At least DK sees an issue here, with Piketty's thesis, one which Piketty does not pursue, except to buttress his argument re global inequality per se:"...Having read Piketty’s Capital in the 21st Century just a couple of months ago, I found it difficult to be quite as enthusiastic as Naím is about economic growth in the Third World. Piketty’s tables showed that the vast masses of China, India, and even Latin America and Eastern Europe are living in poverty compared to the nations of the North Atlantic world, and inequality is also even worse in poorer countries than in rich ones...." DK, discussing Naim's book.
Here's Bobbitt; you can take issue with him:
"...(because our security problems do not arise from a competition among the great powers, but rather out of the seething underclass, domestically and in the Third World, that has been seduced by the cult of consumption at a time when the future dictated by its demographics moves this class ever farther from realizing its fantasies)..." The Shield of Achilles, p. 258.
Friday, May 02, 2014
Capitalism and its discontents
The intellectual world is buzzing over Thomas Piketty's book, Capital in the Twenty-First Century,, and I participated in this on-air discussion of it the other night. To date I have read about a quarter of it systematically, as well as some key passages later in the book. Since it is relatively fresh in my mind, I shall share some of my first impressions now, while promising to delve a good deal more deeply into it in subsequent posts.
Piketty certainly deserves congratulations for undertaking and completing this book, and French academia deserves credit for producing and rewarding him in the first place. Capital in the Twenty-First Century involves a very thorough survey of the economic development of the world's leading nations over the last three centuries. Britain and France receive the most attention, partly because they left behind the most historical data on the eighteenth and nineteenth century, but the US, Germany, and other countries get a good long look as well. Being one of the few historians who has attempted anything of comparable scope, I know how rare such people are, and they are even more rare among economists. In a rather striking passage in his introduction, Piketty explains that after earning his doctorate at a very early age, he worked for three years in an American economics department near Boston. (He is too discreet to identify it as MIT.) He abandoned that career track because his American colleagues were too obsessed with mathematics to the exclusion of all else--and not, in most cases, with numbers drawn from history either. Beginning at the beginning and going on to the end, he has managed to write an absorbing study of the rise and fall of capital and economic growth over the last three centuries, and in some respects for even longer, although it's a basic point of his that that there was extraordinarily little economic growth, or growth in per capita income at any rate, before the industrial revolution. He also repeatedly points out that about 2/3 of what we normally call economic growth is really just population growth--not growth in per capita income, which has averaged 1-2% in advanced countries for a long time. Unlike most economics, Piketty understands that history and politics matter--although as I hope to show in a later post, I personally think that they matter even more than he does.
Piketty's basic point, of course, is that inequality has been increasing rapidly in all advanced countries for the last 35 years or so. But the mechanism he focuses on is a fascinating one. The return on capital, he stresses from the start, has been growing more rapidly than the economy as a whole in all advanced nations. I have to confess that I was stunned the first time I read that, because I did not see how it could be true over the long run. But then, with the help of my wife, whose more traditional left wing views came in handy on this occasion, I realized that this was only another way of saying something we've all known for some time: that the richest few percent of our society has been soaking up all the economic gains that society as a whole has been making. Wages are essentially stagnant; the return on capital is not. And that, Piketty argues, is making our societies more and more like those of 19th century Britain and France, where a rentier class, repeatedly portrayed by Jane Austen and Honore de Balzac, dominated society and the economy, and when economic growth was very slow.
Pikety lays a great deal of stress on the concept of national wealth, the total of assets held by a given country. I well remember my section man in Economics 1 in 1965-6 telling us that national wealth "used to be thought of as very important," but that was the only mention it got. In those days macroeconomics focused relentlessly on GNP, now more commonly termed GNP, and its growth. That, I can see now, was because we were living at the end of the most egalitarian decades of the modern era, from the 1930s through the early 1960s. That, Piketty shows, is when the share of capital, relative to GDP, fell to its lowest level in modern recorded history, thanks in part to the losses suffered in the depression and the two world wars. Yet there was another reason, one that he has not yet treated at any length in the sections I have read. In that expansionist era--and particularly from the time of the Second World War onward--capital flowed relentlessly into industry, where it was transformed into economic growth. A good deal of it flowed into industry through governments, which financed arms, roads, bridges, dams, and much more. A growing population, especially in the United States, also insured a robust level of economic growth. Piketty makes clear that a decline in the role of capital within the economy went with it.
I shall save Piketty's policy prescriptions, which include both a tax on capital and 80% marginal tax rates, for later. Right now I shall simply pose another critical question. Do the holders of capital--megabanks, energy concerns, hedge fund managers, and all the rest--understand that higher levels of economic growth would work to their disadvantage? Is that why conservative economic interests want economic austerity, not expansion, despite our low-wage economy and high unemployment? In the radio discussion that I linked above,. Mark Blyth suggested that today's rich live in a privatized society featuring their own gated communities, private schools, and top-level colleges and universities, and therefore take no interest in how the rest of the population lives. It would be even more damaging if they used their economic power to ensure macroeconomic policies that favored them at the expense of the rest of us. I hope that this becomes part of the debate that Piketty has inspired.
Stay tuned for more analysis of an extremely important, although sometimes erratic, book.
Friday, May 09, 2014
The intellectual world is buzzing over Thomas Piketty's book, Capital in the Twenty-First Century,, and I participated in this on-air discussion of it the other night. To date I have read about a quarter of it systematically, as well as some key passages later in the book. Since it is relatively fresh in my mind, I shall share some of my first impressions now, while promising to delve a good deal more deeply into it in subsequent posts.
Piketty certainly deserves congratulations for undertaking and completing this book, and French academia deserves credit for producing and rewarding him in the first place. Capital in the Twenty-First Century involves a very thorough survey of the economic development of the world's leading nations over the last three centuries. Britain and France receive the most attention, partly because they left behind the most historical data on the eighteenth and nineteenth century, but the US, Germany, and other countries get a good long look as well. Being one of the few historians who has attempted anything of comparable scope, I know how rare such people are, and they are even more rare among economists. In a rather striking passage in his introduction, Piketty explains that after earning his doctorate at a very early age, he worked for three years in an American economics department near Boston. (He is too discreet to identify it as MIT.) He abandoned that career track because his American colleagues were too obsessed with mathematics to the exclusion of all else--and not, in most cases, with numbers drawn from history either. Beginning at the beginning and going on to the end, he has managed to write an absorbing study of the rise and fall of capital and economic growth over the last three centuries, and in some respects for even longer, although it's a basic point of his that that there was extraordinarily little economic growth, or growth in per capita income at any rate, before the industrial revolution. He also repeatedly points out that about 2/3 of what we normally call economic growth is really just population growth--not growth in per capita income, which has averaged 1-2% in advanced countries for a long time. Unlike most economics, Piketty understands that history and politics matter--although as I hope to show in a later post, I personally think that they matter even more than he does.
Piketty's basic point, of course, is that inequality has been increasing rapidly in all advanced countries for the last 35 years or so. But the mechanism he focuses on is a fascinating one. The return on capital, he stresses from the start, has been growing more rapidly than the economy as a whole in all advanced nations. I have to confess that I was stunned the first time I read that, because I did not see how it could be true over the long run. But then, with the help of my wife, whose more traditional left wing views came in handy on this occasion, I realized that this was only another way of saying something we've all known for some time: that the richest few percent of our society has been soaking up all the economic gains that society as a whole has been making. Wages are essentially stagnant; the return on capital is not. And that, Piketty argues, is making our societies more and more like those of 19th century Britain and France, where a rentier class, repeatedly portrayed by Jane Austen and Honore de Balzac, dominated society and the economy, and when economic growth was very slow.
Pikety lays a great deal of stress on the concept of national wealth, the total of assets held by a given country. I well remember my section man in Economics 1 in 1965-6 telling us that national wealth "used to be thought of as very important," but that was the only mention it got. In those days macroeconomics focused relentlessly on GNP, now more commonly termed GNP, and its growth. That, I can see now, was because we were living at the end of the most egalitarian decades of the modern era, from the 1930s through the early 1960s. That, Piketty shows, is when the share of capital, relative to GDP, fell to its lowest level in modern recorded history, thanks in part to the losses suffered in the depression and the two world wars. Yet there was another reason, one that he has not yet treated at any length in the sections I have read. In that expansionist era--and particularly from the time of the Second World War onward--capital flowed relentlessly into industry, where it was transformed into economic growth. A good deal of it flowed into industry through governments, which financed arms, roads, bridges, dams, and much more. A growing population, especially in the United States, also insured a robust level of economic growth. Piketty makes clear that a decline in the role of capital within the economy went with it.
I shall save Piketty's policy prescriptions, which include both a tax on capital and 80% marginal tax rates, for later. Right now I shall simply pose another critical question. Do the holders of capital--megabanks, energy concerns, hedge fund managers, and all the rest--understand that higher levels of economic growth would work to their disadvantage? Is that why conservative economic interests want economic austerity, not expansion, despite our low-wage economy and high unemployment? In the radio discussion that I linked above,. Mark Blyth suggested that today's rich live in a privatized society featuring their own gated communities, private schools, and top-level colleges and universities, and therefore take no interest in how the rest of the population lives. It would be even more damaging if they used their economic power to ensure macroeconomic policies that favored them at the expense of the rest of us. I hope that this becomes part of the debate that Piketty has inspired.
