The free market case against capitalism

By Carl 

Theoretically, laissez-faire capitalism predicts that the actions of self-interested individuals, on the whole, will benefit society. The balancing act any society has to commit to is to ensure that the community standards are upheld while people pursue their greed (itself a moral value that is antithetical to any society).

There are very few political systems that allow for the existence of capitalism. Certainly, democracy's attempt to "form a more perfect union" is diametrically opposite of the goals of capitalism, which is to destabilize and unbalance society as much as possible.

Still, capitalism does work in the framework of a society if it is kept reined in. Democracy can exist with capitalism, even thrive if, as with religion, the two are kept separate.

That crucial distinction is starting to fray.

Now, we may find capitalism itself has come unglued. Comes Rana Foroohar of Time magazine:

A new study from the Kauffman Foundation, a Kansas City, Mo.–based nonprofit that researches and funds entrepreneurship, has found that over the past several decades, the growth in size and importance of the financial sector has run in tandem with lower — not higher — rates of new-business formation. In the 1980s, when Wall Street really took off, the number of new firms created fell, and in the 1990s, it plateaued and has been stagnant ever since. Basically, the facts show the opposite of what Wall Street would have us believe. A number of factors explain that, but one of the most important, argue the study's authors, is that the financial sector is sucking talent and entrepreneurial energy from more socially beneficial sectors of the economy.

You can see it in the graduating classes of the country's top universities. Harvard graduates, for example, enter financial occupations at a far higher rate now than they did in the 1970s. It's a trend that accelerated markedly in the past decade, as the computerization of finance made the profession both more lucrative and more intellectually stimulating (one can now think about the 12th dimension rather than just golf). The proportion of graduates from MIT, for example, who went to Wall Street rose from 18% in 2003 to 25% in 2006.

The problem is that these are the types of people most likely to start the sort of dynamic, job-creating new companies that we need. No wonder economists like Nobel laureate Edmund Phelps speculate that the financialization of the U.S. and subsequent dampening of entrepreneurship may be at the heart of our long-term productivity slowdown (average productivity rates have been lower in the decades since the 1970s than in those before).

Whatever the corporate titans lobbying in Washington say, statistics show that it's new companies, not old, that grow the economy. Some 40% of U.S. GDP this year will come from firms that didn't exist in the 1980s. And nearly all the new jobs in the U.S. are created by firms less than five years old. "The political emphasis shouldn't be on making big firms work," says Kauffman Foundation head Carl Schramm, "but on helping new ones take root."

In other words, distilling these paragraphs to their essence, it's not the poor economy that's responsible for the slow creation of jobs.

It is, ironically, the excellent economy that's hampering job creation. The excellent economy in terms of Wall Street.

There's no getting around the fact that any rational person is going to engage in behavior that provides them with the best opportunity to create the most comfortable life for themselves. It's why Alex Rodriguez makes almost as much as a player for the Yankees than the entire Kansas City Royals baseball team.

It's why every kid on the farms of Indiana or the streets of the inner city plays basketball, for that one shot to make it to the NBA and earn bookoo bucks.

And it's why its ridiculous to whine about athletes when quants (those mathematicians who create these complex instruments that no one can explain without using higher mathematics), who do even less for Main Street America than any high-priced athlete, make fortunes while not creating a single job.

I mean, at least A-Rod puts fannies in the seats and that means you need a stadium and ushers and peanut vendors and security guards and ticket takers, all jobs for people like you and me.

Indeed, one could make the case that the job of a quant is to destroy jobs by betting on inefficiencies in the markets that hurt individual companies as well as individual investors. They suck money out of the economy and hide it in complicated financial instrument that can lose value faster than a banana can rot.

You'll notice that the free market still works for the community as a whole but the community itself has changed. Wall Street has wholly divorced itself from America, just as the rise of multinational corporations have guaranteed that "American" companies are no long American.

Wall Street has about as much fealty to Main Street as you have to the colony of mosquitoes forming on a puddle in your backyard. You come to view them as at best a nuisance and at worst an enemy.

I worry about the future of this country. Can you blame a kid who's really good at math for going in and making as much money as he can without risking a dime out of his pocket?

(Cross-posted to Simply Left Behind.)

