Don’t Blame the System: Why Capitalism Must be Saved from the Capitalists

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* This is a piece I read for class and wanted to share. While I do not fully agree with everything here I do like the general thrust of the piece and wanted to share it.*

 

Research by Raghuram Rajan and Luigi Zingales

Capitalism has always been seen as an instrument for the rich to get richer. A new book turns this view upside down: Capitalism is instead a system that fundamentally benefits everyone, especially the have-nots.

“The paradox we are suggesting is that true capitalism is very much a threat for the rich,” says Luigi Zingales. “As a result, the rich are the greatest opponents of competition, which is a key part of the capitalist system.”

Zingales and Raghuram Rajan, both professors at the University of Chicago Graduate School of Business, address misconceptions about capitalism and the role of government in their new book, Saving Capitalism from the Capitalists (Crown Business, 2003).

To illustrate their main argument, Rajan and Zingales use the example of a poor Bangladeshi villager who needs 22 cents to buy raw material for making stools. For lack of better alternatives, she has to borrow the money from a middleman, who forces her to sell the stools back to him as repayment for the loan. He, of course, sets the price. As a result, the stoolmaker receives only two cents for her day’s labor.

This example points to one of the worst ills of capitalism: exploitation of labor. This exploitation, however, is not an inevitable consequence of the system. The true essence of capitalism is embodied in equal access and competitive markets. It is the lack of access to funds that keeps the stoolmaker’s labor captive.

The authors suggest that in many countries, true capitalist markets and institutions do not emerge for the simple reason that capitalists oppose them. The business elites (the middlemen in the example) would risk losing their position if access to finance became freer and they faced competition. In order to protect their positions, the capitalists may turn against free markets.

Free markets are the single most important tool to eliminate poverty and spread opportunity. Breaking from the traditional view that any government regulation hinders the development of free markets, Rajan and Zingales suggest that competitive markets are not well served by this laissez-faire approach.

The authors point to the airline industry as a key example of the complicated balance between regulation and competition. If there were no supervisory authority and no regulations enforcing safety standards, people would be very reluctant to fly fledgling airlines and would stick with established airlines. Having no safety regulations in the airline industry would favor established firms and make entry impossible, therefore killing competition.

However, if regulation required every airline to have a proven five-year track record of profitable flying before being allowed to accept passengers, new entry still would be killed off. How can new entrants have a proven record? The authors argue that it is on this delicate middle ground that competition flourishes-with enough rules so that people feel confident in flying the new entrants, but not so many rules that the new entrants can never compete.

“Once you accept that some rules and regulations are needed but not too much, the old mantras are useless,” note the authors. “One cannot adopt the posture of the traditional right that any government suffocates markets. Neither should one adopt the posture of the traditional left that markets are terrible and governments should replace them. The right position is the Goldilocks position-neither too little nor too much of the government is best for markets.”

“It is because this middle ground is so narrow that capitalism in its best form is very unstable,” write Rajan and Zingales. “It easily degenerates into a system of the incumbents, for the incumbents, by the incumbents.”

Who Makes the Rules?

Rajan and Zingales point out that even in democracies where it is assumed that rules are made by the people through their elected representatives for the common good, governments tend to act in the interest of the business elites.

One pertinent example they cite is the recent case of President Bush levying tariffs on imported steel. The alleged reason for the tariff was to protect American jobs. However, there are only 190,000 workers producing steel and 9 million workers in steel-consuming jobs. While steel prices in the United States have indeed gone up, steel prices in the rest of the world have fallen as exporters redirect their steel away from the United States. This hurts U.S. industries that rely on steel as an input: they can no longer compete with foreign manufacturers who now enjoy cheaper steel inputs. As a result, some U.S. manufacturers have threatened to move their facilities abroad. Far more American jobs were put at risk outside the steel industry by the tariffs than were saved.

