Monday, May 28, 2012 7:27:38 PM
Bain Capital and our screwed-up culture
Obama's ads portraying Bain's victims employ too many violins, writes Froma Harrop. The problem is not the profession. It's what one does in the course of business. But even among those intent on making it big, people with a conscience will not cross certain lines. Bain blew across them.
By Froma Harrop
Syndicated columnist
Originally published Friday, May 25, 2012 at 4:09 PM
We recently saluted Leslie Sabo for giving his life to save fellow soldiers in Vietnam 40 years ago. Injured after shielding a comrade with his body, the Pennsylvanian grabbed his grenade and stormed the foe's bunker. He died in the explosion. For his selflessness, America awarded Sabo the Medal of Honor.
Weird how we pay tribute to heroes who make the ultimate sacrifice on the battlefield but absolutely worship those who make fortunes wresting every last penny from other members of their company. As many see it: If you're rich, you're automatically a great American. Criticize how someone got rich, and you're a "socialist."
President Obama has been pummeling Mitt Romney over the marauding activities of his former investment company, Bain Capital. Some liberals do go overboard defacing all private equity investing with the same paint sprayer. And Obama's ads portraying Bain's victims employ too many violins for my taste. The problem is not the profession. It's what one does in the course of business.
But even among those intent on making it big, people with a conscience will not cross certain lines. Bain blew across them. There seemed little it wouldn't do for a buck.
That makes the prospect of a President Romney overseeing the laws that keep destructive "investing" practices legal and incredibly lucrative worrisome.
I don't see how buying a company, piling on $420 million of extra debt, immediately pulling tens of millions out of the business to pay off investors — all the while slashing the workers' pay — and then leaving the wounded patient to die in liquidation nine years later can be deemed honorable. This is what Bain did to American Pad & Paper as it turned a $5 million investment into a $100 million take.
Bain also stiffed Ampad's unsecured creditors, including a pension fund for some of its workers. These lenders got back two-tenths of a penny for every dollar Bain owed them.
Bain used a similar strategy at GS Technologies, a steel maker. There it parlayed an $8 million investment into $16 million. When the company went bankrupt, the federal Pension Benefits Guarantee Corp. had to spend $44 million bailing out its underfunded pension plan. And workers saw their pensions slashed by up to $400 a month.
Let's talk about capitalism. Granted, self-interest fuels the "animal spirits" that create our great business enterprises. Because the benefits of capitalism flow down to society at large, we are often at pains to divide ethical behavior from the other kind. Sometimes labor costs must be cut to stay competitive. Not every factory can be saved. And Bain apologists argue with some merit that the companies acquired were in trouble to begin with.
OK, but if a company is in trouble, do you multiply its debt by a factor of 22 and immediately take out millions for yourselves? That's what Bain did at Ampad, and, sorry, "looting" is the word.
And here's another question. What kind of people would walk away from a company with their money doubled but break a promise to workers for severance pay and health coverage if it went bankrupt? This was the case at GS Technologies. You answer that.
After World War II, American culture embraced a belief that labor and management should share in the fruits of capitalism. Those norms have been obliterated to the point that many don't remember they existed.
Meanwhile, the worshippers of Mammon hail the corporate destroyers as heroes. A financial elite that prospers by turning workers upside down for the change in their pockets should not be overseeing economic and tax policies for the country. Mitt Romney seems awfully comfortable with the way things are.
Copyright ©2012The Seattle Times Company
http://seattletimes.nwsource.com/html/opinion/2018289831_harrop27.html [with comments]
===
Minding the Gap
Illustration by Thomas Porostocky
‘The Great Divergence,’ by Timothy Noah
By BENJAMIN M. FRIEDMAN
Published: May 25, 2012
Writing in the middle of the 19th century, Karl Marx predicted that the gulf between the newly rich and the miserable urban poor, made much worse by the Industrial Revolution, would continue to widen indefinitely. This ever greater disparity, he thought, would ultimately undermine capitalism. Marx turned out to be wrong. Income inequality in Britain (and, from what we can tell, elsewhere in Europe too) began to narrow after the 1860s, and inequality in wealth peaked by the time of World War I. In America, inequality in both incomes and wealth began to lessen after the 1920s. The rich continued to live far better than the poor, but over the next 50 years the gap between them narrowed substantially.
Writing in the middle of the 20th century, the American economist (and future Nobel laureate) Simon Kuznets extrapolated into the indefinite future this newer trend toward more equal incomes and living standards — at least for the advanced economies. He theorized that while the initial stages of industrialization caused inequality to increase, and would do so whenever new economies industrialized, further economic development would foster ever greater equality. Alas, Kuznets turned out to be wrong too. The gap between rich and poor has been growing for the past 30 years in most of the world’s advanced economies, and especially in the United States.
Modern economists have learned from Marx’s and Kuznets’s mistakes. Like Kuznets, they see widening or narrowing inequality as the cumulative outcome of several different influences, some pushing the rich and the poor apart and some drawing them closer together. But instead of assuming that the tug of war between those opposing forces is automatically decided by an economy’s stage of development, today’s thinking seeks to understand what makes each influence stronger or weaker. And part of the object is to search out ways for public policy to affect the balance, instead of viewing the overall outcome as predetermined.