What will it take for Americans to wake up and reform capitalism?

By Carl 

This is what:

Yes, the rich live in a different world. And no, information won't change them. But a revolution will. Revolutions build slowly over a long time. Then, suddenly, a critical mass, a flash point, something totally unexpected ignites the ticking bomb.

It happened recently in a remote Tunisian village. Mohamed Bouazizi, a 26-year-old college graduate, unable to pay bribes, set himself on fire to protest police confiscation of his unlicensed vegetable cart. That triggered a revolution. And his death rapidly led to the collapse of a 24-year dictatorship.

Today we have four hot time bombs, tick-ticking, soon to make history; any one can easily accelerate the revolution that's already killing Wall Street from within. 

I'll list them but I urge you to go to Market Watch and read the descriptions in full:

1. Wealth gap: Super-Rich vs class wars, death of democracy
2. Wall Street's doomsday capitalism vs rule by anarchy
3. Pentagon's perpetual war machine vs America's budget time bomb
4. Global population explosion vs resources, jobs, better lifestyles

ANY ONE of those will trigger a mass collapse of the American economy. Any one. All four are in motion already.

You see, the rich really are different. As the article notes, they vacation in elite resorts, they meet at elite clubs, and they manipulate the economy from behind barriers and firewalls that would make Fort Knox blink. 

And they are woefully out of touch with the nations they "reside" in. "Reside" is in quotes because like there are now transnational corporations, there are now transnational people. They may reside in the U.S. or Britain or Switzerland or some small tropical island, but their power and influence and economic activity is so globally pervasive that they can influence far flung regions of the globe.

Prime example? Rupert Murdoch, an Australian who made his media bones in the UK before crossing the Atlantic, and then the Pacific to set up Asia's first pan-national satellite television system.

The rich not only are different from me and you, they don't even care about me and you.

(Cross-posted to Simply Left Behind.)

Taxing the super rich like it's 1959

By R.K. Barry

Robert Reich, who was Secretary of Labour in the Clinton Administration from 1993 to 1997, has a very interesting blog on the current state of affairs that contains any number of useful observations. 

I recently came across one of his posts, which laid out some rather compelling facts about the grossly uneven distribution of wealth in America and how it is that we have come to be in a situation where we can't pay for the things that any civilized society really should be able to fund.

No great surprise, but nearly everyone in America has bought into the idea that we need to radically reduce expenditures rather than give any thought at all to increasing revenues through taxation, specifically by taxing those who can most afford it – the super rich.

We have heard this before, but the numbers, as I say, are compelling.

I do recommend that you read Reich's post in its entirety, but here are a few interesting bits:

Today's typical 30-year old male (if he has a job) is earning the same as a 30-year old male earned three decades ago, adjusted for inflation.

The bottom 90 percent of Americans now earn, on average, only about $280 more per year than they did 30 years ago. That's less than a 1 percent gain over more than a third of a century. Families are doing somewhat better but that's only because so many families have to rely on two incomes.

This may not sound catastrophic, but, and here's the rub, the American economy is more than twice as large now as it was thirty years ago. So, Reich asks, where does all the money go? And the obvious answer is: to the top:

The richest 1 percent's share of national wealth has doubled – from around 9 percent in 1977 to over 20 percent now. The richest one-tenth of 1 percent's share has tripled. The 150,000 households that comprise the top one-tenth of 1 percent now earn as much as the bottom 120 million put together.

In so many ways, I have to say that I don't care what one's politics are. This is just wrong. 

But you might think that with the economy growing so rapidly over the past 30 years, those benefiting the most would be called upon to kick in a bit more. You would be wrong. The power of the super rich has been such that they have been able to make just the opposite happen:

From the 1940s until 1980, the tax rate on the highest earners in America was 70 percent or higher. In the 1950s, it was 91 percent.

Under Ronald Reagan the top rate dropped to 28 percent. Under Bill Clinton it rose to 39 percent and then under George W. Bush dropped to 36 percent (which is, of course, where the Republicans want to keep it).

Reich goes on to talk about big slashes to estate taxes and capital gains taxes, but you get the picture.

