This commentary was written by Dr. Daniel Thornton of D.L. Thornton Economics.
Since this is my last essay for 2019, I thought I would address something that has come up a lot in the press—plutocracy. In a recent editorial in the Wall Street Journal (WSJ) here, Alan Blinder suggested the best alternative weapon against plutocracy is ending the exclusion of taxes on capital gains at death. I’m not opposed to Blinder’s suggestion. But it’s hardly the best weapon.
Plutocracy is a state of nature. In communist and other systems, the powerful become the wealthy. In more democratic and market-based economies, the wealthy become the powerful. It has always been this way and, most likely, always will be.
In Russia, China and many other countries, plutocracy is absolute—the wealthy completely control the government. Our constitution and laws mitigate plutocracy to some extent. So does our representive democracy. The extent to which the latter does, depends not only on the ethical standards of the representatives the people elect, but also on the structure created by the founding fathers. I believe the system they created does relatively little to limit plutocracy.
The newly elected to Congress quickly get a bad case of “Potomac Fever” (if you think you’d be immune from it, I suggest you think again). They soon realize the only way they can keep the “Potomac-Fever High” is to get re-elected. But to get re-elected they must cater to special interests, which they do in a variety of ways—giveaways to secure the votes of a particular group, insert loopholes in the tax code that favor certain industries, companies, the wealthy, or other constituents, etc. They find that doing so makes them even more influential and powerful. They may even delude themselves into believing (some very firmly) that what they’re doing is ok because it enables them to “do the work of the people.”
Human nature is, well, human nature, so I hold no hope it will change. However, the system which our forefathers created can be changed, albeit not easily. Indeed, I made a suggestion for changing it in the second Common Sense Economic Perspective I wrote after retiring from the Federal Reserve Bank of St. Louis, Renewing American Prosperity. The essay was in response to the editorial in the 125th anniversary edition of the WSJ (here) where some notable Americans made proposals to renew America such as: returning to a constitutional government, fixing the job-killing tax code, encouraging two-parent families, restoring the rule of law, pulling the plug on crony capitalism, etc.
I noted that regardless of their merit, none of these proposals had much of a chance happening because this would require congress or the president to fix problems they created or have allowed to exist. I believe that these problems and others are exacerbated by the structure the founding fathers created. It needs to be changed.
Specifically, I propose longer terms for the House, the Senate and the president, 6 or 8 years, and a one-term limit. In the case of the House and the Senate, if you serve a term in one you can’t be elected to the other. This would eliminate career politicians who become increasingly beholden to special interests and more powerful over time. The existence of career politicians is one of the reasons government programs live forever once they are started.
I also propose that the President and members of Congress be paid a salary and benefits similar to those of high-level executives in Washington D.C., a reasonably generous 401(k) during their term in office, health insurance, and expenses including all of the costs of transitioning from private to public life and back again. However, none would receive a life-time pension.
These changes would make public service more attractive to intelligent, hard working people who would like to make a contribution to society, but don’t believe their ethical standards are sufficiently flexible under the current structure. Smart people with high ethical standards but don’t want to make their families or themselves to sacrifice too much economically might also find running for congress more attractive. It would also eliminate the endless reelection cycles that waste enormous amounts of time and financial resources.
These changes are not a panacea. Moreover, they cannot happen without a constitutional amendment, which is an extremely low probability event—congress has no incentive “to bite the hand that feeds it.” It can happen only if the public demands it. It will require massive and very persistent demonstrations by the public, on the scale (and, perhaps percentage-wise larger) than those that have occurred recently in Hong Kong.
Such a movement will likely require the support of wealthy individuals. Why would the wealthy want to limit their ability to influence government? I would say because they recognize, as I do, that the current system is unfair and unsustainable. I’m not sure how likely this is, but the founding fathers demonstrated that it can happen.
I fear that absent this or some equally dramatic change, we are on a collision course with disaster. I’m not sure what form the disaster will take. There are lots of possibilities. Disasters always produce change but not the careful, thoughtful change that generates better results.
On this cheerful note, I wish you a happy Holiday Season and a healthy and prosperous New Year.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor piece written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy. This piece does not necessarily reflect the opinion of Hedgeye.
