Beyond Outrage: What has gone wrong with our economy and our democracy, and how to fix it - Robert B. Reich (2012)
Part One. The Rigged Game
I receive many e-mails from people who have read my columns or who have seen me on the media. Some e-mails are very friendly, others are hostile. But almost all share a common feature. The writers believe the game is rigged. Here’s a composite of several I’ve received from people who describe themselves as Tea Partiers:
I saw you on television just now. You want to raise taxes on the rich so there’s more money for education and infrastructure. You’re a stupid ass. When taxes go up, it’s people like me who end up paying more because the rich always find ways to avoid paying. If you think the money will go to helping average Americans, you’re even dumber. Government is run by Wall Street traders, the CEOs of big corporations, and military contractors. They’ll get the benefits. Where were you when my taxpayer dollars were used to bail out fucking Wall Street? The answer is less government, not more. Do me a favor and shut up.
I don’t recall so many people, regardless of political party or ideology, expressing so much outrage and cynicism about our economic and political system.
Mitt Romney is correct when he says free enterprise is on trial—but it’s not on trial in the way he assumes. The attack on it is not coming from the left. It’s coming from the grass roots of America. And it’s been triggered by an overwhelming consensus that Wall Street, big corporations, and the very wealthy have rigged it to their benefit. Increasingly, the rewards have gone to the top, while the risks have been borne by middle- and lower-income people. At the same time, the very wealthy are getting a greater share of total income than they did at any point in the last eighty years. Their tax rates are lower than they’ve been in a generation. Republicans want us to believe that the central issue is the size of government, but the real issue is whom government is for. Public institutions are deteriorating. We’re saddled by the most anemic recovery from the worst economy since World War II, while the basic bargain linking pay to productivity continues to come apart.
Free Enterprise on Trial
In the late 1980s, I noticed a troubling trend. A larger and larger share of the nation’s income and wealth was going to the very top—not just the top 1 percent, but the top of the top 1 percent—while other Americans were dividing up a shrinking share. I wrote up my findings, and my tentative explanation for this trend, in a book called The Work of Nations. Bill Clinton read the book, and after he was elected president, he asked me to be his secretary of labor. He told me he was committed to reversing the trend, and he called for more investment in education, training, infrastructure, and health care in order to make the bottom half of our population more productive. Clinton and his administration worked hard, but we were never able to implement his full agenda. The economic recovery of the middle and late 1990s was strong enough to generate twenty-two million new jobs and raise almost everyone’s wages, but it did not reverse the long-term trend. The share of total income and wealth claimed by the top continued to grow, as did the political clout that accompanies such concentration. Most Americans remained unaware.
But now the nation is becoming aware. President Obama has made it one of the defining issues of his reelection campaign. The nonpartisan Congressional Budget Office has issued a major report on the widening disparities. The issue is now front-page news. For the first time since the 1930s, a broad cross section of the American public is talking about the concentration of income, wealth, and political power at the top.
Score a big one for the Occupiers. Regardless of whether you sympathize with the so-called Occupier movement that began spreading across America last fall, or whether you believe it will become a growing political force in America, it has had a profound effect on the national conversation.
Even more startling is the change in public opinion. Not since the 1930s has a majority of Americans called for redistribution of income or wealth. But according to a recent New York Times/CBS News poll, an astounding 66 percent of Americans say the nation’s wealth should be more evenly distributed. A similar majority believes the rich should pay more in taxes. According to a Wall Street Journal/NBC News poll, a majority of people who describe themselves as Republicans believe taxes should be increased on the rich.
I used to be called a class warrior for even raising the subject of widening inequality. Now it seems most Americans have become class warriors. Or at least class worriers. And many blame Republicans for stacking the deck in favor of the rich. In that New York Times/CBS News poll, 69 percent of respondents said Republican policies favor the rich (28 percent said the same of President Obama’s policies).
The old view was that anyone could make it in America with enough guts and gumption. We believed in the self-made man (or, more recently, woman) who rose from rags to riches—inventors and entrepreneurs born into poverty, like Benjamin Franklin; generations of young men from humble beginnings who grew up to become president, like Abraham Lincoln. We loved the novellas of Horatio Alger and their more modern equivalents—stories that proved the American dream was open to anyone who worked hard. In that old view, which was a kind of national morality play, being rich was proof of hard work, and lack of money was proof of indolence or worse.
A profound change has come over America. Guts, gumption, and hard work don’t seem to pay off as they once did—or at least as they did in our national morality play. Instead, the game seems rigged in favor of people who are already rich and powerful—as well as their children. Instead of lionizing the rich, we’re beginning to suspect they gained their wealth by ripping us off.
As recently as a decade ago the prevailing view was also that great wealth trickled downward—that the rich made investments in jobs and growth that benefited all of us. So even if we doubted that we ourselves would be wealthy, we assumed we’d still benefit from the fortunes made by a few. But that view, too, has lost its sheen. Americans see that nothing has trickled down. The rich have become far richer over the last three decades, but the rest of us haven’t benefited. In fact, median incomes are dropping.
Wall Street moguls are doing better than ever—after having been bailed out by taxpayers. But the rest of us are doing worse. CEOs are hauling in more than three hundred times the pay of average workers (up from forty times the pay only three decades ago). But average workers have been losing their jobs and wages. The ratio of corporate profits to wages is higher than it’s been since before the Great Depression. The chairman of Merck took home $17.9 million last year, as Merck laid off sixteen thousand workers and announced layoffs of twenty-eight thousand more. The CEO of Bank of America raked in $10 million, while the bank announced it was firing thirty thousand employees.
Even though the rate of unemployment has begun to fall, jobs still remain scarce, and the pay of the bottom 90 percent continues to drop, adjusted for inflation. But CEO pay is still rising through the stratosphere. Among the CEOs who took in more than $50 million last year were Qualcomm’s Paul Jacobs ($50.6 million), J. C. Penney’s Ron Johnson ($51.5 million), Starbucks’s Howard Schultz ($68.8 million), Tyco International’s Ed Breen ($68.9 million), and Apple’s Tim Cook ($378 million). The titans of Wall Street are doing even better.
The super-rich are not investing in jobs and growth. They’re putting their bonanza into U.S. Treasury bills or investing it in Brazil or South Asia or anywhere else it can reap the highest return. The American economy is in trouble because so much income and wealth have been going to the top that the rest of us no longer have the purchasing power to keep the economy going. I’ll get into this in greater detail shortly.
Some apologists for this extraordinary accumulation of income and wealth at the top attribute it to “risk taking” by courageous entrepreneurs. Mitt Romney defines free enterprise as achieving success through “risk taking.” The president of the Chamber of Commerce, Tom Donohue, explains that “this economy is about risk. If you don’t take risk, you can’t have success.” But in fact, the higher you go in today’s economy, the easier it is to make a pile of money without taking any personal financial risk. The lower you go, the bigger the risks and the smaller the rewards.
Partners in private-equity firms like Romney’s Bain Capital don’t risk their own money. They invest other people’s money and take 2 percent of it as their annual fee for managing the money regardless of how successful they are. Private-equity firms get around two-thirds of their total revenues from these fees. They then pocket 20 percent of any upside gains and pay taxes on only 15 percent of what they make—a lower rate than that paid by many middle-class Americans—because of a loophole that treats that income as capital gains.
Rather than taking any real risks, they get government to subsidize them. Having piled the companies they purchase with debt, private-equity managers then typically pay themselves gigantic “special dividends” that recoup their original investments. Interest payments on the mountain of debt they create are tax deductible. In effect, government subsidizes them for using debt instead of incurring any real risk with equity. If the companies are subsequently forced into bankruptcy because they can’t manage payments on all this debt, they dump their pension obligations on taxpayers when the Pension Benefit Guaranty Corporation, a federal agency, picks up the tab.
It’s another variation on Wall Street’s playbook of maximizing personal gains and minimizing personal risks. If you screw up royally, you can still walk away like royalty. Taxpayers will bail you out. Personal responsibility is completely foreign to the highest echelons of the Street. Citigroup’s stock fell 44 percent last year, but its CEO, Vikram Pandit, got at least $5.45 million on top of a retention bonus of $16.7 million. The stock of JPMorgan Chase fell almost 22 percent, but its CEO, Jamie Dimon, was awarded a package worth $17 million.