In “The Great Divergence,” the journalist Timothy Noah gives us as fair and comprehensive a summary as we are likely to get of what economists have learned about our growing inequality. Noah is concerned about why inequality has widened so markedly over the last three to four decades, what it means for American society and what the country can — and, he argues, urgently should — do about it. As he makes clear, what has mostly grown is the gap between those at the top and those in the middle. As a result, his book resonates more with the recent focus on “the 1 percent” than with more traditional concerns about poverty.
The principal influences on inequality that Noah examines include the failure of America’s schools to keep pace with the step-up in skills that advancing technology demands from our labor force; America’s skewed immigration policy, which inadvertently brings in more unskilled than skilled immigrants and thereby subjects already lower-income workers to greater competition for jobs; rising competition with China, India and other low-wage countries, as changing technology enables Americans to buy ever more goods and even services produced overseas; the failure of the federally mandated minimum wage to keep up with inflation; the decline of labor unions, especially among employees of private-sector firms; and what he sees as an anti-worker and anti-poor attitude among American politicians in general and Republicans in particular. Along the way, he enlivens what might otherwise be a dry recounting of research findings with fast-paced historical vignettes featuring colorful characters like the novelist Horatio Alger, the labor leader Walter Reuther and the business lobbyist Bryce Harlow.
What’s to blame, then, for America’s widening inequality? Leaving aside the politicians, Noah reviews economic research supporting the familiar hypotheses. Indeed, each of them is probably part of the explanation. But the goal of research in a policy-oriented inquiry like this one is quantitative — establishing just how much of the explanation to assign to separate influences one by one, even if all of them contribute to the story. We want not merely to portion out the blame but to know what to do, and different explanations call for different remedies. It would make little sense, for example, to invest huge sums in reforming K-12 education and reducing the cost of college if the mismatch between graduates’ skills and what the economy requires accounts for only a small part of the problem. By contrast, if my Harvard colleagues Claudia Goldin and Lawrence Katz are right that education is the core of the issue (Noah draws extensively on their recent research, especially their aptly titled book “The Race Between Education and Technology [ http://www.amazon.com/The-Race-between-Education-Technology/dp/0674028678 ]”), then what and how we teach young Americans should be at the top of the agenda.
It is not Noah’s fault that economic research has yet to reach consensus on how much of the blame for inequality to place on which explanation, and it is to his credit that he does not try to portray a consensus that is not there. His summary of what we know from the relevant research is faithful to what the researchers have found. Part of the problem here, which “The Great Divergence” also accurately conveys, is the tension inherent in concentrating on the American facet of a worldwide phenomenon. As Noah makes clear, inequality is increasing almost everywhere in the industrialized and postindustrial world, even if the increase has been much greater in the United States. We need to know how much weight to give to America-centric explanations like the shortcomings of our schools or our immigration system or the demise of unions. But to understand a global trend, we would like a more universal explanation.
Noah’s own explanation is, in effect, “all of the above,” and his policy recommendation is therefore to take action on all fronts. His chief concern is the fear that ever widening inequality will undermine our democracy: “Americans believe fervently in the value of social equality, and social equality is at risk when incomes become too dramatically unequal. . . . Growing income inequality makes it especially difficult to maintain any spirit of e pluribus unum.” He rightly emphasizes that while the potential for individuals to move up is essential to what makes inequality acceptable, at least to most Americans, economic mobility in the United States is now more limited than it appears to have been in earlier times and — contrary to the popular image — more limited than in many other countries. (It also matters that in America today incomes are becoming more unequal at the same time that most families’ incomes have been stagnant for more than a decade after allowing for inflation — a point that Noah notes but does not emphasize.)
How much inequality can the Republic stand before the social and political fabric frays? Noah does not answer the question, in part because he doesn’t know, but mostly because he feels he doesn’t need to. “You’d have to be blind,” he writes, “not to see that we are headed in the wrong direction, and we’ve been heading that way for too long. . . . The worst thing we could do to the Great Divergence is get used to it.”
Benjamin M. Friedman is an economics professor at Harvard. His most recent book is “The Moral Consequences of Economic Growth [ http://www.amazon.com/The-Moral-Consequences-Economic-Growth/dp/0679448918 ].”
