The cameras will be rolling on Capitol Hill this week as the world’s third-richest man, Warren Buffett, testifies before the Senate Finance Committee — against proposals that would gut the federal estate tax, America’s only levy on grand accumulations of private wealth.
Meanwhile, in Senate backrooms far from the cameras, today's superstars of accumulation — the kingpins of the private equity and hedge fund industry — are quietly killing a measure that would put a serious crimp on their accumulating.
We have that story in this week’s Too Much. Also below: the first installment of our new weekly book note. Hope you enjoy it.
You buy a DVD of a movie you enjoyed. You pay $19. How much of that goes to the person who wrote the movie? A nickel. All told, the over 12,000 members of the Writers Guild of America last year together took in $56.6 million in “residuals” from the sale of DVDs and videocassettes. A single entertainment industry CEO, Viacom's Tom Freston, last year pocketed more than that — $60 million — in severance pay alone. Writers Guild members walked out on strike last week to fight for a fairer share of the wealth they help create. Notes Sarah Durken, a children’s TV writer: “We are not hospital workers and firefighters, we know that — the world is going to keep turning. But I think everyone understands the issue of corporate greed versus the needs of workers and their families.”
Is the U.S. economy entering a recession? American workers, says a noted management consultant, are already suffering through one — a “psychological recession.” Daily life in today's Corporate America, contends Judy Bardwick, a former clinical professor of psychiatry, has left workers feeling “vulnerable and unprotected,” a condition “closely tied to the loss of job, health, and pension security.” Only 20 percent of employees, Bardwick told Business Week earlier this month, feel positively engaged in their jobs, according to recent Gallup workplace polling. Might workers have a reason to feel disengaged? New research from DolmatConnell & Partners, a management pay consultancy, reports that profits for corporations in the Dow Jones industrial average jumped 284 percent from 1997 through 2006, with CEO pay at those companies up 308 percent. The “general workforce,” notes DolmatConnell, “is not sharing in company financial gains,” creating a distinct “dichotomy of increasing pay at the top vs. stagnant pay below.”
On one level, Ray Carey operates as a totally typical retired CEO. He summers on Nantucket and also owns a getaway in Sun Valley. But 
Carey, in the 20 years since he retired from ADT, the nation's largest security services company, has actually been anything but typical. He’s busy spending his golden years blasting America's top-heavy distribution of wealth and the corporate practices that promote it. In his new book and Web site, Carey is arguing that economic prosperity demands a “broad distribution of wealth,” a reality, he notes, that neither major political party in the United States seems serious about pursuing. Notes Carey, a cogent critic of the “buy-it, strip-it, and flip-it” games of private equity investors: “Those who like to concentrate wealth are good at it. They have a very sophisticated approach that includes great lobbying power.”
That “great lobbying power” is now flexing muscles, big-time, on Capitol Hill. This past Friday, the House of Representatives had the nerve to pass a measure introduced by New York Democrat Charles Rangel that closes tax loopholes that save private equity and hedge fund managers billions of dollars a year. But the measure has zero chance of making its way into law this year — and not just because President George W. Bush is threatening a veto. Several key Senate Democrats are also opposing Rangel’s loophole closing. One possible reason: Investment funds, the Washington Post reported last week, “have been pouring money into Washington,” with over two-thirds of the contributions going to Democrats. Contributions overall totaled $11.8 million through the first nine months of 2007 — or less than a third of the $36 million, the Post estimates, that just one of the loopholes the Rangel bill would close last year saved Stephen Cohen, a hedge fund manager with SAC Capital Advisors . . .
Indian tycoon Mukesh Ambani may not yet be the world’s richest man, but he’s sure spending like one. News reports last week revealed that Ambani has just bestowed upon his wife a $82 million private jet. The specially outfitted Airbus 319, an airliner that normally seats 124 passengers. features a “state-of-the-art business office” and master bedroom, complete with showers and bar. Down on terra firma, Ambani will soon be taking occupancy of a new home he’s having built — for $150 million — outside Mumbai. The home will sport “27 floors, a health club, 600 staff, and parking space for 168 cars.” Ambani has a family of six. His current net worth, thanks to a 45 percent rise this year in India’s stock market: $50 billion.
Quote of the Week
“Inequality is now widening in America, and at a rate not seen in three-quarters of a century. A young male in his 30s today has an income, adjusted for inflation, that is 12 percent less than what his father was making 30 years ago.”
Nobel laureate Joseph Stiglitz, The Economic Consequences of Mr. Bush, Vanity Fair, December 2007
New Wisdom
on Wealth
The Rise and Fall of the Middle Class, KUOW, November 1, 2007. What's more important, health or health care? This Seattle public radio interview with economist Paul Krugman features a fascinating exchange with Dr. Stephen Bezruchka on the impact of inequality on health.
Just 1 percent of Americans currently hold about half the financial wealth of the entire United States.
