Submitted by Edward Harrison of the site Credit Writedowns.
As with my most recent post here on Naked Capitalism about Larry Summers, I want to write a thought piece here, as much for discussion’s sake as for its analysis. Now, the core of what you are about to read is something I put together and posted on Credit Writedowns in March of ‘08. At the time, I was struggling with the dichotomy between the perceived increase in wealth in the United States and the obviously poor macro statistics on debt, leverage and earnings for the middle class. This piece was the product of that struggle.
I should warn you that it is at odds with some of what you will see me write here since I am basically a libertarian and the piece is very populist. When I wrote the piece, I can’t say I was 100% behind this interpretation of events. Nevertheless, as time has passed during this financial crisis, many events have validated this view in my eyes (the dichotomy between the bank/insurance company bailouts and the auto bailouts being a prime example). Therefore, I would be curious to read your responses.
As to the data that reinforces this view, you can find more at the following posts:
- Chart of the day: real hourly earnings (Jun 2008)
- Charts of the day: US macro disequilibria (Oct 2008)
I intend to follow this post with one titled “De-regulation as crony capitalism” or something to that effect, because the theme underneath this post is that Special Interests which favor elites are always present in any society, at any time regardless of the form of government. This was true in Egypt, Rome and Greece. It was true in the Soviet Union and it is certainly true in the United States. Therefore, it is axiomatic that de-regulation favors elites through crony capitalism, which is basically what we have seen over the past few decades. This is not the invisible hand of Adam Smith on display and makes the case for some minimal level of regulatory oversight.
One last comment: this post also is in line with my view that the United States has been in relative decline for some time, probably since World War II. The U.S. reached its apex as an economic and military power when large parts of Europe and Asia lay in ashes in 1945. In the intervening time, the U.S. has not recognized its relative decline. This has led to imperial over-stretch and a redistribution from the middle class to elites (This view is in line with Kennedy’s “The Rise and Fall of the Great Powers’ and deserves another separate post as well).
Below is the post. Feel free to comment whether you agree or disagree. Enjoy.
In an earlier post, I said that populism was the problem, not the solution. I reject populist methods of tariffs and protectionism because they are self-defeating economic poison. However, in this brief post, I do want to give voice to a populist interpretation of the last 35 years of U.S. economic history. This is a story of unequal re-distribution of wealth from the less fortunate to the more fortunate. This is a story of the United States in which the rich get richer at the expense of everybody else. At the conclusion, ask yourself: is this true and, if so, what should we do about it?
The Theory of Kleptocracy
First, let’s use a theory from Guns, Germs, and Steel by Jared Diamond as the center-piece for this little theory. In Chapter 14, entitled “From Egalitarianism to Kleptocracy,” Diamond postulates that more stratified societies are by definition less egalitarian, but more efficient and are, thus, able to eradicate or conquer more egalitarian, less stratified societies. Thus, all ‘advanced’ societies with high levels of GDP are complex and hierarchical.
The problem is: these more stratified, more complex societies are in essence Kleptocracies, where those in power re-distribute societal wealth to themselves. Those at the bottom of the society’s pyramid accept this unequal, non-egalitarian state of affairs because they too benefit from their society’s relative advancement. It’s a case of a rising tide lifting all boats.
Diamond says the Kleptocrats maintain power using 4 different methods:
“1. Disarm the populace, and arm the elite.”
“2. Make the masses happy by redistributing much of the tribute received, in popular ways.”
“3. Use the monopoly of force to promote happiness, by maintaining public order and curbing violence. This is potentially a big and underappreciated advantage of centralized societies over noncentralized ones.”
“4. The remaining way for kleptocrats to gain public support is to construct an ideology or religion justifying kleptocracy.”
Kleptocracy in America?
The obvious corollary of this theory is that most successful modern societies are, in fact, kleptocracies. The key is to use the four methods to gain popular support in order to re-distribute as much wealth to the ruling class as the populace will support. If the ruling class takes too much, it will be overthrown and replaced by a new ruling class (which in turn will re-distribute wealth to itself using the same four methods).
While this angle seems cynical, it is a a line of argument that has great internal consistency.
So, is the United States a kleptocracy? Of course it is! Is that bad? Well, it obviously depends on who you are in society. But, it also depends on whether the kleptocracy is efficient and fair over the long term. Let me explain this last statement a bit more.
Efficiency and Fairness
Because any heavily stratified society is by its very nature non-egalitarian, there always exists the potential for disenchantment amongst the masses. The U.S. is no exception. In order to prevent this disenchantment from leading to revolt, the ruling class must appear to strive for efficiency and fairness.
According to dictionary.com, efficiency means “accomplishment of or ability to accomplish a job with a minimum expenditure of time and effort.” So, for the US, it means the ability to increase productivity at a rate which makes the U.S. wealthier on a per capita basis now and in the future. And remember, it is the perception of efficiency, not actual efficiency which is important.
To be fair is to be “free from bias, dishonesty, or injustice.” For the United States, this means maintaining the perception that most every person has the opportunity to succeed while few, if any, have unobstructed paths to guaranteed success.
Is the U.S. efficient and fair?
That’s the $64,000 question, isn’t it. My populist take: no, the United States is neither efficient nor fair.
The United States has been living beyond its means for some time. Since the 1960s, we have run up a massive federal debt and current account deficit, while debt levels have doubled on a percentage of GDP basis. Our present levels of consumption are simply not justified by our current levels of productivity, if we want to maintain our present standard of living in the future.
Were we not the world’s major military superpower with the world’s reserve currency and the world’s largest economy, we would have succumbed to our profligacy years ago. Paul Kennedy has a great book on “The Rise and Fall of the Great Powers.” By contrast, many developing countries have gone bankrupt in the last 30 years from Argentina to Zimbabwe. Yet, we are in worse shape than were they, if one looks at the signposts which represent our macroeconomic health: debt-to-GDP levels, current account deficit as a percent of GDP, Government budget deficit, savings rate, etc.
