The One Percent's Titanic Self-Delusion

Last summer I compared the GOP to a mutinous first-mate on the Titanic, steering  the economy into an iceberg [1] in hopes of taking over when the captain goes with the ship, while forgetting that they're "in the same boat."

If our economy was the RMS Titanic [2], Republicans would be like an ambitious first mate, so eager to seize power from the captain that he steers the ship of state into an iceberg, thinking he'll take over when the captain goes down with the ship [3]. Republicans have forgotten — or no longer care — they're on the boat too, and they're working very hard to ensure that the country will be nearly ungovernable should they succeed in seizing the reins of government.

If it seems like the White House is arranging deck chairs on the Titanic, the GOP is busy measuring the the captain's quarters for drapes, even as the ocean pours in. And the tea party orchestra plays on, with just one song on the playlist — "Under the Sea." [4]

Chrystia Freeland's recent NYT column [5] casts the one percent as the first-class passengers on the RMS Titanic — standing on deck in their life-jackets, telling jokes and sipping cocktails as ship goes slowly down, oblivious to the fates of those in steerage, and asking "Will the lifeboats be seated by class?"

Freeland goes all the way back to 14th Century Venice to find an example how, as Kathleen Grier [6] described it at Political Animal, how "in highly unequal societies like our own, self-dealing elites destroy their economies and themselves by rigging the system to reward their own and closing off opportunities to talented outsiders and new ideas and influences." The result is that an "extractive state" — controlled by, and serving the interests of economic elites — sucks the life out of the economy.

The story of Venice’s rise and fall is told by the scholars Daron Acemoglu and James A. Robinson, in their book “Why Nations Fail: The Origins of Power, Prosperity, and Poverty,” as an illustration of their thesis that what separates successful states from failed ones is whether their governing institutions are inclusive or extractive. Extractive states are controlled by ruling elites whose objective is to extract as much wealth as they can from the rest of society. Inclusive states give everyone access to economic opportunity; often, greater inclusiveness creates more prosperity, which creates an incentive for ever greater inclusiveness.

The history of the United States can be read as one such virtuous circle. But as the story of Venice shows, virtuous circles can be broken. Elites that have prospered from inclusive systems can be tempted to pull up the ladder they climbed to the top. Eventually, their societies become extractive and their economies languish.

It's hard to quote just the most important bits from Freeland's column without almost copying and pasting long passages. It's that good. Granted, as Kathleen points out, it's not all good. There are places where progressives will (and should) part ways with Freeland. But when it comes to disastrous results of the "tilting of the economic rules in favor of those at the top," she nails it.

America’s Serrata also takes a more explicit form: the tilting of the economic rules in favor of those at the top. The crony capitalism of today’s oligarchs is far subtler than Venice’s. It works in two main ways.

The first is to channel the state’s scarce resources in their own direction. This is the absurdity of Mitt Romney’s comment about the “47 percent” who are “dependent upon government.” The reality is that it is those at the top, particularly the tippy-top, of the economic pyramid who have been most effective at capturing government support — and at getting others to pay for it.

Exhibit A is the bipartisan, $700 billion rescue of Wall Street in 2008. Exhibit B is the crony recovery. The economists Emmanuel Saez and Thomas Piketty found that 93 percent of the income gains from the 2009-10 recovery went to the top 1 percent of taxpayers. The top 0.01 percent captured 37 percent of these additional earnings, gaining an average of $4.2 million per household.

The second manifestation of crony capitalism is more direct: the tax perks, trade protections and government subsidies that companies and sectors secure for themselves. Corporate pork is a truly bipartisan dish: green energy companies and the health insurers have been winners in this administration, as oil and steel companies were under George W. Bush’s.

According to historical accounts of the Titanic, like Walter Lord's A Night To Remember [5], the tilt of the ship's deck was so subtle that many of the first-class passengers refused to believe they were in any danger. Some thought the doomed ship would still make it into port in New York. Others believe the ship would at least stay afloat long enough for a rescue to arrive. Even as they were piling into lifeboats, some expected to return to the ship and continue their journey.

