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)