The Great Economic Misdirection

by

A central challenge for left critiques of capitalism as it exists today is the distance between the mythologies that craft understanding of the issues for the great majority and more probable explanations based on examination and analysis. The issues are that concentrated wealth is claims on social resources; that wealth ‘creation’ is an artifact of particular arrangement of social circumstances / relations and that wealth distribution is the social distribution of economic and political power. Concentrated wealth as it exists is hardly likely to distribute this power away from itself. And conspicuously missing is class-consciousness in any revolutionary sense amongst the poor and middle classes whose circumstances in the ‘developed’ West are in rapid decline. Taken together this is a formula for escalating consolidation of economic and political power against people who have little apparent understanding of the economic forces that are overtaking them. Were it not for the risk of growing political and economic dysfunction and its likely effects in social and environmental catastrophes— wars for resources to benefit the residual plutocracy, the inability to address global warming because doing so lowers corporate ‘profits’ and the increasing immiseration of a broadening swath of the socially dis-empowered, concern might rightly be considered effete.

For instance, a survey of public perceptions of wealth distribution undertaken by Michael Norton and Dan Ariely in 2011 found wide disparities between wealth distribution as it is perceived and as it actually is. Even that study grossly understated the concentration of income and wealth because the researchers were working with overly broad categories—quintiles, or fifths, of wealth distribution when the real concentration is at the very top. On the other side of public perceptions is the tiny group of very wealthy who see their wealth, even inherited wealth, as deserved, and who frame challenges to the idea that it is in psychological terms, as ‘envy.’ Adding to social misdirection is the mainstream economic frame that views concentrated ‘capital’ in some confused conflagration of money, quasi-money and things as the prerequisite to economic production. The predominant economic mythologies surrounding income and wealth distribution clearly work the service of the very rich.

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Graph (1) above: Most people have no conception of how concentrated incomes and wealth are at the very top. When Norton and Ariely (link above) asked people what they believed this concentration to be respondents tended to underestimate concentration in the top 20%. Illustrated above is that even within the top 10% of incomes average executive compensation is so great that the average top incomes are barely visible. With the extremes illustrated in this graph as evidence, looking at the issue in quintiles, as Norton and Ariely did, obscures more than it illuminates. But this written, the authors found that even when viewed in quintiles there was broad objection to such concentrated incomes and wealth. One can only imagine responses if the issue were more precisely framed. Sources are the Federal Reserve Survey of Consumer Finances and Forbes. Units are in thousands of dollars.

Capitalist mythology has it that incomes and wealth are largely ‘earned.’ This myth unites the wages of the poor and middle classes in social understanding with those of the very wealthy in a hierarchy of justly differentiated outcomes—the incomes and wealth of hedge fund managers and corporate executives are perceived to be analogous to the paychecks received by truck drivers and service workers, only larger. In fact, through expression of social power in ‘public’ policies that decide which industries get subsidized and bailed out and through granting monopoly and cartel privileges to favored industries and industrialists, the incomes and wealth of the wealthy are not commensurate with the wages of labor in either type or scale. The contrived division of economic and political power that is a central precept of capitalist democracy serves to hide the role of concentrated wealth in crafting ‘political’ decisions that benefit the already wealthy. This is the central factor driving perceptions of political dysfunction in the West when the political system is working just as the plutocracy wishes it to work.

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Graph (2) above: The growth of finance and the rise in financial asset prices has played a large role in inflating executive compensation. Captive Boards of Directors grant huge stock options to corporate executives who now earn hundreds of times more than their workers do. The mythology that the stock market reflects the ‘true’ value of companies ignores the role of the Federal government and the Federal Reserve in subsidizing corporate profits and in raising stock prices through monetary policies specifically designed to do so. Source: Forbes.

One reasonably well-known example of the public sources of corporate ‘profits’ is Wal-Mart, which is dependent upon government subsidies of both its customers and its employees. The heirs to the Wal-Mart ‘fortune’ are individually amongst the richest people in the world. Wal-Mart employees are the largest beneficiaries of Medicaid and food stamp expenditures in a number of states and the company has admitted (link above) that its sales and revenues are dependent on food stamp (SNAP– Supplemental Nutrition Assistance Program) payments to its customers. Another way of saying this is that many Wal-Mart employees couldn’t afford to work for the company if Federal and state governments weren’t subsidizing their paychecks and many of its customers couldn’t afford to shop at Wal-Mart if they didn’t receive food assistance. Left un-addressed is the use of coerced and / or sweatshop labor to manufacture the products Wal-Mart and the rest of ‘retail’ America sells. The use of overseas labor requires a subsidized global infrastructure for the transfer of resources, a standing army to assure repatriation of profits and the social means of coercing labor at ‘profitable’ wages. Historical examples of this latter tendency can be seen in U.S. military invasions throughout Central and South America and Haiti when the institution of higher minimum wages was threatened.

