Last summer, on her final day as the Chairman of the FDIC, Shelia Bair decried the short-termism that has overtaken both Wall Street and Washington, where “[o]ur financial markets remain too focused on quick profits, and our political process is driven by a two-year election cycle and its relentless demands for fundraising.” This short-termism has taken hold of the reins of our larger political system and increasingly characterizes policy initiatives at every level of government. Since the 2008 bailout, banks have fought tooth-and-nail against financial regulations, including many that would serve their long-term self-interest by making the overall banking system more stable. In country after country, public services, from education to healthcare to prisons, have been privatized, and austerity measures have been forced onto unconsenting populations by deficit hawks, technocrats, and institutional creditors. And in a hugely symbolic fight last summer, U.S. Republicans proved they were willing to default on the national debt and jeopardize the country’s ability to borrow in order to shield the country’s wealthiest individuals from higher marginal tax rates. It’s a sign of how far we’ve fallen that our best hope lies in convincing our political and financial elites to “be long-term greedy, not short-term greedy.”
Economists have long recognized that individuals overvalue their present interests over future concerns. But it’s another matter entirely when we can no longer rely on our political institutions to pursue our longer-term and higher-order preferences. To borrow Robert Monks’ line about the corporate form, a state aimed at nothing beyond short-term private wealth generation is little more than an externalizing machine. Unfortunately, this is increasingly the trajectory of our politics. Wealth concentrates among a small financial elite and gets pumped back into government, not as tax dollars to facilitate collective decision-making, but as lobbying and campaign money intended to deflect regulation and further entrench the self-serving policies that helped generate these unprecedented levels of concentrated private wealth. There is a cancer-like logic to this feedback loop, where localized economic growth comes more and more at the expense of the larger body politic.
The recalcitrance of the French elite offers an unsettling parallel to the political crises of today, where even seemingly democratic governments have proven unwilling and incapable of countervailing the interests of the rich.
At some point, you might think that society’s wealthiest would feel that they’d had enough and shift to reverse this trend by placing even their own long-term self-interest over short-term profit streams. A modest request. But the problem here is as much a collective action problem as one of insatiable short-term greed. When wealth protection has become the entire logic of the system, choosing not to pursue profits or not to donate to politicians’ campaigns simply means being left behind. This dynamic hardly requires a lack of empathy or “revolt of the elite” to end in disaster. What can be done when the background legal and economic order incentivizes short-term profits and rent-seeking throughout the economy? Even a beneficent elite would stand little chance against the myriad profit opportunities that tax breaks and privatization can offer. The real question for our long term political stability is whether this vicious cycle can be broken, or whether we get dragged along until it breaks of its own accord. To risk mixing metaphors, how many more turns of the screw before the public can no longer be squeezed?
France’s Ancien Régime, particularly in the decade leading up to the French Revolution, offers a terrifying glimpse at a society stuck in the death throes of a similar cycle. The French nobility of this era exemplified an extractive elite incapable of perceiving or acting in its own enlightened self-interest. For a short time last the fall, Occupy Wall Street was drawing all kinds of comparisons to the French Revolution. Less widely discussed was the extent to which the French elites had been unwittingly digging their own graves for decades as they gutted the state from within. While it’s tempting to paint the French Revolution as a triumph of democracy and Enlightenment values, the more fundamental cause of France’s collapse was the government’s inability to reform itself or pry tax dollars from a recalcitrant ruling class.
France’s Ancien Régime was extractive long before the country fell into financial crisis. The system of taxation was fragmented, uneven, and regressive by design. Following France’s transition from feudalism, the nobility turned to the King to tax the peasants and, rather than extract taxes directly, simply maintained hereditary offices with rights to a piece of that revenue stream. The French monarchy, however, remained dependent on the cooperation of decentralized parlements–a political body of nobles that combined deliberative and judicial functions–to implement and collect new taxes. And in order to attain their cooperation, the King often had to provide the parlementary nobility and aristocracy with tax exemptions and a variety of other legal privileges. Beyond this corrupt system of bargained-for exemptions, French taxes in this period were famously regressive, with the largest share of tax burdens falling on peasants and petty bourgeoisie.
Privatizing the state was the one way in which the French monarchy actually did raise money from the French nobility and economic elites. The government was openly selling public offices to private individuals. Those who purchased political and military offices could then convert them into heritable positions by paying the crown an additional fee. Even the right to collect and keep tax revenues could be purchased from the state. This is how Francis Fukuyama described the French government in the decades leading up to the Revolution:
“Government offices, from military commands to positions in the finance ministry to tax collection, were sold to the highest bidder by a state that was constantly short of cash and desperate for revenue. Government, in other words, was privatized down to its core functions, and public offices turned into heritable private property.”
