The Great Debate

Use plutocracy to broaden our economic debate

This is the fifth response to an excerpt from Chrystia Freeland’s Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, published this week by Penguin Press. The first response can be read here, the second here, the third here and the fourth here

When historians write the story of the presidential campaign of 2012, it is a fair bet they will focus on how the candidates approached the question of wealth, taxation and the responsibilities of America’s richest citizens. In fact, 2012 may be the year that class – long unspoken and unacknowledged in American life – finally became an explicit issue, the year when the illusion that America is a land of universal economic opportunity and relative equality was at last shattered.

The United States as a whole is one of the wealthiest societies the world has ever known. But aggregate wealth is not individual wealth. Per capita income may look good, but it’s a number and an average, easily distorted in a society with a handful of plutocrats. It brings to mind the old joke that when Bill Gates walks into a bar, per capita everyone suddenly becomes a millionaire.

In short, the U.S. may be rich but few of its citizens are – at least in terms of net worth. Wealth is not evenly distributed, and the gap between the super-rich and the rest has never yawned wider. Chrystia Freeland addresses the causes and consequences of that gap, not just in the United States but also throughout the world. And her conclusions are that the new plutocracy is not good for democracy or the future of free-market capitalism.

The  lives of the rich and occasionally famous have always drawn fascination, and today’s plutocrats are no different. CNBC  has a full-time reporter focused on the super-rich, and a host of reality shows festoon the cable universe charting various aspects of wealth. That the U.S. presidential campaign is so focused on what the very wealthy owe  to the common good is simply the political aspect of a cultural obsession.

Everything you know about inequality is wrong

This is the fourth response to an excerpt from Chrystia Freeland’s Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, published this week by Penguin Press. The first response can be read here, the second here, and the third here

Plutocrats is a provocative, articulate summary of the income inequality crisis having spawned the 1% crowd that “pulls up the ladder” available to others.   Honestly, I found myself wanting to read more, like a guilty pleasure.  If only it all were true.

There is such broad consensus that income inequality exists that to suggest otherwise feels ridiculous (Please, no global warming analogies).  For example, the Obama campaign emphasizes millionaires must pay their fair share.  Research by academics such as Piketty-Saez propose a top tax rate of 70 or even 80%.

Has rising inequality actually hurt anyone?

The incomes of the top 1 percent — and especially of the top one-half of the top 1 percent — have skyrocketed over the past 30 years. The latest estimates from the Congressional Budget Office show that the inflation-adjusted average income of the top 1 percent of households was $340,000 in 1979 but $1.4 million in 2007, quadrupling over less than three decades. Popular discussion of the top 1 percent tends to highlight how different, say, Mitt Romney and Facebook founder Mark Zuckerberg are from typical Americans. In reality there is as great a disparity between Zuckerberg’s and Romney’s income as between Romney’s and yours. Disparities in income are so dramatic it is difficult to comprehend them.

Not that there’s anything wrong with that! Or rather, it’s not necessarily the case that there’s anything wrong with inequality levels. Whether American-style inequality’s costs outweigh its benefits remains an open question. Too many accounts of inequality today simply assume that it must be bad — that gains at the top have come at the expense of the middle class and bottom, that high inequality has diminished opportunity, that it has stunted economic growth or led to financial instability, or that it has turned our democratic system into a “plutocracy.” But there is scant evidence for each of these propositions.

Note, first, that the CBO data indicates that median household income — the income of the person in the middle of all households — rose by 46 percent from 1979 to 2007, and the income of the average household in the bottom fifth has risen by a similar amount. To be sure, that’s a smaller increase than Americans saw in the 1950s and 1960s and a much smaller increase than the top has seen. But it’s not the case that the middle class and poor have been doing worse over time. (Male earnings have not increased much over recent decades, reflecting the competing away of the union-based advantages that in earlier decades sent pay levels above what productivity gains would have dictated, but analyzed correctly, the data shows they have not fallen either. Female earnings have risen smartly.)

The causes and consequences of plutocracy

This is the second response to an excerpt from Chrystia Freeland’s Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, published this week by Penguin Press. The first response can be read here.

Today’s plutocracy, as described by Chrystia Freeland, can make for an ugly spectacle. It is an increasingly stateless and distant class. The very rich may sometimes dress scruffily or express an affection for common tastes, but their wealth naturally separates them from the rest of the public. It isolates them physically, as they flit from palace to palace in private jets. And it isolates them psychically, as they grow comfortable with the view that their wealth is not merely the fruit of talent and work but the mark of superiority.

Their wealth and isolation often contributes to a shortfall in empathy (or exacerbates a pre-existing condition, which may have helped raise them to plutocratic status in the first place). They are more likely to feel deserving of rewards, well-earned or ill-gotten. And they are less likely to feel a twinge of hesitation or regret when inflicting hardship on business partners or employees in the name of efficiency and profit.

Sympathy for the Plutocrat

This is a response to an excerpt from Chrystia Freeland’s Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, published this week by Penguin Press.

It’s great to be what you people are now calling a plutocrat.  I know.  I am one.

We plutocrats live incredible lives, surrounded by luxury and insulated from risk and discomfort.  Things have gone very well for us over the last several years.  Since George Bush left office, the stock market has doubled, we got a (sweet!) $700 billion rescue of the financial system, and corporate profits are at a 50-year high.  BOOYA!

