On free-market capitalism, political spending, and Jane Mayer’s ‘Dark Money.’

On free-market capitalism, political spending, and Jane Mayer’s ‘Dark Money.’

So-called libertarian economic philosophy — which has been having a larger and larger influence on mainstream politics over the past few decades — doesn’t make sense.  Which is too bad.  I like the basic ideas behind capitalism.

And I love liberty.

But there are major logical inconsistencies in the popular conception of free market capitalism.

Economist Robert Reich recently published Saving Capitalism to address some of these misconceptions.  In the first few pages of his book, he dismisses the distinction between free markets and government intervention:

Reich_SavingCapitalism_Book_v3The question typically left to debate is how much intervention is warranted.  Conservatives want a smaller government and less intervention; liberals want a larger and more activist government.  This has become the interminable debate, the bone of contention that splits left from right in America and in much of the rest of the capitalist world.

But the prevailing view, as well as the debate it has spawned, is utterly false.  There can be no “free market” without government.  The “free market” does not exist in the wilds beyond the reach of civilization.  Competition in the wild is a contest for survival in which the largest and strongest typically win.  Civilization, by contrast, is defined by rules; rules create markets, and governments generate the rules.

A market — any market — requires that government make and enforce the rules of the game.  In most modern democracies, such rules emanate from legislatures, administrative agencies, and courts.  Government doesn’t “intrude” on the “free market.”  It creates the market.

Some would have you believe that, in a world of free-market capitalism, producers would extract oil from the ground however they want, process it however they want, sell it to whomever they want, keep the entirety of their spoils, then spend that money however they want.

This is, sadly, not what would happen in a world free of government intervention.

Instead, roving warlords would conquer the oil reserves.  Or the refinery.  There would be no money, so oil would have to be bartered for other goods.  But someone bringing huge quantities of oil to the market would likely be murdered, their possessions stolen.  It would be difficult to maintain inequality as extreme as we have in the contemporary United States, because the wealthy would pay huge sums to employ bodyguards.  Greater concentrations of wealth would lure greater extremes of violence.

But this is not the world that self-proclaimed libertarians envision.  Instead they support rules that favor the already wealthy; they claim that the peculiar set of rules they favor is free-market capitalism.  It is not.

This contrast is lucidly described in a passage from Matthew Desmond’s Evicted.  He focuses on the housing rental market, but his analysis applies equally well to many realms of our economy:

unnamed (3)Those who profit from the current situation — and those indifferent to it — will say that the housing market should be left alone to regulate itself.  They don’t really mean that.  Exploitation within the housing market relies on government support.  It is the government that legitimizes and defends landlords’ right to charge as much as they want; that subsidizes the construction of high-end apartments, bidding up rents and leaving the poor with even fewer options; that pays landlords when a family cannot, through onetime or ongoing housing assistance; that forcibly removes a family at landlords’ request by dispatching armed law enforcement officers; and that records and publicizes evictions, as a service to landlords and debt collection agencies.  Just as the police and the prison have worked to triage the ill effects of rising joblessness in the inner city (like social unrest or the growth of the underground economy), civil courts, sheriff deputies, and homeless shelters manage the fallout of rising housing costs among the urban poor and the privatization of the low-income housing market.

Without government intervention, the plight of the urban poor would not be nearly so miserable as it is today.  Landlords could not stake claims to huge numbers of properties throughout a city, because the impoverished would simply claim a place to live and retaliate with violence if a landlord asked them to leave.

This is the basic reason why I support progressive income taxes (and progressive wealth taxes, too).  I think that people should fund government to the extent that their life would become worse without it.  The poor are kept poor by our existing rules.  They cannot take the things they need.  I think they should pay a negative tax, i.e. receive an income supplement.  The wealthier someone is, the more likely that person would be murdered and robbed without the protections of government.  I think it is eminently reasonable for the wealthy to pay a higher percentage to maintain our current order.

9780385535595Of course, several extremely wealthy people do not agree with me.  As Jane Mayer documents in Dark Money, these individuals have used their wealth to promulgate a philosophy very different from my own.  Everybody knows that politicians can be bought — and cheaply, too, with hundred thousand dollar campaign contributions often resulting in million dollar lawsuits being dropped.  Well, academics can be bought, too.  University professors expend so much effort scrabbling for grants that it was unsurprising to learn how a few targeted donations led to steadfast ideological purity throughout the recipients’ careers.

