Dwight D. Eisenhower vs. Andrew J. Hall
The banking giant Citigroup is saying goodbye to its $100 million man, Andrew J. Hall, and the commodities firm he ran. While the firm had generated big profits for the bank, it had also led to significant controversy because of Mr. Hall's huge promised bonus.... Citigroup announced on Friday that it was selling its energy-trading operation, Phibro, to the oil and gas company Occidental Petroleum, potentially allowing the bank to avoid a confrontation with the Obama administration over executive compensation.
The way in which oil speculator Andrew J. Hall is going to get his $100 million demonstrates clearly why we need to return to the 91 percent top bracket income taxes of the Eisenhower years.
Hall was scheduled to get nearly $100 million in bonuses for his services he and his firm Philbro provided to Citigroup. (Philbro is currently a subsidiary of Citigroup.) He earned his keep by using Citigroup capital to play the oil markets, which he did successfully. It's unclear if his actions resulted in any real economic value--no part of our economy functions more efficiently and no one has fuel in their gas tank they wouldn't have had because of his commodity trades. More than likely it resulted in a slight increase in overall oil prices that we all pay. Nevertheless he earned a pretty penny for Citigroup in the process--and for himself.
Unfortunately for Hall, the financial system collapsed and Citigroup was about to go under. Had it collapsed his contract would have been worthless as he lined up behind thousands of other creditors. However, the American taxpayer bailed out Citigroup with about $350 billion in TARP funds and asset guarantees. So Hall, who had a contract that predated the coronation of the Pay Czar, was all set to get his $100 million.
But the public and maybe a few of us bloggers got in the way. We created enough of a stink that Citigroup appears ready to sell him off. Out of sight, out of mind.
But Hall will still get his $100 million, and more. The Obama administration will look the other way because he'll no longer be at Citigroup and therefore not under Pay Czar review. But we should keep looking, especially at the tax code that treats the super-wealthy as if they were Pharaohs.
We have yet to face up to the fact that our current crisis was caused in large part because we threw away the progressive taxes instituted by our forefathers to prevent speculative excess. The more extreme the distribution of income, the greater the chance of a fantasy finance casino. The last time we had a distribution as skewed as today was 1929. Is that coincidental? No. When capital builds up in the hands of the few, the economy becomes imbalanced. There are not enough tangible investments in goods and services to satisfy the investment desires of concentrated wealth holders. So the money runs to Wall Street-created securities and Wall Street-enabled bubbles. You can bank on it.
During the New Deal and afterward we tamed such excesses through steep progressive income taxes. The rate hit 91 percent during the Eisenhower years on incomes that today would be about $3 million. That means the next dollar of income would send 91 cents to the Treasury (while the tax rate applied to the first $3 million was lower). Our economy did not suffer. Quite the contrary, this coincided with America's economic "Golden Age." And we had no financial crashes. Yes, there were all kinds of loopholes but we had the narrowest distribution of income on record during those years. Rich people were still rich, but the blind race to accumulate billions was held in check.
Such progressive taxes are the only way to stop the excesses represented by Andrew J. Hall. If Ike's taxe rates were still with us, Hall would see his income reduced to about $10 million, hardly a hardship.
Look, the 1950s was not nirvana. You have only to watch Mad Men to be reminded of the overt racism, sexism and discrimination against gays. But that era with its compressed income brackets was making a statement. It was important to build the middle class. It was important to strive for goals other than accumulating wealth. In fact, public service was held in high esteem. Can we even imagine that anymore?
In contrast, the Andrew J. Hall era is all about grabbing as much as you can for yourself. Milton Friedman preached that society would benefit as a whole if each of us pursued our self-interest and maximized our gains. With this philosophy we didn't have to ask hard questions about whether or not our actual work contributed to the social good. By definition if we made millions by speculating it meant we were doing good.
But it turns out there's a price to pay for ruthless selfishness. The system crashes. We send millions to the unemployment lines because we let the accumulation process run wild. We no longer give a damn about the middle class and the jobs it needs. All that matters is accumulating vast riches.
