A populist interpretation of the latest Boom-Bust cycle
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).
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.
All societies are the same. They benefit a few and the people at the bottom get what is leftover. The masses are waking up because eggs have gone up 30% in that last year, but they were complacent when they could still pay the mortgage and eat out once a week.
I may be a bit pessimistic, but history bears out that sooner or later the masses will wise up and then it will get ugly. We have had moments like that during the Industrial Revolution. Factory workers were tired of the treatment they recieved and went on strike. Sometimes it got bloody. Black people got tired of getting the run around and it got bloody. The same thing has happened in South Africa or Rwanda or any country where one group is on top.
The real problem is that the ruling class got sloppy and lazy. Their brainwashing techniques are getting old. The propaganda is not tight and the holes are showing.
When you have to choose the one fruit you can afford to buy, gas or entertainment, drugs or food, then no amount of propaganda is going to convince you that everything is OK.
What it boils down to is that people do not want to know the truth about how their lives are run. It is too much to handle. We would rather believe the crap that we are fed everyday, until we become so uncomfortable the soothing words don’t wash anymore.
A few brief comments: Real wages are determined by supply and demand. Three things increased the supply of labor relative to demand: 1. labor saving devices especially in the home; massive immigration; rapid expansion of trade with low-wage countries. The latter two of these were a result of decisions by policy elites, the other a consequence of technological advance. The answer to labor saving technology is a shorter workweek (cf. 19th century). The answer to immigration is a moratorium. The answer to trade is . . . no, not protectionism, but wage subsidies fincanced by a tax on the income of the wealthy. It can be done.
“That is why the poll numbers for the President and Congress are so low.”
Was this piece written during the waning days of the previous administration? Because the current polls for the president are above 60%. I’m not sure what they are for congress but I’m pretty sure they’re not low.
that’s right: this is a post from just about one-year ago. Obama has much higher approval ratings. However, he really needs to get out in front of issues like AIG aggressively — not just with words but action — if he is to keep those approval ratings at these levels.
This administration ha a limited window during which to effect change (the so-called first 100 days). Afterwards, scepticism will grow.
Something I keep coming back to when I think about this issue;
In Farley Mowats’ People of the Deer he writes about the fur trade coming to the Barrens in the twenties. The eskimo people who lived there derived their sustenance almost solely from a great herd of caribou before this. The came to rely more and more on goods traded for the fur of the arctic fox. These people made contact with western civilization just in time to be hit by the great depression. Luxury goods were in very low demand.
The trading company didn’t want to go out of business. They thought maybe they could switch to canning caribou meat. As an incentive to get the locals to bring it to them, they offered a premium on the tongues. As a result, there was a massive slaughter of the herd. One man with a rifle could slaughter large numbers of caribou, and all he had to cart back to the trading company was the tongues. So people ended up starving.
When I think about fair trade today, I think of this. There are farmers in the third world who switched from growing locally consumed food crops to coffee–the premiums offered were just too tempting.
I tend to roll my eyes when I hit websites that talk about the Gini index. If some guy wants to drive around in a Ferarri, what do I care? Big screen tv; who cares? I probably don’t enjoy watching my small screen any less. I enjoy stewed beef as much as I enjoy rib-eye steak.
That’s not the point; the point is that if I’ve leveraged my life to this guys’ appetite for Ferarris, and he gets in trouble, then I’m in trouble. Probably in more trouble than him.
Jim Cramer did what he was supposed to. He supported the financial establishment as was expected of him. He revealed to us that he was invited to the offices of CEO’s and they personally attempted to assauge his fears about what was happening. That’s OK. At least he’s is enough of a loose cannon to admit this.
There is a person who will not submit to this kind of Mea Culpa and continues to drive the idea that the financial industry was as much a victim as everyone else. ERIN BURNETT. She defends this industry relentlessly. Last week she was on Bill Maher’s show and Bill defined her as a ‘moderate’ or a ‘centrist’!!! Erin has done all she can to defend the financial industry as victims of our current circumstances as much as the people moving into tent cities all over America. Lets call her out. I accept that she needs to keep her job and remain important and valuable but some of the things this woman has said….she tried to make the point that it was bad loans to undeserving borrowers that have created this deeply red balance sheet that we have to recover. Bill Maher was unable or uninformed enough to challenge her assertion.
I thought that the bad loans were sliced into securities which were bet on (derivatives) so many times over. She then curiously asserted that said that 90% of good decent homeowners were still paying their mortgages! Is she then saying that 10% of these deadbeat mortgage holders are bringing down the world economy? This is bullshit. But, here’s the thing, on national TV, she said this and no one challenged her!!!! I think most of us understand that the shaky mortgages were bet on over and over again. Each bet being insured through a complex derivatives system so that now money is owed to everyone who placed the right bet since they knew that these corrupted transactions would fail. WHY DOESNT SOMEONE ON CNBC JUST SAY THAT!!?? They knew that these things were toxic and they bought them because there was a twisted insurance system that would guarantee their bets (they hoped). In the end, they all knew that the US government would pay up or else watch their economy crumble. I’m am as ignorant of these issues as any guy on the street. At least people like you help us understand what has destroyed or way of life. Can’t do anything about it but at least we get it. Erin Burnett should be brought to task in the same way Jim Cramer was.
thanks for your input. Personally, I haven’t decided where I fall on the whole Jim Cramer thing. There have been a lot of comments all over the Internet about it.
Some think it’s about time that we got some real journalism and are mortified that it took a comedian to really get to the heat of things. It is shameful on some level.
However, I am left feeling a bit empty by the spectacle. Ultimately, the problems with AIG and Bear and Lehman should have been recognized much sooner, and not necessarily by the media, but rather by regulators. In my view, the media were mere enablers, whereas lax regulation created the pre-conditions.
The question one has to ask is: would it be different elsewhere, in another time in another country under similar circumstances? I end up thinking no. These waves of euphoria and depression are endemic to the capitalist system and it is still very much unclear how to keep them in check.
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