Welcome to the Occupation

In many ways, the most remarkable thing about the global Occupy Wall Street (#OWS) protests is that they haven’t happened sooner. It has been a full decade since the anti-globalization movement imploded in a mess of its own internal contradictions, and I am honestly surprised that left has taken so long to self-organize into another mass protest movement. I would have expected that the knee-capping of the world economy three years ago and the subsequent decision to make everyone except those primarily responsible bear the brunt of the pain would have catalyzed some sort of march on the plutocracy. 

Perhaps the left was biding its time waiting to see what Obama might bring to the table.  Perhaps it was wrong-footed by the Tea Party, which stole a march on the whole idea by taking to the streets from from the other side. Maybe it was still too busy with the wrong-headed troops-out campaign against the war in Afghanistan. And maybe this is exactly the sort of unrest that lots of smart people have predicting would be the consequence of unchecked growth in inequality. At any rate, no one should be too surprised at what is going on: by the mere swing of the pendulum, we were due for a gathering of the left-wing tribes.

Overall,  my views on the usefulness of this sort of protest have not changed much since The Rebel Sell. But my general disdain is leavened in this case by three thoughts. The first is that inequality is a growing problem that all of us need to pay more attention to. And second: to the extent that inequality is magnified by a financial elite that has effectively discovered a way to game the American banking system, then Wall Street is the right and proper target of mass protest.

But finally, and maybe primarily, I'm increasingly inclined to think that regular mass public gatherings are useful for their own sake. Since Canadian prime ministers both Liberal (Jean Chretien: APEC Vancouver 1997) and Conservative (Stephen Harper: G20 Toronto, 2010) have no problem spitting on the constitution and unleashing the full and illegal power of the state against protesters when it suits them, it is probably valuable to assert the right to freedom of assembly pretty much whenever it pleases, for whatever reason at all. 

With that throat-clearing out of the way, here are some pieces  -- some by me, some by people a lot smarter than me – that I think help put the protests in a wider intellectual frame.

An essay by Joe Heath on why the banks didn’t actually go crazy.

An article I wrote last year for Canadian Business on the hard problem of inequality, and a follow up blog post exploring why it’s even harder than I thought.

Trent history prof Robert Wright situates the #OWS movement within the longer traditions of left-wing popular protest.

A column by me for the Ottawa Citizen on what it will take for the protests to be successful.

An excellent analysis by the economics professor Mike Moffat on why the 99 percent don’t really want to fix inequality.

 A thinkier sort of column I wrote on why governments are suddenly so keen to talk about happiness instead of economic growth.

Finally, I'm quoted in this story for the Canadian Press about the intellectual origins of #OWS. And Joe Heath gets a look-in at the end of this story about how Mark Carney called the protests constructive.



Inequality III: Tyler Cowen's strange silence

UPDATE: Forget everything I've written here. Stephen Gordon says taxing the rich is no use.

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OK, I’ve had another look at Tyler Cowen’s AI essay on inequality, and the more I think about it, the more annoyed I am by it.

To recap: What I found initially so intriguing about his argument is that he doesn’t  worry about the effects of income inequality. He dismisses most of it as mere envy, which he sees as for the most part a “local” phenomenon.

So instead, what he does is flip the argument upside down. What we should worry about, he argues, is the dynamic that is causing increased inequality. As he sees it, a substantial amount of the rise in inequality is due to the functioning of the financial markets, in particular the strategy of "going short on volatility". This allows bankers to rack up huge private profits in normal times, and then socialize all the losses during abnormal (crash) times.

As Cowen himself concedes, this has a large number of serious and highly negative public effects.

1. The outsized gains in the sector attract a disproportionate share of society’s smartest and most hardworking individuals. This “represents a huge human capital opportunity cost to society and the economy at large”.

2. The correlated nature of the risk means that when the bets go wrong, everyone pays the price. In particular, it puts a huge number of people out of work.

3. The bailout transfers money from “the Treasury to the major banks”, i.e. from taxpayers to the people who caused the problem.

4. It constrains productivity by preventing huge amounts of capital from being put to any productive use.

Inequality is simply an effect of the banking and financial sectors learning to game the system. These are very, very serious effects, which even Cowen himself concedes. So what to do about it? Cowen thinks the answer is, “not much”, and he goes so far as to suggest that this is “simply the price of modern society.”

This is obscene. When you boil it down, all Cowen has done is repeat many of the arguments that were accepted by mainstream economists years ago: Excessive inequality is wrong because it is inefficient. It results in a colossal misallocation of human capital, of the public treasury, and of private wealth. And keep in mind – these are Cowen’s points, not mine.

The only way, then, Cowen’s quietism can be justified is if the banking and finance sector provided such a vital public service that the public benefits outweigh the costs of the occasional crash. But there is no evidence that is the case. Even Cowen doesn’t try to make that case – as he puts it, these people aren’t providing a vital service, they are “gaming the system”.