We may patch together our rickety financial system and restart the economy again, now that we've bailed out the very people who gambled us into the ground. But failure to grapple with our obscene wealth distribution is still with us and still tears at the fabric of our society. If we don't change it, the next crash can't be far away.
Eisenhower, a conservative Republican understood this well and kept our excesses in check. It's stunning that both our parties today don't have the guts to tackle our billionaire bailout society. The best they seem able to do is make sure Andrew J. Hall's loot is no longer in plain view.
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
Arianna Huffington: A Moment of Truth with Bill Moyers, Marcy Kaptur, and Simon Johnson
Bill Moyers Journal is always illuminating, but tonight's episode, featuring a conversation with Rep. Marcy Kaptur (so amazing in Michael Moore's new film) and economist Simon Johnson is one that no one should miss.
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It's a two-pronged assault on reason. First, show us the money; then, tell us we too can be part of all that. And the result is absolutely what you would expect. If anyone dares suggest raising taxes on the rich, there will be such an outcry that whoever suggested it will run for cover. But the outcry will not come from the rich; it'll come from the middle class. The same middle class whose interests everyone is so concerned with protecting. The same middle class that sees the infinitely small possibility of becoming part of the plutocracy as more important to its well being than the far greater possibility of losing everything they have so that the rich can keep everything they have. Even when the rich, through the government, reach right into the middle class's pocket to steal from it, it still maintains its God-given right to defend to the death every man's right to get rich by hook or crook and keep every last bit of it. Getting rich is the very core of middle class values. Take that away, and they have nothing to believe in.
Well, you and me and Les Leopold makes three people who won't run for cover. Isn't that a start?
But it's even better: after we have agreed on the semi-religious content of the faith in zero taxes for the rich, you have also revealed the emperor's new clothes in all their splendor.
Since there is perfectly objective knowledge available about the probability of moving into those tax brackets, every middle class member can calculate the net present value of his very own support of that tax regime on his own.
And weep.
And then, maybe, wisdom arrives.
The wisdom of net present value, which is Calvinism properly secularized.
As a member of the middle class, NOT. Do you really believe we are all so short sited and self destructive? I see a society where the fairly equal distribution of wealth creates fewer problems with crime and many of the poverty oriented ills of society, and the freed up funds could create amazing advances to things like sustainable energy, health care, education, the arts, and much more. Your premise is very cynical.
so we're four now.
One glimmer of hope is that the Bush Tax Cuts expire next year in 2010. Bush's giveaway to the rich, where 90% of the benefit went to the richest 10%, will expire and there is no chance that the new administration will extend or make permanent that fraud. The rich will have to go back to paying their fair share and just watch, they will be screaming bloody murder. Prepare to turn down the volumne on your television sets to avoid all the yelling.
I do not think the administration will make the tax cuts permanent, but I did believe them when they said they were going to repeal them. Unfortunately, another Flopsie lie. Only time will tell since we cannot believe Flopsie.
Finally, I have been saying this for years. Thank you!
Let's recheck our history. With Democrats in control of Congress for most of Eisenhower's term, I'd wager that those tax rates were left over from Truman, or even FDR. However, suffiice to say Warren Buffet is right that is wrong when his secretarypays a high rate then he does. ALL income, where 'earned' or unearned' should be taxed at the same rate.
No new taxes on the upper middle class. They are already paying a federal marginal rate of 39.6%. Add to that state and local income taxes in NY and California and their marginal tax rate is over 45%.
We need to focus on the wealthy that pay 15% tax rate on dividend income. Also bring back the Estate tax on estates larger than $10M. Anyone making over $1M a year should incur a marginal tax rate of 50%. Annual income over $3M should be taxed at a top rate of 70%.
An indirect tax (VAT) on consumption should be initiated at 5%. VAT in Europe and LatAm range up to 20%.
This simple steps would balance our budget within 4 years.
