Category: Income Inequality Page 2 of 5

So, while it generally takes two quarters for a recession to be so-called, it may be that the recession is here.

Let us recap the non-recessionary period:

The percentage of people employed in the US never recovered;
More than the total amount of growth went to the top four percent or so, with most of that going to the top one percent and most of that going to the top .1 percent;
The stock market had a huge bull market, even though the economy wasn’t working for anyone but the top few;
Outside America, the “south” of Europe never recovered in any meaningful way, and most European nations generally did badly for most of their citizens;
Various resource nations did well for a time, but their success was based on demand from developed nations or, more commonly, from China;
Chinese demand collapsed some time ago;
China has been printing more money than either Japan or the US; much more;
Japan’s “unconventional monetary policy” has been a roaring failure–if its intention was to get the Japanese economy going again;
The collapse in oil prices last year helped the US briefly, but because the rest of the world has rolled off a cliff and because those gains couldn’t go widespread, it was only briefly (this is as I predicted at the time);
Canada’s economy was hurt badly by the oil price crash, and because the mixed economy has been critically injured, there is very little else to hold up the economy;
Both Britain (or London…almost the same thing) and Canada have huge housing bubbles, and those bubbles, with the addition of financial games, are all that holds those economies together at this point;
Britain never actually recovered either, for the majority of its citizens–just a large enough minority to elect Cameron;
Australia has tied itself massively to resource extraction on the back of Chinese demand. There is no meaningful Australian economy whose fate is not tied to China.
India’s development is hollow neo-liberalism, and has seen an actual decrease in per capita calories. It is consumptive and limited to a few key areas.

Let me put this another way: The developed world is in depression. It has been in depression since 2007. It never left depression. Within that depression, there is still a business cycle: There are expansions, and recessions, and so on. Better times and worse times.

While cheap solar is a big deal, it is not yet deployed sufficiently to break the “widespread demand will crash the economy through oil price increases” problem, and this is exacerbated the by the deadlock rich elites have on most of the world’s politics and economic policies, since it is not in their interest to solve problems, but only to become more rich. Not that solving problems is something they mind, if it makes them richer and keeps everyone else poor.

The world still has very few problems we couldn’t solve if we acted on them in a productive way (though some, like climate change and the great die-off, are beyond the point of no return for catastrophic damage), but that’s largely irrelevant while public policy remains in the hands of oligarchs. There is some reason for hope, as left-wing parties rise in Europe, but those green shoots are still nothing but green shoots.

I suggest that my readers who are able to make money do so now, you may soon find that you can’t. This is especially important if your employment is precarious. Take care of yourselves, and take care of each other, unless you are lucky enough to live in the few rich, social democratic states left, you cannot expect much aid from your governments.

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The Three Types of People Who Wind Up Rich and How They Destroy the Wealth of Others

By Ian Welsh

On April 22, 2015

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Models of economics which don’t handle power are marginal at best. They serve only to describe what happens in situations where no one has enough power to set the rules or where there is a central authority which acts to keep any other actor from having enough power to set the rules.

The Standard Model of Power in Markets

Assume that people want two things: They want stuff and they want security. That is to say, they want to know they can keep what they have.

People who become rich usually fall into one of three categories:

1) People who lucked out by being in the right place at the right time (many people who became rich in the internet bubble, for instance, just happened to be working at the right place at the right time);

2)People who are obsessed with something that other people value highly. Like many musicians in the era of mass-produced music before the rise of the internet. Or like J.K. Rowling. These people are also lucky, in the sense that the products of their obsessions are highly marketable at the time of output;

3) People who are obsessed with making money. They think of little else and have devoted their life to it.

In all three cases, once you’re rich, the needs that drove you there don’t go away. Wealth effects people, but it rarely changes either the obsessive need that drove them, nor the human need for security.

The second group is the least dangerous because their primary motivation was never money and their obsession drives them away from thinking too much about money.

The first group, those who got lucky, are the rank and file of the “I’ve got mine, screw you. Jack” brigade. This includes people far beyond those who became truly rich, like those who worked at startups by luck or those who won the genetic jackpot and inherited; it also includes those who won the generational jackpot: the GI Generation, for example, or older Boomers.

The GIs may have been born during the Great Depression, but they spent their prime working years during the greatest general wage increase of the last few centuries. They bought houses when they were cheap, then they benefited from the massive appreciation of housing values from a multi-generational period in which house prices increased faster than wages, capped by an actual housing bubble for those who lived long enough.