These wealthy individuals (the Koch brothers, among others) self-describe as free market capitalists.  They claim to favor extremely limited governance, but their actions bely these claims.  In Mayer’s words,

Singer [who ran a hedge fund that bought “distressed debt in economically failing countries at a discount” then took “aggressive legal action to force the strapped nations, which had expected their loans to be forgiven, to instead pay him back at a profit”] described himself as a Goldwater free-enterprise conservative, and he contributed generously to promoting free-market ideology, but at the same time his firm reportedly sought unusual government help in squeezing several desperately impoverished governments, a contradiction that applied to many participants in the Koch donor network.

The wealthy political donors arguing for less government intervention in the economy are precisely those people who have benefited most from government intervention.  They might argue that their position is internally consistent because they feel that the sole function of a just government is the protection of property rights.

But this is nonsense.  All property carries a history of violence — government protection of “property rights” simply chooses an arbitrary cut-off date and legitimizes all violence that occurred on or before that date, while threatening violent reprisal against those who do not respect ownership claims from after that date.

Furthermore, the environmental regulations that Charles Koch denounces are property rights.  If you own a farm and somebody comes with a gun and tells you, “Get out, it’s mine now,” it’s pretty clear that the government has not protected your property rights.  But this isn’t so different from someone coming and setting fire to your farm — you used to have it, now you don’t.  It isn’t so different from someone starting a huge fire on their own property and letting the flames spread to yours.

And it isn’t so different from someone pumping out toxic sludge just upstream of your farm.  Your land was useful — it could grow food fit for human consumption.  If someone dumps a bunch of mercury upstream, now it can’t.  Most of the value of your property is gone, just as if someone had come and set fire to it.

If a corporation buys the land adjacent to your home and puts in a concentrated animal feeding operation, again, much of the value of your property will vanish.  It’s hard to breathe near those things, and most homeowners like to breathe.

Indeed, if you run a company that digs up coal or oil for people to burn, you should expect the government to tax your industry if you care about property rights.  Because your industry is wrecking property all over the globe.  At minimum, you should expect to compensate others for the losses you’re causing — that’s if a government protecting property rights would even allow you to churn out all that toxic waste.

But not everyone agrees.  In Mayer’s words,

Jane_mayer_2008The problem for this group [of oil & coal profiteers] was that by 2008 the arithmetic of climate change presented an almost unimaginable challenge.  If the world were to stay within the range of carbon emissions that scientists deemed reasonable in order for atmospheric temperatures to remain tolerable through the mid-century, 80 percent of the fossil fuel industry’s reserves would have to stay unused in the ground.  In other words, scientists estimated that the fossil fuel industry owned roughly five times more oil, gas, and coal than the planet could safely burn.  If the government interfered with the “free market” in order to protect the planet, the potential losses for these companies were catastrophic.  If, however, the carbon from these reserves were burned wantonly without the government applying any brakes, scientists predicted an intolerable rise in atmospheric temperatures, triggering potentially irreversible global damage to life on earth.

And, the solution?  Well, the real free market solution is simply to tax negative externalities so that harmful industries can make the correct cost benefit calculations.  If producers reap all the benefits but costs are spread over the entire population, they’ll make too much of a thing.

Indeed, this is a commonly-cited rationale for capitalism: back when many people’s wealth was their livestock, partitioned land holdings was seen as a cure for the tragedy of the commons.  A major cost of raising animals is feeding them, and without private land holdings everyone has an incentive to overgraze.

So, sure, I guess there’s another answer.  We could carve up the atmosphere, trap air in discrete boxes, try to stop all diffusion between them… and then allow the Koch brothers to pump out as much carbon dioxide as they want into their own home’s air.  Presumably they would make different choices, no government regulation required.  Or die — most laboratories gas dissection-bound mice with carbon dioxide.

But these solutions would make it slightly more difficult for our country’s wealthy to continue accumulating mind-boggling quantities of money.  So they’ve chosen a different plan: buy a bunch of academics to churn out philosophical nonsense nearly as toxic as the effluents from their industrial processes.  It’s depressing that this was so successful.

But let’s face it.  Philosophy is dull.  Economics is hard.  When enough people with fancy credentials trumpet nonsense loudly enough, it seems, people will believe.

In Mayer’s words,

When these donors began their quest to remake America along the lines of their beliefs, their ideas were, if anything, considered marginal.  They challenged the widely accepted post-World War II consensus that an activist government was a force for public good.  Instead they argued for “limited government,” drastically lower personal and corporate taxes, minimal social services for the needy, and much less oversight of industry, particularly in the environmental arena.  They said they were driven by principle, but their positions dovetailed seamlessly with their personal financial interests.

