The Self-Destruction of the 1 Percent
Gianni Dagli Orti/Art Resource
By CHRYSTIA FREELAND
Published: October 13, 2012
IN the early 14th century, Venice was one of the richest cities in
Europe. At the heart of its economy was the colleganza, a basic form of
joint-stock company created to finance a single trade expedition. The
brilliance of the colleganza was that it opened the economy to new
entrants, allowing risk-taking entrepreneurs to share in the financial
upside with the established businessmen who financed their merchant
voyages.
Venice’s elites were the chief beneficiaries. Like all open economies,
theirs was turbulent. Today, we think of social mobility as a good
thing. But if you are on top, mobility also means competition. In 1315,
when the Venetian city-state was at the height of its economic powers,
the upper class acted to lock in its privileges, putting a formal stop
to social mobility with the publication of the Libro d’Oro, or Book of
Gold, an official register of the nobility. If you weren’t on it, you
couldn’t join the ruling oligarchy.
The political shift, which had begun nearly two decades earlier, was so
striking a change that the Venetians gave it a name: La Serrata, or the
closure. It wasn’t long before the political Serrata became an economic
one, too. Under the control of the oligarchs, Venice gradually cut off
commercial opportunities for new entrants. Eventually, the colleganza
was banned. The reigning elites were acting in their immediate
self-interest, but in the longer term, La Serrata was the beginning of
the end for them, and for Venetian prosperity more generally. By 1500,
Venice’s population was smaller than it had been in 1330. In the 17th
and 18th centuries, as the rest of Europe grew, the city continued to
shrink.
The story of Venice’s rise and fall is told by the scholars Daron
Acemoglu and James A. Robinson, in their book “Why Nations Fail: The
Origins of Power, Prosperity, and Poverty,” as an illustration of their thesis
that what separates successful states from failed ones is whether their
governing institutions are inclusive or extractive. Extractive states
are controlled by ruling elites whose objective is to extract as much
wealth as they can from the rest of society. Inclusive states give
everyone access to economic opportunity; often, greater inclusiveness
creates more prosperity, which creates an incentive for ever greater
inclusiveness.
The history of the United States can be read as one such virtuous
circle. But as the story of Venice shows, virtuous circles can be
broken. Elites that have prospered from inclusive systems can be tempted
to pull up the ladder they climbed to the top. Eventually, their
societies become extractive and their economies languish.
That was the future predicted by Karl Marx, who wrote that capitalism
contained the seeds of its own destruction. And it is the danger America
faces today, as the 1 percent pulls away from everyone else and pursues
an economic, political and social agenda that will increase that gap
even further — ultimately destroying the open system that made America
rich and allowed its 1 percent to thrive in the first place.
You can see America’s creeping Serrata in the growing social and,
especially, educational chasm between those at the top and everyone
else. At the bottom and in the middle, American society is fraying, and
the children of these struggling families are lagging the rest of the
world at school.
Economists point out that the woes of the middle class are in large part
a consequence of globalization and technological change. Culture may
also play a role. In his recent book on the white working class, the
libertarian writer Charles Murray blames the hollowed-out middle for
straying from the traditional family values and old-fashioned work ethic
that he says prevail among the rich (whom he castigates, but only for
allowing cultural relativism to prevail).
There is some truth in both arguments. But the 1 percent cannot evade
its share of responsibility for the growing gulf in American society.
Economic forces may be behind the rising inequality, but as Peter R.
Orszag, President Obama’s former budget chief, told me, public policy
has exacerbated rather than mitigated these trends.
Even as the winner-take-all economy has enriched those at the very top,
their tax burden has lightened. Tolerance for high executive
compensation has increased, even as the legal powers of unions have been
weakened and an intellectual case against them has been relentlessly
advanced by plutocrat-financed think tanks. In the 1950s, the marginal
income tax rate for those at the top of the distribution soared above 90
percent, a figure that today makes even Democrats flinch. Meanwhile, of
the 400 richest taxpayers in 2009, 6 paid no federal income tax at all,
and 27 paid 10 percent or less. None paid more than 35 percent.
Historically, the United States has enjoyed higher social mobility than
Europe, and both left and right have identified this economic openness
as an essential source of the nation’s economic vigor. But several
recent studies have shown that in America today it is harder to escape
the social class of your birth than it is in Europe. The Canadian
economist Miles Corak has found that as income inequality increases,
social mobility falls — a phenomenon Alan B. Krueger, the chairman of the White House Council of Economic Advisers, has called the Great Gatsby Curve.
