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Thursday, April 30, 2015

On the political movement to create inequality: How an alliance based on money, race, and religion wrecked the middle class

by John MacBeath Watkins

By now, I suppose we've all seen the graph that demonstrates the decoupling of productivity and median income growth:

http://en.wikipedia.org/wiki/Middle-class_squeeze

It looks even worse expressed as hourly wage growth:

http://www.epi.org/publication/ib330-productivity-vs-compensation/

And now, that pinko rag The Wall Street Journal has an article showing that by some standards, wages peaked in 1972: http://blogs.wsj.com/economics/2015/04/17/by-one-measure-wages-for-most-u-s-workers-peaked-in-1972/

Several things had to happen to make things turn out this way. I think the best way to understand it is as a political movement in which the well-off waged a war of words, money, and organization to wrest control of public discourse and political power from working people. One of the first shots in this war was the Powell Memo, a document the United States Chamber of Commerce solicited in 1971 from Lewis Powell, a corporate lawyer who would eventually be appointed to the Supreme Court.

Powell responded with a memo that told businesses that they were losing to the left, and needed to build institution that would push for their interests. Looking at the charts above, it would appear that they were not losing -- wages were growing no faster than productivity, allowing business to make a decent profit. But this was a time when the New Left had not yet fallen by the wayside.

The full text of the Powell memo is here.

Powell told his readers that they were under attack, and were unable to exercise power in the political arena.

He wrote:
...as every business executive knows, few elements of American society today have as little influence in government as the American businessman, the corporation, or even the millions of corporate stockholders. If one doubts this, let him undertake the role of “lobbyist” for the business point of view before Congressional committees. The same situation obtains in the legislative halls of most states and major cities. One does not exaggerate to say that, in terms of political influence with respect to the course of legislation and government action, the American business executive is truly the “forgotten man.”

Current examples of the impotency of business, and of the near-contempt with which businessmen’s views are held, are the stampedes by politicians to support almost any legislation related to “consumerism” or to the “environment.”
 Powell wrote that they could gain power through the courts, through persuasion of the public with television and radio, through rewarding a "faculty of scholars" to publish work in support of their views, and through direct political lobbying:
Business must learn the lesson, long ago learned by labor and other self-interest groups. This is the lesson that political power is necessary; that such power must be assidously (sic) cultivated; and that when necessary, it must be used aggressively and with determination — without embarrassment and without the reluctance which has been so characteristic of American business.
 He also suggested that shareholder could use their power to sway politicians:
The question which merits the most thorough examination is how can the weight and influence of stockholders — 20 million voters — be mobilized to support (i) an educational program and (ii) a political action program.

Individual corporations are now required to make numerous reports to shareholders. Many corporations also have expensive “news” magazines which go to employees and stockholders. These opportunities to communicate can be used far more effectively as educational media.
A large part of what he proposed was propaganda. Whether because of his memo or because they were going to anyway, business interests have founded think tanks like The Heritage Foundation and helped publicize the work of people like Arthur Laffer, built funding mechanisms for political campaigns and supported model legislation by ALEC (the American Legislative Exchange Council) for state legislators to introduce in support of business aims.

But the business aims supported here are not those of the people working in non-supervisory jobs at businesses. In fact, those are defined as the enemy pretty much explicitly in Powell's memo. That's Labor, union bosses and strikers and malcontents all.

In fact, the aims supported by this political movement are those of top-level management and owners of large blocks of stock. They are the aims of the people Christopher Lasch was referring to in his 1996 book, The Revolt of the Elites and the Betrayal of Democracy.

From that book:
Today it is the elites, however - those who control the international flow of money and information, preside over philanthropic foundations and institutions of higher learning, manage the instruments of cultural production and thus set the terms of public debate - that have lost faith in the values, or what remains of them, of the West.

As Daron Acemoglu and James A. Robinson demonstrated in their book, Why Nations Fail, an arrogant and grasping elite can destroy the economy of a nation in order to retain their positional status. They argued that the success of a nation depends to a great degree on the inclusiveness of its economic and political institutions. Once you shut down entry into the elite, the rot sets in.

