“How To Really Rein In The Super Rich”: Giving Everyday People Equal Input With Business And The Rich In Policy Deals
Thomas Piketty, meet Bobby Tolbert.
Piketty is the French economist who rocked the worlds of social and economic policy with his new book, Capital in the Twenty-First Century. In it, Piketty documents with meticulous detail—and data—how we are returning to an era of extreme inequality where a few dynasties amass great fortunes through inheritance and everyone else withers and suffers. Such gross inequality, Piketty argues, is not an accident but inherent in capitalism and can only be addressed through government intervention.
All of which is plainly true. As Paul Krugman has pointed out, conservatives chomping at the purse to refute Piketty have come up with nothing more than name-calling.
Pretty much everyone else agrees gaping inequality is a massive problem in the world and that something has to be done about it. Heck, even the Pope tweeted, “Inequality is the root of social evil.” Not the devil. Inequality!
What the vast majority, who agree inequality is a crisis, do not agree on is what to do about it. Piketty proposes a global wealth tax as well as a progressive income tax that approaches rates, at the top end, closer to what the United States had in place when prosperity was more broadly shared during the ’50s and ’60s. They’re good ideas, but only a start. What they’re missing is a Bobby Tolbert.
Bobby Tolbert is member of the community organization VOCAL NY—a grassroots organization that builds political power among New Yorkers affected by HIV/AIDS, drug use and mass incarceration. Tolbert was in Washington, D.C., this weekend to speak at the annual meeting of National People’s Action, a network of community organizations made up of groups like VOCAL.
Tolbert spoke eloquently about how gross inequality is destroying communities across America. [Full disclosure: I was at the event to help Tolbert and other grassroots leaders practice and deliver their speeches.] Tolbert shared his own story, one only made possible by state-funded HIV medications that are constantly threatened by budget cuts. Tolbert works as a peer health educator but is paid so little that he qualifies for public support. Recently, even those few public benefits were taken away because Tolbert transitioned from supportive housing to independent living—a move you would think everyone would be in favor of, but which meant Tolbert’s government health benefits being jeopardized. He’s currently fighting to have them reinstated.
“Big corporations and the rich are fine with people like me dying,” said Tolbert. “The only problem with that is I’m not ready to die.”
And while for Bobby Tolbert, public supports literally make the difference between life and death, the situation is pretty much as dire for millions of Americans who increasingly rely on food stamps and Medicaid and housing assistance to survive. At the same time our deliberately and aggressively unequal economy has pushed millions more Americans toward poverty and they need more help than ever, conservative corporate elites are pushing for public assistance to be slashed. Tolbert agrees with Piketty—and the majority of American voters—about taxing the wealthy to spread assistance and opportunity to the poor and working class.
But Tolbert argues for something that Piketty and most of the academic and political debate about inequality seem to miss—that the nature of our economy, the rules of the game that currently incentivize unequal distribution, will never change unless the people making those rules, the people seated at the tables of power, change as well. In other words, as long as economic policy decisions are made by Wall Street and their proxies (see, e.g., Treasury Secretaries Robert Rubin, Henry Paulson and Timothy Geithner) then Thomas Piketty’s ideas won’t be included in the discussion, let alone Bobby Tolbert’s.
“We need a new political system,” Tolbert said, “one that takes money out and puts people in.” Yes, that means campaign finance reform and reducing the barriers to voting, rather than increasing them. That would help get more everyday Americans into positions of power. But Tolbert’s vision also includes participatory budgeting in which communities, not special interests, set the government funding agenda—which is already happening in New York. And it means people’s organizations commanding and being given equal input with business interests and the rich in the smoke-filled rooms where policy deals are cut. It means that when the Federal Reserve is weighing interest rates and the Senate Budget Committee is evaluating banking regulations, they should as a matter of habit meet with economists and CEOs and the everyday Americans whom their decisions affect most.
In his speech, Tolbert pointed to the diversity of the thousand-plus community leaders from around the country gathered in the auditorium in front of him. “We represent every race, every gender, every sexual orientation—in fact, we represent America better than the people who are running it.” In front of Tolbert were family farmers and immigrants and folks on welfare and small-business leaders—all of whom have stories to share about the ravages of inequality and solutions to offer. Academic debates and data are useful and important, but until Bobby Tolbert and other everyday people like him are included in the discussion and political process, nothing will ever truly change.