The higher you go in corporate America as a whole, the less relationship there is between risk and reward. Executives whose pay is linked to the value of their firm’s shares protect their wallets by simultaneously placing bets in derivatives markets that their firm’s share prices will drop. This sort of hedging helped AIG insurance head Hank Greenberg collect $250 million in 2008, when AIG collapsed. Other CEOs are guaranteed huge compensation regardless of how their companies do. Disney’s Robert Iger’s arrangement netted him $52.8 million in 2011 and guarantees him at least $30 million a year more through 2015—notwithstanding company performance. The swankiest golf courses of America are festooned with former CEOs who have almost sunk their companies but been handsomely rewarded. Thomas E. Freston lasted just nine months as CEO of Viacom before being terminated and walking away with an exit package of $101 million. William D. McGuire was forced to resign as CEO of UnitedHealth over a stock-options scandal but left with a pay package worth $286 million.
You can push your company into bankruptcy and still make a fortune. Robert Rossiter, former CEO of Lear, landed his company in bankruptcy that wiped out his shareholders along with twenty thousand jobs, but he walked away from the wreckage with a $5.4 million bonus. Earlier this year The Wall Street Journal looked into the pay of executives at twenty-one of the largest companies that recently went through bankruptcy. The median compensation of those CEOs was $8.7 million—not much less than the $9.1 million median compensation of all CEOs of big companies. The reason CEOs get giant pay packages for lousy performance is that they stack their boards of directors’ compensation committees with cronies who make sure they do.
Even if you commit fraud, your personal financial risk is minimal. Since 2009, the Securities and Exchange Commission has filed twenty-five cases against mortgage originators and securities firms. A few are still being litigated, but most have been settled. They’ve generated almost $2 billion in penalties and other forms of monetary relief, according to the commission. But almost none of this money has come out of the pockets of CEOs or other company officials; it has come out of the companies—or, more accurately, their shareholders. In the one instance in which company executives appear to have been penalized directly—a case brought against three former top officials of New Century Financial, a brazenly fraudulent lender that subsequently collapsed—the penalties were tiny compared with how much the executives pocketed. New Century’s CEO had to disgorge $542,000 of his ill-gotten gains, but he took home more than $2.9 million in “incentive” pay in the two years before the company tanked.
Yet as economic risks are vanishing at the top and the rewards keep growing, the risks, as I said, are rising dramatically on almost everyone below, and the rewards keep shrinking. Full-time workers who put in decades with a company can now find themselves without a job overnight—with no parachute, no help finding another job, and no health insurance. More than 20 percent of the American workforce is now “contingent”—temporary workers, contractors, independent consultants—with no security at all.
Most families face the mounting risk of receiving giant hospital bills yet having no way to pay them. Fewer and fewer large and medium-sized companies offer their workers full health-care coverage—74 percent did in 1980, under 10 percent do today. As a result, health insurance premiums, co-payments, and deductibles are soaring.
Most people also face the increasing risk of not having enough to retire on. Three decades ago more than 80 percent of large and medium-sized firms gave their workers “defined benefit” pensions that guaranteed a fixed amount of money every month after they retired. Now it’s down to under 10 percent. Instead, the employers offer “defined contribution” plans where the risk is on the workers. When the stock market plunges, as it did in 2008, 401(k) plans plunge along with it. Meanwhile, people at the top are socking away tens of millions for their retirements while paying little or no taxes—in effect, enjoying a huge government subsidy. Mitt Romney’s IRA is worth between $20 million and $100 million, including Bain Capital holdings in offshore havens like the Cayman Islands.
Romney is right: free enterprise is on trial. But he’s wrong about the question at issue in that trial. It’s not whether America will continue to reward risk taking. It’s whether an economic system can survive when those at the top get giant rewards no matter how badly they screw up while the rest of us get screwed no matter how hard we work.
The Government’s Size Isn’t the Real Issue—It’s Whom Government Is For
Americans have never much liked government. After all, the nation was conceived in a revolution against government. But the surge of cynicism now engulfing the country isn’t about government’s size. The cynicism comes from a growing perception that government isn’t working for average people. It’s seen as working for big business, Wall Street, and the very rich—who, in effect, have bought it. In a recent Pew Research Center poll, 77 percent of respondents said too much power is in the hands of a few rich people and corporations. That view is understandable.
Wall Street got bailed out by American taxpayers, but one out of every three homeowners with a mortgage is now underwater, caught in the tsunami caused by the Street’s excesses. The federal bailout wasn’t conditioned on the banks helping these homeowners, and direct federal help since the bailout has been meager. The recent settlement of claims against the banks is tiny compared with how much homeowners have lost. As a result, millions of people are losing their homes or simply walking away from homes whose mortgage payments they can no longer afford.
Homeowners can’t use bankruptcy to reorganize their mortgage loans, because the banks have engineered the bankruptcy laws to prohibit this. Young people can’t use bankruptcy to reorganize their student loans, because the banks have barred it. But big businesses now routinely use bankruptcy to renege on contracts with their workers. American Airlines, now in bankruptcy, announced plans to fire thirteen thousand workers—16 percent of its workforce—while cutting back the health benefits of current employees. It had intended to terminate its underfunded pension plans, creating the largest pension default in U.S. history, until the taxpayer-financed Pension Benefit Guaranty Corporation made it back off. Now it’s freezing all pensions.
Average consumers and small businesses are still hurting, but corporations that are large enough to finance fleets of Washington lobbyists are raking it in. Big agribusiness continues to claim hundreds of billions of dollars in price supports and ethanol subsidies, paid for by American consumers and taxpayers. Big Pharma gets extended patent protection that drives up everyone’s drug prices, plus the protection of a federal law making it a crime for consumers to buy the same drugs at lower prices from Canada. Big oil gets its own federal subsidy, paid for by taxpayers.
Not a day goes by without Republicans decrying the budget deficit. But the biggest single driver of the yawning deficit is big money’s corruption of Washington. One of the federal budget’s largest and fastest-growing programs is Medicare, whose costs would be far lower if Medicare could use its bargaining leverage to get drug companies to reduce their prices. It hasn’t happened, because the lobbyists for Big Pharma won’t allow it. Medicare’s administrative costs are only 3 percent, far below the 10 percent average administrative costs of private insurers. So it would seem logical to tame rising health-care costs for all Americans by allowing any family to opt in. That was the idea behind the “public option.” But health insurers’ representatives stopped it in its tracks.
The other big budgetary expense is national defense. America spends more on our military than do China, Russia, Britain, France, Japan, and Germany combined. The “basic” defense budget (the annual cost of paying troops and buying planes, ships, and tanks—not including the costs of actually fighting wars) keeps growing. With the withdrawal of troops from Afghanistan, the cost of fighting wars is projected to drop—but the base budget is scheduled to rise. It’s already about 25 percent higher than it was a decade ago, adjusted for inflation. One big reason for that is the near impossibility of terminating large defense contracts. Defense contractors have cultivated sponsors on Capitol Hill and located their plants and facilities in politically important congressional districts. Lockheed Martin, Bechtel, Raytheon, and others have made spending on national defense into America’s biggest jobs program.
So we keep spending billions on Cold War weapons systems like nuclear attack submarines, aircraft carriers, and manned combat fighters that pump up the bottom lines of defense contractors but have nothing to do with twenty-first-century combat. The Pentagon now says it wants to buy fewer F-35 Joint Strike Fighter planes than had been planned—the single-engine fighter has been plagued by cost overruns and technical glitches—but the contractors and their friends on Capitol Hill promise a fight.
Meanwhile, government regulators who are supposed to protect the public too often protect the profits of big companies that provide regulators good-paying jobs when they retire from government, and give key members of Congress fat campaign contributions when they run for reelection. Consider the safety of nuclear reactors. General Electric marketed the Mark 1 boiling-water reactors that were used in Japan’s Fukushima Daiichi plant as cheaper to build than other reactors because they used a smaller and less expensive containment structure. The same design is used in twenty-three American nuclear reactors at sixteen plants. In the mid-1980s, Harold Denton, then an official with the Nuclear Regulatory Commission (NRC), said Mark 1 reactors had a 90 percent probability of bursting should the fuel rods overheat and melt in an accident. But so far, the NRC has done nothing.
