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Thursday, October 25, 2012

The Plutocracy Will Go to Extremes to Keep the 1% in Control


Moyers, Matt Taibbi and Chrystia Freeland explain how the plutocrats have willfully confused their self-interest with America’s interest.

From BillMoyers.com:
The One Percent is not only increasing their share of wealth — they’re using it to spread millions among political candidates who serve their interests. Example: Goldman Sachs, which gave more money than any other major American corporation to Barack Obama in 2008, is switching alliances this year; their employees have given $900,000 both to Mitt Romney’s campaign and to the pro-Romney super PAC Restore Our Future. Why?

Because, says the Wall Street Journal, the Goldman Sachs gang felt betrayed by President Obama’s modest attempts at financial reform. To discuss how the super-rich have willfully confused their self-interest with America’s interest, Bill is joined by Rolling Stone magazine’s Matt Taibbi, who regularly shines his spotlight on scandals involving big business and government, and journalist Chrystia Freeland, author of the new book Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else.

Full transcript of the interview below the video:

BILL MOYERS: The new Gilded Age is roaring down on us, an uncaged tiger on a rampage. Walk out to the street in front of our office and turn right and you can see the symbol of it: a fancy new skyscraper going up two blocks away. When finished, this high rise among high rises will tower a thousand feet, the tallest residential building in the city.

The New York Times has dubbed it "the global billionaires club," and for good reason. At least of two of the apartments are under contract for more than $90 million each. Others, more modest, range in price from $45 million to more than 50 million.

Simultaneously, the powers-that-be have just awarded Donald Trump -- yes, that Donald Trump -- the right to run a golf course in the Bronx which taxpayers are spending at least $97 million to build. What “amounts to a public subsidy,” says the indignant city comptroller, "for a luxury golf course." Good grief. A handout to the plutocrat's plutocrat.

This, in a city where economic inequality rivals that of a third-world country. Of America's 25 largest cities, New York is now the most unequal. The median income for the bottom 20% last year was less than $9,000, while the top one percent of New Yorkers has an average annual income of $2.2 million.
Across America, this divide between the superrich and everyone else has become a yawning chasm and studies indicate it may stifle jobs and growth for years to come. At no time in modern history has the top one hundredth of one percent owned more of our wealth or paid so low a tax rate. But in neither of the two presidential debates so far has the vastness of this astounding inequality gap been discussed. Not by Mitt Romney, who is the embodiment of the predatory world of financial capitalism. And not even by Barack Obama, whose party once fought for working men and women against the economic royalists.

So just in time, if not too late, comes this definitive examination of inequality: Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else. Its author is Chrystia Freeland, whose journalism is steeped in years of covering robber barons from Russia to Mexico and India. Once deputy editor of The Globe and Mail in Canada and a correspondent for The Financial Times and The Economist, she is now the editor of Thomson Reuters Digital.
We're joined by the perceptive and merciless Matt Taibbi, who has made the magazine Rolling Stone a go-to source for understanding the financial scandals that roil America. Who can forget his 2009 article on "The Great American Bubble Machine," which described investment bank Goldman Sachs as quote, "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”? ... Income inequality has soared to the highest level since the Great Depression, with the top one percent taking 93 percent of the income earned in the first year after the recovery, the first full year after the recovery. Why are the two candidates not talking about inequality growing at breakneck speed?

CHRYSTIA FREELAND: You know, I think because it is still a taboo in American political life and in American cultural life. One of the economists I talk to he works for the World Bank. And he said to me, you know, and he's a specialist in income inequality.

And he said, "When you go to think tanks you say you'd like to do a study about poverty, they say, 'That's fine. That's great. We're happy to fund it,' because writing about poverty makes everybody feel good and feel that they're being charitable and beneficent. But if you say, 'Actually, I want to study income inequality,' and even most dangerously, 'I want to study what's happening at the very top of the distribution," what Branko Milanović said to me is the think tanks immediately pull away because they say, "Our donors won't like it."

And that actually challenges the whole economic setup of the United States and of western capitalism. It’s very, very threatening. And I think that that’s why you've had the billionaire class. You know, the minute Barack Obama, I would actually say rather gently suggested that the millionaires and the billionaires should pay a little bit more, you had immediate cries of class warfare from the plutocrats. And very emotional. You know, there was an activist investor who sent an e-mail to his friends. The subject line is, "battered wives." And in the e-mail he compares himself and his fellow multi-millionaires to battered wives who are being beaten by the president. He actually uses those words.

MATT TAIBBI: And I thought it was really interesting in your book how you pointed out that Bill Clinton, himself, responded to Obama's criticism by saying, "You know, I would have done it a little bit differently. I think, you know, you can't attack these people for their success." And I think that's very relevant because if you go back in time, it wasn't always this way.

But I think the shift really began with Clinton and the New Democrats. I think after, you know, Walter Mondale lost in 1984, the Democrats decided, "You know, we're never going to lose the funding battle again." And they began this sort of imperceptible shift, where they continued to campaign on social issues the same way they had before.

They retained their liberalism in that sense. But economically, they began to side more and more with Wall Street and more and more with the very rich. And they've, I think we've now reached the point where neither party really represents the very poor in the way that the Democrats maybe used to. And so, that there's, that's why, you know, you don't see it in the debates, because neither party is really an advocate for that kind of left behind class anymore.

CHRYSTIA FREELAND: It is the people at the bottom, as Matt says. But it's also the people in the middle.


CHRYSTIA FREELAND: You know, the middle class is being--
MATT TAIBBI: Decimated, yeah.

CHRYSTIA FREELAND: --hammered. Those jobs are hollowed out. And where are the people pulling back and saying, "Okay, technology revolution, we love it." Globalization, I love that too. And I think it's great people are being raised up in India and China and now Africa. But let's think about how our society and our politics need to change to accommodate this. And no one is doing that. And meanwhile, the guys at the top, who are making, who are doing so, so well actually are saying, "We need to slant the political system even more in our own favor."

BILL MOYERS: Why are we so passive about this?

MATT TAIBBI: Well, I think the, first of all the poor in this country have been incredibly demoralized whether it's the relentless attention of, you know, bill collectors. Or if you go to poor neighborhoods, you know, I was out in Queens last night interviewing a kid who's been stopped and frisked 70 times already. He's 22 years old. You have this constant interference by the police if you live in a bad neighborhood.

There're all these obstacles to getting up and rising up and having your own voice. And also I think in the media we get these relentless messages that being poor is actually your own fault and that people who are rich deserve to be rich. And a lot of Americans are disillusioned about their situation. They believe, they actually do believe on some level that if they're poor, they deserve to be that way. I think they're, and so they're reluctant to go out and revolt the way maybe Europeans in the last century, early in the last century would have.

BILL MOYERS: Left unanswered, left unanswered where does this vast inequality take America?

CHRYSTIA FREELAND: Well, I think to a very bad place. And I see two real and present dangers. One is that you see an increase of the political capture.

CHRYSTIA FREELAND: Of the political capture. So of the people at the very, very top, capturing the political system. And most crucially, I think something that an economist, a guy called Willem Buiter, who's the chief economist at Citigroup, he calls it cognitive capture. Where he says, look, it's not like this vast conspiracy. It's not as if, you know, everyone is on the payroll of the plutocrats.
And this guy, okay, he is now the chief economist of Citigroup. He wrote this when he was an academic economist. But so it's, he's hardly, you know, some kind of Marxist on the barricades. His argument was that part of the reason the financial crisis happened is the entire intellectual establishment, not just people inside investment banks, but regulators, academic economists, financial journalists, had all been captured by the financial sector's vision of how the economy should work. And in particular, light touch regulation.

And I think there is a broader cognitive capture of, you know, you might call it the intellectual class, the public intellectuals, around maybe the inevitability of plutocracy. You know, as Matt was saying, this notion that if you're poor, it's your own fault. You're part of this dependent 47 percent. Unions are very bad. All of that sort of stuff.

So I think that that cognitive capture increases. And I think what you see increasingly is, you know, elites like to think of themselves as acting in the collective interest, even as they act in their personal vested interest. And so what I think you'll end up seeing is social mobility, which is already decreasing in the United States, being increasingly squeezed. You see particularly powerful sectors, finance, oil. I would say the technology sector is going to be next in line, getting lots of government subsidies.

And meanwhile, I think you see much less money spent on the things that the middle class and the poor need. That's why have this, you know, full bore attack on entitlements, right? Why is the plutocracy so enthusiastic about cutting entitlement spending? Because they don't need it. But they're very worried about their tax dollars funding it.

