Over the course of the last nine months, I’ve been keen to emphasize that part of COVID-19’s legacy will be the extent to which the pandemic not only laid bare the fragility of the world’s largest economy, but also exposed the overlapping nature of the myriad inequities endemic to American society.
That, more than anything else, is the takeaway from 2020, which, despite delivering a financial windfall to the richest members of society (figure below), will be remembered by many in the working class as the worst year of their lives.
The top-10 richest people on the planet gained an astounding $320 billion on paper from January 1 through December 8, according to Bloomberg’s data. Elon Musk’s net worth ballooned by $129 billion over that period.
This isn’t an anti-billionaire rant. Far be it from me to begrudge anyone their wealth. Someone else’s finances are irrelevant to my own situation, so when I discuss rampant inequality and the extent to which the system as it currently exists is guaranteed to perpetuate it, it’s usually from a kind of socioeconomic theory perspective.
That said, I do advocate for policy prescriptions aimed at reducing inequality, but not for the sake of it, rather because the system as it exists simply isn’t sustainable. For all the normative overtones in my work, I’ve been described by those who knew me in previous “lives” as an almost pathologically amoral individual. I don’t generally concern myself with the relative “rightness” or “wrongness” of things, unless the situation admits of objective analysis. In most cases, normative discussions aren’t amenable to objective treatment, but I draw a distinction in three areas: 1) Matters of discrimination based on race, 2) Inequality of opportunity, and 3) Societal conjunctures that are destined to result in conflict to the detriment of the polity. Those are objectively “bad” things.
As discussed at length here on Monday and on countless other occasions, the pandemic created widespread economic precarity, and that tends to feed on itself. In America, it’s commingled with discrimination based on race and gender. The end result is a self-fulfilling prophecy defined by ongoing socioeconomic deterioration. That, in turn, raises the odds of conflict, especially when those who seek to address the situation in ways that would bring about transformative change aren’t allowed to pursue their agenda, even when they manage to get a seat at the table.
In July, Deutsche Bank’s Aleksandar Kocic described the world as “sitting at the intersection of five major crises, each one capable of changing the future course of the economy in a profound way.” Those crises are the pandemic, the economic downturn, social upheaval, political friction, and environmental decay.
What we’ve come to realize in 2020 is that these crises are inextricably bound up with one another. In his 2021 outlook, Kocic revisits all of this in the opening section, before digging into the ramifications of policy for rates volatility.
Regular readers are aware of my affinity for Kocic’s work. His ability to incorporate concepts from various disciplines into rates strategy is quite something to behold, and his latest is no exception.
“The pandemic exposed the degree to which society functioned from one paycheck to the next and uncovered the intrinsic fragility of the entire social and economic system,” he wrote Tuesday, adding the “the crisis has become effectively a multidimensional problem of convexity management.”
This time, the situation is far more acute — the scope far wider — than 2008. As such, the policy response must be commensurately more robust. “Fiscal injection, the main arm of policy response, is aimed at covering the underlying social deficits, but that maneuver requires a highly coordinated monetary policy adjustment as a supplement to contain its potential side effects,” Kocic said.
But this is no panacea. “This is not equilibrium — only a way to buy time,” Kocic remarked.
While monetary-fiscal “partnerships” may the be wave of the future in terms of engineering outcomes deemed more optimal for society, Kocic goes one level deeper.
“The coalescence of the underlying risks, which has created a precarious sociopolitical configuration of intersecting economic and social crises, has exposed the erosion of the implicit bargain by which people accept damage to society or the environment in the pursuit of progress, while faltering growth brings disappointment to those with rising expectations,” he wrote.
That’s a crucial observation and speaks to any number of dynamics currently working themselves out (or tying themselves in even tighter knots) across both the developed and emerging worlds.
Objectively undesirable side effects are tolerated based on justifications that center around the assumption of steady progress. But if that assumption doesn’t hold, or if the progress is there, but the benefits disproportionately accrue to a smaller and smaller subset of the populace, the bargain begins to look like a bad deal.
