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Wednesday, October 12, 2016
Economics/Business ... Politics ...

The theme of the September 2016 issue of Scientific American was “The Future”. That is not an unusual theme for a science magazine. Over the past few decades, however, SciAm has become more and more “socially conscious”, for better and for worse. Science certainly does have to answer to society, and what society values will influence science (although by the same token, science needs and has traditionally maintained some independence and shelter from the whims of politics and business; science is supposed to be about truth, whereas politics and business so often aren’t!).

Therefore it was not all that unusual to see an article in the “future” issue written by a Princeton economics professor. This article was titled “The Threat of Inequality“, and it discussed the potential social and political consequences of the economic trend over the past few decades (but especially since the 2008 financial crash) of declining economic growth and growing income inequality. The name of the author is Sir Angus Deaton. Whoa, now there’s a name that reeks of authority! Well, in my book, anyway. But let’s see what Professor Deaton has to say.

Sir Deaton starts by reminding us how much economic progress the world has made since the 18th century. “We are enormously wealthier and healthier now than at any time in human history”. Over this time, Prof. Deaton admits that the world has not shared uniformly in this progress. “Per capita incomes in the US are 4 times higher than China, 10 times higher than in India or Nigeria, nearly 20 times higher than in Kenya, and more than 90 times larger than in the Central African Republic.” Deaton feels that economic inequality is necessarily always harmful; some inequality is needed to provide incentives to innovate. And it isn’t necessarily bad when things are getting better for everyone, even though they are getting more better for those at the top. “Inequalities are a consequence of progress; it is almost always the case that some benefit before others”.

The problem gets worse, though, when those at the top keep on improving their lot while those in the middle and those on the bottom rungs of the ladder go nowhere or get worse. And that’s why the declining levels of annual economic growth in the US, Europe, China and the world as a whole matter. When I was a young idealist back in college (we had George McGovern back then, just as today’s youth have Bernie Sanders), I was quite cynical about the emphasis on economic growth. Why do we need to always have more, more, more, I asked. Why can’t we just learn to better share and better appreciate that which we already have?

Well, in my old age, I realize that there are good answers to my doubtful questions about economic growth from youth. First off, the world’s population continues to grow. Even though native population growth has slowed a lot over the past few decades in the US and Europe, refugees from high-growth regions like Africa and the Middle East will keep the overall population growing. And population world-wide is still expected to expand from 7.3 billion today to about 9.7 billion people in 2050 and 11 billion in 2100. There is going to have to be vigorous economic growth if all these new humans are going to avoid dire poverty. Second, people are what they are. Those who are already well-off are going to fight to keep what they have. Equitable wealth redistribution probably isn’t going to happen; to the degree that it is attempted, it can trigger wars or social upheavals. The only real chance for things to get better for those on the lower rungs of wealth and income is for growth to reach a point where the already-well off are satisfied enough to allow some of the leavings “trickle down” to the less-well-off.

Sir Deaton essentially concedes this point. He says that “with a growing pie, everyone can have more, but if the pie is fixed, I can only benefit at your expense”. And he clearly asserts that continuing lack of growth and worsening of income distribution will have political consequences. Nowhere in Professor Deaton’s article does he mention the name “Donald Trump”. But he summarizes Trump’s hostile takeover of the Republican Party and his attempt to attain the White House quite accurately: “If the political system is sensitive only to the needs of the wealthy . . . there is a direct threat to political stability. If the main political parties offer nothing to those who are excluded, they may turn to political remedies or candidates that threaten liberal democracy”. This is classic “political economics” talk translated into the more Bernie Sanders-like language of inequality.

Just why, though, has economic growth slowed down so much in recent times? Many GOP presidential hopefuls and conservative pundits have offered various theories about this. Professor Deaton’s favorite theory regards the concept of “economic rents” and the seeking of such “rents”. The good professor is not talking about what you pay to a landlord in order to live in his building (although his type of “rent” can be related to real estate rent on an academic level). When he says “rent seeking”, he is referring to the many political and legal favors that benefit certain people or corporations, usually those that are already quite wealthy. To translate this into Bernie Sanders-talk, “rent seeking” is what is done by “special interests” (or “vested interests”, as they used to be called by political reformers). The classic “rent seeking” is done by big corporations to obtain Congressional laws and regulatory provisions that protect a certain product or service from competition or burdensome regulation or taxes. They obtain these “rent-makers” by engaging in lobbying and by political contributions (often to “PACs”, political action committees).