Stay tuned for more analysis of an extremely important, although sometimes erratic, book.
Friday, May 09, 2014
Friday, May 09, 2014
More on Piketty
Capital in the 21st Century is interesting for its policy prescriptions, which I shall get to eventually, but its greatest value, I would suggest, is simply as a record of what the economies of the advanced countries have been like over the last two centuries. And what is rather extraordinary is how little things have changed. Growth became faster as a result of the industrial revolution, but for most of the last two centuries it hasn't varied very much, staying at 1-2% per capita for most of that time, with the exception of the period 1946-80 or so. Inequality of wealth and income dropped in the middle decades of the twentieth century but they have rebounded now and are threatening to reach the highest levels ever once again. All of this, Piketty argues convincingly, is driven remorselessly by the nature of capitalism in general and the capital-income ratio in particular, which in turn is a function of of the difference (nearly always positive) between the annual return on capital on the one hand and economic growth on the other. Piketty is in many ways at least as deterministic as Marx, at least with respect to economics, although he is much less so with respect to politics.
I would like to begin today by reviewing some of the most interesting things I learned from the book--all of them very specific data. One of my first shocks related to income disparities between regions. Thus, the United States and Canada lead the world, at present, with a per capita income of 40,000 euros a year. (The dollar has been falling against the Euro, I'm sorry to say, and a euro is now worth $1.38.) But the per capita income in Latin America is only 10,000 euros a year, which is almost exactly the world average. A similar situation prevails in Europe, where the major western European nations--the original EU, before 1989--average 31,000 euros per capita income, while the former Warsaw Pact countries earn just 16,000 euros a year per capita, and Russia and Ukraine only 15,000. North Africans earn an average of 5,700 euros a year, but sub-Saharan Africa trails the field at 2,000. The Japanese are essentially tied with western Europe at 31,000 euros per year, while the Chinese have reached 7,700, making China still considerably poorer than Latin America at this point, and the Indians 1200. In short, despite massive inequality in the United States and the European slump, the nations bordering on the North Atlantic are still more than twice as rich as any other part of the world (except Australasia). Nor is there really any reason to expect most of the world to catch up in the lifetime of any person now alive.
A second staggering set of facts concerns the distribution of income and wealth. To say that the US leads the world with a per capita income of 40,000 euros ($52,000) is true, but extremely misleading. The top 1% of the United States receives 18% of total per capita income today (up from 8% in 1980), and the top .1 % (or "top decile," as Piketty puts it) has almost half of that, 7.5% of the total. The top 10% of the nation receives 45% of annual income; the next 40%, which is the real "middle class" in the United States, receives 35%; and the lowest 50% of the population receives 20% of the total. In other words, as I figure it--correct me if I am wrong--the top 10% is receiving an annual per capita income of 4.5 times the national average, or $234,000 a year; the next 40% is 1/8 below the average of $52,000, that is, about $46,000 per person per year; while the bottom half of the population averages 10% of the total, or $21,000 per capita. Meanwhile, real growth is only 1-2% a year, and crucially, most of the proceeds of that growth are going to the top 10% and increasing inequality, This is the nature of the modern American economy. The situation inthe other most advanced countries of western Europe and Japan is not quite so bad, but it is headed at in the same direction. The situation has deteriorated, from the standpoint of equality, in recent decades, although there was never a time in which it was all that much better for the bottom half of the population.
The situation regarding the distribution of wealth--which, to repeat, is increasing faster than income--is even worse. The top 10% of the US population, which, to repeat, earns 45% of total income in the US every year, owns 70% of the wealth, down from an estimated peak of 80% around 1910. (The top 1% owns nearly half of that.) The nest 40% of the population owns the other 30% of the nation's wealth. The bottom half of the population has no significant wealth. They may own cars or household appliances, but they have no significant equity in houses, much less any stocks, bonds, or IRAs. Once again, the situation in the other advanced countries is more equal, but they are headed rapidly in the same direction as the US, and the situation in poorer countries is no better and in some cases even worse. These are huge inequalities, and they are much greater than other inequalities upon which we are often focused, such as those between men and women or between generations.
That is not all. In a truly chilling chapter, Piketty presents pretty good evidence to show that enormous fortunes--those in the billions--tend to increase at least twice as fast as capital on the average, earning as much as 10% a year over most of the last 35 years. This applies not only to large private fortunes like those of Bill Gates, but also to the endowments of Harvard, Yale and Princeton--one of my favorite subjects, as many of you know. Moreover, in one of his most acerbic passages, Piketty notes that between 1990 and 2010, the fortune of Liliane Bettencourt, the l'Oreal cosmetics heiress, who "has never worked day in her life," increased just as quickly as that of Bill Gates, earning a real return of about 11% a year.
What I would like to do now is to reflect a bit on these statistics, and analyze what they say about our current economic debates--before getting either next week or the following week into the question of exactly how things might be improved. These are not questions about which Piketty has too much to say. He is, after all,a Frenchman, not an American, and he speaks with understandable condescension about many aspects of American politics without seeming to know exactly how bad things are at the moment. Nonetheless I will take his remarks as a starting point.
Piketty notes many times that wealthier members of western societies--and particularly of the United States--seem almost desperate to argue that they deserve their greater wealth and income. In my opinion, this results mainly from a bad conscience. I firmly believe, for better or for worse, that within every human being lurks an acute sense of the fundamental equality of us all. That is certainly true of myself and it probably explains why I have been happiest in settings where genuine equality was enforced, such as the U.S. Army (where I served in a non-combatant status.) And thus, the luckier of those among us cannot help but feel some guilt, which they seek to expunge with supposedly rational explanations of their success. Piketty notes that the two favorite explanations of well-to-do Americans are those of greater marginal productivity, which is absolutely impossible to document for managers of firms, or their superior human capital, that is, education and training. That explanation he rejects, on the grounds that managers in other advanced countries seem to do just at their jobs as Americans without receiving such extravagant compensation. Well-to-do Americans, as Theda Skocpol and Vanessa Williamson found in their book about the Tea Party, also like to believe that they are morally superior and attained their wealth through a better work ethic. Lastly, many conservative economists argue that managers and capitalists need their high compensation for the benefit of the rest of us. This, of course, was Ayn Rand's argument in Atlas Shrugged, a dreadful book which I reviewed here at length a couple of years ago, but it is a staple of Republican rhetoric, which attacks any move to tax "job creators" on the grounds that it will hurt us all.
Piketty should explode that myth once and for all, although I am afraid that will not be possible. To put it bluntly, the vast majority of those who accumulate capital do not create jobs. Capital is accumulated more rapidly when economic growth is slow, and thus, it is in the interests of capitalists to keep it slow. That is why, as I shall discuss in a later post, the nation grew more rapidly and shared income more fairly in the era when the federal government taxed its citizens more heavily and put the money into labor intensive enterprises such as dams, schools, the interstate highway system, and yes, even wars. To allow capital to accumulate more rapidly will slow growth still further. That is exactly what has happened since the 1980s. It is incredible that the Republicans ever sold the country on the idea that Reagan launched an era of more rapid growth, when he actually did exactly the opposite, in part, I have no doubt, because he redistributed the tax burden from wealth to income. The critical fact is this: there is absolutely no reason to expect that the economic policies we are now pursuing will give us a better economy than the one we have now. In fact, they will give us a worse one, especially if the Republicans get control of the government and cut taxes still further.
A second critical fact, however, concerns entitlements. As we have seen, roughly half of our population has little or no chance of accumulating significant wealth over its working lifetime. Yet life expectancy is much higher. Thus, rather obviously, Social Security and Medicare are literally the only things allowing half the American people to survive after retirement. Yet the Republican Party wants to privatize or cut both of them. Privatizing them would in some way allow the money that goes into them be used for the accumulation of wealth, which is not now possible. (Although a few doctors have gotten very rich off of Medicare, its reimbursement rates are generally quite low. Indeed, I am convinced, having just crossed the Medicare threshold myself, that the working population subsidizes the elderly by paying more for the same treatments.) That will increase the inequality within our economy still further. The much-touted Ryan plan to turn Medicare into vouchers would almost surely deprive many elderly persons of health care completely. This is the part of the Republican program that is most unpopular among the Tea Party, which is composed largely of elderly Americans, and it is the part that makes the least sense to me. While it's easy to see why corporate interests want to reduce wages and benefits to the lowest possible point in order to accumulate more capital, it's not clear to my why anyone would like to fill the homes of younger Americans with sick and aging relatives who can't support themselves, or turn those elder Americans out into the streets.
Another implication of his ideas which Piketty says almost nothing about relates to the financialization of the American and British economies. The financial industry, it seems to me, is by definition the most capital-intensive activity in our society. It handles enormous amounts of money while employing very few people. As such, to the extent that it is profitable--and it is--it exacerbates the fundamental trend around which Piketty built his book: the way in which the accumulation of capital occurs at the expense of economic growth. Tears nearly come to my eyes when I recall that Larry Rubin and Larry Summers talked Bill Clinton into deregulating the financial industry in order to allow Wall Street to compete globally with other financial markets. From the standpoint of the future of the American economy, that was perhaps the worst thing they could have done. The nation that hosts the largest financial firms is not doing its people any favor.
