by Linda Beale
crony capitalism and casino capitalism–bad flavors for right or left, per Kristof and Stiglitz
The Occupy Wall Street focus on “we are the 99 percent” juxtaposed with the CBO’s recent report on the growing inequality in America (see here) come at a time when the American right is pushing hard for policies, like Perry’s so-called “Flat Tax” and Cain’s so-called “FairTax”, that will exacerbate that inequality in a winner-take-all economic system that rewards the speculators and fat cats to the detriment of ordinary society. Hopefully those first two items will cause ordinary folk to think twice before supporting that exacerbating trend on the right. The right likes to disguise them as ‘folksy’ ‘down-home’ populism. They aren’t. They are wolves disguised in sheep’s clothing.
In Crony Capitalism Comes Home, New York Times (Oct. 26, 2011), Nicholas Kristof notes the “alarmist view” of Occupy Wall Street rampant among the media and the elitist critics of the movement–one that sees the protesters as “half-naked Communists aiming to bring down the American economic system” or “a ‘mob’ trying to overthow capitalism.” He rightly responds that it is instead a movement that “highlights the need to restore basic capitalist principles like accountability.”
[I]n recent years, some financiers have chosen to live in a government-backed featherbed. Their platform seems to be socialism for tycoons and capitalism for the rest of us.
The American critique of the Asian crisis was correct. The countries involved were nominally capitalist but needed major reforms to create accountability and competitive markets. Something similar is true today of the United States.
Capitalism is so successful an economic system partly because of an internal discipline that allows for loss and even bankruptcy. It’s the possibility of failure that creates the opportunity for triumph. Yet many of America’s major banks are too big to fail, so they can privatize profits while socializing risk.
[Mohamed El-Erian, chief executive of Pimco] told me that the economic system needs to move toward “inclusive capitalism” and embrace broad-based job creation while curbing excessive inequality. “You cannot be a good house in a rapidly deteriorating neighborhood,” he told me. “The credibility and the fair functioning of the neighborhood matter a great deal. Without that, the integrity of the capitalist system will weaken further.”
Kristof and El-Erian are correct.
The movement in the US over the last few decades has made crony capitalism possible by pretending that abstract economic theories about “free markets” developed by Milt Friedman and his Chicago boys and based on unreal assumptions about human behavior should not only be consulted for setting fiscal policy but are the “God’s Truth” bible from which such policies should be derived. This has led to the capture of the markets by big money. Swarms of lobbyists for Big Oil/ Insurance/ Banks/ Pharma draft the laws that apply to their industries then work with the agencies to draft favorable interpretations into the regulations and then use powerful firms funded by business coalitions like the U.S. Chamber of Commerce, National Association of Manufacturers or supported by “business-funded so-called ‘think tanks’ to exploit the courts (packed by the right in the four decades since Reagan) to push industry favorable policies no matter the ‘externalities’ for people’s lives, the environment, other priorities, and individual freedoms.
Crony capitalism doesn’t hold capitalists accountable for what they do. We put minimal if any restraints (tax law, anti-trust law, patent law) on business monopolization and business consolidation and business ability to use the power of money to influence the work of legislators, executives and courts. We allow private equity funds that buy, fire, and sell at great profits to themselves but at great cost to communities, not just in jobs lost, but also in abandoned buildings left to be handled at the taxpayers’ expense and polluted waterways, ground and air left to be cleaned (if at all) at taxpayers’ expense. Wal-Mart moves from one address to another across the street and a short hop down the road, because it gets a new tax rebate from the county over the line and leaves behind the community that gave it a tax rebate for the first store, without ever providing the financial benefits the rebate was intended to buy and leaving behind the pollution, waste and destruction of an empty shell megabuilding (real life anecdote from Champaign, Illinois).
Crony capitalism results in excessive inequality (witness the way the managers and owners have accrued all the productivity gains of the last decade) and excessive inequality furthers crony capitalism.
[Lawrence Katz, a Harvard economist, says that] excessive inequality can have two perverse consequences: first, the very wealthy lobby for favors, contracts and bailouts that distort markets; and, second, growing inequality undermines the ability of the poorest to invest in their own education. “These factors mean that high inequality can generate further high inequality and eventually poor economic growth.”
