More on Why Nations Fail: What about the United States?

In our last post we discussed our generally favorable impression of Damon Acemoglu and James Robinson’s Why Nations Fail. As we indicated, we’re not economic historians or political economists, so we’re not quite in a position to pass judgment on the relative merits of A&R’s arguments. But they seem to explain quite a lot about the historical development of countries purely in terms of their economic and political systems, irrespective of cultural and environmental considerations. As we indicated, we don’t necessarily think this precludes multi-layered explanations, but we give A&R points for trying to develop a relatively straightforward theory about why some countries are rich, and some countries are poor.

So, what about the United States? It has clearly been one of the most successful experiments in country-building in human history, as a result of a number of factors—inclusive political and economic institutions in particular. A&R note in their book that this was not necessarily guaranteed or intended—early English settlers in Virginia, Massachusetts and Rhode Island initially attempted to duplicate the Spanish model—and failed. So alternative models, empowering both in terms of economic and political rights, necessarily evolved—where they did not, in fact, colonies perished. Moreover, there have been significant developments along the way—the Civil Rights Act, for example, which redressed the political inequalities created by the preservation of the extractive economic and political institutions of the south after the Civil War.

But they are not sanguine. As they note on their blog:

There are clear and present dangers for US institutions: increasing economic inequality; increasing political inequality; super PACs and all that; failing educational institutions; huge incarceration rates, especially for African-Americans; and erosion of civil liberties.

As A&R discuss in their book and on their blog, there is no necessary guarantee that political institutions, once they become inclusive, will stay that way. And economic institutions will tend towards being extractive if political institutions do not remain inclusive. As they point out, it is quite possible to have inclusive economic institutions but extractive political institutions—look at China, for example. So how likely is it that the US could evolve to more extractive economic and political systems? Or, say, an inclusive economic system but an extractive political system?

Actually, there are concerns on both fronts, as A&R suggest above, but, as they point out elsewhere, the US has been here before—in the 19th century, and it moved ahead. So this could certainly happen again. But that doesn’t mean that there aren’t some real concerns out there. Let’s take the ones A&R mention first, and then add one they seem to have missed.

(1) First, increasing income inequality. We’ve heard quite a lot about this over the past two years thanks to the Occupy movement, but it’s been a multi-decade problem, mainly since the 1980s. The problem appears to be intensifying. More ominously, the share of income from labor is falling, and stands at a record low percentage, according to the Federal Reserve Bank of Cleveland, which provides us with this handy little graph:

What is labor? That’s anyone who takes home a paycheck for anything—truck drivers, supermarket clerks, dentists, traders, Bible salesmen, whatever. There are two take-aways here—first, labor’s share is declining. In fact, since 2000 it has plummeted, and it’s not improving. Moreover, labor income is growing at a slower rate than total income. The Cleveland Fed article has a pretty good discussion of the various factors that may explain what’s going on here.

The second is that capital’s share seems to be increasing—but this is actually a bit misleading, since this may mask a growth in indirect tax subsidies. What is capital? Corporate profits, rental income, depreciation, indirect tax subsidies, and interest income. Why these people feel threatened by Obama is a bit unclear, because like nearly all Democratic presidents, stock market performance under Obama has boomed, and corporate profits have been improving. Capital income looks like it’s never had it so good.

Anyway, this sort of data would suggest that in A&R’s terminology, the US economic system is becoming more extractive, and the process appears to be accelerating. In A&R’s approach to the world, extractive economic systems are those that concentrate wealth at the top. We know from other sources (cited by A&R) that this trend is firmly in place, and there’s nothing in the data portrayed above that’s inconsistent with that fact. It’s one for which no easy solution appears imminent—we’re probably in for a long period of stagnant labor income, even if it stabilizes at current levels. But that’s probably unlikely—the one thing about money is the more you have, the easier it is to get more.

(2) Increasing Political inequality. There are several trends here, which A&R detail in their link. Actually, I would include two of their other concerns in with this one—the increasing power of PACs, and the very high rates of incarceration for black males, which of course tends to disenfranchise them as voters. It’s no accident that the various Republican attempts at voter suppression are funded in large part by Koch money. And it’s not an accident that the media is completely useless here. It’s all of a piece and it’s designed to solidify the political control of the political system by the rich—to make the political institutions as extractive as the economic institutions.

(3) I would add a third issue—the subversion of property rights, which, surprisingly, I have not seen A&R discuss anywhere. As A&R (and David Landes in The Wealth and Poverty of Nations) emphasize, securing property rights is a necessary condition for the emergence of inclusive economic institutions. Extractive economic institutions remain that way in part because of the lack of secure property rights for all. So the subversion of property rights by banks and mortgage companies during the past decade would, one would have thought, triggered more alarm. In fact, it did, and a number of bloggers, particularly Yves Smith over at Naked Capitalism and Barry Ritholtz at The Big Picture, have been banging on about this issue for years. (Others have as well, of course—it’s just that Ritholtz and Smith have probably been the longest and loudest.)

The short version is essentially this—since the banks made their money not on the mortgages they wrote, but rather by packaging them into securitized vehicles such as CDOs to sell on to investors as quickly as possible, they streamlined the title process so that titles were no longer registered as they had been registered for hundreds of years. So tens of thousands of real estate transactions where people had bought homes to which they thought they had title turned out to have a different outcome—no one could actually determine who held title.

The recent National Mortgage Settlement between all 50 state Attorneys General and the banking industry was not a perfect solution, and the banks have been spending the past several years untangling the mess they made. But the more general point is that the system that was designed to secure property rights in the form of title turned out to be surprisingly easy to circumvent, and the penalties have been, in many ways, disproportionately lighter than one would have expected, to put it mildly. The lack of interest by Obama’s Justice Department in pursing this issue has been surprising—but, taken with their lack of interest in prosecuting anyone involved in the creation of the worst global financial crisis since the Great Depression, maybe not so much.

None of this is to suggest that these issues are insurmountable. But they are issues, and they need to be addressed. It’s a virtue of the A&R approach that it gives us some tools to analyze these trends with. As indicated above, they’re optimists—they point out that we’ve been there before, in the age of the Robber barons, and successfully turned back a very unpleasant tide. But doing it again in the face of an indifferent media and an increasingly stacked political deck may be harder. On the other hand, social networking is a huge boon here, as is the Internet in general—it’s just so much easier to find stuff out than it was, say, 30 years ago. Information wants to be free, and it’s a darn good thing. We’re going to need all we can get.

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