American capitalism has failed us

We’re overworked, underemployed and more powerless than ever before

Denmark, Norway and Sweden are all thriving under democratic socialism. Why is it so difficult for us to embrace?

American capitalism has failed us: We're overworked, underemployed and more powerless than ever before
(Credit: Kim Seidl via Shutterstock/samdiesel via iStock/Salon)

[This is a joint TomDispatch/Nation article and appears in print in slightly shortened form in the new issue of the Nation magazine.]

Some years ago, I faced up to the futility of reporting true things about America’s disastrous wars and so I left Afghanistan for another remote mountainous country far away. It was the polar opposite of Afghanistan: a peaceful, prosperous land where nearly everybody seemed to enjoy a good life, on the job and in the family.

It’s true that they didn’t work much, not by American standards anyway. In the U.S., full-time salaried workers supposedly laboring 40 hours a week actually average 49, with almost 20% clocking more than 60. These people, on the other hand, workedonly about 37 hours a week, when they weren’t away on long paid vacations. At the end of the work day, about four in the afternoon (perhaps three in the summer), they had time to enjoy a hike in the forest or a swim with the kids or a beer with friends — which helps explain why, unlike so many Americans, they are pleased with their jobs.

Often I was invited to go along. I found it refreshing to hike and ski in a country with no land mines, and to hang out in cafés unlikely to be bombed. Gradually, I lost my warzone jitters and settled into the slow, calm, pleasantly uneventful stream of life there.

Four years on, thinking I should settle down, I returned to the United States. It felt quite a lot like stepping back into that other violent, impoverished world, where anxiety runs high and people are quarrelsome. I had, in fact, come back to the flip side of Afghanistan and Iraq: to what America’s wars have done to America. Where I live now, in the Homeland, there are not enough shelters for the homeless. Most people are either overworked or hurting for jobs; housing is overpriced; hospitals, crowded and understaffed; schools, largely segregated and not so good. Opioid or heroin overdose is a popular form of death; and men in the street threaten women wearing hijab. Did the American soldiers I covered in Afghanistan know they were fighting for this?

Ducking the Subject

One night I tuned in to the Democrats’ presidential debate to see if they had any plans to restore the America I used to know. To my amazement, I heard the name of my peaceful mountain hideaway: Norway. Bernie Sanders was denouncing America’s crooked version of “casino capitalism” that floats the already rich ever higher and flushes the working class. He said that we ought to “look to countries like Denmark, like Sweden and Norway, and learn from what they have accomplished for their working people.”

He believes, he added, in “a society where all people do well. Not just a handful of billionaires.” That certainly sounds like Norway. For ages they’ve worked at producing things for the use of everyone — not the profit of a few — so I was all ears, waiting for Sanders to spell it out for Americans.

But Hillary Clinton quickly countered, “We are not Denmark.” Smiling, she said, “I love Denmark,” and then delivered a patriotic punch line: “We are the United States of America.” Well, there’s no denying that. She praised capitalism and “all the small businesses that were started because we have the opportunity and the freedom in our country for people to do that and to make a good living for themselves and their families.” She didn’t seem to know that Danes, Swedes, and Norwegians do that, too, and with much higher rates of success.

The truth is that almost a quarter of American startups are not founded on brilliant new ideas, but on the desperation of men or women who can’t get a decent job. The majority of all American enterprises are solo ventures having zero payrolls, employing no one but the entrepreneur, and often quickly wasting away. Sanders said that he was all for small business, too, but that meant nothing “if all of the new income and wealth is going to the top 1 percent.” (As George Carlin said, “The reason they call it the American Dream is because you have to be asleep to believe it.”)

In that debate, no more was heard of Denmark, Sweden, or Norway. The audience was left in the dark. Later, in a speech at Georgetown University, Sanders tried to clarify his identity as a Democratic socialist. He said he’s not the kind of Socialist (with a capital S) who favors state ownership of anything like the means of production. The Norwegian government, on the other hand, owns the means of producing lots of public assets and is the major stockholder in many a vital private enterprise.

I was dumbfounded. Norway, Denmark, and Sweden practice variations of a system that works much better than ours, yet even the Democratic presidential candidates, who say they love or want to learn from those countries, don’t seem to know how they actually work.

Why We’re Not Denmark

Proof that they do work is delivered every year in data-rich evaluations by the U.N. and other international bodies. The Organization for Economic Cooperation and Development’s annual report on international well-being, for example, measures 11 factors, ranging from material conditions like affordable housing and employment to quality of life matters like education, health, life expectancy, voter participation, and overall citizen satisfaction. Year after year, all the Nordic countries cluster at the top, while the United States lags far behind. In addition, Norway ranked first on the U.N. Development Program’s Human Development Index for 12 of the last 15 years, and it consistently tops international comparisons of such matters as democracy, civil and political rights, and freedom of expression and the press.

What is it, though, that makes the Scandinavians so different?  Since the Democrats can’t tell you and the Republicans wouldn’t want you to know, let me offer you a quick introduction. What Scandinavians call the Nordic Model is a smart and simple system that starts with a deep commitment to equality and democracy. That’s two concepts combined in a single goal because, as far as they are concerned, you can’t have one without the other.

Right there they part company with capitalist America, now the most unequal of all the developed nations, and consequently a democracy no more. Political scientists say it has become an oligarchy — a country run at the expense of its citizenry by and for the super rich. Perhaps you noticed that.

In the last century, Scandinavians, aiming for their egalitarian goal, refused to settle solely for any of the ideologies competing for power — not capitalism or fascism, not Marxist socialism or communism. Geographically stuck between powerful nations waging hot and cold wars for such doctrines, Scandinavians set out to find a path in between. That path was contested — by socialist-inspired workers on the one hand and capitalist owners and their elite cronies on the other — but it led in the end to a mixed economy. Thanks largely to the solidarity and savvy of organized labor and the political parties it backed, the long struggle produced a system that makes capitalism more or less cooperative, and then redistributes equitably the wealth it helps to produce. Struggles like this took place around the world in the twentieth century, but the Scandinavians alone managed to combine the best ideas of both camps, while chucking out the worst.

In 1936, the popular U.S. journalist Marquis Childs first described the result to Americans in the book Sweden: The Middle Way. Since then, all the Scandinavian countries and their Nordic neighbors Finland and Iceland have been improving upon that hybrid system. Today in Norway, negotiations between the Confederation of Trade Unions and the Confederation of Norwegian Enterprise determine the wages and working conditions of most capitalist enterprises, public and private, that create wealth, while high but fair progressive income taxes fund the state’s universal welfare system, benefitting everyone. In addition, those confederations work together to minimize the disparity between high-wage and lower-wage jobs. As a result, Norway ranks with Sweden, Denmark, and Finland among the most income-equal countries in the world, and its standard of living tops the charts.

So here’s the big difference: in Norway, capitalism serves the people. The government, elected by the people, sees to that. All eight of the parties that won parliamentary seats in the last national election, including the conservative Høyre party now leading the government, are committed to maintaining the welfare state. In the U.S., however, neoliberal politics put the foxes in charge of the henhouse, and capitalists have used the wealth generated by their enterprises (as well as financial and political manipulations) to capture the state and pluck the chickens. They’ve done a masterful job of chewing up organized labor. Today, only 11% of American workers belong to a union. In Norway, that number is 52%; in Denmark, 67%; in Sweden, 70%.

In the U.S., oligarchs maximize their wealth and keep it, using the “democratically elected” government to shape policies and laws favorable to the interests of their foxy class. They bamboozle the people by insisting, as Hillary Clinton did at that debate, that all of us have the “freedom” to create a business in the “free” marketplace, which implies that being hard up is our own fault.

In the Nordic countries, on the other hand, democratically elected governments give their populations freedom from the market by using capitalism as a tool to benefit everyone. That liberates their people from the tyranny of the mighty profit motive that warps so many American lives, leaving them freer to follow their own dreams — to become poets or philosophers, bartenders or business owners, as they please.

Family Matters

Maybe our politicians don’t want to talk about the Nordic Model because it shows so clearly that capitalism can be put to work for the many, not just the few.

Consider the Norwegian welfare state. It’s universal. In other words, aid to the sick or the elderly is not charity, grudgingly donated by elites to those in need. It is the right of every individual citizen. That includes every woman, whether or not she is somebody’s wife, and every child, no matter its parentage. Treating every person as a citizen affirms the individuality of each and the equality of all. It frees every person from being legally possessed by another — a husband, for example, or a tyrannical father.

Which brings us to the heart of Scandinavian democracy: the equality of women and men. In the 1970s, Norwegian feminists marched into politics and picked up the pace of democratic change. Norway needed a larger labor force, and women were the answer. Housewives moved into paid work on an equal footing with men, nearly doubling the tax base. That has, in fact, meant more to Norwegian prosperity than the coincidental discovery of North Atlantic oil reserves. The Ministry of Finance recently calculated that those additional working mothers add to Norway’s net national wealth a value equivalent to the country’s “total petroleum wealth” — currently held in the world’s largest sovereign wealth fund, worth more than $873 billion. By 1981, women were sitting in parliament, in the prime minister’s chair, and in her cabinet.

