There is a class of individuals in the financial sector who are very effective at creating wealth -- for themselves. That would be almost admirable if that wealth was serving to generate economic activity and greater wealth throughout our society. These aren't, however, capitalists in the traditional sense, investing or taking capital and producing needed industrial and consumer goods or services. These are people who make money just by moving money around the market.
The last 30 years have seen the rise of an investing class, comprised of speculators and hedge fund investors and managers, arbitragers and such, who have found ways to exploit markets and generate fantastical gains...on their investments. The traders and managers charged with generating these gains are also highly compensated. Millionaires and billionaires are getting ever richer, without enriching the rest of us. Thanks to the GOP-driven tax-cutting policies of the last 15 years, we've even managed to rig the system to favor such paper profits, with a lower top marginal rate and a drastically reduced capital gains tax rate. In recent years, the GOP has repeatedly played a game of budgetary brinksmanship with the American economy, just to protect those precious low tax rates.
The question has to be asked: Why?
Why are Republicans so enamored of these 'wealth creators'? Is it because these slavish devotees of Ayn Rand deify the wealthiest in our economy? If so, according to one noted academic and business expert, the GOP is guilty of grossly misunderstanding the gospel of Rand.
We know the GOP loves to call the richest 1% the "job creators", and refuses to allow tax hikes on the wealthiest. Republicans argue such tax hikes would take away money that is being used to create jobs. We know that's a false argument because the financial class isn't really investing in the economy -- businesses aren't increasing production, banks are making record profits but not lending, and job creation is lagging so much that it isn't even keeping pace with the population growth.
Instead of job creation, all we see is wealth creation, for a select few. That's why we see the growing income inequality gap, which was so devastatingly illustrated in the recent CBO report.
GOP Rep. Paul Ryan responded to the CBO report with his own policy paper, wherein he poses that policymakers wishing to address this growing gap in income face a choice.
"Answering the normative question of what policymakers should do to address income inequality must begin with a more precise understanding of the problem. There are two divergent approaches to the question policymakers should be asking:
1. Is the problem simply that some households make more than others, in which case policymakers should be focused on closing this income gap by any means at their disposal, indifferent as to whether government policies aimed to close relative inequality result in lower absolute levels of income?
2. Or is the problem that incomes for households in the middle- and lower-quintiles are not rising fast enough, in which case policymakers should focus first and foremost on creating the conditions for income growth and job creation?"
This is, of course, a self-serving, strawman argument. Writing in the Washington Post, Ezra Klein answers Rep. Ryan by pointing out this an utterly false choice.
"If there actually is anyone out there who believes we should be focused on closing the income gap no matter the cost to growth, I’ve never met them."
On the other hand, Klein writes that the opposite is true:
"[T]here actually are people who focus on what they think to be pro-growth policies without heed to the income gap. People like, say, Paul Ryan."
Rep. Ryan's proposals -- his Roadmap for America -- would surely increase the income inequality he claims to be addressing, raising taxes for those in the middle and below, while delivering an average yearly tax cut of $350,000 to the top 1%. Those proposals would have to generate a lot of income growth and job creation beyond the top 1% to offset the $250k average tax cut the richest 1% would get.
Of course, Rep. Ryan's proposals can't deliver on that promise. Even if you would credit Rep. Ryan with making a good-faith proposal, it based on the false premise that wealth creation is equal to job creation. That's simply not true. The market, as it currently functions rewards short-term profit-taking. Therefore, longer-term investment in the economy is disfavored. It takes too long to produce results and might even produce the kind of short-term losses that the markets really frown on.
That's why new corporate regimes always lay off workers and cut costs when they're trying to increase shareholder value. They're not making the company more valuable, but they are temporarily improving the balance sheets, and the market usually applauds that. CEOs are especially interested in the fluctuations of stock price because most of them have massive stock options. If they can manipulate the stock price to increase the value of their options, they'd be fools not to do it, especially since the shareholders and the Trustees will demand results reflected in share price not long-term competitive positioning.
Wealth creation is not job creation. Often, in today's business world, the two concepts are diametrically opposed. That's how Mitt Romney can be a "success" in business by snapping up companies, and then outsourcing and offshoring their jobs. That's how Carl Icahn became a billionaire, buying companies and dismantling them, when he saw the value of the whole was less than the sum of the parts.
