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An Idiot’s Guide to Inequality

An Idiot’s Guide to Inequality

JULY 23, 2014

Nicholas Kristof

“We may now have a new “most unread best seller of all time.”

Data from Amazon Kindles suggests that that honor may go to Thomas Piketty’s “Capital in the Twenty-First Century,” which reached No. 1 on the best-seller list this year. Jordan Ellenberg, a professor of mathematics at the University of Wisconsin, Madison, wrote in The Wall Street Journal that Piketty’s book seems to eclipse its rivals in losing readers: All five of the passages that readers on Kindle have highlighted most are in the first 26 pages of a tome that runs 685 pages.

The rush to purchase Piketty’s book suggested that Americans must have wanted to understand inequality. The apparent rush to put it down suggests that, well, we’re human.

So let me satisfy this demand with my own “Idiot’s Guide to Inequality.” Here are five points:

First, economic inequality has worsened significantly in the United States and some other countries. The richest 1 percent in the United States now own more wealth than the bottom 90 percent. Oxfam estimates that the richest 85 people in the world own half of all wealth.

The situation might be tolerable if a rising tide were lifting all boats. But it’s lifting mostly the yachts. In 2010, 93 percent of the additional income created in America went to the top 1 percent.

Second, inequality in America is destabilizing. Some inequality is essential to create incentives, but we seem to have reached the point where inequality actually becomes an impediment to economic growth.

Certainly, the nation grew more quickly in periods when we were more equal, including in the golden decades after World War II when growth was strong and inequality actually diminished. Likewise, a major research paperfrom the International Monetary Fund in April found that more equitable societies tend to enjoy more rapid economic growth.

Indeed, even Lloyd Blankfein, the chief executive of Goldman Sachs, warns that “too much … has gone to too few” and that inequality in America is now “very destabilizing.”

Inequality causes problems by creating fissures in societies, leaving those at the bottom feeling marginalized or disenfranchised. That has been a classic problem in “banana republic” countries in Latin America, and the United States now has a Gini coefficient (a standard measure of inequality) approaching some traditionally poor and dysfunctional Latin countries.

Third, disparities reflect not just the invisible hand of the market but also manipulation of markets. Joseph Stiglitz, the Nobel Prize-winning economist, wrote a terrific book two years ago, “The Price of Inequality,” which is a shorter and easier read than Piketty’s book. In it, he notes: “Much of America’s inequality is the result of market distortions, with incentives directed not at creating new wealth but at taking it from others.”

For example, financiers are wealthy partly because they’re highly educated and hardworking — and also because they’ve successfully lobbied for the carried interest tax loophole that lets their pay be taxed at much lower rates than other people’s.

Likewise, if you’re a pharmaceutical executive, one way to create profits is to generate new products. Another is to lobby Congress to bar the government’s Medicare program from bargaining for drug prices. That amounts to a $50 billion annual gift to pharmaceutical companies.

Fourth, inequality doesn’t necessarily even benefit the rich as much as we think. At some point, extra incomes don’t go to sate desires but to attempt to buy status through “positional goods” — like the hottest car on the block.

The problem is that there can only be one hottest car on the block. So the lawyer who buys a Porsche is foiled by the C.E.O. who buys a Ferrari, who in turn is foiled by the hedge fund manager who buys a Lamborghini. This arms race leaves these desires unsated; there’s still only one at the top of the heap.

Fifth, progressives probably talk too much about “inequality” and not enough about “opportunity.” Some voters are turned off by tirades about inequality because they say it connotes envy of the rich; there is more consensus on bringing everyone to the same starting line.

Unfortunately, equal opportunity is now a mirage. Indeed, researchers find that there is less economic mobility in America than in class-conscious Europe.

We know some of the tools, including job incentives and better schools, that can reduce this opportunity gap. But the United States is one of the few advanced countries that spends less educating the average poor child than the average rich one. As an escalator of mobility, the American education system is broken.

There’s still a great deal we don’t understand about inequality. But whether or not you read Piketty, there’s one overwhelming lesson you should be aware of: Inequality and lack of opportunity today constitute a national infirmity and vulnerability — and there are policy tools that can make a difference.”

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MOANING MOGULS

“The past few years have been very good to Stephen Schwarzman, the chairman and C.E.O. of the Blackstone Group, the giant private-equity firm. His industry, which relies on borrowed money, has benefitted from low interest rates, and the stock-market boom has given his firm great opportunities to cash out investments. Schwarzman is now worth more than ten billion dollars. You wouldn’t think he’d have much to complain about. But, to hear him tell it, he’s beset by a meddlesome, tax-happy government and a whiny, envious populace. He recently grumbled that the U.S. middle class has taken to “blaming wealthy people” for its problems. Previously, he has said that it might be good to raise income taxes on the poor so they had “skin in the game,” and that proposals to repeal the carried-interest tax loophole—from which he personally benefits—were akin to the German invasion of Poland.