Not that this is the only thing a nation needs to succeed. They note the disparity in wealth between the Arizona side of the border and the Mexican side, and suggest one of the problems is the weak and corrupt Mexican state, which has never been an effective guarantor of life and property.

Which makes the nature of the alliances formed by the elite Powell was addressing in order to have the votes to control the country all the more alarming.

The Republican Party had long been allied with business elites, but faced with the New Deal alliance of the Democrats they were long a minority party. One of the pivotal figures of 20th century politics, Richard Nixon, attacked the problem by rebuilding the Republican coalition after his own image -- resentful, conservative, and a bit racist.

The Democrats had been strong in the South, essentially from the passage of the Posse Commitatus Act in 1878 until the Democrats re-started the work of Reconstruction with the passage of the 1964 Civil Rights Act and the 1965 Voting Rights Act.

The Posse Commitatus Act ended the role of federal troops in the South in enforcing the voting rights and civil rights of the black citizens of the former Confederate states. It freed state and local authorities to deprive blacks of their voting rights and civil rights. Since congressional seats and electoral college votes are distributed by population, not number of registered voters, this gave racists a disproportionate influence in our politics.

In 1964, Barry Goldwater was the Republican nominee for president, and he opposed the Civil Rights Act. Nixon seized on Southern resentment to rebuild the party around disgruntled white voters.

George Packer wrote a brilliant account of this in The New Yorker, an article titled somewhat optimistically The Fall of Conservatism. From that article:
The Southerners were the kind of men whom Nixon whipped into a frenzy one night in the fall of 1966, at the Wade Hampton Hotel, in Columbia, South Carolina. Nixon, who was then a partner in a New York law firm, had traveled there with Buchanan on behalf of Republican congressional candidates. Buchanan recalls that the room was full of sweat, cigar smoke, and rage; the rhetoric, which was about patriotism and law and order, “burned the paint off the walls.” As they left the hotel, Nixon said, “This is the future of this Party, right here in the South.”
Law and order? The South was the home of one of the most notorious extra-legal customs in America, the lynching, and home to one of the most notorious organizations, the Klu Klux Klan. The Klan existed to terrorize blacks and whites who sympathized with them.

Ronald Reagan gave a speech on the topic of states rights during his 1980 run for the presidency at the Neshoba County Fair, a few miles from Philadelphia, Mississippi, site of the 1964 murder of civil rights workers. I'm sure the symbolism wasn't wasted on his audience. States' rights during the run-up to the Civil War had meant the right to hold slaves, states' rights after the war ended meant the right to discriminate without federal interference.

A friend has long insisted that the Republican Party consisted of an alliance of the rich and the stupid. I would have said an alliance of the rich and the racist. Moderate Republicans of the sort who voted for the Civil Rights Act in 1964 are now called RINO -- Republican In Name Only. They've largely been ridden out of the party at this point, much to the disappointment of voters like me who have historically voted a split ticket.

Tapping into the South's deep well of resentment to support an agenda really set by the economic elite was deeply cynical. When Southern churches began setting up "white academies" -- private schools intended to preserve segregation -- they found a welcoming ally in business interests that wanted to do down the Internal Revenue Service. The result was a lot of rhetoric in support of the cultural agenda of the churches, and a lot of tax cuts and relaxed regulation on their business allies.

The churches got some of what they wanted. Evangelical churches in the 1960s had no particular stand on abortion, but when they found themselves in a coalition with norther Catholics, they changed their stance and demanded legislation to restrict abortion. Business interests didn't mind giving them that.

But for the most part, the votes were coming from segments of the population that harbored racial resentment against the policies of the Democrats, and the benefits were going to the business elites. What was said to get the votes was just the prolefeed, a term George Orwell invented in his novel, 1984, in which the Ministry of Truth manufactures a sort of literature that is designed to keep the proletariat content and not too knowledgeable.

The propaganda arm of the movement harnessed agnotology, the science of creating ignorance, which had been pioneered by the tobacco industry. If scientists say you are harming people, pay some other scientists to say you aren't. The truth doesn't matter, just the bottom line.

