Capitalism, Socialism, and Inequality

Capitalism based on the profit motive and private ownership is supposed to provide the best economic outcomes for everybody. As the owners of industry and commerce enrich themselves, they provide employment for the rest of the population. Everyone shares in economic growth, even if owners reap a greater share. The metaphor “a rising tide lifts all boats” describes this explanation of how capitalism should work.

Proponents of socialism argue that only the owners of capital profit from such a system. The great majority of people labor for the profit of a few. They propose an economic system based on social ownership and more equal distribution of profits.

These competing theories tend to leave out the role of government in shaping an economy and influencing the distribution of wealth. In every economic system, the state encourages and restricts economic activity, and funnels economic advantages to selected population groups.

In all of the real existing systems that have called themselves socialist, social ownership has meant in practice government ownership. In every case since the creation of the Soviet Union, socialist governments have been  dominated by a single political party, which have not allowed any challenges to their power. Inevitably, this has led to the corruption of the ideal of popular ownership of the economy. Those in charge of socialist governments have given themselves and their close supporters economic privileges denied to the wider population, from the special access to goods and services enjoyed by members of the Communist Party in the Soviet Union and its Eastern European satellites to the accumulation of wealth by the leading families of Communist China.

The absence of democracy, the brutal repression of critical ideas, and the continuing economic weaknesses of the Soviet systems led to their collapse in 1989. But not all socialist states were so unsuccessful. China, which had one of the world’s poorest populations through the first half of the 20^th century, has nearly eradicated extreme poverty, according to the World Bank. Although the Cuban economy is one of the most government-controlled in the world, the poverty level is very low, and education and health care rank high.

In the US, capitalism has sometimes worked to make all boats rise. A remarkable study last year of the history of national income, written by the foremost French researchers about income inequality, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, shows that from 1946 to 1980, real income doubled across the economic spectrum. That was also a period of extraordinary economic growth: gains of over 5% in gross domestic product for most years, and occasionally more than 10%. The top income tax rate for the richest Americans was higher than 85% until 1964, and then 70% until 1980. Nevertheless, the top 0.01% tripled their income after taxes in this period.

But since 1980, the story has been very different. The income of the poorer half of Americans has remained completely stagnant. The upper half has seen its income grow, but most of that growth has been at the very top: incomes of the top 1% have tripled, and that tiny rich slice earns almost twice as much before taxes as the whole bottom half. The few thousand families in the top .001% have multiplied their income 7 times. Our graduated income tax, along with other income-based payments like Medicaid, does redistribute money toward the bottom, but that hardly dents the huge inequality.

That’s due to political choices. The top tax rate has fallen steadily, to 50% in 1982, to 40% in 1993, to 35% in 2003. The tax rate on capital gains from stocks, which nearly all go to the wealthiest Americans, has also fallen from 40% to 20%. After nearly tripling from 1940 to 1970, the real value of the minimum wage has fallen since then. One of the least discussed but most important political policies that contributes to growing inequality is the ability of the very rich to hide their income in international tax shelters. The leak of the so-called Panama Papers brought the illegal use of tax havens into the international spotlight: the anonymous leaker said he was motivated by “income inequality”. It is estimated than 10% of the world’s GDP is held in offshore banks,

including about 8% of American GDP.

Corporations have contributed to rising inequality by boosting the incomes of top management. CEO’s earned about 30 times the income of a typical worker in 1980. That ratio has skyrocketed to 300 times average wages.

Political choices continue to widen the economic gulf between the few and the many. The Republican tax reform of 2017 mainly benefitted the rich, notably by doubling the amount of money that can be left in an estate without being taxed, helping only a few thousand families.

Growing inequality is not only an American problem, but a global problem that keeps getting worse. Between 2010 and 2016, the total wealth owned by the poorest half of the world’s population fell by over one-third. At this moment, the world’s top 1% owns more than all the rest of us. The world’s economy keeps growing, but the yachts of the wealthiest are disappearing from view. Since 2000, the bottom half of the world’s population has gotten about 1% of the increase in global wealth. The top 1% took in half of that growth. The 8 richest men in the world now own as much as the poorer half of the global population, 3.6 billion people.