To add insult to injury, Reich makes the point that even before the current economic downturn the middle class's share of the nation's total income had shrunk while their tax burden had grown as they paid bigger chunks of their income in payroll taxes, sales taxes, and property taxes than they did before.

A lot of right wingers want to talk about common sense. Well, it makes no sense to me that public services and programs that the middle class and poorer Americans count on are poised to get the axe while this gross, and relatively new, uneven distribution of wealth in America does incredible damage to the fabric of the country.

The obvious point that Reich makes is that we need to hike taxes on the super rich -- not that this is going to happen any time soon.

No, we are going to continue to vilify public sector employers and big government in general. We are going to let big money buy all the means of mass communication and politicians it needs to convince everyone that what we really need is smaller government, which is just another way of saying that people, a growing number of people, will simply have to do without what they need to live a decent life.

A more equitable scheme of taxation would go a long way to solving the problems we are told can only be solved by massive cuts, but that would simply seem to make too much sense.

I'll give Professor Reich the last word:

Do this and we can afford to do what we need to do as a nation. Do this and you prevent setting the middle class against itself. Do this and you restore some balance to a distribution of income and wealth that's now dangerously out of whack.

Amen.

(Cross-posted at Lippmann's Ghost.)

SOTU and Sputnik: Economic nationalism, political paralysis, and the decline of the American Empire

By Michael J.W. Stickings

I haven't yet commented on last night's State of the Union address, nor on the Republican response, but, then, what more is there to say?

TNR's John Judis thinks it was President Obama's best speech as president. I do not agree, though I'm hard-pressed to name a better one. Not because I thought his SOTU was all that great but because he hasn't exactly given many memorable speeches as president.

Content-wise, I suppose a lot depends on what you think of Obama's economic nationalism, the core theme of last night's speech. The world is moving ahead and America is in decline. That decline is relative, as it is still on top, for the most part, but how long will it be before China and perhaps India take over?

In referencing Sputnik at the core of his speech, Obama was saying that America is now at a fork in the road, much as it was after the Soviet Union launched that first satellite into space. One road leads to further decline, one road leads to further superpowerdom:

Half a century ago, when the Soviets beat us into space with the launch of a satellite called Sputnik¸ we had no idea how we'd beat them to the moon. The science wasn't there yet. NASA didn't even exist. But after investing in better research and education, we didn't just surpass the Soviets; we unleashed a wave of innovation that created new industries and millions of new jobs.

This is our generation's Sputnik moment. Two years ago, I said that we needed to reach a level of research and development we haven't seen since the height of the Space Race. In a few weeks, I will be sending a budget to Congress that helps us meet that goal. We'll invest in biomedical research, information technology, and especially clean energy technology -- an investment that will strengthen our security, protect our planet, and create countless new jobs for our people.

I hardly count myself an economic nationalist, or a nationalist of any kind, and certainly not in American terms, but I do think that Obama is generally right about this. Private investment -- business -- is simply not enough. What is needed, as it was back in the '50s, is extensive government investment in everything from health care to education to research and development in next-generation technological innovation.

This is where conservatives get it wrong. No one is saying, let alone Obama, that business doesn't matter, or that government ought to replace business. We all acknowledge that businesses create jobs and for the most part keep the economy moving. But business, taken as a whole, simply does not have the big picture in mind. Business is about profit, about maximizing returns for shareholders. And that's fine. But sometimes you need, a society needs, government to step in and lead the way. Conservatives pretend that this is never the case, or perhaps have convinced themselves that government can never be the answer. This is historical revisionism, a failure to appreciate how American capitalism, and capitalism generally, has evolved over time.

As Slate's Fred Kaplan explains, huge government investment has been behind many of the most significant technological developments and innovations of recent decades, from space exploration (most notably JFK's pledge to go to the moon, ultimately realized less than a decade later) to the microchip to the Internet:

John Kennedy ran for president in 1960, promising a "new frontier" founded on "vigor." Early in his term, he directly responded to Sputnik in two ways: He poured money into the Minuteman ICBM program (both before and after he realized that the missile gap was a myth). And he pledged to land an American on the moon by the end of the decade.

