Third World America

by Arianna Huffington

  In the three decades since the Reagan Revolution, Americans have been preached to from pulpits far and wide the holy word of unregulated markets as the true path to a higher standard of living. As part of the new religion, we were converted from citizens to consumers and taught a catechism about how the market—not “equality of conditions”—was the foundation of our country. Along the way, the social contract—especially the subsections protecting workers, poor people, and our air, water, and oceans—was fed into a shredder. Starting with the New Deal, we began constructing a social safety net to help the most vulnerable among us. But who needed a safety net when the laws of supply and demand were there to protect us, when the trickle-down theory would provide sustenance for us all?

  The missing tenet in this new free-market fundamentalism was the recognition, central to capitalism, that businessmen have responsibilities above and beyond the bottom line. Alfred Marshall, one of the founding fathers of modern capitalism, in an address to the British Economics Association in 1890, called it “economic chivalry.”15 He explained that “the desire of men for approval of their own conscience and for the esteem of others is an economic force of the first order of importance.” There is a reason Adam Smith’s free-market gospel, The Wealth of Nations, was preceded by his Theory of Moral Sentiments.16 He knew that economic freedom could not flourish without a firm moral foundation.

  But that moral foundation is by no means inevitable. The “approval of their own conscience” and “the esteem of others” have gotten a lot cheaper in recent years. We see the results of capitalism without a conscience all around us: the pollution of our environment, workers being injured or killed, the sale of dangerous products, the shameless promotion of risky mortgages for overvalued homes, and the wholesale loss of millions of jobs and trillions in savings.

  The collapse of communism as a political system sounded the death knell for Marxism as an ideology. But while unregulated, laissez-faire capitalism has been a monumental failure in practice, the ideology is still alive and kicking. You can find all manner of free-market fundamentalists still on the Senate floor or in governors’ mansions or showing up on TV trying to peddle deregulation snake oil.

  Given how close we were in 2008 to the complete collapse of our economic and financial system, anyone who continues to make the case that markets do best when left alone should be laughed off his bully pulpit.17

  Despite the fact that many banks, car companies, and so on would be defunct without government intervention, the free-market fundamentalists continue to live in denial, trying to convince the world that if only left alone, free markets would right themselves.

  Free-market fundamentalism didn’t fail because our leaders didn’t execute it well enough. In fact, during his time in office (until the economic house of cards finally collapsed at the end of his presidency), President George W. Bush and his team did a bang-up job executing a defective theory. The problem isn’t just the bathwater; the baby itself is rotten.

  William Seidman, the longtime GOP economic adviser who oversaw the savings and loan bailout in 1991, cuts to the chase: “[The Bush] administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight.18 To make the market work well, you have to have a lot of rules.” Even Alan Greenspan, whose owl-eyed visage could adorn a Mount Rushmore of free-market capitalists, finally saw the light, telling a House committee in October 2008 that he “made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.”19

  Many, including Bush 43, lay the blame on a few rotten apples: “Wall Street got drunk,” he said.20 Maybe so, but who made the Bush years a nonstop happy hour and kept serving up the drinks?

  Of course, Republican leaders were not the only ones drinking the free-market Kool-Aid. It was also chugged by New Democrats such as Bill Clinton. He came into office knowing it was the economy, stupid, then proceeded to oversee a presidency focused on the soaring Dow Jones industrial average, even as the number of Americans living in poverty stubbornly refused to dip below thirty-two million, and the number of Americans unable to make ends meet without the aid of a soup kitchen or food bank hit twenty-six million—with more homeless children than at any time since the Great Depression.21, 22, 23 Yet the Clinton White House’s messaging was like a twenty-four-hour Boom Channel: All Prosperity, All The Time.

