Jack Balkin: jackbalkin at yahoo.com
Bruce Ackerman bruce.ackerman at yale.edu
Ian Ayres ian.ayres at yale.edu
Corey Brettschneider corey_brettschneider at brown.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
Jonathan Hafetz jonathan.hafetz at shu.edu
Jeremy Kessler jkessler 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 yu.edu
Rick Pildes rick.pildes at nyu.edu
David Pozen dpozen at law.columbia.edu
Richard Primus raprimus at umich.edu
K. Sabeel Rahmansabeel.rahman at brooklaw.edu
Alice Ristroph alice.ristroph at shu.edu
Neil Siegel siegel at law.duke.edu
David Super david.super at law.georgetown.edu
Brian Tamanaha btamanaha at wulaw.wustl.edu
Nelson Tebbe nelson.tebbe at brooklaw.edu
Mark Tushnet mtushnet at law.harvard.edu
Adam Winkler winkler at ucla.edu
The economic news is bleak. Dean Baker warns that we are very close to a second Great Depression. Tim Duy says that the economy is "circling the drain." Doug Henwood observes that while the US economy used to be a "brutal but dynamic place" for workers, now it's just brutal. If employment growth continues at May's pace (a rate typical of post-financial-crash economies), it will take us a decade just to gain back the jobs lost in the Great Recession.
Since nobody likes an unhappy ending, a boomlet of "soft landing" stories has emerged, explaining why (as Tyler Cowen puts it) "we'll feel better" eventually. I want to take a look at a few of these, discuss why I think they're implausible, and turn our attention to what the real stakes of the crisis are. A Japanese Denouement?
At the beginning of the financial crisis, economists worried that the United States would end up like Japan after its real estate bubble burst in the late 1980s. It is a measure of how bad things have gotten that Japan's "lost decade" now looks downright pleasant compared to America's likely economic future. Philip Pilkington has endorsed the Japanese "steady state," based on its high employment and life expectancy, and low crime rate. But, as Yves Smith observes, there is little chance the United States can emulate the Japanese approach to post-crash stabilization:
Even though its post-bubble growth has been dreadful, Japan is still a well-run, tidy country with a low crime rate, universal health care, long life expectancy, and tolerable unemployment. That in turn is due to factors that do not obtain much of anywhere else: Japan was very cohesive to begin with, and its elites chose to have their incomes fall relative to everyone else to save jobs. Wage compression at large companies has increased dramatically. This is the polar opposite of what has happened in the rest of the world, where the gap between the haves and the have-nots has widened.
I agree with her last point particularly, and I think that a spirit of shared sacrifice has been crucial to Japanese resilience. It is entirely lacking in the US, where a bevy of right-leaning think tanks and enforcers has ended any chance that our John Galts will be taxed another penny of income or bequests. They apparently now have a durable veto point in a Congress that would rather see the economy collapse than raise more revenues, even though "federal taxes are at their lowest level in more than 60 years" (according to one of the economic advisors of former President Reagan). Material deprivation is going to loom larger in the lives of an ever-more-pressed lower class, and will likely creep into the middle class soon.
Ecstatic Haves, Happy Have-nots?
But even if that occurs, there is another possibility: a declining middle and lower class happily reconciles itself to a straitened material existence in exchange for digital entertainments or pharmaceutical consolation. This future would entail a "real" decline in living standards, but a subjectively experienced increase in positive emotions. In such a world, gross national happiness could be on the rise even as gross national product falls. For example, Tyler Cowen has worried that GDP figures don't adequately reflect the joy people get from sorting or viewing thousands of Facebook photos. True, "providing an alternative measure of what we produce or consume based on the value people derive from [things like] Wikipedia or Pandora proves an extraordinary challenge." Nevertheless, in a few posts on virtual consumption, SEC Advisor Rick Bookstaber offers a glimpse of light at the end of our economic tunnel.
For Bookstaber, rising inequality obscures a more fundamental trend: "If you look hour by hour at what anyone is doing, it is hard to differentiate the super rich from those a few rungs above subsistence level." A representative man in either class "eats, sleeps, works and then veges out," either playing games or watching audiovisual works. Give them food, shelter, and a sufficiently advanced computing system, and they are "happy as a clam." By projecting a bit into the future, Bookstaber can also sidestep the methodological objections that have dogged other advocates of a "consumption inequality" (rather than wealth or income inequality) focus. We can think concretely of, say, a laid off worker, who now makes minimum wage, but who really doesn't have much need for vacations or consumer goods any more, since a pink tractor in Farmville only costs $4 and is so much more interesting and cheap. Indeed, play can even be profitable.
