an unanticipated consequence of
Jack M. Balkin
Jack Balkin: jackbalkin at yahoo.com
Bruce Ackerman bruce.ackerman at yale.edu
Ian Ayres ian.ayres at yale.edu
Mary Dudziak mary.l.dudziak at emory.edu
Joey Fishkin joey.fishkin at gmail.com
Heather Gerken heather.gerken at yale.edu
Abbe Gluck abbe.gluck at yale.edu
Mark Graber mgraber at law.umaryland.edu
Stephen Griffin sgriffin at tulane.edu
Bernard Harcourt harcourt at uchicago.edu
Scott Horton shorto at law.columbia.edu
Andrew Koppelman akoppelman at law.northwestern.edu
Marty Lederman msl46 at law.georgetown.edu
Sanford Levinson slevinson at law.utexas.edu
David Luban david.luban at gmail.com
Gerard Magliocca gmaglioc at iupui.edu
Jason Mazzone mazzonej at illinois.edu
Linda McClain lmcclain at bu.edu
John Mikhail mikhail at law.georgetown.edu
Frank Pasquale pasquale.frank at gmail.com
Nate Persily npersily at gmail.com
Michael Stokes Paulsen michaelstokespaulsen at gmail.com
Deborah Pearlstein dpearlst at princeton.edu
Rick Pildes rick.pildes at nyu.edu
Alice Ristroph alice.ristroph at shu.edu
Neil Siegel siegel at law.duke.edu
Brian Tamanaha btamanaha at wulaw.wustl.edu
Mark Tushnet mtushnet at law.harvard.edu
Adam Winkler winkler at ucla.edu
In his post below, Bernard Harcourt has analyzed new forms of radicalism adopted by the most and least privileged. Umair Haque at the Harvard Business Review has also identified dispositions shared by street looters and certain elites. As the chief political commentator at London's Daily Telegraph has observed, "The moral decay of our society is as bad at the top as the bottom." Yet there are very different consequences for each group's transgressions.
The more disruptive the disenfranchised become, the more they provoke harsh responses from authorities, thus worsening their already marginal position. By contrast, finance and government elites have positioned themselves to gain from whatever risks they shift onto society at large, via bailouts, emergency powers, and the revolving door. As Ross Douthat observed, "The economic crisis is producing consolidation rather than revolution, the entrenchment of authority rather than its diffusion, and the concentration of power in the hands of the same elite that presided over the disasters in the first place."
Rather than being grateful for public subvention, Wall Street demands even lower tax rates and less monitoring. At least in the US, this "revolt of the elites" is more of a menace to social order than the type of mass protests against inequality and corruption now sweeping India, Israel, Spain, Chile, and many other countries. Whereas the poor are swiftly punished for disruptions, the worried wealthy's initiatives for not-so-creative destruction are self-reinforcing.
1) From risk shift to capital strike: Jacob Hacker's book The Great Risk Shift described forty years of policies designed to shift risk away from corporations and government and onto individuals. For millions of workers, 401(k) plans replaced defined benefit pensions. In 1979, 82% of impoverished families got TANF benefits; thirty years later, only 27% do. During the Bush Administration, there was even a vogue for "health savings accounts" to replace defined health benefits. Current GOP presidential contenders are upping the ante, attacking Medicare and Social Security, and proposing the replacement of traditional unemployment insurance with "personal accounts." These policies and proposals all shift the risk of sudden accidents, a frail old age, child poverty, and economic slumps onto the vulnerable themselves, rather than their employers, or the larger polity.
Austerity for the poor and middle classes is only one half of the risk shift. It helps pay for lavish backing of connected companies. The same groups that benefit most from tax cuts financed by a gutting of the safety net are also pushing for "certainty" in their business ventures. Just as capital is taxed preferentially, so too must its owners' ventures receive subsidies. Lionized on the pages of Forbes or Fast Company for "taking risks," Wall Street's favorite executives often avoid them at all costs. Derivatives are a favorite way of engineering away uncertainty. They do business with "too big to fail" banks, secure in the knowledge that taxpayers are on the hook if anything goes awry. Big investors, too, are keen on loan guarantees and other state "givings." And that is just the beginning of the "certainty" they've been demanding, and getting, as Yves Smith argues:
Businesses have had at least 25 to 30 years near complete certainty -- certainty that they will pay lower and lower taxes, that they will face less and less regulation, that they can outsource to their hearts' content (which when it does produce savings, comes at a loss of control, increased business system rigidity, and loss of critical know how). They have also been certain that unions will be weak to powerless, that states and municipalities will give them huge subsidies to relocate, that boards of directors will put top executives on the up escalator for more and more compensation because director pay benefits from this cozy collusion, that the financial markets will always look to short term earnings no matter how dodgy the accounting, that the accounting firms will provide plenty of cover, that the SEC will never investigate anything more serious than insider trading (Enron being the exception that proved the rule).
As Smith notes, now many of the same corporations "have played their cost-focused business paradigm out." It turns out that the same workers pressed to the wall for concessions happen to be customers, too, and they can't pay for goods and services like they used to. (As the Wall Street Journal puts it: the same "lucky duckies" who are too poor to pay taxes can't even go on their "dollar store splurges" any more.) The obvious macroeconomic prescription is for the state to tax those who are doing well, in order to pay for relief, recovery, and reform. But that isn't happening, either.
Rather, the power groups that dominate the US Congress, Presidency, and courts believe that only private investment can lead to more growth. The problem is that most of those capable of investing now have so much money that they don't need to earn anything from it. It's a capital strike against anything but a "sure thing." Many corporations are also cutting and hoarding. That's a brilliant strategy for CEO's, who may need just a few years at the top to accumulate a massive fortune.
