The Economics of the Rich

Back in 1849, the British economist Nassau Senior chided those defending trade unions and minimum wage regulations for expounding an "economics of the poor." The idea that he and his establishment confreres were putting forth an "economics of the rich" never occurred to him; he thought of himself as a scientist and spokesperson of true principles. This self-deception pervaded mainstream economics up to the time of the Keynesian Revolution of the 1930s. Keynesian economics, though quickly tamed into an instrument of service to the capitalist state, was disturbing in its stress on the inherent instability of capitalism, the tendency toward chronic unemployment, and the need for substantial government intervention to maintain viability. With the resurgent capitalism of the past 50 years, Keynesian ideas, and their implicit call for intervention, have been under incessant attack, and, in the intellectual counterrevolution led by the Chicago School, the traditional laissez-faire ("let-the-fur-fly") economics of the rich has been reestablished as the core of mainstream economics.

The Natural Order

One of the Chicago School’s central innovations, the concept of a "natural rate of unemployment" (NRU), has entered mainstream thought and been given a respected place in textbooks and in the work of liberal economists. Alan Blinder has referred to NRU as the "clean little secret of macroeconomics," and Paul Krugman explained in the New York Times (Feb. 4, 1996) that the existing NRU of 5.5-6 percent made a faster growth rate unsustainable. (It is unsustainable because a lower unemployment rate allegedly means accelerating inflation, which must be curbed.) With liberal thought now combining the NRU model and strong belief in free trade, the difference between Chicago School and liberal economics has become faint.

These beliefs, and the policy agenda that they yield, embody deep ideological premises. Most important, they take the existing economic and political structures as given and defining a "natural order" to which policy must adapt. In much of his writing, for example, Krugman, although expressing concern over the increasing inequality of income, takes the income distribution as a given, because "its trend appears politically out of bounds." But if the rich are able to fix the political boundaries by their economic and political power, an economics that limits itself to considering options within this system of domination is quite clearly in voluntary servitude to the rich.

One consequence of this servitude is that it always yields "trickle-down" economic theory and practice. The "principles" and the political practicalities always require that policy directly serve the rich, with the general populace benefiting, if at all, only indirectly as spinoffs from the provision of adequate investor and entrepreneurial incentives. The structure of the political economy gives us a choice between Clinton and Republicans, both of whom also offer only trickle-down policy options. As this narrowly confined set of choices, and similar ones over the globe, has not brought about much trickling down to the masses over the past several decades, the intellectual "problem" for the economists is to prove to the non-beneficiaries that this is the best of all feasible worlds. As the economist Joan Robinson has pointed out, "It is the business of economists, not to tell us what to do, but show why what we are doing anyway is in accord with proper principles."

The economics of the rich evolves over time in accord with changing conditions. As the rich develop new wants, and find earlier structures and policies obsolete, economists make appropriate adaptations. If the powerful want a huge military-industrial complex (MIC) and sponsor a series of National Security States to provide a favorable business climate abroad, the economists will not object, but will take these as policy givens, necessary and proper responses to external factors, like the Soviet Threat. If the Threat disappears, but the MIC continues to command vast resources, the economists still remain quiet; as in the case of the increasing inequality of income, the trend here will also be "politically out of bounds." If the business community rebels against constraints on bigness and government regulation of food, drugs, workplace safety, and the environment, the Chicago School and other economists throw up analyses that justify higher concentration and broad deregulation, and much of the rest of the profession follows in line. Those who fail to accommodate are marginalized.

The support given brutal dictatorships like Pinochet’s in Chile by numerous members of the Chicago School (and other economists) goes beyond merely taking corporate interests and imperial needs as givens. These economists identify completely with the elite, and a class war that employs large-scale torture and murder not only doesn’t bother them, it is seen as a process of creative destruction. Pinochet’s terror, which decimated organized labor and other intermediate groups interfering with business "freedom," helped establish a workable natural order and set the stage for the growth that Chile—or rather the Chilean elite—now enjoys (for the most recent apologia, see Gary Becker, "Latin America Owes A Lot To Its ‘Chicago Boys’," Business Week, June 9, 1997). This growth, regularly exaggerated by measurements from inappropriate bases (like the 1982 trough), has been accompanied by a fall in the wage share from 42.7 percent in 1970 to 33.9 percent in 1993 and an increase of those in poverty from 17 percent in 1970 to 28.4 percent in 1994.

