
The Self-Destruction of the 1 Percent - wallflower
http://www.nytimes.com/2012/10/14/opinion/sunday/the-self-destruction-of-the-1-percent.html?hp&_r=0
======
acslater00
I have several comments.

1\. We're talking about literally 400 years between the height of Venetian
power and the creation of the Libro d'Oro (1315) and its decline (17th to 18th
century). Forgive me if I'm not quite ready to accept the author's core
premise here.

2\. This sentence made me LOL:

"Public schools are starved of funding... This is the new Serrata".

The premise of the statement, that public schools are starved of funding, is
preposterous. NYC spends upwards of $20,000 per pupil per year. But even
beyond that, comparing moderate variation in school funding levels to the
creation of an ACTUAL OLIGARCHY is just, hack-city. That might be the kind of
tortured analogy that gets you a favorable slot in the NY Times during
election season, but it's sheer nonsense. Look, I can make any argument, on
any part of the political spectrum, that way!

"High income taxes ... this is the new Serrata."

"Occupational licensing ... this is the new Serrata."

"Immigration limits ... this is the new Serrata."

"The Yankees spending $200m a year on their payroll ... this is the baseball
Serrata."

~~~
tsotha
>Public schools are starved of funding..

That made me laugh, too. Somehow this has become received wisdom for the
press, but not only is it false, it's _very_ false. Here in CA we're spending
twice what we spent per student in 1970 (in constant dollars), and if anything
outcomes are worse.

~~~
ChuckMcM
I point that out to people and it annoys them. I ask how is it we've doubled
the funding per student and our results are so bad, maybe funding isn't the
issue.

It is a hard thing for folks to hear though. If the thing you are telling them
means there isn't an "easy" (or even imaginable) solution to the problem they
care deeply about, they really can't accept it. It feels like accepting
defeat.

~~~
jeremymcanally
The problem isn't the amount we're spending, it's how it's being spent.
Everyone I know who is a teacher has severe issues funding class activities
and are usually told they have $0 for supplies for the entire year. That tells
me the money is being used in largely unproductive ways.

Where is the extra money going? Probably to pay for a bureaucrat to enforce
the new standardized testing and feedback crap that isn't really helping all
that much. Probably to fund more sports because sports, amirite? Probably
paying for iPads that, while useful, aren't being use the way they're supposed
to because of untrained teachers.

Wherever it's going, it likely isn't going to fund classroom equipment that
teachers actually need or quality textbooks for students.

~~~
keithpeter
Yup: UK we spent huge amounts of money on _new school and college buildings_
which did not actually improve anything. Some College managements are so
precious about their new buildings that they have regulations about putting
things on walls. Yes, even art Colleges!

------
pg
This is not the generally accepted view of the cause of Venice's decline, to
put it mildly. Venice owed its power in the medieval period largely to
geography. When trade between Europe and the rest of the world was almost
entirely something that happened via the Mediterranean, Venice was the most
important port. After the Spanish and Portuguese discovered sea routes to the
Americas, Africa, and the Far East, that was no longer true. It would have
been surprising if Venice hadn't declined after that.

It didn't help, either, that at about the same time, the whole Italian
peninsula became a prize fought over by the now very powerful kingdoms of
France and Spain. City-states in general were becoming obsolete.

Maybe there is some sort of badness going on in the US, but almost any other
failing empire would have made a better example than Venice. There have been
few where the external causes of failure were clearer.

~~~
enraged_camel
Still though, civilizations usually collapse for more than one reason. The
discovery of alternative sea routes certainly contributed to Venice's fall.
But the thing is, if it wasn't for the Serrata, perhaps they would have enough
entrepreneurs to find other means of powering their economy. At the end of the
day, if you want to be able to solve difficult problems and make progress,
then you need risk-takers.

~~~
pg
I already listed two. If you want a third, add the Ottoman Empire.

Venice was a trading empire. Its empire became worthless. To bounce back from
that would have required a transformation unprecedented in history. In fact,
even knowing the history that followed, if I had been summoned back by time
machine to advise the council about what to do to repair Venice's fortunes, I
probably would not have been able to give them advice that would have worked,
short of telling them about all the scientific and engineering discoveries
that had been made since, and sending them off on a Riverworld-like future.

~~~
enraged_camel
I was going to mention the Ottoman Empire as well to support my argument that
civilizations collapse for more than one reason. In the case of the Ottomans,
the discovery of alternative trade routes definitely reduced the amount of
gold going into the coffers. But there were also many other problems, such as
growing income inequality and rampant corruption among the ruling class. These
economic and social issues eventually led to the stagnation of the empire.
Then competitors caught up and surpassed them technologically, which directly
translated into defeats on the battlefield.

That said, you're right that Venice was a trading empire, so losing that
competitive edge hurt them a lot more.

------
MordinSolus
Liberty produces far more equality than the pursuit of equality could ever
achieve, if I may borrow a line from Milton Friedman.

It really is the fault of us citizens that we've allowed our government to
grow so large and unaccountable. More accurately, we've allowed it to grow far
outside its constitutional limits. And we accept this and deem it necessary.
In fact, some of us still think it needs to be bigger to protect us from
calamities like the housing crisis! Yet we don't realize that it was precisely
the largeness of the government and its influence on the market and money that
caused the crisis.

All of this really does have its roots in the Great Depression. At the time,
people blamed the crash on capitalism when the real causes were anything but,
and as a result people were more than willing to let the government become
bigger so it could 'protect' them. It's unfortunate that we the people were,
and still are, so shortsighted.

On a side note, robber barons are largely a myth. As well, blaming the fall of
the middle class on globalization and technology is simply absurd; how would
we afford iPhones and all of the miracles of modern technology without
globalization and.. technology? You can't look only at one side of the
equation (jobs moving to China) without considering the other (much cheaper
products). While it may hurt certain workers when some kinds of labor leaving
the U.S., consumers as a whole benefit. Not to mention that people elsewhere
on the globe benefit from these jobs.

~~~
phillmv
1\. What constitutional limit?

>Yet we don't realize that it was precisely the largeness of the government
and its influence on the market and money that caused the crisis.

