I was reading some of Thom Hartmann’s laments recently, including some of the pages promoting his books. I applaud his effort to expose the problem, but after reading his democracy will save the middle class rant, his labor perspective becomes more obvious. Hartmann is a rock star every-man author with an armful of book titles to his credit on all sorts of popular subjects, including several on the deconstruction of the middle class, representative democracy, corporate dominance, etc., perhaps the most notable being Screwed: The Undeclared War Against the Middle Class… by Hartmann, Miller, and Palast, but Hartmann is long on productivity and short on substance.
A much better source (probably Hartmann’s too) would be Donald L. Bartlett and James B. Steele’s 1992 America: What Went Wrong? or their 1994 sequel, America: Who Really Pays the Taxes?. Although neither is on the level of Noam Chomsky’s Fateful Triangle dissertation, within the space of the target audience for every-man books on taxes and the economy, Bartlett and Steele deliver the facts in succinct, easily digestible fashion.
Hartmann seems to believe that a conspiracy to dismantle organized labor is the ultimate cause of the deconstruction of the middle class. Conspiracy theories sell books, so it’s likely that Hartmann is tweaking mainstream readers to juice his own royalty stream. Bartlett and Steele don’t draw the conclusions for you, but after digesting the evidence they present, you’d be hard pressed not to conclude that nothing more sinister than unmitigated greed led to the web of policies responsible for expanding the wealth gap and thereby dismantling the middle class.
Ayn Rand defined the capitalist ideal to be a freedom to pursue one’s self-interest, completely unfettered by government regulation, little differentiated from Gordon Gekko’s ‘greed is good’ standard. Unfortunately, the competitive drive coupled with innate human goodness (sic) makes mere independence from government intervention insufficient. Marketplace competition, government regulators, and other potential success inhibitors are most efficiently overcome by lobbying government for grants, contracts, spending programs, and regulatory exemptions. The path represented by conceiving and building innovative products and creatively marketing them is substantially more error prone.
So you might say that it’s natural and inevitable for the tax landscape to become corrupted by special interest lobbying. Perhaps a share of the legislators involved are actually well intentioned (even the most cynical observer must have hope that there’s some good somewhere in government) or maybe they just don’t understanding the downstream consequences of their actions. The unfortunate result, clearly identified by Bartlett and Steele, is an unprecedented transfer of wealth away from the labor class (in which I include most office workers, but not doctors and lawyers), to the capital class. Bartlett and Steele even address Gekko-class corporate raiders. Some of the figures they cite border on astonishing - the very first page in the prologue documents a gigantic transfer of wealth from the middle class to the capital class between 1959 and 1989. In 1959 it took the combined wealth of the bottom 35% of the U.S. population to equal the wealth of the richest 4%. By 1989, the combined wealth of 51% of the population was required to equal the wealth of the richest 4% (using figures published by the Internal Revenue Service). And it’s grown worse… Taylor McKenzie reports that the combined wealth of the top 1% (circa March 2008) equals that of the bottom 95% of the population.
Returning to the prologue of America: What Went Wrong?, there are a slew of uncanny similarities between the Washington Post, New York Times, Los Angeles Times, and Boston Globe articles cited in 1991 and what we’re seeing in the press today. If you didn’t have the dates for reference, you’d think you were reading about the current depression, not the 1991-2 recession. The Fed was slashing the discount rate (to 3.5%, the lowest level since 1964), but one reporter (Richard Ford) in a press conference with the elder Pres. Bush, lamented that a recovery led by consumer spending fueled by low borrowing rates wasn’t going to cut it because people didn’t have jobs with which to pay back the debt they’d be incurring through credit card spending.
I must have taken a ride on H. G. Wells' time machine. Aren’t these major economic corrections supposed to be further apart? FYI, the federal funds rate is now below where it was in 1952. Stimulative monetarism is maxed out - the economy is so depressed that cheap (virtually free) money cannot cure it. Government drains ever larger vials of blood from the economy and now that the body economic is weak, the vampire offers free seeds with which to sow next year’s crops.
