Friday, September 16, 2011

James K. Galbraith's "The Predator State"

This was a surprisingly good review of the current mess the US is in. The book came from a challenge by James Galbraith's father, John Kenneth Galbraith, to his son to write on this theme saying that such a book would iconic for the age. This book hasn't become the defining book of our time, but it has clearly set out the liberal response to 40 years of right wing lies about economics and policy options for the US. I only wish that the key decision-makers in the US read this book to understand how we got here and what the way out is.

This book is a careful review of policies and ideology that has created the mess the US now finds itself in. It looks back to the Great Depression era to see clearly the role of government in getting a society out of this kind of mess. And it points out the key players and "wisdom" that has unleashed a "predator state" that is turning so many people's lives into such a mess. This is a "must read" for anybody wanting to understand the Lessor Depression and the fumbling pretense at "fixing" the current problems.

The book starts with a clarion call:
This book got under way right after Hurricane Katrina, the destruction of New Orleans, and the dispersion of several hundred thousand refugees across the American South, including to my hometown of Austin, Texas. It seemed clear immediately that Katrina had been the Chernobyl of the American system. That is, beyond the natural calamity and the human tragedy, it was -- like the Soviet reactor meltdown of nineteen years before -- a disaster that exposed and laid bare the fallacies of an entire governing creed.
Here is Galbraith taking on the 1980s voodoo economics:
Recall that the entire supply-side argument rests on perfectly functioning markets, including a "rational" response to tax cuts experienced by a handful of very rich people -- the marvelous marketplace that is supposed to operate in their minds. But if the markets do indeed work perfectly, we are compelled toward the following conclusion: public policy should not care at all about the supply of saving.

To see this, consider how the market for savings is supposed to work. To whom do our noble wealthy supply their saving? In the accepted story, they supply it to something we call the "capital market." To put it in concrete terms, lets us say a bank, or a broker, or perhaps a mutual fund. The capital market is an efficient mechanism for the allocation of resources: it transfers the funds from the saver to the investment project with the highest achievable rate of return (after taking account of risk) -- that is, from the capitalist to the entrepreneur. In a seamless process, there is first a necessary reward to the risk taker -- the big prize for seeing and taking a chance. And after that, the saver is rewarded: she earns the return associated with the investment and justified by her thrift.

But if a market is "efficient," it must allocate returns exactly. It must allocate them in full in relation to the quality of effort expended, the risk assumed, and the astuteness of investment judgement. The private saver -- the capitalist -- must get the entire return that is due to capital provided. Meanwhile the person executing the project -- the entrepreneur -- gets the entire return to risk. Between the two, they must get the entire return. That is what market efficiency means, if it means anything at all.

So what is left over for society? What do workers, or anyone else, get out of the process of accumulation? In the simplest, clearest, purest form of the market model, there can be only one answer to this question. Nothing.
Galbraith is quite good at cutting through the underbrush and explaining the broad strokes of the economy. Here is a bit from his look at the engine of inequality.
Thus, much of the mystery surrounding our understanding of "inequality" goes away once we recognize that the word covers two quite different aspects of the economy -- and neither of them is well explained by "supply and demand for skills." One of them is the inequality of pay: the major force affecting the larger working population. This form of inequality is substantially tied to employment and unemployment, and while it is increased dramatically in the 1970s and early 1980s, it also fell quite dramatically in the late 1990s. Higher demand for labor reduces inequality, while pay compression, aided by unions or minimum wage laws, also helps to reduce unemployment.

The other process is not about working people at all. It is about funds flowing from the financial markets through banks and brokers into technology and other hot sectors. This is source, rather than sink, for demand. In the tech boom, working people benefited because there were more jobs. But income inequality also went up because the incomes generated by the stock bubble flowed to a tiny handful of people, in a tiny handful of places. And the same was true in the next expansion, although driven by entirely different policies and favoring a different group.


