Edward Lampert, Jamie Dimon, Donald Trump
Compendium Of Best Pax Posts:
What's Wrong With American Conservatism?
http://paxonbothhouses.blogspot.com/2015/04/compendium-of-best-pax-posts-whats.html
Compendium Of Best Pax Posts On "Too Pure Principles" And The Collapse Of Conservatism
Excerpted from "Why We Can't Afford The Rich"
SATURDAY, APR 11, 2015 09:00 AM EDT
The 1 percent are parasites: Debunking the lies about free enterprise, trickle-down, capitalism and celebrity entrepreneurs
The rich don't generate jobs. Rising tides do not lift all boats. And they probably built that with government help
‘When did you last get a job from a poor person?’ So goes my favorite Tea Party slogan. The Americans are good at slogans but the Tea Party specializes in discombobulatingly daft ones. Of course you won’t get a job from a poor person, we wearily concede, but it doesn’t follow that the rich create jobs, as if they have special powers that turn their gains into a gift of jobs to the rest of us. U.S. billionaire Nick Hanauer is refreshingly honest about this: ‘If it was true that lower taxes for the rich and more wealth for the wealthy led to job creation, today we would be drowning in jobs.’ So why hasn’t the spectacular shift in income and financial wealth to the rich over the last four decades led to unprecedented jobs growth?
First of all, we need to ask what the rich and super-rich do with their spare money. They generally use it to try to get even more, through either real investment or financial ‘investment.’ In the latter case, whether by betting on market movements or buying income-yielding assets, or the many other ways unearned income can be extracted, their actions are unlikely to result in net job creation. Some ‘investment’ is used to buy up firms in order to sell off parts of them – to asset-strip them, in other words. This is likely to result in job losses, and indeed may reduce the ability of the firm to produce in the long run. Many companies have boosted their profits by cutting jobs.
But even if the rich do fund real investment in productive businesses – in equipment, training, new infrastructures or whatever – this may or may not result in job creation. Some businesses need to employ more people if they are to expand, but some do not: they may make more profit by reducing the number of workers they employ, whether by intensifying work for the remaining workers or automating their jobs. Either way, as Nick Hanauer makes clear, hiring more workers ‘is a course of last resort for the capitalist.’ Extra workers may enable more output, but if firms can find other ways of expanding output that are cheaper, they will.
So, even productive investment may be either job-increasing or job-decreasing. The last few decades have seen plenty of ‘jobless growth’ in advanced industrial economies. Contrast that with the post-war boom of the 1950s and 1960s, when the rich controlled a much smaller percentage of wealth than now: then growth was job-creating overall and real wages grew.
In the economy as a whole, the number of jobs depends primarily on the level of total or ‘aggregate’ demand. As Hanauer argues, ordinary people create jobs simply by spending their money. Job numbers are most likely to rise when people and businesses are spending more. Aggregate demand is not within the control of individual businesses: it’s their environment. Businesses can’t grow unless demand increases. The current crisis of capitalist economies owes much to the fact that aggregate demand in many rich countries has been stagnant for decades, and only buoyed up by massive expansion of consumer credit. It has therefore become harder to make profits out of producing goods and services. As both cause and consequence of this, there has been a major relative shift in investment, or rather ‘investment,’ in the last 30–40 years from so-called non-financial companies (that produce goods and services) to financial companies that make money directly from money.
But you might ask why a shift in the proportion of national income going to the rich should make a difference to aggregate demand. Isn’t it just a change in who has the spending power rather than a change in the total spending power? The answer is that the rich use a smaller proportion of their money for buying goods and services than do other people. Those on low incomes cannot afford to save because they need to spend all they have just to get by, and if they get an increase it’s likely to be spent on basic things or paying off debts. Those in the middle may be able to save a little, and if they get more, then both their spending and saving can be increased. Hanauer puts it more simply: someone who earns a hundred or thousand times more than the average person is not likely to spend it on a hundred or thousand cars and houses. Yes, they may spend eye-wateringly large sums on themselves, but it’s likely to be a considerably lower proportion of their overall income than for most people. In Keynes’ terms, the rich have a lower ‘marginal propensity to consume’ than the rest of us. So, other things equal, redistributing income to the rich lowers aggregate demand, and redistributing downwards increases it.