Why do the economists serve the rich? For one thing, the leading economists are among the rich, and others seek advancement to similar heights. Chicago School economist Gary Becker was on to something when he argued that economic motives explain a lot of actions frequently attributed to other forces. He of course never applied this idea to economics as a profession, but it is hardly coincidental that economic ideas shifted so markedly in the post-World War II years in ways that fitted well the changing demands of business and financial interests. The institutional mechanisms supporting such changes—free enterprise chairs, funded research, consultancies, think tank access, etc.—have grown enormously and constitute an "effective demand" that should elicit an appropriate supply response (although this direct influence is by no means the sole factor explaining the evolution of economic thought).

The mainstream media fit into this picture very comfortably. They are a part of the corporate system, owned by the wealthy, advertiser funded, ever more concentrated, and their managers and most prominent anchors, pundits, and reporters are also members of the monied elite. They serve establishment interests at least as consistently as the economists. This was well illustrated during the NAFTA debate of 1993, when the dominant media and pundits, as well as a very large fraction of the leading economists, lined up in fervent support of a policy that was pressed by the corporate community but consistently opposed by the general public, despite strenuous official and media propaganda.

The media gravitate naturally toward economists who speak elite truths that the media understand and favor and to which the public has already been conditioned. These economists are also given credibility as "experts" by their affiliation with corporate-funded think tanks. The rare think tanks that offer dissident ideas, most notably the Economic Policy Institute, are labeled "labor-backed" by the media and are used sparingly. An institution like the American Enterprise Institute, which receives a considerably larger fraction of its income from corporations than EPI gets from labor, is very rarely called "corporate backed." This is a further illustration of the fact that for the corporate media, corporate sponsorship of an economics of the rich reflects a natural order and the national interest.

The Economy Versus the People

Back in 1971, the military ruler of Brazil, General Emilio Medici, noted regretfully that "The economy is doing fine, the people aren’t." The Brazilian military dictator could make such a frank admission because there was no pretense that his regime was aiming to serve "the people." However, in a supposed democracy, and for an economics profession supposedly aiming to maximize the general welfare, it is awkward when the dichotomy between what the system does for "the economy" and "the people" is sharp and extends over many years.

The economics of the rich focuses on "the economy" and keeps the effects on the people in the background, hoping that nobody will notice. The word "economy" has an all-inclusive sound, and policies improving the "economy," "productivity," and the "growth in GDP" sound uncontroversial. "6 Years in the Plus Column for the U.S. Economy" (NYT, March 12, 1997) and "Spain Is Booming as It Moves to Meet Rules Of EU Monetary Pact" (WSJ, May 20) are characteristic. But this is misleading in a trickle-down system. As the evidence of the last 25 years shows, productivity can increase and the GDP can grow while a majority of the population loses out and the gains of growth are skimmed off by the elite. (The piece on booming Spain mentions deep in the article that "Unemployment remains staggering—at nearly 22 percent, the highest rate in the 15-nation EU.") An "economics of the people" would be very clear on how these economic changes affect the majority; in the economics of the rich, we focus instead on "the economy." Gary Becker, in his accolade to the Chicago Boys for their contribution to Chile’s booming conditions, mentions that a recent World Bank study shows remarkable inequality in Latin America, which he attributes to inadequate "schooling and other human capital investments in the very poor." That the sharp rise in numbers of very poor and inadequate human capital investments were implicit in the Chicago-Pinochet policy of class warfare is inadmissible in Becker’s contorted social science.