The fact is our day of reckoning is upon us. We will soon realize that our massive debt and an outsized credit bubble have not only saddled us with debt, but it has also misallocated capital so that we are less productive than we believed. We have built miles and miles of telecom dark fibre when we could have invested in schools. We have built massive numbers of new homes, when we could have repaired our bridges and roads. The last 35 years have been an illusion of extreme productivity and wealth because we have artificially pulled forward demand by misallocating resources in order to consume today, what could have been consumed tomorrow. In essence, we are consuming today, while unwittingly making it more difficult to consume tomorrow because we believe we are wealthier than we truly are.
And as for fairness, Real Weekly Earnings peaked over 35 years ago in September 1972! Using the CPI to adjust wages to today’s dollars, the average worker made $738.48 per week in September 1972. In January 2008, that figure was $598.18.
(Note: these figures are expressed in Jan 2008 dollars. I use the CPI Index to calculate real dollars, which is based on 1982-1984 dollars. But, I then multiply this figure by 2.1108, which represents the BLS’s index factor for Jan 2008).
So, we are getting poorer. And we have been for over 35 years. Only during the end of the Clinton Administration was there an appreciable upswing in real weekly wages over this time period. Don’t believe me? See the raw data yourself, here and run the numbers.
In the meantime, CEOs are earning hundreds of millions of dollars, even when they are forced to leave because of poor management which cost their firms billions. In 2005, the average CEO earned 262 times what an average worker gets. In 1965, that figure was 24 times (see story).
Conclusions
There it is: the U.S. ruling class is not living up to its role in either efficiency or fairness. We are getting poorer.
That is why people are so angry. That is why the poll numbers for the President and Congress are so low [remember, I wrote this in March 2008]. And that is why so many people are suffering from the housing bubble.
The question you should ask yourself is this: Why has it taken the citizens of the U.S. so long to figure all this out? Answer: Even though the gulf between rich and poor was widening and the rich were getting richer, we thought we too were getting richer as well. We thought that we too were profiting from all of this “productivity.” In the 1980s, we came out of a steep double dip recession and stagflation and we won the cold war. This inflated our sense of well-being. In the 1990s, there was the tech bubble to inflate our assets. In this decade, there was the housing bubble. So, we thought we were getting rich too. We didn’t mind that the ruling class was benefiting disproportionately as long as we too appeared to be benefiting.
But, what was really happening is we were loading up on debt. We were not benefiting at all
And now that there are no more cold wars we can win quickly, no more tech stocks, no more double digit house price increases, and no more asset bubbles to hide the naked truth — now we realize that we were getting poorer all the time — just as it felt to us. The ruling class have used the four methods to maintain popular support that I enumerated before in order to give the appearance of equity and efficiency. All the while, the rich were milking the system for all they could.
I advise anyone who finds this populist line of argument compelling to read Jared Diamond’s Pulitzer Prize-winning book. Chapter 14 is especially rich. Once you realize that we the American people have been duped for the last generation, you will be angry. And this is why we need a major change in Washington. The politics and policies of the past just will not do.
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You’ll never get a voluntary change from Americans, they are too lazy. But an involuntary change is coming, society as we have known it, is finished. Our political leaders have given away every bit of our foundation. All we can do is return to ‘existence’ then start rebuilding a new society.
http://www.bushongbusiness.com/opinion.html
This is something preppers and survivalists have known for years, but were pegged as “tin foil conspiracy theorists”.
Ironic that we dress it up with cites and economic terms and readers digess this bitter pill much easier.
We’re ready. Are you?
We live in a constitutional republic, or perhaps we did at one time. And everyman has vote and a stake in the game.
And so we are to blame for our problems for continuing to put the same thieves in charge of the gold, and then express outrage not because they steal from Paul and Mary thats ok, its only when they steal from you and me that its a problem.
People think that their responsibility ends at the voters booth but I think Thoreau said it best on how the average man, I prefer SHEEP, is a cop out via voting
====
“All voting is a sort of gaming, like checkers or backgammon, with a slight moral tinge to it, a playing with right and wrong, with moral questions; and betting naturally accompanies it. The character of the voters is not staked. I cast my vote, perchance, as I think right; but I am not vitally concerned that that right should prevail. I am willing to leave it to the majority. Its obligation, therefore, never exceeds that of expediency. Even voting for the right is doing nothing for it. It is only expressing to men feebly your desire that it should prevail. A wise man will not leave the right to the mercy of chance, nor wish it to prevail through the power of the majority. There is but little virtue in the action of masses of men. “
You lament the Kleptocrats, but who keeps giving them the keys to the vault?
Re: “we won the cold war”
It looks like America is having a Berlin Wall moment these days and I’m not sure if the walls are going up or coming down, but there is a dynamic social shift underway that will destroy our country.
Saith John Bogel (September 2007): ” “My estimate is that the financial sector takes $560 billion a year out of society,” Bogle explains to Bill Moyers. “Banks, money managers, insurance companies, certainly annuity providers. They’re all subtracting value from the economy.”
From:
Bill Moyers talks with John Bogle
In this book, Bogle abhors what he sees as rampant cheating among his peers – not only mutual fund managers but brokers, bankers, lawyers and accountants. It’s not just a few bad apples, he says: “I believe that the barrel itself – the very structure that holds all those apples – is bad.”
