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Krugman and the Social Contract

September 24th, 2011

Krugman puts well what we all know is true:

Detailed estimates from the Congressional Budget Office — which only go up to 2005, but the basic picture surely hasn’t changed — show that between 1979 and 2005 the inflation-adjusted income of families in the middle of the income distribution rose 21 percent. That’s growth, but it’s slow, especially compared with the 100 percent rise in median income over a generation after World War II.

Meanwhile, over the same period, the income of the very rich, the top 100th of 1 percent of the income distribution, rose by 480 percent. No, that isn’t a misprint. In 2005 dollars, the average annual income of that group rose from $4.2 million to $24.3 million.

So do the wealthy look to you like the victims of class warfare?

Krugman makes the point that conservatives and libertarians so studiously ignore: that we do not live in a vacuum, that we all benefit from the society we live in, and therefore have a responsibility to support it through taxes. He quotes Elizabeth Warren, who said, “There is nobody in this country who got rich on his own. Nobody.”

Read the full article. Hat tip to Ken.

Categories: Economics, Right-Wing Lies Tags: by
  1. kensensei
    September 24th, 2011 at 14:24 | #1

    Actually, it was my dad who sent first forwarded the article to me. Thanks for posting it here on your blog.

    “There is nobody in this country who got rich on his own. Nobody.”

    It’s a profound statement that wealth is in many respects a group effort, but only some are reaping the benefits. It strikes a chord with me because there are corporations out there that have no qualms about laying off workers who helped CEOs built their wealth in the first place. No gratitude. No regrets. No shame. No accountability.

    The lack of any moral responsibility for or obligation to the American worker nowadays is staggering. The super-rich are now so powerful that they are immune to any government audits. They share no real social identity and feel no sense of humanity toward anyone but themselves.

    Any sense of nationalism or love for country has been replaced by an insatiable greed and love for money and power. What a dismal and sigraceful lot!

  2. Troy
    September 24th, 2011 at 14:55 | #2

    The problem isn’t the superrich but the fact that goddamn Perry is still within spitting distance of Obama.


    Also, I found an interesting diagram of the 2010 election:


    It shows how the electorate shaved the conservatives from the Dem House caucus and shifted the Republicans right.

    And how in a 60-40 Senate the few conservative Dems in the middle could block everything.

  3. Tim Kane
    September 26th, 2011 at 05:01 | #3

    Tails on the concentration of wealth through history (it’s not pretty)

    (1) Roman Empire
    I took a history of property rights class in 2002 and learned that Rome fell because of concentration of wealth: the wealthy and powerful used their influence to avoid paying taxes. Rome lacked the funds to raise a large enough army to protect its borders. A 500 year dark age ensued. See details below

    (2)Late Medieval Japan
    I then took a class in Japanese law. I learned in that class that that the same thing happened in late medieval Japan – there was no invasion, the country just balkenized into anarchy. a 200 year dark age ensued

    (3)Pre-Islamic Mecca and the rise of Islam
    I then did readings on Islamic law, and as a preliminary reading read about the conditions in Mecca from which Islam grew. As it turns out, Islam is, in part, a reaction to the concentration of wealth in Pre-Islamic Mecca during an historic time of sudden increase in commercial wealth in Mecca – the result of east-west Eurasian trade trying to by-pass the bi-polar dispute along the border between the Eastern Roman/Byzantine Empire and the Sassanian/Persian to get into an out of the Mediterranean basin.

    (4) Ancient Egypt’s New Kingdom
    I then saw a documentary (circa 2004) on the history channel or PBS on Ancient Egypt. I believe it was the New Kingdom – It appears that wealth concentrated, the wealthy and powerful avoided paying taxes, and the Kingdom lacked the army and organization to adequately confront and defend itself from ancient Persia – about 500bc. This was the last domestic Egyptian dynasty until well, basically until Naser became president of Egypt. In essence, this represent the collapse of a 2000 year old civilization.

    (5) Byzantium
    I stumbled into a used book store and read about the collapse of the Byzantine (Eastern Roman Empire) and read how wealth concentration undermined the defense of the Byzantine Empire. See details below – as this is perhaps the closest corallary to our own situation.

    (6, 7, 8)Hapsburg Spain, Bourbon France, Romanov Russia,
    I then realized that concentration of wealth, and the wealthy and powerful avoiding paying taxes helped underwrite the collapse of Hapsburg Spain, Bourbon France, and Romanov Russia.

