Tuesday, August 04, 2009

Insurmountable Barriers to Structural Reform

The current discussion on "reforming" healthcare illustrates the impossibility of true structural reform in a system controlled by deeply entrenched State and private-sector Elites .

The charade of "reforming" sick-care is an excellent example of how "reform" is subverted by entrenched Elites that I call fiefdoms. "Reforms" as currently proposed are merely policy tweaks which do not address any of the numerous structural flaws in the U.S. sick-care system. This is not by happenstance; the obstacles to structural reform are insurmountable.

In a perfect world, both the non-Elite citizenry and those grasping the reins of power would conclude that serious structural reform would serve their long-term interests better than structural collapse. Yet there are ontological (and therefore insurmountable) barriers to any such reform, obstacles which can perhaps best be understood as forces of nature similar to gravity: to expect any concentration of political and financial power to relinquish its power rather than defend it is akin to expecting gravity to cease its pull on mass.

Elites, by definition, hold concentrations of power at immensely higher densities than the broad non-elite populace. I term this structural imbalance in power densityasymmetric stakes in the game, in which the game is the concentration and distribution of national income and wealth, both via State-collected taxes and private capital.

To better understand the concept of power density, in which power is financial and political, let's compare a rural, agricultural economy such as the U.S. circa 1783 and a post-industrial urbanized economy such as the U.S. in 2009.

Setting aside the issue of slavery in 1783 America--from one point of view, a forced concentration of labor to serve the plantation model of production--we note the diffusion of power in the non-slave states. Voters--the ultimate source of political compliance and thus power--and private and public financial assets were diffused except for a few (by today's standards modest) urban centers: Philadelphia, Boston and New York. What Marx called "the means of production"--the capital, plant, tools and knowledge required to produce goods and services and thus wealth--were spread over the rural and urban populations alike.

Another way of describing this diffusion of power is to calculate the rate of concentration via the rate of inequality. Thus a feudal society in which an Elite holds most of the wealth has a high rate of inequality, where a populace of free small landowners and tradespeople has a low level of inequality.

Non-slaveowning Colonial America had a low, stable rate of inequality, a condition which has plentiful academic documentation. According to Frank Ackerman's The Political Economy of Inequality , the top 1% of free adult males held 12% of the wealth in 1774 and 29% in 1860. The share of the top 10% rose from 49% in 1774 to 73% in 1860.

As the North industrialized and the Southern plantation-based economy consolidated, then wealth inequality increased between the Revolution and the Civil War. This concentration of wealth continued unabated through the Gilded Age up to 1929, when the Great Depression wrought vast increases in State powers as wealth was widely destroyed. The net result was a much lower level of inequality from 1940 through the early 1970s--not coincidentally, the era of true prosperity for the middle class and the alleviation of extremes of poverty.

As described above, this true prosperity faded in the stagflation and ennui of the 1970s and was replaced with a bogus credit/debt bubble-based simulacrum of prosperity which is now imploding.

Mass industrial/technical production owned and distributed by global corporations arose from the great efficiencies and profits created by concentrating capital, materials, transport, expertise and labor into monopolies/cartels. Fighting and winning a global war (World War II) greatly expanded the U.S. government's reach and size. These concentrations of capital, expertise, logistics, labor and control created fiefdoms of the State and a private-sector Plutocracy which partnered to extend a mutually beneficial global empire of so-called "soft power" influence and "hard power" military dominance.

Wealth and thus power is now extremely concentrated; at least 2/3 of the productive (income-producing) wealth of the U.S. is held by 1% of the populace. From the long view, we can say that the cycle of wealth concentration has again reached an apex similar to that of 1929. The primary difference between 1929 and the present some 80 years hence is that the State has greatly concentrated its power and share of the national income.

Perhaps coincidentally but perhaps not, this cycle aligns extremely well with the 80-year generational cycle mentioned earlier.

