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||June 1, 2009|
The Obama White House wants Americans to concentrate, in the months ahead, on health care reform. But if we want to achieve something that actually resembles real reform, we’re going to have to focus on something else as well. We’re going to have to focus on inequality, the grand concentrations of wealth inside the health care industry — and beyond.
That’s starting to happen. In Rhode Island last week, a state senate committee gave the green light to a bill that caps hospital executive pay in the state.
In Washington, meanwhile, a new campaign that's urging lawmakers to get serious about taxing the rich — to finance comprehensive health care reform — is just getting underway. We dive into the details behind this welcome initiative, and much more, in this week's Too Much.
In 2007, the poorest 20 percent of Kentuckians made less than $6,000 and paid 7.8 percent of their meager incomes in state taxes. The richest 1 percent averaged $933,100 — and paid just 5.8 percent of that in tax. So what should Kentucky, a state facing a $1 billion budget shortfall, do now? The Kentucky Council of Churches last week joined a host of other state groups in a call for higher taxes on Kentucky’s rich. But Kentucky’s governor is backing away from an earlier commitment to consider tax reform, and the state senate president is threatening a legislative “Armageddon” should any moves to “raise” taxes start advancing. Notes Sheila Schuster, the director of a leading advocacy network for Kentucky’s disabled: “We have a system that protects the big income folks.”
Designer suits. Designer sunglasses. Designer shoes. What’s next? Designer shorts. And they’ve already arrived. Giorgio Armani is now hawking a pair of men’s cotton drawstring shorts for $775. Prada is offering “hiking shorts” for $465. At Bergdorf Goodman in New York, a news report last month revealed, a pair of gray tropical-weight wool city shorts — at $615 — actually sells for $130 more than a pair of gray tropical-weight wool pants from the same designer. How can the shorts cost more than the pants? The shorts, explains Bergdorf Goodman men’s fashion director Tommy Fazio, have pleats . . .
Do relationships, in a troubled economy, matter more than baubles? Could be. Dating services that cater to deep pockets are now reporting a big-time membership surge. Seventy Thirty, a European “introduction agency for millionaires,” currently counts 10,000 clients, a 28 percent jump in just six months. Seventy Thirty annual dues can run up to $97,000, and potential members need to document at least $1.4 million in net worth. Agency CEO Susie Ambrose isn't worrying about losing clients to hard times. Notes the dating exec: “There will always be wealthy people who need our services.”
The former chief economist at the European Bank for Reconstruction and Development is urging lawmakers to “seize the moment” and re-regulate global banking “before the defenders of the financial status quo are able to collect themselves and launch a massive PR campaign to close the door on radical reform.” Among the radical reforms Willem Buiter proposed last week in a Financial Times paper: shareholder “say on pay” with real teeth. In the United States, many reformers want to give shareholders the right to take “advisory” votes on executive pay. Buiter says shareholder votes, to be effective, need to be binding. His even better idea: If shareholders vote down an executive's pay package, the “default remuneration package” that goes to that executive must not “exceed that of the head of government.”
That same “head of state” pay standard, says Rep. Elijah Cummings, a veteran lawmaker from Maryland, ought to apply to the next CEO at AIG, the insurance giant that U.S. taxpayers rescued last fall from the great global financial abyss. Cummings wants the new AIG chief exec to take home no more than the $400,000 that goes to President Barack Obama. Two top business publications last week added to the growing consensus that excessive executive rewards have contributed mightily to the high-finance meltdown. Pay excess, the British Economist magazine noted, has given financial executives “little reason to dwell on the risks associated with the deals that they were signing.” In the Wall Street Journal, former Federal Reserve Board vice-chair Alan Blinder zeroed in on what he called the meltdown’s defining “source”: “Give smart people go-for-broke incentives and they will go for broke.”
Quote of the Week
“We voted against the poorest of the poor and then we voted to protect the richest of the rich.”
Mitchell Schnurman, What separates Southwest from American on executive pay, Fort Worth Star-Telegram, May 27, 2009. At Southwest Airlines, says CEO Gary Kelly, "we have industry-leading pay, but not for executives.”
