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May 11, 2009 |
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Our high priests of high finance — the bankers and traders of Wall Street — take great pride in the complexity of their endeavors. Collateralized debt obligations. Contingent conversion triggers. Credit default swaps. Incantations like these leave most of us bewildered. Not them. They understand. And they deserve, the argument goes, all the big bucks this understanding may bring. At insurance giant AIG, news reports informed us last Tuesday, this understanding generated $454 million in “performance” bonuses last year — on top of the $165 million in post-bailout bonuses we already knew about. AIG set aside another $1 billion for “retention payments.” The company, we’re assured, had no choice. AIG simply could not afford to lose people who understand the “complexity” of high finance. Last week, a noted World Bank economist suggested we're concentrating far too much on the “complexity” of our financial system. To unmelt our global economy, he's urging us to concentrate on something simple enough for all of us to understand. Inequality. In this week's Too Much, we have his story. |
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Run into any multi-millionaires lately on Facebook? Probably not. These days, the deep pockets with Web savvy are all congregating over at Affluence.org, a social networking site exclusively for millionaires, billionaires, and the “socially elite.” Some 30,000 of the awesomely affluent have already signed up for a chance to chit-chat and share the latest on “culture in Dubai and shopping in Paris.” You can join them — if you have at least $3 million in net worth or $300,000 in annual income. But don’t bother trying to sneak in. The site actually “scrutinizes” applicants’ tax and property records . . .
Over in the Hamptons, the summer watering hole for the rich and famous on the east end of New York’s Long Island, nobody’s making any killings on real estate. Housing sales, in 2009's first quarter, dropped 49.8 percent. But some local business people are still predicting a sweet summer. Andrew Zarrow, for instance, runs a seaplane service that takes vacationers to the Hamptons from a marina near Wall Street. He’s expecting full flights, at $495 for a one-way ticket, once the holiday season opens on Memorial Day. What makes Zarrow so confident? Wall Streeters looking to economize, he explained last month to the New York Observer, are “downgrading” to his seaplanes from the far more expensive Manhattan-to-Hamptons helicopters . . . Five years ago, cable TV powerhouse Viacom — the outfit behind MTV and Nickelodeon — lost $17.5 billion and, to fete that achievement, parceled out over $50 Wall Street’s biggest banks have, ever since the meltdown, fewer power suits to pay. But they’re setting aside bonus compensation for these fewer suits, the New York Times reported last month, at pre-meltdown levels, one sure sign that the modest federal executive pay limits now in place for the bailout have precious few teeth. This Wall Street return to compensation business-as-usual has Los Angeles Times columnist Michael Hiltzik yearning for a bailout czar like Jesse Jones, the banker who ran Franklin Roosevelt’s New Deal bailout. Jones set a maximum wage — $60,000 — for the big-time railroad executives who were lining up for federal loans. The execs complained mightily. They had, after all, been averaging around $150,000, the equivalent of about $2.5 million today. But the execs eventually all decided to swallow the $60,000 cap — and smile. One reason: FDR actually wanted the cap set even lower, at $25,000. |
Quote of the Week “As recently as 1980, the richest 1 percent of Americans took home about 9 percent of total national income. But since then, income has concentrated in fewer and fewer hands. By 2007, the richest 1 percent took home 22 percent of total national income. This trend cannot be sustained, either morally, economically, or politically.”
New Wisdom Thomas Frank, Let's Move Their Cheese, Wall Street Journal, May 6, 2009. How pay for performance systems have “incentivized” execs “to game the system, to smooth the numbers, to take insane risks with other people's money.” Reuven Avi-Yonah, The Obama International Tax Plan: A Major Step Forward, May 7, 2009. A tax expert at the University of Michigan Law School assesses the strengths — and weaknesses — of the new White House crackdown on the games wealthy tax evaders play. Citizens for Tax Justice, Myths and Facts about Offshore Tax Abuses, May 8, 2009. A response to the corporate attack on the modest Obama administration offensive against wealthy tax cheats.