There is, in short, no reason at all to assume that the course we are on will lead to better things--on the contrary. There is even less reason to see why Republicans would want to make things even worse--but that is what their platform would do. Yet there is another critical dimension to Piketty's book. Things have been somewhat different. Capital has shrunk relative to income, incomes have become more equal (partly, but not wholly, with the help of taxation), and economic growth has been much higher than it has now. In succeeding weeks I shall give you my own analysis of why that was so from the 1930s through the 1970s, and what it would take to bring a similar era back again.
Friday, May 16, 2014
Capital in the 21st Century is interesting for its policy prescriptions, which I shall get to eventually, but its greatest value, I would suggest, is simply as a record of what the economies of the advanced countries have been like over the last two centuries. And what is rather extraordinary is how little things have changed. Growth became faster as a result of the industrial revolution, but for most of the last two centuries it hasn't varied very much, staying at 1-2% per capita for most of that time, with the exception of the period 1946-80 or so. Inequality of wealth and income dropped in the middle decades of the twentieth century but they have rebounded now and are threatening to reach the highest levels ever once again. All of this, Piketty argues convincingly, is driven remorselessly by the nature of capitalism in general and the capital-income ratio in particular, which in turn is a function of of the difference (nearly always positive) between the annual return on capital on the one hand and economic growth on the other. Piketty is in many ways at least as deterministic as Marx, at least with respect to economics, although he is much less so with respect to politics.
I would like to begin today by reviewing some of the most interesting things I learned from the book--all of them very specific data. One of my first shocks related to income disparities between regions. Thus, the United States and Canada lead the world, at present, with a per capita income of 40,000 euros a year. (The dollar has been falling against the Euro, I'm sorry to say, and a euro is now worth $1.38.) But the per capita income in Latin America is only 10,000 euros a year, which is almost exactly the world average. A similar situation prevails in Europe, where the major western European nations--the original EU, before 1989--average 31,000 euros per capita income, while the former Warsaw Pact countries earn just 16,000 euros a year per capita, and Russia and Ukraine only 15,000. North Africans earn an average of 5,700 euros a year, but sub-Saharan Africa trails the field at 2,000. The Japanese are essentially tied with western Europe at 31,000 euros per year, while the Chinese have reached 7,700, making China still considerably poorer than Latin America at this point, and the Indians 1200. In short, despite massive inequality in the United States and the European slump, the nations bordering on the North Atlantic are still more than twice as rich as any other part of the world (except Australasia). Nor is there really any reason to expect most of the world to catch up in the lifetime of any person now alive.
A second staggering set of facts concerns the distribution of income and wealth. To say that the US leads the world with a per capita income of 40,000 euros ($52,000) is true, but extremely misleading. The top 1% of the United States receives 18% of total per capita income today (up from 8% in 1980), and the top .1 % (or "top decile," as Piketty puts it) has almost half of that, 7.5% of the total. The top 10% of the nation receives 45% of annual income; the next 40%, which is the real "middle class" in the United States, receives 35%; and the lowest 50% of the population receives 20% of the total. In other words, as I figure it--correct me if I am wrong--the top 10% is receiving an annual per capita income of 4.5 times the national average, or $234,000 a year; the next 40% is 1/8 below the average of $52,000, that is, about $46,000 per person per year; while the bottom half of the population averages 10% of the total, or $21,000 per capita. Meanwhile, real growth is only 1-2% a year, and crucially, most of the proceeds of that growth are going to the top 10% and increasing inequality, This is the nature of the modern American economy. The situation inthe other most advanced countries of western Europe and Japan is not quite so bad, but it is headed at in the same direction. The situation has deteriorated, from the standpoint of equality, in recent decades, although there was never a time in which it was all that much better for the bottom half of the population.
The situation regarding the distribution of wealth--which, to repeat, is increasing faster than income--is even worse. The top 10% of the US population, which, to repeat, earns 45% of total income in the US every year, owns 70% of the wealth, down from an estimated peak of 80% around 1910. (The top 1% owns nearly half of that.) The nest 40% of the population owns the other 30% of the nation's wealth. The bottom half of the population has no significant wealth. They may own cars or household appliances, but they have no significant equity in houses, much less any stocks, bonds, or IRAs. Once again, the situation in the other advanced countries is more equal, but they are headed rapidly in the same direction as the US, and the situation in poorer countries is no better and in some cases even worse. These are huge inequalities, and they are much greater than other inequalities upon which we are often focused, such as those between men and women or between generations.
That is not all. In a truly chilling chapter, Piketty presents pretty good evidence to show that enormous fortunes--those in the billions--tend to increase at least twice as fast as capital on the average, earning as much as 10% a year over most of the last 35 years. This applies not only to large private fortunes like those of Bill Gates, but also to the endowments of Harvard, Yale and Princeton--one of my favorite subjects, as many of you know. Moreover, in one of his most acerbic passages, Piketty notes that between 1990 and 2010, the fortune of Liliane Bettencourt, the l'Oreal cosmetics heiress, who "has never worked day in her life," increased just as quickly as that of Bill Gates, earning a real return of about 11% a year.
What I would like to do now is to reflect a bit on these statistics, and analyze what they say about our current economic debates--before getting either next week or the following week into the question of exactly how things might be improved. These are not questions about which Piketty has too much to say. He is, after all,a Frenchman, not an American, and he speaks with understandable condescension about many aspects of American politics without seeming to know exactly how bad things are at the moment. Nonetheless I will take his remarks as a starting point.
Piketty notes many times that wealthier members of western societies--and particularly of the United States--seem almost desperate to argue that they deserve their greater wealth and income. In my opinion, this results mainly from a bad conscience. I firmly believe, for better or for worse, that within every human being lurks an acute sense of the fundamental equality of us all. That is certainly true of myself and it probably explains why I have been happiest in settings where genuine equality was enforced, such as the U.S. Army (where I served in a non-combatant status.) And thus, the luckier of those among us cannot help but feel some guilt, which they seek to expunge with supposedly rational explanations of their success. Piketty notes that the two favorite explanations of well-to-do Americans are those of greater marginal productivity, which is absolutely impossible to document for managers of firms, or their superior human capital, that is, education and training. That explanation he rejects, on the grounds that managers in other advanced countries seem to do just at their jobs as Americans without receiving such extravagant compensation. Well-to-do Americans, as Theda Skocpol and Vanessa Williamson found in their book about the Tea Party, also like to believe that they are morally superior and attained their wealth through a better work ethic. Lastly, many conservative economists argue that managers and capitalists need their high compensation for the benefit of the rest of us. This, of course, was Ayn Rand's argument in Atlas Shrugged, a dreadful book which I reviewed here at length a couple of years ago, but it is a staple of Republican rhetoric, which attacks any move to tax "job creators" on the grounds that it will hurt us all.
Piketty should explode that myth once and for all, although I am afraid that will not be possible. To put it bluntly, the vast majority of those who accumulate capital do not create jobs. Capital is accumulated more rapidly when economic growth is slow, and thus, it is in the interests of capitalists to keep it slow. That is why, as I shall discuss in a later post, the nation grew more rapidly and shared income more fairly in the era when the federal government taxed its citizens more heavily and put the money into labor intensive enterprises such as dams, schools, the interstate highway system, and yes, even wars. To allow capital to accumulate more rapidly will slow growth still further. That is exactly what has happened since the 1980s. It is incredible that the Republicans ever sold the country on the idea that Reagan launched an era of more rapid growth, when he actually did exactly the opposite, in part, I have no doubt, because he redistributed the tax burden from wealth to income. The critical fact is this: there is absolutely no reason to expect that the economic policies we are now pursuing will give us a better economy than the one we have now. In fact, they will give us a worse one, especially if the Republicans get control of the government and cut taxes still further.
A second critical fact, however, concerns entitlements. As we have seen, roughly half of our population has little or no chance of accumulating significant wealth over its working lifetime. Yet life expectancy is much higher. Thus, rather obviously, Social Security and Medicare are literally the only things allowing half the American people to survive after retirement. Yet the Republican Party wants to privatize or cut both of them. Privatizing them would in some way allow the money that goes into them be used for the accumulation of wealth, which is not now possible. (Although a few doctors have gotten very rich off of Medicare, its reimbursement rates are generally quite low. Indeed, I am convinced, having just crossed the Medicare threshold myself, that the working population subsidizes the elderly by paying more for the same treatments.) That will increase the inequality within our economy still further. The much-touted Ryan plan to turn Medicare into vouchers would almost surely deprive many elderly persons of health care completely. This is the part of the Republican program that is most unpopular among the Tea Party, which is composed largely of elderly Americans, and it is the part that makes the least sense to me. While it's easy to see why corporate interests want to reduce wages and benefits to the lowest possible point in order to accumulate more capital, it's not clear to my why anyone would like to fill the homes of younger Americans with sick and aging relatives who can't support themselves, or turn those elder Americans out into the streets.
Another implication of his ideas which Piketty says almost nothing about relates to the financialization of the American and British economies. The financial industry, it seems to me, is by definition the most capital-intensive activity in our society. It handles enormous amounts of money while employing very few people. As such, to the extent that it is profitable--and it is--it exacerbates the fundamental trend around which Piketty built his book: the way in which the accumulation of capital occurs at the expense of economic growth. Tears nearly come to my eyes when I recall that Larry Rubin and Larry Summers talked Bill Clinton into deregulating the financial industry in order to allow Wall Street to compete globally with other financial markets. From the standpoint of the future of the American economy, that was perhaps the worst thing they could have done. The nation that hosts the largest financial firms is not doing its people any favor.
