Who rules America?

An Investment Manager's View on the Top 1% contains a bunch of interesting factoids, mostly on what separates the working rich, the bottom half of the top 1% from the more elite fractions of the wealth distribution.

Since the majority of those in this group actually earned their money from professions and smaller businesses, they generally don't participate in the benefits big money enjoys. Those in the 99th to 99.5th percentile lack access to power.

...the American dream of striking it rich is merely a well-marketed fantasy that keeps the bottom 99.5% hoping for better and prevents social and political instability. The odds of getting into that top 0.5% are very slim and the door is kept firmly shut by those within it.

The picture is clear; entry into the top 0.5% and, particularly, the top 0.1% is usually the result of some association with the financial industry and its creations. I find it questionable as to whether the majority in this group actually adds value or simply diverts value from the US economy and business into its pockets and the pockets of the uber-wealthy who hire them. They are, of course, doing nothing illegal.

Wall Street created the investment products that produced gross economic imbalances and the 2008 credit crisis. It wasn't the hard-working 99.5%. Average people could only destroy themselves financially, not the economic system. There's plenty of blame to go around, but the collapse was primarily due to the failure of complex mortgage derivatives, CDS credit swaps, cheap Fed money, lax regulation, compromised ratings agencies, government involvement in the mortgage market, the end of the Glass-Steagall Act in 1999, and insufficient bank capital. Only Wall Street could put the economy at risk and it had an excellent reason to do so: profit. It made huge profits in the build-up to the credit crisis and huge profits when it sold itself as "too big to fail" and received massive government and Federal Reserve bailouts. Most of the serious economic damage the U.S. is struggling with today was done by the top 0.1% and they benefited greatly from it.

This comes from a blog called Who rules America? in support of a book of same name, by G. William Domhoff, a sociologist at UC Santa Cruz. Interestingly, the link was posted on Hacker News. A comment referenced the theory of control-fraud, developed by William K. Black, author of The Best Way to Rob a Bank is to Own One.

White-collar criminology findings falsify several neo-classical economic theories. This paper discusses the predictive failures of the efficient markets hypothesis, the efficient contracts hypothesis and the law & economics theory of corporate law. The paper argues that neo-classical economists' reliance on these flawed models leads them to recommend policies that optimize a criminogenic environment for control fraud.

...which just goes to prove the point that you can't separate economics from politics. Susceptibility to corruption is a huge factor in the success or failure of economic systems, or more accurately systems of political economy.

Making the patent system even worse

The economist explains the state of the US patent system like this:

At a time when our future affluence depends so heavily on innovation, we have drifted toward a patent regime that not only fails to fulfill its justifying function, to incentivise innovation, but actively impedes innovation. We rarely directly confront the effects of this immense waste of resources and brainpower and the attendant retardation of the pace of discovery, but it affect us all the same. It makes us all poorer and helps keep us stuck in the great stagnation.

Congress is in the process of passing a "first-to-file system". It's hard to see this as anything but a gift to big corporations. Writing in Foreign Policy, Clyde Prestowitz calls the Americans Invent act, "...a bill likely to cut the heart out of our innovative, entrepreneurial culture...". Even the pro-patent group American Innovators for patent reform says,

American Innovators for Patent Reform is opposed to the America Invents Act and we urge the House of Representatives to draft an entirely new law that truly addresses what needs to be reformed. The America Invents Act was crafted by lobbyists for the large corporations that are notorious infringers of patents!

...and...

Canada made the switch to first-to-file in 1989, and a 2009 study from researchers at Canada’s McGill University’s Department of Economics found that the change “failed to stimulate Canadian R&D efforts” and “skewed the ownership structure of patented inventions towards large corporations, away from independent inventors and small businesses.

It looks like the US patent system is about to become even more screwed up.

Nice work as usual, congress.

BTW, Mimi & Eunice is a work of genius

More links

• The America Invents Act: First to File versus First to Invent? - Podcast

The Deficit Is Worse Than We Think

In a WSJ op-ed, Lawrence Lindsey, a former Federal Reserve governor and assistant to President George W. Bush for economic policy, gives three reasons why The Deficit Is Worse Than We Think

• Interest expense
• Anemic growth
• Health care costs

At present, the average cost of Treasury borrowing is 2.5%. The average over the last two decades was 5.7%. Should we ramp up to the higher number, annual interest expenses would be roughly $420 billion higher in 2014 and $700 billion higher in 2020. Normal interest rates would raise debt-service costs by $4.9 trillion over 10 years, dwarfing the savings from any currently contemplated budget deal. [...] The Fed will increasingly have to factor in the effects of any rate hike on the fiscal position of the Treasury.