This means that ‘trickle down’ arguments are wrong. Yes, the rich employ a few servants and provide demand for accountants, tax advisors and luxury services, but far fewer jobs result from this than would be case if their income were redistributed back to ordinary people with a much higher propensity to consume. The best way to get money to cascade down from the rich to the rest is to tax them – or stop them extracting it in the first place! As Ann Pettifor argues, any trickle-down effect is dwarfed by the reverse ‘hoovering up’ effect of rent and interest in directing money to the wealthy.
So, to come back to the Tea Party slogan: jobs are created by those who control the means of production and finance, subject to the constraints of demand and costs. Those with little money don’t create jobs because they lack the means of production to employ anyone to work; where would they get the capital to do so? But that doesn’t mean we have to depend on the rich. More modestly paid owners and managers of firms and other organisations, including co-ops, can create jobs too, where aggregate demand allows. Or the state can. If it provides services for sale, like public transport, and demand for them increases, then, unless it can find ways of increasing productivity, it is likely to have to increase employment. The state can also create jobs where the services it provides are free to the user, as in schools; it can just raise or redirect taxes to pay for more jobs in education.
But there’s another twist here. For an individual capitalist, say, owning a fast-food chain, it makes sense to minimze the wage bill for any given level of output; but it’s also in their interest that other organisations pay good, indeed rising, wages because that will mean bigger sales of burgers and of other goods, to the advantage of all businesses. As Marx and Keynes pointed out, this is one of capitalism’s contradictions: the interests of capitalists in general are in conflict with the interests of individual capitalists. Neoliberalism ignores this problem of collective action and encourages capitalists to pursue their individual interests – to their ultimate cost. For a while there seemed to be a way round this through globalisation, by employing people where labor is cheap and selling their products where incomes are high, but the resulting ‘hollowing out’ of jobs, particularly in manufacturing in the rich countries, also depressed demand there.
One more twist: the rich, collectively, have another reason for restricting job creation. If employment grows too much, it is likely lead to wage inflation, as workers, now less fearful of unemployment, bid up their pay. That would squeeze profits. And wage inflation would also hit the rich as rentiers, because it would erode the value of the debts owed to them. This is why the rich pressure governments to hold down inflation, and high levels of unemployment help.
‘Enterprise’: aren’t the rich the entrepreneurs?
Here’s another case of how words can mislead. Rentiers don’t call themselves rentiers, and not many capitalists call themselves capitalists, but many of each like to call themselves ‘entrepreneurs.’ Upbeat terms like ‘entrepreneur’ and ‘enterprise’ can be stretched to cover things that don’t deserve them.
To be enterprising is to be resourceful, innovative, determined and bold, showing initiative and engaging in risky ventures that turn novel ideas into realities, with beneficial effects; these are surely good qualities. Who wouldn’t like to be seen as enterprising, or better, as an entrepreneur? But what’s problematic about these words is the company they often keep.
‘Enterprise,’ as a quality or virtue, is what linguists call a noncount noun, but as a count noun – ‘an enterprise,’ ‘enterprises’ – it is often seen as synonymous with private business, as is the term ‘entrepreneur.’ This of course has the neat effect not only of associating the virtue of enterprise with the private sector but of setting up an implicit contrast with the public sector, which is seen as un-enterprising by comparison. No argument is needed to support this implicit claim because this use of the word seems to make it a matter of definition: private businesses are enterprises, therefore their owners are entrepreneurs – special, enterprising people – and whatever is not a private business cannot be enterprising.
But if we think about it, we can see that:
1. An entrepreneur or enterprising person does not have to be a capitalist, although already having a lot of money certainly helps to fund business, perhaps an enterprising one. However, significant innovation takes considerable time and resources, so particularly where businesses are under pressure to deliver shareholder value in the short term, this may stifle entrepreneurial behaviour. The spectacle of major firms spending more on buying back their own shares, so as to push their price up, than they spend on research and development makes a nonsense of the idea that they are enterprising in the sense of innovative and risk-taking.
2. Many communities have people who set up new things, for example, running festivals or sports events, starting a community bank or charity or setting up local ‘freecycle’ systems so members can give away unwanted items to others who need them. Such people are entrepreneurs – social entrepreneurs, we might say – but not capitalists. Cooperatives can be entrepreneurial too.
