MAGA Rebellion Against Elite’s Control of the American Economy

Sherwin Rosen, a former chair of the Economics Department at the University of Chicago, wrote an article in the American Economic Review in 1981 titled “Superstars.” It revealed the natural tendency for a few individuals to do extremely well in each recognized field as in entertainment, sports or other areas of social, financial or intellectual interest, and for all others to be left on the sidelines as “also-rans.” Economics involves more than money. Economic decisions can often require time, money, and mental energy. How many superstars can you keep in mind and constantly compare in each and every area of importance?

The top star gets an inordinate financial reward compared to the almost-as-good person in second place. Our limited time and mental energy may cause us to reward Taylor Swift with enormous compensation when a less well know but equally proficient singer and dancer may get little or no attention or compensation. This limitation plays an important role in inappropriately and inefficiently directing a large portions of economic rewards to the “winners” in what inevitably boils down to a “winner-take-all” economy and a severely distorted money flow away from Main Street (the losers), where most of the work is performed, and into Wall Street (the winners), where most of the rewards accumulate.

It is very important to recognize that the financial economy and the real economy are quite separate and very different from one another. The vast majority of the money in the financial economy is owned by institutions and wealthy people (the “winners”), which include most bankers, doctors, lawyers, and the upper management of America’s largest companies. Yes, there was that Vermont janitor, Robert Read, that died at age 93 with $8 million, demonstrating the enormous power of compound interest. However, he was the rare exception that defies the overwhelming statistical evidence that proves the rule: “In America, if you start poor, you stay poor.”

When financial media commentators refer to “the people,” they are usually not talking about the sixty-two percent of people who are living paycheck-to-paycheck or the two-thirds of Americans with no college degree. They are not talking about the MAGA crowd. They are talking about themselves and other wealthy people. The net worth of Treasury Secretary Janet Yellen is estimated to be $20 million while that of Federal Reserve chair Jerome Powell is around $55 million. Much of the stock in the New York stock exchange is owned by millionaires and billionaires. This can lead to a complete lack of understanding of the real day-to-day concerns of most Americans.

While the original land allocations made by King George for the American colonies held up for several centuries, the memory of the French Revolution gave the elite a strong sense of noblesse oblige and motivated them to avoid accumulating enormous wealth. Consequently, in the 1800s the elite encouraged westward expansion with phrases such as “forty acres and a mule” for frontier farmers and the government’s payoff of modest mortgages for widows of union soldiers in the Civil War who “bought the farm” in dying for their country.

This was in sharp contrast to Argentina, which allocated the land in its western expansion into its Pampas grasslands to the elite. The elite in Argentina employed the peasants to work the land but not gain ownership of that land. This severely suppressed the motivation of the peasants in Argentina to work hard and creatively. Consequently, productivity and economic growth in the United States far exceeded that of Argentina. This was further enhanced by government support in creating agricultural experiment stations in the United States.

In the United States, the Land of Opportunity paid off for those willing to work hard on the frontier until the late 1890s and the early 1900s when a distorted money flow set in to over-reward the wealthy elite such as Andrew Carnegie and John D. Rockefeller to bring about financial instability. Fortunately, our democratic institutions allowed the rebellion brought about by the Great Depression that began in 1929 to bring Franklin D. Roosevelt into the presidency to oversee a transition to a somewhat more equitable economy with better money flow for the 1930s MAGA crowd, which enabled America to avoid its own version of the French Revolution.

Beginning around 1960 and reaching a turning point in 1980, America made a transition from our old aristocracy based primarily on legacy to a new meritocracy. In recent years the decline of America’s aristocracy and its replacement with the new meritocracy made the superstar effect and the distorted money flow much worse. The new superstars felt no sense of noblesse oblige and no reason to hold back in accumulating huge amounts of wealth for themselves and their prodigy. While earlier generations of Americans recognized the importance of providing free and mandatory elementary and secondary education for each and every one of our children as essential to the overall growth of our wealth as a nation, in recent years vocational and college educational attainment has been restricted to those who can come up with enough money to cover the ever increasing cost of higher education, leaving behind two-thirds of Americans (the core of Trump’s MAGA crowd).

