Sunday, January 24, 2016

Saving American Capitalism

NB:  This one's by my colleague, George Giacoppe.

We’re number one; We’re number one!
Except when we are not anywhere near
In days as gone as the setting sun
This empire has passed from first to tears
Except for Bernie’s Billionaires
Who write and relish the rules
Of Citizens United and Wall St. shares
And we let them, we fools

The recent book Saving Capitalism by Robert Reich is mandatory reading for anybody who cares about the details of our current economic disease.  Intuitively, perhaps, we have all figured out that the American capitalistic system is skewed for the average person to be screwed.  As Reich explains, the total system is broader than we think.  It includes the tax subsystem, of course, but that could not explain our wide disparity in wealth by itself.  It includes a political subsystem, but that does not explain the legal basis for the axis of money and power.  It includes the judicial subsystem including Supreme Court decisions like Citizens United, but that does not explain how Goldman Sachs is a “person” that can never go to jail.  It includes election of judges who then make judgments favoring major contributors to their elections, but that does not explain large inequities in state systems that enhance gerrymandering that, in turn, promotes long-term disenfranchisement of selected voters.  Truly, the devil is in the details and Robert Reich has researched the details with enthusiasm bordering on fanaticism and finesse bordering on precision.  As a spoiler, I agree completely on his analysis, but feel that his conclusion is wildly optimistic.  In reading the history of the 20s, I cannot envision any voluntary shrinkage by the haves to either assist or even to mollify the have-nots.  In the 20s, the very wealthy corporations and individuals hired private security and convinced many local and state governments to force their will on workers, their unions and even the families of the working class.  Yes, I know compromise would be logical and self-preserving in some ways, but I believe that those with great wealth and property will, once again, aggressively protect their property and privilege until they cannot withstand the forces around them and then they will flee our nation when that strategy fails.  We have built an aristocracy and it may take a 21st century (virtual) guillotine to convince the privileged that compromise works best and aristocracy is unaffordable in the long run.

Mr. Reich posits that outcomes depend more upon decisions than on the policies of our capitalistic variant.  He shows that critical politico-economic decisions are made in the areas of:  Property, Monopoly, Contract, Bankruptcy, and Enforcement.  If you go back to the bad old days of the 18th and 19th centuries, we had a largely agrarian economy and most property was real land or the structures built on that land.  We still use the term “real property” today, but the percentage of property considered to be “intellectual property” is far greater than ever before.  Worse, the rules governing intellectual property have progressively favored longer and longer granting of exclusive rights to that property.  Had the wheel been just recently invented and patented, nobody could use wheels without a license for the next 81 years.  Witness the 2015 legal kerfuffle over rights to the “Happy Birthday” song and lyrics.  Yes, you can now sing it without a paying a royalty, but somebody had to bring it to court for that to happen.  In some areas of commerce, intellectual property rights lend themselves to a monopoly such as in areas of social media, but even the lowly razor long used in shaving, grants the Gillette company a virtual monopoly for a fairly simple tool as the purveyors of a monthly razor subscription service just learned by lawsuit. Start-ups are at a distinct disadvantage and politicians that continuously add to the exclusive rights periods of property, seem to get a share of the largess through campaign contributions by firms wanting to protect their property.

In the area of contracts, time was when most contracts were between equals or comparables, and breaches were handled by lawsuits. Now that is so constrained as to be rare.  You typically sign an agreement to proceed to mandatory arbitration paid for by a large company that has deep pockets and pays for that arbitrator with the result that over 70% of decisions favor that purchaser of the arbitration service.  By contrast, in court only 40% favored the corporation.  Arbitration works well for your telephone or cable-company, but how well does it work for you as a consumer?  Likewise, an agreement not to compete between drug companies combined with the time extension of exclusive rights means that you, as a meds purchaser will pay a higher price because competition has been legally forbidden and the time to go generic has been pushed off into a distant future.  Both the original and generic makers are blessed with high profits while you are cursed with their legal but morally questionable contract.  You lose.

Bankruptcy was an early capitalistic concept that permitted individuals to get away from the threat of debtors’ prison, but there are serious questions as to how decisions are made to implement that concept.  Student debt cannot be eliminated through bankruptcy, yet Donald Trump has declared bankruptcy at least four times.  Those bankruptcies resulted in the impoverishment of people who were not paid for their labor or their “earned” pensions (as also with United Airlines) and many suppliers of goods and services were left with pennies on the dollar while Trump himself was made whole for most of his investments.  Fair?  Mr. Trump surely thinks so.  Similarly, Bain Capital of Mitt Romney fame appropriated pension funds and other assets of companies they took over and declared bankruptcy for several firms in its approach to legally use the bankruptcy rules for personal advantage and the severe disadvantage of workers who depended on their earned pensions and the jobs that were often shipped overseas as part of “restructuring.”  Labor unions and workers were once considered legitimate stakeholders in corporate economic actions.  Today unions represent only about 9% of non-government workers and there, the Supreme Court will soon rule on whether members of a teachers union must pay dues, thus ripping income from an already wounded “stakeholder.”  In the 30s, 40s and 50s when union strength peaked, the income gap and wealth gap of Americans was at its lowest.  It was not coincidence and the creation of “right to work states” stripped power from unions during that following period of weakening unions while the income and wealth gaps again increased.  Workers became so expendable that they lost thousands of jobs to Investment Capital and Venture Capital firms that were able to export jobs to nations with low wages and also were able to legally confiscate earned pensions from purchased corporations.  Workers lost rights and money.  Overwhelmingly, a handful of “Mitt Romneys” of our nation prospered.

