Income Inequality as a Security Issue

This is an interesting way to characterizing income inequality as a security issue:

…growing inequality menaces vigorous societies. It is a proxy for how effectively an elite has constructed institutions that extract value from the rest of society. Professor Sam Bowles, also part of the INET network, goes further. He argues that inequality pulls production away from value creation to protecting and securing the wealthy’s assets: one in five of the British workforce, for example, works as “guard labour”—in security, policing, law, surveillance and forms of IT that control and monitor. The higher inequality, the greater the proportion of a workforce deployed as guard workers, who generate little value and lower overall productivity.”

This is an expansion of my notion of security as a tax on the honest. From Liars and Outliers:

Francis Fukuyama wrote: “Widespread distrust in society…imposes a kind of tax on all forms of economic activity, a tax that high-trust societies do not have to pay.” It’s a tax on the honest. It’s a tax imposed on ourselves by ourselves, because, human nature being what it is, too many of us would otherwise become hawks and take advantage of the rest of us. And it’s an expensive tax.

The argument here is that the greater the inequality, the greater the tax. And because much of this security tax protects the wealthy from the poor, it’s a regressive tax.

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Posted on January 24, 2014 at 6:51 AM • 101 Comments

Comments

Jay • January 24, 2014 7:18 AM

“inequality […] is a proxy for how effectively an elite has constructed institutions that extract value from the rest of society. “

Is it?

That’s not self evident at all. Seems like he’s assuming the premise to me.

(In)equality doesn’t measure the level of extraction, it measures the sum of production+extraction.

Changes in (in)equality could just as plausibly be attributed to underlying differences in production.

Granite26 • January 24, 2014 7:24 AM

I like some of the argument, but a cost that falls on a person more heavily the more money they have to protect can’t really be twisted into a regressive tax, can it?

Jay • January 24, 2014 7:31 AM

The most obvious extraction is government transfer payments.

If you want to talk about “guard labor”, look at the government itself. It requires an enormous surveillance / and enforcement apparatus to insure tax compliance.

I’ll agree that it’s a security issue.

The IRS does as much snooping as the NSA. It’s done out in the open for everyone to see – they even send you a copy! We’ve just normalized it in the IRS context in a way we haven’t (yet!) with the NSA.

I’ll grant there are non-obvious extraction mechanisms. But lets not get so tied up in interesting subtitles that we miss the glaringly obvious either.

Taxation is non-voluntary and extractive.

And on the topic of “guard labor”, lets also talk about “capture labor”.

What does “guard labor” guard against? Lets call it “capture labor” – people trying to extract benefit rather than produce it.

The proper measure of loss is not “guard labor” but the sum of “guard labor” and “capture labor”.

“Guard labor” is increasing in direct response to increased attacks by “capture labor”.

Andy • January 24, 2014 7:38 AM

How is it, with generous social welfare programs, that income inequality is suddenly an issue in the the U.S. and U.K.? These programs have gotten so generous that it’s no longer desirable for the collectors to get off the program dole and get a job. We’ve invested tens of trillions in compulsory education, yet we allow kids to drop out without repercussions and in some ways we later reward them with generous benefits provided by those who didn’t drop out and do contribute to society. In the U.S., $66,000 tax dollars are spent on welfare benefits for each person collecting. Two thirds of those dollars are spent on adminstrative overhead, odd that charities can operate at 15% admin expense.

So, if these social welfare programs have not reduced poverty why are we still spending money on them? Why are we spending money on both education and welfare? To me is seems like it should be a one or the other. If you fail to capitalize on the compulsory education programs that are provided by taxing, why should you later collect welfare benefits that come from taxing?

The dream of a society where everyone is wealthy is a persuit that’s never achived its goal. The only places on this earth where income inequality is not an issue are the poorest countries and under oppressive regimes.

We can’t expect people who are getting something for free to one day wake up and decide to be productive. As long as we’re rewarding people for doing nothing, they will keep doing nothing. The income gap will continue to grow at an accelerating rate. My grandfather gave me the best advice. He said you can’t wait for other people to make things happen for you. You have to make them happen for yourself.

OIMO • January 24, 2014 7:48 AM

@Jay: Taxation is non-voluntary and extractive.

I’d disagree for the Super-Rich. Taxation can relatively easily avoided (i.e. legally side-stepped, rather than illegally evaded) by very wealthy through use of trusts and companies as tax shelters, offshore holdings, non-dom’ tax status and the like.

Ben • January 24, 2014 8:02 AM

One in five as guards seems very high….

Lo and behold, it turns out they are including the military, which is dubious. Worse, they are including the unemployed and prisoners as “guard labour” because they are part of the “reserve army” which supposedly keeps wages low for the benefit of the wicked capitalists. In other words it is just Marxist nonsense.

Jayadev and Bowles, 2006

Tip for anyone not from the UK: Will Hutton is always wrong.

Kevin Lyda • January 24, 2014 8:20 AM

Andy’s comments are not based in fact. Statistics show that most people collect the dole/welfare for very short periods of time. In the US for instance, only 25% of families who receive welfare are viewed as welfare dependant.

paulie • January 24, 2014 8:23 AM

Just as Global Warming is a security issue, and therefore something must be done eh Guardian? There’s a war on you know. But what is the proposed solution, and what is the tax on that? As David Hume said, regarding Hobbes’s Leviathan, “let’s look around”. What is the cost, to the poor, of “guard labour” and redistribution in jurisdictions boasting “equality”? I will not accept the exclusion of the Soviet, Chinese, and North Korean famines from the analysis.

Larry • January 24, 2014 8:30 AM

The U.S. and all other governments are complete frauds now. They are chasing every possible avenue to strip their citizens of their own property – monies. My wealth is hidden where these commie minded government thugs will never find it and be able to confiscate it. Anyone with half a brain should see that they should be doing the same. When the government becomes lawless as they are now, people should not consider obeying such lawless action.

Bruce Schneier • January 24, 2014 8:33 AM

“I like some of the argument, but a cost that falls on a person more heavily the more money they have to protect can’t really be twisted into a regressive tax, can it?”

Yes, I’ve been thinking about this since I wrote it. And while my intuition tells me that the tax is largely regressive, I don’t think I can prove it.

Here’s my intuition: most of the tax is paid out of “general funds”: the law-enforcement system. And while the rich pay more into the general funds account, the poor pay much more as a percentage of their income.

But, yes, this kind of analysis is far out of my area of expertise.

Phil • January 24, 2014 9:12 AM

I work in a form of IT that ‘controls and monitors’, I don’t think that I ‘generate little value’ and ‘lower productivity’. In fact, I make a tidy sum of ‘value’ for my employers and my family.

Only securing the wealthy’s assets? Do the police not respond to all citizens? Does a bank’s security only protect people with more than a certain amount of money?

A Leap At the Wheel • January 24, 2014 9:16 AM

Jay – Glad to see the first comment points out the sucking chest wound of a logical fallacy. But don’t forget that, especially in times of rapid technological changes, (in)equality is also plausibly attributed to changes in productivity, where fast movers can reap big rewards for being the first to find newly productive uses of new technology.

The linked author’s point is probably more accurate in pre-industrial periods when growth was nil+a rounding error. Then, just about the only way to build up wealth was via extraction. There are lots of other ways now that must be accounted for.

Bardi • January 24, 2014 9:23 AM

Phil – but the point is your job would not be there were there no security issues. This is an issue with dishonest people (NSA) as well as just badly written software.

and, the police do not respond to citizens equally. Ask any cop working in a largish city.

Ben • January 24, 2014 9:27 AM

@Bruce, “this kind of analysis is far out of my area of expertise”

This kind of analysis is nonsense. They can only reach the one-in-five figure by including the military, and the entire defence sector, ….. and the unemployed.

Those at the back of the class: Unemployment is not a form of labour.

It’s kind of disappointing that I seem to be the only person, either in the Guardian comments or here, who has actually taken the trouble to verify the source of an obviously ridiculous statement. (I linked to it in an earlier comment to this post, but here it is again: Jayadev and Bowles, 2006. It’s even called out in the abstract!)

Tanuki • January 24, 2014 9:29 AM

This sounds like a specious excuse for the State to reduce ‘income inequality’ by way of some kind of enforced redistribution in the hope that this will reduce the implied threatiness of those lower-down the wealth-scale.

Isn’t that otherwise known as a protection-racket? Pay us your taxes so we can use them to pay-off the proles or they ‘might just’ burn down that nice Internet of yours?

Andy • January 24, 2014 9:47 AM

Sorry Kevin, you’re just wrong. The welfare rolls in the U.S. are swelling and it’s even worse when you look the growing number of people collecting disability and the conditions that now qualify for free money. 1 in 5 U.S. residents is collecting welfare via food stamps. Even Charlie Sheen couldn’t claim WINNING! Johnson’s war on poverty has yielding nothing but trillions that went nowhere.

YeahSure • January 24, 2014 9:52 AM

@Ben “This kind of analysis is nonsense. They can only reach the one-in-five figure by including the military, and the entire defence sector, ….. and the unemployed.”

