Capital and Ideology - Well Worth Reading

I am about to finish Capital and Ideology, a 1000 page book by French economist Thomas Piketty.  It is requiring a major commitment but it is well worth it.  I want to mention several of the most interesting things that Piketty writes in this massive tome.

 

Piketty surveys the history of what he calls ‘inegalitarian regimes’ right up to the current growing inequality of the 21^st century.  His approach is very analytical and he makes use of data and statistics that he and his associates have gathered from historical archives and many other sources.

 

Piketty clearly believes that income and wealth inequality, especially in extreme forms, are an unhealthy condition for society.  He is not a Marxist or a communist, but he is also supremely skeptical of the efficacy of the so-called ‘invisible hand’ of pure capitalism. 

 

The first part of the book tracks the long history of what Piketty calls the ‘ternary’ regimes – regimes that consist of some sort of religious/clerical class, a warrior/noble class and a peasant class.  These regimes dominated the world for many centuries.  The inequality in these societies was extreme – the peasant class, by far the largest in number (usually close to 90%), essentially owned nothing or very little.

 

During the industrial revolution a new elite joined the traditional noble class, but inequality continued to be extreme.  The age of revolution and social consciousness in the late 1800’s ushered in a political will to address these inequalities, starting with Bismarck’s social security policies in Germany.  Later, the two world wars and the depression in the early to mid-1900’s caused major disruptive changes and resulted in a more active role for government in the world economy.

 

The post-WW2 period from 1950 to 1980 was a period of rapid economic growth, but also a period of serious efforts to redistribute wealth and income.  The level of inequality was dramatically lower than ever before in history.  Higher income and wealth taxes were utilized partly for war debt repayment but also to fund social programs and national infrastructure development.

 

But moribund economic results in the 70’s caused a shift away from redistributive tax structures (the Reagan and Thatcher era) and a return to full-throated worship of the free market.  The abject failure of communism seemed to place unfettered capitalism on an unassailable pedestal. The period from 1980 to 2022 has propelled income and wealth inequality to new heights and has caused a total stagnation of middle and lower middle-class incomes.

 

What is particularly interesting in Piketty’s analysis is the evolution of political alignment in the years from 1950 to the present.  From 1950 to 1980, the parties of the left were primarily supported by voters with lower income and lower education.  Conversely, those with higher income and education strongly supported the parties of the right.  This held true for all western democracies.

 

Since 1980, there has been a dramatic shift in these allegiances.  More highly educated voters have moved to the parties of the left (you can see this in my summary of the 2020 election poll by the Pew Charitable Trust - https://rvgeiger.blogspot.com/2022/01/the-2020-election-demographics-what-do.html) and the less educated have moved to the right.  But there is still a significant high-income group (not necessarily highly educated) that has remained faithful to the parties of the right.  Piketty terms these two groups the ‘Brahmin Left’ and the ‘Merchant Right’.

 

Piketty believes that this evolution is due to a couple of factors:  one, that lower income voters have not seen their circumstances significantly improved by the policies of the left and thus have become disenchanted, and two, that the globalization and meritocratic focus of the left has mainly benefited the ‘Brahmin Left’, leaving much of the population behind but attracting well-educated voters.  

 

Piketty posits that the policies of Clinton, Blair, Obama and Macron have not been significantly different than their conservative opponents in terms of reducing income and wealth inequality.  He sees the nativist/identity issues (immigration and nationalism being the primary ones) as secondary, though recognizing that these also play an increasingly noisy role.

 

Another interesting analysis in the book is how the lack of transparent international financial recording and the competition between countries for business by providing tax havens has allowed massive fortunes and profits to be realized and kept hidden from view.  This has clearly accelerated the global accumulation of absurdly disproportionate wealth by the top earners.

 

I have not yet read the final chapters that propose a new international approach to socio-economic challenges.  But it is clear that the current trends are unsupportable in the long run and can only lead to social and political instability.  Whether the world will be able to address this problem while facing climate change and the resurgence of totalitarian regimes is a weighty question.  If we cannot overcome the inertia of today's political chaos then there may be hell to pay.

 

  

The Problem with Inflation

I am not an economist, but I find the subject fascinating.   What is particularly interesting is that it is far from being a true science, but rather has quantitative, psychological and sociological components.  I have read a great deal on the topic and also done some online coursework to become more familiar with the concepts.

 

The developed world is experiencing substantial inflation for the first time in many years.  The last period of high inflation in the USA was in the late 70’s and early to mid 80’s.  The USA and the EU both have inflation currently, though from what I have read the inflation in the USA is somewhat higher than in the UK and EU.