Just because the man made a lot of money does not make it wrong. Oil trading is a very active market and most certainly serves a purpose. Do you know how to source your own gasoline? No you just go and buy it from the gas station. Many of you have no idea hwo these markets work you just don't want anybody to make moeny from them! Who do you think takes the other side when companies want to hedge the price of oil? People like Hall. And hedging input costs can be a useful thing to do. Incidentally Hall can ply his trade from anywhere in the world. High taxes in the UK lead to an exodus of the talented and mobile in the '70's. Anybody who thinks high taxes are good is a fool. What America should do is to tax income from salaries equally with income from investments. Currently investors pay lower taxes than workers if my understanding is correct. Apparently Warren Buffet in on a lower tax rate than his secretary, because his income is all dividends and interest. That is plainly wrong.
What Hall does may in principle have the potential to be beneficial to markets, as you describe. But that only means that he should be allowed to set up his own business and play with his own money or with the money of those who can afford to lose it.
The problem is that he is gearing up his profits and upside by taking risks, the downside of which is covered ultimately by the taxpayer, because citi is too big to fail as things are at the moment.
The pros and cons of tax rates are certainly more complex than can be addressed in a statement as short as: 'anyone who thinks high taxes are good is a fool'.
For example: for those of us who want to keep the Misters Hall in their place in publicly guaranteed financial entities, it's actually quite inevitable to raise taxes. Because how else are going to afford paying off their gambling debts?
Oh boy, so many faces to that single coin, isn't it?
I guess I stepped on some toes by declaring the federal government does not create anything of value.
In fact, its not the government's job to create anything of value. To the degree it confiscates wealth hinders that very creation.
The real role of government is to facilitate a civil society through rule of law to allow creation of things of value and the wealth that results, and penalize those that color outside the lines of those laws
If you want to encourage a behavior, you reward it. Do we want more wealth for everyone in this country?
Should we discourage more weath with draconian taxes? Should we encourage people to find creative ways to avoid those draconian taxes, even to the point of 'Going Galt"?
So, the only role of government is to help rich people get richer?
Is government only about "wealth"?
Your line about more wealth for "everyone" in this country cracks me up. American workers are the most productive in the world -- look at our GNP and output levels -- but the "wealth" of workers has been declining since the 1980s. Workers are generating wealth.... they're just not getting any of it. And now their bonus is to see their jobs shut down or shipped overseas.
"So, the only role of government is to help rich people get richer?"
What was it about 'facilitate a civil society through rule of law' and 'penalize those that color outside the lines of those laws...' that you didn't get?
No government should stand in the way of anyone at any station in life from getting richer, as long as they're doing it legally.
Did Bill Gates do anything illegal in getting rich?
Yeah.
But mostly he got rich because of who he was, what he knew, and how hard he workd. Something wrong with that? You might ask all the employees he's got if they want to 'stick it to the man'.
In those situations where Microsoft was guilty of trying to monopolize certain aspects of the software industry, has the company been fined and had to abandon those monopolistic endeavors?
Yeah.
To the degree our current government falls short in facilitating a civil society or punishing those that get 'rich' illegally is another subject. The question is: what type of behavior are you trying to encourage, Bill Gates's innovation, or tax avoidance?
What you fail to realize is that
'to facilitate a civil society through rule of law to allow creation of things of value and the wealth that results, and penalize those that color outside the lines of those laws'
is not a task that has the level of complexity where 'encouraging a type of behaviour' is all it takes to make sure the aggregate result is the optimum that can be achieved.
This is true only is an extremely simplistic view of the mode of wealth production. As soon as you include modern finance (or modern information technology and knowledge work or still fancier stuff like web 2.0 or web 3.0 or what have you) the picture changes drastically and irreversibly.
No way back to the lost paradise of neoclassics. Fuggetaboutit.
You're operating with an axe. You need a scalpel here.
To clarify:
modern finance and modern means of communication and information technology produce plenty of situations in which certain assets or goods have value depending on nothing more than the presence/flow of information of some kind. And often the value depends on assumptions about the future in a nonnegligible manner.