In the spring of 1959, Texas Instruments had introduced a new technology called the microchip. But it was very expensive and generated no demand from the private sector. However, these tiny chips would be needed to power the guidance systems in the Minuteman's nose cone -- and in the coming Apollo program's space capsule.

It was the Pentagon and NASA that bought the first microchips. The demand allowed for economies of scale, driving down costs enough so that private companies started building products that relied on chips. This created further economies of scale. And so came the inventions of the pocket calculator, smaller and faster computers, and, decades later, just about everything that we use in daily life.

None of this was inevitable. It started only because of government investment. Obama made this same point in Tuesday night's address: "Our free enterprise is what drives innovation. But because it's not always profitable for companies to invest in basic research, throughout history our government has provided cutting-edge scientists and inventors with the support they need. That's what planted the seeds for the Internet. That's what helped make possible things like computer chips and GPS."

GPS was initially an Air Force program, designed to make bombs more accurate. The Internet was an internal communication program created by the Defense Advanced Research Projects Agency.

Obama could have gone back further. The first commercial computer, the IBM 1401 of the late 1950s, came about only because the first customers were government agencies, the Social Security program and the Veterans Administration, which required a computer with enough capacity to store data about the millions of Americans receiving government checks.

If conservatives like today's had had their way, none of this would have happened -- or, rather, it would have, but America likely would not have been the leader of the computer age, the American economy wouldn't have boomed as it did, and Americans, along with American businesses, wouldn't have reaped the benefits of such astonishing innovation.

Obama's speech was all about winning the future, as Slate's John Dickerson notes:

He described a challenge to the American dream: The promise of prosperity is threatened by technology and global competition. His pitch was aimed at those Americans "who feel like the rules have been changed in the middle of the game." After sketching this moment of uncertainty, he quickly moved to optimism, rallying the country to its strongest traditions of perseverance and affirming that Americans have always been able to shape their own destiny. His speech was practically a 12-step program for reconnecting the American people with the dream that animated the country at its beginning. 

There is a dark side to this, of course. Back in the '50s and '60s, there was a clear enemy, the Soviet Union, and Americans (and most westerners) rallied against it. But what is there now? According to Obama -- and he's right about this -- the real challenge to America (if not so much to the rest of the West) is not al Qaeda, or Islamism broadly, but emerging economic superpowers like China and India, and perhaps even Europe. A challenge is not necessarily the same as an enemy, but the risk is that the rest of the world will be seen now as the primary threat to America's future, if not to its survival then at least to its standing atop the world. And this would mean vilifying the Chinese and the Indians, among others. Nationalism, after all, isn't just about national pride and a focus on national interests but about exclusion, about "us" and "them." The world is getting smaller and smaller, but nationalism is about building walls, about driving people apart. Is that really the way to do?

Of course, many other governments invest heavily in domestic industry, and so, to an extent, the U.S. would (and should) be no different. So, fine. Go ahead and invest. The problem is, where is the investment going to come from? Beyond Obama's high-falutin' rhetoric, where is the political will for it happen?

Obama did not call for shared sacrifice but instead for bipartisanship. There's a huge difference. It was fairly easy, relatively speaking, to call for sacrifice when faced with the Soviet threat, but now? All President Bush told Americans to do after 9/11 was to go shopping. Obama still clings to the delusions of post-partisanship that characterized his campaign -- whether he actually believes such nonsense is not clear, but what else are we to take from his insistent rhetoric? -- and so merely asks Democrats and Republicans to work together to address the country's problems. He will do his part, as always, by reaching out across the aisle, but have we, has he, learned nothing of the first two years of his presidency. Republicans want no part of working with him or his party on anything. He might be able to peel off a Republican or two here and there, but the health-care debate is ample evidence that Republicans refuse to compromise in good faith.

And so, the merits of Obama's innovation-based approach aside, progress, it would seem to me, isn't likely. Dickerson notes that the president used the phrase "win the future," or a variant, 11 times in his speech. That means that the speech sounded very much like "a self-help seminar," one loaded with typically banal "tag lines from corporate marketing." Yes, he's for more government investment, perhaps akin to what happened in the '50s and '60s, but the message was presented at such a high level that it rang hollow. And as if that weren't enough, Obama indicated that he remains committed to the tax-cut, spending-cut fiscal conservatism of the political center. As Kaplan writes:

Obama proposed, starting this year, to "freeze annual domestic spending for the next five years," a step that, he boasted, would "bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was president."