This is very similar to what Joseph Stiglitz has been telling us for some time. In his 2010 book, Freefall, Stiglitz recognized that America’s economic crisis stemmed in part from unfounded faith in Econ 101. :
Modern economics, with its faith in free markets and globalisation, had promised prosperity for all. The much-touted New Economy – the amazing innovations that marked the latter half of the 20th century, including deregulation and financial engineering – was supposed to enable better risk management, bringing with it the end of the business cycle. If the combination of the New Economy and modern economics had not eliminated economic fluctuations, at least it was taming them. Or so we were told.
The Great Recession – clearly the worst downturn since the Great Depression 75 years earlier – has shattered these illusions. (This and the following excerpts are from the extract of his book, Why we have to change capitalism, The Telegraph)
Saying that does not make anyone “against capitalism”. It just means that we must open our eyes to understand the potential that unfettered capitalism has for highly negative destruction. As Stiglitz says, “markets lie at the heart of every successful economy but … [they] do not work well on their own.” We have to let government work to correct the imbalances that otherwise result from unfettered capitalism–especially the kinds of imbalances that start to grow when casino capitalism is let loose by socializiation of losses and privatization of gains resulting in enormous inequality within the society.
Economies need a balance between the role of markets and the role of government – with important contributions by non-market and non-governmental institutions. In the last 25 years, America lost that balance, and it pushed its unbalanced perspective on countries around the world. The current crisis has uncovered fundamental flaws in the capitalist system, or at least the peculiar version of capitalism that emerged in the latter part of the 20th century in the US.
[A] closer look at the US economy suggests that there are some deeper problems [than just the ones resulting from our current financial crisis and recession]: a society where even those in the middle have seen incomes stagnate for a decade, a society marked by increasing inequality; a country where, though there are dramatic exceptions, the statistical chances of a poor American making it to the top are lower than in “Old Europe.”
Stiglitz concludes, as many of us have, that this crisis should be taken as an opportunity to ask what kind of society we would like to have and to make the changes necessary to ensure that we are on the right path.
We have gone far down an alternative path – creating a society in which materialism dominates moral commitment, in which the rapid growth that we have achieved is not sustainable environmentally or socially, in which we do not act together as a community to address our common needs, partly because rugged individualism and market fundamentalism have eroded any sense of community and have led to rampant exploitation of unwary and unprotected individuals and to an increasing social divide.
The model of rugged individualism combined with market fundamentalism has altered not just how individuals think of themselves and their preferences but how they relate to each other. In a world of rugged individualism, there is little need for community and no need for trust. Government is a hindrance; it is the problem, not the solution.
But if externalities and market failures are pervasive, there is a need for collective action, and voluntary arrangements will typically not suffice.
The government plays an important role in restraining the “dark angels” of capitalism and allowing the “good angels” to operate for the benefit of society. Without government as an enforcer of accountability and trust, some version of crony capitalism and its brute-force harm to those who lose out in the struggle for wealthy is inevitable.
This crisis has exposed fissures in our society, between Wall Street and Main Street, between America’s rich and the rest of our society. While the top has been doing very well over the last three decades, incomes of most Americans have stagnated or fallen.
We need to keep this in mind, as we deal with the myriad proposals coming from the right to continue the trend of unfettered markets, crony capitalism and winner-take-all policies. Deregulation for Big Banks/Oil/Pharma et al will not create jobs, tax cuts for the wealthy will not unleash broad-based growth, and larger inflows of lobbyists [see, e.g., Eggen & Farnam, Lobbyists playing key role in 2012 fundraising, Wash. Post (Oct. 27, 2011)] into even our political decisionmaking processes made possible by the Citizens United case will not provide ever more “free speech” for everyone. These are excesses of brute-force capitalism exercised in a plutarchy, not evidence of a sustainable democracy.
The answer is what might be called “mitigated capitalism”–an economy that can benefit from the incentive power of capitalism, but that limits and restrains its excesses through reasonable social welfare programs and safety nets for those that are left behind in one way or another, strong emphasis on providing public education and other systems that allow individuals to take advantage of opportunities to advance themselves, and strong enforcement of laws that protect the public commons (natural resources, air, water, land, and the public square) for the public. The progressive income tax–a system that taxes every person on their income from whatever source (capital or labor)–and the estate tax–a system that redresses the inability of the tax system to capture the appreciation of capital resources during a person’s lifetime–are key ingredients of the tax answer to preventing crony/brute-force capitalism’s sway.
October 27, 2011 in Chicago School/Freshwater Economics, Debunking the Reagan “Free Marketarian” Myth, Democratic Egalitarianism, Estate Tax, Inequality of wealth or income, Occupy Wall Street, Sustainable Economy, Tax Policy | Permalink