Jack Lew, former budget director under Clinton and Obama and former Obama chief of staff, answered questions at Senate Finance today in his bid to succeed Tim Geithner as Treasury Secretary. See, e.g., Rubin & Klimasinska, Lew Says He Didn't Know Money-Losing Investment Was in Caymans, Bloomberg.com (Feb. 13, 2013) and other related articles linked below.
When he was first nominated, I noted that I found his candidacy somewhat worrisome. While there are a number of considerations that suggest a decently competent person, there are also some suggestions of a person who has lived in the "Wall Street" flow too long and thus falls into line with the typical Wall Street/mainstream economics thinking--thinking which ultimately supports policies that will continue to slide towards oligarchy.
The hearing focused on several interesting aspects of Lew's career and investment choices.
1) Investing in the Caymans. Lew made an investment of 50 to 100 thousand in a Citigroup fund based in theCaymans while he was at Citigroup, and claimed that he didn't know it was an offshore investment. He got out of it when he went into government and lost money on it.
ME: There we have it--like most rich people, he just didn't care enough to consider closely whehter his investment was in a tax haven country and certainly didn't ponder the negatives .
2) Compensation at Citigroup. Lew got a "bonus" of $940,000 in January 2009 when Citigroup was receiving federal bailout funds. He defended it as being paid in the same way other private-sector employees in similar jobs were paid.
ME: But there was a ridiculous racheting up of financial sector compensation during the years when the big banks were feeding at the trough of easy mortgage securitization money and derivative speculation. Shouldn't someone that we hire as the head of Treasury have been more aware of that speculative binge? Or shouldn't that person be at least somewhat ashamed now that such an exorbitant "bonus" (10 times what most Americans receive in annual pay) should have been funded, in essential part, by taxpayer bailouts of his institution?
Now, Orrin Hatch (GOP-Utah) tried to make a big deal out of Lew overseeing the Financial Stability Oversight Council in administering the Volcker Rule limiting proprietary trading, saying that "it could lead to an awkward situation in which, in your role as chair of the FSOC, you would effectively be saying to financial firms: 'Do as I say, not as I did.' " Hatch claimed that this issue "bear[s] directly on your qualifications." I'm not so sure that is such a big worry since I think it is advantageous if Treasury has some understanding of how big banks trade, but it is just one more piece of Lew's overall nature of being well-attuned to Wall Street (and not so well-attuned to Main Street).
3) Corporate taxes. Lew suggested in the hearing that Republicans and Democrats could "work together" so that changes in the international tax scheme could lead to lighter burdens on some foreign income of US multinationals. The Bloomberg report notes that he supported a global minimum tax, but indicated that could be nominally territorial, with limits on offshoring income to tax haven countries.
4) Earned benefit programs. Lew is one of those Democrats who is more right of center than the party's base. He still mentions the need for "entitlement" program changes as well as additional revenue increases as a part of "balanced" deficit reduction.
ME: This is one of the most disturbing aspects of the Lew nomination. He is pushing the GOP agenda of deficit reduction and "entitlement" reform when instead he should be staunchly defending the New Deal against the oligarchs who want to shrink government, diminish the safety net, end any support for innovative environmental and energy progrms, yet continue to reap benefits from the long-term government subsidies for Big Oil.....We should not tamper with Social Security--and there is no deficit reason for doing so.
Robert Reich, former labor secretary, has some worthwhile advice for the President's State of the Union address: he notes that the focus should be the "central issue you want the nation to help you take action on". That's "not immigration, guns or the environment" (though "[a]ll are important") but rather "joblessness, falling real wages, economic insecurity, and widening inequality" . See Robert Reich, Memo to Obama: Focus on the inqueality gap, Salon.com (Feb. 11, 2013).
He's right.
"It's the economy, stupid", that old slogan from the Clinton campaign days, goes only so far. It doesn't tell us, for example, what parts of the economy are most important--is it the stock market's well-being, and indirectly the fortunes of the very few at the top of the income distribution who own significant amounts of those items being sold on the market? Or is it the unemployment data, with its distressing litany of continuing failure of our economy to provide decent jobs for ordinary people? Is it the way that corporate owners and managers can use the powers of government to make unionization difficult and thereby make it much easier for corporate management and shareholders to retain all the productivity gains while workers wages stagnate (everything from Wal-Mart's tendency to tear down union fliers in worker areas (based on my personal observation) to the CEO's determination to beat unions down any way possible (see the New York Times story in the 2/12 edition, At Cablevision, Norma Rae's Been Escorted Outside, New York Times (Feb. 12, 2013), at A23, regarding Cablevision's firing of two dozen employees for being off work, after claiming to have an "open" management that invited worker conversations yet allowing those same employees to cool their heels for 40 minutes waiting to talk to him and then walking out and firing them for not being on the job)? Or is it the general optimism of the upper class, who can pass on untaxed estates to heirs who will get those stocks at stepped up basis and renew the cycle of monetization without taxation for their own account?