The tariffs were a subsidy not so much to the steel workers, but to the owners and top managers of the distressed steel firms, who benefit handsomely from the tariff. The 30,000 workers who were bussed to Washington to press for tariff protection were effectively used as human shields to protect dominant firms’ interests at the expense of the vitality of the free market system. The reason they prevailed is that the concentrated lobbying power of the powerful private interests often outweighs the public interest in all countries, not just the United States.

It is because rules are made in the interest of business elites that free market economists have traditionally opposed government regulation.

“We need to find ways to ensure that rules are made to enhance the access to free markets and encourage competition,” says Zingales. “We do not want to tame the creative power of markets, we want to liberate it. But to liberate this powerful force, we need to strengthen political support in favor of capitalism.”

Tenets of an Ideal System

What ensures that political action is public spirited and that rules and regulations are not made to protect the interest of a few business elites? Rajan and Zingales propose four pillars to help promote the public good, recognizing that politics and economics cannot be kept separate in modern democracies.

First, they advocate a series of measures to promote the transfer of ownership into efficient hands. Inefficient owners tend to oppose rules that promote competition, seeing the downside of free markets rather than the upside of opportunity that those markets bring. Since taxes on income subsidize inefficient owners (who do not produce much income), while property taxes penalize them, one step in the right direction would be to substitute some of the taxes on income with taxes on property.

Studies also show that firm owners who inherit their control tend to be particularly inefficient. An inheritance tax levied on the transfer of active control of corporate assets would also support efficient ownership. In this respect, estate taxes also perform a useful role. Rajan and Zingales note that they do not support the recent move to eliminate estate taxes.

Second, the authors advocate open borders. Borders open to trade and capital flow force domestic firms to compete with foreign firms, essentially creating competition between domestic rule makers and foreign rule makers. Domestic incumbent interests can no longer prevail since inefficient rules favoring certain segments will jeopardize the entire economy.

Open borders provide a country’s people with the best chance that their country’s policies will be made to enhance the public interest. When regulation faces competition across borders, the result is better regulation in every country.

“We can’t let anti-globalization protestors on the street determine the agenda, because they have the argument backwards,” says Rajan. “There is a moral ground to oppose the protestors, since open borders prevent us from being at the mercy of the current political elite and large domestic firms.”

A third component of their prescription is a safety net. Competition creates winners and losers, which is one of the biggest sources of tension between democracy and free markets. People who don’t fare as well in the economy still have their political power. The problem, however, is that the have-nots may use their political power to lobby for deep-rooted change that would destroy the foundations of the capitalist system. Worse, the incumbent powers may ride the coattails of the anti-free market protest and pressure for protection as well.

Therefore, a safety net is needed to give the have-nots hope so that they do not turn against markets and become easy political prey for the incumbents. However, much of the safety net in developed countries is focused on protecting firms not people, while in developing countries there is too much reliance on family as a safety net.

Rajan and Zingales caution that the safety net should not come in the form of handouts. Crucial elements of the safety net they propose include a good education system and sound healthcare to enable the average citizen to take advantage of opportunities. A well-developed financial system will give people resources to create their own wealth. With these support mechanisms, people will have the tools to reinvent themselves for the job market. The capitalist system in turn is then better able to survive crises such as economic downturns.

The fourth important pillar in their prescription is awareness. Collective belief in the power of free markets and knowledge of the implications of faulty government regulation will help keep business leaders and politicians in check.

Keeping Capitalism Alive

Recent corporate scandals have added to the perception that the capitalist system is unfair. Combined with the general economic downturn, these perceptions can turn into anger against the system. If unchecked and egged on by politicians, such anger could result in a movement against free markets.

Instead of enhancing the power of large corporations and domestic elites, free markets actually curb that power and channel activities into more productive pursuits.

“People feel guilty about the capitalist system when they see the poor,” says Rajan. “There is no reason to feel guilty, because capitalism offers the poor the best access to opportunities. For those who care about the well-being of others, the goal should be expanding access to everyone and making it possible for even the have-nots to participate in the capitalist system.”

 

Raghuram Rajan is Joseph L. Gidwitz Professor of Finance at the University of Chicago Graduate School of Business. Luigi Zingales is Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago Graduate School of Business.