On a global wealth tax, automation, and human trafficking.


If you wanted a super-brief summary of Thomas Piketty’s Capital in the Twenty-first Century (which I’ve discussed in a previous essay, here), it’d probably be: “Piketty presents extensive historical data to demonstrate why we ought to have a global wealth tax, followed by a brief, snappy, depressing summary of why we won’t have one anytime soon.”

And the book is good.  Maybe longer and dryer than many people have the stomach for, but it’s an excellent piece of scholarship.

That said, I wanted to write a piece about two additional arguments for why we ought to have a Piketty-style wealth tax.  I assume the reason why these ideas were left out of his book is not that he didn’t think of them — he seems like a very smart guy — but that he wanted to restrict himself to un-argue-about-able history and numbers.  But since I’m writing sloppy essays for a personal website, not a rigorous tome that other economists will settle in piranha-like to dissect, I get to include these thoughts.

First, a slightly-longer summary of Piketty’s message (presented in a super-non-rigorous manner; my first draft of this essay was very different, but K said it was too academic.  If anyone wants a more accurate, less readable description of this, feel free to send a comment and I’ll add a footnote to this) is that there are two types of income: from labor and from capital.

You can make money by doing things, or you can make money by owning things and having people pay you to use them.  Generally when the share of income derived from labor is low relative to the share of income from capital, people revolt.  The world seems unfair, it’s easy for the rich to become richer, etc.

Probably you’ve seen this by now, but if you haven’t, you should check out this clip from Frans de Waal’s TED talk on inequality where monkeys react petulantly to unfair treatment.  Then, instead of a monkey with a slice of cucumber, imagine you’re dealing with billions of young people born into poverty, in a world where it’s not so hard to acquire military-grade weapons.

The main purpose of a global wealth tax, as proposed by Picketty, isn’t to raise money (although that’s a nice consequence of it, because many governments could use a bit more money to maintain good roads, worthwhile education, public safety, etc.), but to lower the rate of return on capital.  A tax on wealth cuts into what you can earn by owning stuff, which could make the ratio of income derived from capital to income derived from labor smaller, which many people would think was more fair.

Most people intuitively like to see hard work rewarded, and aren’t as keen on seeing people with inherited fortunes become more and more wealthy simply by reinvesting dividends.  And a wealth tax would probably have to be progressive: large holdings typically yield higher rates of return than small holdings.  Just consider the astronomical returns for Harvard’s multibillion dollar endowment versus the interest rate you can get on a small bank account, or $2k minimum certificates of deposit, or even a well-managed million-dollar portfolio of holdings.  There’s no way you could compete — a large endowment can afford better advisors, make riskier gambles, and meet minimum thresholds for investments that a small fish would never have access to.

And that leads into my first addition to Piketty’s argument.  He used only historical data to make his point.  That is, he ignored (purposefully, to make his reasoning as compelling as possible) any speculation about the effect of technology change on his proposal.  But it’s widely recognized that improved technology will allow more and more work to be automated, which will drive down labor’s share of income and raise capital’s share.  Sue Halpern’s lovely article, “How Robots and Algorithms Are Taking Over,” drew my attention to a Paul Krugman quote that nicely encapsulates this idea:

“Smart machines may make higher GDP possible, but also reduce the demand for people — including smart people.  So we could be looking at a society that grows ever richer, but in which all the gains in wealth accrue to whoever owns the robots.”

Which is to say that, even if you’re less liberal than I am and think our current distribution of income between capital and labor is equitable, better automation will make this distribution unfair in the future.  Especially because there is no a priori reason to expect there to be any share of income derived from labor in an extrapolated technological utopia.

(Brief justification for that last sentence: The European Union is pulling back from the Human Brain Project for now, but there are still a lot of smart people working on using computers to simulate the human brain.  Unless you believe thoughts arise from an immaterial soul, it seems pretty clear that they’ll succeed eventually, in which case it would seem that there will be no task a human can do that a machine could not also do.)

In summary, a steady rise in the share of income flowing to capital will make the rationale for a global wealth tax more and more compelling as our technology advances.

My second addition to Piketty’s argument is that the infrastructure necessary to impose a global wealth tax — obviously a massive accounting project that every country would have to collaborate openly on — is the exact same infrastructure that we’d need to combat the money laundering that funds human trafficking and terrorism.