Rising inequality in the US has provoked louder discussion. Conservatives try to derail political discussions about economic inequality by talking about the “politics of envy”. Mitt Romney as presidential candidate in 2012 criticized President Obama’s concern for the poor: “I think it’s about envy. I think it’s about class warfare. When you have a President encouraging the idea of dividing America based on the 99 percent versus 1 percent—and those people who have been most successful will be in the 1 percent—you have opened up a whole new wave of approach in this country which is entirely inconsistent with the concept of one nation under God.” Scary diatribes about the failures of “socialism” are designed to support the status quo.

It’s a common mistake of both left and right to talk about capitalism and socialism as if there were only two choices. One-party socialist systems in less developed countries have not worked well over the past century. Capitalism as practiced in the United States and many other nations has mainly benefitted those who already are wealthy. The nations in which all citizens gain from economic growth have combined elements of market economies, private ownership, and political policies that mitigate inequality. In western Europe, public health care, nearly free university education, stronger progressive taxation, higher minimum wages, and inclusion of trade unions in corporate decision-making result in much lower inequality and much happier populations.

No American politician argues for replacing capitalism. The political choices of the past 40 years have weakened our national economy and our political unity by favoring the wealthy. The rising tide is swamping too many American boats. It’s time for a different politics.

Steve Hochstadt

Berlin

January 29, 2019

Democratic Deadlock

Many loud voices have proclaimed the dangerous situation of Western democracies in the past few years. Extreme right-wing parties, which question the foundations of democratic politics, have suddenly grown stronger, such as the Alternative for Germany and the Fidesz party in Hungary.

Neither the US nor Great Britain have been threatened by new neo-fascist parties. But in both of the world’s oldest democracies, governments have simultaneously been brought to a standstill by the most extreme forces in established conservative parties. The path back to normal politics is unclear.

The United States currently has no functioning national government, due to the shutdown brought on by Trump’s insistence on funding for a wall on our southern border. Although the immediate conflict pits Republican Trump against a Democratic majority in the House, lack of unity within his own party prevented Congressional funding for a wall for the two years when Republicans had complete control of Congress. Republicans could have used their slim Senate majority to give Trump the $5 billion that he has demanded, but they would have had to eliminate the filibuster. Although some of the most conservative Republican Senators advocated eliminating the filibuster when they first took over the Senate in 2015, enough Republicans are against that “nuclear option” that it won’t happen. Congressional Republicans have been satisfied up to now with giving Trump only $1.6 billion a year in funds for building barriers at the border. Now that Trump has made building the wall a do-or-die issue, he has more support within his own party, but cannot do anything without support from the Democrats in the House.

In London, the ruling conservative party also could not overcome a deep split within its ranks to push through a plan for Great Britain to leave the European Union. The agreement that Prime Minister Theresa May negotiated with the EU failed by an unprecedented margin last Tuesday, because more than one-third of Tory Parliamentarians voted against the rest of their party. Various members of her Conservative Party support the whole range of Brexit possibilities, from the “no-deal” option to holding another referendum.

In both countries, the extreme wing of the ruling conservative party has pushed a “populist” policy that is widely rejected by the public. Various polls at the end of 2018 showed most Americans do not support building a wall. Although wide margins of Republicans support the wall and Democrats take the opposite view, the majority of independents who are opposed tip the balance. A significant majority wanted Trump to compromise on his anti-immigration stance in order to prevent a shutdown. In fact, a border wall never attracted majority support: an exit poll after the 2016 election gave the wall only 41% support.