The national commission appointed to investigate the giant oil spill in the Gulf of Mexico concluded that BP failed to adequately supervise Halliburton’s work on installing the well. This was the case even though BP knew Halliburton lacked experience in testing cement to prevent blowouts and hadn’t performed adequately before on a similar job. Neither company bothered to spend the money to ensure adequate testing. It was much the same story at Massey Energy, owner of the West Virginia coal mine where an explosion in April 2010 killed twenty-nine miners. Massey wouldn’t spend the money needed to ensure its mines were safe. It had a history of safety violations but did nothing in response other than fighting them or refusing to pay the fines.
No company can be expected to build a nuclear reactor, an oil well, a coal mine, or anything else that’s 100 percent safe under all circumstances; the costs would be prohibitive. It’s unreasonable to expect corporations to totally guard against small chances of every potential accident. Inevitably, there’s a trade-off. Reasonable precaution means spending as much on safety as the probability of a particular disaster occurring, multiplied by its likely harm to human beings and the environment if it does occur.
But profit-making corporations have every incentive to underestimate these probabilities and lowball the likely harms. This is why it’s necessary to have government regulators and why regulators need enough resources to enforce the rules. And it’s why recent moves in Congress to cut the budgets of agencies charged with protecting public safety are so wrongheaded. One such proposal would reduce funding for the tsunami warning system. Another would ban the Environmental Protection Agency from regulating air pollution, including cancer-causing contaminants.
It’s also why regulators must be independent of the industries they regulate. When there’s a revolving door between regulatory agency and industry, officials are reluctant to bite the hands that will feed them. In Japan, it’s common for regulators to retire to better-paying jobs in the industries they were supposed to have regulated, a practice known there as amakudari. The United States, sadly, is no different. Remember the Department of the Interior’s Minerals Management Service, whose officials were supposed to regulate offshore drilling? Many of them now occupy cushy jobs in oil companies. Remember the financial regulators who were supposed to oversee Wall Street before the Street almost melted down, and others who were supposed to oversee the taxpayer-funded bailout of the Street afterward? Many of them are now collecting fat paychecks on the Street.
Protecting the public doesn’t have to be wildly expensive. But regulators and regulatory agencies have to be independent and smart. The public cannot be safe as long as big corporations—including GE, BP, Halliburton, Massey, and the biggest Wall Street banks—are allowed in effect to bribe legislators and entice regulators. Here again, the game is increasingly rigged, and most Americans are paying the price.
“Big government” isn’t the problem. The problem is the big money that’s taking over government. Government is doing fewer of the things most of us want it to do—providing good public schools and affordable access to college, improving our roads and bridges and water systems, maintaining safety nets to catch people who fall, and protecting the public from dangers—and more of the things big corporations, Wall Street, and wealthy plutocrats want it to do.
Some conservatives argue, like my e-mail correspondent, that we wouldn’t have to worry about big money taking over government if we had a smaller government to begin with. They say the reason big money is swamping our democracy is that a large government attracts big money. When I debated this a few months ago with Congressman Paul Ryan on ABC-TV’s This Week, he told me that “if the power and money are going to be here in Washington, that’s where the influence is going to go … that’s where the powerful are going to go to influence it.” Ryan has it upside down. A smaller government that’s still dominated by money would continue to do the bidding of Wall Street, the pharmaceutical industry, oil companies, big agribusiness, big insurance, military contractors, and rich individuals. It just wouldn’t do anything else.
Millionaires and billionaires aren’t making huge donations to politicians out of generosity. Corporations aren’t spending hundreds of millions of dollars on lobbyists and political campaigns because they love America. These expenditures are considered investments, and the individuals and corporations that make them expect a good return. Experts say the 2012 elections are likely to be the priciest ever, costing an estimated $6 billion. “It is far worse than it has ever been,” says the Republican senator John McCain. And an overwhelming share of the money is coming from a handful of wealthy individuals and large corporations. All restraints on spending are off now that the Supreme Court has determined that money is speech—it can’t be limited—and corporations are people under the First Amendment.
By the end of January, according to Federal Election Commission reports, just fifty-nine donors had given at least $500,000 to a super PAC designed to support a presidential candidate. The contributions of these fifty-nine totaled $80.12 million and accounted for 61 percent of all contributions to super PACs that month. Contributions from donors giving over $100,000—$111.1 million in total—accounted for 85.5 percent of all super PAC donations. Super PACs are supposed to operate independently of the candidates, but that’s a sham. They’re all run by close associates of the candidates.
Meanwhile, nonprofit political fronts like Crossroads GPS, founded by the Republican political guru Karl Rove, are gathering hundreds of millions of dollars from big corporations and a few wealthy individuals like the billionaire oil and petrochemical moguls David and Charles Koch and pouring the money into presidential and congressional campaigns. The public will never know who or which corporation gave what, because, under IRS regulations, such nonprofit “social welfare organizations” aren’t required to disclose the names of those who contributed to them. How many billionaires does it take to buy the presidency and Congress? We’ll soon find out—although we won’t know many of their names.
Never before in the history of our republic have so few spent so much to influence the votes of so many.
Yet when real people without money assemble to express their dissatisfaction with all this, they’re told the First Amendment doesn’t apply. Instead, they’re clubbed, pepper sprayed, thrown out of public parks, and evicted from public spaces. Across America, public officials have said Occupiers have to go. Even in universities—where free speech is supposed to be sacrosanct—peaceful assembly has been met with clubs and pepper spray.
The threat to America isn’t coming from peaceful demonstrators. And it’s not coming from a government that’s too large. It’s coming from unprecedented amounts of money now inundating our democracy, mostly from big corporations and a handful of the super-rich. And it is happening precisely at a time when an almost unprecedented share of the nation’s income and wealth is accumulating at the top. We cannot tolerate inordinate wealth for the few along with unbridled money in politics. As the great jurist and Supreme Court justice Louis Brandeis once said, “We may have democracy or we may have great wealth concentrated in the hands of a few, but we can’t have both.”
The Great Switch of the Super-Rich
One of the major returns to the rich from their political investments has been lower taxes. Forty years ago, wealthy Americans helped finance the U.S. government far more than now through their tax payments. Today wealthy Americans help finance the government mainly by lending it money. While foreigners own most of our national debt, over 40 percent is owned by Americans—mostly the very wealthy.
This great switch by the super-rich—from primarily paying the government taxes to now lending the government money—has gone almost unnoticed. But it’s critical for understanding the predicament we’re now in. And for getting out of it.
From World War II until 1981 the top marginal income tax rate never fell below 70 percent. Under President Dwight Eisenhower, a Republican whom no one ever accused of being a socialist, the top rate was 91 percent. Even after all deductions and credits, Americans with incomes of over $1 million (in today’s dollars) paid a top marginal rate, on average, of 52 percent. As recently as the late 1980s, the top tax rate on capital gains was 35 percent. But as income and wealth have accumulated at the top, so has the political power to reduce taxes. The Bush tax cuts of 2001 and 2003, which were extended for two years in December 2010, capped top rates at 35 percent, their lowest level in more than half a century, and reduced capital gains taxes to 15 percent.
Last year, according to the Internal Revenue Service, the four hundred richest Americans paid an average of 17 percent of their income in taxes. That’s lower than the tax rates of many middle-class Americans, as I’ve already said. Mitt Romney paid less than 14 percent on income in excess of $20 million, in both 2010 and 2011. That’s because so much of the income of the super-rich is classified as capital gains, which, at 15 percent, creates a loophole large enough for the super-rich to drive their Ferraris through. Well-heeled tax lawyers and accountants are kept busy year-round figuring out how to make the earnings of their clients look like capital gains. Congress still hasn’t closed the “carried interest” loophole that allows mutual-fund and private-equity managers to treat their incomes as capital gains.
Great wealth creates opportunities for ever greater tax loopholes. In 2010, eighteen thousand American households earning more than half a million dollars paid no income taxes at all. The estate tax (which affects only the top 2 percent) has also been slashed. As recently as 2000 it was 55 percent and kicked in after $1 million. Today it’s 35 percent and kicks in at $5 million.
The share of government revenue coming from corporations has also been dropping—due in no small part to squadrons of corporate lawyers and lobbyists finding and creating ways to cut their companies’ tax bills. American companies are booking higher profits than ever, but corporate tax receipts as a share of profits are at their lowest level in at least forty years. According to the Congressional Budget Office, corporate federal taxes paid last year dropped to 12.1 percent of profits earned from activities within the United States—a sharp decline from the 25.6 percent on average that companies paid from 1987 to 2008. The nation’s biggest corporations, like GE, find ways to pay no federal taxes at all. Congress has quietly cooperated, creating tax breaks that allow companies to write off investments or shelter their earnings abroad.