This distorted money flow, which moved money away from the real economy and into the financial economy, has been further aggravated by the Federal Reserve Bank due to its limited policy tools that are designed primarily to affect the financial markets on Wall Street, with only a rather limited and lagged effect on the real economy on Main Street. As early as the mid to late 1990s and then after the Great Recession of 2007-2009, the Federal Reserve exacerbated the distorted money flow by pumping too much money into America’s financial markets, which aggravated income and wealth inequality while encouraging an enormous increase in both private and public debt.

Just as Marie Antoinette was confused and caught off guard making her “let them eat cake” remark, many wealthy Americans have not caught on to the real significance of the “hang Mike Pence” and the attempt to kill Nancy Pelosi’s husband as the tip of the spear in a rebellion where the election of Donald Trump to serve as America’s first dictator may be just the beginning of our problems. Controlling and mitigating our distorted money flow and its resulting economic and political instability is essential if we are to avoid a catastrophe and potential blood bath. In spite of all of the warnings of the danger to our democracy of electing Donald Trump to a second term as president, the MAGA crowd continues to press for what boils down to essentially a Trump dictatorship as described in detail by his re-election team. Their willingness to throw away almost 250 years of democracy suggests an anger against the American elite that cannot and must not be ignored. Let’s hope that there are no guillotines set up on the steps of our nation’s capitol.

It is not just about money. Respect, or the lack thereof, is as important, or even more important, than the money. The big mistake of the Democrats occurred in the late 1970s when they started transitioning from a pre-distribution strategy to a redistribution strategy. Under pre-distribution, the Democrats followed the countervailing power approach promoted by Kenneth J. Galbraith in his book: “American Capitalism” in 1952. Where a few companies dominated an industry enabling abnormally high profits, Democrats supported unions to match and control the power of those companies. This mitigated and minimized the distorted money flow that would have otherwise gone almost entirely to the elite. Democrats also got strong minimum wage laws enacted during the 1950s and 1960s.

Unfortunately, the Democrats changed to a redistribution strategy by 1980 where they emphasized higher income and estate/inheritance taxes for the wealthy instead of continuing to support strong unions and higher minimum wages. This not only gave conservatives the opportunity to criticize the Democrats for reversing the “free market” economy’s allocation of rewards, but made working people get more money from welfare and other need-based programs that left them with less dignity and self-respect. Recently Democrats including President Biden are beginning to realize their mistake and return to a pre-distribution strategy with stronger support for unions, higher minimum wages and earned income tax credits. But this change in strategy may be too late for the 2024 election.

Will the MAGA crowd be satisfied with a Trump presidency that simply focuses on replacing the deep state’s commitment to the constitution with a commitment to Trump and arresting Trump’s opponents? What will be done to suppress CNN, MSNBC, The New York Times, The Washington Post and the rest of the “fake news” media? Would that be enough to satisfy the MAGA crowd? Will they want more and will they become disillusioned with Trump if he does not provide better jobs with better pay and more respect for their work? The revolution has begun. The key question is how far will it go?

Dr. Martin Luther King, Jr. emphasized that his civil rights movement was strictly nonviolent. He repeated this to his followers again and again. Otherwise, the 1960s might have been as bloody as the 1860s. Of course, Dr. King was murdered as well as President John F. Kennedy and presidential candidate Robert Kennedy. Hopefully, Donald Trump will emphasize the importance of nonviolence if he loses the 2024 presidential election. Trump will need to make it clear that he does not condone violence, and if he wins the 2024 presidential election, he will not pardon anyone who has committed violence.

Efficiency: Business vs. Government

I love the imaginary world of free enterprise where there is intense competition among businesses to provide the best quality products at the lowest possible prices, where consumers are always rational (at least on average) with infinite amounts of time and mental energy to compare all prices and qualities in that perfectly competitive world. It is a very democratic world. In that world, everyone is a consumer who can purchase anything without regard to race, creed, color, gender, sexual orientation, transgender status, national origin, or ethnicity. True believers in this imaginary world love to refer to this as Adam Smith’s invisible hand of competition in a free enterprise economy.