In England, the situation is more complex, because there are many options on the table besides the deal that May negotiated. On the far right is the “no-deal Brexit”. On the other side are those who would like to remain in the EU. And another form of compromise choice is the hope that a different deal could be negotiated, even though the EU leaders have clearly said they would not do that. The no-deal Brexit favored by the most extreme Tories does not have majority popular support. A poll in July 2018 gave that option only 28%, and the same result occurred in November. The great dilemma in Britain is that none of the options garners a majority of either voters or Parliamentarians. But as in the US, a majority of the Tory “base” favors the most extreme plan, the no-deal Brexit.

In both cases, these extreme policies are based on false claims. Much of what Trump says in support of his border policies is not true. Despite Trump’s assertions about invasion, the number of illegal border crossings has been lower since he became President than at any time since before 1990. He claims that a wall would lessen the dangers posed by heroin illegally coming in from Mexico, but the Drug Enforcement Administration says that 90% of heroin, and 87% of cocaine and methamphetamines come across at ports of entry, not where a wall would be constructed. Despite his alarming statements about how “thousands of Americans” have been killed by illegal immigrants, studies show no link between immigration and crime. He claimed that all the previous Presidents told him they supported a wall, but all living Presidents deny that.

The Tories who favored leaving the EU during the referendum in 2016 made many significant claims about the process that they have since repudiated, including that leaving the EU would be simple process and that no transition deal would be necessary. They tried to frighten the English about massive immigration from Turkey if that country’s efforts to join the EU were successful.

More significant, the Brexiteers promised a great financial boon to the population. Instead the opposite will occur. A bright red bus for the Vote Leave campaign in 2016 proclaimed that Britain sent the EU 350 million pounds a week that could be spent on the National Health Service, a wildly inflated estimate of how much Britain contributes to the EU budget. In October, a survey found that most Leave voters still believe that figure. In fact, the British economy is already about 2.5% smaller than it would have been if the Remain voters had won, a cost of about 500 million pounds a week. Britain will have to pay a 39 billion pound “divorce bill” if it leaves the EU, and one study shows that the British economy will continue to be negatively impacted for at least another decade, costing each person on average about 1000 pounds. Even May’s government accepts that the costs of Brexit will be enormous: an economic hit to the economy of between 2% and 4% by 2035 under May’s plan and at least 8% under a “no-deal” Brexit.

The politics of the extreme right wings of the Republican Party in the US and the Conservative Party in the UK are based on ideology, not reality. They appeal to a minority of voters. They have already damaged both economies and have stopped both governments from dealing with actual political issues.

The ability of extremists in both cases to win some popular backing for their ideological schemes is based on an appeal to insular nationalism and fear of foreigners. These dangerous forces remain powerful in the 21^st century, stoked shamelessly by right-wing politicians whose economic policies are most dangerous for those people to whom anti-foreigner sentiments have most appeal – less educated whites.

Steve Hochstadt

Berlin

January 22, 2019

The Real National Emergency

Donald Trump appears ready to declare a national emergency at our southern border. The only emergency there is the danger that no wall will be built, despite Trump’s promises to his supporters for the past 3 years that he would build a “beautiful wall”. Trump is elevating a personal political problem into a national crisis.

But a much greater potential national emergency looms in our future: the possibility that Trump and the Republican Party will do damage to our democracy out of fear of the 2020 election.

One of the most frightening developments in American politics has been the increasing disdain of significant portions of the Republican Party for basic democratic norms. An early highlight of Republican disregard for our normal democratic process was their refusal to consider President Obama’s appointment of Merrick Garland to the Supreme Court in March 2016. While Mitch McConnell is often linked personally with this unprecedented action, all 11 Republicans on the Judiciary Committee said they would ignore any Obama nominee. Then after the election, Republicans eliminated the filibuster for Supreme Court justices in 2017, enabling them to push through Trump’s nomination of Neil Gorsuch.

The longer history of extreme partisan gerrymandering of state and federal election districts in Republican-dominated states after the 2010 census created disproportionate legislative majorities. In 2012, Democratic candidates for the House won 1.4 million more votes than Republicans, but Republicans took the House 234 to 201.