The only major tax increases in recent years have fallen on the rest of America. Middle- and lower-income Americans are shelling out larger portions of their sinking incomes in payroll taxes, sales taxes, and property taxes than they did thirty years ago. The Social Security payroll tax continues to climb as a share of total government tax revenues. Yet the payroll tax is regressive, applying only to yearly income under $110,100. That means it takes a far bigger bite out of the pay of the middle class and the working poor than out of the rich. Sales taxes at the state and local levels are soaring, along with tolls on highways, bridges, and tunnels, and property taxes. These also take bigger percentage bites out of the incomes of average Americans than they do out of those of the rich.
What are the super-rich and big corporations doing with all their savings? They’ve put significant sums into Treasury bills—essentially loans to the U.S. government—which have proven to be good and safe investments, particularly during these last few tumultuous years. Hence the great switch of the super-rich. Maybe I’m old-fashioned, but it seems to me people at the top, who have never had it so good, should sacrifice a bit more. That way the rest of us—who are struggling harder than Americans have struggled since the 1930s—won’t have to sacrifice quite as much.
Some apologists point to the generosity of the super-rich as evidence they’re contributing as much to the nation’s well-being as they did decades ago, when they paid a larger share of their earnings in taxes. Undoubtedly, super-rich family foundations, such as the Bill and Melinda Gates Foundation, have done much good. Super-rich philanthopic giving is on the rise. Here’s another parallel with the Gilded Age of the late nineteenth century, when magnates like Andrew Carnegie and John D. Rockefeller established philanthropic institutions that survive today.
But a large portion of charitable deductions claimed by the wealthy go not to the poor but to culture palaces—operas, art museums, symphonies, and theaters—where the wealthy spend much of their leisure time, and to the universities they once attended and expect their children to attend (perhaps with the added inducement of knowing that these schools often practice affirmative action for “legacies”). I’m all in favor of supporting the arts and our universities, but let’s face it: These aren’t really charities, as most people understand the term. They’re often investments in the lifestyles the wealthy already enjoy and want their children to have too. They’re also investments in prestige—especially if they result in the family name being engraved on the new wing of an art museum or symphony hall.
It’s their business how they donate their money, of course. But not entirely. This year the U.S. Treasury will be receiving about $50 billion less than it would if the tax code didn’t allow for charitable deductions. (Not incidentally, this is about the same amount the government now spends on Temporary Assistance for Needy Families, which is what remains of welfare.) As with all tax deductions, this gap has to be filled by other tax revenues or by spending cuts, or it just adds to the deficit. I see why a contribution to, say, the Salvation Army should be eligible for a charitable deduction. But why, exactly, should a contribution to the Guggenheim Museum or to Harvard University? A while ago, New York’s Lincoln Center had a gala supported by the charitable contributions of hedge fund industry leaders, some of whom take home $1 billion a year. I may be missing something, but this doesn’t strike me as charity, either. Poor New Yorkers rarely attend concerts at Lincoln Center. It turns out that only an estimated 10 percent of all charitable deductions are directed at the poor. In other words, the great switch of the super-rich isn’t into charity. It is, as I said, from supporting government through taxes to supporting government through lending. As it turns out, that’s not nearly enough support.
The Decline of the Public Good
A society is embodied most visibly in public institutions—public schools, public libraries, public transportation, public hospitals, public parks, public museums, public recreation, public universities, and so on. But much of what’s called “public” today is increasingly private. Tolls are rising on public highways and public bridges, as are tuitions at so-called public universities and admission fees at public parks and public museums. Much of the rest of what’s considered “public” has become so shoddy that those who can afford to do so find private alternatives.
As public schools deteriorate, the upper middle class and the wealthy send their kids to private ones. As public pools and playgrounds decay, the better-off buy memberships in private tennis and swimming clubs. As public hospitals decline, those who can afford it pay premium rates for private care. Gated communities and office parks now come with their own manicured lawns and walkways, security guards, and backup power systems.
Why the decline of public institutions? The financial squeeze on government at all levels since 2008 explains only part of it. The real story began thirty years ago. When almost all the gains from growth started going to the top, the better-off began shifting to private institutions and withdrew political support for public ones, using their political clout to reduce their tax payments. This created a vicious cycle of diminishing public revenues and deteriorating quality, spurring more flight from public institutions.
The great expansion of public institutions in America began in the early years of the twentieth century, when progressive reformers championed the idea that we all benefit from public goods. Excellent schools, roads, parks, playgrounds, and transit systems were meant to knit the new industrial society together, create better citizens, and generate widespread prosperity. Education, for example, was less a personal investment than a public good, improving the entire community and ultimately the nation. This logic was expanded upon in subsequent decades—through the Great Depression, World War II, and the Cold War. The “greatest generation” was bound together by mutual needs and common threats. It invested in strong public institutions as bulwarks against, in turn, mass poverty, fascism, and communism.
Yet increasingly over the past three decades, “we’re all in it together” has been replaced by “you’re on your own.” Global capital has outsourced American jobs abroad. As I’ve noted, the very rich have taken home almost unprecedented portions of total earnings while paying lower and lower tax rates. A new wave of immigrants has hit our shores, only to be condemned by demagogues who forget we are mostly a nation of immigrants. Not even Democrats any longer use the phrase “the public good.” Public goods are now, at best, “public investments.” Public institutions have morphed into “public-private partnerships,” or, for Republicans, “vouchers.”
In his standard stump speech Mitt Romney charges that President Obama and the Democrats have created an “entitlement society,” and he calls for an “opportunity” society. But he hasn’t explained how ordinary Americans will be able to take advantage of opportunities without good public schools, affordable higher education, good roads, and adequate health care.
Romney’s so-called entitlements are mostly a mirage anyway. Medicare is the only entitlement growing faster than the gross domestic product (GDP), but that’s because the costs of health care are growing faster than the economy. Social Security hasn’t contributed to the budget deficit; it’s had surpluses for years. Other safety nets are in tatters. Unemployment insurance reaches just 40 percent of the jobless these days. The only reason food stamps and other benefits for the poor spiked after 2008 is that more Americans fell into poverty after getting clobbered by the Great Recession that hit in that year.
Outside of defense, domestic discretionary spending is down sharply as a percentage of the economy. This spending is “discretionary” in that Congress decides how much to fund such programs in annual appropriations bills. So as the budget is squeezed, these programs are the first to be whittled back. Yet they include the most important things we do as a nation to invest in the future productivity of all our people. With declining state and local spending, total public spending on education, infrastructure, and basic research has dropped from 12 percent of GDP in the 1970s to less than 3 percent last year.
Most federal programs to help children and lower-income families are in this vulnerable category as well. Yet more than one in three young families with children (headed by someone thirty or under) were living in poverty in 2010, according to an analysis of census data by Northeastern University’s Center for Labor Market Studies. That’s the highest percentage on record. The Agriculture Department says nearly one in four young children (23.6 percent) lives in a family that had difficulty affording sufficient food at some point last year. A recent analysis of federal data by The New York Times showed the number of children receiving subsidized lunches rose to twenty-one million in the last school year, up from eighteen million in 2006–2007. Nearly a dozen states experienced increases of 25 percent or more. Under federal rules, children from families with incomes up to 130 percent of the poverty line, $29,055 for a family of four, are eligible.
We’re still in the worst economy since the Great Depression—with lower-income families and kids bearing the worst of it—and yet we’re cutting programs Americans desperately need to get through it. Local family services are being terminated. Tens of thousands of social workers have been laid off. Cities and counties are reducing or eliminating their contributions to Head Start, which provides early childhood education to the children of low-income parents. Medicaid, offering health care for poor families, is also under assault. Congressional Republicans want to reduce the federal contribution to Medicaid by more than $770 billion over the next decade and shift more costs to states and to low-income Americans themselves.
It gets worse. The automatic budget trigger scheduled to cut the federal budget starting next January will take an even bigger whack at domestic discretionary spending. Drastic cuts are already under way at the state and local levels. Since the fiscal year began in July, states no longer receive about $150 billion in federal stimulus money—money that was used to fill gaps in state budgets over the last two years. The result is a downward cascade of budget cuts—from the federal government to state governments and then to local governments—that are hurting most Americans, but kids and lower-income families in particular.