What the information technology boom showed, and what the Bush Beltway Bubble has against shown, is taht public policy can move wealth around in spectacular ways. It can create oligarchs, and it can destroy. That being so, one can only expect that the beneficiaries, and potential beneficiaries, would pay close attention to the behavior of the state. They will even devote themselves to using and abusing the state, turning its instruments to their own purposes if they can. If the state is sufficiently large and sufficiently powerful, it may be that working those levers for the creation and consolidation of wealth is more tempting, and a better investment, than the complicated, tedious work of preparing products for consumption by the public at large, still less that of innovating new technologies for world markets.
He goes on the explain the large forces of history, the choices of Nixon to deal with the gold crisis, and the Reagan era Federal Reserve moving interest rates to near 20%, distorted the US economy, destroyed the manufacturing base of the Midwest, and set the US on the path to being a predatory state.
This is the Predator State. It is a coalition of relentless opponents of the regulatory framework on which public purpose depends, with enterprises whose major lines of business compete with or encroach on the principal public functions of the enduring New Deal. It is a coalition, in other words, that seeks to control the state partly in order to prevent the assertion of public purpose and partly to poach on the lines of activity that past public purpose has established. They are firms that have no intrinsic loyalty to any country.
Here is Galbraith's assessment of how the political left in the US lost its way:
Marxism used to be the hard-boiled left-wing dissident's creed, a doctrine founded on class conflict and the romance of working-class revolution. Unfortunately there were actual Marxist countries; "real existing socialism" took care of the romance. Meanwhile, Keynes and his allies in the progressive movement offered ways to reconcile the capitalists and the workers to avoid the calamity of revolution and the tyrannies that follow, through regulation and the management of total demand. But the price of progressive Keynesianism was big government: establishing countervailing power against the authority of private business. Free-market conservatives, once they recovered from the Great Depression, were inclined to reject that gift, preferring to take their chances with class conflict, and Keynesianism lost its leverage when the threat of Marxism disappeared.

Now we have a new liberalism, something called the Third Way, which consists of hewing as closely as possible to market solutions. If the presumption of modern conservatives is simple -- that markets work best when left alone -- this new breed of domesticated liberals puts a simple gloss on it: government can help. But the well-brought up modern liberal cautiously insists that in making the omelette, no eggs need be broken. The government should work unobtrusively, distorting as little as possible the outcomes that markets would otherwise achieve. Grand schemes for employment, distribution, infrastructure, or the environment are off the table; nothing is possible or permitted that would undermine the authority of the market in a fundamental way.
He then goes on to show that "markets" simply can't allot outcomes in a fair or reasonable way. They have a role to play in guiding business but not in social goals like education, welfare, employment, etc. He carefully shows that the idea of a "labor market" is a myth. Then says:
But if labor is not bought or sold in a "market for skills," how about, say, health care? What is "health care," and is it bought and sold in a market? Obviously not: health care is not any specific thing, but a label covering a class of goods and services, an enormously diverse class, adapted to the specific health condition of each individual patient. There is no unit of health care; if you draw a supply-and-demand diagram, there is no quantity to put on the horizontal axis and no price to record on the vertical axis. Health care is therefore not a commodity that is bought and sold at a given price on an open market. Nor is any medical procedure. In the overwhelming majority of cases, these are prescribed in one-on-one discussions between a medical professional following the norms and standards of the profession and a patient with extremely limited capacity to evaluate either the recommendations or the alternatives. ... There is not only no market in health care, there are no markets within health care either. The suggestion that "market forces" might be usefully deployed to regulate prices and quantities in this area runs into the basic difficulty that no such markets either do exist or could exist.
His prescription is to update Keynes and his father's view, published in The New Industrial State in the 1960s, i.e. use government to ensure a more prosperous and equitable society. He uses the Scandinavian countries as an example and discusses their policies that ensure an open economy but one that leads to widespread prosperity and a reasonable equality.

This book is a refreshing change from the "more of the same" (deregulation, cut taxes, shrink government) of the right and the hand wringing incompetence on the left. This book should be read by everybody. It lays the foundation for a saner, more prosperous future.

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