Actually read the numbers you are quoting Ben. In the last year reported in the paper you cite (2002) the guard labor percentage is more than 26%. IT IS 20% (1 out of five) WITH THE UNEMPLOYED AND MILITARY REMOVED.

I love your kind of half-truth telling. Nobody should be suckered by it.

Lon • January 24, 2014 9:58 AM

Let’s remember that Fukuyama wrote “a kind of tax”. The word “tax” apparently works like blood in the water works for sharks on the intertubes. Perhaps better to call it a friction, something that reduces the efficiency of the system, supplies a required benefit, but that benefit may not benefit the system as a whole, and could be reduced with redesign.

If you care about systems and what Bruce is saying, you’ll find this interesting analysis. If you are forever concerned about people taking things away from you, Fox News is for you. They’ll listen.

Regressive or not, the friction does not burden those who get the most benefit. One-in-five is an unfortunate, and looks to be incorrect construct. But don’t let that dominate the argument. There’s clearly a protection process going on, and it clearly could be reduced by rational redesign.

YeahSure • January 24, 2014 10:02 AM

@Andy

I love this kind of argument. Corporations destroying the economy and forcing people into the ever decreasing social safety net is used as an argument against change in the status quo. These people are not necessarily even unemployed with businesses paying full time workers so little that they qualify for assistance.

Yeah, sure. All those lazy people living and eating and raising kids on my incidental coffee break & snack budget. They are really making out.

Clive Robinson • January 24, 2014 10:06 AM

Hmm unequal taxation, wasn’t that part of the beef that supposadly gave rise to the Boston Tea Party?

Tred with care when listening to the words of those with a vested interest.

Tax generaly falls into three parts “Personal” “Corporate” and all the other bits where fiddles abound.

Personal tax is generaly based on two things “earned income” and “unerned income” (which falls into the “here be fiddles and dragons” department).

Earned income is usually taxed in three ways, direct percentage of income direct percentage of spending and other bits such as “social” and “land” taxation.

Now usually direct percentage taxation has an “offset” that is often incorectly portrayed as a benifit for the poor, by way of a “Personal alowance”. The real reason is “diminishing returns” that is the cost of taxing this money negates the benifit of collecting it (or thats how it started).

And this “diminishing returns” along with “lobying” for fiddles is the reason taxation generaly falls on the middle classes not the poor or the rich.

Now in the UK a political party made a sugestion that sounds outlandish but their is increasing evidence will get rid of nearly all the ills of taxation and welfare.

It’s quite simple, the main broad points are, firstly get rid of all the fiddles and the personal tax alowance, secondly set a flat rate of tax across the board on all income be it earned or otherwise personal or corporate, thirdly pay everyone a fixed sum of money broadly equivalent to the personal alowance (which in most places is significantly higher than pension or welfare payments).

It simplifies and significantly reduces the cost of collecting tax, secondly it gets rid of most if not all of the costs of pensions and welfare.

Importantly it gets rid of the “benifit trap” where people don’t take payed employment because the would “lose benifit” because everybody gets the fixed benifit earning or not.

There is also increasing evidence that even quite modest paments of around 10,000USD paid this way are sufficient to eleviate poverty and importantly the health issues in children that significantly hinder their development that otherwise reduces not just their life chances but length of life as well.

Interestingly it has also been shown to have a significant reduction effect in later life criminal activity and the savings from this alone would provide a significant reduction in taxation requirments.

Whilst I apreciate there is much room for argument the question you have to ask is “How much does the complex tax legislation give rise to ‘work creation’ that has no other economic foundation?” That is it creates a “faux market” that is a false and unnecessary burden on society, simply for bureaucrats to create “empires of the indolent”.

Bob Robertson • January 24, 2014 10:14 AM

Fukuyama is no economist. It’s important to remember that he’s a political commentator, just like Paul Krugman.

“Income inequality” is not particularly important. People like Rockafeller, Getty, Carnegie, these make today’s wealthy Americans look like children.

Yet at the same time, the real wealth of the “bottom 90%” was rising like mad. People like Carnegie and J.C.Penny came out of nowhere, and fortunes were both won and lost, while productivity rose on a 200 year march that created material wealth for the poor that was only available to the super rich in the thousands of years before.

So what’s changed? Since 1971, the standard of living in the US has been decreasing, rather than increasing. With the stunning advances in productivity, such as the ‘Net, the cell phone, the PC, we should be living like George Jetson, coming in to work for 2 hours a week to push the one button that can’t be automated, while supporting a family of four in comfort.

That’s the kind of works people envisioned, until the gold standard was finally abolished entirely, and the wholesale debasement of currency began world wide.

The reason people are upset is not because someone else is rich. That’s the politics of envy, that is how the politicians distract people from learning what is really wrong.

People are upset because they are getting poorer while working harder. Their wealth is being stolen daily by the Federal Reserve, income taxes, sales taxes, taxes taxes taxes. Inflation by the Fed robs anyone who tries to save money, turning the stock market into a casino because of desperate people trying to overcome massive inflation of the money supply.

Bubble after bubble wipes out the savings of the desperate, while bankruptcy looms even for the various governments themselves who thought they could tax their way to prosperity.

Do not look to political pundits for any form of reason. Look to economics: http://Mises.org/

anonymous • January 24, 2014 10:21 AM

The argument used by conservatives (and libertarians) to support their theory of capitalism is that it is the only system that accounts for “human nature”. People, they say, will not work as hard for others as they do for themselves.

Yet they also believe that any amount of inequality is acceptable, as long as it is the result of the “capitalism” and the “free market”. Conservatives are unaware that our knowledge of behavior, psychology, and even game theory have advanced since 1957 (the year that Atlas Shrugged was published).

For example, in the Ultimatum Game, developed in 1982 (the year that Ayn Rand died), the experimenter offers two players a sum of money, say $100. The first player decides how the money will be divided: 50/50, 60/40, 70/30, etc.

Conservative (and libertarian) theory tells us that homo economicus #1 will split the pot as unfairly as possible — 99/1 — and that homo economicus #2 will accept the division, since he is better off with $1 than with $0. “A rising tide lifts all boats”, they say. But that’s not what happens.

What happens is that “the most frequent offer is a 50-50 split”, 1/2 of the second-players reject a split greater than 70/30 *, and that “offers of less than 20% are often rejected”. **

Those who claim that “there is no such thing as fairness” ***, who believe that people will tolerate any amount of income and/or wealth inequality, are just as wrong about “human nature” as the collectivists who believe that people will work “from each according to his ability, to each according to his need” indefinitely.

A rising tide may indeed lift all yachts, but it doesn’t benefit those who don’t have a boat, or even a life-jacket, and are treading water just to stay afloat.

The conservative (and libertarian) response may be that those who reject any amount of income/wealth inequality are not rational. But it doesn’t change the fact that they are just as wrong as the collectivists when making assumptions about which their socio-economic models are based on. Because most humans are mostly fair, most of the time. And a model that doesn’t account for the fact that humans aren’t perfectly rational is wrong.

What does this have to do with security?

First, contrary to conservative (and libertarian) myth, the market does not cater to majority needs as indicated by price. In reality, it caters to the whims of those most able to pay. When income and wealth are grossly concentrated in the hands of a few, the market becomes a centralized economy, ignoring the needs of the many. That didn’t work out so well for the Soviets. If you believe in free markets, then gross income and wealth inequality are a distortion of and threat to the economy.

Second, most of you have probably seen these YouTube videos about income inequality:

“Wealth Inequality In America”
http://www.youtube.com/watch?v=QPKKQnijnsM ( 6 1/2 minutes )

Nick Hanauer TED Talk
http://www.youtube.com/watch?v=bBx2Y5HhplI ( 6 minutes )

The first video deals with perceptions vs the truth about income/wealth distribution. If people knew the true status of income and wealth inequality in America, they would be rioting in the streets. And telling the masses that “Capitalism is great in theory, it’s just that people aren’t good enough for it” isn’t going to cut it. People aren’t going to lay down and starve just so Ayn Randian supermen like Koch, Bloomberg, Gore, Soros, Romney, etc., can accumulate another billion or so — even if the right-wing thinks they should. (Is it any wonder that 1%ers like Bloomberg want to disarm the civilian population? But that’s another topic…)

  • Bruce Schneier. Liars and Outliers. pp. 254-255. (note # 14 for Chapter 3. FYI, you need to correct the Index entry for “Ultimatum game”, which says pp. 256-257).

** Wikipedia.

*** Except when talking about tax rates. Then it’s not fair that the rich have a higher income tax rate, even if they don’t actually pay it.

Winter • January 24, 2014 10:29 AM

There seems to be a lot of security to economic inequality:

United States incarceration rate
https://en.wikipedia.org/wiki/United_States_incarceration_rate

While the United States represents about 5 percent of the world’s population, it houses around 25 percent of the world’s prisoners.[3][4] Imprisonment of America’s 2.3 million prisoners, costing $24,000 per inmate per year, and $5.1 billion in new prison construction, consumes $60.3 billion in budget expenditures.

How Income Inequality Affects Crime Rates
http://financesonline.com/how-income-inequality-affects-crime-rates/

Ben • January 24, 2014 10:32 AM

@YeahSure: “I love your kind of half-truth telling”. Try again.