2\. Just how was _overregulation_ responsible for a massive price bubble?

>At the time, people blamed the crash on capitalism when the real causes were
anything but

3\. What part about your definition of capitalism excludes massive price
bubbles, followed up by the government of the time constraining monetary
conditions?

>how would we afford iPhones and all of the miracles of modern technology
without globalization and.. technology?

Well, I'm not going to argue against global trade. It's pretty great, and the
growth it's generated in China absolutely benefits the Chinese. Mass
exploitation of the labour force, hopefully, is a transitionary stage.

That said, we'd still have iphones. They would be a bit more expensive but not
_that_ much more expensive.

~~~
MordinSolus
> 1\. What constitutional limit?

The limits imposed by the Constitution. It's really not that mysterious of a
document. The interstate commerce clause might seem ambiguous, but it
certainly was never intended to be as abused as it is today. The existence
10th Amendment makes this even more obvious.

> 2\. Just how was overregulation responsible for a massive price bubble?

I'll be a bit more clear: we either need much less regulation, or a whole lot
more. Given how badly more regulation generally goes, I'd prefer less. We were
stuck in this awkward middle ground as a result of the Gramm-Leach-Bliley act.
It didn't get rid of the FDIC, but it got rid of certain regulations
preventing commercial banks from being investment banks (simplification). So
it basically encouraged risk taking by banks. Remove the FDIC, and you'll see
much less risk taking. So we really need to get rid of ALL of the Glass-
Steagal act. As well, we need to get rid of the SEC. By this sort of
deregulating, you discourage risk by making banks much more accountable to
their investors.

> 3\. What part about your definition of capitalism excludes massive price
> bubbles, followed up by the government of the time constraining monetary
> conditions?

My definition of capitalism, ideally, would not include the Fed.

> They would be a bit more expensive but not that much more expensive.

But would the lower/middle classes be able to afford them? Or as readily?
Given wages here, probably not.

~~~
phillmv
>But would the lower/middle classes be able to afford them? Or as readily?

I'm in favour of globalization. I agree with you that they'd be more expensive
(it'd be interesting to determine what percentage of the iphone's cost is due
to labour), I just don't think there's a moral argument to be made. Almost
everyone could afford a car, in America, in 1968. In real terms of quality of
life improvement in the grand scheme of things iPhones and computers are
probably minor inventions next to plumbing, central heating and the first
couple waves of mechanization.

>The limits imposed by the Constitution.

This assumes that a) the intent of the founding fathers was relevant to
today's society and b) their intent was to have a limited size of government,
both of which are pretty big assumptions. For more on the failings of
constitutional originalism see here:
[http://www.economist.com/blogs/democracyinamerica/2011/09/eu...](http://www.economist.com/blogs/democracyinamerica/2011/09/europe-
and-america?fsrc=scn/tw/te/bl/constitutionsandthecrisesthatwarpthem)

>I'll be a bit more clear: we either need much less regulation, or a whole lot
more.

Your conclusion does not follow from your premise. How would removing an
unrelated insurance corporation promote healthier decision making amongst
investment banks?

Poorly designed regulation does stifle innovation and thus growth. However,
there are certain kinds of innovations that prove to be too dangerous to be
handled without some safe guards.

It seems to me you possess a shaky understanding of 1) the events that led to
the FDIC and SEC, and Glass-Steagal 2) the events that occurred from
2001-2007/08 and 3) the cognitive pitfalls and biases human beings suffer from
when reasoning about risk.

~~~
MordinSolus
> a) the intent of the founding fathers was relevant to today's society and b)
> their intent was to have a limited size of government, both of which are
> pretty big assumptions.

Their intent for a limited size of _federal_ government is almost certain. And
I don't see how it's not relevant: our federal government is huge and almost
entirely unaccountable, and clearly is not functioning as it was intended.
From Federalist 45:

The powers delegated by the proposed Constitution to the federal government
are few and defined. Those which are to remain in the State governments are
numerous and indefinite. The former will be exercised principally on external
objects, as war, peace, negotiation, and foreign commerce; with which last the
power of taxation will, for the most part, be connected. The powers reserved
to the several States will extend to all the objects which, in the ordinary
course of affairs, concern the lives, liberties, and properties of the people,
and the internal order, improvement, and prosperity of the State.

The operations of the federal government will be most extensive and important
in times of war and danger; those of the State governments, in times of peace
and security. As the former periods will probably bear a small proportion to
the latter, the State governments will here enjoy another advantage over the
federal government. The more adequate, indeed, the federal powers may be
rendered to the national defense, the less frequent will be those scenes of
danger which might favor their ascendancy over the governments of the
particular States.

> How would removing an unrelated insurance corporation promote healthier
> decision making amongst investment banks?

Not unrelated. Gramm-Leach-Bliley removed barriers allowing commercial banks
to act as investment banks. That was my point: you can't remove these barriers
without also removing the insurance. Having the FDIC encourages commercial
banks to be much riskier.

> It seems to me you possess a shaky understanding of 1) the events that led
> to the FDIC and SEC, and Glass-Steagal 2) the events that occurred from
> 2001-2007/08 and 3) the cognitive pitfalls and biases human beings suffer
> from when reasoning about risk.

Feel free to correct me where I'm wrong. I think the housing bubble was
entirely avoidable had the government taken different action. I'm not saying
that it was ENTIRELY the fault of regulation. I do think that: deregulation
(including removing the FDIC and SEC), much less Fed fiddling in attempts to
'fix' the dot com bubble, and no bailouts or any implicit guarantees of
bailouts, and you wouldn't have seen the housing bubble.

~~~
phillmv
You're still making an originalist argument. Who cares what Alexander Hamilton
had to say about anything? He's dead.

To steal a quote from the Economist article I linked to above, suppose we fast
forward this conversation fifty years. Do we really care what James Madison
might have thought about which privately cloned human-animal hybrids could use
viral DNA material drawn from public health databanks?

No, of course not. This is a conversation to have amongst the living. How big
should the government be? Is a complex question with many stakeholders.

> Having the FDIC encourages commercial banks to be much riskier.

No, it doesn't - because when a commercial bank became an investment bank,
that insurance only applied to deposited accounts. If we define the risk
holders to be the people with deposits, then sure.

