The Tension in American Politics, A Deeper Look.
The Tension in American Politics, A Deeper Look.
While there is much to agree with in Bob Gleeson’s April 9 essay entitled “Global, Urban Economic Growth and American Political Problems,” and while it is cogent and enlightening, it does in my view neglect one important consideration, which is to say the central role of capital formation in driving the geography of American politics.
Bob observed that highly educated, and highly skilled Americans have benefited disproportionately from globalization while at the same time somewhere between 50 and 60 million Americans experienced relative downward economic mobility. He corrected noted that those people who have benefitted from globalization tend to concentrate in (blue) urban centers and their close-in older suburbs, whereas those who have experienced relative decline tend to dominate in (red) newer outer ring suburbs and widely dispersed rural areas. He then went on to say,
“This is certainly not the only fundamental political tension that plagues American politics today. Yet this core issue has evolved, deepened, and become entwined with other tensions so much that it has become one of the most consequential components of the deep estrangement that exits today between the political aspirations of downwardly mobile Americans and the traditional commitment of American voters to the concepts of majority rule and fair elections.”
With all of that I completely agree.
But this having been said, this “consequential component” is arguably an almost secondary manifestation of the underlying, driving economic phenomenon of capital formation, which is to say the increase in the stock of real capital that enables the creation of things that help us to produce more products and services. Capital formation in this regard may be seen as the backbone of the nation’s long-term economic development, by providing the essential tools for productivity and growth.
Generally, “capital” refers to assets stored under an expectation of increased value over time. The idea, roughly, is that such assets tend to attract other units of value to them. For example, for many years now, the rate of return on investment in the American stock market has tended to considerably exceed the national growth rate. This infers that those individuals and groups who at the beginning of any given time period have wealth to invest have tended to increase their wealth relative to the average American over that same period.
This sort of phenomenon is not new. For instance in the King James Bible, Matthew 13:12 says, “For whosoever hath, to him shall be given, and he shall have more abundance: but whosoever hath not, from him shall be taken away even that he hath.” The driving force behind the systemic expression of this phenomenon in the contemporary American economy is the unfettered market.
Unfettered markets are the most efficient institutional mechanism with which to channel self-interest toward economic development. But at the same time, when they are not governed and constrained by well-designed public policies and institutional controls, namely taxes, governmental spending and regulation, they readily produce outcomes that serve the interests of the few at the expense of the many. The attainment of equity is thus one of the main reasons that strong and effective government is the most important institutional prerequisite for a successful capitalistic society.
Many of those individuals in red areas who have experienced relative decline are motivated by their perceived lack of social equity. But improvement in social equity is simply not what capital formation or free markets deliver. Rather, insofar as social equity exists, it does so as an outcome of well-designed and implemented public policy.
Social equity is rooted in ideas about what is fair, which lies in the realm of value judgments. It deals within the realm of “what ought to be” or “what should be,” not within the distinctly different realm of “what actually is.” As such, social equity is created and maintained primarily through governmental institutions, in accordance with standards that are determined by communities of people and their political representatives.
Capital formation, on the other hand, is rooted in the realm of “what actually is.” It stems from increases in the productivity of labor brought on by optimizing the efficiency and output of workers. It can be achieved through introducing advanced tools, machinery, and software to streamline processes, reduce manual labor, and improve output per worker. It can be increased through investing in training and education; creating a conducive work environment with proper facilities, ergonomic designs, and safety measures; ensuring effective leadership, clear communication, and efficient organizational structures designed to eliminate bottlenecks and enhance coordination; implementing well-structured incentives and rewards; identifying and eliminating unnecessary steps or inefficiencies in workflows; and encouraging collaboration. In today’s American economy it is achieved primarily by substituting technology for labor in production processes whenever possible.