The figure quoted was for the UK not the US: ” one in five of the British workforce, for example, works as “guard labour””.

The UK’s figures from the paper are:

United Kingdom
Supervisors: 13.4
Unemployed: 5.5
Military: 0.7
Prisoners: 0.2
Total: 19.9

I said “They can only get to the one in five figure by including the unemployed”. I await your apology.

…..
Now look closer at the figure for supervisors. Again quoting from the paper (page 336):

“””
We have deliberately constructed a model in which productive and guard labor are readily distinguished, because, in the case of supervisors, as Marx put it, the work of supervision becomes their established and exclusive function. This world is fictional, in that most types of work combine some of both aspects. Foremen monitor workers and also solve technical or coordination problems that are clearly productive in the sense just defined. Teachers instruct the next generation in essential productive skills; and they also socialize them to internalize the norms contributing to conformity to the society’s institutions, and so on.
“””

The details of how the supervisor figure is made up is in a separate paper:

http://repec.umb.edu/RePEc/files/jayadev-egl.pdf

Guard labour includes anyone who has the capability to discipline a subordinate.

In other words, the entire output of anyone with a supervisory job title or supervisory responsibility as part of their role is counted as “guard labour” rather than productive. In most industries foremen take an active part in the work, they do not just supervise. The entire activity of anyone called “team leader” or “foreman” is being counted here as guard labour, even though the authors themselves acknowledge that this is “fictional”.

Tim L • January 24, 2014 11:07 AM

@anonymous “…the experimenter offers two players a sum of money, say $100.”

The assumption built into this experiment happens to be the Marxist premise that the problem of economics is wealth distribution rather than wealth production.

If you consider food in the grocery store, it did not exist six months ago. It had to be produced.

Capitalists solve the production problem.

An appropriate legal framework that protects individual rights is necessary for a capitalist system to function. Property rights imply that no one has the right to “equalize” wealth ownership.

One fallacy of game theory is in treating values as intrinsic and non-teleological, rather than as objective and dependent an individual’s goals in the whole context of their life.

Game theory can’t be substituted for ethics because math can be substituted for logic.

Tim L • January 24, 2014 11:08 AM

Typo correction in my last post:

Game theory can’t be substituted for ethics because math CAN’T be substituted for logic.

Nick P • January 24, 2014 11:25 AM

@ Bruce Schneier

Going from excerpts you gave, I think he’s heading in the right direction but using the wrong perspective. He’s thinking in terms of the citizens. It’s not their system, though, any more than the plantation belonged to Southern slaves or indentured servants. The proper perspective in a plutonomy is thinking in terms of those that own, shape, control & receive most benefit from the system: the elites.

To the elites, there is certainly a portion of revenues that goes toward the security of their system. They think of it as a cost of doing business like anything else. Call it maintenance, overhead, an inefficiency, etc. They always look for ways to minimize it to squeeze out more profit. Either way, the systems are still giant money makers for them.

Best to look at the privileged few like an oligopoly market with special rules, tactics, and benefits.

Bob Robertson • January 24, 2014 12:31 PM

@Tim L., one more way that Game Theory does not translate to real life is that most games are based on the theory that one person’s gain is another person’s loss.

When people trade, they do so because they want to. They trade what they individually value less for what they individually value more. The store owner wants my dollar more than their product, I value his product more than my dollar.

Win-Win.

When people transact freely, wealth for everyone increases.

Bob Robertson • January 24, 2014 12:35 PM

Anon wrote: ” Conservatives are unaware that our knowledge of behavior, psychology, and even game theory have advanced since 1957 (the year that Atlas Shrugged was published).”

Socialists are unaware that the knowledge of economics has advanced since 1860.

http://Mises.org/

Anura • January 24, 2014 12:38 PM

We love to talk about how welfare is the problem, but average hours worked per employed person has been fairly static in the last 30 years, in the 2000s the percent of the population that is employed was as high as it ever was, and unemployment was about as low as it ever was, yet GDP growth was the worst it’s been since the great depression, and household income (adjusting for taxes, social security, unemployment, welfare, etc. but not capital gains) for the bottom 80% peaked in 2000 before declining, and remaining stagnant through the decade (despite personal consumption being a higher and higher portion of the GDP), and it is now declining as the percent of the population that is employed remains steady (No, Obama, the employment situation isn’t improving, that’s what happens when nothing is done, and sorry Tea Party, Obama’s approach to the economy has been very capitalist and focused on primarily on things that benefit corporations and the wealthy) and GDP is growing as well, although slowly.

The figures are bleak, and my fear is that if we don’t do something about it then we will end up with the biggest security problem I can imagine: revolt. The right will implement half measures to look like they are fixing these issues, and the far right will continue their policies of deregulation and tax cuts for the rich, despite a lack of results over the last 30 years.

I personally don’t care how we solve the problem, just that we identify a good goal and get results: a society in which everyone grows happier, healthier, and less stressed as production per capita grows. The bottom 80% seeing 14.3% net growth in income over 30 years as per-capita GDP grows nearly 70% does not seem to be the best use of our resources, especially when more and more of our GDP is made up of Personal Consumption Expenditures.

Percent of Population Employed:
http://data.bls.gov/timeseries/LNS12300000
Hours worked:
http://stats.oecd.org/Index.aspx?DataSetCode=ANHRS
GDP:
http://www.bea.gov/national/xls/gdplev.xls
Real per Capita GDP:
http://research.stlouisfed.org/fred2/series/USARGDPC
Household Income:
http://www.census.gov/hhes/www/income/data/historical/household/2012/H03AR_2012.xls
PCE as a percent of GDP:
http://research.stlouisfed.org/fred2/graph/?g=hh3

paul • January 24, 2014 12:48 PM

Bruce: if you look not only at obvious “guard” costs such as law enforcement, you might get a roughly flat incidence (although of course each dollar is worth way more to the poor person than to the rich one). But if you think about all of the “guard” costs a business incurs that get passed on to customers in the form of higher prices, or to lower-level employees in the form of downward pressure on wages, there’s a definite regressive effect.

There’s another strong regressive effect from the fact that most enforcement happens to poor people. If you or I meet a police officer or a security guard, we nod and go our way. If some scruffy person meets that same guard, their chances of being stopped and questioned are much higher. They may even alter their activities to avoid such interactions. All of that costs time and resources that could be used for doing higher-utility things. (And of course if the poor person gets sent to prison for an infraction that would be waved away in the case of a rich person, that’s pretty much a 100% regressive tax.)

Tim L • January 24, 2014 12:58 PM

@Lurker “Boolean algebra. Formal logic is just a branch of mathematics.”

Boolean algebra is a branch of mathematics, but Boolean algebra is not Aristotelian logic, the kind people think with.

“Reason and Analysis” by Brand Blanchard covers the fallacies of symbolic logic in detail, including the notion of “truth values” (logical atomism).

Boolean algebra is great for making machines, but it isn’t a proper foundation for conceptual thought.

45kgjn4kjgn45g • January 24, 2014 1:07 PM

I’ll let the majority of the comments here speak for themselves.. I’m just surprised nobody has bothered mentioned we(US) live in a capitalist republic, it’s designed to create inequality, especially considering the level of deregulation in industry since the writing of the constitution..

It’s also worth mentioning political infrastructure like socialism has never made it to implementation because humans are naturally self-righteous and greedy and we always create plutocracy to maintain power once we win over other demographics..

Michael Froomkin • January 24, 2014 1:12 PM

I was intrigued by your reference to Bowles’s claim that 1/5 of the UK workforce is “guard labor”. That seemed…sort of high…so I decided to see on what he based this.

There are two papers. The first, the one you mention, http://www.santafe.edu/~bowles/GarrisonAmerica2007.pdf , says the numbers are in an earlier paper in J.Dev. Econ which it then neglects to cite. But I believe that I found it at http://www.international.ucla.edu/cms/files/jayadev_bowles.pdf

The number is not at all what it sounds like. “Guard labor” is defined as the sum of several categories.

Start with everyone who works in a supervisory capacity, including foremen, as opposed to the “productive” people on the line. That’s where more than half of his number comes from, but that’s not what his number sounds like at all. To call it padded is an understatement.

To get the total, add in police , the military (including uniformed and civilian employees), prison guards , discouraged unemployed workers (huh?), private guards, judicial officers, and prisoners. [see p. 337 of the paper]

So I agree “guard labor” may be an intriguing concept, and it does appear that there has been some real growth over it over time, but the real numbers are very very much smaller than Bowles’s headline number suggests. E.g. “guards” + “military” = circa 4% of US workforce compared to about 1.5% in 1929.

So what we actually have is a measure more of HIERARCHY in firms (and of changes over time and internationally) than anything else. Itself a very interesting number, but quite different.

David • January 24, 2014 1:13 PM

Income inequality that is obtained through saving and capital investment is not a problem. When it is obtained through cronyism, lobbying and bribes it is a problem.
The economy is not a zero sum game.

A Leap at the Wheel • January 24, 2014 1:21 PM

45kgjn4kjgn45g, I would love to hear your list of regulated industries at the time of the writing of the constitution, and the metric by which we have less regulation now than then.