“These conflicts are reflected in an escalation of political tensions forcing elected political leaders to manage the underlying discontent,” Kocic went on to write, before delivering the following incisive, not to mention foreboding, assessment:
It appears as if there is an urgent need to reconfigure the whole socioeconomic system in a way that harmonizes with the needs of both the economy and society. The main objective of current politics in the short run is to decouple the two crises by any means necessary. In the absence of other solutions, this aspect could take center stage and compound problems further. If this effort fails, it could become just the beginning of a bigger transformation to take center stage in the coming years.
As I put it earlier this year, the ongoing crisis is multifarious, with countless points of intersection.
It’s a kind of Venn diagram that, if only we could comprehend it, would describe a historic period of economic and societal upheaval.
Are you familiar with Peter Turchin?
Oh, and don’t forget about Tainter.
The fact that some people can accumulate billions of dollars in wealth actually does bear on everyone else’s well-being. All of human history indicates that wealth exerts power, and power brings wealth. When we have extreme wealth, we tend to have extreme concentrations of power — regardless of any democratic tissue of deception layered over that fact.
While from an historical perspective I generally agree that wealth leads to power, more recently I would say wealth only supports the ability of the wealthy to make things more comfortable for themselves. Seriously, what, if any, real power has Bill Gates’ wealth brought him? Is he a government unto himself? Little evidence I’ve seen. Bezos has a major newspaper in his quiver but does he have the kind of power once held by Carnegie or Rockefeller once held? Bezos’ firm has your info and can suggest, but not control, what you should buy but is he really involved? Does that info collection arise from his wealth? I’m not sure billionaires have all that much power as they did in the past. Who does have real power, the power to hurt people and determine futures with his own hand is the sociopathic majority leader of the US Senate, the great god Mitch. That’s real power, make no mistake!
Particularly in a low yield world, wealth is more about assets and less about income. Addressing the wealth disparity should entail nominal (i.e. small at +/- 1% or less) annual valuation taxes on all assets not just real estate, plant and equipment, vehicles, etc. Most current annual valuation taxes are administered by local authorities. As stocks, bonds, private equity interests, etc. are quite mobile, these should be taxed at the national level. Suddenly all that stock held by Jeff Bezos, Elon Musk, etc. will be generating some annual tax revenue (and suddenly, dividend yields will become important again as these will be necessary to pay such valuation taxes).
Yes. Gates and Buffett have never paid taxes on most of their appreciated stock holdings (tens of billions of dollars).
So, in a way, they never got to enjoy that wealth.
The deeper question would be – since they don’t need it, why do we let them have any of it?
I never liked that idea of taxing financial assets.
Don’t get me wrong. I’m all for taxing the wealthiest among us and quite heavily too. Certainly more than your proposal. But 1% per year on stuff unrealised? OK. What happened in the years the stock market goes down? They get a refund? How much? 1% or whatever accumulated taxes they paid till it compensates what they just lost?
I’m not sure how to organise an ideal tax system. But I think (suspect?) the best practice would be to tax only at the source of wealth creation (i.e. companies) and, ideally, tax their added value rather than strictly profit (or revenues). This is trying to get at the idea that taxing revenues is a bad idea since a big corpo with lots of revenue can be losing money but, otoh, taxing profits only allow for too many gimmicks in defining said profits.
A wealth tax taxes wealth – a given percentage every year for anything above a threshold. If you become less wealthy the amount you pay reduces. No need for refunds.
Still strikes me as unfair to tax an unrealised P&L. You’re/the taxman is inviting yourself/himself to the upside but skip town on the downside. Head, you win, tail, I lose. Not a good trade.
I prefer heavier taxation earlier, leaving cap gains untouched, if we’re honest.
People bring up wealth taxes often, but they are on somewhat shaky ground constitutionally. I doubt the current court would let one stand. Trying to pass an amendment has never been easy and seems especially so now.
I think the focus should be on realistic solutions like using the income tax and fixing crossborder tax treatment (transfer pricing, etc.)