  In those go-go years, even being downsized could, in the eyes of the free-market evangelists, be turned to your advantage. In early 1996, after forty thousand AT&T workers were pink-slipped, future Mad Money host (and Jon Stewart whipping boy) Jim Cramer, then still a hedge-fund manager, wrote a piece that landed on the cover of the New Republic.24 Headlined “Let Them Eat Stocks,” the article found a silver lining in the dark cloud of the massive layoff, proposing that the fired workers be given stock options. “Let them participate in the stock appreciation that their firings caused,” Cramer gushed. Cue Eric Idle’s “Always Look on the Bright Side of Life.”

  Four years later, Bush v. Gore ushered in the CEO president and his CEO VP. They promptly threw open the White House doors to their corporate cronies from Enron and Halliburton and declared open season on the interests of the average American.25 The Enronization of our economy was under way.

  THE RICH GET RICHER

  The Reagan years ushered in the era of the widening income gap. The rich grew considerably richer while the real income of everyone else, from the poor to the middle class, either slid back or, at best, leveled off.

  In their paper on long-term change in the U.S. wage structure, economists Claudia Goldin and Lawrence Katz of Harvard and the National Bureau of Economic Research reported, “From 1980 to around 1987, wage inequality increased in a rapid and monotonic [i.e. steady] fashion.26 Those at the top grew most rapidly, those in the middle less rapidly, and the bottom the least of all.… [These] wage structure changes have been associated with a ‘polarization’ of the labor market with employment shifting into high- and low-wage jobs at the expense of middle-wage positions.”

  By the late 1980s, due to changes in technology, outsourcing, and the loss of manufacturing jobs, the middle class was sputtering. Even as productivity rose, the wages of the average worker remained flat.

  In 1995, the midway point between the Reagan Revolution and today, John Cassidy penned an article in the New Yorker entitled “Who Killed the Middle Class?” Cassidy had his readers imagine a lineup composed of every American, arranged from poorest to richest.27 The individual exactly in the middle—the median—was arguably the most middle-class person in the nation. That man or woman, in September 1979, was earning (in constant, inflation-adjusted dollars) $25,896 a year. In September 1995, that same man or woman was earning $24,700 a year—a 5 percent cut in salary over the intervening decade and a half.

  In contrast, the nation’s top 5 percent saw their pay rise 29 percent over the same period, up to $177,518.28 And the top 1 percent did best of all. In fact, between 1977 and 1989 the richest Americans’ average income rose from $323,942 to $576,553—a whopping 78 percent increase in real terms.

  The trend continued into the first decade of the twenty-first century. According to a report compiled by Elizabeth Warren, the average middle-class income between 2000 and 2007 fell $1,175, while expenses rose $4,655.29 Over the same period, the top 1 percent—which had pocketed 45 percent of the nation’s income growth under Clinton—captured 65 percent of all income growth under Bush.30

  And according to a report released in May 2010 by the Brookings Institution, between 1999 and 2008 the median household income fell $2,241 to $52,029, while the share of households earning middle-class incomes dropped from 30 to 28.2 percent.31

  So it’s clear: Well before the economic crisis hit in the fall of 2008, the once-envied American middle class was already being driven to its knees. Indeed, in a 2008 Pew survey, 56 percent of middle-clas
s Americans said they had either fallen back or merely managed to tread water over the previous five years.32 It was, according to Pew, “the most downbeat short-term assessment of personal progress in nearly half a century of polling.33 Fewer Americans now than at any time in the past half century believe they’re moving forward in life.”

  And that was just as the Great Recession was beginning to ravage the economy. Since then, life for the middle class has gone from bad to worse. In a revised take on the original Misery Index—the measure developed by the late economist Arthur Okun that combined the unemployment rate with the consumer price index to condense the state of the economy into one neat, digestible number—the Huffington Post created the Real Misery Index.34 Incorporating a more extensive host of metrics, including the most accurate unemployment figures; inflation rates for essentials such as food, gas, and medical costs; and data on credit card delinquencies, housing prices, home loan defaults, and food stamp participation, the Real Misery Index is a much more accurate estimate of economic hardship. In April 2010, as the unemployment rate remained stubbornly high and the number of Americans on food stamps grew to forty million, the Real Misery Index, which charts data from 1984 to today, hit the highest level on record. And the bull rally that sent the stock market up an impressive 56 percent from March 2009 to April 2010 surged in tandem with the Real Misery Index, which climbed 16 percent in the same period—reflecting what Lynn Reaser, the incoming president of the National Association of Business Economists, called a “two-tier economy.”

