Él, ella, usted migra.
Nosotros, nosotras, migramos.
Vosotros, vosotras, migráis.
Ellos, ellas, discriminan.
Political philosopher Samuel Scheffler offers a magnificent summary of the normative value of equality.
“When the relationship among a society’s members are structured by rigid hierarchical distinctions, . . . the resulting patterns of deference and privilege exert a stifling effect on human freedom and inhibit the possibilities of human exchange. Because of the profound and formative influence of basic political institutions, moreover, patterns of deference and privilege that are politically entrenched spill over into personal relationships of all kinds. They distort people’s attitudes toward themselves, undermining the self-respect of some and encouraging an insidious sense of superiority in others. Furthermore, social hierarchies require stabilizing and sustaining myths, and the necessity of perpetuating and enforcing these myths discourages truthful relations among people and makes genuine self-understanding more difficult to achieve. In all of these ways, inegalitarian societies compromise human flourishing; they limit personal freedom, corrupt human relationships, undermine self-respect, and inhibit truthful living. By contrast, a society of equals supports the mutual respect and the self-respect of its members, encourages the freedom of interpersonal exchange, and places no special obstacles in the way of self-understanding or truthful relations among people. It also makes it possible for people to develop a sense of solidarity and of participation in a shared fate without relying on unsustainable myths or forms of false consciousness.”
I’d like to briefly examine in this post the extent of global wealth inequality as presented in the 2015 Credit Suisse Global Wealth Report and offer an interpretation. The authors present four wealth tranches in which the top 0.7 percent owns 45.2 percent of total wealth, the next 7.4 percent 39.4 percent, the next 21 percent 12.5 percent and the bottom 71 percent just 3.0 percent. (Rounding errors.) The top 8.1 percent thereby possesses 84.6 percent of wealth with the bottom 91.9 percent having 15.5 percent.
I think we can get a better grip on these enormous asymmetries if we consider them in terms of the relative wealth of a representative individual within each tranche as illustrated below. (I divide the wealth share by the population percentage and index that to the bottom tranche which I set to one.)
We can see here that the wealth of individuals in the 0.7 percent tranche completely dominates that of the rest of the population and especially the bottom 92 percent. This top tier according to Credit Suisse consists of 33.7 million adults with a total wealth of $112.9 trillion. They detail it as follows:
(Credit Suisse doesn’t show an over $1b bracket. I’ve incorporated the billionaire data from Forbes and adjusted CS’s top tier accordingly.)
Let’s compare a few of these wealth figures to the global median wealth of $3,210 which I’ll represent as a modest single story ranch home. The median wealth in the United States is $49,800 which in comparison to the ranch home would correspond to a 16 story building. $1 million of wealth, the bottom of the 0.7 percent tranche, would rise to 312 stories or over three times that of the Empire State Building. $10 million would soar 1/3 higher than Mount Everest. $50 million would rise to the top of the stratosphere and $100 million would penetrate the Karman line which demarcates the boundary of outer space. $500 million would be well above the altitude of the international space station, and that station would orbit at only 1/3 the height of the tower representing $1 billion of wealth. Finally, the $75 billion of Bill Gates would soar ¼ the way to the Moon.
Wealth has no meaning outside these kinds of comparisons for by itself it’s a completely circular number. Oligarchy is a civilization spanning system of power whereby the minority attains its motivational desires of luxury consumption and wealth defense without cost. In the modern world it’s achieved via what I call the diversion-profit loop whereby whatever the oligarchy spends is returned via profit. That is the essential source and meaning of profit. (Profit is also generated via state deficit spending but we’ll lay that aside for now.) Wealth in toto can be conceptualized as the present value of anticipated future diversion spending (and deficits), capitalized at a consensus discount rate. If the outlook for future diversion dropped or the discount rate increased, then total measured wealth would decline but this is of no real importance. The existential meaning of wealth lies only in its measure of relative power, both between oligarchs and, crucially for the systemic structure, between the oligarchy as a class and the population.
Time passes and it’s hard to believe it has been three years since my last post. I hope all former readers and commenters are doing well.