American feminists also marched for such goals in the 1970s, but the Big Boys, busy with their own White House intrigues, initiated a war on women that set the country back and still rages today in brutal attacks on women’s basic civil rights, health care, and reproductive freedom. In 1971, thanks to the hard work of organized feminists, Congress passed the bipartisanComprehensive Child Development Bill to establish a multi-billion dollar national day care system for the children of working parents. In 1972, President Richard Nixon vetoed it, and that was that. In 1972, Congress also passed a bill (first proposed in 1923) to amend the Constitution to grant equal rights of citizenship to women.  Ratified by only 35 states, three short of the required 38, that Equal Rights Amendment, or ERA, was declared dead in 1982, leaving American women in legal limbo.

In 1996, President Bill Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act, obliterating six decades of federal social welfare policy “as we know it,” ending federal cash payments to the nation’s poor, and consigning millions of female heads of household and their children to poverty, where many still dwell 20 years later. Today, nearly half a century after Nixon trashed national child care, even privileged women, torn between their underpaid work and their kids, are overwhelmed.

Things happened very differently in Norway.  There, feminists and sociologists pushed hard against the biggest obstacle still standing in the path to full democracy: the nuclear family. In the 1950s, the world-famous American sociologist Talcott Parsons had pronounced that arrangement — with hubby at work and the little wife at home — the ideal setup in which to socialize children. But in the 1970s, the Norwegian state began to deconstruct that undemocratic ideal by taking upon itself the traditional unpaid household duties of women.  Caring for the children, the elderly, the sick, and the disabled became the basic responsibilities of the universal welfare state, freeing women in the workforce to enjoy both their jobs and their families. That’s another thing American politicians — still, boringly, mostly odiously boastful men — surely don’t want you to think about: that patriarchy can be demolished and everyone be the better for it.

Paradoxically, setting women free made family life more genuine. Many in Norway say it has made both men and women more themselves and more alike: more understanding and happier. It also helped kids slip from the shadow of helicopter parents. In Norway, mother and father in turn take paid parental leave from work to see a newborn through its first year or more. At age one, however, children start attending a neighborhood barnehage (kindergarten) for schooling spent largelyoutdoors. By the time kids enter free primary school at age six, they are remarkably self-sufficient, confident, and good-natured. They know their way around town, and if caught in a snowstorm in the forest, how to build a fire and find the makings of a meal.  (One kindergarten teacher explained, “We teach them early to use an axe so they understand it’s a tool, not a weapon.”)

To Americans, the notion of a school “taking away” your child to make her an axe wielder is monstrous.  In fact, Norwegian kids, who are well acquainted in early childhood with many different adults and children, know how to get along with grown ups and look after one another.  More to the point, though it’s hard to measure, it’s likely that Scandinavian children spend more quality time with their work-isn’t-everything parents than does a typical middle-class American child being driven by a stressed-out mother from music lessons to karate practice.  For all these reasons and more, the international organization Save the Children cites Norway as the best country on Earth in which to raise kids, while the U.S. finishes far down the list in 33rd place.

Don’t Take My Word For It

This little summary just scratches the surface of Scandinavia, so I urge curious readers to Google away.  But be forewarned. You’ll find much criticism of all the Nordic Model countries. The structural matters I’ve described — of governance and family — are not the sort of things visible to tourists or visiting journalists, so their comments are often obtuse. Take the American tourist/blogger who complained that he hadn’t been shown the “slums” of Oslo. (There are none.) Or the British journalist who wrote that Norwegian petrol is too expensive. (Though not for Norwegians, who are, in any case, leading the world in switching to electric cars.)

Neoliberal pundits, especially the Brits, are always beating up on the Scandinavians in books, magazines, newspapers, and blogs, predicting the imminent demise of their social democracies and bullying them to forsake the best political economy on the planet. Self-styled experts still in thrall to Margaret Thatcher tell Norwegians they must liberalize their economy and privatize everything short of the royal palace. Mostly, the Norwegian government does the opposite, or nothing at all, and social democracy keeps on ticking.

It’s not perfect, of course. It has always been a carefully considered work in progress. Governance by consensus takes time and effort.  You might think of it as slow democracy.  But it’s light years ahead of us.

Ann Jones has a new book published today: They Were Soldiers: How the Wounded Return from America’s Wars — the Untold Story, a Dispatch Books project in cooperation with Haymarket Books. Andrew Bacevich has already had this to say about it: “Read this unsparing, scathingly direct, and gut-wrenching account — the war Washington doesn’t want you to see. Then see if you still believe that Americans ‘support the troops.’” Jones, who has reported from Afghanistan since 2002, is also the author of two books about the impact of war on civilians: Kabul in Winter and War Is Not Over When It’s Over.

Worse than the Roaring Twenties

What even Thomas Piketty underestimates about American income inequality

The 1 percent could soon lay claim to as much as 60 percent of our country’s wealth, warns economist Lance Taylor

Worse than the Roaring Twenties: What even Thomas Piketty underestimates about American income inequality

This article originally appeared on AlterNet.

A  new paper  by economist Lance Taylor for the  Institute For New Economic Thinking  takes on the way economists have looked at wealth and income inequality. Taylor’s research challenges some conclusions about what’s driving inequality made by Thomas Piketty and Joseph Stiglitz. What’s really causing the startling gap between haves and have-nots? Is it mechanical market forces? Outsourcing? Real estate? As Taylor sees it, economists have gotten the answer wrong. Worker exploitation and outsized business profits are factors, but even more key are the unjustified payments to the wealthy generated by our outsized financial sector. This hasn’t just “happened.” Flawed economic theory and politicians beholden to the rich lead to policies that make it happen. We can fix the problem, but it will take bold steps.*A version of this interview originally appeared on the Institute’s blog

Lynn Parramore: You recently dived into the debate on what causes wealth and income inequality — and whether or not we can fix it within the existing social order. Heated discussions among economists got touched off by Thomas Piketty’s bestselling book, Capital in the Twenty-First Century, but you say that a key part of the story is actually a debate that happened in the late 60s and early 70s. What is it and why should we care?

Lance Taylor: It’s key because mainstream economists have been wrong in how they think about inequality for a long time. Which means that they haven’t been particularly helpful in solving the problem. This is one of the key challenges of our time. We can do better.

The debate from the 60s and 70s is known as the “Cambridge capital controversy” and took place between economists at MIT in the U.S. and at Cambridge University in the U.K. First, especially for the Brits, it was about whether distributions of income and wealth are partly shaped by social and political relationships – class conflict if you will – or mostly by “market forces.”

There were technical skirmishes at the second level – one in particular about the nature of capital and the role of the rate of profit made by producers. Most economists want to say that market processes pay different forms of capital, labor, and real estate pretty much in line with their economic productivities. Everything comes out about right. The Invisible Hand knows best. But the Cambridge debate showed that different profit rates can show up with the same combinations of capital — stuff like machines and computers — and workers. Why is that? The Invisible Hand must be guided by something other than economic factors. What, exactly? There are different answers. But you can’t ignore the question.

LP: So it’s not just some kind of mechanism of production and market forces that determines who ends up with a big share of the income pie and who doesn’t. That’s a pretty big deal. Why do conventional economists want to sweep all this under the rug?

LT: The debate’s conclusion has not just been downplayed. It is simply ignored. Yet the reality is that market forces alone cannot determine who gets wealthy and who doesn’t. In 1966, MIT’s Paul Samuelson, a Nobel laureate, rather graciously conceded as much. Even so, macroeconomics courses at leading U.S. and U.K. departments continued to be based on failed theory. MIT’s canonical 1989 macro textbook by Olivier Blanchard and Stanley Fischer did not bother to mention the controversy.

Economists are conditioned to believe in the optimality of the market. That’s why they have  been in denial  for so long that change is not likely in the short run. But we have to try, because getting this wrong means that economists promote machine-like models that suggest that it is simply some invisible mechanism that ensures that workers don’t get paid very much, that owners make high profit rates, and that the economy will be just fine under these conditions  Along with colleagues at the New School for Social Research (supported in part by the Institute) I am now working on growth models in which overall demand for goods and services and income and wealth distribution play much more central roles in the economy.

LP: Your paper is critical of some of Thomas Piketty’s views. Can you briefly describe how you differ with his take on inequality?

LT: Piketty’s data work is formidable, but questions remain. One, unsurprisingly, is about how to value capital. Possibly aside from a residence (with mortgage attached), you and I as members of households do not own physical capital. At most we own financial claims such as stocks and bonds against companies which own the physical assets.  Our personal wealth ultimately depends on how these assets and claims are valued.

The traditional way of valuing capital does not take Cambridge complications into account, but at least it does examine the costs of producing new capital goods and how rapidly they depreciate in use. Adding up their costs over time gives a “perpetual inventory” estimate of the capital stock, which we use in our growth models.