Also, it pure revisionist history to say that the US is ‘designed’ to create inequality. Its pretty plain from the Constitution, the Federalist Papers, and the other writings of the founders that the US was ‘designed’ to protect Lockian conception of liberty. Equality or inequality is completely orthogonal to the design.

Which, for a group of rich dudes well schooled in overly-moralistic, then-consensus history of Rome, seems kind of dumb. But there you go.

Anura • January 24, 2014 1:32 PM

In the end, what the system was designed to do, what the founding fathers wanted, etc. is completely irrelevant. It does not matter what it was designed to do, all that matters is what we want today. High inequality is not good for society, it’s not even good for the economy, especially if the economy is going to be consumer driven. What matters is that the model we’ve been running for the last 30 or 40 years has failed to produce results.

Throughout the 1950s and 60s we saw a huge boom in economic growth, and income grew for everyone. The 70s 80s and 90s all had about the same level of growth, significantly lower than the 1950s, but growth in income for most of the people and growth in per capita GDP started to diverge more and more, then with the 2000s (even excluding 2008+) we were slightly better than the 1930s in overall economic growth and income stagnated for most of the population. However, there is no plan to fix this problem, and it is a dangerous problem to ignore.

Bob Robertson • January 24, 2014 1:44 PM

“especially considering the level of deregulation in industry since the writing of the constitution”

Hahahahahahahaha!

Adjuvant • January 24, 2014 3:02 PM

@Bruce
I expect you’d find the work of Raymond W. Baker to be complementary. A fine introduction may be found in this address to the World Affairs Council of Connecticut. Baker opens his talk as follows [my “rush transcript”]:

“How many of you want capitalism to survive? As I do! … Any hands not up? … For those who do and those who don’t, guess what? Not going to happen: not going to happen. Not going to happen unless this changes: the enormous disparity income between those at the top and the lack of income available to those in the rest of the world.”

One of the more valuable insights I gained from the address and Baker’s book is an understanding of how and why the GDP of every country in the world is misstated as a result of illicit financial flows. See chapters 8-10 & 14-15 of video — 15 for direct criticism of the World Bank’s reporting. Baker’s NGO attempts to provide the hard data on the missing numbers.

From a security perspective, though, you might consider this anecdote from Chapter 7 of the video [my “rush transcript”]:

In 1997, I found myself in Lyons, France talking with the global director of anti-money laundering activities at INTERPOL, a global police organization. This gentleman was an American; he was bright, experienced, has been four years in the job, and he was about to retire. So he was feeling talkative. For two and a half hours, in what was virtually a monologue, he told me tales of drug dealers, criminal syndicates moving their money around the globe in order to get it into the Western financial system. And when he had finished he sort of self-confidently leaned back and rather dismissively asked me if I had anything to add to what he had said. And I responded, “Anything to add? You haven’t cited a single example of moving drug and criminal money that I haven’t seen years ago in the business of moving corrupt and commercially tax-evading money.” He bolted forward, learning for the first time that everything he had worked on for four years had its antecedent in the normal routine of moving corrupt and commercially tax-evading money.

Quite a lot to chew on here, and it opens a broader vista upon the international financial system and its discontents. I also recommend Baker’s book very highly.

Sergey • January 24, 2014 3:53 PM

There was an actual experiment of “ubiquitous equality”, the USSR. Of course, the party leaders were “much more equal than the others”, to quote “1984”, but let’s put that part aside for now. Let’s also put aside the question of stealing from the government and in general of obtaining the benefits from the government.

But even if we look at the equal common people, we’ll find that they were stealing from each other like there is no tomorrow. Anything that was not nailed down got stolen, and the nailed stuff was un-nailed and also stolen. So the income inequality has nothing to do with it.

What does? First, the morality of the society. Theft was officially considered bad but in practice it was seen as cool. Everyone boasted to their friends, how they’ve managed to steal something. And I’m not talking about the “troubled youth”, I’m talking about everyone of every age. Second, the punishment and lack thereof. All this theft largely went unpunished. And third, the irresponsibility, the said feeling of no tomorrow. The soviet propaganda said, “the confidence for the future” but it basically translated to every day bringing the next hand-out. Just spend what you’re given, steal what you can and also spend. There will be more handed out tomorrow. Or you can lose everything tomorrow including possibly your life, it’s not up to you, it’s up to the high powers. There were no consequences for your own actions. If you try to save, you’re guaranteed to lose it, either because someone will steal it or because the government will consider your saving a crime.

45kgjn4kjgn45g • January 24, 2014 4:13 PM

To the people criticizing my statements: Are you going to say with a strait face that we don’t have career politicians, and most of our labor infrastructure in foreign countries? These two realities are just the most obvious products of industry deregulation and violation of the US constitution..

Also, America is a country that borrows it’s own money and includes foreign production so it can fake it’s GDP every year. At what point are Americans going to stop pointing their fingers at other countries and wipe it’s own you-know-what?

Go on telling me how I’m wrong like we’re talking about a high school football team..

Bob S. • January 24, 2014 4:13 PM

It occurred to me the addition of multiple layers of security (e.g. +200 new cameras and 3000+ security guards for the Super Bowl) everywhere in the USA isn’t to protect us from “TERRORISTS!!!” so much it is to control measure the lower class (spectators) lest they become prone to RIOT, THEFT and PROPERTY DESTRUCTION thus inconveniencing the owner class. And, the spectators pay their guards salary via outrageously priced tickets…and taxes.

In short, it’s an expression of the class war launched on all of us over 40 years ago.

Anura • January 24, 2014 4:36 PM

@45kgjn4kjgn45g

The formula used to calculate GDP is “GDP = Personal Consumption + Gross Private Domestic Investment + Government Investment + Government Consumption + Exports – Imports”

Importing does not inflate our produciton. There’s nothing wrong with outsourcing in and of itself, just like there’s nothing wrong with automation, the problem is that we need to make sure that everyone benefits from it and not just business owners. What I do have a problem with predatory capitalism, in which we find countries that are beginning to industrialize, and then get them to make exports their primary focus instead of domestic production. Exports are fine, but if you can’t clothe your people but you are exporting enough clothing to clothe the west, then your priorities are backwards; you should export what you don’t need, not what you do need.

Trade is always mutually benefitial to some extent, but it’s not always a net benefit when compared to no trade.

Adjuvant • January 24, 2014 5:11 PM

@Anura: What you mention is only the tip of the iceberg. Here’s another Baker piece from a few years back

Some analysts suggest that perhaps half of global trade and capital movements pass through tax havens and secrecy jurisdictions somewhere between origination and completion. Financial secrecy is not just a tax or law enforcement problem. Even more importantly, it is an economic development and human rights problem of huge proportions. The Washington NGO Global Financial Integrity estimates that $1 trillion in illicit money is spirited out of developing countries every year, utilizing the global shadow financial system.

This outflow drains hard currency reserves, heightens inflation, reduces tax collection, cancels investment, cripples foreign aid, undermines free trade, worsens poverty, and forestalls sustainable growth for billions of people. With official development assistance recently running about $100 billion annually, for every $1 being generously handed out across the top of the table, the West is taking back some $10 under the table. The human cost of these financial outflows from developing countries is vast.

And here’s Baker’s book

YeahSure • January 24, 2014 5:23 PM

@ Ben “I await your apology.”

Oh, Ben!! You make me chuckle. Sure I made a mistake. It was the US that won the guard labor contest!! Woohoo!!

But an apology? Oh golly!! You totalitarian personalities make me all hot and bothered. So sexy with all your disciplinary apparatus!!

It is curious that most of the so called guards are supervisors. I imagine that would include middle management who in my corporate experience seem to do little except try to look busy and avoid the ax. Not much guarding going on, or anything else for that matter.

Cross national comparisons of who the guards are is hard. The military does more policing in some nations, less in others. Those Special Forces the US has in 160+ nations, well they’re all teachers, I’m sure.

Thanks, Ben. You made my day.

Neil in Chicago • January 24, 2014 6:06 PM

bad ratio of data to bias here
If everyone on the TSA payroll stayed home and just cashed their paychecks, it would be a net gain for the economy.
If every photo-ID checking flunky in the lobby of an office building stayed home, life would be more pleasant and business easier.
I think a large majority of your readers would agree. Not as many might agree that we’d be better off without the hundreds of thousands of sinecures making up the “War on Drugs”, but I think it’s more of the same.
These are things we all know from daily life, and don’t have to look up. One in five seems high, but it’s crushingly obvious that a lot of “security” is simply hobbling of the economy.

Clockmaker • January 24, 2014 7:29 PM

Income inequality has been demonstrated empirically to be caused by inflation and cronyism in government/private systems. I think this is a statement that people from all sides of the equation can agree on, including Chris Hedges, Lord Keynes, and F.A. Hayek.

@Anonymous:
Ayn Rand is hardly a Libertarian. She took some libertarian ideas and pulled out all the humanity and compassion, leaving the result.

To really understand the inequality problem is to understand Austrian economics. Inflation hurts savers, and encourages fascism also known as cronyism. I highly recommend everyone read F.A. Hayek’s “Road to Serfdom” Even Keynes had only great things to say about it.

