A recurring theme of this blog has been the trend, now quite egregious, of capture of political institutions by financially well-off elites. And interestingly, for various reasons, the intelligentsia have played along.
We have enough evidence today to argue that deregulation, excessive financialisation and privatisation, business concentration, de-unionisation, and skill-biased technologies have all led to a weakening of labour's influence and a corresponding dominance of business interests in both the economy and the polity.
The result has been widening inequality and the emergence of a group of super-wealthy elites. The signatures, with evidence, of the dynamics that have contributed to this state of affairs have been piling up - increasing business concentration across sectors, declining labour's share in national income, booming executive compensation, soaring profits, growing entry barriers and anti-competitive practices, slackening anti-trust enforcement, rising prices and stagnant productivity following mergers, business investment declines associated with rising market power, higher price mark-ups, disproportionate benefit from monetary policy, and so on.
But we are still debating this. Isn't all this adequate to connect the dots? What more evidence do we need to call out the problem?
One could argue that even these signatures, damning as they are, would have been a matter of concern but not alarm if this were all and, importantly, the safety valves of democratic politics were active and healthy. But the aforementioned dynamics have been accompanied by an increasing trend to use the resulting economic dominance to capture the process of making the rules of the game in society, polity, and economy and use them to favour the dominant group at the cost of all others. When this happens, the social contract starts breaking down. And we may now be staring at an advanced state of break down.
A rich body of recent research points definitively to capture of politics and institutions responsible for laying down the rules of the game. Business executives have unprecedented access to the highest political levels, some even averaging one White House meeting a week, and that access translates into decisions which unfairly favour them over others. Stock market returns, and not real world concerns, "cause Fed policy".
And what if Federal Reserve Governors selectively leak insider information to benefit their favourites? Since 1994, the average excess return on stocks over Treasury Bills, or equity premium, was earned entirely in weeks 0, 2, 4, and 6 in Federal Open Market Committee (FOMC) cycle time, where the cycle starts on the day before each of the scheduled eight annual FOMC meetings. But disturbingly, these returns appear to be caused by systematic unofficial communication with selective market participants (or insider information leaks) from Fed Governors who meet bi-weekly after the FOMC meeting. And what if there is evidence of increased opportunities for such informal leaks after such meetings from analysis of taxi trip data into and from New York Fed. The FOMC is open, but it seems only for a privileged few!
These look like simple misdemeanours when compared with the actions of those who caused the "Made in Wall Street" global financial crisis. Wall Street firms have since been charged with misleading clients, selling dodgy securities, deceiving and mis-selling to customers, rigging bids and interest rates, foreclosure abuses and mortgage misrepresentations, market manipulation, predatory sales, fraud cover-ups, and so on. In sum, the full spectrum of white collar crimes, many with outright criminal liabilities. And those at the receiving end included both retail customers, regular investors and high-net worth ones, and institutional investors, including public pension funds. Not one senior Wall Street executive has been charged with criminal liability, much less sentenced. Worse still, much the same character cast are now back to enjoying fat bonuses and lobbying to chip away at even the weak regulatory oversight on their activities put in place by the Dodd-Frank legislation.
Then there are the authoritative ringside expositions of the capture from, among others, Yanis Varoufakis, William Buiter, and Paul Tucker. Paul Tucker has even gone to the extent of pleading for the retreat of technocracy and more space for politics, and cautioning central bankers from attending Davos!
And these trends have become so egregious that what would have been considered scandalous in public life a few decades back is today passé. When immediately after demitting office, a President of the United States and a Chairman of Federal Reserve, the premier executive and regulator respectively in the world's largest economy and most powerful nation, nonchalantly accept handsomely compensated speaking tours sponsored by the very same interests who benefited the most from their policies and are arguably at the vanguard of political capture, then it cannot be denied that there is something seriously wrong!
Leave aside all such research and just consider the short history of the last decade. On the one hand, the rich have benefited immensely from the ultra-low interest rates and booming stock markets, even as the middle-class and the less well-off have seen their wealth erode due to the low rates and the tanking of the housing market. Businesses and the richest individuals have been the biggest beneficiaries of tax favours of all kinds, even as public debt soars into unsustainable terrains.
On the other hand, the non-elites have borne the brunt of the austerity policies that governments have pursued either on their own volition or been forced to do so. Consider the direct squeeze on funding for local governments and their increasing indebtedness, pervasive and sharp across the US and UK; the pruning down of welfare programs; the creeping privatisation of essential public services and their transfer to private interests with questionable intents. While the richest benefit by way of even tax exemptions on their bloated (so call "Cadillac") medical insurance policies, the poorest are left to fend for themselves by shopping for insurance policies from the market.
Or consider the behaviours of the corporate titans of tech America. They incorporate subsidiaries in off-shore tax havens, vests intellectual property rights in them, transfers almost all profits to those subsidiaries, and thereby "avoid" paying taxes; thanks to the low interest rates they are able to borrow cheap in the US, use the money raised to finance share buy-backs, and boost their own wealth and payout massive dividends; and as if all this were not enough, claim tax exemption on the interest expenses for the debt raised, thereby avoiding paying even less of the already meagre tax dues.
In the US, in the immediate aftermath of the bursting of the sub-prime mortgage bubble, each one of the major actors - households, corporates, and financial institutions - were left with massive debt overhang. The US Government and the Federal Reserve reacted with alacrity and a slew of initiatives to bail out the same financial institutions, who bore the primary responsibility for inflating up the bubble. Then the extraordinary persistence with low interest rate was justified as necessary to repair corporate balance sheets and encourage investment. As regards households, somewhere in the fine print of these measures was a small program to help those struggling with foreclosures.
