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
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.
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
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.
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
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
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
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
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.
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.”
He proposed a two-tier property tax, restoring higher rates for commercial and absentee investors.
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.
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.
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.
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
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
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.
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.
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.
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
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.
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