ataxingmatter

Town Hall Meetings on the Ryan Budget Adopted by the House

Cross-posted from Angry Bear

Various congressional representatives held town hall meetings recently, and the news channels and print media were abuzz with the lively give-and-take, including shouting matches.  See, e.g., House G.O.P. Members Face Voter Anger Over Budget, New York Times, Apr. 26, 2011;   Republicans facing tough questions over Medicare overhaul in Budget Plan, Washington Post, Apr. 22, 2011.

The issue--the House's adoption of the Ryan budget proposal and its clear agenda of overturning New Deal safety nets embodied in the current understanding of Medicaid, Social Security and Medicare. 

Those at or near retirement are worried that the Ryan proposal will hurt everybody.  The Ryan proposal comes with frequent disclaimers about protecting the already older population and needing to act now to protect our grandchildren, a clear effort to massage the message to appeal to current grandparents.  See, e.g.,  House G.O.P. Members Face Voter Anger Over Budget, New York Times, Apr. 26, 2011 (noting Webster's statement that "not one senior citizen is harmed by this budget" while implying that it is necessary to prevent grandchildren from "looking at a bankrupt country"); Congressional Republicans go home to mixed reveiws, CBS.com, Apr. 26, 2011 (noting North Carolina GOP Rep. Renee Ellmers'claim that "If you're 55 and older, your Medicare and Social Security will not change").   

But the Ryan proposal clearly envisions mechanisms that would likely lead to decimation of these programs--either through turning them into limited vouchers (Medicare proposal); turning the funds over to the states to use as they see fit (Medicaid proposal) or limiting benefits (Social Security proposal) in ways that will --probably sooner rather than later-- hurt everybody. 

For more analysis on this issue, see the original post at Angry Bear.

Citizens United and Concepcion: Big Money, Speech, Taxes, and Individual Freedom

[edited 4/28 to add Angry Bear link]

Money isn't speech. 

In spite of that, the Supreme Court continues to expand its initial holding that treated expenditures of money to purchase speech as equivalent to speech and therefore protected by the Free Speech clause in the Bill of Rights, literally giving away elections and issue education to the top dollar, which will generally be the wealthy elite and the big corporations that own and manage. 

This idea--that money is the same as the speech that money can buy--is at heart a radically anti-freedom idea.  By equating money with the speech that it can buy, the Supreme Court has ensured that genuine speech rights will wither away, and that money will be able to buy elections and legislation to suit the source of the money.  The Court failed to understand that while speech can be bought by money, that purchased speech is merely one mechanism for distributing speech.  Speech is much more than the purchased speech that is bought by money.  If you don't limit the ability of money to purchase election speech, you are in effect disenfranchising all other types of speech that can't compete with purchased speech.  By equating the speech itself with the money that purchases it and claiming that the Free Speech clause applied to the money expenditure, the Court empowered purchased speech and empower Big Money, while it disempowered individual speech and made non-purchased speech practically irrelevant.

Since the Supreme Court's Citizen United decision expanding on this "money can purchase speech, therefore money used to purchase speech is protected in the same way that speech is protected" idiocy, it has been quite clear that Big Business carries a gigantic Big Stick that influences elections through anonymous issue ads and direct campaign contributions. 

The people are misled, since the ads are often purportedly sponsored by groups with titles that suggest little people working for the common good. 

The politicians aren't misled, because they get the Big Money that will allow them to flood the airwaves with similar stuff and they know where it comes from.

The result is that Big Money, from the few super-rich and the big corporations that they own and manage, can heavily influence critical legislators on deregulation and tax provisions favorable to the rich and Big Business. 

• There is a reason that the fringe right elected to Congress in 2010 is pushing for repeal of the health reform and Dodd-Frank financial reform provisions--those reforms require Big Business to operate in ways that protect individual freedoms and limit the way that those Big Businesses can push their costs off into externalities to create socialization of losses, privatization of gains  (e.g., high premiums paid only to find delay or denial from health insurance companies, risky casino speculation in derivatives from interconnected banks that lay their losses off on the public while raking in cheap financing provided by the public). 
• There is a reason that Big Business got its wish list in the 2003 tax legislation pushed through by the Bush Administration, and then got more and more of its new wish lists in the following years Bush tax legislation and in the Republican  provisions fought for in the "compromise" on stimulus funding in the first year of the Obama administration.  Those tax provisions provide tax reductions for corporations that increased the deficit and required additional borrowing (including bonus expensing, the active financing exception permitting deferral of income for certain controlled foreign financing subsidiaries, new cross-crediting provisions that permitted U.S. multinationals to subsidize their foreign operations by reducing their US tax rate, and many others).