The alternative is to mark up a company’s perpetual inventory of capital by the market value of its shares. Economists talk about the ratio (they call it q) of these two numbers. Estimates differ in detail, but after around 1980, q has gone up significantly. Piketty’s estimate of the wealth of households is based on stock market valuations. That’s fine if you believe that the ratio of stock market value to capital will stay high indefinitely. But John Maynard Keynes, the 20th century’s greatest economist, warned against “the dark forces of time and ignorance which envelop our future,” especially for numbers from financial markets.

We don’t have a crystal ball, so we had better be careful when building models and equations that say what markets will do. An engineer designing an investment project is not going to look at her company’s stock market quotation. Her job is to find a least-cost combination of capital goods and labor to satisfy the project’s needs. In that sense, Piketty’s wealth estimates ignore both capital theory and what practitioners really do.

LP: You’re also critical of Joseph Stiglitz’s perspective on real estate as a big driver of the giant increases in inequality in recent years. What role do you think real estate played and how is that view different from what Stiglitz proposes?

LT: Here again the details are messy. Both Piketty and Stiglitz talk about “rent” which is a slithery concept. Basically it is a payment to some economic entity with a strong market position – say to a holding company controlled by your landlord, which owns your apartment, or to a politician who can arrange a tax break for your firm. Neoclassical economists interpret exploitation in terms of rents and bribes. This approach ignores the social structures that give certain people opportunities to extract such payments. In principle, crooked politicians can be removed.

The question of how we value assets adds another layer of complication. If a rent is expected to continue over time, then, in a stable financial market, its discounted present value constitutes wealth. The simplest calculation “capitalizes” the rental flow by dividing it by the interest rate.  Rent on residential housing appears in the national accounts. As a share of GDP, it has been rising recently. But even so, its capitalized value is roughly equal to the worth of the housing stock as estimated by perpetual inventory. In the U.S., rents on agricultural land and for ownership of natural resources are small shares of GDP. You may see a lot of towers owned by new billionaires along Manhattan’s 57th street, but real estate is not the major contributor to wealth inequality. Rather, in Manhattan, the Bay area, London, and similar places, incredibly expensive real estate is a symptom of wealth that has been accumulated by other means.

LP: Some of your recent work takes a detailed look at the way people in the U.S. share the economic pie and how income flows to different groups over time.  Since real estate is not a prime driver of wealth or income inequality, what is? What do you think the actual role of real estate has been relative to other factors? What are the roles of things like outsourcing? Executive compensation?

LT: Let’s distinguish between income and wealth inequality. We have been working on integrating information on how income is distributed across households from the Congressional Budget Office into the national accounts. The income share of the top one percent has risen by ten percentage points since around 1990 – a very big change for such an indicator. Those million-odd households now get around 15 percent of national income, which is huge.

Where does this money come from? One chunk is labor pay. The top one percent of households get seven percent of the national total – that’s where high executive compensation comes in. But financial payments including interest, dividends, share buybacks, and capital gains (increases in asset prices à la Piketty and Stiglitz) are more important.

Let me bring in one last observation about national accounting. Aside from minor transfers, business profits equal interest and dividend payments to households, taxes, and business saving (retained earnings).

Two things are important to know: 1) the business profit share has been increasing steadily across business cycles (which is not supposed to happen according to the Solow model) and 2) household capital gains have exceeded business saving net of depreciation which is why that the q ratio I mentioned has gone up. Rich households have benefitted from both trends, along with low taxes on “carried interest” (a loophole used by hedge fund managers) and other accounting tricks. They also save more than the lower classes, say 40 percent of income for the top one percent versus 15 percent or 20 percent for households between the 60th and 99th percentiles of the size distribution and negative saving (as well as inconsequential wealth) for the rest.

Rising profits, big capital gains, and high savings explain why the rich are getting richer.

According to Piketty’s colleagues Emmanuel Saez and Gabriel Zucman, the share of wealth of the top one percent was around 50 percent on the eve of the Great Depression. With high taxes inherited from the New Deal and WWII, along with a sluggish stock market, the share fell to 25 percent in the 1960s. Now it has crept back up to around 40 percent (other estimates come in a bit lower).  Our calculations, based on a Cambridge U.K. growth model proposed by economist Luigi Pasinetti, suggest that with current saving rates and high profits the share could rise to 60 percent.

LP: So pretty soon our wealthy will be riding higher than their counterparts in the Roaring Twenties?

LT: Potentially, yes.

LP: We know you’ve been  skeptical  of the quick fixes pushed by folks in the political realm to fix inequality. Given the enormous size of the gap, what would it take to do it? Basic income? Wage increases? Changes to tax codes?Can we fix it within the existing social order?

The existing social order does not necessarily guarantee that the rich will get richer (remember Keynes on the essential uncertainty of the future). But even if they do, a stiff tax on capital gains could be used to build up a socially-oriented wealth fund that would help offset that.

Look at Norway’s “oil fund,” which takes a cut of petroleum revenues and invests the money while giving a small annual pay-out from its investment returns. An example closer to home is California’s CalPERS retirement fund. The key point is that such funds can save at a higher rate than wealthy households, amassing market power and potentially using capital income for social purposes.

In the labor market, real wages of employees have lagged productivity growth, which is why the profit share for the boss has gone up. Outsourcing has played some role, but policies and legal interpretations (think of so-called “right to work” legislation and attacks on public sector unions) that reduce labor’s bargaining power have been more important. Recreating that power could reverse the trends and slow the accumulation of wealth. Our studies and others suggest that simply raising taxes on the rich and transferring the proceeds downward in the income distribution will not have a large immediate effect on distribution, but the impacts could cumulate over time.

It is possible to reduce U.S. wealth and income disparity, but reversing the trends of the past 30 or 40 years that got us there will not be easy or quick.

 

http://www.salon.com/2016/02/02/worse_than_the_roaring_twenties_what_even_thomas_piketty_underestimates_about_american_income_inequality_partner/?source=newsletter

 

Charter schools are no cure-all

To the 1 percent pouring millions into charter schools: How about improving the schools that the vast majority of students actually attend?

If we really want to improve education for all, we must address income inequality.

To the 1 percent pouring millions into charter schools: How about improving the schools that the vast majority of students actually attend?

(Credit: AP/John Minchillo)

Obscured by the rancor of the school reform debate is this fact: Socio-economic status is the most relevant determinant of student success in school.

It is not a coincidence that the so-called decline of the American public school system has coincided with the ever-widening gap between the rich and the poor.  According to a 2014 Pew Research Center report, the wealth disparity between upper-income and middle-income families is at a record high. Upper-income families are nearly seven times wealthier than middle-income ones, compared to 3.4 times richer in 1983. Upper-income family wealth is nearly 70 times that of the country’s lower-income families, also the widest wealth gap between these families in 30 years.

As the income disparity has increased, so has the educational achievement gap. According to Sean F. Reardon, professor of education and sociology at Stanford University, the gap for children from high- and low-income families is at an all-time high—roughly 30 to 40 percent larger among children born in 2001 than among those born 25 years earlier. With 22 percent of children in the U.S. living in poverty, this country’s 27th-place PISA ranking—the worldwide study that measures K-12 academic performance—simply cannot be compared to a country like Finland, which ranks 12th and, at 5.3 percent, has the second-lowest child poverty rate in the world.

So, why are wealthy school reform funders so squarely focused on identifying teachers and their unions as the cause of public education’s decline and advancing charter schools as the best solution?

Charter schools will never be the answer to improving education for all. It is simply not scaleable. And yet titans of industry such as Bill Gates, Eli Broad and the Walton family, and billionaires such as John Paulson who earlier this year gave $8.5 million to New York’s Success Academy charter school system, are pouring their millions into support for charter schools—millions that will not, incidentally, be invested in improving the schools that the vast majority of U.S. students attend: traditional public schools.

Can it be a coincidence that those who have benefited most from the last 50 years of steadily increasing income inequality—the top 10 percent–support an education solution that hinges on denigrating public school teachers, dismantling unions and denying that income inequality is the underlying condition at the root of the problem?

The most generous explanation for this phenomenon says that the wealthiest among us are motivated to support charter schools purely out of ideology. They are operating under deeply held beliefs that a school system run by the government smothers innovation and that teachers unions inhibit a free market system that, if allowed to operate, would result in better teachers and child outcomes. In addition, these philanthropists believe that public education has become so hidebound that meaningful change within the system is no longer possible, and that fresh ideas and programs not beholden to a system that resists change will provide programs and ideas that are more effective.

Another explanation that has been posited is that good, old-fashioned greed is at the root. After all, the wealthy did not achieve their wealth through an indifference to achieving a return on their investments—and our public school system is a $621 billion per year endeavor. For example, a recent investigation by the Arizona Republic found that the state’s charter schools purchased a variety of goods and services from the companies of its own board members or administrators. In fact, the paper found at least 17 such contracts or arrangements totaling more than $70 million over five years.

In addition, there are specific tax loopholes that make it especially attractive to donate to charter schools. Banks and equity and hedge funds that invest in charter schools in underserved areas can take advantage of a tax credit. They are permitted to combine this tax credit with other tax breaks while they also collect interest on any money they lend out. According to analysts, the credit allows them to double the money they invested in seven years.