>>For information about Saving Capitalism from the Capitalists, visitwww.savingcapitalism.com.

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Tax Reform: Not for Public Disclosure

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Picture by Katie Goodwin

Picture by Katie Goodwin

COMMITTEE CONFIDENTIAL. NOT FOR DISTRIBUTION. DO NOT COPY. These materials may not be released to the public from the National Archives or by the Finance Committee prior to December 31, 2064.

This warning is not from a James Bond movie nor is it from a national security intelligence briefing. This is the warning being place on Senate member submissions for tax reform.

In June the Senate Finance Committee requested Senate members to submit proposals for the portions of the tax code they would like to see preserved during tax reform. Apparently the Senate Finance Committee got so little response that they sent out a memo on July 19th stating that all submissions will be kept confidential for more than 50 years.

Last time I checked the tax code was public information and Senators were publicly elected officials. So why are proposals by publicly elected officials on a public policy matter secret? What is it that Senators fear the public seeing? If Senators were advocating preserving the mortgage deduction or tax breaks for small farmers they would want everybody to know. If their proposals were for the benefit of the country as a whole then they would proudly declare them. In fact Senator Bernie Sanders (I-VT) has made his proposals public including copies of the letters he submitted to the Senate Finance Committee.

But the other Senate members are so fearful of public disclosure that only two electronic copies of the proposals will be kept and those will be housed on a secure password protected server. In addition all paper copies will be kept in a locked safe and only a dozen people in total will be allowed to handle the proposals. On top of that the proposals will not be disclosed to the public until December 31st, 2064. Currently the youngest member of the Senate is Chris Murphy (D-CT) who is turning 40 on August 3rd. So the youngest member of the Senate will be 91 years old when the tax reform proposals are allowed to be disclosed to the public. Quite literally they want to take this secret to the grave.

Congress recently reminded the public in regards to surveillance “If you have nothing to hide then you have nothing to worry about.” Yet tax reform requires utmost secrecy by Senators for 50 years. What are Senators hiding? Do they fear loosing votes by failing to support their constituency? Or do they fear loosing campaign contributions by failing to support their wealthy donors? Why does tax reform warrant such secrecy?

 

PRISM: Not Enough Data for the NSA, They Need More

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So as if NSA surveillance wasn’t already over the top another revelation has come out that the government wants more of our data. In this case CNET broke the story that the Federal government is demanding user passwords from internet companies.

The metadata they could already gather on EVERYBODY apparently was insufficient to whet the surveillance state’s appetite to know the intimate details of our lives. Whereas metadata only can tell you who is contacting who, how often and when; the government is now seeking user passwords from internet companies. That would grant the state the power to do EVERYTHING that the user could do. They could see all of your information private or not. They could use it to impersonate you if they wished because they would have full access to your personal accounts. On top of that allowing the government to obtain user passwords could involve real risk or harm. Think for a minute about what somebody could do with all of your passwords. At first you think they could go through your emails, IMs, calendar, lists of friends and other such things. But remember your password for your bank account log-in allows you to transfer money, review all of your purchases, examine in every intimate detail your financial situation.

It is high time that the government stop this excessive secret surveillance. If the Federal government wants to dig into every last intimate detail of your life then they need to serve you will a search warrant. If the government feels the need to investigate somebody so deeply then the person has the right to know about it. In fact these secret searches violate the Constitution but not the 4th amendment you are thinking of. Rather it violates the first amendment right to “to petition the Government for a redress of grievances.” We the people have the right to challenge the government’s actions which is Constitutionally guaranteed. But when the government acts in secret we loose our right to “to petition the Government for a redress of grievances.” We can’t challenge the government’s actions if we aren’t aware of their actions and the government takes great pains to ensure we are not aware as demonstrated by their treatment of leaks and media recently. The government is not beyond imprisoning anybody that inhibits or challenges their secret violations of the Constitution and citizen rights.

The surveillance state has gone way too far with digital spying on citizens!