*
THE GREAT DIVERGENCE
America’s Growing Inequality Crisis and What We Can Do About It
By Timothy Noah
Illustrated. 264 pp. Bloomsbury Press. $25.
http://www.amazon.com/The-Great-Divergence-Americas-Inequality/dp/160819633X
*
© 2012 The New York Times Company
http://www.nytimes.com/2012/05/27/books/review/the-great-divergence-by-timothy-noah.html [ http://www.nytimes.com/2012/05/27/books/review/the-great-divergence-by-timothy-noah.html?pagewanted=all ]
===
Market Values
Illustration by Thomas Porostocky
Illustration by Thomas Porostocky
‘Land of Promise,’ by Michael Lind
By DAVID LEONHARDT
Published: May 24, 2012
Whatever their political party, American leaders have generally subscribed to one of two competing economic philosophies. One is a small-government Jeffersonian perspective that abhors bigness and holds that prosperity flows from competition among independent businessmen, farmers and other producers. The other is a Hamiltonian agenda that believes a large, powerful country needs large, powerful organizations. The most important of those organizations is the federal government, which serves as a crucial partner to private enterprise, building roads and schools, guaranteeing loans and financing scientific research in ways that individual businesses would not.
Today, of course, Republicans are the Jeffersonians and Democrats are the Hamiltonians. But it hasn’t always been so. The Jeffersonian line includes Andrew Jackson, the leaders of the Confederacy, William Jennings Bryan, Louis Brandeis, Barry Goldwater and Ronald Reagan. The Hamiltonian line includes George Washington, Henry Clay, Abraham Lincoln, William McKinley, both Roosevelts and Dwight Eisenhower.
Michael Lind’s “Land of Promise” uses this divide to offer an ambitious economic history of the United States. The book is rich with details, more than a few of them surprising, and its subject is central to what is arguably the single most important question facing the country today: How can our economy grow more quickly, more sustainably and more equitably than it has been growing, both to maintain the United States’ position as the world’s pre-eminent power and to improve the lives of its citizens?
Lind, a founder of the New America Foundation in Washington and the author of several political histories, acknowledges from the beginning that his thesis will make some readers [obviously including Leonhardt] uncomfortable. “In the spirit of philosophical bipartisanship, it would be pleasant to conclude that each of these traditions of political economy has made its own valuable contribution to the success of the American economy and that the vector created by these opposing forces has been more beneficial than the complete victory of either would have been,” he writes.
“But that would not be true,” he continues. “What is good about the American economy is largely the result of the Hamiltonian developmental tradition, and what is bad about it is largely the result of the Jeffersonian producerist school.”
Hamiltonian development built the Erie Canal, the transcontinental railroad, the land-grant universities and the Interstate highway system. In the process, the United States became a giant, interconnected market, a place where companies like Standard Oil, General Motors, John Deere and Sears Roebuck could thrive. The government — and the American military in particular — also played the most important role in financing innovation at its early stages. The industries that produced the jet engine, the radio (and, by extension, the television), radar, penicillin, synthetic rubber and semiconductors all stemmed from government-financed research or procurement. The Defense Department literally built the Internet.
The United States is like “a gigantic boiler,” Sir Edward Grey, a British foreign secretary during World War I, said, according to Winston Churchill. “Once the fire is lighted under it, there is no limit to the power it can generate.” Lind’s aim is to make Sir Edward’s point in the active voice: the government has often lighted the flame, and big business has often generated the power.
And Lind has a strong case to make. He cleverly notes that Jeffersonians themselves often have a change of heart when they find themselves running the country and responsible for its well-being. As president, Jefferson altered his position on federal support for canals, roads and manufacturers. His successor, James Madison, signed a bill creating a national bank, having previously denounced the idea. The leaders of the Confederacy, after decrying centralized power, realized they needed an economic machine to finance a war and started “a crash program of state-guided industrialization from above that was more Hamiltonian than Hamilton,” Lind writes. Modern Jeffersonians, like Reagan and George W. Bush, have campaigned on spending cuts, only to expand government while in office.
For all its logical rigor, however, the book’s thesis does suffer from one basic flaw. Lind never quite explains how the United States has ended up as the richest large country in the world, with per capita income about 20 percent higher than Sweden’s or Canada’s, almost 30 percent higher than Germany’s and almost 500 percent higher than China’s. If anything, other countries have pursued more Hamiltonian policies in many ways than the United States, without quite the same success.
What, then, can explain American economic exceptionalism? Education plays an important role (and receives only sporadic mention in the book). This country long had the most educated, skilled work force in the world, which, as other economic histories have persuasively shown, helped American workers to be among the best paid.
Beyond education, the United States also has a culture that is arguably different from that of any other power — more individualistic, more risk-taking, more comfortable with the workings of the market. If you were looking for a name for this culture, you might choose Jeffersonian.
Lind, I expect, would dispute that a Jeffersonian culture has played a major role in creating prosperity. Yet readers will emerge from the 586 pages of “Land of Promise,” despite its many charms, without hearing an argument that fully engages with its opponents.
American economic history, in Lind’s telling, has been a series of three revolutions and counterrevolutions, with each revolution tied to an actual war. The economic decision that awaited the victorious founders in the 1780s was whether to create a system that complemented the British economy by providing resources for Britain’s emerging industries and customers for its products, or to create a full-blown national competitor.
Southerners, understandably, preferred a partnership, since they had the resources, particularly cotton. The Southern view was also informed by centuries of history in which global living standards had been largely unchanged. In this zero-sum, Malthusian world, a simple agrarian economy made sense. It seemed to maximize individual freedom and avoid the pollution and concentration of power that industry brought. “While we have land to labor,” Jefferson wrote in 1782, “let us never wish to see our citizens occupied at a workbench.”