In generational terms, they were born on second (though not third). They had the GI Bill, great jobs, great job security, great pensions, great health care, and so on.

They lucked out. It’s not that they didn’t work hard for what they got, but the same amount of work in a different time or place wouldn’t have reaped the same rewards.

People like this become conservative. The GIs start off as the footsoldiers of post-war liberalism, but they wind up Reagan Democrats. They have theirs and they vote for politicians and policies which make sure that what they have is secure. The net result of those policies has been to pull the ladder up after them–to make their children and grandchildren less prosperous.

If you got lucky, then preservation of capital is the first rule. People who got lucky are against high taxes, because they can’t expect to make more money. They are especially against high taxation of unearned income, because their advantage is unearned income–their houses, stock portfolios, bonds, and so on. Their money makes money.

These are their interests. Most people act on their interests as filtered through their beliefs.

Thus, we come to group #3. The people who made a ton of money and who did so because that was their goal; they were always obsessed with money. This group also includes those people who came into a lot of power because they were obsessed with power, though the dynamic is a bit different.

These people still have the need for security. The best security is the legal protection of no one else being able to join your business. Some businesses have this quality innately. For instance, suppose you are the cable or phone provider to an area. You have the phone lines, you have the cable; it’s unlikely anyone else can drive those lines.

But the government, in the 90s, forced phone providers to lease their phone lines to internet providers (dial up, for ancients). So even having a physical monopoly isn’t security if the government acts against you.

High speed internet, over phone or cable, is not something those companies in the US (or Canada) are forced to allow other companies to sell.

The first concern for someone who is wealthy is getting protection from whoever is politically powerful. Government, if you wish, though it can be warlords or Kings or the local tribe, depending on the culture. They need sanction to keep what they have.

This is especially true of businesses which aren’t natural monopolies: selling weapons to the government, for obvious reasons, or; selling music, which could be copied by anyone (say hello to copyright laws); being a lawyer and not wanting too many other people to act as lawyers (say hello to bar exams and law schools); selling genetically modified food of which people are scared (make GMO labeling illegal). Creating money out of thin air, which is what banks, brokers and so on do, might be considered the ultimate monopoly. They sure don’t want Joe Blow to be able to say “I have one hundred thousand dollars, and if Goldman Sachs (in the 00’s) can create money through leverage at 41/1, I can too.”

Creating and lending money is a valuable perogative, one worth defending.

And what if everything goes wrong? What if, despite all your money, and all the defenses you’ve bought, you lose everything anyway?

Be clear: This is what happened in 2007 and 2008. If you take into account counterparty risk and you mark assets to market (value them at what they could be sold for), every bank and major brokerage in the United States, and probably all of those in Europe, was bankrupt.

Bankrupt. Even the ones who made the right bets, like Goldman Sachs: because if all their counterparties go under, so do they.

This sort of risk, the kind that is backed up by the full credit of the United States, requires owning government. It requires knowing the central bank is yours and will act to save you.

The first thing a capitalist does when he or she gets rich enough, is buy the system.

They do this for three reasons: 1) to secure their current privileges; 2) to provide a backstop in case of disaster; 3) to create new opportunities.

The consequence of these actions is to drive up prices and keep out competition. It is explicitly to reduce competition, because competition is a danger. The fewer entities controlling more of a market, or controlling politicians, the more money is made and the more secure the current (and future) fortune is.

What this does is destroy the future. To those who are currently in power, the future cannot be allowed to happen until they control it: until they are the ones who will make a profit from it.This doesn’t mean all distruptive change is impossible. There are, even today, many factions amongst the rich: Wall Street, Oil, Silicon Valley, etc.. They have interests in common, and cooperate around those interests, but they are competing to see who will control the future.

This doesn’t mean all disruptive change is impossible. There are, even today, many factions amongst the rich: Wall Street, Oil, Silicon Valley, etc.. They have interests in common, and cooperate around those interests, but they are competing to see who will control the future. Largely, they agree on the basics–things like continually extending copyrights, for example, or free movement of capital, or making regulations so that government can’t enact laws which would make their business go away. They agree about low taxes on capital and low wages (Apple and other Silicon Valley companies conspired to keep engineer wages low by not bidding against each other). They agree about unions not being too powerful.