Nevertheless, I'm not convinced by Bookstaber's sanguine views. He doesn't mention health care, a constantly contested topic of experience inequality. (Just try getting a specialist in a timely fashion if you're on Medicaid, or uninsured and poor.) He neglects the degree to which homes that afford good educational opportunities, or easy commutes, are often very expensive. And what is the value of a bank account that assures you won't be turned out on the street 6 months, a year, or a few years after losing a job? I'm sure the 72 percent of Americans living paycheck to paycheck would love to have that security, and experience its absence with some degree of anxiety.
Knowledge, Voice, and Legibility
The critical inequalities of a democratic society also include disparities in information, influence, and legibility---that is, susceptibility to being "read," watched, or monitored by some powerful entity. You don't need to look hard at our current economic mess to see their importance. After a brief struggle in 2010, it's now settled: no more discussion of tax increases for the rich. Our government will slash food aid, Medicaid, education, and investments in the future, causing untold suffering, just to assure that the richest continue to enjoy their lowest effective tax rates in decades. That elite consensus is the product of what John Gaventa calls hidden power, the ability to keep certain topics from even being discussed or on the public agenda. James Kwak and Simon Johnson see such power at work in the intellectual landscape funded by TBTF financial institutions. And it also wends its way into economics, and economically informed discussions like Bookstaber's.
For example, Bookstaber assumes in his post that the "contribution of labor to production" has declined over time. But the contribution of labor is distinct from what labor is paid (which, presumably, is the measurable value Bookstaber is referring to here). As Daniel JH Greenwood recently observed, "for a generation, American workers’ wages have lagged behind their productivity gains." Productivity is increasing, but it is being captured by top executives and a concentrated class of shareholders. Can we really say that the designer of 100 pairs of jeans has contributed 5 times more to their value than the seamstresses who sewed them, merely because the designer gets paid five times more than they do? Or, to use an example from Ha Joon Chang, consider that a driver in Norway may be paid 25 times more than a rickshaw operator in New Delhi, even though the latter job takes far more effort (and perhaps skill) to do well.
As technology and design contribute more to production, disputes over the value of labor will accelerate. For some time, they were muted by geographical distance: the poor seamstresses lived in China, the designers lived in America, and each was paid a rate appropriate for their station in the global economic order. China also developed a far more repressive security apparatus to quash protests. But increasingly, job opportunities are mobile, putting everyone into the same global labor pool. And this is yet another problem for the Bookstaber thesis, because laborers in the developing world undoubtedly spend their time, hour by hour, in a different way than the "super rich," even though they are a "few rungs above subsistence level."
Power and Productivity
There are occasionally disputes over the value of their endeavors, as recent developments at Foxconn illustrate. But for the most part such disputes can be suppressed, via another sector of the economy that Bookstaber does not pay adequate attention to: guard labor. Vilfredo Pareto once observed that individuals' efforts "are directed to the production or transformation of economic goods, or else to the appropriation of goods produced by others." Arjun Jayadev and Samuel Bowles, expositors of the guard labor concept, confirm the importance of that dichotomy. Inspired by Pranab Bardhan's exploration of the "range of tactics which are most likely to result in the successful conversion of resources into power," they delineate the necessary conditions for B to have power over A: "by imposing or threatening to impose sanctions on A, B is capable of affecting A’s actions in ways that further B’s interests, while A lacks this capacity with respect to B."
Jayadev and Bowles argue that, in order to understand the relationship between productivity and power, "we need to study not only the production of goods and services as conventionally defined" but also "the reproduction (or alteration) of the economic institutions governing the process of production." Institutions are "the laws, informal rules, and conventions which give a durable structure to social interactions among the members of a population." Guard labor, in the form of "prisoners and guards (police, corrections officials and private security personnel)," among other actors, is necessary to reinforce institutions.