The final category developed and explained by Reich is Enforcement.  As you may imagine, enforcement has some interesting issues related to the political side of our capitalism.  An example provided by the author is that the official policy for income taxes assures us that tax liabilities are measured and used to apply the rules.  However, the current GOP Congress decided that it did not want to support finding big tax dodgers and therefore enforcement was cut back.  This decision was made despite the statistic that for every dollar spent in tax enforcement (audits, etc.) twenty-five dollars in tax income is earned by the federal government.  Perhaps this was a quiet rebuke to President Obama, but it had the effect of reducing government income, regardless of motivation.  Even the concept of “small government” itself is misleading since many conservatives want to reduce enforcement of regulations in areas like environmental protection (witness the BP oil spill and the toxic lead in Flint, MI drinking water).  On the other hand, they want to beef up and privatize military spending or have government add staff to monitor birth control, abortions and Congressional investigations.  These are decisions based on cherished ideologies rather than cold logic.  Large corporations with legions of lawyers are time-consuming tax targets that require larger government staffs to effectively audit.  Cuts disproportionately benefitted wealthy individuals and corporations that might otherwise be audited.  Of course, those same corporations (people?) invest heavily in political campaigns to promote those very politicians that seem to favor the corporations, but that is only coincidental happenstance, right?

How can all this be?  Hedge fund traders (many making a $1 B or more per year) are taxed using “carried interest” (also called performance fee) rules that tax their gains as ordinary income (also true for companies like Bain and their managers).  You and I cannot. 

This entire issue of legality should cause us to review how things become “legal” in our nation.  How can we permit the very wealthy like the Koch brothers to spend $889M for the current presidential election without concluding that their purpose is to buy elections?  The short answer is that the capitalistic economic system does not work in a vacuum of a free market as the mythology suggests.  There is no “free” market except for what the political forces allow.  The longer answer must include that the Supremes decided that “one person = one vote” was undemocratic and that “$1 = one vote” was “freedom of speech.”  Maybe the Supremes only talk money. Traders also invest in politicians that write favorable tax rules.  Another coincidence!  You probably thought that we had a consumer economy.  In good times, we do.  In the current time, we have an investment economy and if you have enough dollars to invest in the right politicians, the tax rules are a payoff while the other is that if you are too big to fail or pay taxes, your losses will be covered by the taxpayers themselves (another payoff for investment in politicians).  We privatize winnings and socialize losses.  Conservative Socialism.  Be too big to fail.  Stiff the taxpayers and get bigger.  Hmm.  Lobbying has become a growth industry but we taxpayers simply do not have the monetary resources to hire lobbyists to compete with the big players.  “Legality” is the result of judicial interpretation of laws made by our legislators and influenced by lobbyists who are paid to represent specific interests and enforced by people with ideological agendas.

As another example of how the rules permit a legal fleecing of the taxpayer, you may be surprised that CEOs need to report their incomes for stock accounting purposes.  CEO salaries and bonuses and other compensation are indeed reportable and tax deductible.  In most nations that has not changed the basic CEO compensation ratio with the average worker (e.g., 50: 1 in Germany).  In America, that ratio has become about 400 to one.  That fact has actually changed what US companies do for a living.  Instead of a focus on manufacturing or providing services and sharing its largess with all stakeholders, what happens, increasingly, is that the value of a company is measured by its stock price.  CEOs are paid mostly on shareholder value.  They take most of their income in stock (often at special pricing) and then proceed to increase the value of their company’s stock at the expense of quality products made here at home.  As a personal example, when GM bought Hughes Aircraft in 1985, the company was a highly skilled high tech and engineering company in LA with about 78,000 employees and capable of competing for the highest technology contracts in government and civilian efforts.  A few years later, the company was down to about 27,000 employees and incapable of significant contracts in technology.  The target stock price of, say, $55/share was reached and the remaining pieces of the company were sold.  GM did not have to make anything.  It simply played the stock market and rewarded the management team for great (non) work.  The concept was absolutely legal, despite several lawsuits for questionable firing practices.  GM won the day.  Engineers lost.  America lost.  Allowing that to be legal meant that the rules had to be in place beforehand.  It is noteworthy that GM was bailed out by our government in 2007-2008.  Unfortunately, that was repeated all over America and workers won the race to the bottom while CEOs won the race to the top. Their compensation is deductable by the company, e.g., Hughes/GM or Wigits Inc. and therefore the company pays less in taxes and the cycle begins anew with influencing the political element to favor the wealthy corporations and individuals.  It never stops.  True, some companies like GM blamed their problems on unions, but, as an example, GM ran Saturn for more than 20 years in a union free environment and was unable to earn a dollar.  Top-heavy management without a quality product focus outweighs any union expense.

Robert Reich seems to feel that the “haves” will see the hazards of continuing this unstable US model of capitalism and will willingly, if grudgingly, provide legislative and corporate relief through new decisions and by more modest personal enrichment.  As I see the history of the 20s, the decisions will be made in the streets, not in the boardrooms, nor in a lobbyist crowded Congress.  Prove me wrong.  Please.

22 Jan 2016
George Giacoppe

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