Thursday, December 06, 2007
War on Greed
by Cliff Schecter
"Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit." So said fictional character Gordon Gekko, the embodiment of a 1980s corporate raider in the movie Wall Street.
Yet, sadly, just as the Gekko character was based on real men and the greed speech on an actual address, today we also see real live Gekkoesque creatures of venality known as equity fund managers. For these self-appointed demi-Gods who lord over Wall Street, no amount of compensation is too much and no amount of compassion too small. Furthermore, it is this very ruinous rapacity that is playing an important role in damaging our economy, assaulting the standard of living of middle class Americans and raising economic disparity to levels unseen since The Gilded Age.
In general, while policy and our cultural ethic dictated that in the 1950s and 1960s, CEOs didn't make exorbitant salaries while the wages and benefits of their workers stagnated, the Right has led an assault on both since the 1970s, which has been a startling "success." According to Paul Krugman, in an article entitled The Great Wealth Transfer:
The reason most Americans think the economy is fair to poor is simple: For most Americans, it really is fair to poor. Wages have failed to keep up with rising prices. Even in 2005, a year in which the economy grew quite fast, the income of most non-elderly families lagged behind inflation. The number of Americans in poverty has risen even in the face of an official economic recovery, as has the number of Americans without health insurance. Most Americans are little, if any, better off than they were last year and definitely worse off than they were in 2000.
But how is this possible? The economic pie is getting bigger -- how can it be true that most Americans are getting smaller slices? The answer, of course, is that a few people are getting much, much bigger slices. Although wages have stagnated since Bush took office, corporate profits have doubled. The gap between the nation's CEOs and average workers is now ten times greater than it was a generation ago. And while Bush's tax cuts shaved only a few hundred dollars off the tax bills of most Americans, they saved the richest one percent more than $44,000 on average. In fact, once all of Bush's tax cuts take effect, it is estimated that those with incomes of more than $200,000 a year -- the richest five percent of the population -- will pocket almost half of the money. Those who make less than $75,000 a year -- eighty percent of America -- will receive barely a quarter of the cuts. In the Bush era, economic inequality is on the rise.
Rising inequality isn't new. The gap between rich and poor started growing before Ronald Reagan took office, and it continued to widen through the Clinton years. But what is happening under Bush is something entirely unprecedented: For the first time in our history, so much growth is being siphoned off to a small, wealthy minority that most Americans are failing to gain ground even during a time of economic growth -- and they know it.
Here is another example of what Krugman is talking about:
Only twice before over the last century has 5 percent of the national income gone to families in the upper one-one-hundredth of a percent of the income distribution — currently, the almost 15,000 families with incomes of $9.5 million or more a year, according to an analysis of tax returns by the economists Emmanuel Saez at the University of California, Berkeley and Thomas Piketty at the Paris School of Economics. Such concentration at the very top occurred in 1915 and 1916, as the Gilded Age was ending, and again briefly in the late 1920s, before the stock market crash. Now it is back, and Mr. Weill [Sandy Weill, of Citigroup] is prominent among the new titans. His net worth exceeds $1 billion, not counting the $500 million he says he has already given away, in the open-handed style of Andrew Carnegie and the other great philanthropists of the earlier age.
One of the largest culprits in this economic sea change are the latter day financial predators known as private equity firms. They borrow money from banks to take over companies--often companies in distress. These leveraged buyouts are great for their bottom line, as the head honchos at these firms receive compensatory stock options, management fees, tax writeoffs, etc., that reach the multi-millions and sometimes even billions. But this gratuitous wealth is often accomplished by slashing jobs and benefits of workers who don't have access to the corporate jet or "company housing." In fact, here is an example of how this market dynamic often plays out, to the chagrin of everyone not sitting in a corporate boardroom or owning large caches of the stock:
Employees knew that Hastings Manufacturing Co., a family-owned auto-parts supplier 30miles south of Grand Rapids, Mich., was in deep water. Facing financial pressure, 375 employees--two-thirds of whom were in the United Auto Workers' (UAW) bargaining unit-conceded $1 million in benefits to save their company, relinquishing newly negotiated pay raises and agreeing to cover part of their own health care costs. But according to UAW Local 138 Chief Steward Kim Townsend, who testified before the House Commercial and Administrative Law subcommittee in September, when Hastings' management declared bankruptcy and was taken over by the private equity firm Anderson Group in December 2005, the slicing didn't stop there. Sick days were cut in half, an existing two-tier wage system with a top rate of $13.49 an hour was maintained and the allotment for bargaining time was limited to two hours a month on company time. For retirees, the consequences were more dire, with pensions and health care coverage all but severed.
To market analysts, Hastings appears more profitable today. But its value stems not from innovation but from breaking obligations to the company's employees and retirees. "We make the same products," Townsend said at the hearing, "in the same building, with the same equipment, for the same customers as we did before the asset sale."
And as if the plethora of these kind of stories are not bad enough, a tax loophole, one that both Democrats and Republicans alike appear loathe to do anything about, allows these fund managers to declare their compensation as capital gains. This means their income is taxed at the 15% capital gains rate instead of the 35% rate appropriate for this kind of obsene economic gain. Yes, ladies and gentlemen, you're paying more in taxes than a hedge fund manager who made a cool billion last year. Big name firms such as Cerberus Capital Management, The Carlysle Group, The Blackstone Group and Kohlberg, Kravis, Roberts (KKR) take advantage of this loophole with stunning success.
How's that for fair?
So what are the economic consequences of this kind of behavior for our nation? Well, it's that we start to resemble the very Developing World dictatorships we often sanctimoniously decry in the press. Here is a nice helping of this hypocrisy for you:
According to Executive Excess 2007, a study released in August by the Institute for Policy Studies and United for a Fair Economy, the 20 highest-paid fund managers made an average of $657.5 million last year--22,255 times the average annual U.S. salary of $29,500.
This is not only an immoral way to treat the middle class and working Americans on whose backs this country's economy has been erected. It also provides an atmosphere ripe for the kind of Abramoffian political corruption to which we have all become accustomed over the past seven years. Furthermore, this increasing subjugation of everone except those at the very top of the income ladder is dangerous for a democracy, as any historian can tell you.
Which reminds me. Gordon Gekko had another piece of sage advice in the movie Wall Street. At one point in the film he turns to his new protege, stock broker Bud Fox, and offers this prescient observation with practiced nonchalance, "now you're not naïve enough to think that we're living in a democracy, are you, Buddy? It's the free market, and you're part of it."
Yes, indeed we are.