And if your pundit is continually wrong, as Arthur Laffer has been, that doesn't matter. Just keep quoting him as if he were a reliable source of information.

Not that all were obviously wrong. One of the great controversies of the 1970s was about the viability of Keynesian economics in general and the Phillips curve in particular. The Phillips curve describes how higher inflation tends to be related to lower unemployment, but was challenged in the 1970s by a period of high inflation and high unemployment, called stagflation.

Milton Friedman, the great monetarist, claimed that the unemployment rate could not fall below a certain level without sparking a wage-price spiral, which he called the "natural rate" of unemployment. The ModiglianiPapademos paper of 1975 introduced it as the non-inflationary rate of unemployment.

There are other contributing factors, but it's probably not entirely coincidental that real hourly wages for non-supervisory jobs have not increased since the Federal Reserve Board started using the non-accelerating inflation rate of unemployment (NAIRU) as a tool in setting monetary policy.

The movement Powell was associated with paid attention to many things most people don't, like who gets appointed to the Federal Reserve Board. They backed, with cash, candidates who drank the Kool-Aid about low taxes on rich people stimulating the economy and generating more tax revenues, and the idea that regulations could be eliminated with no harm and a stimulating effect on the economy.

Robert Bork wrote a book published in 1978 titled The Antitrust Paradox, in which is said, sometimes you get lower prices with one large company than with several competing companies, so why penalize predatory pricing? With the election of Ronald Reagan in 1980, this became the official policy of the Justice Department, and still is. Walmart used tactics that were illegal up until then to become the largest employer on America.

(As noted in a previous post, In 1967, the Safeway grocery store chain, then the second largest in the country, signed a consent decree with the Justice Department in which they agreed to stop engaging in predatory pricing -- selling below cost in order to drive the competition out of business.  A generation later, in 1983, Safeway correctly perceived that the Reagan Justice Department would take a different view of their activities, and asked to be released from the consent decree, and was freed of its restrictions.)

One result of this is that predatory pricing, which is hard on small business and only possible for large businesses, has, as one might expect, resulted in many small businesses closing. Another is that Walmart exercises enormous power over wages of their workforce and of prices for their suppliers. This redistributes power in ways that destroys workers' and suppliers' negotiating power.

Another theory that got a lot of support at about that time was managing corporations for shareholder value. Strangely enough, given our current beliefs, this is not how corporations were usually managed prior to the 1970s. Public corporations had been managed on the theory that they were persons, and their chief purpose was to survive and thrive. Shareholders did not have the rights of property, they only had a claim on future earnings should the board decide to issue a dividend. One might compare this to 'owning' a fighter, in which you own part of the fighter's future winnings. You can't actually take the fighter apart and eat the bit you own if you get peckish.

Under this system of managing corporations, shareholders had an important stake in the company, as did bondholder, customers, and employees. The public corporation was a sort of gestalt being, made up of many other beings occupying its metaphorical body.

When Milton Friedman and others began promoting the idea that the shareholders were owners more in the sense that partners are owners, they found ready support for this view among people who could make money on it. Changes in the banking industry made it possible for corporate raiders to raise money to buy up companies. What they did then was described in a paper by Larry Summers and Andrei Schleiferwere titled Breach of Trust in Hostile Takeovers.

From that paper:

One striking fact militating in favor of. the importance of wealth transfers as opposed to pure efficiency gains is that a significant fraction  of hostile acquisitions are initiated and executed by only a few raiders. It is hard to believe that Carl Icahn has a comparative advantage in running simultaneously a railcar leasing company (ACF), an airline  (TWA) and a textile mill (Dan River). It is more plausible that his comparative advantage is tough bargaining and a willingness to transfer value away from those who expect to have it. In fact, those who describe  him (including he himself) point to this as his special skill. The industrial diversity of many raiders' holdings suggests that their particular skill is value redistribution rather than value creation.
Now, consider the reason companies exist. Ronald Coase explored this question in a highly influential 1937 paper, The Nature of the Firm. Coase noted that you could hire individuals to do everything you need done, no matter how big the job, so why have companies in which the employer has obligations to long-term employees instead?