At the same time, the Republican Party embarked on a nationwide effort to rig elections by disenfranchising voters more likely to vote for Democrats: minorities and the poor. Republican state legislatures have employed demands for special kinds of ID, restrictions on absentee and early voting, purging of voter rolls, and inadequate staffing of certain voting places to target typically Democratic voting groups.

These two sets of anti-democratic strategies created Republican-dominated state legislatures, even where they received fewer votes than Democrats, as in North Carolina. In 2016, Republicans began to use these majorities to invalidate the results of election losses. After Democrat Roy Cooper won election as North Carolina’s Governor in 2016, Republicans in the state legislature convened a special session to transfer many of his powers to themselves. For example, the number of appointments that Cooper was allowed to make was cut from 1500 to 400.

After the 2018 midterms, Republicans in the Wisconsin and Michigan legislatures stripped powers from newly elected Democratic governors. The Wisconsin state legislative races were so blatantly gerrymandered by Republicans that federal judges had overturned them, but they were still in place for the 2018 elections. In December, the Republican legislature voted to limit Governor-elect Tony Evers’ appointments, to restrict early voting, and to restrict the power of Josh Kaul, the Democrat elected as attorney general, and outgoing Governor Scott Walker signed the bills. In both the Wisconsin Senate and House, only one Republican legislator voted against these laws.

Based on one of the most extreme gerrymanders in the country, Michigan’s legislature is dominated by Republicans, although the Democrats won more votes in 2014 and 2018. After losing all the statewide races in 2018, Republicans voted to limit the powers of the new Governor and Attorney General, and to redefine elements of the non-partisan citizens’ commission to oversee future redistricting, that had just been passed by over 60% of Michigan voters. The Promote the Vote ballot initiative allowing voter registration up to Election Day, that had passed 67% to 33%, was altered to add ID requirements. Again nearly all Republican legislators voted for these bills.

The Republican Party has transformed itself into a political force that prioritizes its own power over the sanctity of electoral democracy. The authoritarian tendencies of Trump as President added to this rampant Republican electoral cheating threaten to create a national crisis. Trump has consistently disparaged the results of elections, even his own victory in 2016. He appointed an experienced vote suppressor, Kris Kobach, to oversee a futile federal effort to prove electoral fraud. Trump uses presidential power to promote his personal interests. He employed our armed forces on our southern border as a political stunt. Although the shutdown that Trump gladly took credit for, until he started blaming the Democrats, is rejected by a majority of voters, Republican legislators have remained behind him. Now he is considering using the President’s emergency powers, when our elected Congress thwarts his will.

The election of 2020 presents a critical dilemma for Trump. It may not be possible to indict a sitting president for the campaign finance violations for which Trump is currently an unindicted co-conspirator. If Trump wins in 2020, the statute of limitations of five years for such federal offenses will run out while he is in office. But if he loses, he may face prison time. The many other investigations of his political and business activities that have already begun or will be initiated by the Democratic House will add to his judicial peril. 2020 qualifies as a personal emergency for Trump.

Would Trump’s core supporters accept a coup? Many evangelical leaders and voters believe Trump to be the modern incarnation of King Cyrus of Persia, a nonbeliever chosen by God to accomplish the goals of the faithful. Some of Trump’s most prominent evangelical supporters openly long for a “king” to rule America.

A criminal President, who will do anything to serve his ego and self-interest, threatened with jail. A party willing to fix elections and ignore electoral results that don’t go their way. Cheerleaders on the most popular media network who ignore inconvenient news. A howling base of supporters that believes Trump’s opponents are traitors who belong in jail.

All the elements are in place for a presidential coup against our constitutional democracy. Paul Krugman just wrote about a possible reaction to looming defeat in 2020: “if you aren’t scared about how a cornered Trump might lash out, you haven’t been paying attention.” It will be too late in November 2020 to prevent a national emergency. We must pay attention now.

Steve Hochstadt

Bloomington, IN

January 15, 2019