Bi-Weekly "Metapolitics" Discussion in Fishtown (Sunday Meetup)

Due to popular demand, we're meeting on a Sunday afternoon again. I also had to shift our discussion's start time from 1:00pm to 1:30pm due to Front Street Cafe's busy schedule.

Our standard discussion venue is the Front Street Cafe in Fishtown on the corner of Front & Girard Streets. SEPTA's Girard Station is just a block south, and there's also usually spaces available for street parking in the surrounding neighborhood. If you can't find a spot on the street, there's a paid parking lot called "Park America" a half-block north at 1320 N. Front Street.

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This discussion will address the socio-economic & political dynamics that drive cronyism, oligarchy & rent-seeking, low income mobility & zero-sum economic situations. I'm assuming our members have a basic understanding of public choice theory terms like rent-seeking, regulatory capture, the resource curse, information asymmetry, the free-rider problem, concentrated benefits & diffuse costs, etc.

To cut down on the amount of reading required for this discussion, I've linked 4 short videos that summarize 4 recent scholarly works that we'll use as the basis of our discussion. After each video, I've include a summary of its major points, as well as some notes that I've gleaned from articles on these subject. Each comment in the notes is followed by a number in parentheses (#) that refers to the number of the article in the bibliography I created. I don't expect you to read the articles in the bibliography, but if you want to it's listed in our Discussion tab - https://www.meetup.com/Philadelphia-Political-Agnostics/messages/boards/thread/50560818

BUENO DE MESQUITA & SMITH'S "SELECTORATE THEORY"

1. CGP Grey's video "Rules for Rulers" (19:30 minutes)

http://www.cgpgrey.com/blog/rules-for-rulers

The above video summarizes the main ideas from Bruce Bueno de Mesquita & Alastair Smith's book, The Dictator's Handbook (2011). The Three Rules are: (1) Get the key supporters on your side, (2) Control the flow of treasure& distribute it to your key supporters to ensure their loyalty, (3) Eliminate or ignore unnecessary supporters who would drain your treasury and offer little in return. As the video points out, a benevolent would-be ruler who doesn't follow these 3 rules will be outmaneuvered by less scrupulous & more devious rivals who do.

This ties into Bueno de Mesquita & Smith's "selectorate theory" which holds that the essential difference between tyrannies & democracies is the size of the "selectorate" - i.e. the portion of the population involved in selecting the political leader(s). They argue that countries with large selectorates have to appeal to a broader section of the populace and thus naturally invest more in human capital, respect civil liberties & create a better quality of life for most people. Conversely, countries with small selectorates tend to rely on wealth extraction methods that benefit only the ruling elite, and they use the military & police to suppress the rest of the society (1).

ACEMOGLU & ROBINSON'S "WHY NATIONS FAIL" AND INSTITUTIONAL ECONOMICS (EXCLUSIVE/EXTRACTIVE VS. INCLUSIVE/INNOVATIVE INSTITUTIONS):

2. James Robinson, "Why Nations Fail" (TED Talk, 18:33 minutes)

https://www.youtube.com/watch?v=jsZDlBU36n0

Daron Acemoglu & James Robinson's institutional theory presented in Why Nations Fail (2012) has two parts: (1) they use a game theory analysis similar to the "Ultimatum Game" where the ruling class offers the populace a certain amount of wealth and the populace can choose to accept it, revolt, or emigrate, (2) they explain how the "inclusive institutions" of democratic regimes satisfy the populace by promoting innovation & economic growth that enriches everyone, while the exclusive institutions of dictatorial regimes tend to create a low-growth economy that's close to a zero-sum game reliant upon "extractive institutions" and is subject to periodic revolts & a "brain drain" from emigration. Robinson's TED Talk focuses on the 2nd part of their theory - i.e. inclusive vs extractive institutions. He uses the example of how Bill Gates built his fortune in the US with software that revolutionized business by boosting efficiency, and he notes that Microsoft was checked by anti-trust litigation when it became too monopolistic. He contrasts Bill Gates with Carlos Slim, the Mexican billionaire who built his fortune in Mexico by erecting a telecom monopoly that costs Mexicans a fortune in higher phone bills.

Why Nations Fail was criticized by several reviewers for being too simplistic and neglecting other factors that influence a society's success with development, such as geography & culture. The development economist Jeffrey Sachs pointed out that China appears to falsify their thesis, since it still has exclusive political institutions yet has experienced major economic growth (6). Acemoglu & Robinson replied that it may be possible for illberal, exclusive regimes to generate GDP growth while "playing catch-up" but that it's unlikely they could generate the innovation & entrepreneurship necessary to push forward once they caught up (7).