MATT TAIBBI: Right. Where was that outrage when the $5 trillion or $6 trillion in bailouts was coming their way?

CHRYSTIA FREELAND: Right. So I really worry about that. And then the other thing that I worry about is you do start actually stifling economic growth. So, you know, if you want my dystopia scenario for the United States, it is that America's moving into a more Latin American structure of the economy.
BILL MOYERS: People at the top, rich. And a lot of people—

CHRYSTIA FREELAND: A few incredibly rich, you know, having just great lives. And then people at the bottom really struggling.

MATT TAIBBI: We both lived that. We saw that in Russia and it happened in the mid-'90s. And—

BILL MOYERS: Yeah, you both cut your teeth in journalism covering Russia. What do you take away from that that is relevant to what's happening in this country?

MATT TAIBBI: You know, I, that experience completely shaped the way I look at the present situation in the, in America. In the mid-'90s, suddenly when Russia became a "capitalist society" you suddenly has this instant division of the entire society into this very, very tiny group of people at the top who had more money than anybody in the world. And then there was everybody else who had nothing.


BILL MOYERS: And they got it through privatization, the government sold off the resources of--

CHRYSTIA FREELAND: "Sold" in quotation marks--


MATT TAIBBI: But that was, that's the key part that I think people don't understand, is that what happened in Russian was really a merger of state and private power that empowered this one tiny little class. There was this moment in Russia's history called loans-for-shares. The loans-for-shares privatizations, where a few people, a lot of them were ex-KGB types, were essentially handed the jewels of Russian industry by the people in the Yeltsin government. There were companies that were put in charge of their own auctions. So they--
CHRYSTIA FREELAND: They were all in charge of their own auctions.

MATT TAIBBI: They were all in charge of their own auctions. So they, you would have an auction for an oil company and a bank would be put in charge of that auction. And the bank magically, you know, would win the auction for the oil company, which was worth, you know, billions or even hundreds of billions of dollars. And that's how they instantly created this super wealthy class of people. And everybody else had nothing. This one story, for me this image that I'll never forget. I went to a coal mine up in the Russian arctic north where workers hadn't been paid their salaries for nine, ten months at a time. And when I went to the mine, the mine owners, the first thing they wanted to do was to take me to their bright shiny new lounge that they had built for themselves and show off their brand new slate pool table that they had built with the money that they weren't paying to their workers.

And that, to me, perfectly expressed the divide in modern Russian society. You had these people who were living off nothing on the one hand. And then you had these super wealthy people who had been enabled who had just kept the money for themselves. And that's I think, you know, it's a caricature of what we're experiencing here in America. But I think that's where the world is drifting toward now.

BILL MOYERS: You write about some of these super rich, not only with insight, but with empathy. That is, you've gotten to talk to a lot of them. You have moved among them as a financial journalist, been to Davos and other places like that. And I'm wondering, how did you crack what is clearly a tight knit world?

CHRYSTIA FREELAND: Well, I guess the way journalists do it, just by talking to people, writing about them. I think you write stories that show people that actually you're interested in what they're doing. And what I would also say is, you know, I believe in capitalism. And I also actually believe in globalization and the technology revolution. If you gave me the option of turning the clock back to the 1950s, I wouldn't do it. Partly because I'm a woman and things were not that great for us then.


CHRYSTIA FREELAND: And, you know, it's important, you know, I think a mistake that the left can make in criticizing income inequality is to behave as if this is entirely a political confection. It's entirely about political capture. There are no genuine, legitimate and actually benign economic forces driving it. Because I think there are. I think the winner take all economic dynamic is something that is existing separate from the politics. The politics in the United States are exacerbating that division rather than mitigating it.

But I do think that when you pull back and look at the global picture, which is something that was important for me to do in the book, it becomes a little bit harder to say, "this particular American tax break," or even, "this particular American financial reform is the only thing driving income inequality," because the really remarkable thing is the extent to which this is a global phenomenon.
It's happening across the western industrialized world. I'm Canadian. So I'm practically born a socialist in the view of many Americans. But even in Canada, income inequality is increasing. It's even, you know, for a while in the economic literature the one outlier was France. And so, insofar as economists make jokes they would say, "oh, the French. They have to be exceptional even in this area." But now you're seeing it increase in France too. And you're seeing it increase in the emerging market economies. So I think we do have to accept that there are some economic drivers.

Now those economic drivers are partly put in place by the politics. It was politics that allowed globalization to happen. And in the United States really crucially, and I think you can't emphasize this too much. Look at what happened with the tax code. I mean, in the 1950s, this era when America felt itself to be a very conservative society, and it was, the top marginal tax rate was above 90 percent.

BILL MOYERS: Yeah, 91 percent, I believe.

CHRYSTIA FREELAND: Right, just think about that. Imagine if Barack Obama had said in the debate this week, "You know what Governor Romney? I think America in the '50s was a wonderful place. That was the age of the greatest generation. They, too, faced a real budget deficit they had to pay off. And the people at the very top were willing to pay a 90 percent top marginal tax rate. Would you be willing to do that, Governor?" I mean, imagine if he had said that.
BILL MOYERS: You cover some of the same crowd that Chrystia's writing about, but you do so with a, with complete irreverence. Do you still gain access to them? Or have all the doors been slammed in your face?

MATT TAIBBI: Well, the very, very top people won't talk to me. You know, I don't have access to the same people that Chrystia maybe talks to. But I do talk to a lot of people who work on Wall Street. In fact I got started down the road of this whole topic, you know, after I wrote a couple of articles. And then suddenly on this there was this outpouring of people from Wall Street who suddenly wanted to talk to me because they were upset about the direction that the financial services industry was taking.

So I'm hearing a lot from people sort of from the middle on down on Wall Street. And what they're really upset about is corruption. Is this merging of state and private power, where the losers don't lose anymore. I think the people who get really upset are small hedge funds, small banks. And they see companies like, you know, Citigroup and Goldman Sachs and J.P. Morgan Chase make mistake after mistake. And they get rewarded for it what with bailouts and even greater market share than they had before.

And so, you know, my analysis is informed by those people. And I think, you know, I think Chrystia and I agree about a lot of things about, particularly about the growing divide and how extreme it's become. My analysis just might be a little bit angrier just because the, you know, from the point of view that I'm particularly looking at is the corruption and the use of force and state power to keep divide where it is and increase it.

BILL MOYERS: You both have pointed out that we tend to talk as if Wall Street and the plutocracy were a monolith. But it's not. Do you think there is a civil war within the one percent?

MATT TAIBBI: There is absolutely a schism developing in this community. Think about it just on one level, on the level of banking, right? If you have these too big to fail banks, everybody in the world knows that nobody's going to l allow the very biggest commercial banks to go out of business. It will never happen. 2008 proved it, that if they ever get in trouble the government will come in and rescue them. So what does that mean for those banks?

It means that it allows them to borrow money more cheaply because anybody who lends them money knows they're always going to get paid off. The government if, in the worst case scenario, they're going to get paid off. So this gives them an inherent financial advantage over the small, regional commercial bank, which does not have that implied government guarantee. And so those people are furious.

They're furious that they have to compete against these gigantic monoliths that have the implicit backing of the U.S. government. Then there's the other problem of corruption. I mean, I hear all the time from hedge funds you know, these smaller guys who believe that some of the big investment banks are selling them out to even bigger hedge funds, that are, you know, giving away information about their positions to even bigger clients so that somebody else can trade against them.

Or maybe the banks themselves are front running their positions and trading against their own clients. There's this schism developing between the smaller guy the medium size financial player and the very, very big too big to fail companies that are perceived as getting a break, and getting the backing of the government. And also are perceived as getting away with stuff that they wouldn't get away with.

CHRYSTIA FREELAND: I agree with Matt. And I think what you’re really seeing , actually, it's sort of the battle of the millionaires versus the billionaires because this winner take all dynamic is not just between, you know, the 10 percent and the 90 percent or the one percent and the 99 percent.

What's quite interesting and leads me to really believe that there're some deep economic forces involved is it's happening just as much within the top one percent. We saw it in the recovery. You sited those statistics, Bill, about 93 percent of the recovery going to the one percent. Thirty-seven percent of the recovery went to the top 0.01 percent.

So even in there, there's, you know, even more of a gap. And the people one layer down can be very, very aggrieved precisely because, you know, they see what's going on. They see that unfairness. And it makes them really, really mad.
You know, one of the things that I found as I was writing my book and talking to plutocrats was, you know, as Matt says, these are very, very smart people. And many of them, not all, some—
BILL MOYERS: They work very hard too, don't they?

