Occupy Handbook 2

Chapter 2 features the (in)famous Paul Krugman and Robin Wells, who argue that the 2008 crisis was a text-book Keynesian crisis with obvious Keynesian solutions, solutions which were ignored for political reasons. After laying out the facts about inequality, noting that 2007 levels were equal to those on the eve of the Great depression, they addresses this question:

Why does higher inequality seem to produce greater political polarization? Crucially, the widening gap between the parties has reflected Republicans moving right, not Democrats moving left. This pops out of the Poole-Rosenthal-McCarty numbers, but it’s obvious from the history of various policy proposals. The Obama health care plan, to take an obvious example, was originally a Republican plan, in fact a plan devised by the Heritage Foundation. Now the GOP denounces it as socialism.

The most likely explanation of the relationship between inequality and polarization is that the increased income and wealth of a small minority has, in effect, bought the allegiance of a major political party. Republicans are encouraged and empowered to take positions far to the right of where they were a generation ago, because the financial power of the beneficiaries of their positions both provides an electoral advantage in terms of campaign funding and provides a sort of safety net for individual politicians, who can count on being supported in various ways if they lose an election. [10]

Krugman and Wells argue, then, that inequality was the cause of the crisis. They contend the 1% became rich enough to buy the Republican party, and to cause deregulation enough to create crisis. However, while the first part of that assertion may very well be true (and I have sympathy with it), there are other points to be made. Firstly, rich people and institutions, like banks, support the Democrats as well. Secondly, rich people can cause crises (even unintentionally) through manipulating the market just as much as they could through recklessly deregulating it. I’ve read fairly persuasive (to my mind) responses to their view along the lines that (a) Hoover was not significantly practicing austerity, (b) that “regime uncertainty” may help to explain the length of the depression (see the work of Robert Higgs), and (c) that the 2008 crisis cannot realistically be traced ultimately to deregulation, but rather should be blamed on various interventions through fiscal and monetary policies (this is a common Austrian argument, anyway, and an example can be seen in Thomas Woods’ Meltdown). These things are at least worth considering, and actually need not oppose Krugman and Wells’ point that rich people may have caused this crisis; this is more about the mechanism through which they might have done this.

Krugman and Wells, I think, are fair to ask us to consider whether the rich might have effectively bought a significant chunk of the democratic machinery of the USA. And it perhaps should lead us to consider whether it may not be just to try to set a limit to inequality simply to prevent this possibility. Republicans/Conservatives are completely willing to engage in preemptive attacks in cases like Iraq, or potentially in Iran, to prevent disaster to the republic. Why, then, not preemptive action to prevent a coup by crony capitalists in their own country? The principles seem the same to me.