It’s power, stupid [u]

Rising inequality, a recurring theme on these pages, has been variously explained by “globalization,” “mechanization” (as in robots), a “skills gap,” inadequate education, increased productivity, and so on. Yes, those who inhabit what passes for The Left in America have always maintained that inequality and just about every other ill besetting the globe can be blamed on “capitalism” and its monomaniacal obsession with profits—workers, environment, peace, and justice be damned. For the most part, however, establishment media and academia have avoided the critiques of Marx and his followers while simultaneously portraying the alleged causes of rising inequality as somehow inevitable or the logical consequence of free markets guided by Smith’s invisible hand.

More recently, however, an increasing number of economists have treated the usual suspects as a series of straw men, which they have systematically knocked down. Among these economists are Paul Krugman and Robert Reich. They now argue that inequality is hardly inevitable. Rather, the fact that such a few accumulate so much while the Rest of Us forever struggle is the intended outcome of political choices aided and abetted by the same few.

The intellectual about-face is on display in Reich’s latest book, Saving Capitalism: For the Many, Not the Few. Krugman reviews Reich’s effort in the New York Review of Books.

Krugman begins by mentioning a 1991 book by Reich, The Work of Nations, which also focused on inequality.

Reich’s book saw inequality largely as a technical problem, with a technocratic, win-win solution. That was then. These days, Reich offers a much darker vision, and what is in effect a call for class war—or if you like, for an uprising of workers against the quiet class war that America’s oligarchy has been waging for decades.

In his most recent book, according to Krugman, Reich points his finger at the growing concentration of economic power that the rich have effectively parlayed into political power. With increasing political power comes lower taxes, fewer regulations, and the ability to influence who gets elected and what they do once they assume office. Spoiler alert: these representatives of the rich do us no favors.

…Reich makes a very good case that widening inequality largely reflects political decisions that could have gone in very different directions. The rise in market power reflects a turn away from antitrust laws that looks less and less justified by outcomes, and in some cases the rise in market power is the result of the raw exercise of political clout to prevent policies that would limit monopolies—for example, the sustained and successful campaign to prevent public provision of Internet access.

Similarly, when we look at the extraordinary incomes accruing to a few people in the financial sector, we need to realize that there are real questions about whether those incomes are “earned.” As Reich argues, there’s good reason to believe that high profits at some financial firms largely reflect insider trading that we’ve made a political decision not to regulate effectively. And we also need to realize that the growth of finance reflected political decisions that deregulated banking and failed to regulate newer financial activities.

A few months ago the New York Times found that a few wealthy families accounted for half of the political contributions during the current presidential election cycle, and most of those dollars have gone to Republican candidates.

The concentration of donors is greatest on the Republican side, according to the Times analysis, where consultants and lawyers have pushed more aggressively to exploit the looser fund-raising rules that have fueled the rise of super PACs. Just 130 or so families and their businesses provided more than half the money raised through June by Republican candidates and their super PACs.

Thanks to the U.S. Supreme Court, the rich have few, if any, restrictions on exercising political influence. Meanwhile, the “countervailing power” of unions has degraded, which former labor secretary Reich woefully acknowledges. That loss can also be blamed on the rise of the rich and their minions operating at the state and federal levels. It is more than simple coincidence that income concentration follows reduced union participation rates. (Chart below based on OECD data of member countries.)

unions and inequality

Worst of all, in my judgment, the plutocracy has become so pronounced as to enervate the Rest of Us. Many of us don’t bother because the deck is so heavily stacked in the rich’s favor.

Still, Reich is optimistic. Even Ted Cruz, Reich says, has decried income concentration, the “rich and powerful, those who walk the corridors of power.” Yet Cruz’s tax plan would benefit the wealthy at the expense of every one else. Words are much too cheap.

And lying seems to work these days, as The Donald will tell you.

UPDATE (Dec. 2, 2015):

Economist John Quiggin writing for Crooked Timber on the growth of the financial sector, which is crowding out more productive growth opportunities that would benefit the Rest of Us:

The result of all this is that the financial sector benefits from an evolutionary strategy similar to that of an Australian eucalypt forest. Eucalypts are both highly flammable (they generate lots of combustible oil) and highly fire resistant. So eucalypt forests are subject to frequent fires which kill competing species, and allow the eucalypts to extend their range.