Denton doesn’t go too deeply into just what types of rent seeking are most harmful to overall economic and social welfare. There are all kinds of tax code provisions, administrative regulations and federal and state laws that give protection to a specific industry or product, as a result of political lobbying and campaign contributions by the rich and powerful. Bernie and Elizabeth Warren will tell you all about these, especially in the banking and finance industries. These provisions help explain why some major corporation pay very little income tax. Another small example was an old law that required the Navy to use anthracite coal from Pennsylvania at its European bases, courtesy of former Pennsylvania Congressman Daniel Flood. And the Obamacare legislation has plenty of “rent” provisions added at the behest of the insurance and pharmaceutical industries. Most of these “rent” provisions don’t have much effect on the economy; but when you sum up the effects of hundreds or thousands of such provisions, a lot of “market efficiency” is lost. The corporate interests benefit, but the public at large loses because of slower economic growth.

However, when you think about it, corporations and business owners aren’t the only “rent seekers” out there. On the labor side, employee unions have engaged for many decades in contract restrictions supported by federal laws that severely restrict what a particular worker can or can’t do. I once worked for a railroad, and I saw all sorts of examples of things like “well I can’t change that light bulb under the union agreement, so we are going to have to stop this train and sit for two hours while they get an electrician out here”. These kinds of union agreements helped the Japanese and other nations to slowly diminish the American auto industry. Unions were pretty darn good at “rent seeking” in their time. Admittedly, today unions have been greatly weakened by both economic and political factors. They decided to play the rent game to the hilt, and eventually they were beaten by those who were better at it — i.e. the big corporations.

Unfortunately, “rent seeking” has become something that almost all of us are involved in, in some way. For example, senior citizens (including myself) don’t want to hear about what our current levels of Social Security and Medicare benefits might do to the economic prospects of the young today. We have our lobby, such as the AARP, and we make sure that political candidates don’t dare talk about any sorts of reforms or flexibility to the existing old age support laws (old people do tend to vote more than young people do). If and when the young get their political act together, I am sure they will focus on collecting “rent” in the form of relief from student loans.

Personally, I feel that rent seeking cannot be entirely avoided; it has been with us since the days of the Revolutionary War. But today, modern technology allows us to take “rent seeking” to higher and higher levels. It seems as though the notion of patriotism, of sacrificing for the good of the nation, is going the way of music cassettes, the land-line telephone, and the hand-written letter mailed with postage stamps (all are still part of my life today! which just shows what I dinosaur I have become).

I recently posted two blog essays which tried to view some of the current social and political movements going on in the US through the lens of economics. In sum, I was taking a “political economics” view of such phenomenon as the recent political success of Bernie Sanders and Donald Trump, and the resurrection of black social and political activism through Black Lives Matter. I tried to relate how some of the key factors that affect our modern economy also shape our politics and social interactions.

The economics approach might seem too abstract and removed from reality. Along with Sir Angus Denton, however, I believe that economics are a huge driving factor behind that reality (or shall I say “YUGE” in Trumpian fashion?). The problem, perhaps, involves the confusion between academic economics and real-life economics. Real-life economics are about paychecks and credit cards, monthly rent or mortgage payments, gasoline and food prices, healthcare costs, etc. Real-life economics determine what kinds of schools your kids can go to (if they can go to any at all), what kind of neighborhood you can live in and in what kind of residence, whether and when you can retire, where you can go on a vacation, what kind of job you should be looking for, what kind of beer you can drink, on and on.

Academic economics, by contrast, are about graphs and formulas and Fed interest rate policy and tax rates. And academic economists too often use terms like “rent seeking” instead of offering common-sense explanations. It frequently appears that economics professors and business analysts make a fairly lucrative living from this stuff, without worrying too much as to whether their ideas and theories truly relate to the daily life decisions of consumers, producers and traders. I earned a masters degree at Rutgers-Newark many decades ago, and I was lucky to encounter a fair number of teachers who went out of their way to relate their charts and graphs and equations to what everyday consumers and business people really do. I would bet that things have gotten more and more abstract and removed from reality in the colleges and universities today.

But one recent sign of hope is the rise of “behavioral economics“, which focus on actual studies of people making decisions on what to buy, how much to pay, how much to spend, how much to save, what to invest in for their careers or businesses, etc. There are some popular media explorations of why people often don’t do what the economics books say they should do, for example, the “Freakonomics” book and NPR radio show. The behavioral economists are trying to work on that, and thus make the big macroeconomic and microeconomic theories more realistic. Perhaps all of this is why I have a lot of sympathy for the various economics-based theories about what is going in society and politics today.