I’ve devoted this hiatus to writing a book centered on some of the basic themes that have been brought out in this blog and I’m happy to announce it has finally been released. Capitalism as Oligarchy seeks to build on the works of Jeffrey Winters (Oligarchy) and Michal Kalecki and offers a somewhat different and I believe important approach to understanding our social world. Since it will provide the grounding perspective for future posts, I’d like to outline the basic idea here.
Throughout the entire 5,000 year history of recorded civilization, and for thousands of years before that, every socioeconomy of any size was a hierarchy in which a tiny minority possessed virtually all material power and thereby ruled over the vast majority. It’s no different today as conservative estimates report that the bottom 90 percent of the global population possesses just 12 percent of wealth. Similar asymmetries exist within all countries.
Despite the deep historical continuity of inequality, our system over the last couple hundred years is almost universally defined and analyzed as ‘capitalism’. This is a significant problem for a number of reasons. It imposes unneeded complexity onto a power structure that’s inherently simple, it presents the system as relatively new and we therefore lose sight of its tight link with the past, and it hides the core hostility that’s the essence of power.
As capitalism, the system is presented as one of ‘private’ ownership in which the primary motive, the “Moses and the Prophets”, is the unending accumulation of monetary profit. Inequality is a mere by-product as is the massive poverty and insecurity that reigns everywhere. Despite our immense productive potential, billions live in polluted slums and vast majorities in even the ‘developed’ world struggle for the basics of decent food, housing, sanitation, medical care, safe neighborhoods, secure retirements, leisure, and so on.
But if we think of the system as ancient inequality, i.e. oligarchy, things appear completely different. It’s no longer one of ‘private’ ownership but ‘concentrated minority’ ownership. The systemic logic becomes straightforward. The motives of the propertied minority are self-evidently the aggressive defense of wealth and luxury consumption. Its prime risks arise from others competing for power and, existentially, the propertyless population. And from these, we can deduce two fundamental dynamics that must apply wherever inequality exists—I call them diversion and suppression.
Diversion is the process by which the oligarchic minority costlessly diverts human effort into satisfying its motives. Some ways this has been historically handled is through slavery, serfdom, and indentured servitude. It’s managed today through what I term the diversion-profit loop by which whatever is monetarily expended by the oligarchy is subsequently returned via profit. This is the essential meaning of the Kalecki profit equation (Profit = Capitalist Spending) and from it we can see that profit isn’t the systemic motive but is rather a mere operational detail that permits the oligarchy as a class to costlessly achieve its motives in a monetary based socioeconomy. Through Kalecki, we also discover that the population can never be profitable for, excluding ever-expanding debt, workers can’t spend more than they’re paid in wages.
The other dynamic is suppression, the means by which inequality is enforced over the population. It’s the ongoing imposition of suboptimal living standards, dependence, insecurity, and poverty in service to the vital wealth defense need of sustaining the structural hierarchy. It’s evident in every nook and cranny of the system but is easily overlooked because so many of us accept the ideologies of finance. Examples include corporate pricing power achieved through consolidation, the suppression of unions, the ideology of worker competition, and a host of mythologies on cost, taxation, public debt, international trade, inefficiencies of collective action, individualism, and so on. Suppression is a crucial dynamic of oligarchy as inequality can’t exist without a subservient population. It unambiguously explains why it is that despite our immense productive capacity, the conditions across the planet are what they are. Poverty and insecurity flow directly from the fundamental logic of the system.
I’ll stop here. For those interested, a more detailed summary of my argument can be found under the Capitalism as Oligarchy tab where I’ve posted the book’s Table of Contents, Preface, and Introduction.
I want to add another aspect to yesterday’s post concerning ways to make housing finance easier and cheaper that goes beyond just interest rates or down payments or unearned rentier income. It’s the issue of class status.
A high cost of housing is a form of red-lining that very efficiently separates economic classes and allows for clear displays of status. While segregation is no longer allowed based on race, there’s an obvious link as any visit to an American city will attest. But even if class today is completely based on “merit”, it’s undeniable that we still live in a hierarchical society.
A meritocracy simply means that jobs are filled based on qualifications; it doesn’t at all speak to what degree, if any, income should vary. Meritocratic socialist egalitarianism and a vastly unequal hierarchy based on “merit” are both internally consistent forms, although it’s nearly impossible to square the latter with democracy.