Because there is no interconnected set of records for international wealth transfers.  In Treasury’s War Juan Carlos Zarate argues, somewhat unconvincingly in my opinion, that there was, but even he admits that this is becoming less and less true all the time. The proceeds from the sale of sex slaves (or drugs, sure, but given that I think most drugs should be legalized and regulated, and obviously think that slavery should stay illegal, I’m not as concerned about drug trafficking, although it’s worth noting that the same people and organizations often dabble in both) can easily be disguised as legitimate earnings (check out the money laundering chapter in Lydia Cacho’s excellent Slavery Inc. for more info).  Regardless, the absence of a transparent global finance system abets criminals.

Not that the banks, legislatures, dictators et al. who would have to collaborate on a connected system to impose a global wealth tax are likely to be swayed by these additional arguments any more than they would be by the litany of rationales presented in Piketty’s book.  After all, for any individual, the higher the percentage of income derived from capital, the less that person would want a wealth tax… and those who run banks and governments tend to be wealthier than average.  Their incomes are unlikely to drop (at first) as our society becomes increasingly automated, and their children generally aren’t trafficked into slavery or sexual exploitation.  So it goes.

On deficit spending.

750px-Paul_Krugman_BBF_2010_ShankboneI generally like Paul Krugman’s opinion pieces.  I think he does a good job of explaining economic concepts in terms that the average reader can understand, and I like that his biases — because economics is a sufficiently squishy subject that your preexisting biases could lead you to diametrically opposite conclusions even when analyzing the same set of facts (at least, that is what does happen; maybe the problem is that not everyone is doing the math correctly, but it’s tenured economics professors with all their fancy awards who’re coming to opposite conclusions) — match my own closely enough that he usually comes to the same conclusions I would.

And, sure, I’m never pleased by his recent articles about health care, since I am a huge fan of insurance and I’m sad that the Affordable Care Act basically outlawed insurance.

(That might sound a bit weird, but I don’t think it’d take too many words to explain.  Well, first, here’s why I like insurance: if you look at it as a transaction involving money, it’s a rip-off.  The amount of money you get out in a disaster times the probability of disaster has to be less than the amount of money you put in, or else you’re dealing with a very bad insurance company that’s about to go out of business.  But if you look at it as a transaction involving utility, insurance is great.  The insurance company is relatively unaffected by your personal calamities, so the value of money for them is identical whether you get hurt or not, and so for the company, monetary gains are directly proportional to utility gains.  Happiness gains.  They take your money, so they’re happy.  But for you, the value of a dollar when you’re healthy is lower than the value of a dollar when you’re sick.  If you’re healthy, you could work and earn more dollars.  If you’re sick, you can’t.  So the low monetary pay-off the insurance company gives you actually sums up to a higher utility pay-off than what you paid.  If you bought a good policy, that is.  I hope you did!  Otherwise, you’re squandering both your money and your happiness.

But the problem, in my opinion, is that the ACA outlawed that type of insurance.  A policy that would contribute nothing to your healthcare spending until you hit some enormous deductible, $6000 in my case, after which it would pay all your health costs.  So with routine maladies, it would do nothing.  I had a policy like that for three years, I believe, and so I threw away three years’ premiums and got nothing in return… except the sanctity of knowing that I’d get some high utility dollars back if I ever became too sick to type this sort of essay.  I guess my own case is a touch bizarre since my income has been zero for several years, just draining the savings I built up by eating bread and lentils on my grad school stipend, but once that money runs out I could get a job.  As long as I’m healthy, that is.  But, right, that sort of policy was outlawed; basically, even though the policies are still called “insurance,” that’s not the correct word.  Everyone is now required to buy a health care plan, where you’re pre-paying for certain minimum standard of care in addition to having insurance.

And that’s fine, if you think everyone should receive that minimum standard of care, except the idea of having a private company provide it is bizarre.  Just decide what the bare minimum you want schmucks to have is, tax everyone enough that you can pay for that for everyone, and then anyone who doesn’t want to get their medical care in those bare minimum conditions, or who wants to be healthier than the bare minimum care would make them, can buy their own care, or insurance policies to provide it, above and beyond the government provided allotment.

I guess that was a somewhat long parenthetical aside.  Oops.  Anyway, that’s the only major issue that I’ve disagreed with in Krugman’s previous editorials.)

His recent article on debt and deficits, though, had a concept that seems very off to me.  The main point of the article is fine: governments that can should spend more money so that the economy isn’t a gigantic sinkhole.  Sure.  But he also writes about deficits in a way that seems too generous to me.  From his article:

“You can see that misunderstanding at work every time someone rails against deficits with slogans like ‘Stop stealing from our kids.’  It sounds right, if you don’t think about it: Families who run up debts make themselves poorer, so isn’t that true when we look at overall national debt?