Inequality.org argues that the legal minimum wage is about a third of the cost of living and I’m inclined to agree that business is a major component in the wealth skewing mechanism - too little is being paid out at the bottom, and too much is paid out at the top. Inequality.org has also argued that the wealth imbalance should be addressed via estate taxes, but I’m not so sure.
Private foundations are so much more efficient than government that it gives me pause to consider turning even a fraction of the Gates, Allen, and Buffet fortunes over to the tax man and frugal (sic) federal legislators. Obviously, philanthropic foundations sidestep that capital seizure, thus ensuring that the endowment is preserved. Warren Buffet has never lived a lifestyle with even a fraction of the bling of Jay Leno, much less Elizabeth Taylor, Richard Burton, Paris Hilton, Hugo Boss, or Larry Ellison. He’s dead set against his heirs living like Hollywood stars based on an accident of birth, but I have trouble imagining the Bill and Melinda Gates Foundation (who he’s bequeathed the vast majority of his fortune to) being any less effective than the Smithsonian at spending the money. Do we really want to capture those fortunes and redistribute them through the federal government?
If the very wealthy avoid the tax man by starting private foundations, where’s the government revenue stream represented by condemning that wealth? In all likelihood, based on the way things have been working since the fifties, a continued inheritance tax will simply be re-engineered to expand the wealth gap further. It would be better to ensure fairness at finer points along the way. If pension plans are going to be subject to corporate/pension raiders, why sanction them in the first place? Why not make the original wage earner the trustee of their retirement assets, just as people do now with IRA, 401K, and KEOGH plans?
The U.S. is on the verge of spending a trillion dollars more than the existing budget deficit to counterbalance the depression. The money will be used to stimulate the economy, create jobs, etc., but the first $350 billion Wall Street bailout resulted in bank acquisitions, not loan restructuring. Working class taxpayers bailed out capital class institutions in yet another massive transfer of wealth from the have-nots to the haves. Executive bonuses paid by Goldman-Sachs in 2006 and 2007 totaled $36 billion. Their 2007 bonuses totaled $20B, despite Goldman needing a $3B bailout that same year! How many regular Joes do you know that received massive bonuses despite failing to meet their MBO goals? If Goldman had paid just $3B less in bonuses in 2007, they wouldn’t have needed a $3B cash infusion.
Why bother embezzling millions when you can get your cronies to cut you a check? If you sign mine, I’ll sign yours. Do you harbor doubts about who controls American corporate assets (stock)? Note that America’s wealthiest 1% owns 36.9% of the corporate stock and the next wealthiest 9% owns 41.9%; the poorest 90% owns the 21.3% of stock left over.
Back to the current depression and the Obama administration’s political inheritance… Assume that 15% of the country is unemployed and we want to get unemployment back to 5%. That missing 10% represents about 19.5 million jobs. If the jobs created by infrastructure improvement programs pay an average of $50k per year (a total fabrication on my part), putting most of the unemployed back to work (assuming that finance and computer geeks can sell their resumes to contractors hiring construction workers) will cost $975B per year, which is just about what the economists are saying it will take to stem the slide. What makes me queasy is that infrastructure improvements do not provide ongoing employment, so the question is: Will the economy tank a year later, when the $1 trillion runs out and the roads and bridges are all fixed up?
Printing $1 trillion in fresh greenbacks will also cause a huge spike in inflation, gut foreign exchange rates, and increase the price of American goods overseas, thereby limiting their marketability, in an environment of substantial existing trade deficits with China, Korea, Japan, etc.
Uncle Sam can’t cash in on capital gains on houses and stock portfolios that are declining in value, so it certainly serves the Treasury’s interests to re-inflate the currency by printing a trillion or two more greenbacks. What a racket! The Treaasury prints a mountain of money to bail out an economy strangled by corrupt federal tax policies, thereby inflating the money supply (and devaluing the dollar overseas), and collects taxes on the apparent ‘gain’. Uncle Sam’s revenues also fall when people are out of work. No income, no tax revenue, so you might say that government is primarily interested in ensuring its own survival.
The problem is that taxing incomes is what wreaked the economy’s shock absorbers in the first place. Applied Forecasting cites a Gallup poll showing that Joe Public believed a recession was brewing back in November 2007, yet economists didn’t officially declare one until as much as a year later. What gives?