Many people are still reluctant to concede that abuse was so widespread, since what they fear most is an assault by government in the form of tougher regulations. Unsurprisingly, loud complaints are now being lodged by influential lobbyists in Washington about the Sarbanes-Oxley Act of 2002, the only serious measure passed in the wake of the scandals to control business excess. And the tough-minded chairman of the Securites and Exchange Commission, William Donaldson, recently stepped down in the face of opposition from the White House and business interests.
Genuine shareholder democracy, he argues, would require chief executives to worry about the long-term health of the company, not the short-term fluctuations of stock prices. They would be far less tempted to manipulate earnings. In particular, if shareholders had appropriate voting power, the abuses associated with executive stock options could be reduced. Because shareholders do not have adequate voting rights, Bogle says, reform continues to be stymied.
From:
THE BATTLE FOR THE SOUL OF CAPITALISM
Great post, Edward! As a socialist, I agree with almost all of it–you libertarians are deadly accurate about economic phenomena once you realize/admit that “free-market” capitalist economic interactions have substantial involuntary and/or coercive aspects, broadly speaking–i.e, that organized market power exercised by and for elites actually exists. Thanks for admitting it–see if you can get your fellow libertarians to see the light! My only comment is that you need to parse “efficiency” by asking ‘what “jobs” do we WANT to accomplish (efficiently)? And over what time frame should we measure the real costs of accomplishing those jobs, including fixing global environmental destruction down the road?’ Once we think through those questions honestly, the case for capitalism pretty much evaporates. Also, Jared Diamond’s book Collapse is another must-read, though he offeres no solutions at the end but to hope that big business “decides” to save the planet–a pipe dream if ever I heard one…
Again, very perceptive post!
I’m curious if your weekly wage figures are comprehensive.
Over the period of time that you mention, money wages declined but perks such as health insurance have gone up. Since health insurance is compensation, it’s misleading to leave it out.
Also, typically, wage figures don’t include bonuses and tips. However, both of those things have become a larger portion of total compensation over the time period you cover.
I believe that once you factor in all compensation, you will find that average compensation has, in fact, risen.
This piece is an excellent summary of the delusions of the last 35 years.
The only thing I’d add is that increasingly the kleptocrats no longer even try to create the perception of the rising tide lifting all the boats.
Sure, they still mouth the same trickle-down lies, but clearly no one including the liars themselves believe it any more.
Now it’s just brazen rent-seeking and theft. Lobbying, bribery, anti-public lawsuits, capture, trying to destroy all social spending once and for all, trying to obstruct any solution to any problem once and for all.
By coincidence, this was the subject of my own blog post a few days ago, if anyone would like to read it at:
http://attempter.wordpress.com/
Although they love to invoke Smith, today’s “free-marketeers” envision almost exactly the opposite of Smith’s free market. Absence of rent-seeking and monopoly charges were what Smith meant by “free market,” while today the sort of freedom they have in mind is freedom for the powerful to crush those they oppose. That is a perverse sort of freedom that should cause libertarians to run screaming for the exits.
@Size: So do you think that workers are better off now than in the ’70s? If average compensation truly is higher now, it could only be because of the very tip-top pulling up the average. Run of the mill blue collar work does not compensate workers at anywhere near the level of the ’70s. I want to say it is closer to half than to even. Health benefits for most blue-collar jobs provde no value whatsoever. They consume an unreasonable portion of income in premiums yet do not even “insure” since the deductibles and copays still lead to financial ruin in the case of a serious health event. Workers are better off without it since they pay the premiums now, but still end up bankrupt when they need the “insurance.”
Superb post — I’d quibble on going back 35 years with income, since that was largely before the rise of two-income families. As in the gilded age with immigrants, individual incomes have gone down partly to accomodate all those extra workers, but families have felt their boats were rising until quite recently.
The question of the age seems to be why Americans are so passive in the face of what appears to be complete and open corruption of the system. Theories abound, from flouride to the Republocrat shell game, but I think people are much more aware, at least at an instinctual level, of what’s going on than most thinkers give them credit for, they’ve just checked out in the face of their powerlessness.
This may occur is in part because taking on debt has the psychological effect of lowering one’s sense of worthiness — thus one becomes more afraid of losing what one has, exhibits all kinds of irrational, instinctive behaviors to hold on to what one has, and in general, forgives the system because one can’t forgive oneself.
Size – you seem to be mistaken about the inclusion of bonuses and benefits in earnings stats.
The BLS stats do include benefits in kind and bonuses. See here: http://tinyurl.com/p753rd. Not hard to track down and I can’t understand why you didn’t bother to check.
Earnings don’t include tips, for obvious reasons. I assume you will agree that the 20% decline in real earnings is unlikely to be made up by tips.
The fact that you don’t know whether the BLS stats include tips, benefits and bonuses can’t possibly be used to support your claim that wages have gone up, can it? You would need to supply some actual evidence to support that claim.
I agree with this assessment.
The loss of effiency is a natural process in the evolution of a civilization (Quigley).
It comes from the evolution of instruments (serving external purposes) to institutions
(mainly serving their own purposes).
This process takes place on many levels:
education (minize student contact hours, maximize grants, physical infrastructure, fund raising)
corporate leadership (stuff your own pockets)
political leadership (get reelected)
health care (maximize revenue for yourself not the health of the patient)
the military (promote your own wellfare, fight only the likes of the Taliban and Somali pirates)
religious leadership (squeeze the believers so you have the means to sin and ask for forgiveness)
…
As the standard of living declines for most and anger rises the idea is born that progress can only be made by destroying others.
War is coming.
SEC Insider trading allegations surface:
http://debtsofanation.blogspot.com/
2009/05/debts-of-spenders-allegations-of-sec.html
Sorry to speak out of turn, but hi!
Did you miss me? I missed you.
This is a very good analysis. On the question of what kind of method the kleptocracy uses in the US:
“4. The remaining way for kleptocrats to gain public support is to construct an ideology or religion justifying kleptocracy.”
