Archive for August, 2011

The London Riots: A Musical Debate

August 8th, 2011  |  Published in Art and Literature, Politics

Image via Jodi Dean:

Point: Jello Biafra, Dead Kennedys

“Riot-playing into their hands \ Tomorrow you’re homeless \ Tonight it’s a blast.”

Lyrics.

Counterpoint: Boots Riley, The Coup

“That’s not chaos, that’s progress.”

Lyrics.

Redistribution Under Neoliberalism

August 8th, 2011  |  Published in Data, Political Economy, Politics, Social Science, Statistical Graphics, xkcd.com/386

Last week, Seth Ackerman wrote a Jacobin blog post in which he gave us a snarky attack on the record of “left neo-liberalism” in the United Kingdom. Basically, he showed that while New Labour managed to reduce poverty somewhat with cash transfer programs, the progress was meager and could not be sustained. Since the programs were financed out of a series of asset bubbles, the UK has seen poverty go back up again with the recent crisis.

I don’t have much quarrel with this account, but I’m not sure it can bear the weight of the argument that Seth wants to put on it. He suggests that the UK experience is a refutation of the general strategy of progressive neoliberalism, which Freddie DeBoer felicitously dubbed “globalize-grow-give”:

First, you embrace the standard globalization model of reduced or eliminated tariff walls, large free trade agreements such as NAFTA or CAFTA, deregulation, and general trade liberalization. This encourages international trade and the exporting of jobs from highly-regulated, fairly well compensated, high worker standard of living places like the United States to the cheap labor, low regulation, low worker standard of living places like China or Indonesia. This spurs international economic growth in both the exporting and importing countries. Here at home, higher growth results in higher tax revenues which can then be redistributed from those at the top of the income distribution (who have benefited from the globalized trade regime) to those at the bottom of the income distribution (who have been hurt by the globalized trade regime that undercuts their wages and exports their jobs).

I think that if you want to really criticize this view, you need to look beyond the UK, which is neither a very generous nor a particularly well-designed welfare state. As it happens, my day job involves analyzing cross-national income data, so I’m going to perpetrate some social science on y’all.

The way I read the “globalize-grow-give” critique, you can extract an empirical claim about how the income distribution should look in a G-G-G economy. The distribution of income before taxes and transfers will become increasingly unequal due to deregulation and globalization, but the distribution after taxes and transfers are accounted for will not become vastly more unequal because government is compensating for the inequality in the private market.

To test this, I did some simple calculations, following other researchers who have done similar things. Using data from the Luxembourg Income Study, I calculated the Gini coefficient, a standard measure of inequality, for several different countries. I calculated two different Ginis:

  • The Gini of market income. Market income is defined here as income from wages, pensions, self-employment and property. This is income before any taxes or transfers are accounted for.
  • The Gini of disposable income. This is the income that people actually have to spend, after taxes are deducted and any transfers are added in. (For more details about the variables, see the postscript).

Unfortunately, the difficulty of harmonizing cross-national data means that the numbers I have access to are a bit out of date–specifically, they end before the current crisis period. I still think we can learn something useful from them, however. The way G-G-G neoliberalism is supposed to work, the Gini of market income should go up but the Gini of disposable income should not–or at least should rise more slowly. We can think of the difference between market income inequality and disposable income inequality as a rough measure of the amount of redistribution done by the state.

So here’s what things look like in the UK:

Income Inequality in the UK

This figure basically supports Seth’s argument. Market income inequality has gone way up in the last few decades, but disposable income inequality has gone up by a lot as well. The state is doing a bit more redistribution than it used to, but not enough to make up for the rise in private-market inequality. If you look at the United States, the situation is even worse, as the state has done essentially nothing to counter rising inequality in market income:

Income Inequality in the USA

The question, though, is whether it has to be like this. Let’s put the UK alongside another rich European economy, Germany:

Income Inequality in the UK and Germany

Here we see something very interesting. Before you take taxes and transfers into account, the rise in inequality in Germany looks very similar to what happened in the UK–indeed, the two countries converge to almost the same value by 2005. But disposable income inequality has stayed flat in Germany, because the German state has used taxes and transfers to counteract rising inequality.

Every good social democrat loves the Nordic model, so let’s finish off with a look at Sweden:

Income Inequality in Sweden

Here the story is a bit different–both market income and disposable income inequality have remained pretty flat, although both have risen a bit. The important thing to note here is that even in the most socialist of welfare states, market income inequality is very high, nearly as high as it is in the UK or US. The fact that Sweden is one of the least unequal countries on earth has to do almost entirely with taxes and transfers.