By: Sally Kohn, The Daily Beast, April 29, 2014
“Three Expensive Milliseconds”: Society Is Devoting An Ever-Growing Share Of Its Resources To Financial Wheeling And Dealing
Four years ago Chris Christie, the governor of New Jersey, abruptly canceled America’s biggest and arguably most important infrastructure project, a desperately needed new rail tunnel under the Hudson River. Count me among those who blame his presidential ambitions, and believe that he was trying to curry favor with the government- and public-transit-hating Republican base.
Even as one tunnel was being canceled, however, another was nearing completion, as Spread Networks finished boring its way through the Allegheny Mountains of Pennsylvania. Spread’s tunnel was not, however, intended to carry passengers, or even freight; it was for a fiber-optic cable that would shave three milliseconds — three-thousandths of a second — off communication time between the futures markets of Chicago and the stock markets of New York. And the fact that this tunnel was built while the rail tunnel wasn’t tells you a lot about what’s wrong with America today.
Who cares about three milliseconds? The answer is, high-frequency traders, who make money by buying or selling stock a tiny fraction of a second faster than other players. Not surprisingly, Michael Lewis starts his best-selling new book “Flash Boys,” a polemic against high-frequency trading, with the story of the Spread Networks tunnel. But the real moral of the tunnel tale is independent of Mr. Lewis’s polemic.
Think about it. You may or may not buy Mr. Lewis’s depiction of the high-frequency types as villains and those trying to thwart them as heroes. (If you ask me, there are no good guys in this story.) But either way, spending hundreds of millions of dollars to save three milliseconds looks like a huge waste. And that’s part of a much broader picture, in which society is devoting an ever-growing share of its resources to financial wheeling and dealing, while getting little or nothing in return.
How much waste are we talking about? A paper by Thomas Philippon of New York University puts it at several hundred billion dollars a year.
Mr. Philippon starts with the familiar observation that finance has grown much faster than the economy as a whole. Specifically, the share of G.D.P. accruing to bankers, traders, and so on has nearly doubled since 1980, when we started dismantling the system of financial regulation created as a response to the Great Depression.
What are we getting in return for all that money? Not much, as far as anyone can tell. Mr. Philippon shows that the financial industry has grown much faster than either the flow of savings it channels or the assets it manages. Defenders of modern finance like to argue that it does the economy a great service by allocating capital to its most productive uses — but that’s a hard argument to sustain after a decade in which Wall Street’s crowning achievement involved directing hundreds of billions of dollars into subprime mortgages.
Wall Street’s friends also used to claim that the proliferation of complex financial instruments was reducing risk and increasing the system’s stability, so that financial crises were a thing of the past. No, really.
But if our supersized financial sector isn’t making us either safer or more productive, what is it doing? One answer is that it’s playing small investors for suckers, causing them to waste huge sums in a vain effort to beat the market. Don’t take my word for it — that’s what the president of the American Finance Association declared in 2008. Another answer is that a lot of money is going to speculative activities that are privately profitable but socially unproductive.
You may object that this can’t be right, that the invisible hand of the market ensures that private returns and social returns coincide. Economists have, however, known for a long time that when it comes to speculation, that proposition just isn’t true. Back in 1815 Baron Rothschild made a killing because he knew the outcome of the Battle of Waterloo a few hours before everyone else; it’s hard to see how that knowledge made Britain as a whole richer. It’s even harder to see how the three-millisecond advantage conveyed by the Spread Networks tunnel makes modern America richer; yet that advantage was clearly worth it to the speculators.
In short, we’re giving huge sums to the financial industry while receiving little or nothing — maybe less than nothing — in return. Mr. Philippon puts the waste at 2 percent of G.D.P. Yet even that figure, I’d argue, understates the true cost of our bloated financial industry. For there is a clear correlation between the rise of modern finance and America’s return to Gilded Age levels of inequality.
So never mind the debate about exactly how much damage high-frequency trading does. It’s the whole financial industry, not just that piece, that’s undermining our economy and our society.