Romney’s budget proposals would shred safety nets even more. According to an analysis by the Center on Budget and Policy Priorities, his plan would throw ten million low-income people off the benefits rolls for food stamps or cut benefits by thousands of dollars a year, or both. “These cuts would primarily affect very low-income families with children, seniors and people with disabilities,” the center concludes. At the same time, Romney’s tax plan would boost the incomes of America’s wealthiest citizens, who are already taking home an almost unprecedented share of the nation’s total income. He wants to permanently extend George W. Bush’s tax cuts, reduce corporate income tax rates, and eliminate the estate tax. These tax reductions would increase the incomes of people earning more than $1 million a year by an average of $295,874 annually, according to the nonpartisan Tax Policy Center.
By reducing government revenues, Romney’s tax cuts would squeeze programs for the poor even further. Extending the Bush tax cuts will add $1.2 trillion to the nation’s budget deficit in just two years. The same amount is supposed to be saved by the automatic spending cuts starting next January—which, as I’ve noted, will hit the poor especially hard. Oh, did I say that Romney and other Republicans also want to repeal President Obama’s health-care law, thereby leaving fifty million Americans without health insurance?
Meanwhile, the nation has been cutting school budgets to shreds, even though the size of America’s school-age population keeps growing. By 2015, an additional two million kids are expected to show up in our schools. Yet so far this year, twenty-three states have reduced education spending, on top of cuts in 2011 and 2010. According to a survey of city finance officers released by the National League of Cities, half of all American cities face cuts in state aid for education. That’s no surprise. Education is one of the biggest expenses in state budgets. But states can’t run deficits—almost every state constitution forbids it—and tax revenues during the prolonged downturn haven’t kept up.
Arizona has eliminated preschool for more than four thousand children and cut funding for books, computers, and other classroom supplies. California has reduced kindergarten through twelfth grade aid to local school districts by billions of dollars and is cutting a variety of programs, including adult literacy instruction and help for high-needs students. Colorado and Georgia have reduced public school spending nearly 5 percent from 2010; Illinois and Massachusetts, by 3 percent. Virginia’s $700 million in cuts include funding for class-size reduction in kindergarten through third grade. Washington suspended a program to reduce class size. Pennsylvania has squeezed local budgets: Philadelphia is laying off fourteen hundred teachers and staff; Carlisle is using sheep to trim its playing fields.
Local communities can’t make up the difference. As housing values have declined, revenues from local property taxes have plummeted. This means even less money for schools and local family services. So kids are being squeezed into ever more crowded classrooms with reduced school hours and shorter school weeks. Prekindergarten programs are being cut. Schools have even started to charge families for textbooks and extracurricular activities.
Meanwhile, at least forty-three states are cutting back on funding for public colleges and universities and increasing tuitions and fees. As a result, many qualified young people won’t be able to attend. For example, the University of California has increased tuition by 32 percent and reduced freshman enrollment by twenty-three hundred students; the California State University system cut enrollment by forty thousand students. Arizona’s Board of Regents has approved in-state undergraduate tuition (tuition paid by students who are residents of the state) increases of between 9 and 20 percent as well as fee increases at the state’s three public universities. Florida’s public universities have raised tuition 32 percent. New York’s state university system has increased resident undergraduate tuition by 14 percent. Texas has cut funding for higher education by 5 percent, or $73 million. Washington has reduced state funding for the University of Washington by 26 percent.
Because of these state cuts and tuition hikes, families and young people are absorbing more of the cost of higher education. The total amount of outstanding student debt is staggering. The New York Federal Reserve Bank estimates it to be $550 billion; Sallie Mae, the school-loan equivalent of the housing industry’s Fannie Mae and Freddie Mac, puts it at $757 billion. Almost a third of students graduating from college are burdened with these debts. Punitive laws enforce repayment, and it is almost impossible to shed student loans in bankruptcy. There is no statute of limitations for non-repayment. Why have we allowed this to happen? Our young people—their capacities to think, understand, investigate, and innovate—are America’s future. In the name of fiscal prudence we’re endangering that future.
In a recent survey of thirty-four advanced nations by the Organization for Economic Cooperation and Development, our kids came in twenty-fifth in math, seventeenth in science, and fourteenth in reading. The average fifteen-year-old American student can’t answer as many test questions correctly as the average fifteen-year-old student in Shanghai. America’s biggest corporations don’t seem to care about the deterioration of American education, because they’re getting the talent they need all over the world. Many of them now have research and development operations in Europe and China, for example. America’s wealthy and upper-middle-class families don’t seem particularly worried, either. They have enough money to send their kids to good private schools and to pay high tuitions at private universities. But the rest of the nation is imperiled.
I’m not one of those who believes the only way to fix what’s wrong with American education is to throw more money at it. We also need to make improvements in how we educate students. Judging teacher performance has to be squarely on the table, and teachers should be paid according to how well their students learn. We should experiment with vouchers whose worth is inversely related to family income. Universities have to tame their budgets for student amenities that have nothing to do with education. But considering the increases in our population of young people and their educational needs in the new global economy, more resources are surely needed.
President Obama calls this a “Sputnik moment,” referring to the wake-up call to America by the Soviet’s successful launch in the 1950s that resulted in the National Defense Education Act, training a whole generation of math and science teachers. Sadly, we’re heading in the opposite direction. The latest budget agreement invites even more federal budget cuts in public education. Pell Grants that allow young people from poor families to attend college are already squeezed.
No wonder so many Americans feel that no matter how hard they or their children try, they can no longer get ahead. The game seems rigged because, increasingly, it is. We’re losing public goods available to all, supported by taxes. In their place are private goods available mainly to the very rich. At the same time, the rich are paying less to support the public good. And more and more government expenditures are finding their way into bailouts, subsidies, and government contracts going to favored industries and their shareholders and executives.
There is something dreadfully wrong with this picture.
The Broken Basic Bargain
As I write this, jobs are starting to return, and America appears to be emerging from the deepest economic downturn we’ve experienced since the Great Depression. But the pay of most Americans is not returning—and that is the longer-term and more disturbing story. For most of the last century, the basic bargain at the heart of the American economy was that employers paid their workers enough to buy what American employers were selling. That basic bargain created a virtuous cycle of higher living standards, more jobs, and better wages. But for the last thirty years that basic bargain has been coming apart.
In 1914, Henry Ford announced he was paying workers on his Model T assembly line $5 a day—three times what the typical factory employee earned at the time. The Wall Street Journal termed his action “an economic crime,” but Ford knew it was a cunning business move. The higher wage turned Ford’s autoworkers into customers who could afford to buy Model Ts. In two years Ford’s profits more than doubled.
That was then. Now Ford Motor Company is paying its new hires about half what it paid its new employees a decade ago. Ford’s newest workers earn about $14 an hour, in contrast to the $25 an hour earned by new Ford workers in 2002 (adjusted for inflation). Ford also gives today’s new recruits a maximum of four weeks of paid time off a year; Ford workers used to get five weeks. And instead of receiving a guaranteed $3,000-a-month pension when they retire at age sixty, new hires must build their own “personal retirement plans,” to which Ford contributes less than $2,000 a year.
It’s the same story across America. At GE, new hires now earn $12 to $19 an hour, versus $21 to $32 an hour earned by workers who started at GE a decade or more ago. New data from the Commerce Department show employee pay is now down to the smallest share of the economy since the government began collecting wage and salary figures data in 1929. Meanwhile, corporate profits now constitute the largest share of the economy since 1929.
In case you forgot, 1929 was the year of the crash that ushered in the Great Depression. In the years leading up to that crash, most employers forgot Henry Ford’s example. The wages of most American workers remained stagnant. The gains of economic growth went mainly into corporate profits and into the pockets of the very rich. American families maintained their standard of living by going deeper into debt. In 1929 the debt bubble popped.
Sound familiar? It should. The same thing happened in the years leading up to the crash of 2008. The latest data on corporate profits and wages show we haven’t learned the essential lesson of the two big economic crashes of the last seventy-five years: when the economy becomes too lopsided—disproportionately benefiting corporate owners and top executives vis-à-vis average workers—it tips over.
