The Price of Civilization

by Jeffrey D. Sachs

  In the middle of the health care debate I asked a leading congress-woman about the miserable state of the health care legislation. She literally put her head in her hands and declared “The lobbies, the lobbies.” It felt to me like the final scene of Heart of Darkness, in which Kurtz mutters, “The horror! The horror!”

  The health care debate, indeed, exposed once again that U.S. politics are narrowly channeled in a very deep groove of special interests.15 Lost throughout the fifteen months of debate were the public’s trust and a coherent reform effort. By failing to put forward a coherent plan during the entire process, Obama left the public on the sidelines. He stumped energetically for “health care reform,” but few people (including myself) were able to keep track from week to week of what was actually in the reform legislation of the moment. Nor was the public honestly apprised of the merits and likelihood of key changes, such as a public option, systemic change for cost controls, or the various potential means of financing expanded coverage. The administration and Congress turned to their favorite experts along the way, but America lost the chance to hear systematically from the expert community about the merits and demerits of various alternative proposals. In short, we were told to avert our eyes to the “sausage making” on Capitol Hill but then forced to eat the sausage, like it or not.

  Case 3: The Energy Policy Stalemate

  America desperately needs a coherent energy strategy, since the country is being hemmed in on three sides: the global scarcity of oil; the intensifying competition over supplies in unstable regions of the world; and the environmental risks of a continued rapid rise in fossil fuel use. The president came into office promising to break the logjam on climate change and to set a new course for U.S. energy security. Yet after more than two years in office, his progress on creating a new overall framework has been minimal. Bits and pieces of policies are coming into place—such as R&D for renewable energy, new funding for nuclear power, and modest funds for intercity fast rail—but there is no overarching strategy or clarity. When I asked Larry Summers to explain the administration’s plan to reduce carbon emissions by 17 percent as of 2020, as Obama announced in late 2009, he responded, “We don’t plan in America.” That may be true, but we also don’t achieve our energy and environmental objectives either.

  Why don’t we plan an energy policy when it is so manifestly evident that we need one? Here, too, corporate power is the key reason. I witnessed this during another meeting at the White House, this time with the former energy “czar” Carol Browner. I thought that perhaps she would be interested in promulgating an energy plan. That did seem, after all, to be her assignment. Our conversation made it clear that she had a quite different role, almost purely dedicated to managing the corporatocracy. Rather than discuss energy policy with me, Browner went through a long list of senators, noting the special demands that each senator was making in return for a promised vote for anti–climate change legislation. One senator wanted special provisions for the auto industry; the next wanted more favorable benefits for states involved in offshore drilling; the third wanted special provisions for nuclear power; and on went the interminable list. Rather than a national policy, Browner was designing a grab bag of special perks in order to get a shell of a policy. In the end, the entire process failed; Big Oil and Big Coal torpedoed the legislation.

  Case 4: The Financial Lobby Bailouts and Bonuses

  The financial saga has been equally illuminating. The 2008 financial crash resulted from a confluence of forces: deregulation, monetary mismanagement, and reckless irresponsibility by the top management on Wall Street, who lusted after profits with sheer disregard for their shareholders, workers, and clients. Behind it all, of course, were the astounding wealth and power of Wall Street, which epitomizes the translation of big bucks into power, power to achieve a massive bailout when the going got tough in 2008.

  Not only was Wall Street bailed out, but the corporate leadership was allowed to continue to rake in megabonuses even as the firms were on Washington’s life support systems. During 2009, I exchanged views on several occasions with Larry Summers about the need to rein in the egregious bonuses, which had no merit in market forces or morality. He staunchly defended the administration’s “hands-off” position—hands off in the peculiar sense of giving the bailouts but then leaving the CEOs alone to pocket them. Absurdly, after the Treasury pumped tens of billions of dollars of bailout funds into AIG, Summers claimed that he couldn’t find a way to stop the company from paying megabonuses to the very traders who had caused the disaster: “We are a country of law. There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system.”

  Suffice it to say that the limits were never found. The extraordinary political power of Wall Street arises from many quarters. The top decision makers such as Rubin, Paulson, Summers, Rahm Emanuel, Orszag, Jack Lew (Orszag’s successor at the Office of Management and Budget and a former Citigroup executive), Daley, and countless others have one foot in Wall Street and one in Washington. Wall Street was, of course, one of Obama’s main campaign financiers. Obama’s campaign was properly renowned for mobilizing Internet-based donations from small donors, but it is still the case that 65 percent of his donations came from individuals who gave $200 or more and 42 percent came from individuals who gave $1,000 or more. Obama depended on the heavy-hitter campaign contributors from Wall Street and elsewhere just like other more traditional candidates.16