CHRYSTIA FREELAND: This is not Downton Abbey. These are not people, this is not a landed gentry. These are people who even, and even if they're sort of a Mitt Romney or a Bill Gates who grew up very affluent, their actual business, they did build themselves. They built in a society that was very supportive of that, but they built it. So, you know, they're hardworking. They have to be thoughtful about the world because they're making investments.

And what I found was very interesting was they were very keen to divide the world into the good plutocrats and the bad plutocrats. And what was very funny was everyone was happy to make that division. But everyone felt that they themselves and their particular type of business belonged to good plutocrats, and somebody else belonged to bad ones. So you talk to the Silicon Valley guys, they love talking about this, especially after the financial crisis because their view was, "Of course income inequality is a problem. Of course there has been state capture by those bad guys in New York. "We however, are the innovators. We created value ourselves. We are completely pure and good. And these issues really have nothing to do with us."

BILL MOYERS: Do you think they think they're really defending honest capitalism?

MATT TAIBBI: Oh, absolutely. I, you know, the one thing that's consistent in my exposure to the financial services industry is that the people who work within it, and particularly the people you know, at the very, very top, sincerely believe that they have not done anything wrong. And, you know, when you bring up things like the mass sale of fraudulent mortgage backed securities, it's just like you say.
It's always somebody else who made that mistake. You know, "We didn't know at the time that we were selling billions and billions of dollars of junk and we were dumping this on pension funds and foreign trade unions." It was always somebody else who was doing that. And they also have built up this very, very powerful insulating psychological justification for their lifestyles. They've adopted this sort of Randian point of view, where--


MATT TAIBBI: Yeah exactly, you know, they genuinely believe that they are the wealth creators and that they should get every advantage and break whereas everybody else is a parasite and they're living off of them. So when you bring up to them, for instance, how is it that nobody, despite this mass epidemic of fraud that appears to have happened before the 2008 crash, how come nobody of consequence has gone to jail after that?

They always, you know, they always argue against more regulation and more enforcement because they say, "We need room to, we need air to breathe, we need room to create jobs. And this is just counterproductive to put people in jail. It'll cast a pall over society.

CHRYSTIA FREELAND: If I may say so Bill, this very sincere, absolutely, absolutely sincere self-justification, I think, is one of the most dangerous things that's happening because in our society, and I would say this is particularly powerful in America. Really since the Reagan era, there has been this vision of the successful businessperson as really a leader for the whole society. And there has been a view that the businessperson, what he thinks, and, by the way, all of my plutocrats are men.

But, you know, what he thinks about how society should be ordered, we should all listen to because he, after all, is the hero of our time, is the hero of capitalist narrative. And I think it's so important for us to really understand that what is good for an individual business, particularly in this age of very high income inequality and the ways of thinking, the ideas that are no doubt absolutely the right ones for this particular business, may very well not be good for society as a whole.

BILL MOYERS: Both of you write in different ways that, with irony, that they threaten the system that created them.

MATT TAIBBI: Well this was another thing, another image from Russia that always stuck in my mind. And I studied in Russia when it was still communist. I remember going through the countryside. And you had all these villages and people walked around in the villages.

And then suddenly in the mid to late '90s in Russia you drove through the Russian countryside. And suddenly there were these big brick houses that had these huge walls on the outside, these big brick walls with guards on the outside. It was the rich had sort of built this wall that insulated them from the rest of society.

They were living, there was one society on one side of those walls, and then one society on the other side of it. And I think that's where we're headed now. We have this kind of community of rich people who sort of live, hop from place to place. And they never have any sort of intercourse with the rest of the world.
BILL MOYERS: Disconnected?

MATT TAIBBI: They're completely disconnected. And so they've built this kind of nation where inside, it's all, you know, nice and everything works logically. And it makes sense to them. But they never really see what goes on on the outside.
BILL MOYERS: Do they feel entitled?

CHRYSTIA FREELAND: Yes. Absolutely. And, you--

BILL MOYERS: For what reason?

CHRYSTIA FREELAND: Because they are treated so well. So my favorite story about this was when I was at Heathrow Airport, about to go to a fancy conference. And I ran into someone also going to a fancy conference, a Silicon Valley senior technology person. You know, I didn't have a car. But he had a car coming to picking him up and so he offered to share the ride. So we're in the car and this technology guy said to me, when you live our life, you are surrounded by such power and such entitlement, you lose touch with reality." And his very personal example was he said, "I was recently staying at this lovely Four Seasons Hotel. And I was beside the pool. I was eating a melon. And my spoon fell to the ground. And he said, "Before I could summon anyone, someone rushed up to me with three spoons of different sizes on a linen napkin so that, God forbid, you know, I shouldn't have the wrong size spoon."

And what he said was, "You know, what was amazing to me," he's talking about himself, "is when I reentered my real life," he said, "I was kind of a jerk because I like, I expected to live a life where I was constantly being presented with three spoons of different sizes. And I just I couldn't deal with the frustrations of everyday life." What makes this a totally ironic story is here he's telling this kind of self-aware story about the plutocracy.

But when we had been in the airport waiting for the car, he was on the phone, screaming at someone about "Where is my car," et cetera, et cetera.
So this is, you know, morning in Heathrow. Middle of the night, you know, in San Francisco. And he's yelling at someone there because she hasn't organized his car and we had to wait for five minutes. And then he tells me this story about how entitlement can make you not an ideal person. That kind of says it all, right?
BILL MOYERS: But political behavior's another thing. And there's no doubt in either of your minds, is there, that they tilt the rules in their favor through their influence and power over the politicians.

MATT TAIBBI: Absolutely. I mean--

BILL MOYERS: I mean, our own government relaxed the regulations, upended the rules, leveled the laws to make way for them.

MATT TAIBBI: They have this power and influence over the government to and they've been continually deregulating the atmosphere to legalize whatever it is that they want to do, whether it's, you know, merging insurance companies and investment banks, whatever it is. The derivatives, the Commodity Futures Modernization Act of 2000, they lobbied heavily to create a completely deregulated atmosphere for that. And we saw what happened with that in 2008 with the collapse of companies like AIG. They've been incredibly successful in creating their own landscape where they get to do business the way they want to do business.

CHRYSTIA FREELAND: And what I think is crucial is, this is not framed as, "I want government to do this so I can get rich and my company can prosper." This is framed as "We need to do these things for the greater good." And this is where I think another big problem in America today is a disempowering and a devaluing of the role of government and of its authority as an independent, respected arbitrating body in the center of the ring. And one of the great contrasts for me in the past decade has been looking at what happened in bank regulation in the United States and looking at what happened in Canada. Matt has just spoken about bank mergers. And with hindsight, you know, one of the great brave decisions taken by the Canadian government was to not allow the Canadian banks to merge. They wanted to. Huge lobbying effort. And they made the same arguments about, "Oh, if we can't merge, we'll never operate on a global scale. You know, Canada will be left behind. We'll be a provincial backwater." And the government just said no. And that decision I think flows directly into the Canadian government's ability to regulate the financial sector.
Leverage at U.S. levels was not allowed. And the consequence was Canada didn't have a financial crisis. It's the only G7 country that didn't have to bail out its banks. So government can actually hold the line. Government can--

BILL MOYERS: But not if it's captured, Chrystia.

CHRYSTIA FREELAND: Not if it's captured. Not if it's captured. And so--
BILL MOYERS: And it is captured—

MATT TAIBBI: But now we're completely captured, with the banking example, now we have these banks that are literally too big to fail in America because we didn't do the same thing.

CHRYSTIA FREELAND: But government can act. I mean, I think it's important not to have a counsel of despair. That you can have a sophisticated, industrialized western economy. People can live, you know, civilized lives. They can have bankers. Their bankers even, maybe they're not going to earn $25 million. But they can earn $5 million or $6 million.

They can be perfectly affluent. And government can actually stand up to its banks and stand up to other sectors of industry and say, "You know what? I'm sure that would be great for you guys. My judgment is it's wrong for the country. And you're not going to do it."

BILL MOYERS: They resent any criticism, despite all the advantages and entitlements they have. They also exhibit disdain, as Mitt Romney made clear in that infamous or famous 47 percent video. You know, when he talked about other people being dependent on government.

MATT TAIBBI: I've heard that attitude more than once, and not just from Mitt Romney. I think it's, again, it's consistent with this mindset that there is an intellectual atmosphere that these people I think have to work within in order to justify a lot of what they do, because you have to be completely disconnected from the real world in order to do things like sell fraudulent mortgages to a state pension fund. If you're actually thinking about that, you know, you're taking somebody's life savings away when you do that. But you can't think about that.

