Both Reich and Krugman are generally regarded as liberal stalwarts, but the fact is that both were dangerously neo-liberal in their beliefs in the 1990s and early 2000s. I think the multiple failures of the Dubya administration, especially the 2007-2008 financial crash, caused them to rethink some basic beliefs and assumptions. But what especially forced them to rethink their economics was the brutal and shameless way Bush and the neo-cons used their political power to drive us into the Iraq War. They seemed to have had nagging doubts regarding the issue of how political power impacts economics, but by the end of the Bush Jr. regime, both Reich and Krugman were openly discussing how political power was shaping economic results.
I particularly remember an article by Krugman, sometime before the elections of 2008, in which Krugman admitted that the economic effects of NAFTA were not what he had expected, and explicitly wrote that he had reluctantly concluded that it was the political power of large trans-national corporations that was driving U.S. trade policy. I can’t find Krugman article right now, but for those interested, here is William Greider in The Nation in April 2013: Why Was Paul Krugman So Wrong?
What Krugman and Reich think about the role of political power is crucial, because we no longer have an economy shaped by “free markets,” but an economy shaped by a corporatist oligarchy, which Sheldon Weldon has explained as “inverted totalitarianism”:
Inverted totalitarianism is different from classical forms of totalitarianism. It does not find its expression in a demagogue or charismatic leader but in the faceless anonymity of the corporate state. Our inverted totalitarianism pays outward fealty to the facade of electoral politics, the Constitution, civil liberties, freedom of the press, the independence of the judiciary, and the iconography, traditions and language of American patriotism, but it has effectively seized all of the mechanisms of power to render the citizen impotent.Economists generally don’t want to deal with the messy issue of politics at all—which is completely opposite the preoccupation with “political economy” which characterized economics in the nineteenth century and well into the twentieth. (For those interested, Michael Hudson has written some excellent articles tracing this “defanging” of economics.) Indeed, even political scientists dislike discussing the problem of economic and political power becoming so dangerously concentrated that they begin to threaten the very nature of what is supposed to be a democratic republic. So when in May 2009 former chief economist of the International Monetary Fund Simon Johnson used the word “oligarchy” to describe how Wall Street and the finance industry had effectively captured the government (“The Quiet Coup,” The Atlantic Monthly,) it made quite a splash.
Since then, we’ve seen an academic study by Princeton researchers Martin Gilens and Benjamin I. Page confirm empirically that the United States is no longer a democracy. And at the end of July, former President Jimmy Carter has been bold enough to bluntly state the the United States has become "an oligarchy with unlimited political bribery"
So, yeah, the issue of how political power is used to shape the economy to benefit only the rich is pretty damn crucial. And just in case you aren’t convinced yet, here’s is a recent angry recitation of the statistics on the complete suffocation of the middle class:
It has been estimated that it takes approximately $50,000 a year to support a middle class lifestyle for a family of four in the U.S. today, and so the fact that 71 percent of all workers make less than that amount shows how difficult it is for families that try to get by with just a single breadwinner.And,
If you can believe it, about a quarter of the country actually has a negative net worth right now. What that means is that if you have no debt and you also have ten dollars in your pocket that gives you a greater net worth than about 25 percent of the entire country.I especially recommend Krugman’s review of Reich’s book for anyone not yet familiar with the problem of figuring out why most modern economists are so terribly damaging to society. Krugman explains that back in the 1990s, the chief cause for income inequality was believed (by economists) to be “skill-biased technological change” which Krugman abbreviates as SBTC. After noting that skill-biased technological change remains “especially popular among moderate Republicans in denial about what’s happened to their party and among “third way” types lamenting the rise of Democratic populism,” he explains how economists were forced to recognize that something other than SBTC was causing income inequality, which began accelerating in the 1980s and 1990s.
The story fell apart in stages. First, over the course of the 1990s the skill gap stopped growing at the bottom of the scale: real wages of workers near the middle stopped outpacing those near the bottom, and even began to fall a bit behind. Some economists responded by revising the theory, claiming that technology was hollowing out the middle rather than displacing the bottom. But this had the feel of an epicycle added to a troubled theory—and after about 2000 the real wages of college graduates stopped rising as well. Meanwhile, incomes at the very top—the one percent, and even more so a very tiny group within the one percent—continued to soar. And this divergence evidently had little to do with education, since hedge fund managers and high school teachers have similar levels of formal training.