Schwarzman isn’t alone. In the past year, the venture capitalist Tom Perkins and Kenneth Langone, the co-founder of Home Depot, both compared populist attacks on the wealthy to the Nazis’ attacks on the Jews. All three eventually apologized, but the basic sentiment is surprisingly common. Although the Obama years have been boom times for America’s super-rich—recent work by the economists Emmanuel Saez and Thomas Piketty showed that ninety-five per cent of income gains in the first three years of the recovery went to the top one per cent—a lot of them believe that they’re a persecuted minority. As Mark Mizruchi, a sociologist at the University of Michigan and the author of a book called “The Fracturing of the American Corporate Elite,” told me, “These guys think, We’re the job creators, we keep the markets running, and yet the public doesn’t like us. How can that be?” Business leaders were upset at the criticism that followed the financial crisis and, for many of them, it’s an article of faith that people succeed or fail because that’s what they deserve. Schwarzman recently said that Americans “always like to blame somebody other than themselves for a failure.” If you believe that net worth is a reflection of merit, then any attempt to curb inequality looks unfair.

That’s not how it’s always been. A century ago, industrial magnates played a central role in the Progressive movement, working with unions, supporting workmen’s compensation laws and laws against child labor, and often pushing for more government regulation. This wasn’t altruism; as a classic analysis by the historian James Weinstein showed, the reforms were intended to co-opt public pressure and avert more radical measures. Still, they materially improved the lives of ordinary workers. And they sprang from a pragmatic belief that the robustness of capitalism as a whole depended on wide distribution of the fruits of the system.

Similar attitudes prevailed in the postwar era, as Mizruchi has documented. Corporate leaders formed an organization called the Committee for Economic Development, which played a central role in the forging of postwar consensus politics, accepting strong unions, bigger government, and the rise of the welfare state. “At the very top, corporate leaders were much more moderate and pragmatic, and, because that’s where national politics were, they were very influential,” Mizruchi said. Corporations supported policies that might have been costly in the short term in order to strengthen the system as a whole. The C.E.D. called for tax increases to pay for the Korean War and it supported some of L.B.J.’s Great Society. As Mizruchi put it, “They believed that in order to maintain their privileges, they had to insure that ordinary Americans were having their needs met.”

That all changed beginning in the seventies, when the business community, wrestling with shrinking profits and tougher foreign competition, lurched to the right. Today, there are no centrist business organizations with any real political clout, and the only business lobbies that matter in Washington are those pushing an agenda of lower taxes and less regulation. Corporate profits and C.E.O. salaries have in recent years reached record levels, but there’s no sign of a return to the corporate statesmanship of the past (the occasional outlier like Warren Buffett notwithstanding). And that’s one big reason that it’s become impossible for Washington to get things done, even on issues of bipartisan interest.

If today’s corporate kvetchers are more concerned with the state of their egos than with the state of the nation, it’s in part because their own fortunes aren’t tied to those of the nation the way they once were. In the postwar years, American companies depended largely on American consumers. Globalization has changed that—foreign sales account for almost half the revenue of the S&P 500—as has the rise of financial services (where the most important clients are the wealthy and other corporations). The well-being of the American middle class just doesn’t matter as much to companies’ bottom lines. And there’s another change. Early in the past century, there was a true socialist movement in the United States, and in the postwar years the Soviet Union seemed to offer the possibility of a meaningful alternative to capitalism. Small wonder that the tycoons of those days were so eager to channel populist agitation into reform. Today, by contrast, corporate chieftains have little to fear, other than mildly higher taxes and the complaints of people who have read Thomas Piketty. Moguls complain about their feelings because that’s all anyone can really threaten. 

ILLUSTRATION: CHRISTOPH NIEMANN”

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No, President Obama Did Not Break the Middle East

It’s so important to put into perspective what Obama has done during his presidency. Many people criticize him for not doing what he promised during his campaigns, but it’s important to note the context within which he’s working.

Congress is at an all time historical low for passing bills, they block everything the president wants to do (even shutting down the government in the process). Obama first came into office right at the beginning of the Great Recession and during a war between Israel and the Gaza-based Hamas in the Middle East.

Gun restrictions had been slowly loosened over the course of the past couple decades thanks to NRA-like lobbying. Inflation since the 70s and productivity since the 80s have been increasing without match, thereby plummeting their correlation to minimum wage. Meanwhile, corporations are finding more and more loopholes so that they can continue to increase their profit margins while simultaneously not allowing the profits to “trickle down” (instead all the excess profit is going into off-shore, non-taxed accts).

Manufacturing jobs have been gradually outsourced to other countries over the past couple decades, effectively slashing the averagely-skilled, middle-class workforce in the US. And the oil and rubber lobbyists have pretty much monopolized the entire energy economy in the US, making it near impossible to move beyond our out-dated, limited-resource-based energy systems.

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June 23, 2014 · 4:38 pm