45kgjn4kjgn45g • January 24, 2014 7:47 PM

@Anura: There are some nuances related to my comment in correlation to your response to it, but your statements are more interesting and usable.

Another thing not factored by anyone here are common HR practices that directly dictate economic classes through income. HR filter algorithms are mostly built around social compatibility and all that entails. It’s easy to say most people just don’t want to work, even though the typical US state has an average unemployment rate of around 20% of it’s employable population.

That reality also manufactures a lot of crime stats.. People always bind lazy explanations to these things which is why they are never remedied at a changeable rate. Most of the time it’s blanketed by race bias..

Anura • January 24, 2014 7:49 PM

@Clockmaker

I don’t think inflation makes sense as a cause of inequality. There tends to be an inverse correlation between inequality and inflation, that is as inequality increases, inflation decreases and vice versa. This is due to demand-pull inflation, and is obvious in areas with a rapid decline in unemployment. Conversely, in the US the last few decades have seen very low inflation compared to the 50s and 60s, and 70s, but combined with growing inequality and slowing economic growth. Around 2008/2009, we saw deflaiton as inequality jumped with the loss in jobs; this is something that is expected, as prices increase and decrease with demand.

Clockmaker • January 24, 2014 8:52 PM

@Anura

Inflation absolutely does cause inequality. As inflation goes through the system, not all asset prices go up at the same time. In the current and also many other inflations, the current cost of food and energy are going up at disproportionate rates versus other asset classes, which disproportionately hits the lower income brackets. That’s one reason we had riots in the middle east. Food and energy make up a very large proportion of disposable income, and income always lags inflation!

Incidentally inflation measured by the CPI calculation using the calculation from 1990 puts us at almost 6% current vs the sub 2% claimed. In fact, most of the government figures put out by the BLS are complete lies and easily proven to be so, but I digress. The below thoughts on the subject are clearly outlined by Martin Spitznagel:

“The relentless expansion of credit by the Fed creates artificial disparities based on political privilege and economic power.”

David Hume, the 18th-century Scottish philosopher, pointed out that when money is inserted into the economy (from a government printing press or, as in Hume’s time, the importation of gold and silver), it is not distributed evenly but “confined to the coffers of a few persons, who immediately seek to employ it to advantage.”

“The Fed is transferring immense wealth from the middle class to the most affluent, from the least privileged to the most privileged. This coercive redistribution has been a far more egregious source of disparity than the president’s presumption of tax unfairness (if there is anything unfair about approximately half of a population paying zero income taxes) or deregulation.

Pitting economic classes against each other is a divisive tactic that benefits no one. Yet if there is any upside, it is perhaps a closer examination of the true causes of the problem. Before we start down the path of arguing about the merits of redistributing wealth to benefit the many, why not first stop redistributing it to the most privileged?”

Quotations from: http://www.zerohedge.com/news/guest-post-wealth-inequality-%E2%80%93-spitznagel-gets-it-krugman-doesn%E2%80%99t

Another couple Amazing economic texts that are highly worth reading are:

“Monetary regimes and Inflation” – Peter Bernholz
“Dying of Money” – Jens O. Parsson – freely available online

Buck • January 24, 2014 9:40 PM

@Clockmaker

why not first stop redistributing it to the most privileged?

Uhh because… of uhh… trickle-down economics?
Yeah, that’s the ticket! Surely those with more resources are more well qualified to allocate them in an economically/socially responsible manner… Duh! 😛

At it’s finest:

Warren Buffett might be the epitome of the cautious investor, but he’s betting $1 billion on this year’s NCAA tournament.
Quicken Loans is offering a $1 billion prize to the basketball fan who submits the perfect NCAA bracket for this year’s tournament. And the prize, if there is one awarded, will be paid out by Buffett’s Berkshire Hathaway.

http://money.cnn.com/2014/01/21/news/companies/buffett-ncaa-bracket/

Gotta wonder who’ll win that one… Man or machine?

Clockmaker • January 24, 2014 9:42 PM

and one last one:

D – Taxes as a percentage of real disposable income have more than doubled since 1980. This trend has not been kind to the bottom 90%.

http://www.zerohedge.com/news/2014-01-02/biggest-redistribution-wealth-middle-class-and-poor-rich-ever-explained

This is an extremely important issue, one that there is clear empirical data for, but is, like other issues such as the NSA, pushed aside for political and economic reasons. Thank you Bruce for bringing it up.

Clockmaker • January 24, 2014 9:52 PM

@Buck

Warren Buffet is certainly one of the biggest crony capitalists of our time, like the Rockefellers of old. To think I drove to Omaha to sit through one of his circus shareholder meetings once. I once had great respect for him… He is a fascist and nothing like his father, who seems to have been an honorable man from what I can tell.

Warren Buffet gamed the system in 2008 by using the government to get a deal on Wells Fargo, is gaming the system by blocking a pipeline so he can ship oil via rail, and has straight faced deceived everyone who would listen by asking to “raise my taxes” when his wouldn’t go up a dime under those same rules proposed. He is a cheat, a crony capitalist.

foo • January 24, 2014 11:36 PM

Here’s the real problem with income inequality.

A small fraction of uber-rich at the very top hoard a large percentage of the country’s total wealth. By doing this, they deprive a large fraction at the bottom (the poor masses) of that wealth. The masses have to struggle to make ends meet. They spend more of their time, energy, stress and limited wealth on the bare necessities and just trying to survive. If the distribution were more equitable, the lower classes would have considerably more disposable income (and time, and energy) to spend on non-essential goods and services. The economy would be healthier. Poverty-related crime would be lower. Access to education and proper health care would improve. Everyone would win, except perhaps for the uber-rich. But they’re the 0.01% anyway. The needs of the many outweigh the needs of the greedy few.

Wealth and Income Inequality in America:
http://www.youtube.com/watch?v=eKtQJmCMuCc

Adjuvant • January 25, 2014 12:15 AM

If we’re going to discuss monetary policy here, then let’s be appropriately radical about it. The IMF dropped this bombshell research paper back in 2012. As a proud supporter of the Chicago Plan (so called because it was championed by the First Chicago School of Economics, with Yale’s Irving Fisher as its most important evangelist), I never thought I’d see the day. A presentation of the paper by one of its others authors may be found here.

If we ever hope to address the root of many of our problems, this is what we’ll ultimately be wanting to do. Sadly, Keynes and his New Deal won the day with Roosevelt, following inter alia
the untimely accident suffered by key Senate sponsor Bronson Cutting (R-NM), who died in a plane crash on May 6, 1935.

And so, with the coming of WWII and the post-war boom years, the critical moment was lost, and the finest plan the leading economic minds of the 1930s could produce to put an end to the Great Depression was quickly forgotten. Apart from the occasional token homage by the odd economist (e.g. Milton Friedman), it faded into the mists of monetary heresy until our present crisis arrived. I wish I were up to providing a conceptual introduction tonight, but I’ll let the IMF researchers speak for themselves for now.

Adjuvant • January 25, 2014 12:58 AM

For the sake of piquing interest, just one quote, from the “Foreword from a Banker” of 100% Money by Irving Fisher, 1935:

If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.”

–Robert Hemphill; Credit Manager of Federal Reserve Bank, Atlanta, 1935.

We know how the ensuing decade actually played out, but the inherently unstable structure of our monetary system remains in place to this day.

Also, a brief summary of Fisher’s book (apparently by a Conservative UK MP, of all things) may be found useful, and can be located here.

Adjuvant • January 25, 2014 3:19 AM

And finally, now that I’ve kept myself up to an untenable hour, here’s Kumhof just last November presenting at the LSE. New to me, and simply electrifying! The seemingly insuperable obstacle, however, is touched upon at the very start of the recording by the chair, Professor Danny Quah: revoking the privilege of money creation and seignorage would inherently reduce the power of the City of London (and, by extension, Wall Street and the banking industry at large). Therefore, for some very powerful people, it would be considered a non-started.

Clive Robinson • January 25, 2014 3:33 AM

@ Neil in Chicago,

    One in five seems high, but it’s crushingly obvious that a lot of “security” is simply hobbling of the economy

ALL security is their to hobble, that’s it’s primary purpose, the fact it has spin offs that can boost the economy is incidental to it’s purpose.

Basicaly “security” is “error elimination” if there were no errors in a system it would not require correction and thus the system would be more efficient. The most efficient way to correct errors is at or before the point the error occures, that is “prevention” is generaly more efficient than “correction”.

If you are dealing with a fully determanistic system then error prevention can be made the first step in the system. However as few systems are fully determanistic error prevention or correction usually becomes distributed in the system.

I think it’s safe to say that any system based on self interested but limited outlook entities is very much non determanistic. Hence we have a need for security systems.

The problem is all entities have a limited outlook, which means that we have a problem with designing security systems. We can not optomise security because we only know it’s effectivnes when it fails, thus we usually overspend on security and to compound the problem we generaly don’t put it in the right parts of the system either.