So, any significant leveling of inequality, especially in something as status related as housing, represents a direct confrontation with the existing system of meritocratic hierarchy. Lifestyles and neighborhoods that were once affordable only to a certain “meritocratic” income class would suddenly become available to lower, less “merit-worthy” workers.
I wonder how many liberals there are out there who often speak against inequality in the abstract but would oppose ideas such as discussed yesterday because they would directly confront the usefulness of housing as status.
There can be little doubt that the housing interest rate extraction industry based on Wall Street serves functional purposes beyond the simple channeling of rentier income. And that the status quo has very deep roots.
The world of finance is widely seen as little more than a casino seemingly custom designed to wreak havoc and destruction throughout the world. As portrayed endlessly in movies and books, though, it seems to have a high degree of panache; it’s exciting, gets a great deal of attention, and our focus is directed on ways to dampen the speculative excess. But there’s another face of finance that’s not speculative at all and has absolutely no sexiness attached to it. It’s the steady grueling daily parasitic extraction of rentier finance. While it gets little attention, though, it’s arguably more damaging over the long term than the casino. No industry illustrates this better than residential real estate.
A home, of course, isn’t just another consumer commodity; it’s a fundamental requirement to civilized life, ranking right up there with food, clothing, and healthcare. On the economic front, residential real estate is the critical backbone of the US economy and a collapse in values, as we’ve seen, can easily lead to depression. A sharp rise in prices, on the other hand, can be equally bad; not only because it could then collapse, but also because it’s a sharp tax on future generations who must buy at the inflated prices.
The United States has developed elaborate institutions to encourage home ownership and prop up housing values, but it turns out every one of them is centered on and directly benefits finance. Fannie Mae, Freddie Mac, and the FHA provide 100% guarantees against losses to mortgage financiers while the homeowner is essentially unprotected. What a deal! Mortgage financiers take absolutely zero risk yet are institutionally enabled to extract high rents from homeowners in the form of interest charges.
The average mortgage rate in the US today for a 30 year mortgage is 3.98%, plus an average additional upfront fee of 0.7% plus many other charges and aggravations. Financing a home turns out to be a very costly and grueling experience. For a $300,000 home financed at 90%, for example, the annual interest charge at today’s rate is a whopping $10,746, about 21% of median household income. This significant transfer of income, we must not forget, is for a loan that’s fully guaranteed by the government and has no risk.
We live in a hierarchical society structured like a great pyramid and the gigantic wealth and power at the top is largely sustained through these kinds of riskless rentier extractions. The only way to really improve conditions lower down is to put an end to the upward flows. The relationship between rentier finance and the population is a direct conflict of interest and there’s no way forward without facing up to it. In that light then, I humbly offer a straightforward proposal.
I propose that the government end its loan insurance program for finance and start financing the homeowner directly. There’s nothing inherent in the laws of the universe which decrees a home must be expensive, risky, and difficult to acquire. So, how about this? Anyone who wishes to buy a home simply makes a down payment, perhaps 5%, and the remainder is automatically financed by the government at 0% interest. No principal payment would be required either, so there would be no monthly payment, no underwriting requirements, and no additional hassles. The effect would be to render home ownership far cheaper, sharply increase disposable income, and virtually eliminate home ownership risk. Homelessness would be vastly reduced. Not only would we eliminate the unjust unearned income going to the top, we would also put an end to the vast waste of human effort devoted to producing, servicing, and analyzing mortgage securities, the collection and foreclosure industry, and much else. We of course need to assure these workers find new sources of income, but that’s a separate story for another day.
Here’s some obvious objections and comments:
1) Where does the government get the money? Anyone who reads this blog knows the dollar is a fiat currency and can be created at will. Interest rates are controlled by the Fed and it can and should keep them at zero. There’s never a just cause for a riskless rate of return for wealth. Risks of inflation are controllable through assuring that the economy never attempts to spend beyond its real resources, coupled with oversight over the oligopolies to assure they maintain “reasonably” low profit margins. Existing home sales are now on about a 5,000,000 unit per year pace with the median price being $192,800. At this level, the program would require annual financing of about $867 billion per year or $72 billion per month. While this may sound high, it’s lower than current QE purchases which could then be reduced or discontinued. Also, we must remember that the government need only finance a home once since all future sales would be a net wash given that the new government loan would simply pay off the old one.