Something else began happening after 2000: labor in general began losing ground relative to capital. After decades of stability, the share of national income going to employee compensation began dropping fairly fast. One could try to explain this, too, with technology—maybe robots were displacing all workers, not just the less educated. But this story ran into multiple problems. For one thing, if we were experiencing a robot-driven technological revolution, why did productivity growth seem to be slowing, not accelerating? For another, if it was getting easier to replace workers with machines, we should have seen a rise in business investment as corporations raced to take advantage of the new opportunities; we didn’t, and in fact corporations have increasingly been parking their profits in banks or using them to buy back stocks.
In short, a technological account of rising inequality is looking ever less plausible, and the notion that increasing workers’ skills can reverse the trend is looking less plausible still. But in that case, what is going on?It is at this point that Krugman writes that “Economists struggling to make sense of economic polarization are, increasingly, talking not about technology but about power.” Now, Krugman is not discussing political power at this point, but “market power,” as in what happens when a monopoly comes to dominate an industry or segment of the economy. And he mentions the role played by Milton Friedman in getting economists, and eventually policy makers and political leaders, to believe that monopoly economic power was really not something to be worried about.
Here, I think Krugman could have added much more, both in terms of discussing how Friedman destroyed over a century of American political economy, and the entire cast of characters who did it. In the book, The Road from Mont Pèlerin: The Making of the Neoliberal Thought Collective, edited by Phillip Mirowski and Dieter Plehe, there is a chapter by Rob van Horn, of the Economics Department at the University of Rhode Island, “Reinventing Monopoly and the Role of Corporations: The Roots of Chicago Law and Economics,” which details how the traditional liberal opposition to monopolies and concentrations of economic power was replaced by the neo-liberal conception (perhaps deception would be a better word?) that the ill effects of monopolies will always be counteracted by market forces; therefore there is no need for enforcing the Sherman Anti-Trust Act. Van Horn traces the rise of this dogma back to the creation of the Free Market Study project at the University of Chicago law school in 1946. This project was conceived by Fredrich von Hayek, who arranged funding from the William Volker Fund, and included Aaron Director (a law professor), Edward Levi (a law professor), Frank Knight (an economics professor), Garfield Cox (dean of the Business School), Wilber Katz (dean of the Law School), Theodore W. Schultz (chair of the Economics Department), and Milton Friedman (economics professor). The amazing thing is that this small group managed to overturn a century of USA anti-trust law not with any empirical evidence (there was none), but by contorted economic theories to “prove” that it was not in a corporation’s best interest to achieve monopoly power because doing so would attract too much competition! That both the economics and law professions could be bamboozled by such a flagrant contradiction in logic speaks to the utter intellectual and moral collapse of those professions.
Personally, I think Krugman is being much too calm and mundane when he next writes:
It’s increasingly clear, however, that this was both an intellectual and a policy error. There’s growing evidence that market power does indeed have large implications for economic behavior—and that the failure to pursue antitrust regulation vigorously has been a major reason for the disturbing trends in the economy.
Other evidence points indirectly to a strong role of market power. At this point, for example, there is an extensive empirical literature on the effects of changes in the minimum wage. Conventional supply-and-demand analysis says that raising the minimum wage should reduce employment, but as Reich notes, we now have a number of what amount to controlled experiments, in which employment in counties whose states have hiked the minimum wage can be compared with employment in neighboring counties across the state line. And there is no hint in the data of the supposed negative employment effect.
Furthermore, focusing on market power helps explain why the big turn toward income inequality seems to coincide with political shifts, in particular the sharp right turn in American politics. For the extent to which corporations are able to exercise market power is, in large part, determined by political decisions. And this ties the issue of market power to that of political power.So, finally, we arrive at the question of political power—though I urge you to read the entirety of Krugman’s review, which mentions a number of examples of monopoly and its effects in the economy today. Krugman hints that he thinks Reich is not radical enough, but maybe that’s just the way I’m reading it. It is also important that Krugman raises the issue of American politics lurching to the wrong-wing, which I will discuss more below. But first, Krugman makes one important point about labor unions which I think should be widely shared:
We tend to think of the drastic decline in unions as an inevitable consequence of technological change and globalization, but one need look no further than Canada to see that this isn’t true. Once upon a time, around a third of workers in both the US and Canada were union members; today, US unionization is down to 11 percent, while it’s still 27 percent north of the border. The difference was politics: US policy turned hostile toward unions in the 1980s, while Canadian policy didn’t follow suit.This leads Krugman to directly address the relationship between economic and political power:
But why has politics gone in this direction? Like a number of other commentators, Reich argues that there’s a feedback loop between political and market power. Rising wealth at the top buys growing political influence, via campaign contributions, lobbying, and the rewards of the revolving door. Political influence in turn is used to rewrite the rules of the game—antitrust laws, deregulation, changes in contract law, union-busting—in a way that reinforces income concentration. The result is a sort of spiral, a vicious circle of oligarchy.Krugman does not delve into the “feedback loop” perhaps because it is simply too frightening. Last week, Paul Rosenberg wrote at Salon about how Republicans and conservatives / libertarians can no longer compete on policy positions and their real world effects, because they have been proven to be disastrous. Their credibility was destroyed by the string of debacles under Dubya, so now their only strategy is to scare us: “The party of security tanked the economy and unleashed Middle East disaster. Now they have nothing but fear itself.”
