The core dilemma of our economics

Let's dive into some of the most fundamental aspects of the economics you rely upon. And this won't be dry! We'll get to the very heart of it.

First though, a couple of political riffs. Like could Amy McGrath unseat Mitch McConnell?  Look, I touted her to the sky. But like Beto, she did not win her intermediate goal. Still, I am inclined to say – you go grl. Love then money.

This guts a core confederate incantation. States that voted Democrat in 2016 generally rely less on federal funding than Republican states. Thirteen out of the top 15 states found to be most dependent on the federal government voted for President Donald Trump in the 2016 presidential election. Ten out of the 15 least dependent states voted Democratic.

Yes, poverty-wracked New Mexico and Mormon Utah are outliers, with Mormons giving serious thought to dropping their loyalty to a party of mafiosi, sexual perverts and traitors. Kansas doubled down on Supply Side insanity and crashed every part of their state’s health.

We'll add a few more political riffs at the end. But for sure you really must read this from the LA Times, listing all the many ways the GOP is trying to crush the power of voters in red and purple states, openly defying citizen rebellions against gerrymandering and concocting truly blatant cheats to prevent citizen empowerment. Seriously, you won't believe the long list of outrages. 

Their justification? Suppression of "mob rule." As opposed to their agenda. Rule by the Mob.

== The core dilemma of our economics ==

Probably the most clear and cogent explainer of economics issues is Robert Reich. This video shows clearly what's happened to wealth disparity in America.* Watch it, if you do nothing else. 

Joseph Stiglitz - Nobel laureate in economics - shows how "capitalism" can be defined the way the Greatest Generation did, under the FDR era social contract, as entrepreneurship where genuine wealth rewards come from delivery of ever-better goods/services under flat-fair-competitive-open conditions while a regulatory system prevents most cheating or evasion of externalities (like labor conditions or environmental impact), while society invests in children and justice and infrastructure to maximize (as F.Hayek recommended) the number of skilled, eager, creative competitors. 

This capitalism of Adam Smith thrived during the Greatest Generation, achieving unequaled rates of growth and opportunity and justice. It was hated by (guess who?) the oligarchy.

Or else capitalism can be defined the way Milton Friedman, Ronald Reagan and (ironically) Karl Marx and today's youths do - a system of unregulated rapacious feeding off the commonwealth and the future, with secret connivings, self-dealings and unbridled cheating leading to devastation of the middle class and wild market swings in which the predatory consolidate into a new, feudal oligarchy of the kind Smith denounced, while Marx rubs his hands, predicting inevitable (and it is) revolution.

These two experiments, 1935-1980 and 1981-2019 -- were both "capitalist." One showed steady rises in every metric of societal health and social justice and middle class strength. 

The other featured endless demands for experiments in handing over wealth to be managed by aristocrats. Supply Side tax gushers into their maws... and Federal Reserve policies that encouraged binges of unprecedented borrowing. Both were meant to spur the rich to invest in factories, productive capacity ("supply"), jobs, workers and R&D, resulting in ever-higher growth and deficit-erasing tax revenues.

None of that happened. Ever. Even once. At all. (In science that record refutes a theory.) 

Instead, the gushers were spent as Adam Smith said they'd be - on passive, rentier asset bubble inflation and on cheating -- electoral, financial, monopolistic and propaganda. With intermittent bubble-pops and a skyrocketing accumulation of debt. And yes, Adam Smith predicted all of those, and every predicted outcome happened.

One RASR (Residually Adult-Sane Republican) economist I know sees all this, but blames the Fed and only the Fed for low interest rates. But no one held a gun to the oligarchy, demanding they borrow, then put none of it to real economic work. 

Let's put it in terms even a RASR can understand. When it comes to skyrocketing debt there are three parties to this crime:

- the Fed, who offered easy borrowing.

- Republican Congresses who gave the rich gift-gushers of Supply Side voodoo rape.

- the Rentier-CEO-oligarchy recipients of all this, who bribed to twist policy and reaped both rewards.

Today's RASR conservatives blame just one of the three. Arguably the least-guilty. Let's paraphrase the excuse:

“Oh, no! The Fed made money so cheap I just HAD to borrow it to pump trillions into rentier asset bubbles and never productive capital or R&D! It’s not my fault! Those Fed whores wore short skirts and plunging necklines and seemed cheap! It’s all her fault for tempting me‼ Tempting me into.... borrowing! And gambling it all.”