Unfortunately, that perfectly rational and perfectly competitive free enterprise economy does not exist.  

Even something as simple and easily observed as gasoline prices are all over the place.  People are often too busy and have too little time to get the best price for gasoline.  GasBuddy tries to help us, but people often just go to the nearest or most convenient gasoline station regardless of the price.  We are too often greatly constrained by a shortage of time and mental energy.

Certificates of deposit are another example of inherent disequilibrium where interest rates are all over the place. Many banks realize that most people do not have the time to compare rates, so they let their CDs roll over at whatever rate their bank has set, which is often very low and noncompetitive. Such people often have CDs for a standard fixed period such as 12 months.  The banks realize this, and when they need more money to loan out, they offer higher interest rate “specials” for 11 months or 13 months.  Some require that you also have a checking account with the bank to get the best rate on CDs.  Instead of generally offering and widely advertising their best rates on CDs to all their customers, they offer their loyal customers “relationship banking.”

The idea that people operate rationally and independently as required (at least on average) for free enterprise to work efficiently and effectively has been refuted by Dan Ariely in his book: Predictably Irrational. New York: HarperCollins, 2008.  Not only are people irrational, but they are  predictably  irrational. It is disappointing that the economics profession has taken so long to figure this out when the people in marketing have understood this and exploited this for hundreds of years.

More recently, the development of behavioral economics has greatly enhanced economics in making it much more realistic. Economics Nobel prize winner Richard Thaler (and others) have offered careful analysis of human behavior and discovered that people don’t always act in a rational manner but have inherent biases that produce inefficient and ineffective behavior from a strictly free market theory point of view. See Thaler’s books:   Thaler, Richard H. and Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth and Happiness. New York: Penguin Books, 2009. Thaler, Richard H. Misbehaving: The Making of Behavioral Economics. New York: W. W. Norton and Company, 2016.

Schumpeter’s “creative destruction” should really be called “competition destruction” when a small, efficient family-owned restaurant gets wiped out during a pandemic or a recession because it doesn’t have and can’t get the cash to ride out an economic downturn.  With sufficient cash on hand, a large corporation (e.g., Amazon, Facebook, Google, etc.) can buy up or crush its competitors, especially when there are barriers to entry such as economies of scale or network effects.

But Adam Smith revealed a second invisible hand when he said: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Adam Smith’s second invisible hand is the invisible hand of collusion or market power.

The concentration of American industry into oligopolies, duopolies, and monopolies is well documented in the book by Jonathan Tepper with Denise Hearn called The Myth of Capitalism: Monopolies and the Death of Competition, (Hoboken, NJ: John Wiley & Sons, 2019), which I think they should have called “The Myth of Competition” since it reveals the extensive existence of industrial concentration in industry after industry in the United States

For example, a pair of reading glasses can be purchased for just a few dollars, but as soon as a “prescription” is involved, the price jumps up to over one hundred dollars, because there are primarily just two companies that have been authorized to provide prescription glasses.

Patents, licenses and other restrictions are often effectively controlled by those who already are in the restricted enterprise, so they have a vested interest in not letting competitors into the business.  

Patents were created to encourage innovation by giving businesses time to recoup their investments, but they have been extended way beyond that to the point where they are actually being used to restrict competition.  We would have more innovation if we got rid of patents altogether.  Government funding through the National Science Foundation (NSF) and Centers for Disease Control (CDC) can produce lots of new and innovative products by people who are more interested in promoting their professional reputations than in restricting competition and maximizing profits.  NSF and CDC data, methods, and research techniques are made readily available to the public. Making lots of money is just one way of feeling good about yourself. Some people such as teachers and daycare attendants feel good about helping children even though they are often paid very little for their work. Creative entrepreneurs such as Steve Jobs and Elon Musk are frequently more focused on changing the world with new and innovative products than in making money per se.