Another semantic support for the economics of the rich is the distinction frequently made between policies serving "the economy" and those based on "political" decisions, the implication being that the former are politically neutral. This was recently illustrated in the discussion of Tony Blair’s shifting of the control over monetary policy to the Bank of England. According to the New York Times, "By giving the Bank of England the power to set short-term interest rates, Mr. Blair immediately removed politics from interest rate decisions and went further than...Margaret Thatcher or John Major, had been willing to go" (May 7, 1997). This embodies a fallacy: the Bank of England’s choices are inherently political, and will reflect the politics and political influences affecting the Bank’s controllers. By transferring power from democratically elected representatives to Bank officials—who are more consistently sensitive to the demands of the financial interests than politicians—Blair was assuring the British elite of his abandonment of a social democratic agenda. Alan Greenspan’s decisions on the interest rate and inflation/unemployment balance are not politically neutral and concerned only with the "economy"—they reflect his (and his colleagues, and the bankers) view of proper policy and entail highly controversial value judgments and weightings.

A similar fallacious dichotomy is expressed in the title of a Wall Street Journal article: "Trust in Markets: Antitrust Enforcers Drop the Ideology, Focus on Economics" (Feb. 27, 1997). The title of the article points to an internal contradiction, as there is an ideological element in "trusting" markets just as there is in incorporating non-economic considerations into antitrust. But the article assumes that a faith in markets and disregard for the social and political effects of giant size is not ideological. This get us back to the notion that markets are the natural order of the human condition, and that government actions not serving the profit motive are unnatural.

Markets Versus Workers

The economics of the rich demonstrates its values very clearly in its stress on the market and inattention to the concerns and condition of workers. Most newspapers no longer have a reporter assigned exclusively to labor, and major trends affecting workers, such as the corporate war on unions over the past 15 years, the frequent use of replacement workers in strike-breaking, the Pittston and Caterpillar strikes, and the rise of temporary work and underemployment, have been underplayed. The downward trend of wages and increased worker insecurity have received relatively little attention, which is incompatible with the notion that the press is truly concerned with the general welfare. Just as labor news is sparse and has shrunk over the years, so stock market news and celebration of its gains and heroes has grown. This is the economic perspective of the rich.

While wage increases are the means by which ordinary citizens improve their economic status and share in the benefits of productivity increases, investors, business firms and financial institutions see wage gains as reducing profit margins and spurring inflation. The investor-business perspective dominates media coverage of these issues: wage increases are seen first and foremost as threatening higher business costs—"US wage rises mar productivity gains," reads a headline in the Financial Times (May 8, 1997). A front page article in the New York Times was entitled "Markets Surge As Labor Costs Stay in Check" (April 30, 1997), featuring the conflict between wage increases and "market" prosperity. The emphasis on labor as a cost of production and excessive wage increases as a threat is a throwback to mercantilism; workers are seen as a means, not an end.

This point is reinforced by establishment attitudes toward the growth of worker insecurity. Alan Greenspan was quoted recently as saying, very matter-of-factly, that "job insecurity" was the most important factor explaining why wages were not rising. But insecurity is a serious negative factor in people’s lives. If the happiness and welfare of ordinary citizens was the central objective of public policy, this feature of the workings of "the economy" would be considered bad and in need of rectification. An "economics of the people" would have treated Greenspan’s remark with indignation. For the mainstream economists and media, however, his statement was not worthy of comment.

It should be noted that although the economics of the rich views wage increases with dread, the rich are sensitive to accusations that the system is not doing well by workers. This causes their spokespersons to feature news of wage gains and job growth, while keeping negative evidence buried. As an illustration, when wages rose 1 percent in the first quarter of 1996, this was front page news in the New York Times (May 1, 1996); but when the Labor Department reported a fall in real wages of 2.3 percent in June 1995, possibly the largest drop "since the 1840s," this was on page four of the business section of the paper (June 23, 1995). <R>

The Sublimity of the Market

In the economics of the rich the market is sublime, the state is a threat. This of course does not preclude the support of massive state intervention where this is serviceable to business enterprise; these are the "exceptions" and "givens" currently fixed by the political economy. A Milton Friedman, when criticizing government intervention, always excludes the MIC, and the business community and media are also remarkably selective in their harangues on the evils of government.