Stiglitz puts it differently than my stark portrayal of looming class warfare. His prescription "begins by recognizing the vital role that the state plays in making markets serve society. We need regulations that ensure strong competition without abusive exploitation, realigning the relationship between corporations and the workers they employ and the customers they are supposed to serve. We must be as resolute in combating market power as the corporate sector is in increasing it."

In contrast I say it as "regulations are needed to reduce the natural human tendency to cheat, plus raising up the max number of competitors, both of them entirely justifiable under Smithian capitalism."

But read his missive. It overlaps with my summary, though without my own (patented) referrals to historical seers like Smith & Marx.

== Politics Redux ==

Lest you run out of examples of Two Scoops’ pettiness and mafia tendencies (as if you ever could; where do you think I got his nickname?) Remember former Deputy FBI Director Andrew McCabe? He spent his adult life chasing badguys for us, but Fox calls him — and hundreds of thousands of other skilled professionals — “Deep State” villains, because they dare to notice today’s cesspool. A consummate pro.

And Trump fired McCabe from the FBI just 26 hours before his retirement was set to take effect, denying him his full pension. And Fox & Foxzoids chortled with glee over this, as when they deny aid to disaster victims in blue states. These may be our countrymen (and we should not behave likewise toward such jerks). But they are not ‘citizens.’ 

Consider the members of Trump's circle who apparently ignored his orders - according to the Mueller Report. Again and again I despair over any Democrat realizing what a political judo-jugular strike can be. In this case, setting aside the details of any particular case, anyone from Biden to AOC could say: 

Across all of U.S. history, no twenty presidents were ever "betrayed" by so many former "great guys." Whatever your politics, one truth shines through -- Donald Trump is a terrible judge of character.

== lagniappes ==

First: Watch 19 vivid seconds as the puppet enters behind them... Remind your RASRs this happened right after MBS and Putin each ordered enemies whacked on the soil of NATO allies.

Amid our Putin obsession remember that the Bush family is a cadet branch of the Saudi Royal House and did their bidding as much as Trump does Russia's. 

This round of the civil war, the confederacy finally got its 1860s dream -- foreign help... and masters. And lest we forget who has benefitted from the deliberate destruction of our alliances... recall this image of Trump greeting Putin.  Good doggy.

Wiley Miller's April 18 Non-Sequitur comic nailed the problem of 60,000 years and the fundamental flaw of capitalism... or feudalism or communism. Those who reach the top - even if they competed fairly to get there - will tend to cheat in order to stay there, and give their sons unearned power over the children of others. 

This - along with our human propensity for delusion - explains nearly all of the horrid litany called "history." It is why geniuses finally innovated methods to divide power enough to force elites to keep competing fairly. Constitutional division. Breaking up monopolies. scientific debate, etc. 

Kings, lords, chieftains and commissars never accomplished what this new method has... and so, all those varied types of mafiosi are now ganging up against the new way. If they win, they won't let it be tried again. And we'll lose the stars.

Wiley's cogent cartoon efficiently make a second point. That it's easy to convince romantics to love their tyrants. In 1861 a million poor white southerners fought and died for their plantation slave-lord class oppressors. As other confederates did in 1778, 1830, 1852 and other phases of the US Civil War. And as they do today, hating (at Fox-behest) the "elites" of fact and brains who gave them everything. Because smart people are the one force standing in the way of a return to feudalism.

And because we keep "stealing" their brightest children.

=====

* And this is one reason why I've already decided on one aspect of the race for the Democratic Party nomination in 2020. I have various ranked opinions about the top of the ticket. I'm hoping to learn more about Inslee, for example. And I am SO aboard for Buttigieg 2028!  But the one thing I've decided to be passionate about is Elizabeth Warren for Vice President! She would be unleashed to take that town with unconstrained ferocity... while getting the executive experience she now totally lacks. 