Imagine an issue ad by "People in support of Removing Bad Regulation" that puts out misleading, non-factual claims about how Big Business X (maybe a resource-extractive business) will be done in if the "bad" regulation is continued, and that all kinds of little people will be harmed if Business X is harmed.  The facts are otherwise.  Big Business X engages in extraordinarily harmful mining practices that level the mountains, leave toxic debris in streambeds, and put miners in harsh, unhealthy conditions that don't meet anybody's standards of a decent working environment while preventing unionization to allow collective bargaining and bombasting the region with warnings about how jobs would drop if any of these bad practices are regulated.  And Business X is actually providing all the funding for "Little People".  And Buiness X also contributes $400,000 to several  congressional politicians who are on key committees that oversee Business X's industry.  It engages in both of these activities anonymously. 

How would people react if they knew that Business X was funding the ads that appear to be from a local concerned citizens' grassroots organization and at the same time was contributing huge sums of money to key politicians voting on those issues.  They would be more likely to ask questions and more likely to doubt the veracity of the information in the ads, knowing the source of the money behind them.

So there has been a movement in support of individual freedom that demands that at the least we must have disclosure of the Big Money behind the purchased speech that has disemplowered the free speech of the people.  Yet, Senate Republicans defeated a Disclose Act proposal in Congress last year through the now common route of requiring a supermajority of 60% to get to a vote, even though 59% of the Senate voted for cloture.  See Open Congress on Senate bill; seel also Disclose Act (wikipedia). 

Now the Obama administration is apparently considering an executive order that would require those Big Businesses seeking federal contracts to disclose their purchase of direct or indirect campaign contributions.  In other words, when they buy election-related speech that clearly serves as a quo inviting a quid from the elected officials aided by such speech. they should disclose it so that we the public can evaluate whether they get the invited quid.

Big Business doesn't want to lose its anonymity--especially when it comes to getting the lucrative federal contracts even though it may be supporting fringe politicians who claim to want to cut government spending.   (And of course, Big Business will likely use its money to support those politicians who talk about cutting government spending but mean only cutting spending for programs that form part of the social net for vulnerable citizens, not cutting spending on lucrative military contracts or other lucrative federal spending programs that create instant billionaires, like Eric Prince and his Blackwater security contracts in Iraq).

Big Business doesn't want to engage in real speech, but in purchased speech that can be hidden from the public with the use of misleadingly labeled front groups like the fictitious organization in my hypothetical.  And it intends to use all the formidable weapons in its arsenal to ensure it can continue to pour money into election campaigns without revealing its role. So Josten, head of the U.S. Chamber of Commerce, a major organization supported especially by the U.S.'s biggest multinational corporations, says "all options are on the table" to ensure that Big Business can contribute anonymously.  See Lichtblau, Lobbyist Fires Warning Shot over Donation Disclosure Plan, NY Times, Apr. 26, 2011.  Josten threatens that "all options are on the table."  Big Business will apparently do almost anything to protect its right to spend to elect its politicians of choice while not letting real voters know what it is doing.

 Meanwhile, of course, the Supreme Court continues on its tear of decisions that uphold Big Businesses' rights to conduct business as they want, no matter what impact that has on the freedoms of individual citizens of this country that fought a revolution to ensure those freedoms.  AT&T Mobility v Concepcion is only the latest foray in this direction.  In this case, the Court holds that we little people have no right to join together in a class-action against corporations that have misled us, even when the contract through which we became the corporation's customers was a contract of adhesion and the relinquishment of the right to a class-action is an interpretation by the corporation of the arbitration "term of contract" that we signed to get the service that the corporation provides.  Contracts of adhesion are "take it or leave it" contracts.  Most customers don't have the ability, let alone the money, to figure out what the terms mean.  Even if someone did finally persevere and reject a contract of adhesion because the terms took away individual freedoms, that person would find no better contract at any other service provider, since they all incorporate essentialy the same corporate-friendly terms in their contracts of adhesion.

The Supreme Court's inability to understand that the constitutional protection of individual freedoms was intended to prevent just this kind of corporate tyranny will be costly for this nation.  I predict that more and more people will get angrier and angrier about the extraordinary empowerment of Big Business and the extraordinary disemplowerment of ordinary people through this kind of corporatist agenda. 

For another Bear's perspective on the AT&T case, see Beverly Mann, The Fine Print, Angry Bear, Apr. 28, 2011.  It begins this way:

It’s hardly a secret that Chamber of Commerce types have co-opted a bare majority of the Supreme Court as their proxy in their war against business litigation, and that the most potent categorical weapons are arbitration as a forced substitute for lawsuits and the effective elimination of class actions.

In a manipulative, far-reaching opinion that the Court issued Monday, the five corporate proxies killed both birds with one stone.

And it includes a good description of how this decision turns our past understanding of arbitration  on its head.

