Fear and Looting in America: How Wealth Begets Wealth on the Hill

Friday's New York Times provides not one, but two blatant examples of what happens when we allow money to concentrate in the hands of the few.

The first concerns the successful lobbying efforts by financial institutions to kill new legislation that would permit bankruptcy judges to change the terms of home mortgages. The financial industry, including banks that received billions in TARP funds and loan guarantees, spent heavily to lobby Congress. According to NYT reporter Stephen Labaton, they convinced several key Democrats that any attempt to alter the amount of the mortgage or its rate, "would push up interest rates and slow the housing market's recovery, even though academic studies have countered such claims." As a result, judges can reduce all other creditor claims during personal bankruptcies, except the banks' mortgages. And we paid for that lobbying! (Read it here.)

NYT columnist Floyd Norris gives us the second appalling example of the raw power of money. He discusses a newly released study, "Watch What I Do, Not What I say" by the National Bureau of Economic Research that looks at the "Homeland Investment Act of 2004" pushed through Congress by large corporations. The act gave global U.S-based companies an enormous tax break on overseas profits if they brought the money home to invest in research and development, new plant and equipment and other job-producing efforts. As a result of the bill, corporations did indeed bring back $299 billion in profits, on which they paid a little more than 5% in taxes -- quite a deal when compared to their normal 35 percent rate. (see here)

So where did all that money go? According to the authors (including a former Bush Administration official) about 92 percent ended up in the pockets of shareholders either through dividends or increased share buy-backs. In other words, taxpayer money that was supposed to support tangible investments in the real economy went into the pockets of the investor class.

What did they do with it? Professors Dhammika Dharamapala, C Fritz Foley and Kristin J. Forbes believe that the tax holiday may still have helped our economy even if it didn't go directly to real investments: "Presumably these shareholders either reinvested these funds or used them for consumption. Either of these activities could have an effect on U.S. growth, investment and employment."

But maybe the economic effect was negative! We have every reason to suspect that this shareholder gift helped to fuel the derivatives casino on Wall Street. At that very time, billions of investment dollars were pouring into CDOs, CDO squared and a host of financially engineered products designed to soak up investor surplus capital. It's likely that this tax break helped to feed the orgy of fantasy finance investments that led directly to the crash of the economy. For sure it didn't go where it was supposed to go.

Little wonder. From the mid-1970s on, we permitted a transfer of enormous wealth into the hands of the elite. Our research for The Looting of America found that in 1973 the top one percent of income earners took in 8 percent of the nation's total income. By 2006, the top one percent got nearly 23 percent of the pie, the highest proportion since 1929.

This shift in wealth in turn created an unholy cycle of more lobbying for more benefits for the super-rich and large corporations, who in turn paid for even more lobbying - a cycle that still is in full motion.

We will never get out of the economic crisis until we put a stop to this kind of looting. And that means having the courage to enact steeply progressive income taxes on multi-millionaires and pass a higher minimum wage. It's not a matter of ideology. It's what we need to do in order to get out of this fantasy finance crash and to prevent the next one. We've got to keep money flowing into the real economy and the best way to do so is to put more into the hands of working people.

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)

Comments

[HenryDavid]

As the final Bush year was winding down, I thought, "At least he didn't get our social security funds for the stock market as he tried to do." No, not directly anyway. Wall Street still got our social security funds another way--as a $700 billion bailout.
Our legislators are so blatantly corrupt, and they rub it in our faces. Dodd did a terrible job with his committee on financial oversight. He admitted as much. What he didn't admit was that he was bought and paid for, to include the sweetheart deals he got on mortgages from the banks.
I don't know what we can do to stop this reign of horror. Wall Street and crew will bleed us until the dollar is not worth a dime. Between PAC funds and lobbyists, the complicit congressmen are a disgrace.
Would term limits help? I don't think so. Look how much damage can be done in one vote.
All I can think of is ban PAC funds and shame the legislators who are complicit in the bailout travesty.

[mismicma]

Ever since Bear Stern's collapse and subsequent investigations I have felt victimized not only by my corporations and banks but my own government as well. But now I have found a solution---a utilitarian existence. I will only spend money on things that are absolutely necessary. I will make every effort to cut down on all expenses. I will not shop the big box store EVER and will avoid the ethically disabled merchants (the list has been greatly expanded lately) at all costs---even if that means living without the needed item. I have already dismissed the cable company, the garbage collector and two credit cards. My husband's car is going to be sold off and the insurance (rip off!) along with it. The next step will be paying off my car and after that my mortgage. My father and I have planted an extensive garden that will yield enough vegetables, beans and corn for a full year for two families--and yes we know how to grow vegetables. I know most of the things I will be doing would yield less than a formal job, but the self sufficiency is priceless. No one is going to get an unfair "cut" of my carrot. No tax dollar will be collected from my beets---to be given to a greedy banker or contractor. My ability to benefit from this work cannot be outsourced and my pay will keep pace with infation :) Delicious.