Graduate School Excitement

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I am so excited to start graduate school. I was accepted to Stony Brook University masters of political science program. My classes begin on August 26th and I finally have my class schedule.

I will be taking intro to statistics, research design, dynamics of public opinion and passionate politics: mobilization, interest groups and social movements. On top of that I may replace a class with time series statistics or see if I can just add it to my schedule. The intro to statistics will be an easy A, it covers basic statistical tests like T test and F test then moves on to regression. I am familiar with and regularly use those concepts and statistics. Research design should be interesting, I am already familiar with psychology research design which has a lot of similarities. But it will be interesting to see the differences in research designs between psychology and political science. I am really looking forward to the dynamics of public opinion course. That course will examine the relationships between political opinions and the individual’s values, knowledge and personality. I am curious to see how different individual factors impact political ideology. I am also really excited about the passionate politics course. In that course I will learn about factors that impact political mobilization including group identity, personal values and emotions. I have been reading extensively about social movements over the past year and I think I will really enjoy that course. Finally there is the time series statistics, though it is not as glamorous as something like passionate politics time series statistics are an import tool in analyzing political phenomenon. Time series statistics involve analyzing and modeling data that occurs over time. So you could use to look at the impact of certain event or actions have on the future. For example you could look at the decline in Obama’s approval rating as it relates to NSA surveillance scandal.

The only problem is that I may have to drop a class to take time series. Since my research design and intro to statistics are required that would mean I would have to drop dynamics of public opinion or passionate politics. I am going to ask about the workload and see if maybe I can just add the class onto my schedule. I think I can manage an extra class since both intro to stats and time series will be easy for me. I already do time series stats as a part of my job and I use basic stats on a regular basis. Also I think the research design course will be easy since research methodology and the philosophical grounding of research design are areas that I am strong in. But we will see.

At this point we just need to finish with the logistics of getting to NY from Austin and getting set up there. Due to all of the work that needs done to move across the country I have not had as much time as I would like to post to my blog. I apologize for neglecting the blog for the past couple of weeks and I apologize for the neglect my blog will see over the next 6 weeks. But once I am settled in NY things should get back to normal and y’all should see me posting more often.

 

Is Congress Getting Paranoid?

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Most of you may have never heard of Huawei which is a china based communications company who’s equipment connects one third of the world’s population  and is the worlds second largest network equipment producer. But the US Congress has heard of them, in fact Congress believes Huawei to be a national security threat and has banned the sale of their phones in the US.

Now let’s just stop and think about this. The US Congress is perfectly fine with and supports surveillance on pretty much every bit of digital data and communications that pass through the US. Congress believes it necessary to collect data on US citizens and foreign citizens if their data passes through a US server or company. This is perfectly fine to Congress. But the possibility spying without evidence or verification is sufficient to close off the US market from a foreign company.

As hypocritical as that position sounds it is not surprising at all. Overall humans judge the behavior of others through the lens of their own behavior. Our own behavior is the basic reference point by which we evaluate others since we are most familiar with our own behavior. So all humans have a strong tendency to think that others are like them. That means that those who are honest tend to believe others are honest; those that cheat believe most others cheat; and those that spy believe others are spying too. With a Congress so intent on spying on everybody it is not surprising that they are very cognizant of the possibility of spying. For that reason Congress is wary of Huawei operating in the US.

But what is next? Anymore many electronic devices utilize connections with communications networks or the internet; most device also contain software that could be programmed for spying. So are we going to start banning all foreign electronic devices that could potentially spy on the US? You know your iPhone may have been produced in China, what is to stop them from adding a little bit to it in order to spy on us? What about your laptop? It probably has a built in camera, a wifi connection and software to hide some spyware in, should we ban foreign produced computers and laptops? How about your car? What is to stop Toyota from spying on you while you drive to work? We have OnStar which can listen to you in the car and control some functions of your car. So should we ban foreign produced cars? How about products produced in America by foreign companies? All of the spyware could have been designed overseas then assembled here in the US. Maybe we should ban all foreign companies from doing business in the US?

