Income-Inequality Whiners Are Today's Neo-Marxists

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Earlier this week I mentioned a recent study commissioned by NASA's Goddard Space Flight Center that focused not on rocketry, physical propulsion or even the broader topic of a grand unified theory of physics. Instead, the government agency purportedly dedicated to human flight broke out its interest in economic equality of the kind you would find in a symposium on Marxism. The day after I wrote about that curious correlation, a former top advisor to Vice President Joe Biden, indeed one of the "voices" that helped craft the ARRA "stimulus" bill, confirmed his Marxist bona fides.

In testimony to Congress, Dr. Jared Bernstein was asked by Rep. Mick Mulvaney (R-SC) whether he was generally disposed to favor the statement, "from each according to his abilities, to each according to his needs." Dr. Bernstein answered, apparently in earnest, that he viewed the statement "generally favorably."

The last vestiges of the Soviet Union were swept away more than two decades ago, but they are being reconstituted slowly in various capacities. While Vladmir Putin seeks to recreate, allegedly, the physical structure and stature of the "evil empire", its core philosophy is catching more and more as economic malaise grinds the current system asunder.

Where Martin Wolf recently and openly extolled the heavy redistributionist idea of a guaranteed minimum income (from the state, not the government), essentially appealing to the nineteenth century race-neutral version of slavery, we also have a prominent "economist" making significant noise with his "new" contention that Karl Marx, "wasn't wrong, just early." Thomas Piketty's new book, Capital in the Twenty-First Century is another flavor of exposition about just such redistribution.

Marx's basic philosophy on capitalism was that it had already fashioned the rope in which it would inevitably hang itself. The concentration of wealth that had to follow from capitalistic systems would create, he believed, indelible contradictions that would tear the system apart from within. The true communist revolution would be waiting for that moment, to rebuild from the decimated remains.

Unfortunately for the Marxists, the good workers' paradise had too long to wait - the capitalist rope was far longer than he ever anticipated. The reason was simple too, as the concentration of savings in the hands of the wealthy was not a fatal flaw, but only a misunderstanding of the relation between economy and time. In other words, just as the Fabian Society and John Hobson did in their statist contributions and solutions to a problem that did not exist (at least not as they conceived it), the savings of the wealthy actually served an invaluable service to both the poor and the economy at large.

Nathaniel Hawthorne famously noticed that "families are always rising and falling in America", in that there is dynamism surrounding not just innovative advances, but into wealth itself. The phrase "new money" had a plain meaning in the time of Hawthorne as much as it does today. It takes no abstraction to understand the implications of these factors, only an appreciation for individualism and meritocracy (flawed as it may be). Ralph Waldo Emerson provided the basis for the early 20th century corruption of phrase that used to be both common and self-evident, "build a better mousetrap, and the world will beat a path to your door."

That was the energy and vitality that Marx and his descendant strains could never seem to grasp. The American capitalist spirit unlocked the mobility that renders such focus on inequality futile and unseemly. This meritocratic redistribution provides both economic efficiency and hope, in real terms rather than dour sloganeering, in that whatever the inequality of one moment will be displaced by something else the very next. And in each cycle of displacement, the inequality remains between the top and bottom, but the entire system ratchets forth in the upward slope of rising living standards. Do we really need to be reminded that in 2014 the "poorest" among us are just as likely to be obese as the rest?

For all that positive energy and advance, something has to be called to account for the current and stubborn dislocation. This progression of apparent Marxist appeal (or if not direct appeal, then attention) and renovation is not an idle fascination or it would be limited to the university class settings that it never left. There is widespread dissatisfaction that punctures a status quo that is painfully ill-suited to the task. For example, it used to be common knowledge that minimum wage jobs were also a temporary placement in the hierarchy of the income spectrum - you never really expected to stay at the bottom, nor was that expected of you.

In this "recovery" that has all changed, the equation is off and the spin of economic function has taken a seemingly new axis. The ire of the first major incarnation of this new Marxist fascination, Occupy Wall Street, was, I think, at least thoughtful enough in its eponymous target. There was and remains an obviousness in the game of inequality politics in demonizing the big banks, not the least of which is their durable unpopularity. "Too big to fail" cuts against every known fabric by which the capitalist system has forestalled those Marxist expectations of apocalypse. It is more than unfair; there is an unsettling nature of a kind of financial fascism to that arrangement, as if banking has obtained a pedestal unique in history.

There is more than a little truth to that, as even a cursory reading of the 2008 FOMC minutes can attest. The 21st century bank is nothing like the one that sets far back out of sight in the tales of Hawthorne and Emerson - were they mentioned at all. Sure, the Morgans and Mellons took on the air of drama in their age, also noted for the rise of Progressivism in the US on the same appeal to inequality, but banking has been for most of its history beyond boring. That was especially true of the multi-national bank variety.

The modern bank is a slippery creature, particularly those in the upper strata. In the case of MF Global, for example, its ultimate bankruptcy disrupted the supposedly settled idea of property law. MF Global was largely a commodity trader, meaning it bought, sold and "stored" physical goods on behalf of its customers. That would seem to place the "bank" within the realm of property law rather than securities law. After all, though the investors were conducting transactions in paper futures markets, the ultimate settlement of those futures were in goods - physical property.