There is, in short, no reason at all to assume that the course we are on will lead to better things--on the contrary. There is even less reason to see why Republicans would want to make things even worse--but that is what their platform would do. Yet there is another critical dimension to Piketty's book. Things have been somewhat different. Capital has shrunk relative to income, incomes have become more equal (partly, but not wholly, with the help of taxation), and economic growth has been much higher than it has now. In succeeding weeks I shall give you my own analysis of why that was so from the 1930s through the 1970s, and what it would take to bring a similar era back again.
Friday, May 16, 2014
Dr. Piketty's Prescriptions
I cannot begin, by the way, without making a generational point. When Generations and The Fourth Turning came out, I took the lead in applying their insights to Europe. Strauss and Howe had simply assumed that Europe was on virtually the same identical cycle as the United States. I thought that was broadly true, but that the last crisis, in particular, had begun later in Britain and France than in the US, and that it had lasted longer. Britain had remade itself economically and socially in 1945-51, not 1933-41 as in the US. France's political crisis, it seemed to me, had not reached its climax until 1958-62, when de Gaulle returned to power, left Algeria, and had to face down a series of military coups and create a new constitutional framework that has lasted until this day. At one time I thought the French crisis might in fact have lasted until 1968, but I had decided, until I read Piketty, that I might have gone too far with that date. Now, thanks to him, I think I might have been right the first time: 1968, it turns out, was a lot more than a student revolt, it was a key year in French economic and social history as well, after which wages began to rise.
But I am more convinced that I was right for another reason: Thomas Piketty himself. He was born in France in 1971, meaning that his American contemporaries would be Gen Xers, of the Nomad archetype, but he very clearly is not. He is a Prophet, like a Baby Boomer. He is fascinated by the long-term movement of history, and by general principles. He has spent years putting together an amazingly complete picture of worldwide economic growth, and he has a strong sense of what is wrong and what should be done about it. I am glad that French academic life--unlike American academic life--can still produce, and reward, such a thinker. Now, on to how he hopes to change the world.
Piketty's specific proposals have to be understood in terms of his view of the world. Although he is deeply concerned with the rise of inequality over the last 35 years or so, he credits the twentieth century with two remarkable achievements. The first is the creation of what he calls the "patrimonial middle class," that is, the 90th to the 50th percentiles of income and wealth in most advanced countries. In the United States that group now owns 30% of the wealth, compared to 70% for the top 10% and essentially nothing for the bottom 50%. The second is what he calls the "social state," an advance over states in the 18th and 19th centuries, because it provides basic services for free, including health care and education, as well as pensions for all. To be sure, the social state is considerably larger in Europe than in the United States, since it generally includes health care for all and, except in Britain, almost free higher education. (Piketty never mentions this, but because higher education in the U.S. is increasingly financed by loans, it is yet another factor increasing the rapid accumulation of capital at the expense of economic growth.) Piketty clearly wants to preserve, if not extend, the social state, and he is also concerned, as I am, that the emerging nations of the Third World have much smaller states that do not provide such services. His policy proposals are designed to preserve the social state as well as to attack inequality directly.
His first proposal is to return top marginal income tax rates to 80%, which he would apply to incomes of either half a million or a million dollars a year in the U.S., and corresponding incomes in Europe and Japan. This is not in the least unprecedented. Both the United States and Britain imposed higher rates in the mid-century decades, and US occupation authorities also imposed such rates in Germany and Japan after the war. What is rather fascinating, however, is why Piketty wants to do this. He does not claim that an 80% rate would bring in a great deal of revenue--far from it. In the United States, he thinks marginal rates would also have to be raised on those making $200-500,000 or so as well to pay for a more generous social state. But he thinks, and I agree, that the 80% top rate would transform our salary structure, for the simple reason that it would make it absurd to pay salaries of millions or tens of millions a year annually to anyone, since 80% of them would go straight into the coffers of the federal government. Executive salaries are high, he claims, because executives themselves set them and their directors and shareholders rarely protest. That would immediately change if most of them were going to taxes.
I think that Piketty is right about this, but I think the consequences could easily be far more beneficial than even he imagines. The American and world economies have been transformed over the last thirty years--and especially since the 1990s--by hedge fund managers and private equity firms, who pay very high compensation. If such compensation were no longer available, it seems to me that that sector of the economy would rapidly shrink, which would be a very good thing. As it is, our current economic system and our elite institutions of higher learning seem designed to funnel a high percentage of our smartest young men and women into businesses that specialize in the pure accumulation of capital. That simply has to be connected to the rapid growth in the capital-income ratio which is at the heart of Piketty's whole analysis. Indeed,. if salaries were capped in that way, well educated people might rediscover some of the real joys of life, including being more useful to their fellow citizens, since they would be more or less forced to make the pursuit of unlimited wealth the focus of all their attention. That, as I shall show next week, is what Franklin Roosevelt called upon Americans to do in March 1933, and he persuaded many of them to do so.
Piketty's second proposal is the one that has gotten even more attention, largely, I would suggest, because the right wing sees it as easier to attack. He wants a progressive tax on all capital assets. Ideally, he argues--speaking as Prophet--the tax should be global, but he recognizes that to be a utopian project, and he would be more than happy to begin in the European Union, the United States, and Japan. He has in mind a rate of 0% for fortunes below 1 million euros (about $1.4 million), 1% on fortunes between one and five million euros, and 2% for fortunes over five million euros. He suggests that it might be better to have an even higher rate of 5-10% on fortunes of over one billion euros, and an even lower rate--perhaps half a per cent--on more modest fortunes of 200,000-1,000,000 euros.
Piketty wants to levy these taxes annually, which sounds confiscatory, until one remembers that capital is still returning 4-5% a year in the long run, and, crucially, that the largest fortunes tend to grow considerably more rapidly than that. (It is not clear, and I think this is a legitimate question to raise, what plans he might have for existing American capital gains taxes. These are much lower than they used to be, but they are still higher than any corresponding taxes in Europe.) He makes very clear, however, that an additional step is needed before any of this can be done. The world, including the small nations of Switzerland, Austria, and certain third world nations who serve as tax havens, must be forced to accept new reporting requirements on bank deposits, capital income, and other forms of assets. Under current conditions, he makes clear, this tax could not possibly be implemented effectively because so much income is hidden. The scale of the problem is staggering. To cite just one of his examples (p. 466), the rich countries of Europe, the Americas, and Japan show in their balance sheets foreign debts totaling about 5% of annual world output--but the best estimates say that about 8% of annual world output is hidden in assets overseas. That is why, Piketty argues, the sum of the world's nations balance of payments is strongly negative. A great deal of the accumulating capital in the world is now invisible, and it cannot be taxed until its owners are forced to disclose it. just as Americans have to do for their domestic assets.
Although Piketty may not know this, his proposals reflect the thinking of a 19th-century American economic theorist, now forgotten, named Henry George. Having seen a land boom in the San Francisco area first hand, George argued that when the value of a property increased fivefold in a few years, the owner had not created this extra wealth--the growth of the economy had created it. He therefore proposed a high tax on land values, especially unused land. Piketty, it seems to me, is saying essentially the same thing: that too few people are monopolizing the extra wealth which everyone has helped to create.
A capital tax, Piketty argues, is by far the best way to deal with the sovereign debt crises in Europe and the lesser debt problem in the United States. (The extent of our debt problem, as I have mentioned repeatedly here, is much exaggerated; the debt we have to worry about is only about half of the reported figure, which is about 100% of GDP.) Trying to solve the problem through austerity will hurt the social state and further enrich holders of capital, making the inequality problem even worse. That is almost surely why austerity is so popular in the financial community, even though everyone knows that it hurts economic growth.
It is much too soon to know how much traction Piketty's ideas will get within the political systems of advanced countries. Piketty knows politics are important, but he devotes relatively little attention to them. The question of whether such ideas can be implemented raises the most interesting historical question of why they were implemented, in various ways, in the decades around the middle of the twentieth century, and whether that experience could be repeated. That is one question, if I may say so, where I think I am better informed that Piketty, and that will be the subject of next week's post.
Piketty makes an overwhelming case that the period 1914-80 was very different both from what came before and from what has come after. Because, however, he is an economist--albeit a relatively sophisticated one about history--he has a lot of trouble explaining why. It might be better to say that he makes little real attempt to do so. The data he presents about the period are striking. Thus, for example (pl 196), the worldwide capital-income ratio--the ratio of accumulated assets to world economic product in a given year--fell by almost exactly half, from 500% to about 250%, from 1910 to 1950, rose quite slowly for the next twenty years, and then began accelerating much more rapidly and now once again exceeds 400%. In terms of annual income, the share of the top 1% in the US fell from 18% in 1910 to 8% in 1960, where it stayed, roughly, until 1920, after which a swift rise has taken it back to 18%. In Britain the top 1% dropped from an even higher peak of 22% in 1910 to a lower one of 6% in 1980. Capital suffered even more heavily from the two world wars on the continent, where inflation virtually wiped out savings, and income became more equal there before the 1980s. It is still more equal.
The question is, why? Piketty simply refers, again and again, to "the shocks" of the two world wars. There's a good deal of truth to that as far as it goes, but where did those shocks come from? Like many Europeans of his age, I suspect, Piketty regards great war as an anachronism of a bygone age, a product of obsolete values. There is, we can hope, some truth in this, but in my opinion, both the wars and the economic policies pursued in their aftermath have to be understood in political and intellectual terms. We can only do this with the help of some lengthy background.