Read Alex Carey’s “Taking the Risk Out of Democracy” to fully appreciate the use of “sacred and satanic symbolism” in US propaganda through out the US history really, but Carey focuses on US corporate propaganda of the 20th century.
The religion is “free markets equal democracy,” non capitalism equals Satanism. This is religious propaganda to keep crony capitalism in power. US corporations and financial elites never met a fixed market they did not love… Propaganda and indoctrination has been the tool that drove the last 40 years. The fixed market propaganda has been overwhelming. You cannot discount the first tenant of fascism… corporate owned governance. You see clearly right now with the vast amounts of public tax money bailing out Wall Street and corporations beyond any sanity.
Look at the mass manipulation of GDP, CPI and U3 unemployment as propaganda to further the entrenchment of the political class. This is propaganda in action. The American public truly believed in 2006 unemployment was 4%, prices rose at 2.3% and GDP was growing. The American public, a product of an educational system designed so they are just smart enough to show to work on time and follow directions but can’t do enough math to read a statistical chart let alone analyze one.
The second key reading would be Joseph Tainter’s “The Collapse of Complex Societies.” The Laws of Diminishing Returns are real and they apply to more than just the marginal benefit of the next acre of corn you plant. Complexity and hierarchy of a society reach their own diminishing returns.
We see this today. Poor billions more into the US military and the marginal benefit is practically null at this point. Poor billions into education and the marginal benefit to society and GDP is greatly reduced from its peak in the 1950s. Poor trillions into the financial sector and well you could have produced more marginal benefit by burning the trillions for heat.
I applaud Edward for taking a serious analytical approach or “big picture” look at the foundations of where we are today. He is correct to use real wage comparisons and the fact that this is not now nor probably has been a functioning democracy in decades. I also applaud Edward for breaking the cult of “free markets equal democracy” for calling the US capitalist system what it is, fixed market oligarchy.
How else can the same idiots fail upwards? Do you really think George Bush is smart enough to go to Yale? Smart enough to take out a $500k loan, invest it in a Rangers stadium deal and make $14 million? In what universe is Bush smart enough for that? Only in a fixed market kleptocracy.
Thank you Edward!
Irm21, I share the same opinion as you in this matter. But, there are powerful social forces that restrain legitimate political discourse between individuals in the U.S.
As easy as it may be to call others sheep, I think the name-calling doesn’t add to the discussion.
The article was an elegant summary of things no one in the U.S. wants to discuss. (class, for one is a huge no-no. Income distribution is another.) Any broad discussion on the matter will quickly be hushed and the primary actors marginalized as ‘socialists.’
Most Americans still want to pretend in the America taught in History and Political Science textbooks. And for reasons I don’t understand, they are quite indifferent they are being robbed.
Problem is said Look at the mass manipulation of GDP, CPI and U3 unemployment as propagandaLet’s go crazy and take the raw data from BLS and start calculating our own statistics. It’s far from impossible, there’s lots of standard modeling out there and it’s easy to publish everything including the methodology.
I would argue that even if a scientifically decent set of stats are generated, they will be quickly marginalized simply because they may be more accurate.
It would be a fun exercise, but needs a team of volunteers with discipline to do well.
Great post. Let me attempt to trump March 2008 with December 2007. The context is the primaries, but to understand the stakes in the primaries you have to understand the last 35 years. And let’s not say “populism,” eh? What’s wrong with leveraging the insights of political economists? Not quantitative enough? Ha.
@Edward Harrison said: “Diamond postulates that more stratified societies are by definition less egalitarian, but more efficient and are, thus, able to eradicate or conquer more egalitarian, less stratified societies.”
I vehemently disagree. Egalitarianism as used here is a red herring. Just because a society is more eglalitarian does not mean it is less efficient. In fact, in many cases just the opposite is the case.
It seems to be an almost universal human trait to admire and want to reward (and serve) exceptional merit and achievement. Not too many people have a problem with that. As Rousseau pointed out, where the rub comes is when wealth and rank no longer correspond to merit. Societies that fail to maintain an equitable balance between wealth and rank on the one hand and demonstrable merit and achievement on the other open themselves up to civil disorder. This makes them vulnerable to conquest or dissolution. (As an aside, libertarianism is correct in its recognition that merit deserves reward. Its failure is that its mechanism for proportioning reward to achievement is flawed.).
Walter Bagehot further elaborated on this theme in Physics and Politics:
He (Bagehot) begins indeed by showing that “Natural Selection” in the early stages of the march of civilization–the better organized, more cooperative groups conquer the less unified. But then more and more other qualities, initiatives, and ideas–liberty, free discussion, written law, habits of calm reflection, of tolerance and generosity–conduce to survival, because they make for an ever higher degree of cohesion. These virtues are the strength of the national state, whose power a less developed people cannot successfully withstand.~
–Jacques Barzun, From Dawn to Decadence~
Jonathan Haidt recently delivered a completely modern take on the same theme:
For a long time there was a consensus that emerged beginning in the 1960s that human cooperation can be explained so parsimoniously just by these two beautiful simple processes: kin selection…and reciprocal altruism… And that’s all we need is just these two. This consensus had a kind of, almost a quasi-religous aspect to it in that people who challenged it, people who tried to produce or talk about other processes were often treated as though they were committing a kind of sacrilege. There was almost an emotional response, a rejection of people who tried to bring in other processes…
But in, just in recent years, in the last 10 or so years…things have changed. The consensus has unraveled and there’s an increasing appreciation that natural selection really does work at multiple levels at the same time and then the question is what are the factors that make inter-group vs. inter-individual competiton more or less important. The basic dynanic that’s been recognized since Darwin is that group efforts, cooperative efforts are always threatened by free riders, by people who reap the benefits of cooperation without making any contribution. This problem was thought to be fatal in the 60s but what has now been realized… is that culture is a solution to the free rider problem. Cultures are extremely good at solving free rider problems. Cultures come up with all kinds of mechanisms. We have abilities to gossip, we have institutions and practices that help us gossip efficiently, text messaging and the internet nowadays. But the gossip has been around for quite a long time, all sorts of religous practices, legal practices, all sorts of institutions help us ferret out free riders and make free riding costly.