So what can we conclude from all this? Let me be clear that I don’t think this is a knock-down argument in favor of “globalize-grow-give” as a political model. But I think the best argument against the G-G-G model is not that it’s economically impossible or dependent on asset bubbles. Rather, I’d point us back to the political arguments enumerated by me, Henry Farrell, and Cosma Shalizi among others. What makes Sweden and Germany different is not that their economies are different from those in the US and UK (although they are), but that they have different political environments, featuring things like a hegemonic Social Democratic party in Sweden and a strong labor movement in Germany.

So if left-neoliberalism is to be a workable political agenda rather than the motto of useful idiots for the “globalize-grow-keep” agenda of the right-wing neoliberals, it has to either make its peace with the sources of working-class power that currently exist, or else come up with workable models of what might replace them.

[Postscript for income inequality nerds only: the income variables are equivalized for household size using the square root of the number of persons in the household as the equivalence scale. The variables are then topcoded at ten times the equivalized mean and bottom-coded at 1 percent of the equivalized mean.

Note that the transfers included in disposable income are only cash transfers and “near-cash” benefits (like food stamps), not in-kind services like health care. So you could argue that this data actually understates the extent of redistribution.

If you’d like to look at the data, including a bunch of countries I didn’t include in the post, it’s here. For help interpreting the country codes, go here]

Artificial Scarcity Watch: Barack Obama vs. Innovation

August 4th, 2011  |  Published in anti-Star Trek

Barack Obama is so full of bad policy ideas these days, some of them seem to be slipping under the radar. But this piece by Zach Carter at the Huffington Post zeroes in on one especially bizarre bit of the President’s posturing around the debt ceiling deal: his claim that one of the best ways to create jobs is for Congress to “send me a bill that would make it easier for entrepreneurs to patent a new product or idea, because we can’t give innovators in other countries a big leg up when it comes to opening new businesses and creating new jobs”.

Anyone who’s been reading my recent posts about intellectual property law can probably guess what I think about this: the last thing we need right now is to make it easier to get patents. As NPR’s Planet Money makes clear in a great follow-up to their This American Life piece on patent trolls, the flood of vague and useless patents is already gumming up the legal system with litigation and probably costing jobs. In fact, Intellectual Ventures, the villian of the TAL piece, turns up in the HuffPo piece as one of the companies lobbying against anything that weakens patent protections.

But as with most things in our political system, the patent “reform” legislation has turned into a gigantic contest of corporate lobbyists, with the rest of us left watching from the sidelines. The whole article is worth a read, but here are a few highlights.

Carter explains that this has ended up coming down to a contest between tech companies and drug companies. The tech companies are, relatively speaking, the good guys here. They’re tired of being subjected to lawsuits from patent trolls, and want some protection from Congress. Unfortunately, they seem to have lost out to the drug companies, who depend heavily on sales of patent-protected drugs to make their money. So the tech giants have given up on patent reform, and are focused instead on teaming with Pharma to demand a ludicrous tax holiday.

Meanwhile, Wall Street–in a great example of the narrow-minded selfishness of the capitalist class–managed to get a special exception dropped into the bill by their man, New York Senator Chuck Schumer. The exception would make it easier to invalidate “business method” patents–but only in the finance industry. This provision is thought to be targeted specifically at a company that holds patents on check processing, and has managed to extort a bunch of money out of the big banks as a result. This is indeed stupid, but rather than fight for a more sane system for everyone, Wall Street just wants to get special treatment and leave everyone else to fend for themselves.

What’s interesting is that this fight doesn’t really come down along partisan lines, although the Republicans are predictably the worst. Schumer is being opposed by a coalition that includes Nancy Pelosi, Maxine Waters, and a couple of Republicans, who all make the preposterous claim that invalidating business method patents in finance would “stifle innovation”. There is also an amusing story about patent-troll advocates whipping up a Tea Party astroturf campaign fronted by the likes of Phyllis Schlafly and Ed Meese.

Finally, the article also includes an amusing set piece that often appears in stories on the broken patent system: a parade of ridiculous patents. Carter recounts:

In recent years, patents have been approved for products including a wheeled flower pot (patent No. 7,908,942), the crustless peanut butter and jelly sandwich (patent No. 6,004,596), a decorative box that can be placed in a casket (No. 7,908,942) and an accounting scheme that helps people dodge taxes by moving stock options around (No. 6,567,790).

