“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Wednesday, September 17, 2014

From Plutocrat to Plutocrat - The Extreme Concentration of Wealth

A small number of individuals currently control a disproportionate amount of the wealth in most democracies. In America, the ultra-rich .01% of the populace has 11.1% of the nation’s wealth, with the top 1% owning 39.8% of the wealth, an astounding $32.6 trillion. These numbers do not consider assets held in offshore accounts which would skew the percentages even further. The richest .01% has quadrupled their share of America’s wealth since 1980, a time when they were already quite rich. To a major degree, government policy has been responsible for the affluent being able to accumulate this grossly unequal share of assets, while the middle class has stagnated financially and poverty appears to be intractable. (Just a small portion of the money held by the ultra-rich could completely eliminate poverty in the United States.) Income inequality in the U.S. is greater than in any other nation in the developed world by a significant percentage.
And wealth creates wealth. The more disposable income and excess capital an individual has that is not required for living expenses, the more extra money he or she can accrue through investments. Then, that additional surplus money can be reinvested along with the original sums, creating greater and greater wealth for that individual and his or her family. Thus, those with large amounts of disposable income become wealthier each year. And if governments are unable to restrict this accumulation in some fashion, the wealth is transferred from generation to generation, continuing to grow with each cycle, assuming the heirs are reasonably intelligent and not dissipated. To a certain degree, in democracies the ultra-rich have achieved the same status the nobility were accorded in feudal societies, living in castles with servants and bodyguards, their every desire gratified.
Unfortunately, the result is that over time, democratic states may be transformed into plutocracies, where a small group of affluent people control the government and all the important political decisions, as wealth is also equated with power. Affluent individuals are able to influence the outcome of elections through campaign contributions. And in addition, they can donate huge sums of money, tens to hundreds of millions of dollars, or even billions, to nominally independent groups that sponsor political advertisements and mobilize citizens to vote in certain ways. This provides the ultra-rich with the ability to induce legislatures and executives to do their bidding. The consequences are usually lower tax rates and fewer regulations on businesses.
Thomas Piketty in his book Capital in the 21st Century noted- “When the rate of return on capital exceeds the rate of growth of output and income, as it did in the 19th century and seems quite likely to do again in the 21st, capitalism generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based. There are nevertheless ways democracy can regain control over capitalism and insure that the general interest takes precedence over private interests, while preserving economic openness and avoiding protectionist and nationalist reactions.” Thus, one of the major objectives of democratic societies must be discovering how to lessen the concentration of wealth in only a few hands with continuous generational transfer, and achieving this end in a rational fashion.
And can societies suppress the sentiments of class privilege that inevitably develop as individuals and families amass wealth and power. Though this is not commensurate with the ideal of democracy, it is unlikely to be changed. Mickey Kaus noted in The End of Equality- “in their isolation, these richer Americans not only are passing on their advantages to their children, but are coming to think that those advantages are deserved; that they and their children, are at bottom, not just better off, but better.”
Inequality is inherent in capitalism, where those who are smarter, or those who work harder, will accumulate more wealth and have the advantages that wealth brings. There is nothing wrong with that. The challenge for democracy is cut down on the generational transfer of this wealth so that a plutocracy does not eventually develop. For a democratic society to flourish, equality of opportunity, a meritocracy, must be maintained, rather than control of the state by those with inherited wealth. Can it happen when lobbyists pressure Congress to meet the needs and interests of the most affluent segment of the population, and the wealthy themselves use their wealth to help elect those politicians who will bow to their wishes? It will not be easy.
Resurrecting Democracy


  1. The latest meeting of the People Who Influence Everything from Auto Loans to 401(k) Plans — a.k.a. the Federal Reserve Board’s Open Market Committee — has just concluded. The Fed confirmed Wednesday that, as expected, it will stop buying bonds with freshly printed money in October but did not say when, exactly, it will end its recession-fighting zero-interest-rate policy.

    Under former chair Ben S. Bernanke, the Fed said it might abandon that policy when the official unemployment rate hit 6.5 percent. That milestone is now in the rearview mirror — unemployment was 6.1 percent in August — but the Fed hasn’t yet acted.

    Bernanke’s successor, Janet Yellen, worries justifiably that the jobless rate has lost validity as a measure of overall economic weakness; much of the recent improvement seems to reflect not hiring but a shrinking labor force. Pending better data, she’s keeping her options open.

    Not to add to the chair’s worries, but she needs to take another issue into account: inequality. This month, the Fed released the latest edition of its triennial Survey of Consumer Finances, which showed that “only families at the very top of the income distribution saw widespread income gains” between 2010 and 2013.