Breyer, though, writing for the four dissenters, pointed out that Congress’s actual stated purpose was to require courts to treat arbitration agreements as contracts, for the purposes of enforcing them and, when required under contract law, voiding them—and that that is what the text of the FAA says.

Scalia also said that class arbitration defeats the purpose of arbitration. Which I suppose is true if the purpose of arbitration, or at least arbitration as the only option under law, is to undermine any real threat of meaningful penalty for corporate wrongdoing.

California ban on contingency fees

There has been considerable concern about the role of contingency fees as an incentive to tax attorneys to provide advice in support of aggressive or even risky positions on tax returns.  The Treasury has looked at that in the context of the regulations governing practice before the Internal Revenue Service, commonly called "Circular 230" and has restricted the setting in which contingency fees are permissible in tax practice.  Not surprisingly, tax practitioners have argued for loosening of those restrictions, claiming that contingency fees are not problematic in many situations.

California is apparently moving towards a position that is even stronger than the one currently followed in Circular 230.  The California Senate Governance and Finance Committee approved S.B. 342 today on a 5-2 vote and the bill now goes to the Judiciary Committee.  The bill would "ban contingency fees for anyone representing taxpayers in matters involving the Revenue and Taxation Code".  It would also place a cap on attorneys' fees for lawyers in tax litigation and make clear that the provision in the Revenue and Taxation Code is the only remedy for fees in tax litigation, because of a recent attempt by attorneys to claim higher fees under the private attorney general doctrine.

The drafter of the legislation, Sen. Lois Wolk, stated that the ban would address the problem of tax advisers who file "highly aggressive tax refund claims hoping not to get caught in the audit lottery."  BNA Daily Tax RealTime, Apr. 27, 2011 (7:54 pm).  The statement in the bill's text worries in particular about "unregulated tax consultants" , as noted below.

However, sophisticated cottage industries of non-accountant tax consultants have grown considerably in  recent years, offering to amend a taxpayer's previous state income tax returns seeking refunds of previous taxes paid  by claiming tax credits not included on the taxpayer's original return.  Additionally, consultants assist taxpayers protesting an assessor's valuation of his or her property by pursuing appeals seeking to reduce the value with county assessment appeals boards.  In both cases, the taxpayer compensates the consultant as a percentage of the refund, providing a significant incentive to file aggressive claims with questionable justification.   As many of these consultants are neither accountants subject to state law or codes of ethics, nor practitioners covered by Circular 230, they may charge taxpayers contingency fees without any limitation.  Id. at 1-2.

Which is worse--theft of pizza or hiding almost $5 million from the IRS?

In California, I seem to recall, some unlucky (and probably bullying) soul went to jail under the three strikes law for stealing a slice of pizza.

Now, a member of the elite class can file a false tax return to defraud the government (and all honest taxpayers) by hiding $4.9 million in assets in a Swiss bank and not filing tax returns and information reports as required and what does he get ? Possible maximum sentence under the sentencing guidelines was 20 years.  He got: 24 months probation.  the taxes due.  a $940 thousand civil penalty.  (The penalty charge is only 50% of the assets he had hidden in one year--2004, even though it ostensibly could be charged for more years.) And a $10,000 fine.

This guy was clearly engaging in intentional tax evasion.  When the UBS case came to light, he moved a million of his stash to Lichtenstein, hoping to stay ahead of the law.  (Lichtenstein was even better at banking secrecy than the Swiss.) Then he made regular trips back to his Swiss bank to take out bunches of travelers' checks, trying to empty out his account. 

The case is United States v. Vogliano, S.D.N.Y., No. 10 Cr. 327 (sentencing 4/21/11).  You can read the plea agreement here  Download Vogliano SDNY No. 10-cr-327. 122210 plea agreement.

Will the lack of jail time make all those scofflaws who had gotten worried about their tax information coming to light in the UBS case decide it isn't worth worrying about?  Probation, after all, is just checking in with someone to show you're still around.  They're probably living in their multimillion dollar townhouse, so what's not to like.  These days, the "greed is good" crowd doesn't seem to have much shame.  He'll end up paying about a fifth of the assets he had socked away, though.  That's something.

Some GOPers Considering Tax Increases?

The New York Times editorial "Rethinking Their Pledge" (April 23, 2011) suggests that maybe some GOPers will recognize the hypocrisy of crying deficits, cutting entitlements without figuring out first how to cut costs (or pay for things we really want), and still cutting taxes for the wealthy. 

You see, 95% of the Republicans in Congress have signed Grover Norquist's little "pledge" never to raise taxes.  What most people don't realize is that the pledge isn't just a no taxes forever pledge.  It's also a "keep up the tax expenditure goody stream for Big Business and its owners" pledge.

