The Economics of the Rich


S. Herman

 

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.