Anywhere Capital has consensus, if they have been able to buy the system, it is virtually impossible to do anything against their consensus.

Gays have rights because it’s not important to most rich and powerful people that they don’t; and it is important to some of them (say, Tim Cook) that they do.

Effective wages have stagnated or dropped for over 40 years now because it is important to most rich and powerful people that they do; your wages are their costs.

Unions have lost massive power because rich and powerful people find that in their interest–even those in industries without unions want them kept weak so they will never have unions.

Concentrated wealth quickly turns into concentrated power and concentrated wealth will always be inimical to widespread prosperity. Wealth is power when it is concentrated. Wealth that is not disproportionate is not power. If it is not power, it cannot protect wealth.

If you allow any group, especially any small group, to obtain disproportionate wealth, they will always use it to protect their wealth.

Part II will discuss how the drive for further wealth leads to the vast impoverishment of everyone outside the wealthy and a small retainer class. Part III will discuss how moderate concentration of wealth can lead to general progress for everyone.

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Austerity in the EU—in Rap

By Ian Welsh

On April 21, 2015

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The entire video is worth watching, but if you want to skip to the meat, go to 3:37. This is one of the most accurate portrayals of Lagarde (in charge of the IMF) and Merkel I’ve seen. Better than most written analysis.

Also, funny.

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World Economy Heading for Recession

By Ian Welsh

On April 5, 2015

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That seems most likely to me. China has been stalling out for some time, Japan’s “stimulus” didn’t work, Europe has been suffering under austerity for years (despite some minor good news), the other emerging economies are doing badly, the petro-states have been hammered by the drop in oil prices and now the US job market has fallen off a cliff after a few months of excellent results.

Those results were driven almost entirely by the drop in oil prices, but were unsustainable with most of the rest of the world economy in the doldrums. Low oil prices should be generally good for everyone but oilarchies, but their effect is muted (in comparison to past decades) by the oligarchical and oligopolistic nature of our economy. Put simply, there are too many barriers to entry for new businesses to arise and even lower oil prices don’t put enough money into ordinary people’s hands to create enough new demand for long enough.

In an economy where individual sectors tend to be controlled by a few companies, and where those companies are already awash with money, more money means little; those with pricing power will simply take it away and add it to the stockpiles of money they already aren’t using for anything productive.

The standard solution to the situation we’re in now would either be to implement very high corporate and individual marginal taxation (if private actors won’t spend, take the money from them) and/or to break up oligopolies and/or to heavily regulate them so that they aren’t sopping up all the excess cash in the economy. (Why are app stores still allowed to take 30%, for instance?)

Since we refuse to do any of those things, and since we only print money to give to rich people and corporations (thus pooling money at the top, doing little for widespread demand), the western economy (which includes Japan) remains stagnant. You may get a few good months here and there, but that’s all you’re going to get.

Labor Force Participation Rate Graph

Let’s discuss some individual countries and regions. First, take a look at the above labor force participation rate graph. It shows the number of people either looking for work or who have work. Can you tell that there were a few good months? That’s how good the American economy is after your few good months. It didn’t really improve much, it just went horizontal.

You need a few years of such job results to make a difference. And that’s before we get to the fact that most of those jobs were low-paying and that all of the gains of the last economic cycle have gone to the top three to five percent of the population (depending on how you slice it). And the top 1% has done better than 3%, the top .1% better than the top 1% and so on. This is your economy on unconventional monetary policy.

Japanese monetary base and inflation to early 2015

Ah, unconventional monetary policy. In Japan they call it “Abenomics.” The idea was to get inflation going in the Japanese economy–get the Japanese to spend and bring Japan out of its 30 year slump. The chart to the right shows how well it has worked.

But don’t think that money has been “wasted!” Abenomics may have done nothing for ordinary people, but it’s helped a lot of rich people become richer. That money went somewhere. In Japan’s case, a ton of it will have gone overseas, with foreigners borrowing for low costs in Japan and then speculating with that money elsewhere for higher gains (or so they hope).

Unconventional monetary policy is, and always has been, about giving money to the rich, wealthy, and corporations. At first, it was about bailing them out after the financial collapse. Now, it’s just about giving them money, lots of money, in a way that the hoi-polloi can’t access.