The pledge is often thought of as an agreement never to vote for raising taxes for any reason, but it goes even further than that. Those who sign it also vow never to eliminate any tax deductions or credits (like the handout to ethanol makers), unless the resulting increase in revenues is offset, dollar for dollar, by further tax cuts.  Id.

As the editorial notes, Norquist wants to "shrink government" and "drown it in a bathtub." 

Why, one should stop and ask, is this government that our Founding Fathers labored so to create deserving of such scorn? 

It's because government is what stands between ordinary Americans and Big Business's ability to treat us like its minions--working for the wages it deigns to pay us, eating the food with the products it decides to put in the food, taking whatever conditions in the workplace it decides to impose on us, and doing without the kind of world-class public higher education that corporate taxes used to help pay for so that we could find ways to expand our horizons beyond the Burger Shack next door.

As I wrote in a recent posting on Angry Bear referencing Corey Robin's article in the Nation on Reclaiming the Politics of Freedom,

Our very freedom is threatened. When we are economically powerless, we are also powerless in our lives because we lose our freedom to make choices that are right for us.

• we lose our rights to bargain with our employers (look at how Wisconsin and Ohio have treated their public employees or how WalMart treats its workers and anyone who talks unions),
• we lose the power to improve ourselves by pulling ourselves up by the bootstraps through publicly funded education from grade school through university,
• we are dominated in the marketplace by powerful businesses that use automated systems to turn us off, ignore our calls and letters seeking redress for a mischarge or a poorly done job,
• we lose our jobs, are forced to accept paycuts or furloughs, when the company claims times are tought, yet we watch the same public companies to pay their CEOs millions more

That said, I don't put much stock in Senator Coburn's recognition that there are tax subsidies in the Code that probably don't make sense.  He may support removing the ethanol credit (which, from what little I have been able to figure out, seems to use about as much energy to produce as it produces, since it takes gas to till the corn fields, move the corn, and process the corn into gas to run the cars).  But I'll bet he won't support the other things that would cut the huge multinational monopolies and the elite managers that run them down to size--like breaking up the big banks, or disallowing any deduction for compensation to any one person in excess of a million dollars, or eliminating most of the tax free reorganization provisions that have helped foster the consolidation of industry into powerful megalithic corporations, or eliminating the R&D credit that pretends to incentivize US research (even though much of the time it is enacted retroactively, and you can't incentivize the past).....

Robert Reich's After Shock--prescriptions for the cure

In an earlier post (here), I reviewed Robert Reich's book After Shock, on the causes (and potential remedies) for the problems in the US economy. 

With just a few words--"a perception that the economic game is rigged--that no matter how hard we try we cannot get ahead because those with great wealth and power will block our way",  Reich sums up the anger that so many Americans feel about the billions spent on a bailout for banks, perhaps necessary, but with the result that banks are back on easy street, using other people's money, while most of the rest of us are struggling with lost jobs, tanked mortgages or foreclosed homes, and diminished economic prospects.  Add to that the worries about furloughs and retirement insecurity that the recent flurry of anti-union legislation in states like Wisconsin and fervor to cut the two programs that provide the only real safety net providing freedom to retire for most Americans, Social Security and Medicare, and there is a general economic malaise today among everybody but the rich.

The game has  been "tilted in the direction of big business and the wealthy."  And that tilt has left ordinary Americans with few resources to maintain their standard of living.  Reich notes that the coping mechanisms that ordinary Americans developed have been used up:

• women moved into the paid workforce in droves, but families have reached the limit of benefit from additional work outside the home when they have to hire someone to take care of their children;
• men and women worked longer hours--350 more hours per year than the average European and more even than the Japanese--but we've reached the limit on that, too, with health and families suffering from the lack of leisure time; and
• we all drew down savings and borrowed more to make ends meet, often using the equity in our homes as our emergency piggy bank, but the housing market bubble has burst and credit is hardly available at all to ordinary Americans, even with banks enjoying easy credit because of the Fed's monetary policies.

The answer, Reich says, is a "new deal for the middle class" in which the lopsided income and political power scale is righted, giving back to ordinary Americans their control over their work lives and their family lives, their freedom to enjoy their leisure, their freedom to dream the American Dream again.  He proposes a number of specific remedies, as follows.

