Category Archives: Economy

Dog Shows & the Illusion of Order

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I spent two nights last week watching the Westminster Dog Show with several other contributors to this blog. There were a few conversations about how immoral and sometimes cruel dog-breeding can be and that here are so many other ways in which this spectacle can be found offensive: You have to be a certain kind of rich to even partake. And it’s a kind of objectification that most of its viewers would find objectionable in any other context. The most analogous “sport” or contest I can think of has to be the child beauty pageant. But I won’t go into that or into the ethics of the breeding.

What I really want to write about is how this contest purports to sort and rank among the thousands of dogs that are escorted around that stage every year.

How does the contest presume to compare across dog breeds? How do you put a purebred, one hundred and twenty pound Great Dane next to a Pekingese or a chow chow and then determine that one is more deserving of the coveted “Best in Show” title than all the rest? The answer, obviously, is that you create some kind of frame and superimpose it onto the animals. You devise a sorting system to ignore the messy and incomparable details of reality, and if you designed it right, the system provides outcomes that humans care about (such as telling you which dog is “best”). Humans do this kind of nonsense all the time, and fortunately we have things like dog shows to remind us just how ridiculous it is.

According to the Judging and Standards section of the Westminster Dog Show’s webpage, the specimens of different breeds are evaluated against one another according to the following system:

Each breed’s parent club creates a STANDARD, a written description of the ideal specimen of that breed. Generally relating form to function, i.e., the original function that the dog was bred to perform, most standards describe general appearance, movement, temperament, and specific physical traits such as height and weight, coat, colors, eye color and shape, ear shape and placement, feet, tail, and more. Some standards can be very specific, some can be rather general and leave much room for individual interpretation by judges. This results in the sport’s subjective basis: one judge, applying his or her interpretation of the standard, giving his or her opinion of the best dog on that particular day. Standards are written, maintained and owned by the parent clubs of each breed.

To get around the fact that these dogs are in a sense incommensurate, a system has to be designed that can, nonetheless, compare them. And the result, in short, is something of a contest of Platonic ideals. The closer a French Bulldog, say, comes to what people have collectively identified as its essence, the better it will fare against other Frenchies, and the better it will “perform” against other dogs who don’t so perfectly embody their breed’s ideal characteristics. This is a contest to best embody the quintessence of one’s kind, a step removed from asking which dog is most like its ideal self.

Which is absurd, except that we do it all the time. People compare athletes across sports, musicians across genres, and writers across eons. We compare the utility or “costs and benefits” of vastly different government policies, and we feel comfortable assigning dollar values to just about anything.

Westminster Kennel Club logo

Westminster Kennel Club logo

I’ve been reading a terrific book by Pierre Schlag, The Enchantment of Reason, that I want to tie in here. Schlag basically argues that reason is a system of belief that requires faith, and that while it can consistently answer some questions, often it’s just the language in which people express their interests and preferences. In other words, the institutions that rely on “reason” (e.g. law, economics, etc.) always depend on the same circularity and hypocrisies as the dog show. The outcomes are just the delayed realization of their axioms. And like the dog show rules, these axioms we live by are a decision that can never be fully grounded in reason.

One of the most interesting chapters in Schlag’s book points out that “reason” breaks down most obviously when it’s asked to compare things that are incommensurable. To use his example, how can you reasonably conclude whether eating apple pie or reading Wittgenstein is a better use of your time? Which provides more utility? Or more happiness? Or satisfies a more important desire? Which time horizon is more appropriate — short-term or long-term interest? And whose interests, yours or society’s? The answer to which activity is “better” is simply a function of which system you use to ask the question. All it does is hide the ball and give the appearance of reason to an arbitrary choice that does all the work.

It’s one thing if the system is one for evaluating dogs to gratify the economic desires of dog breeders and the egotistical yearnings of wealthy dog owners,  but what if this same problem really plagues the systems that underlie most of our public institutions? Why do we pretend that law is an orderly, rule-determined game, when the referees and agenda-setters can often pick whatever criteria they want? Or that we can put prices on lives or on art or on our health? The glib answer is that it’s necessary to make society work, but that only goes so far.

