Kiss Your Class Good-Bye
Recently income inequality has become a hot topic. It isn’t that income inequality hasn’t been getting attention for some time. In 1954, Simon Kuznets published what is now a classic paper on whether income inequality affects growth, and by the 1980’s adverse effects of income inequality were being tracked as a public health issue. Income inequality in the late 1990’s reached near historic highs. So why now? Because income inequality has two important parts: competition for scarce resources, which means competition with people below you on the economic scale, and control of structural resources, which means competition with people above you on the economic scale. To put it simply: poor people consume more bulk, rich people consume more structure.
This means that for any particular group of people income inequality is seen by how much better they live than the people below them, and how much push back they have on the people above them, in terms that money can buy. This is related to, but not the same as, the same perception in the realm of politics. The relationship is the effectiveness of buying political power. The more power can be reliably bought, the more the two become related. A plutocracy must not only have pluto, but cracy.
This means that now that even members of the professional class can see the upper class disappear up out of sight, their perception of wealth inequality changes. No longer are they watching the middle class and working class drop down into the abyss, which has been true since the early 1970’s, but they are seeing their own fall in comparison to the upper class.
Hence, a paper using income tax returns written by solid members of the establishment is here, down near the bottom, it is labelled “bottom inequality_11162011.pdf ” The conclusions it draws are stark, since 1987, it concludes that much of the growth in inequality is the growth in income inequality for men, and all of that gap is permanent, and that previously, households had closed the gap by increasing the number of members working, but that for households, this was not enough to blunt the loss of income, and that most of that loss, is also permanent.
What this means is this: in the 1970’s and early 1980’s the working and middle class lost ground. Many rebelled against the liberal consensus, blaming loose policies, crime, and the war in Vietnam. The upper middle class, and professional class, while under pressure, could make back the gap by growth in assets: housing primarily, but also equities and pensions. When the slide became strong, the moment was ripe for the prescription that government and macro-inflation were the root of all evils.
With the dot com bust, a large wing of the professional class, the technical class, was pushed down into the middle class: their incomes stopped growing adjusted for inflation. Much of the blogging revolution, was run by techies who were out of work, or re-employed at stagnant wages.
The Fed Queen’s Race
Now the protected area of the professional class, those employed in banking, are being pushed out as well, and not surprisingly, dissent among them has been growing, from small investors and fund managers, economists, bankers, and so on. So too are the hold outs in the information economy, as papers close, as permanent jobs vanish, all that is left is being a SEO-grapher: writing to catch the search engine wave.
In the same order, income inequality became an issue: first working class and low paid creative class, then middle class and the technical classes, and now the professional class. First the working class went part time, then the middle class, and now the professional class sees the most cherished part of their role evaporating: the ability to join the petit-aristocracy. This is deep in the psychology of this part of society, they see themselves as working for the elites, and in return have the chance to join them when some noble family is extinguished, or when they perform some great service. Consider this example from U.P. Burke’s “The Fabrication of Louis XIV:”
“Colbert intended to re-establish the king’s dominance as a patron. His wide-ranging concern for the king’s glory is revealed in his official correspondence, especially his correspondence with Jean Chapelain. Chapelain, a poet and critic, had won the favour of Cardinal Richelieu by writing an ode in his (Richelieu’s) praise. He (Chapelain) became a member of the Academie Francaise when it was founded in 1634-5. In response to a request from Colbert, Chapelain wrote him a long report in 1662 on the uses of the arts ‘for preserving the splendour of the king’s enterprises.”
This is the road to close proximity to the elite: write an ode of praise, and then serve as counsel for the aristocracy. Chapelain, despite being a rather forgotten writer, was given a pension of 1000 crowns in 1632, and provided the plan for dramatic unity that would be at the cornerstone of French plays and operas. 1000 crowns was not an inconsiderable sum of money, taking Hoffman’s wage data and measurement of an actual corona of the time, which has 3.3 g of gold, which was 40g of silver according to the ration 12:1 of the time, that means the pension was about 25 times the unskilled wage of the time +/- 20%. Not bad for one forgettable ode of praise. Even taking that to be minimum actual wage, that is approximately equal to $250,000 on the relative economic scale.
Another example of the psychology comes from the late 19th century, from Chekhov’s “Death of a Government Clerk” of a civil servant, Tchervyakov by name, who sneezes on a general, and abases himself repeatedly, until the general can no longer take it. The sin is not so bad as the obsequious apologies for it, and without that sign of favor, life itself is not worth living.
“Be off!” yelled the general, turning suddenly purple, and shaking all over.