3. The state – yes, the state! – so often portrayed as rule bound and sluggish, and lacking the spur of competition, can also be entrepreneurial. Even though it usually has a monopoly in certain activities, the public sector sometimes engages in enterprising ventures, such as setting up the National Health Service, establishing the Open University in the UK, highspeed rail services or launching space probes. As we show later, governments have repeatedly fostered fundamental research and borne the risk of ventures failing. Ability to withstand failure is essential if people are to have the freedom to think ‘outside the box,’ for most innovations, like most new small businesses, fail. The road to success is paved with failures; if there’s no room for failure, then people – whether they work for the state or private firms – become conservative and risk averse. And again, enterprise needs patient money, for major innovations can take over a decade to turn into successful products. Market competition may help to drive innovation, but competition forquick gains is more likely to be a brake, especially on major innovation. Obsession with liquidity – with being able to sell off any fixed assets like machinery, buildings or research divisions the minute they fail to yield gains – stifles innovation in production.
4. Pure (non-working) capitalists are not entrepreneurial – they merely own the means of production and extract profit from businesses, delegating any control and direction of activities to managers, who may or may not be enterprising. Their shortterm demands may inhibit enterprising behaviour.
5. Working capitalists may or may not be enterprising: while successful innovations may make firms profitable, there are other ways of making a profit, such as squeezing labor or suppliers. (It’s a sad day when we treat wage cutting as ‘enterprising.’)
6. As American economist William J. Baumol noted, enterprise may be used in devising new forms of rent-seeking that damage rather than benefit the economy (‘unproductive entrepreneurship,’ as he called it). Rentiers may find new ways of extracting rent or interest, but while they might like to think of themselves as enterprising in this respect, they are unproductive – worse, a drain on the productive economy. All sorts of ingenious financial instruments have been designed, often by ‘quants’ – first-rate mathematicians employed by financial institutions – for valueskimming and speculation. While the quality of enterprise involves being willing to take risks, a lot of risk taking is not entrepreneurial: all sheep are animals, but not all animals are sheep. As we saw earlier, when speculators claim to be entrepreneurs because they take risks, they flatter themselves.
7. Workers may be enterprising, but their scope for realising their potential in this respect is limited by lack of money and security and restrictions on what they are allowed to do at work. Alternatively, they may fear that their bosses will take the credit (both financial and symbolic) for their enterprising activity. Those who want to develop new products and ways of doing things usually have to leave and become self-employed or set up a small business.
8. Finally, the romance of the entrepreneur is like the romance of the individual scientific genius; it is rarely simply individuals who do innovative things on their own, but more often groups or networks, and all are indebted to the accumulated knowledge and infrastructure that they inherit from their society. Wittingly or unwittingly, celebrations of ‘entrepreneurs’ in the media serve to render invisible the workers on whom they depend.
So, for all these reasons, we should be sceptical about the idea that the rich are entrepreneurs and thereby deserve their wealth.
Sometimes, though, an owner of a firm – a capitalist – is enterprising, perhaps developing a new product from which millions of consumers benefit. Don’t they deserve their wealth?
The Jobs/Dyson defence: don’t truly innovative people deserve all they get?
Steve Jobs, the late CEO of Apple computers, was said to have been ‘worth’ $8.3 billion. If you were given a dollar every second, it would take 266 years to get that much. In the UK, James Dyson, famous for his Dyson vacuum cleaners, was estimated to be worth £2.65 billion (84 years at £1 per second), according to the 2012 Sunday Times Rich List.
People like Jobs and Dyson are exceptional. But they are rare amongst the rich in creating new products of value. Paul Krugman points out that ‘very few of the top 1 percent, or even the top 0.01 percent, made their money that way. For the most part, we’re looking at executives at firms that they didn’t themselves create. They may own a lot of stock or stock options in their companies, but they received those assets as part of their pay package, not by founding the business.’ So Jobs, Dyson or indeed Mark Zuckerberg of Facebook are exceptional as regards their role in developing brilliant new products that have benefitted millions, but they are not representative of the super-rich, even though they are useful poster boys for them.
But we still need to ask questions: first, how much would they have got if they hadn’towned (much of) their firms? And second, to what extent did they depend on technologies developed by others?