As with the dog show, it certainly appears more legitimate to pick a set of rules than for someone to arbitrarily pick winners. But picking rules itself can be thinly veiled exercise of arbitrary power. (Like Bush v. Gore which essentially picked rules after the fact as a pretense to pick the President in the 2000 election). It’s not an uncommon observation to say that if the dog show mattered at all, these rules would be intolerably vague. They do nothing to constrain the whims of the decision-makers. There’s no basis for thinking that a dog that does well one year would do as well under a different set of judges, etc.

To risk comparing the incomparable, these are precisely the same problems that plague the operating rules in the economics profession, courtrooms, insurance companies, and countless other public and private institutions where allegedly disinterested judges or observers apply allegedly objective criteria. These systems are just slightly better at hiding their arbitrariness (at least most of the time). They are more opaque and cryptic about how fundamentally unreasonable their assumptions are, and they enjoy positions of power that provide a patina of authoritativeness. So in the end maybe the dog show isn’t so bad after all. It’s not any less reasonable than these other institutions, and the stakes, at least, are not quite as high.

Fighting over Salaries

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Slavoj Zizek has a new piece in the LRB arguing that the recent waves of protests around the world are “not proletarian protests, but protests against the threat of being reduced to proletarians.” The unrest he identifies comes at least partially from the group he calls the salaried bourgeois, educated protesters seeking to maintain their privilege from the managers and bankers who are taking home an increasing share of global surpluses. The salaried bourgeois are professionals, emplyees with benefits and bargaining power, anyone who derives surplus value for their work over the minimum amount that capitalists can get away with paying completely debased wage slaves like sweatshop employees in China.

There’s a lot of interesting stuff to say about his position. It was pointed out in an online reading group I’ve been following that it’s overly simplistic and that the absence of debt considerations is a glaring flaw in his account. Another is that our currently configured economy appears incapable of producing all the jobs that would allow people to attain the status of salaried bourgeois or even that of a wage laborer. In other words, these protests might be a recognition that the current economic system, for whatever combination of reasons, makes a handfull of people obscenely rich but cannot provide jobs to a large segment of the population, educated or otherwise.

In an effort to do a bit more blogging on this site, I’m just going to post what I emailed the listserv earlier today.

I love Zizek, but there’s this unfortunate tendency even on the left to reduce management to high-paid-but-still-just-salaried employees. I know Zizek is more interested in getting at the idea that CEOs don’t really earn their surpluses (which is true) but he fails to recognize the role they have in cutting their own pie. Yglesias did the same thing here incidentally. But this distinction is one that salaried bourgeois should care a lot about. Peter Frase had a good response to the Yglesias piece, where he said “the point isn’t just ‘what you take home’, nor is it even how your income is classified for accounting purposes; rather, it’s where you’re positioned in the system of capital accumulation.”

I think there are at least two major things that make executives structurally different from salaried workers (and if workers had these things our capitalism would be a very different capitalism). One is that managers are paid at least partially in equity (i.e. stock or options) so when the company is worth more they are worth more. Stock compensation for employees is not just a “bonus” as Zizek says; it’s a way to maintain a property right in whatever excess wealth your company produces. While it looks like higher pay, this is really a kind of proportional ownership, and it’s a very different relationship to production than the rents that salaried employees bring home. The second big difference between CEOs and employees is that managers make decisions that affect their compensation and those of everyone below them. Formally managers don’t have votes on the board, but they get to influence the composition of the board and hence affect votes that way, and managers make all kinds of spending and other decisions that often come back to benefit them directly. Whereas workers are treated like a labor input and increasingly can’t even pressure management or directors through collective bargaining.

So while I’m in agreement with Zizek that some of the protests are about a salaried bourgeois afraid of having their privileges and salaries gradually taken away, I don’t think this is about protecting the right to a salary. Or at least not only that. Even if you make a decent salaried living, being an employee means being in a mostly powerless position where you are decided upon. And people are starting to see that having no power in this system is a gradual path toward less pay, fewer jobs, and more wealth being extracted upwards. I like to think that the protests were about employees, temps, students, etc recognizing their powerlessness in this structure and not just about transferring surplus profits from CEOs to workers.

Reimagining the Corporate Form: Toward a More Democratic System of Corporate Governance

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This entry was also posted at the HLPR Blog: Notice & Comment.