This brings us to Europe and austerity. Austerity is a wonderful thing, if you’re rich. Public assets are put on the selling-block which you normally could never buy and they are put there for cheap. You get to own more of the economy, your relative wealth increases. While it’s true that one might be richer in a generally prosperous economy, you must remember, this isn’t about absolute wealth. It’s about relative wealth. Better to be somewhat poorer and able to lord it over everyone else, than be richer in a world where the peons don’t have to kowtow to your every whim or don’t have to live miserable, want-filled lives. If the price is a lot more poverty, that doesn’t affect you in any meaningful way.

Not all peons suffer, of course. A lot of Germans do very well in the current regime. As the South of Europe suffers under austerity, they’re doing great. The worse the southern economies are, the better for Germany, since it reduces the price of the Euro, increasing German exports. If everyone in the Euro area was doing well, Germans wouldn’t be doing nearly so well. If the price is suicides, widespread poverty, homelessness, and so on, that’s certainly a price Germans are willing for Italians, Spanish, Greeks and Portuguese to pay.

Meanwhile in Canada, there is a housing bubble which kept on going from the point where the US bubble collapsed. Better, inflated prices are guaranteed by the Federal government, so when the bubble bursts, it can cause maximum damage to public finances. With oil prices falling, and with Canada now a petro-state (as I noted almost a decade ago) due to deliberate government policy, those housing prices are looking less and less sustainable.

In the UK, we also have London’s housing bubble (which is to say, the majority of the actual economy of the UK, if you want to call a housing bubble and financial services an economy, which UK politicians do). This shouldn’t be a surprise, since the UK hired Canada’s ex-central banker to come to the UK and do what he did to Canada: Blow a nice big bubble. The UK hardly has any other economy besides real estate and financial ponzi schemes, so we’ll see how that works out for them.

In general, understand this: The world bailed out bankers and brokers and traders and they went back to doing what they were doing before. Blowing bubbles. There are CDOs out the wazoo, there are stock market bubbles, there are real-estate bubbles in various places (they just tend to be more localized now, but they’re still huge).

The economy will NEVER be good for everyone until this is changed, but that doesn’t precisely mean this is unsustainable. The elite’s had one fundamental realization and it was this:

“We can print as much money as we want and as long as we make sure it doesn’t get into ordinary people’s hands it won’t blow up the economy.”

Many people expected that unconventional monetary policy would cause general inflation. It hasn’t because the money stayed in the hands of a very few people and major corporations. It did cause massive inflation in the things rich people buy, but not general inflation.

So the rich, and the politicians and central bankers they own, aren’t worried about the various bubbles because they handled them in 2007 and 2008, and they’re sure they can handle them the same way if they burst again. These bubbles may never all burst at the same time again, because if they show signs of doing so, the elites can always just have the central banks print money and buy up assets before they even become distressed.

As long as there is no actual price discovery (and how can there be), there is no real threat to the only part of the economy that matters: The economy of the people with enough money buying up politicians.

Everyone is addicted to this game, even China, which has printed unbelievable amounts of money (more than Japan, America and Europe combined) and has used it to create vast amounts of unused and unusable housing and other boondoggles. China, granted, wants much of the benefits to get to ordinary people (because the Chinese are still willing to riot extremely violently and the Communist party’s leadership knows their lives are on the line), but they’re still playing the late-capitalist game of credit pumping, rather than the mercantilist game which built the Chinese economy. That makes sense, in a way. As China’s customer-economies stagnate, it becomes harder and harder to create widespread growth for the most populous country in the world through simple exports.

The correct strategy would be to start decoupling and move to a domestic market, and in a sense, the Chinese have tried that, but they’ve bungled it on boondoggles. Capitalism of the variety we do today is terrible at redistribution and redistribution is what the Chinese economy needs, in a huge way, in order to boost widespread demand.

So that, my friends, is your world economy on austerity and unconventional monetary policy. As I predicted right after Obama put out his worthless “stimulus” program in early 2009, for most people, the economy will not recover for at least a generation. It will only recover then if the population is willing and able to rebel, peacefully or violently. If not, we are in for decades of stagnation and decline, exacerbated by the absolute certainty of catastrophic climate change.

And so it goes…

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The Right Thing to Do: Homeless edition

By Ian Welsh

On March 3, 2015

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So, Utah decided to just give the homeless places to live. The results are what anyone with sense, or who has followed the topic would expect:

Utah’s Housing First program cost between $10,000 and $12,000 per person, about half of the $20,000 it cost to treat and care for homeless people on the street.