2) Should it be available for investment properties and very high priced homes as well? I think not. I think it should be directed toward the vast majority of the population and centered on owner occupied homes. Of course the cost of home ownership would sharply decline and rents would certainly decline as well.
3) Wouldn’t it just lead to sharply higher housing prices? Without some reasonable controls, it probably would. But the controls wouldn’t be that difficult and would serve important societal purposes. Housing price increases could be limited by an index tied to inflation or median income. The controls could even be optional in the sense that a homeowner could decide whether or not to opt into the program. Once a home is entered into the program though, it’s future value would then be linked to the index. We may lose some possible benefits dealing with price signals from an unstructured housing market, but they would be greatly offset by the elimination of the risk of future housing collapses or bubbles and the vast advancement in disposable income.
4) This is way too radical and would never be implemented. Probably true, but no reason to attack it.
This post clearly hasn’t addressed the many issues involved, but they’d all surely be resolvable with a bit of effort. It isn’t exactly rocket science. The important thing, I think, is that our views on finance need to be sharply radicalized if we’re to make true progress. We can’t endlessly send rentier income upward if we seek to live prosperously, and that will clearly involve radical challenges to existing power. Every day we hear radical proposals emanating from the top demanding ever greater cuts in wages, security, benefits, and living conditions. We have, it seems, just three possible ways to respond: we can accept the elite theory of the universe as true and, serf-like, humbly accept their endless cuts; OR we can seek to avoid the cuts and maintain the status quo; OR we can throw right back at them our very own democratically based proposals that fully match theirs in the level of radicalism. Why not go for the third?
Update 6/14: I think the class status aspect of housing is very relevant here and I touch on it in today’s post.
It’s truly inspiring to witness the historic flowering of the global middle class and I think it’s way past time we all stand up and thank the wise political leadership in the European Union, the United States, and throughout the world for their fine dedicated efforts. These experts, educated through years of advanced study, have learned the essential formula for creating a prosperous middle class world and we are the beneficiaries. And here it is, the end result of centuries of human thought, the brilliant formula for middle class prosperity:
Unrestricted free trade, low taxes, free capital mobility, competitively low wages, balanced budgets, repressed unions, police discipline, high interest rates, strong business confidence, strictly enforced property rights, and a limited constitutional democracy under the ‘rule of law’.
The great fruits of this formula are, of course, self evident in the “developed” world as throngs everywhere are gathering on the streets to celebrate the gleaming 21st century utopian world. What’s even more exciting is the phenomenal achievement in Latin America! To mark this beautiful spring awakening for the Latino middle class, Joe Biden recently made a triumphant visit to that true bastion of Latin American middle-classdom, Colombia, and toured one of the great middle class industries of our new 21st century, the flower farm.
Colombia has long practiced the middle class formula and is rightly seen as a noble role model. It maintains a competitive wage structure through its innovative high poverty program which consistently secures poverty rates well above 30%. It has free trade agreements with the US, has high interest rates, currently a whopping 3.25%, and its investors are surely bursting with confidence, having achieved a remarkably high gini coefficient of .548. Perhaps Colombia’s most effective competitive advantage is its truly ground-breaking policy on unions, which, through the efficient murdering of union leaders, has kept union enrollment to less than 4%!
Biden was so impressed with his visit, he even wrote an article in the Wall Street Journal about it, entitled “Joe Biden – The Americas Ascendant: The Spread of Free Trade and Democracy has been a Boom to the Hemisphere”. “What I saw on the flower farm”, he gushed, “was just one sign of the economic blossoming in the year since a U.S. free-trade agreement with Colombia went into force.”… “Today, I believe we can credibly envision an Americas that is solidly middle-class, secure and democratic”.
Joe’s right, the flower farming industry in Colombia is truly inspiring, being one of the world leaders in maximizing profitability through the clever strategy of paying employees a wage of less than $2 per day. Equally helpful is the hands off regulatory environment which permits high output, an obvious key to maintaining middle class standards, without getting bogged down in petty grievances like the silly fact that two-thirds of the flower workers suffer sickness from pesticide exposure.
Because flower farming is such a critical industry for the 21st century middle class, Biden even produced a two minute video of his tour. Be sure to watch it as it’s quite exciting.
