The key of the interview is this linkage of rising inequality threatening US capitalism system and more troubling the US democracy. The policies and the capitalism system have increasingly become favorable to the top 1% which has amassed more and more wealth in the last 30 years. The everyday richer public in turn is driving the political agenda threatening democracy. The thread of the society has shifted from being morally right to plain greedy:
In a recent post on your website, you said there was “moral rot” in America. And you say: “It’s located in the public behaviour of people who control our economy and are turning our democracy into a financial slush pump.” Can you expand on this?
An economy depends fundamentally on public morality; some shared standards about what sorts of activities are impermissible because they so fundamentally violate trust that they threaten to undermine the social fabric. Without trust it has to depend upon such complex contracts and such weighty enforcement systems that it would crumble under its own weight. What we’ve seen over the last two decades in the United States is a steady decline in the willingness of people in leading positions in the private sector – on Wall Street and in large corporations especially – to maintain those minimum standards. The new rule has become making the highest profits possible regardless of the social consequences.
In the first three decades after World War II – partly because America went through that terrible war and also experienced before that the Great Depression – there was a sense in the business community and on Wall Street of some degree of social responsibility. It wasn’t talked about as social responsibility, because it was assumed to be a bedrock of how people with great economic power should behave. CEOs did not earn more than 40 times what the typical worker earned. Rarely were there mass layoffs by profitable firms. The marginal income tax on the highest income earners in the 1950s was 91%. Even the effective rate, after all deductions and tax credits, was still well above 50%. The game was not played in a cutthroat way. In fact, consumers, workers, the community, were all considered stakeholders of almost equal entitlement as shareholders.
Around about the late 1970s and early 1980s, all of this changed quite dramatically. The change began on Wall Street. Wall Street convinced the Reagan administration, and subsequent administrations and congresses, to deregulate and to undermine the set of regulations that were put in place after the crash of 1929 – particularly during the Roosevelt administration – to prevent a repeat of the excesses of the 1920s. As a result of that move towards deregulation, we saw a steady decline in standards – a kind of race to the bottom – on Wall Street and then in executive suites. In the 1980s we had junk bond scandals combined with insider trading. In the 1990s we had the beginnings of a speculative binge culminating in the dotcom bubble. Sad to say, under the Clinton administration the Glass-Steagall Act – that had been part of the banking act of 1933, separating investment banking from commercial banking – was repealed. In 2001 and 2002 we had Enron and the corporate looting scandals. Not only did this reveal the dark side of executive behaviour among some of the most admired companies in America – Enron had been listed among the nation’s most respected companies before that time – but also the complicity of Wall Street. Wall Street traders were actively involved in the Enron travesty. And then, of course, we had all of the excesses leading up to the crash of 2008.
Where has the moral centre of American capitalism disappeared? It’s ironic that at a time the Republican presidential candidates and state legislators are furiously focusing on private morality – what people do in their bedrooms, contraception, abortion, gay marriage – we have this far more significant crisis in morality. Wall Street is back to its same old tricks. Last week, Greg Smith, a vice-president of Goldman Sachs, accused the firm of putting profits before clients. What else is new? Almost every other Wall Street firm is doing precisely the same thing and they’ve been doing it for years.
He picks some very interesting books on the way suggesting how similar is America today to America in 1900s…Much like what Acemoglu said in this must read paper.
He says – “The richest 400 people in America have more wealth than the bottom 150 million Americans put together.” Am wondering how that equation holds up in India? How much wealth of richest 400 people equal to bottom Indians put together? Should be a much larger figure. I mean when one reads so much about disintegrating American values, one wonders can we even consider India in such a debate?