of wealth is achievable in most countries of the world my mid-century.

REDISTRIBUTION    –      REDISTRIBUTION    –     REDISTRIBUTION

This and this explain the reference in #5 to “Citigroup documents”.

Plutonomy has made it onto Wikipedia

from Norbert Haering

Those who have been following this blog for a while will be aware of the history of the infamous term “plutonomy”.

According to Wikipedia: Plutonomy (from Greekπλοῦτος, ploutos, meaning “wealth”, and νόμος, nomos, meaning “law”, a portmanteau of “plutocracy” and “economy“) is a term that analysts of Citigroup have used for economies “where economic growth is powered by and largely consumed by the wealthy few.” ^[1]

This is the link to the Wikipedia-entry, which is not yet listed on search engines: https://en.wikipedia.org/wiki/Plutonomy. For eight years, plutonomy was without mention on Wikipedia, despite huge public interest. According to Edward Fullbrook, entries on Plutonomy have consistently been the most read on this blog. In particular, the 2010 blog-entry Citigroup attempts to disappear its plutonomy report has been the most read in the history of this blog with over 37,000 views according to Edward. The suppression efforts of Citigroup seem to have been ongoing according to this blog entry at least until the end of 2011 and might be still ongoing.

Affluent Rules

from Peter Radford

A couple of weeks ago I led off an article with a quote from a new Gilens and Page paper – linked to in the article. Subsequently I have acquired and waded through the Gilens book “Affluence & Influence”.

Time for a few more quotes, all from page 81 of the aforementioned book:

“The complete lack of government responsiveness to the preferences of the poor is disturbing and seems consistent with the most cynical views of American politics. These results indicate that when preferences between the well-off and the poor diverge, government policy bears absolutely no relationship to the degree of support or opposition among the poor.” 

“For those proposed policy changes on which middle- and high-income respondents’ preferences diverge by at least 10 percentage points, policy responsiveness for the 90th percentile remains strong … but is indistinguishable from zero for the 50th percentile”

“But when their views differ from those of more affluent Americans, government policy appears to be fairly responsive to the well-off and virtually unrelated to the desires of low- and middle-income citizens.”

In the context of our ongoing debate over inequality I think these quotes stand for themselves.

12-country 1975-2007 chart of share of income growth going to The 1%

from David Ruccio

According to a new study of top incomes by the Directorate for Employment, Labour and Social Affairs of the OECD [pdf],

The Enlightened Capitalist

from Jonathan Nitzan and Shimshon Bichler

Preamble

Over the past few years, we have written a series of articles about the global crisis. [1] These papers try to break the conventional constrains of liberalism and Marxism, examining the crisis from the new theoretical viewpoint of capital as power. Capitalists and corporations, we argue, are driven not to maximize profit, but to ‘beat the average’ and increase their differential power. In this approach, the redistribution of income and assets is not a ‘societal’ side effect of the economy, but the central conflict that propels modern capitalism. And the main weapon in this struggle, we claim, is not investment and growth, but what the American political economist Thorstein Veblen called ‘strategic sabotage’ – the restrictions, limitations, hazards and pains that capitalists impose on the rest of society in order to sustain and augment their differential power.

Now, until 2011, distribution was a non-issue. Save for a few ivory-tower experts and justice-seeking activists, nobody spoke about it. It received little media coverage, let alone headlines, and elicited no meaningful debate. But with the global crisis lingering and upward redistribution continuing unfazed, the Occupy slogan ‘We are the 99 percent’ has finally gained traction. Suddenly, inequality and the excesses of the Top 1% are hot commodities, broadcast, discussed and written about all over the media.

The debate itself, though, remains largely conservative. The protest movements succeeded in putting distribution on the political table, but they haven’t figured how to take this achievement forward. So far, they have produced no new policy template, let alone a new theoretical framework, and this vacuum has left the political centre-stage open for policymakers, leading academics and Noble Laureates to recycle their worn-out platitudes. 

Capital and distributions of the surplus in the 21st century

from David Ruccio

Thanks to Thomas Piketty’s new book, the returns to capital are now back on the intellectual—if not the political—agenda.

Profit from Crisis: Why capitalists do not want recovery, and what that means for America

from Jonathan Nitzan and Shimshon Bichler

Can it be true that capitalists prefer crisis over growth? On the face of it, the idea sounds silly. According to Economics 101, everyone loves growth, especially capitalists. Profit and growth go hand in hand. When capitalists profit, real investment rises and the economy thrives, and when the economy booms the profits of capitalists soar. Growth is the very lifeline of capitalists.

Or is it?

What motivates capitalists?

The answer depends on what motivates capitalists. Conventional economic theories tell us that capitalists are hedonic creatures. Like all other economic “agents” – from busy managers and hectic workers to active criminals and idle welfare recipients – their ultimate goal is maximum utility. In order for them to achieve this goal, they need to maximize their profit and interest; and this income – like any other income – depends on economic growth. Conclusion: utility-seeking capitalists have every reason to love booms and hate crises.

But, then, are capitalists really motivated by utility? Is it realistic to believe that large American corporations are guided by the hedonic pleasure of their owners – or do we need a different starting point altogether?

Economic policy in a post-Piketty world

from Dean Baker

Thomas Piketty’s new book, Capital in the 21^st Century, has done a remarkable job of focusing public attention on the growth of inequality in the last three decades and the risk that it will grow further in the decades ahead. Piketty’s basic point on this issue is almost too simple for economists to understand: if the rate of return on wealth (r) is greater than the rate of growth (g), then wealth is likely to become ever more concentrated.

This raises the obvious question of what can be done to offset this tendency towards rising inequality? Piketty’s answer is that we need a global wealth tax (GWT) to redistribute from the rich to everyone else. That is a reasonable solution if we’re just working out the arithmetic in this story, but don’t expect many politicians to be running on the GWT platform any time soon.

If we want to counter the rise in inequality that we have seen in recent decades we are going to have to find other mechanisms for reversing this upward redistribution. Specifically, we will have to look to ways to reduce the rents earned by the wealthy. These rents stem from government interventions in the economy that have the effect of redistributing income upward. In Piketty’s terminology cutting back these rents means reducing r, the rate of return on wealth.

Fortunately, we have a full bag of policy tools to accomplish precisely this task. The best place to start is the financial industry, primarily since this sector is so obviously a ward of the state and in many ways a drain on the productive economy.

First Piketty and now Gilens and Page

from Peter Radford

“When the preferences of economic elites and the stands of organized interest groups are controlled for, the preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy.” – Martin Gilens & Benjamin Page, ” Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens, forthcoming this Fall

Wow. The second shoe drops.

Whilst we are all absorbing the impact of Piketty – and I repeat: go read it before you comment on capitalism henceforth – in come Gilens and Page with a blockbuster paper that shreds any concept that America is a functioning democracy, where by democracy we mean a state whose policies are influenced by popular sentiment.

We are an oligarchy, with a slew of special interest groups providing a supporting cast to an economic elite who manage to direct policy to their advantage. Not always, but often enough to skew society prodigiously. Having established with their research that American policymaking is dominated by an elite, Gilens and Page end:

“Americans do enjoy many features central to democratic governance, such as regular elections, freedom of speech and association, and widespread (if still contested) franchise. But we believe that if policymaking is dominated by powerful business organizations and a small number of affluent Americans, then America’s claims to being a democratic society are seriously threatened.”