The American Dream will have to be revised

The republican party lost the election despite fielding the most competent, centrist, and generally acceptable candidate since Bush sr, or even including him. The hate fringe didn’t help the GOP, but it’s not what lost them the election either. The republicans still got nearly half the vote despite including individuals who would alienate more than half of the population. It’s not the individuals, it’s the policies that lost the elections.

The issue at the heart is the future vision for the individualist and affluent society that we call the American Dream. All can see that the dream has ran into problems lately. Instead of delivering prosperity and self-actualization America seems mired in social stress and inequality. The parties differ as to what to do about that. The democrats feel that the Dream has veered and want to do a course correction. The republicans are panicking and would desperately step on the gas.

For your reference, my own views are in line with the strongly social-democratic parties of northern Europe but I also value the individualist opportunity that Anglo-Saxon culture affords. Partly to make a good read, this is written as a polemic. I understand that neither side holds beliefs as one-dimensional as I caricature here. 

It’s not Romney. Romney was in every respect the best candidate the GOP could run: Competent, not too old, moderate on social issues, and generally acceptable to the average person. If Romney had won nobody would honestly feel that they’d have to spend four years governed by a madman, as many felt with G. W. Bush. If Romney wasn’t burnt by this election he would still be the best nominee for 2016, and indeed the GOP need to find another like him to win then. In that sense, Romney has been the tragic centrist figure in a chorus of madness.

Nor was it the right-wing haters that lost the election. They certainly didn’t help, and at the individual level the unelectable people didn’t get elected. But the party did a reasonable job of containing the lunatic hate fringe and presenting a civilized, if conservative, vision for society. If attitudes to abortion and gay marriage really weighted heavily in people’s minds the GOP would capture closer to 25% of the vote, that is only males right of center, not 48%. I know the democrats among you will say no, no, no, it was women’s issues, or something, but think: Did your republican friends really want women put on a leash, or in binders? Of course not. Conservative people and conservative states voted Romney despite those issues. On both sides, people voted economically.

Right now, republicans are in distress because they perceive their economic future, their perception of the American Dream, to be near collapse. Democrats are relieved that the highly destructive and insincere economic plan of the right didn’t come to pass. Among ordinary voters, years of misinformation diffused by the right have created a gulf of understanding regarding how the economy works, what wealth is and who has it, and what are realistic options for America going forward. If asked to put forward their positive vision, the two groups would come up with very different conceptions of the American Dream:

The American Dream according to republicans
Republicans are zero-sum pessimists. They’re concerned with direct effects of actions such as work and trade, and don’t see or acknowledge systemic effects. As such they like free markets and equality of opportunity instead of outcome. They resist any rules or regulations on actions unless they can see that the action itself, rather than its distant effects, are harmful.

To republicans the pie is mostly fixed. They talk of “job creation” and “making money” but really they mean that the jobs and the money come here instead of going there. Some of them favor hard money, such as gold, because it fits their perception of the overall economy as static. Republicans obsess over government debt in part because they think it has to be paid back in real terms, like a credit card bill. They see private debt or saving as a transfer of value through time, and back arrangements such as student loans and private pensions even though they don’t work.

Prosperity, according to republicans, is a relative term. The economy, and society in general, is a competition to separate winners from losers. The total wealth of society is fixed, or close enough, and the goal of a successful individual is to claim a higher share. Republicans care about education, family values, marriage, and so on as devices to place their kids among the winners. The republican vision of the American Dream is fundamentally based on inequality.

The republicans do see the enormous gulf of inequality that has developed between the wealthy and the poor in America. As anxious middle class, they look at the chasm that separates them from the poor and don’t focus so much on the steep slope up to high wealth. Their philosophy of a fixed pie and a direct win-lose economy leads them to conclude that filling the gap would destroy all wealth, especially their wealth even if it’s not much. They don’t want the gap to be filled. They just want to keep themselves on the safe side.

A lot of rhetoric is generated by republicans to justify these positions, and some of it is moralistic rationalization while some is propaganda. To appease their own morality, republicans divide people into good virtuous disciplined winners and foreign, sinful, wasteful losers. Right wing think tanks propagate notions such as trickle-down and the idea that absolute (not relative) wealth matters, which republicans do not believe but use as levers to attack the left.

The American Dream according to democrats
Democrats are networking optimists. For the most part, they look at the long-term outcomes of policies such as fiscal stimulus, welfare, the “war on drugs”, and prefer what appears to be effective in society rather than what might make moral sense to someone in the micro. They tend to be sensitive to environmental and global issues, although there’s no shortage of shallow feelgood attitudes around such topics.