And once free rider problems are solved, and this is true for any species or at any level, once free rider problems are solved and you create a new one-for-all, all-for-one dynamic, you then get a major transition in evolutionary history. Big changes happen because of the enormous gains from cooperation.~
http://thesciencenetwork.org/programs/beyond-belief-candles-in-the-dark/jonathan-haidt-1
So how does this dynamic play out in history? Here’s one example:
By contrast with the West, the eastern (Roman) empire was relatively untroubled by civil wars and internal unrest during the period of the invasions, and this greater domestic stability was undoubtedly a very important factor in its survival. If the eastern empire had faced internal distractions in the years immediately following the Gothic victory at Hadrianopolis in 378, similar to those that the West faced in the period following the 406-7 barbarian crossing of the Rhine, it might well have gone under. There is no very obvious reason for this greater stability in the East, beyond good luck and good management. In particular, through the dangerous and difficult years after Hadrianopolis, the eastern empire had the good fortune to be ruled by a competent and well-tried military figure, Theodosius (emperor 379-95), who was specifically chosen and appointed from outside the ranks of the imperial family to deal with the crisis. By contrast, the ruler of the West during the years of crisis that followed the Gothic entry into Italy in 401 and the great crossing of the Rhine in 406 was the young Honorius, who came to the throne only through the chance of blood and succession, and who never earned any esteem as a military or a politica leader. Whereas the figure of Theodosius encouraged a healthy respect for the imperial person, that of Honorius, dominated as he was by his military commanders, probably encouraged civil war… Honorius was [frequently portrayed] in elaborate armour, [holding] an orb surmounted by a Victory, and a standard with the words “In the name of Christ, may you always be victorious.” Reality was less glorious—Honorius himself never took the field; and his armies triumphed over very few enemies other than usurpers… As one contemporary source wryly noted: “This emperor, while he never had any success against external enemies, had great good fortune in destroying usurpers.”~
–Bryan Ward-Perkins, The Fall of Rome and the End of Civilization~
And who was the Western Roman empire fighting against? What kind of political system did it have?
Because the first medieval rulers had been barbarians, most of what followed derived from their customs. Chieftans like Ermanaric, Alaric, Attila, and Clovis rose as successful battlefield leaders whose fighting skills promised still more triumphs to come. Each had been chosen by his wariors… Lesser tribesmen were grateful to him for the spoils of victory, though his claim on their allegiance also had supernatural roots…
But the chieftans had been chose for merit, and early kings wore crowns only ad vitam aut culpam—for life or until removed for fault.~
–William Manchester, A World Lit Only by Fire~
But once a society matures, it seems the rank and file become quite (some would say overly) tolerant of the failings and shortcomings of the elite:
[A]s soon as workers have something more to lose than their chains, as soon as they have the slightest stake in the status quo, (it need not be property, it need be only a fairly secure job or the minimum security of a sime-adequate unemployment dole), they will suffer the slings and arrows of outrageous fortune, rather than fly to evils that they know not of.~
–Reinhold Niebuhr, Moral Man & Immoral SocietyFor the rich and powerful could maintain their prestige only by giving the general public what it wanted. It wanted properity, economic expansion. It had always been ready to forgive all manner of deficiencies in the Henry Fords who actually produced the goods, whether or not they made millions in the process.~
–Frederick Lewis Allen, Since Yesterday
Edward,
Excellent post, I loved reading Guns, Germs and Steel. You wrote: “There it is: the U.S. ruling class is not living up to its role in either efficiency or fairness. We are getting poorer.”
I happen to think the U.S. ruling class never really lived up to their role except to create a indebted and subservient class that is struggling to get by. For some strange reason, in the U.S., people still believe that if you work hard enough, you too can make it. For the majority of people, this is simply a pipe dream.
I laugh when I see these ads running on U.S. televison networks about how terrible Canadian healthcare is and how much better it is in the U.S.. The ads are pure nonsense, but if you brainwash people to believe it, they will oppose universal healthcare.
Our Canadian system is far from perfect, but when I see the stark statistics of uninsured in the U.S., I can’t help but conclude the corporatization of healthcare has been an abysmal failure.
My brother is a psyhiatrist and he explains it very simply. He thinks the asymmetry in information between heaslcare providers and patients if so huge that you need to control it or else abuse will be rampant. As he says, “When you mix profits with healthcare, most people lose out.”
There is another secular trend worth noting here. Manufacturing jobs are disappearing in developed nations and along with them, so is the middle class.
The rich are getting richer and the masses are amassing more debt to get by. Elizabeth Warren said it in the documentary Maxed Out: “They will never pay off those debts.”
Worse still, there is a full front assault on pension plans. The Canadian government just announced they will not help GM’s pension plan here in Canada.
Around the world, companies are freezing pensions or scrapping them altogether. next up, i expect serious cuts in public pension benefits and an increase in contribution rates.
The power elite have to accept the limits of unconstrained capitalism. If they don’t recitfy some of these injustices, we are going to have another major social dislocation.
So far, the masses have not revolted, but the way things are going, I think this might happen over the next decade and maybe sooner.
cheers,
Leo
I am surprised in a discussion like this Naomi Klein Shock Doctrine is not mentioned. It is not all about happiness. Scaring people and then using their fear and confusion to drive policy is at least as important.