Not to say I don’t like the idea of a wealth tax, it gets directly at the heart of the inequality problem. It violates some norms about taxing someone when they might not have the cash on hand to pay it, but I’m sure something could be figured out.
I am a hopeful person but if McConnell and Trump run a shadow government all hope may be a fools bet.
Yeah even if Mitch loses his fight with entropy and Trump and his entire organization goes to prison… the reasons to hope for reconfiguring the socioeconomic system to address basic human well being concerns like healthcare and sufficient income levels to support actual economic growth rather than just asset value growth are barely visible. The Supreme Court, the Senate, the Census, Gerrymandering, revolving door between public office and corporate payrolls, Citizens United… We’re closer to Dystopia now than ever and moving the wrong way.
Immediately prior to reading this article, I watched the viral video…uhhh, scratch that…the video that was liked a bunch of times and forwarded on to others a bunch of times in a manner in which the number of views over time followed an exponential curve…showing a crying, and, for all intents and purposes, emotionally broken, Sherman Oaks restaurant owner. She was shutting down due to burdens of COVID restrictions. In the immediate vicinity of the restaurant is a television production set that had set up outdoor tents for production staff to use to dine under. (I recommend a viewing.)
She is losing everything while others are being paid to eat under someone else’s tent; there are different sets of rules for different social and economic segments of our population.
We have to expect the emergence of a political movement. This time, due to the shared suffering of so many working people, across racial and geographic lines, let’s hope the rallying is for a better life for everyone…rather than focusing on reducing the tax burden on the 1% or other such nonsense that perpetuate the existing schema.
The film industry tests everyone on set every 1-3 days, depending on the person’s place in the heirarchy, so those film tents are used for people who know they don’t have Covid-19.
However, what that restaurant owner is facing is absolutely terrible and unfair. The government could have stepped in to assure small businesses did not fail.
Regarding McConnell and Trump’s shadow government: it reminds me of Ray Dalio’s writing about how our current stage of decay in a civilization can lead to civil war. Perhaps those two are setting up a Confederacy — of dunces.
Long overdue.
This is a country that has failed to address even somewhat successfully the major problems of our time; pathetically unequal distribution of wealth, global warming, nation destruction under the guise of nation building, universal basic healthcare and a pandemic. If that doesn’t scream ‘fast failing system of government’ what does. A democratic government’s primary responsibility is to keep its citizens safe.
but you can’t coddle the losers, goddammit!
/sarcasm
The United States was able to implement the New Deal (including the creation of Social Security) as a response to the Great Depression. Subsequently, the 1960s saw the passage of two landmark civil rights acts as well as a significant expansion of Social Security to address socio-economic dislocations.
The current tensions and challenges are not so different from the crises faced by the United States in the 1930s and the 1960s. Political, social, and economic divisions and inequality have reached a point where the underlying systems have become unstable. There is widespread perception of the absence of the type of leadership that could lead to reforms to defuse the problems before they become more critical.
Yet, effective leaders are frequently a product of the challenging environment from which they emerge; and their radical solutions and reforms are accepted only once the populace and the powers that be have peered into the abyss.
At this moment a plurality of Americans are almost certainly not ready for significant reforms to the country’s socio-economic system. In essence, things may have to get worse before they get better.
In the end, however, the only alternative to reform is entropy.
Surviving Fascist Authoritarianism: Advice for Americans.
The fascist authoritarians will come to power with a campaign based on fear, scaremongering and distorting the truth. Nevertheless, their victory will be achieved through a democratic electoral process. The fascist authoritarians will claim a mandate from the People to change the system.
Remember – gaining power through a democratic system does not give them permission to cross legal boundaries and undermine democracy.
The fascist authoritarians will divide and rule. Their strength lies in unity, in one voice and one ideology, and so should yours. They will call their supporters Patriots, the only “true Americans”. You will be labeled traitors, enemies of the state, unpatriotic, the corrupt elite, the old regime trying to regain power. Their supporters will be the “People”, the “sovereign” who chose their leaders.
Don’t let them divide you – remember you’re one People, one Nation, with one common good.