Democrats recognize that the economy varies according to both productivity and demand and that inter-temporal transfer of value largely doesn’t exist: You can send a house into the future, by letting it sit there, but almost anything that matters such as food, health care, consumer goods, etc. only happen in the here & now. According to this worldview, public investment in education an infrastructure is not only valid but essential. Rather than “store up debt” it expands the economy of the future and thus the next generation’s welfare. Democrats dislike large inherited wealth and are skeptical of the private approach to financing life, through loans and savings, because they have an inkling these don’t work for normal non-wealthy folk. They are correct, although to explain why would bore most economists.

Democrats struggle with the relative vs. absolute definition of wealth. Anyone who lives in the US cannot but be mindful of their relative standing in wealth. It’s a competitive society, and you don’t want to fall. However democrats recognize areas where private claims are value-destroying for society as a whole: notably the escalation of private debt, financial instruments, and other abstract rights in relation to the real economy. These do just slice the pie and generate winners and losers, as well as a class of people who live off rents. Democrats would like less of that and more sharing of public goods such as education, safety, and diversity that make everyone better off. The electoral map showing diverse, dynamic blue states around the coasts and conservative, stagnant red states in the hinterland demonstrates this starkly.

To the democrats the level of inequality in society is the most pressing and serious problem. This was brilliantly and forcefully brought out by the Occupy movement and the 1% message. The democrats, even if they are middle class, see themselves in the same boat with the unemployed black youngster or the ageing truck driver. They want to close the gap between the barely affluent and the poor, because everyone has the same dignity and because people do shift places in life. Democrats recognize that undoing four decades of divergence, since Reagan, is costly but also that a more equal society grows more prosperous, as it did in the Eisenhower to Carter years.

Liberals and progressives are generally on the defensive when it comes to public discourse. This is largely the left’s fault. The theory of the left still centers around marxism, which isn’t useless but will only go as far as an opening critique. The relatively powerful visions of Keynes and Galbraith are viewed with equanimity – they were economists after all. Thinkers of the left have completely missed the greatest transition since the industrial era: The fact that since around 1980 the marginal product of capital outstrips labor so much that the majority of us are technically redundant. Social justice can no longer follow from labor. It must be a goal in itself. Progressive thought is stuck in the industrial era while the right has fully grasped the new world order and is winning the information war. Until recently the left had only anger to show. The Occupy movement is the new voice of challenge and hope.

Society today
The democrats’ vision of of society won on election day.  Crass comments about women didn’t lose the republicans the election, but painting half the population as worthless moochers did. Perhaps individual voters didn’t have a refined and well rounded economic perspective as it pertains to every issue, but where it matters they did. One family could see their health costs spiral out of control while republicans recoiled against Obamacare. A young couple could see no realistic prospect of repaying their student loans. Entrepreneurs could see Wall Street, rather than government spending, crowd out investment in their productive firm.

This election has also been exceptionally well informed. Perhaps I live in a bubble. I’m a white guy with money and an education, who reads blogs and thinks Google+ is some sort of credible window into the zeitgeist. But maybe openness does matter. People do use social media. When not farming virtual pigs, they do hear what others say. They hear engaging, diverse arguments about the financial crisis or first hand accounts of the NYC police beating the Occupy people. People like them. The quality of public discussion is not usenet 1989 either. Give people openness and information and they become smarter… Radical!

What’s going to happen in the next few months to a year is American society will come to terms with the idea that the cohesive, rather than the class divisive, agenda won. Republicans will have to admit that the world didn’t fall apart, and the bolsheviks didn’t roll their tanks over Washington. Obamacare will come into effect and yield visible benefits without bankrupting the country, as Mitt Romney’s beta version of this program already showed in Massachusetts. I’ve heard conservatives cry “OMG socialism is coming” many times before. Well in the end the mild center-left government that does come goes about its business and life is still good.

The more significant change will come about a year into Obama’s new term. This is the realization on all sides that the income and wealth gap has to close. The parties have taken clear opposite positions on this, and the voters have spoken: they want it closed. The working and poor class will be suspicious, but of course it’s in their interest. The middle class will fret about cost but agree that the gap has to close. Even enlightened 1% people like Buffett and Gates want the gap closed. So this will become a new social consensus. The revised version of the American Dream will be more equal.

There’s no shortage of material to appeal to to sell this idea: The US grew fastest when it was more equal, from the end of WWII until the ’80s. Europe, when it’s not killing itself over debt, is prosperous and more equal; the more “socialist” northern states the more so. East Asia is dynamic and more equal in institutions, as well as having a much stronger social fabric. Even Brazil, long a hellhole of inequality, has shifted to a consensus that a more cohesive society is essential and prospered significantly as a result. Expect to hear this message a lot over the coming years through official sources, editorials, and all media (well, maybe not Fox). The administration will be marketing to voters the choice they already decided on.