GILEN'S "AFFLUENCE & INFLUENCE" AND THE NEED FOR CAMPAIGN FINANCE REFORM:

3. Represent.Us, "Corruption Is Legal In America" (5:50 minutes)

https://www.youtube.com/watch?v=5tu32CCA_Ig

The above video was created by a nonprofit called Represent.Us formed in 2012 to push for campaign finance reform. Their model legislation is the "American Anti-Corruption Act" which would limit lobbying, ban secret political donations, and create publicly-funded elections (10). The video cites statistics from the research of Martin Gilens presented in his book, Affluence and Influence (2012). Gilens found that when preferences of low- or middle-income Americans diverge from those of the affluent, there is virtually no relationship between political policy outcomes and the desires of less advantaged groups. In contrast, affluent Americans' preferences exhibit a substantial relationship with policy outcomes whether their preferences are shared by lower-income groups or not.

While many Americans think of political corruption in the form of quid-pro-quo bribery, scholars like Lawrence Lessig have argued that legal lobbying & regulatory capture represent forms of institutional corruption that are far more pervasive (15). Although most Americans aren't aware of this, several academic studies of campaign finance have shown that the amount of money spent on political campaigns is oddly low compared to advertising campaigns for most major brands of consumer products, but that this is explained by a low correlation between the money that is spent by a candidate and their chances of getting (re)elected as well as the candidate voting in the interests of their campaign contributors even when they are elected (17, 18, 19).

Bryan Caplan also points out that the even though getting Congress to enact more policies favored by the middle & lower classes would be more democratic, it probably would not be beneficial since most people don't understand economics, sociology, foreign policy, etc. (14). Matt Yglesias mostly agrees with Caplan, stating that "purpose of a political system is to resolve political questions in a satisfactory way, not represent wider views," and that voters' true power lies in their ability to "fire" politicians who don't produce satisfactory outcomes for society (13).

STIGLITZ, PIKETTY AND THE DEBATE OVER WEALTH INEQUALITY & INCOME MOBILITY:

4. Politizane, "Wealth Inequality In America" (6:23 minutes)

https://www.youtube.com/watch?v=QPKKQnijnsM

The above video is based on Dan Ariely & Michael Norton's 2011 study where they asked Americans what they thought the actual wealth distribution in the US was and what their ideal distribution of wealth would be. Its theme ties into the debate over wealth & income inequality that rose to public prominence following the Occupy Wall Street protest in 2011 (26).

Joseph Stiglitz argued in his book, The Price of Inequality (2012), that inequality is self-perpetuating, that it is produced by the vast amount of political power the wealthy hold to control and is tied primarily to rent-seeking, with the wealthy using their power to shape monopolies, incur favorable treatment by the government, and pay low taxes. While he promotes the idea that a free market is good for society if it's competitive, he states that the government needs to regulate it to be beneficial, as concentrating market power in too few hands is just as bad as excessive regulation (18, 36).

The work of the economists Sutirtha Bagchi & Jan Svejnar corroborate Stiglitz's claims, although they note that while the relationship between wealth inequality and overall economic growth are negative, only "politically connected wealth inequality" (i.e. crony capitalism) was associated with low growth. Meanwhile politically unconnected wealth inequality, income inequality, and initial poverty have no significant effect on economic growth, either positive or negative. This suggests that free-market capitalism freed from rent-seeking is the best formula for economic growth, but that with wealth redistribution through progressive taxation does not appear to kill the profit motive & diminish growth as many free market advocates claim (33). However, Ryan McMaken notes that wealth redistribution via social welfare programs like those in Europe may not slow overall economic growth, but they reduce the median household income of European countries below most states in the U.S. (38).

Another important work on wealth inequality was Thomas Piketty's Capital in the Twenty-First Century (2014). Its central thesis is that inequality is not an accident but rather a feature of capitalism that can be reversed only through state intervention, and that unless capitalism is reformed (perhaps by a global tax on wealth), the very democratic order will be threatened (19). Many economists thought Piketty was arguing that the most powerful force driving greater wealth inequality in the US since the 1970s is the gap between the after-tax return on capital and GDP growth, which was rejected as an explanation by the IGM Expert Panel (20). However, Piketty countered that his book argued that the major reason is the rising wage inequality due to unequal access to skills & higher education, as well as exploding top managerial compensation (23). These 2 explanations are supported by the majority of the IGM Experts Panel (21, 22).

