How not to repeat the mistakes of 2011.
In a couple of days I’m going to be participating in an Economic Policy Institute conference on “excessive wealth disorder” — the problems and dangers created by extreme concentration of income and wealth at the top. I’ve been asked to give a short talk at the beginning of the conference, focusing on the political and policy distortions high inequality creates, and I’ve been trying to put my thoughts in order. So I thought I might as well write up those thoughts for broader dissemination.
While popular discourse has concentrated on the “1 percent,” what’s really at issue here is the role of the 0.1 percent, or maybe the 0.01 percent — the truly wealthy, not the “$400,000 a year working Wall Street stiff” memorably ridiculed in the movie Wall Street. This is a really tiny group of people, but one that exerts huge influence over policy.
Where does this influence come from? People often talk about campaign contributions, but those are only one channel. In fact, I’d identify at least four ways in which the financial resources of the 0.1 percent distort policy priorities:
1. Raw corruption. We like to imagine that simple bribery of politicians isn’t an important factor in America, but it’s almost surely a much bigger deal than we like to think.
2. Soft corruption. What I mean by this are the various ways short of direct bribery politicians, government officials, and people with policy influence of any kind stand to gain financially by promoting policies that serve the interests or prejudices of the wealthy. This includes the revolving door between public service and private-sector employment, think-tank fellowships, fees on the lecture circuit, and so on.
3. Campaign contributions. Yes, these matter.
4. Defining the agenda: Through a variety of channels — media ownership, think tanks, and the simple tendency to assume that being rich also means being wise — the 0.1 percent has an extraordinary ability to set the agenda for policy discussion, in ways that can be sharply at odds with both a reasonable assessment of priorities and public opinion more generally.
Of these, I want to focus on item (4), not because it’s necessarily the most important — as I said, I suspect that raw corruption is a bigger deal than most of us can imagine — but because it’s something I think I know about. In particular, I want to focus on a particular example that for me and others was a kind of radicalizing moment, a demonstration that extreme wealth really has degraded the ability of our political system to deal with real problems.
The example I have in mind was the extraordinary shift in conventional wisdom and policy priorities that took place in 2010-2011, away from placing priority on reducing the huge suffering still taking place in the aftermath of the 2008 financial crisis, and toward action to avert the supposed risk of a debt crisis. This episode is receding into the past, but it was extraordinary and shocking at the time, and could all too easily be a precursor to politics in the near future.
Let’s talk first about the underlying economic circumstances. At the beginning of 2011, the U.S. unemployment rate was still 9 percent, and long-term unemployment in particular was at extraordinary levels, with more than 6 million Americans having been out of work for 6 months or more. It was an ugly economic situation, but its causes were no mystery. The bursting of the housing bubble, and the subsequent attempts of households to reduce their debt, had let to a severe shortfall of aggregate demand. Despite very low interest rates by historical standards, businesses weren’t willing to invest enough to take up the slack created by this household pullback.
Textbook economics offered very clear advice about what to do under these circumstances. This was exactly the kind of situation in which deficit spending helps the economy, by supplying the demand the private sector wasn’t. Unfortunately, the support provided by the American Recovery and Reinvestment Act — the Obama stimulus, which was inadequate but had at least cushioned the effects of the slump — peaked in mid-2010 and was in the process of falling off sharply. So the obvious, Economics 101 move would have been to implement another significant round of stimulus. After all, the federal government was still able to borrow long-term at near-zero real interest rates.
Somehow, however, over the course of 2010 a consensus emerged in the political and media worlds that in the face of 9 percent unemployment the two most important issues were … deficit reduction and “entitlement reform,” i.e. cuts in Social Security and Medicare. And I do mean consensus. As Ezra Klein noted, “the rules of reportorial neutrality don’t apply when it comes to the deficit.” He cited, for example, Mike Allen asking Alan Simpson and Erskine Bowles “whether they believed Obama would do ‘the right thing’ on entitlements — with ‘the right thing’ clearly meaning ‘cut entitlements.’”
So where did this consensus come from? To be fair, the general public has never bought into Keynesian economics; as far as I know, most voters, if asked, will always say that the budget deficit should be reduced. In November 1936, just after FDR’s reelection, Gallup asked voters whether the new administration should balance the budget; 65 percent said yes, only 28 percent no.
But voters tend to place a relatively low priority on deficits as compared with jobs and the economy. And they overwhelmingly favor spending more on health care and Social Security.