  The links of Wall Street and Washington go far beyond the White House, the Fed, and the Treasury. The industry has established a remarkable army of lobbyists carefully detailed by the Center for Responsive Politics.17 During 2009–2010, the financial services industry (including banks, investment firms, insurance companies, and real estate companies) “commissioned 1,447 former federal employees to lobby Congress and federal agencies,” including an astounding “73 former members of Congress, accounting for 47 percent of the 156 former members who have reported lobbying in the time period.” These seventy-three former members included “17 former congressional members [who] served on the Senate or House banking committees.” Moreover, “at least 42 financial services lobbyists formerly served in some capacity in the Treasury Department; and at least seven served in the Office of the Comptroller of the Currency, including two former comptrollers.”18

  Case 5: The Proliferation of Tax Havens

  The globalization of capital markets has also made it far easier for companies to hide their profits in offshore tax havens. This is part of the “race to the bottom.” The use of tax havens has soared in the past thirty years, and what was once a dodge for wealthy individuals avoiding the IRS has become a systematic vehicle for hiding corporate income from taxation. Yet what is even more notable is that the IRS is often a willing handmaiden to these practices. A recent report on Google pulled the curtain back just a bit on these practices.19 Google is an American-based corporation with earnings all over the world. Its main capital is its intellectual property (IP), specifically its powerful search engine. Under the U.S. tax code, the allocation of Google’s earnings around the world should reflect the reality that its core IP is U.S.-based. Specifically, when a Google foreign subsidiary sells search-engine services to a foreign client, the foreign subsidiary should transfer the bulk of those earnings back to the U.S. headquarters in the form of internal royalty payment for the use of the intellectual property. For allocating incomes among Google’s international operations for U.S. tax purposes, the internal transfers should take place at a royalty rate that mimics an arm’s-length commercial transaction between unrelated firms.

  Google instead found friends in the IRS. In 2006, Google and the IRS reached a secret agreement whereby a wholly owned Google subsidiary could keep the revenues and profits abroad. Specifically, Google was allowed to license its IP at a noncommercial rate to a foreign subsidiary called Google Ireland Holdings. Google’s foreign ope
rations pay IP royalties to Google Ireland Holdings, which thereby books almost all of Google’s profits earned in Europe, the Middle East, and Africa. Specifically, Google’s operations for those three regions are headquartered in Dublin in another entity called Google Ireland Ltd. Google Ireland Ltd. takes in around 90 percent of Google’s $12.5 billion in revenues from those markets and then channels the profits to Google Ireland Holdings as royalty payments. The last step of this wonderful chain is that Google Ireland Holdings, despite its name, is based in Bermuda, where it avoids taxation on the billions of dollars of royalties paid to it.

  There are many other tax shelters for the super-rich, including the so-called carried interest provisions for hedge fund managers. A typical hedge fund manager receives as compensation a fraction of the assets under management and of the profits earned on the portfolio, for example the standard 2 and 20 rule, meaning 2 percent of assets and 20 percent of profits. Under an obscure IRS rule, the profit earnings are not treated as ordinary income for the manager, taxable at 35 percent, but rather as capital gains, taxable at 15 percent.20 Incredibly, this provision has survived the recent public outcry over Wall Street behavior, a remarkably vivid testament to the power of hedge fund campaign financing to smooth over any inconveniences of noxious tax rules.

  We in the public are of course innocents in this remarkable process. How many people aside from the tax lawyers and their clients know of the “Double Irish” tax shelter or many other gimmicks like it? And which advocates of “free markets,” as they hail the technological wonders of Google (an admiration I share), realize that Sergey Brin’s ingenious work in creating Google’s search engine was supported by the National Science Foundation?

  Google’s tax dodge exemplifies a vast system of corporate tax havens and tax shelters that operate with the connivance and support of the Internal Revenue Service. A recent report of the Government Accountability Office (GAO) on the subject makes frightening reading.21 Of the 100 largest public traded U.S. corporations, 83 reported operating in tax havens, and often in several simultaneously. A Congressional Research Service study suggested that tens of billions of dollars of revenues are lost per year as a result of shifting corporate profits out of the United States through transfer pricing and similar means.22

  Whose Opinion Really Counts?

  One of the most interesting insights about money in politics has come from studies examining how congressional votes are linked to the attitudes of constituents. Larry Bartels has studied how the votes of senators align with the survey attitudes of their constituents when divided into high-income, middle-income, and low-income groups. The results are clear, if not totally surprising:

  For Republican senators there is no evidence of responsiveness to middle-income constituents, much less low-income constituents. The views of high-income constituents, however, seem to have received a great deal of weight from Republican senators [on the issues studied]—almost three times as much … as for Democrats. Meanwhile, Democrats seem to have responded at least as strongly to the views of middle-class constituents as to the views of high-income constituents—though, once again, there is no evidence of any responsiveness to the views of low-income constituents.23

  The point is that even when translating the wishes of constituents into congressional votes, money counts and the poor are effectively dispossessed. This is more than a congressman aiming for the middle or the median voter. It is, instead, catering disproportionately to those who will finance their campaigns. At least the Democrats evidence some responsiveness to the middle of the income distribution.