Thus there is a large surface for self interested parties to play in, and in general with any system there are three broad classes of players, those who own the system, those who supply the system parts and those who operate the system. Their respective self interest can be looked at in many ways but as a first order we can see,

The system owner want’s to minimise cost to maximize profit. The parts supplier wants to maximize price to maximize profit. The system operator wants to maximize pay and minimize effort.

What can immediatly be seen is that it’s best for all concerned to minimize the information they give to the other parties. Further it’s also best for the supplier and operator to “paint worst case” as the basic starting point when negotiating with the owner…

The result is what we clearly see in Defence spending and appropriations and recently people have been claiming that the DoD cannot account for a sum of money that is a half of the US national debt…

So yes it appears that security is a major tax on the national economy.

refheiufheiufh • January 25, 2014 4:36 AM

It’s plutocracy.

It was included with the political design by the Greeks(democratic(in the form of a congressional controlled electoral college) republic), named after a Greek philosopher, spread by mostly western imperialism to countries that managed to escape it during the empire wars, in the last century, through illegal deniable military ops like assassinations and supplying destabilization movements on foreign and domestic soil..

As one well educated person here pointed out: Capitalism is by definition and logical flow designed to cause this. There are no checks and balances and massive deregulation. For example over 80% of US Congress seat holders hold major stock in Exxon, and nobody questions why the US only has started wars where the the second largest oil deposit in the world, the one it doesn’t boarder, resides.

Also it’s a direct violation of the US Constitution for their to be career politicians in any form.. Literally every tier of the US gov. is nothing but, and it’s rare to find one who has never worked outside of banking or at all..

It’s all designed to fail and the plutocrats keep it that way..

anonymous • January 25, 2014 8:16 AM

Sergey • January 24, 2014 3:53 PM
First, the morality of the society. Theft was officially
considered bad but in practice it was seen as cool.
Everyone boasted to their friends, how they’ve managed
to steal something…
Second, the punishment and lack thereof. All this theft
largely went unpunished. And third, the irresponsibility,
the said feeling of no tomorrow.

You’ve just described modern American capitalism. Not the theory, but as it actually works today (cf, Wall Street, the finance industry).

And please don’t tell me that these Ayn Randian heroes would have behaved as paragons of virtue “if only government would get out of the way and let the market work its magic”. One of those thieves was a candidate for president recently, and deified as a Job Creator ™. His supporters believed (and still do) that greater income inequality is a feature, and not a bug, of the system, and something that we need more of.

anonymous • January 25, 2014 8:31 AM

Clockmaker • January 24, 2014 7:29 PM
Ayn Rand is hardly a Libertarian. She took some libertarian
ideas and pulled out all the humanity and compassion

Libertarians obviously haven’t gotten the memo, given their slavish devotion to Rand.

I find it interesting that the two most popular novelists among libertarians (based on an unscientific sampling of libertarian web sites) are Ayn Rand and Robert Heinlein. Yet Rand and Heinlein had diametrically opposed ideas about an individual’s role in and moral obligations to the larger society he lives in.

Unfortunately, the Rand-wing — which celebrates sociopathy as a virtue — is the dominate strain of libertarianism today.

Bryan • January 25, 2014 8:36 AM

@Clive Robinson
“”Hmm unequal taxation, wasn’t that part of the beef that supposadly gave rise to the Boston Tea Party?””

No. it was taxation without [b]representation[/b]. Which I might add we are effectively in a state of right now with the plutocracy controlling campaign finance. It’s been decades since we’ve had any real choice in leaders.

Anura • January 25, 2014 12:44 PM

@yesme

I voted for Jill Stein in 2012, and I did not vote for any seat when my only choice was between Republicrats. The problem is that the Republicrats have gotten really good at convincing people that voting for a second party is throwing your vote away (it’s the other way around), and they have gotten good at limiting media exposure of second parties; they don’t even allow them to participate in the debates.

f3kjf4f • January 25, 2014 1:11 PM

@yesme: Never thought I’d see someone to try to use Richard Stallman to encourage a trend. When he talks at conferences and on TV people get annoyed for some reason.. Linus Torvalds basically invites people to start drinking before handing him the mic..

I’m not saying what you’re suggesting isn’t 100% valid and the reality, I’m just pointing out most people don’t care until the convenient and often times anti-social path isn’t profitable by social means..

George Arndt • January 25, 2014 5:03 PM

Cheerleaders for India and China seem oblivious to two things: growing economic inequality and environmental degradation. Both factors could derail economic growth and political stability in both nations.

rehefefhieurf • January 25, 2014 6:23 PM

@George Arndt: India is a democratic republic just like America even on the micro economic level. It’s just less scaled for obvious reasons.

China is a socialist republic, but a capitalist republic in practice.

It’s really annoying when people who learned about the world and history through the typical American educational system suggest that all these countries are communist and even remotely socialist when it’s extremely obvious they’re not from their abstract behavior all the way down to their written policies.. Same with Americans describing Russia.. It’s just lazy and illiterate.. Russia was not even partially communist and socialist around a half a century ago..

Wesley Parish • January 25, 2014 10:47 PM

anonymous • January 25, 2014 8:16 AM

> Sergey • January 24, 2014 3:53 PM

You’ve just described modern American capitalism. Not the theory, but as it actually works today (cf, Wall Street, the finance industry).

A book was published in the 1970s called The Russians: I re-read it in Christmas 2008 and was struck with various similarities with the United States. Such as the increasing military as opposed to non-military spending, the increasing lack of trust in public institutions, etc.

I emailed Hedrick Smith via his contact email asking him if he had ever considered that the USA might wind up becoming like the USSR, but predictably he never replied.

kf34jf3n3fjn • January 27, 2014 1:04 AM

Maybe my last comment on this worthwhile blog post:

Once upon a time I studied pure economics and light sociology as a person who knew too much about the psychology of human relations and the local job market, from unemployment struggles. I was looking for a way to beat ‘the system’, or in that case overcome my overwhelming HR red flags; a work history gap and low voice.

I repeatedly read some of the top textbooks and other literature on applied economics, pure economics, pure mathematics, and AP psychology, general psychology, and social psychology. Also some digging on US government weaponized psychology and propaganda/PSYOPS..

Here is what I took away from all that, and my experience since-forth. I’ll stick to job markets and the affected sociology:
-companies use “HR filters” to weed out anyone remotely a social incompatibility or race allegation risk. This is behind a lot of issues in 1st and 2nd world remaining job markets.

-too many vital decisions by all tiers of government are often left to a small group or single person’s personal opinion. Basic statistics and basic psychology show how this is bad, because petty bias naturally encourages corruption even in the most frequent routines

-mentioned HR practices in what remains of industry in countries where most of the industries are outsourced to push up profit margins, mostly in labor infrastructure, are logically to blame for job market collapse in those countries

-Politicians who claim to be restoring job markets basically do nothing and generate news based on ANY stimulase, mostly engineering and sales industry coming to locations that have no engineers or salesman, let alone ones with outstanding experience the fields

-Psychology is NOT science.. it’s entirely statistics from clinical studies. People seem to use it as if it IS a science..

-You can’t really use anything from economics or sociology if you’re making less than ~300 USD a month in disposable income.. At least not at 1st world rates

-People who lease and rent their assets do so around geographic employer statistics. This means the system for people who don’t inherit wealth is designed to naturally fail so those people really only make enough to live to work

Michael Moser • January 27, 2014 4:05 AM

Depends on how you look at it: maybe guarding is also a sort of job creation program;

for many nations globalization means a decrease in industrial activity, but you need to keep people occupied by other means, guarding is a way out, some say the Old Kingdom of Egypt would build pyramids for just this purpose.

Maybe part of the security state serves the same function as did those pyramids.

Autolykos • January 27, 2014 5:17 AM

@Clive: “It’s quite simple, the main broad points are, firstly get rid of all the fiddles and the personal tax alowance, secondly set a flat rate of tax across the board on all income be it earned or otherwise personal or corporate, thirdly pay everyone a fixed sum of money broadly equivalent to the personal alowance (which in most places is significantly higher than pension or welfare payments).”
Totally agree here. Universal Basic Income is probably the most elegant solution to pretty much all problems of social security I’ve ever seen. It minimizes control and bureaucracy (the only thing you need to check is that the people you’re paying it to are actually alive), and guarantees that everyone has a) enough to live and b) will always have more money in the pocket when they earn more. It isn’t even a new idea or locked into a special ideology (in Germany, variations of the idea have been thrown around by everyone from socialists to market liberals since more than twenty years). It’s a shame that it never gets off the ground because conservatives and social democrats oppose it vehemently (the former because it would force employers to pay fair salaries, the latter because it would make trade unions redundant).

Wesley Parish • January 27, 2014 5:28 AM

@Michael Moser

It’s hardly news that the military often functions as a welfare program: one could argue that the Cold War served both Washington and Moscow as an economic stimulus program that helped them avoid the inevitable depression caused by demobilization.

Again, I think future historians will see the much ballyhooed “War on Drugs” (rephrased as “War on Psychotropic Chemical Compounds” turns it into a joke! Imagine declaring “War on Catnip” 🙂 and likewise the “War on Terror” (rephrased as “War on Irregular Warfare Tactics” puts it into perspective 🙂 as Corporate Welfare Programs.