Imagine that.

The right thing to do is almost always cheaper and gives better results, at least if the welfare of people is your concern.

If people are poor, give them money. If people don’t have a house, get them a house. If people are sick, get them health care.

The fact is, though, that you have to want to do the right thing. People tend to get down on the Church of Latter Day Saints, but for all their issues, I’ve always had a soft spot for them because I’ve heard many stories like this:

The church donated all of this,” Bate says. “Before we opened up, volunteers from the local Mormon ward came over and assembled all the furniture. It was overwhelming. For the first several years we were open, the LDS church made weekly food deliveries—everything from meat to butter and cheese. It wasn’t just dried beans—it was good stuff.” (The Utah Food Bank now makes weekly deliveries.)

I ask him if this is why the programs work so well in Utah—because of church donations.

“If the LDS church was not into it, the money would be missed, for sure,” he says, “but it’s church leadership that’s immensely important. If the word gets out that the church is behind something, it removes a lot of barriers.”…

….

“Why do you think they do it?” I ask(my emphasis)

“Oh,” he says, “I think they believe all that stuff in the New Testament about helping the poor. That’s kind of crazy for a religion, I know, but I think they take it quite seriously.”

A major driver of the social welfare movement in the United States was the social gospel. The ending of sweatshops, the huge work programs of the 30s, the provision of Medicare and Social Security was driven in large part by Christian crusaders who believed that what they did to the poor, they did to Jesus.

You have to want to do the right thing.

This is just as true when dealing with matters like inequality. FDR and the politicians of the 50s ran marginal tax rates for high earners at 90% or so because they, and the American people, genuinely believed that no one should have that much money. They believed that it was earned by the efforts of other people: a rich person is someone who gets rich on other people’s work, with very rare exceptions, and even they get rich because of the society they are in. (For a complete explanation of that, something most people refuse to understand, read “It’s Not Your Money.”)

Ethics and mores; belief, is why people do things. It doesn’t exactly come before material circumstances (the two influence each other, with material circumstances, including technology, determining a range of possibilities), but within what is possible, belief in what we should do determines what we actually do.

In the world today we have the resources not just to feed everyone, but to give them a decent life, with education, entertainment, and housing that is warm in the winter and at least not unbearable in the summer. We can cloth everyone well. We have had the ability to do this for at least a hundred years or so, in theory, we’ve had it in practice since the recovery from World War II.

To do so, however, we must believe that we should, and we must be willing to act on that belief. There will be sacrifices (a lot fewer billionaires, a lot less McMansions), but in the end even most of those who complain would be objectively better off, because inequality is robustly associated with worse health and less happiness, even for those who are the richest. The top .01%, if they were still the top .01% but had far less money and power, would be happier and healthier in such a world.

As such, the battleground of belief; of ideology, is as important as that of technology. It is belief, mediated by power and turned into behaviour, which determines what actually happens in this world.

The Problem with Basic Income

By Ian Welsh

On February 27, 2015

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Basic income—just giving everyone a certain amount of money, is an idea with a lot to recommend it. In any society which isn’t willing to just let people suffer or die because they don’t have money, there is a “social welfare net” with a vast bureaucracy. Why not just give everyone enough money to live on, and wipe out most of that bureaucracy? If you’re going to give poor people money anyway, it’s more efficient, and vastly less humiliating.

There’s a great deal of controversy around the idea of technological unemployment (economists sneeringly dismiss the idea on aggregate as the “lump of labor” fallacy), but even if you don’t believe in it en-gross, changing technology does cause specific people, often large numbers of them, to lose their jobs, and many of them never work again, or if they do, work at terrible jobs. A basic income deals with this issue, at least somewhat, and, again, far more efficiently than welfare and unemployment insurance and so on. And if you believe that there will be widespread technological improvement as AI and robotics improve, this will mitigate against it.

In a demand based society; a consumer society, where the economy is based on large numbers of people buying things, a basic income makes sense. People with no (or too little) money, don’t spend it (obviously) and that’s bad for the economy. Every dollar you give a poor person gets spent; it immediately goes to someone else, and that means that even those who are well off have reason to be for a basic income: most of it is going to wind up in their hands, and if it doesn’t (because you have a basic income which goes to everyone, not just those below a certain income), well, they still get theirs.

