The New Republic | September 14, 2011
By Timothy Noah

If you want to read a radical critique of twenty-first century American capitalism, skip the Daily Worker and go straight to Wall Street. A 2005 report by three Citigroup analysts coined the term “plutonomy” to describe an economy in which only the rich matter. In a follow-up report (cited in Don Peck’s excellent new book, Pinched), the analysts explained that the United States was “powered by the wealthy, who aggrandized larger chunks of the economy to themselves.”

Not to be outdone, Michael Cembalest, the chief investment officer of JPMorgan Chase, wrote in July of this year (in a clients-only newsletter obtained by Washington Post columnist Harold Meyerson) that “profit margins have reached levels not seen in decades,” and “reductions in wages and benefits explain the majority of the net improvement.” (Cembalest printed the latter quote in boldfaced lettering.) “US labor compensation,” he explained, “is now at a 50-year low relative to both company sales and US GDP.”

Cembalest and the Citigroup analysts see the American postindustrial economy’s abandonment of fair play as an interesting fact to consider in formulating future investment strategies, not an occasion to march down Broad Street waving some Fortune 500 chairman’s bald head atop a bloody pike. By contrast, the Wall Street maverick traders profiled in Michael Lewis’s razor-sharp 2010 narrative The Big Short see it as both. “The upper classes of this country raped this country” is one of the more polite things that Morgan Stanley money manager Steve Eisman has to say on the eve of the 2008 sub-prime fiasco. A Spartacus Youth clubber might judge Eisman’s rhetoric a trifle overwrought. A few pages later, Eisman concedes that, by shorting the sub-prime market, he helped create the liquidity that kept it going: “We fed the monster until it blew up.”

Then there’s Dan Alpert. As managing partner of the New York investment bank Westwood Capital, Alpert hasn’t lost interest in making money. But, when he describes his view of how joblessness and stagnating middle-income wages relate to the debt bubble of the aughts—as he’s been doing more and more in the financial press and on the Washington policy-wonk circuit—he sounds like Robespierre. (He’s actually more of a Hubert Humphrey Democrat. Alpert and I were grade-school friends when Humphrey lost his presidential bid in 1968; we fell out of touch soon after. This past winter, our mutual interest in income inequality, about which I’m writing a book, brought us together.)

Once upon a time, Alpert explains, American capitalists paid American laborers with something called a “salary.” Henry Ford famously boosted his workers’ pay to $5 a day so they could buy the Model Ts they were assembling. The better part of a century passed, and, by the early aughts, globalization had created a world oversupply of free-market labor—a hiring hall now housing about 2.6 billion recruits from emerging nations, together with roughly 550 million in the developed world. It no longer made financial sense to pay American workers high wages when you could pay Chinese workers low wages to do the same work. On the other hand, if American workers lost their spending power, who would keep the U.S. economy afloat?

The rise of cheap credit provided the answer. American labor effectively got paid in a different currency: debt. Instead of Model Ts, the latter-day working class bought overpriced houses and all sorts of other stuff it couldn’t afford. The beauty for the capitalists was that, when laborers got paid with debt, they had to pay it back with interest. Alpert calls it “middle-class serfdom.”

Alpert doesn’t believe there was a capitalist conspiracy; his point is that had there been a conspiracy, the outcome wouldn’t look much different. During the past half-century, Alpert explains, there were two large debt bubbles. The first one, during the late ’80s, saw real median incomes increase along with debt. Not a lot (inflation-adjusted median income hasn’t seen much growth since the early ’70s), but enough to ease the pain when the bubble burst in 1987. When plotted in a graph, the ’80s debt bubble looks like a big hill (debt) on top of a little hill (income). The second bubble, during the aughts, was a different story altogether. It occurred while real incomes went down. The aughts’ debt bubble looks like a big hill on top of a big valley. This time, there’s nothing to ease the pain.

Alpert isn’t the first person to suggest that our current economic troubles resulted from people buying with debt what they could no longer buy with wages; Raghuram G. Rajan has made a similar case in this magazine (see “Let Them Eat Credit,” August 27, 2010) and in his 2010 book Fault Lines. But Rajan is an economist. Alpert is a banker. Bankers buy, sell, and securitize debt. Banks are essentially debt stores, right?

No, Alpert says. You might call a commercial bank a debt store, he explained in an e-mail, or a foreign bank, or “the post-Glass-Steagall mega-monstrosities.” But an investment bank is (or at least is supposed to be) more of a capitalinvestment store. Alpert has, he concedes, created his share of “products” over his career, including the first pooled commercial-mortgage-backed securities to be graded by any of the big three ratings agencies. His firm got out of mortgage-backed securities “when the business became both irresponsible and commoditized. There was no value for us to add, because we don’t have a checkbook of other people’s money to fritter away.” They don’t have such a checkbook because Alpert’s firm is an old-fashioned partnership, not a publicly held company.

Why is Alpert so vocal? He says his clients benefit when “we channel our firm’s expertise, and America’s ingenuity in general, toward obtaining solutions to the current economic predicament.” A similar motive likely drove Warren Buffett to point out recently that, far from simplification, what the income tax really needs is the complication of two new tax brackets above $1 million and $10 million to keep up with growing income concentration at the top. “We now have a Gini index similar to the Philippines and Mexico,” a Proctor & Gamble vice president told The Wall Street Journal earlier this month, referring to a measure of income distribution. Since when do marketing executives keep track of the Gini index? It seems that no one making an honest effort to diagnose the economy can avoid the topic of growing economic inequality. The rhetoric sounds alarmist because the situation is a genuine cause for alarm. Maybe that’s why even Democratic politicians have almost nothing to say about it.