Walking through the farm amidst the clearly happy $2 per day middle class workers, he just can’t help but marvel at “the progress in the decent good paying jobs”. “We see a future for not just Colombia but for the hemisphere, all of us of middle class societies that are in fact democracies like Colombia that are growing and prosperous; and that’s the future and that’s not been anything more than a dream for the last century. In this next decade or so we can make tremendous progress”.
It’s really so exciting. Thank you Joe Biden and Barack Obama! And the other deserving leaders throughout the world!
Prior to the 16th century, most of Christendom fervently believed the Earth was the center of the Solar System and that the Sun revolved around it. It became obvious to the Renaissance scientists and pretty much all future observers (American Creationists excluded) that the empirical facts didn’t give much support to the geocentric view and it was far simpler to think of the Sun as the center around which orbited the Earth. The Theory of Relativity tells us, though, that there’s no such thing as absolute motion and so any object in the universe can make equal claim to being considered the stationary center. It’s therefore not empirically proven that the Earth does in fact orbit the Sun; it’s just vastly simpler and in accordance with all our physical theories to view it that way.
We see something similar, I think, in the realm of political economy. Does Democracy revolve around Money or is it vice versa? Which has the better claim to being the stationary center? Is our system better considered Democratic Capitalism or Capitalist Democracy (with the second word having the implied greater importance)?
I won’t try to untangle that question here but I think it’s interesting to see how the framing of the current crisis helps in arriving at an answer. Writing about Europe today, Financial Times columnist Philip Stephens gives us a typical example (paywall) of the orthodox perspective.
“Put a bunch of European leaders in a room and it is a fair bet that the conversation turns to the rise of populist parties across the continent. A year or so ago, the same politicians would have been obsessed with the markets’ threat to the euro. Now they worry about whether European democracy can survive the shock of saving the single currency.”
We have massive unemployment and suffering throughout Europe and elsewhere and the system is highly unpopular. It’s a crisis for sure, but what type? Is it a crisis of the socio-economic system that’s enforcing this misery, i.e. Capitalism? Or is it a crisis of the people’s supposed sovereign right to change it, i.e. Democracy?
Except for a brief instant at the very beginning of the crisis when it appeared the entire financial system was about to go supernovae, we hardly ever see the crisis reported as one of capitalism. It’s almost universally framed as a crisis of democracy. I think that’s pretty interesting.
The standard framing of articles like Stephens’s should leave us in no doubt that the most basic socio-economic theory of our human universe, as concocted by those in true power, firmly places Democracy in orbit around that brightest and most glorious of stars, Money. We know this to be true because if Democracy were truly considered the center, then we’d be told we’re living in a crisis of Capitalism. And the very idea of that; that Democracy could really truly be at the center of it all is, to our elites, laughable, “populist” lunacy; as ridiculously absurd as that old silly dogma of the medieval geocentrists.
The New York Times presents us today with some friendly coverage of a recent paper written by Daron Acemoglu, economist at MIT, James Robinson of the Harvard Department of Government, and Thierry Vierdier, economist at the Paris School of Economics. The paper, “Can’t we all be Scandinavians?”, is one of the more outlandish propaganda pieces I’ve seen of late, and the fact that such nonsense can be produced in such prestigious universities and further broadcast to the wider world via the “paper of record”, is just one more reminder of the great institutional power of neoliberal capitalism.
The essential argument is that global technological progress requires at least one country, currently the United States, have a “cutthroat” socio-economic system of very lucrative rewards for entrepreneurs coupled with high poverty, inequality, and few social benefits for the average worker.
Without pointing to any developed theory of human motivation or the actual history of inventions and discoveries, the authors grandly assert that technological innovations require a “cutthroat reward structure with high-powered incentives for success” which “implies greater inequality and greater poverty (and a weaker safety net)”. In short, progress can only be achieved through greed.
It’s the “cutthroat American society that makes possible the more cuddly Scandinavian societies”. The richer developed world is living off of the “technology frontier” enabled and advanced through the cutthroat reward system of the Americans. Those with more equal societies are parasites who “free-ride on this frontier economy and choose a more egalitarian, cuddly, reward structure”.