The PROTECT IP Act

The Protect IP Act (full text) enables the government and copyright holders to compel DNS providers, ISPs, search engines and advertisers to censor sites hosting copyright or trademark infringements. They're going to make linking to pirated material a crime.

Media companies want this because it's easier to go after the intermediaries, rather than the infringers, especially those outside the US. It's not that different from the Great Firewall of China.

This is the second attempt, the previous incarnation COICA having been introduced in September of last year. Senator Ron Wyden (D-Oregon), held up that legislation and is trying to do the same again. Cheers to Ron Wyden.

Larry Downes provides an excellent summary of the "full-scale war between content distributors and everyone else" in his Law of Disruption blog, including the property seizure tactics of the Department of Homeland Security's Immigration and Customers Enforcement division, a name straight out of Orwell.

The media industries, everyone agrees, are in the fight of their lives. These businesses rely for profitability on the controlled distribution of information goods whose individual copies have a marginal cost that keeps getting closer to zero.

The EFF has a couple articles on the PROTECT IP act and a petition.

One commenter asked, "Why is the attorney general wasting precious tax dollars enforcing corporate plutocracy?"

The real question

A lot changes when the costs of production and distribution are approaching zero. The question we should be asking is this: What still has value?

• The creation itself - the skill, insight and artistic judgement necessary to make movies, music, or writing that doesn't suck.
• The ability to sift through mountains of dreck to find the good stuff. The value of the filter goes way up in the new environment.
• The community? A viable place to discuss. I'm pretty sure that the difference between Quora and You-Tube comments has value.

Legislating without a clear idea of what's valuable in the new environment will lead to useless and harmful laws that burden legitimate service providers while only slightly inconveniencing pirates - something like requiring every new car to come with a trunk full of horseshoes to protect the blacksmiths.

Humans are a tribal animal

It's amazing how much of human nature can be explained by the fact that we're a tribal animal. I'm not sure if we're more like a herd or a pack, or exactly what's the difference anyway. Street gangs, nationalism, sports fan mania, racism, cults, even religion to some extent can be all be explained by a group membership instinct. How supportive people are towards the welfare state is proportional to racial homogeneity. Tribal identity shows up everywhere from music and fashion to the followers of certain programming languages. The structure of governments and corporations mimic the alpha male social dynamic of the apes.

The countervailing force is individualism. And, somehow, technology plays a role in freeing us from our local community, separating us from those directly around us, even while connecting us to those farther away.

The bubbles of the elite

In Fighting to Shut Out the Real India, Manu Joseph writes:

The pursuit of India’s elite is to protect themselves from India — from its crowds, dust, heat, poverty, politics, governance and everything else that is in plain sight. To achieve this, they embed themselves in their private islands that the forces and the odors of the republic cannot easily penetrate.

...

The bubbles of the elite have strong walls, but the realities of India are so potent that they very often break in. There is a limit to the isolation that the back seat of a Mercedes can provide. The odors of the driver; the crippled urchins knocking at the windows; the million honking horns; the smog of unmoving traffic, these are the relentless forces of the nation seeking to breach the walls of the elite.

Why the West Rules--for Now

Ian Morris draws on 50,000 years of history, archeology, and the methods of social science, to make sense of when, how, and why the paths of development differed in the East and West—and what this portends for the 21st century.

Stanford history professor Ian Morris put out a book this past October called Why the West Rules--for Now: The Patterns of History, and What They Reveal About the Future.

His answer to that question is not unlike Jared Diamond's excellent Guns Germs and Steel. The general trajectory of human societies is dictated by biology and sociology. The differences in their success is a matter of geography. But, the development of societies and technology periodically changes our relationship with geography.

Agriculture started in about 6 places around the world with favorable geography and climate. The invention of irrigation suddenly meant that you could grow crops in places where they formerly wouldn't grow. This theme repeats itself through the growth and decline of empires up to the invention of oceangoing ships and guns. Geography drives the development of societies and the development of societies then changes the meaning of geography.

Put together oceangoing ships and working guns and this is a very powerful package. The ships allow you to cross the oceans. The guns allow you to shoot the people you meet on the other side. This is great for everybody who's got them. ...it changes the meaning of geography once again.

The same process is still at work bringing about a shift of wealth and power from west to east. Whether that happens smoothly or not or whether it even matters by the time it's complete... those are open questions.

Morris sees the near future as "a giant race between, on the one hand, something like the singularity that Ray Kurzweil talks about, and on the other hand, some kind of nightfall scenario, where we trigger a set of changes that we simply can't control, and we are looking at a collapse of civilization on a scale that has never been seen before in history."

His factors of collapse are all too familiar:

• migration
• state failure
• famine
• epidemic
• climate change