Tag Archives: demand

Conservatives defend inequality out of self-interest — nothing more

Conservatives have justified inequality for decades, arguing that it is an inevitable byproduct of capitalism and broadly beneficial. This intellectual edifice has begun to collapse.

Supply-side economics rest on the assumption that the wealthy drive economic growth, and that by reducing taxes on them, we can unleash latent economic potential. In fact, however, investment is driven by demand, not supply (a point acknowledged by the relatively conservative Martin Feldstein). If there are viable investments, they will be made regardless of tax rates, and if there are no investments, cutting taxes is merely pushing on a string. Thomas Piketty and Emmanuel Saez, two top economists on inequality, find no correlation between marginal tax rates and economic growth.

Recently, two IMF papers confirmed what Keynesians like Joseph Stiglitz have long argued: Inequality reduces the incomes of the middle class, and therefore demand. This stunted demand means fewer opportunities for investment, stunting growth.

Add to this growing body of research the fact that a robust defense of inequality is increasingly difficult to muster when every other OECD country has far lower levels of inequality than the United States. Greg Mankiw’s defense of the 1 percent was widely decried, because a large swath of research shows that the rise of the 1 percent did not come from natural economic forces, but rather rent-seeking.

The evidence is clear: The economic benefits of inequality have been massively oversold. Inequality is, in fact, a detriment to growth. So why has the right not conceded the argument?

The answer is class interest.

“Class interest” does not mean that the wealthy are nefarious schemers. Instead, it means there are various cognitive biases that lead them to justify and perpetuate inequality. For instance, Kris-Stella Trump conducted experiments in which participants were asked to solve anagrams in a high inequality scenario (the winner received $9 and the loser $1) and a low inequality scenario (the winner got $6 and the loser $4). When asked what a fair distribution would look like, the high inequality group preferred an inequality of $5.54 ($7.77-$2.23) while the low inequality group preferred inequality of $2.30 ($6.15-$3.85). She concludes: “Public ideas of what constitutes fair income inequality are influenced by actual inequality.” Inequality perpetuates inequality.

Paul Piff finds that the wealthy feel more entitled to their earnings and are more likely to show personality traits typically associated with narcissism. Recent research by Andrew J. Oswald and Natavudh Powdthavee finds that lottery winners in the UK are more likely to switch their political affiliation to the right, and also more likely to believe that current distributions of wealth are fair. As people get richer, they think that tax policies favoring the rich are fair — not because of the macro-economic benefits, but because of how they benefit me.

These cognitive biases, rooted in class distinctions, have deep implications. As a young economist argued in 1846, “The ruling ideas are nothing more than the ideal expression of the dominant material relationships.” Benjamin I. Page, Larry M. Bartels, and Jason Seawright examined the policy preferences of the very wealthy and found that they generally fall in line with their class interests. The wealthy were far less likely than the general public to believe that “government must see that no one is without food, clothing, or shelter,” or that minimum wage must be “high enough so that no family with a full-time worker falls below official poverty line,” or that “the government in Washington ought to see to it that everyone who wants to work can find a job.”

This is not meant to demean the policy preferences of the wealthy — only to examine the motives. For too long, the wealthy have couched their economic ideas as being broadly good for the country, but in fact, de-unionization, capital market liberalization, and austerity benefit themwhile leaving the rest of us far worse off. It’s time that we were all honest about why we support the policies we support.

Now of course, not everyone who supports conservative economic policy is wealthy. Indeed, there is a large literature devoted to the question why the working class supports policies against their own interests. Engles calls this phenomenon “false consciousness,” writing to Franz Mehring, “the real motive forces impelling him remain unknown to him; otherwise it simply would not be an ideological process.” Thomas Frank proposes that working-class conservatives are swayed by social issues. Ian Haney Lopez argues that racial animus still plays a role. Rick Perlstein notes the power of identity politics. The American ethos of upward mobility certainly plays a role; truck drivers in Tallahassee vote for tax breaks on Wall Street believing that they may someday posses enough wealth that an estate tax might affect them. John Steinbeck noted the power of aspiration, writing, “Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.”

But when it comes to wealthy conservatives who favor economic policies that hurt many Americans: Bartels’ previous investigation of economic and political power finds, unsurprisingly, that those with a higher socioeconomic status have more influence on legislative outcomes. Martin GilensDorian WarrenJacob HackerPaul Pierson, and Kay Lehman Schlozman have all recorded similar findings. It seems obvious, but it is important to connect these dots: Not only do the wealthy have interests divorced from the broader interests of society, but they also have the political heft to turn those interests into policy.

It is considered rather gauche to discuss class today, and the inequality debate is therefore situated in a purely theoretical realm. Liberals are constantly confused and aggravated about why the preponderance of evidence that austerity doesn’t work (while stimulus does) and that inequality harms society is lost on a large portion of conservatives.

Well, let’s face it: Those who support austerity and inequality are not really about “trickle-down” economics or “efficiency and equity.” They are protecting the interests of the upper class.

As Jonathan Swift warned, “It is useless to attempt to reason a man out of a thing he was never reasoned into.”

Originally published on The Week. 