When one applies Piketty to the 18th and 19th centuries, what emerges is a powerful refutation of one aspect of Marxism: Marx's idea that intellectual change always reflected economic change. Piketty shows that the western world experienced relatively little economic change in the 18th century, and no change in the pattern of inequality--although it did experience significant population growth. The nineteenth century experienced the industrial revolution but without any significant change in income distribution. Yet these were centuries of intellectual and political revolution. Traditional authority gave way to authority based on reason--whether in a new democracy like the United States, or the bureaucratic states of Europe in the first half of the 19th century. The idea of democracy took root in the eighteenth century, and that of socialism took root in the late nineteenth. I was very struck, reading Piketty, at how little socialists had managed to accomplish before 1914 with respect to income distribution, but they had become a significant political force at the ballot box in many European countries, including Germany, where the Social Democrats became the largest party in the Reichstag in 1912. Many thinking people, as well as much of the lower three quarters of the population, understood that inequality was much too vast. In the United States Theodore Roosevelt and Woodrow Wilson took a similar line, although their initial steps were also extremely tentative and not effective.
Meanwhile, nationalism had redrawn the map of western and southern Europe during the 19th century. Because of German expansionism, a crisis in the Balkans between Austria-Hungary and Serbia turned into a global struggle for world domination. That forced every major government to mobilize its people and resources to fight on a scale not seen since the Napoleonic Wars, if then. Because France and Germany both borrowed to pay for the war and counted on indemnities from defeated states to make their debts good, the war drastically cut the value of their currencies, and thus, their capital. Meanwhile, both Britain and the United States imposed serious progressive income taxes. With European soldiers dying by the hundreds of thousands and millions, the idea that sacrifices must be broadly shared was inescapable. In addition, labor exploited its position within the war effort to make significant gains, especially in Germany.
Another huge political shock hit Europe late in 1917: the Bolshevik Revolution. The Russian state had collapsed under the weight of the war, and revolutionary socialists seized power and won a protracted civil war. As Piketty notes, they repudiated the enormous debts of the imperial government, dealing a heavy blow to British and French rentiers. But they also frightened many people in the west about the consequences of laissez-faire capitalism.
After a modest recovery in the 1920s, an excess of unregulated speculation in the United States, combined with structural problems growing out of the war, triggered the Great Depression. The United States government and the German government reacted strongly to it, perhaps because they were the hardest hit. In 1932 Herbert Hoover signed a new tax bill raising the top marginal tax rate to 65%. (Piketty mistakenly attributes this increase to FDR, who did raise the rate still further in 1936 and again during the war, when it topped 90%.) In Germany the depression created a complete political collapse and led to the advent of Adolf Hitler. It is easy to forget not only that Hitler put an end to unemployment in Germany with a combination of public works projects and rearmament, but that he also began to implement a vision of a good life for every German, complete with paid holidays and Volkswagens. But partly because he was destined to lose the war, his legacy did not endure. Roosevelt's did.
As I show at length in my new book, Roosevelt based the New Deal on a new set of values. As he said in his first inaugural, a relentless pursuit of private wealth had landed the United States in a catastrophic economic situation, and only new values could get us back on the right track. Equally importantly, he and his advisers specifically believed it necessary to transfer incomes from the wealthy, who would simply accumulate them, to farmers and workers who would spend money and promote recovery. He did so partly by undertaking a series of gigantic public works projects. He also took steps to create what Piketty calls the modern social state, signing Social Security in 1935 and also guaranteeing the rights of labor to organize. (Germany and Britain, to be fair, had instituted forms of social security in the 1880s and early 1910s, respectively.) And when the world crisis became critical beginning in 1937, Roosevelt defined a new contest of values between the U.S. and other democracies, standing for the rule of international law, and dictator powers who were plunging the world into international anarchy. In 1940-1 he took steps to insure that the US would throw its full industrial weight into the scales. By then the world war had engulfed nearly every major nation.
Two sweeping historical changes, I would argue, transformed both economics and politics in the advanced nations. On the one hand, the world wars forced them into an unprecedented mobilization of their resources which was bound to have a greater effect upon those who had resources--the rich--than those who did not. At the same time, especially in the victorious nations of Britain and the US, the working classes took advantage of the mobilization to make large gains and strengthen their unions. On the other hand, the ideas of socialism (in Britain) and regulated capitalism (in the US) became mainstream ideas. Lastly, the threat of totalitarian revolution never left the consciousness of the generation born in the first quarter of the twentieth century, which in the United States held power into the 1980s and even later. Piketty believes that economic growth increased in the postwar period simply to make up for the losses during the war. There is certainly a good deal of truth in this in Europe--but not in the United States. I believe it increased partly because of the huge increase in the birth rate--the demographic baby boom--and partly because, to put it bluntly, economic growth was the principal focus of domestic public policy.
That was not all. European Communist parties were strengthened by the war, and the United States became involved in a worldwide cold war with the Soviet Union. Those developments convinced both center-left and even conservative parties that they had to make real improvements in the lives of ordinary citizens to win national and political competitions, and they did so. German workers became full partners in their industrial enterprises. The British, French, and West German governments all nationalized large sectors of their economies, meaning that these sectors would now accumulate public, not private, capital. The social state grew all over the western world.
One particular example suggests that Piketty is indeed exaggerating the impact of the world wars, relative to independent political and intellectual change. The relatively small nation of Sweden, Piketty shows, has gone through the same stages in the last 120 years as all the major western European countries. It was very bit as unequal in income and wealth around 1900, became the most egalitarian nation in Europe in the mid-century decades, and in the last thirty years has been moving steadily in the other direction (although it is still far more equal than the United States or Britain.) But Sweden took absolutely no part in either world war. I do not know exactly how or why all this was accomplished there, and Piketty doesn't seem to either, but it certainly suggests that the war was not necessarily critical to the creation of the relatively egalitarian era in which I grew up.
What I am suggesting is that we do, in fact, know how to moderate or reverse the trends that Piketty is so concerned about. We can do so, as we once did, by mobilizing our societies on behalf of a large and expensive public goal. I am not suggesting that we need to unleash a new series of world or large-scale regional wars--far from it. The crises in Ukraine and the South China Sea do suggest that we are heading for a more conflict-rich environment, even among major nations, but I do not expect them to become full-blown wars--and that will be a good thing. There is, however, no lack of expensive projects to undertake. The infrastructure of the United States is in many ways second-rate and desperately needs repair. Lots of evidence suggests that the use of the automobile has peaked and that we need other forms of transportation. Last, but hardly least, a real commitment to cleaner energy and a reduction of fossil fuels could be a huge project, and a good one as well.
Another interesting problem concerns birth rates. Piketty says again and again that higher birth rates fuel economic growth, as they did in the US, especially, from the 1940s through the 1970s. (Oddly, Piketty at one point talks as if the baby boom of the late 1940s included Europe as well. It did not--European birth rates, including French ones, remained low until the late 1950s.) He also says that continuing US population growth, mainly through immigration, is the only reason that US GDP is growing faster than European GDP. But he does not dare call for policies to encourage more children in the west. The trend is obviously in the other direction, especially among the upper half of the population, and I think it would be beneficial for it to increase. The social and cultural changes of the last few decades, however, all tell in the opposite direction.
To undertake such projects, we need to recover the idea of common national enterprise and of the government as the steward of the economy and society. We also need another rebirth of new values. It may take a long time for these things to happen, and the men and women who might implement such changes may not yet be born. Yet history shows that it could be done. With the proper political will, nations can overcome capitalism's natural trend towards inequality--a trend which thanks to Piketty has become impossible to deny, but which, history shows, can also be reversed, given the proper inspiration and the proper political will.
The book includes echoes of two other great thinkers whose lives overlapped with Tocqueville, the older Clausewitz and the younger Karl Marx. Democracies, he noted--as did Clausewitz--were potentially stronger militarily than aristocracies because they could command the whole resources of the people. Clausewitz also made this point in On War, and he added that the other European powers had only managed to defeat Napoleon when they, too, had incorporated some of the political changes that had occurred in France in their own nations. At another point, he noted the tendency of industry to create both a new aristocracy of wealth and a new submerged class of poor laborers, and speculated that that might be a threat to liberty as well--anticipating Marx and Engels. While in the United States he repeatedly noted that the central government remained weak, and the state governments more important, he fond the central power in Europe increasing everywhere, taking a keen interest in the direction of education, industry, and provision for the poor, and in short, threatening to establish a dictatorship. This of course came to pass in the Fascist and Communist states of the 20th century, and a good many European citizens seem to feel that the European Union, whose bureaucrats are not elected, has achieved almost absolute power as well. In the United States the central government also became far more powerful than in Tocqueville's day in the 20th century, but the prejudice against it has remained strong.