This got me wondering just how easy it is to find things like this. So I wrote a little script that generates a link to a random patent from among the last million patents issued. That covers those issued in the last five years or so. (Incidentally, this is about 1/8th of all the patents issued since 1836, which itself says something about how out of control the system is.)

The first random patent I found at least seems like a plausible invention, although I don’t really have the expertise to judge. Patent 7,121,819:

Auxiliary end heating devices on an elongated, heated hot melt distribution manifold body assist in maintaining uniform temperatures throughout all portions and passageways of the manifold body. The heating devices preferably take the form of thick film electrical resistive heaters of plate-like construction. The end heaters are on their own control circuit separate and apart from the circuit for other heaters for remaining portions of the manifold body. Special isolating slots are formed in lower corners of the manifold body between supporting standoffs and overhead melt passageways in the manifold body.

The next one I got, though, was Patent 7,127,671:

A method for publishing a customized publication including an article for a customer includes obtaining information from the customer including a topic for the article and the identity of a primary source for quotable information about the topic. The method also includes establishing and following a defined schedule for a three-step process for obtaining information about the topic prior to preparing and printing the publication.

It’s hard to make sense of exactly what this is supposed to be, but to me it sure looks like someone patented the idea of being hired to talk to sources and write an article for a single person. Reading the rest of the patent didn’t really make it look any better. I did like the section that defines such “technical terms” as “article”, “printing”, and “quotable information”.

Anyone reading this is welcome to try this out themselves. If my rudimentary PHP is written correctly, the following link is randomly generated, and should go to a different patent for everyone who reads this:

Your Random Patent, Patent Number 7625416.

Reloading the page will generate a new random link. If you find any particularly good patents, please leave them in the comments.

The Decay of the Capitalist Class

August 2nd, 2011  |  Published in Political Economy

A recent post from Bruce Webb at Angry Bear gave me a new angle on the fecklessness of our ruling elites, who currently seem incapable of even running capitalism for their own benefit. The basic insight here is that capitalism requires the capitalist class to impose an austere kind of discipline not just on the working class, but on itself. And while the breakdown of worker discipline causes well-known problems for capitalism, the decay of capitalist discipline poses difficulties as well.

Doug Henwood has long observed (and long threatened to write a book about) the decay and decomposition of the American ruling class. Rather than a disciplined force that seeks to promote the long-run accumulation of capital, our elite increasingly appears short-sighted and avaricious–more interested in looting the system through bailouts and high-end tax cuts than in ensuring the its long term health. Henwood:

Well, you know it was once the WASP elite, but there ain’t none of that now. I think one of the problems of the United States is that there is a great deal of incoherence at the upper level, that unlike the WASP ruling class, there is no social formation that can think in the truly long-term, that can think beyond the short-term concerns about the accumulation of money, the most amount of money in the quickest possible time.

Webb’s post is about something slightly different, but related: is the capitalist class primarily oriented towards accumulation, or towards “consumption and display”?

Classical, neo-classical, and neo-liberal economics all share a common mistaken psychological premise, one that is simple but deep, and in itself explains why they don’t understand the aims of Progressive Taxation.

Label it how you like, the academic discipline that emerged from England in the 18th and 19th century implicitly, hell I’ll make it stronger, explicitly assumed that the goal of capitalism is accumulation, i.e. getting more an more numbers on the right side of the ledger sheet. Which assumption seems blindingly obvious, which is why it is simple and goes so deep. In this model taxation on gains from capital serve to displace investment on the equally simple assumption that if you tax something people do less of it. Again perhaps blazingly obvious.

But it doesn’t hold up well against the historical record either narrowly considered in relation to 18th and 19th century England or more broadly across cultures and across history. Instead in most of those cultures and most definitely in Georgian and then Victorian England the evidence is strong that capitalists saw investment as the means to different ends, those of consumption and display that in turn would lead to societal status. You only have to look at the great Country Houses that were built during this period, with no expenses spared inside or out whether that be on landscape architects or silversmiths.