Wait? What? You think I am sounding paranoid; you think I sound like a conspiracy theorist. Well maybe I do but that is where you land if you take Congress’s logic out to it’s full extend. It heads straight to paranoia over being spied on by foreign agents through the products you buy. Though to be fair the paranoia may be justified considering we all now know that we are being spied on by the US government through the electronic devices we own and the digital services we utilize.

 

“We Welcome the Conversation”

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We all have heard the President, administration officials and Congressional members state that they “welcome the conversation” on a variety of topics. Most recently was Attorney General Holder welcoming a conversation on race relations in the US after the Zimmerman verdict. Before that it was President Obama welcoming a conversation on surveillance. In the past we have heard the same thing about entitlement reform or the budget or any number of other policies.

But these people have a very strange idea of what a conversation is. If you look up any definition of a conversation it involves two way interaction and communication. Yet that is not what we get from these officials when they “welcome the conversation”. Officials make a speech or statement about the subject and leave it at that. The communication is purely one way, they tell us what they think and they consider that a conversation. There is no way for the public to become involved in this conversation, we have no say or influence on it at all. If we are lucky the press might ask a few question about the assertions of the official but rarely are those substantive. There is no expression of alternate positions, there are no challenges brought forth against the official’s take on the situation, there is no conversation.

There are many important conversations we need to have such as the limitations and justification for surveillance, race relations, reform of entitlement programs, balancing the budget and paying down the national debt. Unfortunately when it comes to public policy the public is not part of the conversation. We are excluded from it. The conversation takes place on Capital Hill between law makers and the administration. We hear the conversation in the media through pundits and talk shows. But we the people never get to be involved. Essentially the public is cut off from any conversation that could potentially influence policy decisions.

This would not be so bad if we felt represented by those having the conversation but that isn’t the case either. Congress doesn’t represent most people considering that Congressional approval is around 6% right now. Just look at how both sides of Congress are just fine with NSA surveillance that concerns the public so much and is causing issues with our international relations. Yet these are the people having the conversation for us and then deciding what we want.

If the Obama administration or Congress welcomes a conversation then they should show it with their actions. Create a neutral website where the public can post questions and vote on which questions they want asked. Then answer the questions live on TV or in live streaming video. After each question the public would be allowed to post follow up responses or questions that can be voted on in real time and answered immediately without time to develop the ‘proper’ political response. Let the public decide what questions need answered instead of letting politicians decide which questions they care to answer. Let the public challenge the answers in real time. If you really welcome the conversation then bring the public into the conversation.

Statement from Edward Snowden in Moscow

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Statement from Edward Snowden in Moscow

One week ago I left Hong Kong after it became clear that my freedom and safety were under threat for revealing the truth. My continued liberty has been owed to the efforts of friends new and old, family, and others who I have never met and probably never will. I trusted them with my life and they returned that trust with a faith in me for which I will always be thankful.

On Thursday, President Obama declared before the world that he would not permit any diplomatic “wheeling and dealing” over my case. Yet now it is being reported that after promising not to do so, the President ordered his Vice President to pressure the leaders of nations from which I have requested protection to deny my asylum petitions.

This kind of deception from a world leader is not justice, and neither is the extralegal penalty of exile. These are the old, bad tools of political aggression. Their purpose is to frighten, not me, but those who would come after me.

For decades the United States of America has been one of the strongest defenders of the human right to seek asylum. Sadly, this right, laid out and voted for by the U.S. in Article 14 of the Universal Declaration of Human Rights, is now being rejected by the current government of my country. The Obama administration has now adopted the strategy of using citizenship as a weapon. Although I am convicted of nothing, it has unilaterally revoked my passport, leaving me a stateless person. Without any judicial order, the administration now seeks to stop me exercising a basic right. A right that belongs to everybody. The right to seek asylum.

In the end the Obama administration is not afraid of whistleblowers like me, Bradley Manning or Thomas Drake. We are stateless, imprisoned, or powerless. No, the Obama administration is afraid of you. It is afraid of an informed, angry public demanding the constitutional government it was promised — and it should be.

