A recent Wall Street Journal article by Arthur C. Brooks on the Occupy Movement and fairness ("Fairness and the 'Occupy' Movement, November 25) says some interesting things about potential common ground between free-market ideas and the Occupy movement. Yet Brooks also commits some very important errors. Perhaps with clearer facts there could be more common ground on reforming the economy and politics.
Brooks, the head of the American Enterprise Institute, denounces crony capitalism as the dark side of American politics and economics. On this we should all agree. The level of corruption in Washington is staggering, growing, and rife in both parties. The White House and Congress dispense billions of dollars of favors to political supporters like a non-stop vending machine. The new book by Peter Schweitzer on crony capitalism (Throw Them All Out, Houghton Mifflin Harcourt, 2011) should be required reading. Even if wrong on some particulars, as some members of Congress charge, its overall message is powerful and correct.
Where Brooks goes wrong is his description of inequality and fairness. The Republican view, which he espouses, is to reduce taxes, cut government services, and let markets be the standard of fairness. Here Brooks is deceptive in his rendition of the facts.
First, Brooks downplays the extent of inequality that has been built up in thirty years of crony capitalism. He favorably writes that "every income quintile has seen a real increase in purchasing power of at least 18% over the past 30 years," citing a recent study of the Congressional Budget Office (CBO). Yet the real point of the CBO report, which Brooks does not mention, is that the richest 1% enjoyed a staggering rise of 275%, while the poorest stumbled by with a meager 18% gain. Moreover, the CBO report takes the data only to 2007. By now, even those meager gains at the bottom have been mostly lost.
Second, Brooks fails to note that the situation for the poor will be drastically worse if federal transfer programs are cut as the Republican Party is urging. The poorest quintile depends on these federal programs to stay alive. If the poorest Americans had to survive without government support, their incomes would be slashed to disastrous levels.
The Republicans answer to crony capitalism is to slash government. Yet by this they mean mainly an attack on the remaining social programs. This is a kind of bait-and-switch strategy: rev up the anger against government corruption, and then kill the life-support programs of the poor and working class. Crony capitalism exists mainly in the big-ticket sectors of the economy -- banking, oil, real estate, private health insurance, military contractors, and infrastructure -- not in the essential but much smaller parts of the economy: malnutrition of poor children, lack of quality pre-school, insufficient job training, and inadequate student loan coverage.
Yes, crony capitalism should be confronted anywhere in the economy, yet cutting the life-support systems for the working class and poor won't fix government, but instead would cripple the prospects of more than 100 million poor and near-poor Americans. To control crony capitalism, we need to direct our attention where it belongs: the wealth-support systems of the rich, not the life-support systems of the poor.
Here are five specific actions against crony capitalism that should appeal across the political spectrum.
First, restore the Glass-Steagall Act's separation of commercial banking and investment banking, and strongly regulate derivatives trading. The financial casino continues to infect the core of the banking system and the real economy.
Second, prosecute the law-breakers of the 2008 crisis. Virtually every marquee firm on Wall Street, including Citigroup, Goldman Sachs, and JP Morgan, committed financial fraud. Lead bankers who oversaw the fraudulent practices are still in place, and need to go.
Third, retire politicians like Congressman Paul Ryan who pressed for financial deregulation on the grounds of "free markets," but who then called for Wall Street bailouts when the crisis hit. They are the agents of moral hazard.
Fourth, end the rampant tax loopholes that allow America's biggest companies to park their profits in the Caribbean tax havens. Rather than giving tax amnesties to these companies, we should pull the plug on these tax abuses.
Fifth, crack down on Congressional insider trading. Members of Congress are not only swayed by their big campaign contributors and the lobbyists who hire their families and staff, but also by the prospect of personal gains through trading on their insider information and access to sweetheart deals. Congress's approval rating is on its way to zero.
The biggest point of contention between the free-marketers like Brooks and the Occupy Movement is the affirmative role of government in American society. Today's free-marketers need to re-learn the wisdom of Adam Smith, Friedrich Hayek, and Milton Friedman, whom they praise but don't read. These earlier free-market advocates were very clear about the need for government to help the poor, protect the environment, and provide public goods including scientific research and infrastructure.
Today's free-marketers are different. They downplay the suffering of the poor and the extent of inequality. They deny the science of climate change. They stand by as the public infrastructure collapses. They disdain the hallowed tradition of federal support for science and education.
They subscribe instead to the ugly philosophy of Ayn Rand, who preached that there is no such thing as society or social responsibility, only a collection of individuals. Rand's philosophy is a tribute to greed, hate, and ruthlessness. Smith, Hayek, and Friedman would have been aghast. So are most Americans.
Yes, Mr. Brooks, let us find common ground. We all agree on the need to end crony capitalism. But let us also work together not to cripple government but to make it work for all Americans.
Follow Jeffrey Sachs on Twitter: www.twitter.com/JeffDSachs
Washington AND Big Capital should be penalized for their greed, irresponsibility.
Throw the bums out, and jail the others and make them pay it all back!