By: Paul Krugman, Op-Ed Columnist, The New York Times, April 13, 2014
“Aligned Agenda’s”: The Tea Party and Wall Street Might Not Be Best Friends Forever, But They Are For Now
“Our problem today was not caused by a lack of business and banking regulations,” argued Ron Paul in his 2009 manifesto End the Fed, which outlined a theory of the financial crisis that only implicated government policy and the Federal Reserve, while mocking the idea that Wall Street’s financial engineering and derivatives played any role. “The only regulations lacking were the ones that should have been placed on the government officials who ran roughshod over the people and the Constitution.”
There seems to be some confusion about the relationship between the Tea Party and Wall Street. New York magazine’s Jonathan Chait says the two “are friends after all,” while the Washington Examiner‘s Tim Carney insists that the Tea Party has loosened the business lobby’s “grip on the GOP.” So let’s make this clear: The Tea Party agenda is currently aligned with the Wall Street agenda.
The Tea Party’s theory of the financial crisis has absolved Wall Street completely. Instead, the crisis is interpreted according to two pillars of reactionary thought: that the government is a fundamentally corrupt enterprise trying to give undeserving people free stuff, and that hard money should rule the day. This will have major consequences for the future of reform, should the GOP take the Senate this fall.
On the Hill, it’s hard to find where the Tea Party and Wall Street disagree. Tea Party senators like Mike Lee, Rand Paul, and Ted Cruz, plus conservative senators like David Vitter, have rallied around a one-line bill repealing the entirety of Dodd-Frank and replacing it with nothing. In the House, Republicans are attacking new derivatives regulations, all the activities of the Consumer Financial Protection Bureau, the existence of the Volcker Rule, and the ability of the FDIC to wind down a major financial institution, while relentlessly attacking strong regulators and cutting regulatory funding. This is Wall Street’s wet dream of a policy agenda.
Note the lack of any Republican counter-proposal or framework. The few that have been suggested, such as David Camp’s bank tax or Vitter’s higher capital requirements have gotten no additional support from the right. House Republicans attacked Camp’s plan publicly, and Vitter’s bill lost one of its only two other Republican supporters immediately after it was announced. So why is there a lack of an agenda? Because the Tea Party thinks that Wall Street has done nothing wrong.
The story of the crisis, according to the right, goes like this: The Community Reinvestment Act and other government regulations forced banks into making subprime loans, and the “affordability goals” of government-sponsored enterprises made the rest of the subprime that crashed the economy. The Federal Reserve pumped a credit bubble, as it always does when it tries to push against recessions. In other words, the financial crisis in 2008 was entirely a government creation, and could have been solved by just putting all the financial firms into bankruptcy. There’s no such problem as “shadow banking,” and to whatever extent Wall Street misbehaved, it was only the result of the moral hazard created by the assumption that there would be bailouts. Or as Senator Marco Rubio said in his 2013 State of the Union response, we suffered “a housing crisis created by reckless government policies.”
This narrative is an easy one to believe for people who distrust government, but it’s far from the facts. The CRA didn’t even cover the fly-by-night institutions making the vast majority of subprime loans. The GSEs lost market share during the housing bubble and subprime loans account for less than 5 percent of their losses. Low interest rates likely account for only a quarter of housing price shifts, and even then, low interest rates likely offset capital coming into the country from abroad.
The mainstream account of the crisis, as Dean Starkman pointed out in The New Republic, is that we’re all to blame—or, as Georgetown law professor Adam Levitin wrote in his recent survey of the crisis, that it was a “perfect storm.” Starkman argues that the Everyone-Is-To-Blame narrative is partially responsible for the lack of serious homeowner help in the Home Affordable Modification Program. As he demonstrates in his piece, “there’s a big and growing body of documentation about what happened as the financial system became incentivized to sell as many loans as possible on the most burdensome possible terms.”
The lack of any Republican policy on financial reform is the result of several factors. Mitt Romney thought it would be a liability to put forward his own agenda in 2012. By voting nearly unanimously against Dodd-Frank, Republicans were able to make this moderate, lukewarm response to the crisis look like a partisan takeover of finance (financial reform is hard and may not work, so all the better to have Democrats own the issue so they can be clubbed with it later). Rather than wage total war against Dodd-Frank through partisan outfits, the smartest minds on the right are weakening the law through law firms and K Street. And the conservative infrastructure has been solely focused on privatizing the GSEs completely.