Bill Ritter, Rich men, poor politics? WABC, May 27, 2009. A news anchor muses over whether democracy can thrive when one candidate has an unlimited warchest.
Nathan Johnson, The Status Quo Just Won’t Do, Yankton Press & Dakotan, May 27, 2009. Why our lives “really do depend” on our success at creating a more equal nation.
Patricia McLaughlin, Monetizing Everything, St. Louis Post-Dispatch, May 30, 2009. An exploration into the psychology of luxury that concludes “we might all be happier if the federal tax code reverted to Eisenhower's top marginal income tax rate of 91 percent.”
Getting Healthy: A Tax-the-Rich Prescription
Later this month, in both the House and the Senate, lawmakers will likely begin “marking up” legislation that might finally give all Americans what the citizens of every other developed nation in the world already have: access to affordable health insurance.
How will lawmakers foot the bill?
“We'll pay for it,” Senate Finance Committee chairman Max Baucus, a Democrat from Montana, promised last week, “in a balanced way.”
What does that mean? Baucus, a key figure in the congressional health care deliberations, appears willing to “balance” the burden of financing health care on the backs of average Americans who already have health insurance.
Health insurance benefits don’t currently count as taxable income. Baucus two weeks ago included taxing health benefits on a list of “policy options” for financing reform he released with his Republican colleague, Chuck Grassley.
Also included in the Baucus funding option list: an assortment of other proposals that aim directly at the pockets of ordinary people. He's even considering expanding federal payroll taxes to college students in work-study programs.
Curiously missing from this “balanced” approach to bankrolling health care reform: any move to tax the individuals and corporations that have profited so lavishly from our dysfunctional health care status quo.
This week the pushback — against the Baucus “balance” blinkers — begins. A coalition of health care reform-minded labor, religious, and community groups will be meeting this Wednesday in Washington to lay the groundwork for a tax-the-rich offensive.
Congress could take a giant step toward funding health care reform, notes the new Citizens for Tax Justice analysis undergirding the offensive, by “eliminating or reducing several subsidies and preferences provided in the federal tax code to the wealthiest and most powerful among us.”
This Citizens for Tax Justice “revenue options” paper aims to restore the “balance” so egregiously missing in the Senate Finance Committee options list.
Average Americans, the paper points out, have just provided “Wall Street (and thus the richest people in America) the biggest taxpayer-funded bailout in history.” Congress, the analysis continues, now ought to cut a deal. Main Street, after all, “is paying to make Wall Street healthy.” Wall Street, to help finance health care for all, should “return the favor.”
Citizens for Tax Justice is proposing a host of tax-the-rich ideas various lawmakers have advanced over recent years: ending preferential accounting treatment for executive stock options, closing offshore tax loopholes, repealing tax breaks for hedge fund managers. But the group is also advancing some proposals that haven’t received much attention in the past.
The most potentially lucrative of these: Subject the rich to the Medicare tax.
This Medicare tax currently only applies to payroll income. If you work for wages or salary, you pay this Medicare levy. If you get your income from investments, you don’t.
One Citizens for Tax Justice proposal to end this inequity would apply the 1.45 percent Medicare tax that currently applies only to paychecks to all income. Another would tax paycheck income over $250,000 on joint returns to a higher than 1.45 percent tax rate.
Still another option — that Citizens for Tax Justice gives a special spotlight — would combine these two approaches but exempt senior citizen couples from paying any additional Medicare tax on their first $100,000 of income.
This combined proposal would raise $44.7 billion in 2012, a major chunk of the $106.8 billion the total Citizens for Tax Justice package would collect — without taking any appreciable dollars out of the pockets of families in the bottom 90 percent of the U.S. income distribution.
In fact, of the $106.8 billion the Citizens for Tax Justice plan would raise, 91.8 percent would come from households in the top 10 percent, with 78.4 percent from the top 1 percent alone.
The Citizen for Tax Justice proposals, in total, would bring in more than $1 trillion over a decade — and simply the tax code to boot. Will that be enough to get the attention of Senator Baucus? Only if the rest of us insist.