We can’t all be Scandinavians they conclude because the world’s growth rate would decline without at least one country structured around cutthroat incentives. “(O)ne may claim (with all the usual caveats of course) that the more harmonious and egalitarian Scandinavian societies are made possible because they are able to benefit from and free ride on the knowledge externalities created by the cutthroat American equilibrium.”
Progress and prosperity require poverty and inequality. This has been the elite religion since the very beginnings of human civilization; there’s absolutely nothing original here. What’s a bit more recent though, is the couple hundred year history of trying to couple the defense of aristocracy with the allure and prestige of science. The authors, with the weighty institutional credentials of MIT, Harvard, and the Paris School of Economics, and with an absurd use of advanced mathematics, outlandishly expect the public to accept their piece of silly, simplistic propaganda as a hard scientific theory. In a just world, they’d receive a prompt cutthroat firing for writing such trash.
The oligarchy surely has no better friend than Paul Krugman, today’s intellectual leader of an ever so slightly moderated version of neo-liberalism that’s neatly packaged to the public as the “Keynesian left” alternative. Forget that there’s no resemblance to the views of the real John Maynard Keynes, himself no radical, or that the sole claim of expertise is rooted in an utterly disgraced profession, Krugman has nevertheless been anointed the critical role of sowing hope for alternatives while remaining firmly bounded within a socio-economic system in which there can be none. Ignoring the rhetoric, we find nothing truly antagonistic to Thatcher’s TINA.
This is the disgrace and hypocrisy of the so called “center-left”, an outrageously false designation given how very far it is from any reasonable notion of that true moral center we find rooted in almost all philosophical and religious traditions. We need look no further than the recent speeches of Pope Francis, who has offered views on our socio-economic system that are truly central in the moral sense and, needless to say, far to the left of today’s so-called “Keynesian center-leftists”,
Let’s look at Krugman today in a post entitled “Europe’s Keynesian Problem”. “Everyone with a bit of sense”, he informs us, knows the central problem in Europe. It has nothing to do with extreme inequality or the fact that just a handful of oligopolistic firms and banks control virtually the entire economic structure; no, it’s a far simpler case of accounting valuations. “(T)here was a sharp rise in relative costs and prices in the periphery during the boom years, and the process of correcting that overvaluation through “internal devaluation” is extremely difficult and painful.” The Krugmanian / “Keynesian” solution is for nothing beyond continued austerity in the “periphery” albeit not as extreme as today. Direct action to advance prosperity is simply not in the cards. “(N)obody is suggesting stimulus for, say, Portugal”, he asserts, bearing his neo-liberal teeth. Portugal has an unemployment rate of 17.5%, and an average wage half that of Germany coupled with longer work hours; yet while the so called “private sector” can’t come close to providing anywhere near the living standards our productive capacity clearly permits, Krugman cannot bring himself to support “stimulus”.
And what of the term “peripheral”, used here and throughout the neo-liberal world as if it were a basic, morally unobjectionable feature of nature? Should not any system of thought which accepts the notion that a group of people can be “peripheral”, i.e. not central, be branded as sitting on the extreme outer periphery of any true moral center?
Krugman then regurgitates a 21st century version of “trickle down”: “on any kind of rational pan-European basis, we should be seeing austerity in the periphery at least partly offset by stimulus in the core.” This is Krugman’s central dogma for Europe: austerity for the periphery, although less than today, coupled with inflationary spending in Germany. German spending will then trickle down to the peripheral Portuguese through the magic of the market. Yes, and we see the same market magic trickling between the United States and Mexico, do we not? The answer to the problems of the Mexicans then should be little more than a bit of stimulus in America! I wrote a post the other day on Krugman and Mexico, in fact, and his views are rooted in the same pitiful neo-liberalism as his ideas for Europe. Mexico, to Krugman, merely needs better child nutrition and education and should then wait a few decades for the medicine to work. TINA personified!
Our center-left intellectuals, almost all “economists”, are truly a disgrace. And it’s demonstrated almost daily. We need look no further today than Brad DeLong, who Krugman refers to in his post. It’s the standard left neo-liberalism that requires no further comment. What’s notable is that DeLong admits (correctly) of his own intellectual impotence, concluding that the disgraced right wing economist Kenneth Rogoff “is one of those people whose judgment is significantly more likely than not to be better than my own.”
It’s all one big joke, right?