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The Great Tax Irony of Our Times Jack Kemp, the 1996 Republican vice-presidential nominee, died a week ago Saturday from cancer. Two days later, the Obama White House announced a crackdown on overseas tax evasion havens. These two events had absolutely nothing to do with each other. Their juxtaposition could hardly have been more random. Or ironic. We ought to pause a moment over that irony. We can learn something from it. To do that learning, to appreciate last week’s irony, we need to take a walk down memory lane, back to 1977, the year a young congressman from Buffalo, former football star Jack Kemp, burst onto the national political scene with a daring proposal to slash income tax rates — across the board — by 30 percent. At the time, wealthy Americans faced a 70 percent tax rate on most of their income over $200,300, the equivalent of about $700,000 today. A tax rate this high, the Kemp camp argued, drove the wealthy to chase after tax loopholes. If that rate were significantly lower, the contention went, the rich would no longer have an incentive “to hide income.” Massive tax evasion would disappear. Kemp wanted the nation’s top tax rate slashed from 70 to 50 percent. He would soon get what he wanted. In 1980, Ronald Reagan campaigned as an avid supporter of Kemp’s tax cut legislation. In 1981, the newly elected President Reagan would bluster the basic Kemp tax cut plan into law. More tax cuts, over the next two decades, would follow. In 2001, a newly elected George W. Bush would take the top tax rate down at 35 percent, half the 70 percent top rate that Jack Kemp went after in 1977. And how did the wealthy react to this incredible good fortune? Did they stop hiding income from the IRS and Uncle Sam? Not exactly. In fact, not for a minute. In 2001, according to an in-depth IRS study released in 2006, American taxpayers paid $345 billion less in taxes than they legally owed. Just which Americans did all this tax evading? Last year, IRS economist Andrew Johns and the University of Michigan’s Joel Slemrod broke the IRS “tax gap” data down by income level and found that Americans making between $500,000 and $1 million a year were underreporting their incomes at triple the “misreport” rate of taxpayers making between $30,000 and $50,000. This past January, after Barack Obama took office, the IRS director of inspections upped the tax evasion ante. The taxes Americans were evading via cross-border transactions, he suggested, could be adding as much as another $123 billion to the original IRS $345 billion “tax gap” total. The tax haven crackdown President Obama announced last week directly targets these cross-border transactions. “Currently,” the White House notes, “wealthy Americans can evade paying taxes by hiding their money in offshore accounts with little fear that either the financial institution or the country that houses their money will report them to the IRS.” Among the steps the White House is proposing to end this evasion wave: the hiring of 800 new IRS agents “devoted to international enforcement.” The overall “tax cheat” package that the White House is proposing, points out the Tax Justice Network, a global group of tax and finance experts, actually doesn’t go as far as the Stop Tax Haven Abuse Act that Barack Obama, as a senator, co-sponsored in 2007. But that hasn’t stopped business groups from attacking the administration crackdown in exceedingly strident terms. The National Association of Manufacturers has dubbed the White House proposals “disastrous,” and the Business Roundtable, a group that represents top corporate CEOs, has charged that Obama’s moves would “ripple growth, reduce the competitiveness of U.S. companies overseas, and destroy jobs.” Jack Kemp couldn’t have said it any more feverishly. Three decades ago, at the start of his drive to lower tax rates on America’s richest, he argued that the tax code then in effect “punishes savings, investment, work, and production.” Kemp has now left us. His spirit clearly lives on. |
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Did Derivatives Drive the Meltdown? Branko Milanovic, The Cause of the Global Crisis, YaleGlobal Online, To understand what has gone so horribly wrong with our economy, various well-intentioned commentators have spent recent months assuring us, we need to train our brains on the complexities of contemporary high finance — and how Wall Street has so recklessly manipulated them.