Turning to the question of mores, Tocqueville found much in the United States that tended to preserve stability and liberty. Americans by and large were most interested in making money, although he repeats again and again that very few of them manage to make, and fewer still to conserve, great fortunes. Tocqueville's claim that the United States lacked many rich men has been vindicated decisively by Thomas Piketty's 21st-century classic, Capital in the Twenty-First Century(2014), which found that because 19th-century land was so plentiful and cheap, capital--that is, wealth--was much lower relative to national income in the United States than in Europe at least until the second half of the nineteenth century. The growth of great industrial enterprises was recognized as a threat to democracy in the United States from the Gilded Age onward, of course, and although as Piketty showed the Progressive era did not stop the growth of inequality, the Depression, the New Deal and the Second World War did reverse the trend until the 1970s. Then, as I discussed in a series of posts on Piketty's book nearly three years ago, inequality of income and wealth began to rise rapidly, and many voters clearly now view this as a threat to their future and their liberty.
The Americans, Tocqueville said again and again, had moderate habits, befitting their moderately prosperous economic status. Because they were not rich, they focused their energies on getting richer, and that made them supporters of a stable social order. He was also profoundly impressed, like many other contemporary Americans and Europeans, by the stricter morality prevailing in America in the relations of the sexes. Some of this he ascribed to social equality. In France or Britain, a rich man might seduce a poor woman without fear of having to marry her, since society would reject such a match. In the United States no one could claim this aristocratic privilege among free citizens. Married women almost never betrayed their husbands, he noted, and although they had to submit to their will and share their good fortune and bad, they freely chose their husbands, and rarely complained. All this, too, has obviously changed so much as to have little relevance today. Tocqueville could scarcely have imagined societies like contemporary America and Europe, where such a large portion of the adult population remains single for most or all of their lives. We do not yet know what the consequences of this new state of affairs will be.
Tocqueville still provides a compelling framework for the analysis of the United States today. Alas, perhaps the most important change in the last 200 years or so involves the political sophistication of the average American citizen. In volume I Tocqueville showed how deeply ordinary Americans were involved in the local and state management of their political affairs, and how this gave them real knowledge and experience about government. This, it seems to me, has not been the case for some decades, and although a higher percentage of the population has the right to vote, the number of qualified voters who actually exercise that right has probably fallen as a percentage of the total. Few indeed are the Americans who actually understand where the money in state and federal budgets comes from and where it goes, and political rhetoric deals in generalities that often have no relationship to actual fact. Tocqueville saw that emotion played an important role in American politics, but surely it has rarely if ever been so important as it was in the election of 2016. And the breakdown in the people's relationship to their political leadership has led to the election of Donald Trump, who capitalized, it is increasingly clear, on very real economic grievances in the heartland of the United States to win election, but who will obviously do little or nothing to improve the lives of the voters who elected them.
The citizenry still enjoys all its basic freedoms--indeed, in some ways, it enjoys more of them than ever. The legal profession remains an important obstacle to despotism, although it may not be able to protect our 11 million illegal immigrants, who represent a problem without parallel in Tocqueville's day. Our greatest problem, I believe--echoing Tocqueville--is one of mores and values. Greed has created a new elite, with tremendous consequences, and greed reigns unchallenged. Associations, which Tocqueville thought so important in American political life, remain very powerful today--but nearly all the most powerful ones are on the right. Half a century ago the NAACP and the AFL-CIO were perhaps the two most powerful lobbies in Washington. Today they do not remotely compare to the NRA, AIPAC, the network of groups funded by the Koch brothers, or the Chamber of Commerce.
Tocqueville ended Democracy in America with one of my favorite passages, one which I frequently quoted as history classes came to an end. Democracy, he repeated--social equality--was the wave of the future, and nothing could stand in its way. Attempts to preserve aristocratic virtues, he argued, were doomed, and should be abandoned--even though he himself had more inherent sympathy for aristocracy. The future held many possibilities, and here were his last words.
"For myself, looking back now from the extreme end of my task and seeing at a distance, but collected together, all the various things which had attracted my close attention upon the way, I am full of fears and of hopes. I see great dangers which may be warded off and mighty evils which may be avoided or kept in check; and I am ever increasingly confirmed in my belief that for democratic nations to be virtuous and prosperous, it is enough if they will to be so.
"I am aware that many of my contemporaries think that nations on earth are never their own masters and that they are bound to obey some insuperable and unthinking power, the product of pre-existing facts, of race, or soil, or climate.
"The nations of our day cannot prevent conditions of equality from spreading in their midst. But it depends upon themselves whether equality is to lead to servitude or freedom, knowledge or barbarism, prosperity or wretchedness."
Amen.
Kuttner's book is evidently about the political impact of free-market global capitalism. He does not seem to aware of Strauss and Howe, sadly, but he has a fine understanding of long-term economic and political trends and he recognizes the parallels between the 1930s and our own time. There is one huge difference which Crain's review, at least, does not mention. In the 1930s, the world economy had largely broken down; today it is generally thriving. In both cases, however, profound economic changes had wreaked havoc among the lower classes of society in various parts of the world, causing significant hardship and anxiety. And in both cases, many voters reacted by turning to strongmen or, in the 1930s, totalitarian movements. In a scary reversal, today we have a somewhat anti-democratic strongman in the United States, while western European democracy, while threatened with right wing movements, remains intact. In the 1930s dictators ruled Germany, Italy, and Spain, but Franklin Roosevelt presided over a robust democracy in the United States.
While discussing Kuttner's book, Crain refers to Thomas Piketty, but not to Piketty's most fundamental insight: that the natural tendency of capitalism is to produce inequality, because capital accumulates more rapidly than the economy grows as a whole. That, we should note, is true regardless of the degree of free trade and globalization at any particular moment. If globalization increases economic growth overall--and it evidently does--it will increase inequality more rapidly, but capitalism itself, not globalization, causes inequality--unless something is done to reduce it. That is what happened in the middle decades of the 20th century, as Kuttner obviously understands.
Several things combined to reduce inequality. First of all, the First World War and the Depression both wiped out a great deal of wealth. The financial crisis of 1929-32 led to very tight regulation of financial markets in the United States, and there were no major panics or banking crises for a full 60 years after the Second World War. The two world wars led to the imposition of extraordinarily high marginal tax rates--91% on the highest incomes in the United States, until 1964. After the Second World War, western societies compensated their veterans and their families with a whole host of benefits. The experience of the Depression and the Keynesian revolution in economic thought convinced governments that they could and should take fiscal steps to insure the highest possible employment. The rights of labor, and unionization, were at an all-time high. Economic equality increased through the 1960s.
Partly under the economic pressure of the Vietnam War and partly because of oil shocks, the postwar economic system (including fixed exchange rates) broke own in the late 1960s and early 1970s. Inflation soared and the Keynesians had no remedy. As Kuttner points out, conservatives led by Alan Greenspan and Milton Friedman saw their chance for a counterattack and pushed a return to the free market. That led, first, to the return of draconian monetary policy to stop inflation, and then to the beginning of a long series of tax cuts under Reagan. By the 1990s the Democratic Party had jumped onto the free market bandwagon. Inequality began to increase, and increased still further after the deregulation of financial markets. The American and European working classes were hurt, not helped, by globalization. By the 2010s large numbers of them were voting for extreme right wing parties or candidates--including now-President Donald Trump. And in the United States, the leadership of both parties was firmly allied with the most powerful new economic interests on Wall Street and in the tech sector. Kuttner argues, essentially, that political authorities will once again have to intervene in the market to halt and reverse these trends. I shall return later to how this might happen.
Like Martin Luther King,Jr., William Barber finds the roots of his activism in the Bible. Even irreligious people like myself can recognize the Christian roots of leftist economic thought, and the very important role that Christian activism of various kinds has played in European and US history over the last few centuries. Cobb's article suggests, moreover, that Barber's Christian approach allows him to move beyond racial categories. Talking to Cobb, Barber says--as I have many times--that the issue of poverty has become so "racialized" that most people don't realize that the majority of poor people in the United States are white. Barber has established links to what remains of organized labor, and we wants to bring poor white and black voters together. But there is, to me, a serious falw in his reasoning.
According to Cobb, the Bible was only one of the formative books of Barber's youth. Another was that very influential tome---now immortalized in Good Will Hunting--A People's History of the United States, by Howard Zinn. That book argues that every authentic movement for justice and equality in American history came only from the lower classes--and that such movements were consistently betrayed by the upper classes. It has sold so many copies because it captured the spirit of campus activism in the 1960s. It implied that the power structure in the United States has always been oppressive and corrupt, and that only activism outside the system has ever been able to bring about any real change. Those views animated the Black Panthers and the Weathermen and the other revolutionary spin-offs from 1960s campus activism. More recently they have been very influential among the Occupy Movement and Black Lives Matter. These views rein on campus, where virtue is found only among oppressed groups. It is no accident, in my opinion, that none of those movements have yielded any tangible long-term benefits. They are based on a false understanding of how American politics work.
The great achievements of the mid-century era--including the civil rights acts of 1964 and 1965--came mainly from building broad electoral coalitions and enlisting the whole nation to solve huge problems, including building a whole new infrastructure from the 1930s through the 1960s and fighting the Second World War. The NAACP successfully fought a long battle on two fronts, legal and political, to end legal segregation. Its alliances with organized labor, Jewish groups, and mainline Christian churches played a huge role in its legislative victories. Beginning in 1960 civil disobedience generated pressure for legislative action, but it was only one of many factors responsible for success. The Progressive and New Deal eras had created a substantial, bipartisan political class genuinely committed to a better life for all Americans, and the civil rights movement could appeal to them. Those are the very real lessons that most contemporary activists do not understand.
