Egypt's revolution of 2011 seemed like a success. Mubarak resigned, parliament was disbanded, the constitution was suspended, and free elections were scheduled. All of this was accomplished while the military exercised considerable constraint, thus avoiding widespread killing. The whole world seemed to breathe a deep sigh of relief.

But Egypt's revolution had a critical flaw: It only addressed three branches of government: executive, legislative, and military. The judicial branch was ignored, and now Egypt's revolution is paying a severe price.
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Supreme Constitutional Court of Egypt
Over the past year much has surfaced about Egypt's armed forces. They are quite independent from the executive branch, and its top officers are among the nation's wealthiest individuals. The military operates massive civilian businesses, including roads and housing construction, consumer goods manufacturing and distribution, resorts, and vast tracts of real estate. Most of the military's financial statements, along with its officers' incomes, are tightly held secrets. Some experts say it controls as much as forty percent of Egypt's economy. Indeed, Mubarak began accumulating his vast wealth, estimated in the tens of billions, as an officer in the air force. Without a doubt, the military is a central force in Egypt.

The world is just now realizing, however, that Egypt's judicial branch, headed by its Supreme Constitutional Court (SCC), is a critical fourth branch. It has played an essential role in supporting Egypt's wealthy few all along the way. The SCC is an independent and autonomous branch of government. Its decisions are final and become the law of the land. The SCC has its own budget which is not reviewed by any other branch. Its seven judges serve until the age of 65, and cannot be impeached for any reason whatsoever.

Recent trouble signs emerged when the SCC's president (akin to the Chief Justice of the Supreme Court in the US) assumed the lead role in governing the parliamentary and presidential elections. Past members of the ruling elite were favored, and popular candidates were forced to vie for limited openings. Massive protests were waged, and the SCC relented somewhat. But most of their rulings stood, and many popular candidates were squeezed out or even disqualified outright. 

Most citizens regarded the final presidential election between Morsi and Shafiq as highly unsatisfying. Shafiq was a top member of the air force, and Morsi represented conservative Islamists from the Muslim Brotherhood. Completely missing from the final election was Egypt's highly popular secular voice. Indeed, Egypt's revolution was primarily driven by secularism, not a bias toward Islamic rule, and certainly not by a desire to return power to the old regime! In the end, Egypt's final presidential election ballot was a distortion created in large part by the SCC.

Two days before the final election, the SCC realized their strategy would likely backfire, and the Muslim Brotherhood would win the election. To avoid complete disaster, the SCC shocked the world by dissolving the popularly elected Egyptian parliament––a parliament that was elected in a free election process managed by them! Further, they reallocated significant executive and legislative powers to the military, leaving the election all but irrelevant.

The underlying, untold story from Egypt is this: The judicial system will use its legal power to support the wealthy few at any cost.

The lesson for those citizens who want to reduce income disparity here in the US: don't underestimate the power and willingness of our Supreme Court to do the same thing!

FDR launched the New Deal back in 1933 in response to the widespread income disparity that ultimately created the Great Depression. His New Deal was working, which meant that income disparity was declining. In a desperate effort to protect the interests of the wealthy few, our Supreme Court declared the New Deal unconstitutional. In retaliation, FDR held a famous fireside chat and presented his "court-packing" plan. All of a sudden the Court's viability was at stake. The Court immediately relented, and approved the New Deal in what was called "the switch in time that saved nine."

Or, take the Court's recent Citizens United or Wall-Mart decisions. See the pattern? These, and many similar Court rulings intentionally help the wealthy few extract a grossly disproportionate share of wealth from our economy at the expense of everyone else.

The most recent and significant protest in the US against economic inequality, the Occupy movement, was shut down by the courts. Even though mayors issued the actual orders to close the camps and obstruct constitutional rights to peaceful assembly, they correctly assumed the courts would support them.

Judges are political beings, just like anyone else. They are biased members of the political process. The notion that judges can remain objective and impartial has been proven wrong, again and again. Until we make the judicial branch, like every other branch, accountable to the people, the courts will continue to support the wealthy few and undermine any efforts to establish a truly healthy economy. 

For a comprehensive set of recommendations on how to make the judicial branch accountable, read Deep Economics, Part 5.
 
I just watched a Niall Ferguson presentation on the "The Six Killer Apps of Prosperity" (TEDTalks, on Netflix). These factors explain "The Great Divergence," or how the West came to dominate the East in terms of wealth, and how the East has now erased the West's advantage by adopting the killer apps themselves.

For context, it is useful to know that Ferguson endorsed Romney for President a year ago. His rationale: we need "a private-equity guy in the White House." Simultaneously, he dismissed the Occupy movement as "Occupopulists." If nothing else, this conservative has a dry wit.
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Niall Ferguson
Back to his thesis. Ferguson, and a vast number of conservatives like him, assume it is OK to sum the wealth of everyone living in a country, divide it by the total number of people in the country, and use the resulting average to compare nations, continents, or civilizations with one another. To make things exciting, conservatives then compete with one another to invent stories, called "theories," for why average wealth went up or down over time. 