Another explanation suggests a darker motivation. The wealthy’s focus on charter schools is a strategy to weaken unions, one of the few reliable Democratic voting blocs that remain. It is also a convenient way to deflect from the fact that they have benefited most from income inequality and that their business practices—such as moving manufacturing jobs overseas and reducing their tax burden by taking advantage of offshore tax havens—have been among the causes of income inequality and the accompanying erosion of the middle class.

So, if you are a philanthropist from the tech or finance sectors and your goal is truly to fix education in this country, you would do well to apply your generosity, innovative spirit and funds toward addressing the problem of income inequality. Your wealth and position as prominent business leaders put you in a particularly influential position to help close the gap between the wealthy and the poor. Rebuilding the middle class—not expanding charter schools—is the most effective path to increasing access to quality education and to giving more students the opportunity to achieve their dreams.

Gary M. Sasso, Ph.D., is the dean of the College of Education at Lehigh University. 

Bernie Sanders is history’s champion: Inside the centuries-long battle between inequality & democracy

The dire effects of inequality are nothing new. A look back in time illustrates why this fight is so important now

Bernie Sanders is history's champion: Inside the centuries-long battle between inequality & democracy
(Credit: Benjamin Wheelock/Salon/AP)

Why does economic inequality matter? This is a question that many on the right continue to ask as inequality continues to soar. While Sen. Bernie Sanders, I-Vt., has made a campaign out of denouncing the grotesque levels of income and wealth inequality in America, hardly a peep has been heard from Republican candidates on the issue. And when the issue does come up on the right, it is usually to defend inequality by saying things like, “the fundamental producer of income inequality is freedom” (a declaration from George Will in a didactic piece last month), or that the American poor are the “envy of the world,” which America’s richest congressman, Darrell Issa, R-Calif., said earlier this year.

Of course, economic inequality is hardly a new phenomenon, and neither is the apologia that comes along with it. In the United States, this debate goes all the way back to its founding, before the country became industrialized — which would create immense wealth concentration among a few industrialists. Among the founding fathers, wealth inequality was mostly a concern because of the instabilities that came along with it (as well as the inevitable political inequalities).

As with most things, Thomas Jefferson and Alexander Hamilton had different views on inequality, partly because Jefferson believed in a romantic agrarian society, while Hamilton was at the forefront of America’s industrialization. Even though Hamilton was outspokenly anti-democratic, he saw the dangers of great concentration of wealth, and believed a strong middle class was “needed to become energetic customers of businesses in the entire economy.” Jefferson, on the other hand, believed in widespread ownership of land, so that each person could have the “property of his labor.” (Jefferson’s view of property was greatly influenced by the Lockean theory that property comes from one’s exertion of labor on natural resources.) While in France, he wrote to James Madison:

“I am conscious that an equal division of property is impracticable. But the consequences of this enormous inequality producing so much misery to the bulk of mankind, legislators cannot invent too many devices for subdividing property, only taking care to let their subdivisions go hand in hand with the natural affections of the human mind. The descent of property of every kind therefore to all the children, or to all the brothers and sisters, or other relations in equal degree is a politic measure, and practicable one.”

While Jefferson’s view of property was a product of his time (preceding industrialization), his view of economic inequality remains important when considering what kind of balance between liberalism and democracy the founders had in mind. The consensus among the founders seemed to have been that the larger the inequality in property, the greater the threat to the Republic and liberty itself. John Adams advocated the “distribution of public lands to the landless to create broad-based ownership of property,” while in 1792, Congress passed a law subsidizing the cod fishing industry, giving five-eighths of the subsidy to the fisherman and the remainder to the ship owners — but only if the owners shared profits. (If Fox News had been around in those days, they’d have probably labeled the founding fathers job-killing socialists).

Even the father of classical economics, whose invisible hand is promoted by all free marketeers of today as an ultimate truth, spoke out against economic inequality in “The Wealth of Nations”:

“Servants, laborers, and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconvenience to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of people, should have such a share of the produce of their own labor as to be themselves tolerably well fed, clothed, and lodged.”

In a post-Citizens United America, the vast economic inequality of today directly challenges political equality (the American political tradition has historically considered economic and political inequalities to be intertwined). It is clear that those with higher incomes and levels of wealth, who can afford to donate large sums to political campaigns and hire lobbyists to further their interests in Washington, have much more political power than the majority of people who do not have money to throw around. Studies have found that in the United States, where inequality is among the highest in the developed world, “political institutions and public policy are indeed most heavily influenced by the policy preferences of the wealthiest segments of the citizenry, while middle and low income citizens have virtually no impact on politics.”

While voter suppression of poorer Americans and minorities is becoming increasingly common around the country, in theory, every citizen is supposed to have equal political power (with their vote), and elected officials are supposed to represent the majority. But this is clearly not the case. In a government where representatives rely on large donations to run political campaigns, political power will inevitably be disproportionately held by the wealthiest.

Not only does inequality and its close relative of poverty create political inequality and social instability, but economic instability. It should not be taken as a coincidence that the two biggest economic crises of the past hundred years occurred during the greatest periods of inequality. As Thomas Piketty writes in his acclaimed book on inequality, “Capital in the Twenty-first Century”:

“In my view, there is absolutely no doubt that the increase of inequality in the United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous saving injected into the system by the well-to-do, offered credit on increasingly good terms.”

Most of those on the right shrug off income and wealth inequality as a natural result of varying innate abilities — the capitalist apologist Herbert Spencer popularized this notion when he transferred Darwin’s theory of biological evolution into the social realm, with his famous saying, “survival of the fittest.” All humans obviously differ in aptitude and attitude, but this idea that all inequalities of today simply come from innate differences is hilariously ahistorical, and it completely ignores the economic institutions of today. In our globalized world of capitalism, where massive corporations have immeasurable power on governments and the ownership of property and capital (productive and intellectual) tend to determine one’s wealth, this notion is rather old-fashioned. Indeed, it had more truth to it in the preindustrial time of Thomas Jefferson, when individuals toiled on their land (many, albeit, with slave labor) and artisans individually crafted products or provided services. It is as if those on the right, particularly libertarians, believe in a kind of lemonade-stand capitalism, where every individual is economically autonomous — which is obviously not the case.

For many people, economic inequality is considered a moral issue, as is social/political inequality and poverty. Though the two latter are undoubtedly moral issues, it is debatable whether income and wealth inequality are “morally wrong,” or how much inequality should be put up with in a society (there will always be a certain degree of inequality in an open society — how excessive this inequality is is the main concern). This is a philosophical question that cannot be answered here, but there is little doubt that economic inequality creates societal and economic instability, and causes political inequality as well — which is indeed a moral issue.

Sen. Sanders has put the excessive inequalities that have grown rapidly over the past 40 years at the forefront of the 2016 election, and the debate over inequality will only become more contentious in the coming year. Sanders (and Clinton, to a degree) has been very vocal about how inequality has corrupted American democracy, and this has created a growing movement among the discontent (particularly the young) — but it would be even more effective if he discussed the other practical problems that economic inequality inevitably causes. Social and economic stability was the main concern of the founding fathers and the progressives and New Dealers who came after them. Today, challenging the inequality that has grown is not only a question of fairness and democracy, but a practical question of social cohesion.

Conor Lynch is a writer and journalist living in New York City. His work has appeared on Salon, AlterNet, Counterpunch and openDemocracy. Follow him on Twitter: @dilgentbureauct.

Why the Rich Are So Much Richer

The Great Divide: Unequal Societies and What We Can Do About Them  by Joseph E. Stiglitz   Norton, 428 pp., $28.95

Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz   The Roosevelt Institute, 114 pp., available at www.rewritetherules.org

Creating a Learning Society: A New Approach to Growth, Development, and Social Progress by Joseph E. Stiglitz and Bruce C. Greenwald  Columbia University Press, 660 pp., $34.95; $24.95 (paper)

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Ludovic/REA/ReduxJoseph Stiglitz with Christine Lagarde,Paris, September 2009

The fundamental truth about American economic growth today is that while the work is done by many, the real rewards largely go to the few. The numbers are, at this point, woefully familiar: the top one percent of earners take home more than 20 percent of the income, and their share has more than doubled in the last thirty-five years. The gains for people in the top 0.1 percent, meanwhile, have been even greater. Yet over that same period, average wages and household incomes in the US have risen only slightly, and a number of demographic groups (like men with only a high school education) have actually seen their average wages decline.

Income inequality has become such an undeniable problem, in fact, that even Republican politicians have taken to decrying its effects. It’s not surprising that a Democrat like Barack Obama would call dealing with inequality “the defining challenge of our time.” But when Jeb Bush’s first big policy speech of 2015 spoke of the frustration that Americans feel at seeing “only a small portion of the population riding the economy’s up escalator,” it was a sign that inequality had simply become too obvious, and too harmful, to be ignored.