Inequalities of knowledge, voice, and legibility shape the (re)production of economic institutions, and they do not bode well for non-elites. At one point unions could try to pool the voices of a sizeable plurality of private sector workers; today, they're on death's door. A fragmented media landscape leads to what Jodi Dean calls the decline of symbolic efficiency. Finally, any political views too far out of the mainstream can be easily marginalized, stigmatized, and even punished by a somnambulant press, invasive "human resources" apparatus, and enveloping surveillance state (respectively). Former derivatives trader Satyajit Das sums up the result of this convergence of inequalities:
Human beings and societies are unable to see their own products and social relationships for what they are . . . . French philosopher Michel Foucault identified a carceral continuum, the system of cruelty, power, supervision, surveillance and enforcement of acceptable behaviour affecting working and domestic lives. Economics and economic systems are part of this system of power. In Lewis Caroll’s Alice in Wonderland, Humpty Dumpty understood the issue: “The question is which is to be master – that’s all.” Economics and economist have been always been part of the mechanism of social control and power. The rest is just noise.
Thus when we hear for the 1000th time from John Boehner that any more taxation of America's millionaires will hurt those who "create jobs," we never get a clear sense from mainstream economists about the real composition of investment activity. To return to our Farmville player mentioned above: a tycoon may choose to invest in a cupcake shop that gives him a job, or buy the building he lives in, convert it to luxury condos, and evict him. The investor class can opt for green technology that promises to make everyone's life less polluted and costly, or a gold and land-buying spree that promises to further concentrate wealth. The central problem of contemporary economics is that it has no language to even begin to make such distinctions. As Willem Buiter has diagnosed, mainstream economics has been driven by "aesthetic puzzles . . . .rather than a powerful desire to understand how the economy works." Only in the hall of mirrors of ketchup economists and efficient markets theory could paper "wealth" take on the overweening significance it now has. As Michael Hudson has argued,
[Many financial institutions'] “product” is not a tangible consumption good, but interest-bearing debt. These debts are a claim on output, revenue and wealth; they do not constitute real wealth. This is what pro-financial neoliberals fail to understand. For them, debt creation is “wealth creation” (Alan Greenspan’s favorite euphemism) when credit – that is, debt – bids up prices for property, stocks and bonds and thus enhances financial balance sheets.
The “equilibrium theory” that underlies academic orthodoxy treats asset prices (financialized wealth) as reflecting a capitalization of expected income. But in today’s Bubble Economy, asset prices reflect whatever bankers will lend. Rather than being based on rational calculation, their loans are based on what investment bankers are able to package and sell to frequently gullible [or internally betrayed] financial institutions. This logic leads to attempts to pay pensions out of a “wealth creating” process that runs economies into debt. . . .
There amount of debt that an economy can pay is limited by the size of its surplus, defined as corporate profits and personal income for the private sector, and net fiscal revenue paid to the public sector. But neither today’s financial theory nor global practice recognizes a capacity-to-pay constraint. So debt service has been permitted to eat into capital formation and reduce living standards – and now, to demand privatization sell-offs.
Hudson isolates the deep problem with financialization of the economy: it is unmoored from projects that improve our long-term prospects.
Restoring Rationality to Capital Allocation
Is there any hope for change? The most heartening examples I've heard recently come out of the private sector. Shareholders are starting to organize online. Certain businesses are succeeding by taking sustainability seriously. Businessweek has highlighted Subaru's green culture, including zero-waste initiatives that generate gains for the company's shareholders and its workers. Umair Haque's book The New Capitalist Manifesto highlights a number of companies (ranging from Starbucks to Interface to WalMart) that have begun to focus on the real costs and benefits of their business strategy. These companies are focusing less on squeezing out labor costs and piling new responsibilities on the harried employees who remain. Rather, they are researching "value cycles" that minimize waste and isolate them from increasing or volatile commodities prices.
Haque argues that we need to "reset the incentives for everyone to make more authentically wealth-creating (and less wealth-extractive) choices." Real wealth crucially depends on shared security and opportunity, not the baubles and privileges with which it is metonymically identified. Haque is not afraid to frame the issue in the moral terms that the times demand:
The biggest unintended consequence and hidden cost of the pursuit of opulence might not be outside us, but inside us; might not be poisoning the skies, emptying the seas, or even fracturing societies, but withering and blighting human potential itself, what an economist with a heart might call a negative consumption externality of the soul: that it rots a society from the inside out by imploding the institutional capacity, organizational ambition, and personal hunger to take on tomorrow's greatest world-changing challenges, solve really big problems, and work on the stuff that matters most.
Today's engines of financialization are drawing our best math, science, and engineering talent away from "the stuff that matters most." They instead work on securing claims to a fragile global productive capacity that can only shrink if it is not better tended to. This zero-sum game ranges from martial finance to cloak-and-dagger obfuscation to political influence peddling. Returns to finance must become a much smaller part of our economy if it is ever to reward productivity as much as it pays off raw power.