But that the free market and free trade are wonderful for ordinary folk, and for Russia and Mexico, is assumed by the economics of the rich, and explains the near universal support for Yeltsin and Russian privatization, Salinas, Zedillo and NAFTA, GATT and the WTO.

Since the market supports giant media mergers and the Telecommunications Act of 1996—with electoral money and enthusiastic trading action—these are treated kindly in the mainstream media and receive significant backing by economists. There is the pretense that competition prevails among these behemoths, or will soon if we unleash them, and besides they need giant size to compete in the national interest in the global marketplace.

The New York Times house economist, Peter Passell, reflects well the changing structure of the economics of the rich, nowhere better than in his accolades to free trade, cost-benefit analysis, the Telecommunications Act of 1996, and free competition in broadcasting. On the last issue, Passell outdid himself recently with accolades to the auctioning off of the radio spectrum ("Radio spectrum sales seem a success. Why the attack?," May 29, 1997) and an attack on regulation of broadcasting ("Big Brother wants to manage the broadcast spectrum again," Feb. 6, 1997). In both articles Passell relies heavily on claims by Peter Pitsch, an economic consultant who advised Reagan’s notorious FCC chair Mark Fowler during the years when the Fairness Doctrine was killed and toy manufacturers given the go ahead to produce childrens’ programs. In the first piece, Passell asserts that the auction of the radio spectrum is "widely seen as a raging success, accelerating the telecommunications revolution and raising more than $20 billion for Uncle Sam." It is surely seen as a raging success by the participating market operators, but Passell gives not one iota of evidence that it has benefitted the public.

As for his attack on broadcasting regulation, the performance of the "market" in broadcasting over 70 years of U.S. experience shows its deadly effects on the "public sphere," children’s programming, and even the quality of entertainment (see Herman and McChesney, The Global Media: The New Missionaries of Corporate Capitalism). Ignoring this evidence, Passell takes it as an act of faith that the market works to perfection here as everywhere.

Urgency of a Balanced Budget

The economics of the rich calls for a balanced budget at this stage of history. During the Reagan years, when the national debt almost tripled in size, budget balancing was not considered all that important, because Reagan was cutting the taxes of business and the wealthy (i.e., helping create an "entrepreneurial culture") and pouring money into the MIC, so that the deficits were financing worthy endeavors. Following this era of elite windfalls and Potlatch, the problem becomes keeping the lid on and eventually shrinking further the welfare state, while protecting the MIC and squeezing in some further benefits for the haves. This is tricky, as the neglect of the infrastructure and long stagnation/decline of wages and further effects of welfare "reform" intensify the need for social expenditures. At the same time, protecting the MIC and exacting further tribute for the wealthy runs counter to the emphasis on balancing the budget.

Not to worry. There is a consensus of the rich that while balancing the budget is urgent, achieving it requires compromises on "all sides." The poor, having no weight in the political system, are not one of the "sides" to be accommodated. Thus, despite the poor having taken budgetary punishment for many years, the new balancing of the budget will be built on their backs (and cutbacks in non-corporate entitlements more broadly). Forcing a balance will exert a deflationary influence, supplementing Greenspan’s monetary policy efforts to keep unemployment high and wage rates restrained, and the need to balance will preclude helping the poor. Of course, they could be helped by increasing capital gains tax rates, high bracket personal income taxes, estate taxes, and corporate taxes, or by cutting MIC budgets and corporate welfare. But these are the "givens" of the economics of the rich and outside the political boundaries of the feasible. In fact, in the wonderful new budget compromise of "all sides" capital gains and estate taxes will be reduced. So the mainstream media and economists largely ignore these political givens, challenged only by "extremists."