==== Housekeeping note! ====

I have been amazed for years how this blog, one of the oldest on the Web and a comment community that's among the best, has been able to maintain a mostly open comment policy, in an era rife with loonies and anonymous trolls. Every few years I am forced to shut down anonymous postings, when some obsessive jerk decides he has nothing better to do than poop where he's not wanted. You all can still post via your google accounts. If necessary, I will go to moderated posting. Tnaks for remaining among the brightest.

How Cheating Spoils Capitalism: the true roots of skyrocketing inequality

== What causes wealth disparity to skyrocket? ==

In a cogent analysis, Brookings fellow Jonathan Rothwell appraises varied explanations for why the top 0.01% have taken in such gushers of wealth in recent years. “Three of the standard explanations—capital shares, skills, and technology—are myths. 

"The real cause of elite inequality is the lack of open access and market competition in elite investment and labor markets. To bring the elite down to size, we need to make them compete.”

This has been my own relentless theme.  The rationalizers of rapacious versions of capitalism claim to be promoting Adam Smith’s competitive markets – while doing everything in their power to demolish any chance those markets will be flat-open-fair-creative, or even Hayekian. 

Unintentionally, they are proving Smith right, who denounced conniving oligarchy as the great enemy of creative markets across all recorded history.

Were they sincere, instead of conspiratorial-rentier cheaters, they would know that their own lavish-gusher incomes should – by capitalist theory – attract talent from every other human field, until the price of financial talent would stop rising and actually go down! Supply and demand, it's called. Elsewhere I show how they explain why this never happens … that they are uber-lord-mutant-great managers! Immune to supply and demand, like basketball stars. 

Only the analogy shatters! NBA players are subject to utter scrutiny by relentless, objective metrics -- points, rebounds, assists per game and all that. In contrast, the CEO caste of 5000 golf buddies appoints each other onto their boards aiming to obscure measures of company health, concocting excuses for why a declining balance sheet or fading product line should be rewarded with higher compensation. They bandy reasons why stock buy-backs that eat a company's seed corn are better than investing in new products or services.

Rothwell’s appraisal is cogent and clear. “There is no evidence to support the idea that the top 0.01 percent consists mostly of people of “exceptional talent.” In fact, there is quite a bit of evidence to the contrary.”  

No, it is strictly and purely a matter of which industry you are in. Aside from the quasi-monopolistic mining and utilities sectors, just being in finance gives you a huge – i.e. parasitical – income multiplier, no matter what the actual outcomes of your work. The financial caste is not facing competition.

 Moreover, tellingly, Rothwell rejects calling this a matter of Left or Right. “The modern left still too often sees the world through a Marxist lens of capitalist owners trying to exploit people who sell their labor for a living. But that doesn’t help explain rising top incomes. On the other hand, many on the modern right wrongly infer that great earnings must only be generated by great people.

“Before Marx, Adam Smith provided a framework for political economy that is especially useful today. Smith warned against local trade associations which were inevitably conspiring “against the public…to raise prices,” and “restraining the competition in some employments to a smaller number than would otherwise…occasion a very important inequality” between occupations.”

== It grows even clearer ==

In Left and Right Share a Common Enemy: Capitalists Who Corrupt Capitalism, perhaps the best and most important essay yet to be posted on the fast-rising Evonomics site, Professor Lawrence Lessig nails so many powerful points about how desperately capitalism needs to be saved from capitalists. 

Lessig, you may recall, briefly ran for president under a single-issue campaign to get the corrupting tsunamis of Big Money out of U.S. politics.  It think he would have made a better - far more modern-with-it - version of Bernie Sanders. (Though Bernie is almost a pure clone of my own dad.) On this occasion Lessig cogently lays down what’s at stake, showing how market economics is not the enemy of justice.  

Rather, our flat-open-fair-creative markets are the top victims of an ongoing attempted oligarchic putsch. 

Indeed, as Larry clearly shows, the all-too human contradictions that lead so many market winners to then cheat and shut down markets, was recognized and called out by the “founder” of modern enterprise capitalism.

Some of us have been urging for way more than a decade that Adam Smith be rediscovered as an archetype and founder — not just of fads like ”neo-liberalism,” but of the much broader notion that we call Liberalism, itself. The Evonomics site now invokes Smith in almost every-other article and I have hopes that this rediscovery movement will overflow into the nation's bitter discourse, as well.

