Post-pandemic policy making and elite capture

The economic policy making in the aftermath of the Covid 19 pandemic is a teachable moment in illustrating arguably the most corrosive effect of widening inequality, that of elite capture of the political decision-making space. 

The impact of Covid 19 and the recovery appears to be K-shaped across the world. While previous pandemics and wars were associated with wealth destruction among the rich and lowering of inequality, this one has been associated with the exact opposite trend. 

The reason for the reversal of trend has been squarely due to the political choices made in the determination of the rules of the game. 

Three in particular stand out. 

1. Instead of increasing taxes at the higher income levels to raise money to support the spike in fiscal spending to combat the pandemic, tax increases have largely remained off the table. 

As a counterfactual, during both the World Wars, taxes surged to finance the war effort. Morgan Hausel quotes FDR from 1942,

Are you a businessman, or do you own stock in a business corporation? Well, your profits are going to be cut down to a reasonably low level by taxation. Your income will be subject to higher taxes. Indeed in these days, when every available dollar should go to the war effort, I do not think that any American citizen should have a net income in excess of $25,000 per year after payment of taxes [roughly $375,000 adjusted for inflation].

Emmanuel Saez and Gabriel Zucman advocated an excess profits tax citing precedent from World War I,

The government should impose excess profits taxes, as it has done several times in the past during periods of crisis. In 1918, all profits made by corporations above and beyond an 8 percent rate of return on their capital were deemed abnormal, and abnormal profits were taxed at progressive rates of up to 80 percent. Similar taxes on excessive profits were applied during World War II and the Korean War. These taxes all had one goal — making sure that no one could benefit outrageously from a situation in which the masses suffered.

In the supposedly more liberal environments of our times, these ideas have scarcely been discussed in serious circles. None of the ubiquitous poster children of liberalism, who never shy away from taking up woke causes, have thought it appropriate to espouse such issues.  

2. Instead of wealth erosion (especially by way of equity and other asset markets falling), the massive credit market and monetary accommodation has primarily been aimed at backstopping and propping up the expansion in the asset markets. The extended monetary accommodation, with all the numerous extraordinary credit and bond market interventions since the GFC and especially since the pandemic have all been aimed primarily at keeping the equity markets booming and defies all logic. This issue is the central concern of Rise of Finance. 

3. Instead of confining stimulus to those most affected and whose livelihoods were made vulnerable and allowing capitalism to enforce its disciplining powers on greedy and irresponsible executives and their companies, fiscal policy has generously and recklessly showered benefits on corporates and private equity investors. Sample this and this about the socialisation of losses involving Marriot and Disney respectively. Sample this, this and this about waste and the questionable efficacy of the massive Pay Check Protection (PPP) program. 

In all three cases, the standard historical rules of game were changed to suit the preferences of the wealthy and corporates. Tax cuts were never seriously considered and backstopping the financial markets became the matter of highest priority. The wealthy elites had become too powerful to be able to manage the political establishment and their political choices. This is perhaps the most corrosive impact of widening inequality, its implications on political choices.

Economics involves the study of efficient allocation of scarce resources. And this allocation involves decisions which are fundamentally political, which goes beyond mere efficiency and looks at considerations of fairness, equity, and specific ideologies of each ruling dispensation. It's just that an establishment which is the hand maiden of elite interests and plutocrats is excessively oriented towards efficiency to the exclusion of all else, besides the inevitable cronyism and corruption.

For economists looking at canonical models to assess the impact of various trends (like inequality), which model can capture these fundamental human preferences and their consequences?