• a reverse income tax combined with even lower rates on the lower middle class--Milt Friedman's original idea that we already have in the weak form of the Earned Income Tax Credit, but this would be expanded upward to the middle class.  Workers who make $20,000 or less would get $15,000; earn $30,000, get $10,000; earn $40,000, get $5000 but none for those earning $50,000 or more.  Tax rates would be the same for capital gains and salaries, with a low rate of 10% for amounts between $50 and 90 thousand and increasing rates thereafter.
• revenues would be raised through a carbon tax on fossil fuels, collected at the point of extraction or point of entry, and it would increase gradually over time from $35 per metric ton to $115 per metric ton, to push energy companies and users to conserve
• higher marginal tax rates on the wealthy--55% for the top 1% (earning over $410,000); 50% for the top 2% (earning over $260,000); 40% for those in the top 5% (earning over $160,000)  and, as noted earlier, all income would be treated the same, with no preferential rate for capital gains
• a reemployment system, including wage insurance that would make up most of the difference between former pay and lower pay at a new job for two years or for a period of training for new employment
• universal school vouchers (redeemable at either "charter" schools of public schools)
• college loans linked to subsequent earnings
• medicare for all
• sizable increase in public goods (public transportion, parks, recreational facilities, museums and libraries) that would be free of charge to users
• elimination of money from politics in the aftermath of the Citizens United case, through a requirement that all contributions to campaigns (or issue campaigns?) be made through blind trusts.  people can claim to the politico that they contributed thousands to his campaign, but the claim won't be verifiable.  So many people who don't contribute will claim to contribute.  So the politico won't be able to provide the quid pro quo that underlays the corruption in politics today.

These ideas aren't perfect, but they are worth considering.  Somehow, the middle class needs to be re-empowered.  These funds would be well spent, and would richochet through the economy providing support for new jobs, and new entrepreneurs, especially in the area of clean energy.  Medicare for all is a program we should have adopted 40 years ago.  But just as Reagan dumped the solar panels from the White House, Big Business has made sure to dump the possible programs that would free us from  allegiance to the Big Power companies, the Big Pharmaceutical companies, and the Big Insurance and Health Care companies.  It's time for us to break free, and Reich's proposals sound like one way to do it.

Ultimately, we have to remove the capital gains preference and treat all sources of income the same; we must create a more progressive bracket structure so that the super-rich pay an appropriate tax; we need to make education more accessible to the poor and we must find a way to soften the blow for those who lose their jobs.   These programs aren't justs a basic fairness issue, but the necessary lubricant to a thriving economy that will pay us back time and again with jobs and sustainable lifestyles that provide more freedom for everyone.   

Fundamental injustice: Charles Hugh Smith's Take

 Yesterday I commented on Robert Reich's book, After Shock, in which he urged us to recognize the fundamental cause of the 2007-2008 Great Recession lay in our imbalanced economy in which income and wealth is becoming more concentrated and consolidated in the hands of wealthy elites, while the vast majority of Americans are stagnating or struggling just to hold even.  Others have noticed the long-term consequences of such substantial income and wealth inequalities.  For example, Charles Hugh Smith writes, on of two minds.com, Apr. 20, 2011, about "The Fundamental INjustice that is Poisoning the Nation."

There is a fundamental injustice that is poisoning the soul of the nation, and if it is not openly addressed then the nation will face the explosive consequences of institutionalized injustice. (bolding in original)

Simply put, it is this: those responsible for the nation's financial crisis and its catastrophic after-effects are not paying for the consequences of their actions--it is the innocent, those who were not responsible, who are paying the price.

You can call it whatever you want: the Anarchy of the Super-Rich (as per Paul Farrell), the Financial Power Elite, the financial Oligarchy, Plutocracy or Corporatocracy, or the unprecedented concentration of financial wealth and political power in a financialized post-industrial economy. Whatever you call it, we all know this class of financiers and its minions got away with high financial crimes.

The biggest quibble I have with this is that it limits the "crime" to the "financiers and its minions."  In truth, the guilty are the entire upper crust--CEOs, CFOs and other high-priced managers of multinational corporations and the wealthy elite who own most of the stock, municipal bonds and other financial assets--who continue to benefit extraordinarily from the low cost of borrowing, offshoring, de-unionization, privatization, deficit-focus, and "entitlement narrowing" mentality that has been pushed by right-wing think tanks who still proclaim that just getting government out of the way (including by use of the favored three: deregulation, privatization, and tax cuts) so the free market decides winners and losers will create jobs and stimulate growth.  Of course, in this age of "truthiness" rather than truth-telling, none of the pushers bother to acknowledge that the favored three policies have apparently had exactly the opposite effect throughout the four decades of the reagonomics experiment--more concentration of wealth and income at the top; puny economic growth; and fewer jobs (and especially fewer good jobs) for the overwhelming majority of Americans.

 Smith goes on to make the point that I have been hammering with my focus on democratic egalitarianism--unless we ride herd on the forces that are consolidating wealth at the top, using tax policy and other policies to do so, we face the rapid deterioration of the institutions that make possible a democratic society.

[T]he really catastrophic losses are to the foundations of democracy and the economy. Democracy has been subverted--...--and the economy has been incentivized to favor poisonously addictive financialization and the shadow institutions of corruption, fraud, embezzlement, favoritism, collusion and misrepresentation of risk. This might be summarized as the protection of vested interests, engineered and overseen by the partnership of the ever more intrusive Central State and the nation's Financial Power Elite.