Forget G-Zero, it’s China that’s leading the world

This is the third in a series of responses to Ian Bremmer’s excerpt of Every Nation for Itself: Winners and Losers in a G-Zero World. The first response can be read here and the second here.

Ian Bremmer is launching his new book with an eye-opening observation above the uncertain future of global order. This time he is warning us of the dangers of having a world with no clear leader. In his view, the United States and Europe are in a weak position to sustain any hegemonic position. In particular, their focus on austerity measures can complicate their role as military leaders of the world (e.g., NATO’s role). Moreover, multilateral organizations, such as the G7 or the G20, will not do the trick either. The G7 is in the middle of the worst crisis in almost a century, and the G20 has members with preferences that are hard to aggregate. BRICS, the organization supposedly coordinating the efforts of Brazil, Russia, India, China and South Africa, is too young and preoccupied with other issues to act as the new hegemon. What, then? Where is the world going? Who will emerge as the new leader?

The obvious candidate is China. I have not read the entire book, so I do not know precisely what Bremmer’s position is on China. But because the book’s argument is that there is no real global leader now, I assume he believes China will not be taking that role in the future either. I want to argue, in contrast, that China has begun to play that role and has the potential to become a hegemon. Yet, if China rises to be the global leader, there will be major tensions in the institutional foundations of global capitalism as we know them today. As China’s leadership role grows, the global institutions that have ruled the world in the last 20 or so years will have to change.

Why G-Zero is a good thing

This is the second in a series of responses to Ian Bremmer’s excerpt of Every Nation for Itself: Winners and Losers in a G-Zero World. The first response can be read here.

It’s said that predictions are risky business, especially those about the future. No one knows that better than Ian Bremmer, who in addition to his multiple books has created one of the more successful risk analysis organizations. Being in the business of highlighting risks, he has for the past few years focused on the breakdown of the world order most of us grew up with, whether a 20th century world of great-power struggles or an early 21st century world of American economic and military preponderance. Now, says Bremmer, those systems are finished and in their stead we have… nothing.

It’s a compelling, alarming and yet exhilarating vision – though few probably embrace that last adjective. Compelling because it admits that most of the models we use to predict what will be are based on a world that no longer exists and hence are likely to be wrong. Alarming because it leaves us with a tabula rasa whose outcomes are utterly uncertain. Yet exhilarating because it offers the promise of a brave new world that may go in any direction, including more productive and positive ones than many observers currently assume.

Since when has G-anything run the world?

This is part of a series of responses to Ian Bremmer’s excerpt of Every Nation for Itself: Winners and Losers in a G-Zero World.

Ian Bremmer has, as always, made a perceptive and provocative observation about the state of the world. Where I would respectfully differ from him is over the true significance of this observation.

It really comes down to what is meant by “global leadership,” on the one hand, and “global governance,” on the other. It is conventional to call for more of the former and to bewail the weaknesses of the latter. And with Bremmer I would accept that there is a shortage of such leadership and that global governance is patchy at best. The world is certainly not being run by the G-20, or by a G-anything else.

Should economists be “imagineers” of our future?

By Mark Thoma
The opinions expressed are his own.

This essay is a response to Roger Martin’s “The limits of the scientific method in economics and the world” (part one and part two), recently published on Retuers.com.

Roger Martin is unhappy with the state of economics. One charge is that:

[an economist] predicts a future that is based on the past.  And when it is anything but, he returns to the same tools to do it again, believing that in doing so he is being meritoriously scientific. … Extrapolating the future to be a straight-line projection of the past is neither accurate, nor is it helpful in creating better understanding and newer ideas.

As I will discuss further below, I agree that macroeconomists need to fix their models. But I don’t think that predicting the future based upon “a straight-line projection of the past” is the problem. Let me explain why, first in a relatively narrow sense, and then more broadly.

The limits of the scientific method in economics and the world

By Roger Martin
The opinions expressed are his own.

Part one of this essay was published Thursday. This is part two.

As the power of the scientific method has encroached further than its applicability warrants into fields such as economics and business, its predictions of the future become ever more erroneous. In this list, we can include virtually every economic prognostication from the first half of 2008, and countless market research studies that misjudge consumer interest in the new product concepts that they test.

Were he alive today, Charles Sanders Peirce, a turn-of-the-20th-century American pragmatist philosopher, would be unsurprised at the shoddy results of these analyses. A brilliant thinker, Peirce is less famous than his peers William James and John Dewey, mainly because he was an ornery and unpleasant character.  However, Peirce had an almost entirely overlooked yet extremely insightful theory applicable to modern scientific work. He concluded that no new idea was ever derived from the analysis of the past using inductive and deductive logic – the two forms of logic our modern scientific method utilize.

These forms of logic can only prove things in the past, so whether business people, economists and scientists realize it or not, the only thing about the future that the application of  deductive or inductive logical analysis can predict is a simple extrapolation of the past.  That is very useful for studies of things in the Aristotelian camp of cannot be other than they are. If we find some property of granite by studying existing hunks of granite, we can safely extrapolate that in the future, hunks of granite will have those properties.