“What?” asked Tchervyakov, in a whisper turning numb with horror.
“Be off!” repeated the general, stamping.
Something seemed to give way in Tchervyakov’s stomach. Seeing nothing and hearing nothing he reeled to the door, went out into the street, and went staggering along. . . . Reaching home mechanically, without taking off his uniform, he lay down on the sofa and died.
I have been told, and it is true, that I am difficult to read. But this is because instead of pure polemic, I am explaining that the structure of the bureaucratic class is to create the glorious illusion of all of the enterprises of the center, of the pinnacle of the top down society.
Consider Bob Woodward’s biography of Alan Greenspan: Maestro : Greenspan’s Fed and the American Boom. The title alone, is enough. The Fed goes from necessary evil, to being headed by an oracular man of myth, the only man who saw the 1987 crash. Which is not true, and even more damning, he was the man who perpetuated a cycle of booms.
The popular term is “frog boiling,” in this case the gradual breaking of the connection between the professional class and the good of the general public, and instead alignment with the wealthy. The conversion of the hard learned lesson of the early 20th century that national strength is in the general welfare, and the return to the idea of the autocratic era of the role of poets to glorify, “all of the king’s enterprises.”
It is here that one of the most important tools for understanding how the world works must be explained again: the Red Queen’s Race. In the classic children’s book, the Red Queen drags Alice “as fast as they can go,” and they go nowhere. The term Red Queen’s Race is used generally to describe any situation where exerting all one’s efforts leads to going nowhere. The current Red Queen’s Race is our willingness to buy oil from whoever, thus creating a class of resource rich, and those resource rich want to buy capital rents, corporations an assets. This break was established with the Arab Oil Embargo. Because the US was tangled up in Vietnam, the ability to cage the Middle East was not present, and the OPEC realized the US needed the oil. Hubert’s first peak, that of American oil production, ran headlong into the “guns and butter” faith in universalization.
Two results: one, that means that there was no one tide to lift all boats, but instead a zero-sum game. Class Civil War became the norm, and the question was just how to do it: by race, geography, industry or some combination of the above. The second a place for income inequality and consolidation.
If the US concentrated wealth and consolidate ownership, then we could hold on to control of the capital system, it is more expensive to buy half of one large bank, then to take over some of 10 smaller banks. This was the first wave, of Reagan. The second wave was to create a gold rush for new kinds of assets, and to concentrate productivity in smaller spaces. Much of the US economy is not worth any more as capital, than 40 years ago. It is cheap to buy it, but no one wants to own Coca-Cola Bottling, since there are few upsides. That was Clinton. The third wave was the mess that was the Iraq play: mint housing, make mortgage backed securities, and let “American Capitalism” sell them.
One should look at almost any policy that “serious” people push, and ask how it creates more paper to sell, or concentrates liquidity in the financial system. What you, the public, gets, is the continued sprawlconomy, and the ability to pay rent to people who do not compete directly for things you want, and not pay rent to people who do. You also get stability of physical culture: phones, cars, trucks, houses, all work the same way. It is a trade that the vast majority of Americans are willing to make, not tied to one party, but to two different visions at any one time of how to accomplish this.
Each wave blew up, and there was squabbling afterwards as to who to bail out. The bail out technique is to give tax cuts to the wealthy, and a hair cut to the poor. Each round then, generates a more unequal society. Each wave a slightly larger group of people who are out. As with most such arrangements, the people who are pushed out do not see why, and demand that they be given the same deal that others have. Libertarians love fiat currencies, so long as they are driving the fiat with the model in it, liberal populists want liberalism for white suburbanites, so long as they can turn it into a rent on would be suburbanites: charge for education, health care, and housing. Bitcoin and MMT are both attempts by one group of people to force others to pay them for the privilege of being born later. Both are really scams to enrich the people who started them.
Thus Fed worship has been part of the entry into being “a serious person.” Not recognition that interest rates have no natural level, and thus must be set, but worship of the Fed’s role in cushioning and facilitating liquidity at the top.
Ex-Huming the Theory of Money
Most people are crude Humians about money: the live in a world where money is a lump, they have limited ability to raise their income or cut their costs, since they have no pricing power, and thus see “more money chasing fewer goods.” What most people do not realize, since they spend, or save to spend in the future, virtually all of their money, that money buys not just scarce good, or time of other people, but control. Mind share is limited. People can know only so many people, or know only so many brands. But what it is not, is inflationary of limited physical resources directly. The price of owning GE could quadruple tomorrow, but inflation will only happen to the extent that people can cash out. The next CEO of GE is not going to increase the price of oil, unless he wants to do something, and that will come out of investment in goods and services, not in the fight for control of the company.