  THE MIDDLE CLASS PAYS ITS UNFAIR SHARE

  This two-tier economy comes with two sets of rules—one for the corporate class and another for the middle class.

  The middle class, by and large, plays by the rules, then watches as its jobs disappear. The corporate class games the system—making sure its license to break the rules is built into the rules themselves.

  One of the most glaring examples of this continues to be the ability of corporations to cheat the public out of tens of billions of dollars a year by using offshore tax havens.35 Indeed, it’s estimated that companies and wealthy individuals funneling money through offshore tax havens are evading around $100 billion a year in taxes—leaving the rest of us to pick up the tab. And with cash-strapped states all across the country cutting vital services to the bone, it’s not like we don’t need the money.

  Here is Exhibit A of two sets of rules: According to the White House, in 2004, the last year data on this was compiled, U.S. multinational corporations paid roughly $16 billion in taxes on $700 billion in foreign active earnings—putting their tax rate at around 2.3 percent.36 Know many middle-class Americans getting off that easy at tax time?

  In December 2008, the Government Accountability Office reported that 83 of the 100 largest publicly traded companies in the country—including AT&T, Chevron, IBM, American Express, GE, Boeing, Dow, and AIG—had subsidiaries in tax havens, or, as the corporate class comically calls them, “financial privacy jurisdictions.”37

  Even more egregiously, of those 83 companies, 74 received government contracts in 2007.38 GM, for instance, got more than $517 million from the government—i.e. the taxpayers—that year, while shielding profits in tax-friendly places like Bermuda and the Cayman Islands. And Boeing, which received over $23 billion in federal contracts that year, had 38 subsidiaries in tax havens, including six in Bermuda.

  It’s as easy as opening up an island P.O. box, which is why another GAO study found that more than 18,000 companies are registered at a single address in the Cayman Islands, a country with no corporate or capital gains taxes.39

  America’s big banks—including those that pocketed billions from the taxpayers in bailout dollars—seem particularly fond of the Cayman Islands. At the time of the GAO report, Morgan Stanley had 273 subsidiaries in tax havens, 158 of them in the Caymans.40 Citigroup had 427, with 90 in the Caymans. Bank of America had 115, with 59 in the Caymans. Goldman Sachs had 29 offshore havens, including 15 in the Caymans. JPMorgan had 50, with seven in the Caymans. And Wells Fargo had 18, with nine in the Caymans.

  Perhaps no company exemplifies the corporate class/middle class double standard more than KBR/Halliburton. The company got billions from U.S. taxpayers, then turned around and used a Cayman Islands address to reduce its expenses.41 As the Boston Globe’s Farah Stockman reported, KBR, until 2007 a unit of Halliburton, “has avoided paying hundreds of millions of dollars in federal Medicare and Social Security taxes by hiring workers through shell companies based in this tropical tax haven.”

  In 2008, KBR listed 10,500 Americans as being officially employed by two companies that, as Stockman wrote, “exist in a computer file on the fourth floor of a building on a palm-studded boulevard here in the Caribbean.”42 Aside from the tax advantages, Stockman points out another benefit of this dodge: Americans who officially work for a company whose headquarters is a computer file in the Caymans are not eligible for unemployment insurance or other benefits when they get laid off—something many of them found out the hard way.

  This kind of sun-kissed thievery is nothing new. Indeed, back in 2002, to call attention to the outrage of the sleazy accounting trick, I published a tongue-in-cheek newspaper column announcing I was thinking of moving my syndicated newspaper column to Bermuda.43 “I’ll still live in America,” I wrote, “earn my living here, and enjoy the protection, technology, infrastructure, and all the other myriad benefits of the land of the free and the home of the brave. I’m just changing my business address. Because if I do that, I won’t have to pay for those benefits—I’ll get them for free!”