Stock market statistics mostly tell us about the upper class, along with the upper part of the middle class that has some share of that bounty: they don't tell us about how well the economy is serving others, unless the general well-being of corporate America spills over to the general well-being of average Americans. It doesn't do that in an era of push-down on unions to ensure that workers have no voice, push-back on taxes to ensure that the wealthy managers and owners not only get all the productivity gains but have to pay too little in taxes to support the system that made those gains possible. Mostly, stock market statistics tell us about how the privileged are maintaining their privilege, as their ownership of most of the financial assets continues to mean their heightened influence over most laws and their garnering of most of the gains that do take place.
This is well noted in a post on Economist's View (Mark Thoma), embedding a post by Miles Corak on Free Exchange about research on inter-generational social mobility.
The real lesson from the historical research is not that there is anything inevitable about a low degree of inter-generational mobility, or that it signals more persistence than other research. The most privileged will do everything they can to perpetrate their status across generations, and in past eras the structure of labor markets and public policies permitted, and in some measure continue to permit, a non-level playing field.
I've long argued that the way to evaluate the economy is in terms of how well it is serving ordinary people who make up the middle class (roughly defined as the middle three quitiles of the income and wealth distribution) and how adequate is the safety net it provides for those who make up the lower class (the bottom quintile of income and wealth). What matters is economic sustainability, in terms of adequacy of those many intangibles by which we measure quality of life--like accessible quality health care, accessible quality education, accessible quality jobs, decent wages for decent work. That means that government's intervention in the economy will need to be on the side of the little guy, ensuring that resource allocation isn't so skewed to the already rich that we become an oligarchy where most of us live off crumbs and a few of us live like kings. If we want a sustainable economy and sustainable democracy, democratic eqalitarianism demands that governments temper market forces with protections for underdogs, providing counterforces to the redistribution upwards tendency of brute force capitalism.
Today, the rise of the US oligarchy and the frightening power of wealth in determining how laws work have put us in a terrible situation: "debtor prisons, once a relic of the 18th century, are making a frightening comeback in the U.S. justice system." Alex Kane, Miss a traffic ticket, go to jail?, Salon.com (Feb. 11, 2013).
So an appropriate slogan for progressives today should be something along the lines of "It's the inequality, stupid." And that certainly doesn't mean more of the same old failed GOP policies that favor the wealthy, mistakenly labeled "job creators" by the GOP in its constant effort to undo unions (witness Michigan's disastrous anti-union legislation or Cablevision's determination to aid anti-union forces and squelch union activists), favor capital over labor (from the problematic preferential rate for capital gains to the ridiculous "carried interest" taxation of the compensation payments to so-called profits partners (a category of "partner" for tax purposes not provided for in the tax code but essentially an invention of Wall Street) to the squandering waste of an estate tax and charitable contribution deduction that favor meritless accession to and use of untaxed wealth and pushes the burden for government revenues to laborers instead). And it certainly doesn't mean more of the same "deficit hawks, austerity mavens, trickle-down charlatans, and government haters who have commanded center stage for too long." Memo to Obama: Focus on the inqueality gap, As Reich says:
The President should make it clear that any Republican effort to hold the nation hostage to the GOP's ideological fixation on the budget deficit and a smaller government will slow the economy, likely pushing us into another recession. And that those most imperiled are the middle class and the poor.
He should emphasize that the real job creators are not the rich but the vast majority of ordinary Americans whose purchases give businesses reason to add jobs. And that if most Americans still cannot afford to buy, the government must be the spender of last resort. Id.
Reich goes on to make some specific policy suggestions for acting to reduce inequality. These include
reversing the impact of the reinstatement of the higher Social Security tax rate by exempting the first $20,000 of income from the tax and lifing the ceiling on income subject to it;
reviving government-run work corps, like the WPA and CCC, "to put the long-term unemployed directly to work"
raising the minimum wage
imposing a 2% tax surcharge on wealth in excess of $7 billion to be dedicated to education
Cutting corporate and military welfare
not cutting public investments or safety nets
giving tax credits for actual job creation
supporting states that rehire teachers, firefighters police and social workers. Id. (quoting and paraphrasing).
Sounds like a pretty good plan. As Corak noted (in the Economist's View post cited above):
[D]ynamic labor markets offering new opportunities to the population as a whole, progressive public policies of relatively more benefit to the relatively disadvantaged, and strong families with growing incomes and human capital will lead to much more mobility than aristocrats of a pervious era could ever have imagined.