This is actually what Hume and Smith argued, only in reverse. Piling up specie in the United Kingdom, against the cost of wars, did not improve the wealth of the nation, because the more specie, the higher prices became. Thus money piled up for control became inflationary because the people who held it, bid up prices for luxury once they felt safe. And since they could see other elites and the appetite for luxury, they could vie in the glory race that Louis XIV created. The same glory race is now in place, we have reinvented the age of absolutism, and for the same reason. The state argues that freedom leads to civil war, and that the power of the state was all the stood in the way of this. The intellectuals of Louis XIV would work for the regime for the next 130 years.
It is only when the share of the gains from war dropped, that criticism seriously mounted: once it was a war to hold on to the sugary islands gained, and there was no simple profit, the elites began to defect. A sharp line can be drawn between the career of Voltaire, and that of Rousseau. Voltaire lived in the bubble, but preached reform, a fundamentally conservative idea, and Rousseau tried, as critic and composer, but was forced to the edges. David, Danton, Marat, were pushed out. The writing of each reflects its, Voltaire was in, but troubled, Rousseau at the margins, but with income, David a promising career blocked. There were no careers open to talent.
The two errors of crude quantity money are that not all demand is demand for physically limited goods, and that one can print an unlimited amount of money that goes nowhere. Since 1987 the quantity of dollars has expanded dramatically, and it has gone two places, one is to trade, as the dollar has grown more powerful, the junk currencies of the world less so, and the other is into the great bubble of the Red Queen’s Race.
Breakfast On Olympus
The problem with this fictional money is that “in the long run,” as Malthus pointed out, the rich want to live well. The reason control money is not inflationary in 1983, but is in 2013, is because the rich could not buy their way out of the system, they could merely get first in line to the same system. Now it is possible to create a parallel world, with banks in Cyprus, hotels in Dubai, and medical care that the rest of us do not see. This is expensive, and it competes for limited physical resources, since this parallel world is not tea with the queen, but breakfast on Olympus. The reality of Breakfast on Olympus is that it cuts the professional class off from their very life blood, the opera that our fine clerk could attend with a general in front of him.
And this is why the servants of wealth are now concerned. That they are richer than you is their due. But first class isn’t first class, first class is in a private jet. They no longer run into the generals and cardinals that they curry favor with. In my world, I used to see Mayor’s and CEO’s flying the Shuttle. They don’t fly the Shuttle any longer. They don’t go to the same hospitals, theirs do not accept insurance. This is also why the professional class hates taxation, they are not rich enough to hide their money, it is all where it can be found by governments. And taken.
One can go down a long list of consumer goods, from houses to cars, and find that one has to spend a great deal to be appreciably better than what is available at the low end. One can get a car for 50,000 dollars that will be competitive with any available up to 200,000 dollars. But the top end super cars are 1,000,000 and up, and they will lay waste to a Porsche 911 GT3. To afford an apartment in the core of Manhattan, it requires 1.5M liquid to apply, and probably to be turned down. This is a world that you do not see. And having such a world, like the palaces of Versailles, and unfashionable distance from Paris of the day, is enormously expensive. A world where a billion dollars is not enough to protect you from a vengeful President of a certain successor state to the USSR.
Thus the liquidity for control must come out some how. One is by inflation, the other is by stagnation: which is, of course, inflation by another name. People whose incomes are slashed have effectively seen the cost of goods increase. Wage Deflation is the same as Price Inflation from the point of view of welfare.
The inflation rate at the top is now much higher than for ordinary people, and thus, the consumption of the bottom must be cut, one to cut the outflow to resource barons, the other to free up the labor that would go to taking care of the aging body boomers, and free it up to clean third yachts and fourth mansions instead.
Income inequality and lack of social mobility is in the design of our political economy.
There has been a progressive exclusion of classes from increases in real wealth since 1972.
The public has accepted these exclusions, in hopes of cashing out, while elites have used them to concentrate power.
Money for control is increasingly becoming permanently inflationary, and this inflation is being inflicted as stagnation downwards.
Each wave cast out does not unify, because it sees the problem differently, and demands a solution which privileges them at the cost of others. The populists see the problem as their peer competitors.
This wave of inequality has reached the class whose job it is to serve the top, that is why we are reading about it now.
You can bend over, and kiss your class good bye.
Stirling Newberry can be followed on Twitter at @SSNewberry