Occupy Wall Street has, in the words of John Paul Rollert, “come to embody a common sense that something is wrong with American capitalism.” The problem Rollert points to is not with capitalism itself, but with a particular American version that has ceased to work for broad cross-sections of its population. Given America’s Depression-level income inequality and near-record levels of private indebtedness, it is extremely tempting to focus on bad outcomes as the problem. But the real issue is that many of the economic and political structures that we take for granted repeatedly produce unequal, undesirable outcomes. If reformers seek to make American capitalism more inclusive, the focus needs to be on fixing these structures and getting the rules right.

It has been a steady mantra of Occupy Wall Street not to make demands of existing political leaders and institutions. But as Matt Langer explained, “the reasoning behind not making demands most certainly does not preclude making demands of our collective imagination.” Whether people prefer to work within existing structures or not, the next essential step is to understand how broken institutions and flawed incentives created this mess and to start imagining what structures can be built in their place. Where better to start than with corporations?

Current Governance Structures and Their Shortcomings

Consider the role that our system of corporate governance has played in producing some of our current imbalances. Excessive risk-taking, stagnating wages, and the spike in executive compensation can all be linked back to a system of corporate governance that privileges management’s interests at the expense of other actors.

It’s by no means an original observation to say that boards are under the sway of management. Indeed, the US is something of a global outlier in allowing a business’ president/CEO to appoint its board of directors, and in some cases the president/CEO actually serves dually as the chair of the board. Not only is the composition of the board not reflective of its owners, employees, or investors, boards are only subjected to a relatively relaxed legal standard. As a result, directors often find that their interests (i.e. staying on the board) are best served by taking a passive role and letting management make most of the choices. In light of this structural failure to limit conflicts-of-interest, it should be unsurprising then that the interests of employees, shareholders, and other stakeholders are, at best, secondary to those of executives. As Harvard Law Professor Mark Roe succinctly phrased it, “the US is managerialist, not capitalist.”

Current governance arrangements have had an enormous impact on the larger economy and on the distributive features of American capitalism. To begin with, the existing corporate governance system (in conjunction with other regulatory failings) has proven inadequate to keep excessive managerial risk-taking under control. Despite the Enron disaster, the fall of Bear Sterns and Lehman Brothers, and the near-collapse of many of America’s overleveraged financial firms in 2008, we appear to have done nothing to address this issue. These risk-induced failures were repeated last week in the near-overnight fall of MF Global. As though nothing was learned, the star-studded MF Global board sat by and, in Steven Davidoff’s words, “gave executives []free rein to take tremendously risky bets that brought the house down.”

In 2008, Martin Lipton and his colleagues at Wachtell prepared an excellent memoranda on boards’ responsibility over risk-management which was posted at the HLS Forum on Corporate Governance. In discussing the legal framework for risk-management, they advised corporate boards to go beyond the minimal requirements created by the leading state law case, In re Caremark. Nonetheless, this is how they summarized the state of the law: “These cases demonstrate that it is difficult to show a breach of fiduciary duty for failure to exercise oversight; these cases do not require the board to undertake extraordinary efforts to uncover non-compliance within the company.” Federal laws like the Sarbanes Oxley Act do require auditing and increased oversight from the board, but the overall implications remain: the decision-making center of gravity remains largely with executives, whose personal incentives to post short-term profits can fuel excessive risk-taking, and current law gives boards few incentives to keep that risk-taking in check.

The problem is not just that boards are passive and deferential, but that those who want risk limited cannot make themselves heard. These high-risk strategies often run counter to the interests of other stakeholders, including bondholders and shareholders, whose interests are not reflected in the board’s composition and thus are not sufficiently represented. The idea that the broader public or the employees whose jobs are on the line would have a say is, under current thinking, not even a remote possibility.

The resultant proximity between Boards and management has a lot to do with runaway executive pay. Board members usually have a stake in their position, and because they are appointed by management, it’s often not in a director’s interest to start ruffling the CEO’s feathers. As Lucian Bebchuk and Jesse Fried argue in their excellent book Pay Without Performance, “structural flaws in corporate governance have produced widespread distortions in executive pay.” Their argument, briefly, is that boards have too many incentives to go along with management and are therefore unable to contract with executives at arm’s length. This broken feedback loop is at the root of the ridiculous pay packages, bonuses, and golden parachutes we’ve seen over the past decade.