Several financial experts took issue with Ariely & Norton's study & Politizane's video. Josh Barro had 3 criticisms of the study: First, the authors told survey respondents to imagine they would be "randomly assigned" to one of the wealth quintiles, implying that effort plays no role whatsoever in wealth accumulation. Second, there is little reason to believe that the public is good at evaluating ideal distributions of wealth -- as demonstrated by the impossibility of the preferred wealth distribution found in the paper. Respondents preferred a wealth distribution where the bottom quintile got 11% of the nation's wealth, but the highest wealth share for a bottom quintile in an advanced country is 2.1% in Japan. Third, the paper focuses on wealth distribution, when income distribution is a better metric for inequality (27).

Tim Worstall points out that the study & the video assume the bottom quintile has zero wealth but don't account for the policies we currently have that redistribute wealth as part of social welfare programs. In the US, the federal government spends about $500 billion/years on various social programs, and that's supplemented by state & local spending. If you want to convert this social spending ot wealth in order to measure wealth inequality, you'd have to convert the $500 billion to a large capital sum that's effectgively paying interest similar to a trust fund. If we assume 5% interest which comparable to most annuities, that represents a capital sum of $10 trillion out of the nation's total of $70 trillion (32).

Mark Perry also points out that by focusing on income brackets rather than individuals, the video overlooks income mobility. Typically, we expect young unskilled workers or new immigrants to be in the lower income tiers but that's not too problematic as long as they can move up. "Most working Americans who were initially in the bottom 20% of income earners rise out of that bottom 20%. More of them end up in the top 20% than remain in the bottom 20%. People who were initially in the bottom 20% in income have had the highest rate of increase in their incomes, while those who were initially in the top 20% have had the lowest. This is the direct opposite of the pattern found when following income brackets over time, rather than following individual people." (31) John Stossel corroborates Perry's claims, noting that economists at Harvard & Berkeley found that mobility is close to what it was 30 years ago. Today, 64% of those born to the poorest fifth of society rise out of that quintile—11% rise all the way into the top quintile. Meanwhile, 8% of people born to the richest fifth fall all the way to the bottom fifth. And while, over the last 30 years, incomes of rich people grew by more than 200%, poor people gained 50%, and Stossel argues. that growth should matter more than the disparity (37). This last statement by Stossel is corroborated by the IGM Experts Panel, where 70% agreed that "the 9% cumulative increase in real US media household income since 1980 substantially underestimates how much better off people in the media household are economically" (39).

EPILOGUE - THE CRONY CAPITALISM INDEX, ECONOMIC FREEDOM & TRUMP: While direct ties to corruption can be hard to prove, the staff at The Economist came up with a "Crony Capitalism Index" that measures the ratio of billionaire wealth to GDP. The idea is that an economy in which there's a suspiciously high numbers of billionaires despite modest or poor GDP suggests that the rich have accumulated their wealth through rent-seeking & extractive methods rather than the type of innovation & human-capital-intensive production that forms the "rising tide that raises all ships".
https://en.wikipedia.org/wiki/Crony-capitalism_index

We discussed the Heritage Foundation's Index of Economic Freedom, and it's worth noting that several of the countries that rank very high on their index - like Hong Kong & Singapore - also rank high on the Crony Capitalism Index. The Economist is quick to note that Hong Kong and Singapore are well-run places by any standards, but also says that they are “packed with billionaires in crony industries. This reflects scarce land, which boosts property values, and their role as entrepots for shiftier neighbours." It's also important to note that there's not a linear relationship between the two indexes - Russia, Malaysia, and Ukraine, which round out the top five cronyist countries on the Economist’s list, are all scored pretty dismally by Heritage, and the least cronyist country measured, Germany, is a respectable 18th on Heritage’s index. - http://www.slate.com/blogs/the_world_/2014/03/19/economist_crony_capitalism_index_the_world_s_freest_economy_is_also_the.html

The IGM Experts Panel's recent vote on the "Trump Rally" in the stock market suggests that it anticipates the sort of crony capitalism the Crony Capitalism Index measures. 85% of the experts agree that "US share prices have risen since Donald Trump’s election victory at least partly because the policies he seems poised to implement are likely to increase US after-tax corporate profits". However, 46% are uncertain and 38% disagree that "US share prices have risen since Donald Trump’s election victory at least partly because the policies he seems poised to implement are likely to increase US real GDP growth." There's also strong agreement that Trump's 100-Day Plan will not benefit the middle class or low-skilled American workers:
http://www.igmchicago.org/surveys/trump-and-share-prices
http://www.igmchicago.org/surveys/100-day-plan