Economic rule by the rich debated
By James McCusker Oct. 20, 2002

  The impressions made when we are young are all but indelible. That is why, even though I know better, when somebody says that America is a plutocracy, my first thoughts turn to Pluto, and then to Mickey and Donald. And if that is America, how could that be so bad?
  But without the capital "P," plutocracy turns out to be less of a happy thing. It means government by the rich, and despite the lingering Disney imagery that some of us can’t entirely shake off, a plutocrat is not Pluto in a top hat.
  The author Kevin Phillips says that the United States has turned into a plutocracy in which "money not only talks, money screams." In his recent book "Wealth and Democracy’” he writes of how money has come to dominate both major political parties and how the wealthy exert their influence and control over our lives.
  In recent interviews, Phillips emphasized that the extremely lopsided distribution of income in America -where the few at the top own nearly everything - is something we haven't seen since the so-called Gilded Age of the 1890s and early 20th century.
  In "Wealth and Democracy, Phillips paints a very unflattering portrait of the politicians and corporate executives who, by his estimate, are both running and ruining the United States. He is a political analyst by nature and is at his best when skewering the politicians maneuvering for position at the trough of campaign finance cash.
  In one sense, Phillips picked an easy target. Greed today has few defenders. In a world of collapsing corporate shell games, the "Greed is good" motto of the movie character Gordon Gekko in "Wall Street" sounds closer to insane than insightful. But while it is difficult to argue that greed is good for government, or CEOs, the broader economic issues raised by Phillips are tougher to analyze.
  The two basic questions are these: Does unfettered market capitalism naturally progress to a plutocracy where our lives are controlled by the rich? And is a Gilded Age inherently a bad thing. In other words, if everybody is better off, should we be concerned about lopsided income distribution?
  The simple answer to the first question is yes. The same Adam Smith who free market enthusiasts turn to for their inspiration made it quite clear that market forces were not always sufficient to overcome the natural tendency of merchants to control markets at the expense of consumers.
  But while Smith was an astute observer of human nature and its effects on economics, it was left to his successor, David Ricardo, to do the pick and shovel analysis that explained how markets really work Ricardo showed that market expansions, particularly in natural resource industries, tend to benefit the rich. And if that weren’t enough, he also describes in detail. how the rich are able to exert economic control -because they made the rules under which markets operate. Sound familiar?
  The second question is more difficult. The Gilded Age, which began about 1890 and lasted until the World War I began in 1914, was a time of economic prosperity But more for some than for others. While it was the time when great fortunes were amassed by captains of industry it was also a time of great economic instability.
  The financial panic of 1893, for example, was bad enough, but it was followed by another in 1903 that had such devastating effects on financial markets and personal savings that Congress was finally frightened enough to pass the Federal Reserve Act.
  The economics question is whether the unbalanced income distribution contributed to that economic instability. It certainly did in one sense, since the wealthy were opposed to bank regulation and delayed the Federal Reserve System for over a decade.
  More directly, though, the wealthy accumulate money faster than they can spend it, and their savings fuel the crucial investment sector. But since the rich are such a tiny minority, when they go through mood swings - and they do - the effect on the investment sector can jerk around the entire economy.
  So we are right to be concerned about the link between plutocracy and panics, between lopsided wealth and economic instability. But what to do about it isn’t clear. Phillips recommends income redistribution, but, historically, efforts to redistribute income through the income tax system have failed miserably - in no small part because once government gets its hands on the money it has its own ideas about how to spend it.
  What we really need are some clear thoughts on how the wealthy could be made not less wealthy but less dangerous to the rest of us. And this will be most likely found in regulating markets, and market volatility, rather than individuals.

James McCusker is a Bothwell economist, educator and consultant He also writes "Business 101," which appears monthly in The Herald Business Journal.