The wage stagnation that’s affected the remainder of the workforce shares a common origin: all stakeholders other than executives are systematically excluded from decisions that determine compensation. The fact that corporate profits remain at near record highs suggests that the problem is indeed structural and not attributable simply to changes in the labor market. The absence of a voice for employees either in management or on the board of directors, in conjunction with weakening collective bargaining rights, means that the record profits businesses have been posting get funneled mostly to executives and do not translate into gains for the average American worker. The rules that determine who gets to cut the pie, in other words, have a lot to do with the fact that CEOs went from making 24 times what the average worker did in 1965 to making 185 times as much in 2009.

http://www.stanford.edu/group/scspi/cgi-bin/fact2.php

Ratio of CEO compensation to of average worker’s compensation.
Source: Economic Policy Institute, 2011, via SCSPI.

More Inclusive Alternatives to Minority-Rule Governance

Corporations do not have to be organized in this way in order for the private sector to prosper or for the economy to grow. Recent events should make it clear that keeping down transaction costs is not the only concern here. A number of compelling alternatives exist. I start with the more moderate reform proposals and conclude by proposing that we look to the German corporate model or other structures that afford investors and employees a role in a company’s management.

Calls are frequently made to enhance the role of shareholders in decisions involving executive compensation and risk-management that happen at shareholders’ expense. Bebchuk and Fried have argued that it’s possible to improve transparency and accountability by giving shareholders a greater say on pay, by strengthening shareholders’ ability to unseat and replace directors, or by increasing the number of independent directors (i.e. directors not employed by or doing business with the company). Another proposal they describe would allow shareholders the ability to amend the corporation’s charter. Any long-term solution to these agency problems entails providing investors and owners with a permanent vote or some structural role in decisions that affect them.

An increased role for employees is also necessary to prevent some of imbalances that have arisen between management and the average member of the workforce. Randall Thomas and Kendell Martin, for example, have argued that labor unions and related entities should be allowed to make shareholder proposals. It would be possible to go even further by affording both investors and labor a role on the board and a larger say in major decisions that affect a company’s future. This is precisely what the German corporate governance system does. The German Codetermination (Mitbestimmung) system provides employees a role in the company’s management and has proven remarkably successful across a number of economic sectors. And although German income inequality has grown in recent years, “income inequality in Germany is a long way from reaching US proportions.”

I point these out not to advocate any particular corporate form, but to observe that there are alternatives that can address failings of the existing system. It’s important also to observe that things were not always this way. The internet has fostered an explosion in new forms of social organization, and cooperative membership structures are another potential source of ideas. There’s no reason that running a successful business means accepting a one-size-fits-all corporate model, particularly when that model marginalizes a company’s most committed participants—its investors and its employees.

Capitalism isn’t a single thing or a system of natural laws. It is a system whose rules are shaped by political—and ideally democratic—choices. Nowhere is this more obvious than in the reified legal fiction of the modern corporation. The absence of democracy within corporations is a central reason that the US has seen such a proliferation of high-risk investment strategies, and an unprecedented divergence in incomes. The concerns of both investors and employees have been systematically subordinated to the interests of America’s managerial class. The failure to create an inclusive economy is fundamentally a failure to build inclusive institutions. And the first step to fixing this problem is remembering that the rules that govern institutional decisions can be different.

Economist, Heal Thine Incentives

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In case it wasn’t clear, this is why businesses choose to pour money into economics research:

Political economy, so to speak, hits the employers [i.e. funders] of the professors where they live. It deals, not with ideas that affect those employers only occasionally or only indirectly or only as ideas, but with ideas that have an imminent and continuous influence upon their personal welfare and security, and that affect profoundly the very foundations of that social and economic structure upon which their whole existence is based. It is, in brief, the science of the ways and means whereby they have come to such estate, and maintain themselves in such estate, that they are able to hire and boss professors.

 – H.L. Mencken, from his essay, ”The Dismal Science” (which I found via Doug Henwood’s excellent and prescient book, Wall Street)

That is precisely the same problem the economics profession is dealing with almost a full ninety years after Mencken wrote this essay. As Edward Nell, an economics professor at the New School told Reuters, ”Nobody can say that the donors, corporations, people that fund the studies are doing anything except funding a mathematical approach but it completely changed the perspective of the economics profession.” The 2010 movie, Inside Job, named the conflict of interest facing academic economists as a central factor in the lead-up to the 2008 financial crisis. And there’s no shortage of commentators, from both inside and outside the profession, arguing that this conflict of interest either facilitated the 2008 financial crisis or, at best, created blind spots that made made it difficult to see the crisis before financial markets were already in a state of collapse.