The answer, he said, is that contracting individually for each person need to perform the tasks of the firm would require exorbitant transaction costs to negotiate and enforce the contracts. Much better to gather a group of people to work for a common goal, such as making better and cheaper widgets to make a profit in the widget business.

Summers and Schleiferwere argued that what Icahn and others were doing was appropriating money by violating those implicit contracts.

This is not one of their examples, but consider the case of the Boeing aircraft corporation. In the late 1960s, management bet the company on the first jumbo jet, the 747. Engineers worked so enthusiastically that they came to be called 'the incredibles.' Management would tell people to go home, only to have them drive around the block and come back to work when management wasn't looking.

Their devotion paid off. The company dominated the commercial airliner market to the point where Lockheed withdrew from the market and Boeing took over McDonnell Douglas and cancelled all their airliners.

However, McDonnell Douglas executives proved more adept at corporate infighting, and gained considerable influence over the company, resulting in some big changes.

In July 2014, Boeing CEO Jim McNerney created a controversy by saying he wouldn't retire at 65 because “The heart will still be beating, the employees will still be cowering, I’ll be working hard.”

This is a major change in attitude. And Boeing was not subject to a hostile takeover, it is simply that public corporations are run differently than they were in the past.


Summers and Schleiferwere noted that employees in companies that had been subject to a takeover found that the company had no loyalty to its employees. They cite a number of employee reactions, but the one that put the issue most clearly to me was, "How can you go to another company now and give 100 percent of your effort?"
Leeham Co. LLC, which describes its business as "intelligence for the aviation industry," examined the Boeing situation on their blog in a Nov. 2013 post titled Loyalty is a One-Way Street at Boeing...
The problem is, if a company is not "managed for shareholder value," it becomes a target for takeover. As a consequence, companies that invest their profits in the business instead of starving research to pay stockholders are the companies that become a target for takeovers.

Would Boeing in its current position benefit from the fierce loyalty and enthusiasm of "the incredibles" on a project launched today? It seems unlikely.

The new, more extractive model used by Boeing is the rule rather than the exception today. Once the banking business changed in ways that encouraged takeovers, the very nature of the publicly traded corporation changed. And when money is changing things, it can call out the justifications for what it is doing. In an earlier time, when the question was whether such corporations existed to serve the shareholders or if the shareholders were just one of the stakeholders in the company, the latter view had won out.

In fact, people in the business world overwhelmingly believe that corporations have a fiduciary duty to maximize shareholder value, even though the case law doesn't support this, and the case most often cited in support of this is an odd one.

The case usually cited is Dodge Brother vs. Ford. Henry Ford owned 58% of the company, the Dodge brothers owned 10%, and five other individuals owned the rest. Prior to WW I the Dodge Brothers were both a major investor in the company and a major supplier of engines, transmissions, and chassis. Ford was planning to build a factory that would make him no longer dependent on the Dodge Brothers for his manufacturing, and trying to drive down the price of the stock so he could buy the brothers out.

As chairman, president, and the majority stockholder, he was in a great position to do this. He decided to withhold a dividend that the brothers would need to complete their own plant in which they planned to start building their own line of cars.

Now, if Gordon Gekko's golden rule -- "he who has the gold makes the rules" -- were applied, Ford as majority stockholder should have been able to decide what dividend, if any, the company paid out. This was not a publicly traded company, it was a closely held corporation which Ford owned most of. The Michigan Supreme Court, which is not usually considered an authority on corporate law, ruled that Ford had an obligation to pay out a substantial dividend.

Lynn Stout, a Columbia law professor and author of The Shareholder Value Myth, argues rather credibly that Dodge v Ford is about a majority shareholder's obligation to minority shareholders, not about the obligations of publicly traded corporations. She also raises the question of why this case is cited rather than later cases from more expert courts (such as Delaware's Supreme Court, which rules in the state most large corporations choose to incorporate in.)

The answer, I"m afraid, is that intellectuals can serve more than one purpose. They can seek truth, or they can manufacture justifications for actions influential players want to take. Even when they do not view themselves as doing the latter, they may take a view that is picked up by those players and used as a justification.

