Lost in Grift

How the real wealth producers are being strip-mined...

THE PROBLEM of "income inequality" is not, for the most part, a problem of income inequality, writes Nathan Lewis of New World Economics.

When capitalism is working well, people do not particularly dislike the super-wealthy. If anything, they are celebrities and even heroes.

For example: Larry Ellison, Steve Jobs, Alexander Rodriguez, Oprah Winfrey. These people are super-rich. But, they also brought something valuable to society, in the form of software and computer hardware, media and entertainment, and even the joy of sports performance.

Rather, people tend to use these archaic, 19th-century terms of discussion in an attempt to identify a different problem today: the corruption of the ideals of capitalism.

Or, to put it more simply: crime pays.

Ideally, we could organize society along altruistic lines. This is the normal state of affairs in the nuclear family; sometimes, in the extended family as well, and among a few close friends. It is sometimes possible in small tribal bands of under 150 people, like some groups of Amish or Roma. However, anthropologists find that, as human groupings become larger and more complicated, other modes of organization become prominent.

The fact is that there simply isn't a large enough portion of the human population that is motivated by altruistic notions. Most people are motivated by self-interest.

Even when there have been large groups of people organized in a broadly altruistic fashion, as was arguably the case for Native Americans, or perhaps the Tibetans, they tend to be conquered by others with less noble goals.

When all you have is sand, you build sand castles. This leads us to capitalism.

The moral core of capitalism lies in the way that it channels this rather amoral self-interest in ways that benefit society as a whole. In an alchemical process, amoral motivations lead to a moral result. To become wealthy, as these people have, they need to bring something of value to society – some good or service, sold at a profit. The profit margin indicates that the value of the finished product is greater than the value of the inputs required to create it; it prevents waste.

Along the way, for the business-builder to become successful, thousands of jobs can be created, thus also engaging the broader mass of people in prosperous activity. The process of competition leads to improving productivity, and a higher standard of living.

The "rising tide raises all boats," as John F.Kennedy described, at a time when the US middle class was steadily becoming wealthier via this process.

The capitalists' reward, for all the risk and genius involved in producing some valuable good or service in the competitive capitalist economy, is a corporate profit margin typically around 6% – not a particularly large reward, you could argue. It is about the same as a real estate agent's fee for selling a house.

Societies get into trouble when it becomes easier for people to achieve their goals of self-aggrandizement by means that do not make society wealthier and more prosperous, but rather make it poorer. In the past, this could take the crudest form of simple conquest and pillage – the strategy of Genghis Khan, or perhaps Napoleon Bonaparte. Obviously, nothing new is created in this process, and much is destroyed. Wealth simply changes hands, flowing from the less-powerful to the more-powerful, as total wealth shrinks.

The rich get richer and the poor get poorer.

I find that today's concern over "income inequality" is motivated primarily by the recognition – correct, I believe – that many are becoming wealthy today in ways that do not benefit society as a whole, but rather impoverish it.

In other words, today's wealth is, in many cases, fundamentally immoral – the term we use for things which may benefit an individual, but which harm others and the broader society.

Simply stealing wealth by force of arms is not so common today in the US It would be a little too obvious. The process now is rather more subtle – what I generally call "crony fascism." You could also call it the "grifter economy" or "parasite economy;" to use more old-fashioned terminology, the "rentier economy." But, the end result is that the stronger steal from the weaker; and the overall wealth is diminished rather than increased.

The financial industry, for example, creates no useful goods or services by itself. Ideally, it serves a function in the creation of goods and services – namely, by enabling the financing of business investment. The financial industry should serve as a middleman enabler between investors and businesses. Like any middleman service, it is optimized when it is minimized, and has the lowest cost.

This was the case during the prosperous 1950s and 1960s. Banks were boring, and a relatively minor part of the economy. The focus of activity was corporations that produced valuable goods and services, creating well-paid jobs in the process.

This is the opposite of today. Not only do financial companies account for about 30% of all US corporate profits, but people employed in the financial industry – way too many – are paid way too much. These people are, in large part, rentiers, enjoying the benefits of society (what they can buy with their money), while contributing little in the form of valuable goods and services.

The financial industry is not the only industry with strong "rentier" or "grifter" characteristics. The health care industry and higher education are also prime suspects.

Health care accounts for an estimated 18.3% of US GDP in 2014. Most of this is basically grifterism (i.e., theft) of one form or another. How do I know this? Because Singapore spends about 4.5% of GDP on healthcare, and gets results that are as good or better. The other 13.8% of US GDP going into healthcare is the grift.

13.8% of GDP! That's a lot.

The "grift" takes other forms too: overpaid CEOs, who cash out with tens of millions while their companies wither and die. Private equity wiseguys who strip the equity out of healthy companies for ultimate dissolution in bankruptcy, while they escape with bags of loot. Lawyers. Period.

This sort of thing has always existed, and always will. But, there's way too much of it today.

Alongside these private-sector scams, we have a whole category of government-related scams. The basic process is that money is taken from the citizens by way of taxes, in much the process of Genghis Khan: ultimately, by force of arms. More funds are obtained by debt finance, with the burden ultimately falling upon taxpaying citizens. Some of this goes to important government services, including welfare services. However, a lot of it is lost "in the grift."

Some of this grift is in the form of unionized government employees, at the Federal, state and local level; like bankers, there are too many of them, and they are grotesquely overcompensated. Or, perhaps the swelling ranks of the not-really-disabled. In this troubled time, grift by the lower-income classes can take on a vaguely moral tone, relative to the grift by the wealthy. But, it is all crime in the end.

Some of it is in the form of cronyism. A friend was wondering why a little traffic circle should cost the municipal government $1 million. Of course, it didn't cost $1 million. That would be absurd. It cost $15,000, and $985,000 was stolen. Americans seem to have a hard time understanding this.

The defense industry. Corporate welfare on many levels, including oil reserves conveniently "liberated" by the taxpayer-funded military, or agribusiness giveaways.

We see today's financial criminals walk free, while innocents are jailed. The hardest buck to make today is an honest buck.

Who really produces the valuable goods and services of our society? It is those least rewarded, and from whom the loot is being taken: waitresses, construction workers, hotel cleaners, auto mechanics, middle managers in real value-producing enterprises, adjunct professors, most small business owners.

These people are being strip-mined.

When a society rewards those who do the most damage, and punishes those who create the society's actual wealth, the society will inevitably decline.

This is a time of decay. But even these times of decay do not last forever. Societies and governments also have times of renewal. Perhaps we, in the US, will enjoy one again.

It will need to be a time when we again return to the moral principles of capitalism: that those who are rewarded with wealth and prestige have to earn those rewards by providing useful goods and services to society. They become wealthy by making others – the middle class and not-quite-middle-class – wealthy in the process. Not by stealing the wealth of others.

We have had eras like that in US history. It would be good to have one again.