== The rationale of Supply Side or 'trickle down' ==

Joseph Stiglitz, Nobelist in Economics, explains how Supply Side (SS) economic theory - darling of the American right, despite never once sustaining a successful, major prediction -- seemed so alluring, for so long:

"The reason why these ideas justifying inequality have endured is that they have a grain of truth in them. Some of those who have made large amounts of money have contributed greatly to our society, and in some cases what they have appropriated for themselves is but a fraction of what they have contributed to society. 

"But this is only a part of the story: there are other possible causes of inequality. Disparity can result from exploitation, discrimination and exercise of monopoly power. Moreover, in general, inequality is heavily influenced by many institutional and political factors— industrial relations, labour market institutions, welfare and tax systems, for example— which can both work independently of productivity and affect productivity."

Stiglitz explains how legislation that funneled vast advantages into the upper castes was not only the core reason for the American Revolution (and not 'tea party' rage at taxes), but also how Adam Smith denounced the anti- market effects of "rent seeking." 

He adds -- "rent-seeking means getting an income not as a reward for creating wealth but by grabbing a larger share of the wealth that would have been produced anyway. Indeed, rent-seekers typically destroy wealth, as a by-product of their taking away from others. A monopolist who overcharges for her or his product takes money from those whom she or he is overcharging and at the same time destroys value. To get her or his monopoly price, she or he has to restrict production."

Someone explain how that is flat-fair-competitive capitalism, instead of its opposite. Seriously, after reading Lessig, dive into this wise detailed, and definitive Stiglitz article. For more, see Stiglitz's book, The Price of Inequality: How Today's Divided Society Endangers Our Future.

== The guru of the intelligent right ==

Not only Adam Smith, but Friedrich Hayek, too, can be rediscovered and re-interpreted. While it's true that Hayek despised government-socialist intervention, the reason for his skepticism toward government meddling was actually quite cogent: when too many decisions are made by bureaucrats you reduce economic wisdom by limiting the number of economic players and choosers. 

A fair point, though with complexities the Right chooses to ignore. For example, if 100,000 diverse, accountable and transparent civil servants cannot "allocate" well because they are too few, then isn't the problem even worse when allocation is done by an incestuous, conniving, secretive cabal of only 5,000 CEO-caste golf buddies? Connivers who sully Hayek's name, whenever they mention him?

Which leads us to the Bigger Picture... the one aspect that Lessig, Stiglitz, and apparently everyone else leave out is the great context of large scale history. 

For 6000 years, wherever humans got metals and agriculture, the typical social pattern was a pyramid of inherited hierarchy, loosely called feudalism.  Big men with swords found it appealing to arrange that they would get no competition from those below, and that their sons would inherit ownership of other folk's sons and daughters. 

The pattern, replicated everywhere, reinforced by darwinian reproductive advantage.  And it boiled down to a single, simple word that anyone would understand -- cheating.  Using your high status advantages -- e.g. swords or armies of lobbyists -- to crush any potential competitors from below. The temptation will always be there.

Our brief, 240 year miracle - dating not just from the Declaration of Independence but also the publication of Adam Smith's Wealth of Nations - has been based upon dividing power so that cheating can be limited by competitive accountability. By opponents pointing out and staunching cheats before they get so large that they become self-reinforcing. 

One result has been the world's first Diamond-shaped society, with an empowered middle class that fizzes forth new competitors at rates that should please Smith or Hayek and that delivers real goods. Alas, a diamond is unstable and last year's winners will try to prevent new competition, so they can become next year's lords.

Our parents in the Greatest Generation knew this better than we do, because - like all their ancestors - they knew what class war was. Desperately, with help of fellows like FDR - they sought a solution other than the one most widely offered at the time, Marxian revolution.... choosing instead to empower the working class and flat-fair-creative competition, their Rooseveltean reset was so successful that we boomers grew up imagining “class war” to be quaint, obsolete, a worry to prioritize far below other long-neglected injustices like racism or sexism. 

But human nature hasn't changed and today's wealth disparities are nearing 1930s levels. Some claim the levels of 1789 France. An oligarchic putsch is underway, and Lessig's clarion calls are vital, if we are to perform another moderate, reasonable "reset" that saves and enhances and renews both capitalism and freedom. It will be either that or "tumbrels," which is why all the smart billionaires today - who can look beyond their noses - are democrats.