I have had the pleasure of being in some of your classes on sustainable development. One thing I wish you bring to your public positions is the level of academic objectivism you bring to the podium every time you lectures. Maybe this article is intended for another audience but even to an ignorant college student like me, much of what you are preaching sound like cliches and truisms. For example, instead of calling derivatives trading "casinos" that "infect" our economy like all the other uneducated activists downtown, why don't you actually spend a couple sentences walking everyone though exactly how derivatives are infecting the economy. The bankers sure are making a compelling case for the necessity of this "gambling"...
Sadly, it is exactly this kind of preaching on the part of Professor Sachs that feeds the tendency for people to praise but not read. I am willing to bet that less than 1% of the 99% protesting in OWS don't have the faintest clue what a derivative is...
Professor Sachs, maybe the huffington is a place for you to shed your academic skin and quarrel support from the vulgar masses. But I consider myself vulgar enough and I am not in the slightest convinced by your catchy chants. Please lecture me as well as everyone else reading the same way you lecture your students.
Always,
Your student and follower
Read Dr Emmanuel Derman Phd Quantum physics. "Models behaving badly".(You can google him) He was the first quantum theorist to bring his experiments to Wall street and specifically Goldman Sachs.
You are a little unfair in your criticism of Mr Sachs. But I allow for your youth and lack of understanding of historical banking activities. In a perfect world there is no reason for excluding any financial instruments from play in a truly free marketplace? The question becomes "what if" and the answer is before us today. The corruption of the brand of trading carried out in the last 30 years, bespeaks of the need for stringent controls to avoid future occurrences.
Naturally bankers and traders have vested interests in avoiding any rules being brought to the game, that might destroy their edge, or provide a socially protective and stabilizing, leveling of rules for liquidity and asset valuations. Their paychecks, bonuses and excessive profits, are obviously in danger under such a threat. By the way I believe you would lose your bet, given that 1 in 4 americans are now living at the poverty level.(NY Times oped sunday) Many of them worked in the lower levels of the financial industry. I am sure most now know what a derivative is!
That goes straight from my paycheck all the way to Goldman Sachs
The fats are getting rich, the rest of us are hurtin',
Hell our last vice president came straight from Halliburton
You can use your billy clubs, tear gas, or mace
But my ass was already kicked by JP Morgan Chase
It was homicide by Countrywide and Angelo Mozilo
Citigroup and Boeing made us all bite the pillow
Exxon Mobil Wells Fargo pay no income tax
But nobody goes to prison for the min much less the max
AIG and BofA they brought us to our knees
While General Electric shipped their jobs overseas
(Smash It Grab It OCCUPY...the video!)
http://www.youtube.com/watch?v=W8XE4CdNYEs
They subscribe instead to the ugly philosophy of Ayn Rand, who preached that there is no such thing as society or social responsibility, only a collection of individuals. Rand's philosophy is a tribute to greed, hate, and ruthlessness. Smith, Hayek, and Friedman would have been aghast. So are most Americans.
Yes, Mr. Brooks, let us find common ground. We all agree on the need to end crony capitalism. But let us also work together not to cripple government but to make it work for all Americans."
Amen.
Don't forget the prison industrial complex!!!
In this vision, a market is deemed free based on the sole condition that its free from any governmental interference. Collective bargaining, or the right of workers to negotiate their own wages (something which is indisputably a vital component of any functioning capitalist system), is spun as a market distortion and hence, needs to be severely restricted, if not abolished entirely. By contrast, all forms of predatory capitalism, up to and including speculation and predatory lending, are seen as wealth creating activities.
What we actually need is a free market guided by public regulation put in place with an eye towards maximizing competition. A system where a mix of progressive governance and public ownership acts to lower the cost of living, thereby facilitating commerce. By contrast, prevailing economic doctrine merely focuses on creating rigged markets where wealth extraction is the endgame.
What OWS happens to be fighting against is a corporate culture where short term profit is so highly elevated that business is incapable of articulating a longterm vision to ensure capitalism's viability. Brooks' endorsement of exactly this system just proves that the wealthy, by and large, simply don't get it. Nor do they have any interest in getting it.
If the only way to point out the plight of the poor is to point to someone else and say "Look what they got!", then your argument is broken and it's just class envy. 18% increase in purchasing power plus the gains in standard of living is pretty good for a group of people containing many people who just sit around collecting government cheese.
These two sentences indicate that you have absolutely no clue about the current state of economics, or what has happened to the working class over the last five decades.
Your straight conservative mantra of "the poor have made themselves poor through bad decisions" is so completely devoid of fact. The majority of working class and poor aren't just sitting around "collecting government cheese," they're being trampled on by a free market economy gone haywire.
Do some reading on economic history (or any history, for that matter), and get back to us when you can use something other than the predictable republican mantra of "it's your fault if your poor."
Our children and elderly are suffering. How could we reorganize society to provide the care instead of the limitless profits?