One might point out that we’re moving away from a demand based society, however, at least in the West. More than all the productivity gains of the last business cycle in the US, for example, have gone to the top 10% (really the top 3%). Consumer inflation is flat, and in many countries verging on deflation, while the goods that the rich buy (investment art, Manhattan and London real-estate) are booming. Moving away from a broad-based demand society, such as we had in the post-war liberal era was mainly done because it benefited the rich, but it also solved another problem—increased demand fed into oil and other commodity prices, and as the 70s and early 80s showed, that lead to huge inflation and economic dislocation.

So basic income, at any level that would be equivalent to a living wage (aka. letting people live a decent life, not just barely scrape by), can be expected to spike inflation in various commodities, including oil. This is a problem, but it’s not a huge problem, because we finally have the technology which allows us to move off oil (not completely, but enough to mitigate the effect of demand increases), and because, hey, we’re flirting with deflation anyway.

The real problem with basic income has to do with who controls our economy—with the fact that we are sold what we need, by and large, by oligopolies. A few large companies control most industries, and effectively price set. (Broadband profits in the US are almost 100% a year.)

This is known as pricing power. When someone needs what you sell more than you need to sell it to them; when they have little choice but to pay what you ask, you can demand a premium. If something is scarce, either naturally or artificially, those who control it get more of the share of national income than otherwise. In a society whose economy is not controlled by oligopolies this is usually a good thing—prices go up, more people enter the industry, prices drop. That’s the what the economics textbooks tell you happens. But it doesn’t happen in an oligopolistic economy where the oligopolists control government and where barriers to entry are very high.

So those who are in an oligopolistic situation, whether telecom companies, health insurers, pharmaceutical companies or landlords, are generally able to set prices: you must have medicine, you must have shelter, and in a modern economy, try and get by without a phone and internet.

What this means is that increases in income, especially at the lower end, tend to be simply taken away by those who have what you must have. Everyone will know what the basic income is, and they will know who is surviving on just that, or just that plus a low-wage job. And they will raise prices so that money goes to them.

Basic income which does include either oligopoly busting or regulation (or having the government, oh, just provide broadband and/or housing itself) will help many people, to be sure. But in a not very long time, most of the gains will be eaten by those who have pricing power.

This, by the way, is far from a “socialist” theory. This comes out of bog-standard neo-classical economics. Non-competitive markets tend towards concentration of wealth, and those who have pricing power use it (they act in their own self-interest, precisely as economics says they will.) Markets are wonderful things. They are extremely efficient at allocating money. And they will do exactly what they are set up to do. In an oligopoly situation, with capture of government, they will allocate that money very quickly to the oligopolists.

So if you want basic income to work, you must also make capitalism work. You must create actual competitive markets, you must-trust bust, you must regulate and you must move, as government, to ensure that the important things people will spend that basic income on are not scarce—either naturally or artificially.

This extends far beyond basic income. A market economy; a capitalist economy, works to the benefit of the majority only when it is competitive and when scarcities are actively managed, ideally to remove them, and when they can’t be removed, to ensure that those who provide scare necessities, do not reap outsize profits which allow them to buy up the rest of the system, including government and civic society.

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The nature of a corporation and how it changed in the 1980s

By Ian Welsh

On February 8, 2015

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By Matt Stoller

Let’s start with Pfizer, which announced the acquisition of generics maker Hospira for $17B this week. Pfizer isn’t a drug company. Pfizer is a financial company that happens to own some labs and drug factories. Pfizer’s business model is to acquire small companies who innovate, lay off their scientists, and ride the patent or other monopolies. Former employees of acquired companies explain this clearly. So does Pfizer itself.

Pfizer is telling Wall Street that the acquisition will be ‘accretive to earnings’ and it will cut $800M in costs. Laying off scientists. What this means, in reality, is that large pharma companies are actually innovation destroying machines. How did we get here?

Prior to the 1980s, Americans understood that corporations were private governments of resources and people. Large corporation consolidations in the 1890s were done under the auspices of rationalizing the economy. Then antitrust from the 1930s to the 1970s was done to force these private governments to act in the public interest. RCA, GE, Alcoa, Dupont, Xerox, etc – all were forced by antitrust actions to put their patents into the public domain. The US gov’t structured markets as a way of ensuring that these political entities had checks and balances on their activities.