This drive to substitute technology for labor influences all forms of capital, each in its own way. It influences the formation of human capital (marketable skills), social capital (marketable contacts and networks), intellectual capital (such as is protected by intellectual property law), building capital (real estate plant and equipment), financial capital (money in the stock market or the bank), or environmental capital (physical capacity, such as infrastructure or natural resources).
The colocation of people and firms in relatively dense conditions is a great way to increase overall productivity, so urban (blue) areas concentrate capital formation geographically. Again, this is not a new or particularly controversial insight. The influence of capital formation on urban areas has been understood and researched extensively since at least 1890. This was when the economist Alfred Marshall first systematically analyzed the ways that productivity can be increased.
Marshall argued then, as many have since, that the drive to optimize productivity and efficiency is behind the growth and development of cities. Accordingly, he and his successors have argued, cities develop due to the concentration of economic activities and resources in a specific geographical area.
Cities provide benefits such as access to a larger labor pool, specialized suppliers, and knowledge spillovers, which lead to increased productivity and economic growth. This concentration of economic activities creates positive feedback loops in which clusters of existing firms and individuals themselves attract yet more firms and individuals to urban areas, further reinforcing urban growth.
If Marshall and his followers are at all correct, and urban areas do in fact exist to facilitate capital formation, then the American economy, left to its own devices without some supervening institutional controls, may well predictably lead to an increase in the wealth of the few, who will largely concentrate in urban (blue) areas, much as Bob aptly described, and a decrease in the well-being of those in the red areas.
All of which is to say that it’s no surprise that the people who live in the exurban and rural red areas Bob identified are deeply estranged and voting for change. And it’s no surprise that those people who own the accumulating capital live in the urban blue areas. That’s what unfettered capital formation does.
What is somewhat more surprising given the relatively high levels of downward mobility in urban cores and (increasingly) suburbs, is that the blue urban areas have remained so predictably blue.
The three basic public policy levers for controlling capital formation and redirecting the economic system back in the direction of equitable resolve of the fundamental political tension Bob noted, are taxation, government spending, and regulation.
The appropriate tax policy reform would involve implementing progressive taxation systems in which the urban rich can no longer dodge taxes.[1] It might also include removing the cap on the maximum amount of earnings subject to Social Security taxes. This cap is adjusted annually based on changes in the national average wage index. For the year 2021, the cap was $142,800, meaning that individuals only paid Social Security taxes on the first $142,800 of their earnings.
The appropriate government spending might include transfer payments and spending for education, so as to provide greater equality of opportunity. It might also include direct payments to families with children to reduce child poverty and provide support for families struggling to make ends meet, increased earned income tax credits, increased housing assistance for low income families, subsidies for healthcare costs, increased nutrition assistance (such as the Supplemental Nutrition Assistance Program, SNAP), and enhanced disability benefits and support services to provide vital assistance to individuals with disabilities, reducing financial hardship and improving quality of life.
The appropriate regulatory framework would include things that countervail against the root causes of income inequality, like trust busting, protection of worker’s rights to organize, increasing the federal minimum wage and indexing it to inflation, implementing regulations to curb excessive executive compensation, promoting employee representation on corporate boards, and encouraging profit-sharing or employee ownership schemes can help address income inequality within corporations. It might also entail enforcing regulations to prevent predatory lending practices, regulating the financial sector to reduce speculation and excessive risk-taking, and implementing measures to protect consumers and address systemic risks.
So, while in my view Bob does have his finger on the pulse of the geographic and political tension in the United States today, I cannot see how abandonment of globalization or undermining the traditional commitment of American voters to the concepts of majority rule and fair elections will make this any better for the downwardly mobile. The underlying cause of this tension seems to me to be a breakdown in the public institutions necessary to establish the preconditions for capital formation to occur in a way that benefits society as a whole, rather than an ever-smaller group of increasingly wealthy and powerful individuals.
Bill Bowen
[1] A good guide is the book by Emmanuel Saez and Gabriel Zucman called The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay (2019: W.W. Norton and Company).