In other words, the real reason the American economy tanked in 2008, and why we’re still struggling to recover, is that the basic bargain has been broken. The big news isn’t the slow return of jobs. It’s the drop in pay. Most of the jobs we’ve gained over the last two years pay less than the jobs we’ve lost. An analysis from the National Employment Law Project shows that the jobs created since February 2010 pay, on average, significantly lower wages than the jobs lost between January 2008 and February 2010. The biggest losses during the Great Recession were jobs paying between $19.05 and $31.40 an hour. The biggest gains over the past two years have been in jobs paying an average of $9.03 to $12.91 an hour.
For several years now, conservative economists have blamed high unemployment on the purported fact that many Americans have priced themselves out of the global/high-tech jobs market. So if we want more jobs, they say, we’ll need to accept lower wages and benefits. That’s exactly what Americans have been doing. More and more Americans are retaining their jobs by settling for lower pay or going without cost-of-living increases. Or they’ve lost a higher-paying job and have taken one that pays less. Or they’ve joined the great army of contingent workers, self-employed “consultants,” temps, and contract workers—without health-care benefits, pensions, job security, or decent wages.
All told, this has been the worst decade for American workers in a century. According to Commerce Department data, private sector wage gains over the last decade have even lagged behind wage gains during the decade of the Great Depression (4 percent over the last ten years, adjusted for inflation, versus 5 percent from 1929 to 1939). Conservatives say that’s still not enough, which is why unions have to be busted—and why Republican governors and legislators are trying to pass so-called right-to-work laws banning employment contracts requiring employees to join a union and pay union dues. Without such a requirement there’s no reason for any particular worker to join a union, because he can get the bargaining advantages of unionization without paying for them—which in turn destroys unions, exactly the point. Indiana just enacted the nation’s first right-to-work law in more than a decade and the first ever in the heavily unionized upper Midwest.
The current attack on public sector workers logically follows. As the pay and benefits of workers in the private sector continue to drop, Republicans claim public sector workers now take home more generous pay and benefits packages than private sector workers. It’s not true on the wage side if you control for level of education, but it wasn’t even true on the benefits side until private sector benefits fell off a cliff. Meanwhile, all across America, public sector workers are being “furloughed,” which is a nice word for not collecting any pay for weeks at a time.
It’s no great feat to create lots of lousy jobs. A few years ago Michele Bachmann remarked that if the minimum wage were repealed, “we could potentially virtually wipe out unemployment completely because we would be able to offer jobs at whatever level.” If you accept her logic, why stop there? After all, slavery was a full-employment system.
Conservative economists have it wrong. The underlying problem isn’t that most Americans have priced themselves out of the global/high-tech labor market. It’s that most Americans are receiving a smaller share of the American pie. This not only is bad for the majority but also hobbles the economy. Lower incomes mean less overall demand for goods and services, which translates into lower wages in the future. The basic bargain once recognized that average workers are also consumers and that their paychecks keep the economy going. We can’t have a full-fledged recovery and we can’t sustain a healthy economy until that bargain is restored.
What happened to America? Why and how did we come apart?
What Went Wrong
It’s estimated the economy will grow between 2 and 3 percent in 2012, which is peanuts. The deeper the economic hole we’ve been in, the faster we need to grow in order to get back on track. Given the depth of the hole we fell into in 2008, we need the economy to be growing by 4–6 percent by now. In 1934, when the economy began emerging from the bottom of the Great Depression, it grew 7.7 percent. The next year it grew more than 8 percent. In 1936 it grew a whopping 14.1 percent.
The U.S. economy won’t really bounce back until America’s surge toward inequality is reversed. When so much income goes to the top, the middle class doesn’t have enough purchasing power to keep the economy going without sinking ever more deeply into debt—which, as we’ve seen, ends badly. The 5 percent of Americans with the highest incomes now account for 37 percent of all consumer purchases, according to Moody’s Analytics. Yet the spending of the richest 5 percent alone will not lead to that virtuous cycle of more jobs and higher living standards. Nor can we rely on exports to fill the gap. It is impossible for every large economy, including that of the United States, to become a net exporter. 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 they pull back when the values of their assets tumble. Sound familiar?
Even if President Obama is reelected, and even if by some miracle he gets congressional support for another big stimulus while Ben S. Bernanke’s Federal Reserve keeps interest rates near zero, these policies can’t work without a middle class capable of spending. Pump priming helps only when a well contains enough water.
Look back over the last hundred years and you’ll see the pattern. During periods when the very rich took home a much smaller proportion of total income—as in the Great Prosperity between 1947 and 1977—the nation as a whole grew faster, and median wages surged. The basic bargain ensured that the pay of American workers coincided with their output. In effect, the vast middle class received an increasing share of the benefits of economic growth. We created that virtuous cycle in which an ever-growing middle class had the ability to consume more goods and services, which created more and better jobs, thereby stoking demand. The rising tide did in fact lift all boats. On the other hand, during periods when the very rich took home a larger proportion—as between 1918 and 1933, and in the Great Regression from 1981 to the present day—growth slowed, median wages stagnated, and we suffered giant downturns.
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. Starting in the late 1970s, the middle class began to weaken. The two lines began to diverge: Output per hour—a measure of productivity—continued to rise. But real hourly compensation was left in the dust. This was mainly because new technologies—container ships, satellite communications, eventually computers and the Internet—started to undermine any American job that could be automated or done more cheaply abroad. Factories remaining in the United States have shed workers as they automated. So has the service sector. But contrary to popular mythology, trade and technology have not reduced the overall number of American jobs; their more profound effect has been on pay. As I noted, jobs are slowly returning from the depths of the Great Recession, but in order to get them, many workers have to accept lower pay than before.
Over the last three and a half decades the middle class continued to spend, the breakdown of the basic bargain notwithstanding. Its spending was at first enabled by the flow of women into the workforce. In the 1960s, only 12 percent of married women with young children under the age of six were working for pay; by the late 1990s, 55 percent were. When that way of life stopped generating enough income, Americans went deeper into debt. From the late 1990s to 2007, the typical household debt grew by a third. As long as housing values continued to rise, it seemed a painless way to get additional money. Eventually, of course, the bubble burst. That ended the middle class’s remarkable ability to keep spending in the face of near-stagnant wages.
The puzzle is why so little has been done in the last thirty-five years to help deal with the subversion of the economic power of the middle class. With the continued gains from economic growth, the nation could have enabled more people to become problem solvers and innovators—through early childhood education, better public schools, expanded access to higher education, and more efficient public transportation. We might have enlarged safety nets—by having unemployment insurance cover part-time work, by giving transition assistance to those moving to new jobs in new locations, by creating insurance for communities that lost a major employer. And we could have made Medicare available to anyone. Big companies could have been required to pay severance to American workers they let go, and train them for new jobs. The minimum wage could have been pegged at half the median wage, and we could have insisted that the foreign nations we trade with do the same so that all citizens could share in gains from trade. We could have raised taxes on the rich and cut them for poorer Americans.
But starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It cut spending on infrastructure as a percentage of the national economy and shifted more of the costs of public higher education to families. It shredded safety nets. And it allowed companies to bust unions and threaten employees who tried to organize. Fewer than 7 percent of private sector workers are now unionized. Meanwhile, as I’ve noted, the top income tax rate was halved to 35 percent, and many of the nation’s richest were allowed to treat their income as capital gains subject to no more than 15 percent tax. Inheritance taxes that affected only the topmost 1.5 percent of earners were sliced. Yet at the same time sales and payroll taxes—which are more painful to those with modest paychecks—were increased.
Most telling of all, Washington deregulated Wall Street while insuring it against major losses. In so doing, it allowed finance, which until then had been the servant of American industry, to become its master, demanding short-term profits over long-term growth and raking in an ever-larger portion of the nation’s profits. By 2007, financial companies accounted for more than 40 percent of American corporate profits and almost as great a percentage of pay, up from 10 percent during the Great Prosperity.
Some say the regressive lurch occurred because Americans lost confidence in government. But this argument has cause and effect backward. The tax revolts that thundered across America starting in the late 1970s were not so much ideological revolts against government—Americans still wanted all the government services they had before, and then some—as revolts against paying more taxes on incomes that had stagnated. Inevitably, government services deteriorated and government deficits exploded, confirming the public’s growing cynicism about government’s doing anything right.