    (9) Coolidge/Hoover America.
    I then read in an historical atlas that it contributed to the economic collapse in America in 1929. That collapse contributed to the collapse of Germany’s economy and the rise of Hitler, paving the way to the World War II, and the Holocaust (thank you Republican party).

    (10) Bush II America
    Finally, the concentration of Wealth in the United States: beginning in the 1970s (the median wage has not increased since 1972, the minimum wage is below what it was in 1968). Since 1973, the median wage has not gone up but GNP has gone up 150%. Some of that 150% went to families by families putting more people (women, teenage children) into the work force or by demographic growth, but the lion’s share has gone to the top 2%. Concentration of wealth was a problem even during the Clinton Administration – as evidence by downward pressure on prices (deflation), investment bubbles (because of lack of decent returns on orthodox investment, due to collapse in demand), and increasing pressure to deregulate (again, an inability to get decent returns on orthodox investing leads to cries for deregulation to get at unorthodox investing in order to capture decent returns).

    Movement Conservatives, Fascist, Republicans, Neocons, Teapartiers – all would find offence and dispute what I say here. To a certain degree, each one of these events could be viewed as anecdotal. Other factors were certainly in play in each case.

    Each case can be argued and rebutted. But in the aggregate, taken collectively, in the long sweep of history, the result is indisputable – the concentration of wealth in a society is dangerous at epic proportions. For a society, the concentration of wealth is like standing up in a canoe: it is subject to sudden and epic collapse.

    To bolster the point consider the counter factual. From 1940 on, wealth and power became unconcentrated – first as result of the demand for labor in World War II, followed by liberal political regimes through out the world, and strong labor movements. In the post war era, from 1948 to 1972, global (and domestic) productivity doubled. (It is important to point out that this era was aided by cheap oil). In less than 30 years, the world grew faster than it had the prior 11,000 years of history.

    This created the worlds greatest golden age. In nearly all fields of art, culture and science (with the exception of painting, and perhaps literature, but music really exploded in rock and roll and in musical plays) new levels or zeniths were achieved – culminating in a man landing on the moon. Not just any man, but an American man. (Since 1972, we have increasingly been less willing to fund such venture, as well as fund infrastructure and education – Thus we have slid into a new dark age, gradually).

    In that era, American productivity doubled (it had recently doubled during the four years of WWII). These were years of high tax rates, high investment in infrastructure, strong labor unions, and so wages for all groups, poor, working class, middle class and wealthy went up roughly equally. Society, especially the economy, became more stable.

    The concentration of wealth, the destruction of the social contract, can only have a bad ending.

    (In the back of my mind, I’m wondering if a surging China and resurgent Russia, over the course of another decade of high growth rates, might not inherit the role of Germany and Japan as disruptive forces. During the 1930s, both Germany and Japan were the first countries to implement, effectively, Keynesian economics, and so were the first countries to crawl out of the depression, while the center weight of the world economic and policitical world, the United States, languished in prolonged depression due to austerianism – in 1940 the U.S. was still depressed while Japans productivity had grown over 100% in the prior decade). This created a narrow opportunity for Germany and Japan to attempt to overthrow the international order – which they both took. These countries longed for hegemonic status but from a very constricted space and so longed for space to compete with continental sized powers (Russia, United States, China, and perhaps India and Brazil) – this was especially the motive behind Germany’s actions.

    If the U.S. stays on an austerian course, over time, while other powers figure out how to thrive, it invites new emerging powers to challenge it to craft a new international regime. If Russia and China in 10 years time double their productivity, each will be able to Challenge the new order. What would be different, of course is the scale. The U.S. had continental scale resources to draw from in the 1940s, as did Britain, indirectly, from India, Canada, and Australia, and as did Russia, but Japan and Germany only had continental proportions to draw on temporarily and from conquered peoples, and so less enthusiastic and less well organized and less well harnessed. In a future contest, the disruptive forces from Russia and China might have continental proportions to draw from. America and Europe would still be constrained by austerianism. The wild card would be a newly prominent India and Brazil.

    This is of course, all fanciful conjecture. A million things could happen or nothing could happen. The point is emphasize the destabilizing effects of concentration of wealth. It is a playing of fire of the most epic kind. It serves no ones interest. It is suicidal.