Something similar has happened in economics. Historically, inequality was not something that academic economists, at least in the dominant neoclassical tradition, worried much about. Economics was about production and allocation, and the efficient use of scarce resources. It was about increasing the size of the pie, not figuring out how it should be divided. Indeed, for many economists, discussions of equity were seen as perilous, because there was assumed to be a necessary “tradeoff” between efficiency and equity: tinkering with the way the market divided the pie would end up making the pie smaller. As the University of Chicago economist Robert Lucas put it, in an oft-cited quote: “Of the tendencies that are harmful to sound economics, the most seductive, and…the most poisonous, is to focus on questions of distribution.”

Today, the landscape of economic debate has changed. Inequality was at the heart of the most popular economics book in recent memory, the economist Thomas Piketty’s Capital. The work of Piketty and his colleague Emmanuel Saez has been instrumental in documenting the rise of income inequality, not just in the US but around the world. Major economic institutions, like the IMF and the OECD, have published studies arguing that inequality, far from enhancing economic growth, actually damages it. And it’s now easy to find discussions of the subject in academic journals.

All of which makes this an ideal moment for the Columbia economist Joseph Stiglitz. In the years since the financial crisis, Stiglitz has been among the loudest and most influential public intellectuals decrying the costs of inequality, and making the case for how we can use government policy to deal with it. In his 2012 book, The Price of Inequality, and in a series of articles and Op-Eds for Project Syndicate, Vanity Fair, and The New York Times, which have now been collected in The Great Divide, Stiglitz has made the case that the rise in inequality in the US, far from being the natural outcome of market forces, has been profoundly shaped by “our policies and our politics,” with disastrous effects on society and the economy as a whole. In a recent report for the Roosevelt Institute called Rewriting the Rules, Stiglitz has laid out a detailed list of reforms that he argues will make it possible to create “an economy that works for everyone.”

Stiglitz’s emergence as a prominent critic of the current economic order was no surprise. His original Ph.D. thesis was on inequality. And his entire career in academia has been devoted to showing how markets cannot always be counted on to produce ideal results. In a series of enormously important papers, for which he would eventually win the Nobel Prize, Stiglitz showed how imperfections and asymmetries of information regularly lead markets to results that do not maximize welfare. He also argued that this meant, at least in theory, that well-placed government interventions could help correct these market failures. Stiglitz’s work in this field has continued: he has just written (with Bruce Greenwald) Creating a Learning Society, a dense academic work on how government policy can help drive innovation in the age of the knowledge economy.

Stiglitz served as chairman of the Council of Economic Advisers in the Clinton administration, and then was the chief economist at the World Bank during the Asian financial crisis of the late 1990s. His experience there convinced him of the folly of much of the advice that Western economists had given developing countries, and in books like Globalization and Its Discontents (2002) he offered up a stinging critique of the way the US has tried to manage globalization, a critique that made him a cult hero in much of the developing world. In a similar vein, Stiglitz has been one of the fiercest critics of the way the Eurozone has handled the Greek debt crisis, arguing that the so-called troika’s ideological commitment to austerity and its opposition to serious debt relief have deepened Greece’s economic woes and raised the prospect that that country could face “depression without end.” For Stiglitz, the fight over Greece’s future isn’t just about the right policy. It’s also about “ideology and power.” That perspective has also been crucial to his work on inequality.

The Great Divide presents that work in Stiglitz’s most popular—and most populist—voice. While Piketty’s Capital is written in a cool, dispassionate tone, The Great Divideis clearly intended as a political intervention, and its tone is often impassioned and angry. As a collection of columns, The Great Divide is somewhat fragmented and repetitive, but it has a clear thesis, namely that inequality in the US is not an unfortunate by-product of a well-functioning economy. Instead, the enormous riches at the top of the income ladder are largely the result of the ability of the one percent to manipulate markets and the political process to their own benefit. (Thus, the title of his best-known Vanity Fair piece: “Of the 1 percent, by the 1 percent, for the 1 percent.”) Soaring inequality is a sign that American capitalism itself has gone woefully wrong. Indeed, Stiglitz argues, what we’re stuck with isn’t really capitalism at all, but rather an “ersatz” version of the system.

Inequality obviously has no single definition. As Stiglitz writes:

There are so many different parts to America’s inequality: the extremes of income and wealth at the top, the hollowing out of the middle, the increase of poverty at the bottom. Each has its own causes, and needs its own remedies.

But in The Great Divide, Stiglitz is mostly interested in one dimension of inequality: the gap between the people at the very top and everyone else. And his analysis of that gap concentrates on the question of why incomes at the top have risen so sharply, rather than why the incomes of everyone else have stagnated. While Stiglitz obviously recognizes the importance of the decline in union power, the impact of globalization on American workers, and the shrinking value of the minimum wage, his preoccupation here is primarily with why the rich today are so much richer than they used to be.

To answer that question, you have to start by recognizing that the rise of high-end incomes in the US is still largely about labor income rather than capital income. Piketty’s book is, as the title suggests, largely about capital: about the way the concentration of wealth tends to reproduce itself, leading to greater and greater inequality. And this is an increasing problem in the US, particularly at the highest reaches of the income spectrum. But the main reason people at the top are so much richer these days than they once were (and so much richer than everyone else) is not that they own so much more capital: it’s that they get paid much more for their work than they once did, while everyone else gets paid about the same, or less. CorporateCEOs, for instance, are paid far more today than they were in the 1970s, while assembly line workers aren’t. And while incomes at the top have risen in countries around the world, nowhere have they risen faster than in the US.

One oft-heard justification of this phenomenon is that the rich get paid so much more because they are creating so much more value than they once did. Globalization and technology have increased the size of the markets that successful companies and individuals (like pop singers or athletes) can reach, so that being a superstar is more valuable than ever. And as companies have gotten bigger, the potential value that CEOs can add has increased as well, driving their pay higher.

Stiglitz will have none of this. He sees the boom in the incomes of the one percent as largely the result of what economists call “rent-seeking.” Most of us think of rent as the payment a landlord gets in exchange for the use of his property. But economists use the word in a broader sense: it’s any excess payment a company or an individual receives because something is keeping competitive forces from driving returns down. So the extra profit a monopolist earns because he faces no competition is a rent. The extra profits that big banks earn because they have the implicit backing of the government, which will bail them out if things go wrong, are a rent. And the extra profits that pharmaceutical companies make because their products are protected by patents are rents as well.

Not all rents are terrible for the economy—in some cases they’re necessary evils. We have patents, for instance, because we think that the costs of granting a temporary monopoly are outweighed by the benefits of the increased innovation that patent protection is supposed to encourage. But rents make the economy less efficient, because they move it away from the ideal of perfect competition, and they make consumers worse off. So from the perspective of the economy as a whole, rent-seeking is a waste of time and energy. As Stiglitz puts it, the economy suffers when “more efforts go into ‘rent seeking’—getting a larger slice of the country’s economic pie—than into enlarging the size of the pie.”

Rents are nothing new—if you go back to the 1950s, many big American corporations faced little competition and enjoyed what amounted to oligopolies. But there’s a good case to be made that the sheer amount of rent-seeking in the US economy has expanded over the years. The number of patents is vastly greater than it once was. Copyright terms have gotten longer. Occupational licensing rules (which protect professionals from competition) are far more common. Tepid antitrust enforcement has led to reduced competition in many industries. Most importantly, the financial industry is now a much bigger part of the US economy than it was in the 1970s, and for Stiglitz, finance profits are, in large part, the result of what he calls “predatory rent-seeking activities,” including the exploitation of uninformed borrowers and investors, the gaming of regulatory schemes, and the taking of risks for which financial institutions don’t bear the full cost (because the government will bail them out if things go wrong).

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All this rent-seeking, Stiglitz argues, leaves certain industries, like finance and pharmaceuticals, and certain companies within those industries, with an outsized share of the rewards. And within those companies, the rewards tend to be concentrated as well, thanks to what Stiglitz calls “abuses of corporate governance that lead CEOs to take a disproportionate share of corporate profits” (another form of rent-seeking). In Stiglitz’s view of the economy, then, the people at the top are making so much because they’re in effect collecting a huge stack of rents.

This isn’t just bad in some abstract sense, Stiglitz suggests. It also hurts society and the economy. It erodes America’s “sense of identity, in which fair play, equality of opportunity, and a sense of community are so important.” It alienates people from the system. And it makes the rich, who are obviously politically influential, less likely to support government investment in public goods (like education and infrastructure) because those goods have little impact on their lives. (The one percent are, in fact, more likely than the general public to support cutting spending on things like schools and highways.)

More interestingly (and more contentiously), Stiglitz argues that inequality does serious damage to economic growth: the more unequal a country becomes, the slower it’s likely to grow. He argues that inequality hurts demand, because rich people consume less of their incomes. It leads to excessive debt, because people feel the need to borrow to make up for their stagnant incomes and keep up with the Joneses. And it promotes financial instability, as central banks try to make up for stagnant incomes by inflating bubbles, which eventually burst. (Consider, for instance, the toleration, and even promotion, of the housing bubble by Alan Greenspan when he was chairman of the Fed.) So an unequal economy is less robust, productive, and stable than it otherwise would be. More equality, then, can actually lead to more efficiency, not less. As Stiglitz writes, “Looking out for the other guy isn’t just good for the soul—it’s good for business.”

