Mr. President, You Want to Talk About 'Inequality'? Let's Talk About It

I woke up this morning to Steve Liesman on CNBC explaining the theme of tonight’s State of the Union Address. You see, since 1980 middle class wages have only gone up 50% in inflation-adjusted terms, whereas for the top 1% of earners income has gone up by 210%. Something clearly must be done. How can such a disparity be? This is unfair. Can’t the government “solve” this?

The new narrative, which has likely been crafted by John Podesta, super crony capitalist extraordinaire, is that Congress (specifically the Republican-controlled House) isn’t letting the president address the issue of income inequality.

“It’s those old guys who don’t care about you who are holding back the manna from heaven a.k.a. Washington DC. It’s their fault not mine. I’m not incompetent and way out of my league even after five years in the White House. Not my fault. It’s the selfish and rich Republicans. They want you to remain poor.”

Rally the base when times are bad is the old political wisdom, and they are very bad for this president. Shore up the folks who will defend you no matter what, and change the conversation from Obamacare. Anything but Obamacare.

Given that the ACA is Obama’s chief “achievement” to date, this is a particularly sad state of affairs. The president’s “pivot” (the word is right up there with “optics” in my book) toward income inequality is a cynical political move. The White House is desperate to regain at least some momentum in the face of a 2013 which was one failure after another.

But since Mr. Obama seems keen on bringing it up, let’s talk about inequality.

Despite what the establishment #old media always say, the increased income inequality that we see is not the result of the “rich” taking advantage of unfettered markets and then making a mint at the expense of everyone else. Capitalism, free markets, free thinking, entrepreneurship, innovation are not the problems. Capitalism is in most respects the cure. 

No, the problem is that business and government have increasingly partnered with one another to make some very rich and to shut out others. It’s too little capitalism which is the problem.

Let’s take a look at the most obvious example, Wall Street.

Has Wall Street reaped the windfall it has over the past five years because of the free market, because of capitalism?

Absolutely not. Had the free market been allowed to work in 2008, Goldman Sachs, AIG, Citi, Bank of America, and Morgan Stanley would probably be history. These banks leveraged themselves out too far and got caught exposed. Their greed did them in. Mr. Market made a margin call and many “masters of the universe” turned out to have feet of clay after all. The banks should have been allowed to collapse so that better managed banks could fill in the space.

The banks weren’t too big to fail. They could have failed and life would have gone on. ATMs would have kept working. The sun would have still risen in the east. The economy after a period of adjustment would have righted itself and emerged much healthier for having jettisoned the poorly managed firms. Lloyd Blankfein would have been out of a job, but he’d have survived somehow in the Hamptons.

But that isn’t what happened, as we know. The managers of these institutions knew how to manipulate the levers of power. They were able to engineer a massive bailout which started at $700 billion and just grew from there. In the years after the bailout bonuses were paid out at the big banks with abandon. These bonuses were for the most part paid for by the American taxpayer. No wonder people are angry.

But the bailouts weren’t capitalism. The bonuses which were paid to Jamie Dimon and friends weren’t a result of “free markets.” They weren’t the just rewards of building a better mousetrap, or even building a better derivative algorithm. They were the result of crony capitalism, a soft form of fascism, which is of course a form of socialism. The bankers made millions because the state redistributed the income of everyday Americans and gave it to Wall Street.

Or take for example the sell off of the taxpayer’s (forced) position in GM at a loss last year. In addition to losing $10 billion on the deal for the taxpayers, the deal done by the Treasury unleashes the executives which, so long as money was still owed to the taxpayer, couldn’t go nuts with executive compensation. Now, after the $10 billion taxpayer loss, they and the GM board are free to do as they wish in the pay department.

Or what about the huge percentage of so called “green” energy initiative grants and loans which went to politically connected people in 2009. Folks made millions in wind, solar, algae, and who knows what else, all again courtesy of the US tax payer. Almost none of the ventures were economically viable. But lots of people got paid, that is for sure.

There are probably thousands of other examples over the last ten years or so (and many more going back way before the past decade), ranging from war profiteering of all sorts, to cronyism in the new healthcare law, to draconian copyright laws which are a subsidy to Hollywood, to, well, there are many other examples which we have chronicled at Against Crony Capitalism.

So we shouldn’t be surprised that there is so much income inequality. Business and government in this country have partnered up. Sometimes the government has the upper hand. Sometimes business does. But both parties engage in the crony capitalism waltz to enrich themselves, to the exclusion of a large part of the American population.

And at the heart of it all, is the Federal Reserve.

Read the rest of the story at Against Crony Capitalism.