Individual wages went flat with Carter but household income continued to grow as more families had two wage earners, as pointed out above. Carter has oil shocks and recession to deal with. So wages not going up during his Presidency was understandable. It is really with Reagan that the stagnation in real wages becomes institutionalized even in conditions of economic expansion.
It is really with Reagan that you have the creation of the paper economy. You have recycling of oil revenues, tax cuts for the wealthy, high deficits, explosion of the national debt as well as the destruction of unions, stagnation of wages, and increases in Social Security taxes. All these things conspired to move us from a worker based economy to an investor led one, from the real economy to a paper dominated one.
The discrepancy between the two could only be sustained through massive debt. We were producing less and buying more. I used to think that Clinton represented a reaction to these trends but really he was a conitnuation benefiting from Greenspan’s easy money policies. It was still the same game. LTCM, the dot com bubble, Enron, all should have been wake up calls. Instead the last brakes to the system were removed and the pace of speculation in paper markets became even more feverish.
And then it collapsed. It burst as all bubbles do. We are left with the remnants of a financial system which has long ceased to serve any useful economic purpose and which can consume trillions without blinking an eye or achieving anything at all. We also have what’s left of our real economy, distorted and looted as it has been by the demands and expectations of a paper economy totally divorced from reality. And we have debt, lots and lots of debt.
So yes, we are and will be poorer. Indeed for many in this country, recession hit them 5 or more years ago. They have known for a long time they were poorer. The difference is without the masking curtain of the paper economy and its bubbles, the rest of us are coming to this realization as well.
Yep – welcome to what we affectionately call “regulatory capture” in my neck of the woods. It’s been growing for 35 years or more, and I’m very glad to see it at least called by its true, vampire name.
My question is how the process can be reversed without the empire collapsing entirely. We all recognize that new productive capacity and some serious innovation in the REAL economy is needed if we are to avoid waves of barbarians coming over the hill for the next decade (well, it may be a little late). What I don’t hear are good suggestions for where that investment should be made, and what skills are really needed to support it. If we need to leapfrog, where do we start that process?
For the past 20 years, I have known that I was not keeping up with my parents. I have watched as the standard of living for myself and people like me, and the kind of open economy that permitted my grandfather to build a business that made him wealthy, were gone. The American dream died quietly quite a long time ago — the insane run up in housing prices just made it more visible.
An interesting post. I’m still fascinated, though, by Jim Grant’s thesis that we are actually living in the populists’ world.
In the early twentieth century, the populists demanded institutions and policies like easy money and credit, limitless public spending and borrowing, and regulatory bodies like the SEC and FDIC, to watch out for the middle class’s interests. In the process they helped enable and create the very kleptocracy this post laments. It is somewhat ironic, if not entirely unpredictible, that vesting the government with powers intended to guard the middle class actually gave it the power to destroy them.
EH:
Welcome aboard. I’ve been saying things like this for decades. I concluded US real wages peaked in 1973, about 20 years ago. Really. There was an article about this in Atlantic Monthly about 10 years ago. I’m with John Williams at Shadow Stats, I think the CPI is a scam statistic and that US median earnings are down about 50% since 1973! It’s worse than Uncle Sam wants us to think it is.
“We have built miles and miles of telecom dark fibre when we could have invested in schools”
Good grief…here in New Jersey an average of over $18,000 per student, per year is spent on inner-city, “troubled” schools, with barely two-thirds of these students graduating. How much more, money-wise, could we possibly invest? The state is nearly insolvent due to ridiculously high spending on social services. What would it take, $25,000 per student per year, $30K, more? Speaking of the 1970s, no way were we spending anything like this (even inflation-adjusted), and at least in the end the kids could read and write. Can’t say as much now, whether they “graduate” or not.
I basically agree with what you write, with two reservations. First, I think that the US’ hegemonic position as a complex kleptocracy is still a net win for the world at large. Just as Britain’s most vocal critics in the C19 were actually quite willing to live in a British world and accept its rule in exchange for the benefits in peace and stability, so for the US in the C20-21. Hence the ability of the UK rather than Germany to assemble large coalitions in two world wars.
The second reservation is that hegemonic kleptocracies don’t necessarily fall suddenly or completely. Just as the UK has found a relatively prosperous and influential role for itself, the US can.
I think the two “big” changes in the next few decades will be first, the emergence of the RMB as a reserve currency – Brad Setzer suggests this could take place quite simply by China requesting that at least some of the notes it accepts from the US be denominated in RMB. Secondly, the US itself can gradually change its stance from unaccountable hegemon to cooperative partner.
In other words, instead of deciding foreign, trade and defence policy exclusively in Washington and then waiting to see who opposes it, the US can coordinate its policy choices with China and Europe in the name of preserving a world trading order that is to everyone’s benefit.
There would be an irony, of course, in that we would no longer be waiting to see if China is willing to be a good world citizen, but rather if the US is. Maybe a second irony is that this change would most likely be accepted much more enthusiastically outside the US than within.
Great topic. I must apologize beforehand because my response is rather long and drawn out. I only hope that it makes as much sense to others as it does to me.
The subject seems a bit more nuanced than you are making it out to be. I won’t disagree with your statement regarding the existence of an elite within the USA. However, the fluid nature of the individuals who that elite is comprised of, the varying interests which they represent, and their responsiveness to the public at large, or some subjectively / objectively derived notion of efficiency (I would probably suggest that robustness be a more optimal term) varies over time, within and between specific elite / interest groups.