Others say we couldn’t have reversed the consequences of globalization and technological change. Yet the experiences of other nations, like Germany, suggest otherwise. Germany has grown faster than the United States for the last fifteen years, and the gains have been more widely spread. While Americans’ average hourly pay has risen only 6 percent since 1985, adjusted for inflation, German workers’ pay has risen almost 30 percent. At the same time, the top 1 percent of German households now takes home about 11 percent of all income—about the same as in 1970. And although in recent months Germany has been hit by the debt crisis of its neighbors, its unemployment is still below where it was when the financial crisis started in 2007. Germany has done it mainly by focusing like a laser on education (with regard to math scores, German students continue to extend their lead over American students) and by maintaining strong labor unions.
The real reason for America’s Great Regression was political. As income and wealth became more concentrated in fewer hands, American politics reverted to what Marriner S. Eccles, a former chairman of the Federal Reserve, described in the 1920s, when people “with great economic power had an undue influence in making the rules of the economic game.” But it’s unlikely that the plutocrats can retain their political clout forever. So many people have been hit by job losses, sagging incomes, and declining home values that Americans will eventually become mobilized. The question is not whether but when. Perhaps the Occupier movement marks the beginning. Americans have summoned the political will to take back our economy before, in even bleaker times. As the historian James Truslow Adams defined the American dream when he coined the term at the depths of the Great Depression, what we seek is “a land in which life should be better and richer and fuller for every man.”
Why Big Corporations Won’t Lead the Way
Republicans want to rely on big American corporations to solve our economic problems and to reduce the size and scope of government. But the prosperity of America’s big businesses has become disconnected from the prosperity of most Americans. Without a government that’s focused on more and better jobs, we’re left with global corporations that don’t give a damn. And American corporations are increasingly global, with less and less stake in America. According to the Commerce Department, American-based global corporations added 2.4 million workers abroad in the first decade of this century while cutting their American workforce by 2.9 million. Apple employs 43,000 people in the United States but contracts with over 700,000 workers abroad. It makes iPhones in China both because wages are low there and because Apple’s Chinese contractor can quickly mobilize workers from company dormitories at almost any hour of the day or night.
American companies aren’t creating just routine jobs overseas. They’re creating good high-tech jobs there and doing more of their research and development (R&D) abroad. The National Science Foundation (NSF) warns that the United States is quickly losing ground in research. China’s share of global R&D now tops ours. One big reason, according to the NSF, is that American firms nearly doubled their R&D investment in Asia over the last decade.
That’s because China has a national economic strategy designed to make it the economic powerhouse of the future. China wants to create the technologies and the jobs of the future, and it has been pouring money into world-class research centers designed to lure American corporations along with their engineers and scientists. The Chinese are intent on learning as much as they can from American corporations and then going beyond them—as they already have in solar and electric-battery technologies. They’re also pouring money into education at all levels. In the last dozen years they’ve built twenty universities, each intended to become the equivalent of MIT. American corporations are happy to play along because China has the biggest consumer market in the world, to which every American company wants access.
At last year’s summit between the Chinese president, Hu Jintao, and President Obama, China agreed to buy $45 billion of American exports. President Obama said the agreement would create more American jobs, but in fact it would create more profits for American companies and relatively few new jobs for Americans. Nearly half of the deal was for two hundred Boeing aircraft whose parts are coming from all over the world. The rest involved agricultural commodities that don’t require much U.S. labor (because American agribusiness is highly automated) and chemical and high-tech goods that are even less labor-intensive. American corporations signed up for deals with China involving energy and aviation manufacturing, but much of the work is to be done in China.
American companies don’t care, as long as the deals help their bottom lines. An Apple executive told The New York Times, “We don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible.” He might have added, and showing profits big enough to continually increase our share price. If Apple or any other big American company can make a product best and cheapest in China or anywhere else, then that’s where it’ll do it. I don’t blame the companies. American corporations are in business to make profits and boost their share value, not to create good American jobs. That’s the form of capitalism we practice, in contrast with China’s “state-run” capitalism.
The real problem is that American firms also have huge clout in Washington. They maintain legions of lobbyists and are pouring boatloads of money into political campaigns. After the Supreme Court’s decision in Citizens United v. Federal Election Commission, there’s no limit. (That ruling allows corporations to give unlimited amounts of money to candidates.) Their clout extends into the Obama White House. The president’s own Council on Jobs and Competitiveness is chaired by Jeffrey Immelt, CEO of GE, and is full of CEOs of other big American corporations.
But the indifference if not outright opposition of big American corporations to higher wages and better jobs in America hobbles the development of a national economic strategy to generate both. GE, for example, has been creating more jobs outside the United States than in it. A decade ago, most of GE’s employees were American; today, the majority are non-American. Fifty-three percent of GE’s $150.2 billion in revenue last year, from all sources, came from abroad (up from 35 percent only a decade ago). And like other major corporations, GE has also been shifting more of its research to China. It recently announced a $500 million expansion of its R&D facilities there on top of a $2 billion initial investment. GE’s joint venture with Aviation Industry Corporation of China, to develop new integrated avionics systems (which presumably will find their way into Boeing planes), will be based in Shanghai.
It should come as no surprise that the President’s Council on Jobs and Competitiveness is calling for lower corporate taxes and fewer regulations. It has also called for repeal of the anti-corporate-looting provisions enacted by Congress in 2002 in response to Enron, arguing that they impede growth and hiring. But lower corporate taxes and fewer regulations won’t bring good jobs to America. They might lower the costs of production here, but global companies can always find even lower costs somewhere else around the world. America’s corporate elite also wants China to raise the value of its currency, so that everything it buys from us is cheaper and everything we buy from it is more expensive. But even if our currencies were better balanced, China would still come out ahead. We’d have more jobs because our exports would be more attractive in world markets, but those jobs would summon fewer goods from around the world. A lower-valued dollar makes everything else we buy from the rest of the world more expensive, so we in effect become poorer.
Global corporations will create jobs wherever around the world they can get the best return—either where wages are lowest or where productivity is highest or both. America can’t and shouldn’t try to compete on the basis of low wages; that’s a recipe for a continuously declining standard of living. Global companies will create good, high-wage jobs in the United States only if Americans are productive enough to summon them. Yet the sad truth is a large and growing portion of our workforce is handicapped by deteriorating schools, unaffordable college tuitions, decaying infrastructure, worsening health and rising health-care costs, and diminishing basic R&D. All of this is putting us on a glide path toward even lousier jobs and lower wages. And we have no national plan to reverse any of this.
Instead of a national economic strategy to make these investments in our people, we have a hodgepodge of tax breaks and corporate welfare crafted by American-based global corporations to maximize their profits. They’ll do and make things in China and give the Chinese their know-how when that’s the best way to boost the corporations’ bottom lines, and they’ll utilize research and development wherever around the world it will deliver the biggest bang for the dollar. Meanwhile, deficit hawks in Congress are cutting publicly supported R&D. And cash-starved states are cutting K–12 education and slashing the budgets of their great public research universities.
China has a national economic strategy designed to create more and better jobs. We have global corporations designed to make money for their shareholders. No contest.
The Continuing Clout of the Street
Wall Street, meanwhile, has been using its lobbying power to water down regulations emerging from the Dodd-Frank financial reform law. The Street says Dodd-Frank is overkill. Dodd-Frank may, in fact, be too weak.
The European debt crisis, for example, isn’t a problem for America’s real economy. Whatever happens to Greece or other deeply indebted European governments, America’s exports to Europe aren’t going to dry up. In any event, those exports are small relative to the size of the U.S. economy. If you want to find the real reason for concern in the United States about what’s happening in Europe, follow the money. If Greece defaults on its debts, Italy and Spain—the next weakest borrowers—will have to pay higher interest rates on their own debts, pushing one or both of them to the brink. A default by either Italy or Spain would have roughly the same effect on our financial system as the implosion of Lehman Brothers in 2008—that is, financial chaos. It could easily pummel German and French banks, to which big Wall Street banks have lent a bundle. The Street has also bet on or insured all sorts of derivatives—in effect, bets placed on the outcomes of other trades—emanating from Europe, on energy, currency, interest rates, and foreign exchange swaps. If a German or French bank goes down, the ripple effects are incalculable.