    The top 3 percent of households claimed 30.5 percent of all income in 2013, up from 27.7 percent in 2010, while the next 7 percent held steady at nearly 17 percent — and the bottom 90 percent’s share declined to 52.7 percent.

    In short, the recovery erased nearly all of the decline in the top-earners’ share that occurred during the “Great Recession,” while nine out of 10 families not only didn’t experience a similar comeback but fell further behind. Family net worth, a measure of accumulated wealth, showed a similar skewing upward.

    Since this three-year period coincides with the Fed’s own extended experiment in ultra-cheap-money policies, the question arises: How much, if at all, is the Fed to blame?

    Obviously the central bank did not intend to increase inequality; its goals, which it has largely accomplished, were to stop a historic financial panic and then jump-start growth.

    Indeed, to the extent the Fed’s policies prevented truly massive joblessness, inequality might have been worse without them. That’s because a tighter labor market gives workers more leverage to bargain for higher wages.

    The question is whether, and how much, that effect is offset by others. Rock-bottom interest rates hurt small savers, who generally can’t diversify into higher-yielding but riskier investments.

    Economist Mario Belotti of Santa Clara University has calculated that savings-account holders lost nearly $1.2 trillion in interest income between August 2007 and September 2013, relative to what they would have realized absent the Fed’s policies, even though deposits grew from $3.8 trillion to $7 trillion.

    1. {...}

      Meanwhile, Wall Street bathed in free money from the Fed. Owners of stocks and other assets, such as farmland, who are disproportionately high-income, profited from the bull market.

      That effect was foreseeable and not entirely unintended, as Bernanke acknowledged in his Sept. 13, 2012, news conference. He predicted that higher asset prices will make people “feel wealthier; they’ll feel more disposed to spend,” thus boosting demand and broader economic activity.

      Any regressive impact of Fed policy is especially awkward for monetary doves, since they tend to favor both a level distribution of income and vigorous Fed action against lingering slack in the labor market.

      But what if the longer you pursue extra employment increments via cheap money, the more you risk skewing income distribution upward? That’s been the result of Japan’s years-long experiment in ultra-loose monetary policy, according to economists at the Dutch central bank.

      It’s a surprisingly little-studied area, and central banking experts don’t necessarily agree on a theoretical framework. Economist William R. White of the Dallas Federal Reserve has written that central banks may have exacerbated inequality over several decades, because their persistent bias in favor of pouring cheap money on a crisis-prone financial sector artificially inflated that sector’s profits and the incomes of those who operate it.

      James Bullard, president of the St. Louis Fed, by contrast, has argued that central bank policy probably just smoothed out the ups and downs of a long-standing trend toward inequality that’s driven by technology and social factors beyond the Fed’s control.

      Perhaps the best idea comes from economist Pierre Monnin of the Swiss National Bank. He proposes that central banks commit to regular analysis and public reporting on the distributional impact of their policies.

      Greater transparency has been the Fed’s response to concerns about how it uses its vast power. Given that, a little more exactitude about monetary policy’s winners and losers doesn’t seem like too much to ask.

    2. BUT, those "savings account holders" that lost $1.2 T weren't "small" savers. They were the Very Large Savers (Very Wealthy Folks.)

      The lower interest rates have affected "small savers" very little.

    3. .

      Rufus channeling his inner Krugman.

      The 'Krugman Doctrine'.

      Krugman argues that it is the rich that are 'suffering' because it is only the rich that have any real money so naturally they are the big losers. He ignores the fact that the rich have options and numerous opportunities to diversify. Its the rich who have made it big in the rising stock market while the poor and the elderly, after having lost half their net worth in 2008, are scared shitless, don't have the options the rich do, and having been burnt badly are looking for low risk investments that pay at least enough to keep up with inflation. There aren't any, at least not for them.

      Krugman is a political pundit not an economist. His wealth likely puts him in the top 5%. It's like Rush Limbaugh offering his views on money to the dittoheads.

      I read Krugman's article on this subject in the NYT and could only shake my head. It was a short while later that this article came from Forbes.

      <a href="'>Paul Krugman Is Dumber Than We Thought</i>

      Dumber than a rock?


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    1. And that part of it is meaningless.

      But there is more.....

    2. You should be ashamed of yourself, #2.

      But you are not.

  3. Like this--

    Hi Uncle,

    Yesterday the custom office was closed by the time I got free from office.
    I will try to pick up the package today. :) Thank you for T-shirts.. I am
    very excited to try them on. :)

    Lots of Love,

  4. You desperately need a new girlfriend, #2.

    Good night

    Mr. Miller