Educational attainment, which created the American middle class, is no
longer rising. The super-elite lavishes unlimited resources on its
children, while public schools are starved of funding. This is the new
Serrata. An elite education is increasingly available only to those
already at the top. Bill Clinton and Barack Obama enrolled their
daughters in an exclusive private school; I’ve done the same with mine.
At the World Economic Forum in Davos, Switzerland, earlier this year, I
interviewed Ruth Simmons, then the president of Brown. She was the first
African-American to lead an Ivy League university and has served on the
board of Goldman Sachs. Dr. Simmons, a Harvard-trained literature
scholar, worked hard to make Brown more accessible to poor students, but
when I asked whether it was time to abolish legacy admissions, the Ivy
League’s own Book of Gold, she shrugged me off with a laugh: “No, I have
a granddaughter. It’s not time yet.”
America’s Serrata also takes a more explicit form: the tilting of the
economic rules in favor of those at the top. The crony capitalism of
today’s oligarchs is far subtler than Venice’s. It works in two main
ways.
The first is to channel the state’s scarce resources in their own
direction. This is the absurdity of Mitt Romney’s comment about the “47
percent” who are “dependent upon government.” The reality is that it is
those at the top, particularly the tippy-top, of the economic pyramid
who have been most effective at capturing government support — and at
getting others to pay for it.
Exhibit A is the bipartisan, $700 billion rescue of Wall Street in 2008.
Exhibit B is the crony recovery. The economists Emmanuel Saez and
Thomas Piketty found that 93 percent of the income gains from the
2009-10 recovery went to the top 1 percent of taxpayers. The top 0.01
percent captured 37 percent of these additional earnings, gaining an
average of $4.2 million per household.
The second manifestation of crony capitalism is more direct: the tax
perks, trade protections and government subsidies that companies and
sectors secure for themselves. Corporate pork is a truly bipartisan
dish: green energy companies and the health insurers have been winners
in this administration, as oil and steel companies were under George W.
Bush’s.
The impulse of the powerful to make themselves even more so should come
as no surprise. Competition and a level playing field are good for us
collectively, but they are a hardship for individual businesses. Warren
E. Buffett knows this. “A truly great business must have an enduring
‘moat’ that protects excellent returns on invested capital,” he
explained in his 2007 annual letter to investors. “Though capitalism’s
‘creative destruction’ is highly beneficial for society, it precludes
investment certainty.” Microsoft attempted to dig its own moat by simply
shutting out its competitors, until it was stopped by the courts. Even
Apple, a huge beneficiary of the open-platform economy, couldn’t resist
trying to impose its own inferior map app on buyers of the iPhone 5.
Businessmen like to style themselves as the defenders of the free market
economy, but as Luigi Zingales, an economist at the University of
Chicago Booth School of Business, argued, “Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition.”
IN the early 19th century, the United States was one of the most
egalitarian societies on the planet. “We have no paupers,” Thomas
Jefferson boasted in an 1814 letter. “The great mass of our population
is of laborers; our rich, who can live without labor, either manual or
professional, being few, and of moderate wealth. Most of the laboring
class possess property, cultivate their own lands, have families, and
from the demand for their labor are enabled to exact from the rich and
the competent such prices as enable them to be fed abundantly, clothed
above mere decency, to labor moderately and raise their families.”
For Jefferson, this equality was at the heart of American
exceptionalism: “Can any condition of society be more desirable than
this?”
That all changed with industrialization. As Franklin D. Roosevelt argued
in a 1932 address to the Commonwealth Club, the industrial revolution
was accomplished thanks to “a group of financial titans, whose methods
were not scrutinized with too much care, and who were honored in
proportion as they produced the results, irrespective of the means they
used.” America may have needed its robber barons; Roosevelt said the
United States was right to accept “the bitter with the sweet.”
But as these titans amassed wealth and power, and as America ran out of
free land on its frontier, the country faced the threat of a Serrata. As
Roosevelt put it, “equality of opportunity as we have known it no
longer exists.” Instead, “we are steering a steady course toward
economic oligarchy, if we are not there already.”
It is no accident that in America today the gap between the very rich
and everyone else is wider than at any time since the Gilded Age. Now,
as then, the titans are seeking an even greater political voice to match
their economic power. Now, as then, the inevitable danger is that they
will confuse their own self-interest with the common good. The irony of
the political rise of the plutocrats is that, like Venice’s oligarchs,
they threaten the system that created them.
The editor of Thomson Reuters Digital and the author of “Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else,” from which this essay is adapted.
I all the time used to read paragraph in news papers but now as I am a user of net so from now I am using net for posts, thanks to web.
ReplyDeleteMy website - lanautica