BILL MOYERS: Matt, you quoted the billionaire Charlie Munger of Berkshire Hathaway, who said that anyone who wants to complain about the Wall Street bailout should realize they were, "absolutely required to save your civilization." What did he mean by that?

MATT TAIBBI: Well, again, this group of people believe that all of civilization depends on their health and their wellbeing. So when they were threatened in 2008, when they were all about to collapse, it made absolute sense to them that the government should immediately intervene and give them as much money as they needed, to not only to get back on their feet, but to restore their lifestyles to the level that they had been accustomed to.

CHRYSTIA FREELAND: So I'm going to, here, step in as a voice in favor of the bailout. I think that Munger was right. I do actually believe--

BILL MOYERS: Saving civilization?

CHRYSTIA FREELAND: Yeah, I think it was. I think that the bailouts were absolutely essential. I think that, had there not been a bailout, which, by the way, let's remember, voices on the right as well as the left were objecting to the bailout at the time. I think had there not been a bailout, you would've had a much more severe crisis. You would've had a full financial collapse and a much, much deeper economic recession. Now, I think where you can and should criticize is first of all, why was the crisis allowed to happen in the first place and the regulatory failure beforehand. I think second of all, you know, where were the strings attached? And actually Charlie Munger's great business partner, Warren Buffett, drove a much harder bargain with Goldman Sachs than the U.S. Treasury did.

You know, 2008 is not so long ago. And already, the anti-regulation chorus is so strong. You know, I think the re-regulation was not done well at all.
But the fact that people are already making a very, you know, powerful and proud argument against government regulation, bankers are making this argument. I mean, how dare they. How dare they have the gall to actually argue that too much regulation of American financial services is what is killing the economy.

MATT TAIBBI: Right. Right. Just to be clear, I actually agree that the bailouts were necessary. What I completely disagree with was the way they were done. They just simply threw a whole bunch of money at this community and didn't have any conditions at all. They didn't sweep in and change any rules. You know, and after the S&L crisis, for instance, we went in and there were massive criminal investigations.

We put 1,000 people in jail. There were no such investigations this time around. So this was just making everybody well again and restoring everybody to the status quo, which I think was a major mistake because it produced precisely the result we're talking about now. It allowed everybody to think that the previous status quo was okay.

BILL MOYERS: Let me talk about the CEO class because it seems almost every day now there's a new story of some CEO, some boss of a big company who's attempting to tell voters to vote as they say.

CHRYSTIA FREELAND: If you really see yourself as a job creator, someone who is not just pursuing their business interest in getting richer, but someone who is creating jobs, doing great things for America and for your workers, and you also sincerely believe that Barack Obama is a bad guy, then you feel you have to help your workers to understand this. You know, you have to let them know that you, the job creator, believe that this job creation of which they are the fortunate beneficiaries, you know, that engine is going to slow down. It's going to grind to a halt.

BILL MOYERS: Do you see this as different from what unions do in urging their voters to go out and vote for the candidates of their choice? Do you see it differently?

MATT TAIBBI: I think it's a little different just because there's an implied threat. It's very, very vague, but, you know, if the CEO of your company suggests to you that you have to vote for Mitt Romney or you have to give money to the Romney campaign, I think the tendency to, you know, to not break ranks, is going to be a little stronger than maybe it would be in a union.

But I think it grows out of this, you know, companies and corporations, they're not democracies. They're authoritarian structures. And the people who work in those companies-- they start to adopt those attitudes after a while. And especially the people at the very top.

I think they've begun to actually believe that their authority extends beyond that. And I just think that people– it’s a little bit different when it’s something your boss tells you to do something than when your union brothers tell you something.

BILL MOYERS: Matt, you have written a lot about the tax code and these plutocrats. Exactly how do they work the tax system?

MATT TAIBBI: Well the plainest example is Mitt Romney. I mean, you know, if you look at his tax returns, he paid, you know, rates of 14, 13 percent. That's totally normal in this world if you work in a private equity fund. Your income is—

BILL MOYERS: Again, he's not an exception, he's an embodiment.

MATT TAIBBI: He's an embodiment. In the financial services industry for sure, the very, very rich mostly receive income as capital gains or if they're private equity people, as carried interest.

In both of those, the max rate is 15 percent. So people who make $20 million, $30 million, $50 million a year like Mitt Romney and like, you know, Steve Schwarzman of whoever it is, they pay half the tax rate of, you know, a nurse or a doctor or a fireman or a teacher. And it's considered totally normal in that world.

BILL MOYERS: So they really do consider tax reform a threat?

MATT TAIBBI: Absolutely. I mean every time that there's been any discussion about rolling back the carried interest tax break in particular, there's suddenly been this intense, you know, hurricane of lobbying. And it never seems to get rolled back. Barack Obama promised to repeal that tax break and didn't do it.
BILL MOYERS: Give us a working definition in the vernacular of carried interest.

CHRYSTIA FREELAND: So basically, what this means is that if you're in, if you work in a private equity firm, the money that you earn– so, you invest a little bit of your own money. And the gains that you make on that investment would be treated under any definition as a capital gain taxed at 15 percent. But you also earn money because you are investing on behalf of all of your investors.
That money that you earn, it's called carried interest. And it is treated as a capital gain in the same ways that the gains to the investors are treated.
The economic arguments in favor of the carried interest tax break are so weak. I mean, even Mike Bloomberg, who is, you know—

BILL MOYERS: The tenth richest man—

CHRYSTIA FREELAND: --very far from being a socialist. He has come out and said he doesn't support it. And it says something to you about the power of a very well heeled, very focused lobby group. That, you know, Barack Obama is president. He is opposed to this. He says he's opposed to it. Even Mike Bloomberg is opposed to it. So there's a body of Wall Street opinion that thinks it should go away. It's still there.

BILL MOYERS: But when there was an effort, when the Obama White House and others made an effort to revoke carried interest, the fight was led by people like Democrat Senator Chuck Schumer, representing Wall Street--
MATT TAIBBI: It’s always the New Yorkers.

BILL MOYERS: Yes, the New Yorkers. Of course, that's their constituency, they would say if they were sitting here. But the Democratic Party didn't come to the aid and relief of working people at that time.

MATT TAIBBI: Well right, because again, it's because you have a small, very, very concentrated lobby that is very, very noisy and is very, very specific in what it wants and what it needs. And then there's the rest of us who, how many people are really thinking about the carried interest tax break? So the advocacy against the carried interest tax break is dispersed. It's sort of random. It's not focused, whereas the advocacy for it is incredibly organized. It's disciplined. And it has a ton of money.

CHRYSTIA FREELAND: And it is bipartisan.

BILL MOYERS: Who's looking out for the rest of us?

MATT TAIBBI: Well, there are, I mean, there definitely are good people in Washington. You know, I meet and talk to a lot of them. There are a lot of honest politicians who are trying to do the right thing. But the-- my experience, the money issue is so overwhelming to people in Congress that--

BILL MOYERS: Raising money for their campaign?

MATT TAIBBI: Raising money for their campaigns. It's so central to their daily lives, really. And especially in the House, where you have to essentially start raising money the instant you get elected because the reelection campaign is only a couple years away that -- it's just too overwhelming for most legislators to get past that issue.

BILL MOYERS: Despite how the plutocrats have reacted to Barack Obama, he does not seem to be like FDR, taking on the economic royalists or like Theodore Roosevelt, fighting the guys he says are taking the country down. How do you explain Obama's attitude toward these plutocrats?

CHRYSTIA FREELAND: Barack Obama in many ways is one of them. He is educated the way a plutocrat is educated. He had an opportunity to join the plutocracy. He could very easily right now be a top corporate lawyer. And they know that.