  We can see the results of this representation bias in case after case: the “temporary” tax cuts for the rich are extended; the unpopular war in Afghanistan continues; the public option for health care is dropped; alternative energy technologies are left undeveloped; the largest banks get megabailouts and use them to continue to pay outrageous subsidies. In all of these cases, public opinion has run strongly against the decisions made by the bipartisan congressional majority in Washington.

  The Role of Corporate Spin

  The power of the corporatocracy is supported not only by campaign financing and lobbying, but also by relentless public relations spin. A number of studies in recent years have deconstructed the ways in which key sectors—military contractors, oil and coal, health care insurers, and Wall Street–use public relations firms and disinformation campaigns to disguise the damage they are doing to society. Major corporate media outlets, led by Rupert Murdoch’s vast News Corporation empire of newspapers and television networks, aid and abet the process. Murdoch himself is a personal investor in the oil sector (together with former Vice President Dick Cheney) as well as other industries, so the PR interest is often direct personal gain as well as corporate gain.24

  In many recent cases where industries are causing environmental and public health damage, such as acid rain from coal-fired power plants, ozone depletion from CFCs, and climate change from fossil fuel use, industry lobbyists have deployed slick, well-funded public relations campaigns to spread antiscientific propaganda in order to forestall federal regulations. Big Oil and Big Coal are the most notorious abusers, and The Wall Street Journal has been the most consistent enabler of antiscientific propaganda. The main strategy has been for the industry lobby to sow confusion in the public mind by making it appear that well-established scientific findings are in fact open to major doubt and scientific dispute. Industry has shown time and again that it is possible to find people with a PhD in their title to sign off on just about any fraudulent scientific claim, if the fee is right. And experience has shown repeatedly that a poorly informed public is highly vulnerable to manipulation by a determined corporate lobby.

  Climate change is the latest example of this relentless corporate assault on science. ExxonMobil, Koch Industries (the largest privately owned oil company in the United States), News Corporation, and other companies have conspired for years to spread unscientific nonsense about climate change, mainly around the theme that human-induced climate change is not yet an established scientific consensus. Several dogged journalists such as Ross Gelbspan and researchers such as Naomi Oreskes have laid bare the web of big corporate money that funds this ongoing PR effort. To a trained eye, the PR effort is rather pathetic: egregiously antiscientific and even puerile in its misuse of basic facts. Yet for a confused public, it works. Around half of the American people deny the reality of human-induced climate change despite the overwhelming scientific consensus that human actions have already dangerously disrupted the climate, with a lot more damage to come.

  The Corporate Sector Continues to Win Big

  The main thing to remember about the corporatocracy is that it looks after its own. There is absolutely no economic crisis in corporate America. Consider the pulse of the corporate sector as opposed to the pulse of the employees working in it:

  Corporate profits in 2010 were at an all-time high.25

  CEO salaries in 2010 rebounded strongly from the financial crisis.26

  Wall Street compensation in 2010 was at an all-time high.

  Several Wall Street firms paid civil penalties for financial abuses, but no senior banker faced any criminal charges.

  There were no adverse regulatory measures that would lead to a loss of profits in finance, health care, military supplies, and energy.

  The creation of America’s rich class (those in the top 1 percent, with incomes above $400,000 per year) and super-rich class (those in the top 0.01 percent, with incomes above $8 million per year) has been the thirty-year achievement of the corporatocracy. We can now see the tools of the trade. It began with globalization, which pushed up capital income while pushing down wages. These changes were magnified by the tax cuts at the top, which left more take-home pay and the ability to accumulate greater wealth through higher net-of-tax returns to saving. CEOs then helped themselves to their own slice of the corporate sector ownership through outlandish awards of stock options by friendly and often handpicked
compensation committees, while the Securities and Exchange Commission looked the other way. It’s not all that hard to do when both political parties are standing in line to do your bidding.

  CHAPTER 8.

  The Distracted Society

  Most attempts to explain the current economic crisis put the spotlight on reckless financial deregulation, and a few link the disastrous regulatory choices to the corrupted politics of Washington. Very few put a spotlight on the citizenry as well. It is easy, and right, to blame our politicians and greedy CEOs. The public knows the score and detests it. Yet at the end of the day, Americans have elected their leaders. Americans have allowed themselves to be manipulated by corporate propaganda. And Americans have behaved in a very shortsighted way with their own budget management, falling dangerously into debt and eventually into bankruptcy. Tens of millions of Americans are repeatedly overconsuming today and regretting it tomorrow: whether by overeating, overborrowing, overgambling, excessive TV viewing, or indulging in yet other addictions.