There are many stupid things you have to believe if you want to be taken seriously on financial matters. These myths about economic and financial matters form the playing field for the debate over financial reform. Simon Johnson says that these myths are a kind of social capital which finance companies like JPMorgan Chase and Goldman Sachs have accumulated over the years. One channel of this influence is the revolving door, men (they’re always men) moving from the finance companies to government and back, trailing clouds of the perfume of money. Another channel is the unexamined claim of expertise of business people. These channels of influence only work because Congress and the White House uncritically accept these myths.
Here are five:
1. Finance companies are geniuses at risk management.
2. Finance companies must be allowed to grow to gargantuan size if they are to compete.
These and other myths are the ground on which all economic battles are fought. If we want to argue for re-imposition of Glass-Steagall, we have to start from miles away, arguing that at least some financial regulation is a good thing. If we want to argue for some kind of industrial policy, we have to overcome the rote objection that government is no good at picking winners, and that we are already the greatest. If we argue that we need to improve our infrastructure, we are told that markets will fix things, and we should privatize the infrastructure.
The myths are accepted by all of the financial elites. Peter Wallison, an employee of the American Enterprise Institute, asserts that speculation is a perfectly good thing, because it provides liquidity. That is such an obvious truth that Wallison doesn’t think people should waste time thinking about it.
Several months ago, I was on a blogger call with one of the Treasury people who was explaining the Administration’s ideas about regulating swaps. I asked if it wouldn’t be a better idea to discourage speculative activity and encourage productive investments. The official said that it was not really possible to separate the two. It doesn’t matter which party is in power, both agree on these myths.
This is a serious problem for progressives. We have not created an alternative view of capitalism, as have so many other nations. Let’s start by getting away from the myths, and thinking about society as it exists.
Right now a tiny number of people reap a massive share of the economic benefits of living in our society. IRS data shows that in 2007, the top 400 households earned an average of $345 million each, and paid income taxes at an average rate of 16.6%. Adjusted for inflation, their income increased five-fold between 1992 and 2007. Vast amounts of that wealth are going to hedge funds for the purpose of speculating. Little of it is going into productive activity. This happened while 90% of Americans didn’t even keep place with inflation over the past decade, our infrastructure deteriorated, our factories left the country, our national debt increased dramatically, and poisonous politics destroyed the ability of the majority to govern.
Here’s a first draft of a question: Why should a few people reap such a disproportionate share of the fruits of the labor of all of us? Here’s the catch: you can’t use myths or talking points. It isn’t an answer that “they earned it, they should keep it”. It isn’t an answer that the Constitution or the Founding Fathers or Adam Smith or Ayn Rand said it was a good idea. Those and other myths are out of bounds. Let’s think about whether the current structure is the best way to organize things. Here’s the rephrased question:
Assume that you know what you know today about our society. Assume you are in charge of designing the rules for our society, not knowing where you will wind up in that society. What is your justification for establishing social arrangements with the current distribution of rewards?
image courtesy cobalt123