[lightningbolt]

Both the democrats and the republicans are extremely corrupt, which makes fixing the system very difficult. If Obama doesn't fix the system, then we will have three options to fix it ourselves:
1. Elect a third party to power (which will never happen)
2. Massive non-violent protests (which don't accomplish anything)
3. Massive violent protests (which will never happen)

Conclusion: Americans will continue getting screwed forever because most people don't give a rats ass.

[jmpurser]

Thank you for an excellent obituary for the United States.

[rich misty]

16 years ago, when Bill Clinton came into office, he announced his plan to raise corporate taxes. The Republicans swore that it would hurt business and job creation.

-- By the end of Clinton's term, we saw 22 million jobs created, Dow Jones tripled.

8 years ago, George W Bush cut business taxes, declaring that it would lead to enormous economic growth.

-- By the end of Bush's term, we saw 2 million jobs created, Dow Jones DOWN 2500 points from when he came into office.

[schatsie]

Fabulous ARTICLE!!!!

[PrahaPartizan]

I was reading the book "How the Irish Saved Civilization" by Thomas Cahill recently. He included a description of what happened in the Roman Empire as it collapsed. Much of it had to do with the Roman elites managing to avoid paying for the government they were using and pushing the tax burden off onto the middle class, which they made hereditary so they couldn't avoid paying taxes. In another book talking about the French Revolution, I was reading that the French "ancien regime" actually had a similar situation in which the clergy and nobility paid no taxes and forced the burden of paying for the state onto the average citizen. In both cases, they added insult to injury by arranging a crony system so that friends of the rulers got payed to fill government positions and to receive government contracts. It all sounded so similar to what we've seen for the last forty years in the US. It also appears headed directly for the same abyss. Human nature really resists learning.

[schatsie]

that is exactly what Mark Twain was writing about in A Connecticut Yankee in King Arthurs Court....

[stuporman]

the only fair tax follows this one rule: those that suck the most out of the system must be required to put the most back in.

[kamachanda]

Les Leopold is absolutely right. The moneyed interest in this country have been cooking the books since Reagan and the results are only now beginning to show. The American People are becoming indentured servants to a huge national debt that is being created by under taxation of the wealthy and the direct transfer of money from the public coffers to investment bankers and financial interest. I had some hope for the Obama administration though I didn't like all this tarp money going unregulated into the banking system before any new oversight and regulation of the financial industries. When they managed to use a portion of that money to kill foreclosure reform, I knew my hope in the Obama administration was misplaced and we had once again gotten the lesser of two evils. I am comforted by the fact that when we got the Greater of two evils (twice) with George W Bush, the vile depths of the activities our government initiated and participated in was beyond my comprehension. I can only hope that, like rain wearing down a mountain, we can exert enough pressure on our present government to begin repairing the damage done to our country by the right wing.

[metalpipe]

I believe we can and will be better informed this next election cycle, and that we should pay close attention to the legislators who voted down the bill that would have given judges the right to re-set mortgage principals. Removing them would go a long way to routing out the bad weeds.

[lostpl8]

Tax the rich, Higher minimum wage? Are you kidding the lobbiest would never allow that, poor people don't help lobbiest bottom line.

[Boyaca]

The whole system, and country, are so corrupt that I personally think it needs the French Solution. You know, the Guillotine. Then start over. It has gotten so bad that it can never be worked out through negotiation or with limited laws. The system is rotten from the top down. Is it any wonder that most of the world views democracy with skeptisism and loathing. The countries in the West are an average citisen's nightmare. The only freedom for the average Joe is the freedom to starve and freeze to death in the dark.

[metalpipe]

Like Obama, I feel we should stop looking for a Utopia, stop looking for quick fixes, and start admitting to ourselves this is a big mess that will take years of concerted effort to make right. We should keep our kids heavily involved in the decision making process by sharing the facts and having conversations about politics and economics. Only by bringing the next generation into the fold of change can we succeed in healing the disease in our countries government and policies.