Attack on Entitlements   

It is also the consensus of the rich that entitlements must be cut back. Not corporate and MIC entitlements, but social entitlements of ordinary folk. Led by Pete Peterson and the Concord Coalition, the corporate think tanks, and mainstream pundits, it has become the consensus wisdom that Social Security and Medicare/Medicaid are almost broke and that the coming into retirement age of the baby boomers 20-30 years down the road will bust the budget. This is the one case where the economics of the rich takes the long view and concerns itself now with future prospects (in contrast, e.g., with environmental issues). Their case is also built on unreasonable assumptions regarding productivity growth and other matters; in fact, on plausible assumptions there is no social security crisis even 50-70 years from now (see my "The Assault on Social Security," Z Magazine, Nov. 1995, and Dean Baker, "Robbing the Cradle," Economic Policy Institute, 1995). The threat of Medicare/Medicaid cost growth is real, but it is based in good part on the crisis in the medical care system at large, which the economics of the rich does not choose to address.

The emergence of a consensus that the threat of entitlements—for ordinary people—is very serious and needs urgent attention has been greatly helped along by liberal economists, notably Krugman and Lester Thurow. Krugman had a very positive and extremely ignorant and superficial review of Peterson’s book, Will America Grow Up Before It Grows Old?, in the New York Times Book Review of Oct. 20, 1996. More important, Thurow’s "The Birth Of a Revolutionary Class" (subhead: "Today’s elderly are bringing down the social welfare state and threatening the nation’s future"), in the New York Times Magazine of May 19, 1996, is a strong contender for the most damaging to progressive causes of any article published so far in the 1990s. Thurow alleges that "Today, spending on entitlements plus interest payments (most of it accumulated in recent years to make payments to the elderly) take 60 percent of total tax revenue....expenditures on the elderly are squeezing government investments in infrastructure, education and research and development—from 24 percent to 15 percent of the Federal budget in 20 years." A problem with these claims is that Social Security has been in surplus up to now, so that there is no way that the recent growth of interest outlays could have been to "make payments to the elderly" or that such elderly demands were squeezing the social budget.

Later, Thurow states that "advocates for the elderly argue that Social Security is running a surplus and, hence, needs no restructuring. But that is an illusion. If the government is running an overall deficit, it is irrelevant whether one sector has a ‘surplus’ because it is credited with collecting more taxes than it needs. What matters is what is driving the expenditure side of the budget." Again, this is complete nonsense—"the expenditure side of the budget" cannot be under pressure from an elderly sector of the budget that is in surplus and thus allows more non-elderly- oriented outlays than otherwise.

Thurow never suggests that social budgets might have been cut back by deliberate Republican and New Democrat policies to shift incomes and outlays from the poor to the rich and business community. He effectively rewrites fiscal history to shift blame from Reaganomics to the elderly. "Expenditures on the elderly have fundamentally altered our fiscal systems. In the 1960s, governments generated what was then called the fiscal dividend. However large its deficit, a government could generate a budgetary surplus simply by doing nothing for a few years. Even with rapid economic growth and no new programs, government spending rises faster than tax revenues." The opening sentence suggests that this structural deficit resulted from Social Security, which is false—it happened because of the huge Reagan era tax cuts, ignored by Thurow. Government spending also rises rapidly now because of inflating medical costs. Thurow mentions this, but he does not tie it to the nature of the U.S. medical system and the failure to reform it—he prefers letting the blame for such inflation fall on the elderly.

Nowhere does Thurow ever suggest that the business community has any political power and that Republican and New Democrat policy toward social budgets (and Social Security) might be influenced by corporate priorities. The only political force mentioned is the elderly lobby; the only class war he recognizes is the (ersatz) war of the elderly against the victimized non-elderly.    

 

Where the rich are united, as in support of NAFTA, an imperial-sized military establishment, media commercialization and concentration, and a slashing of welfare state entitlements, the mainstream media and leading economists always provide a helping hand. This may be in the form of strategic silences or the explicit formulation of justifying principles. In a free country like our own these silences and rationalizations are contested, but on the margins and with minimal reach to ordinary citizens who might be attracted to an "economics of the poor." The problem for the challengers is how to extend that reach to their natural but inaccessible constituencies.