    Detail on #1 – the Fall of the Roman Empire

    In the fall 2002, I took a class: “History of Property Rights” co-taught by an Economic Historian who was also a Nobel laureate (one of the few who are economic historians), Douglas C. North. In that class, we had to read North’s own book “Structure and Change in Economic History.” It is a very short, rather thin, paper back sized book.

    In that book, North says the the Roman Empire fell because the empire didn’t have the political will to raise enough taxes to raise a large enough army to protect it’s borders.

    Wealth had become highly concentrated: six senators owned half of North Africa (I’m not sure if North distinguishes the provence of Africa – today’s Tunisia – or the Geographical expression of North Africa which would include Morocco, Algeria, Tunisia and Libya and sometimes Egypt, I’m assuming the latter, but it makes the point all the same – just imagine if just 6 people owned half of all the farm land in Tunisia).

    The wealthy and the powerful used their influence to avoid paying taxes. The Roman Legion still held a tactical advantage over opposing forces, but that advantage had thinned, and so Rome needed more soldiers and a larger Army to secure its borders. (I suspect that the Roman legion’s advantage had thinned only over Sassanian/Persians on Rome’s eastern flank, not the barbarians on its Northern flank – except for the Huns, which they eventually defeated anyway, but even so…).

    So the people with the most to lose, the Wealthy and Powerful, were the least willing to fund the perpetuation of the state that provided them with the property rights to amass their great wealth. Rome, which controlled the entire resources of Western Civilization, when Western Civilization still included Turkey, Syria, Palestine, Egypt, Libya and the rest of North Africa as well as all Civilized Europe, lacked the political will to defend it’s borders against landless, shiftless, nomadic bands of peoples.

    (As I’ve mentioned in other places, people of great wealth quit a nation’s social contract because they no longer see them selves as part of a nation, but instead as a nation unto themselves. This may have been true in Roman times. Some commentators/historians believe the very wealthy survived into fuedal times, at least in Western Europe, to become the Dukedomes of fuedal Europe, and what remains today of Europe’s once vaulted nobility.)

    Europe fell into a 500 year dark age, and political fragmenation that exist to today – though partly restored by the EC/EU.

    Some other historians, attribute Rome’s collapse to the collapse of the commercial economy. That we are seeing in our own times, is the same thing. Wealth concentrates, demand collapses, and shrinks the commercial economy. These historians say the Eastern Empire survived because it still had a cash economy. Again the same thing. Interesting austerian economic policies continued and made the situation worse. Constantine, the first Neocon, implemented the latifunde system, which turned farm workers into serfs – which caused the majority of farmers to descend into subsistence level of economic activity, and what exchanges they did were done on a barter system.

    There appears to be new revisionist histories on the collapse of the Roman Empire, but these also appear to be funded by Neocon based movement. The idea is to not blame the fall of the Empire on the concentration of wealth let alone to draw attention to the use of Christianity to control the peoples stuck in this system, for political purposes.

    Details on (#5) Byzantium:

    The explosion of Islamic forces out of the Arabian peninsula in the 8th century consumed all of Persia, ending Zorastrian Civilization for good, and took all of Byzantine Syria, Palestine and North Africa for good. Yet, the Byzantine Empire survived and held on by halting Islam’s encroachment into Greek speaking Anatolia – despite numerous raids through there and at least two prolonged seiges of Constantinople itself. How did Constantinople manage to hang on to its heartland of Anatolia? Social Contract.

    Anatolia was organized into a system called Themes. Farmers were given control (ownership/property rights) of their land in exchange for military service. This provided a large number healthy recruits for the Army – who were highly motivated and who had a reason to fight for the protection of their means of providing for their families. Islam couldn’t penetrate this land or its people’s allegiances. Around 975, Byzantium finally got a strong Emperor, Basil II. He destroyed the Bulgars in the Balkans, and pushed the Anatolian border deep into the Middle East. When he died in 1025, Byzantium was the strongest power in the Middle East (the Caliphate was dissolving before it) and Bazil was in the midst of organizing a reconquest of southern Italy and Sicily (very wealthy). At the Time, most of the Middle East was still about 50% or more Christian.

