While some are claiming that the credit crunch shattered America's 'Neoliberal Dream',noted scholar Francis Fukuyama offers a different analysis of why America's massive wealth inequality persists.
In a recent article for the American Interest, Fukuyama asks "Is America a Plutocracy?"
if the question is taken to mean, "Do the wealthy have disproportionate political influence in the United States?" then the answer is obviously "yes", and that answer would qualify as one of the most unsurprising imaginable.
Fukuyama cites four basic ways in which the rich influence policy:
- Lobbying to shift regulatory costs and other burdens away from corporations and onto the public at large
- Lobbying to affect the tax code so that the wealthy pay less
- Lobbying to allow the fullest possible use of corporate money in political campaigns
- Lobbying to enable lobbying to go on with the fewest restrictions
As we all know the rich have been quite successful in all four but Fukuyama is puzzled by the enduring success of #2 and sees it as a danger to democracy and society:
Scandalous as it may sound to the ears of Republicans schooled in Reaganomics, one critical measure of the health of a modern democracy is its ability to legitimately extract taxes from its own elites. The most dysfunctional societies in the developing world are those whose elites succeed either in legally exempting themselves from taxation, or in taking advantage of lax enforcement to evade them, thereby shifting the burden of public expenditure onto the rest of society.
Then Fukuyama moves on to the big question "Why has a significant increase in income inequality in recent decades failed to generate political pressure from the left for redistributional redress, as similar trends did in earlier times?
Conservative ideas clearly had to do with the rise in inequality: The liberal (in the original 19th-century meaning of the term) economic model favored by Ronald Reagan was intended to open the doors to greater competition and entrepreneurship, which necessarily meant that gains from growth would go disproportionately to those best prepared to create wealth...but, as pro-market advocates have repeatedly told us, growth also nearly always trickles down over time to all or nearly all class cohorts.
With real income for workers peaking in the 1970s and the average person's net-worth dropping like a stone, why hasn't there been a movement to solve these problems? Fukuyama correctly cites Neoliberalism as the cause of both the inequality and its adoption by the Democratic Party as the reason reforms have not come.
The Democratic Party, which one would have expected to be the principal focus of such political advocacy, floundered. It managed to regain majorities in the House and Senate, and it did hold the presidency between 1993 and 2001 (and, of course, regained it in 2009), but its electoral successes have not turned on economic fairness issues. To an unexpected degree, Democrats drank the Kool-Aid of market fundamentalism during the 1990s and in so doing reflected larger intellectual trends
The problem is Neoliberalism is not only morally reprehensible it's economically inaccurate.
The crisis made it glaringly obvious that the efficient market hypothesis was wrong: Oversized returns were flowing to innovative financial entrepreneurs who, in their avidity to create new and more complex financial instruments and products, were destroying rather than creating value for society as a whole.
So when then did the Tea Party happen (beyond the Corporate Astro-turfing)? Why was there no populist movement to restore equality or at least some semblance of it?
Americans have learned to distrust big government in a way they had not in the period from 1933 to 1969. Like taxpayers in Latin America, but unlike various Swedes, Danes and Germans, Americans don’t want to pay taxes because they are convinced that the government will waste whatever it takes in.
This is the real strategy behind the conservative push to de-legitimize government, which, of course is a key plank in Reaganism: Get the government off our backs, so the rich can pick our pockets.
Another explanation Fukuyama cites is one offered here, namely that the FIRE economy found a way through credit expansion to maintain consumption for Corporate America, while Corporate America cut wages.
the working and middle classes whose incomes either stagnated or fell during the past generation were in effect bought off by cheap credit: The flood of capital coming in from Asia and other surplus countries, creatively packaged by the banks and quasi-public institutions like Fannie Mae and Freddie Mac, allowed people to borrow against the future and enjoy standards of living that were in the end unsustainable...Cheap credit masked inequality at least in the sense that it enabled many people to increase their consumption, even if they could not keep up with richer cohorts who were increasing their consumption even faster.
But perhaps the most interesting explanation, given Fukuyama's profession as an academic, is the bought priesthood theory he offers as to why economists and intellectuals bought in to the Wall Street give away:
The intellectual turn taken by the economics profession from Marxist or Keynesian models to strict monetarism and the Chicago School occurred right about the time that Reagan and Thatcher emerged on the political scene, and served to provide a seemingly scientific justification for market liberalization...but little empirical ground existed for believing that capital market liberalization would have beneficial effects.
So why was it embraced so wholeheartedly by the intellectual establishment?
Wall Street seduced the economics profession not through overt corruption, but by aligning the incentives of economists with its own. It was very easy for academic economists to move from universities to central banks to hedge funds—a tightly knit world in which everyone shared the same views about the self-regulating and beneficial effects of open capital markets. The alliance was enormously profitable for everyone: The academics got big consulting fees, and Wall Street got legitimacy.
Quite a racket.
So as we go forward will ObamaReaganomics continue to reign with a colluding academia justifying a wild FIRE economy? If so, the Plutocracy continues.