The GOP, however, has placed itself at the altar of Ayn Rand, with priests like Paul Ryan, who seem unable to see the difference between wealth and job creation -- unable to or unwilling to acknowledge the difference publicly. With respect to government economic policy, Rep. Ryan writes:
"The focus ought to be on increasing living standards, expanding economic opportunity, and promoting upward mobility for all."
That sounds good, but the problem is the Republicans put all their eggs in the one basket, counting on the wealthiest to spread the wealth. More to the point, because they are avowed followers of Rand, they believe that the wealthy have earned their riches and that the government has no right to take it away. In Rand's view, wealthy entrepreneurs and businessmen drive the economy, so anything that benefits them will inure to the greater benefit of our society.
So, what would Ayn Rand, the great prophet of the modern right-wing, really think about all this?
Bruce Judson, who is a former Yale business school teacher and a widely-respected expert on entrepreneurship, thinks Rand would take a dim view of the modern financial industry's value to our economy.
In an essay titled "Why Atlas Shrugged," originally found on his blog ItCouldHappenHere, Judson notes, the central tenet of Rand's philosophy is a simple one:
"Those who create the greatest societal wealth should be the most highly compensated."
Few would argue with this as a general principle -- or, at least, few would argue with the idea that this is how a capitalist economy should operate. Judson argues, however, that our economy is no longer really capitalist -- at least, that this fundamental precept of capitalism does not describe our economy any more.
'[R]eal capitalism is no longer enforced in America; not because of welfare programs, taxes, the social safety net, or government regulations, but for a very different reason: The highest paid people in America today create no real wealth for the society."
What would real societal wealth look like?
"Real societal wealth is anything that enhances the lives of those in our society, starting with basics such as food, shelter and medicine, but also including almost any property a person can own or anything a person can experience, such as entertainment or greater convenience."
Put simply, says Judson,
"Real wealth can be eaten, used, shared. or experienced."
Looking at our vast financial industry, Judson observes:
"The outcome of all their efforts are high profits, but little, if any, new societal wealth."
The financial industry is capable of generating huge profits...on paper. Judson quotes Paul Krugman writing for the New York Times in 2008:
"The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich".
When all that is being accomplished is moving around paper investments that never find their way into factories, stores or even other service providers, the only wealth reflected in these paper profits is what goes to the elite class of investors who have the access to reap 100%% of the economic benefits.
In fact, while the financial industry may be generating wealth for the investing class, on a more basic level, the industry is not only not generating "real societal wealth," it is destroying it.
Moreover, as Krugman and Judson both argue, all this useless wealth-creation is spent in ways that are crushing our political and economic system. Huge sums are being spent on political lobbying and campaigns with the goal being to influence legislation in ways that will only promote this socially destructive anti-capitalism. Not only will the rich keep getting richer, but much needed capital and much needed human talent will continue to flow into this socially unproductive financial sector, because -- wait for it, Mr. Willie Sutton -- that's where the money is.
Rand, of course, is revered by the right because she abhorred the government-run social programs that she saw as a transfer of wealth from the most-deserving to the least-deserving. Our current circumstances flip that notion on its head. These days, the people who make the most money in this country are often the least-deserving -- the least-deserving because they are producing nothing of value for society. Instead, because they are taking valuable resources out of production, these profiteers are actually having a negative impact on societal wealth.
As Judson writes, Rand opposed the social-safety net for...
"...the same reason I am certain she would be horrified by the current channeling of wealth to financial firms: She believed that they were allocating the benefits of production away from the rightful beneficiaries."
So, tell me again -- why does the GOP continue to fight so hard to preserve a bankrupt system that favors only the "wealth creators" -- that creates wealth only for a select few and few jobs for our economy? It ain't because Ayn Rand would approve.
---------------------------------------------
For those who believe in the ideology of the free market as the ideal of economic efficiency, our current situation poses a curious dilemma. Because of the dynamics of split-second program trading and because of the failure of government de-regulation, the markets have failed. They are not free, or efficient, because of the market distortions generated by the great wealth and political influence of the investing class. The only way to restore market efficiency seems to be for governments to intervene and reorder the way the markets function. Equally important is the tax piece of the argument. We must reorder tax policies to favor a return to longer-term investing, eliminating the preferential treatment for short-term capital gains.
This is the case that Democrats must make in coming elections. This is the argument that the Occupy movement should take to the streets, when they're asked for an agenda. Then we'll see how many stand with the GOP in defending the wealth creators' stranglehold on our financial sector and our politics.