However, most people would define the bank investors to be the ones willing to
take risks. The shareholders, accordingly, were not protected by the FDIC and
got wiped out when these banks failed or merged into larger banks.

>I think the housing bubble was entirely avoidable had the government taken
different action.

Yes, but that's a tautology for a lot of things in the economy.

The financial crash was far too complex for me to try to recount here. There
is a wide range of incentives that could have been tweaked; but the bottom
line is people took far too many risks across far too many levels of the
economy. The end result was not caused by an industry forced into bad
decisions due to poor regulation. Investment banks were allowed to borrow too
much money relative to their capital holdings, and they were allowed to pour
their money into financial instruments that are computationally impossible to
accurately judge.

Removing the FDIC and the SEC would exacerbate the problem.

Here's some very accessible reading material, that I think you ought to brush
up on:

[http://www.npr.org/series/124587240/planet-money-s-toxic-
ass...](http://www.npr.org/series/124587240/planet-money-s-toxic-asset)
[http://www.thisamericanlife.org/radio-
archives/episode/355/t...](http://www.thisamericanlife.org/radio-
archives/episode/355/the-giant-pool-of-money)
<http://en.wikipedia.org/wiki/The_Big_Short>

------
lionhearted
After spending quite a bit of time outside of America, articles like this seem
strange to me. Not right or wrong in assessment, just... very American-centric
and lacking a lot of perspective (Venetian anecdotes aside).

I mean... pretty much everyone in America is rich. Stupidly ridiculously rich.
The working poor in America are fabulously fantastically stupendously
ridiculously rich compared to most of the world. I mean, staggeringly so.

It's like, as time passes, luxuries become conveniences become necessities...
and thus, there's always this keeping-up thing going on. But the majority of
American "necessities" are truly luxuries in, like, 2/3rds of the world's
eyes.

~~~
kamaal
Well if you really mention this you are likely to be badly admonished to keep
this to yourself.

I can't even imagine how anybody in the US can even describe themselves as
poor. I mean the definitions of poor so badly put down in this case, it makes
the actual poor look like they don't exist at all.

Sometime back there was a post here about blacks(in the US) in some place not
having good sanitation facilities. They were considered very poor. And they
had cars, good enough homes, food, electricity, roads, park and ask what not.
In my country they would qualify as very rich people(In India).

Its law of diminishing utility, a massive hedonic threadmill to describe at
the best.

~~~
seanmcdirmid
Its about social equity and respect. I remember a story where a redneck in
Appalachia made about as much money as a highly regarded doctor in Africa, but
the redneck was definitely worse off: he had no respect from the community,
his social contribution was very low, and very low self esteem, while the
doctor got to eat with the president of their country, had connections abroad,
and so on. The war against poverty isn't finished once survival needs are met,
people want meaningful lives, to thrive in society also and not just survive.

I very much admire Europe (or at least Switzerland) where the upper class
treats the working class with a lot more respect. Everyone is important, you
don't treat the guy at the fast food rudely, even if you have much more money
than them. Everyone's life seems meaningful and people are happy. Now, compare
this with China where I now live, where very little respect is given from the
middle class to lower-working class that cleans their houses, makes their
food, drives them around...

Edit: I didn't mean to use redneck here as a pejorative, it just seemed to get
the point across more quickly.

~~~
waterlesscloud
Semi-tangent. In 1989, I did the summer of backpacking across Europe thing.
Just before the fall of the Berlin wall, so there was still soviet control of
eastern/central Europe.

Anyway, I went to Budapest on that trip, and at the time it was common to be
met at the train station by people offering a place to sleep in their homes
for cheap. Me and some guys I was with at the moment took one of them up on
the offer and went with him to his apartment, $15 a night for the three of us.
It was a cramped little place, but in the city, so it was cool. We stayed up
late talking to the guy, and found out he was a doctor.

Which was a huge shock to me. A doctor living in a tiny little place and
letting tourists sleep on his couch for very little money. That (and the
flagship department store in Budapest being nearly barren by US standards)
convinced me that the West had gotten some things right, at least.

The guy did have a lot of books though, and asked me to send him some science
fiction books once I got home. I mailed him a bunch of cyberpunk. Wonder what
he made of that. Wish I'd kept up with him.

~~~
drumdance
I was just in Budapest in June, arrived via train, and there were at least a
dozen people offering room for rent. Don't know if any of them were doctors,
but the economy has been struggling there. We stayed in a really, really nice
hotel for about $100/night.

------
twoodfin
_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._

Shocking that income gains during a stock market rally (typically a leading
economic indicator) go to the investor class while employment income (a
lagging indicator) continues to struggle.

This is agitprop. Isn't there anyone other than Saez folks like the author can
cite? Saez could have put out a "study" to show that the rich took a real
bloodbath during '07-'08 while the middle class barely felt a prick for just
the same reason. But he didn't: he'd rather be a hack and win unending
favorable references in _Times_ thumb suckers.

~~~
JDShu
Saez's contribution to economics was a novel way to measure income inequality
of really small percentages (top 1%, 0.1% etc.) of the population. That's why
it's hard to find other studies. He wasn't "being a hack" he was doing
research in a topic that he found interesting. His work by the way, won him
the prestigious John Bates Clark medal so we can infer that his work is
respected in economic circles.

By the way, if you took the data from the census and measured wealth instead
of income, you would get a far more extreme differences in inequality. This
makes sense of course, since wealthier people have more money in the stock
market.

You are correct that the rich lost a lot during the stock market crash in
2008, but it similarly recovers quickly as the market rallied. Again, this is
a natural effect of wealthier people having more money in the stock market.

~~~
twoodfin
_Saez's contribution to economics was a novel way to measure income inequality
of really small percentages (top 1%, 0.1% etc.) of the population._

That may be, but income statistics like the one cited here don't require
anything novel: The IRS publishes everything you'd need to know.

~~~
JDShu
No it doesn't, that's the point. The IRS publishes the top 1% and I believe
the top 0.1%, but it does not cover the top 0.01% which you cited.

