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A Wall Street Windfall Profits Tax: Now or Never?
"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.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.
Follow Les Leopold on Twitter: www.twitter.com/les_leopold
George Goehl: Showdown in Chicago: Creating a "Which Side Are You On" Moment
Until our elected officials know there is a price to pay for siding with big money over everyday people, the average American will continue be on the losing end.
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The rebellion is in its infancy, but will gain strength. We're here- http://anewwayforward.org
Make sure that insurance companies, particularly health insurance companies are specifically included in the pay cap and windfall profits tax. And for good measure raise marginal income tax rates just in case. Besides, this is needed to bring executive pay and benefits in manufacturing in line with historical U.S. and current world levels to make us competitive again. The make sure the lawyers and accountants trying to game the system are caught in the net. And finally, or maybe not finally, cap the pay for executives in non profits. Why should someone running a non profit make millions? If the pay and benefits exceed $400,000 (or better, the pay level of a U.S. Department Secretary) non profits should lose that status.
Les, good read. I think this is the clearest picture I've yet got of the actual causal relationship between the problem you point out (income inequality) and the obvious disastrous results wreaked on all of us (a tanking economy in near-freefall). It is an intuitive connection, but until now I didn't grasp it on a rational level. There are probably other culprits, but it seems plain that surplus capital -- itself a result of income redirecting policies under mostly Republican leadership -- directly led to the climate and investment vehicles that sparked this mess. So thanks for continuing to pound the drumbeat on this topic, it's worked its way through my skull now and hopefully many others.
If we wait for Obama to organize the protests (or to pull a rabbit out of the hat; depends on whether you believe him an activist politician or a magician) we completely misunderstand the greviousness of our current condition. The neglect of community political health over the last 40 years has so broken our system that we are crippled.
The massive street protests of the 60s were made possible by economic prosperity. The reactionary policy in fear and panic of genuine change, so well described in this article, not only enriched the political class and its allies, it also starved the middle and working classes. We need public programs that will pay the public to protest. When Chaney was told by Nixon to get rid of the Poverty Program, because it used federal funds to support progressive action, they knew who buttered their bread.
Maybe somewhere initiative remains to set up an alternative deliberative body to write legislation that is life affirming rather than life denying. We need to see what could be done. We need to pay people to care for other people. I do not minimize the real dangers we face. But we need those who will talk about the healing and cooperation it takes for genuine progressive change. Our gravest danger is that we have been so crushed, no one has strength left to organize us. If so, nothing will change and progress will be put on hold, Keep your eyes on the prize!
"This is [...] the best moment we've ever had to end Wall Street's domination of our economy."
Personally, I'm _outraged_ how Obama has turned into a Republican. Not even centrist. He's pi55ing away opportunities for reform at every turn - at least, so it seems. Wish I had more time to call and write...
...The only voting mistake I've ever made was for Diane Feinstein. Barbara Boxer is a gem, while Feinstein moved steadily rightward since 1983 or so. Today, she can hardly be described as Democrat. Barbara Lee may not be the brightest bulb in the House, but she _does_ have her hart in the right place and votes reliably progressive. ...Of these, two of them don't need any coaxing to do the right things and the other is intransigent right-wing and does not listen to liberal / progressive coaxing.
Like Feinstein, Barack's tone-deaf to his base. He apparently thinks that by wooing those "on the other side of the aisle" he's helping all of America be his constituency, but in reality he's merely supporting the one side that's always been supported - moneyed interests - and ignoring his base; the people who brought him to the dance.
Obama has been in opposition to progressive reforms. He'll be a one-termer for sure if he keeps going as he has been these past 6 months... IF WE DO NOT ENACT REFORMS NOW, WE NEVER WILL. Probably.
BTW, YES, I do call/write to persuade him to progressive values...
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WE all knew this but we can't do anything at all? Where is the people's power this time?
Your windfall profits tax is too low. It should be 150%.
Les, excellent article! Concentrated wealth in the hands of the few has never worked. Unless Obama shepherds true reform, another financial crisis will happen which will instigate political turmoil. Goldman's actions will doom our democracy and and will eventually be seen as treasonous.
Here's a progressive movement excercise: let's start printing money that is based upon something tangible and that comes with no debt attached. Let's return currency to it's proper place as a value indicator.
Les, your article is based on hyperbole and oversimplification. Most of it are not worse off relative to 3 decades ago; data supports otherwise (median HH income etc) and economic growth has not been a zero sum game. Moreover, imply the decline of blue collar jobs is Wall Street's fault is unfounded; corporate America in general, and trade policy (which sent jobs overseas), yes, but not Wall Street. Your claims related to what wealthy did with their money and why is also distorted guesswork. You totally ignore the fact the "capital surplus" had a huge international (thanks China) and domestic monetary policy cause; rates were pushed to ZERO, causing people of all wealth profiles invest stupidly. Also keep in mind the investors in mortgage securities were institutions sovereign wealth funds, pension funds (like CALPERS), municipalities, etc; not only some anthropomorphic force defined by you as the "wealthy", who had no where else to turn so they created these nefarious securities. Finally, all your suggestions are nothing more than arbitrary and counterproductive; for example, how are we all better off if market liquidity decreases (which is what will happen if you tax transactions)? Windfall profits are justifiable through policy when an external force (like oil prices) drives up company profits at the expense of the public (paying $10/g at the pump). Sounds like you just feel it's unjust for that profits are large, and people make a lot of money in an industry you deem unimportant. Not very convincing.
