The .01%

06.28.14

Dawn of the Age of Oligarchy: the Alliance between Government and the 1%

Thanks to their cozy relationship with the Obama administration, a new class of super-wealthy oligarchs keeps getting more powerful while the country’s middle class shrinks.

When our current President was elected, many progressives saw the dawning of a new epoch, a more egalitarian and more just Age of Obama. Instead we have witnessed the emergence of the Age of Oligarchy.

The outlines of this new epoch are clear in numerous ways. There is the diminished role for small business, greater concentration of financial assets, and a troubling decline in home ownership. On a cultural level, there is a general malaise about the prospect for upward mobility for future generations.

Not everyone is suffering in this new age. For the entitled few, these have been the best of times. With ever more concentration of key industries, ever greater advantage of capital over labor, and soaring real estate values in swanky places such as Manhattan or San Francisco which , as one journalist put it, constitute “vast gated communities where the one percent reproduces itself." The top hundred firms on the Fortune 500 list has revenues, in adjusted dollars, eight times those during the supposed big-business heyday of the 1960s.    

This shift towards oligarchy well precedes President Obama’s tenure. It was born from a confluence of forces: globalization, the financialization of the economy, and the shift towards digital technology. Obama is not entirely to blame, it is more than a bit ironic that these measurements have worsened under an Administration that has proclaimed income inequality abhorrent.

Obama’s Oligarchs

Despite this administration’s occasional rhetorical flourishes against oligarchy, we have seen a rapid concentration of wealth and depressed conditions for the middle class under Obama. The stimulus, with its emphasis on public sector jobs, did little for Main Street. And under the banner of environmentalism, green cronyism has helped fatten the bank accounts of investment bankers and tech moguls at great public expense.

Wall Street grandees, many of whom should have spent the past years studying the inside of jail cells for their misbehavior, are only bothered by how to spend their ill-gotten earnings, and how not to pay taxes on it. The Obama Administration in concert with the Congress , have consented to allow  the oligarchy to continue paying capital gains taxes well below the income tax rate paid by poor schmuck professionals, small business owners and high-skilled technical types. 

In this, both political parties are to blame. Republican fealty to the interests of the investor class has been long-standing. But Obama and the Democrats are also increasingly backed in their “progressive” causes by the very people -- Wall Street traders, venture capitalists and tech executives -- who benefit most from the federal bailouts, cheap money, low interest rates, and low capital gains tax rates.   

Large financial institutions also have benefited greatly from regulations that guaranteed their survival while allowing for increased concentration of financial assets. Indeed in the first five years of the Obama Administration the share of financial assets held by the top six “too big to fail” banks soared 37%, and now account for two-thirds of all bank assets.  

“Quantitative easing,” the government’s purchase of financial assets from commercial banks, essentially constituted a “too big to fail” windfall to the largest Wall Street firms, notes one former high-level official. By 2011, pay for executives at the largest banking firms    hit new records, just three years after the financial “wizards” left the world economy on the brink of economic catastrophe. Meanwhile, as “too big to fail” banks received huge bailouts, the ranks of  community banks continues dropping to the lowest number since the 1930s, hurting, in particular, small businesspeople that depend on loans from these institutions.

This tilt towards of the financial elites, as Elizabeth Warren has noted, occurred during both the Bush and Obama Administrations. “The government’s most important job,” she remarks, “was to provide a soft landing for the tender fannies of the banks.”

Warren’s observation reflects the influence exercised by the oligarchs in both parties, a bipartisan alliance of the super-rich to buy government influence and protect theior wealth. A recent Mercatus Center report found that politically connected banks received larger bailouts from the Federal Reserve during the financial crisis than financial institutions that spent less or nothing on lobbying and contributions to political campaigns. Another study by two University of Michigan economist found a strong correlation between receiving TARP assistance and a company’s degree of connectedness to members of congressional finance committees.

As well as they have done lately, Wall Streeters have not been the only oligarchs to thrive under Obama. The tech industry, once an exemplar of dynamic capitalism, has become increasingly dominated by a handful of firms and their venture capital backers. These tech fortunes are greatly enhanced by monopolistic control of key markets, whether in search (Google); computer operating systems (Microsoft); internet retail sales (Amazon); or social media (Facebook). All of the tech giants are incessantly trying to extend their dominion into control of people’s lives, whether by tying them to a device, like the new Amazon phone, or by re-selling people’s data to advertising.

These tech companies, which author Rebecca MacKinnon (labels) calls “the sovereigns of cyberspace,” all enjoy strong, even intimate, ties to the Obama Administration. They have little reason to fear anti-trust crackdowns or scrutiny of their increasingly gross violations of privacy from friendly government lawyers.

Of course, if thing ever soured with the Democrats, the oligarchs can always look for benefactors among Republicans legislators, as Facebook and Google are already doing,. After all, most Republicans, particularly in the Senate, embraced the bailout of the large financial institutions -- the very essence of the crony capitalism that favors large, well-connected institutions over smaller ones.

Despite this administration’s occasional rhetorical flourishes against oligarchy, we have seen a rapid concentration of wealth and depressed conditions for the middle class under Obama

For the most part, the oligarchs have lined up with Obama from the start. Indeed, at his first inaugural, notes one sympathetic chronicler, the biggest problem for donors was to find sufficient parking space for their private jets. As an observer at the left-leaning Huffington Post put it, “the rising tide has lifted fewer boats during the Obama years -and the ones it's lifted have been mostly yachts.”      

