Occupy Wall Street

I have followed the demonstrations on Wall Street with interest, but not surprise. In May, I blogged about the effects of rising inequality, and I believe that the Occupy Wall Street movement is only the beginning of what will become an increased tension between the rich and poor across the world. I expect that these protests will begin primarily in the developed world but quickly spread to China and other parts of the developing world, where the fruits of economic growth have been unevenly distributed.

Corporatocracy

The United States is rapidly becoming a corporatocracy–a system of government run in the interest of corporations. In January 2010, the Supreme Court ruled that the government cannot restrict election political spending by corporations. An index fund based on the amount of lobbying that American firms do outperformed the S&P 500 by a stunning 11% a year since 2002, and one study suggests that there is a 22,000% return on lobbying investment. This follows Aristotle's prediction that an aristocracy (rule by the righteous few) will degenerate into oligarchy (rule by the wealthy few). When this happens, the poor rise up in protest, and eventually demagoguery results.

Occupy Wall Street

So far, most observers seem to regard the '99 percent' with a mixture of surprise, amusement, and disgust. The Economist suggests that they are unlikely to achieve any real impact unless they organize themselves and make their voice heard through the electoral process, and The Telegraph calls the movement 'a fashion show masquerading as a political movement.' 

It is difficult to predict how things will develop. As the economy continues to struggle, however, I expect the masquerade (and others similar to it) to occur around the world with increasing frequency and intensity. Already, demonstrations have already spread to 27 other cities in the United States, and protests are expected in at least 25 cities outside the United States on October 15. Reports also suggest that the movement is becoming more structured, with concrete demands and better organization. This may be a good thing, especially if it means that the demonstrators can make their claims heard through the electoral process (some commentators have compared them to the Tea Party). If, however, these efforts fail, things could turn ugly.

Next: Demagoguery?

The world was shocked by the riots that swept Britain's cities earlier this year. I don't expect the Wall Street protests to turn violent, but the riots in Britain provide clear warning as to how quickly social unrest can erupt and become destructive. This unrest will quickly spread across the globe, aided by social media and the Internet.

The Economics

It is difficult to argue completely in favor of the economic prescriptions of either the '99 percent' or the rich, especially since both sides have such opposing views. In this case, however,  there is broad consensus among mainstream economists that governments in developed countries should: (1) provide short term fiscal stimulus, (2) commit to a credible long term debt reduction plan, and (3) implement financial reform to prevent a reenactment of the 'too big to fail' scenario.

The pain of fiscal reform must be shared by all income groups, but I agree with Warren Buffet and others who have argued that the rich may have to contribute a larger share of the tax burden. A good place to start is with the very sensible recommendations of the bipartisan Simpson-Bowles fiscal commission. Failing this, no one will be exempt from the economic costs of social unrest.