“No, it isn’t.  An indebted family owes money to other people; the world economy as a whole owes money to itself.  And while it’s true that countries can borrow from other countries, America has actually been borrowing less from abroad than it did before, and Europe is a net lender to the rest of the world.”

Piketty_in_Cambridge_3_cropAnd, honestly, I used to blithely think pretty much the same thing.  Because that’s how the numbers work in a macroeconomics course, so it seemed sensible to me.  I’m very appreciative to Thomas Piketty for changing the way I think about this.  His book “Capital in the Twenty-first Century” seemed like it was longer than it needed to be, but I think I understand why he wrote it in a way I disliked: knowing that many people would scoff at his conclusions, he wanted to present his case over and over again with as much data as possible.  Which, yeah, fine.  But it didn’t make for fun reading for me, for a lot of the middle chapters.  And that’s a shame, because I worry that maybe people would stop reading his book during that middle slog, and he has some insightful things to say near the end.  Here’s a quote that appears near the end of his book (oh, and, I just noticed when I went to type this passage – the book was originally in French.  So, thanks Arthur Goldhammer!):

“There are two main ways for a government to finance its expenses: taxes and debt.  In general, taxation is by far preferable to debt in terms of justice and efficiency.  The problem with debt is that it usually has to be repaid, so that debt financing is in the interest of those who have the means to lend to the government.  From the standpoint of the general interest, it is normally preferable to tax the wealthy rather than borrow from them.”

And that’s the point of contention with Krugman’s article.  Deficits aren’t stealing from America or Americans if you average the amount of wealth everyone has… but they are stealing from Americans if you analyze the situation person by person.  The easiest way to see this is simply to imagine that you have progressive taxation, so the wealthier you are the higher your percentage tax burden will be, and costs of living as well as you feel you ought to that rise more shallowly than total wealth, so that the wealthier you are the higher your percentage of investment will be.  Both reasonable assumptions in the United States, even though our tax burdens aren’t very progressive at the moment.  But let’s pretend, shall we?

Then, if you want to have a government service — say a police force to make sure that the impoverished hordes don’t kill the wealthy and take all their money — you can pay for it in one of two ways.  You can pay by taxing the populace, in which case the wealthier you are the more you’re paying for policing, or you can pay by running a deficit, in which case the wealthier you are the more you’re being paid to have police protect your wealth.

The latter seems… not good, right?

Because a deficit means the government is issuing bonds.  Bonds pay interest.  Poor people can’t buy bonds.  Rich people can.  Deficit spending is the government paying wealthy people for the privilege of using their money.  Which is, taking money from the aggregate population, giving it to the rich members of the population, in order to provide services.  Deficit spending is stealing from our kids, unless the “our” in question means the wealthy.

I suppose it’s worth disclosing that I believe both my parents might be millionaires.  So maybe it seems like I would fall into that wealthy people’s “our” category.  But I personally am not monetarily rich — K. and I support our family plus some on a public high school teacher’s salary (hers), and my, uh… I cook well, which cuts down on our food bills, and one time last winter I found a five dollar bill on the ground while I was out jogging — so I’m not sure which side of this divide I fall on.  I’ve definitely enjoyed many perquisites of the wealthy: I studied as an undergraduate at a very fancy university and finished with only five thousand dollars of debt.  Even among people fortunate enough to attend that sort of school, a lot of people graduate with huge amounts of debt, whereas I had so little (because my parents were willing and able to spend so much on me; thank you!) that I was able to zero it out using leftover money from my grad school living stipend.  But that doesn’t change where I stand intellectually.  I definitely agree with Piketty’s call for a global tax on wealth, payable to whatever nation that wealth resides in.  That’s the nation enforcing property rights to allow that wealth to remain privately owned, after all.

More generally, I think that people should pay for governance to degrees that would reflect how much they would lose (or gain) if there were anarchy instead.  For a lot of poor people, the fact that we have a government is a strict detriment to their lives.  They’re harassed by police, they can’t pull a Walden Pond and build homes wherever they’d like, etc.  So those people should pay negative taxes, to compensate them for the harm they’re subject to by consenting to remain governed.  The wealthy, I feel, should pay high tax rates, because it seems unlikely they’d keep their fancy homes, or their whatever else, or even have had the opportunity to make all that money, if we had anarchy.

So, right.  Deficit spending: yes, a better idea than austerity, as pointed out by Krugman’s article.  But still bad.  Still is stealing from our children.  Raising taxes would be better than deficit spending.  And I think those taxes ought to be progressive.