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Graph (3) above: The pretense / premise of Western economics is that ‘we are all in this economy together.’ This was / is the improbable foundation that has kept variations on ‘trickle-down’ economics alive in economics departments across the West. Without apparent irony or much public comment is that executive compensation and the need for food assistance have risen in tandem since the 1980s. The need for food assistance is evidence of severe poverty. Not illustrated is the rapid increase in those living at half of the poverty level or less since financial asset prices and executive compensation began to ‘recover’ in 2009. Sources: U.S. Department of Agriculture and Forbes.

As can be seen in Graph (2) above, in addition to government bailouts, subsidies and protections that boost corporate profits, a rising stock market also contributes to inflated executive compensation. Many people believe / assume that the stock market is unaffected by ‘external’ factors and therefore reflects ‘true’ market values for company stock. In fact, in recent decades the ‘monetary’ policies of the Federal Reserve have been designed to inflate the values of financial assets.  Low interest rates affect the price of the borrowing (leverage) used to buy financial assets on margin and quantitative easing (QE) is the direct purchase of financial assets by the Federal Reserve. Interest rates intentionally kept low by former Fed Chair Alan Greenspan inflated the dot-com and housing bubbles and the policies of subsequent Fed Chairs Ben Bernanke and Janet Yellen have re-inflated financial asset prices since 2009. There is nothing ‘natural’ about these sequential bubbles. Through the role that rising stock prices play in inflating executive compensation and the salaries and bonuses of bankers and hedge fund managers a tiny group of connected insiders has been made wealthy beyond the conception of most people. And the low interest rate policies of the Federal Reserve can also be seen as a subsidy of corporate profits through lowering the borrowing costs of corporations.

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Graph (4) above: There are multiple ways of valuing the stock market. Most of those in use today incorporate the extreme valuations of the dot-com bubble of the 1990s and 2000s thereby making recent valuations appear more typical than they really are. When compared to long term corporate earnings (CAPE—Cyclically Adjusted Price Earnings) ‘cycles’ over one-hundred and thirty-five years of stock market history today’s valuations are very far above typical valuation levels and are currently at levels only seen a few times before in history at bubble peaks. With executive compensation coming from bubble level stock market valuations corporate executives can try to claim that they’ve ‘earned’ their compensation. But the more plausible explanation is that the Federal Reserve and a financial system run amok are far more responsible for it. Source: Robert Shiller.

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Graph (5) above: Part of the explanation that the Federal Reserve gives for policies favoring the rise in financial asset prices is the ‘wealth effect,’ the tendency for people to spend more because they feel richer when stock prices rise. While some statistical analyses suggest that this may be true, who benefits from rising stock markets are the people who own stocks. As is illustrated above, the richest twenty-percent of households own almost all of the stock market. Again, as with income distribution, the true concentration of ownership of financial assets is at the very top of the top ten percent. Federal Reserve policies to raise stock prices overwhelmingly benefit already wealthy households. As Graph (3) illustrates, the contention that everyone benefits from policies to make the rich richer faces the reality that extreme poverty is rising as the rich are being made richer.

The great misdirection of Western economics in recent decades is conflation of financial wealth with economic ‘value’ creation. Apparently left unconsidered by much of the ‘income inequality’ crowd is that were financial asset prices to implode, as they did in 2001 and again in 2008, some fair proportion of the mechanism of concentrated income and wealth distribution would implode with it. This goes far in explaining the complete devotion of the political and financial establishments to resurrecting banking and finance since 2008 while ignoring the plight of the vast majority on the other side of this system. Many of the homes of the housing boom and bust are still standing but under new ownership by the financiers who took them, the role of finance in economic production exists as facilitator and not as producer. The role of facilitator could come straight from Western governments through their ability to create and distribute fiat currency ‘out of thin air.’ That this wasn’t the route taken from 2008 forward illustrates the control that the existing plutocracy has over ‘political’ policies. The real tragedy is still underway— the incapacity for social and environmental reconciliation without major social upheaval. Anyone who doubts this should spend time with the flaccid hallucinations posed as economic ‘explanation’ coming from the banker ghettoes in New York and London.

Rob Urie is an artist and political economist. His book Zen Economics is forthcoming.

 

Rob Urie is an artist and political economist.

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