The science of greenhouse gases dates back to the 19th century. It is firmly established. So too are the facts of recent global warming. Leading climate skeptic, physicist Professor Richard Muller, has recently reversed course and agreed that global warming is real. Here is his conclusion:
"we find that the global land mean temperature has increased by 0.911 ± 0.042 C since the 1950s (95% confidence for statistical and spatial uncertainties). This change is consistent with global land-surface warming results previously reported, but with reduced uncertainty."
Unfortunately, from the very beginning, the core group at the heart of Climategate had no interest in "scientific truth." As one states: "The trick may be to decide on the main message and use that to guide what's included and what is left out." In other words, let's decide on a conclusion and then use only evidence that proves that point, discarding everything else. One scientist who seems to have been slightly troubled by these methods wrote: "I also think the science is being manipulated to put a political spin on it, which for all our sakes might not be too clever in the long run." In another note to Phil Jones, this same scientist complained: "Observations do not show rising temperatures throughout the tropical troposphere unless you accept one single study and approach and discount a wealth of others. This is just downright dangerous. We need to communicate the uncertainty and be honest."
From The Detroit News: http://detnews.com/article/20111129/MIVIEW/111290379/Lacey--Climategate-2--The-Corruption-of-Science#ixzz1f5tlDGMC
replace the system that made this country the greatest in the world in a short 240 year timespan (compared to other countries) because some people don't want to work, things aren't "fair", and some are doing better than others.
OR you can state the truth: In this country, you pretty much get what you deserve, if you don't stay in school, if you don't work hard, if you don't get a certain job skill set. You shouldn't complain if you are digging ditches if all you know how to do is dig ditches.
Have you ever read the history of how this was accomplished? Judging by your position, it is highly unlikely.
So that the record of history is absolutely crystal clear. That there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.
Milton Friedman
That Friedman believed in free markets or not, is not the question. It is obvious democracies have had to increasingly abandon, so called pure free market capitalism, as a matter of essential social demand. Government must have the ability to act as the conduit that secures social stability. No economic system can do this alone! For anyone to suggest that Milton F would disagree with this essential matter, does not understand Friedman or Hayek or even Keynes or the application of economic theory in essence! Any working economist today is aware of the need to assure first the survival of society over pure economic theory.
The errors of pure theory, just been witnessed in our financial markets with the employment of Quantum math in financial modeling, again shows the need for an understanding of the principle of allowance for the human factor. A factor that is indefinable by any of the softer sciences and in particular economic modeling. It therefore falls to the mechanics of the democratic system to protect the "people" from the vagaries of unproven theories, be they economics or mathematics! That authority is a representative government!
Just to keep the record of history absolutely clear! Pure theory is just that! A theory! When it malfunctions it falls to govt/people to correct. They also pay the price apparently?
A few points of clarification:
a) What you mistake for crony capitalism is actually crony socialism, a system whereby risk market risk for both companies and individuals is socialized by the government with failures by both are insured by the government, whether that is TBTF, UI, Foodstamps, welfare, etc. We need to get the government out of insuring people against their own failure and bad luck.
b) Your concern of income inequality is misplaced. 1) It is mis-measured and overstated, 2) an artifact of demographics and skill-biased technology change rather than any nefarious plot by the top 1%, 3) it does not affect mobility with you chance of dropping out of the 1% about the same as your chance of moving up and out of the bottom 20%, about 57-58%, 4) income inequality has no negative impact on the economy, and in fact those companies with declining inequality have seen their economies also crate, France, Greece, Spain, etc, 5) consumption equality and improvements in standard of living is the real metrics to watch, and in bath cases the poor and low-income earners are better off than before, 6) class warfare and success envy hiding behind a manufactured veil of concern over income inequality is sad and disingenuous.
3) How would Glass-Steagall have stopped derivatives trading since it existed BEFORE the repeal of G-S, more importantly, how would it have stopped a Fed and Freddie and Fannie induced housing bubble?
Great. Glad to see that you are so knowledgeable. A couple of questions:
a) Why did derivatives exist and trade BEFORE G-S was repealed if they only existed because of the repeal, with the first ones being issued in the 1980’s?
b) What specifically in the repeal of G-S would have stopped the housing crises since CDO’s and the existence of independent mortgage brokers, and there were ample investment banks and commercial banks operating separately that also defined the market? What specifically in G-S would have limited that business?
c) Why were there TBTF episodes prior to the repeal of G-S, including but not limited to Penn Central Railroad (1970, saved union jobs), Lochkheed (1971, saved union jobs), Chrysler (1980-saved union jobs), Continental Illinois (1984), S&L (Late 80’s), LTCM (98), Mexican Bonds (95), etc. So G-S would prevent TBTF? It looks like it was a major player in creating TBTF!!!
d) What specifically in G-S, would have address the root problem of the Housing Crisis (Fed-induced bubble and Freddie and Fannie combined with perverse regulations) and the Financial Crisis (over leverage, partly the result of relaxed regulations in 2004)?
I do not think that, as a securities dealer, you know all that much. But bring it! Qualify this statement ‘Repealing Glass-Steagall resulted in "too big to fail"’
Kai