Hamiltonians put more faith in economic change and progress. They subscribed to the ideas of John Locke, the pre-eminent political philosopher of the American Revolution, in which military power stemmed from economic growth and population growth. Hamiltonians encouraged the immigration of inventors and skilled workers (Hamilton himself was an immigrant) and pushed public support for infant industries as well as tariffs to protect them. They also advocated a modern, centralized financial system to pay for the needed investments.
The grander ambitions of the Hamiltonians largely won out, but the victory was temporary. Even as the country benefited enormously, some people did not. The changes also threatened entrenched interests and stoked classically American fears of centralization. Soon Andrew Jackson, more Jeffersonian than the namesake, was on the counterattack, opposing federal road building and closing the national bank.
These cycles have continued, more or less, for 200 years. Lincoln — a state legislator during Jackson’s time who fought for federal investment — was the great Hamiltonian of the 19th century. After the South left the Union, Lincoln, with the backing of Congress, was able to undertake an investment bonanza that Southern representatives had blocked, building rail lines, roads and colleges. Many of these programs would ultimately help industrialize the South.
Hamiltonians, obviously, did not always make the right investments. The first aviator the federal government backed was Samuel Pierpont Langley, the director of the Smithsonian Institution, whose test flights crashed into the Potomac. But the cost of such failures paled next to the returns of the successes. The military soon became the Wright brothers’ first client and allowed them, and American aviation more generally, to flourish before a private market for it existed.
Among the joys of Lind’s book are small, little-known stories like the one about the Wright brothers that have clear relevance today. I expect I will be returning to the index of “Land of Promise” with some frequency. Another joy is Lind’s attempt to rehabilitate figures to whom history has not been kind. McKinley may have had some cronyism problems, yet he also fought to modernize the American economy and was ahead of his time on civil rights. Wall Street tycoons of the 19th century like J. P. Morgan may have been rapacious, yet they also provided crucial financing for inventors like Thomas Edison. Even Herbert Hoover, whom Lind criticizes for the usual reasons, receives praise for creating the (albeit too modest) forerunners of the New Deal and World War II mobilization.
That mobilization provided the most important Hamiltonian victories since Lincoln’s time. A generation of bipartisan presidents afterward, from Harry Truman to Gerald Ford, largely accepted the world Roosevelt left them. Then came the Great Dismantling, to use Lind’s term, when first Jimmy Carter and, much more aggressively, Reagan moved toward a less centralized, more laissez-faire economy. These decades have seen far slower income growth for most Americans than the previous century.
The chapters on the most recent years are a fairly standard liberal version of events, with deregulation and modern finance as the main antagonists. If you think airline deregulation was an abomination because service can be wretched and airline bankruptcies are common, you will like Lind’s telling. If you instead prefer to concentrate on the fact that middle-class Americans can now afford to fly regularly or that air travel has never been safer, you will not be persuaded.
But Lind ends on a stronger note. The major problems facing the United States today, he argues, are ones that demand Hamiltonian solutions. True innovation, of the kind that lifts living standards for the masses, cannot come from lone inventors. It requires resources that only large organizations have. It also requires skilled people, be they well-educated natives or immigrants admitted because of the skills they can bring.
The notion that the United States has stopped making many large-scale investments that bring great returns is not, in Lind’s view, surprising. American economic history tends to run in cycles. Yes, our roads and bridges are dilapidated. Our broadband infrastructure is not quite world-class. Our schools, including many colleges, can no longer claim to be the finest. But the economic need for change will eventually create the political will for it. “Land of Promise” ends on as optimistic a note as the title suggests, though it also acknowledges that failure is an option.
*
LAND OF PROMISE
An Economic History of the United States
By Michael Lind
586 pp. Harper/HarperCollins Publishers. $29.99.
http://www.amazon.com/Land-Promise-Economic-History-United/dp/0061834807
*
© 2012 The New York Times Company
http://www.nytimes.com/2012/05/27/books/review/land-of-promise-by-michael-lind.html [ http://www.nytimes.com/2012/05/27/books/review/land-of-promise-by-michael-lind.html?pagewanted=all ]
--
for context, coupla older by/re Lind:
The Myth of Barry Goldwater
November 30, 1995
http://www.nybooks.com/articles/archives/1995/nov/30/the-myth-of-barry-goldwater/?pagination=false
Why Intellectual Conservatism Died
1995
http://mises.org/misesreview_detail.aspx?control=79
The Limitations of a Neo-Nationalist
1997
http://nova.wpunj.edu/newpolitics/issue23/russel23.htm
===
(linked in):
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=71561891 and preceding and following
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=73504847 and preceding and following
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=75197318 and preceding and following
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=75317829 and preceding and following
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=75955448 and preceding and following
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=76005314 (and any future following)
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=76023857 and preceding (and any future following)
Obama's ads portraying Bain's victims employ too many violins, writes Froma Harrop. The problem is not the profession. It's what one does in the course of business. But even among those intent on making it big, people with a conscience will not cross certain lines. Bain blew across them.