While behemoth corporations were too big to fail, households had to be disciplined with foreclosures. It was as though the free-market principles of competition and moral hazard applied only to the latter and not the former.
The result is to see. Even as the top 1%, even the top 10%, have seen their wealth rocket upwards on the back of the stock market boom, the bottom half has seen a steep fall in their wealth. For the richest, it is a case of sow the wind and let others reap the whirlwind, all the while sitting in a comfortable place and enjoying life!
Stunningly, the elites have drawn strength and credibility from the ideological and intellectual underpinning provided by the US academic establishment (barring a few honourable exceptions) and reputed institutions like the IMF in support of their actions. Free trade, liberal immigration, global citizenry, unfettered individualism, deregulation, globalisation, and so on have found ideological justification in their works. Even when some of the concerns like widening inequality have been surfaced by the likes of Thomas Piketty, these intellectual forefathers have sought to distract with obfuscation and arcane and superfluous digressions. Needless to say, these eminence grise have, in their own differing ways, benefited from the same trends.
The flag-bearers of the Fourth Estate have played a prominent role in distilling and disseminating these ideas and the narrative. They have helped establish a Gramscian hegemony to rationalise and drive these trends. The mutually beneficial partnership which emerged has been sustained under the veneer of a noble sounding "liberal democratic and free-market consensus".
Even enlightened self-interest has disappeared from the playbook of the elites. Clearly, they have become so emboldened with hubris as to eschew even pretensions of propriety and fairness in their actions. Again, history repeating itself.
It was no surprise that things started to go wrong and wheels started coming off the apparent Goldilocks economy. The global financial crisis may have been a trigger, in so far as it exposed all the cracks that had hitherto been papered over by favourable forces like rising property markets, policies that allowed gorging on debt, globalisation and the rise of China, and the flush of productivity gains and opportunities that emerged from the new technologies. But after a few moments or months of sobriety and right rhetoric, things have gone right back to where they were, before 2007. May be, worse.
This is history repeating itself big time. Across societies and polities over time, economic elites have exercised their dominance over political power and control over decision making processes. And always the dominance has spilled over into excesses, provoking rebellions and revolutions, and sometimes assimilations, that resulted in regime shifts. We are seeing our own version of this dynamic.
Hegel, though in the context of abstract ideas, described this in terms of an inexorable dialectic - thesis, anti-thesis, and synthesis. Accordingly, any state of the world, or thesis, generates its own opposition, or anti-thesis. The contradictions are resolved through a new state of the world, or a synthesis. In some sense, humans need the ‘other’; so do nations, institutions and ideologies to sustain themselves and to hold themselves from slipping into ‘excess’ mode.
Adam Smith cautioned about such capture and excesses. Karl Marx adapted Hegel to the material world and made it his central thesis - "the history of all hitherto existing society is the history of class struggles"! In more secular terms, Vilfredo Pareto and Gaetano Mosca claimed this as an immutable law, though in an acknowledgement of the dialectic, Pareto wrote about the "circulation of elites" and described "history as the graveyard of the elites". C Wright Mills wailed at the "power elites" from political, economic and military establishments who had usurped power from elected representatives and the resultant erosion of democracy. A host of others in recent times from James Burnham to Robert Putnam have written about the ceding of decision-making power by democratic institutions to managers and technocrats. Notice the striking similarity here with the prevailing central bank dominance over economic policy making.
Adam Smith cautioned about such capture and excesses. Karl Marx adapted Hegel to the material world and made it his central thesis - "the history of all hitherto existing society is the history of class struggles"! In more secular terms, Vilfredo Pareto and Gaetano Mosca claimed this as an immutable law, though in an acknowledgement of the dialectic, Pareto wrote about the "circulation of elites" and described "history as the graveyard of the elites". C Wright Mills wailed at the "power elites" from political, economic and military establishments who had usurped power from elected representatives and the resultant erosion of democracy. A host of others in recent times from James Burnham to Robert Putnam have written about the ceding of decision-making power by democratic institutions to managers and technocrats. Notice the striking similarity here with the prevailing central bank dominance over economic policy making.
But democracies, over the past century or so, have sought to address this problem through sufficient institutional checks and balances against egregious excesses by the dominant classes. These institutions and channels of engagement and negotiations have served as safety valves. John Kenneth Galbraith described them as institutions of "countervailing power", necessary to attenuate excesses. Over the past century, faced with the onslaught from communism, these same institutional systems have helped capitalism and liberal democracy survive by giving birth to the likes of labour unions and collective bargaining, consumer organisations, welfare state, social democracies, and so on. It is not incorrect to say that capitalism co-opted elements of communism to fend off the latter.
But that was then. Unfortunately, if we accept the aforementioned dynamics on both the economic and political realms, the space now available for such safety valves to defuse may have shrunk and even disappeared. The populist backlash of recent times is a manifestation of this disturbing reality. And the response of the liberals is even more disconcerting.
Instead of realising the enormity of the problem facing us and the near complete breakdown of the social contract, and advocating measures to address it, the liberal intellectuals and opinion makers have acquiesced with the elites by going after the convenient straw man in Donald J Trump (DJT). Even with all his flaws, DJT is merely a transient phenomenon, the sort of which is very likely when the social contract is tattered.
It is not DJT that is the real problem, it is the elite capture of the rules of the game and the near complete marginalisation of the voices of labour and the economically disenfranchised. The "thesis" is no longer sustainable, and the "anti-thesis" is chaotic and deeply uncertain. In the circumstances, history teaches us that all we can expect is a tumultuous synthesis. Unless we act now to achieve a more orderly synthesis.
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