The Street says it’s not worried because most of its exposure to European banks is insured through “credit-default swaps” that will offset any losses. But AIG nearly collapsed in 2008 because it couldn’t make payments on its swap contracts that were supposed to insure big Wall Street banks against losses on their bets. American taxpayers had to bail out AIG as well as the big banks. One of the many ironies here is that some badly indebted European nations (Ireland is the best example) went deeply into debt in the first place by bailing out their banks from the crisis that began on Wall Street. Full circle.
You don’t have to be an Occupier to conclude the Street is still out of control. Last summer, after Groupon selected Goldman Sachs, Morgan Stanley, and Credit Suisse to underwrite its initial public offering, the trio valued Groupon at a generous $30 billion. Subsequent accounting and disclosure problems showed this estimate to be absurdly high. But the banks didn’t care a whit. The higher the valuation, the fatter their fees. Or consider the recent collapse of MF Global, a Wall Street firm that gambled in financial futures, bet wrong on sovereign debt, and lost between $1.2 billion and $1.6 billion of its customers’ money. Those funds were supposed to have been held separately, but MF Global and other firms trading futures contracts have few safeguards to protect customer money and don’t even have to inform customers about where their money is.
Or take a look at the fancy footwork by Bank of America (BofA) when hit by a credit downgrade last fall. BofA avoided higher charges by simply moving the risky derivatives that had triggered the downgrade from its Merrill Lynch unit to a retail subsidiary flush with insured deposits. The subsidiary has a higher credit rating because those deposits are insured by the Federal Deposit Insurance Corporation (that is, you and me and our fellow citizens). Result: BofA improved its bottom line, at the expense of American taxpayers.
Wasn’t this supposed to be illegal? Keeping risky assets away from insured deposits had been a key principle of U.S. regulation for decades before the 1999 repeal of the Glass-Steagall Act, the Depression-era law that separated investment banking (betting in the financial casino) from commercial banking (taking in deposits and lending them out). Glass-Steagall’s demise allowed bankers to place large bets with other people’s money—and make huge bundles for themselves. It also led to the near meltdown of the Street in 2008. But even then, the Street fought against resurrecting Glass-Steagall. Reluctantly, bankers accepted as a compromise the so-called Volcker rule, which under pressure from Wall Street’s lobbyists has morphed into almost three hundred pages of regulatory mumbo jumbo riddled with exemptions and loopholes.
Meanwhile, the portion of the Dodd-Frank law that’s now supposed to be in effect is barely being enforced. That’s because the agencies charged with enforcing it, including the Securities and Exchange Commission, don’t have enough money or staff to do the job. The Street’s Washington lobbyists have made sure Congress doesn’t appropriate even these bare necessities. Several of these agencies are still lacking directors or commissioners. Ironically, many of the business leaders who blame the sluggish economy on “regulatory uncertainty” are the same ones who are keeping financial regulation in limbo. A senior vice president of the Chamber of Commerce told The New York Times, “Uncertainty among companies about the rules of the road is keeping a lot of capital on the sidelines.” Yes, and the chamber has been among the groups most responsible for maintaining uncertainty about Dodd-Frank’s final regulations.
Bankers try to justify their attempted murder of Dodd-Frank by saying tightened regulatory standards would put them at a disadvantage relative to their overseas competitors. JPMorgan Chase’s Jamie Dimon publicly accosted Ben Bernanke, complaining that the law’s implementation would harm the Street’s competitiveness. The argument is pure claptrap. In fact, senior Wall Street executives are making the same argument to financial regulators in Europe, arguing that tighter bank regulations there will cause Wall Street to move more of its business out of Europe and back to New York.
The problem isn’t excessive greed. If you took the greed out of Wall Street, all you’d have left is pavement. The problem is the Street’s excessive power. Wall Street is the richest and most powerful industry in America with the closest ties to the federal government—routinely supplying Treasury secretaries and economic advisers who share its worldview and its financial interests and routinely bankrolling congressional kingpins. How else can you explain why the Street was bailed out with no strings attached? Or why taxpayers didn’t get equity in the banks we bailed out—as Warren Buffett got when he bailed out Goldman Sachs—so when the banks became profitable again, we didn’t get any of the upside gains? Or why no criminal charges have been brought against any major Wall Street figure—despite the effluvium of frauds, deceptions, malfeasance, and nonfeasance in the years leading up to the crash and subsequent bailout? Or why Dodd-Frank is being eviscerated?
Since Dodd-Frank was enacted, Wall Street has spent as much on lobbyists and what amount to political payoffs designed to stop the law’s implementation as it did trying to water down the law in the first place. The six largest banks spent $29.4 million on lobbying in 2010, and even more in 2011. According to the Center for Public Integrity, the Street and other financial institutions hired roughly three thousand lobbyists to fight Dodd-Frank—more than five lobbyists for every member of Congress. They’ve hired almost the same number to delay, weaken, or otherwise prevent its implementation.
Earlier this year the Street’s biggest lobbying groups filed a lawsuit against the Commodity Futures Trading Commission, seeking to overturn its new rule limiting speculative trading in food, oil, and other commodities. Wall Street makes bundles from these bets, but they raise consumer costs—another redistribution from the middle class and the poor to the top. The Street argues the commission’s cost-benefit analysis wasn’t adequate. It’s a clever ploy, because there’s no clear legal standard for an “adequate” weighing of costs and benefits of financial regulations since both are so difficult to measure. And putting the question into the laps of federal judges gives the Street a major tactical advantage, because the Street has almost an infinite amount of money to hire so-called experts who will say benefits have been exaggerated and costs underestimated, while the commission’s budget is limited.
The Street used the same ploy last year after the Securities and Exchange Commission (SEC) tried to make it easier for shareholders to nominate company directors. Wall Street argued that the SEC’s cost-benefit analysis was inadequate. Last July, a federal appeals court—inundated by Wall Street lawyers and hired-gun “experts”—agreed with the Street. So much for shareholder rights.
Obviously, government should weigh the costs against the benefits of anything it does. But when it comes to regulating Wall Street, one big cost doesn’t make it into any individual weighing: the public’s mounting distrust of our entire economic system, generated by the Street’s repeated abuse of the public’s trust. Wall Street’s shenanigans have convinced a large portion of America that the economic game is rigged. Yet capitalism depends on trust. Without trust, people avoid even sensible economic risks. They also begin trading in gray markets and black markets. They think that if the big guys cheat in big ways, they may as well begin cheating in small ways. And when they think the game is rigged, they’re easy prey for political demagogues with fast tongues and dumb ideas.
Wall Street has blanketed America in a miasma of cynicism, and much of it is directed against Wall Street. The Street has only itself to blame. It should have welcomed new financial regulation as a means of restoring public trust. Instead, it’s been busily shredding new regulations and making the public more distrustful than ever. The cost of such cynicism has leached deep into America, finding expression in Tea Partiers and Occupiers and millions of others who think the Street has sold us out.
Whom Is the Economy for, Anyway?
All of this raises the basic question of whom the economy is for. Surely it’s not just for a few Wall Street executives and traders or a handful of managers of hedge funds and private-equity funds, and not just for big corporations and their CEOs. The success of our economy cannot be measured by how fast the GDP grows or how high the Dow Jones Industrial Average rises, because in an economy like ours very few of the gains from growth or from a rising stock market are trickling down to most people.
The economy’s success can’t be measured by the unemployment rate, either. As I’ve emphasized, that rate doesn’t take account of declining wages. Nor does it account for all the people who have become too discouraged to look for work because there are no jobs for them, and all those who are working part-time who want and need full-time jobs—or the growing ranks of contract workers, temporary workers, and others living from paycheck to paycheck with no job security at all.
Our economy’s success can’t even be measured by whether average incomes are turning upward. An average can disguise what’s happening to the majority because averages are pulled up by the top, and when the top is exceptionally high, the average can be far better than what most people experience. Shaquille O’Neal and I have an average height of six feet.
Even if most Americans are able to buy more, our lives will not improve if our schools, parks, roads, air and water, and other public goods continue to deteriorate. We won’t feel better off if our workplaces are unsafe, if we can’t safely walk on the streets of our communities, if we have no regular access to medical care, or if the cost of a major illness can wipe out our savings. And our lives will not be better if our democracy is dying, replaced by a system mostly responsive to big corporations and wealthy individuals. It is impossible to live happily in a society that seems fundamentally unfair or to live well in a nation rife with anger and cynicism.