Meanwhile, and first-hand accounts like second-class passenger Lawerence Beesley's [7] The Loss of the S. S. Titanic: Its Story and Its Lessons [8], revealed that second- and third class passengers below deck were much closer to the site of the damage, and as a result found out much sooner that the ship was indeed sinking. Left to fend for themselves, many  — like many Americans in the grip of the recession, who were left to grapple with long-term unemployment, "underwater" mortgages, robo-signing, and foreclosures on their own, even as the banksters pilled in to lifeboats —  got trapped below decks and went under with the ship.("Titanic economics" influenced the outcome [9], in terms of who survived. The one percent fared well [10], by any comparison — 62% of first-class passengers survived, compared to 41% of second-class and 25% of third-class.

Freeland's column suggests that today's one-percenters won't fare nearly as well as their Gilded Age counterparts, as their hubris and blindness is as likely doom the economy as that ice berg did the "unsinkable" Titanic.

It is no accident that in America today the gap between the very rich and everyone else is wider than at any time since the Gilded Age. Now, as then, the titans are seeking an even greater political voice to match their economic power. Now, as then, the inevitable danger is that they will confuse their own self-interest with the common good. The irony of the political rise of the plutocrats is that, like Venice’s oligarchs, they threaten the system that created them.

But no one need ask, "Will the lifeboats be seated by class?" this time. Austerity is already sinking the lifeboats in Greece [11], Britain, and much of Europe. In fact, it's gotten bad enough to rattle intitutions like the IMF [12] and even indivuduals like Larry Summers [13], as it begins to dawn on a handful of austerity advocates that the ship just might, and take them down along with everyone else.

Sen. Todd Akin calls for abortion on demand and free distribution of condoms. The CEO of Exxon decries global warming and demands an end to oil company subsidies along with new public investment in renewable energy. Arizona Sheriff Joe Arpaio calls for amnesty for undocumented workers.

Not likely, right? But the equivalent of these improbables just took place in international economics. The International Monetary Fund, for decades famed for inflicting harsh austerity policies on developing nations, now says, "Never mind," essentially admitting it got it wrong.

IMF Director Christine LaGarde is calling on European nations to ease austerity measures before they cause another global recession. "The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity," the Financial Times reports [13].

This extraordinary recognition of reality by the IMF raises an obvious question: Will Republican presidential candidate Mitt Romney and Republicans get a clue? The IMF's call is a direct repudiation of the harsh austerity policies it has been peddling. Just like the IMF, Romney is passionate about deep cuts [14] in federal spending as well as tax reforms [15] that do not lower revenues. (He claims now that he wants to lower rates across the board, but pay for them completely by closing loopholes.)

Maybe a few of one percenters are beginning to realize something Joseph Stiglitz [16] said earlier this year: the wealthy have an interest in a functioning society.

From the left, meanwhile, the widening inequality often elicits an appeal for simple justice: why should so few have so much when so many have so little? It’s not hard to see why, in a market-driven age where justice itself is a commodity to be bought and sold, some would dismiss that argument as the stuff of pious sentiment.

Put sentiment aside. There are good reasons why plutocrats should care about inequality anyway—even if they’re thinking only about themselves. The rich do not exist in a vacuum. They need a functioning society around them to sustain their position. Widely unequal societies do not function efficiently and their economies are neither stable nor sustainable. The evidence from history and from around the modern world is unequivocal: there comes a point when inequality spirals into economic dysfunction for the whole society, and when it does, even the rich pay a steep price.

Rational self-interest [17] — the idea "that individuals, be it a person, a family or a firm, tend to make choices and select alternatives rationally, that they believe in their best interest" — is a key assumption of economic theory. Adam Smith [18], the favorite philosopher on the right, held that " rational self-interest and competition can lead to economic prosperity."

If people make rational economic choices, it follows that markets should be rational too. But the recent financial crash, with its ensuing economic crisis and recession, has effectively busted the myth of the "rational market," [19] and should be enough to undermine faith in rational-self interest

Of course people don't always make rational economic choices. If so, why would the one percent advocate, and even demand harsh austerity policies, when all available evidence shows that such austerity will decimate the very same economy and social order they rely upon to maintain their position?

Maybe they think the lifeboats will be seated according to class, and thus they'll be ensured a relatively dry spot to wait out this disaster, while the rest of us are floundering in the surf. Freeland's column suggests that's delusional. I concur.