The Grand Failure of Government to Limit Concentration of Power

While much is made of the "balance of powers" in the U.S. and other democracies--the power of the executive branch being offset by the legislative and judicial branches--this "balance" completely failed to hinder the credit/housing bubble and the structural fraud and embezzlement at its heart. No branch of the "balanced powers of the State" saw any reason to interfere with the systemic looting and debauchery of credit and currency.

We should also note that in previous periods of extreme concentrations of wealth and high inequality, the "balanced powers" of the U.S. government did not reverse or even seriously challenge these long periods of high inequality. In this sense we should be careful not to overestimate the State's concern or leverage over wealth concentration and rising inequality.

Despite the supposedly "leveling influence" of income taxes, wealth has become ever more concentrated in the past 40 years, paralleling the high inequality between the Civil War and the Great Depression. Neither the "trust-busting" actions of the Federal government in the early 1900s nor the rise of industrial unions reversed or disrupted the 1860-1930 period of high wealth concentration/high inequality.

This, then, is the grand failure of government: due to the concentrations of power accumulated by those with asymmetric stakes in the game, any attempt to limit or reduce a concentration of power is thwarted by status quo financial, political and judicial defenses. All the issues which so worried Madison in The Federalist Papers have come to full flower: the power of the State has been legally channeled into Elites which have nothing to fear from any branch of the State because they are the State.

Despite decades of attempted electoral "reform," elections in the U.S. grow ever more prohibitively expensive, and it is still legal to contribute large sums of money to politicans. The cliche has it that "money is the mothers' milk of politics" and as has been noted above, it is far cheaper to buy a legislative loophole than it is to pay taxes, build treatment plants, relinquish monopoly, etc.

These concentrations of financial and thus political power flow ontologically from the concentrations of capital and labor which were necessary to industrial production. The model of a "factory" mass-producing goods, so successful in manufacture, has been applied, consciously or unconsciously, to fields of endeavor which are structurally quite different from manufacture--education, for instance, with the mixed results one would expect of mis-applied models.

The human mind's power comes from understanding models or templates and applying them to new situations. In the long view, it is understandable that just as Newtonian physics sparked a frenzy of mis-applied models (the human being understood as a mechanical device like a clock, etc.), so too would the highly successful model of concentrated mass-production be earnestly and enthusiastically mis-applied.

This concentration of materials, machinery, transport, labor and capital--the factory and the industrial corporation--naturally led to a concentration of organized labor, a model which, now that industrial production has faded, has been mis-applied to the last outsized concentration of labor: government.

With no real restraints on government largesse, then naturally organized public-union labor has concentrated its political power and "won" (I use quotation marks because there has never been any real opponent to its concentration of power) stupendous benefits and wages which have created the "upper-caste" I have described above: a protected class of technocrats who are compensated at two or three times (when pension and healthcare benefits are included) the market rates earned by their lower-caste private-sector brethren.

Once financial and political power has become concentrated into cartels and State fiefdoms, then those Elites hold highly asymmetric stakes in the game: they have so much more to gain and lose from the political distribution of taxes and the relaxation of regulations than non-Elites that they will fiercely deploy all their power and wealth to preserve and extend their share of the national income.

In contrast, the non-Elite citizenry have vanishingly modest stakes in the regulatory and tax-distribution games; while a narrowly focused law will enrich an Elite for decades to come, the consequences to the broad non-Elite citizenry are so diffused as to be akin to the brush of a feather.

Immense State/Elite empires have been constructed from initially modest taxes collected from tens of millions of non-Elites--Medicare, for example--while seemingly minor tax laws have enabled vast empires of private capital to solidify--energy, for example, which has been built on depletion allowances and other tax schemes far more favorable than those awarded to manufacturers of washing machines.

From its humble tax-funded beginnings, Medicare has grown into a stupendously profitable empire which will soon exceed both the military-intelligence complex (the Pentagon) and the Social Security system in budget. This vast empire is comprised of loosely allied fiefdoms (the A.M.A., the trial lawyers, the pharmaceutical industry, the insurance industry, the hospital industry, etc.), each eager to defend its turf from non-Elite

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

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