Friday, October 24, 2014

A Class of Its Own

PRINCETON – The very rich, F. Scott Fitzgerald famously wrote, “are different from you and me.” Their wealth makes them “cynical where we are trustful,” and makes them think “they are better than we are.” If these words ring true today, perhaps it is because when they were written, in 1926, inequality in the United States had reached heights comparable to today.

During much of the intervening period, between the end of World War II and the 1980s, inequality in the advanced countries was moderate. The gap between the super-rich and the rest of society seemed less colossal – not just in terms of income and wealth, but also in terms of attachments and social purpose. The rich had more money, of course, but they somehow still seemed part of the same society as the poor, recognizing that geography and citizenship made them share a common fate.

As the University of Michigan’s Mark Mizruchi points out in a recent book, the American corporate elite in the postwar era had “an ethic of civic responsibility and enlightened self-interest.” They cooperated with trade unions and favored a strong government role in regulating and stabilizing markets. They understood the need for taxes to pay for important public goods such as the interstate highway and safety nets for the poor and elderly.

Business elites were not any less politically powerful back then. But they used their influence to advance an agenda that was broadly in the national interest.

By contrast, today’s super-rich are “moaning moguls,” to use James Surowiecki’s evocative term. Exhibit A for Surowiecki is Stephen Schwarzman, the chairman and CEO of the private equity firm the Blackstone Group, whose wealth now exceeds $10 billion.

Schwarzman acts as if “he’s beset by a meddlesome, tax-happy government and a whiny, envious populace.” He has suggested that “it might be good to raise income taxes on the poor so they had ‘skin in the game,’ and that proposals to repeal the carried-interest tax loophole – from which he personally benefits – were akin to the German invasion of Poland.” Other examples from Surowiecki: “the venture capitalist Tom Perkins and Kenneth Langone, the co-founder of Home Depot, both compared populist attacks on the wealthy to the Nazis’ attacks on the Jews.”

Surowiecki thinks that the change in attitudes has much to do with globalization. Large American corporations and banks now roam the globe freely, and are no longer so dependent on the US consumer. The health of the American middle class is of little interest to them these days. Moreover, Surowiecki argues, socialism has gone by the wayside, and there is no need to coopt the working class anymore.

Yet if corporate moguls think that they no longer need to rely on their national governments, they are making a huge mistake. The reality is that the stability and openness of the markets that produce their wealth have never depended more on government action.

In periods of relative calm, governments’ role in writing and upholding the rules by which markets function can become obscured. It may seem as if markets are on autopilot, with governments an inconvenience that is best avoided.

But when economic storm clouds gather on the horizon, everyone seeks shelter under their home government’s cover. It is then that the ties that bind large corporations to their native soil are fully revealed. As former Bank of England Governor Mervyn King aptly put it in the context of finance, “global banks are global in life, but national in death.”

Consider how the US government stepped in to ensure financial and economic stability during the global financial crisis of 2008-2009. If the government had not bailed out large banks, the insurance giant AIG, and the auto industry, and if the Federal Reserve had not flooded the economy with liquidity, the wealth of the super-rich would have taken a severe blow. Many argued that the government should have focused on rescuing homeowners; instead, the government chose to support the banks – a policy from which the financial elite benefited the most.

Even in normal times, the super-rich depend on government support and action. It is largely the government that has financed the fundamental research that produced the information-technology revolution and the firms (such as Apple and Microsoft) that it has spawned.

It is the government that enacts and enforces the copyright, patent, and trademark laws that protect intellectual property rights, guaranteeing successful innovators a steady stream of monopoly profits. It is the government that subsidizes the higher-education institutions that train the skilled work force. It is the government that negotiates trade agreements with other countries to ensure that domestic firms gain access to foreign markets.

If the super-rich believe that they are no longer part of society and have little need of government, it is not because this belief corresponds to objective reality. It is because the prevailing story line of our time portrays markets as self-standing entities that run on their own fuel. This is a narrative that afflicts all segments of society, the middle class no less than the rich.

There is no reason to expect that the super-rich will act less selfishly than any other group. But it is not so much their self-interest that stands in the way of greater equality and social inclusion. The more significant roadblock is the missing recognition that markets cannot produce prosperity for long – for anyone – unless they are backed by healthy societies and good governance.

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  1. CommentedFred Phillips

    Nearly 40 years ago my PhD advisor brought a famous economist as guest speaker. The guest spun out a story of two guys stuck on a desert island, and how an exchange economy would spontaneously develop. I asked, "What prevents one guy from hitting the other over the head and simply taking the goods?" The economist replied "Well, we assume he won't." My takeaway: Economists as well as moguls are to blame for the current "government has no role" world view.