Why on earth would we then simply accept it as the price of “modern society”? Maybe it is true, that we don’t have the ability to properly regulate the industry, and that any attempt to do so will backfire or result in perverse consequences. So be it. But that doesn’t mean that we have to just suck it up. After all, those outsized gains exist, they are sitting there in bank accounts, and in the form of Jags and houses in the Hamptons and Damien Hirsts and all other perks of being a Wall Street big shot.

And keep in mind, again, that these gains are, ex hypothesi, illegitimate. That is, by Cowen’s own analysis, these are windfall profits earned by gaming the system and which play no productive role in the economy.

So while we might not be able to regulate the industry so as to prevent this money from being acquired, there is another mechanism at the state’s disposal. It’s called the tax system. Tax something and you get less of it, economists like to say. Well, one of the most influential popular economists in North America is concerned that there are too many people going into finance, concerned that these people are earning too much money, and concerned that the public fallout from their activies is too great. We want less of all of this? Tax the hell out of it at every stage. Tax the business schools that train these people. Tax the incomes on the earnings. If that's too hard, tax their expenditures on the Jags and the homes and the Hirsts.

As it turns out, this is exactly the solution to rising inequality proposed by the economist Robert Frank: A massive and steeply progressive luxury tax that returns these outsized gains to the public treasury. At the very least, that money can then be used to fund an extremely generous employment insurance fund for workers who lose their jobs during crises caused by the operations of the financial sector. Instead of the state bailing out the people who caused the crisis, the people who caused the crisis would be bailing out the people they have harmed.

Tyler Cowen has argued against this solution in the past. Given his new analysis of income inequality, I don’t see how he can continue to resist it.

Inequality, Updated

There are a number of ways to tackle the problem of growing income inequality. For those who think it is no big deal, one way is to simply deny the phenomenon. Another, more intellectually responsible approach, is to accept that it exists, but offer arguments for why the inequality is not as big a problem as many on the left make it out to be. That's Will Wilkinson's approach in his recent essay for the Cato institute.

From those who take inequality seriously, some on the far left tend to look at ways of eliminating the phenomenon, usually by taxing the living heck out of big earners and redistributing it. Others focus on the effects of rising income inequality, and, where those effects are judged pernicious, suggest ways of mitigating them. That's my basic approach in my essay in the latest issue of Canadian Business.

In an essay in the latest issue of The American Interest, Tyler Cowen offers one of the most original analyses I've seen about inequality. What he does is flip the argument upside down, arguing that the effects of income inequality are not that big of a deal. What we should worry about, he argues, is the dynamic that is causing it. As he sees it, rising inequality is almost entirely due to the functioning of the financial markets, in particular the strategy of "going short on volatility". This allows bankers to rack up profits in normal times, and then socialize all the losses during abnormal (crash) times.

The upshot of all this for our purposes is that the “going short on volatility” strategy increases income inequality. In normal years the financial sector is flush with cash and high earnings. In implosion years a lot of the losses are borne by other sectors of society. In other words, financial crisis begets income inequality.

Worse, it isn't clear what to do about it:

For the time being, we need to accept the possibility that the financial sector has learned how to game the American (and UK-based) system of state capitalism. It’s no longer obvious that the system is stable at a macro level, and extreme income inequality at the top has been one result of that imbalance. Income inequality is a symptom, however, rather than a cause of the real problem. The root cause of income inequality, viewed in the most general terms, is extreme human ingenuity, albeit of a perverse kind. That is why it is so hard to control.

Cowen goes on to suggest that this might just be the price we pay for a modern economy. The unanswered question, I think, is whether the macroinstability of this system in the financial realm translates into instability in the political realm. Cowen doesn't appear to take political instability seriously, largely because he seems to think that Americans are generally ok with the system they see. But -- and this is the one point in my CB essay that I think bears on this issue -- that might be because Americans severely underestimate the extent of inequality,  are deluded as to the true amount of social mobility, in their country.

Why inequality matters

I have a feature in the new issue of Canadian Business magazine about rising inequality and why it matters. Excerpt:

Barack Obama might have swept to power two years ago on a banner of “Yes we can” social solidarity, but his biggest opponents right now, in the Tea Party movement, are more concerned about the effects of his policies on middle-class tax rates. In fact, almost the only ones in America who are leading the charge to soak the rich these days are the rich themselves: Warren Buffett, for example, has been arguing for ages that “people at the high end, people like myself should be paying a lot more taxes.”

This seems paradoxical, but it isn’t. In his 2006 book, The Moral Consequences of Economic Growth, the Harvard economist Benjamin Friedman argued that economic growth is crucial to the social and political well-being of a nation. In the absence of growth, people look for answers in intolerance and fear — which is exactly, and not coincidentally, what the Tea Party leaders are selling.