Too Big To Fail And Economic Inequality

As I wrote in a piece a couple of months ago, I am glad to be in the political party that is actually having a debate about how to revive the American middle class, because I think it is one of the two most central and important economic debates of our generation (the other being how do we convert our worldwide economy into one that doesn’t cook the planet). Given that the Republicans’ only big focus is how to keep taxes low on the rich and government too weak to function, I am happy my party’s debate is a little more focused on where it needs to be. The only problem I have with the debate is that too many of the establishment Democrats think it can be done without challenging the wealthy special interest status quo, the concentration of power in both our economy and politics.

Here’s one example of what I am talking about: a Larry Summers op-ed in the Washington Post just before Thanksgiving entitled “Three Ways to Combat Inequality.” I appreciate Summers caring enough about inequality to write something about it, but I found the op-ed disturbing (although not surprising) in that he totally buys into the establishment conventional wisdom that the reasons for increased inequality “lies substantially in changes in technology and globalization.” He goes on to say that on one side (presumably the side of crazy lefties), “the debate is framed in zero-sum terms, and the disappointing lack of income growth for middle-class workers is blamed on the success of the wealthy”. After that classic swipe, he talks about how the right wing is wrong not to worry about the issue at all, and then lists his three solutions: don’t reward the wealthy with special concessions, “pro-fairness, pro-growth tax reform,” and making sure there is more equity in areas like education and health care.

I agree with Summers on his three general policy proposals, although I suspect we would disagree on the details of those policy ideas — for example, I strongly support taxing speculation on Wall Street through a bill like Harkin and DeFazio’s Financial Transaction Tax, and Summers strongly opposed the idea while at the White House, and I strongly supported a public option on health care when Summers was happy to trade it away. But none of these three “solutions” do anything to more fundamentally solve anything, which Summers tacitly admits by saying upfront that inequality is pretty much inevitable because of globalization and technology. Summers, along with his mentor Bob Rubin and his protégé Tim Geithner, are dead wrong on their central approach to economic policy, which encourages “the market” (as they define it, at least) to do what it will and uses government to soften the rough edges and keep things from being quite so miserable for at least the poor. The fact that these proposals ignore the very heart of the matter, which is the power relations that drive our modern economy, speaks very loudly.

The reason that economic inequality, as well as the depth of the unemployment problem, is so much worse in the United States than in virtually every other modern, developed economy in the world is because labor unions are so much weaker here, and because our industries — especially our financial institutions — are so much more concentrated. The fact that countries like Germany, Sweden, Canada, Denmark, and Australia all weathered the worldwide financial crisis better than we did is because their unions kept wages relatively high so people had money to buy things, and because their big banks were not nearly so dominant a party of their economy. If globalization and technology were the big and inexorable causes of economic inequality, then every country would have the USA’s bad numbers on that score, but they don’t. Those two causes, which are so popular with conservative economists, are certainly a factor, but concentration of wealth flows more than any other thing from concentration of power. It was true in the ancient Roman Empire, as wealth basically flowed from the size of people’s armies and their friendship with the Caesars. Throughout the middle ages, the same patterns remained true. In the late 1800s in this country, concentration of wealth came about partly because of industrialization, but mostly because the big corporate trusts of the robber barons ran government through open bribery. In the 1920s, concentration of wealth rose to incredible new heights again, as the conservative pro-big business Republicans controlled government and big corporate trusts paid little in taxes, broke unions viciously, and speculated in the stock market with impunity.

Today, with unions as weak as they have been since the 1920s and major industries as concentrated as they have been since the 1890s, we have tremendous inequality and a disappearing middle class. That disappearing middle class includes a breakdown of small business in sector after sector as well, as the small guys have more and more trouble competing with big business. Four companies now control 70 percent of general retail sales; four grocery chains control 55 percent of grocery sales; three firms control 80 percent of beer sales, and two control 70 percent of toothpaste sales; five big oil companies control 60 percent of retail gas stations; four accounting companies lock down 70 percent of the accounting work done in this country. I could go on and on, in industry after industry, from telecom to agribusiness, from technology to pharmaceuticals. These huge conglomerates have destroyed tens of millions of small businesses, and even more jobs. They have broken unions and driven down wages. Their power is breaking the middle class in this country.

You know the biggest problem with all this concentration of wealth? These firms become so politically and economically powerful that government becomes their handmaiden: they are the ultimate Too Big to Fail companies. As a result, they distort our economy and government in terrible ways. One of the most essential reading items I have seen in a long time is a new report out of Bloomberg about the secret Federal Reserve loans to the Too Big to Fail banks during the financial crisis of 2008-9. It is an incredible read, documenting how much money was shelled out by Ben Bernanke with no strings attached to the biggest banks in America. They didn’t have to loan the money out to businesses, or invest it in promising new companies that might create jobs, or write down any loans to homeowners. And with virtually no interest loans (0.01 percent), these banks not only survived the financial crisis, but grew much bigger in size, made massive profits, and paid themselves record breaking bonuses. It is not an exaggeration to say that this is corruption on a scale never before seen in human history. The details are worth reading, even though it will probably make you ill.

Larry Summers, one of the two key architects of the repeal of Glass-Steagall and other financial deregulation of the late ’90s, doesn’t have any policy proposals in his what to do about economic inequality op-ed relating to countering the kind of concentration of wealth and power that gave us this kind of backroom dealing — deals that exacerbated the concentration of wealth even more. It is predictable but very sad. What we need are economic thinkers who also understand the most basic theory of the founding fathers, which is pluralism. Pluralism was that core idea of Madison’s that only by having power widely distributed could a democracy survive. That core idea is being fundamentally threatened today, because big banks on Wall Street and the other dominant economic powers that be have too much power (both economic and political), and unions and consumers and small businesses and the rest of the 99% have too little. Changing that will do far more to solve economic inequality than all of the policy ideas suggested by establishment thinkers like Summers combined.

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