~~~
twoodfin
<http://www.irs.gov/pub/irs-soi/08in12ms.xls>

Try dividing the number of $10M+ earners by the total number of taxable
returns. You'll get a number surprisingly close to .01%.

~~~
JDShu
Yes, what Piketty and Saez did was a more sophisticated operation on IRS data
to get a time series so that we can measure exactly how the top 0.01% etc.
did.

Here's the link to the paper if you want the details.
<http://elsa.berkeley.edu/~saez/>

------
akamaka
The article seemed pretty cool until he started talking about the "$700
billion dollar rescue of Wall Street". Why do authors constantly love to throw
out this number without any context? It just makes me think that the author is
either stupid or full of crap.

Here's some basic info right from the Wikipedia page:
<http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program>

"The TARP program originally authorized expenditures of $700 billion [...]
reduced [...] to $475 billion. [...] total disbursements would be $431
billion. [...] $245 billion handed to U.S. and foreign banks. [...] $169
billion has been paid back."

And here are the latest numbers:
[http://www.forbes.com/sites/steveschaefer/2012/10/11/cbo-
upd...](http://www.forbes.com/sites/steveschaefer/2012/10/11/cbo-updates-tarp-
tally-24b-cost-to-taxpayers-14b-from-aig-bailout/)

"the latest update from the Congressional Budget Office projects the Troubled
Asset Relief Program (TARP) will ultimately wrap up at a cost of $24 billion."

"The ultimate losses from TARP will not come from that first round of
spending, as all of those initial bank investments have been repaid, but
instead from the use of TARP funds to help smaller banks (minimally), as well
as the extension of the program to pump $79 billion into automakers General
Motors and Chrysler and contribute to the bailout of insurer American
International Group."

~~~
ryanwaggoner
If true (I want to investigate more), this kinda blows my mind. I haven't
heard this from either side, and you would expect someone would bring it up at
some point. I've always been against the bailout, partly due to the cost, but
given how much we spend on the most ridiculous of endeavors, $24 billion
hardly seems a drop in the bucket.

I still am not in favor of the bailout because of moral hazard, but that's a
discussion for another time.

Thanks for this!

~~~
bmelton
Having seen only bits of the information in the wild, I was also impressed to
see the GP's summary there.

I had already known that many of the banks that received bailout funds had
already repaid it, but (as the GP mentions) for many of the smaller banks, but
I didn't know that the initial outlay came down to as little as $431 billion.

~~~
001sky
Have you counted what is on the Fed balance sheet?

------
AutoCorrect
So, the article is saying that government giveaways and government rule-making
is entrenching the rich even more, and it's the fault of the rich? Wow, what
perverse thinking that is. It seems to me that if the government made less
rules and gave away less of OUR money, there would be a more even playing
field. That doesn't mean NO rules, just a minimum.

The title of the article should be "Government and it's role in causing wealth
disparity".

~~~
tsotha
This. The problem isn't that the government doesn't have enough rules to
control business. The problem is the government is so involved in every aspect
of life it's become far more efficient to co-opt the state than to compete
with other companies in your sector.

For some reason people on the left think if only the government was _more_
involved, _this time_ it would work to rein in powerful people instead of
making them more powerful like the last 97 times.

~~~
chernevik
I once maintained that Senate Republicans on the Banking committee supported a
complex regulatory regime because their influence and status derived from the
value they provided helping banks navigate that regulatory apparatus. My left-
wing friends regarded this as the most cynical thing they'd ever heard, but
they didn't have much evidence or analysis against it.

Politicians want a powerful state because their power derives from their
influence over that state. They want their power to grow because no one is
ever satisfied with what they have.

If the US has a Serratta, it would be in the impossibility of doing business
without managing political relations, and thus the exclusion of people with
serious interests from any serious effort to reform the state. I'm not sure
we're there yet, but if we aren't we're dangerously close.

------
nathanmarz
The article only touches on lobbying, but that's the key mechanism by which
wealthier people gain an unfair influence on government. As campaigns have
gotten more expensive, the system selects for those politicians that raise
enormous amounts of money – people who cater to the lobbyists. Lawrence Lessig
did a phenomenal job breaking down the campaign finance / lobbying problem in
his book Republic, Lost: [http://www.amazon.com/Republic-Lost-Money-Corrupts-
Congress/...](http://www.amazon.com/Republic-Lost-Money-Corrupts-
Congress/dp/0446576433)

I also found the Lawrence Lessig / Jack Abramoff interview very illuminating
in understanding the corrupting influence of money on government. It's long
but worth watching: <http://www.youtube.com/watch?v=pkvIS5pZ0eI>

~~~
stretchwithme
We'd all be better off without winner-take-all elections. It takes money to
pretend to be all things to all voters.

------
adrianbg
"the libertarian writer Charles Murray blames the hollowed-out middle for
straying from the traditional family values and old-fashioned work ethic that
he says prevail among the rich"

"Following the June Seventeenth uprising the secretary of the Writers' League
had leaflets distributed on Stalin Allee where one could read that the people
had forfeited the confidence of the government and could regain it only
through redoubled efforts. Wouldn't it be simpler under these circumstances
for the government to dissolve the people and elect another one?"

\- Berthold Brecht

------
001sky
_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 $8 Trillion "bridge loan" that finances this? Split pro-rata, of
course, amongst the lower and middle class.

~~~
ryanwaggoner
Could you expand on this?

~~~
001sky
Yes. The main point is you need to follow both the asset base (how it is being
financed), as well as the ancilliary revenue streams (coming from the assets).
Its one thing to skew income to the group X. Its another thing to finance that
with financial contracts, being paid for by another group Y. The latter is
even more perverse from a perspective of social equity. Capitalism is (even
for its most ardernt, free-market supporters) premised on ~proportional
returns (ie, x% capital, pro-rata % share of earnings).[1] The liberal-left
position is that this should skew somewhat[2].

The illustrated example is worse than both, it skews _opposite_ , making a
"sucker" class of the general group Y. If you are in group Y (no matter if you
are on the right or the left), you should be thinking WTF, because it is not
only contradictory to both principles, it's all self serving to X (incl. both
left and right, etc).

______________

[1] Nuance: RAROC'd

[2] To the poor, or in this example to Y

~~~
ryanwaggoner
I agree with the fact that most of the benefits are going to X, but I'm not at
all sure that the cost is being borne by Y, where Y is defined by the poor and
middle class. I say this because the reality is that the poor and a big chunk
of the middle class in this country do not pay any Federal income tax, which
is where the cost of this will be paid from. The lion's share of this will
probably be borne in the end by Z, which are the upper middle class and
wealthy with earned income who pay the highest marginal tax rates and a huge
share of the tax revenue. In fact, the top 20% of households pay 94% of the
Federal income tax [1]. They're the ones who are going to pay for this
boondoggle, and while that does include hedge fund managers and Donald Trump,
it also includes dentists and professors and small business owners.

