A Wall Street Windfall Profits Tax: Now or Never?

08/16/2009 05:12 am ET | Updated May 25, 2011

"With Big Profit, Goldman sees Big Payday Ahead"

New York Times

"Part-Time Workers Mask Unemployment Woes"

New York Times

Every economics teacher in America should be forced to explain these dueling New York Times headlines from July 15, 2009. Goldman Sachs reported record profits for the second quarter -- not a record for this year, but an all-time record of $3.4 billion, higher than any quarter during the enormous financial bubble that burst last fall and took down the economy. And then there's David Leonhardt's excellent article on the real jobless rate which is nearing 20 percent and already has crossed that mark in Oregon, Rhode Island, Michigan, South Carolina and California. I'd love to hear how the economics profession would account for this contrast.

Would they whisper sweet nothings about leading and lagging indicators, supply and demand curves, and monetary and fiscal policies? Or would they startle us with Schumpeter's creative destruction? Would they wave before us the Friedman/Smith invisible magic wand? Or in frustration would they bellow out conspiracy theories involving Goldman Sachs ("Jewish bankers"?) ripping us off? (And if they do have it in for Goldman Sachs, how would they account for this startling headline: "JP Morgan Earnings Soar as it Finds Profits in the Slump")

Here's my rap, or at least part of it. (For the full version, see The Looting of America)

Once upon a time, like thirty years ago, our policy leaders, academicians and pundits called for and embarked on a radical experiment: to enact polices that moved money to the top of the income ladder and to deregulate the financial sector so that financial capital could easily be concentrated and accumulated. This was to lead to a massive investment boom that would lift all boats.

It didn't work; rather, it worked in part. Money did indeed gush to the top of the income ladder to create the most skewed income distribution since 1928-29. The compensation ratio of top 100 CEOs to production workers rose from 40 to 1 in 1970 to 1,723 to one in 2007 -- quite a jump that can't be explained by any standard economic theory without reliance on what is known in the field as "heroic assumptions." The top one tenth of one percent of all tax returns showed as much income as the bottom 50 percent by 2006.

But most of us got crushed in the process: The average real wage of production workers actually declined by 18 percent since the mid-1970s (due to anti-union policies, the decline of the minimum wage and the export of most of the industrial sector).

So what did the investment class do with all this new wealth? They invested it. But they had so much additional wealth that it literally ran out of investments in the real economy of goods and services. It became surplus capital looking for a home. Wall Street's financial gurus quickly solved the problem by creating wave after wave of fantasy finance instruments that offered attractive returns at low risk, but didn't own anything tangible at all. Leveraged on high, these instruments were extremely vulnerable to changes in the value of the junk debt upon which they were constructed. When housing prices stopped their meteoric rise the entire fantasy finance casino crashed, freezing solid the credit markets. Without credit, the real economy of goods and service was pushed off a cliff, and in the closing months of 2008 we faced another Great Depression.

That was the result of our great deregulatory/wealth distribution experiment.

To prevent a true depression, we moved $13 trillion into the financial sector in the form of TARP and asset guarantees (see Nomi Prins' excellent sleuthing).

We placed the entire financial sector on the dole.

Lo and behold, that money is now kicking in to produce record profits for the remaining banks and investment houses that have been deemed too big and too interconnected to fail. (One wonders: too interconnected to one another or too interconnected to Congress and the Bush and Obama administrations?) They'd have to be idiots not to make money.

So what are we going to do about it? We have to unwind the grand experiment. We need to move money out of Wall Street and back into the real economy. And we need to move wealth and income from the top to the middle and bottom. Here are three proposals that would do it:

1. A president's wage cap on all financial sector employees. No one in the financial sector shall earn more than the President of the United States ($400,000 per year).

2. A small excise tax on each and every financial transaction (Representative Peter Defazio's bill, H.R. 1068 "Let Wall Street Pay for Wall Street's Bailout Act of 2009," is a good start)

3. A windfall profits tax of 90 percent on all financial firms (in honor of the Eishenhower-era marginal tax rate).

Why isn't this happening?

First of all, many in Congress would rather give money to Wall Street than take it back. Somehow it's ok to bail them out, but it's an abomination to raise taxes on anyone for any reason. Forget about reaching these folks.

Second, the bank lobby is a strong as ever. Emboldened by the fact that we didn't wipe out their shareholders and that we didn't really nationalize them, the financial community has organized for a full-scale assault on any and all regulations, especially the proposed Financial Consumer Protection Agency (see "Redefining Chutzpah: Wall Street Using Bailout Money to Kill Financial Consumer Protection Agency")

But the most insidious obstacle comes from those of us who are praying that our 201ks will once again become 401ks. When no one is looking, many of us peek at our financial pornography hoping that our pathetic little portfolios might bounce back. We have an intuitive sense that rising profits for Goldman Sachs, JP Morgan, and their Wall Street brethren will boost the stock market overall, which in turn might allow us to recoup our savings and retire in dignity.

Meanwhile, unemployment surely will rise, Wall Street will get its outrageous bonuses again, and the fantasy finance casino will reopen for business. This is both a recipe for disaster and the best moment we've ever had to end Wall Street's domination of our economy.

Pissing and moaning about Obama and Congress is not enough. We really need to put significant heat on them to reclaim our wealth. Where is the counter pressure coming from the grassroots? Where is the progressive movement? Where are our protests as the financial community rewards itself for a job well-done? Either we get engaged in a hurry or we might as well just wait for the tooth fairy to put the money under our pillow and hope it will all work out.