Republicans Have No Clue How Businesses Work

The Republican party has alienated many groups with its antics: women, blacks, Latinos, poor people, pensioners and young people, to name a few. However, it’s often agreed that they work for two groups: really rich people and entrepreneurs. These groups, they say, drive the economy, and bring the middle class along for the ride.

Republicans claim to be the party of entrepreneurship: by cutting taxes, red tape and regulations, they make it easier for small businesses to get started. The problem with Democrats, they claim, is that, by constantly expanding social welfare programs and establishing universal health care they create uncertainty (voting 40 times to repeal said legislation does not, apparently, create uncertainty) which makes entrepreneurs less likely to hire.

This is a pretty common trope. Here’s an interview with an unnamed 20-something wannabe entrepreneur, from the Acton Institute, who decries government intervention (especially, surprise, Obamacare) as the reason potential entrepreneurs will take a job with an established company rather than striking out on their own.

But, in fact, this is all backwards. Entrepreneurs need two things: 1) demand for their product and 2) a suitable safety net if they fail. Questions about complexity, healthcare for employees, taxes, etc. are those that badger relatively successful businesses. In truth, Republicans don’t promote entrepreneurship, they help out already successful businesses.

First, by exacerbating inequality, Republican policies destroy demand. One entrepreneur (a successful one, not an unnamed 20 year Conservative college student) writes, inBloomberg Businessweek:

My investment portfolio includes Pacific Coast Feather Co., one of the largest U.S. manufacturers of bed pillows. Like many other manufacturers, pillow-makers are struggling because of weak demand. The problem comes down to this: My annual earnings equal about 1,000 times the U.S. median wage, but I don’t consume 1,000 times more pillows than the average American. Even the richest among us only need one or two to rest their heads at night.

This is the central tenet of “Middle-Out Economics” or the idea that true growth comes not from the top 1 percent, but rather the bottom 99 percent. Even the rather conservative Martin Feldstein has noted that the U.S. recovery has been stalled by inadequate demand. Two studies lend strong credence to the thesis of Joseph Stiglitz and other economists who assert that the poor and middle-class have a higher marginal propensity to consume than wealthy individuals. Entrepreneurs should therefore prefer more income in the hands of middle-class and poor individuals.

The second things entrepreneurs need is a safety net if they fail. Not everyone can go rely on financing from their parents and rich acquaintances. For most Americans, the safety net is governing programs. While the Affordable Care Act may create some uncertainty for small businesses, it creates more certainty for those who are afraid that losing their job might mean that their pre-existing condition will leave them uninsured. It creates more certainty for those who can now qualify for Medicaid. It gives young entrepreneurs more certainty that they can stay on their parent’s plan. Research by Robert Fairlie, et al, shows that men just under 65 are far less likely to become entrepreneurs than men just over 65, and believe that access to health insurance through Medicare is the important factor. Research by Alison J. Wllington points to the fact that those who obtain health insurance through a spouse are more likely to be self-employed than those who do not.

Recently, Helaine Olen noted that 1 in 5 college graduates can’t repay their student loans. That’s a really big deal, because these students are more likely to take any job that comes their way to pay off their loans than invest in themselves. Yet Republicans aren’t concerned about the looming (student) debt crisis or any of the practical solutions to solve it.

Essentially, Republican policies will help you if you’ve already got an established business, but don’t like paying taxes (or your employees). But is that enough? If we look back at how their policies have worked, the results are dismal. I used the most recent BLS data to calculate how many seasonally-adjusted private sector jobs each President created in their term (beginning in February, since they normally take office in late January). There’s obviously a limit to how much one president can do to create jobs, but the numbers are still telling:

The totals are even worse: Democrats created 45 million jobs, while Republicans created only 23 million, and Republicans actually had more time in the White House. But what’s truly interesting about this data is that even if you take the highest numbers under Bush (in January 2008, before the recession) he still created only 3.9 million jobs. And remember he did that after coming into office with great economic indicators and a balanced budget. So much for supply-side economics. On the other hand, Obama, who was dealt far more strife, has focused more, although not entirely on the middle class — and so far, this nonsense about the “Obama economy” isn’t even close to true. If job growth keeps improving like it has over the past year (at about 2 percent), then by July of 2016, Obama would create more than 12 million jobs over his 8 years. Larry Bartels finds in his book, Unequal Democracy, that income growth is not only higher when a Democrat is in office, it’s also more equally distributed.

Of course, when presented with this data, Republicans will generally claim that underlying economic conditions drive job growth, which is true. But it is also true that Bush’s supply-side, budget-busting tax cuts didn’t produce much in the way of economic stimulus and job creation, while Obama’s demand driven stimulus has.

Fascinating new research on the industrial revolution finds that it was hardly inevitable that the Industrial Revolution begin in England; rather, the authors find that poor laws, by increasing demand and providing a (minimal) safety net, facilitated rapid economic growth. In America, the post-war growth period was facilitated by high demand (from high wages), low inequality, cheap education and a new social safety net.

The truth is that this trope, like most Republican tropes, is aimed at securing more wealth for the richest Americans. Americans who want to participate in the American Dream need a safety net to fall back on. That means health care shouldn’t be tied to employment, unemployment benefits should be generous, borders should be open, education should be cheap and readily available, and policies should favor a strong middle-class. Which party stands for those things?

This piece originally appeared on Salon.

E-mail Sean @ seanadrianmc@gmail.com