IN the early 14th century, Venice was one of the richest cities in Europe. At the heart of its economy was the colleganza, a basic form of joint-stock company created to finance a single trade expedition. The brilliance of the colleganza was that it opened the economy to new entrants, allowing risk-taking entrepreneurs to share in the financial upside with the established businessmen who financed their merchant voyages.The Self-Destruction of the One Percent (New York Times)
Venice’s elites were the chief beneficiaries. Like all open economies, theirs was turbulent. Today, we think of social mobility as a good thing. But if you are on top, mobility also means competition. In 1315, when the Venetian city-state was at the height of its economic powers, the upper class acted to lock in its privileges, putting a formal stop to social mobility with the publication of the Libro d’Oro, or Book of Gold, an official register of the nobility. If you weren’t on it, you couldn’t join the ruling oligarchy.
The political shift, which had begun nearly two decades earlier, was so striking a change that the Venetians gave it a name: La Serrata, or the closure. It wasn’t long before the political Serrata became an economic one, too. Under the control of the oligarchs, Venice gradually cut off commercial opportunities for new entrants. Eventually, the colleganza was banned. The reigning elites were acting in their immediate self-interest, but in the longer term, La Serrata was the beginning of the end for them, and for Venetian prosperity more generally. By 1500, Venice’s population was smaller than it had been in 1330. In the 17th and 18th centuries, as the rest of Europe grew, the city continued to shrink.
The story of Venice’s rise and fall is told by the scholars Daron Acemoglu and James A. Robinson, in their book “Why Nations Fail: The Origins of Power, Prosperity, and Poverty,” as an illustration of their thesis that what separates successful states from failed ones is whether their governing institutions are inclusive or extractive. Extractive states are controlled by ruling elites whose objective is to extract as much wealth as they can from the rest of society. Inclusive states give everyone access to economic opportunity; often, greater inclusiveness creates more prosperity, which creates an incentive for ever greater inclusiveness.
The history of the United States can be read as one such virtuous circle. But as the story of Venice shows, virtuous circles can be broken. Elites that have prospered from inclusive systems can be tempted to pull up the ladder they climbed to the top. Eventually, their societies become extractive and their economies languish.
That was the future predicted by Karl Marx, who wrote that capitalism contained the seeds of its own destruction. And it is the danger America faces today, as the 1 percent pulls away from everyone else and pursues an economic, political and social agenda that will increase that gap even further — ultimately destroying the open system that made America rich and allowed its 1 percent to thrive in the first place.
As Republicans head toward next week’s convention something extraordinary has come into view now that their ticket is complete. Mitt Romney came from wealth and went on to build his own quarter-of-a-billion dollar fortune. Paul Ryan, who has never worked a day in the private sector (outside a few months in the family firm) reports a net worth of as much as $7 million, thanks to trusts and inheritances from his and his wife’s family.The Rise of the Drawbridge Republicans (Washington Post)
Wealthy political candidates are nothing new, of course. But we’ve never had two wealthy candidates on a national ticket whose top priority is to reduce already low taxes on the well-to-do while raising taxes on everyone else — even as they propose to slash programs that serve the poor, or that (like college aid) create chances for the lowly born to rise.
Call them the Drawbridge Republicans. As the moniker implies, these are wealthy Republicans who have no qualms about pulling up the drawbridge behind them. Such sentiments used to be reserved for the political fringe. The most prominent example was Steve Forbes, whose twin obsessions during his vanity presidential runs in 1996 and 2000 — marginal tax rates and inflation — were precisely what you’d expect from an heir in a cocoon.
Most rich Republicans who champion regressive tax plans find it necessary to at least pretend they’re doing something to help average folks. John McCain, who’s lived large for decades thanks to his wife’s inheritance, famously had trouble keeping track of how many homes he owned — but McCain also tried bravely to create a path to citizenship for illegal immigrants. George W. Bush campaigned as a “compassionate conservative,” and touted education initiatives that made this claim plausible.
Today’s Drawbridge Republicans can’t be bothered. Yes, when their political back is to the wall — as Romney’s increasingly is — they’ll slap together a page of bullet points and dub it “a plan for the middle class.” But this is only under duress. The rest of the time they seem blissfully unaware of how off-key they sound. As the humorist Andy Borowitz tweeted the other day, “As a general matter, it’s a bad idea to talk about austerity if you just had a horse lose in the Olympics.”