There is a second part to this fundamental injustice: look who will pay for the bailouts, guarantees and the interest on the borrowed trillions. ... Those who the Central State can easily tap: taxpayers who earn most of their income from wages, and those politically weak players dependent on government payments.

Now that the bills of the bailout are coming due, the State isn't going after GE for more taxes.  ...  No, the politically easy thing to do is raise taxes on wage earners and trim entitlements, because all the government needs to do is send down the orders and it is done: the taxes are withheld and the bennies trimmed.

Fearmongering over the US Budget Deficit

Kash at Angry Bear has expressed the obvious about S&P's announcement a couple of days ago that they were downgrading the outlook on the U.S., because of their concern that Congress wasn't going to act fast enough to deal with the deficit.  Fear-mongering over the U.S. Deficit, Angry Bear, Apr. 18, 2011.  As Kash puts it, the analysts "have apparently been drinking liberally from the Deficit Crisis Kool Aid."

US debt is still rated as AAA, which effectively means that S&P's rating analysts believe there is a zero percent chance of the US government not making payments on its debt. However, this new "ratings outlook" indicates that they now believe that there's a reasonable chance that some time within the next two years they will change their mind, and start to believe that there's a chance -- albeit a remote one -- of the US government defaulting on its debts.

***

Ah, but no doubt S&P is worried about what will happen to that debt burden beyond 2012. After all, there are alarming predictions that the currently large budget deficits will continue to be unduly large after 2012, even as the economy recovers.

But deficit projections are notoriously slow to catch up with the business cycle. When the economy is doing well and deficits are small, forecasters tend to look in the rearview mirror and make very rosy projections into the future. And when the economy is doing poorly and deficits are large, forecasters also tend to project doom and gloom going forward.

See Kash's chart for a visual representation of the way deficit forecasts miss the boat when compared to actual experience a decade and a half later.

Now folks, did you have the same thought I had?  S&P, the notorious soft-baller on subprime mortgages and everything else that smelled bad but was profitable to the corporate client asking for a rating, is "worried" about the U.S. based on what appear to be right-wing think tank/Chicago School "free market takes care of itself" talking points about the debt and deficit?  Certainly not based on John Maynard Keynes.  Or Marriner Eccles.  And certainly disregarding the fact that the US--unlike Greece, Ireland and Portugal--is it's own monetary boss with its own monetary policy (and its own money printing machine). 

Come off it, S&P--did you get some big bucks from an unknown client to make that pronouncement, huh?  Maybe those guys like Ryan pushing entitlement-busting as the revenue raiser to pay for the existing and additional tax cuts they want to provide to the big multinationals like GE and their shareholders and managers? 

Robert Reich's After Shock

Robert Reich's book, After Shock: The Next Economy and America's Future (Alfred A. Knopf, 2010), does not contain a lot of new information.  But he makes a persuasive case for the kinds of policies that our country has relied on to create a prosperous society, and points to the real cause of the economic malaise that we are suffering today. 

He starts by looking at the period of Great Prosperity under Roosevelt after WWII. Marriner Eccles, head of the Federal Reserve Board from 1934 to 1948, recognized the way moneyed interests could control the economy in their favor. 

The "major cause [of the Great Depression] ...had nothing whatever to do with excessive spending during the 1920s.  It was, rather, the vast accumulation of income in the hands of the wealthiest people in the nation, which siphoned purchasing power away from mowst of the rest."  Id. at 17.

We are in that situation again, Reich points out.  The wealthiest few at the top garner about the same share of income and wealth that they had in that time, leaving those at the bottom to scrounge for necessities.  As he notes, the share going to the richest 1% of the population peaked in 1928 and 2007 at over 23%, with the richest 10% enjoying the same kind of peak.  at 20.  Compare that to the 9-11% share from the 50s through the 70s.

The wages of the typical American hardly increased inthe three decades leading up to the Crash of 2008, considering inflation.  In the 2000s, they actually dropped.  ...In 2007, a male worker earning the median male wage...took home just over $45,000.  Considering inflation, this was less than the typical male worker earned thirty years before.  But the American economyh was much larger in 2007 than it was thirty years before.  If those gains had been divided equally among Americans, the typical person would be more than 60 percent better off than he actually wa by 200y.  Where did those gains go?  As in the years preceding the Great Depression, a growing share went to the top.  It was just like Eccles's 'giant suction pump' drawing 'into a few hands an increasing portion' of the nation's total earnings. Id. at 19.

Economists and financiers in that day, too, were insisting that "the market would correct itself automatically, and that the government's only responsibilityh was to balance the federal budget.  Lower prices and interest rates, they waid would inevitably 'lure natural new investments by men who still had money." Id. at 13. 

