Origins of what may become the 3rd American Republic (a plutocracy)

Summary:  The article excerpted here provides a powerful explanation for the evolution of our political system during the past 35 years to favor the super-rich, becoming in effect a plutocracy.  It even provides an excuse for us, the citizens.  If you consider ignorance and apathy to be excuses.

Review by David Runciman (teaches politics at Cambridge) in the London Review of Books, 14 April 2011 — It’s open to non-subscribers, and well-worth reading in full.  If you don’t subscribe, I recommend doing so!

Treasure Islands: Tax Havens and the Men who Stole the World by Nicholas Shaxson

Winner-Take-All Politics: How Washington Made the Rich Richer – and Turned Its Back on the Middle Class by Jacob Hacker and Paul Pierson

Excerpt (red emphasis added)

Slowly in the later 1960s and 1970s, and then much more rapidly in the 1980s and 1990s, America deregulated its financial controls and allowed money to move in and out with fewer if any questions asked, in the hope that more of it would stick to the sides.  Once this process began, it also unleashed a new wave of competition between individual American states to offer the most hospitable, least intrusive regulatory environment for outside companies to work in.

Leading the way was little Delaware, which had always tried to compensate for its lack of size by being open for any business.  Since the 1980s more and more corporations have moved to Delaware to take advantage of the state’s extreme laissez-faire attitude to the rights of shareholders and employees against company managements.  If you took your business to Delaware (and this was often just a question of establishing a shell office and filling in some forms), it would be much harder for anyone to prove anything against you, because the Delaware courts did not think that much of what you did was any of their concern.  Again, other states faced a choice: they could try to isolate Delaware by tightening up their own standards or they could try to compete for a share of the spoils.  Enough of them decided to compete to start a race to the bottom. Offshore {havens} had moved onshore.

Shaxson defines a tax haven as ‘a place that seeks to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulations of jurisdictions elsewhere’.  But this is the crux: where is the politics? Why aren’t these moves more politically unstable, or at least politically contentious?

… This is the question that Jacob Hacker and Paul Pierson tackle in Winner-Take-All Politics. They don’t spend much time talking about offshore, but the story they tell has striking parallels with the one laid out by Shaxson.  One of the ways you can identify an offshore environment, according to Shaxson, is that local politics gets captured by financial services.  In that sense, Washington has gone offshore: its politics has been captured by the interests of a narrow group of very wealthy individuals, many of whom work in finance.  For Hacker and Pierson this, more than anything else, explains why the rich have got so much richer over the last 30 years or so.  And by the rich they don’t mean simply the generally wealthy; they mean the super-rich.

The real beneficiaries of the explosion in income for top earners since the 1970s has been not the top 1 per cent but the top 0.1 per cent of the general population.  Since 1974, the share of national income of the top 0.1 per cent of Americans has grown from 2.7 to 12.3 per cent of the total, a truly mind-boggling level of redistribution from the have-nots to the haves.

Who are these people?  As Hacker and Pierson note, they are ‘not, for the most part, superstars and celebrities in the arts, entertainment and sports.  Nor are they rentiers, living off their accumulated wealth, as was true in the early part of the last century.  A substantial majority are company executives and managers, and a growing share of these are financial company executives and managers.’

Hacker and Pierson believe that politics is responsible for this.  It happened because law-makers and public officials allowed it to happen, not because international markets, or globalisation, or differentials in education or life-chances made it inevitable.  It was a choice, driven by the pressure of lobbyists and other organisations to create an environment much more hospitable to the needs of the very rich.  It was even so a particular kind of politics and a particular kind of choice.

It wasn’t a conspiracy, because it happened in the open.  But nor was it an explicit political movement, characterised by rallies, speeches and electoral triumphs.  It relied in large part on what Hacker and Pierson call a process of drift: ‘systematic, prolonged failures of government to respond to the shifting realities of a dynamic economy’.  More often than not the politicians were persuaded to do nothing, to let up on enforcement, to look the other way, as money moved around the globe and up to the very top of the financial chain.  This chimes with what Shaxson says about the way the offshore system was allowed to develop over the last four decades.  Here too there was no real conspiracy, because there was no real need. Instead, it happened because ‘nobody was paying attention.’

… It is easy to assume that if the rich have been winning in recent decades, the process must have started with the election of the pro-big business, anti-big government Ronald Reagan in 1980 (and concomitantly, Margaret Thatcher in Britain in 1979).  But Hacker and Pierson argue that the real turning point came in 1978, during the presidency of Jimmy Carter.  This was the year the lobbyists and other organised groups who were pushing hard to relax the burden of tax and regulation on wealthy individuals and corporate interests discovered that no one was pushing back all that hard.  Despite Democratic control of the White House and both Houses of Congress, 1978 saw the defeat of attempts to introduce progressive tax reform and to improve the legal position of trade unions.   Instead, legislation was passed that reduced the tax burden on corporations and increased the burden on their employees (through a hike in the payroll tax, a regressive measure).  All this happened because the politicians followed the path of least resistance – as elected politicians invariably do – and the better organised and better-funded resistance came from the representatives of big business, not organised labour.

What took place in the 1980s was therefore an extension of the Carter years, not a reversal of them.  The process of deregulation and redistribution up the chain accelerated under Reagan, who was broadly sympathetic to these goals.  Yet it happened not because he was sympathetic to them, but because his sympathies were allowed free rein in a political environment where the opposition was muted and the expected coalition of interests opposed to the changes never materialised.  After all, as Hacker and Pierson point out, Richard Nixon, who might have been expected to share some of Reagan’s sympathies, had gone the other way in his actual policies a decade earlier, shoring up the legislative framework of the welfare state and maintaining a broadly progressive tax system.  (Something similar happened in Britain under Edward Heath.)  He acted like this because he felt he had little choice: the organised pressure ready to resist change appeared much too strong.

It was only during the Carter years – and to some extent the Callaghan years in Britain – that this pressure turned out to be weaker than anyone thought.  The politicians of the Reagan/ Thatcher revolution did what they did not because they were committed ideologues, determined to stick to their principles.  They did it because they found they could get away with it.

So where did the resistance go?  This is the real puzzle … Hacker and Pierson’s argument is really a return to a much longer-standing critique of democracy, one that flourished during the 1920s and 1930s but was supplanted in the postwar period by expectations of rational behaviour on the part of voters.  This traditional critique does not see the weakness of democracy as a matter of the voters wanting the wrong things, or not really knowing what they want.  They know what they want but they don’t know how to get it. It’s because they don’t understand the world they live in that democracy isn’t working.  People aren’t stupid, but when it comes to politics they are ignorant, lazy and easily satisfied with pat answers to difficult questions.

Please read this article in full.

About the author

From Wikipedia:

The Hon. David Walter Runciman (born 1967) is a British political scientist who teaches political theory at Cambridge University and is a fellow of Trinity Hall, Cambridge … He has worked as a columnist for The Guardian newspaper and written for many other publications.   He currently writes about politics for the London Review of Books.   His monograph The Politics of Good Intentions was adapted in part from his LRB articles.   His most recent book, Political Hypocrisy (2008), explores the political uses of hypocrisy from a historical perspective.

He specialises in the development of the theory of the modern state and on aspects of contemporary politics

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  4. About campaigns for high office in America – we always expect a better result from the same process, 17 June 2009
  5. Please read this. For the sake of yourself, your children, and their children, 25 June 2009
  6. More about the tottering structure of the American political regime, 17 August 2009
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  10. Programs to reshape the American mind, run by the left and right, 2 August 2010
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  15. The winners and losers from this election, hidden amidst the noise, 3 November 2010

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