Of course, this is all just debt right now, so who knows what will end up
happening. But given the conversation happening in this country right now, I
can't see a big change in the 20% / 94% number above.

1\. [http://taxfoundation.org/blog/top-20-percent-households-
pay-...](http://taxfoundation.org/blog/top-20-percent-households-
pay-94-percent-income-taxes)

~~~
001sky
Understood, but I'm simply defining Y as not X. Within y, the distribution may
not itself be homogeneous. There is also the issue of the regressive (and
pernitious) nature of inflation on the Y.

~~~
ryanwaggoner
I was responding to this:

 _\-- The $8 Trillion "bridge loan" that finances this? Split pro-rata, of
course, amongst the lower and middle class._

I don't think it will be split amongst the lower and middle class at all
really. Upper middle class will end up paying for this. Unless you count the
potential for a long-term deleterious effect on our economy, in which case we
all get to pay for it :)

------
tomasien
The reality that "the tippy-top, of the economic pyramid who have been most
effective at capturing government support" is canon in my opinion.

I'm not insanely liberal or anything, so I don't want to go too far down the
road of "who does the government REALLY serve" - but the Constitution was
built around building a state that could enforce contracts. And for good
reason, but that reason was NOT that they were worried about serving the poor.

~~~
sillysaurus
You should expand on what you're trying to say, because you've said nothing
but started with a very interesting premise. So I'd like to hear more.

~~~
tomasien
So I think the best resource on this topic, by far, is Woody Holton's Unruly
Americans.
[http://books.google.com/books?id=w-IiCowd8_4C&printsec=f...](http://books.google.com/books?id=w-IiCowd8_4C&printsec=frontcover&dq=inauthor:%22Woody+Holton%22&cd=1#v=onepage&q&f=false)

But essentially what really motivated those behind the Constitutional
convention was the diminishing value of their assets under the Articles of
Confederation. Contracts weren't enforceable because the federal government
wasn't strong or effective enough, especially across state lines.

Man, this just reminds me of one of the truly amazing things about American
history: virtually the same people who wrote the Constitution tried to form
the country under a different set of documents, and it failed so thoroughly
that they TOTALLY re-did it (arguably illegally) 6 years later.

~~~
sillysaurus
That's very interesting. Thank you for the book reference!

If you have more time, would you philosophize on how all of this might relate
to present-day circumstances? (In addition to the topic of the original
motives for the constitution, it might be interesting to include some
discussion of what those those "at the top" could/should infer from history.)

~~~
tomasien
So the only thing I can say for certain is to remember that the rich always
benefit from the existence and strength of government more than the poor
unless that government is extremely hostile toward business. Despite some
rhetoric that is out there, that is extremely far from the case in the case of
the US government.

What the US government has almost always done a fantastic job at (not
necessarily above and beyond other governments, just in a vacuum) is creating
a system where financial transactions can occur without much risk (monetary
policy, moving off the gold standard frictionlessly, etc.) and where contracts
can be enforced. And that's business pretty much right?

The argument from there about taxes and regulation are details, and we can
argue about that all day. But they are details that are minor compared to the
ability to conduct business with confidence in a general since, not the slight
variations we see these days.

I'm a liberal, but it's for the above reason I supported the financial
bailout. If I fear for anything, it's either of those core securities being
diminished.

~~~
001sky
There is a lot of very good insight here, in particular the focus on
foundational economic institutions (ie, truth telling and promise keeping).
Even so far as the taxes and regulations being details (a couple percent here
or there, not a crisis).

The issue that we are facing though, is starting to become of another sort. It
is evidenced by the shift of wealth from the commercial centers to the DC
area. It is evidenced by 80% of government spending not being on running
government or protecting the population or even enforcing laws, etc. It is
evidenced by (what was quoted in the article) of goverment borrowing (and
printing money) to support the oligarghical too-big to fail banks. It is
evidenved by the nationalization of private sector debt via student loans and
via housing loan guarantees. It is evidenced by the failure to regulate
derivatives or split investment banks from commercial ones.

It is evidenced by "Economists" in the keynesian tradition who support
uncritical borrow and spend (as the answer to everything), all of which
provides stability but none of which provides actual earnings/power to the
working classes...etc. It just provides benefits to the rich and debt/taxes to
the poor. The "Liberal" current administration has underwritten the most
perverse transfer of weatlth from the poor/middel to the top, its almost
comical they pretend to be for anyone other than themselves. They make the Tea
Party, in Contrast, look almost perversely rational. There is too much fear.
In the Left. Of change.

------
efuquen
I'm always dismayed to read comments in HN when an article like this comes up
because their is always such a complete backlash against it. Don't get me
wrong, I saw problems with the article too, but I don't necessarily disagree
with overall premise and I find it sad that there isn't even an inkling of an
opinion of someone trying to defend it.

~~~
crucialfelix
It's kind of funny. The article is pro entrepreneurship, pro capitalist and
pro free market. So many here are taking it as an attack on success or the
rich. Theres a huge misreading of the article and a lot of attacks on minor
points and statements and nobody addressing the basic premise.

------
blackhole
The one fundamental error in this article is the assumption that money solves
everything. As many have pointed out, we spend lots of money on education - it
has had little to no effect on the quality of that education.

------
frozenport
Don't forget that the income gap in Venice was immeasurably worse then in the
USA today. Contrast the doge with the sailer who had nothing but a life of
indenture.