But "Eccles though that was nonsense. ... He saw that what passed for the God-given operation of economics 'was nothing more than a determination of this or that interest, specially favored by thestatus quo, to resist any new rules that might be to their disadvantage.'"  at 14.  He recognized "that men with great economic power had an undue influence in making the rules of the economic game, in shaping the actions of government that enforced those rules, and in conditioning the attitude taken by the people." Id. at 13-14.

So in the Depression, there were the same old arguments that the "free market" could take care of everything, and that govenrment policies should ensure that the wealthy are undisturbed because that's how jobs will be created.  It was balderdash then just as it is now, since of course there is no such thing as a free market, but rather a government-created climate amenable to commerce.

"Eccles told the senators that the government had to go deeper into debt in order to offset the lack of spending by consumers and businesses. ... He advised the senators on ways to get more money into the hands of the beleaguered middle class.  He offered a precise program designed 'to bring about, by Government action, an increase of purchasing power on the part of all the people. ...His proposed program included relief for the unemployed, government spending on public works,government refinancing ofmortgages, a federal minimum wage, federally supported old age pensions, and higher income taxes and inheritance taxes on the wealthy in order to control capital accumulations and avoid excessive speculation."  Id. at 14-15.

Those programs worked. 

The wages of lower-income Americans grew faster than those at or near the top.  the pay of workers in the bottom fifth more than doubled over these years [from 1945-1975]....Productivity also grew quickly...,defying the self-serving predictions of those who said wide inequality was necessary for rapid growth because top executivews and innovators needed the incentive of outsized earnings.  Labor productivity--average output per hour worked--doubled, as did median incomes. 

...

[The U.S. government] actively created the conditions for the middle class to fully share inthe nation's prosperity.  It did so by pushing the economy toward full employment, creating a more progressive income tax, enhancing the bargaining power of average workers, building up Social Security, providing workers with a strong safety net when they couldn't work, and improving their productivity.  Id. at 44.

As Reich notes, the period of Great Prosperityh "provide that widely shared income gains were not incompatible with economic growth; they were, in fact, essential to it."  Id. at 50.  And high income tax rates on the wealthy played a significant role in assuring that economic gains were appropriately distributed during and after WWII. 

The top marginal rate during the war ranged frp, 79 percent to 94 percent.  In the 1950s, under President Dwight Eisenhower, whom few would call a radical, it was 91 percent.  In 1964, the top rate dropped to 77 percent.  It was 77 percent again in 1969, when Richard Nixon became president.  Id. at 49.

Of course, we are now in a period of similar inequality of income and concentration of wealth in the hands of a few, like the prior Gilded Age, and the top rate has dropped precipitously (and capital gains--the primary income of the wealth--gets a significant preference of just about half the top rate for ordinary income).  And of course those programs proposed by Eccles and put in place under the New Deal--the ones that made that period of Great Prosperity possible-- are the very programs that the GOP budget proposed by Ryan would decimate or destroy entirely.  (If Social Security and Medicare are left in place for those 55 and older while weakened for everybody else, it will be little time before they are weakened as well for those 55 and older.  Sheer jealousy will see to that.)  

Companies were allowed to bust unions and threaten employees who tried to organize. .. .

And nothing impeded CEO slaaries from skyrocketing to more than three hundred times that of the typical worker (up from thirty times during the Great Prosperity), while the pay of financial executivesw and traders rose into the stratosphere. Increasingly, the ranks of America's super-rich were made up of top business and financial executives.  More than half of all the money that the top one-tenth of 1 percent of American earners reported on their 2001 taxes represented the combined incomes of the top five executives at the five hundred largest American companies.  Almost all the rest were financial traders and hedge-fund managers.

Significantly, Washington deregulated Wall STreet while insuring it against major losses.  In so doing, it turned finance. . .into its master.  .  . . As the financial economy took over the real economy, Treasury and fed officials grew in importance.  The expectations of bond traders dominated public policy.  And the stock market became the measure of the economy's success.  Id. at 56-57 (with much left out).

And this time our society is bifurcated so much by class that the wealthy and the rich don't even seem to feel very bad about using their influence in the halls of power (including the Supreme Court) to get rules that favor themselves.  That may be because, as Reich notes,

Across the nation, the most affluent Americans have been seceding from the rest of the nation into their own separate geographical communities with tax bases (or fees) that can underwrite much higher levels of services.They have moved into office parks and gated communities, and relied increasingly on private security guards instead of public police, private spas and clubs rather than public parks and pools, and private schools (or elite public ones in their own upscale communities) for their children rather than the public schools most other children attend. Being rich now means having enough money that you don't have to encounter anyone who isn't. Id. at 22 (emphasis added).

Reich makes an important point about Wall Street. 