Meanwhile, notes Washington University sociologist Mark Rank, the nation’s bottom 60 percent hold less than 1 percent of that wealth, and 75 percent of Americans, sometime in their adult lives, can now expect to “experience a year either in poverty or near poverty.”
How much more unequal can the United States become? Plenty
If the United States keeps to its present course, Rank predicted last week at an insight-rich national conference on inequality in North Carolina, the nation could “begin to reflect the bifurcation patterns more typical of third-world countries,” with the privileged opting to “physically separate themselves from the middle and bottom.”
That separation, Rank added, has already begun — via everything from gated communities to growing private school enrollments.
The good news? Inequality amounts to an unnatural disaster. Conscious political decisions have helped make the United States deeply unequal. Conscious political decisions can, by the same token, help undo that inequality.
That theme sounded repeatedly last week on the University of North Carolina campus as Mark Rank and dozens of other academics, activists, and policy makers converged for two days of discussion and debate on “Wealth Inequality and the Eroding Middle Class.”
The conference — hosted by the university law school’s Center on Poverty, Work and Opportunity — didn’t make many headlines. The conference had perhaps a more important role: helping Americans make sense of the headlines we already see.
Headlines, for instance, on the subprime mortgage market collapse. The subprime market, University of Connecticut law professor Patricia McCoy explained last week, didn’t even exist a quarter-century ago.
But in 1980 “waves of federal deregulation” began reshaping the banking industry, stripping away limits on mortgage terms and rates. Lenders soon became able, for the first time, to “segment the mortgage market between stronger and weaker borrowers” — and manipulate the weaker into paying through the nose.
By 2006, American families were carrying adjustable rate mortgages with interest rates that could double at the first reset. And if these families went to refinance those mortgages, they faced prepayment penalties that could hit as high as $9,000 on a $150,000 loan.
All this deregulation would prove spectacularly lucrative for the nation’s biggest lenders — Countrywide Financial CEO Angelo Mozilo, for instance, pocketed $295.7 million over a five-year span — and spectacularly devastating for struggling families.
“By year-end 2008,” notes the University of Connecticut’s McCoy, “over 2 million subprime loans are expected to go into foreclosure.”
The inequality that deregulation has nurtured could, in theory, be offset by tax policies that target extremely high incomes. But current tax policies, University of Oklahoma law professor Jon Forman pointed out last week, are doing precious little to redistribute excess.
We now have, Forman noted, “hardly any taxes on wealth and investment income.” Taking just one small step to change this situation — by eliminating the current tax break for capital gains and dividends — “could raise about $130 billion a year.”
Lawmakers could take all sorts of other steps, conference presenters made clear, to broaden the distribution of America’s wealth. You can check these steps out online, where the Center on Poverty, Work and Opportunity is this week posting conference highlights.
Robert Kuttner, The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity. Alfred A. Knopf.
Back two dozen years ago, in the early 1980s, a few astute economists began noticing that something strange was happening to America’s middle class. It was shrinking.
One of those economists, Robert Kuttner, is still working to help Americans understand why. Kuttner — who keynoted last week’s “Wealth Inequality and the Eroding Middle Class” conference in North Carolina — now has a new book out, maybe his best yet.
The years since 1973, Kuttner writes in his new Squandering of America, “have been trying times economically” for most Americans.
“But they have been terrific times,” he notes, “for the top 10 percent, even better for the top 1 percent, and best of all for the superrich.”
These rich, as Kuttner vividly demonstrates in detailed chapters that take us everywhere from corporate boardrooms to the living room of a Presidential candidate, have done what the rich always do: translate their wealth into political power.
The politics that results only addresses the problems that vex the privileged. A democracy, under this pressure, steadily wilts.
“When politics does not deliver for people,” notes Kuttner, “the people give up on politics. Or they see politics as a realm mainly for cultural warfare, for battles over patriotism, or as something for other people.”
Kuttner, over the course of his career, has helped launch two eminently sober pillars of progressive politics, the Economic Policy Institute think tank and the American Prospect magazine. He writes and speaks in measured terms. He has even served a stint as a Business Week columnist. In short, no wild-eyed radical here.
Just a careful but deeply distressed analyst.
“I believe,” Kuttner writes in The Squandering of America, “that the American economy is in danger not just of increasing economic and financial inequality. It is at risk of a 1929-scale catastrophe.”
“In the mass deprivation of the 1930s,” he adds, “demagogues and dictators abounded. It was a miracle that the Depression delivered Franklin Roosevelt and an energizing of American popular institutions, rather than a home-grown Adolf Hitler.”
Scary stuff. But Kuttner doesn’t want us scared. Or discouraged. He wants us mobilizing for more than “political crumbs.” He wants a more equal America. So will, by the end, this book’s readers.
Stat of the Week
The over 25,000 power suits who currently sit on corporate boards of directors in the United States are typically taking home, for their seat time, $100,031 a year, the Corporate Library reports. The average corporate board boasts 11 directors. Over 80 directors last year pocketed more than $1 million for serving on a single corporate board.
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