Regarding the first question, although they are working, indeed entrepreneurial, capitalists, rather than pure capitalists, as (part) owners they are able to take the profit produced partly by others. Key research and development employees and managers responsible for important innovations may get higher pay than other workers, not least to stop them going to another firm, but unless they can get shares or share options they do not get the chance to even approach the kind of rewards that owners can.
Regarding the second question, it’s easy to swallow the usual media tales of heroic individuals doing it all themselves, or at least starting off on their own – the maverick-kids-in-garages stories. But research on innovation reveals a different picture of the involvement of multiple individuals, groups and agencies in which people interact and build on the achievements of others. If there appear to be ‘breakthroughs’ they are typically the final stage in long processes of learning that involved many people. As we’ll see in Part Two, so much of our wealth depends on those who have gone before us. In computing, the graphical user interface involving mouse, pointer, icons and hypertext, adopted by Apple and Microsoft, had already been invented, as Bill Gates has acknowledged. Key innovations in electronics, including the microchip and the development of the internet itself, were funded not by private money but by the U.S. government’s Department of Defense. Similarly, the development of the algorithm behind Google was funded by the U.S. National Science Foundation, and the technologies behind the iPhone – GPS and touchscreen display – were also dependent on state funding.
To be sure, Steve Jobs and others were brilliant at taking these and developing them into consumer products, but they were building on what others had done. And it’s not just in electronics that the private sector depends on innovative work done within the state: 75% of radical new drugs in the U.S. pharmaceutical sector are the product of research funded by the National Institutes of Health; similar stories are to be found in less glamorous sectors like construction.
Rather than simply be dazzled by the brilliance of the products and the nice stories of the rise from obscurity to fame, we need to take a more sober look at what has enabled these employers’ wealth. We might agree that the likes of Jobs and Dyson deserve more than ordinary workers, though we’d probably differ on just how much more they should get. But let’s not kid ourselves, these innovative capitalists do not ask their workforces or the general public: ‘How much do you think I deserve for my contribution?’ (Jobs would have had to go to China to consult the bulk of the manufacturing workforce, including those at one of Apple’s chief suppliers, Foxconn, a company that made headlines for the high number of worker suicides, under-age labor and oppressive working conditions. Dyson would have had to go to Malaysia, as he moved his factory there from England to cut costs, especially labor costs.) Such employers get what they get because they can, and the crucial reasons for this are the availability of existing technologies and private ownership. And let’s remember that it’s not uncommon for employees who come up with inventions to find that they are effectively stolen from them by their employers, who then get the benefit. So, at best, two cheers for innovative working capitalists.
‘They’ll just go to another country and take their money with them …’
‘… if we tax them too much, or otherwise restrict their power.’ This point is frequently wheeled out, as if the rich were major wealth creators, possessing rare powers, and therefore people whom we must do all we can to attract.
British Conservative politician John Redwood’s defence of this belief is a common one: ‘The problem is the rich do not have to hang around if you seek to make them too poor. They have the best lawyers and accountants. They can go on strike when it comes to investing and developing businesses. They can go off shore.’ This is right on all three counts: yes, there are no restrictions on them taking ‘their’ wealth elsewhere; yes, they can afford the best legal and financial servants; and yes, they can hold countries to ransom by refusing to invest. But of course, accepting these facts as if they were immutable adds up merely to saying ‘might is right.’ We need to challenge their arbitrary power.
Redwood also resorts to the tired old trickle-down and job-creator claims: they employ ‘small armies of professional advisers [and] set up businesses and create jobs.’ We’ve already dealt with these wellworn myths. Their advisors will no doubt help them evade tax, in fact the likelihood is that most of their money has already gone to other countries, particularly tax havens. They could indeed disinvest from any country that didn’t provide a ‘competitive’ (in other words low tax, low regulation) environment, escaping their duties as good citizens. Unrestricted movement of capital, and governments’ support of rentier businesses, allows them to pick and choose where to go in order to avoid tax and maximize profits. But capitalism was much more successful when it had top rates of tax of 80% and over, restrictions on capital movements and the top 0.01% controlled a much smaller share of wealth than now.