  2. CommentedFaruk Timuroglu

    Long struggle of working class from 1930s on and economic boom after WW II brought what Mr. Rodrik calls the "moderate inequality" period that began to erode when the Rich Boys discovered cheap labor depots around the world with globalization of capital in 1980s. Governments have no longer power to stop growing inequality even if they want to.

  3. CommentedDennis Zelkowski

    Re: A Class of Its Own/Dani Rodrik- Rodrik has too much 20th century thinking in this article to be convincing. An excellent example of this is Rodrik saying that these corporate moguls are dependent on government action for stability in markets and that they will take shelter under the governments umbrella when economic storms hit. The 21st century paradigm is that by and large the big corporations pretty much own the government via campaign donations, super pacs, lobbyists, ALEC, etc. and the corporate ownership of government is increasing with each passing year. Who would argue, given the Supreme Court decisions these last few years that the top court is anything but the lapdog of its corporate and plutocrat masters. The US government acting to ensure financial and economic stability during the financial crisis did so as a lapdog to Wall St. banks.
    So the plutocrats will effectively tell the government what it wants and the government will follow orders. I mean look at the outrageous TPP which is nothing less than a corporate wish list and the government is bending over backwards trying to make it happen. This is why I cannot take Rodrik seriously here. In reality, the line between corporation and government has blurred.

  4. CommentedGerry Hofman

    The super rich don't need the government as much as they already own it. They take part in the government and the government caters for them. The very fact that the financial crisis was solved by tree capitalizing the banks while leaving the population to bleed should speak for itself. The rich don't care about governments because they already since long have subverted them to their causes and issues, make then guarantee their

  5. CommentedTim Chambers

    You're wasting your time, Professor. If Schwatzman, or any other of his psychopathic ilk are reading your words, which I doubt, they are comparing their assets with yours and laughing all the way to their shadow banks. What they don't want to admit to themselves is that it's 1927 all over again. Consumer markets are sputtering, seccurities markets are frothing with no room left to grow. 1929 is coming.
    Then the rest of us can have the last laugh.

      CommentedTony Pirog

      When 1929 comes, I don't think we'll be laughing. Many of us will be hit hard.

  6. CommentedLeo Arouet

    Magnífico, genial. Más claro y preciso imposible. Es el Estado también el que hace respetar las normas para el beneficio de las empresas y, por extensión, de los más ricos.

  7. CommentedFrederick Hastings

    This piece sometimes reads as if it were comparing life for the super rich under anarchy versus government, downplaying the distinctions between a government viewed as a referee and guardian of property rights and one viewed as an active administrator and player in the economy, either by picking winners and losers or engaging in research and development. Everyone wants a government, it's just which kind is appropriate, which this article seems to want to avoid discussing in the interest, perhaps, of advocating for the bigger rather than the limited government role.

      CommentedRay Phenicie

      The role of government can't be any smaller that what is needed to successfully integrate management techniques into the society that see to the well being and benefit of all in a just and equitable manner. The power of policing as handled by the executive must be tempered with successful oversight and channeling of that power by the Congress and the Federal courts. A well informed and actively engaged electorate is another requirement (along with a well read journalism cadre to inform the populace on what is going on) to see that the policing power of the state is kept well within carefully defined and safe boundaries. In other words it is not the size of the establishment but the nature of the government made up of educated and caring elected officials.

  8. CommentedAurelian Dochia

    Surowiecki briefly touches upon another factor that seems to make a difference between the prevailing attitudes in the "50s / "60s and the ones today. The communist system was regarded and feared by many as a real alternative to capitalism and there was a competition in the world to win hearts and minds and to convince on the superiority of one system over the other. Business elites were supportive of government efforts to better the situation of "the masses" because they understood the stakes are much higher than immediate personal gain. With the gradual weakening of the communist system and its official demise in 1989, elites' need to refrain for higher, public interest just vanished.

    I am not sure how important this factor is but I am quite surprised it is not pondered.

  9. CommentedRon Chandler

    Read Frank Herbert's Dune, to know how human history might have -- may indeed -- go.
    A global war called the Butlerian Jihad was triggered by tyranny underpinned by computers, automation and high-technology. By the end of the Butlerian jihad, computers, robots, automation is banned, by a futuristic regime of Luddite revolutionaries.
    Think about it, because the disease of the globalists is best-defined by the words: 'No imagination'.
    What is imagined, is possible. 1917 can happen again. This time, the Commies will take no chances.