This explanation of both the rise in inequality and its consequences is quite neat, if also bleak. But it’s also, it has to be said, oversimplified. Take the question, for instance, of whether inequality really is bad for economic growth. It certainly seems plausible that it would be, and there are a number of studies that suggest it is. Yet exactly why inequality is bad for growth turns out to be hard to pin down—different studies often point to different culprits. And when you look at cross-country comparisons, it turns out to be difficult to prove that there’s a direct connection between inequality and the particular negative factors that Stiglitz cites. Among developed countries, more unequal ones don’t, as a rule, have lower levels of consumption or higher levels of debt, and financial crises seem to afflict both unequal countries, like the US, and more egalitarian ones, like Sweden.

This doesn’t mean that, as conservative economists once insisted, inequality is good for economic growth. In fact, it’s clear that US-style inequality does not help economies grow faster, and that moving toward more equality will not do any damage. We just can’t yet say for certain that it will give the economy a big boost.

Similarly, Stiglitz’s relentless focus on rent-seeking as an explanation of just why the rich have gotten so much richer makes a messy, complicated problem simpler than it is. To some degree, he acknowledges this: in The Price of Inequality, he writes, “Of course, not all the inequality in our society is the result of rent seeking…. Markets matter, as do social forces….” Yet he doesn’t really say much about either of those inThe Great Divide. It’s unquestionably true that rent-seeking is an important part of the rise of the one percent. But it’s really only part of the story.

When we talk about the one percent, we’re talking about two groups of people above all: corporate executives and what are called “financial professionals” (these include people who work for banks and the like, but also money managers, financial advisers, and so on). These are the people that Piketty terms “supermanagers,” and he estimates that together they account for over half of the people in the one percent.

The emblematic figures here are corporate CEOs, whose pay rose 876 percent between 1978 and 2012, and hedge fund managers, some of whom now routinely earn billions of dollars a year. As one famous statistic has it, last year the top twenty-five hedge fund managers together earned more than all the kindergarten teachers in America did.

Stiglitz wants to attribute this extraordinary rise in CEO pay, and the absurd amounts of money that asset managers make, to the lack of good regulation. CEOs, in his account, are exploiting deficiencies in corporate governance—supine boards and powerless shareholders—to exploit shareholders and “appropriate for themselves firm revenues.” Money managers, meanwhile, are exploiting the ignorance of investors, reaping the benefits of what Stiglitz calls “uncompetitive and often undisclosed fees” to ensure that they get paid well even when they underperform.

The idea that high CEO pay is ultimately due to poor corporate governance is a commonplace, and certainly there are many companies where the relationship between the CEO and the board of directors (which in theory is supposed to be supervising him) is too cozy. Yet as an explanation for why CEOs get paid so much more today than they once did, Stiglitz’s argument is unsatisfying. After all, back in the 1960s and 1970s, when CEOs were paid much less, corporate governance was, by any measure, considerably worse than it is today, not better. As one recent study put it:

Corporate boards were predominately made up of insiders…or friends of theCEO from the “old boys’ network.” These directors had a largely advisory role, and would rarely overturn or even mount major challenges to CEO decisions.

Shareholders, meanwhile, had fewer rights and were less active. Since then, we’ve seen a host of reforms that have given shareholders more power and made boards more diverse and independent. If CEO compensation were primarily the result of bad corporate governance, these changes should have had at least some effect. They haven’t. In fact, CEO pay has continued to rise at a brisk rate.

It’s possible, of course, that further reform of corporate governance (like giving shareholders the ability to cast a binding vote on CEO pay packages) will change this dynamic, but it seems unlikely. After all, companies with private owners—who have total control over how much to pay their executives—pay their CEOs absurd salaries, too. And CEOs who come into a company from outside—meaning that they have no sway at all over the board—actually get paid more than inside candidates, not less. Since 2010, shareholders have been able to show their approval or disapproval of CEOpay packages by casting nonbinding “say on pay” votes. Almost all of those packages have been approved by large margins. (This year, for instance, these packages were supported, on average, by 95 percent of the votes cast.)

Similarly, while money managers do reap the benefits of opaque and overpriced fees for their advice and management of portfolios, particularly when dealing with ordinary investors (who sometimes don’t understand what they’re paying for), it’s hard to make the case that this is why they’re so much richer than they used to be. In the first place, opaque as they are, fees are actually easier to understand than they once were, and money managers face considerably more competition than before, particularly from low-cost index funds. And when it comes to hedge fund managers, their fee structure hasn’t changed much over the years, and their clients are typically reasonably sophisticated investors. It seems improbable that hedge fund managers have somehow gotten better at fooling their clients with “uncompetitive and often undisclosed fees.”

So what’s really going on? Something much simpler: asset managers are just managing much more money than they used to, because there’s much more capital in the markets than there once was. As recently as 1990, hedge funds managed a total of $38.9 billion. Today, it’s closer to $3 trillion. Mutual funds in the US had $1.6 trillion in assets in 1992. Today, it’s more than $16 trillion. And that means that an asset manager today can get paid far better than an asset manager was twenty years ago, even without doing a better job.

This doesn’t mean that asset managers or corporate executives “deserve” what they earn. In fact, there’s no convincing evidence that CEOs are any better, in relative terms, than they once were, and plenty of evidence that they are paid more than they need to be, in view of their performance. Similarly, asset managers haven’t gotten better at beating the market. The point, though, is that attributing the rise in their pay to corruption, or bad rules, doesn’t get us that far. More important, probably, has been the rise of ideological assumptions about the indispensability of CEOs, and changes in social norms that made it seem like executives should take whatever they could get. (Stiglitz alludes to these in The Price of Inequality, writing, “Norms of what was ‘fair’ changed, too.”) Discussions of shifts in norms often become what the economist Robert Solow once called a “blaze of amateur sociology.” But that doesn’t mean we can afford to ignore those shifts, either, since the rise of the one percent has been propelled by ideological changes as much as by economic or regulatory ones.

Complicating Stiglitz’s account of the rise of the one percent is not just an intellectual exercise. It actually has important consequences for thinking about how we can best deal with inequality. Strategies for reducing inequality can be generally put into two categories: those that try to improve the pretax distribution of income (this is sometimes called, clunkily, predistribution) and those that use taxes and transfers to change the post-tax distribution of income (this is what we usually think of as redistribution). Increasing the minimum wage is an example of predistribution. Medicaid is redistribution.

Stiglitz’s agenda for policy—which is sketched in The Great Divide, and laid out in comprehensive detail in Rewriting the Rules—relies on both kinds of strategies, but he has high hopes that better rules, designed to curb rent-seeking, will have a meaningful impact on the pretax distribution of income. Among other things, he wants much tighter regulation of the financial sector. He wants to loosen intellectual property restrictions (which will reduce the value of patents), and have the government aggressively enforce antitrust laws. He wants to reform corporate governance so CEOs have less influence over corporate boards and shareholders have more say over CEO pay. He wants to limit tax breaks that encourage the use of stock options. And he wants asset managers to “publicly disclose holdings, returns, and fee structures.” In addition to bringing down the income of the wealthiest Americans, he advocates measures like a higher minimum wage and laws encouraging stronger unions, to raise the income of ordinary Americans (though this is not the main focus of The Great Divide).

These are almost all excellent suggestions. And were they enacted, some—including above all tighter regulation of the financial industry—would have an impact on corporate rents and inequality. But it would be surprising if these rules did all that much to shrink the income of much of the one percent, precisely because improvements in corporate governance and asset managers’ transparency are likely to have a limited effect on CEO salaries and money managers’ compensation.

This is not a counsel of despair, though. In the first place, these rules would be good things for the economy as a whole, making it more efficient and competitive. More important, the second half of Stiglitz’s agenda—redistribution via taxes and transfers—remains a tremendously powerful tool for dealing with inequality. After all, while pretax inequality is a problem in its own right, what’s most destructive is soaring posttax inequality. And it’s posttax inequality that most distinguishes the US from other developed countries. As Stiglitz writes:

Some other countries have as much, or almost as much, before-tax and transfer inequality; but those countries that have allowed market forces to play out in this way then trim back the inequality through taxes and transfer and the provision of public services.

The redistributive policies Stiglitz advocates look pretty much like what you’d expect. On the tax front, he wants to raise taxes on the highest earners and on capital gains, institute a carbon tax and a financial transactions tax, and cut corporate subsidies. But dealing with inequality isn’t just about taxation. It’s also about investing. As he puts it, “If we spent more on education, health, and infrastructure, we would strengthen our economy, now and in the future.” So he wants more investment in schools, infrastructure, and basic research.