The rich, however, are different from you and me. In 2011 the political scientists Benjamin Page, Larry Bartels, and Jason Seawright managed to survey a group of wealthy individuals in the Chicago area. They found striking differences between this group’s policy priorities and those of the public at large. Budget deficits topped the list of problems they considered “very important,” with a third considering them the “most important” problem. While the respondents also expressed concern about unemployment and education, “they ranked a distant second and third among the concerns of wealthy Americans.”
And when it came to entitlements, the policy preferences of the wealthy were clearly at odds with those of the general public. By large margins, voters at large wanted to expand spending on health care and Social Security. By almost equally large margins, the wealthy wanted to reduce spending on those same programs.
So what was the origin of the conventional-wisdom consensus that emerged in 2010-2011 — a consensus so overwhelming that leading journalists abandoned the conventions of reportorial neutrality, and described austerity policies as the self-evident “right thing” for politicians to be doing? What happened, essentially, was that the political and media establishment internalized the preferences of the extremely wealthy.
Now, 2011 was an especially dramatic example of how this happens, but it wasn’t unique. In their recent book “Billionaires and Stealth Politics,” Page, Seawright, and Matthew Lacombe point out the enduring effects of plutocratic political influence on the Social Security debate: “Despite the strong support among most Americans for protecting and expanding Social Security benefits, for example, the intense, decades-long campaign to cut or privatize Social Security that was led by billionaire Pete Peterson and his wealthy allies appears to have played a part in thwarting any possibility of expanding Social Security benefits. Instead, the United States has repeatedly come close (even under Democratic Presidents Clinton and Obama) to actually cutting benefits as part of a bipartisan ‘grand bargain’ concerning the federal budget.”
And here’s the thing: While we don’t want to romanticize the wisdom of the common man, there’s absolutely no reason to believe that the policy preferences of the wealthy are based on any superior understanding of how the world works. On the contrary, the wealthy were obsessed with debt and uninterested in mass unemployment at a time when deficits weren’t a problem — were, indeed, part of the solution — while unemployment was.
And the widespread belief among the wealthy that we should raise the retirement age is based, literally, on failure to understand how the other half lives (or, actually, doesn’t). Yes, life expectancy at age 65 has gone up, but overwhelmingly for the upper part of the income distribution. Less affluent Americans, who are precisely the people who depend most on Social Security, have seen little rise in life expectancy, so there is no justification for forcing them to work longer.
Where do the preferences of the wealthy come from? You don’t have to be a vulgar Marxist to recognize a strong element of class interest. The push for austerity was clearly linked to a desire to shrink the tax-and-transfer state, which in all advanced countries, even America, is a significant force for redistribution away from the wealthy toward citizens with lower incomes.
You can see the true goals of austerity a couple of ways. First, by comparison with other advanced countries the U.S. has low taxes and low social spending, yet almost all the energy of self-proclaimed deficit hawks was expended on demands for reduced spending rather than increased taxes. Second, it’s striking how much less deficit hysteria we’re hearing now than we did seven years ago. The full-employment budget deficit now is about as large, as a share of GDP, as it was in early 2012, when unemployment was still above 8 percent. But this deficit, although far less justified by macroeconomic considerations, was created by tax cuts — and somehow the deficit hawks are fairly quiet.
No doubt many wealthy backers of tax cuts for themselves and benefit cuts for others manage to convince themselves that this is in everyone’s interest. People are in general good at that sort of self-delusion. The fact remains that the wealthy, on average, push for policies that benefit themselves even when they often hurt the economy as a whole. And the sheer wealth of the wealthy is what empowers them to get a lot of what they want.
So what does this imply going forward? First, in the near term, both during the 2020 election and after, it’s going to be really important to ride herd on both centrist politicians and the media, and not let them pull another 2011, treating the policy preferences of the 0.1 percent as the Right Thing as opposed to, well, what a certain small class of people want. There’s a fairly long list of things progressives have recently advocated that the usual suspects will try to convince everyone are crazy ideas nobody serious would support, e.g.
A 70 percent top tax rate
A wealth tax on very large fortunes
Universal child care
Deficit-financed spending on infrastructure
You don’t have to support any or all of these policy ideas to recognize that they are anything but crazy. They are, in fact, backed by research from some of the world’s leading economic experts. Any journalist or centrist politician who treats them as self-evidently irresponsible is doing a 2011, internalizing the prejudices of the wealthy and treating them as if they were facts.