So you have the irony that Republicans and conservatives / libertarians are now using populist language to decry the control of large corporations over government, while they adamantly refuse to acknowledge how the policies of their political saints, such as Ronald Reagan and Phil Gramm, are in large part responsible for creating those large corporations and handing them control. The Reagan regime’s deliberate refusal to enforce anti-trust law is perhaps the clearest example of this.
But Rosenberg’s article points to something even more fundamental, and therefore more troubling:
...what stands in our way most dramatically now, like an 800-pound gorilla, is the GOP’s wild-eyed phantasy of omnipotent male power. And if we want to understand that, we need to dig deep into early childhood psychology, exemplified by the work of Melanie Klein, who used that spelling—’phantasy‘ with a ‘ph’ to distinguish unconscious cognition from conscious daydreams. That phantasy world is profoundly dichotomous—me/not-me, omnipotence/powerlessness, bliss/despair, or even terror—and ruled by its own internal logic, confused and contradictory as it may appear to us, that has nothing to do with the outside world, and everything to do with managing imaginary hopes and fears.It is worth pointing out that our side appears at this time intellectually ill-equipped to deal with these issues, and that our side also relies to no small extent on the phantasy of another Republican in the Oval Office doing as much damage as Bush Jr. did. This phantasy allows Obama supporters to ignore the fact that the economy has not recovered when measured in terms of the jobs and income of the middle class. Indeed, we now have declining life expectancy for the working class, and those who have fallen out of the middle class. It allows Hillary supporters to ignore the fact that she is totally committed to inverted totalitarianism, simply because she would not get the money to campaign if she weren’t.
In his book, Reich examines a number of solutions to income inequality, and settles on a guaranteed national income as the best solution. But that will be almost impossible to sell to those terrified by Republican phantasms. I think one way to get them to accept it is to tie it to mandatory national service. Everyone serves, but only a very small percent serve in the military. Everyone else can serve in something like the Civilian Conservation Corps, or the Works Progress Administration. Or how about a National Software Facilitators Corps to help the computer-challenged overcome all the viruses and malware, or just the tribulations of installing a printer or new software? And in return, everyone gets a check for $1,500 or $2,000 from the US Treasury each month for the rest of their lives. People who serve in the military can get an additional amount each month, depending on time served.
We all know that in the near future, millions of jobs are going to be replaced by robots and other technology. Reich has a chapter on this at the end of his book, but he fails to draw what I think are the necessary conclusions. On one hand, this new economic capacity is wonderful news, because it means we have reached a point in human economic development where everything we need can be provided by less than a third of our workforce. On the other hand, the bad news is that we are moving into this future crippled by conservative ideology that is completely hostile to the sharing of this great wealth we have. Conservative, a.k.a., neo-liberal economic doctrine, that the common good will magically come about from the chaotic clash of private, selfish interests, must be repudiated and discarded if we want to build a bright and beautiful future for our children and grandchildren.
There are other major modifications we need to make to our political culture if we are to rescue our republic from its descent into oligarchy and corporatist inverted totalitarianism. One of the most important — and most controversial— is we have to recognize that freedom of speech does not apply to television and radio. That was, in a way, the idea behind fair use: nobody could just broadcast whatever they want, without giving equal time to an opposing view point. But reviving fair use is not going far enough. Given the psychological and sociological effects we are now aware of—and Klein’s phantasy problem is only one of many; look at the studies of the intelligence of Fox News viewers for more—we have to ban the use of television and radio advertising for political campaigns, and all political issues. They simply are not mediums suited to a rational discussion of national policies and their impact in a modern industrial economy, especially given what we have learned about how a modern corporatist oligarchy arises using advertising as one of its principal tools to create and shape both consumer demand and public opinion.