Although the income gap is fact, it is hard to say that America is become less
inclusive and hence I find it hard to support this author's argument.

~~~
mhartl

        immeasurably worse
    

I think you mean inequality was _higher_ , not _worse_. Executing all American
billionaires would lower inequality in this country, but it wouldn't make it
better.

------
tomasien
The iOS 6 maps reference is incredibly forced

------
Futurebot
Like the "education gap" explanations (and its solutions, like "more education
is the answer"), this explanation is about the last battle, not the current
one. It mentions briefly the role of automation (AKA "technological
unemployment"), but that's it.

The chief driver of unemployment in the future is going to be labor
automation, and that is that. The new battle lines are going to be over "how
do we get taxes - _and a culture that supports levying them_ - to the level
needed so we can supply a guaranteed income, universal healthcare, and
free/low-cost housing to support the mass of permanently unemployed, zero
marginal product (ZMP) workers that are going to be created over the next
20-30 years." Countries like Denmark have a real leg up on the US policy-wise
here, as they already have some of these things in place along with what
appears to be a populace that is fairly supportive of keeping them.

When you see someone under 10 from now on, ask yourself "what is the
likelihood that this kid will have a job 25 years from now?" The answer is
becoming "less likely every day." The world is only going to need so many
politicians, managers, programmers, and robot designers.

Even the hard-to-automate jobs (as per Autor:
<http://economics.mit.edu/faculty/dautor/papers>) are slowly getting
automated,and there won't even be jobs in "food service, cleaning and
gardening, health support, child care, personal appearance, security guards,
recreation, and miscellaneous services" for them to do. We should be thinking
about the current and next battle, not the previous one(s), though that's
(sadly) often the pattern when it comes to political economy.

------
kamaal
There are some errors in this article. Or I rather must say the author might
be unaware of the certain things that he is talking about.

>> Extractive states are controlled by ruling elites whose objective is to
extract as much wealth as they can from the rest of society.

and

>> That was the future predicted by Karl Marx, who wrote that capitalism
contained the seeds of its own destruction.

The world has changed drastically since Karl Marx, in fact so much that Marx
wouldn't ever recognize the world if if he were to suddenly thrown here. The
biggest change is the definition of wealth as a dynamic entity which can be
created and expanded with work. Unfortunately this didn't exist in the time
Marx, or even if it did- the access to such an activity was limited to only a
certain set of individuals.

>> You can see America’s creeping Serrata in the growing social and,
especially, educational chasm between those at the top and everyone else. At
the bottom and in the middle, American society is fraying, and the children of
these struggling families are lagging the rest of the world at school.

I laugh when people write things like these. I am an Indian, staying in
Bangalore. If you say the US is struggling, I would say you have no clue about
other parts of the world. You have no clue what struggling means, no clue what
hunger means, no clue what poverty or lack of education or health care means.
Think of it this way, even the poorest in the US would be like 10x better of
than the poorest in the other parts of the world.

>> Economists point out that the woes of the middle class are in large part a
consequence of globalization and technological change.

I would say these changes are good for the US and the world in general. A lot
of co operation and competition means things will move quickly.

>> Tolerance for high executive compensation has increased, even as the legal
powers of unions have been weakened and an intellectual case against them has
been relentlessly advanced by plutocrat-financed think tanks.

Sorry, is the word Tolerance the right word? It makes it sound like some sort
of a criminal scam is going around in those circles which every one needs to
put up with.

Sorry but the author seems to point what we generally call as 'Socialist
guilt'. The problem is people automatically label the ambitious, hardworking
and people who look for big rewards as greedy. This problem is an unfortunate
consequence of communism and to an extent socialism in general. Unless these
people are made to believe that there is inherent evilness in money and desire
for it, they really can't sell their philosophy. The direction in which a
communist thinks is to visualize money and in general wealth as a minimal
thing merely required for survival. And other things are also pushed, like for
example glorifying poverty- Promoting rationing of things etc.

The author fails to understand why there are 1%'s anyway. Which is that a
capitalist society believes the rewards are not fixed, but vary with effort
applied towards the work done to achieve goals. Its not like somebody just
called a person in the cabin and wrote them $1 million check. You are selling
something and somebody is ready to pay a price for it. This of course requires
working hard, taking risks and going through tough times to get there. Not
everybody would like to do that, because some people are just happy with what
they have now. But just because those people don't want a little extra, it
doesn't mean those who want it and earn must share their rewards with others.

The fact is nearly everybody wants to be rich, some just convince themselves
they don't want to after considering the effort they need to expend to get
rich. But later when they look at somebody getting rich, they just happen to
either proceed with all this drama.

Unless you are ill, or disabled or limited for another genuine reason can't
work to get successful, you just can't blame somebody else for your problems.

~~~
phillmv
You're missing the point entirely.

The point is, the process which you describe above where pluck and hard work
will get you everything is only possible in states whose ruling structure is
inclusive and not extractive – i.e. you can open a business without having to
belong to the aristocracy.

The analogy being drawn is that the oligarchic elite in western societies are
increasingly seeking ways to patrimonialize the state and whether consciously
or not move towards an extractive structure.

You require far less pluck and hard work to succeed if you belong to the
contemporary 'landed nobility' and, on a vast institutional level state
incentives are being redrawn to reward incumbent elites in one way or another.

~~~
kamaal
I absolutely agree.

And its not that very different in India either. To give you an example, being
born into a rich family absolutely has some benefits and that is undeniable.

My point is how is that default advantage the rich have, a disadvantage to the
poor? Unless the poor want it to be, it really can't be. And here is where
things go wrong, agreed that no one gets a level playing field and game itself
isn't fair to even begin with. The moment you enter the game the advantage is
already favoring the rich.

But what the game does offer is a way forward to improve your chances of
winning if you play well along.

Besides it will be nearly impossible in system of economic set up to create a
level playing field at the very start and I don't even think that should be
the aim of any economic system either.

~~~
phillmv
>The moment you enter the game the advantage is already favoring the rich.

If you're progressive, the idea is to try to level the playing fields
somewhat. We don't have to equalize them, just try to improve everyone's odds
a little bit.

>My point is how is that default advantage the rich have, a disadvantage to
the poor?