But while vigilance can mitigate the extent to which the wealthy get to define the policy agenda, in the end big money will find a way — unless there’s less big money to begin with. So reducing the extreme concentration of income and wealth isn’t just a desirable thing on social and economic grounds. It’s also a necessary step toward a healthier political system.
We marvel at the continuing energy of octogenarians such as Warren Buffett, Ruth Bader Ginsburg and Clint Eastwood, but let’s face it: Few 80-year-olds are as good at their jobs as they were in their 50s.
In most workplaces, wages rise with seniority, but productivity does not. In the U.S., after many years of a declining retirement age, the average worker is now retiring later, which means that there are fewer jobs for young people.
.. Given the added fact that mandatory retirement and age discrimination are illegal, employers hesitate to hire middle-aged workers, who may stay on the job long after their pay has exceeded their productivity.
.. A relatively simple set of reforms could help American businesses and workers at the same time. These would include a
- relaxation of age-discrimination laws, so that contracts could require workers to retire at 65 or older, and
- a reduction in Social Security benefits for well-paid older employees who decide to keep working.
.. Retirees in the U.S. can maximize their Social Security benefits by retiring around the age of 68, but some workers are induced to retire earlier. Their employer or union makes it irresistible through a “defined-benefit” pension plan, which provides a set annual payout, usually based on the salary earned in their final years of employment. Virtually all such plans encourage timely retirement by requiring contributions from those who continue to work and reducing their benefits if they stay on the job past a certain age. By design, most workers find it economical to retire by 60.
.. In place of defined-benefit plans, the new standard has become individual retirement accounts or defined-contribution plans, in which the employer provides tax-favored contributions but bears no responsibility for investment returns.
.. These new retirement plans have taken away the ability of employers to influence the age at which workers retire.
.. One way forward would be to amend current law to allow employers and employees to agree on a retirement age at the start of a new job. The contract could specify that, after a certain age, the employee could be terminated without cause.
.. It would also subtly redirect age-discrimination law to help job applicants in their 50s and early 60s, because employers would know that these employees could not simply stay on the job forever.
.. One effective change in incentives would be to reduce Social Security benefits for any beneficiary with more than $75,000 a year in earned income. A worker entitled to full retirement benefits at 66 who continues in a relatively high-paying job might, for example, lose $5,000 in Social Security a year.
.. For higher earners, the penalties could be even steeper. After age 76, an employee who makes, say, $200,000 a year and chooses to continue working full time would stop receiving Social Security benefits altogether. The benefits would start up again only at retirement.
The end of the world has already arrived in Brazil.
A constitutional amendment passed by the Senate last month is being called “the end of the world” amendment by its opponents. Why? Because the consequences of the amendment look disastrous — and long lasting. It will impose a 20-year cap on all federal spending, including education and health care.
.. The government isn’t backing down. The “end of the world” amendment is just one of many neoliberal measures being pushed through by Michel Temer, the president. It should be cause for concern that Mr. Temer can undertake so many such reforms, especially considering most of them, including the budget cap, go against the agenda of the person who — unlike Mr. Temer — actually won the most recent presidential election.
.. He’s still at it, saying he’s taking advantage of his unpopularity to put unpopular measures in place.
.. His proposal will set a minimum retirement age of 65, in a country where the average person retires at 54.
.. Although the average life expectancy in Brazil is 74, we’re one of the most unequal countries in the world. For example, in 37 percent of the neighborhoods of the city of São Paulo, people have a life expectancy of less than 65 years. It’s even shorter for the rural poor.
.. 51 percent of Brazilians rated it “bad” or “terrible.” (Only 10 percent of respondents said they approve of the government. Thirty-four percent called it “regular.”) Mr. Temer, who took power thanks to Ms. Rousseff’s impeachment, has also been found guilty of violating campaign finance limits and has been named in one of the many corruption scandals unfolding in the country.
.. Nevertheless, the new government has already received full support from the following organizations: Brazilian Federation of Banks, the Agricultural Parliamentary Front, National Confederation of Industry, the World Trade Organization, the Federation of Industries of the State of São Paulo, Federation of Industries of the State of Rio de Janeiro, Brazilian Chamber of Construction Industry, National Federation of Motor Vehicle Distributors and several top executives.