For all his brilliance, Ferguson's work is flawed by an egregious statistical error: you can't use averages to describe skewed numbers! This tenet is taught in every introductory statistics class; it is a very basic principle. 

As we all know, wealth is highly concentrated –– or skewed. For example, in 2007 the top 10% owned an incredible 83% of all non-home wealth! (See Part 2, Disparity for more details.) 

Averages would allow Ferguson to proudly proclaim that average wealth has been rising in the US, when, in fact, wealth has been declining for most people. Since wealth has increased dramatically at the top, the average is inflated, and the important story impacting the greatest number of people is concealed.

Numbers can reveal the truth, or they can disguise it. It depends on your values. If you value compassion and the general welfare, then you studiously avoid averages in economics. But if you value greed or winning at any cost, then averages are a great tool for hiding the carnage.

Ferguson's failure to abide by the fundamental rules of statistics means his work is fundamentally flawed. It also means that every economist who uses averages is very likely making the same mistake. And, since there are lots of economists using averages, then ... well, I think I've made my point. The leading killer app in economics is averages.
 
Women need a 65% pay increase to reach men. In 2009, average personal income was $25,370 for women and $41,750 for men.

$25,370 is a very low income. It's barely over the poverty line for a family of four.

It would cost $2 trillion per year to fix this problem. That's a lot of money. For example, we spent $4.8 trillion in four years on the financial sector bailout.

The simplest explanation for why women are paid less than men is that it would cost a lot of money to pay them the same.
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From the US Census Bureau, Table 705, 2009
In classic economic terms, where markets are all-wise, the huge pay disparity between men and women can only mean one thing: women are worth far less than men. And, since the markets are never wrong, there must be a good, logical explanation for why women are worth less. Such as: women prefer lower paying jobs, or women don't perform as well as men.

But, if we make the far more rational assumption that women are just as capable as men and they want to earn as much as men, then we must conclude that the markets are not wise, and something else is going on. Indeed, all the evidence tells us the markets are anything but perfect, and that the cause of male/female pay disparity has nothing to do with capabilities or preferences, and everything to do with our values.

Take the Supreme Court's recent Wal-Mart decision. The following facts were uncontested: women fill 70% of the lower-paying hourly jobs, but only 33% of the higher-paying management jobs. If the Court valued fair pay, it would have ruled that Wal-Mart was obviously discriminating against women. But ever since Eisenhower's two and Nixon's four conservative appointments, the Supreme Court took a decisive turn in favor of corporate interests, and has rarely looked back.

We must ask ourselves: Do institutions like the Supreme Court and corporations value the same things we do? Certainly this can't be true. Otherwise, what kind of society are we –– one that values women less than men? And, if these institutions are not in alignment with our values, what are we going to do about it?
 
One month ago Amendment 1 passed, making North Carolina the last Southern state to constitutionally ban gay marriage.

Where is the payoff from bashing gay rights? Perhaps history has a clue. The South's last unanimous campaign against civil rights targeted the black race. Even though most Southern whites had nothing to gain economically, they fought and died to protect slavery. Why?
Perhaps no one gave a better answer than Supreme Court Justice Roger B. Taney in the Dred Scott decision. His words resonated deeply in the South: "[people of the black race are] 
beings of an inferior order, and altogether unfit 
to associate with the white race, 
either in social or 
political relations, and 
so far unfit
that they had no rights 
which the white man 
was bound to respect." (For more details, see Part 1 of Deep Economics)

Taney's words succinctly captured Southern hatred of blacks. Southern gentry used it to their advantage: you poor white boys better fight and fight well, otherwise the North will force you to live cheek-to-cheek with those blacks. It was a powerful battle cry. Confederates were three times more effective than Yankees at killing the enemy. Fighting against feared personal degradation was far more motivating than fighting for somebody else's freedom.

And now Southern hatred rises again, but this time against gays. Posters like "God Hates Fags" present the essence of the message sent by Christian fundamentalists across the South. And it worked: 61% of voters supported Amendment 1 in North Carolina, which in politics is a tremendous margin of success. Liberals, fighting for somebody else's rights, were far less effective and took a terrible beating at the polls.

Conservative wealth needs voter support to maintain dominion. It wins that support by aligning with hate campaigns. War is a longstanding favorite. Hate is rallied to rationalize war, which in turn feeds the mammoth arms industry.

Another hate campaign is being tested today in Wisconsin. The campaign is presented by conservative wealth as a cure for our financial woes. But it's just another hate campaign, this time against public workers and their right to a decent wage, pension, and to be unionized. Conservative wealth hopes to win voter support, and thereby protect its dominion.

Hate campaigns restrict our vision, especially when polished by massive infusions of money. Well-financed hate campaigns make it hard to see what is really going on. They delude us into thinking hate brings deliverance. But God will not smile on Southern churches for bashing gay rights. Wisconsin's economy will not heal by cutting public spending and restricting unions. Yet hate campaigns supported by egregious wealth consistently make silk purses out of sow’s ears.
 