Because the more of the total percentage of economic activity gets captured by
an oligarchy the less is available for everyone else.

Further more, the issue at hand is that across the west we're enacting
policies that make tilt the balance even more towards elites.

~~~
kamaal
>> If you're progressive, the idea is to try to level the playing fields
somewhat. We don't have to equalize them, just try to improve everyone's odds
a little bit.

Correct, but I believe that will come through opportunities. The poor will be
given opportunities, but however remember using them and converting them to
goodness is really their responsibility. And as a rule of thumb, opportunities
always present themselves in the form for some work.

I would believe US is far better of at this than any other country I know of.
Correct me if I'm wrong, but don't you people have county schools which are
free? Don't you people now have some form national healthcare system? Don't
you have social security? I would already consider these as very big
advantages compared to many other countries. I mean the government can
practically support you when you go broke, and then of course its up to you to
take it from there.

>>Because the more of the total percentage of economic activity gets captured
by an oligarchy the less is available for everyone else.

True only if the percentage of wealth created at any time static, which it is
definitely not.

>>Further more, the issue at hand is that across the west we're enacting
policies that make tilt the balance even more towards elites.

I think any economic system should reward getting wealthy, because that is
good motivator to create more wealth.

~~~
phillmv
>I would believe US is far better of at this than any other country I know of.

It's not a leader overall. It may have the most billionaires, but if you're
looking at average outcomes you're probably best off in Norway.

>I think any economic system should reward getting wealthy

Absolutely. It doesn't work nearly as well otherwise.

>The poor will be given opportunities, but however remember using them and
converting them to goodness is really their responsibility.

Responsibility _and_ availability of opportunities. The more opportunities,
the more people benefit. We're talking about increasing the pool of
opportunities.

~~~
twoodfin
_We're talking about increasing the pool of opportunities._

And what are the progressive schemes for doing that?

~~~
phillmv
Standard social welfare and insurance comes to mind. There are many possible
policies, but that's the outlook at least.

------
yehia
These comments aren't taking into account the deterioration of the quality of
teachers. One reason for this is due to smart women leaving the field in the
'70s when the rest of careers opened up to them. My sister quit teaching
English and became a lawyer. She earned a lot more and got a lot more respect.
And, yes, in order to attract those people back to teaching the country will
have to pay a lot more. These women have options and they walked.

Further, there is a serious problem with the fact that classroom discipline is
so compromised by unruly students that many competent teachers no longer want
to be with these children. This is not just in the US. I was in Chile last
year, taking an ESL teaching class, and watched a video of a Chilean teaching
English to a class of 10 year olds. The whole room was in complete chaos.

An older man in the class with me who was my age (early 60s) had been a
teacher and said that the video depicted why he would no longer go into the
classroom. Curiously, the 2 younger students in the class, recent college
grads, felt we didn't accept normal in students. Well, the new normal is
devastating to learning. Parents are responsible for this mess.

Christine

~~~
sjg007
The way we will mitigate this is expanding things like Teach for America.
Basically, the gov't will start canceling student loan debt based on years of
service. You can imagine a scale from 2-10 years. They already do this for the
medical research field. That's the only way. It will be a "hidden" indirect
cost.

------
sbierwagen
pg's written a couple essays defending income inequality:

<http://www.paulgraham.com/gap.html>

<http://www.paulgraham.com/gh.html>

~~~
EricDeb
In response to PG's article - I think most people would agree that wealth
creation is a talent like any other. I think where people have a problem is
that the particular talent of business and wealth creation buys so much more
influence in society compared with being in the top 1% of teachers, policemen,
academic researchers, or even programmers.

Furthermore, pg suggests that those who get rich innovate and drive society
forward, which I agree with. Unfortunately this seems to be the case for only
a minute portion of those who are rich. Most of the best and brightest are
doctors, dentists, lawyers, and investment bankers. The smartest pursue these
avenues not to push society forward, but to gain the influence that assured
wealth provides.

Innovators (Peter Thiel's 0-1 innovators, not 1-n) absolutely deserve the
highest possible influence in society - fame, status, and wealth - because
they push society forward and raise the standard of living for all. On the
other hand, the top 1% of doctors, lawyers, investment bankers, and non-
innovative businessmen gain a disproportionate amount of wealth without
contributing to society and in my opinion should not be valued tremendously
more than the top 1% of programmers, teachers, or biologists.

~~~
rayiner
Peter Thiel runs a hedge fund and most of his successful investments have been
advertising-industry web startups. I'm not sure how much that really pushes
society forward. At least Elon Musk is doing something truly socially useful
with his money.

I suppose my brother and I are great examples of your point: I left
engineering to become a lawyer, and he took his physics degree to an
investment bank. More money in law and banking. But is engineering or
programming really more socially valuable, as practiced? Like many engineers,
I used to work in defense contracting--I feel someone more socially valuable
as a lawyer, and that's saying a lot. Where does a talented programmer go
these days? Silicon Valley? Where the big, world-changing work everyone seems
engaged in is exploiting private information for advertising profit? I'm not
sure if I believe that's any better for society.

~~~
001sky
You're dismissing paypal, which is the sin qua non and an actual 0,1
innovation. Thiel was also a lawyer by trade, who went into entreprenuership
to do something useful. His investments in FB etc are also thru his vc fund,
not his macro-hedge fund (clarium). These are details, but important.

~~~
rayiner
You're right, I'll give him Paypal. But I don't see the distinction between VC
and macro hedge funds. Are you saying VC are socially useful?

~~~
001sky
Before the mid-1990s VC in fact were responsible for a lot of 0,1 type
innovation. Intel, Apple et al. Wall street was not set up to provide asset
lite companies debt. Nor was it set up to take public equity deals of early
stage, cash bleeding, negative gaap earning early-stage companies. So they
filled a market gap, and enabled new deals/businesses to get done.

Since then, the increasing sophistication of general market participants has
commoditized everything about VC, except for perhaps certain elements of
information flow. In that regard, you are right, that a stage agnostic hedge
fund and/or a $NBillion VC funde start to look alike.

But Remember Thiel was in FB as an <Angel> in 2004. Clarium itself was a macro
fund, taking positions on open public markets. They are actually quite
disctinct lines of work. Its not like clarium was doing later stage VC or PE
deals either (from my recollection).