So I will continue to be interested in this and I will continue to discuss the economic factors behind modern political doings. And I believe that Sir Angus would approve. I’m sorry if these viewpoints aren’t always easy to grasp or don’t seem immediately intuitive, but . . . well, it might be like bitter medicine. The more that you don’t like it, perhaps the more that you need it! In the end, Professor Deaton, Bernie Sanders and Elizabeth Warren are all concerned about the same things. Even if they way that they talk about them often seems like night and day.

◊   posted by Jim G @ 7:55 pm      

  1. Jim, I’m really not sure whether this is a real response to your post or not; but it’s the tho’ts I had as I read it. Perhaps I just am out of my league, yet, again, still. So for what it’s worth:

    A good explanation of Lobbying and Lobbyists. I have to be honest: I have never understood why people in academia always seem to have a need to use three syllable words when a one or two syllable one will do just fine. For a long time I tho’t it was only teachers and people in education who used “big words” when regular ones would make things so much simpler. But then I found out that other fields of study did the same thing, and here it seems that even economics does it. I guess somehow it makes things sound more “scholarly” and more “important”.

    Maybe if economics had used “regular” words to explain what it meant, I’d have given more attention to it than I did; but for the most part it never interested me as it always seemed I’d have to do a “double think” in my mind to figure out: oh, they’re talking lobbying.

    But be that as it may, I guess that’s my own particular problem and view point.

    I find myself at a loss to express exactly what it is about the excuses and arguments for “inequalities” that are a “consequence of progress”. It seems to me to mean (and I think it actually DOES mean), well, too bad if you’re on the lower rungs of society and have to wait for the guys who have a bunch of money to allow it to trickle down to you “lower people”. Maybe if things work out OK for you, you can get a job working for the “higher rungs of society” and gradually work your way up to earn a little more. THEN, if you are really lucky you might actually have an idea that won’t get stolen and/or taken by those in the “higher levels”; and you may eventually be able to get to where you can become one of the “higher levels of people”.

    I find myself thinking of the program “Shark Tank” where people who have an idea come to “beg” (and basically that’s what they are doing, even tho it seems they are presenting this wonderful idea that they had) for the “top level” to invest money to help them. Then I hear the “Sharks” say to those they might deign to give some money for investment purposes: “You will make more money than you ever made before.” I never hear that but I think: Yes, indeed, these people will see more money than they ever saw before, but not nearly as much as the “Sharks” themselves will see from their investment in the business you have worked so hard at.

    Then too, I find myself wondering just how many people in the United States (to say nothing whatsoever of people in very poor countries where people work for 50 cents a day for most of their lives) will ever see any way to get to “the top”, so to say.

    I am not sure what your position is about such big groups as PACs, Unions, etc. I come from the days before PACs when Unions were radical. In the days I was growing up John L. Lewis, the founder of the CIO, was considered a SAINT; I, however, sometime later in the 1960s found myself taking a position against the union at the place I worked. A scandal beyond belief took place within my family when I opposed what the union was doing. But I stood against the union. The result at that time was that the workers gained NOTHING; it SEEMED they gained what they wanted in increased money; but they lost the same amount they gained during the strike. All I could think of was: What’s wrong with this picture?

    There was another union some years later of people who worked in housekeeping at one of the major hotels in Chicago. The union for the workers went on a massive strike. This was, if I remember correctly, sometime in the 1970s. As far as I know, to this very day that union is STILL on strike; its workers have long ago lost their jobs, non-unionized workers have taken their place; the hotel chain has gotten bigger and bigger; but somehow the housekeeping people have not advanced. And here I will guess and say that in fact, the workers at that hotel chain are now likely working without health insurance, pensions, or any other benefits; most likely they are working for minimum wage too. Everybody has completely forgotten about that “strike” that has lasted some 40 years and still lasts (technically).

    It seems to me that expecting Capitalism to always “continue growth” is ridiculous. Past a certain point the corporation must share with its employees or the only one benefiting is the Corporation, which gets (as is evident from Donald Trump) many benefits just for being “big”, specifically, write offs for losses that can last 20 years and end up with the corporation paying NO taxes. In the end it becomes a situation where those who are NOT “rich” can pay the taxes and end up supporting the large corporations (to some extent) and all the rest of the needs of the government while the “rich”, most of whom seem to be corporations pay no taxes. (As Donald Trump says, “it’s pure genius”.)