He thinks the way they do. He's a technocrat in the accepted manner of the current plutocracy. And I think they like that. I think that's why he had such a strong reception in 2008. So I think that's one element. Another element though, and I think that this is something that sort of bothers them, is he isn't over-awed by them. And that kind of bugs them too, because they do think they’re pretty great.
MATT TAIBBI: To answer your question about, you know, why doesn't he take the sort of fist shaking attitude of an FDR or a Teddy Roosevelt, I just think Barack Obama has surrounded himself with people, like Larry Summers, like Bob Rubin. And I think he's accepted a lot of the justifications and the arguments that come from Wall Street and the business community.
So I don't think he feels genuine class based rage towards this community. I just don't think that's in him. You know, I think the-- if you listen to Rush Limbaugh and Sean Hannity and the likes, they really believe that somewhere under there, there's this raging socialist. And, you know, there's Lenin ready to break out and put them all up against the wall in a firing squad. That guy just isn't there. He really is more one of them than they think.
BILL MOYERS: So you don't think he's fighting a class warfare as the right says he is?
MATT TAIBBI: Definitely not. No. No, I think he's very emotionally and culturally much closer to those people than he is to the rest of us.
CHRYSTIA FREELAND: No, but he is moving-- he is and I don't think he says this as directly as perhaps, you know, some of his supporters would like. He is challenging this notion of the successful businessman as the hero and the driver of the American narrative. And that actually is a big-- if you think it through to its logical conclusion, that is a big challenge. And I think that accounts for this hurt. This seemingly completely disproportionate emotional reaction.
MATT TAIBBI: He's made a rhetorical mistake in the way he's occasionally described this community. And that's what's inspiring this whole reaction against him, this feeling that we are like battered wives because they've occasionally been described as rich.
CHRYSTIA FREELAND: So it's easy to laugh about this, and we should. But this hurt feelings, the fact that this is really playing out in the emotional space as well as in the balance sheet space, I think is really an important point. I think it's hard for us civilians to get it because it seems so absurd. You know, really? That would hurt your feelings? Are you so thin skinned? But it is real. And I think that it's real for a reason, which is I think that Barack Obama, the Democratic party, but also the political discourse more generally is posing an existential threat, or certainly an existential question to the plutocrats, which makes them very, very anxious.

BILL MOYERS: I haven't heard that, Chrystia.


BILL MOYERS: Barack Obama said—


--I'll tell you what it is--


--in the debate this week that-- CHRYSTIA FREELAND: No, but I'll tell you—
BILL MOYERS: --he sounded like, he said, "I'm for free enterprise, I'm for--"
CHRYSTIA FREELAND: And I'm for free enterprise too. But what he had started to say—

BILL MOYERS: That sounds very tough on them.

CHRYSTIA FREELAND: No, but there is an underlying point that he does make. I think he should make it more explicitly which is to say that American capitalism is not working the way it was in the '50s. That we are not living in a time when a rising tide is lifting all boats. That we are seeing the people at the very top take off. Their economic fortunes actually disconnect from those and from --

BILL MOYERS: Stratospherically leaving earth.

CHRYSTIA FREELAND: --most everybody else. And they're not dependent. You know, that old Henry Ford model, where you needed the middle class to be well paid to buy Henry Ford's stuff, that that has broken down. And we can argue a lot, and we should, about the reasons. But the facts are that it has. And to say that, to actually state that, is profoundly threatening because it starts to break down this equation of my wealth equals my virtue.

The size of my bank account doesn't-- it isn't just good for me. It is a manifestation of my civic contribution. And that, in some ways, is Mitt Romney's campaign. He's saying, "I'm a successful businessman. So I will make a good president." And Barack Obama, he is actually saying, "You know what? I don't think that that equation works and is automatic." And actually, in saying that, the plutocrats are not wrong to detect there a very powerful ideological challenge.

BILL MOYERS: If plutocrats keep on winning, if they manage to avoid tax reform, if they keep low regulation, if they get a president who is sympathetic to them or even enables them, what's ahead for us?

MATT TAIBBI: Well, I mean, I fear that what's ahead is just a continual worsening of the situation. You know, what we've seen in our lifetime even since we've come back from Russia is this decimation of the middle class in America.
If we continue on this path, what we'll end up with is, you know, is Russia or some other third world country where, again, you have this handful of people who are protected and who have expanding wealth. And then there's this sort of massive population of everybody else. And that's what I worry about.
CHRYSTIA FREELAND: I would like to really issue a clarion call to progressives because I think the sort of the progressive public intellectuals are to blame as well. I think a big reason people aren't protesting is no one is offering sufficiently compelling alternatives and solutions.

And when you think back to the history of the Industrial Revolution, the Progressive Era, the New Deal, these were brand new ideas and brand new institutions designed to cope with changed economic circumstances. What I think is the challenge for everyone who is worried about this, and I think all of us should be worried about it. We should be terrified. But I think we need to start taking the next step. And we need to realize the 1950s are not coming back. What angers me sometimes about these debates is people talking about manufacturing jobs coming back.

That-- it's just not going to happen. So let's really face the facts of how the world economy works. And really come up with what needs to be the political and social response.

And frankly, you know, I see the right not interested in addressing this issue at all. And I see the left not offering enough new thinking. And people know that. And that's why people aren't on the barricades. There's no manifesto to be waving.

MATT TAIBBI: One caveat I would like to just throw anytime you propose anything that has any kind of government, you know, component to it, there's this automatic criticism that it's communist and socialist. So, when you come up with a solution, the boundaries are let's come with a solution that doesn't have-- that can't be criticized as being communist or socialist. And that is incredibly difficult for people to work around.

CHRYSTIA FREELAND: Okay, but let’s at least see the new ideas. I mean, my argument is we are living through equally profound economic transformations. And we're just trying to rehash and re-tinker with the twentieth century institutions. I don't think it's enough.

Veteran journalist Bill Moyers is the host of “Moyers & Company,” airing weekly on public television. Check your local listings. More at www.billmoyers.com
Matt Taibbi is a writer for Rolling Stone.

Sunday, October 14, 2012

Economy Is the Issue That Isn't: Misidentifying problems, marginalizing solutions


Extra! October 2012

Economy Is the Issue That Isn't

Misidentifying problems, marginalizing solutions

By Neil deMause

If there's one thing the media seem certain about this election season, it's that the choice between Barack Obama and Mitt Romney will come down to one thing: the economy.

The "rhetorical debate question" from Ronald Reagan's debate with Jimmy Carter, USA Today (8/21/12) reported on its front page , "has become an iconic one for voters. Are you better off than you were four years ago?" The paper cited polls showing that 55 percent of Americans say they are not.

Considering that, you'd expect that the summer would have seen a barrage of stories on the state of the economy, on the trials of the more than 8 percent of Americans who remain unemployed, and especially about how well the two candidates' policies were likely to alleviate the nation's economic woes. And yet, with few exceptions, the subject of the economy--and more to the point, what can be done to fix it--was barely addressed by major U.S. media over the summer, beyond occasional reports on fluctuating employment figures.

Instead, the bulk
of economic coverage focused on the looming debt crisis--not coincidentally, the one economic issue being raised incessantly by the Romney campaign. (Obama's preferred summer topic--the future of Medicare--received a similar flurry of coverage.)

"Presidents have been warning for decades of the dangers of this country's debt and deficits," noted Jake Tapper on ABC's This Week (8/19/12). "But the big question: Is this time different? Is this the year we finally start to get our nation's finances in order?" What followed was a panel of current and former Washington officials (plus one Wall Street Journal columnist and anti-tax activist Grover Norquist) in which Tapper demanded that each declare whether they were "optimistic" or "pessimistic" about bringing down the federal debt.

Yet while majorities of Americans consistently rank either "the economy" or "unemployment/jobs" as the most important problem facing the country today (Gallup.com), the federal debt has struggled to break into double digits as a top problem.

Which is a reasonable assessment, given that--notwithstanding the "fiscal cliff" that Congress imposed during last year's battle over the nation's debt ceiling--the costs of high unemployment are far greater than those of a rising national debt: As Paul Krugman argued (New York Times, 1/2/12): "Yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap."

If so, both the Republican plan--which would, under Paul Ryan's proposal, cut $2.2 trillion in federal spending on domestic programs over the next decade--and the Democratic plan, to stay the course with a fading stimulus after Obama's last jobs bill was killed by Congress last fall, will do little to improve the economy. Yet most reporters continued to paint the economic debate as one over free spending vs. austerity--and then seemed puzzled that voters aren't treating the election as a referendum on the same.

The Los Angeles Times (7/7/12) referred to "Obama's apparent ability to defy economic gravity." The Washington Post (8/6/12) called it a "contest that, so far, defies nature." USA Today's story on poll results puzzled over the fact that many voters favored Obama even though they thought they were worse off than before his presidency.

Of course, there could be many reasons why people would intend to vote for Obama despite the economic situation: They could blame their job woes on the economic crash that preceded his presidency; or they could be displeased by his handling of the economy, but think Romney would do an even worse job. (One Michigan woman told USA Today that though she'd give Obama a "D" on the economy, "Is the economy going to be better because Romney's in there? I don't know.")