If Joe Public can call the plays better than professionally trained economists (who can’t officially declare a recession until negative growth has been evident for two consecutive quarters ), wouldn’t it make sense to empower that foresight by putting individual taxpayers back in charge of capital conversions (income taxes being a largely involuntary conversion of individual capital into spending on government)? If individuals had the right to control the conversion of their earnings into government spending (e.g. through consumption taxes), rather than having earnings subject to government condemnation (in analogous fashion to the way that real property is condemned), Joe Public would have more savings with which to weather economic downturns and government wouldn’t need to play such a large role in the recovery.
One can conclude two things: 1) Government conversion of individual capital into current spending has sapped so much of the country’s capital reserve that the economy sits upon a knife edge of instability - a hiccup here propagates and snowballs into a crisis over there, sometimes in seemingly unrelated economic sectors (mortgages to Wall Street to Main Street). 2) No amount of quantitative oversight by Nobel prize winning economists provides the same degree of foresight as an unbiased poll of consumer confidence.
Rand objects to elevating the values and rights of society over those of the individual on principle, and we’ve seen evidence that individuals are better at forecasting the economy, so why have we embraced big government, now running over 30% of GDP ?
In Rand’s insular capitalism (free from government intervention), WaMu, AIG, Lehman Brothers, Merrill Lynch, etc. would be allowed to fail and their stockholders would suffer the loss. Two things make this sort of economic natural selection politically inconvenient on Wall Street: 1) Where was the oversight from the Securities and Exchange Commission in the months leading up to the debacle? Admitting that Wall Street collapsed would be an indictment of the SEC’s oversight. 2) Thousands of non-executive staffers lose their jobs along with the superstar executives and their multimillion dollar annual bonuses. Aside from the after-the-fact government funded intervention, corporate America enjoys a keiretsu-like symbiosis with government actively ameliorating harsh conditions in the business environment.
Curiously, socialists have seized upon the meltdown in mortgage backed securities and the subsequent Wall Street correction as signs that capitalism has failed. The root of the problem stems from the Clinton administration, when Fannie Mae was encouraged to loosen down payment requirements. Fannie Mae’s chairman sounded a warning note at that time, concerned that an economic downturn would likely escalate into a rescue similar to one we saw in the 1980’s. There were other factors, namely a disastrous separation of loan originators from mortgage investors, though speculative interest in default credit swaps (which were exempt from regulation), also played a significant role. So, the current economic crisis isn’t so much the result of capitalism failing as it is the confluence of a social agenda (making mortgages accessible to previously under-qualified buyers), the albatross of federal spending becoming too much for taxpayers to shoulder, and greed driving a gigantic wedge into the wealth gap.
Bartlett and Steele’s first chapter opens with a striking graph depicting aggregate workforce salary increases in three income categories during the 1980’s. In ten years, the income of the entire workforce earning between $20k and $50k increased by 44%. In the $200k to $1M salary range, the aggregate increase in wages over the period was 697%. In the greater than $1M salary range, the aggregate increase in wages during the period was 2,184%. Naturally, all categories can grow via an increase in the number of individuals in the category as well as via an increased average salary within the segment, but as dramatically ambiguous as the opening graphic is, the chapter includes all sorts of insights into where income tax policy is broadening the wealth gap. Notable examples include anecdotes on lavish executive expense accounts; the conglomerate and take public profit cycle; and asset purchase and sweetheart lease back deals that suck the economic vitality out of once sound corporations (not unlike the executive bonuses paid to Goldman Sachs execs in the last few years).
America: What Went Wrong? is 235 pages long including the index. It’s a fast read, even amidst distractions, yet it’s packed with sometimes eye popping facts - it’s a worthwhile read for taxpayers and politicos alike.
Further reading…
Florida Economists Declare State is in Recession
Goldman Sachs 2007 executive bonuses totaled $20B
Goldman Sachs fund gets $3 billion bailout
Goldman Sachs 2006 executive bonuses totaled $16B
Ayn Rand Center for Individual Rights
Federal outlays as a percentage of GDP, 1940-2003
Concentration of Wealth fact sheet