Enter Branko Milanovic. A lead economist at the World Bank, an expert on financial globalization, Milanovic can do complexity as well as anybody. But he chooses not to. In a just-published manifesto, he’s urging the rest of us to junk the concentration on complexity, too — and focus instead on one simple phenomenon we can all understand. That phenomenon: inequality. We won’t find the real cause of our current economic meltdown, Milanovic argues, in “the arcane of how ‘derivatives’ work.” That real cause “lies in huge inequalities in income distribution.” Yes, Milanovic readily acknowledges in the latest edition of the Yale Center for the Study of Globalization flagship economic review, financial manipulations have certainly done our body politic grievous harm. But explanations of our current meltdown that focus on “feckless bankers, financial deregulation, crony capitalism, and the like” overlook our far more fundamental problem, our deeply unequal distribution of income “across individuals and social classes.” Milanovic has spent a good chunk of his career tracking this extreme inequality. In the United States, he notes, our most affluent 1 percent have doubled their share of the national income since 1976 and, in the process, “eerily replicated the situation that existed just prior to the crash of 1929.” What makes rising inequality so toxic to our economic health? In any society growing wildly unequal, Milanovic explains, the rich can only physically consume just so much of their new-found fortune. Life simply limits how many “Dom Pérignons and Armani suits one can drink or wear.” That reality leaves the rich sitting on “a huge pool of available financial capital,” hankering for profitable investment opportunities. They need help putting their excess cash to work. They ask their friends in high finance for it. But these friends — investment bankers, hedge fund managers, and assorted other financial wizards — quickly become overwhelmed. In a top-heavy society, with wealth packed in precious few pockets, they can’t find enough “safe and profitable investment opportunities” to handle the enormous quantities of cash at their disposal. What do these financial wizards do? They’re certainly not going to walk away from all those astounding investment fees they can charge their wealthy clients. So they take their only other alternative. They steer the wealth of the wealthy into unsafe investments. They invent ever more exotic securities. They endlessly repackage high-interest loans to borrowers at high risk of default. In the end, observes Milanovic, Wall Street’s kings of complexity would create a financial system that boiled down to “basically throwing money at anyone who would take it.” But this recklessness could only get traction in a society where large numbers of people felt they had to borrow, at any terms lenders demand. In the United States, over recent years, large numbers of Americans felt just this way. Rising inequality left them little choice. Real median wages in the United States, Milanovic details, have been “stagnant” for the past 25 years, “despite an almost doubling of GDP per capita.” The gains from America’s economic growth have gone overwhelmingly to the top. Between 1976 and 2006, he notes, the nation’s richest 5 percent pocketed nearly “one-half of all real income gains.” To chase the American Dream, amid this inequality, average Americans had to borrow — and keep borrowing. Household debt in the United States quickly soared from “48 percent of GDP in the early 1980s to 100 percent of GDP before the crisis.” That crisis came — the entire financial system collapsed — when great numbers of middle class Americans began defaulting on their debts, as they inevitably would in a society where income was furiously concentrating not at the middle of the economic ladder but at the top. A simple story to understand. And the key to recovery? That’s equally simple. Rising inequality created the crisis. More equality, Branko Milanovic's work suggests, will end it. |
Stat of the Week The gap between the average pay for America's top 100 CEOs and the pay of the average American worker stood at 45 to 1 in 1970, notes Labor Institute director Les Leopold, the author of the soon-to-be-published new book, The Looting of America. By 2006, the gap between top 100 CEO and average U.S worker pay had soared to 1,723 to 1.
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Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org. |
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After a few short weeks in the spotlight, swine flu is exiting the global center stage, much too quickly for anybody to figure out a way to get rich fighting it. That leaves Peter Norton still the world’s wealthiest virus fighter. Norton specializes in viruses of the computer persuasion, and now he’s trying to make a killing in real estate. Software mogul Norton and the mogul who lives right below him in Manhattan’s Trump Tower, the pharmaceutical industry’s Richard Ullman, have joined 
million each to the firm’s top three execs. Amid the resulting outrage, Viacom officialdom earnestly pledged, from then on, to pay only for “performance.” How has that worked out? Quite nicely for Viacom CEO Philippe Dauman. In 2008, according to just-released filings, Dauman 
The end result of all this concentration on complexity? Most Americans remain utterly bewildered about exactly what caused our current crisis and what we need to do to end it.