Failure Is an Option

Two scholars scan history to find that nations fall because once-open institutions become closed and corrupt. If this sounds ominous, it should.

The financial crisis and its aftermath recently revealed how tilted our economic and political playing fields can be. During the past three decades, large financial institutions rewrote their regulations, exploited the new rules to generate enormous profits, and poured a share of those profits back into politics. When several of these institutions collapsed after an orgy of creating, repackaging, and reselling mortgages, the federal government rushed to shore them up; many homeowners who took out those mortgages lost their houses to the same banks, leaving the impression that Washington is in Wall Street’s pocket.

The power of the financial sector is only one example of the broader threat to our inclusive political institutions: namely, the ability of the economic elite to translate their enormous fortunes directly into political power. In the wake of the Supreme Court’s 2010 decision in Citizens United, super PACs can mobilize unlimited amounts of money—and can accept contributions from 501(c)4 organizations, which do not have to identify their donors. Americans for Prosperity, backed by the Koch brothers, and American Crossroads, Karl Rove’s political vehicle, both plan to raise and spend more than $200 million in the current election cycle. Mitt Romney’s super PAC laid waste to the rest of the Republican presidential field; Barack Obama countered by encouraging supporters to contribute to his super PAC, despite his earlier criticisms of big money in politics.

This may seem like a level playing field. But money is not distributed evenly. American Crossroads, for example, has consistently raised more than 90 percent of its funds from billionaires (with a “b”). The recent, breathtaking rise in inequality has put unprecedented resources at the disposal of the super-rich. With the ability to secretly invest unlimited sums in political activities, they now have the opportunity to swamp all other participants in American politics.

Rising inequality and deregulation of political spending have made possible a new kind of class warfare. The 1 percent can blanket the airwaves, install their chosen representatives, and sway public policy in their favor. That political power can be used to extract resources from the population at large. In the sixteenth century, Spanish colonists used forced labor arrangements to marshal Native Americans to mine the famous silver mountain of Potosí. Since the 2010 elections, Republican-controlled state legislatures have been pushing “right-to-work” and other bills that weaken unions and limit collective bargaining rights. Though far less barbaric, the basic idea is the same: fewer rights for workers, making it easier for companies to obtain labor on favorable terms.

The most direct way to translate political power into cold, hard cash is to advocate for lower taxes. Republican presidential candidates spent the past year competing to offer the most bountiful tax cuts to the super-rich. While they talk about closing unspecified “tax loopholes,” they want to eliminate taxes on investment income altogether, creating the biggest loophole of all. Showering goodies on the rich would require draconian cuts to Social Security and Medicare—programs that are popular among the Tea Party rank and file. Republicans’ current anti-tax orthodoxy reflects the interests of their wealthy funders rather than their middle-income base.

As Warren Buffett observed, “there’s been class warfare going on for the last twenty years, and my class has won.” This should be little surprise: “My side has had the nuclear bomb. We’ve got K Street, we’ve got lobbyists, we’ve got money on our side.” What can be done? Acemoglu and Robinson argue that a free media can protect inclusive institutions against elite capture. But the helping hand that Fox News lent to the growth of the Tea Party has shown that media institutions owned by billionaires and led by political entrepreneurs can instead become an instrument of political warfare. Constitutional checks and balances may have torpedoed Franklin Roosevelt’s attempt to pack the Supreme Court in the 1930s, but Supreme Court justices appointed by Republican presidents were instrumental in unleashing unlimited corporate political spending in Citizens United, accelerating the concentration of political power in the hands of the super-rich.

But it is too early to declare victory for the 1 percent. American billionaires are far from unified, and President Obama has plenty of friends among the wealthy. The most potent bulwark of inclusive institutions is probably the rich variety of influential interest groups that all have the ability to participate in politics. Still, the accumulation of huge fortunes and their deployment for political ends has changed the nature of our political institutions. Funding by the economic elite is a major reason why Republicans advocate transfers from ordinary people to the rich in the form of tax cuts and reductions in government services—and why Democrats have been dragged to the right along with the GOP. In addition, as Why Nations Fail teaches us, political institutions shape economic institutions. Disinvestment in public education means less social mobility and economic opportunity—key elements of inclusive institutions. A country dominated by a hereditary aristocracy, whose wealth comes from investments in multinational companies with easy access to cheap labor here and abroad, is not likely to foster the technological innovation and creative destruction that produce long-term economic growth.

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