The elite are not a monolith. To provide an example, Eisenhower distinctly warned the public against the military industrial complex, unsuccessfully of course, but produced the very conditions for rapid expansion of suburban sprawl, dependence on imported oil through highway infrastructure spending, supporting the rise of American car companies and the entrenched roadway construction interests that currently have a stranglehold on funneling gasoline tax dollars into highway spending rather than public transportation.
While I would agree that government capture is at unprecedented levels, I wouldn’t assume that this capture extends across all areas or that it will likely be sustained across all fronts. The tentacles of special interests slowly work their way into institutional systems and become more entrenched, they are often competing, and it is far from linear, more likely accumulative phenomena, their stars rise in the night sky and they fall. The prison industrial complex is likely to have their hedges trimmed in the near future with state marijauna related decriminalization efforts, and although they are receiving a bailout, the car companies grip over the trajectory of US development seems rather tenuous as well.
You neglected to mention that the last time the polarity of wages was so high was before the great depression, specifically the last massive market collapse. After this point a number of hedges were trimmed, tax rates became significantly more progressive, longstanding public safety nets that we take for granted were integrated, ect. These were probably just as much for the public benefit as they were to preempt the rise of socialism. Does this seem like a rather self-correcting process? It seems, at least to me, that the concentration of money, power, and often self-delusion, eventually cannibalizes itself. I would certainly like to see more research on inequality rates and the frequency of economic crisis. However, our current elites may be a bit more sophisticated than they were back then with armies of PR agents and lobbying firms, but people working for the ‘public interest’ are much more sophisticated as well.
Different elites have different pet projects, some are more robust than others. If the strategy was to improve the relative position of the USA vis a vis other nations, we might have a bit of a problem, but was a multi-polar world order a bit inevitable, and haven’t we caught most of the rest of the world in this giant ponzi scheme. The tragedy seems to occur when the sheer plethora of concentrated interests stifles the political process. It would be a challenge to outline a strategy for robustness without a firm grasp on future events, everything otherwise seems a bit ad hoc and path dependent.
Furthermore, the public’s role of accepting manufactured delusion has certainly been less than passive. The public as a whole is much more fragmented that this article seems to put on. Cheap natural resources achieved through neo-colonial expansion has been instrumental in sustaining the American way of life. Shopping at Walmart and then complaining about American jobs losses, seems the current modus operandi of the American public. We all bought into living beyond our means, and I believe Carter warned against that very trend in American society. So is it the dog wagging the tail or the tail wagging the dog? Is the notion of control more like a governor on a car than a firm grip? By framing the public choice a predetermined set of options, you can exercise a loose degree of control with a rather predictable set of outcomes while avoiding the hallmarks of authoritarianism.
Otherwise a great post, and sorry again for the length of my response.
Has anyone been watching China’s non-performing loan issues with their state owned banks? I caught Will Hutton and Martin Wolf discussing it recently on a LSE public lectures podcast. The Chinese have been rather opaque about the issue but with the decline in export revenues, they seem to be edging towards their own precipice.
Brilliant.
The whole lot of you.
Great post. Great Comments
Kevin Phillips makes very much the same arguments, with plenty of supporting data, in his book “Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism,” which was published in 2008.
The American people are getting the (kleptocratic) government they deserve for allowing the system of legalized bribery that fuels political campaigns. Obama took more money from Wall Street than any Republican. So why are we surprised that he’s continuing the Bush era policies cooked up by Hanky and Bernanke?!
Richard Smith,
Thanks for the link. It didn’t work for me, but I appreciate your effort.
BLS includes bonuses, commissions and tips ONLY if they are paid on a regular basis, but since they are performance based, they cannot be considered to be paid on a regular basis.
Fringe benefits are not included.
The Self-employed are not included at all.
Here’s the problem with this: The variable compensation has been growing in popularity, but is not fully captured in labour statistics. Fringe benefits have been growing as a percentage of total compensation, but we are not capturing them at all. We also have more self-employed as a percentage of all working people than we did in 1972. This means that when we compare 1972 to 2008 without any adjustments, we are comparing apples and oranges. We aren’t getting a true picture of the changes in income.
The reason I asked about Edward’s numbers is because they looked unadjusted, but I wanted to ask before I assumed they were.
You and I have a point of disagreement about fringe benefits, but since your link didn’t work, I couldn’t see where you were referring me. I refer you to the page I am looking at.http://www.bls.gov/cps/earnings.htm
However, even if you’re correct about fringe benefits, the data would still need further adjustment before a comparison could be made.
I am old enough to remember the 70’s and I can’t honestly say that people whose income currently falls into the quintile I was in at the time are poorer than I was.
Incidentally, I don’t disagree with Edward’s arguments in general, just the compensation bit.
I think people may think they are poorer because expectations have increased faster than income, but I don’t think any of them would trade today’s lifestyle for 1972’s.
Edward, I’m not at all happy with what I wrote back up the thread. I’m afraid I rambled around a lot but managed to say very little.
My Webster’s dictionary defines “egalitarianism” as “a belief in human equality.” Great minds for centuries have pondered the truth, the worth and the meaning of equality. The result of all this is that, as Barzun concluded, “equality is a social assumption independent of fact.”
If one assumes equality means equal wages for all, with no heirarchy whatsoever, then I would agree with Diamond’s assertion: less egalitarian societies are more efficient. But other than the most devout of Marxists, does anyone really argue for such a utopian ideal any more?
My definition of equality comes much closer to what in your post you call “fairness.” When I say equality I mean equality of opportunity and equality of rights, implying equality before the law.
The argument I was trying to make is that efficiency is at least in some part dependent upon the perception of egalitarianism/equality/fairness in the society. The greater the perception of egalitarianism, the greater the efficiency. This is of course just the opposite of Diamond’s statement.