Beyond whatever role economists played in creating and legitimating the state of affairs that produced the financial crisis and burgeoning income inequalities, there is a separate concern about the integrity of economics as a descriptive, purportedly scientific discipline. Without wading into the debate over whether or not economics is in fact a science, it’s important to note that other fields (including highly empirical fields) are confronting similar institutional crises over the appropriate role of private funding in research.

Back in January of this year, a number of economists from the American Economic Association (AEA) wrote a letter to the group’s president calling for increased disclosure requirements. Problem is, the conflicts of interest facing the economics profession extend all the way to the board that would have to implement different ethics rules. When asked about the likelihood of rules from the AEA, economist James Galbraith told Reuters, “You can’t have an ethical code unless ethical people design it. No sign of that sensibility at the AEA. I think what should happen is the formation of small societies with codes joined by subscription. Then people could distinguish between economists who avoid or disclose conflicts, and those who do not.”

Even if such alternatives arose, you’d almost have to be an economist to believe that disclosure alone would eliminate or resolve these conflicts of interest. Providing perfect information about funding sources doesn’t address the larger agenda-shaping affect of money, especially since network effects in academic research can be very determinative about what it’s advantageous to write about. There are also information asymmetries that disclosure cannot solve. Hill staffers and representatives holding hearings, for example, do not have a formula that tells how to discount something when it comes with a disclosure statement. Nor is there any reason to be assured that the norms of publishing even after disclosure will reflect the interests of either the public or the field of economics. This is particularly true if the market in readership has divergent interests (e.g. private business leaders and other potential funders). In short, disclosure is a partial solution at best.

I want to say that it still seems more appropriate for the economics profession rather than the government to address this conflict of interest. But the past few years have severely weakened my faith in institutions’ ability to self-police and serf-regulate, even when its in their own longterm self-interest.

Short-termism is a kind of contagion

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An emphasis on short-term performance does not always produce a long-term viable strategy. That looks obvious enough when typed out. But short-termism has become the prevailing logic of many American institutions, none more radically than those institutions that make up its financial sector. As Sheila Bair noted in an op-ed on her last day as chairman of the FDIC, our media, political institutions, and businesses fall victim to this tendency, and it has begun to undermine our long-term stability.

To persist in acting this way would require a kind of insane faith that what’s good for now is good for tomorrow. It’s the story of how every tragedy of the commons ends badly. These attitudes, however, persist less because of any rational deliberation than because institutions can easily devolve toward incentives that reward short-term results.

One principal reason for this is that short-term strategies have a tendency to spread. In a way, this might even be a more general feature of unrestrained competition. I want to make a slightly tenuous comparison to evolution before returning to the more general point.

Assume there is a small plot of land with two unrelated breeds of plant. If plant A can absorb soil nutrients faster and outbreed plant B, it will proliferate and might eventually displace plant A entirely. This is known as exploitation competition. The evolutionary pressures on A become: 1) either depend on fewer nutrients, 2) develop a some alternate replication strategy, or 3) simply beat B at its own game, by reproducing faster and extracting nutrients more quickly. The last of these is the one I want to emphasize: Short-termism is self-reinforcing and it is contagious. When B’s reproductive strategy is on short-term success, it redefines the game for A. Eventually it becomes the only game left. This is what kudzu did when introduced in the southeastern United States. Taken to an extreme, quite literally, this is the logic of cancer.

In other words, if B chooses to play a shorter-term game than A, that redefines the game A must play to survive. Market competition is also susceptible to this dynamic, and in many ways it may account for some of markets’ successes. The process can weed out under-performers and produce more efficient manufacturing processes. But it also weeds out other business models that under other conditions would be perfectly viable and sustaining.

This fact alone should also provide a compelling reason for market regulations—something I’ll write about another time—but this dynamic also means the following: If a business starts engaging in rent-seeking activities (i.e. attempting to influence government into creating a legislative or regulatory playing-field more favorable to its interests), then quickly other competitors, other businesses, and even entire sectors may be forced to follow suit.