 

There are many causes for the inflation.  Some of the causes are left over from supply chain problems caused by the pandemic.  Another possible cause is the surplus cash infused into the economy as pandemic relief through the American Rescue Plan.  And of course the recent invasion of Ukraine by Russia, with the ensuing economic consequences and energy embargos, will be a significant contributor to inflation.

 

The problem is that once inflation rises over a modest 1-2%, there are positive feedback effects that are difficult to predict or control.  Positive feedback means that when some quantity increases, the effect of that increase on other things tends to cause the original quantity to increase further.  This is a recursive effect that can spiral out of control in the worst case, and often does in countries where there is limited financial stability.

 

If prices rise, then consumers (especially at the lower end of the pay scale) struggle to make ends meet. This in turn will cause upward pressure on wages to ease that burden.  In a labor market that favors workers (i.e. low unemployment and lots of jobs available) wage increases will certainly occur.  This is the current situation. 

 

If producers are forced to increase wages, then they will raise prices further – positive feedback.  The rise in prices may eventually reduce demand for products, which can then stabilize the wages and prices without a further spiraling effect.  But when this will occur is difficult to predict or control.

 

There are other factors that can increase inflation once an inflationary cycle begins.  One example is that opportunistic producers may raise prices unnecessarily to increase profits, hiding behind the general inflationary trend.  And even if some or all of the inflationary pressure is driven by temporary problems with the supply chain, it is unlikely that prices will return to their original levels.

 

The Federal Reserve will attempt to rein in inflation by raising interest rates.  This will have the effect of reducing the cash flow and availability, which in theory will reduce demand and stabilize prices.  How quickly this stabilization will occur is the key question, and whether it will occur without seriously reducing economic growth and threatening a new wave of job losses.

 

Once anything is out of equilibrium in the economy there is the danger that there will be some major problems – inflation, recession, unemployment, etc.   How well the Fed can manage to hold things together while the world is still recovering from the pandemic and in the midst of a major conflict is a question that has no immediate answer.  We will hope for the best.

 

  

Are Liberals Hypocritical or Simply in a State of Paralysis?

I sympathize somewhat with the conservatives who sneer at limousine liberals.  There is something a bit ironic and unsettling about fabulously wealthy movie celebrities, rock stars and sports heroes who speak out for progressive causes as they private-jet around the world to their luxurious homes and vacation spots.

Do liberals lack the strength or will to incorporate their convictions into their lives? Is there a profound disconnect between their beliefs and their actions?  Is this an example of bad faith, weakness or simply a fairly understandable paralysis born of financial inertia?

 

If we look at most people in the wealthier part of the income spectrum, we see that their income is based on market conditions.  Of course, there are kleptocrats who obtain wealth by illegal or unethical means, but for the most part the upper class are simply acquiring their wealth through one or more of several legal and accepted means – inheritance, salary, stock acquisition/options, real estate, entrepreneurship, or appreciation of previously-owned assets.

 

Wealth begets wealth.  The rich get richer.  It is well documented that financial assets grow faster than wages, and the greater the asset base, the more avenues there are for even greater returns.

 

Most people who have a certain level of wealth also try hard to avoid taxation.  It is deemed perfectly acceptable for everyone to use any legal tax avoidance strategy at their disposal.  The rationale may be described as:  “Why should I pay more taxes if everyone else is legally avoiding them?”  And there are armies of tax lawyers, accountants and financial advisors whose profession it is to maximize this avoidance.

 

For the most part, liberals who are wealthy wish for a more equitable world.  Many of them vote for representatives who are likely to promote programs to reduce financial inequality and possibly raise taxes.  Are they sincere in their political stances, or are they simply assuaging their consciences, knowing unconsciously that their wealth is likely to remain secure?  

 

How far would most progressives be willing to go to create a less inegalitarian society? What is clear is that the vast majority of them are not willing to take steps on their own to get the ball rolling.  You don’t see anyone following Jesus’s advice to the young ruler to give up all his wealth. 

 

No, in fact you see the wealthy, whether liberal or conservative, living ever more lavish lifestyles because they are simply able to and because the friendship circles they inhabit are all pushing the luxury envelope further each year.

 

I number myself among them, not because I am fabulously wealthy, but because I participate in a lifestyle that is much more luxurious than most the world could afford.  I try to be generous but I acquiesce in the general upward trend of my finances.  

 

Would I welcome a much higher rate of taxation that would reduce my wealth?  I believe I would accept it if I felt that everyone was making a similar sacrifice relative to their means.  But I would certainly chafe at paying more if I felt the gazillionaires at the top weren’t being aggressively unburdened of their wealth.  

Of course there is the possibility that some or perhaps many so-called liberals would shift their allegiances immediately if there were truly an effective move toward a significant re-distribution of wealth.  