I also quibble with your calling the United States a “kleptocracy.” To me a kleptocracy implies the government stealing from some to give to others. It is a crime of commission. But again, “stealing” is a social assumption independent of fact. Once we have produced wealth, we can do with it as we like. As John Stuart Mill wrote:
The things once there, mankind, individually or collectively, can do with them as they please. They can place them at the disposal of whomsoever they please, and on whatever terms… Even what a person has produced by his individual toil, unaided by anyone, he cannot keep, unless by the permission of the society… The distribution of wealth, therefore, depends on the laws and customs of society. The rules by which it is determined are what the opinions and feelings of the ruling portion of the community make them, and are very different in different ages and countries, and might be still more different, if manking so chose…~
So, for those of us who believe in democracy, when we say the government is a kleptocracy, what we are really saying is the government is no longer acting according to the wishes of the people. And I’d say that, with the government taking money from the taxpayers and giving it to the financial services sector, that’s exactly what we have now in the U.S.
But there’s another side to this coin. And that is that goverments are not only capable of commiting crimes of commission, but also crimes of omission. As Mill goes on to explain:
Not only can a society take it from him, but individuals could and would take it from him, if society…did not…employ and pay people for the purpose of preventing him from being disturbed in [his] posession.
~
To me, given the government’s obsession with free market fundamentalism and laissez-faire, its crimes of ommission have been and will continue to be a greater problem for the citizens than the crimes of commission.
You forgot to factor in the bit about how the utterly short sighted greed that aborted any effort to prepare for the now arrived peaked worldwide oil production ensures a disorderly creative destruction of the economuy and social order to dwarf what has occured so far or occured in the Great Depression.
This party is just getting started and a fully operational oligarchic police state a near inevitability.
Smoke while you got em.
You forgot to factor in the bit about how the utterly short sighted greed that aborted any effort to prepare for the now arrived peaked worldwide oil production ensures a disorderly creative destruction of the economuy and social order to dwarf what has occured so far or occured in the Great Depression.
This party is just getting started and a fully operational oligarchic police state a near inevitability.
Smoke while you got em.
Well heck, here’s a chart of real weekly and hourly earnings of private production and nonsupervisory workers that Andrew Samwick, Chief Economist on the first Bush administration’s CEA, constructed on BLS data:
1964-2008doubtful that inclusion of benefits would fully offset.
nor do i think this should be divorced from the strong decline in the nonfinancial profit rate that had begun somewhat earlier and which contributed to implementation of anti-labor, neo-liberal, ‘trickle down’ policies on one hand and greater emphasis on the financial on the other.
Great post.
There’s just one thing I would add – the huge impact of advancing technology.
As most people got poorer they could still afford a better car, faster PC or whatever purely because of advancing technology and falling real prices for tech goods.
Absent this the fall in real wealth would have been exposed much sooner.
Housing is a particularly interesting case, at least here in the UK. It is undoubtedly true that houses are better insulated and have more modern appliances than our parents’ generation enjoyed BUT, by common consent they are more poorly built and they are certainly smaller. The footprint of the average new-build plot has something like halved in the last decade (sorry I can’t find the exact statistic).
“I laugh when I see these ads running on U.S. televison networks about how terrible Canadian healthcare is and how much better it is in the U.S.. The ads are pure nonsense, but if you brainwash people to believe it, they will oppose universal healthcare.”
I do not watch enough TV I guess. (I really do not; at most about two hours a week.) But what you are saying doesn’t really surprise me.
“I happen to think the U.S. ruling class never really lived up to their role except to create a indebted and subservient class that is struggling to get by. For some strange reason, in the U.S., people still believe that if you work hard enough, you too can make it. For the majority of people, this is simply a pipe dream.”
George Soros made most of his money by exploiting the spread between perception and reality. For example, he was able to make money in 2007. Soros is part of the ruling class, and people in the ruling class are able to exploit the difference between perception and reality. Soros does not engage in any attempts to change perception, but his open society institute tries to make reality better for many people. The elite change reality for their benefit, and use techniques so the masses would not be apprised of this reality.
Leo, you are correct. The Protestant Work Ethic is bullshit.
I do not see what would help the US except a universal eugenics program that would increase the IQ of every newborn by 15 points (and it would not if the tests were standardize again.) I suppose more intelligent people would be able to at least understand the mechanisms that the elite use to maintain their power and pass it on to their children. Understanding the mechanisms and understand the information will at least allow them to formulate plans to thwart power consolidation from the elites.
yes aki, perception vs. reality.
one example
brasil, 2002, ‘lula’ da silva strong in the polls, looking to be the likely winner…so, media assists in helping drive [particularly north american] perceptions with such phrases as ‘radical former union leader appears set to win brasilian presidency’, and these sorts of things within the context of argentine crisis, et cetera.
so the bovespa was nicely low while some particular issues were dramatically below value.
reality though had more to do with ‘lula’ and the pt’s rightwards shift over a number of years and evidence of somewhat more than incipient economic recovery in the southern cone…both evident to anyone who bothered to dig below the superficial.
this was truly, one of those ‘perfect’ moments.
Well, if anyone reads this again, Soros is a speculator. He makes observations, and the tries to take positions to profit from observations.
I did not intend to cast Soros in a negative light, but to highlight that many of the ruling class are able to manipulate and exploit perception. Soros does not attempt to manipulate perception in a way that benefits him financially, but he does try to exploit perception in a way the benefits him finacially.
Another case:
If a social democrat in Sweden uses propaganda (to reinforce a certain perception of the world) to get Swedes more skeptical of the free market and its alleged “prosperity,” it could show clips of how the poor live in the US and how they are insecure. It is really easy propaganda as one is only apprising people of what really goes on in a liberalized country. The only deception that might be used is hyperbole, but at least the propaganda does convey a truth.
The US elites do something more sinister.