With respect to my favorite classical (or post-classical) economist, this is only partially in keeping with what Marx thought. True, he believed that capitalists had to accumulate; but he also thought that the capitalist “developed in his breast, a Faustian conflict between the passion for accumulation, and the desire for enjoyment.” And he might agree with Webb about what was going on in the 19th Century, but he would see it as a sign of capitalism’s ill health. As he put it in Capital:

Even in the early part of the 18th century, a Manchester manufacturer, who placed a pint of foreign wine before his guests, exposed himself to the remarks and headshakings of all his neighbours. Before the rise of machinery, a manufacturer’s evening expenditure at the public house where they all met, never exceeded sixpence for a glass of punch, and a penny for a screw of tobacco. It was not till 1758, and this marks an epoch, that a person actually engaged in business was seen with an equipage of his own.

“The fourth period,” the last 30 years of the 18th century, “is that in which expense and luxury have made great progress, and was supported by a trade extended by means of riders and factors through every part of Europe.”

What would the good Dr. Aikin say if he could rise from his grave and see the Manchester of today?

Accumulate, accumulate! That is Moses and the prophets! “Industry furnishes the material which saving accumulates.” [23] Therefore, save, save, i.e., reconvert the greatest possible portion of surplus-value, or surplus-product into capital! Accumulation for accumulation’s sake, production for production’s sake: by this formula classical economy expressed the historical mission of the bourgeoisie, and did not for a single instant deceive itself over the birth-throes of wealth. [24] But what avails lamentation in the face of historical necessity? If to classical economy, the proletarian is but a machine for the production of surplus-value; on the other hand, the capitalist is in its eyes only a machine for the conversion of this surplus-value into additional capital.

The point Marx is making here is that capitalism doesn’t just trap workers within the prison of alienated and exploitative labor, it also subjects capitalists to the endless treadmill of accumulation for the sake of accumulation. (On this point, see also my earlier remarks on the distinction between capital and capitalists). This point doesn’t often get made, I think, because it’s contrary to most Marxists’ moral orientation–nobody feels all that bad for the capitalist, and it’s still good to be the king. Nevertheless, to be a good capitalist takes discipline–so what happens when the dominant image of the capitalist is no longer Ebenezer Scrooge, but Steve Schwarzman’s birthday party? Says Webb:

So what does this have to do with progressive taxation? Well once you accept the assumption that the fundamental goal of investment among the upper classes is consumption and display and further that in most cases that consumption doesn’t have the multiplicative effects on the wider economy that re-investment would then the goal of progressive taxation becomes obvious, and by the way a lot less socialist than the old shibboleth of redistribution. The goal of progressive taxation in the classical political liberal position dominate in this country from 1913-1980 was to penalize consumption and favor re-investment. After all at least under current law gains on capital are by and large not exposed to federal taxation until they are realized, if instead they are plowed back into productivity improvements they are at the corporate or individual level largely tax exempt. It is only when you take the equity out in the form of interest, dividends or simply cashing out equity that tax is encured.

The logical conclusion of this model is that if we accept the principle that to tax something is to induce people to do it less, if nothing else by increasing its marginal cost, then Supply Side becomes the Voodoo the Elder Bush always said it was. Lowering top marginal rates and taxing capital gains at half the rates of capital income would under my model have the effect of encouraging consumption and discouraging reinvestment. Whereas high rates would have the opposite effect. Which has the advantage of being testable, if we had to constrast the 50s and the 80s in terms of the consumption patterns of the near the top level of capitalists and managers we see a lot less conspicuous consumption among the former than we do in the post Reagan-era. In the 50s and 60s only Greek shipping magnates could afford the kind of consumption patterns that became common in before, during, and after the Enron era and certainly continuing today. From my perspective all Supply Side did was to lower the cost of consumption in pre-tax dollars, purchases that were inconceivable in the days of 90 and then 70% top rates have become routine in the days of 15%.

So if the capitalist class was truly able to act as a collective personification of capital, then they would be for progressive taxation! But to bring this back to Henwood’s argument, we see instead that the ruling class is too fractious and selfish to impose this kind of discipline on themselves. Instead, they’re just trying to make off with as much loot as they can, and live as lavishly as possible. The result is a plutonomy in which “There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take.”.

The only counterpoint to this that I can see is that at the very top, the accumulation of money itself is, in Webb’s terms, the “display” that “leads to social status”. Making money becomes like points in a game, as everyone tries to get the biggest pool of money. Why else, after all, would a billionaire hedge fund owner keep trying to grow ever richer, even after accumulating more riches than they or their family could ever consume? Unfortunately, these hoards of money seem mostly to be put to use chasing asset bubbles, high-frequency trading, and other sorts of zero-sum competition rather than investing in productive activity.