When one Washington Post/ABC News poll (5/11/12) found that 47 percent of registered voters regard the stimulus favorably while 49 percent view it unfavorably, the poll didn't ask whether whether respondents were displeased with the stimulus at all or because it was insufficient to the task--yet the Post still concluded that "the stimulus is clearly a dead end" as far as Obama being able to point to successful economic policies.

When Obama warned of Republican prescriptions of austerity to fix the economy, "We tried it, and didn't work," Washington Post columnist Dan Balz (7/7/12) retorted, "But it has become increasingly difficult for Obama to argue that what he has tried is working well, or that he has something new to offer."

Actually, though, whether the Obama stimulus worked is hardly an open question. The Congressional Budget Office (5/25/12) determined that at the peak of stimulus spending in the third quarter of 2010, the American Recovery and Reinvestment Act had created or preserved as many as 3.6 million jobs, almost exactly what had been projected by Obama in 2009 (Politifact, 7/13/10); by mid-2012, though more than 90 percent of ARRA money had been spent, between 200,000 and 1.2 million people still owed their jobs to Obama's policies. And a poll of economists across the political spectrum by the Initiative on Global Markets (2/15/12) found that they agreed by a 20-to-1 margin that the stimulus had lowered the unemployment rate.

Of course, even 3.6 million jobs is far less than the estimated 8 million jobs that were lost in the economic crash. Meanwhile, few major media reports have noted that the temporary boost from the federal stimulus has been largely swamped by state and local spending cuts: Counting state and local government, public sector jobs fell by 590,000 during Obama's first three years (Calculated Risk, 3/18/12), compared to significant increases during both George W. Bush's and Ronald Reagan's post-recession first terms.

Economic experts, though, were all too seldom called to comment on the state of the economy in the news media. More typically, reporting consisted of competing he-said-she-said claims by the two campaigns that their candidate was best suited to resolving the economic crisis.

This was especially true on TV news talk shows, which often left it to representatives of the Obama and Romney campaigns to face off against each other, with no outside critics or economic experts present (Face the Nation, 7/15/12 and 8/12/12; This Week, 7/29/12). On an ABC World News "Your Voice, Your Vote" segment on the economy (8/4/12), the only voices heard were those of Obama and Romney--plus noted everyman Clint Eastwood.

The limits of televised economic debate could be seen on ABC's This Week (7/8/12), which opened with George Will declaring: "It's quite clear the president got terrible advice early in his administration. First, his advisers said, we'll do this stimulus and it will never reach 8 percent. Forty-one weeks now--41 months over 8 percent." Chimed in U.S. News & World Report editor Mort Zuckerman: "I think whatever has been tried, add a huge amount of deficit spending, has simply not worked."

Former Obama "car czar" Steve Rattner immediately agreed that "we have to deal with the long-term deficit problem," but added, "I would argue that the stimulus program, the financial rescue, the auto rescue all got us in a much better place than we would have been had none of those things happened."

And Washington Post columnist EJ Dionne pointed out that "from the beginning, the stimulus should have been bigger. [Obama] cut it back partly to get votes in Congress.... If you had simply the growth in government employment now that you had under Ronald Reagan, the unemployment rate would probably be a point lower."

It was a rare moment of actual debate about how public policy can address economic problems. Or rather, how it could have been addressed--at no point did anyone suggest that the White House should now be looking at increased stimulus or government hiring to boost the economy. Because if neither major party is proposing a policy idea, far be it from the news media to recognize that it exists.

Neil deMause (@neildemause) is a contributing editor for City Limits, and a frequent contributor to the Village Voice, Slate, and Extra!.

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Tuesday, October 9, 2012

Most of Us Will Not Have a Better Life Unless We Turn the Tables on the Super Rich


Chuck Collins' new book '99 to 1' reveals how wealth inequality is wrecking everything.


The following is an excerpt from 99 to 1: How Wealth Inequality Is Wrecking the World and What We Can Do About It, by Chuck Collins (Berrett-Koehler, 2012).
An economy so dependent on the spending of a few is also prone to great booms and busts. The rich splurge and speculate when their savings are doing well. But when the values of their assets tumble, they pull back. That can lead to wild gyrations. Sound familiar? It’s no mere coincidence that over the last century the top earners’ share of the nation’s total income peaked in 1928 and 2007—the two years just preceding the biggest downturns. —Robert Reich (b. 1946)

There are many theories about what triggered the 2008 economic meltdown. These explanations focus on bad actors such as the large banks and financial firms, the unregulated “shadow” financial sector, and unethical subprime mortgage pushers.

But there is a missing lens to the story, one that shows how the economic meltdown was caused by excessive income and wealth inequality. The two triggers were consumption by the 99 percent based on borrowing rather than real wage growth, and reckless financial speculation by the 1 percent.

Ingredient 1: Consumption Based on Borrowing, Not Real Wage Growth

Real wages for the bottom 80 percent of households have remained relatively stagnant since the late 1970s. People survived these stagnant wages by working more hours, bringing more family members into the paid labor force, and borrowing more, thanks to easy access to credit. This put enormous stresses on many working families as they got caught on a work-consume-borrow treadmill. But for many, this was the only way to attain or maintain a middle-class standard of living.

Most households stopped being able to save. In 1980, the savings rate—the share of people’s income saved after expenses—was 11 percent. By 2007, the U.S. savings rate had plummeted to less than 2 percent, meaning people were earning only slightly more than they were spending.

Did things appear different? With a median income of roughly $50,000, many people in the United States were living with little surplus. That said, the parking lots at the mall and the Applebee’s restaurant were full. The rising middle class bought new cars, teenagers got smartphones, and families took expensive vacations. These feats of consumption were not a reflection of rising wages. In some cases, increased spending was the result of two or three incomes. But most purchasing was made possible by families taking on more debt. Consumer debt—both credit card and home equity loans—escalated during the decade prior to 2008. The total amount of credit card debt exploded, thanks in part to aggressive “debt pushing.” In 2006, there were 6 billion credit card solicitations sent out.The majority of home financing was for second mortgages, not new home acquisitions. Access to easy credit was the drug that enabled millions to live beyond their means.

Exploding consumer debt was worsened by a shift in the culture, as extensive borrowing became more socially sanctioned. The debt pushers contributed to this, advertising cheap credit and peddling home equity loans as the new normal.
Overwork and debt masked the reality of falling and stagnant wages. If you and your neighbors could still acquire a flat-screen TV and take a Caribbean vacation, then it was hard to feel constrained. But these trends were fundamentally unstable. Underlying these indicators was a growing credit card and housing mortgage bubble. Think of the sound track from the movie Jaws as a shark creeps up on the unsuspecting swimmer.

The entire economy was humming, but it wasn’t based on healthy wage growth and shared prosperity. The consumption engine driving the economic boom between 2000 and 2008 was based on borrowing, not real wage increases.
So when the economy seized up in 2008 and access to easy credit ground to a halt, so did the consumption engine. Millions of people lost their jobs or a significant household income. But they also lost the borrowing lifeline that had eased the gap between inadequate income and spending. Without debt-driven consumer demand, the entire economy froze.

Extremely unequal wages and income contributed to the collapse of consumer buying power. If consumption had been based on a foundation of healthy wage growth, the situation would have been considerably less volatile.

Ingredient Two: Financial Speculation

The dynamic of debt-based consumption was bad enough. But there was another way that inequality contributed to crashing the economy. At the top of the economic pyramid, those in the top 1 percent were doing their part by taking part in risky gambling. Unfortunately, the gambling was not confined to a casino, where the losses could be contained, but took place at the heart of our whole economy.

In 2007, the richest 1 percent owned 36.5 percent of all the private wealth in the United States and over 42.4 percent of all financial assets. Part of this estimated $20 trillion in wealth was in the form of land, houses, artwork, jewelry, private jets, and other private property. But an enormous fraction of it was in the form of stocks, bonds, and ownership stakes in the world’s corporations.

The 99 percent, when they have money to invest, look to banks, bonds, and mutual funds. But almost everyone in the 1 percent has investment professionals who advise them about allocating their invested wealth. So imagine for a moment that you’re a member of the 1 percent, with $200 million in wealth, and I’m your trusted investment advisor. It’s sometime between 2000 and 2007.

I explain that a typical asset allocation strategy is to park a portion of your wealth in stable investments that are a bulwark against serious market downturns. These include insured deposits in banks and credit unions and bonds backed by local, state, or federal governments. This guarantees that you will always be rich, even in tough times. The problem, I explain, is that these have relatively low rates of return. In fact, in 2005, we’re talking 2–3 percent returns. In other words, real snoozers.