“… [The French political system] virtually legitimized and institutionalized rent seeking and corruption by allowing agents to run the public offices for private benefit. Indeed, the very word “rente” originated in the French government’s practice of selling off a public asset, like the right to collect a certain type of tax, that would produce a continuing stream of revenues.”
Of course, France existed for several hundred years under this extractive system of patronage and regressive taxation. It wasn’t until the profound financial crises of the 1770s and 80s, when the French government found itself unable to access credit markets, that the ruling classes drove the nation into chaos as they made clear how inexorably they would repel any increased tax liability. It was during this period that King Louis XVI and a series of finance ministers turned, quite urgently, to the nobility, clergy, and aristocracy to help the country pay off its foreign debts. But in order for tax reforms to take effect, the consent of the nobles and aristocrats who made up the regional parlements was required. Rather than willingly accede to these demands, many of these elites adopted a faux-populist rhetoric of ‘no taxation without representation’ and fought down every effort to end tax exemptions and move the state back toward solvency.
As conflicts between the finance ministry and the nobility escalated, a series of political showdowns–reminiscent of last summer’s debt debates–served only to strengthen elites’ stranglehold on France’s fiscal situation. Because direct tax reforms had proven politically unfeasible, the finance ministry, under the leadership of the reformist and popularly-supported Jacques Necker, was forced to propose structural changes that would limit the authority of the obstructionist parlements and end the sale of government offices. These fights against the nobility ended disastrously for Necker, and with the King’s position weakened, Necker was quickly forced out of office. Needless to say, the proposed reforms failed.
The next finance minister, Charles Alexandre de Calonne, again sought to implement a comprehensive tax reform and fared just as poorly. Rather than confront the parlements directly, Calonne convened an Assembly of Notables to help push through structural reforms, only to be defeated there as well. The nobles who made up the Assembly refused to recognize the crown’s taxing authority over the parlements, again leaving the state powerless to raise revenue from the only constituency with money. As the historian David Andress wrote, “[n]oble members made free, in all apparent seriousness, with arguments that the arrangements for local gatherings were insufficiently representative and risked establishing a despotism of the wealthy.” The irony of an untaxed upper class bemoaning the threat of institutionalized inequality was apparently lost on them completely.
Having failed repeatedly to bring the elite classes under government rule, Louis XVI called the 1789 Estates-General, a national convening of the nobility, clergy, and commoners that had last been called more than 150 years before, to propose and implement much needed reform. The nobility denied the commoners even speaking privileges and made it clear that its position was not about to change. Within weeks, the discussions had reached an impasse. It was only then that the commoners decamped in the King’s tennis courts and formed the National Assembly that marked the outbreak of the French Revolution. Even the counterrevolutionary Alexis de Tocqueville recognized that the inequality in taxation “planted the seed for all the vices and abuse which affected the old regime…and finally caused its violent death.”
In an opinion piece for the Wall Street Journal comparing the Occupy protests to the French Revolution, David Andress offered, along with some advice for the Occupiers, a few words of caution to American political and financial elites poised to repeat the mistakes of the French:
“The drive of the 1 percent to force change in government that suited their purposes helped make France ungovernable, and actively promoted the desperate last-ditch efforts to impose reform that collapsed into direct confrontation, and revolution.”
“That 1 percent was of course the nobility, and it only takes a glance at the most abiding clichés of the French Revolution to know what awaited many of them when their gridlocked leadership failed to offer the people a way out.”
Appeals to self-interest had proven unpersuasive among France’s nobility. Any collective decision that ran counter to elites’ private self-interest had become a political impossibility. And there’s been little indication that such calls would fare much differently today. Then, as now, every political battle over a proposed, and utterly necessary, tax would drive enough elites to dig in their heels so far that reform was unthinkable. Even as the very state that French nobility depended on teetered on the edge of bankruptcy, their desire to avoid paying taxes was so strong that they were willing, quite literally, to see the entire state crumble in order to make that happen.
The recalcitrance of the French elite offers an unsettling parallel to the political crises of today, where even seemingly democratic governments have proven unwilling and incapable of countervailing the interests of the rich. For all their love of liberty, the insubordination of French elites more than matched that of the revolutionaries camped in the tennis courts across the street. But the deeper problem was a structure incapable of self-correcting, incapable of breaking its extractive cycle even to save itself. Given several chances to choose the health of their state over their immediate financial self-interest, the nobility opted to render the entire nation apoplectic. Do we trust that our financial elites are more capable of acting in their own long-term self interests now? Is that something our capitalist politics can still accommodate? John Kenneth Galbraith warned that “people of privilege will always risk their complete destruction rather than surrender any material part of their advantage.” That’s probably right, if only for the reason that politics often provides no real alternatives. If only our elites were more long-term greedy, they’d see that more class warfare might be good for us all.