So, I was amazed to hear Mitt Romney describing himself as having “come through small business”, as if his private equity firm were just like a mom-and-pop store or something. But Digby informs us that he made similar claims in his convention speech, making Bain sound like a scrappy little start-up. And it’s true it had only 10 people at first — that, and $37 million, yes, $37 million, in seed money.Small-Time Mitt (Paul Krugman)
Where did that $37 million come from? A large part from foreigners, in many cases investing via Panama-based shell companies. Also, funds from families of Central American oligarchs, who were sitting things out in Miami while death squads sponsored by their class, and in some cases by their relatives, were roaming their home countries.
Hey, doesn’t this sound like just your usual small-business success story?
There's a reason he wasn't named Horatio Alger Romney. There is nothing here like Mitt Romney's giveaway of the George Romney inheritance. Instead, after the campaign, Tagg "kicked around ways to parlay his campaign experience into a business venture and settled on launching a private-equity firm with his father’s 28-year-old fund-raising chief, Spencer Zwick."You Didn't Build That, Somebody Else's Last Name Did (Slate)
Solamere Capital—named after an exclusive neighborhood in Utah where the family had a vacation home—was incorporated in February of 2008, only weeks after the campaign ended. Its first office address was the Romney campaign headquarters in Boston’s North End. One of its first big commitments was $10 million from Ann Romney’s blind trust... According to a copy of the Solamere prospectus that The Boston Globe obtained, they promised “unique access” to lucrative deals that the partners would land thanks to their “close personal and business relationships.” The New York Times reported that the firm ultimately raised money from a variety of Romney donors and fund-raisers, including John Miller, a longtime family friend and former corporate CEO, and Meg Whitman, the former head of eBay.
Luckily, Melissa grew up as a rich kid (whose mythical trust fund is tied up until she can figure out how to create a life her dad likes, which, frankly, will be never when we are starting with a junk shop online and New Yorkers in bed). In case you don’t know the benefits conferred on rich kids, here’s a snapshot:Find the right career by doing the wrong career (Penelope Trunk)
Melissa picks up her phone and it’s her mom’s friend. Her mom is a doctor. Her mom’s friend is a lawyer. And her mom’s friend has a client in the Middle East who has a textiles business, and a meeting set up with Nordstrom to sell stuff to them. The lawyer wants Melissa to represent the textile firm to Nordstrom.
Not that Melissa knows anything about textiles. Or the Middle East. But so what?
She decides they need a lookbook – which is how you pitch high-flying buyers on products that have to look expensive and precious. Melissa is a great photographer who never markets herself, so it’s the perfect storm.
She takes photos of the stuff. With her friend who is not a model but looks like a model because all girls who go to expensive private schools look like models.
Then, at Nordstrom, Melissa meets all sorts of budding entrepreneurs who need lookbooks. Melissa makes the sale to Nordstrom, because Melissa can sell anything if she tries. Then she collects all the business cards of people who want Melissa to photograph their product.
Just like that, Melissa has a new, exciting job.
A friend forwarded me Posner’s latest blog post, “Luck, Wealth, and Implications for Policy,” parts of which sound vaguely like a post I wrote three years ago, “Do Smart, Hard-Working People Deserve To Make More Money?“* In that post, I argued that even if differences in incomes are due to things that people ordinarily think of as “merit,” like intelligence and hard work, that doesn’t mean that rich people have a moral entitlement to their wealth, because they didn’t do anything to deserve their intelligence or their propensity to work hard. In summary, “I have little patience for the idea that rich people deserve what they have because they worked for it. It’s just a question of how far back you are willing to acknowledge that chance enters the equation.”'Ultimately Everything is Attributable to Luck' (Economist's View via Baseline Scenario)
Posner now goes even further than I did: “I think that ultimately everything is attributable to luck, good or bad,” he writes, including the propensity for working hard, a low discount rate, and so on. “In short, I do not believe in free will. I think that everything that a person does is caused by something. . . . If this is right, a brilliant wealthy person like Bill Gates is not ‘entitled’ to his wealth in some moral, Ayn Randian sense.”
He goes on—he is still Richard Posner, after all—to argue that tax policy should be concerned solely with incentive effects. High taxes on the wealthy are not unfair in any meaningful sense, and it is meaningless to say that rich people pay a disproportionate share of their income in taxes, absent some incentive-based argument. It does make sense to tax inherited wealth more than earned income, because of the incentives it creates. The same goes for investment profits, either because they are the product of luck (in the ordinary sense) or because people with lots of money are going to invest it anyway rather than consuming it all in the current period.