Through convoluted laws and threats they will try to control mainstream media and limit press freedom. The fascist authoritarians will ban critical press from their briefings, calling them “liars” and “fake news”. They will brand those media as “unpatriotic”, acting against the People (see point 2).
Fight for every media outlet, every journalist that is being banned, censored, sacked or labelled an “enemy of the state” – there’s no hope for freedom where there is no free press.
The fascist authoritarians will maintain a constant sense of conflict and danger to enact new authoritarian laws. The fascist authoritarians will disguise them as being for your protection, for the good of the People.
See through the chaos, the fake danger, expose it before you wake up in a totalitarian, fascist state.
The fascist authoritarians will distort the truth, deny facts and blatantly lie. They will try to make you forget what facts are, sedate your need to find the truth, replace knowledge and logic with emotions and fiction.
Always think critically, fact-check and point out the truth, fight ignorance with facts.
They will incite and then leak fake, superficial “scandals”. The fascist authoritarians will smear opposition. This is just smokescreen for the legal steps they will be taking towards totalitarianism.
See through superficial topics in mainstream media (see point 3) and focus on what they are actually doing.
The fascist authoritarians will propose shocking laws to provoke your outrage. You will focus your efforts on fighting them, so they will seemingly back off, giving you a false sense of victory. In the meantime they will push through less “flashy” legislation, slowly dismantling democracy (see points 4 and 6).
Focus your fight on what really matters.
The fascist authoritarians will focus on what hurts the most – women and minorities. The fascist authoritarians will act as if democracy was majority rule. Racial, religious, sexual and other minorities will become enemies to the order and security. The fascist authoritarians will challenge women’s social status, undermine gender equality and interfere with reproductive rights (see point 7).
Women and minorities should fight the hardest, reminding the majority what true democracy is about.
The fascist authoritarians will try to take control of the judiciary, to be able to push through unconstitutional legislation and threaten anyone that defies them with prosecution, including the press (see point 3).
Preserve the independence of your courts at all cost, they are your safety valve, the safeguard of the rule of law and the democratic system.
The fascist authoritarians will try to limit freedom of assembly, calling it a necessity for your security. If they can choose who can demonstrate legally, they have a legal basis to forcefully disperse or prosecute the rest.
Oppose any legislation attempting to interfere with freedom of assembly, for whatever reason.
The fascist authoritarians will distort the language, coin new terms, repeat shocking phrases until you accept them as normal and subconsciously associate them with whom they like. A “thief”, “liar” or “traitor” will automatically mean the opposition, while a “patriot” or a “true American” will mean their follower (see point 2).
Fight changes in language in the public sphere, remind and preserve the true meaning of words.
The fascist authoritarians will take over your national symbols, associate them with their regime and power. The fascist authoritarians want you to forget that your flag, your anthem and your symbols belong to you, the People, to everyone equally.
Show your national symbols with pride, let them give you strength, not associate you with the tyranny they brought onto your country.
The fascist authoritarians will try to rewrite history to suit their needs and use the education system to support their agenda. The fascist authoritarians will smear any historical or living figure who wouldn’t approve of their actions.
Guard the education of your children, teach them critical thinking, ensure their open-mindedness and protect your real history and heritage.
The fascist authoritarians will alienate foreign allies and partners, convincing you don’t need them. While ruining your economy to fulfill their populist promises, they will omit the fact that you’re part of a bigger world that depends on cooperation, on sharing and on trade.
Don’t let them build walls promising you security instead of bridges giving you prosperity.
The fascist authoritarians will eventually manipulate the electoral system. The fascist authoritarians might say it’s to correct flaws, to make it more fair, more similar to the rest of the world, or just to make it better.
Oppose any changes to electoral law that an authoritarian regime wants to enact – rest assured it’s only to help them remain in power longer.
And above all, be strong, fight, endure, and always remember you’re on the good side of history. Every authoritarian, totalitarian and fascist regime in history has eventually failed, thanks to the people.
Just a reminder, entropy is the law no one can change. All will be chaos eventually.