I am unbowed in my convictions and impressed at the efforts taken by so many.

Edward Joseph Snowden

Monday 1st July 2013

Wikileaks

Snowden is correct that the government wants to scare future potential leakers away before they even think about leaking any information, though that is not the sole objective. The current government reaction to Snowden is multifaceted.

The first objective for the government is to stop future leaks, by showing how harmful leaking is to the leaker. This will stop many from being willing to leak information even if it is of great importance to the public. Any potential leakers will definitely consider that if they are lucky they will only be exiled and ostracized. If they are unlucky they may well end up in prison for life. That threat alone will keep most quiet.

The second object is to intimidate the press from publishing leaks. The prosecutions and investigations into leaks and the press are an attempt to scare the press into complacency. If the government can cultivate fear of prosecution in the press then they can undermine the 1st amendment freedom of the press more than any court ruling ever could. The press’s fears will restrict their behavior more than the government ever could because fear can stop the press from following, investigating or publishing certain stories. Whereas the government can only address leaks once they occur, a fearful press can prevent leaks from garnering public attention in the first place.

Prevention of leaks through intimidation of future leakers and the press will serve the government’s interests best in the long run. It will stop problems before they even start.

The third objective is to discredit Snowden himself. By calling into question Snowden’s credibility they can mitigate the damage he has caused since fewer people will believe his information. This is a damage control tactic aimed at reducing the influence Snowden has over public opinion. They want to make it undesirable to listen to or believe anything Snowden says. Especially in the era of social media, individuals play a major role in spreading information and creating the public discourse. If the government can convince the public to reject Snowden then the can stifle the conversation around him and NSA surveillance.

The fourth objective is to avoid the issue by focusing on Snowden. By focusing on Snowden the government can get the public discourse to focus on a single individual and not on the information leaked by that individual. As long as we are talking about Snowden then we are not talking about the bigger questions of surveillance and the 4th amendment. It also diverts attention away from the government programs that were exposed. We are all too caught up in the drama surround Snowden and the leaks to pay attention to the broader implications. This is exactly what the government wants since discussing the surveillance programs is not beneficial for the government. In fact the government has been utilizing this tactic equisitely, there is far more focus and discussion about Snowden himself than there is about surveillance and rights. I am as guilty as any other in this regard, I too have been caught up in the drama unfolding and I have focused less on the core issue of privacy vs surveillance.

Thus the government wants to create fear surrounding leaking information to prevent individuals from leaking. The government also wants the press to fear investigation and prosecution for publishing leaks so as to prevent new sources from reporting on leaked information. Also the government seeks to discredit Snowden and thus mitigate the damage his information can cause. Finally the government seeks to shift the conversation from surveillance to Snowden in order to dodge the issue entirely.

We the people need to push back by keeping the conversation focused on our rights and the government surveillance programs. We have to try not to be distracted by the drama surrounding Snowden. We can’t focus on defending or attacking Snowden or his credibility. Instead we need to hammer home the fact that we are not happy about the surveillance programs that were revealed.

Shut down the NSA’s 1.2 billion dollar Utah Data Center

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we petition the obama administration to:

Shut down the NSA’s 1.2 billion dollar Utah Data Center

The Utah Data Center is a data farm that will begin harvesting emails, phone records, text messages and other electronic data in September.

Look at our tax dollars at work. Our tax dollars are being used for something illegal, unconstitutional, and unagreed upon by the American public. How wasteful… Petition to take down this data center.

We the People petition to Shut down the NSA Utah Data Center

While the public is outraged by the NSA surveillance programs the Obama administration continues forward on expanding such programs. They are building a NSA data center in Utah to help collect all of the information gather through NSA surveillance programs. It is so much information that it must be measured in zetabytes which is one trillion gigabytes. If you do not support the NSA gathering vast amounts of data on everybody inside and outside of the US then sign the petition on the We the People website.

https://petitions.whitehouse.gov/petition/shut-down-nsas-12-billion-dollar-utah-data-center/RMk4DTXg