By Froma Harrop
Syndicated columnist
Originally published Friday, May 25, 2012 at 4:09 PM
We recently saluted Leslie Sabo for giving his life to save fellow soldiers in Vietnam 40 years ago. Injured after shielding a comrade with his body, the Pennsylvanian grabbed his grenade and stormed the foe's bunker. He died in the explosion. For his selflessness, America awarded Sabo the Medal of Honor.
Weird how we pay tribute to heroes who make the ultimate sacrifice on the battlefield but absolutely worship those who make fortunes wresting every last penny from other members of their company. As many see it: If you're rich, you're automatically a great American. Criticize how someone got rich, and you're a "socialist."
President Obama has been pummeling Mitt Romney over the marauding activities of his former investment company, Bain Capital. Some liberals do go overboard defacing all private equity investing with the same paint sprayer. And Obama's ads portraying Bain's victims employ too many violins for my taste. The problem is not the profession. It's what one does in the course of business.
But even among those intent on making it big, people with a conscience will not cross certain lines. Bain blew across them. There seemed little it wouldn't do for a buck.
That makes the prospect of a President Romney overseeing the laws that keep destructive "investing" practices legal and incredibly lucrative worrisome.
I don't see how buying a company, piling on $420 million of extra debt, immediately pulling tens of millions out of the business to pay off investors — all the while slashing the workers' pay — and then leaving the wounded patient to die in liquidation nine years later can be deemed honorable. This is what Bain did to American Pad & Paper as it turned a $5 million investment into a $100 million take.
Bain also stiffed Ampad's unsecured creditors, including a pension fund for some of its workers. These lenders got back two-tenths of a penny for every dollar Bain owed them.
Bain used a similar strategy at GS Technologies, a steel maker. There it parlayed an $8 million investment into $16 million. When the company went bankrupt, the federal Pension Benefits Guarantee Corp. had to spend $44 million bailing out its underfunded pension plan. And workers saw their pensions slashed by up to $400 a month.
Let's talk about capitalism. Granted, self-interest fuels the "animal spirits" that create our great business enterprises. Because the benefits of capitalism flow down to society at large, we are often at pains to divide ethical behavior from the other kind. Sometimes labor costs must be cut to stay competitive. Not every factory can be saved. And Bain apologists argue with some merit that the companies acquired were in trouble to begin with.
OK, but if a company is in trouble, do you multiply its debt by a factor of 22 and immediately take out millions for yourselves? That's what Bain did at Ampad, and, sorry, "looting" is the word.
And here's another question. What kind of people would walk away from a company with their money doubled but break a promise to workers for severance pay and health coverage if it went bankrupt? This was the case at GS Technologies. You answer that.
After World War II, American culture embraced a belief that labor and management should share in the fruits of capitalism. Those norms have been obliterated to the point that many don't remember they existed.
Meanwhile, the worshippers of Mammon hail the corporate destroyers as heroes. A financial elite that prospers by turning workers upside down for the change in their pockets should not be overseeing economic and tax policies for the country. Mitt Romney seems awfully comfortable with the way things are.
Copyright ©2012The Seattle Times Company
http://seattletimes.nwsource.com/html/opinion/2018289831_harrop27.html [with comments]
===
Minding the Gap
Illustration by Thomas Porostocky
‘The Great Divergence,’ by Timothy Noah
By BENJAMIN M. FRIEDMAN
Published: May 25, 2012
Writing in the middle of the 19th century, Karl Marx predicted that the gulf between the newly rich and the miserable urban poor, made much worse by the Industrial Revolution, would continue to widen indefinitely. This ever greater disparity, he thought, would ultimately undermine capitalism. Marx turned out to be wrong. Income inequality in Britain (and, from what we can tell, elsewhere in Europe too) began to narrow after the 1860s, and inequality in wealth peaked by the time of World War I. In America, inequality in both incomes and wealth began to lessen after the 1920s. The rich continued to live far better than the poor, but over the next 50 years the gap between them narrowed substantially.
Writing in the middle of the 20th century, the American economist (and future Nobel laureate) Simon Kuznets extrapolated into the indefinite future this newer trend toward more equal incomes and living standards — at least for the advanced economies. He theorized that while the initial stages of industrialization caused inequality to increase, and would do so whenever new economies industrialized, further economic development would foster ever greater equality. Alas, Kuznets turned out to be wrong too. The gap between rich and poor has been growing for the past 30 years in most of the world’s advanced economies, and especially in the United States.
Modern economists have learned from Marx’s and Kuznets’s mistakes. Like Kuznets, they see widening or narrowing inequality as the cumulative outcome of several different influences, some pushing the rich and the poor apart and some drawing them closer together. But instead of assuming that the tug of war between those opposing forces is automatically decided by an economy’s stage of development, today’s thinking seeks to understand what makes each influence stronger or weaker. And part of the object is to search out ways for public policy to affect the balance, instead of viewing the overall outcome as predetermined.