Can a Book on Derivatives Be Delightful?
Les Leopold, The Looting of America: How Wall Street’s Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity. Chelsea Green Publishing, 2009. 220 pp.
Great teachers love metaphors. To help learners grasp the unfamiliar, great teachers — like Les Leopold, the founder of the respected Labor Institute in New York — latch on to realities students already understand. Leopold has been using metaphors, for decades, to help working men and women understand how our economy really works.
But two years ago, amid the gathering Wall Street storms, Leopold suddenly realized that, as a teacher, he really didn’t understand the high-finance “innovations” just then beginning to crash into the headlines, the CDOs and the swaps, the tranches and the quants.
So Leopold set about to educate himself on Wall Street’s innards, and now he’s sharing what he has learned — in an energizing and remarkably entertaining new book, The Looting of America.
The book’s core, perhaps not surprisingly, revolves around a delightfully insightful metaphor. If you really want to comprehend how Wall Street has melted down our economy, Leopold suggests, give a look to fantasy baseball.
In fantasy baseball, groups of baseball fans create their own “teams” and stock them with players they pick from lists of real-life baseball players. If the players you pick for your fantasy team do well on the real-life baseball diamond — if they hit lots of homers, for instance — your fantasy team will do well.
Your fantasy team, in effect, “derives” value from real baseball. You have no actual relationship to this real baseball. But you can still make money, playing fantasy baseball, if the real-life players you pick for your fantasy team put up better numbers than the players your fantasy league competitors pick.
“In effect,” explains Leopold, “you are speculating on the stats derived from real major league players, but those players don’t know they’re playing on your team.”
This same sort of speculation, over recent years, has been driving Wall Street. We have “fantasy finance.” Bankers and traders have created a sticky global web of “derivatives” — collateralized debt obligations, credit default swaps, and more — that bear the same relationship to the “real” economy as fantasy baseball bears to real balls and strikes.
In the “old” days, bankers and traders bought and sold claims to real things. Owning a stock entitled you to a stake in a real enterprise. Holding a mortgage gave you a claim to an actual home. In fantasy finance, bankers and traders don’t have to hold a claim on anything real. They buy and sell financial products that only “derive” their value from real economic activity.
Bankers, for instance, can sell you a “derivative” that will rise in value if the price of oil goes up. They don’t have to own any oil to sell you this derivative. They can create derivatives based on anything.
But the fantasy baseball metaphor, Leopold notes, only takes us so far. Fantasy baseball players don’t claim they’re “improving” baseball. And they can’t cause any great damage either. If baseball players go out on strike, fantasy baseball leagues simply grind to a halt. No big deal.
Fantasy finance, by contrast, involves trillions of dollars. And the players of fantasy finance have spent decades insisting that these trillions help our economy by “spreading economic risk.” In fact, their derivatives ended up concentrating risk — and wrecking the economy.
At the root of all this fantasy: the concentration of America’s income and wealth that began in the 1970s. With so much money in so few pockets, our real economy couldn’t offer enough lucrative opportunities for the investor class. Wealthy investors would find those opportunities in fantasy finance.
The Looting of America traces how all this unfolded with clarity, wit, and patience. And hope. The bank bailouts and partial federal takeovers we’ve so far seen, Leopold points out, do help clarify the “fateful choices” we now face.
“We can hold onto and supervise the semi-socialized financial sector,” he notes, “or we can return the entire banking system to private investors. We can enact policies that allow workers’ real wages to rise. Or we can keep the wealth flowing upward to the super rich. We can put limits on financial engineering, or we can wait and see what the next orgy of fantasy finance does to our economy.”
Crucial choices. Thanks to Les Leopold, many more of us will understand them.
Stat of the Week
The CEOs of the nation’s top 50 financial institutions averaged just under $10 million in compensation last year, Bloomberg reported last week. The highest-paid exec on the Bloomberg list, Lloyd Blankfein of Goldman Sachs, collected $42.95 million last year in salary and stock awards. Wall Street pay decisions, Blankfein told an institutional investor group meeting in April, now appear “greedy in hindsight.”
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: firstname.lastname@example.org.
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