LESSON: PEOPLE ARE CATCHIN' ON

Picking up on my theme of the last two postings, I will continue reviewing the lessons I gleaned from the last election. With this posting, I will share my most important lesson. The lesson reflects a topic I have addressed in previous postings: the growing inequality among Americans. This is a fundamentally federalist concern. While the average voter might not be able to verbalize this so articulately – then again, maybe he or she could – there seems to be, and I believe this election demonstrates, a growing awareness that the system is becoming categorically unfair.

I have in the past cited, on various occasions, statistics on the income and wealth distribution in this country. Those numbers reveal a system that is channeling more and more values to fewer and fewer people. A lot of this has been hidden by the promulgation of myths that are aimed to legitimize these distributions. The myths take on two forms. The first is that those who benefit are worthy of those benefits due to the contributions they provide the society. The second is that transfer payments of any kind are “payoffs” to takers in exchange for their votes. The news outlets are reporting that Mitt Romney is explaining his defeat by pointing out that the President “bought” certain constituents' votes by giving them “gifts.” Both of these myths are duplicitous and have the effect of dividing us as citizens.

The first myth is particularly insidious. Don't get me wrong. Those in the upper class are often talented and hard working, but is the top one percent worthy of seventeen percent of the national income (it was eight percent in 1979)?¹ This might be true if this result was the product of fair competition or free markets. I will question this assumption shortly, but before doing so I want to state that even with fair competition or free markets, I contend that increasing inequality just creates and strengthens social forces that are detrimental to all of us. This notion deserves a thought-out explanation, but let me just illustrate this warning by pointing to conditions in nations where high levels of inequality prevail. Just look south of the border to nations that have high degrees of inequality and where drug wars, rampant crime, and kidnappings are as common as the stifling poverty. Gee, is there a connection? But my point here is that the benefits that the rich are enjoying are not the product of free markets; they are more and more the product of “seeking rents.”²

Nobel prize winning economist, Joseph E. Stiglitz, in his latest book, The Price of Inequality,³ explains how the well paid executives of large corporations have used their influence to undermine competition; by doing so, they have, to increasing levels, garnered huge compensations. The overall approach is known as seeking rents. Stiglitz explains the term as a description of business activities that seek compensation higher than would be derived from a truly competitive market. His book outlines a variety of strategies that result in such compensation. Let me give you the most obvious example. By eliminating competition, a corporation can sell its products at higher prices. Most of our major products are in markets that are either out and out monopolies or highly oligarchic (few competitors). And they are able to maintain these conditions through favorable governmental actions. The excuse used is that contracted markets allow for higher economies of scale. This occurs when businesses can produce goods or services at cheaper costs per unit by being able to acquire larger quantities of resources in larger bulk. But this has nothing to do with pricing calculations that businesses would have to make if there were many competitors. Without competition, these corporations are able to charge higher prices than a free market would allow. These prices lead to higher revenues and profits and executive pay.⁴ This is only one way to seek rents. It is a way that demonstrates how the rich are getting over-sized salaries that they do not earn. I will be reviewing in future postings the several ways the rich seek rents and how government either creates these ways or supports them. So please don't give me any self righteous claims of unjustified or unearned “gifts” to groups of voters who don't belong to the one percent.

The second myth is that the gifts are simply catering to the interests of the recipients. If transfer payments, in whatever form they take, were simply that, we should be outraged. But any review of these payments can and is justified for the social benefits they provide. Again, this posting will only address this topic in its most general sense. In its most general terms, we only have to remember a purpose for creating our national government: “to … promote the general Welfare …” . What does the general welfare refer to? It's up to interpretation but would you argue with me if I suggest that it includes a healthy, an educated, a protected, a working/earning population? Do you disagree? Assuming you don't, government benefits or, better stated, investments need to be justified on these grounds. Whether a particular benefit/investment does or doesn't add to the general welfare is subject to debate.

Hence, that's why we have elections. And we just had one. Let's move on and understand that a lesson from this one is that the average American is catching on to the games privilege play.

1See New York Times website: http://www.nytimes.com/2011/10/26/us/politics/top-earners-doubled-share-of-nations-income-cbo-says.html . The 17 % of national income statistic refers to the top 1 %'s share in 2007.

2For an interesting description of how this term evolved, see Stiglitz's book cited in the next note.

3Stiglitz, J. E. (2012). The price of inequality: How today's divided society endangers our future. New York, NY: W. W. Norton and Company.

4I have only given the most sketchiest of explanation of this type of rent seeking. I will in the future attempt to review this strategy more completely.