Michael Moser • January 27, 2014 5:45 AM

@Wesley Parish

I would like to know what would be the optimal percentage of GDP that can be assigned to pyramid building? I guess economic theory does not have an answer ready.

The USSR it got out of hand: they were doing nothing but pyramid building, that’s a major reason why that state went away, thankfully.

However the war on drugs might have a point, one only has to search for substance induced psychosis on google.

Autolykos • January 27, 2014 6:42 AM

Pyramid building and its capitalist equivalent, bullshit jobs, are only required to keep a system running that’s based on faulty assumptions (namely that satisfying everyones needs requires everyone to work full-time). This may have been true in the 19th century, but it is only getting wronger since then (which gets us right back to the UBI in my post above…).
And that assumption is damn hard to get out of people’s heads. Saying that something will cost jobs is a political death sentence for any idea (even though no sane person would do something just to have more work to do).
Remember: If your conclusions are contradictory, check your premises.

Michael Moser • January 27, 2014 7:23 AM

@Autolykos
…. a system running that’s based on faulty assumptions (namely that satisfying everyones needs requires everyone to work full-time).

I think a system that tells a quarter of the population to sit quitly in the corner and make it on handouts may be the worse option; you might tell me that this is a result of social conditioning, but my self esteem went down the drain when I was unemployed, prolonged unemployment is very bad for most persons and – by extension – bad for society;

Clive Robinson • January 27, 2014 8:51 AM

@ Michael Moser, Wesley Parish,

    … what would be the optimal percentage of GDP that can be assigned to pyramid building? I guess economic theory does not have an be assigned to pyramid building?

As economic theory provides little in the way of answers, other than the obvious ideal that supply should balance demand, and the nature defiying all capital –as an abstraction of work/energy– should be used to consume or create further goods and services to consume rather than stored in any form, you have to look else where for answers.

Nature incorporates both energy storage and redundancy as accepted and necessary axioms and comes up with a figure that closley aproximates 1/3 as the non productive figure for continuation.

However there is a problem with pyramid building, it suffers from “spin offs” in one form or another…

Current historical thinking on the Egyptions is that we have mostly got it wrong. Our impressions have been based on the reports of Romans, who to be blunt were never honest reporters in victory or defeat and were masters of what we would call “political spin”.

Thus much of the labour involved with building pyramids were not slaves but the general population who due to the nature of flooding etc in the Nile delta had an “idle three or four months” each year. And thus gave an oportunity for other work rather than agrarian labour, which encoraged the “arts” and artisan work. Thus the spin off was a mixture of education and skill development in stone masonary, metal work, arts and the science supporting them, as well as all sorts of other societal developing labour (including the brewing of beer 🙂

Thus you have to consider are pyramid scheams total wastes of resources or things that have spin offs that improve society in not immediatly obvious ways.

A more modern example might be that of the Space Race, it was in essence a political objective to be the first nation to “thumb the nose” at another on another celestial body [1]. The side benifits were increased spending in science and engineering along with the education system to suppot it. And half a century later we are still gaining benifit from the research that happend, unfortunatly not so from later military-industrial research, which appears to be a retrograde step for US society.

[1] Basicaly the US had fallen well behind in space technology and the Russian’s were clocking up all the “firsts”. So under advise Kenedy set a goal that was sufficiently advanced that the US could play catch up by out spending the CCCP. It was felt to be a necesity for the US to maintain a string of “firsts” for political and moral reasons. But in reality to keep the US populous from finding out about many of the dirty little secrets of the military-industrial complex, as well as handing out political pay-offs and making certain favoured organisations and individuals significantly richer.

Anura • January 27, 2014 11:56 AM

@Michael Moser

One of the effects of a basic income is that those who want to work will find it easier to find jobs, since they have less competition. Those who don’t want to work, don’t want to work all the time, or don’t want to work full time can do so without significant financial burden.

Most likely you will see a lot more contracting, a lot more people taking time off between jobs, and and a lot more part time jobs. I’d argue that fewer people working is a good thing, especially when it reduces pollution and traffic by having fewer people commuting every day, not to mention the overall stress levels we are under, unecessarily. Other advantages include parents being more able to take time off to take care of their kids, which I would think would be a huge benefit for society down the road.

Also, if it were me, I would probably find a lot more time to work on open source projects or doing other volunteer work. I think many more people would do the same.

Clive Robinson • January 27, 2014 11:57 AM

@ Autolykos,

    …. a system running that’s based on faulty assumptions (namely that satisfying everyones needs requires everyone to work full-time)…

Unfortunatly it’s true, you have to work full time to “satisfy everyones needs” because a small part of the set of “everyone” includes those who’s desire it is to have an increasing “status gap”. They use their influance to have labour work for less than the sensible minimum and have those people subsidiesed by the state via taxation on what is left of the middle income earners, whilst they pay no tax, or get favourable tax rebates worth more than any tax they have paid.

Their ultimate aim is to have enclaves of the unemployed in “work camps/houses” where their labour can be had for nothing. Likewise those who have skills being so afraid of ending up in the enclaves they will not fight for any rights and will fight to work more hourse for nothing just to prove what sort of compliant employee they are.

You can see the start of this via the “prison industry” who are developing the enclaves that are filled by police and judges who’s own career prospects are based on the enclave bound traffic of humanity they create.

This sort of thing has historical precedent in Europe and Russia pre and post WWII.

@ Michael Moser,

What you are realy saying is not that you want to work full time, but that you want to be occupied in a satisfying way full time. The two are not the same as many people who took early retirment can tell you.

3frk3jhbf3jhbf • January 27, 2014 1:05 PM

@Michael Moser: As you can see you’re talking to mostly disconnected wealthy and upper-middle-class people. It’s always going to be ‘because they don’t want to work’ because their insight comes from a mostly copy written textbooks written based on a long line of like minded classed people who mostly copy wrote, and they were indoctrinated through family to embrace class warfare and support established plutocracy..

This is why most people below the plutocracy line naturally came to the conclusion violence and revolt is the answer. It’s just not public in America as much because all the consumer conveniences and services, but this all disappears when the demographics can no longer consume and are focused on why..

Also eventually all the black-box charities and NPOs in America that claim to remedy these things through the world, will eventually become exposed, and their executives burning books will no longer hide their real business models..

Anura • January 27, 2014 2:57 PM

I posted this link before, it’s worth studying in more detail.

http://data.bls.gov/timeseries/LNS12300000

Show the time series for 1948-2013. It’s interesting to note that the percent of the populaton employed has been steady since the height of the recession. What’s important to note is that from 1948-1972 the percent of the population employed was just below what it is now. It’s also interesting to note that 1950s-1960s were periods of strong economic growth, whereas 1970s-1990s were fairly meh, and the 2000s were horrid, despite the high employment rates. Indeed, the entrie time that employment rates have grown is when wages as a percent of GDP started dropping.

http://research.stlouisfed.org/fred2/graph/?g=2Xa

So, the question is do many people want to work less/not work at all? Most likely, as right now it appears to be that the only reason we were working so much in the first place is due to slowing economic growth coinciding with increasing inequality.

Michael Moser • January 27, 2014 8:05 PM

@Anura
… time that employment rates have grown is when wages as a percent of GDP started dropping.

I think its hard to abstract such a long period of time by means of just one argument; it depends on how you look at it:

1945-1970 right after WW2 the US was the only country left with and industry, so there were lots of higher paying jobs in manufacturing; on the other hand women were expected to stay at home and there was wide spread discrimination against minorities.

later periods were saw more participation in the workforce, but on the other hand a decline in manufacturing; so wages went down.

@Anura
do many people want to work less/not work at all? .. only reason we were working so much in the first place is due to slowing economic growth

I guess its about transaction costs, more workers toiling for less hours get less work done. In Germany and France they shortened working hours (these countries still have unions), but things did not work out like that, so by now the working week is back to 41-42 hours for most workers. On the other hand they have longer vacations in much of Europe.

As for not working at all – i think that’s a very bad idea for most people (see previous comments)

moo • January 27, 2014 10:18 PM

@Adjuvant:

Thanks for posting the links to that paper and youtube video of Michael Kumhof, that was very interesting.

Here’s another youtube video of a presentation he gave in Germany: http://www.youtube.com/watch?v=tnehf-U527g

And here’s a 5-minute video where he clearly describes how bank loans (the creation of money) come before deposits and how the typical “intermediation” or “loanable funds” stories are totally divorced from reality.
http://www.youtube.com/watch?v=uCyQUkPizIY

Anura • January 28, 2014 2:06 AM

@Michael Moser

Loss of manufacturing may explain slowing growth in GDP, but it does not explain why wages have not kept up with economic growth. Healthcare costs are probably a big contributor, but even then a lot of it has just been businesses getting better and better at rent seeking.