As to the actual policy that Obama will put in place, it’s hard to know precisely but I predict some form of long-run wealth equalizing reform. It’ll be a reform of the tax system, but may be broader than that and touch capital gains, stocks, and banking reform. I don’t expect a direct income redistribution scheme because conservatives will be quick to label it “tax & spend” and sound economic advisors will point out that prevailing market power may essentially negate its effects. It would also be fragile to future administrations’ undoing. Rather, I would expect a complex wealth redistribution policy that eventually puts more wealth in the hands of middle class and ordinary folk. The PPACA (Obamacare) was such a policy. It subtly makes the middle class wealthier. Expect another milestone policy of this form, in taxation, savings and banking, stocks and social security, or a similar broad area. It may include an endorsement of real productivity and protection of long term investment, as opposed to so-called free markets and speculation. We’ll see.

Some analysts say that Obama will use his second term to force an overdue but essential hot topic policy such as gun control or a massive de-escalation of the “war on drugs”. I don’t think so. it would be wrong for Obama to burn his political capital on such an issue while having the mandate, and facing the necessity, to address long-term inequality. Feeler policies for gun control or drugs tolerance may happen locally, as the latter did in some states, but ultimately I would expect the next republican president to cut some sense into these sacred cows of the right.

For wealth redistribution to work, learned discourse has to reach an acceptable consensus on deficit and the debt. This is not something that normal people care much about, but it’s necessary to fend off the deficit hawks and Tea Party when they attempt to hold the country hostage. The position of the administration is already articulated fairly well by Krugman and practiced by Bernanke. Essentially a modest deficit is an acceptable and effective seignorage/inflation tax. The balance of the two is a technical distinction that depends on the exact relation of growth, deficit, and inflation. The spectacle of Europe killing itself over the “wrong” 1800s conception of debt (actually I think the Bundesbank, sorry did I say that I meant the ECB, is being malicious) provides the best demonstration that could be given of what not to do. Bernanke is not dumb, and neither is US business elite, so I don’t expect the debt ceiling nonsense to amount to much.

So we should see the American Dream take a course correction. It will be to a more equal society in terms of wealth, and a financially safer and more prosperous one. The Reagan and Thatcher dogma of speculation and destruction will be cut back a notch, and we’ll have some of the economic sanity and strength of the ’50s and ’60s. Without the repression. It will be a good thing!

If you’re interested in a much more in-depth juxtaposition of the left and right mindset in the US, I urge you to read George Lakoff’s books. He presents a more balanced and detailed view of how both sides think, although he’s clearly a liberal with a liberal agenda. I recommend Whose Freedom. If you’re lazy you can hear his Google talk instead.

2 thoughts on “The American Dream will have to be revised

  1. I enjoyed reading your blog. Would you provide an explanation of the statement below to a non-economist (perhaps by way of example)?

    The fact that since around 1980 the marginal product of capital outstrips labor so much that the majority of us are technically redundant.

    Reply
    • Thank you. It’s a big topic on its own. The basic idea though is that classical industry, say car manufacturing in the 60s, had certain limitations to scaling: You needed people to operate the machines. You could only build a plant so big, meaning there was diversity – either many plants or many manufacturers. The skill of car technology was held in people, so there was some inertia in starting or moving a plant. There was much imperfect information in the making or selling of a car that resulted in many manufacturers and many jobs retaining their niches. For all these reasons the industry depended on both capital and people and the position of a skilled worker or professional was relatively good.

      Compare that with an industry of today like smartphones. The vast majority of the value add is capital rather than labor: Intel or Arm chips, which are built in a technically advanced plant out of data and sand. Boards and screens, which are in essence precision printing of data onto surfaces. Lots and lots of software. Very little labor is needed to manufacture a unit. In addition, the process is almost completely scalable. You can really build all the iPhones you need in one plant. You can move the work to another plant if need be. If market share shifts, plants can switch to producing Android phones. Any one vendor can scale to supply the whole market if they win the demand, and information efficiency means that big shifts in market share do happen.

      The result is a winners-take-all economy with 1-3 winners owning each market. Capital is extremely important, so the people working at Apple or Google or Intel, or some trendy outfit like Instagram, or some IP firm do well. They’re in capital formation. But this is a very small minority. People who can’t get a job in capital formation struggle to retain mostly useless jobs in retail, manufacturing, or various ad-hoc services. As more and more activities get done through Google and a tablet, jobs elsewhere in the economy become redundant (journalist, travel agent, florist, guide, bookseller, teacher).

      This results in a world with wondrous connectedness and efficiency, but we can’t pretend that the old, pre-information-age balance of power between labor and capital will carry us anywhere. The new capital-labor balance directly produces the skewed wealth distribution that we see: high top wealth, shrinking middle class, poor majority. We should either redistribute, or (conservatives would say) accept it, or tweak the balance of power say by weakening IP rights and valuing inter-personal services.

      Reply

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