In “The Great Divergence,” the journalist Timothy Noah gives us as fair and comprehensive a summary as we are likely to get of what economists have learned about our growing inequality. Noah is concerned about why inequality has widened so markedly over the last three to four decades, what it means for American society and what the country can — and, he argues, urgently should — do about it. As he makes clear, what has mostly grown is the gap between those at the top and those in the middle. As a result, his book resonates more with the recent focus on “the 1 percent” than with more traditional concerns about poverty.
The principal influences on inequality that Noah examines include the failure of America’s schools to keep pace with the step-up in skills that advancing technology demands from our labor force; America’s skewed immigration policy, which inadvertently brings in more unskilled than skilled immigrants and thereby subjects already lower-income workers to greater competition for jobs; rising competition with China, India and other low-wage countries, as changing technology enables Americans to buy ever more goods and even services produced overseas; the failure of the federally mandated minimum wage to keep up with inflation; the decline of labor unions, especially among employees of private-sector firms; and what he sees as an anti-worker and anti-poor attitude among American politicians in general and Republicans in particular. Along the way, he enlivens what might otherwise be a dry recounting of research findings with fast-paced historical vignettes featuring colorful characters like the novelist Horatio Alger, the labor leader Walter Reuther and the business lobbyist Bryce Harlow.
What’s to blame, then, for America’s widening inequality? Leaving aside the politicians, Noah reviews economic research supporting the familiar hypotheses. Indeed, each of them is probably part of the explanation. But the goal of research in a policy-oriented inquiry like this one is quantitative — establishing just how much of the explanation to assign to separate influences one by one, even if all of them contribute to the story. We want not merely to portion out the blame but to know what to do, and different explanations call for different remedies. It would make little sense, for example, to invest huge sums in reforming K-12 education and reducing the cost of college if the mismatch between graduates’ skills and what the economy requires accounts for only a small part of the problem. By contrast, if my Harvard colleagues Claudia Goldin and Lawrence Katz are right that education is the core of the issue (Noah draws extensively on their recent research, especially their aptly titled book “The Race Between Education and Technology [ http://www.amazon.com/The-Race-between-Education-Technology/dp/0674028678 ]”), then what and how we teach young Americans should be at the top of the agenda.
It is not Noah’s fault that economic research has yet to reach consensus on how much of the blame for inequality to place on which explanation, and it is to his credit that he does not try to portray a consensus that is not there. His summary of what we know from the relevant research is faithful to what the researchers have found. Part of the problem here, which “The Great Divergence” also accurately conveys, is the tension inherent in concentrating on the American facet of a worldwide phenomenon. As Noah makes clear, inequality is increasing almost everywhere in the industrialized and postindustrial world, even if the increase has been much greater in the United States. We need to know how much weight to give to America-centric explanations like the shortcomings of our schools or our immigration system or the demise of unions. But to understand a global trend, we would like a more universal explanation.
Noah’s own explanation is, in effect, “all of the above,” and his policy recommendation is therefore to take action on all fronts. His chief concern is the fear that ever widening inequality will undermine our democracy: “Americans believe fervently in the value of social equality, and social equality is at risk when incomes become too dramatically unequal. . . . Growing income inequality makes it especially difficult to maintain any spirit of e pluribus unum.” He rightly emphasizes that while the potential for individuals to move up is essential to what makes inequality acceptable, at least to most Americans, economic mobility in the United States is now more limited than it appears to have been in earlier times and — contrary to the popular image — more limited than in many other countries. (It also matters that in America today incomes are becoming more unequal at the same time that most families’ incomes have been stagnant for more than a decade after allowing for inflation — a point that Noah notes but does not emphasize.)
How much inequality can the Republic stand before the social and political fabric frays? Noah does not answer the question, in part because he doesn’t know, but mostly because he feels he doesn’t need to. “You’d have to be blind,” he writes, “not to see that we are headed in the wrong direction, and we’ve been heading that way for too long. . . . The worst thing we could do to the Great Divergence is get used to it.”
Benjamin M. Friedman is an economics professor at Harvard. His most recent book is “The Moral Consequences of Economic Growth [ http://www.amazon.com/The-Moral-Consequences-Economic-Growth/dp/0679448918 ].”
*
THE GREAT DIVERGENCE
America’s Growing Inequality Crisis and What We Can Do About It
By Timothy Noah
Illustrated. 264 pp. Bloomsbury Press. $25.
http://www.amazon.com/The-Great-Divergence-Americas-Inequality/dp/160819633X
*
© 2012 The New York Times Company
http://www.nytimes.com/2012/05/27/books/review/the-great-divergence-by-timothy-noah.html [ http://www.nytimes.com/2012/05/27/books/review/the-great-divergence-by-timothy-noah.html?pagewanted=all ]
===
Market Values
Illustration by Thomas Porostocky
Illustration by Thomas Porostocky
‘Land of Promise,’ by Michael Lind
By DAVID LEONHARDT
Published: May 24, 2012
Whatever their political party, American leaders have generally subscribed to one of two competing economic philosophies. One is a small-government Jeffersonian perspective that abhors bigness and holds that prosperity flows from competition among independent businessmen, farmers and other producers. The other is a Hamiltonian agenda that believes a large, powerful country needs large, powerful organizations. The most important of those organizations is the federal government, which serves as a crucial partner to private enterprise, building roads and schools, guaranteeing loans and financing scientific research in ways that individual businesses would not.