To make the link now to the financial sector: Incentives in the financial community have become tied closer than ever to short-term performance. Such incentives have the potential to reward speculation, and the 2008 crisis revealed that these incentives have the potential to reinforce bubble-generation. Extreme short-termism redefined the terms of competition. It drove firms that emphasized longer-term performance and responsible practices to obscurity and irrelevance, and it drove many organizations into riskier positions to remain competitive (e.g. the decision at Fannie Mae to get into subprime mortgages in 2007). It should not be surprising that given the ways that incentives were linked to performance that the terms of competition became what they did.

Nor is it surprising, as Bair notes, that short-termism has come to characterize many of Wall Street’s interactions with Congress and other regulators. Rent-seeking through lobbying and other activities directed toward obtaining a favorable regulatory playing-field have now become part of the ways that businesses in America compete. To take one easy example, provisions of Dodd-Frank that were seen as restraints on business were cut, watered down, and those that were left in have been implemented half-heartedly. And that happened despite a general consensus that Dodd-Frank was not aggressive enough in providing the US the framework it would need to respond to another financial crisis.

[Legislators are now plagued by a similar dynamic of having to fund-raise to keep up with each other, with a short-term focus on reelection rather than on governance. This further exacerbates the influence Wall Street spending can have].

Given the various ways in which Wall Street successfully defeated attempts to impose new regulations after the 2008 crisis, we would expect that the financial sector would be well-positioned for the coming decade or to handle another crisis. But this hardly seems to be the case. The shadow banking system, probably the single largest accelerator of the crisis’ spread remains largely unregulated. Banks are fighting tooth and nail against hightened capital requirements. And the fact that large financial institutions pushing for austerity measures is so shorted-sighted as to ignore any possible interdependence between growth and a healthy middle class. Etc. etc.

Perhaps the most insane thing about all of this is that large financial institutions and proponents of deregulation are so short-sighted that they believe this kind of game is actually serving their interests. [Or maybe the game is just to be the last one standing?]

To quote a post at Digby’s blog about Murduch’s ability to rapidly corrupt the WSJ, one of the world’s “most important sources of financial news”:

I think this may be the best sign yet of just how crippled our institutions have become. If there is one group in the world who should demand unadulterated facts and data it is the financial community. Sure, they’ll play it to their advantage, and care not a whit about how it affects our democracy. That’s not their job (although it is their duty as citizens.) But they simply cannot function properly if their information is tainted.

The ‘invisible hand’ produces races to the bottom just as often as it produces self-regulating systems. We have failed utterly to keep the terms of this game from keeping this short-term contagion in check. When that happens, even the winners are at risk.

Photo credit: Galen Parks Smith.

Debt: The First 5000 Years

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This is just a short follow up on my last post, to observe that there’s absolutely nothing new about the dynamic underlying the economic policy of the United States or the resistance to the austerity packages we’re seeing across Europe. I just ordered David Graeber’s excellent-sounding book, Debt: The First 5000 Years. If this summary is any guide, Graeber is suggesting that debtor-creditor relationships predate currency-based markets and are one of the fundamental organizing devices in human history:

Every economics textbook says the same thing: Money was invented to replace onerous and complicated barter system—to relieve ancient people from having to haul their goods to market. The problem with this version of history? There’s not a shred of evidence to support it.

Here anthropologist David Graeber presents a stunning reversal of conventional wisdom. He shows that for more than 5,000 years, since the beginning of the agrarian empires, humans have used elaborate credit systems. It is in this era, Graeber shows, that we also first encounter a society divided into debtors and creditors.

With the passage of time, however, virtual credit money was replaced by gold and silver coins–and the system as a whole began to decline. Interest rates spiked and the indebted became slaves. And the system perpetuated itself with tremendously violent consequences, with only the rare intervention of kings and churches keeping the system from spiraling out of control. Debt: The First 5,000 Years is a fascinating chronicle of this little known history—as well as how it has defined human history, and what it means for the credit crisis of the present day and the future of our economy.

UPDATE (11/7/11): I wrote a review that was published in Guernica a few weeks back.

The Debtor-Creditor Divide

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Several weeks ago, Bob Kuttner published an excellent 1-page piece called “Debtor’s Prison” in the American Prospect. The distinction he offers now seems quite clearly to be one of the emerging battle grounds in global politics—between rentier creditors and debtors. This is a line that’s deeply obscured in our political discourse but one that underlies virtually every economic debate. Reading this article and Paul Krugman’s follow-up offered one of those rare, paradigm-shifting moments where a number of seemingly disparate and complicated elements all fell together into one coherent picture.