If you’re a free-market fundamentalist, this sounds disastrous—a recipe for taking money away from the job creators and giving it to government, which will just waste it on bridges to nowhere. But here is where Stiglitz’s academic work and his political perspective intersect most clearly. The core insight of Stiglitz’s research has been that, left on their own, markets are not perfect, and that smart policy can nudge them in better directions.

Indeed, Creating a Learning Society is dedicated to showing how developing countries can use government policy to become high-growth, knowledge- intensive economies, rather than remaining low-cost producers of commodities. What this means for the future of the US is only suggestive, but Stiglitz argues that it means the government should play a major role in the ongoing “structural transformation” of the economy.

Of course, the political challenge in doing any of this (let alone all of it) is immense, in part because inequality makes it harder to fix inequality. And even for progressives, the very familiarity of the tax-and-transfer agenda may make it seem less appealing. After all, the policies that Stiglitz is calling for are, in their essence, not much different from the policies that shaped the US in the postwar era: high marginal tax rates on the rich and meaningful investment in public infrastructure, education, and technology. Yet there’s a reason people have never stopped pushing for those policies: they worked. And as Stiglitz writes, “Just because you’ve heard it before doesn’t mean we shouldn’t try it again.”

 

http://www.nybooks.com/articles/archives/2015/sep/24/stiglitz-why-rich-are-so-much-richer/

For Every One, A Basic Income?

 Yes! Radical Ideas About Fixing Inequality

Tony Atkinson’s new book points the way forward.

British economist Tony Atkinson has been studying inequality — the gap in income and wealth between the top and the bottom — for nearly half a century. Now that the dogma of trickle-down has been exposed as myth, he sees economists, policy-makers and the public finally waking up to the seriousness of the problem. But how to fix it? In his new book, Inequality: What Can Be Done?Atkinson focuses on ambitious proposals that could shift the distribution of income in developed countries. This post was originally published on the blog of theInstitute for New Economic Thinking.

Lynn Parramore: When did you become interested in the topic of economic inequality? What sparked your work?

Tony Atkinson: My interest in the topic actually led me to become an economics student. There was a famous book in England called The Poor and the Poorest, which was the rediscovery of poverty in Britain, published in 1965. I then decided to write a book about poverty when I graduated, and it was published in 1969: Poverty in Britain and the Reform of Social Security.

LP: In terms of finding solutions to inequality, Thomas Piketty, in his book Capital in the Twenty-First Century, talks about a wealth tax, but many are skeptical that it could work. What is distinct about your prescriptions?

TA: It’s fair to say that Piketty’s book was not about solutions. He does refer to a global capital tax, but he was much more concerned with an analysis rather than a set of prescriptions. In a way, my book was really continuing the lines of recent discussions, that is to say, we’ve identified the problem and we’ve seen some of the reasons for it, and we’ve seen our political leaders and our religious leaders all saying this is a serious problem — a “defining challenge of our time” to quote your president. So the next question, of course, is, what are we going to do about it?

What I tried to do was to set out a range of measures, which were to some extent very familiar in terms of taxes and transfers. But I also tried to stress that this is only, at best, part of the solution. One has to think much more carefully about what determines incomes people get before the government intervenes in taxing and transferring.

LP: Some of the possible prescriptions you discuss, such as a basic income for all citizens, may sound radical, but you point out that they are actually already implemented as policy in many countries in various ways. Are ideas like basic income getting more attention and traction now?

TA: Definitely. A lot of people I’ve talked to about the book, in different places, say, Oh! I never knew we could do that kind of thing. It’s a tragedy, in a way, that our political system has become very narrowly focused and not willing to at least debate these ideas.

The basic income is very close to the idea Thomas Paine put forward in the 1790s. (Paine’s proposal, by the way, is on the website of the U.S. Social Security Administration.) That proposal is something that I and many others think is really interesting, which is that everyone, on reaching the age of 18 or so, should receive a capital payment. It would be like a negative capital tax. That idea was also proposed years ago in America by Bruce Ackerman, a professor of law at Yale.

A capital payment, or capital grant, would contribute to solving the problem of the intergenerational distribution of income, which is something I stress in the book. That is a serious problem, which I found, for example, in discussions with Korean journalists and economists. They are very worried about generational divide — concerned that the older people have benefitted from growth and the younger people are struggling to find jobs and so on. Some of the measures I propose are designed to take money away from my generation and give it to younger generations. The capital grant certainly would do that.

LP: You’ve been a strong critic of claims that we can’t afford to do much about inequality. How do you react to such claims?

TA: I think that the question about whether we can afford it has two dimensions. One is the extent to which addressing inequality involves redistribution —whether it involves some people, like myself, paying higher taxes to finance a more effective system of social protection, for example. On the other hand, it’s a question about how far these measures and other measures would tend to reduce the size of the cake, to put it in a rather hackneyed metaphor.

The second argument is the one I spend more time discussing, which is to say that in the kinds of economies in which we live, there are a number of directions in which we can both make the distribution fairer and contribute to making our economies more efficient and more productive for everyone. That’s very much within the Institute for New Economic Thinking’s way of looking at the world because I’m really saying that the economic model we’ve had to think about is one in which intervention tends to reduce the size of the cake. Yet if you think about a different economic model, you have to allow for the fact that there are corporations with monopoly power. You have to allow for the fact that we have workers who have very little countervailing power, and so on. There are, in fact, ways in which the current situation is inefficient.

LP: So reducing inequality may increase efficiency rather than the opposite, as neoclassical economists might argue?

TA: Yes, I think that as a starting point we need to look at the world as it really is. We have unemployment and other evidence that the world isn’t working in a kind of textbook competitive fashion.

LP: Let’s talk about debates concerning Britain and whether or not inequality is growing. Pikettty, for example, says that British society is becoming more economically unequal. Others refute this view. How do you read the data?

TA: I think it’s very important to distinguish here between distribution of incomes and distribution of wealth. On incomes, there’s very little dispute. There is no doubt that income inequality in Britain today is very significantly higher than it was a generation ago. The Gini coefficient, which is used to measure it, is some ten percentage points higher than it was in the 1970s. And that’s a very big increase. It took us from being a country like the Netherlands or France to being a country like the United States in terms of inequality. I don’t think anyone disputes that, nor do they dispute the fact that poverty is higher than when I started out as an economist nearly 50 years ago.

Where there is much less certainty is about the wealth data, that is, how rich people are. There, our current statistics about changes in wealthy inequality are not so good — not as good as the American statistics. I think there is room for confusion there. The OECD says that wealth concentration in Britain is rising. Maybe. I’m not myself quite sure. It’s much harder to measure wealth concentration now because people are so geographically mobile. People on the “rich list” — it’s not quite clear whether they live in England or not. They might live somewhere else. It’s not clear whether the wealth is owned by them, or by a foundation, or a trust, or whether it’s spread out amongst a family. So it’s a much more complicated set of statistics to assemble today than it was 20 or 30 years ago.

LP: You’ve written in your book that you feel optimistic about solving the problem of inequality. What gives you hope?

TA: People often say that there’s a sense of inevitability, that there’s nothing much you can do. But what I was trying to argue in the book is that there are things you can do. The problem has been that we’ve not had on the agenda issues that would make a difference. Interestingly, even since I wrote the book the Conservative government in Britain has actually adopted the living wage as policy. Last week in the budget the chancellor announced he was in favor of paying higher wages. So there’s hope.

Lynn Parramore is contributing editor at AlterNet. She is cofounder of Recessionwire, founding editor of New Deal 2.0, and author of “Reading the Sphinx: Ancient Egypt in Nineteenth-Century Literary Culture.” She received her Ph.D. in English and cultural theory from NYU, and she serves on the editorial board of Lapham’s Quarterly. Follow her on Twitter @LynnParramore. 

 

 

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10 Brutal Ways the American Safety Net Is Being Shredded

FDR’s New Deal is in trouble in 2015.

On the 80th anniversary of the Social Security Act of 1935, which established the social security system in the United States, President Franklin Delano Roosevelt’s New Deal is on life support as the American middle class continues to be squeezed and millions of Americans struggle with poverty.

The U.S. desperately needed a New Deal 3.0 after the crash of September 2008 and a program of aggressive reforms. Instead, most of the welfare that followed the Panic of 2008 has been corporate welfare rather than programs to help America’s embattled poor and middle class. Overall, the U.S. has been moving away from the New Deal when it should be reinvigorating it. Below are 10 ways in which the New Deal (and by extension, LBJ’s Great Society) continues to be under attack in the United States.

1. Income Inequality Is Going from Bad to Worse

FDR firmly believed that capitalism cannot function well without a strong middle class, and even auto magnate Henry Ford agreed with him: Ford famously said that American workers needed to be paid a decent wage in order to be able to afford his products. And during the post-FDR America of the 1950s and 1960s, having a robust middle class was great for a variety of businesses. But in 2015—with the gains of the New Deal having been imperiled by everything from union busting to the outsourcing of millions of American jobs—income inequality in the U.S. is a huge problem. The Organization for Economic Cooperation and Development recently released a report on income inequality among OECD members and found that the U.S. was among the worst offenders. The U.S., Mexico and Turkey had some of highest income inequality of OECD countries, while Denmark, the Czech Republic, Finland, Iceland and Belgium fared much better. OECD Secretary-General Angel Gurría commented that “high inequality is bad for growth,” and he’s absolutely right.