Today, of course, Republicans are the Jeffersonians and Democrats are the Hamiltonians. But it hasn’t always been so. The Jeffersonian line includes Andrew Jackson, the leaders of the Confederacy, William Jennings Bryan, Louis Brandeis, Barry Goldwater and Ronald Reagan. The Hamiltonian line includes George Washington, Henry Clay, Abraham Lincoln, William McKinley, both Roosevelts and Dwight Eisenhower.
Michael Lind’s “Land of Promise” uses this divide to offer an ambitious economic history of the United States. The book is rich with details, more than a few of them surprising, and its subject is central to what is arguably the single most important question facing the country today: How can our economy grow more quickly, more sustainably and more equitably than it has been growing, both to maintain the United States’ position as the world’s pre-eminent power and to improve the lives of its citizens?
Lind, a founder of the New America Foundation in Washington and the author of several political histories, acknowledges from the beginning that his thesis will make some readers [obviously including Leonhardt] uncomfortable. “In the spirit of philosophical bipartisanship, it would be pleasant to conclude that each of these traditions of political economy has made its own valuable contribution to the success of the American economy and that the vector created by these opposing forces has been more beneficial than the complete victory of either would have been,” he writes.
“But that would not be true,” he continues. “What is good about the American economy is largely the result of the Hamiltonian developmental tradition, and what is bad about it is largely the result of the Jeffersonian producerist school.”
Hamiltonian development built the Erie Canal, the transcontinental railroad, the land-grant universities and the Interstate highway system. In the process, the United States became a giant, interconnected market, a place where companies like Standard Oil, General Motors, John Deere and Sears Roebuck could thrive. The government — and the American military in particular — also played the most important role in financing innovation at its early stages. The industries that produced the jet engine, the radio (and, by extension, the television), radar, penicillin, synthetic rubber and semiconductors all stemmed from government-financed research or procurement. The Defense Department literally built the Internet.
The United States is like “a gigantic boiler,” Sir Edward Grey, a British foreign secretary during World War I, said, according to Winston Churchill. “Once the fire is lighted under it, there is no limit to the power it can generate.” Lind’s aim is to make Sir Edward’s point in the active voice: the government has often lighted the flame, and big business has often generated the power.
And Lind has a strong case to make. He cleverly notes that Jeffersonians themselves often have a change of heart when they find themselves running the country and responsible for its well-being. As president, Jefferson altered his position on federal support for canals, roads and manufacturers. His successor, James Madison, signed a bill creating a national bank, having previously denounced the idea. The leaders of the Confederacy, after decrying centralized power, realized they needed an economic machine to finance a war and started “a crash program of state-guided industrialization from above that was more Hamiltonian than Hamilton,” Lind writes. Modern Jeffersonians, like Reagan and George W. Bush, have campaigned on spending cuts, only to expand government while in office.
For all its logical rigor, however, the book’s thesis does suffer from one basic flaw. Lind never quite explains how the United States has ended up as the richest large country in the world, with per capita income about 20 percent higher than Sweden’s or Canada’s, almost 30 percent higher than Germany’s and almost 500 percent higher than China’s. If anything, other countries have pursued more Hamiltonian policies in many ways than the United States, without quite the same success.
What, then, can explain American economic exceptionalism? Education plays an important role (and receives only sporadic mention in the book). This country long had the most educated, skilled work force in the world, which, as other economic histories have persuasively shown, helped American workers to be among the best paid.
Beyond education, the United States also has a culture that is arguably different from that of any other power — more individualistic, more risk-taking, more comfortable with the workings of the market. If you were looking for a name for this culture, you might choose Jeffersonian.
Lind, I expect, would dispute that a Jeffersonian culture has played a major role in creating prosperity. Yet readers will emerge from the 586 pages of “Land of Promise,” despite its many charms, without hearing an argument that fully engages with its opponents.
American economic history, in Lind’s telling, has been a series of three revolutions and counterrevolutions, with each revolution tied to an actual war. The economic decision that awaited the victorious founders in the 1780s was whether to create a system that complemented the British economy by providing resources for Britain’s emerging industries and customers for its products, or to create a full-blown national competitor.
Southerners, understandably, preferred a partnership, since they had the resources, particularly cotton. The Southern view was also informed by centuries of history in which global living standards had been largely unchanged. In this zero-sum, Malthusian world, a simple agrarian economy made sense. It seemed to maximize individual freedom and avoid the pollution and concentration of power that industry brought. “While we have land to labor,” Jefferson wrote in 1782, “let us never wish to see our citizens occupied at a workbench.”