    Unfortunately, Bazil did not leave an heir. Two wealthy families in Constantinople contrived for control of the Empire. Which they managed to establish. One of the first things they did, when they got control was requisition the land title from the themes in Anatolia, pushing the farmers into serfdom and empoverishment, and using the wealth extracted to hire mercenaries to fill the ranks of the army (the old saw: mercenaries will fight for you, but they won’t die for you). In the process Byzantium became an eggshell. After 1050, Turks of Central Asia, recently converted to Islam, invaded the Middle East to protect the Caliph. In perperation for an attack on Egypt, to protect their northern flank they sent a light excursion Army into Anatolia in 1070. Only a few years before, the Byzantine establishment realized the precariousness of their condition and had managed to put a decent man on the throne. He worked to restore the foundations of the Empire in the Army but it was too little too late. At the battle of Manzikurt in Eastern Anatolia (Eastern Turkey) the Turks expeditionary army routed the Byzantine Army and pushed them entirely out of Anatolia – backing them up to the Bosporus and Dardanelles straights and the very face of Constantinople. In desperation the Byzantines called upon the Western Christians for help, who responded with the Crusader movement. Byzantium survived in a fashion, for another 400 years, but into an increasingly smaller and smaller state.

    Before Manzikurt, Byzantium had great traction in the Middle East and Southern Europe. Had their been a Bazil III, similar to Basil II, we can Assume that he would have conquered Southern Italy, filled the vacuum left by the disintegration of the Caliphate, and recaptured all the Middle East west of Persia, provided Bazil III would have put up a good showing against the Turks. Historically, he who dominated eastern Anatolia and northern Iraq, got Syria, Palestine and Egypt to boot, and much, if not all, of North Africa. Given that the Middle East had only been under Islamic Caliphs just barely 300 years, at least half the people were still Christian. It is possible that had there been a Basil III following Basil II, all of the middle east west of Persia would be Christian, as well as North Africa, and even the Arabian peninsula today would be Christian. Instead we got the crusades, massacres and a present circumstance of Islamic societies that can’t quite adapt to modernism (at least, not yet).

    The cost of the concentration of wealth in Byzantium is incalculable. Byzantium itself never really recovered after Manzikurt. Another lost civilization.

  4. Troy
    September 26th, 2011 at 10:18 | #4

    Tim, speaking as a Georgist, I think your thesis is missing a critical element of analysis.

    Concentration of wealth is not harmful if living standards continue to rise and those on the low end have sustainable lives, with no serious unmet needs.

    I was a young adult in the 1980s and it is interesting that the poor today have rather easy access to many things that were beyond luxurious 30 years ago — iPods, 40″ TVs, cell phones.

    The mere existence of billionaires does not offend me.

    What does offend me is the FLOWS from working class to rentier class.

    This is what makes an economy unsustainable, when it costs more for the working class to maintain their standard of living compared to the wages that are available.

    The US spends $500B/yr on gasoline alone. From every tank of gas we buy, how much of that money stays in the paycheck economy vs. how much disappears, off to Dubai or wherever, never to see another paycheck again?

    Same thing with the trade deficit with China. We may save $50 buying a Chinese-built iPad (compared to what it would cost to mfg in the US), but of the $500 cost, $200 of that ends up in China, and $160 of that $200 ends up with the Chinese Central Bank, which is not interested in further trade with the US but rather buying our assets with that money.

    So again, we have money leaving the paycheck economy and entering the rentier economy.

    Health care, same thing. US doctors are notorious for having investment clubs and money coming out of their ass. That’s their patients’ money! The US has a per-capita health expense of $7500, compared to $2500 for Japan and under $2000 for ROK.

    We’re not 3X sicker than the Japanese, that $5000 difference is again rents being extracted from the working class.

    At least the medical sector employs 14 million people in the US, so there is a bit of recirculation, not all of that $7500 per year leaves the paycheck economy immediately.

    There’s also land rents, which are greater than the above 3 rent-sucks. Half the nation rents, and most of that money is paying ground rent not the use of the building (which depreciates very little year by year).

    Land rents are the greatest suck from working class to rich. Churchill called land the mother of all monopolies back in 1909, and he was entirely right.

    September 28th, 2011 at 19:51 | #5

    I agree with Tim rather than Troy, but I won’t go into the argument. I used to tell my management students at the University of Johannesburg that if the University of Pretoria doubled my salary, I would certainly move to Pretoria -but I couldn’t teach the Pretoria students any better than I tought them.

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