Working in North Carolina--one of the most closely balanced states in the nation, which voted for Obama in 2012 and Trump in 2016--Harris has started a weekly civil disobedience campaign, Moral Mondays, to put pressure on the Republican state legislature. He is fighting the power of James Arthur Pope, a convenience store magnate who is to North Carolina politics what the Koch brothers are nationwide. The Democrats managed to regain the governorship of North Carolina in 2016, but the Republican-dominated legislature immediately moved to cut the Governor's power. The same drama will be played out all around the country this year. Will women's and high school students' marches translate into decisive electoral success? If they do, will that success translate into real legislative progress that will at least halt the trend towards inequality? These are huge questions.
Few people, I think, could have finished Jelani Cobb's article without feeling great admiration for William Barber. The tradition he exemplifies reflects the last two years of the life of Martin Luther King, Jr., when King decided that both capitalism and militarism were evils against which he had to struggle. That decision deprived him of much of his support and influence among white Americans, even as younger black activists challenged his non-violent approach. Certain evils are definitely inherent in capitalism and militarism, including capitalism's tendency towards economic inequality--but we are stuck with them both, in my opinion, because they have roots in human nature. Capitalism, we found in the last century, can be tamed and regulated for the benefit of all. Military power, as I taught for more than twenty years, can be reserved for rare cases in which its use can effectively meet critical threats and lead to a lasting peace. No antidote for these evils will be perfect, but history tells me that trying to wipe them off the face of the earth will not work. Future generations, I hope, will develop new forms of activism based upon reality. Plenty of historical evidence suggests that such activism can work.
This is the third of what I think will turn out to be four posts on Capital in the Twenty-First Century, and it will deal with Piketty's specific policy prescriptions. The fourth one will appear late next week, when I'll be on vacation, and it is probably the most important one I will have to contribute to the general discussion of the book. It will deal in some detail with the period 1914-1980 (and more especially 1933-1980) when,. as Piketty agrees, things were different--and it will ask why.
Tuesday, May 20, 2014
Piketty and the twentieth century crisis
Thomas Piketty knows where he stands in the sweep of economic and intellectual history. In the 19th century, he shows, society accepted inequality and certain economists rationalized it in various ways. Then came the era of the two world wars, which profoundly changed the distribution of wealth and income in all the advanced nations. By the mid-1950s the economist Simon Kuznets was writing that capitalism had entered a new phase characterized by more equality, rather than less. Piketty reached consciousness just as that era was coming to an end, and he has evidently spent a good deal of his adult life documenting the resurgence of inequality. His book is an excellent example of why history has to be rewritten in every generation. First of all, as Michael Beschloss generously recognized in his review of my new book in The New York Times, new data always remains to be discovered even on the most written-about topics. Secondly, changes in the present change our perspective on the past. The greatness of Roosevelt's Missionary generation becomes clear when they are compared to the current generation of Prophets, the Boom generation.
Monday, July 28, 2014
The Decline of Power
This week I have finished a remarkable book, The End of Power, by a Venezuelan academic, Moisés Naím, who is now based at the Carnegie Endowment for international peace. (For the record, I have not met Naím, and we share a publisher, but not an editor.) The book is metahistory—not as ambitious chronologically as Strauss and Howe, since it really focuses on the last few decades, but more ambitious geographically, since it attempts to analyze changes in the entire world. The author has evidently not encountered Strauss and Howe, and that is a pity, because they might have sharpened his thinking about the critical question of his book: exactly where the changes he observes are going to lead us. Essentially the book is about the collapse of traditional large-scale authority in virtually every sphere of life and all over the globe, including religion, economic life, the use of armed force, and politics and government. My regular readers will not be surprised to hear that I found this analysis congenial. Naím understands the dangers our descent towards anarchy, but he attempts to remain guardedly optimistic. His book is in any case informative and provocative, and although it was not that widely reviewed, it was blurbed by both former President Clinton and Francis Fukuyama.
Naim argues that three revolutions are upending modern life, and names them More, Mobility, and Mentality. By More he refers to rapid economic growth, particularly in the third world, which has created a large new and demanding middle class and, he thinks, has made people less willing to submit to arbitrary authority. By Mobility he means both the mobility of people and the mobility of goods, bytes in cyberspace, and ideas. By Mentality he means that ideas about authority are changing, that people have become less credulous, and that there is no longer any monopoly of opinion. Having read Piketty’s Capital in the 21st Century just a couple of months ago, I found it difficult to be quite as enthusiastic as Naím is about economic growth in the Third World. Piketty’s tables showed that the vast masses of China, India, and even Latin America and Eastern Europe are living in poverty compared to the nations of the North Atlantic world, and inequality is also even worse in poorer countries than in rich ones. I was also not convinced that economic power is truly becoming so decentralized, much less that the new competition of newer firms and kinds of financial institutions is helping the peoples of the world in general. Nor am I convinced that the new economy of cyberspace is really based on sound foundations, and I will not be in the least surprised if the world economy is shaken by a great Facebook crash, when stockholders realize that the site is never going to generate large amounts of income. I certainly agree that economic life is changing rapidly, but I cannot, as I say, be quite so optimistic about its results. Naím also has a section on labor unions, but there he focuses more on decentralization than on their secular decline and its consequences.
There is obviously no arguing with the mobility revolution, which has sent millions of immigrants into all the advanced countries, none of which has been entirely successful in assimilating them. Another difference between Naím and myself is this: he is focused on the whole world, while I am more concerned about the heartland of western civilization along the shores of the North Atlantic and in South America. This leads me to his third revolution, in my opinion the most important. The Mentality revolution represents a gigantic change both in attitudes and loyalties. Especially in the US, but also in Europe and much of the rest of the world, he notes, people trust their government less and less. He realizes this represents a grave danger, insofar as it may make it impossible to get anything done (as has happened now in Washington), but he also still regards the shift as a good corrective to the authoritarianism of the past. He still lauds the Arab spring, despite its exceedingly mixed results. He is very concerned not only by gridlock in Washington, but by the rise of minority parties in nearly every democracy in the world. There is hardly a country left, he points out, in which one party governs without coalition partners. In addition, in many countries, again including the US, the courts are making more and more decisions, while elected governments fail to act. Extremism is on the rise, compromise is on the decline, and international institutions like the European Union are finding it even harder to make decisions, since they often require unanimity. Political parties have generally become much weaker and vulnerable to single-issue movements and populist uprisings like the Tea Party.
One of the more interesting sections deals with one of my own specialties, military power. Na[D2] ím stresses that traditional large militaries—led, once again, by the United States—now have to cope with small, apparently weak but intractable opposition from terrorist groups, or NGOs as he sometimes calls them, and have a lot more trouble working their will. He might have paid more attention to issues of scale. The United States at the height of the Cold War had several million men under arms at all times; now the whole military establishment is under a million, while the population of regions like the Middle East has enormously increased. That is one of the biggest reasons why our recent experiments in imperialism in Iraq and Afghanistan have gone so badly—and no other large nation mobilizes a very large percentage of its population, either. Were he revising his book now, it seems to me, he would have to take notice of the larger and larger areas of the world that are governed by militias—including a good portion of Syria and Iraq. He notes that governments have effectively given up on the Weberian idea of a monopoly of legitimate force, relying increasingly on contract troops, but he doesn’t spend much time on the increasingly powerful movement within the United States that calls on citizens to enforce laws themselves with guns. The book was written, of course, before the bloodless annexation of Crimea by Vladimir Putin (whose imminent decline Naím rashly predicted), much less the cross-border uprising in Eastern Ukraine which threatens to detach that region. Putin, in short, is showing how traditional authority might be revived.
Naím concludes with some recommendations for the future, similar in some ways to Strauss and Howe’s guidelines in 1996 at the end of The Fourth Turning. To begin with, he says, commentators and nations should stop focusing on which nations are rising and which are falling and focus on the common problems of governing that they all increasingly share. With this I heartily agree, although I would go even further and suggest that the examples of Libya and Iraq have shown that there are things worse than authoritarian governments, and that we should not be so quick to demand their overthrow. He warns about “terrible simplifiers,” or ideologues, who unfortunately, as I argued last week, are likely to gain ground in times like these. He asks the world to “bring trust back,” a noble thought, but one that will be very difficult to achieve. He wants to strengthen political parties and increase political participation. And in his last pages, he declares that all the innovations that have transformed the rest of our lives are bound to create new and more effective political institutions as well—although how, and what they will look like, is more than he can say.
I am afraid, for reasons that I discussed last week, that these tasks may be much harder than he believes. As I have said many times, the civilization of the last two centuries grew out of the Enlightenment, which by 1900 had no serious ideological rivals. Now religion has made an extraordinary comeback in various areas of the world, science has lost a good deal of its prestige, and universities pay much less attention to our intellectual and cultural heritage. More importantly, trust and consensus, history tells me, can only be built up by a massive common national enterprise. This need not be a war, but it obviously requires a widespread consensus to make this happen. Such consensus can either be imposed by authoritarian governments—something which I do not think has become impossible by any means, as Putin seems to be showing us now—or developed by inspiring politicians in action such as Bismarck, Franklin Roosevelt, or Charles de Gaulle. None such have popped up on our horizon.
Naím has written an important book because the problems he identifies are very real ones. It is not clear, however, that any book can have real policy impact in a major nation, much less in the world, in an age of cyberspace. (The furor over Capitalism in the 21st Centuryseems to have subsided quite rapidly.) Nor is it clear that real consensus can be established in a world of talk radio and inflammatory web sites. There is a good possibility, as he acknowledges at one point himself, that only Hobbesian necessity will force us to accept more authority again.