The basic idea is that decades of U.S. financial deregulation and the government’s response to the financial crisis have systematically favored the claims of creditors and transferred the losses and downside of their risk to taxpayers, homeowners, and less sophisticated borrowers. To quote Krugman, “everything we’re seeing makes sense if you think of the right as representing the interests of rentiers, of creditors who have claims from the past — bonds, loans, cash — as opposed to people actually trying to make a living through producing stuff.” I also recommend Yves Smith’s post on the costs of rentier rule.

Geithner, Summers, and most of Obama’s financial team have done little to alter this development. Charles Fergesun, the director of Inside Job, has drawn attention to regulators’ unwillingness to see creditors take even minor haircuts. This has proven true even in egregious cases such as AIG’s toxic credit default swaps in which creditors cashed in at 100 cents on the dollar during the bailout. As Shelia Bair, the Bush-appointee who recently stepped down as Chairman of the FDIC, noted in her wonderful farewell op-ed in the Washington Post, there were few prominent regulators advocating that banks write down losses for the bad mortgages and other bad borrowing. Quantitative easing and the Fed’s decision to keep interest rates near zero have likewise served as a second stimulus for large creditors but have not translated into economic growth or more jobs.

As Tim Harford argues in his book, Adapt: Why Success Always Starts With Failure, we need individuals and businesses to take risks because success is an iterative, evolutionary process of failing and building off of what works. But when we punish borrowing so harshly and reward rentiers uncritically, we destroy incentives to innovate and instead encourage speculation and bubble formation. Getting people above water in their homes and allowing businesses to take loans on favorable terms is precisely what we need to stimulate demand and begin an economic recovery. Even Goldman Sachs acknowledged that this job crisis is a problem caused by too little aggregate demand.

But instead the response has been more of the same. In order to stay in creditors’ good favor, Europe is facing what feels like an endless series of sovereign debt crises and austerity measures forced on its population, and the U.S. is quickly throwing itself down the same rabbit hole. By imposing austerity measures and penalizing borrowers, policy-makers risk creating an entire class or an entire generation that’s too indebted to innovate, move, or seek additional training — creditors need to wake up and realize they’re not getting paid this way either.

Perhaps the most frustrating aspect of this entire situation is that because our political system is so closely tied to its own creditor class, this conversation is completely absent from the current fiscal debates. As Peter Dorman rather tragically observed:

“There are lots of interesting, complex issues in political economy. None of that matters now: the world is in the hands of politicians governed by expediency calculations whose time horizon can be measured in weeks. As far as I can tell, the gross illogic of their policies is simply beside the point.”

FDR 1936 Re-Election Speech

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“For twelve years this Nation was afflicted with hear-nothing, see-nothing, do-nothing Government. The Nation looked to Government but the Government looked away. Nine mocking years with the golden calf and three long years of the scourge! Nine crazy years at the ticker and three long years in the breadlines! Nine mad years of mirage and three long years of despair! Powerful influences strive today to restore that kind of government with its doctrine that that Government is best which is most indifferent.

For nearly four years you have had an Administration which instead of twirling its thumbs has rolled up its sleeves. We will keep our sleeves rolled up.

We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.

They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.

Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred.

I should like to have it said of my first Administration that in it the forces of selfishness and of lust for power met their match. I should like to have it said of my second Administration that in it these forces met their master.”

  — Franklin D. Roosevelt, 1936. Full text and recording here.

It’s extremely easy to get caught up in the news cycle and lose any historical perspective on what’s happening. This FDR speech, however, makes me wonder that there’s something deeply wrong with our constitutional design and the rules we apply to business entities if corporate power poses such a recurrent threat to stable and independent democratic institutions.

This quote alone makes it quite clear that the US government has been captured by the rentiers in its financial class before, and it’s somewhat heartening to know that the democracy managed to survive it. (At least for the few decades before we began dismantling banking regulation and campaign finance laws). But I wonder how much of that came down to FDR personally. It is troubling that the party and election-financing systems now in place have more completely blocked out any possibility that anyone as adverse to “organized money” could ever win a nomination, let alone the Presidency.

Anyway, this speech is incredible, in part because it’s so unthinkable today. It’s hard to believe now that people ever took FDR-Obama comparisons seriously.