 

The financial world is complex, and fairness will never be assured.  There is also a powerful state of inertia that exists, keeping the wealthy at the top and the rest below.  Moreover, the marketplace is broken and tends to over-reward the top 25% or so while keeping the majority in a state of financial stagnation.  It will take fairly dramatic steps or, preferably, a steady flow of baby steps to turn the tide.

 

Thus, the good-intentioned liberals are in a state of paralysis.  Their good intentions are not quite strong enough to motivate them to selfless acts or self-sacrifice, but they seem at least to recognize that their wealth and lifestyles are somewhat grotesque and out of synch with their convictions.  Perhaps this disequilibrium will be enough to provide momentum for true socioeconomic progress before social unrest and incivility resurrect an age of revolution.

A Pragmatic Way to Change the Nation

The idea I want to explore in this piece is whether identity politics and racial justice should be downplayed in an effort to reduce partisanship in the bottom half of the income distribution and encourage a common goal of reducing income and wealth inequality.

By any measure, the US is growing increasingly inegalitarian.  The bottom half (50%) of US wage earners has only 1.5% of the total wealth in the nation, while the top 10% has 70%.  This disparity grew very large in the late 1800’s – the Gilded Age – and then peaked in the late 1920’s.  The depression and two world wars reduced the chasm significantly and the years of high taxation in the 50’s through the 70’s kept inequality at a much lower level.  The top 10% had about 35% of the wealth during this period.  

 

But the Reagan tax cuts, the double-income multiplier (https://rvgeiger.blogspot.com/2014/12/the-double-income-family-amplifier.html) , and the hyper-capitalism of the 1990’s to the present time catapulted the top third of the population into dizzying heights of wealth, while the average worker saw his or her inflation-adjusted earning power stagnate.  We are now at a stage of wage and wealth disparity that rivals South America, Africa and the Middle East.

 

The stagnation of wages, loss of industrial middle-class jobs, and resultant decay of many small towns and rural areas created a populist movement that allowed Donald Trump to attain the presidency.  This populist movement was able to frame the problem of decreasing economic opportunity in terms of nationalistic, racist and xenophobic tropes.  The average white blue-collar worker, formerly a solid union supporter in Democratic ranks, fled in desperation to Trump, who promised to revitalize American industry, stop immigration and defy political correctness.

 

Instead of building a coalition to demand better infrastructure, free education, free healthcare and a bigger share of the financial pie, low-wage workers split into multiple ‘identity’ groups – African Americans, white, Hispanic – and found themselves at odds with one another over issues such as policing/BLM, systemic racism, crime, drugs and immigration.  People of color went one direction and the white groups another.

 

Somehow, white voters in the bottom half of the wage spectrum have bought into the idea that America needs to have a wealthy superclass to drive the economy and that all blame for their own plight rests on the shoulders of ill-defined elites who greedily offshored our industrial power, and the huddled mass of poor and immigrants who supposedly lap up endless entitlements, crippling our economy.

 

Meanwhile, people of color, fed up with their long history of persecution and lack of opportunity, promote the BLM movement, historical analysis of structural racism, police defunding and Critical Race Theory (CRT), which would all be worthwhile topics for public discourse if there were any chance of a reasonable conversation.  

 

However, the right wing gleefully takes these hot button items, along with the religious right’s top three of abortion, homosexuality and transgender issues, and employs them in a highly cynical and hysterical fear campaign to paint a picture of a violent, immoral and dystopian future that alienates the white working class from its brethren of color.

 

If the US tackled its most basic problem – grotesquely unequal financial benefits and services for ALL lower income people – many of the other issues would probably be addressed as well.  At a minimum this would mean establishing free, quality education up through vocational or college years, subsidized childcare, better transportation systems and universal healthcare.  These would be paid for by increased taxes (income and wealth) on the top 10%.  

 

These basic but dramatic changes in social services and infrastructure would remedy many of the legacies of systemic racism. They would restore health to urban communities and begin the process of reducing policing dysfunction. They would provide a basis for revitalizing small towns and rural communities.  Immigrants would be more successfully integrated into society.

 

The deeper, more complex challenges of a post-industrial and global economy will have to be attacked as well to ensure that dignified, satisfying employment is available for all who are capable of working.  This will have to be accomplished with some level of social engineering, which is of course anathema to the free-market zealots whose belief in the ‘invisible hand’ remains unshaken.  

 

The achievement of such a comprehensive political victory and its associated socioeconomic programs would require a combined popular movement of all the working class as well as the progressive side of the middle and upper classes.  There is no chance for such a movement as long as the working class is bitterly divided over ideological red herrings.  Taking an idealistic stand on such issues as systemic racism, immigration and BLM would be a noble act in a saner and less partisan society, but that is not the society where we find ourselves today.  Taking a longer view and finding common ground where all can stand arm in arm is more likely to produce the desperately needed changes.