2. Republicans Yearn for Social Security Privatization

Although President Dwight D. Eisenhower was a Republican, he supported elements of the New Deal and saw the need for a strong social safety net: in fact, Eisenhower expanded social security, and in 1954, he bluntly asserted that any oligarchs who would “attempt to abolish social security, unemployment insurance and eliminate labor law and farm programs” were “stupid.” But in the 21st century, Republicans have been going after social security with a vengeance. The privatization of social security was proposed by President George W. Bush in 2004, and far-right Republicans, the Tea Party and wingnut lobbying groups like the Club for Growth have been doubling down on the idea of privatizing social security. GOP presidential hopeful Jeb Bush called for social security privatization at a town hall meeting in New Hampshire in June, and he also favors raising the social security retirement age to 69 or 70, which would be especially bad for blue-collar workers who have spent decades in physically demanding jobs.

3. The 1% Continue to Dodge Taxes

FDR had no problem asking the ultra-wealthy to pay their fair share of taxes: the U.S.’ top marginal tax rate rose to 94% in the early 1940s, when the country entered World War II. Taxes for the ultra-rich didn’t go down much under Republican Eisenhower, who lowered the top tax rate to 91% in the 1950s—and after that rate decreased to 28% under President Reagan, it rose to 39.6% under President Clinton and decreased to 35% under President George W. Bush. Looking at the last 80 years of tax history, one sees a clear pattern: the American middle class does much better when the 1% pay their fair share of taxes. And even though the Tea Party tries to paint Barack Obama as a soak-the-rich president, their assertion is laughable because Obama extended the Bush tax cuts and hasn’t been nearly as forceful as FDR or Eisenhower when it comes to taxing the 1%.

4. The Minimum Wage Is Much Too Low

One of the important elements of the New Deal was FDR’s strong belief in a national minimum wage. FDR began to push for a federal minimum wage after taking office in January 1933, saying, “By living wages, I mean more than a bare subsistence level. I mean the wages of a decent living.” And Congress enacted one in 1938, when the U.S.’ first federal minimum wage was set at 25 cents per hour. But in recent years, the federal minimum wage (which was raised to $7.25 an hour in 2009) has not kept up with inflation. Economist Robert Reich has proposed raising the federal minimum wage to $15 an hour, which he sees as a crucial part of economic recovery. And in some cities, including Los Angeles and Seattle, city councils have raised their local minimum wages to that amount. But at the federal level, an increase to even $10.10 an hour (President Obama’s proposal) is a steep uphill climb when both houses of Congress are dominated by far-right Republicans who hate the poor with a passion.

5. Infrastructure Continues to Deteriorate

The New Deal was great for the U.S.’ infrastructure thanks to programs that built or strengthened everything from roads to water and electric systems to municipal power plants. But in recent years, the American infrastructure has been seriously decaying—and a major wake-up call came on May 12, when an Amtrak train derailed in Philadelphia and eight passengers were killed. But the nation’s railways are only one of the ways in which the U.S.’ infrastructure has deteriorated. According to Ray LaHood (former secretary of transportation for the Obama Administration), 70,000 bridges in the U.S. are now structurally deficient. That is in addition to all the roads that are in desperate need of repair. And when it comes to high-speed rail travel, the U.S. lags way behind Europe (where one can get from London to Brussels in just under two hours or from Madrid to Barcelona in less than three hours).

6. Union Representation Has Reached Historic Lows 

One of the most important pieces of New Deal-era legislation was the National Labor Relations Act of 1935, a.k.a. the Wagner Act, which did a lot to advance labor unions in the U.S.: by the mid-1950s, around 35% of America’s labor force was unionized. But according to the Bureau of Labor Statistics (BLS), a mere 11.1% of salaried U.S. workers (factoring in both the public and private sectors) were union members in 2014. Among private-sector workers, the number was a paltry 6.6%. And the decline of unions has been encouraged bad working conditions: according to the Economic Policy Institute, executives at large companies earned, on average, 296 times as much as their average workers in 2013 compared to only 20 times as much in 1965. But as much as labor unions have declined in the U.S., Wisconsin Gov. Scott Walker (a GOP presidential hopeful for 2016) and his fellow Republicans would like to see them decline even more. Walker recently set a disturbing precedent in that state when he supported anti-union legislation that prohibits private-sector unions from requiring members to pay union dues; Walker has, in essence, made Wisconsin a northern “right to work” state. And it’s safe to say that Walker, based on his actions in Wisconsin, would be among the most anti-union presidents in U.S. history.

7. “Too Big to Fail” Is Bigger Than Ever

Unlike many of today’s extreme-right Republicans and neoliberal corporatist Democrats, FDR was not afraid of offending the banking sector. FDR said of the banksters of the 1930s, “They are unanimous in their hate for me, and I welcome their hatred.” One of the New Deal achievements that banksters detested was the Glass-Steagall Act of 1933, which mandated a strict separation of commercial and investment banking and was designed to prevent another major Wall Street calamity like the crash of 1929. Glass-Steagall served the U.S. well for many years: although there were some tough recessions in the mid-1970s, early 1980s and early 1990s, none of them cut as deep as the Great Depression. But the repeal of Glass-Steagall in 1999 was a major blow to the New Deal and paved the way for the crash of September 2008, clearly the most devastating financial event in the U.S. since 1929. Unfortunately, there was no real banking reform after the 2008 calamity, and as Vermont Sen. Bernie Sanders points out, JPMorgan Chase, Bank of America and Wells Fargo are now “80% larger” than they were in 2007. Critics of the banking sector propose bringing back Glass-Steagall, including Reich (who warns that another major Wall Street crash “is not unlikely”) and Massachusetts Sen. Elizabeth Warren. And Sanders has proposed New Deal-like legislation that would break up the U.S.’ largest banks.

8. Medicare, An Expansion of the New Deal, Is a Major GOP Target

Medicare, which established a single-payer health care system for Americans 65 and older, was not part of the New Deal per se: Medicare came into being in 1965 as part of Democratic President Lyndon B. Johnson’s Great Society (which was very much an extension of the New Deal). And the program proved to be so popular that even Republican President Richard Nixon (who was considered an arch-conservative in his day) expanded Medicare in both 1969 and 1972. But these days, far-right GOP wingnuts in the House of Representatives—especially Rep. Paul Ryan, chairman of the House Ways and Means Committee—have repeatedly called for drastic Medicare cuts and for replacing traditional Medicare with a privatized voucher program. In June, a variety of pro-Medicare groups (including the Alliance for Retired Americans and the Medicare Rights Center) sent a joint letter to the House criticizing representatives who wanted to cut $700 million from the Medicare program.

9. Home Ownership Is Becoming Increasingly Difficult for Many Americans, and the Rent Is Too Damn High

Before the New Deal, five-year or 10-year mortgages were the norm in the U.S., and were unaffordable for most Americans. But FDR saw home ownership as a crucial part of building a strong middle class: between the Federal Housing Administration, the Home Owners’ Loan Corporation and the introduction of 30-year fixed-rate mortgages—all of which came about under FDR—home ownership in the U.S. gradually increased. According to the U.S. Census Bureau, home ownership in the U.S. went from 45% in 1920 and 47% in 1930 to 55% in 1950, 61% in 1960 and 62% in 1970. But the Crash of 2008 has been terrible for American homeowners, resulting in countless foreclosures, and banksters have been allowed to acquire and rent out many foreclosed homes. The private equity firm Blackstone Group had, as of late 2013, bought almost 40,000 homes in the U.S. in order to rent them. To make matters worse, all those post-2008 foreclosures have caused rents to skyrocket all over the country. And the more one pays in rent, the harder it is to save for a down payment on a home. To quote Jimmy McMillan, the rent is too damn high.

10. Wingnut Attacks on Food Stamps Never End

The American food stamps program started on a pilot basis under FDR’s secretary of agriculture, Henry A. Wallace, in 1939 but became permanent when LBJ signed the Food Stamp Act of 1964 into law as part of his Great Society. In recent years, the U.S.’ economic decline has been so painful that, according to the U.S. Department of Agriculture, the number of Americans poor enough to quality for food stamps was 46.2 million in 2014 compared to only 17 million in 2000. Food stamps, as envisioned under the New Deal and the Great Society, are designed to be a stepping stone for the poor—and the benefits (which presently average $127.91 per month per person, according to USDA figures) are hardly lavish. But that has not prevented Republicans in Congress from repeatedly proposing dramatic food stamp cuts during the Great Recession. And in Wisconsin, Gov. Scott Walker has been trying to punish and shame food stamp recipients by subjecting them to drug-testing.

Alex Henderson’s work has appeared in the L.A. Weekly, Billboard, Spin, Creem, the Pasadena Weekly and many other publications. Follow him on Twitter @alexvhenderson.

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