A perfect example is how the markets reacted to the changed view of financial analysts on the quality of citi's balance sheet at the beginning of the crisis.
The decision variables of business leaders, bankers, policy makers and private investors are interdependent and dependent on assumptions about the future to an extent that makes the idealized notion of a competitive auction utterly unsuited as a metaphor explaining price formation in markets.
Sorry but you can't just skip this problem by pointing out that I just killed your favorite metaphor.
It's a fact of life that you need to deal with.
Progressive taxation does more than "stick it to the rich" redistribution of wealth. Let's ignore that when the wealthy have incomes rising faster than the middle class, that in itself is redistribution....
High tax rates above X number of million$ accomplishes more than sending extra dollars to the Treasury. It encourages corporations to restructure pay to top management, rather than have so much lost to taxes. Mansions, yachts and other luxuries won't sit unsold; instead they're priced more realistically reflecting the actual values of those items. This, in turn, helps prevent the ballooning of many lower-scale items--discouraging "bubbles" such as was seen in middle-class housing, for example.
This is also good for the rest of the corporation. There are tax advantages for allowing pay to rise for the middle- and lower-tier employees instead. More profits distributed to shareholders encourages greater participation in investment by more people. Most importantly, there's incentive to focus on long-term growth rather than exceeding each successive quarterly earnings report.
What it does NOT do is discourage innovation. The Bill Gates and Steve Jobs of the world will still have plenty of incentive to innovate. Super-successful entrepreneurs have the bulk of their wealth in ownership of the businesses they create. It's those striking it rich simply by manipulating our economy who would be hit the hardest... and we have good reason to discourage the kind of financial tampering we've seen, and continue to see even after the ruin it has caused.
Thank you, Mr. Leopold, for stating the truth so clearly.
The truth is that the obscenely rich do not invest. They "speculate" (gamble) with the lives and assets of everyone in this disgustingly skewed economy.
Under no circumstances would Eisenhower even win a primary in the Republican Party of today. He would be considered a Democrat by present standards. He thought government should serve the people. Today's Republican Party believes government should serve the rich and powerful.
Can someone please coherently articulate how a very high tax rate on the wealthy will solve our terrible income disparity problem?
If, as I fear, you are going to put all your eggs in the basket of the government to redistribute income, please tell us exactly what people are going to do in this welfare state? Does everyone become a government employee?
I suspect the real motive is to stick it to the rich.....but I wait...
Personally I'm fine with the stick it to the rich idea, but that is not what this is about. If the government was better funded a higher standard of living would be provided for the citezens. If your argument is that the gov. can't do anything useful, remember we are the gov., and would be more so if we were competing with wealth and special interests on a level playing field. Of course this would require public campain finance. Do you really want to live in a plutocracy? They all end the same way, bloody revolution where the wealthy and their offspring are slaughtered. Restoring a prohibative tax rate on the obscenely wealthy insures their survival as well as our own.
Part 1 The author clearly explained his position. Imagine our economy is a very large Apple Pie. Presently & in the recent past there have not been high taxes on virtually any sized income. Take Mr. Hall. He is scheduled to receive $100M or more. The highest tax bracket is around 39-41%. Discounting tax shelters & accounting games, Mr. Hall will net approximately $60M for raising the price each of us pay for gasoline. Under a 91% tax & again discounting whatever loopholes are available to Mr. Hall, he nets only $9M out of the $100M. He has lost the incentive to earn so much money. The idea that Mr. Hall earns $100M is preposterous to begin with. This BONUS is equal to approximately 2,000 average $50,000 wages. Mr. Hall does not perform any task which should entitle him to make more in an hour than average people in a year.
Certainly the government does some useful things: it fights war, it provides fire and police services. Doing well in commerce: not so much. Take DARPA or NASA - did a great job creating basic technology, but it was the commercial sector that actually turned those innovations into useful products.
And here is the black cloud in the silver lining - look at how unrestrained compensation for state and local workers is causing horrible crises. The pension burdens they have created is bankrupting many municipalities.
So I just don't buy into the idea that government should compete with private interests.