The role of money in an economy is like that of blood in a body---it has to circulate to keep the entity that contains it alive. When a tremendous amount pools in one place, other parts suffer. Redistribution of income is vital to the health of American capitalism. Its decline presages a different type of economy on the horizon.
2) Doom Loops: So why isn't anyone doing anything about this? Some brave protesters in India and Israel provide a model response to their own countries' inequalities. As Rana Dasgupta notes, "taxpaying professionals working 70-hour weeks now compete unhappily for urban space with massively wealthier and more powerful businessmen and bureaucrats whose sources of wealth are opaque and, on the face of it at least, too effortlessly acquired." "Opaque" turns out to be a bit of a euphemism:
After independence in 1947 . . . [f]ortunes were accumulated to be spent on property – in India and elsewhere – or stored abroad. The globalisation of the Indian economy in the 1990s only expanded the opportunities for this corrupt . . . entrepreneurial class. “Big-ticket” deals multiplied, much as they did in Russia during the same period: businesses became involved in a scramble for the ownership of basic resources previously controlled by the state – land, mines, oil, mobile telephony spectrums etc – and this only the political class could endow.
The seamless integration of political elites with executives in finance, real estate, extractive industries, and communications is a feature of many so-called "free market" economies. But, as Harcourt notes, social disturbances in the US, Spain, and Britain have too often been unmoored from any positive political vision for change. And the most aggressive protests have themselves become the target of popular ire, rather than the conditions that sparked them.
[M]ajor private sector firms (banks and nonbank financial institutions) have a distorted incentive structure that encourages eventually costly risk-taking. Unfortunately, the measures taken in various US and European bailout rounds during 2008-2009 (and again in 2010 for the eurozone) have only worsened, and extended to far more entities, these underlying moral hazard incentive problems. . . .
This cycle of boom followed by bailouts and bust amounts to a form of implicit taxpayer subsidy that encourages individual institutions to become larger – and the system as a whole to swell. Our preparation to bail out their creditors means systemic institutions are able to raise finance cheaply in global markets. The implicit subsidy to creditors encourages greater debt, which makes the system ever more precarious.
Years after the financial crash, the chief perpetrators---be they foolish, negligent, or purposefully fraudulent---are wealthier than ever. And they continue to push for liquidationist measures that force lower living standards onto workers and citizens, rather than investment in a positive-sum future for all. In case of peak oil, today's smart investment is to buy oil futures, rather than invest in a green energy startup. If effortless grabbing of a larger share of a shrinking pie is a bit more profitable than long-term investment to shift out the production possibilities frontier, Mr. Market endorses it. Each year, our brightest business school graduates vote with their feet: thousands opt for the financial alchemy behind a quick buck, while far fewer take part in the hard work of creating a sustainable future.
3) Expect More Stability: Several analysts have argued that the resulting flow of incomes away from the bottom 90% (whose income has gone up 1% in real terms since 1980) and toward the top 1% (which has enjoyed a nearly fourfold increase in income, with much higher gains for those in the top 0.1 and 0.01%) will generate social unrest in the US. I doubt this. First, as Dan Ariely has shown, not many people actually understand how unequal our society is. Second, our media is profoundly uninterested in discussing issues of equity or opportunity. Rather, it has bought, hook, line, and sinker, the Pete Peterson-sponsored message of endless austerity for the middle and lower classes. Third, US authorities are getting more creative in defusing protests, in actions that even a leading libertarian advocate of the First Amendment applauds for targeting "the bad people."
Finally, and most importantly, technologies of surveillance have made dissent more costly. Sarah Jaffe has explained the consequences of the application of military-grade technology on the homefront:
As a burgeoning international protest movement takes shape, opposing austerity measures, decrying the wealth gap and rising inequality, and in some cases directly attacking the interests of oligarchs, we're likely to see the surveillance state developed for tracking "terrorists" turned on citizen activists peacefully protesting the actions of their government. And as U.S. elections post-Citizens United will be more and more expensive, look for politicians of both parties to enforce these crackdowns. Despite growing anger at austerity in other countries, those policies have been embraced by both parties here in the States.
Citron & I have discussed several aspects of this phenomenon, including domestic intelligence collection about political action, and problematic collaborations between state and corporate "law enforcers." Add into the mix the growing power of entities that secretly generate reputational data about individuals, and you have a variety of "chilling effects" on political activism that challenges inequality in the US. Meanwhile, the Bush-Obama war on whistleblowers has demonstrated the dangerous consequences of trying to publicize misuses of that technology. The end result is a mass "learned helplessness," as the very idea of collective action becomes a bitter joke to a critical mass of the populace.
I only mean to predict increased stability within the US. Elsewhere, food scarcity (including that induced by our own wasteful energy use) is likely to wreak havoc. Complexity theorists in MIT's Technology Review predict that, "If we don't reverse the current trend in food prices, we've got until August 2013 before social unrest sweeps the planet." Fortunately, the food stamps program in the US appears to have enough support from large agricultural interests to preserve it here.
History teaches that the great change agents in our society lost dozens of times before finally making a positive and lasting mark in law. As Harcourt notes, we could stay in the eye of this storm for a long time. Electoral politics, our traditional venue for gradual and constructive public investment, has been deeply corrupted by mass distraction and targeted influence. It will take years, and perhaps decades, of work to restore a party system that rewards politicians for addressing the real economic and environmental needs of their constituents. The best public intellectuals can do is follow the example of the minds who brought us to the present impasse: namely, to develop a "Mt. Pelerin Society" for those who actually believe there is such a thing as society.
Note: Given my title, I should acknowledge that Christopher Lasch identified a "Revolt of the Elites" 15 years ago.