What forced MF Global into bankruptcy was not its brokerage unit, but its proprietary trading and balance sheet accounting. The modern bank, again as distinct in operation, seeks to both provide financial and property services to itself and others at the same time. The means for it to do so are the legalese openings provided by financial terms like risk. Banks have found over the past four decades a sudden and profound "need" to offset embedded risk through hedging, a perfectly legitimate activity in its own right. But where this grew dark was in crossing the line from serving customers and hedging risk created by that service to intentionally speculating through that window.

The bankruptcy procedure through the CFTC recognizes this property law distinction. Subchapter IV of the Chapter 7 Bankruptcy Code was specifically written for an MF Global-type event.

"A fundamental purpose of these provisions is to ensure that the property entrusted by customers to their brokers will not be subject to the risks of the broker's business and will be available for disbursement to customers if the broker becomes bankrupt."

The plain language of the code even specifies the word, "property." But MF Global was never placed in Subchapter IV, instead being brought into liquidation under SIPC. That was wholly different in that MF Global's assets were treated not under property law but securities law. That is why investors that thought they were extended such property protections instead had to wait out the sorting of rehypothecated "collateral", an element indistinct of anything but pure finance. That legal designation applied as much to gold accounts as others.

There is a whole lot of legal opinion incorporated in the MF Global case, and not an insignificant amount of very cutting and even reasonable conspiracy theory. From the outset, there is a distinction between futures markets and actual property, though that kind of transaction straddles both. Under the CFTC rules and procedures, the futures market is supposed to operate like a physical equivalent, but anyone participating there better know that this is at best a hybrid. This is not to say that those unfortunate investors that were tied up in the unseemly mess deserved their fate, far from it, only that there is a vital distinction here where a window was open to change property into finance. In that disaster we see exactly the change in character where banks have undertaken a leading position in the order of arrangements. To think that this has no wider and downstream effects in the real economy is to be blind.

The direct historical analogy here is global trade, the underpinning of much of this capitalistic salvation from poverty, rendered under some combination of gold standard of exchange. In the past systems of the various gold standards that meant banks in London, largely, moving physical bars of bullion from one vault rack to another. If Saudi Arabia wished to sell oil to Brazil (companies from each country, more specifically), the bank in London was only needed as a clearing agent. It played no more important role than that of an accountant with a big vault and a gun to guard it.

In such a schematic arrangement, the bank served primarily as nothing more than a custodian of personal property. Money, properly understood, is exactly that - property. There is no need to introduce financial elements into the transactions as they are all perfectly self-extinguishing and also fully comprehensible to all parties. If finance were to intrude, credit might be extended on intimate knowledge of the arrival of other significant deliveries of money as property. The bank is a servant in the realm of physical money, even in the situation where physical property is currency rather than money.

That all changed in the 1960's. Ironically, the introduction of technology allowed the exchange of ledger balances, transactions that needed no physical settlement, thus rendering clearing even more mechanical. But introducing widespread "ledger money" meant also a break in the limitations supplied by money as physical property. If money is solely property, the bank can never be anything more than a property agent providing a clearing and custodial service, a systemically minor task. However, breaking the physical limitation was the transformation that made the desires toward potentially unlimited finance possible - what was transformed was the balance between banks operating in finance and those operating as custodians.

Once money is transformed into something intangible, the bank is also transformed in both function and situation - the balance between finance and property custodian was obliterated, as banks became largely all the former at the expense of the latter. We saw exactly this process in the late 1960's and early 1970's, as eurodollars took on an increasing role in global trade settlement - and the only realistic means of settlement after 1971. But in the eurodollar market, ledger money is the sole and predicate resource foundation, meaning banks are not clearing via physical transactions, but rather extending credit and providing "risk transformations." The bank moves from the background to the forefront.

Under such an economic system where finance dominates in both scale (at the margins) and political priority there can be but one result - the very inequality that creates such noise today. The vital difference here is that there is no better mousetrap to create that corrective mobility and dynamism. Financial-driven inequality is sclerotic because of its narrow constructions; the monopoly of "currency" provided by political cover destroys all means of competition. And any competition that might result from inside the financial system is rendered at least incomplete via "too big to fail" and the ease at which those at the top swallow up any financial "gazelles."

That means that the character of inequality, that is inherent in all human systems and endeavors by nature itself, is fundamentally transformative in the financial version outside and separate from the capitalist version. The economy will not break free of malaise as long as this imbalance is allowed to persist, as far too much of resources are expended in the service of nothing but finance.

If you revisit recent empirical data for economic accounts, particularly the past twenty years in the US and the past twenty-five in Japan, you see exactly this kind of result. While there was a major fuss a few months back when Larry Summers introduced his negative natural interest rate idea the trajectory and history of economic accounts bear out something that would look like a negative natural interest rate (in an orthodox interpretation - the negative natural interest rate is the balancing factor in an equation to create what really looks like a downward slope to economic potential). Intuitively, that runs through concepts like Minsky described where it is obvious that credit and finance saturation exhibit diminishing returns over time. There is a limitation to financial dominion because the sheer scale of its attainment of such a pre-eminent position necessarily requires massive misallocation (see China).

That ends up looking like the very inequality that Marx warned would be fatal. Thus the new Marxists appeal to statist redistribution as a cure to what they see as capitalism. And, unfortunately, many erstwhile friends of capitalism embrace the financialism and all its statist redistributionist tendencies. Capitalism is thus left completely off the table holding all of the blame.


Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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