The amazing creativity of government funded projects that have resulted in a broad range of creative innovations from interstate highways to rockets to the moon and the Internet is well documented in these three books by Mariana Mazzucato:   Mazzucato, Mariana. The Entrepreneurial State: Debunking Public vs. Private Sector Myths. New York: PublicAffairs, 2015.    Mazzucato, Mariana. The Value of Everything: Making & Taking in the Global Economy. New York: Hachette Book Group, Inc., 2018.    Mazzucato, Mariana. Mission Economy: A Moonshot Guide to Changing Capitalism. New York: HarperCollins Publishers, 2021.

Doctors, lawyers, hairdressers, and a large number of other professions restrict entry.  The boards that regulate the restricted professions are themselves made up of the people already in those professions, so they have a natural desire to avoid competition and restrict entry to keep their wages high. The interesting thing is that these restrictions vary enormously by city and state so not all of the professional restrictions are really necessary to protect the public. 

The idea that businesses are efficient and government agencies are inefficient may be the opposite of the truth. Government agencies by law must be largely transparent.  The federal government has to follow the federal open meetings law ( U.S. Code § 552b – Open meetings ). Government is often dismissed as inefficient, partly because it may have goals other than profit maximization, and also because, unlike private businesses, the government’s operations are subject to close public scrutiny such as under the Freedom of Information Act and the Open Meetings Act. State governments may impose additional restrictions requiring transparency in government. 

Ironically, many of the most conservative states have the strongest government transparency requirements.  Not trusting the government and requiring openness makes the government more efficient and effective.  Revealing any government inefficiencies has two effects: (1) It puts immediate pressure on the government to clean up its act and get its house in order to be more efficient and more effective, and (2) It gives the general public the idea that government is inefficient, especially relative to business where inefficiencies are mostly hidden.  In theory, inefficient businesses should be driven out of business by competitors, but many industries are dominated by a few firms that retain dominance through a wide variety of barriers to entry.

Businesses are not subject to transparency for the most part. They often impose non-compete clauses in their employee contracts that forbid passing along or in any way revealing company “secrets.”   The idea that a business could not exist for long if it was inefficient is far from reality. Large corporations are prone to a range of efficient and inefficient departments. Excessive monopolistic profits can cover up a great deal of inefficiency. Natural monopolies such as local water, sewage and electric providers can get by without having to worry about being run off the road and replaced by competitors. Large businesses can be and often are more inefficient than government.

For example, Saluto Pizza started as a small pizza place in St. Joseph, Michigan. Its pizzas were so popular it started freezing them to sell to people to take home to reheat for consumption later. The frozen Saluto Pizzas were in such great demand that a frozen pizza manufacturing plant was created to produce them to sell to grocery chains around the nearby region. Their popularity was such that another factory for making the frozen Saluto Pizzas was created in Birmingham, Alabama. Then General Mills bought out Saluto Pizza. But following the financialization strategy of cutting costs, the Saluto Pizzas were then made with cheaper ingredients, which made them unpopular. Before long the Saluto Pizza brand was discontinued. Such cost cutting and removal of the resulting unpopular products is then described as enforcing efficiency in private business, in contrast to alleged government waste and inefficiency. The executives who cut costs and cut out unprofitable products were probably rewarded and promoted. By contrast, so-called government “bureaucrats” who serve the public are seen as unproductive and wasting the taxpayer’s money. 

Some politicians like to discredit government employees who they refer to as “career bureaucrats” or collectively as “the deep state.” What such politicians really want is to replace these civil servants who have taken an oath to obey and defend the constitution of the United States with sycophants who will readily violate the constitution in pursuit of their political master’s political agenda. In Russia Vladimir Putin has learned that replacing “the deep state” with political sycophants in the Russian justice system has enabled him to charge and convict any political opponent with all sorts of invented and imaginary crimes. Removal of “the deep state” here in the United States could lead to a similar outcome. An autocratic leader’s political slogan of “Lock her up” “Lock her up” could become a reality for anyone opposing that autocratic leader once that politician is elected president and after the removal of the government employees referred to as “the deep state.”