In some cases, it is hard to assume altruism on the part of the intellectual involved. Arthur Laffer may once of believed that cutting taxes on the richest people would spur the economy and generate higher tax revenues, but it strains belief to think that he continues to hold this assumption for purely altruistic reasons. Saying exactly what the rich wanted to hear was the making of him. Admitting he was mistaken would be the unmaking of him.

Laffer first described the Laffer curve to Dick Cheney and Don Rumsfeld at a lunch meeting in 1974. The curve shows that at some point between 0% and 100% tax rates, there is a rate that maximizes revenue. It was first proposed by and Arab philosopher and historian, Ibn Khaldun. Laffer's innovation appears to have been to propose that we are always at a higher point than optimum on the curve whenever he is asked.

However, research since 1974 has shown that cutting top marginal rates does not increase gross domestic product above the rate that would have occurred without the cuts. And research on the rate at which tax revenues are maximized seem to show that it is about a 70% top marginal rate, which it was in 1974, before Laffer's theory was applied. (Economists Peter Diamond and Emmanuel Saez calculated in a 2011 paper that the revenue maximizing top marginal rate is 73%.)

Laffer wasn't bothered when the Reagan administration increased payroll taxes, because he was more concerned with top marginal rates.  By the end of Reagan's term in office, it was evident that Laffer was wrong, but he still reliably says what his audience wants to hear, and he has been rewarded with several directorships at large corporations.

Lowering the top rate from 70% to 28% didn't quite stick, but the top marginal rate of 35% on ordinary income and 28% on capital gains is still far below where it was when the U.S. economy was growing more rapidly. Lower taxes on high earners and higher payroll taxes represented a large shift in wealth to the high earners.

One consequence of lower tax revenues was a reduction in investment in things that benefit us all, such as roads and bridges. Federal infrastructure investment has fallen from a peak of about 1.2 percent of GDP to about .2 percent, our about 1/6th.

The result is a loss of productivity and international competitiveness. A truck waiting for a train to pass rather than driving on an overpass is a job lost for someone. Corporations have no national loyalty, and move their income around to the countries that allow them to minimize taxes. If America becomes less competitive, that's fine, they can always invest in some other country. The stateless income of international corporations does not support the well being, let alone the greatness, of countries.

These companies lobby for lower taxes, lobby for the freedom to flee to tax havens, and donate money to politicians. Public investment only interests them if it benefits them and they don't have to pay for it. The case of Citizens United v. Federal Election Commission, decided by the U.S. Supreme Court in 2010, ruled that prohibiting expenditures by corporations or unions violated the First Amendment guarantee of free speech, which means that although a corporation is not a voting citizen, it is sufficiently a person to finance a campaign for or against a candidate.

In his last book, The Revolt of the Elites and the Betrayal of Democracy, Christopher Lasch in 1995 argued that the privileged class had managed to isolate themselves from the crumbling social structure and decaying cities around them. In becoming international in their outlook, "citizens of the world," they have given up on the responsibilities of citizenship in their own countries and communities, and pursue only the interest of their class.

Lasch had no clear solution to this problem, nor do I. We seem to have developed an Ayn Rand elite, narcissistic and self-serving, who have the wealth and the connections to run things. They do not seem restrained by empathy for the less fortunate or a sense of duty to their nation or community. As inequality increases, there are reasons to think that the wealthy become less empathetic.

Studies of the effects of wealth on compassion and fairness have shown, as a report in Scientific American put it, that "as people climb the social ladder, their compassionate feelings towards other people decline."

And given the psychological effects of wealth, it is not surprising that the justifications for these attitudes are often couched in terms of freedom. Berkeley psychologists Paul Piff and Dacher Keltner suggest that "The less we have to rely on others, the less we may care about their feelings. This leads us towards being more self-focused."

We are living in a world built by a political movement driven by these people -- people alienated from community and nation, from any but their own class of wealthy cohorts. They are able to remain in power because of the alliance they formed with others, who are alienated from nation and community by prejudice and resentment. Both sides of this alliance wrap themselves in the flag while displaying contempt for the very notion of the national government.

You seem confused, fella, which is it?

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