Larry Lessig's Evonomics missive makes this all very clear (except the history-feudalism part.)  Lessig explores these issues more thoroughly in his book Republic Lost: The Corruption of Equality and the Steps to End It. His quotations are vivid ammo, so copy and use a lot of them! 

But let me add one more, from Will and Ariel Durant's classic The Lessons of History:

“In progressive societies the concentration[of wealth] may reach a point where the strength of number in the many poor rivals the strength of ability in the few rich; then the unstable equilibrium generates a critical situation, which history has diversely met by legislation redistributing wealth or by revolution distributing poverty.”

== Why conservative revisionists should give a Hayek ==

Aw heck. Add one more brilliant mind to this mix. David Sloan Wilson, one of the driving forces behind the dynamic and insightful Evonomics site, has been part of the movement to rediscover and revive interest in Adam Smith, one of the chief founders of the modern enlightenment western experiment. 

Wilson has also called for a rediscovery of another complex thinker who was way-oversimplified by the American right: Friedrich Hayek. Yes, he was more explicitly anti-government  than Smith’s anti-oligarchy. Still, he evolved over time. As Wilson puts it:  “not a single prediction made in The Road to Serfdom materialized and Hayek himself modified his own views." 

Even in The Road to Serfdom Hayek wrote: “Nor is the preservation of competition incompatible with an extensive system of social services—so long as the organization of these services is not designed in such a way as to make competition ineffective over wide fields.” 

As Economic Inequality Grows: the "NBA Star" rationalization.

== Are super-compensated CEOs “mutant-NBA level” worth it? ==

Nobel Prize willing economist Joseph Stiglits makes a point in cogent and clear terms that I have been trying to get across for a decade - that members of our CEO-golf-buddy caste are utter hypocrites for claiming that their skyrocketing bonuses and compensation packages are immune to the laws of supply and demand: 

"Competitive forces should limit outsize profits, but if governments do not ensure that markets are competitive, there can be large monopoly profits. Competitive forces should also limit disproportionate executive compensation, but in modern corporations, the CEO has enormous power—including the power to set his own compensation, subject, of course, to his board—but in many corporations, he even has considerable power to appoint the board, and with a stacked board, there is little check. Shareholders have minimal say. Some countries have better “corporate governance laws,” the laws that circumscribe the power of the CEO, for instance, by insisting that there be independent members in the board or that shareholders have a say in pay. If the country does not have good corporate governance laws that are effectively enforced, CEOs can pay themselves outsize bonuses."   

Let me make this absurd situation plain to you. In any rational labor market, skyrocketing pay levels would have the natural market effect of attracting geniuses from other fields of human endeavor, drawing competitors and new talent until the supply of talent met demand and compensation packages settled back down to more historically normal levels. That isn't capitalism 101.  It is Capitalism 1.

Yet, members of the steadily narrowing and increasingly incestuous CEO Caste have strenuously avoided discussion of this simple fact of economics, while shouting their fealty to market forces in every other way. (Hence the hypocrisy.) 

On those rare occasions when they do address this issue, they use what I call the Mutant Basketballer argument… that they are like the very top athletes on championship ball teams, so mutant-good that they are beyond any thought of replacement and worth any salary they demand. (See my earlier posting: The Syndrome of the Essential Man.)

Of course, there is an inconvenient flaw to that incantation. NBA stars are subject to fiercely rigorous statistical and scientific appraisal of their objective performance, more closely tracked and scrutinized - in fact - than any other professional clade on Earth. (I've made this same point more extensively before.)

Moreover, those sports stars do not appoint buddies to the committees that evaluate them. NBA athletes compete with each other, instead of participating in an oligarchic circle-jerk.

Stiglitz (author of The Price of Inequality: How Today's Divided Society Endangers Our Future) makes this point amid a larger context, describing how Adam Smith himself prescribed government actions to compensate for inevitable aristocratic cheating. Indeed, the doyen of right wing economics, Friedrich Hayek, also maintained that governments should act to maximize the number of skilled and confident citizen-consumer-producers who are well-equipped to compete with one another in flat-open-fair markets.