This lack of policy has allowed the far right and Austrian School acolytes to occupy the intellectual space in the party. It’s the minority party for now, but all it takes is a few Senate seats changing hands before the Tea Party narrative becomes the prevailing one on the Hill—and nothing would delight Wall Street more.
By: Mike Konczal, The New Republic, March 21, 2014
“Christie’s Latest Scandal”: How He Sold Public Pensions To Wall Street Donors
The media would label it Pensiongate — if they were interested.
When Governor Chris Christie (R-NJ) cruised to his first statewide election victory in 2009, his promise to responsibly manage the state’s pensions helped deliver him the governor’s mansion. It’s Democrats like Governor Jon Corzine who are playing fast and loose with public pensions, the Christie campaign argued. “Jon Corzine made it easier for his friends from Wall Street to manage New Jersey’s pension fund,” read a campaign press release.
But soon after Christie took the reins as governor, his skepticism of the relationship between Wall Street and pension funds quickly evaporated. Hedge funds managed by influential Republican donors soon landed enormous contracts to manage public pensions. Friends of The Governor benefited handsomely.
As the Investigative Fund’s Lee Fang reports, the controversy centers around Paul Singer, the billionaire founder of Elliott Associates. The month prior to Christie’s first 2009 gubernatorial victory, Singer donated $100,000 to the Republican Governors Association, a fervent supporter of Christie’s election bid. After his election, and despite his campaign rhetoric to the contrary, Christie suggested that Elliot Associates be given a contract to manage $200 million in public pensions. In 2012, the firm was indeed granted the contract.
The result of this investment was large payoffs for the hedge fund, while New Jersey public workers saw their pension returns fall below average. In 2013, the median pension return was 16.1 percent; in New Jersey, the pension program delivered a return of just 11.79 percent.
But because of fines and fees associated with a hedge fund investment, it was a lucrative business for managers like Singer. As Fang reports, Singer benefited greatly from the deal: Chris Tobe, a former trustee of Kentucky Retirement Systems, estimates that in 2013 alone, Elliot Associates collected close to $8.6 million in fees from the New Jersey public pension fund.
And Singer, it seems, is not one to let a favor go unreturned. After Christie became chair of the Republican Governors Association in 2013, Singer donated $1.25 million to the group.
Interestingly, Singer’s profitable deals with politicians do not start and stop with the embattled Governor Christie. A recent report in The Hill shows former Rep. Connie Mack (R-FL) may also have used his office to aid the notable Republican donor. Mack, now a lobbyist, has registered to lobby for American Task Force Argentina, a group that seeks to “hold medium and wealthy nations accountable for the repayment of their debts to U.S. creditors and to uphold U.S. court judgments against these same nations.” Holding impoverished South American nations accountable for their debt to American companies is an initiative Mack touted during his time in office.
As it happens, Elliot Associates is also a member of Task Force Argentina. According to The Hill, employees of Elliot management were the second largest contributor to Mack’s failed 2012 Senate run. Furthermore, another hedge fund linked to Singer is owed $1.6 billion by the Argentine government.
By: David Feuerherd, the National Memo, March 20, 2014
“Don’t Buy It”: The “Paid-What-You’re-Worth” Myth
It’s often assumed that people are paid what they’re worth. According to this logic, minimum wage workers aren’t worth more than the $7.25 an hour they now receive. If they were worth more, they’d earn more. Any attempt to force employers to pay them more will only kill jobs.
According to this same logic, CEOs of big companies are worth their giant compensation packages, now averaging 300 times pay of the typical American worker. They must be worth it or they wouldn’t be paid this much. Any attempt to limit their pay is fruitless because their pay will only take some other form.
“Paid-what-you’re-worth” is a dangerous myth.
Fifty years ago, when General Motors was the largest employer in America, the typical GM worker got paid $35 an hour in today’s dollars. Today, America’s largest employer is Walmart, and the typical Walmart workers earns $8.80 an hour.
Does this mean the typical GM employee a half-century ago was worth four times what today’s typical Walmart employee is worth? Not at all. Yes, that GM worker helped produce cars rather than retail sales. But he wasn’t much better educated or even that much more productive. He often hadn’t graduated from high school. And he worked on a slow-moving assembly line. Today’s Walmart worker is surrounded by digital gadgets — mobile inventory controls, instant checkout devices, retail search engines — making him or her quite productive.
