Thursday, March 11, 2010

Save the Rich!

As the economy was sinking in 2007, government officials intervened with a series of programs designed to stabilize asset prices. Trillions of dollars were poured into the breach. If these programs succeeded, they did so by socializing the losses that banks and other wealthy institutions and individuals would have experienced without government intervention. We should take a moment and ask what this means for our society.

Socialism --- government ownership of productive assets --- is opposed by proponents of free markets because it interferes with individual freedoms, property rights, but most of all because it sacrifices economic growth for greater equality. While I lack a sophisticated and contingent analysis, we must assume that socializing losses goes in the opposite direction, creating more inequality and possibly greater growth than would have happened if taxpayers had not saved the rich by propping up asset prices. The United States will experience more growth than it would otherwise, but greater inequality. We have saved our titanic economy but only by ensuring that the robber barons got to the lifeboats first.

This is not an overt conspiracy. I do not think anyone in policy circles reflected on this effect in the midst of the crisis. Still, the evidence is already with us. Unemployment is high, but so is productivity, meaning that companies can buy labor low, and produce relatively more with what they hire. Workers' purchasing power will be stagnant or declining in real terms, while firms with market power can increase profits. Holders of capital will become richer, while labor becomes poorer.

There is more to consider here: We all have bills to pay, many which we do not realize. The trillions in expenditure and loans must come out of someone's pocket. The poor cannot help. They have no assets (by definition) and so don't pay taxes (or conversely, don't experience the invisible tax of inflation). The very rich and major institutions can maneuver around the tax code, or use influence in politics to ensure that the apparent tax burden remains only apparent. The real cost of saving the rich will fall on the middle class.

The middle class have already been squeezed by economic conditions. Many have maintained nominal middle class status only by doubling up on paychecks (either by putting two family members into the workforce or by working multiple jobs) and by using debt for consumption. With home equity in negative territory, high unemployment, and banks reluctant to refill the credit card merry-go-round, we will be seeing more families moving down the social ladder than up. These effects will be exacerbated as government provides fewer services and looks to extract more revenue.

Rome had similar problems in the last decades of the empire. The rich and politically well connected discovered ways to avoid their contribution to the common weal. The poor had nothing for the state to steal. Increasingly, the small landholders and merchants were taxed out of existence as officials looked desperately for assets to seize to pay the state's bills.

What happens to democracy in such conditions? It would be a stretch to say that American democracy is in peril. However, it is less far fetched than at other times since WWII. The great depression created a similar crisis, but the failure of the Hoover administration in particular to prop up asset prices had the (unintended) consequence of weakening of the hold of the rich on the state, while the populist reorientation of politics led to greater equality in the United States. Today, saving the rich means soaking the middle class. As a society, we have chosen that tradeoff, though only in the midst of dire predictions about imminent financial meltdown.

Are the rich so important that we cannot do without them? Soon after the worst of the crisis abated, we discovered that Wall Street was throwing a party. There was a lottery in which every ticket paid large bonuses, except for the ones purchased by tax payers. Government protection of risk capital is a massive redistribution of wealth to the wealthy. While some inequality is necessary to reward innovation, government subsidies should not be necessary to make "free markets" function. Capitalism in America has gone from letting the rich keep their riches to guaranteeing these riches (no matter how unwisely invested), to using the coercion of the state to force the middle class to make the rich richer. The world is always unfair and democracy in the United States has never been perfect, but never before has American democracy been a front for officially sanctioned looting by the rich. Interestingly, the only discussion of class warfare in the mainstream media is coming from CNBC.

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