And actually the threats to leave are exaggerated:
If it were the case that higher taxes caused wealth to flee we would expect to see an exodus of the wealthier citizens of Sweden, Denmark, Norway and France – the countries with the highest tax rates. A glance at the latest Forbes billionaires list reveals that of four Norwegians on the list all live in Norway, the two Danes live in Denmark, five of the nine Swedes live in Sweden, and eight of the ten French live in France.
The new small entrepreneur
In talking about this book with friends I’ve found that the most common objection to my argument goes like this:
What if someone sets up a small business with savings or by borrowing money, perhaps by remortgaging their house? In so doing they’re taking a major risk. They work hard. Let’s say the business turns out to be successful; so they start employing people, and build up the business into a significant venture, from which they can draw a high income, and indeed become rich. Surely they’ve deserved their wealth, especially as they’ve created jobs on the way?
To answer this, we need to look at the stages in the development of this new firm.
In the first place, the founder is self-employed or co-owns it with a partner, or possibly employs one or two people, often family members.
At this stage she is what political economists call a ‘petty commodity producer.’ If she’s successful and demand for the product increases, she may then employ more workers. As she does so, she gradually shifts to becoming a working capitalist, that is, an owner of means of production who employs others to work for her, but who also still does some work, usually planning and management. Workers are only likely to be employed if they can not only cover their own costs and that of the materials they use, but produce enough to make a profit over and above this – to which, thanks to capitalist property rights, they are not entitled. For example, if each worker produces goods and services worth 20% more than they cost to employ plus other costs, under capitalist property rights, that 20% belongs to the owner, to be used as she sees fit – for her own consumption or for investment, speculation or whatever. As the firm grows and the owner relies more and more on employees to produce the output, an increasing proportion of the owner’s income comes from this surplus.
Eventually, she may be able to stop working altogether and delegate management to employee managers, and become a pure, that is, non-working capitalist, and still draw profit from the business. She may then be able to take over other firms and live off their profits too, and use them to get still more unearned income from rent or interest or other capital gains.
So we might agree that the person who starts a successful business and then employs a workforce deserves credit, and indeed some extra income, but, especially in the long run, the source of their profit comes primarily from being able to take advantage of capitalist property relations that allow them sole ownership of the revenue received by the firm for the goods and services that the workers have mostly produced. Unfair outcomes can have clean origins.
Other objections and slogans
‘I do not believe you can make the poor rich by making the rich poor.’
Another palm-to-forehead, exasperating slogan. No one said either that the rich should be made poor – or indeed that the poor should be made rich. But, given the dependence of the rich on wealth extraction, and the low marginal propensity to consume of the rich, redistributing income from rich to poor would be a positive-sum game, expanding aggregate demand and increasing employment, which in turn would create more demand.
‘I believe that the way to help the poor is not to take from the rich but to make the pie bigger through economic growth.’
The implication is that we need inequality in order to get growth. Not only does this not make any sense in terms of transfers of unearned income, investment and the marginal propensity to consume, but the empirical evidence on the relation between economic growth and inequality at national levels shows there is no such relation. On the contrary, capitalism grew faster when it was more equal. But we should note also how, in today’s debased political culture, saying ‘I believe x’ is taken to be more convincing than ‘the evidence shows that x’: apparently, belief trumps evidence, and those who bother to look at the evidence are accused of not knowing what they think, or being a ‘flip-flop person,’ as John Kerry was called in the U.S. election of 2004.
‘A rising tide lifts all boats’ – or yachts.
This tired old cliché has the same discombobulating effect on thinking about economic matters. The message is supposedly that everyone benefits from economic growth, the hidden premise being again that inequality is necessary for that economic growth. It’s a disanalogy. Yes, we may rather like the attractive imagery, but people are not like boats, and the economic growth is not like a tide: it’s characteristically uneven and it’s not at all unusual for some groups to lose out in not just relative but absolute terms during periods of growth. That politicians and media pundits still trot out this phrase shows how a picturesque analogy can disarm critical thinking and replace it with wishful thinking. But it’s doubtful that even the ruling elite believe this themselves: in a secret report for the superrich, Citigroup, the international financial conglomerate, used the following headline: ‘Rising tide lifting yachts.’
Excerpted from “Why We Can’t Afford The Rich” by Andrew Sayer. Published by The Policy Press and the University of Chicago Press. Copyright © 2014 by Andrew Sayer. Republished with permission of the publisher. All rights reserved.
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