I first posted this on DailyKos, and this assertion that freedom of speech does not apply to television and radio drew some heated discussion. So I want to post here the substance of one of my replies. Basically, there are a number of Western industrial democracies which ban political advertising outright. A May 2006 background paper for a meeting of the European Platform of Regulatory Authorities states:
Paid political advertising is statutorily forbidden in the vast majority of Western European countries such as Belgium, Denmark, France, Germany, Ireland, Malta, Norway, Portugal, Sweden, Switzerland, and the UK. Several countries from central and Eastern Europe such as the Czech Republic and Romania, also have a prohibition of paid political advertising.And on September 16, 2011, The Hill, a daily newspaper devoted to covering the U.S. Congress (Capitol Hill), carried this article by R. Spencer Oliver, The Danish Way of Election:
The most traditional justification for this prohibition is that rich or well-established parties would be able to afford significantly more advertising time than new or minority parties – thus amounting to a discriminatory practice. Another rationale invoked for the restriction or the ban is that it may lead to divisiveness in society and give rise to public concern. It has also been suggested, albeit less frequently, that a prohibition would preserve the quality of political debate.
But the biggest difference in campaign season between our two countries – aside from the length – is the money. With a ban on political TV ads in Denmark, cash plays a much smaller role in the blitz for votes here. And this is where the American political establishment, if it really cares about the strength of its democracy, would do well to take a breather from the already frenetic 2012 race to learn a thing or two from the Danish elections. By shortening the official campaign period and taking television ads out of the process, you decrease the money involved in campaigns and increase the genuine democratic debate.
I think we should also consider restricting speech by the rich. We already restrict the speech of active duty military officers, based on the classical republican distrust of the political effects of a standing army. But in classical republican thinking, an entrenched wealthy elite is as much a danger as a standing army. Perhaps the very idea of restricting free speech of the rich is too shocking for most. It might be better to couch the issue in different terms. What if we instead talk about how we prevent corruption by the rich? If that’s what you think, I invite you to read Zephyr Teachout’s The Historical Roots of Citizens United v. FEC: How Anarchists and Academics Accidentally Created Corporate Speech Rights, which traces how the First Amendment became "the first among equals" in the Supreme Court's response to the conviction of anti-war activists under anti-sedition statutes during World War One. As Professor Teachout explains it:
But what happens in this era, matching the First Amendment and corruption cases up against each other, is a subtle but important shift in the Court’s basic understanding of the Constitution’s political theory. Up through the 1930s, the Court—when it is forced to refer to core American political values—turns to classic republican ideals and considers its role to be a limited one, largely protecting the country from the threats of corruption. Afterwards, when it is forced to directly engage in political theory, the first place the Court looks is the First Amendment, and it sees its role as protecting the country from incursions upon the First Amendment.And that is how we got to where we are today: money is equated with speech, and corporations given the same rights as human beings. Just to give you an idea of how badly out of whack the United States today is from classical republican theory, in the nineteenth century lobbying was actually a criminal offense in some states. In a Supreme Court decision in 1854, in a case concerning lobbyists and lobbying contracts, one Justice wrote:
The use of such means and such agents will have the effect to subject the state governments to the combined capital of wealthy corporations, and produce universal corruption, commencing with the representative and ending with the elector. Speculators in legislation, public and private, a compact corps of venal solicitors, vending their secret influences, will infest the capital of the Union and of every state, till corruption shall become the normal condition of the body politic, and it will be said of us as of Rome — omne Romae venale.” (See Thomas Franks in the New York Times review of Professor Teachout's new book Corruption in America: From Benjamin Franklin’s Snuff Box to Citizens United.)The issue of what to do about immense concentrations of economic power and its impact on free speech is beginning to seep into public discourse: also in the latest issue of The New York Review of Books, along with Krugman's book review, is this article by Michael Massing, entitled Reimagining Journalism: The Story of the One Percent:
Even amid the outpouring of coverage of rising income inequality, however, the richest Americans have remained largely hidden from view. On all sides, billionaires are shaping policy, influencing opinion, promoting favorite causes, polishing their images—and carefully shielding themselves from scrutiny. Journalists have largely let them get away with it. News organizations need to find new ways to lift the veil off the superrich and lay bare their power and influence.I think we have only begun to fight.