See Les Leopold's Profile
Many good points that are worthy of further discussion. You add nuance to the make up of the investment community and I buy much of your description. But it also is a fact that we have 400 billionaires with a total net worth is $1.56 trillion. That's a lot of concentrated mula.
But the bottom line is that the system crashed right before our very eyes. Last September, we were on the verge of another great depression. That's not hyperbole. Why did that happen? I'm open to any and all discussion of that question. I'm leaning more and more to the Keynes-Minsky argument that free-market finance is inherently unstable, and that skewed income distributions mightily contribute to that problem. In truth, I struggling for a sensible answer for too big to fail. I'm not hopeful that regulation alone will work. My purpose in these pieces is to provoke more of that discussion. I'd be very curious what you would think of the "Looting of America." I wish you'd review it somewhere.
"Not very convincing."
I would agree with the sentiment, but about your comments, not the article; while you add details, primarily your approach is to defend the indefensible.
Good luck with selling that spiel...I'm sure your Wall St. cronies would be much obliged if you could convnince even one non-GOP blue collar worker or desk jocky that your apologist pap is any sort of excuse for the economic malfeasance we've been assaulted with for the last three decades.
I agree with Les that you raise interesting points of criticism. A few comments:
+ Household income as a metric is valuable, but not supreme. There isn't an exact correlation, but part of continued growth in (real) median incomes must certainly arise from growth in two-earner families. But by using HH income we dismiss the financial and social costs caused by this shift. Real income per worker would be a more appropriate lens on our quality of life.
+ Monetary policy is indeed a big part of what created surplus capital. But bear in mind why our interest rates are so low: earlier efforts to stave off recession that served mainly to postpone the problem, while leading those who had amassed capital to need "innovative" financial devices if they wished to earn good returns. Go back to 2001 or 2002, the first time I remember hearing the phrase "jobless recovery". We didn't solve the right problems then, and created new ones with the Bush tax cuts; that's why (had they even wanted) the Fed was unable to bump up our interest rates in the intervening years, so when cuts were needed in 2008 our primary tool to slow a recession was rapidly neutered by reaching its effective floor at 0%.
ctd...
+ The institutional investors you cite are just as much an impersonal, somewhat-anthropomorphic force as the monolithic "wealthy". The problem is that those with money to burn moved the market, pushing pensions and other investment institutions that should have known better into risky schemes and financial engineering because that's where the gains were to be made. So yes, the pension funds are at fault as well, but that doesn't excuse the individuals at the top who, seeking continued capital gains (fat income at cheaper tax rates!), pressed the banks/insurers in the direction of high-risk vehicles. And that would have been far less likely to happen had the wealth scale not been so imbalanced -- which is the central point Les seems to be making and you seem to have ignored.
+ I don't know much about market liquidity, but that seems like a misleading item of focus. Credit liquidity is vital, as we have all been too aware lately, but that shouldn't necessarily depend on large firms being free to boost trading volume without paying a surtax. Of those put forward here, that's actually the suggestion I think is most likely to help. Make it a bigger tax, say 3%, and prohibit mutual funds from passing it on in fees and it would probably pay for a good chunk of health care reform too!
...ctd...
+ It seems inconsistent to accept that the decline in the manufacturing sector was a result of corporate actions, but at the same time deny banks' role in funding business as a contributing factor. Wall Street *is* banks. Big banks. They provide capital for business, they underwrite stock offerings, etc...and when they decided domestic manufacturing wasn't where their money should go, they were deciding the American economy had little/no place left for industrial production.
Casinos only work because people like to play, even if they are guaranteed to lose. Wall Street won't lose influence until we remove the 401k tax provision. And even then they will get plenty of "contributions" from those who still believe in Santa.
what is a windfall profit? If a company is going to be heavily taxed when it has higher than average returns does that mean that there will be a bailout standing by for when they have greater than average losses?
What business is it of the Federal govt how much a private employee is paid?
By taxing a financial transaction I'm hoping the writer only meant transactions that occur in the financial arena and not simply a transaction that involves money. That would be most transactions and we already have an income tax. Assuming this is correct, suppose a person has a 401(k) with some investments. Does an additional tax help or hurt this person in their planning for retirement? This tax isn't simply taking a dollar away from a person but also every dollar in interest that initial dollar would have earned in the 2-3 decades before that person retired.
Now or never? I vote for never.
See Les Leopold's Profile
Why? You think they earned it? Goldman Sacks got $12.9 billion of our money via AIG for CDS coverage -- 100 cents on the dollar. Hard not to make profits with that kind of subsidy.
Actually... they earned it. They had contracts with AIG and so AIG had to pay out. The only alternative was to let AIG fail. I leave it to you to decide if we would be happier with that scenario. Personally I doubt it.
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