I suggest taking another portion of your $200 million and investing in some long-term growth equities—companies that have been around for a long time. These include Ford, General Motors, and General Electric, the “blue chip” or seemingly stable companies. But it’s the same problem again: very boring and modest returns on investment, maybe 5–6 percent.

With another portion of your funds, we’ll start to increase risk and return, looking for a diversified mixture of small- and large-capitalization new companies outside the stock market. These are more interesting and have the potential for higher returns, in the 7–10 percent range.

Now we pause and take a deep breath. Our hearts start to beat a little faster in anticipation of what comes next. Up until now, we’ve pursued the investment strategy that the super-rich have employed for decades—diversified, sensible, a nice blend of risk and return. We will tweak it based on your age and special needs, but it’s a tried-and-true approach.

There is, however, a new class of investments that are generating very high returns. You’re smiling because this is what brought you in my door. These new investment vehicles are complicated but highly lucrative—dazzling returns of 10 or 15 percent. Some funds have even had 20 percent returns for five years in a row.

To get those returns, however, we have to make speculative, high-risk investments. These include investments in hedge funds, derivatives, and credit default swaps—some of the financial innovations that some very smart young fellows on Wall Street have designed. These are not investments in the “real economy,” in which firms make actual things or provide services that people use. Rather, these are ways to place financial bets on the movement of money and markets. The question for you is, how much are you willing to risk?

Think about your $200 million. If all you had was $20 million, you would be able to live a very wonderful life, meet all your material needs, and guard against most possible problems. You might not be able to buy genuine love or eternal life, though you’ll probably live longer. You’ll be able to go to the Mayo Clinic for whatever medical need you have and enjoy every luxury the planet has to offer. With another $20 million, you will be able to provide the same to your progeny.
So, setting aside that $40 million, you have $160 million you’re willing to gamble with. Wouldn’t it be fun to keep score and watch it multiply? It is, after all, mostly just numbers on a page or screen. So we allocate a large portion—let’s say $80 million—to the new financial instruments.

Now imagine this same conversation playing out in the wood-paneled offices of the 1 percent all across the planet between 1998 and 2007. As a result, huge amounts of wealth shifted into the speculative market.

The speculative funds of the top 1 percent are merged with additional trillions of dollars in sovereign wealth funds—the colossal piles of wealth generated by Middle Eastern oil profits and Chinese exports and held by central governments. Add to this the trillions in cash accumulated by the world’s corporate 1 percent—banks, insurance companies such as AIG, and the finance arms of corporations such as General Electric. That totals trillions of dollars of wealth looking for a home—not in sleepy investments in the real economy, which are incapable of generating such large returns, but in the casino-like speculative economy.

Wall Street drove this process by seeking more and more high-risk deals. One of their favorites was high-interest mortgage debt, known as subprime mortgages. Investment banks and brokers such as Morgan Stanley, Citigroup, and Bank of America called up mortgage lenders and people who bundled mortgages together and said, “Bring us more of those high-return, high-risk deals!” So trillions of dollars flowed into the shadow financial sector—and the deals became more and more delinked from the fundamentals of the real economy.
By 2007, the speculative bubbles had grown, not just in the housing market but also in other sectors of the economy. Commodity futures rose, pushing up the cost of foodstuffs and triggering food riots across the world. Speculation in oil futures drove up the cost of oil, and a gallon of gas during the summer of 2008 topped $4 a gallon. Americans spent hundreds of billions of dollars more on gas in 2008 than they did the previous year.4 Funds that could have financed a transition to a green economy went to the oil industry, which enjoyed unprecedented profits—in 2008, ExxonMobil set records with profits of $45.2 billion.

Tick, tick, tick. Kaboom!

The extreme inequalities of wealth—stagnant wages and speculative activity—brought the economy to its knees. And here’s the bad news: it hasn’t stopped. As long as the 1 percent has excess money to bet with, they will continue seeking speculative investments.

Too bad it’s not a game in a casino. Unfortunately, it’s a very costly game. And the people paying the price with ruined lives are not in the 1 percent.
Published with permission from Berrett Koehler, copyright 2012. From the new book 99 to 1: How Wealth Inequality Is Wrecking the World and What We Can Do About It.

Chuck Collins is a senior scholar at the Institute for Policy Studies and chair of the Working Group on Extreme Inequality, an emerging coalition of religious, business, labor and civic groups concerned about the wealth gap. He is coauthor with Bill Gates Sr. of Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes.

Monday, October 8, 2012

Wall St.'s Next Profit Scheme -- Buying Up Every Piece of Your Home Town


Across America, schools, roads, and water systems are for sale to the highest Wall Street bidder.

The pace of Wall Street’s war against the 99% is quickening in preparation for the kill. Having demonized public employees for being scheduled to receive pensions on their lifetime employment service, bondholders are insisting on getting the money instead. It is the same austerity philosophy that has been forced on Greece and Spain – and the same that is prompting President Obama and Mitt Romney to urge scaling back Social Security and Medicare.

Unlike the U.S. federal government, most states and cities have constitutions that prevent them from running budget deficits. This means that when they cut property taxes, they either must borrow from the wealthy, or cut back employment and public services.

For many years they borrowed, paying tax-exempt interest to wealthy bondholders. But carrying charges on these have mounted to a point where they now look risky as the economy sinks into debt deflation. Cities are defaulting from California to Alabama. They cannot reverse course and restore taxes on property owners without causing more mortgage defaults and abandonments. Something has to give – so cities are scaling back public spending, downsizing their school systems and police forces, and selling off their assets to pay bondholders.

This has become the main cause of America’s rising unemployment, helping drive down consumer demand in a Keynesian nightmare. Less obvious are the devastating cuts occurring in health care, job training and other services, while tuition rates for public colleges and “participation fees” at high schools are soaring. School systems are crumbling like our roads as teachers are jettisoned on a scale not seen since the Great Depression.

Yet Wall Street strategists view this state and local budget squeeze as a godsend. As Rahm Emanuel has put matters, a crisis is too good an opportunity to waste – and the fiscal crisis gives creditors financial leverage to push through anti-labor policies and privatization grabs. The ground is being prepared for a neoliberal “cure”: cutting back pensions and health care, defaulting on pension promises to labor, and selling off the public sector, letting the new proprietors to put up tollbooths on everything from roads to schools. The new term of the moment is “rent extraction.”

So having caused the fiscal crisis, the legacy of decades of property tax cuts financed by going deeper into debt are now to be paid for by leasing or selling off public assets. Chicago has leased its Skyway for 99 years to toll-collectors, and its parking meters for 75 years. Mayor Emanuel has hired J.P.Morgan Asset Management to give “advice” on how to sell privatizers the right to charge user fees for previously free or subsidized public services. It is the modern American equivalent of England’s Enclosure Movements of the 16th to 18th century.

By depicting local employees as public enemy #1, the urban crisis is helping put the class war back in business. The financial sector argues that paying pensions (or even a living wage) absorbs tax revenue that otherwise can be used to pay bondholders. Scranton, Pennsylvania has reduced public-sector wages to the legal minimum “temporarily,” while other cities are seeking to break pension plans and deferred-wage contracts – and going to the Wall Street casino and play losing games in a desperate attempt to cover their unfunded pension liabilities. These recently were estimated to total $3 trillion, plus another $1 trillion in unfunded health care benefits.

Although it is Wall Street that engineered the bubble economy whose bursting has triggered the urban fiscal crisis, its lobbyists and their Junk Economic theories are not being held accountable. Rather than blaming the tax cutters who gave bankers and real estate moguls a windfall, it is teachers and other public employees who are being told to give back their deferred wages, which is what pensions are. No such clawbacks are in store for financial predators.
Instead, foreclosure time has arrived to provide a new grab bag as cities are forced to do what New York City did to avert bankruptcy in 1974: turn over management to Wall Street nominees. As in Greece and Italy, elected politicians are to be replaced by “technocrats” appointed to do what Margaret Thatcher and Tony Blair did to England: sell off what remains of the public sector and turn every social program into a profit center.

The plan is to achieve three main goals. First, give privatizers the right to turn public infrastructure into tollbooth opportunities. The idea is to force cities to balance budgets by leasing or selling off their roads and bus systems, schools and prisons, real estate and other natural monopolies. In the process, this promises to create a new market for banks: lending to vulture investors to buy rights to install tollbooths on the economy’s basic infrastructure.

Elected public officials could not engage in such predatory and anti-labor policies. Only the “magic of the marketplace” can break public labor unions, downsize public services and put tollbooths on the roads, water and sewer systems while cutting back bus lines and raising fares.