This week I have finished a remarkable book, The End of Power, by a Venezuelan academic, Moisés Naím, who is now based at the Carnegie Endowment for international peace. (For the record, I have not met Naím, and we share a publisher, but not an editor.) The book is metahistory—not as ambitious chronologically as Strauss and Howe, since it really focuses on the last few decades, but more ambitious geographically, since it attempts to analyze changes in the entire world. The author has evidently not encountered Strauss and Howe, and that is a pity, because they might have sharpened his thinking about the critical question of his book: exactly where the changes he observes are going to lead us. Essentially the book is about the collapse of traditional large-scale authority in virtually every sphere of life and all over the globe, including religion, economic life, the use of armed force, and politics and government. My regular readers will not be surprised to hear that I found this analysis congenial. Naím understands the dangers our descent towards anarchy, but he attempts to remain guardedly optimistic. His book is in any case informative and provocative, and although it was not that widely reviewed, it was blurbed by both former President Clinton and Francis Fukuyama.
Naim argues that three revolutions are upending modern life, and names them More, Mobility, and Mentality. By More he refers to rapid economic growth, particularly in the third world, which has created a large new and demanding middle class and, he thinks, has made people less willing to submit to arbitrary authority. By Mobility he means both the mobility of people and the mobility of goods, bytes in cyberspace, and ideas. By Mentality he means that ideas about authority are changing, that people have become less credulous, and that there is no longer any monopoly of opinion. Having read Piketty’s Capital in the 21st Century just a couple of months ago, I found it difficult to be quite as enthusiastic as Naím is about economic growth in the Third World. Piketty’s tables showed that the vast masses of China, India, and even Latin America and Eastern Europe are living in poverty compared to the nations of the North Atlantic world, and inequality is also even worse in poorer countries than in rich ones. I was also not convinced that economic power is truly becoming so decentralized, much less that the new competition of newer firms and kinds of financial institutions is helping the peoples of the world in general. Nor am I convinced that the new economy of cyberspace is really based on sound foundations, and I will not be in the least surprised if the world economy is shaken by a great Facebook crash, when stockholders realize that the site is never going to generate large amounts of income. I certainly agree that economic life is changing rapidly, but I cannot, as I say, be quite so optimistic about its results. Naím also has a section on labor unions, but there he focuses more on decentralization than on their secular decline and its consequences.
There is obviously no arguing with the mobility revolution, which has sent millions of immigrants into all the advanced countries, none of which has been entirely successful in assimilating them. Another difference between Naím and myself is this: he is focused on the whole world, while I am more concerned about the heartland of western civilization along the shores of the North Atlantic and in South America. This leads me to his third revolution, in my opinion the most important. The Mentality revolution represents a gigantic change both in attitudes and loyalties. Especially in the US, but also in Europe and much of the rest of the world, he notes, people trust their government less and less. He realizes this represents a grave danger, insofar as it may make it impossible to get anything done (as has happened now in Washington), but he also still regards the shift as a good corrective to the authoritarianism of the past. He still lauds the Arab spring, despite its exceedingly mixed results. He is very concerned not only by gridlock in Washington, but by the rise of minority parties in nearly every democracy in the world. There is hardly a country left, he points out, in which one party governs without coalition partners. In addition, in many countries, again including the US, the courts are making more and more decisions, while elected governments fail to act. Extremism is on the rise, compromise is on the decline, and international institutions like the European Union are finding it even harder to make decisions, since they often require unanimity. Political parties have generally become much weaker and vulnerable to single-issue movements and populist uprisings like the Tea Party.
One of the more interesting sections deals with one of my own specialties, military power. Na[D2] ím stresses that traditional large militaries—led, once again, by the United States—now have to cope with small, apparently weak but intractable opposition from terrorist groups, or NGOs as he sometimes calls them, and have a lot more trouble working their will. He might have paid more attention to issues of scale. The United States at the height of the Cold War had several million men under arms at all times; now the whole military establishment is under a million, while the population of regions like the Middle East has enormously increased. That is one of the biggest reasons why our recent experiments in imperialism in Iraq and Afghanistan have gone so badly—and no other large nation mobilizes a very large percentage of its population, either. Were he revising his book now, it seems to me, he would have to take notice of the larger and larger areas of the world that are governed by militias—including a good portion of Syria and Iraq. He notes that governments have effectively given up on the Weberian idea of a monopoly of legitimate force, relying increasingly on contract troops, but he doesn’t spend much time on the increasingly powerful movement within the United States that calls on citizens to enforce laws themselves with guns. The book was written, of course, before the bloodless annexation of Crimea by Vladimir Putin (whose imminent decline Naím rashly predicted), much less the cross-border uprising in Eastern Ukraine which threatens to detach that region. Putin, in short, is showing how traditional authority might be revived.
Naím concludes with some recommendations for the future, similar in some ways to Strauss and Howe’s guidelines in 1996 at the end of The Fourth Turning. To begin with, he says, commentators and nations should stop focusing on which nations are rising and which are falling and focus on the common problems of governing that they all increasingly share. With this I heartily agree, although I would go even further and suggest that the examples of Libya and Iraq have shown that there are things worse than authoritarian governments, and that we should not be so quick to demand their overthrow. He warns about “terrible simplifiers,” or ideologues, who unfortunately, as I argued last week, are likely to gain ground in times like these. He asks the world to “bring trust back,” a noble thought, but one that will be very difficult to achieve. He wants to strengthen political parties and increase political participation. And in his last pages, he declares that all the innovations that have transformed the rest of our lives are bound to create new and more effective political institutions as well—although how, and what they will look like, is more than he can say.
I am afraid, for reasons that I discussed last week, that these tasks may be much harder than he believes. As I have said many times, the civilization of the last two centuries grew out of the Enlightenment, which by 1900 had no serious ideological rivals. Now religion has made an extraordinary comeback in various areas of the world, science has lost a good deal of its prestige, and universities pay much less attention to our intellectual and cultural heritage. More importantly, trust and consensus, history tells me, can only be built up by a massive common national enterprise. This need not be a war, but it obviously requires a widespread consensus to make this happen. Such consensus can either be imposed by authoritarian governments—something which I do not think has become impossible by any means, as Putin seems to be showing us now—or developed by inspiring politicians in action such as Bismarck, Franklin Roosevelt, or Charles de Gaulle. None such have popped up on our horizon.
Naím has written an important book because the problems he identifies are very real ones. It is not clear, however, that any book can have real policy impact in a major nation, much less in the world, in an age of cyberspace. (The furor over Capitalism in the 21st Centuryseems to have subsided quite rapidly.) Nor is it clear that real consensus can be established in a world of talk radio and inflammatory web sites. There is a good possibility, as he acknowledges at one point himself, that only Hobbesian necessity will force us to accept more authority again.
Friday, January 06, 2017
Tocqueville - In Conclusion
In the second part (originally published as a second volume) of Democracy in America, Tocqueville attempted to analyze the influence of democracy upon virtually every aspect of human life. By "democracy," it bears repeating, Tocqueville did not refer primarily to an elected government orpopular liberties as enjoyed under the US Constitution. He meant the opposite of aristocracy, a society without legal distinctions among different classes, special privileges, and traditions of deference. He saw this kind of democracy spreading all over Europe, and he was not at all sure what kind of political institutions it might lead to. Indeed, he clearly believed that it was at least as likely to lead to despotism, as it had in France under Napoleon, as to liberty, and he spends much of Part II warning of the dangers he saw. While some of part II specifically discusses the United States, it is more about the whole future of western civilization.
"These are false and cowardly doctrines which can only produce feeble men and pusillanimous nations Providence did not make mankind entirely free or completely enslaved. Providence has, in truth, drawn a predestined circle around each man beyond which he cannot pass; but within those vast limits man is strong and free, and so are peoples.
Thursday, May 17, 2018
How the left has gone wrong
Yesterday I caught up with last week's New Yorker on a plane ride. The issue contained two fascinating articles on left-wing politics, written from entirely different perspectives. The first, by Jelani Cobb, discussed a North Carolina minister and civil rights activist named William Barber, who wants to build a multiracial coalition of poor blacks and whites in the South. The second, by Caleb Crain, reviews a new book by the economist Robert Kuttner, Can Democracy Survive Global Capitalism? In this piece I will be contrasting Barber's views, as related by Cobb, with Kuttner's, as related by Crain. The two men are both leftists in the current context and both, it seems to me, are concerned about the same trends and want to see similar changes in our world. Yet they represent very different traditions. Kuttner and the earlier thinkers he discusses at length in his book--the early twentieth century economists Karol Polanyi and John Maynard Keynes--are very firmly in the Enlightenment tradition and take a scientific approach to discovering what is wrong and how to fix it. Barber--a remarkable and admirable man, who has also waged a long struggle with painful and debilitating illness--represents a Christian tradition of activism, leavened with the spirit of the late 1960s and the radicalism of the last years of Dr. Martin Luther King, who died when Barber was only four years old. Barber's kind of activism and the world view behind it, I would argue, has increasingly dominated the left on campus and among activists over the last half century. Unfortunately, it has been utterly unable to stop, much less reverse, the economic trends that Kuttner focuses on, which have created a new plutocracy in the United States and much of the rest of the world.
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