Lastly, someone needs to write the contracts in a free market economy. So
Legal and Finance guys are socially valuable. The underlying issue, however,
is are they abusing or overleverageing their (privleged) position in the
economy to extract opportunistic rents. See, eg.

> <http://en.wikipedia.org/wiki/Opportunism>

That's an argument (perhaps for another day), because it is more an
ethical/cultural/policy discussion and comes down to how people are
educated/brought up, their values, etc. That kind of thing varies from decade
to decade, from firm to firm, etc. Arguably, right now across all of what used
to be the professions, we are losing the partner _ethos_ , and replacing it
with arguably a more a-moral, and mercenary one.

------
christkv
I found Niall Fergusons last lectures to be quite eye opening in regards to
possible reasons to the wests apparent decline and what is driving it.
www.bbc.co.uk/programmes/b01jms03/episodes/guide

------
tokenadult
This New York Times Sunday review opinion essay, "The Self-Destruction of the
1 Percent," is an interesting read and has prompted a very interesting set of
comments here on HN overnight in my time zone. As I turned in yesterday, the
top comment was by kamaal, pointing out that India provides a useful reality
check on some of the assertions about the United States in the article. As I
woke up this morning, the top comment was (and is) by acslater, posted not
long after kamaal's comment, pointing out that United States public schools
are well funded by international standards. Can both comments be true? Yes
they can.

I agree with the main claim of the submitted article that a society in which
many people have opportunity to make it into the top earning echelon of the
society is a better society all around. "Like all open economies, theirs was
turbulent. Today, we think of social mobility as a good thing." And I still
think of social mobility as a good thing, having lived in more than one
country in my life. International rankings with annual revisions produced by
nonprofit, nongovernmental organizations reveal that the United States enjoys
huge advantages outside its government-operated school system. One of those
advantages is an exceptionally high level of political and economic freedom
for ordinary citizens and residents, as reported in The Freedom House rankings
of countries by freedom (both political and economic):

<http://www.freedomhouse.org/report-types/freedom-world>

Another advantage the United States has for progress and prosperity is low
level of corruption in private business and government as reported by The
Transparency International rankings of perceived public corruption:

<http://www.transparency.org/research/cpi/overview>

Both of those societal advantages continue to draw into the United States
bright, high-initiative persons from around the world who received their
primary and secondary schooling in other countries.

It is simply a matter of fact that public spending on government-operated
schools in the United States has long been high by world standards.

[http://usatoday30.usatoday.com/news/education/2003-09-16-edu...](http://usatoday30.usatoday.com/news/education/2003-09-16-education-
comparison_x.htm)

"'There are countries which don't get the bang for the bucks, and the U.S. is
one of them,' said Barry McGaw, education director for the Paris-based
Organization for Economic Cooperation and Development, which produced the
annual review of industrialized nations."

[http://economix.blogs.nytimes.com/2010/12/08/education-
spend...](http://economix.blogs.nytimes.com/2010/12/08/education-spending-and-
those-international-test-scores/)

"As you can see, the United States is exactly on the line of best fit [on a
scatterplot of country GDP and country means on reading test scores]. American
students scored about as well as you’d expect them to if all you knew about
them was their average standard of living.

. . . .

"So if money doesn’t appear to have a strongly predictable impact on students’
test scores, what does?

"How educated their parents are seems to play a bigger role."

From "America's Assets" section of the OECD report "Strong Performers and
Successful Reformers in Education: Lessons from PISA for the United States":

<http://www.oecd.org/pisa/46623978.pdf>

"One of the American assets is the amount of money American citizens are
willing to invest in public education – more per student than any other
country save one. This means that there is a lot of room to get better
performance by reprogramming what is currently being spent."

Eric Hanushek, an astute economist who has many peer-reviewed publications in
a variety of journals about education evaluation and education reform in the
United States and other countries, has repeatedly examined the vexing issue of
teacher quality and how to measure it. His latest publication on the issue,
"The Distribution of Teacher Quality and Implications for Policy" Eric A.
Hanushek, Steven G. Rivkin, September 2012, Annual Review of Economics, pp.
131-157,

[http://hanushek.stanford.edu/sites/default/files/publication...](http://hanushek.stanford.edu/sites/default/files/publications/Hanushek%2BRivkin%202012%20AnnRevEcon%204.pdf)

points out that variance of teacher quality within each school is generally
much greater than the mean quality of instruction differences between schools.
The paper examines what data are necessary to fairly assess "value added" of
individual teachers in classroom service.

Hanushek's article "The Economic Value of Higher Teacher Quality," Eric A.
Hanushek, June 2011, Economics of Education Review, pp. 466-479

[http://hanushek.stanford.edu/sites/default/files/publication...](http://hanushek.stanford.edu/sites/default/files/publications/Hanushek%202011%20EER%2030%283%29.pdf)

provides evidence supporting the proposition that simply encouraging the
bottom 5 to 8 percent of teachers currently in service in the United States to
change occupations, replacing them with teachers of average effectiveness,
could move the United States, with its current diverse population, to near the
top of international mathematics and science rankings and add trillions of
dollars of economic growth to the United States economy.

So to the point of the submitted article, yes, let's make sure that ALL young
people in the United States (and everywhere, for that matter) enjoy
schoolteachers who are effective at teaching, societies that are free,
governments that are not corrupt, and thus upper economic classes that are
open to new participants. That will help all of us and all of our children and
grandchildren prosper.

------
avoutthere
Marxist tripe.

~~~
msellout
Capitalist tripe?

------
ktizo
This article is fairly myopic and overly congratulatory about the history of
the US. Phrases such as:

 _"The history of the United States can be read as one such virtuous circle."_

 _"Historically, the United States has enjoyed higher social mobility than
Europe"_

 _"IN the early 19th century, the United States was one of the most
egalitarian societies on the planet."_

 _"For Jefferson, this equality was at the heart of American exceptionalism:
“Can any condition of society be more desirable than this?”_

Would seem to completely ignore the history and even the existence of African
Americans and their experiences in this supposedly classless society.