To achieve this financial plan, it is necessary to frame the problem in a way that rules out less anti-social alternatives. As Margaret Thatcher put matters, TINA: There Is No Alternative to selling off public transportation, real estate, and even school systems and jails.

Dismantling public education and police departments to pay bondholders

Local tax policy used to be about education. The United States was divided into fiscal grids to finance school districts, along with roads and bus lines, water and sewer systems. Municipalities with better schools taxed their property more, but this made it more desirable to live in such districts, and thus raised rather than lowered real estate prices. This made urban improvement self-feeding. Lower-taxed districts were left behind.

This no longer is the American way. Education in particular has been demonized. California’s formerly great school system is the most visible casualty of the state’s Proposition 13, the property tax freeze enacted in 1978. The Los Angeles Apartment Owners Association employed its political front man, Howard Jarvis, as a lobbyist to promise voters that little would change by cutting back education and libraries. He claimed that “63 percent of the graduates are illiterate, anyway,” so who needed books. Education and other parts of public spending was frozen as property taxes were slashed by 57% – from 2.5 or 3% down to just 1% of assessed valuation, and were frozen at 1978 price levels for owners who have kept their property. The result is that California’s school system has plunged to 47th rank in the nation.

For neoliberals, the silver lining is that downgrading education makes citizens more susceptible to the Tea Party’s false consciousness when it comes to how to vote in their economic interest. Back when Prop. 13 was passed, for instance, commercial investors promised homeowners that across-the-board tax cuts would make housing more affordable and that rents would fall. But they rose, along with real estate prices. This is the Big Lie of neoliberal tax cutters: the promise that cutting property tax will lower costs rather than provide a windfall for property owners – and also for banks as rising rental values are “free” to be capitalized into larger mortgage loans. New buyers need to pay more, raising the cost of living and doing business.

Back in 1978 on the eve of Proposition 13, commercial owners paid half the real estate taxes and homeowners the other half. But now the homeowners’ share has risen to two-thirds, while commercial taxes have fallen to one-third. Bank loan officers have capitalized the tax cuts into larger mortgages, so housing prices have risen, not fallen. Los Angeles Mayor Antonio Villaraigosa exclaimed ruefully last year that “the time is now to address the inequity of Prop 13 that allows large corporate interests to get a windfall meant for homeowners. We are not funding government. We are just decimating government and the services it provides.”[1] He proposed a two-tier property tax, restoring higher rates for commercial and absentee investors.

School teaching is an exhausting occupation. That is one reason why teachers are one of America’s strongest labor unions. Their wages have not risen as fast as their expenses, because they have agreed to take less income in the short run in order to get pensions after their working days end. These contracts are now under attack – to pay bondholders. States and cities are now insisting that bondholders cannot be paid without stiffing their labor force.

So we are now seeing the folly of untaxing property and replacing tax revenues with borrowing – paying tax-exempt interest to the nation’s wealthiest bondholders. Cutting the property tax base thus finds its twin casualty in the wave of defaults on pension promises.

Real estate taxes have plunged from two-thirds of urban revenues in the 1920s to just one-sixth today for the United States as a whole. Federal grants-in-aid also are being cut back, and state aid to the cities is following suit. But instead of making housing more affordable, these tax cuts have “freed” rental value from the tax collector only to end up being paid to the banks.

Here too, California has led the way. In 1996 its voters approved Prop. 218, requiring any new tax, fee or property assessment to be approved by two-thirds of voters. (A few exemptions were made to keep local sewer and water systems viable.) This stratagem “starves the beast,” with the “beast” being public infrastructure and social services. Police forces are being downsized and social programs are cut back. And as urban poverty increases, crime rates are rising, imposing an “invisible” cost of living.

The most important economic fact to recognize is thus that whatever the tax collector relinquishes tends to be capitalized into mortgage loans. And by leaving more rent available to be paid as interest, cutting property taxes obliges homebuyers to go deeper into debt. Lower property taxes thus mean higher housing prices – on credit, because a home or other real estate is worth whatever a bank will lend to new buyers. So by capitalizing the after-tax rental value into a flow of interest, bankers end up with the rent – and hence, with the property tax cuts.

That is what a free market means today – income created by public-sector investment, “freed” to be paid to banks as interest rather than to be recaptured by government.

Most urban revenue is a free lunch created by taxpayer-financed roads, schools, sewers and water systems. But neither real estate speculators nor their bankers believe that this investment by taxpayers should be recovered by taxing the increased site values created by providing these public services. Instead of making the public sector self-financing as it expands public services to create wealth, private owners are to get the benefit – while banks capitalize the gains into larger mortgage loans, which now account for 80% of bank credit.

The core of the bankers’ “false consciousness” – the cover story with which Tea Party lobbyists are seeking to indoctrinate U.S. voters – is that taxes on land and financial assets punish the “job creators.” Going on the offence, the beneficiaries of this public spending claim that they need to be pampered with tax preferences to invest and employ labor, while the 99% need to be kicked and prodded to work harder by being paid low wages. This false narrative ignores the fact our greatest growth periods are those in which U.S. individual and corporate tax rates have been highest. The same is true in most countries. What is stifling economic growth is the debt overhead – owed to the 1% – and tax cuts on free lunch wealth.

The public pension squeeze is part of the overall debt crisis

Republican Vice Presidential nominee Paul Ryan and Texas Governor Rick Perry have characterized Social Security as a Ponzi scheme. This is true in the obvious sense that retirees are supposed to be paid out of contributions to new entrants. That is how any pay-as-you-go system is supposed to work. The problem is not that the system needed to be pre-funded to provide the government with revenue to cut taxes on the 1%. The problem is that new contributions are drying up as the economy buckles under its expanding debt overhead.

Social Security can easily be paid. After the 2007 crash the Fed printed $13 trillion on its computers to give to bankers. It can do the same for Social Security – and for federal grants-in-aid to America’s states and cities. It can pay state and local pension obligations in the same way it has paid Wall Street’s 1%. The problem is that the Fed is only willing do what central banks were founded to do – finance government deficits – to give to the banks. The aim is to save bondholders and the banks’ high-flying counterparties, not the 99%.

The problem is that the financial system itself is rotten. This has turned today’s class war into a financial war, with the major tactic being to shape how voters perceive the problem. The trick is to make them think that cutting taxes will lower their living costs and make housing cheaper, rather than enabling banks to take what the tax collector used to take. That is the key perception that needs to be spread: cutting taxes leaves more “free lunch” income available for banks to lend against, loading the economy deeper into debt.

Here’s why the present track can’t possibly work. State and local pension funds are $3 trillion behind because they are only making 1% returns these days (the only safe return), not the 8+% that they were told to make in order to pay pensions by “capital” gains (that is, the bank-financed free lunch). The Fed is keeping interest rates low in an attempt to re-inflate real estate and other asset prices back to the happy decade of Bubblemeister Greenspan. If interest rates rise – by enough to enable California, Chicago and other localities to obtain enough interest to pay retirees what they promised – then banks will see the collateral for their mortgage loans fall.

So the Fed has locked the economy into low returns. Neither Democratic nor Republican politicians are willing to raise taxes on the finance, insurance and real estate (FIRE) sector. They vote in line with what their campaign contributors are paying for – to make Wall Street rich.

At issue is the old Who/Whom choice. Given the mathematical fact that debts that can’t be paid, won’t be, the question is who should get priority: the 1% or the 99%?

Debt-ridden austerity and downsizing government is being urged as if it is inevitable, not a policy choice to put bondholders and the 1% over the 99% – a reward for the lobbying money it has spent on buying politicians and misleading voters to believe that cutting property taxes and cutting taxes on the rich will help the economy.

But if America still lets the 1% write the laws – or what turns out to be the same thing these days, to contribute to the political campaigns of lawmakers – then the economy will get much poorer, quickly. The era of America growth will be over.

Something has to give: If bondholders won’t be paid, states cannot pay labor’s deferred wages in the form of pensions, and will have to cut back public services.

So it’s time to default. Otherwise, Wall Street will turn us into Greece. That is the financial plan, to be sure. It is the strategy for today’s financial war against society at large. In Latvia, I spoke to the lead central banker, who explained that wages in the public sector had fallen by 30 percent, helping push down private-sector wages nearly as far. Neoliberals call this “internal devaluation,” and promise that it will make economies more competitive. The reality is that it will up the internal market and drive labor to leave.


[1] Adam Nagourney, “Tax Cuts From ’70s Confront Brown Again in California,” The New York Times, January 9, 2011.
Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), Trade, Development and Foreign Debt (1992 & 2009) and of The Myth of Aid (1971).