In previous posts I described my disappointment with President Obama's shift from a liberal campaign to a moderate presidency. In this post I discuss another moderate: Robert Reich.

In 2000 he published The Future of Success. In it he claimed: "Most of us are more prosperous than ever before. We own more. We're able to get terrific deals." And: "Today we can see the emergence of a vibrant new economy brimming with innovations. ... Jobs will be abundant, many of them exciting and well paid."
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Robert Reich
Reich was wrong. He was the Secretary of Labor for President Clinton from 1993 to 1997. He had a unique opportunity to help the common worker. But he missed it. Vast segments of our population were experiencing employment and income decline. He should have fought for the middle class when he had the chance. Instead he predicted utopia. Oops!

In 2007 he published Supercapitalism. His thesis is summarized here: "The real explanation [for the widespread decline of economic prosperity] involves the way technologies have empowered consumers and investors to get better and better deals–and how these deals, in turn, have sucked relative equality and stability, and well as other social values, out of the system."

Reich does not admit he got it wrong back in 2000. He just accepts the miserable plight of common workers as a fact. Then he blames technology for our woes. He dismisses other explanations as "mostly nonsense." Among the nonsense explanations he specifically sites are: greed, globalization, financial deregulation, tax cuts for the wealthy, etc. Here is an example of how he defends egregious, greedy executive pay practices:
  • "But the super-rich are not at fault. The market is generating these outlandish [high compensation] results. And the market is being driven by us as consumers and investors."
  • "Boards are willing to pay more and more for CEOs and other top executives because their rivals are paying more and more for them. And all are willing to pay more because, in effect, consumers and investors are pressuring them to."
This is typical "moderate-talk." It's like doublespeak. First he liberally denounces income disparity, then conservatively blames technology, not board directors or policymakers, and certainly not economists.

Reich published Aftershock in 2010. Here he defends his 2007 thesis that technology was the culprit, but now adds globalization: "The underlying problem emerged around 1980, when the American middle class started being hit by the double whammy of global competition and labor-replacing technologies." But in 2007 he dismissed globalization as a cause of our woes, and offers no explanation for the change of tune. And he doesn't explain how he missed the demise of the middle class as Labor Secretary, or why he predicted utopia in 2000.

Reich further revises his story: "Instead of implementing a new set of policies that would enable the middle class to flourish under these very different circumstances, political leaders ... embraced deregulation and privatization, attacked and diminished labor unions, cut taxes on the wealthy, and shredded social safety nets." On the one hand, Reich clearly makes a liberal statement here. But on the other hand, in 2007 he thoroughly discredited these types of liberal policies as "mostly nonsense." Will the real Robert Reich please stand up?

My conclusion is that you can't trust a moderate. They say liberal things one day, and conservative things the next. I should be happy that Reich has now embraced the need for liberal policies that directly benefit the middle class. But I can't help but wonder what side of the fence he will be on tomorrow.
 
Yesterday I read an opinion in the The Wall Street Journal entitled The Real Cause of Income Inequality by Phil Gramm and Steve McMillin. Mr. Gramm was a Republican senator from Texas, and Mr. McMillin was the deputy director of the Office of Management and Budget for President G.W. Bush. Now they both work for US Policy Metrics, a boutique advisory firm for hedge funds and asset management firms.

Notably, Mr. Gram is the first name on a particularly infamous piece of legislation: the Gramm-Leach-Bliley Act. Signed by President Clinton in 1999, it let banks greatly expand risk-taking, which contributed significantly to the current global financial crisis.
Despite the article's title, the authors never discuss the cause of income inequality. They just defend it using outdated economic platitudes. And for added fun, they blow a little smoke in our faces about taxation. The essence of their argument is:
  1. Inequality is a healthy by-product of success
  2. We all benefit from success
  3. US taxes inappropriately punish people who are successful

The true cause of inequality is something first-graders can easily understand: a few people get a lot more money than everyone else. This is the real cause of income inequality. It's pretty basic. But I guess fundamentals like these are of no use to hedge funds and asset management firms.

Imagine a school teacher who wanted to demonstrate the ludicrous nature of the Gramm / McMillin logic. Let's say the teacher held a race on an elementary school playground. The teacher gave the winner $550 in a big, clear box full of one dollar bills for everyone to see, and then handed $1 to everyone else. How would the children react? They would scream the outcome was unfair. And what would their parents say? I suspect they would see to it that the teacher who devised this little demonstration of extreme American capitalism was quickly fired.

The teacher's defense could be that the top .01% of America earned 550 times more than Middle America in 2008. (See Part 2 of Deep Economics: Disparity.) He could rightly assert that the wealthy few routinely give each other outsized rewards, and that he should be rewarded, not punished, for teaching young students the American way. But this justification would not save the teacher, would it?

Apparently hedge funds and asset management firms greatly appreciate the Gramm / McMillin logic. But it doesn't serve the general welfare. And it doesn't follow the "play nice on the playground" rule, either.