Antitrust was a Madisonian solution to the monopoly problem of the 1890s-1920s, which was understood as political NOT economic. This had an incredible effect. Large companies, like Dupont, were forced to spend more on R&D instead of acquiring innovation. Because they had to compete against smaller firms and they couldn’t acquire (due to merger scrutiny). Pfizer’s business model, in other words, would have been illegal prior to the 1970s.

Most of the laws that forced this state of affairs are still on the books. The were just reinterpreted by Reagan. Any President can simply go back to the pre-1981 model through executive action. Every merger is still reviewed by DOJ.

In the 1980s, an intellectual revolution took hold. Corporations were no longer private governments. They became property. They weren’t political entities, but economic entities pursuing ‘efficiency’. Corporations exist only for shareholder benefit. This idea was radical. Prior to this, few thought large shareholders were the only stakeholders, or even the most important ones. Eliminating all other interests – workers, managers, customers, communities, national security, small shareholders – was truly radical.

It was a political fight, but the Reagan conservatives along with Wall Street Dems of the early 1980s won. Liberal Democrats had focused their energies on important social questions, rather than the nature of the corporation. The result was Wall Street primacy and a massive merger boom in the 1980s. Layoffs, offshoring, globalization, monopolies, etc.

This idea that these private governments – corporations – exist solely for shareholders has led to a dangerous unbalanced politics. In which the industrial base, worker rights, small businesses, consumers, don’t matter. Even China’s strategic threat is irrelevant.

This is changing. Net neutrality is the first significant antitrust concept to emerge and take hold since the Reagan revolution. Because tech companies and citizens intuitively understand but can’t articulate that telecoms are private governments, not just property.

Which brings us back to Pfizer. The ability to create/sell medicine is of deep public interest. Pfizer has a state charter to do this. That Pfizer instead is full of financial engineers who generate cash by destroying access to medicine is increasingly understood. Same with hospital monopolies. These should not be run to maximize cash generation over patient well-being. This is a consequence of the Reagan revolution in corporate governance. It is unsustainable. And the ideas behind it are stale and bad.

All it will take to reorganize our culture is relearning that corporations are part of our political system and need to be managed through a Madisonian checks and balances system of ensuring competition and the public interest as mattering.

Antitrust is popular, Zephyr Teachout got huge applause lines on it when she ran a shoestring campaign in NYC. Net neutralit generated 4 million comments to the FCC. People get it. It’s simple stuff. The liberal lawyer elites aren’t there yet. But we’re beginning to understand the importance of the government protecting private property from corporate predators. And Citizens United is opening up a new (or rather old) way to understand how political corporations really are.

And that is why these ideas are coming back. And why our political system feels deadened, but is on the verge of renewal.

(And to make the point another way: In 2008, Pfizer/Wyeth spent $13B on R&D. 2009, Pfizer bought Wyeth. In 2013, the combined company spent $6.55B on R&D. Down 50%.)

Why the Sharing Economy is Destroying Prosperity

By Ian Welsh

On November 13, 2014

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Let us start with Uber drivers:

Uber has become like Walmart. Drivers now make less than the minimum wage when we do the math,” said Abdoul Diallo of the newly formed Uber Drivers Network, which opposes new lower fare rates set by the company.

The high-tech livery-service firm recently slashed passenger fares to compete with car services such as Lyft, Gett and regular yellow cabs, a move that drivers say takes money out of their pockets.

Some Uber drivers claimed fares — and their paychecks — had been chopped 25 percent in recent months.

Other drivers said they make less than a living wage, just $7 to $12 an hour after expenses and fees — far less than the $25.79 an hour Uber promises drivers can make by joining its fleet, protesters said.

Drivers began complaining that Uber was taking them for a ride back in July, when the company temporarily launched its less-than-taxi-rate Uber X service.

In late September, Uber extended those cuts permanently — outraging drivers.

Uber treats drivers like private contractors, saddling them with insurance, gas and vehicle expenses but the company has total control over fares.

In its essence the sharing economy is similar to offshoring and outsourcing in how it works.

Let us establish the basics: high income for individuals, absent government fiat, is based on a tight supply of whatever it is they are selling, and nothing else.