Hamiltonians put more faith in economic change and progress. They subscribed to the ideas of John Locke, the pre-eminent political philosopher of the American Revolution, in which military power stemmed from economic growth and population growth. Hamiltonians encouraged the immigration of inventors and skilled workers (Hamilton himself was an immigrant) and pushed public support for infant industries as well as tariffs to protect them. They also advocated a modern, centralized financial system to pay for the needed investments.
The grander ambitions of the Hamiltonians largely won out, but the victory was temporary. Even as the country benefited enormously, some people did not. The changes also threatened entrenched interests and stoked classically American fears of centralization. Soon Andrew Jackson, more Jeffersonian than the namesake, was on the counterattack, opposing federal road building and closing the national bank.
These cycles have continued, more or less, for 200 years. Lincoln — a state legislator during Jackson’s time who fought for federal investment — was the great Hamiltonian of the 19th century. After the South left the Union, Lincoln, with the backing of Congress, was able to undertake an investment bonanza that Southern representatives had blocked, building rail lines, roads and colleges. Many of these programs would ultimately help industrialize the South.
Hamiltonians, obviously, did not always make the right investments. The first aviator the federal government backed was Samuel Pierpont Langley, the director of the Smithsonian Institution, whose test flights crashed into the Potomac. But the cost of such failures paled next to the returns of the successes. The military soon became the Wright brothers’ first client and allowed them, and American aviation more generally, to flourish before a private market for it existed.
Among the joys of Lind’s book are small, little-known stories like the one about the Wright brothers that have clear relevance today. I expect I will be returning to the index of “Land of Promise” with some frequency. Another joy is Lind’s attempt to rehabilitate figures to whom history has not been kind. McKinley may have had some cronyism problems, yet he also fought to modernize the American economy and was ahead of his time on civil rights. Wall Street tycoons of the 19th century like J. P. Morgan may have been rapacious, yet they also provided crucial financing for inventors like Thomas Edison. Even Herbert Hoover, whom Lind criticizes for the usual reasons, receives praise for creating the (albeit too modest) forerunners of the New Deal and World War II mobilization.
That mobilization provided the most important Hamiltonian victories since Lincoln’s time. A generation of bipartisan presidents afterward, from Harry Truman to Gerald Ford, largely accepted the world Roosevelt left them. Then came the Great Dismantling, to use Lind’s term, when first Jimmy Carter and, much more aggressively, Reagan moved toward a less centralized, more laissez-faire economy. These decades have seen far slower income growth for most Americans than the previous century.
The chapters on the most recent years are a fairly standard liberal version of events, with deregulation and modern finance as the main antagonists. If you think airline deregulation was an abomination because service can be wretched and airline bankruptcies are common, you will like Lind’s telling. If you instead prefer to concentrate on the fact that middle-class Americans can now afford to fly regularly or that air travel has never been safer, you will not be persuaded.
But Lind ends on a stronger note. The major problems facing the United States today, he argues, are ones that demand Hamiltonian solutions. True innovation, of the kind that lifts living standards for the masses, cannot come from lone inventors. It requires resources that only large organizations have. It also requires skilled people, be they well-educated natives or immigrants admitted because of the skills they can bring.
The notion that the United States has stopped making many large-scale investments that bring great returns is not, in Lind’s view, surprising. American economic history tends to run in cycles. Yes, our roads and bridges are dilapidated. Our broadband infrastructure is not quite world-class. Our schools, including many colleges, can no longer claim to be the finest. But the economic need for change will eventually create the political will for it. “Land of Promise” ends on as optimistic a note as the title suggests, though it also acknowledges that failure is an option.
*
LAND OF PROMISE
An Economic History of the United States
By Michael Lind
586 pp. Harper/HarperCollins Publishers. $29.99.
http://www.amazon.com/Land-Promise-Economic-History-United/dp/0061834807
*
© 2012 The New York Times Company
http://www.nytimes.com/2012/05/27/books/review/land-of-promise-by-michael-lind.html [ http://www.nytimes.com/2012/05/27/books/review/land-of-promise-by-michael-lind.html?pagewanted=all ]
--
for context, coupla older by/re Lind:
The Myth of Barry Goldwater
November 30, 1995
http://www.nybooks.com/articles/archives/1995/nov/30/the-myth-of-barry-goldwater/?pagination=false
Why Intellectual Conservatism Died
1995
http://mises.org/misesreview_detail.aspx?control=79
The Limitations of a Neo-Nationalist
1997
http://nova.wpunj.edu/newpolitics/issue23/russel23.htm
===
(linked in):
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=71561891 and preceding and following
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=73504847 and preceding and following
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=75197318 and preceding and following
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=75317829 and preceding and following
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=75955448 and preceding and following
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=76005314 (and any future following)
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=76023857 and preceding (and any future following)
Greensburg, KS - 5/4/07
"Eternal vigilance is the price of Liberty."
from John Philpot Curran, Speech
upon the Right of Election, 1790
F6
Join the InvestorsHub Community
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