And the Reich plan is certainly better than what most of the GOP-led state experiments like Michigan are coming up with, which read like a plan for even more redistributing upwards to the top few, including:
eliminating income taxes in favor of regressive sales taxes,
eliminating business taxes in favor of regressive user fees (a GOP-led Michigan "upward" redistribution "innovation"),
pushing hard against unions (a GOP-led Michigan "innovation"),
reducing safety net support like Medicaid (being considered in Michigan),
taxing vulnerable seniors on pension income (another of Michigan's recent "innovations"),
cutting support for state universities while reallocating the support that remains to those that serve the upper class rather than underprivileged who will generally need to borrow more and take longer to succeed (another of Michigan's redistributionist efforts).
As usual, there was one of those all-knowing snippets in the news last Friday about what the direction in the stock market meant for the economy. Observing high corporate profits and buoyed by the idea that the GOP might not play its "just say no" game on the debt ceiling issue (at least for three months), Wall Street profits rose. See Wall Street at 5-year high, New York Times Business Insider, Jan 18, 2013.
Should we so easily consider Wall Street's well-being as a general sign of the well-being of the economy? Sometimes it seems that it marches to its own tune, while ordinary Americans continue to struggle. Foreclosures, job losses, offshoring, state actions to make union membership harder even when most Americans say union membership should be easier, huge inequalities in incomes and wealth and the social problems that go with those inequalities--there are all kinds of things going on that still don't bode well for ordinary Americans whose income is mostly made up of wages and not preferentially taxed capital gains and who don't own much of the financial assets of this country. Democratic egalitarianism isn't satisfied by such a system that consistently rewards one class of income over another based on what amounts to class distinctions--the kind of income that requires hard work is less rewarded than the kind of income that comes with a silver spoon at birth.
In other words, corporate giants making high profits doesn't provide much reassurance to ordinary guys about the stability of their own personal economies. High profits seem to translate to higher payouts to corporate managers/shareholders, but ordinary workers don't get more than a trickle of a share of those productivity gains.
Trickle down hasn't trickled much down the last few decades, if it ever did. Inequality is growing worse, and with that comes even more influence so that the politically powerful are the same as the economically powerful, yielding a return on lobbying that the Founders couldn't have imagined.
The unequal society that is today's United States has many problems that are at least partially caused by the high level of inequality--from teenage pregnancy to illiteracy rates to lifespan of the underclass to low birth weights to college graduate rates and many other indicators of a less than optimal quality of life. And those problems are exacerbated by the continuing blind faith of so many Washington politicians in the "degenerating discourse of mainstream economics" (the link is to a recent post on Yves Smith's Naked Capitalism by Philip Pilkington). We continue to look to Wall Street, and ignore the blight of wealth and income inequality that besets Main Street, because economists have fabricated a convenient theory of equilibrium that is most successful at hiding what is really going on from us while protecting the "free market" impulses of brute force capitalism.
Perhaps one of the positive results of the buoying of Wall Street is the general consumer attitude, which does result in more spending (still perhaps beyond one's means for much of the underclass)? That spending increases business demand, and could even result ultimately in more job creation, especially if accompanied by more federal spending rather than the counter-stimulus current focus on spending cuts and "balanced" budgets (in at least one sense an oxymoron for a federal government that can print its own money). But those jobs will require a better educated public than the US is likely to have. Again, partly due to the mainstream economic discourse, we are effectively debilitating public education through cuts in funding, exploitation of teachers, and privatization for the profit-making gains of education profiteers, rendering what was our greatest strength our greatest weakness.
But what really happens to most of the wealth created by those increases in corporate profits (and those demands for ever higher returns that the wealthy have come to view as their norm, accompanied by those terribly preferential tax rates that mean the wealthy get to keep more of their unearned wealth while ordinary workers cannot)? One suspects that much of that 'extra' wealth heads out of the country--to offshore tax havens, invested in yet another vacation home abroad, put into emerging markets, following the promise of higher returns without much regard for the impact on the US economy.
As long as we are facing the kind of inordinate reward to the uberwealthy and underreward to ordinary Americans, I find it hard to get excited about a five-year high on Wall Street. It's main effect is to drive home the need for Congress to develop better tax policy to at least use tax as a means to help, on the periphery, cut back on inequality. Eliminate the preferential taxation of capital gains and dividends and estates. Don't listen so much to the deficit scolds who want to decimate earned benefit programs like Medicare and Social Security. Invest more in physical infrastructure, particularly mass transit and environmentally sounder energy policies. Don't listen so much to the militarists (who are often in company with said deficit scolds) who want to continue allowing the military budget to engorge itself.
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