    I’m not sure I see why “behavioral economics” will be of benefit to anybody who has ordinary income. Do “actual studies” of behavior science showing how people make “decisions on what to buy, how much to pay, how much to spend, how much to save”, etc., really benefit the PEOPLE or do they benefit the corporations? Seems to me these studies will benefit the corporations not the “un-rich”.

    To my astonishment (and on re-thinking it, I wonder why I was astonished) I went online shopping at a company only to find out that this one company was owned by a corporation that held about 10! different “stores” where one could buy almost anything a person might need in the line of personal goods. So there is not only a TOP layer of those who earn “big bucks” but there’s a two-tiered layer, the corporation that owns all the companies and the individual companies that sell various kinds of goods. When it comes to “trickle down”, I think the “trickle” will tend to go from the top layer to the second layer; but hardly to any “layer” that includes the people actually packing the goods that go out for sale nor to any people who buy from those companies. (I know I didn’t get a rebate or discount or even free shipping on what I bought.)

    Jon Katz on his blog, “Bedlam Farm” talks about the people in rural areas who are trying to maintain small farms that used to be the backbone of our society but that now have been put out of business by large farming corporations; he calls these people unable to make a living on a small farm the “Left Behinds”; as they actually HAVE been “left behind” by the way our Capitalistic system has grown in the last century.

    Although I have not gotten very far at this point into the book by J.D. Vance, he has a book dealing with a different group of people, yet who have similar problems as the group Katz calls the “left behinds”: The people from Appalachia who moved to cities so that their children would have benefits they did not have only to find that eventually the industries (such as steel) no longer were in business and their children were unable to find work and thus had no chance of advancement. (On a personal note a member of my in-laws worked for over two decades at the steel plant on the south side of Chicago; it closed; and I do not think that the man put out of work ever got any job similar to the one he had at the steel plant. He and his family struggled for years as a result of that company closing due to the fact that there simply were no jobs available for such workers any more.)

    While explaining these issues in terms of how our economy works is helpful as knowledge of what is going on (one cannot understand the problem unless one understands how the whole thing works), knowledge in and of itself is not helpful when it comes to getting a job, making a wage that can support a family, getting benefits that all the “rich” so readily take for granted, having a sense of a future that will be secure, etc.

    Our current problem seems to have been side tracked by a nominee that himself does not care to understand the problem, must less have any empathy for those who are “not rich”. I agree with you, Jim, that someone like Bernie Sanders and/or Elizabeth Sanders would make a good candidate. Unfortunately, neither one is a candidate for president. Yet, I find myself wondering should a woman become president, we may get a different approach to the many problems, including the economic ones our country faces now. After all, even today I see the rebels of the 1960s working in the Chicago city Counsel; they have long ago decided to work within the system to make changes.

    Then too, I think men have a different approach to problems than women do. Be assured I mean no disparaging remark here, no snide consideration of the situation; I’m just noting a difference that occurred in a situation that I was involved in long ago. (Here I might also mention that I paraphrase in the following as it’s impossible to remember exact wording any more.) I once worked with a male colleague on a project who, when a problem arose, told me that his approach was to “crash right through” it. I could not help but respond to him that my approach to things was to “go around” them. I Can’t help but think that the different approach could easily lead to a different result, but I am willing to concede perhaps not. I find myself wondering if we might find that a woman for president may have a different approach to the “how” of solving problems. It’s something I’m going to be looking at should our next prez be a female. (Not much about economics here, but perhaps there is tangentially.)

    There’s no doubt in my mind that somehow or other Capitalism needs a much more “cooperative” approach than the current “competitive” approach it has. I find myself wondering if “cooperation” would preclude such problems as smart phones that catch fire in peoples’ hands or pockets (surely that’s the result of an attempt to save money on something; at least IMO). Further, I wonder if a cooperative approach to the economy/ies of the world would benefit those who are in most need of sharing with the very rich their largess. (I hope that sentence makes sense.)

    In the end I wonder if a cooperative approach of might have a much different effect on the world in general and the poor in particular than the competitive one we are now using. Perhaps this is way, way, way too radical a thought; I just can’t help thinking it. MCS

    Comment by Mary S. — October 15, 2016 @ 11:21 am

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