It has nothing to do with sticking it to the rich. It has to do with making sure that the country can support a strong middle class and take care of its people when they can't take care of themselves. A strong tax base that is supported by the wealthy more than those making little money enables the government to provide services that actually make our economy stronger, such as schools including colleges and universities, which build a smart and competent workforce; infrastructure like airports, roads, bridges, sewer systems, and clean water supplies, all of which contribute to trade, commerce, and health; national parks, which contribute to recreation, environmental protection, and tourism; science and health agencies that contribute to innovation and public health, etc. Also, when disasters strike, such as Katrina, the government is then in a strong position to help with both aid and hiring people to rebuild so the disaster can be mitigated as soon as possible.
When people are SO rich, they are less inclined to start new businesses. After all, if you had $5 billion, why would you bother? You'd have everything you need. You might as well hang out on your yacht and do whatever you feel like (like gamble in the stock market or commodities markets) without the hassles of coming up with a start-up company. It's good to have wealth, but it shouldn't be obscene extremes of wealth, which tend to sit idle and don't help anyone. (cont.)
I completely agree that we need a strong middle class - it is the backbone of our country. And I would gladly pay more taxes IF i could be convinced that the government could take the incremental money and actually do some good.
I do reject your second paragraph. Specifically if taxes are high there is no incentive to go out and actually form a company - to use your words - "why would you bother"...."with the hassles of a startup company"?
It is shocking to me how many people of limited means stick up for the rich as if they have some divine right to their wealth (or perhaps they think they'll be rich someday and don't want anyone touching their money when that happens) when usually it's mainly about being lucky. Bill Gates, for example, was really just lucky in that he figured out something that turned out to be really important for the rest of the world. But it wasn't like he planned it that way. Even David Stockman, who invented the trickle down theory, now says it's completely useless. You can't take a pie with 10 pieces for 10 people, give 9 pieces to 1 person and have the 1 left over divided among the 9 without screwing things up big time. It's not fair and it won't make for happiness, welfare, tranquility, or justice, all the things our founding documents said our country was constituted to provide for. Besides, if there isn't a strong middle class to buy the products the rich people provide, they won't be rich for long nor will their corporations survive. (cont.)
A strong middle class is the key to the success of any society, especially one that claims to be civilized. If you have a few very rich at the top and most of the people struggling at the bottom, like a Ponzi pyramid scheme, that's not going to last nor should it. If we believe all men were created equal, then they should have at least a stab at having a decent life with their basic needs and opportunities provided for. Even the Bible points out that the rich don't get to heaven as easily as the poor, so to have an economy where people can become obscenely rich is not even good for their souls not to mention a prosperous society. Besides, do we really want to reestablish aristocracies and serfs? I don't think so.
I actually agree with everything you say.
My point is that we are better off creating private sector jobs than having the government taking money from the wealthy through confiscatory tax policies and naively believing that will help create a new middle class.
Isn't this just "trickle down" economics, with the government taking the place of the rich?
Part 2
Additionally, going back to the large pie. Take the excesses of Mr. Hall & multiply it by all the other grossly overpaid executives, movie stars, athletes & others who earn way more than enough to be rich. The more a relatively small number of high earners make, the less there remains to be divided among the rest of us. This directly leads to a small class of very ultra rich & a very large class of working poor or just plain poor. It IS why the middle class is being squeezed out.
20 years ago at the end of a movie titled The Dream Team, 4 lunatics head to Yankee stadium at the end of the movie. They have $42 in cash & are going to get 4 seats in the bleachers & a couple of hot dogs. Today, those bleacher seats & hot dogs would probably cost $300. The increase far exceeds inflation & is directly attributable to the salaries paid to ball players, managers, coaches, front office staff & most everyone connected to the cash machine.
Unless the greed ends we can & should expect to see continued pressure on the middle class until it is but a memory & it will be impossible to reverse.
I would like to see some economic analysis that examined taking money from the rich through confiscatory policies and just giving it to the poor. Given the wide disparity in numbers (i.e. very few very rich, millions and millions of poor) I wonder if it would actually have much of an impact? I really doubt it. As I have said, creating meaningful jobs is the way out of this mess.