The War Against Small Business

If Obama has proven a god-send for the oligarchs, he has been less solicitous of small business. Long a key source of new jobs, small business start-ups have declined as a portion of all business growth from 50 percent in the early 1980s to 35% in 2010. Indeed, a 2014 Brookings report, revealed small business “dynamism,” measured by the growth of new firms compared with the closing of older ones, has declined significantly over the past decade, with more firms closing than starting for the first time in a quarter century.

There are many explanations for this decline, including the impact of offshoring, globalization and technology. But much can be traced to the expansion of regulatory power. Small firms, according to a 2010 report by the Small Business Administration, spend one-third more per employee than larger firms on staff  who can help them meet with federal dictats. The biggest hit to small business comes from environmental regulations, which cost 364% per employee more for small firms than large ones. Small business owners and self-employed professionals also have also been among those most impacted, through the cancellations of their health care policies, by the Affordable Care Act.

The Politics of Oligarchy

To be sure, every society has its Oligarchs, those who take leadership and lay foundations for the future. Economically, the oligarchs are necessary as creators and investors in new economic potential. The great 19th century robber barons, though often exceedingly ruthless in their practices, left an enormous legacy in the form of industries such as steel, utilities and railroads that underpinned the industrial era. But only later, due to reforms and the further expansion of the economy, did the oligarch’s work translate into mass affluence.

The need to put limits on oligarchic power was clear to leaders such as Theodore Roosevelt who labeled his era’s moguls as “malefactors of great wealth.” In the early 20th century, many progressives and populists, as well as a growing socialist movement, rose to oppose oligarchy. But for most this was not so much an anti-capitalist, or even anti-market movement as a concern great power and wealth concentrated in the hands of the few. That seem fear of concentrated, anti-democratic power worried the founders, like Jefferson and Madison, who confronted a very different kind of oligarchy during the war for independence. 

“We can have democracy in this country, or we can have great wealth concentrated in the hands of a few,” Supreme Court justice Louis Brandeis once noted, “but we can't have both.”

These sentiments are still valid. Many, if not most Americans, recognize that our political economy is not working for the majority of the country. The vast majority recognize the reality of crony capitalism and understand that government contracts go to the politically connected. More troubling still, less than one third believe the country even operates under a free market system. Most suspect that the American dream is falling increasingly out of reach. By margins of more than two to one, Americans say they enjoy fewer economic opportunities than their parents, and that their offspring will have far less job security and disposable income.     

Today, Americans increasingly see the same threat Brandeis saw. American politics has ceased to function as a rising democracy and come to resemble an emerging plutocracy. These days, political choice is fought over by dueling groups of billionaires appealing to right and left to see who will best look after their interests. This can be seen in the emergence of conservative oligarchs like the energy billionaire Koch Brothers or the heirs to the Wal-mart fortune, who have emerged as the ultimate bêtes  noires for Democrats like Senate Majority Leader Harry Reid.

Yet Reid and other Democrats have less problem with their own oligarchs. Among the .01 percent wealthiest Americans who increasingly dominate political giving, the largest contributions besides the conservative Club for Growth went to Democrat aligned groups such as Emily’s list, Act Blue and Moveon.org. Seven of the ten Congressional candidates most dependent on the money of the ultra-rich were Democrats. In 2012, President Obama won eight of the country’s ten wealthiest counties, sometimes by margins of two-to-one or better. He also triumphed easily in virtually all the top counties with the highest concentrations of millionaires and among wealthy hedge fund managers.  

The Oligarchs pervasive influence buying from both parties undermines the very structure of the democratic system as well as a competitive economy. It allows specific interests -developers, Wall Street, Silicon Valley, renewable or fossil fuels producers - enormous  range to make or break candidates. As the powerful battle, the middle classes increasingly become spectators.  It’s not far off from the decadent phase at the end of Greek democracy or the late Roman Republic, examples that resonated with our classically educated founders.

Many Americans today are alarmed, and rightfully so, by this concentration of wealth and power. But right now this grassroots reaction mainly finds its expression from the political fringes. The Tea Party, for example, had its origins in opposition to the bank bailouts that followed the financial crisis. This, not surprisingly, has made some large bank executives as wary of this right-wing movement as they were of Occupy Wall Street.

In contrast, the oligarchs have little to fear from the mainstream of either party, though there are signs that smoke is wafting over the political horizon. The defeat of house majority leader Eric Cantor partly reflected concern over his incessant lobbying and cozying up to Wall Street. Similarly, nascent opposition to Hillary Clinton’s corporatist campaign is coming from at least some Democrats, notably Massachusetts Senator Elizabeth Warren. The recent shift leftwards of the Democratic Party, epitomized by New York’s Bill de Blasio but spreading nationwide testifies to growing unrest among the grassroots.

These voices, both right and left, are still far from the main corridors of federal power but they are getting closer. The oligarchs should not rest too comfortably. An observer of gilded age America may have also assumed that the oligarchic power of the robber barons and industrial magnates would continue to wax inexorably. Yet, there comes a time -- as occurred in the early years of the last century and again in the 1930s -- when the political economy so poorly serves the vast majority that it ignites a political prairie fire. We are not there yet, in either party, but if the corrupt bargain between the oligarchs and the political class goes unbroken, the wait may not be long.

Joel Kotkin is the Roger Hobbs fellow in urban futures at Chapman University, His next book, The New Class Confict from Telos Publishing, will be available in September 2014.