It's hard to see how he or the Congress can resolve this contradiction -- Kennedy-esque vigor and investment on the one hand, Ike-like torpor and penny-pinching on the other. He said much of this extra money could be freed up by eliminating subsidies for the oil companies. First, good luck on that. And second, that alone won't free up enough.

So where's the money going to come from? Even if he gets Democrats on board -- and he certainly won't get all of them -- there's no way Republicans are going to agree to massive government investment in anything, let alone when they mistakenly think voters gave them an anti-government mandate last year and when they plan on running along Tea Party lines in 2012.

Sure, this was the "old" Obama again, the one calling for the "hard choices" to be made and for bipartisanship to prevail, and he was generally quite effective, and, sure, Americans seem to like what they heard, but where exactly do we go from here? It sounded more like Obama was laying the groundwork for his re-election bid, presenting a nationalistic (and vaguely populistic) vision that appeals to independents, then he was presenting anything resembling a realistic policy agenda for the next two years. (As TNR's Jonathan Chait remarks, the president's "emphasis on public investment reflects less a desire to increase spending on infrastructure, R&D and the like than a platform from which to oppose anticipated Republican cuts.")

That's fine, I suppose -- he needs to run on something, after all -- but it just seems to confirm that nothing is actually going to happen. Even if Americans like what they heard, they don't want their taxes raised and they have a party, the GOP, that is fundamentally anti-tax and anti-government and that will appeal to them along those lines. Americans also oppose cuts to most government programs, including Social Security, of course, even if Republicans refuse to acknowledge this, and so as the country faces political intractability, and as the willingness to accept shared sacrifice is largely non-existent, there just isn't the money for what Obama wants.

Even if this is another Sputnik moment for America, the outcome will be very different. Obama will make his case, Republicans will make theirs, and nothing will change -- except, from time to time, the politicians voters send to Washington.

The decline of the American Empire, already in full swing, continues.

(photo 1, photo2)

Republicans, spinning wildly, claim credit for positive economic news

By Michael J.W. Stickings 

The question is, do Republicans really believe their own propaganda?

It took less than three weeks for the new Republican Congressional leadership to claim credit for an apparent economic upturn.

An aide to House Majority Leader Eric Cantor, Brian Patrick, emailed reporters [yesterday] morning:

THERE ARE THE JOBS: Republicans Prevent Massive Tax Increase, Economy Begins to Improve: U.S. companies plan to hire more workers in the coming months amid growing optimism over the economy, a quarterly survey released Monday showed, providing further evidence that the jobs market is turning around. In the fourth-quarter poll of 84 companies by the National Association for Business Economics found 42% of companies interviewed, ranging from manufacturing to finance, expect to boost jobs in the six months ahead. That's up from 29% in the first three months of 2010. Only 7% in the latest survey predict they will shed jobs in the coming six months, down from 23% at the start of last year.

The Dow Jones wire story Patrick linked makes no mention of the GOP.

Do they? Maybe, maybe not. Obviously, they're trying to score political points by taking credit for any good news they can find.

It's just so transparent how full of shit they are.

As Steve Benen remarks, "[e]ven by the standards of the most shameless hack, this is farcical. Worse, it's part of a growing pattern":

To reiterate a point from last week, this really is fascinating. The economy started growing again in 2009, with the stimulus giving the economy a boost. We saw growth continue throughout 2010 -- even after those rascally Democrats passed health care reform and Wall Street reform -- while Republicans said Dems were killing the economy.

And now we have several Republican leaders arguing that the same tax rates that were in place last year (and the year before that, and the year before that), coupled with economic policies that haven't even been voted on, deserve the credit for more optimistic projections.

So to review, Republicans in the Bush era brought the global economy to the brink of catastrophic collapse; Obama and congressional Dems helped turn things around; and now those same Republicans whose policies failed want credit for Democratic successes.

I know some folks will find this persuasive, and maybe even some of these GOP officials have deluded themselves into believing their own rhetoric. But it doesn't make the argument any less ridiculous.

That's one word for it.