It is common practice among economic policymakers to fervently and sincerely believe that Wall Sgtreet's financial health is not only a precondition for a prosperous real economy but that when the former thrives, the latter will necessarily follow.... [But] Wall Street is a casino in which high-stakes wagers are placed within a limited number of betting houses that keep a percentage of the wins for themselves and fob off losses on others, including taxpayers.  Id. at 39.

...

One of the basic asumptions of capitalism is that anyone paid huge sums of money must be worth it.  Policymakers are not immune to this logic. ...They talk solemnly of the importance of "stabilizing" the [financial] system and "recapitalizing" it.  Roughly translated, this means saving the assets--and the asses--of bankers.  Id. at 40

We worry about Wall Street, and gauge the success of the economy by where the Dow and the NASDAQ are.  But that is a wrong assumption.  As we've seen with the Bush years and the radical concentration of wealth at the top, what is good for Wall Street isn't necessarily good for Main Street.  The stock market goes up, but private equity managers are still doing leveraged buyouts, laying off workers, and selling the slimmed down business for a profit.  Jobs are disappearing, while shareholders and managers make money from outsourcing and offshoring and using expensive and aggressive tax avoidance techniques (and lobbying Congress for more of them).  And this is all done in a way that conditions people to accept it, even to laud the "free market" ideology that is stripping them of their jobs and their dignity.

The rich and the powerful also had substantial influence "in conditioning the attitude taken by people as a whole toward[the] rules....They generously financed think tanks, books, media, and ads designed to persuade Americans that free markets always know best.  Ronald Reagan, Margaret Thatcher, Alan Greenspan, Milton Friedman, and other apostles of free-market dogma reiterated a simple story:  the choice was between a free market and big government.  Government was the problem.  Free markets were the solution.

But how could the public have been so gullible as to accept this story?  After all, America had gone through a Great Depression, suffering the consequences of an unfettered market and unconstrained greed.  Even Marriner Eccles .... saw that left to its own devices, the market concentrates wealth and income--which is disastrous to an economy as well as to a society.  American had also experienced the Great Prosperity, which depended so obviously on public improvements, safety nets, and public investment. ...

One way to understand the paradox is loss of generational memory.  While the trauma of the Great Depression echoed in the memories of people who came to adulthood in the 1930s....their grandchildren, born during the Great Prosperity, had no actual, palpable memory of their grandparents' experience of a fallible and unreliable market offset by a strong and reliable government. ... [A]ll they recalled was the failure of government and the apparent success of the market.  This made them particularly susceptible to the seductive rants of the free marketeers.  Id. at 59-60.

The next post will look at Reich's suggestions for bringing our economy back to a more stable equilibrium where wealth and income is not so concentrated. 

How is combatting fraud like socialism? You have to be a Wall Street Journal reporter to get that one...

Yves Smith at Naked Capitalism links to a great smack-down of the Wall Street Journal's lapdog corporatist reporting on behalf of the big banks and multinational corporations.  It's William Black, Why aren't the honest bankers demanding prosecutions of their dishonest rivals? Apr. 12, 2011.  (I've linked to the Naked Capitalism coverage, since that is where I first spotted it. )

Stephen Moore, calls government employees and regulatory agents "takers" that are destroying America.  Earlier, he had written about Sarbanes-Oxley as a "white collar witch hunt" with an article that labeled regulatory action "Neobolshevism".  Here's just a taste of Black's response:

Moore, for example, is the Wall Street Journal’s senior economics writer. Somehow, prominent conservatives have become “bleeding hearts” for the most wealthy, powerful, arrogant, and destructive white-collar criminals in the world. ... People like Moore not only spur neutralization, they actively campaign to minimize the destructiveness of elite white-collar crime and to deny the regulators and the prosecutors the resources to prosecute the criminals.

....

The anti-regulators got their wish – they took the regulatory cops off the beat. The banking regulatory agencies ceased making criminal referrals, the SEC ceased bringing even their wimpy consent actions against the massive accounting control frauds, and the Justice Department ceased prosecuting the accounting control frauds during the run up to the crisis. The results were multiple echo epidemics of fraud, a hyper-inflated bubble, and the Great Recession. If Baker and Moore think these fraudulent CEOs constitute the “productive class” – then capitalism was killed by the producers. The financial frauds, however, were not productive. They were weapons of mass financial destruction. Their fraudulent CEOs were motivated by the most banal of motivations that every major religion warns against – unlimited greed, ego, and a radical lack of empathy for their victims. The most pathetic figures in the crisis, however, are not the CEOs but their shills.

A commenter (Eric) noted that  he was "still puzzled to see how strongly small-business people support the criminality of the big business oligopolists who make things so difficult for them."  I suspect it is in part because of the incessant shilling of media like the Wall Street Journal on behalf of the big buys.