  Washington has been trying to address the issue for close to fifty years—JFK gave it a go in 1961.44 But time and again corporate America’s game fixers—a.k.a. lobbyists—and water carriers in Congress have managed to keep the loopholes open.

  The battle is once again afoot. While Congress considers legislation that would clamp down on some of the ways corporations hide their income offshore to avoid paying U.S. taxes, corporate lobbyists are furiously fighting to make sure America’s corporate class can continue to enjoy the largesse of government services and contracts without the responsibility of paying its fair share.

  The latest tax-reform bills are far from perfect—they leave open a number of loopholes and would only recoup a very small fraction of the $100 billion that corporations and wealthy individuals are siphoning off from the U.S. Treasury.45 And they wouldn’t ban companies using offshore tax havens from receiving government contracts, which is stunning given the hard times we are in and the populist groundswell against the way average Americans are getting the short end of the stick.

  But the bills would end one of the more egregious examples of the tax policy double standard, finally forcing hedge-fund managers to pay taxes at the same rate as everybody else. As the law stands now, their income is considered “carried interest,” and is accordingly taxed at the capital gains rate of 15 percent.46

  According to former labor secretary Robert Reich, in 2009 “the 25 most successful hedge-fund managers earned a billion dollars each.”47 The top earner clocked in at $4 billion. Closing this outrageous loophole would bring in close to $20 billion in revenue—money desperately needed at a time when teachers and nurses and firemen are being laid off all around the country.48

  But the two sets of rules—and the clout of corporate lobbyists—leave even commonsense, who-could-argue-with-that proposals in doubt, and leave the middle class shouldering an unfair share of a very taxing burden.

  Indeed, the double standard was famously ridiculed by Warren Buffett in 2007 when he noted that his receptionist paid 30 percent of her income in taxes, while he paid only 17.7 percent on his taxable income of $46 million.49

  HOMER SIMPSON HAS IT TOO GOOD: SNAPSHOTS FROM THE MIDDLE-CLASS BATTLEFIELD

  The numbers don’t lie: We increasingly live in a “winner take all” economy. Indeed, we’ve arrived at a point where even Homer Simpson—created as a classic American Everyman character—is
now living a middle-class fantasy. After all, how many American middle-class families do you know where the family’s sole breadwinner, a safety inspector at a nuclear power plant, can still comfortably support a family of five on a single income?

  A more accurate snapshot of a modern middle-class family can be found in Nan Mooney’s book (Not) Keeping Up with Our Parents.50 One person profiled in the 2008 book is Diana, thirty-six, a licensed psychologist with a doctorate in clinical psychology. Her husband, Byron, is a trained engineer who makes his living as a technical writer for a patent attorney. The couple has two young children. Besides bringing up her kids, Diana holds down two part-time jobs, one as an assessment director for a nonprofit organization that places school counselors, the other building her private practice as a psychologist. She makes $35,000 a year. Her husband, a contract worker paid on a per-project basis, makes $40,000. When interviewed by Mooney, their credit cards were loaded with debts totaling $17,000. Their mortgage cost them $1,150 a month. Diana was paying $450 a month on her school loans, but that figure was about to get bumped to $550 a month. Rent on her office, plus condo fees, added another $750 a month. The couple had little equity in their property and had wiped out their savings.

  “I feel like we’ve cut every corner we can cut,” Diana told Mooney. “We don’t take vacations. We never go out. Right now, I just keep my fingers crossed that nothing breaks. We need a new roof and new tires for the car. And we’re going to get hit hard by taxes this year.” At that point, Diana’s voice began to crack. “I’m scared. I’m scared we’ll never be able to retire. I’m scared we won’t be covered for health care. I’m scared we won’t be able to send our kids to college. We’ve never had much, but before I always felt like we were doing our time. We were working our way toward a more comfortable future. That doesn’t seem true anymore. At this point, I see no way out at all.”