Autolykos • January 28, 2014 2:35 AM

@Michael Moser: I don’t expect the result of UBI to be 3/4 working full-time (and overtime) and 1/4 sitting around and twiddling thumbs like it is now. If people can make ends meet while working part-time, more will take that option (especially if they have family), causing labor to be split more evenly. Some will still want the extra money, but what good is more money if you have no free time to spend it?
So in the end, we’d have most people working something in between full-time and part-time (depending on how much they value their time and others value their work), and a few people doing art or charity work for free or very little just because they like to and can afford it now. In short: We’d have a fair and healthy labor market, probably for the first time in history.
Like you said, most people are pretty unhappy if they have nothing useful to do, so I don’t expect that to become very prevalent even if they could get away with it.

Anura • January 28, 2014 3:46 AM

Personally, I’d love to see us slowly start implementing a UBI on a global level, at least with countries that meet various human rights criteria. I figure inequality on a global level is a significantly bigger problem (and security threat, if you want to be selfish) than inequality within the developed nations itself. We have something like over a billion people living off of less than $2 a day PPP, and for what the west spends on wars, we could spend ending world poverty and showing the world we aren’t here to be exploitative, producing friends rather than enemies and reluctant allies.

We should set out goal on completely ending global inequality, even if it is unlikely in our lifetimes. It’s the most important goal we can strive for; if every country was roughly equal, economically, then outsourcing labor wouldn’t be a thing, closed borders would be unnecessary, and with significantly more educated people worldwide, even if the west took a hit in GDP, it would still mean technology would advance more rapidly, especially if aren’t wasting so much of our resources on weapons of war and espionage.

Clive Robinson • January 28, 2014 4:42 AM

@ Anura,

    We should set out goal on completely ending global inequality, even if it is unlikely in our lifetimes.

It’s both a laudable and sensible goal, unfortunatly it’s not going to happen, not just in our lives but the lives of the next several generations.

There are a number of reasons for this but it boils down to a genetic problem with humans that has been with us for atleast as long as written records have existed.

There are those without morals and as far as we can tell can not develop them the result is what we call sociopaths and psychopaths and to lesser degrees those who end up running corporations and banks irresponsably.

They have a “sense of entitlement” that can not be satisfied by the meer accumulation of wealth. It requires the direct and indirect control of others. In some this results in barbaric crimes against individuals in others it results in a desire for a “status gap”. This latter group use accumulated wealth to buy of politicians etc.

We know from history that such people became the “power behind the throne” or “king makers” and had laws put in place that enforced a class or cast system, where even the types of clothes warn was legislated and breaking these rules carried either torture or death or both as punishment.

They even solved the “slave” problem –of feeding and accomodating– by the “surf” system, where you were tied to the land and compeled to serve the Land Lord either directly or by taxation, whilst also being responsible for finding your own food and accomodation etc etc.

The modern equivalent is by holding down wages and increasing the price of basic essentials. In the UK we had someone carry this out to such a degree that their name has become the word used for this type of explotation “Rachmanism”.

Peter Rachman was an associate of the natorious Cray Twins Ron and Reggie. You can read more about Peter Rachman at,

http://en.m.wikipedia.org/wiki/Peter_Rachman

Autolykos • January 28, 2014 5:32 AM

@Anura: Even though it has a lot of merits from a humanitarian standpoint, I think UBI is not necessary (and may even be suboptimal) for developing countries. They need every hand they can get to industrialize, and before they do, they won’t have much excess labor anyway. The main selling point of the UBI is that it eliminates the drawbacks of “lost jobs” (i.e. more efficient production) – but a developing country doesn’t suffer from these drawbacks yet (and plain undeveloped countries need to start a lot further back than that).
First, we should try to get it running locally, within stable and cohesive societies. That’s hard enough already (and might not even happen in my lifetime), we don’t need to throw international conflicts, religious/cultural differences, differences in industrial base and economic models, and plain racism and distrust into the mix.

Nick P • January 28, 2014 9:36 AM

@ Anura

“does not explain why wages haven’t kept up with economic growth”

That’s easy: most companies are keeping them down on purpose. A theory supported by the evidence a big bank worked hard to take down. CEO/owner pay going up tremendously over the years with huge employee productivity boosts as well, but wages consistently get lower?

Yeah, it would have to be on purpose. It’s the best way for people on top to maximize their share of the pie. A consistent goal of theirs.

Anura • January 28, 2014 12:26 PM

@Clive Robinson

Yeah, what we can do and what we should do is usually disconnected from what we will do. However, I figure if I fight for a small goal and get part of it, I will always get less or equal to what I receive if I fight for a large goal and get part of it. Or maybe I’ll be brushed off as a nut, but that’s a risk I’m willing to take.

@Autolykos

There’s definitely a level of development countries need before a basic income can even be implemented. They must have the ability to receive and distribute foreign goods, or else foreign currency is useless. They need a banking system to distribute the money, they need to have a system to track residents to make sure everyone gets paid. To those that aren’t there yet, the only option is direct assitance with those goals.

My biggest concern with industrialization is pollution; right now, most of the world is not industrialized, and those that have gone through or are going through industrialization have had a history of poor air quality standards. We are concerned about CO2 output with only a small portion of the world industrialized; I cannot imagine how bad it would be if all of Latin America, Africa, and Asia/Pacific became industrialized as well. Personally, I think it might be better to limit global production, and just focus on food, clothing, shelter, basic medicine, education, and services until we can get off of coal and oil.

@Nick P

Yeah, that’s definitely the main part of it, although lobbying for a flatter tax code, corporate tax loopholes, cuts to government programs, monetary instead of fiscal stimulus to pump up the stock market, and the whole everything leading up to the banking crisis were certainly a big part of it as well.

Autolykos • January 29, 2014 4:24 AM

Hm, I may need to clarify that I meant industrialization in the more abstract sense of “automating labor” and not as “paving the whole country with steel mills, refineries and chemical factories”. With increasing development, heavy industry is going to require an increasingly smaller amount of work (just like farming did before) and most value will be derived from “clean” production anyway. But heavy industry is still necessary as a base for more advanced production, and skipping that stage will leave your economy fragile and very dependent on imports – which is not desirable, especially in a politically unstable region.
Basically, you need food, infrastructure, a base of heavy industry and education, exactly in that order, to get (and keep) a country running. Once that’s set up its part in the total economy will start to decrease, but it will always stay vital.

Anura • January 29, 2014 2:27 PM

@Autolykos

You don’t even have to turn the entire country to be fully industrialized to have a problem. Even Sweden and Iceland, some of the “greenest” industrialized countries, produce more CO2 per capita than the world average. This means that even if all developed countries reduced CO2 outputs to their levels, and all countries achieved their level of development with their level of pollution, we would still be seeing more CO2 output per capita than we do today. Hell, we are pumping out too much CO2 today, so unless existing industrialized countries to clean up their act, then any level of additional industrialization is potentially dangerous. Development also usually means some level of deforestation which also compounds the problem.

http://en.wikipedia.org/wiki/List_of_countries_by_carbon_dioxide_emissions_per_capita

Of course, there is more to the environment than CO2 and other other greenhouse gasses, there is also displacement of wildlife, garbage (see plastic soup), water pollution, overfishing. Unless we can fix the west, any level of industrialization could have severe consequences to the environment. Further industrialization needs to be tightly controlled, with a global cap and trade plan on various emissions and pollutants, deforestation, wildlife protection, etc. However, even today there is enough food and clothing produced to feed and clothe the world, so I think that’s why that needs to be the goal today, rather than full on industrialization.

Sergey • January 31, 2014 12:36 AM

@anonymous & Wesley Parish
You’ve just described modern American capitalism. Not the theory, but as it actually works today (cf, Wall Street, the finance industry).

Nope, nowhere close. In fact, exactly the opposite. The only part of the population where I see the close similarities is among the welfare recipients and other such “occupy Wall Street” public. And apparently you don’t see the difference between theft and earning the money either.

Jim Beard • February 15, 2014 9:30 AM

“Cost of security” is to a rather large extent determined by willingness of those who value it to pay, and what they are willing to pay.

The “cheapest” (in some ways) means of providing security often are draconian, unpleasant (especially for those guarded against, but for those doing the guarding and on-lookers as well), and very effective at precluding recidivism. In the extreme case, morticians may see an up-tick in business.

Benefits of a socio-economic system of private property and private effort are great, making them the bed-rock of competitive free-market economies, that have proven most effective in creating productive capability and wealth.

Making it expensive to secure those benefits (particularly against government aggrandizement of its power and ability to dominate all spheres of human activity) is a sure-fire way to ensure degradation of economic efficiency and equity within a population.

NB: Note that “equity” is not a synonym for “equality,” but that would be a topic for another time and place.

name.withheld.for.obvious.reasons • February 15, 2014 2:04 PM

Well it looks like the security haves and have nots are being aligned. Based on PPD 21 and the cyber security critical infrastructure initiative headed by DOC and executed by NIST (at least for the framework) the final draft was released this week. With the use of classification as the primary mechanism to Balkanize the interwebs, “providers” will be able to make winners/losers of Internet players. This tiering is deliberate, companies like Raytheon, Boeing SAIC, Lockheed Martin, and the usual suspects will probably extract ransoms–oops, I mean fees–from those wanting to stay protected from the bad actors (like the NSA).

Weather • July 17, 2018 5:19 AM

Yes but the basic is there, it should only happen to about two 255,needs modifier, at least you are putting in the effort

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