Dutch Courage

In a comment on Shawn Gude’s previous post on the main page about the Occupy movement, I asked who the “1%” is and whether Occupy protesters were primarily aggrieved about “Wall Street,” or whether they were aggrieved about “wealth inequality” more generally.  Commenter Michael Drew referred me to this post at Rortybomb entitled “Who are the 1%, and what do they do for a living?” purporting to get right to the point.  Here’s the operative chart:

These numbers show that the wealth share of CEOs and other private sector executives has actually decreased almost 14% since 1979.  In contrast, the share of financiers increased more than 80%.  Yet the rest of the Rortybomb piece lumps business leaders into the same category as financiers.  Why? 

The most obvious explanation is that the Occupy movement is primarily organized around a moral commitment to a particular definition of “fairness” oriented around results rather than process.  I previously outlined the problems with drawing a necessary connection between wealth inequality and “unfairness” or “injustice.”  But I have also discussed the real problem of power inequality:

There is nothing unjust about economic inequality.  What does become unjust, however, is when those who benefit from an organized system of laws to amass wealth[ ] then use that wealth to abuse that system of laws.  What results, then, is not just wealth inequality (which I contend is no sin by itself), but power inequality.  Where power inequality exists in great enough measure, a political system can no longer sufficiently guarantee procedural fairness.  And where there is no guarantee of procedural fairness, wealth inequality suddenly becomes a real injustice—inequality of wealth is only just to the extent it is the result of free choices, and free choice cannot be presumed where there exists an inequality of power.

Pointing generally to wealth inequality fails to take into account the threshold-earner phenomenon and the clarion call of cultural critics to work less and eschew building financial fortune and to spend more time in non-economic activities. It also fails to account for the fact that, in real terms, the poor have experienced significant economic improvement in the past 30 years. The rest of us, too, get the benefit of the new technology and other cheap consumer goods that corporations invent, develop, manufacture, and distribute, many of which undeniably improve our lives. I previously made and developed these and other points on these pages in my review of Paul Krugman’s book.

If power inequality—e.g., “crony capitalism”—is the problem, does the Occupy movement have a solution?  Simply more regulation and more central control won’t get us there.  In fact, that road may wind up making matters worse.  Cronyism is a two way street.  True, the bigger an industry gets, the more resources it can devote to rent-seeking.  But that has nothing to do with the incentive to rent-seek.  A powerful interest has little reason to buy influence in a weak government.  The problem of faction and “crony capitalism” thus gets worse as government becomes more powerful and centralized. 

The controversial 2005 Supreme Court opinion in Kelo v. New London provides a worthwhile illustration.  The Supreme Court’s failure to enforce the “public use” clause of the Fifth Amendment, a structural check against the influence of factions, has led directly to more crony capitalism.  For example, corporations’ and developers’ wealth had little to do with the crony capitalism that befell Suzette Kelo when her home was taken by the city council of New London, Connecticut at the behest of the Pfizer Corporation—who later scrapped their plans and abandoned her bulldozed neighborhood as a blighted vacant lot.  Had the Court faithfully applied the Constitution according to its plain language—so as not to give near-unfettered discretion to local governments—Pfizer would have had no reason to rent-seek in the first place.  Had the law of the land clearly prohibited the taking of property from one private party to hand over to a more politically favored private party, Pfizer would not have bothered asking the town council to exercise a power it clearly didn’t have.

Fixing the damage done by Kelo is relatively straightforward because we know where the system failed.  Constitutional checks were already in place but the Supreme Court ignored them.  The Court can and at some point will reverse Kelo. 

The rest of our problems concerning economic and regulatory policy are more difficult because we’ve been operating off book.  Who do we blame for our financial crisis?  “Fat cats”?  “Crony capitalists”?  “Corrupt politicians”?  These are not new phenomenon.  They were baked in the cake as we evolved our federal government by way of court decisions and “Constitutional Moments.”  We got the progress and economic growth hoped for, but we failed to install structural checks against the downsides.  No wonder “class warfare” is brewing:  populist forces are rushing to fill the vacuum created by having altered the balance of governmental power that has given factions  more access to the levers. 

Somewhere under the din of bongos, the Occupy movement has some legitimate grievances.  However, a generalized grievance of against wealth disparity will not get us the structural checks we’ve been lacking.  The movement could take up a more intellectually cohesive position by rallying against centralized economic and financial planning and restoring America to a more constitutional model.  Unless it does that, I predict we’ll see some legislative reforms pandering to the vague demands of the movement, but little in the way of serious reform. 

[Cross-posted at the main page]