The real difference is the GM worker a half-century ago had a strong union behind him that summoned the collective bargaining power of all autoworkers to get a substantial share of company revenues for its members. And because more than a third of workers across America belonged to a labor union, the bargains those unions struck with employers raised the wages and benefits of non-unionized workers as well. Non-union firms knew they’d be unionized if they didn’t come close to matching the union contracts.
Today’s Walmart workers don’t have a union to negotiate a better deal. They’re on their own. And because fewer than 7 percent of today’s private-sector workers are unionized, non-union employers across America don’t have to match union contracts. This puts unionized firms at a competitive disadvantage. The result has been a race to the bottom.
By the same token, today’s CEOs don’t rake in 300 times the pay of average workers because they’re “worth” it. They get these humongous pay packages because they appoint the compensation committees on their boards that decide executive pay. Or their boards don’t want to be seen by investors as having hired a “second-string” CEO who’s paid less than the CEOs of their major competitors. Either way, the result has been a race to the top.
If you still believe people are paid what they’re worth, take a look at Wall Street bonuses. Last year’s average bonus was up 15 percent over the year before, to more than $164,000. It was the largest average Wall Street bonus since the 2008 financial crisis and the third highest on record, according to New York’s state comptroller. Remember, we’re talking bonuses, above and beyond salaries.
All told, the Street paid out a whopping $26.7 billion in bonuses last year.
Are Wall Street bankers really worth it? Not if you figure in the hidden subsidy flowing to the big Wall Street banks that ever since the bailout of 2008 have been considered too big to fail.
People who park their savings in these banks accept a lower interest rate on deposits or loans than they require from America’s smaller banks. That’s because smaller banks are riskier places to park money. Unlike the big banks, the smaller ones won’t be bailed out if they get into trouble.
This hidden subsidy gives Wall Street banks a competitive advantage over the smaller banks, which means Wall Street makes more money. And as their profits grow, the big banks keep getting bigger.
How large is this hidden subsidy? Two researchers, Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz, have calculated it’s about eight tenths of a percentage point.
This may not sound like much but multiply it by the total amount of money parked in the ten biggest Wall Street banks and you get a huge amount — roughly $83 billion a year.
Recall that the Street paid out $26.7 billion in bonuses last year. You don’t have to be a rocket scientist or even a Wall Street banker to see that the hidden subsidy the Wall Street banks enjoy because they’re too big to fail is about three times what Wall Street paid out in bonuses.
Without the subsidy, no bonus pool.
By the way, the lion’s share of that subsidy ($64 billion a year) goes to the top five banks — JPMorgan, Bank of America, Citigroup, Wells Fargo. and Goldman Sachs. This amount just about equals these banks’ typical annual profits. In other words, take away the subsidy and not only does the bonus pool disappear, but so do all the profits.
The reason Wall Street bankers got fat paychecks plus a total of $26.7 billion in bonuses last year wasn’t because they worked so much harder or were so much more clever or insightful than most other Americans. They cleaned up because they happen to work in institutions — big Wall Street banks — that hold a privileged place in the American political economy.
And why, exactly, do these institutions continue to have such privileges? Why hasn’t Congress used the antitrust laws to cut them down to size so they’re not too big to fail, or at least taxed away their hidden subsidy (which, after all, results from their taxpayer-financed bailout)?
Perhaps it’s because Wall Street also accounts for a large proportion of campaign donations to major candidates for Congress and the presidency of both parties.
America’s low-wage workers don’t have privileged positions. They work very hard — many holding down two or more jobs. But they can’t afford to make major campaign contributions and they have no political clout.
According to the Institute for Policy Studies, the $26.7 billion of bonuses Wall Street banks paid out last year would be enough to more than double the pay of every one of America’s 1,085,000 full-time minimum wage workers.
The remainder of the $83 billion of hidden subsidy going to those same banks would almost be enough to double what the government now provides low-wage workers in the form of wage subsidies under the Earned Income Tax Credit.
But I don’t expect Congress to make these sorts of adjustments any time soon.
The “paid-what-your-worth” argument is fundamentally misleading because it ignores power, overlooks institutions, and disregards politics. As such, it lures the unsuspecting into thinking nothing whatever should be done to change what people are paid, because nothing can be done.
Don’t buy it.
By: Robert Reich, The Robert Reich Blog, March 13, 2014
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