Continueth Stiglitz:

"Our political system has increasingly been working in ways that increase the inequality of outcomes and reduce equality of opportunity. This should not come as a surprise: we have a political system that gives inordinate power to those at the top, and they have used that power not only to limit the extent of redistribution but also to shape the rules of the game in their favor, and to extract from the public what can only be called large “gifts.” Economists have a name for these activities: they call them rent seeking, getting income not as a reward to creating wealth but by grabbing a larger share of the wealth that would otherwise have been produced without their effort. Those at the top have learned how to suck out money from the rest in ways that the rest are hardly aware of—that is their true innovation."

To be clear, many of our current crop of billionaires have made their wealth the way Smith and Hayek and all believers in flat-fair-creative market systems know is best, by fostering teams of bright engineers to create new and better good and services. This is the type of entrepreneurs that Supply Side economics was supposedly designed to encourage! 

Only then comes the irony — that Supply Side never helped any of these "productive" billionaires. Indeed, nearly all of them today are democrats (with some deep libertarians) who despise the blatant crony raid and rent-seeking subsidy called Supply Side.

Read this article by one of the smartest economists of our era.

== Economics ==

A fascinating political-economic piece on the Evonomics site has a terrible title: Stop Crying About the Size of Government; Start Caring About Who Controls It. It is worth a look... as are a majority of things appearing on that bold new site, whose contribution is to prove that creative-productive market enterprise is not the same thing as plutocratic oligarchy.  They are, in fact, opposites.

The White House's common sense idea to protect retirement accounts. Regarding brokers and managers of the millions of IRAs and other retirement saving accounts that have mostly taken over from old-style corporate pension plans, , the administration wants to impose a legally enforceable duty to act in the “best interest” of clients, similar to the fiduciary duty lawyers and other professionals already owe. Now what could be controversial about that?  Well, these brokers currently are allowed to churn those accounts to maximize their own commissions and the GOP led Congress has stalled for 7 years doing anything about it. Yep, on the side of the little guy. 

A  fascinating piece on why it has been so hard to establish the “rule of law” in most crony-corrupt developing states.  

== The threat of North Korea ==

Internationally, headline-grabbing North Korea claimed to have set off a Hydrogen Bomb, a technological feat that most western experts view with suspicion and doubt. But I'll not opine on that, except to say there is one and only one potential solution to this ongoing canker sore on humanity’s lip.

That solution is North Korea’s lifetime partner and subsidizing neighbor to the north and west.  Sure, many have tried to get that neighbor to apply pressure – which they could easily do, getting Kim Jong Un’s regime to settle down and stop chewing the carpet. 

So far, all normal means of persuasion have failed, because that giant neighbor likes pointing at North Korea as an object lesson. Moreover it does not want to see a united, prosperous Korea next door. Also, to be fair, a collapse of the NK regime could send millions of refugees crossing the Yalu River. None of which excuses this refusal to act.

Hence, the U.S. government has decided to take a tougher line: “In a striking public rebuke of China, Secretary of State John Kerry warned Beijing on Thursday that its effort to rein in North Korea had been a failure and that something had to change in its handling of the isolated country it has supported for the past six decades.” 

Among the discussed options, getting from the UN a partial ban on permitting North Korean ships to enter ports around the world – including Chinese ports - an effort to cut off more of the country’s trade. But China has vetoed such resolutions in the past. 

Well, well. There is one thing the West and others have not tried… tort law.  

Tort law? Yes, simple assignment of liability. Before leaving office, President Obama should declare that - if the North Korea ever does anything truly nasty, the victims of that nastiness - yes even in war - will have recourse to courts everywhere, seeking compensation from the deep-pocketed power who neglected to do much, across 60 years, to prevent the harm. 


Watch how that gets a reaction! Why? Because Rule-of-Law is a concept that both boggles and awes powerful men, when they see it actually functioning. They know, deep-down, that it is the sole source of actual legitimacy. And they have found it incomprehensible, yet transfixing, how an increasingly independent world judiciary has the power to impose accountability outside of the international (and easily bullied) political caste. The notion that individual citizens of Seoul might - after say an NK artillery barrage, or far worse - file suit against much deeper pockets... that could raise a chill up certain spines.

And I have said enough about that.