This can be a generally tight labor market, as in the late 90s or most of the years from 45 to 68, or it can be in a specific area. If you have an occupation where most people can’t compete, you make more money. This could be because you have skills they don’t have, it could be because of artificial scarcity imposed by regulation (most professions which require licensing), it could because of geography, and so on.

Hotels make decent money because any Joe or Jill can’t sell their rooms. Taxi drivers (or, more accurately, those who own the licenses) used to make decent money because any schmo with a car couldn’t compete. And so on.

In manufacturing terms, when those jobs pretty much had to be in a first world country, and the government enforced the ability of unions to strike by forbidding replacement workers, assembly line workers made good money.

So the sharing economy increases capacity. It increases supply to areas which had constricted supply.

Supply increases, and the profits and/or wages of those in the old sector go down. Spotify claims artists receive 6 cents to .84 cents per thousand plays. That means 1 million plays will get you 6K to 8.4. But there’s reason to doubt those numbers, Swift has refuted them, and earlier reports were lower as well, plus Indie labels get less.

All of these platforms: Spotify, AirBnB, etc… take huge margins. Spotify takes 30%. This is in line with what App Stores take, again, 30% being standard.

That number is one we’ve become numb to, but it’s essentially oligopoly or monopoly profits, a huge distribution rate. If you add that much to the cost of a product, it will sell far fewer copies and make far less money. That percentage comes directly out of profits.

In most cases, one or two sites control most of the business. Maybe three. That makes them oligopolies or monopolies. You go through them, or you don’t make a living, and once they are established, they are essentially impossible to dislodge.

In the fifties or sixties this would have been recognized as clear abuse of monopoly or oligopoly power and they would have been busted up or regulated.

But they aren’t. Instead what they do is lower prices, vastly concentrate earnings (30% is a lot, and makes you billions if you control any reasonable platform, even if that billions is from equity), and they lower wages and earnings to everyone who doesn’t control the platform.

Now the sharing plaftorms would be ok (minus the oligopolistic abuse) in a genuinely booming economy where there genuinely weren’t enough workers, and where companies were competing for workers by increasing wages and treating them well (think how programmers were treated during the late 90s internet boom.)

Bring the extra resources online, let people earn some extra cash by driving occasionally, and move people over to the parts of the economy that are booming and need workers.

We don’t live in that world. We haven’t, absent a few years, since somewhere between 1968 and 1980.

Instead what the sharing economy does is lower the value of specific types of labor and assets, allowing more people to compete, but reducing the actual earnings for those who are in that market.

Reduced prices might increase standards of living, and in any single case they do. The number of musicians who can’t earn a living under the new regime (not just Spotify) is much less than the number of people who can consume much more music. People who want to be driven prefer to pay less to Uber. AirBnB makes it cheaper to travel. Etc… There are genuine gains.

But added to offshorng, outsourcing, oligopolistic storefronts like AppStores and Amazon, and with increase parts of the economy moving into the sharing economy, while in the meantime older jobs have been deskilled (all fast food is deskilling of cooks jobs, for example), and you reach a point where “there are hardly any good jobs”. Prices are not dropping faster than good jobs.

The other effect of this is that because many of these trends are naturally oligopolistic or monopolistic (even fast food is, if you take a bit of time to think about all the small business restaurants they put out of business), they tend to concentrate wealth and income radically. That leads to capture of the political process by the rich (yes, even more than already), and that leads to policies like, well, turning anti-trust law into a dead letter, or endless copyright extension, or vast numbers of anti-union policies.

As Stirling Newberry once pointed out to me the more humans are fungible; that is one human can replace another and do whatever that person is doing, the less they have value. That doesn’t mean that fungibility is necessarily bad, it increases efficiency, can increase economic capacity, and so on, IF we choose to distribute the gains properly. But absent trends moving in opposite directions it decreases the amount everyone except those who control the points of coordination of the economy make while vastly centralizing wealth, income and power.

The Sharing Economy really isn’t. Sharing is the wrong word. And for now, while some of us many win and get income we need for it, overall we’re losing.

The way we distribute resources; the way we distribute necessities and the good stuff of life is going to have to change. Ultimately a market which clusters into oligopolies; deskills jobs; makes humans interchangeable; is not one which can produce widespread prosperity, let alone well being. If we continue to distribute goods and power primarily by market success, even if we manage a fix, it will only last a few decades at most—and there is no guarantee, this time, that we will manage a fix.

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