2/2
When will people start to admit that there is an element of religious Calvinism in this article of faith? There's some kind of residual faith that riches can only be accumulated by those who have integrity.
But the secular thing to do is to DROP this assumption, and to DROP it for good. The only good that can be done with those excess fortunes is to finance public goods.
So, assuming that there are ways of determining what public goods are - and there are plenty - a steep progressive income tax is the method of choice to get there.
Not that there would be anything new in this argument. I'm not a historian of US tax law, but I wouldn't be surprised if that were exactly the reason why it used to be as you describe.
It was.
"So, assuming that there are ways of determining what public goods are - and there are plenty - a steep progressive income tax is the method of choice to get there."
Why do you assume that the government is the best vehicle to accomplish this? Why not the private sector? Why not let those that accumulated the wealth redistribute it?
Big brother looms in every corner....
That's actually pretty simple - but it will require once again that you renounce your Reaganite heritage:
the single best example of a public good is national security. Would you want the wealthy to manage their own military expenses? (which is basically what the Bush-Cheney administration REALLY was)
Another perfect example of a public good is financial stability: Do you feel like the top echelons of the world of finance are about to see the error of their ways? (which is basically what the Rand-disciple Greenspan wanted to make the world believe for several decades)
Still another good example of public goods is economic stability for citizens, as manifested in a decent web of insurance like health, retirement, and unemployment. Now it's perfectly possible that these insurances are best run according to market principles. But the government still has to be there to pass and enforce a law that requires everybody to participate, because that's what makes the story work (it solves about half of the problems of moral hazard and cherry picking and other sources of market failure that would otherwise loom large in these insurance sectors).
And where do you think will clean energy get with that lousy billion of Mr. Soros?
Furthermore, it's also pretty clear that there exist economies of scale by avoiding a multitude of bureaucracies.
But I am certainly the last person on earth to start arguing against private initiatives of welfare enhancing activities.
1/2
First of all, it's a good thing that citi sold off Hall's unit, for all the right reasons, brought into the light of day by - tada - the public.
That he can still go home with his $100m ... well, he would have received it one last time at citi, so he preferred to move on right away, to get out of the spotlight.
In my opinion, yes, the skewed income distribution is itself destabilizing and it can and should be smoothened by taxation. But that issue is of an order of magnitude less urgent than financial market reform, say on pay and international rules for winding down failed behemoths - so that they can fail in the future and lose their bargaining power.
There's a very simple reason why it is destabilizing: because those in the stellar income brackets (defined as: no need to work for themselves and for their offspring) participate with very odd motives in the investment process.
Even if I subscribed to the whole nine yards of rational agents and homo economicus and what have you... all invisible hands of the world active all at once....
none of this mumbo jumbo has ever provided an answer to the question why the preferences and tastes of somebody who (by definition) need not worry about his future or the future of his family can possibly be anything other than suspicious.
Restore the 91% top tax bracket to put a check on executive compensation.
Keep capital gains taxes low to keep from penalizing free enterprise.
Right cause earned income is "bad money" whereas "sit on your ass and rake it in" money is "good money".
Now now, taxing earned income above $3-$5 Million annually at a higher rate is hardly sticking it to the working man. The progressive tax is supposed to offset the exponential relationship between power and wealth.
I'd still say it's essential to support investment and entrepreneurship, which is what capital gains is all about. How to do so without also rewarding reckless speculation and wanton greed is the issue.
Thank you for having the now rare courage and/or insight to print that WHAT WE ARE DOING DOES NOT WORK!!! We have made this nation work before, we know how to do it, we know what was changed that broke it.
But we can't "fix it" by continuing to do what broke it. Incrementalism won't fix calamity. You don't arrive at your destination by walking a little slower IN THE WRONG DIRECTION!!!
'You don't arrive at your destination by walking a little slower IN THE WRONG DIRECTION!!!'
awesome.
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