Who Knew What and When?


You can’t make this stuff up. Bradley Smith quoted from the WSJ:

The Internal Revenue Service’s scandalous targeting of tea party and conservative groups refuses to die, as one by one the administration’s explanations prove untrue.

We were told that the White House, like the rest of the country, learned about the program on May 10 through a planted question asked of then IRS official Lois Lerner at an American Bar Association conference. Turns out the White House knew earlier. We were told the targeting was the work of a few rogue IRS employees in Cincinnati. Then those employees insisted that they were being managed from Washington.

We were told that no political appointees were involved, but now we know the scandal goes at least to the office of Obama appointee and IRS Chief Counsel William Wilkins. We were told that liberal groups were targeted, too. But then the IRS’s inspector general, whose report exposed the harassment, clarified that only conservative groups were targeted.

Now the administration line is that the scandal is nonetheless “phony.” That assertion is part of a Democratic counteroffensive contending that the tea party and conservative groups applying for “charitable” tax status never should have sought such IRS approval.

Rep. Xavier Becerra (D., Calif.), chairman of the House Democratic Caucus, argued on “Meet the Press” on May 19 that conservative groups were, “under the guise of a charity, [using] undisclosed millions of dollars to do political campaigns.”

Rep. Becerra argues that 501(c)(4) status should be reserved for “something good, not groups that are in business to do politics.” That’s a remarkable statement from a man who has spent the past 22 years in elective office.

Review of “Unequal Democracy: The Political Economy of the New Gilded Age”

I gave this book 4 stars, but I would have given it 3 1/2 if that was an option…

This is a well-researched examination of the politics of inequality. Unfortunately it fails to analyze  the economics of inequality, with the result that Bartels’ findings are based on some false premises and misperceptions.

The most serious error is to define and measure economic inequality solely in terms of income, when, in actuality, wealth is causing most of the divergence in incomes through the ownership of financial capital. Take a look at the income graphs: incomes converge during market crashes and recessions and diverge during market booms, so inequality is largely determined by the value of financial assets. Mr. Bartels uses the terms “haves” and “have-nots” extensively, but never stops to answer the obvious question: have what? What they have is capital: financial capital, human capital, and social capital. In this sense, growing inequality is one price of capitalist success. But instead of categorizing people as rich, poor, or middle class according to income data, Bartels should be looking at what determines those incomes and how those factors have changed over the past 30 years.

The rise of what Bartels terms the “New Gilded Age” can be attributed to two main events, a historical trend, and a technological revolution. The two events are Nixon’s repudiation of the gold redemption Bretton Woods dollar standard in 1971 and Paul Volcker’s appointment by Carter to break the back of inflation with tight monetary policy. The historical trend is the continuing globalization of trade and manufacturing that started in the early 1970s, while the technological revolution is that taking place in communications and information. Each of these changes has helped tip the balance of power between capital and labor, with the result that the returns to capital far outstrip returns to labor over the relevant time period. I question whether anyone really wants to accept the trade-offs to reverse this. Those trade-offs might include slower growth, less opportunity, less job creation, shrinking incomes, lower asset prices, higher inflation, dollar devaluation, and probably a declining population. Our emerging trading partners want no part of such trade-offs – they will take capitalist success wherever they can, so that’s the world we find ourselves competing in.

Though Bartels misses these fundamental economic truths about our current state of the world, he does identify the true political danger, which is that all this capital wealth has taken control over the democratic political process. This means the “haves” are now running policy and in so doing are defying economic realities (like market crashes) with policies that perpetuate market crises (like easy Fed policy and bailouts). But it is vitally important that we get our policy analysis correct, because Bartels’ interpretation leads him to conclude that the balance can be reinstated by electing more Democrats to office. Nothing could be more misguided. It doesn’t matter which Republocrats gain office, policies will continue to favor capital. Why? Simply put, because it’s a CAPITALIST system and success is defined in those terms. This has been proven clearly with the Clinton-Bush-Obama consistency in financial policy. Same old, same old.

Unfortunately, Bartels misses all this as he focuses on the politics of inequality and the dysfunctional political system. Let’s take his two main cases that demand explanation: the estate tax repeal and higher minimum wages. The public favors repeal of the estate tax and a minimum wage that keeps pace with wage incomes, but both populist preferences fail. Bartels tries, but really can’t explain why. Could it be that both estate tax repeal and lower minimum wages favor economic growth and capital accumulation? Do the non-wealthy recognize that in this free market system, accumulated capital is everything and thus from their personal perspective it’s wrong for the government to tax inheritances, of anybody? And don’t policies that allow the real value of the minimum wage to decline favor growth objectives by keeping wages low and employment higher or even stable? Aren’t national policies biased to favor higher GDP, lower unemployment, and lower inflation? Bartels identifies how party elites override populist preferences, but both of these preferences would be more readily embraced if the party elites better understood the economic realities of the system they seek to manage. In these cases, Democratic elites (by stopping estate tax repeal) seem more out of step with reality than Republican elites (by stopping minimum wage hikes), though Bartels wrongly assumes the opposite.

The real problem with our current politics is not taxes, misinformation, or voter ignorance. It’s that neither party is identifying the true causes of our democratic malaise and proposing solutions. Liberal elites tout redistribution through taxing and spending, but Western democracies adopting this strategy are in dire financial straits. This will not change, because political redistribution is counter-intuitive in a market economy where success in measured in profits and labor is a cost. The world has now largely accepted how markets create wealth, so there’s no going back (Marxist socialism is dead). On the other hand, conservatives tout market outcomes, but fail to account for how the accepted rules of the game tilt the outcomes in favor of the already successful, to the detriment of those struggling to become successful. Neither party is proposing to change their stripes. And why should they? Elites benefit to no end by perpetuating the status quo that favors their elite status. Liberals are saying to voters, “You NEED US to survive,” while conservatives are saying, “Just let us all enjoy our riches and someday you will too.” Is it any wonder why we have voter revolts?

The key to breaking out of this degenerative cycle is to open up the capitalist production process through the broad ownership of capital. This is not redistribution: ALL capital is earned through successful risk-taking, so every citizen of a free society must participate in successful risk-taking in order to share in the returns. (This is preferred practice in technology companies and why wealth is widely dispersed by Apple, Google and Microsoft.) On the portfolio side, we have extensive markets for managing risk, which enables us to take on prudent risks in hope of gaining higher returns. There is no magic here, but this is the only way to manage globalized world markets where capital is mobile and labor is not – where profits accumulate as capital and labor costs are minimized. Education is important to the extent that it creates opportunity to build human capital, which is also put at risk to earn a positive return.

The democratic political system will thrive when we empower the have-nots by promoting policies that guarantee their economic independence through participation in capitalism. The liberal stance favoring redistribution cannot succeed because it presupposes the have-nots’ perpetual dependence on political largesse. We already know that politics will favor the policies that yield economic success and wealth creation above all else. Thus, the promise of capitalism and freedom is not to be found in labor, union or otherwise; it’s to be found in widespread, accumulated capital. We need political leaders and scholars like Bartels to rise up and bring this message to the masses. It hasn’t happened yet and I’m not holding my breath.